FED APOLOGISTS ABOUND

In cruising the Internet, we from time to time encounter articles like this one proclaiming that holding the Fed's feet to any oversight flame is misguided. To be sure, the Fed has it apologists. Here's an example.

marctomarket.com/2015/11/democratizing-fed-or-politiczing.

Even the title of the article, "Democratizing or Politicizing the Fed," is disingenuous. Any notion that members of the Fed are not political appointees put there by politicians is laughable. And what stirs the ire of the Fed's apologists is folks are finally beginning to get it.

We don't think the Fed has abused its power, we know it has. And nearly anything that ruffles the ire of the current White House occupant and Fed Chair Yellen is a move toward more liberty, not the reverse. As far as more transparency goes and the Fed's denial of purposely obfuscating, one need only check out Robert Woodward's Maestro book on the Fed during Sir Alan's reign.

Woodward quotes Sir Alan when asked how Sir Alan will address the media over a possibly thorny
issue. Sir Alan, without any hesitation, calmly replies he will say this, then that to keep them confused. It pretty clear from the confidence of his remark, this is not something new or foreign to him.What the author proposes is more weekly Fed media meetings. Some people are gluttons for punishment. Being a glutton for pain is for now still permitted in a semi-free society.

Rumor has it that when they were interrogating prisoners at Guantanamo, the most effective method, notwithstanding media reports, wasn't water boarding, but piping into the inmate cells 24 hours of uninterrupted Fed speak. Even when they experimented with piping in periodic commercials, it's effectiveness only dropped one percent.

Economists profess to have a particular understanding of and body of knowledge. The more supercilious ones refer to themselves as experts. The article claims, "Monetary policy is not a technocratic process." If so then you might find this quote from Wikipedia interesting.

Technocracy is an organizational structure or system of governance where decision-makers are selected on the basis oftechnological knowledge. The concept of a technocracy remains mostly hypothetical. Technocrats, a term used frequently by journalists in the twenty-first century, can refer to individuals exercising governmental authority because of their knowledge.^[1] Technocrat has come to mean either "a member of a powerful technical elite" or "someone who advocates the supremacy of technical experts".^[2][3][4] Examples include scientists, engineers, and technologists who have special knowledge, expertise, or skills, and would compose the governing body, instead of people elected through political partiesand businesspeople.^[5] In a technocracy, decision makers would be selected based upon how knowledgeable and skillful they are in their field.

Econometric models, in fact all data today, is based on computers, highly technical ones run by people who claim a certain technological know how and understanding. If that sounds like a cadre of economists trying to connect the dots around a large table in the Eccles Building in Washington, you might be onto something.

Data itself is a technocratic process and who more the Fed lives by and sings the kudos of data more than economists. One could argue econometric modeling is the new addiction or slavery afoot. Then there is the now infamous Fed dot-plot; it's pretty simple, so much so one could suggest the author undermines his own argument about simple rules, something he accuses others of suggesting.

The author cites another example that is little more than a subtle subterfuge that the complexity of today is different from the past. The truth is the steamship, the automobile, the telephone, the television and the airplane all ushered in drastic changes of their time as did the advent of credit early in the last century.

Interstate highways destroyed old businesses and created new ones just as America's railroads did earlier. The Internet is an international information highway, nothing less, nothing more. That's the only real change here. People have more and in many cases better information to judge incompetence, partisanship and the like, not a venue entrenched MSM relishes.

The fear about tying the Fed's hands is a semantical scapegoat. These bureaucrats are about as dangerous as handing a loaded pistol to a four-year old. What they do effects millions of peoples' lives. The phony, triumphed up Fed data to claim there is no inflation that the Obama administration just used to screw the COLA crowd is a classic example.

Apparently, the only inflation around around today is over at the U.S. Senate where policy makers recently voted themselves a raise. We could go on, but you need to do your own homework, decide for yourselves because after all that's really what true liberty is about.

