WELCOME THE OPPORTUNITY

When you go down to the local pond to feed the ducks you usually take some bread crumbs along to toss out randomly. The symbolism to even the ducks is clear. There may be more to come.

ECB President Mario Draghi today made his long awaited visit to the media pond and he didn't disappoint. Draghi brought along some financial crumbs to feed the folks. Negative interest rates are just one of the stratagems Draghi coughed up.

The ECB rate has been at zero for a some time and after the Draghi announcement they are now at -10%, not an enamoring move to Germans. What this means is banks will have to pay to park their funds at the ECB or take their funds elsewhere like lending them out to families and businesses for a higher return but not a return without risks.

And therein lies the rub. It's about liquidity. The hope is-- and to be sure, at this point that's all it is, a hope--families and businesses will put that money to work creating more demand and along with it some hoped for inflation.

And let's not leave out what many believe is the over-valued euro. EU politicians and bureaucrats have been praying for a  weaker euro to do their bidding for them and now they may get their wish. But markets can be perverse creatures sometimes, so the hourglass has been turned upside down and we will see. 


Even before Draghi announced his plan the head of Germany's savings banks, Georg Fahrenschon, attacked the rate cut for causing Germans to save less in a nation where savers typically put away one-tenth of their income. A loss of savings by depositors is a loss of income for the savings banks, another indirect case of whose ox gets gored.

Fahrenschon's comments were directed at what's known as the Denmark experiment when in 2009 the tiny Scandinavian country engineered a economic turnaround with negative rates. The ECB spent months a while back studying the Denmark ploy. In some ways, therefore, Draghi's move is not a big surprise.

Taking the deposit rate below zero is something no major central bank has ever done. So if it works in this case the praise will be lavish. But if it doesn't you can expect heavy fallout. There are two main points here. First, all of this maneuvering will do little or nothing to correct the obvious structural defects in the EU, defects that many apparently choose to either ignore or deny. 

The second main point is one investors should never take their eye off and that is how to make money from it. Recognize an opportunity when it arrives. To paraphrase Winston Churchill, if most people were walking down the street and opportunity came along and knocked them to the ground, they'd just get up, brush  themselves off and keep walking.

It is not now and hopefully never will be sinful, un-American, anti-European or a crime against humanity to book a profit off the affairs of bumbling, stumbling politicians and bureaucrats who privately hold most of the human race in utter contempt.

MORNING BECOMES THURSDAY

Much of the expected ECB's move on Thursday should they, as anticipated, cut rates has been in the market for a while now and may have been already discounted.

True, these people move slower than those melting glaciers global warming freaks spend so much time fretting about. But one surprise most have not mentioned much is if the market just yawns. An initial reaction followed by a quick return to the new, boring, low volatility normal is quite possible.

While it might be good for bond holders, it'll hardly help ease the dissension in a Union that more and more appears to be held together by string, some spit and ceiling wax.  Make no mistake there's no love lost between the Union's two biggest players, France and Germany. Nor is there any between those peripheries and bureaucratic-laden Brussels.

A change in rates is expected to drive the dollar higher and hopefully make EU products cheaper. But those austerity-crazed German will most likely reap most the the benefits if there are any. So far the ECB has been the luckiest of central banks caught in this bind accomplishing more by just jawboning than the other central banks.

But cheap talk after the vote last weekend will hardly carry the day now. On this side of the Atlantic you have a Fed that, according to MSM, is becoming increasingly concerned about a so-called complacency it did it's utmost to create.

The risk premium on corporate versus U.S. government bonds hovers around one percent, a low last seen in 2007. In short, the narrower the spread the less risk-averse bond buyers are. And if the VIX, a so-called volatility benchmark many investors track, gets any calmer, it'll soon resemble Coleridge's painted ship on a painted ocean.

So tomorrow when morning becomes Thursday, investors may get some answers. But don't bet your grubstake on it. The EU is a badly cracked and flawed-thrown-together dream that with a bit of help from its so-called friends could easily turn into the Continent's worst nightmare since WWI. 

