THE NON-PROSE OF ECONOMISTS

Economists are not known for their prose.

Mohamed El-Erian is an economic adviser to the big German firm Allianz and a former Pimco guru. He also pens columns for various media groups like the Financial Times and Bloomberg, two outfits one would think employ copy editors.

Maybe they do and maybe they don't. Maybe EL-Erain, like some of those too big to fail banks, is exempt from such petty editorial vagaries. Or maybe his assigned copy editor has already tossed up his hands and given the "Oh well sign" and turned the page.

In one of his latest, "Policy making tug of war leaves investors facing difficult calls," El-Erain penned this convoluted beauty.

In scaling such relative positioning, investors would be well advised to keep one more issue on their radar screens. The prospective moves in markets implied by the divergence theme would tend to complicate rather than facilitate policy making in a world subject to increasing bimodal distribution of potential outcomes and low availability of broker-dealer liquidity during transitions.

If you break this down it means: Since the new regulations hit, broker-dealers have less liquidity. Liquidity moves markets. Without it things could quickly get as calm as Coleridge's painted ship on a painted ocean. And that could leave a whole gaggle of folks holding their bags.

The divergence theme is the big dog, USA, pulling away from the pack. Such a economic fly in central bank soup kitchens muddies the fare.

When you get into statistics you run into distributions, bimodal and otherwise. It's a delicate way of saying stuff can hit the economic fan two ways, one of which might not be expected. You might think of  those on-the-other-hand economists Harry S Truman complained so much about were all bimodal.

What Truman was really asking for was a unimodal one.

It's fairly certain señor El-Erian is getting decent bucks to write this stuff.

So for simplicity's sake we'll leave you with another economic term: Go figure.

Meanwhile, know that the Fed has expanded its view of the what-counts factors to include the international scene. So just be careful not to get tugged over the line in this tug of currency wars.

FABRICATED MSM

 
Inside an upscale hotel room in a famous large southern city, one recently hit with the worst storm in its colorful history, a prominent news anchor is frantically talking on the phone with one of his engineers.

NA: Anybody see that body floating past?

E: No, man! Are you in the flooded area?

NA: Hell no, I don't even like water...

E: What's all this floating body crap?

NA: I just looked out my hotel window and there it was, floating past.

E: No fake wires attached, nothin? Outside the Ritz?

NA: No, man...and I'm not smoking anything either.

E: Are you sure Joe Biden hasn't checked in?

NA: Naw!

E: Shit, man...you better report that on the news tonight.

NA: You like it, huh? Gotta make it real!

And as they say, this and the rest of the story is fabricated MSM history.

IN NONSENSE THERE'S STRENGTH

There's line in Kurt Vonnegut's Breakfast of Champions to describe what's going today in the world's central banks.

If you like lists, here's a good one--China, European Union, Canada, Australia, Denmark and Japan. Those are just a few of the central banks that have been talking up deflation, cutting interest rates and debasing their currencies.

Denmark liked it so much they cut their rates four times in less than fortnight. It's viewed as an act of survival. Japan for now might be the monetary policy Breakfast of Champions. The Japanese central bank appears set to pull the lever and open the flood gate again give or take what happens in the next few months.

According to one source, half the central banks of the Group of 20 developed and large emerging economies have eased their monetary policy this year, some in the form of interest rate cuts and others via more subtle maneuvers.

Left standing at the chapel is the United States. They've already shot that bird. Three times over.

Japan, Denmark and China are all export-dependent countries. And their are others often referred to as emerging markets.

Symbols are symbols and have symbolic meaning for a reason. They predate the Gutenberg press and computers. Look at a dollar and on some still floating around you'll see the symbol of a truncated pyramid with a radiant eye at the top and some Roman numerals etched at the base.

How'd they get there and why? It's a mystery and as Vonnegut wrote: Not even the President of the United States knew what that was all about. It was as though the country were saying to its citizens, 'In nonsense is strength.'

There are some medicines out there, three of them, for those unfortunate enough to have been exposed to AIDs. It's usually from a puncture wound, a needle stick. 

Needle sticks are an occupational hazard for health care providers, policemen, firemen and many others, sometimes just innocents who don't routinely even work in health care.

The suspected victim is prescribed two of the three and given a 28-day supply.