IT'S BACK

Well, so much for rock stars and other high profile sets.

The news is out: "Rock stars helped convince the international community to write off more than $100 billion of African government borrowings a decade ago, " according to the WSJ. Now like a noted Jack Nicholson's movie character, it's back.

The key phrase here is a decade ago. Accompanying the article is a picture of Kofi Annan, the former Secretary General of the UN and Irish Rock star Bono celebrating the debt relief. In the words of the Journal: "Now the big debts are back, and it's getting tougher for countries to pay them off."  Debt levels of GDP ranged from 86% to 73% and after forgiveness sank to 9% in the case of Mozambique only to rise again to the current 61%.

In the case of Ghana its debt level of GDP hit 82% in 2005 before the IMF relieved the country of half the debt burden. Quoting a British economist who specializes in African economics, referring to the debt relief program, the Journal notes, "In some cases like Ghana, the increase has been quite alarming. This certainly isn't the future the international institutions had in mind."

Some of these economies are commodity based and have swooned along with the commodity markets, after initially doing well in the previous commodity run-up.  Most central banks are so-called lenders of last resort. Raising funds in capital markets is tough, but that was the announced hope when the debt relief went into effect. In short, make them more independent.

Ghana exports cocoa, gold and oil. Like that old saying, it worked for a while. But the while is now over. A strong dollar cuts many ways. And emerging markets is just one of them, especially when coupled with slowing growth.

But there's another lesson here: debt relief at best has a checkered past. Research shows over and over what one gets for nothing is never appreciated. It also sets up the old moral hazard. If we get in trouble, they will bail us out again.

The African situation is further evidence of the dangers meddling bureaucrats at places like the World Bank and the IMF pose. And, oh yea, let's not leave out those well-meaning rock stars and members of  the high profile set.

OUR VIEW

If investors have a speck of contrariness in their beings, they should take a look at big oil stocks in particular and energy in general.

Sure investment firms and nearly everyone else are sounding the gong of cheap oil and increasing  prospects of even cheaper crude on the horizon. And there is also those alternative energy options market savants and climate change fascists keep talking about. No doubt sooner or later some of those will have some impact. But that is then and this is now.

And then there is reality. The world is quite unstable. And rightfully so. There is a deeply ingrain ugliness afoot and it's not just in the Middle East. Frustration abounds. Despite all the do-good phony political palaver and convoluted, ridiculous legislation, with its endless red tape, it's getting more so. The all-too tragic recent Paris event will strike louder, more strident calls for even bigger hurdles against continued open borders and mass immigration. And rightfully so.

Open borders has been an abject failure. Restoring border integrity is a move toward preserving national sovereignty. Something the elites deplore. Further, it's a move toward respecting and honoring cultural differences. Open borders along with globalization is one of those unintended consequences that seemed like a good idea at the time.

Globalization was never about free markets. It's about more centralization, less individual liberty wrapped in bountiful bureaucratic promises from a ruling elite. And that's the paradox. In the days of kings the masses were known as subjects. The popular con term today is citizens. It's designed to make you believe you have a voice. You do not.

Frustration grows. Central bankers around the globe who are more economic astrologers than people with real knowledge and know how. If you're placing you're lives in the clutches of these bureaucratic puppets, we hope you stock pile your benzodiazepine supplies before they are proscribed entirely. England's Mr. Carney and his recent diatribe about the dangers of global warming--towing to the party line of half-truths and twisted facts--is a case in point should you need one.

There is a growing distrust among even younger people about politicians and MSM in general; about the phony, agenda-driven fanaticism surrounding climate change with its scaremongering zealots who seek to silence any and all critics. Stick your head somewhere on these issues were the sun never shines and you'll most likely live to regret it.

Take a look at the issues dividing the two U.S. political parties in the upcoming circus called a free nation presidential election. Part of the outcome will rest on which party can truck in more illegal immigrants to vote not once or twice but three of four times, an electoral practice the good souls of Chicago are quite familiar with.

