ABSOLUTE HEDGING?

 Well, the news is out. Probably.

Here's a headline from CNBC: Yellen: "Rate hike probably appropriate in the coming months."

Federal Reserve Chair Janet Yellen answered questions at Harvard University on Friday as markets looked for more hints of when the central bank will hike interest rates. 

Her appearance comes as colleagues on the Fed's policy making committee have pointed to an increase in the federal funds rate target sooner rather than later. Yellen has expressed caution this year on rates, as inflation lags below the Fed's 2 percent target and possible global risks persist. 

Federal Reserve Chair Janet Yellen said Friday an interest rate hike is "probably" appropriate in the coming months if economic data improve. 

"I think for the Fed to gradually and cautiously increase our overnight interest over time and probably in the coming months, such a move would be appropriate," she said at Harvard University.
Her appearance comes as colleagues on the Fed's policy making committee have pointed to an increase in the federal funds rate target sooner rather than later. Yellen has expressed caution this year on rates, as inflation lags below the Fed's 2 percent target and possible global risks persist.
Yellen said "the economy is continuing to improve." She said she sees growth picking up after a sluggish first quarter. Yellen added that oil prices and the dollar are "roughly stabilizing," which will help inflation move toward the Fed's goal. 

"There's noting more dangerous than absolute certainty," goes an old saying. What about absolute hedging? 

STAY TUNED

It's been pointed out by us and others, praise of the Federal Reserve usually comes near market tops not bottoms. Such occurred during the Greenspan years and we are starting to see some now.

Along with it we usually see the cheerleaders telling any and all who will listen things are better than they appear, including much purposeful denial. This bull market is old. It's benefited from all sorts of artificial stimulants, aberrant cheap money, stock buy backs and what has always been a standard Wall Street favorite, fudged earnings. If it were a human it would've been busted for drug abuse long ago.

Now the Fed is set to make a move, one that's been more broadcast than a hurricane alert. Apparently, the news somehow skipped corporate profits and farmers. Here's the story line from two WSJ articles today, "Farm Belt Banks Tighten Buckle," and "No Relief for Corporate Profits."

Let's take farmers first, "....with the farm slump moving into its third year, banks have become pickier, requiring some growers to cough up more collateral and denying financing outright to some customers who need it to pay for seeds, crop chemicals and rent." The Journal quotes the U.S. Department of Agriculture: "... net farm income will slide this year to $54.8 billion, down 56% from its peak in 2013 and the lowest level since 2002. Debt-to-asset ratios among farmers expected to rise for fourth year in row."

And about those corporate profits. Pinched is the kind term the Journal uses. "As if it wasn't bad enough for investors that the economy has been growing slowly, they are also getting a shrinking share of it."  That shrinking share is corporate profits.  No doubt some will name the energy sector downturn, the strengthening dollar and such, but that's hardly the whole picture.

Fourth quarter domestic corporate profits, excluding greenery, the Journal notes, were "down 3.8% from a year earlier." If as the Fed apparently believes the labor market is tightening than wages--wages that for the most part have been flatter for years than most table tops--should be set to rise, further squeezing corporate profits.

The latest report on corporate profit out today showed:
Friday’s report also offered the first official estimate of U.S. corporate profits during the first three months of the year. Profits after tax, without inventory valuation and capital consumption adjustments, rose at a 1.9% rate from the fourth quarter.
The modest rebound came after two consecutive quarters of falling profits. Still, profits were down 3.6% last quarter compared with a year earlier.

“This weakness in profits is likely contributing to the recent pullback in business spending and hiring growth,” J.P. Morgan Chase economist Daniel Silver said.

A separate measure that more closely aligns with economic output, pretax profits with inventory valuation and capital consumption adjustments, rose at a more modest 0.3% rate in the first quarter and declined 5.8% from a year earlier.

Nor will higher earnings for workers necessarily translate into more consumer spending as household debt levels are nearly back to where they were when this mess all began .As the say: Stay tuned.

ELECTION YEAR PROMISES

It's certainly an election year. And we all know what that means, promises, promises, promises.

Probably the best thing about those promises is they never get kept because they are almost always the wrong promises, short-term in nature at best and never address the real long term problems. Long standing problems seldom get solved without some pain. And that's one of the problems. Few if any have the guts to tell the truth and in turn to address.



It's election season, and that means we're hearing a lot about how to fix the economy. 
It can almost seem as if the government is banging its head against the wall making more and more adjustments, only to see the economy stay in slow-growth mode.
Howard Marks, cofounder of Oaktree Capital Group, ran through all of the attempts or promises from politicians and institutions in his latest investment memo.

He found the proposals to be wanting, mostly due to their short-term nature, rather than an attempt to adjust the economy long-term.

"Most ordinary citizens don’t have what it takes to figure out what is and isn’t economically feasible," Marks wrote. "Since we’re in the midst of election season, with promises of cures for our economic woes being thrown around, this seems like a particularly appropriate time to explore what can and can’t be achieved within the laws of economics."