AROUND THE WEB

 

The Loss Of Sovereignty 
 http://www.spiegel.de/international/europe/interview-with-french-front-national-leader-marine-le-pen-a-972925.html

Made In America Not Seamless
http://www.reuters.com/article/2014/06/04/walmart-reshoring-idUSL1N0OJ1C120140604

The Real Solution: Vote With Your Feet
http://www.millersmoney.com/money-weekly/hiroshima-2014-should-you-fear-the-nuclear-solution-to-underfunded-public-p

Minimum Wage History?
http://www.slate.com/blogs/moneybox/2014/02/seattle_raising_its_minimum_wage_to_15_it_s_history_in_the_making.html

Difference Of  Opinions
http://www.bloomberg.com/news/2014-06-03/george-says-fed-should-allow-asset-runoff-before-raising-rate.html

More On The Fed
http://www.acting-man.com/?p=30923#more-30923

Wisdom Of Adam Smith
 http://www.thedailybell.com/editorials/35357/Richard-Ebeling-The-Wisdom-of-Adam-Smith-for-Our-Own-Times/

 High Gas Prices
 http://globaleconomicanalysis.blogspot.com/

Ain't That America
http://finance.yahoo.com/news/almost-everything-buy-grocery-store-140800668.html

TRUST

 

Put your hand in the hand of the man from Galilee is a line in an old gospel tune.

Believer or non-believer, it's about trust. And according to a recent Financial Times blurb, one group you might not want to put your hand in the hands of when it comes to your investment future and interest rates is economists. 

Of  67 economists polled by Bloomberg in April, the Times  reported, every one of them predicted higher interest rates by this October. So far as everyone knows this has yet to happen. Consensus might be comforting, but it's also dangerous.

The explanations for the demise of interest rates in the U.S.10-year Treasury note are legion:

Wrong-footed bond fund managers covering their shorts or playing catch-up after missing the move. Foreign investors looking for a safe port to park their money and at the same time make some money. Pension funds who have to make a reasonable guess about their future obligations. A slower-than-expected-more lumbering U.S. economy coupled with the yield-hungry crowd. The Fed trying to hold the lid on future inflation concerns. All of these and more get tossed around daily in the MSM.

With the exception of  bond yields not much has changed since the start of the year other than equity valuations are less cheap though not so out of whack as to cause more than a sharp and, as many believe, much needed short-term correction. 

There is still plenty of money on the sidelines, most of it retail, as, according to one firm that tracks such things, recently reported, almost twice as much money during the first four months of this year flowed into savings accounts as into equity mutual funds.

Think of it this way. Savings accounts that yield next to nothing and a relentless rising equity market. This is an age old teeter-totter.  One end is fear of being in, the other missing out, setting the stage once again, a cynic might suggest, with an increasingly higher market to pull retail folks in at the later stages to push the market even higher and setting them up one more time for you know what.

So in any quick, sharp pullback, we'd be buyers because until interest rates spite there's still more upside left in this playful, aging puppy.  

That's our view. We hope you trust yours.

BEYOND THE ZIRP ZONE

John Authers in the FT's weekend edition writes in his "The Long View" column: "The dollar has us all entrapped. There is simply nothing that is better, and nothing that is safer." 

Authers is quoting a Cornell University economics professor who, surprise of surprises, has a new book on the subject. What Authers suggests is the dollar despite all the hand wringing will not soon lose its world status as the currency of economic exchange, a terrific and some might say a privileged advantage.

Nor are we suggesting anything different. But there is a consideration here, one that Authers to his credit acknowledges.

At the beginning of 2014 most expected bond interest rates to rise and bond prices to fall. Now as just about everyone on the planet including my gardener knows, it didn't happen. Once again bettors are lined up including the ECB crowd to see the dollar rise along with U.S. interest rates and the euro decline.

You can bet a lot of  EU bureaucrats and politicians are praying for such especially given the recent voting results there. And we're not here to suggest it won't. We've said before and in print that the euro could fall to around 120, probably were it belongs.

But this is really just another example of a "Beggar thy neighbor" stunt to help pull the EU out of its economic doldrums. It does little or nothing to correct structural faults and cracks. It's just another form of putting direct pressure on the wound until the surgeon arrives. But in this case none is coming.

