LET THE RABBLE BEGIN

It's been said that "No decision is a decision."

That pretty much summarizes the Janet Yellen-led Federal Reserve Bank as talk picks up about a possible rate hike this month as those great economic soothsayers once again meet. In what has become the most anticipated rate hike in the long, inept history of this quasi-Federal institution the financial gossip and guessing continues. What's yours?

Somewhere it's been noted that when one starts with a false assumption or premise the conclusion is likely to be just as false. That fairly characterized the Fed and its policy makers. The false assumption is that these people have any clue about what they're doing and, accordingly, can do anything (something?) worthwhile to help the economy.

With little more than two months remaining for 2015, a rate increase now (though it could happen) is most unlikely given the history of this economic Federal foot-dragging group. When that first hike finally does hit the economic fan, expect a small hiccough and then more business as usual.

This is not another of those reputed "buy-the-dip times," but something quite different as in upgrade your portfolio for the long haul.  In the meantime, stay calm, upgrade and let the rabble rabble on.

GOES AROUND

Back in the early 1980s there was a Federal judge named Harold Green who decided what at the time was a landmark case.

The major telephone company, AT&T or what was then known popularly as Ma Bell, was broken up, owing to his decision, into regional bell companies like Southern Bell, Pacific Bell, Southwest Bell, a total of eight regional companies in all.

All traded on the NYSE and were known as the "Baby Bells." In fact, I owned quite a few, they all paid decent dividends and many appreciated in price. But like most things in life and true to a basic truth of what goes around comes around, less than 25 years later a wave of mergers and acquisitions started until they all merged into now, with few exceptions,what for the most part is AT&T or "Ma Bell."

The issue centered on a 1974 anti-trust filing since AT&T was the sole provider of telephone service in the country. In many quarters at the time it became known as the Green Decision. Little known about Judge Green then and most likely still isn't was his close association with U.S. Attorney General at the time Bobby Kennedy and that Green helped write the 1960 Civil Rights Act.

What makes this story important is really a sidebar about one of the many tens of thousand who worked for one of these Baby Bells, Pacific, named Scott Adams.  Adams was a middle manager who, like many others, was trapped in a job he viewed as boring and monotonous.

To ward off the boredom, he created an affirmation, a powerful one which he took the pains to write down 15 times a day, every day: "I will become a syndicated cartoonist." Adams, you see, had a dream. He yearned to be a successful cartoonist, but most of his work  had only met with rejection.

But as he persisted he noticed certain positive changes  and after several more rejections he landed a position with United Media, a cartoon syndication. Millions today know Scott Adams as the creator of one of the most popular carton characters around, Dilbert. 

There is a law in psychology that if you form a picture in your mind of what you'd like to be, and you keep and hold that picture there long enough you will soon become exactly as you have been thinking. William James                                         
  
For the record James was the brother of famous novelist Henry James and one of the most famous 19th Century psychologist who taught at Harvard.

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?

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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?
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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.
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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.

 

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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.