The dreaded thing is exposure to body fluids and there are many ways to get exposed to them. According to the CDC, it's a government sponsored agency, should you choose to believe them, even if you get stuck with a contaminated needle from a known positive HIV carrier, your chances of developing the disease are 0.3 per 1,000.

That's a lot better odds than what Vegas offers. And that should tell you something about human behavior and human reactions. But this should not be misconstrued for implying in any way that HIV is nonsense. Not in the least.

It's about understanding the risk and not about panic.

The medicines are not without side effects. In some cases worse than the feared disease.

The feared disease for central banks is so-called deflation, an economic event so the story goes central banks have little experience or luck treating. That might help explain the current panic. 

Who among us doesn't fear the unknown, all the more reason to believe they're flying bureaucratic stained pants upside down.

But no one knows for sure the difference between real deflation and just low prices. One might be troublesome, the other quite healthy.

Since the prices of all things don't deflate at the same time, at least they haven't so far, who gets to roll the dice, you who are out here on the firing line or a committee table full of bureaucrats?

If you track the history of fiat money you'll see the point. Forget Roman numerals. Etched on the base that truncated pyramid and on the front section of global central bank charters should be: In nonsense is strength.

CRUDE UP AS RIG COUNT FALLS

 Crude oil up in mid-day trading as fear about falling rig count grows. See our previous posts, oil-cuts-continue.  and montana-bakken.

Brent crude at $58.45.

 SAN FRANCISCO (MarketWatch) — Crude-oil futures headed higher on Monday for a third straight session, helped by a further drop in rig counts in the U.S. that could eventually ease the supply glut that has sent prices tumbling over several months.
marketwatch.com/story/oil-prices-volatile-after-weak-china-trade-data-rig-count-drop-2015-02-09?

US:C

GEOPOLITICAL RISKS

Much of the news centers on German Chancellor Angela Merkle's visit today with President Obama about the escalating situation in the Ukraine.

Ad we noted last week we're seeing more Western editorials calling for Western powers to send arms to the Kiev government. Last week the Financial Times and the Wall Street Journal piped out similar tunes.

As odd as it seems, fear mongers and war monger sometimes occupy the same boudoir.

(Reuters) - German Chancellor Angela Merkel is set to argue in Washington on Monday against arming Ukraine in its conflict against Russian-backed rebels, while in Brussels EU ministers held off tightening sanctions to give peace talks a chance.

Merkel's message that sending Western weapons to Kiev risks escalating the conflict is likely to get a sympathetic hearing when she meets President Barack Obama later in the day.
reuters.com/article/2015/02/09/us-ukraine-crisis

HOT GREECE

For another view on Greece and the possibility of a Grexit, one we find much to disagree about, here is marctomarket.com.

The discussion about Greece and its future in the monetary union, or like Greenspan opined, the lack thereof, has focused on economic issues to the near-exclusion of all else. This is myopic.  There are important geostrategic interests at stake.

There is much fear mongering in here. Those Brussels geniuses perhaps should of thought about some of these things before they invited or, more correctly, coursed and cajoled, some of those southern nations into the scheme, none of which were recognized financial paragons of fiscal probity.

Biting off more than one can chew is an old act of arrogance. Kicking the can further down the road once the error has been discovered is an act of gross negligence. The potential the-sky-is-falling crowd always find a way to center stage.

We're not sure why, but Greenspan's stating the obvious has riled some EU apologists. The truth, as they say, is pretty tough to take. 

Hot grease should be handled carefully. And carefully here is the simpest, straightest line between two points--let Greece go.

GREENSPAN:GREECE WILL GO

 
Anytime we find ourselves sharing the same side of an issue with former Fed Chairman Alan Greenspan we start to worry.

A while back we wrote the Brussels should take a page from old Moses and let Greece go. There's nothing in it for either side. Greece may be the seat of democracy, but it's also been a financial prodigal son, wasteful, undisciplined and from all appearances determined to stay that way.

In a Sunday interview with the BBC, Greenspan noted:

Hours before Prime Minister Alexis Tsipras was due to set out plans on how to keep his government paying its bills, the former Federal Reserve chairman said the nation’s crisis can’t be resolved as long as it remains in the single currency.

“I don’t see that it helps them to be in the euro and I certainly don’t see that it helps the rest of the euro zone,” Greenspan said in a radio interview with the BBC on Sunday. “I think it’s just a matter of time before everyone recognizes that parting is the best strategy.

