IT'S ASSET PRICES THAT REALLY MATTER

To assume QE is not one of the reasons interest rates are at historical lows denies the truth.

Part of trying to revamp an economy is to stimulate borrowing and spending, get people to loosen up. It's the part of QE related to the feel good factor by pushing up prices of stocks and bonds. Some might call it a financial mirage.

To claim as many do that this is not something central bankers know and clearly intend stretches the credulitity quotient of even imbeciles. Now from the International Bank of Settlement comes some data many cenral bankers and their  apologists will deny but many others know is accurate.

According to James Mackintosh's Short View today, central bankers at the Fed and ECB might be gazing at the wrong set of prices in their entrail studies. Citing authors at BIS, the so-called central bank of central bankers, paying attention to asset prices and 
not employment numbers is the more important of the two.

Moreover, that "consumer prices measured by inflation statistics have little relevance for future growth. Instead, it is asset price
which really matter, housing in particular."

As Mackintose notes: "...the study makes pretty clear that consumer price deflation in itself is not usually associated with slower growth (the Great Depression was an exception)."

In case you haven't guessed it, the main meme today is deflation fears, the assumption being pushed nearly everywhere deflation is bad. What this leads us to is what we wrote about in Fence Straddling, central banks often paint themselves into a corner.

With high asset prices the Fed faces the dilemma we now have.

FED FENCE STRADDLING CONTINUES

How do you paint yourself into a financial corner?

Head up a central bank and sport the name Janet Yelllen. That's pretty much what came from the  mouth the Federal Reserve oracle aka The Patient Lady Wednesday.

As we noted in Be Careful What You Prepare For, the market was overly long the dollar and painfully myopic about what doves really do--act dovish. We could add confused and clueless doves but we've already taken our meds for today.

And that poses another question: How does June morph into September months before Fall arrives? Simple. Just add another dot to the Fed's nonsensical dot plot scheme, one they didn't count on, in this case a weather dot to screw up the plot.

“Just because we removed the word patient from the statement doesn’t mean we are going to be impatient,” Ms. Yellen was quoted in the Wall Street Journal. Judging from the market's huge rally with the DJIA jumping 227 points to break through 18,000 on the index, it was an all clear ahead for now if you want to dump the dollar and load up on some low-yielding bonds and bloated equities.

Some might say the Fed left the punch bowl half full, opening the door for a possible rate hike but showing some real hesitation about crossing the threshold. At what point does caution become indecision and not caution?

The main point is the Fed reduced its inflation, interest rates and growth outlook given the perceived  slowdown in the economy.

Meanwhile, back at the Fed the fence straddling continues.

BE CAREFUL WHAT YOU PREPARE FOR

Worry that the Federal Reserve led by Chairwoman Janet Yellen has now switched from what the Fed is going to do to does the Fed have any idea what to do if they make a mistake.

Today is the day the Fed is expected to remove the patience safety net beneath the interest rate trapeze it's been flying around on for some time.

Some fear the move will "inject uncertainty back into the financial markets." The key word in that sentence is back. Except for those who believe the Fed knows what it's doing, the truth is the uncertainty never went away.

Fear mongers like the Financial Times economist and main fear jockey, Martin Wolf, claim the problem isn't excessive QE-caused low interest rates but a "managed depression." Wolf writes this beauty in today's column: "Rising risk aversion might be another reason why real rates on safe securities have fallen."

With nearly everyone from hedge funds to mom-and-poppers scouring the dark, four corners of the earth seeking some yield, it's clear Wolf sees with bias through what is a clear prism of bureaucratic bumbling and fumbling.

The truth is nobody including the Fed knows whether they've overstayed their presence at the party that's now been going on seven years. With few exceptions this has been a market that volatility has been as absent from as many members of Congress at vote taking time. It's there version of  don't ask, don't tell.

The Chicago Board of Options Exchange's volatility index sits around 17 for this year so far, slightly up from last year's average 14, but below its average of 21 between 2009-2014. If you're a hedge fund guy or gal you've been screaming for a little volatility most likely. If you're an MSM meme shill you probably need to check out the term in Webster's.

Investor hand wringing about guidance and so-called transparency or the paucity of such has its own nightmarish elements. Last December, Chairwoman Yellen, taking a page from former President Bill Clinton, claimed the "patience promise" meant the Fed would keep rates the same for the next two Fed meetings. That was a shift away from her previous "considerable time" nonsense.

This prelude to an interest rate hike has been more anticipated that the Second coming. Many investors are long a stronger dollar as a result. The potential fly in the investment ointment is recent sluggish economic data.