Take a look at both party's candidates. There's more bankruptcies there than one would find at a Chapter 11 hearing in a month. The fact that these candidates are even remotely what the best that America has to offer should frighten you more than a Freddy Kreuger movie. It tells you just how bankrupt the nation is. You have a do-nothing, fence-straddling, lame-duck leader who was handpicked to set an historical precedence. Well, that precedent has been met. Time to move on.

The globe is quite unsafe. Frustration continues to fester. Energy is still the name of the global game.

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

BEHOLD BUREAUCRATIC MARVELS

 

Behold the marvels of low carbon energy.

That's the last line in a Wall Street Journal Opinion piece today by Jacob R. Borden, "California Dreamin'--of Lower Prices at the Pump." A former principal engineer at BP Biofuels, Borden is now an assistant professor of chemical engineering at McNeese State University in Lake Charles, Louisiana.

The crux of Borden's article is the higher pump prices California drivers pay for a gallon of gas owing to the state's well-intentioned but stumbling, bumbling, crazy legislators , a wacky governor and an unelected regulatory body of climate change tyrants locally known as the California Air Resources Board. This is a group that, given its unelected status, is answerable to no one. And in case you don't recognize it, you'll find unanswerable to no one and paucity of common sense in the dictionary under synonyms.

Borden correctly writes: 

Californians will continue to pay a premium for energy. In 2006 gasoline in California was no more than four or five cents a gallon more expensive than the U.S. average. The margin widened to 30 cents a gallon in 2010, to 50 cents a gallon in 2013, to 75 cents a gallon today. Likewise, California's residential electricity rates have rocketed from 11th-most expensive in 2009 to fifth most expensive today.

Much of this premium we Californians are paying has to do with phony, ill-conceived carbon credits. Here's a link to Borden's entire piece.

wsj.com/articles/california-dreaminof-lower-prices-at-the-pump

FOLLOWING COPPER SURROGATE

High prices lead to over supply. Low prices to cost-cutting, layoffs and mine or shop closings.

That's what business cycles and the market are supposed to do--that is, if you don't have government interference.You can spell government interference in many ways from China's building cities with zero inhabitants to global QE madness.

Copper is called the educated metal, jokingly referred to by many as having a Ph'd in economics. That just might be one of it inherent weaknesses.The world today is awash in Ph'ds and the same can be said for copper.

A bell weather for copper is Freeport McMoran, one of the globe's big miners of the metal. With China's recent revelation about its future growth prospects, Freeport's stock price, a New Orleans-based firm, turned further south.

The rout in copper is on. The important industrial metal just hit a six year low. China has been the globe's largest copper glutton, gobbling up an estimated 40% of world supply. But now it's dorsiflexing it hands and pushing itself away from the table. For many this has come as a surprise, proving once again the hard-learned lesson some call the law of impermanence. Or in popular Wall Street jargon, trees don't grow to the sky.

Down for five straight sessions, copper is off  22% for the year. Here's a chart from MarketWatch via Factset.



And here is chart for FCX. We're not  recommending anything here, just pointing out some things. Last August hedge fund manager Carl Icahn revealed he owned a big share of the company and in September the CEO reportedly purchased a million shares around $9.74 a pop.The stock closed  yesterday at $9.83 and this morning is trading around $9.25.

Again, we're not suggesting anything here, just ruminating on a concept we keep rolling over in our mind, capitulation.The FCX chart speaks for itself and the economy. So you might want to follow FCX not the bouncing ball.

YOU OWN SKIN

 
There is an old complaint about the news business that big stories later found to be flawed or plain incorrect make the front page, but retractions wind up buried on the obit or church page.

A similar thing happens with government numbers, especially those economists and central bankers harp on and on about and use to make decisions that affect innocent people. At the moment these folks along with the MSM financial press are fixated on the job number, a figure that supposedly came in a thundering 0.1% better, improving from 5.1% to 5.0%.