Greenspan spoke on the eve of a critical week for Greece, providing a backdrop to Group of 20 officials meeting Monday before euro-zone finance ministers gather for emergency talks on the country on Wednesday and a summit of leaders the next day. Greek public debt stands at more than 320 billion euros ($362 billion), about 175 percent of gross domestic product.

“Greece is in the position that if they don’t get additional loans, then they will default and leave the euro,” Greenspan said. “At this stage, I don’t see any people who are willing to put up the funds, having been disappointed so often.”

For a guy who in his time spread his share of wastefulness, Greenspan must have flipped a switch.

Asked if he thought the Germans should stick to their austerity line, he responded: "I certainly do."

TIDBITS

So what if minimum wage earners just got a raise, whatever spending impact that might or might not have on the economy.

According to Barron's, citing a report from Challenger, Gray and Christmas, the big executive outplacement firm, last month U.S. employers announced plans to cut 53,000 workers, 40% of them from the energy sector, most of which are higher paying jobs.

Given the just released positive jobs report and, at least for now, stabilizing oil prices, Wall Street consensus for the moment looks for the Fed to hike interest rates in June.

Having gotten the excuses they need to cover their moves, the mood at the Fed despite all the patience blabbers, has been wanting to raise rates. It's one of those ahead-of-or-behind-the curve things. The best bet is they don't have a clue. Ten year Treasury notes last week rose O.26 to yield 1.96%, the biggest one week boost in roughly 19 months.

The oil price jump is being taken as a positive for global economy by many. Coupled with the jobs data, rising bond yields and higher energy prices, it's most likely a sign of the Fed's hoped-for return of inflation, at least that's the way some market participants are seeing it.

Last is the return so far of market volatility and the Fed may be breathing a bit easier as they look for an exit strategy before all this crazy monetary policy blows up in their face. Cover is cover. Running for cover, running for shade when things get too hot to take the blame is as old as bureaucratic institutions themselves.

Gold, which has rallied this year, in the eyes of some has decoupled from its long correlation to oil and the dollar rally at the end of the week took a bit of luster of the yellow metal. One of the expect memes for 2015 is the strong  U.S. dollar. A strong dollar usually means weaker  gold prices.

With Europe beginning its QE program and bond yields there negative or nearly so, flows of money from European investors has been another popular market story to date. What income investor wants to get negative returns for lending out his money.

How well that story will play out is one of those we'll see things.
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Recently, we wrote about Procter and Gamble, the huge consumer brands company, and their expected hit to earnings owing to the strong dollar since a  god portion of their earning come from overseas.

Based on the Insider Transaction Ratio from  Reuters the ratio of the index is  30-plus to 1 sells to buys. Translation: 12:1 ratio considered bullish. 20:1 bearish.

Three P&G insiders apparently just sold 118,605 shares totaling more than $10 million. Now people sell for a variety of reasons, but given the concern about overseas revenue one of the most likely is the expected earnings hit.
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We've written  a lot about oil of late, a sector we closely follow. One stock we own and continue to accumulate on weakness is British Petroleum (BP). We've written about its nasty Gulf oil spill hassles with the greedy U.S. government. Greed is the only word word here.

Last week an editorial in the Financial Times claimed enough is enough, saying the U.S. government--and we agree--is over the top on this one.

Here are the facts, BP has done everything it said it would do after the spill, first owning up to its role, responding rapidly and already doling out a ton of money in fines and restitution.

Here's a blurb from recent  issue of  Barron's:

One beaten-down stock that looks like an opportunity is BP. With a huge 5.8% dividend yield and a technical breakout in place, this stock has an ample cushion to ride out increased volatility. BP started to rally in December and now sports positive indicators in momentum, volume, and relative performance. Not a bad combination, even if crude oil only moves sideways instead of higher for the next few weeks.

The U.S. government greed is not without its messages. Other governments also need  money and they are desperate to get it. Past poor management begets desperate times.

Part of the recent rise in oil is coming from the Libyan situation where violence past and present has impacted production. In mid-2014 civil war broke out and oil production is down 900,000 barrels a day to around 350,000 barrels a day.

Total, the big French firm, responsible for about 30,000-35,000 barrels a day recently closed production. Also, trouble brews around the port there impacting U.S. producers Conoco-Phillips and Marathon Oil.