The Fed and its clutch of bureaucrats is one of the globe's biggest fence straddlers. It's part of their "on-the-other-hand" DNA. The problem with fence sitting, however, is sooner or later the fence falls down.  

Be careful what you prepare for.

GURU COLUMNISTS

There are a lot of guys who write much and say little and one of those is Mohamed A. El-Erian, the Pimco-to-Harvard-to-Pimco-again-to-independent-financial-columnist guru.

One supposes it's their contract to produce so much verbiage in a certain time to justify their pay.

Divergence is a vague term and Mr. El-Erian conveniently blames it instead of the real culprits, central banks, in their zeal to prevent real restructuring that always involves real economic pain.

 El-Erian writes in http://www.marketwatch.com/story/the-messy-politics-of-economic-divergence-2015-03-16

The world is increasingly characterized by divergence — in economic performance, monetary policy, and thus in financial markets. Global divergence has already contributed to stock-market volatility, unprecedented declines in advanced economies’ government bond yields, and outsize currency movements.

And the trend is not abating, placing increasing pressure on already-strained political systems.
The world’s systemically important economies can be placed into four categories.
On their own, currency markets will not bring about the growth-enhancing global economic rebalancing that is needed. Better policies at the national, regional, and global levels are also essential — and that requires better politics.

He then defines the four groups starting with the U.S. and India where, he claims, "economic recovery is "broadening, enabling them to overcome financial imbalances." If anything what the U.S.has done is creating more financial imbalances, many of them still hidden in the shadowy world of new regulations that as yet are to rear their unintended ugly consequences.

El-Erian then lists a bunch of vague terms that would make any office seeking politician proud like "better politics." Good luck waiting for that one. Related to better politics, he cites better policies. Man, that's earth-shattering progress.

Next he notes:  Overcoming it — and ensuring steady, financially stable global growth — will require responsive national policy making and multilateral coordination. Unfortunately, today’s rather messy national and international political environments have so far precluded such an approach.

That "so far have precluded" phrase hints at a time element. Our cynical side suggests the real  meaning here is that it's a cosmic so far. And it's been pretty difficult to find more multilateral than the current "beggar-thy-neighbor."

If El-Erian isn't careful someone will soon nominate him for the Nobel Prize for his specifics. That he can cash those economic column remuneration checks with a straight face tells you how much trouble we're in.

This somehow doesn't pass the smell test. And the odor is one that emanates from global central bank cellars to Wall Street to Goldman Sachs and back again.

 

MINE NOT YOURS

 
Though some might not recognize it, Open Skies, the agreement hammered out a while back to allow national airlines more access to each others markets, is just another name for globalization.

So here's a question for you: What's the difference between subsidies and trade barrier? Both are exercised to benefit the homeland player.

What brings this up is a meeting in Washington this week between U.S. officials and those of Emirates and other Gulf carriers that U.S. airlines and their unions are claiming receive unfair subsidies as the fight for traffic escalates.

It's labeled unfair competition.

If this smells of protectionism, particularly in the so-called free enterprise promoting U.S., you're onto something. As the Financial Times reported,  "A German politician had called for a ban on granting landing rights to Gulf carriers, 'unless they answer the subsidies question.'"

Translation: It's okay for U.S. companies and their politically-controlling unions to subsidize but don't you try it. Anyone naive enough not to realize the push toward globalization would create such problems is a prime candidate to hold  public office.

Just how greedy is the U.S. government, particularly this administration?

The U.S. is fighting a judge’s decision that shaved more than $4 billion off the maximum pollution penalties BP must pay for its 2010 Gulf of Mexico disaster, the biggest offshore oil discharge in U.S. history. 

The spill size was set in January by U.S. District Judge Carl Barbier in New Orleans at 3.2 million barrels. He also rejected claims London-based BP was reckless in preparing for a disaster or had acted unreasonably in responding to the spill. 

The U.S. didn’t say which part of the court ruling it was appealing in a notice filed Friday. The U.S. estimated the spill at 4.2 million barrels, which could have triggered a maximum $18 billion fine.

This is a subject we've mentioned a couple of months ago http://financialspuds.blogspot.com/2015/01/greed-takes-hit.html a

Since the recession hit in 2008 there's been a rash of governments suing each other over alleged corporate and financial wrongdoing led by the current greedy U.S. administration.

There's also been an outbreak of people who now view the unintended consequences of globalization as something more sinister when it comes to individual and, yes, business and cultural, freedoms than most thought.

TIDBITS

 
Ahead of the Fed.

TOKYO (Reuters) - Asian shares drifted higher on Monday after a downbeat session on Wall Street kept sentiment in check, while the euro recovered from a fresh 12-year low touched on the divergent monetary policy paths between the United States and the euro zone.