If change is the only constant in life, say hello to revision of government economic data.That booming October job number nearly everyone seems to be falling over most likely faces revision. Maybe even more than one. Was the October number just an outlier, an aberrant figure like many we've seen and come to question with government data in the past?

But it's a safe bet traction-wise the revised number or numbers will cut little bait. This is one of the main reasons such data--particularly that which the Fed follows or invents--and the economy in general are lagging indicators while the stock market is a leading one.

There's another reason, too. Most market players have their own skin in the game. When was the last time you could say that about politicians or government bureaucrats?

AROUND THE WEB

As we cruise around the Internet we come across reads we think are worth sharing. Every year there is discussion about a Santa Clause rally. The piece below pearled recently on dailyspeculations.com .

Stock Trader's Almanac is the longtime publication originated by Yale Hirsch now headed by his son and is alway worth a look and fun to peruse. We don't have connections to either, just enjoy good content where and when we find it.
   

Has anyone studied Art Cashin's claim that:

"When October is up over 7 percent, the result of the next two months — the so-called Santa Claus rally — is cut in half," UBS's director of NYSE floor operations told CNBC's

His research comes from Stovall from S&P, if I hear him right. Cashin says that instead of approx 3% benefit long drift you only should look for half of that because of the >7% rise in Oct.

anonymous writes: 

I have not studied his claim, but if he does not somehow factor in the relative strength of the market in months just prior to October, I'm not sure the observation is worth much. Presumably, the very week August and September of 2015 created a reset of sorts and the odds of a Santa Claus rally occurring this year are probably no worse than usual. Just my opinion of course. 

Jeffrey Hirsch writes: 

We have.

While I love Art Cashin, he and everyone else mistakenly calls the yearend rally the Santa Claus Rally. As defined by Yale Hirsch my illustrious father and mentor the Santa Claus Rally is the short 7-trading-day period cover the last 5 trading days of the year and the first 2 of the New Year. Most importantly as the songwriter in Yale has made clear: "If Santa Claus should fail to call, Bears may come to Broad and Wall." Here is the page from the 2016 Almanac and a slide image I use a presentations.

From Page 114: "Santa Claus tends to come to Wall Street nearly every year, bringing a short, sweet, respectable rally within the last five days of the year and the first two in January. This has been good for an average 1.4% gain since 1969 (1.4% since 1950). Santa's failure to show tends to precede bear markets, or times stocks could be purchased later in the year at much lower prices. We discovered this phenomenon in 1972."

The history of the Santa Claus rally:

dailyspeculations.com

CENTRAL BANK FANATICISM: HELLO MR. CARNEY

In our last Weekend Notes we wrote about the upcoming Paris meeting on what has become almost a fascist obsession about the dangers of global warming more deceptively known as climate change.

Recently, the Canadian transplant and current head honcho at the stodgy old Bank of England, Mark Carney, jumped into the fray with a fiery, scaremongering speech worthy of a Pentecostal preacher on a sultry summer Sunday morning in the deep South. The problem with people like Mr. Carney is he appears to be playing the useful idiot role for climate change hardliners with his acceptance  nonpareil of conventional wisdom.

When Mr. Carney addresses his board of fellow governors perhaps few pay much attention. That would be somewhat understandable, the economic cellar is full of some pretty dry stuff. Such is not the case, however, when it comes to the current rage of global warming fanaticism. Some people take their homework seriously. Here's brief example with the site for those who choose to take the time. prienga.com/blog/2015/10/9/fact-checking-mark-carneys-climate-claims

In his speech London’s insurance community, Mark Carney, Governor of the Bank of England, asserted a series claims about climate change.   Some of these are widely accepted.  The climate does change.  The world has warmed.  Atmospheric CO2 has increased, half of the increment due to human activities. 

Beyond this, there is no consensus, and indeed, the available data in many cases directly refutes the Governor’s more extreme assertions.  There is no consensus that humans are the primary drivers of climate change.  As we can see, sea levels, for example, were rising well before the 1950s date Carney gives as the start of modern anthropogenic warming. 