And last week Saudi Arabia, the 800 pound gorilla of oil production, reduced its prices to Asian buyers while hiking prices to U. S. buyers, a move many see as a shot at U.S. shale  producers. Meanwhile, check your local gas station as prices this week rose 5.4% for the week.
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WIEN WEIGHS IN

Byron Wien, the former Wall Street veteran and current adviser to Blackstone, offers every year his list of 10 possible surprises.

According to his recent post about those for 2015, he noted they are less about being correct than about stretching one's thinking or point of view.

Recently we wrote about MSM's churlishness over anyone who questions whether QE European style will work in reviving the EU economy. Laden as it is with Keynesian and quasi-Keysesian apologists, MSM get their panties twisted in a bunch at such matter.

So any attempt to stretch their points of view may be a stretch.

Especially if the one doing the questioning is a known conservative. Now we don't know what Wien's political bent is. That's not the issue. The point is how many of MSM financial scribes parse their criticism deliberately toward those on the right who question monetary policy and its purported effectiveness, American or European style.

The European economy is the focus of the fourth Surprise. European Central Bank chief Mario Draghi has been talking about implementing quantitative easing for some time and now he is finally going to do it. The Surprise is that it has little impact and Europe remains on the brink of recession. There is some precedence for this in the U.S. experience. The Federal Reserve expanded its balance sheet from $1 trillion in 2008 to $4 trillion in 2014 and the increase mainly pushed stock prices higher and kept interest rates low. I estimate only 25% of the quantitative easing found its way into the real economy. The recovery took place as a result of natural, not monetary, forces in the business environment. I believe that the slowdown in Germany, resulting partly from diminished Russian trade, will have an impact on the rest of Europe and that the European stock market will be down in 2015.

In the fifth Surprise, I express similar concern about Japan. Shinzo Abe’s first two arrows, fiscal and monetary stimulus, looked like they were working and the country was showing reasonable growth. Most observers were curious to see the impact of the third arrow, structural reform, on the economy. As last year developed, the increase in the sales tax had a greater negative effect than expected and Japan went into a recession in the third quarter. A slowdown in China and other parts of the world also contributed to the weakness. Abe is determined to get the country back on a growth path and is prepared to step up the stimulus to accomplish this. He will suspend the second sales tax increase, which was scheduled for this year, and implement further measures. The Surprise is that it doesn’t work and Japan remains in recession during 2015. The Nikkei 225, not excessively valued, remains flat, but further weakness in the yen causes it to be down in dollars.

For the umpteenth time we don't have a camel in that race. We just gather the news and determine who we can and who we can't trust to tell the  truth.

HOLY RISK MISPRICING

 
First there was ZIRPS--sounds like something to pour over your morning hotcakes--and now there's NIRPS.

Gotta love those acronym folks.

It's been six months, as the Financial Times reports today, since the ECB coughed up "negative rates for deposits by commercial banks."

If anyone approached you a few yesteryears back and tried to sell you a five or six year zero or negative yield savings bond, can you give us what most likely would've been your succinct, decisive two-word response?

How about, screw you?
Finland yesterday provided worrying evidence of the lack of hope for economic growth and inflation when it sold one billion euros of five-year government bonds with a negative yield. 

Well, the people getting screwed today by all those wonderful QE programs and their derivatives of such are the people. Yield starved or otherwise, unless you're a savvy speculator well anointed in the foibles and follies of central bankers and their ignorance, anyone dumb enough to purchase one of these suckers is a sucker.

Unless anyone has forgot, when you buy a bond you're the lender and the entity, corporate, government or whatever, is the borrower. Anyone love their efficient governments enough to lend them free money?

Or to be more exact, pay them to lend them your money. It's deals like this that make gold glitter.

Two things we know of have zero yields at the moment--only one of which regularly catches hell from the MSM punditry--cash and gold.

In some fundamental churches when the preacher lays a cool one on the congregation, usually someone will stand up and shout out a big "Hallelujah!" Well, you should forget that. Just stand up and shout out a robust--"Mispricing of risk!"

C'mon now! Let's hear another one of those, this time with some real feeling,"Mispricing of risk!"

In next year's Super Bowl, instead of the Patriots and Seahawks, maybe we can have the ZIRPS versus the NIRPS. It just might set a new viewer record.

Instead of a trophy at the end of the game, however, the winner will be presented with a Big Bag.