Yes, there is a Fed confab scheduled for this week and everyone will get a firsthand definition of patience, like one's old girlfriend. Is she going or staying?

----
Be careful what you cede sovereignty for. That's the theme in our minds of this article. www.marketwatch.com/story/greek-crisis-tests-ecbs-credibility-2015-03-16?
----
Twenty-four central banks have cut their interest rates so far this year and more cuts are on the way. Norway is expected soon to foster another cut as falling energy prices been more pain. Beggar-thy-neighbor running amok.
----


President goes missing.

The Kremlin denied suggestions of Mr. Putin’s illness. Spokesman Dmitry Peskov said the Russian leader was absolutely healthy in comments to the Ekho Moskvy radio station Thursday, adding that “there’s no need to worry, everything is fine.”
We don't really know if there's anything amiss here, but when was the last time you heard those reassuring words?

It's a bit like a central banker bellowing: "Don't sweat it we got this covered." ---
Trouble in pension land or what you've been getting for years from your elected officials whose real definition of democracy is line their own pockets not yours. From the WSJ:

U.S. public pension liabilities ballooned by 32.7% in the years following fiscal 2008 while assets increased only 14.4%, according to preliminary fiscal 2014 data from the National Association of State Retirement Administrators. That leaves public retirement systems with enough to cover 73.5% of future obligations as compared with 85.2% in 2008, according to the data.

Longtime workers have often been spared from some of the most drastic cuts as government officials took the easier path of cutting benefits for workers yet to be hired or suspending retiree cost-of-living bumps. But state and local governments that face pressure to act more aggressively are increasingly shifting more responsibility to current employees.

New Jersey Gov. Chris Christie last month became the latest to suggest more radical curtailments of benefits for current workers. The move led to more than a dozen unions saying in March they would file a suit seeking to block the pension changes. Unions have also challenged prior attempts in Rhode Island, Illinois and Louisiana to target existing workers, arguing that pension benefits are contractual promises that can’t be breached.

Brought to you by insensitive, greedy, wasteful politicians nationwide.

 

---

PERVERSITY LOOMS LARGE

 
Words are important.

We are all told, as author George Eliot noted, to watch our words, to others and ourselves. The latest word of importance, given the current market, is patience, a trait humans are not well-known for having much of.

In this case, it's the ill-conceived Fed's word to describe their recent monetary policy posture from these bureaucrats who huddle periodically in the bowels the Eccles Building in Washington. Not all perversity comes from witches' dens.

The term will be much on investor minds this coming week as the Fed goes into its silent mode. But back to perversity, the central bank kind.

To prove the point, here's a couple of quotes from a recent piece by John Dizzard in the Financial Times about the downside of QE from his "Investors should embrace the inherent contradictions of quantitative easing."

The advent of negative yields for the best European government or corporate (bond) issuers is usually reported in the media as some sort of curiosity, like a bright object in the night sky that seems to be getting bigger. What it really represents is the breakdown of the policy's world response to the global financial crisis. A large European bank's credit strategist told me: 'We have searched through the records and asked the ECB how they think their (asset purchase strategy) will work, and there is no evidence they know the answer.

From a cycle perspective, the time for the ECB to carry out QE was back when asset prices were too distorted and low. But credit spreads are already low. They are chasing investors into markets that will create a problem when markets normalize. It's just perverse.

What this is about in case you don't get it is QE's contribution to the paucity of high quality assets. In case you have not been paying attention, there's a real shortage of high quality assets around today. In brief, it's impossible for fiduciaries now to cover the future needs of their beneficiaries by any stretch of the prudent man rule.

The fiduciaries' hunger for yield on respectable assets has also run into the requirements for banks and other market participants to put up more high quality collateral for derivatives transactions, Dizzard writes. This last one is thanks to those astute, ever-present, well-intentioned regulators.

Translation: There are many unintended, perverse consequences buried in here that nobody fully understands and won't until they rear their ugly consequences.

IT TAKES BOTH

If you hang around a boxing gym a while you'll learn many lessons, like it's pretty uncomfortable to get punched in the face.

Not too many investors will recognize it, but that's pretty good investment advice. One has to learn to get comfortable with being uncomfortable. Otherwise, boxing and maybe a host of other sports like football is not your sport.

Here's another way to put it: Some of our worst trades are those we're most comfortable with. If as the saying goes, misery loves company, what's that say about comfortable market positions?  MSM is doing its utmost to convince everyone chasing these minuscule bond yields is the new wave of the future.