Importantly, the increase in losses since the 1980s is more likely to reflect expanded insurance coverage, increasing payouts as a percent of losses incurred, and an increased number of assets with higher values placed in harm’s way.  Losses increases have not occurred due to increases in hurricane, tornado, flooding, drought or fire frequency or strength, at least not in the United States, which represents the lion’s share of insurance claims.  In many cases, either frequency or intensity of weather-related events has actually declined.  Sea level rise has not accelerated, not as measured by either satellites or tide gauges.  Sea level has been rising for well over 100 years, and continues on that pace.

Like so many other economists, Governor Carney seems to operate under the assumption that current CO2 levels are just on the edge of some catastrophic acceleration.  For some reason, 320 ppm of atmospheric CO2 is safe, but 540 ppm is not, because there is some precipice—an inflection point or boundary—between here and there.  The limit is not 1,000 ppm, or 5,000 ppm, or 42,448 ppm, but right here, right now.  A little more CO2, a trace more of a harmless trace gas, and we are doomed.

The climate is complex and the future uncertain.  It is possible the worst fears may prove correct.  Nevertheless, such an assertion is not supported by the historical data, not for US droughts, floods, tornados, hurricanes or fires.  But it does show up.  In politics.  If sea levels were 20 cm higher in New York and this contributed to the damage from Superstorm Sandy, well, any middling analyst could have predicted the rise back in 1940, just as we can predict today that sea levels will be one foot higher a century hence.  The failure was not of CO2 emissions, but squarely a failure of governance.  And that goes doubly so for the fate of New Orleans.  If Governor Carney wanted to make a constructive proposal, he should have called for Lloyds to create macro audits of risk zones and censure or refuse to insure jurisdictions where governance is not up to par.  If insurers had refused to insure New Orleans unless the levees were sound, they could have saved themselves $30 bn in payouts and probably twice that in losses.

As an analyst, I find Mr. Carney’s speech is truly dismaying.  For the Governor of the Bank to claim that climate change is leading to rapidly rising insurance claims is, at best, a critical failure of analysis.  As discussed above, insurance claims are a function of a number of factors, including the type and country of the weather event, as well as the extent of insurance coverage and payout ratios.  A hurricane in the US may see one hundred times the payouts of a major flood in India. Payouts will rise as a function of nominal GDP, as both inflation and the value and concentration of assets will play a crucial role in overall losses.  The specific path of a storm can also be decisive for global averages.   It goes without saying that a storm which strikes in Philadelphia, marches up the New Jersey coast, slams into the Manhattan and turns towards New Haven is going to cost a bundle.  That same storm hitting, say, rural Mississippi would cause a fraction of the monetary damages.  And this matters, because Superstorm Sandy caused more insured damages than all the leading weather events in Europe, Japan, and China combined.  Single events can move long-term global averages.

If the Bank missed this, it is not because the necessary data is hard to find.  Information on weather-related events is readily and publicly accessible on the internet.  Almost every graph I use above relating to hurricanes, tornadoes, floods and droughts comes from the US government itself.  Apparently, the Bank of England could not be bothered to consult the underlying climate data before making hyperbolic claims.  Thus, at best, the Bank was careless with data analysis.

A worse interpretation of events suggests that Mr. Carney was willing to blindly accept the conventional wisdom, the ‘consensus of scientists’ regarding global warming, without any will or curiosity to dig deeper and form a personal view.  One can only hope that monetary policy in the UK is not informed by such superficiality or passivity.  

The very worst interpretation is that Mr. Carney is in fact aware of the source data, but chose to make hysterical claims to promote a personal political agenda.  I cannot imagine a more ill-considered idea.  For those of us who consider central bank independence sacred, the appearance of a national bank taking sides in a highly charged political debate—and doing so with scant regard for the underlying data—will establish the Bank of England as partisan and the political opponent of conservative politicians.  Given that Janet Yellen, the Chairman of the US Federal Reserve Bank, hails from Berkeley, a hot bed of climate activism, should the Republican Party consider the Fed also its opponent?  If so, I can assure you, the Republicans will find some support to ‘audit’ the institution. 