At the start of the year emerging markets were touted as the place not to be. Except for a brief interlude, that appears to be false as investors are once again throwing money there. Emerging market stock funds have shown an increase of money flows for the last three months.

Emerging market shares based on the MSCI are up 3.1% so far in 2014 versus 3.8% for the S&P 500. On a valuation level the MSCI offers the better value trading at a forward p/e ratio around 10 compared to the S&P 500 at 15. The 10 year average for the MSCI is 10.8 versus 13.8 for the S&P 500.

None of this is to suggest you should be piling into emerging markets. The time to get in was back in February when the index was hovering near its lows and investors were following the January touts. The take home here is the unexpected frequently catches people with their drawers down.

To be sure, many will counter that we didn't know that was the bottom. We didn't say we did. Nor do we pretend to possess the skill to devine such. We just take what the market gives us and often times that means fading popular opinion.


With nearly every single solitary interplanetary soul apparently looking for interest rates to go up gradually and orderly, what happens if they surprise by bypassing ZIRP on their way to much higher ground?

AROUND THE WEB

IS THE WAR ON DRUGS CAPUT?
http://www.thedailybell.com/editorials/35358/Anthony-Wile-Is-the-War-on-Drugs-Over/

UK INVESTORS BOOST EM EXPOSURE.
http://www.reuters.com/article/2014/05/30/us-funds-poll-britain-idUSKBN0EA11220140530

THE PROPAGANDA WAR
http://www.spiegel.de/international/world/russia-uses-state-television-to-sway-opinion-at-home-and-abroad-a-971971.html

 SLOWER GROWTH AHEAD?
 http://www.csmonitor.com/Business/2014/0601/Whither-US-entrepreneurs-Why-a-key-engine-of-economic-growth-is-sputtering

THE UP COMING ECB MEETING
http://www.minyanville.com/business-news/markets/articles/Trading-Radar-The-Most-Important-Market/5/30/2014/id/55165

THE TRUH: HARD TO KNOW
http://globaleconomicanalysis.blogspot.com

LOW VOLUME, LOW VOLATILITY
http://www.marketwatch.com/story/volume-vix-and-yields-are-stock-markets-bogeymen-2014-06-01?pagenumber=2

BETTER THAN THEY LOOK
http://www.theautomaticearth.com/debt-rattle-mat-30-2014-the-pretty-girl-and-the-us-economy/

OIL PULLBACK

Oil is due for a pullback.

If  we can trust what we read and read what we trust, the black oozy stuff  should come off it's high pretty soon and provide one with an opportunity.

If you aren't buying it at that time you love working for the man. Most people do. That's why there's that so-called big inequality gap do-gooders, politicians and bureaucrats love to exploit. Expect another spike up first, then the pull back.

Hydrocarbons should be a permanent holding in your portfolio with some profit taking sprinkled in from time to time. People love to hate. That's never going to change. Don't let it stop you from making a profit. They've already tried making it a sin. Now they want to make it a crime.

There is much more at stake here than what the so-called cognoscenti are telling you. Despite all the caterwauling the globe is not awash in oil. And even if it were they would find some way to marginalize it, keep it from trickling down to you. 

Two big oil players, Exxon and BP, just put their thumbs to their noses and waved their fingers at official sanctions against Russia.   

Oil is a substance that goes into the making of so many other products it's meaningless to discuss. Many of these people are folks who've made their booty and now don't want you to make yours. 

Be not afraid. Buy some shares on the pullback. 

AT YOUR OWN PERIL

Populist shock waves rattled through the elite in Germany after last Sunday's election in France led by Marine Le Pen's National Front party.

Since the EU's inception France and Germany have worked together trying to keep the far-flung EU intact. Some of the dismayed German elite are calling the election results a tragedy, a real threat to the stability of the EU. 

What many of these critics fail or refuse to understand is many of these voters don't want their history, their culture and their sovereignty washed away by Brussels bureaucrats. Globalization for all of its so-called advantages, though many will deny it, is about loss of sovereignty. 