The new normal. If you're comfortable with that we suggest you queue up and purchase a few of those low yielding 50 and 100 year bonds governments and corporations are now dropping on investors.    

Deflation is the worry of choice today. Back in the early 1980s it was inflation. And 30-year bonds and CDs, anyone remember them, we're yielding 14-15 percent. There was just one problem, however. Nobody wanted them because everyone except a few liars believed inflation was going to continue its upward surge.

The few who took the other, uncomfortable side of that trade--and there was a few--made fortunes if they held onto their bonds a while. The other side of the deflation meme today is just how dead commodities and inflation are.

And, yes, you can include gold and silver here.

Once those bond yields started coming off 14-15 percent as things changed and new long-term ones yielding 9-10 percent got floated, investors shunned them because they wanted 14-15 percent. In other words, it took awhile for investors to grasp the trend and that the trend had changed.

Since nobody knows for sure where the inflection point is, just as they didn't know then, there's going to be plenty of room for some uncomfortable positions. In the fight game there's no shortage of fighters with balls, a necessary requisite.

But when you get one with balls and smarts, now you're onto something. 

In investing it's no different. You need both.

TIDBITS

The game of beggar-thy-neighbor continues.

South Korea joined the fray Thursday in what caught some off guard, when the Bank of Korea cut it's base rate 25 basis points to a record low of 1.75 percent. It was the bank's first cut in nearly six months.

Of course deflation took the blame at least in part coupled with a weaker than hoped for economic picture. Korea joined a growing list of central banks ponying up to the gaming table. On Wednesday the Bank of Thailand cut rates, supposedly catching investors off stride.

Others cutting rates of late include India, China, Singapore, Indonesia and Australia. Everyone knows about Europe and Japan among others. The move by Korea pushed the KOSPI up nearly 0.5 percent while also helping other Asian markets. Much of this cutting comes at a time when the U.S. Federal Reserve Bank , according the the WSJ, is considering now a June rate hike.
---


In Euroland the euro continued it's swan dive, settling at a 12-year low of $107, on its apparent route to parity with the greenback. The euro began this year at $1.20 amid much of the hue and cry for the ECB to do something by rolling out its version of U.S.-style QE which began earlier this week.

But the yield-hungry crowd, to some alarm, seems to be rushing for higher returns on their holdings, putting further downward pressure on the euro. Some analysts are calling for parity by the end of this year while others think it will land at $0.85 in 2017.
--
Maybe what investors really need is to take a couple of deep breaths and a shot of powdered alcohol, the latest and most recent approval thanks to the Alcohol and Tobacco Tax and Trade Bureau. It's called Palcohol.

We don't know how much of a pal it will turn out to be, but we'd sure like to know the name of the bureaucrat who came up with the monicker.

The product, appropriately name "Palcohol", is alcohol in another form-powder in this case. Thinking out of the box, or rather out of the bottle, researchers were able to turn their favorite cocktails into powder form. Just add water, shake and sip. After all, the best drinks are shaken, not stirred.

Since last year's revocation in its first attempt at pushing the product through the bureau, Palcohol has worked out many of its earlier issues. Spokesperson for the bureau, Tom Hogue, says that all of its previous issues have been resolved to the point that now four varieties of Palcohol have now been approved. But the brand can't celebrate just yet. Just because it has made it through the bureau's guidelines doesn't mean it will be hitting shelves that soon.

While the product may be available for sale as this summer, many state legislators are pushing against the sale of powdered alcohol for fear of its potential implications. Even Colorado state legislators, who recently legalized the sale and use of marijuana, have expressed concern about the potential ease of access to minors, and the opportunity of concealing the potent substance. But the while the bureau has said that they are approving the product for sale, based on their own guidelines, they are by no means making the final call. That is up to each of the individual states and whether or not the company would like to fight their claims.

Hogue explains that the bureau's evaluation is based on whether or not the product matches its label, not "its potential for abuse.
---


In other interest-rate related news governments and corporations are selling long-dated bonds like there is no tomorrow. As the Financial Times noted, "The rapid growth in multi-decade debt comes as borrowers seize opportunities to lock into interest rates that have been pushed down, even into negative territory, by central bank action and faltering economic outlooks."

There are some red flag terms in here that any savvy investor should be aware of like "lock in" and "central bank actions" and "faltering economic outlook." This is an opportunity if one isn't careful to get screwed twice without benefit of clergy or the KY jelly.

Central banks and central bankers are the culprits for all three of those things. The Times quoted one investment wag, noting that such borrowings might not be repaid in the lifetime of finance ministers and corporate treasurers, "It makes sense."