At the end of the day, political neutrality is a pre-condition for central bank independence.  If a political party deems the central bank to be an opponent, then it will take measures to gain political control over the bank, with the result that monetary policy itself may become politicized.  If the Bank nevertheless feels compelled to champion a particular side in a political debate, its analysis must be water-tight and its communication, impartial. That Governor Carny violated both dictums is simply stunning and a huge blow to the prestige of the Bank of England.  It was a very bad call indeed.

CAPITULATION

 
They say look for signs of capitulation.

They also say there are no signs of inflation as far as one can see. Most commodity sectors are weaker than a new born kitten. Concerns about anemic demand appear to grow daily. Higher interest  rates supposedly bode well for some sectors like banks and building materials and metals and mining.

The other side of that coin is companies that lend credit to keep their businesses afloat like the auto industry and certain retailers. A stronger dollar goes along with higher interest rates and so does a bigger trade deficit. Prices of  U.S. imports for October reportedly fell 0.5%, the fourth straight dip while prices of U.S.-made stuff exported to other countries declined 0.2% in October.

For the mathematically challenged that's a -0.3% shortfall. Think about it this way, just for kicks. A 0.1% increased in jobs is apparently large enough to make the  trigger-shy, Yellen-led Fed pull the trigger. When in doubt the usual ploy is like those usual suspects: Feed the big dog.

Higher interest rates and a stronger dollar will feed the safe harbor perception on the buck and likely drive it higher when feathers get ruffled in a global world where ruffled feathers are as certain as politicians who look you in eye and lie. In past few months if you've been paying attention several firms have closed or curtailed their emerging market exposure. A lot of that has to do with the crumpling commodity markets. For many EMs commodities is the name of the game.

Today comes news that Goldman Sachs, you remember them from their close ties to the Federal Reserve Bank, "closed its BRIC fund after years of poor returns, the latest sign of how falling commodity prices and weak global demand growth have upended long-held investment strategies," according to the Wall Street Journal.

Apparently, Goldman moved the funds into larger-emerging markets fare, abandoning for now once Wall Street darlings of the future, Brazil, Russia, India and China, the Journal noted. It was Goldman back in 2006 that coined the term BRICs fund. Citing another source, the Journal says, "Retail and institutional assets in commodity investments in the third quarter are down more than 50% from their 2011 peak."

We don't know if this is capitalization and we are well aware of so-called value traps. But if we had to guess, given all that we read, that door is well ajar.

HOMEWORK

As rig counts continue to decline, more hand wringing about China's slowdown and a host of other concerns about slow global growth, here's a chart you might want look at. It's from  
oilprice.com/Energy/Energy-General/A-Big-Week-For-The-Oil-Markets-Ahead-Of-OPEC-Meeting.

Along with an interesting read about energy, it raises some questions. What do these traders know, if anything, that so many others seem not to know? Has the energy glut seen it's worst days and so on. Hedge funds of late have been wrong about many issues, but is that just an aberration or are they onto something here?

Much of today's news in the industry centers on the International Energy Agency's recent report about OPEC's apparent stubbornness to cut production. The fear here is sustained low prices for an indefinite period. Several members--Venezuela, Iran and Algeria--to name a few, face crying time again with prices at this level.

But they are not alone as non-OPEC members pick up the refrain. Much of this comes before what could be a difficult meeting early next month. Where will energy prices settle for 2016 is the latest market topic of conversation and there, like always, is no paucity of opinions. Is it the current price or $60 or $80 a barrel?

That's a scenarios nearly as opaque at the black gold itself. About the only thing that remains clear is investors have their homework cut out for them.