To think there wouldn't be a reaction the first time things get dicey is naive and shortsighted. To think that people are going to go gently into that wasteland is just plain arrogant. It's elitism of the first degree. Germany is to France economically as oil is to water. The two don't really mix.

Still another sign of the problem is the disagreement in high places as to whom the next EU president will be.  Jean-Claude Juncker, once the leading candidate, comes with some baggage many view as unacceptable given the recent anti-EU vote.

As one reader wrote to the Financial Times, calling attention to the bad rap populism seems to be getting in the MSM, he listed the dictionary's definition of a populist as "someone who believes in the right and ability of the common people to play a major part in governing themselves."

He concluded with: "It is understandable that advocates of  Brussels centralist government should regard this as a term of abuse but why do you all continue to portray populism as some sort of extremist and undesirable activity?"

And here's your answer, folks. The worst nightmare of bureaucrats and the MSM is the fact that some people are actually paying attention. Fail to do so at your own peril. 

  







 

FOUR LETTER-WORDS

It doesn't take much imagination if one tries to figure out the other side of the bond market.

They're both four-letter words. But here's a hint, gold.

To say gold has been an investment orphan since its 2011 peak around $1,900 an ounce is like saying politicians love to bluster and bloat. So far this year the yellow metal is up 6%, twice the gain in the S&P 500 index return.

Just to be forthright, we don't own any marijuana shares, don't smoke the stuff and try not to labor too much on Sundays. And Taylor, our dog, still laughs occasionally at our snappy one liners. 

If gold were anymore unwelcome today it would look like one's mother-in-law coming up the walkway with a stuffed suitcase unannounced early on a rainy Saturday morning.

Look around. Public confidence in bureaucrats and politicians is lower than whale dung. Bond prices are more inflated than the famous Goodyear Blimp. They took "In God We Trust" off the fiat currency a while ago. 

For years pundits have argued gold doesn't pay anything while you're holding it. Have you looked at your checking or savings account lately? Or how about those supposedly-safe CDs?  

Forget taxes and inflation. Use the old Rule of  72 to see how long it will take to double your money on what your checking or savings account is yielding. Now that's a fun exercise. Next time you have friends over turn it into a parlor game. Just be sure you allot enough time. It's going to take awhile.

We don't sell gold or have a relationship with anyone who does. That's probably our error. We're just saying something our dear old mother used to tell us when we were growing up

 "What you don't know, son, won't hurt you. But it can kill you."

Another one of those four-lettered words.


 

THE BOND BOAT

Want more proof too many are lining up on the wrong side of the interest rate boat?

Today's WSJ: "Rate-Wary Banks Build Bond Shelter."  According to the story, U. S. banks have increased their Treasury investments, joining the so-called in-crowd in their concern over deflation and uncertainty especially about interest rates.

Here's a quote: "In the first quarter, the collective holdings of Treasuries by U.S. banks grew 23%--the biggest shift since the financial crisis and the fifth-biggest on record......As a result banks now hold more Treasuries than they have since 1997, even after adjusting for inflation."

Some cynics might view this as payback to their friends at the Fed, helping to keep a lid on inflation fears and allowing the government to continue financing it's debt on the cheap. There's a spread profit here if one cares to look: Borrowing from depositors and customers for practically zero and booking over 2% income on the bonds.

Now to push the cynical aspect a bit farther, we're not for a moment suggesting that the Fed would ever let the banks know just before they hike rates so the banks can book a profit on those bonds. We're saying you can bet your first born on it.

Banks are feeling the pinch of stronger regulations, declining mortgage business and a drop in securities trading, to list a few of the industry's claimed woes. The solution, according to many bank executives, lower interest rates to ramp up volatility and bring back the mortgage business.

In other words, give them a playing field they like and rally the prices on all those bonds so they can dump them at a profit otherwise we'll have to cut more costs. And we all know what that means, cutting what hardly exists in the financial world today or, for that matter, in corporate America, service.

The bond boat is getting crowded. Just make sure you're wearing a life preserver. What didn't happen in 2014 could be lurking just around the corner in early 2015.