And that it does if you're the seller. If you're the buyer, however, you need to look up the definition of coney-catching.
---

NO SURPRISE HERE

Surprises come and go.

But there's two things today that shouldn't surprise you: Wall Street profits are down but Wall Street bonuses are up--three percent. And the other half of our great two party system, the Democrats, are in denial about Hilliary Clinton's long, considerable and contemptible baggage.

Both should be mixed into a cocktail along with a pinch of the evening news and knocked down nightly to bolster your confidence in what many call the system.

Hilliary's pathetic history speaks for itself for those who don't suffer from political and historical dyslexia. But Wall Street--isn't that the group the Fed recently bailed out--who among us would of thought they'd be so brazen so soon with taxpayer money? Surely, not you nor I.

Even General Motors showed more respect for taxpayer dollars notwithstanding those faulty ignition problems that somehow didn't get a timely recall.

If leopards never discard their spots, Wall Street never tempers its greed.  

Now we have Goldman Sachs, another major Wall Street firm pulling their version of  Captain Louis Renault in the movie classic, "Casablanca":  "I’m shocked, shocked to find that gambling is going on here!”

Change gambling to greed, they both start with G, and you have a great picture of Goldman Sachs's recent claim: "Goldman  No. 2 'freaked out' by tanking bond yields," as reported by MarketWatch, http://www.marketwatch.com/story/goldmans-president-is-freaked-out-by-tanking-european-bond-yields-2015-03-11?dist=afterbell

Goldman Sachs’s second-in-command, Gary Cohn is freaked out about the pervading trend of negative interest sweeping across Europe. 
 
Cohn told CNBC’s “Squawk Alley” on Wednesday that negative rates, in which investors effectively pay government bond issuers for holding their debt, “freaks him out.” 

Cohn’s frank response is saying something, coming from the towering, 6’4’’ president and chief operating officer of the world’s most prominent investment bank, which is known as a bond trading powerhouse.

The Goldman honcho noted that negative yields make it hard in the insurance, asset management and pension businesses to generate a return. Those institutional investors represent a good chunk of Goldman’s clientele. 

The last paragraph really says it all. This is a not so subtle message to Goldman's many close friends at central banks everywhere, it's the other, little guy's ox that should be getting gored not ours. 

Call it a great big, financial "Whoa!" Time to take another look at this madness. It's a spin on the old three Fs--friends, family and fools. We don't mind them taking there low-yield lumps, but not us.

We're Wall Street investment bankers.

Now about those Wall Street bonuses, we think you already know the facts.

DRINK CAREFULLY

 There is the well-known story about the frog and boiling water.

The frog gets put in tepid water and the heat slowly increased to the boiling point, but the frog never notices the change and doesn't jump out before it's too late. Some might say the tale is just a metaphor for subtlety.

Subtle changes like those flapping butterfly wings create big effects. There's another term that likewise begins with the letter "s" that's undergoing big changes today under what is becoming less and less subtle--sovereignty. In this case the rapidly growing loss of it.

Globalization is a term that 's been pushed by MSM. It's described as a modern day panacea for the globe's ills. But folks are starting to realize globalization is the antonym of sovereignty. Hardly what's it's been cracked up to be.

If you think otherwise, you have not been following the eurozone mess. Or for that matter other areas of the world where folks are becoming increasingly upset about the obliteration of local control and customs.

Walmart is the huge conglomerate people love to hate. If you look around today conglomerates, like robots, are taking over. In the U.S. corporate big boys like Walgreen's, CVS and RiteAid have all but captured the pharmacy business.Local mom and poppers followed the Edsel down the Oblivion Freeway. 

And much the same is happening all around us. What once was subtle is now--or it should be--blatantly overt, an outright assault on choice. And that's just another way of saying globalization is hardly your friend if you revere freedom of choice.

Some people we fear still believe milk is the only thing that's getting homogenized. Local not central is synonymous with sovereignty. Local not central is synonymous with choice. Like the best laid plans of mice and men, good intentions often beget not so good results.

What part of Washington or Brussels or Beijing or Moscow is local? The Greeks along with several of their peripheral EU members, notwithstanding their pathetic historical lack of fiscal probity, get it.

So here's a couple of questions for you, one about semantics, the other about money printing.

Are the words manipulate and titrate really fungible? The first, manipulate, denotes something unfavorable while the second, titrate, something acceptable.

And which is it that central bankers around the globe do--titrate or manipulate? If you sup regularly at the MSM trough you get the picture. You also get at which trough you're expected to slake your thirst.

But like that grade school warning about approaching railroad crossings most of us grew up with, stop, look and listen.

And drink carefully.