"It’s my goal here to point out how some of the things that central banks and governments try to do – and election candidates promise to do – fly in the face of those laws," he added.
Marks ran through eight current policies and proposals set forth by the government and their failures to adhere to the basics of economics. They were:

businessinsider.com/marks-government-has-no-idea-how-to-fix-economy-2016-5?

OVERNIGHT

Prime Minister Shinto Abe reportedly has postponed an expected 2017 tax hike until 2019 helped lift Japanese shares in early trading Friday boosting shares that most benefit from a weaker yen.

In thin trading the Nikkei edged higher 0.4% at 16,846.32. Barring any surprise the index could finish the week up neatly one percent. There's no quest the expected VAT tax has weighed on markets as investors worried about that coupled with global concerns. Now, however, with the prospect of higher U.S. interest rates closer suggesting better economic growth in the globe's largest economy investors relaxed a bit.

In other markets, the KOSPI was up 0.42, the Hang Send was down 0.13, the Shanghai Conposite was also down 0.30 and the ASX All Ordinares Index was up 0.57%. Yet to come is Friday's speech at Harvard by Fed Chair Janet Yellen as investors will be scrutinizing for any hints about exactly when rates in the U. S. will be going up, June it July. Maybe even both. Her talk caps off the week of other Fed members speaking at various events softening up investors for what's ahead, some believe.

ABOUT THAT BLOOD TEST

Elizabeth Warren is a strange animal, an officer of the court with some apparent strange views.

• 
  

  

  Chairman of theSenate Banking CommitteeChristopher Dodd (D-CT)
 
• Chairman of theSenate Budget Committee Kent Conrad (D-ND)

  

The liberal Massachusetts Senator now apparently wants to make buying property on the cheap a cardinal offense. We seem to recall a former Democrat Senator from Connecticut who refinanced his home with Countrywide Mortgage on the cheap. Countrywide you might recall was deeply involved in the subprime mess. Their CEO, Angelo Mozilo, was later described "In the documentary film Inside Job Mozilo is cited as one of the persons responsible for the Economic Meltdown of 2008 and named in Time Magazine as one of the "25 People to Blame for the Financial Crisis". Condé Nast Portfolio ranked Mozilo second on their list of "Worst American CEOs of All Time".^[21]  

businessinsider.com/trump-vs-warren-spat-might-be-the-future-of-political-campaigning-2016-5

Did she get into Harvard on the cheap when she checked that box claiming she was a minority?
Seats at Harvard as we understand it are pretty precious, hard to come by. She claims in her book she just took the word of her parents. For someone as inquisitive as she appears to be, Harvard Law School graduate and all, that seems a rather flip answer. Did she never wonder enough to verify it?

But we now have testing available to see if she indeed has any American Indian blood coursing through her political agenda veins. Did she take a true minority's seat on the cheap? Did someone suffer from her possible callousness? Is she a seat grubber? Since Ms Warren invoked the name Dodd in her criticism of Mr. Trump, here's quote from Wikipedia.

The Countrywide financial political loan scandal in 2008-2009 involved U.S. politicians who allegedly received favorable mortgage rates.

In June 2008 Conde Nast Portfolio reported that numerous Washington, DC politicians over recent years had received mortgage financing at noncompetitive rates at Countrywide Financial because the corporation placed the officeholders in a program called "FOA's"--"Friends of Angelo", Countrywide's Chief Executive Angelo Mozilo. The politicians extended such favorable financing included the chairman of the Senate Banking Committee,Christopher Dodd (D-CT), and the chairman of the Senate Budget Committee, Kent Conrad (D-ND). The article also noted Countrywide's political action committee had made large donations to Dodd's campaign.^[1] The largest recipient of campaign contributions from Countrywide, though, was Rep. Ed Royce (R-CA), House Financial Services Committee), who has received $37,500 since 1989. ^[2] Dodd has advocated that the federal government, through the Federal Housing Administration, insure up to $300 billion in refinanced mortgages for distressed homeowners.^[3]

Franklin Raines, then Chairman and Chief Executive Officer of Fannie Mae, on July 31, 2002

It was reported by the Wall Street Journal on 6 June 2008 that 2 former CEOs of Fannie Mae, Franklin Raines and James A. Johnson, who was also an adviser to then-Democratic presidential candidate Barack Obama, had received loans from Countrywide.^[4] On July 16, 2008, The Washington Post reported that Franklin Raines had "taken calls from Barack Obama's presidential campaign seeking his advice on mortgage and housing policy matters."^[5] However, Raines and the Obama campaign both allege that Raines has never advised Obama.^[6] See Raines and Obama.

Are favorable mortgage rates synonymous with "on the cheap?" 
The good Senator then calls Trump out: “Donald Trump is worried about helping poor little Wall Street? Let me find the world’s smallest violin,” she said. She later added: “Can Donald Trump even name three things that Dodd-Frank does?” 

One would think Ms Warren, being a lawyer, might be interested in facts. Here's a fact, a known one, a published one. Hillary Clinton received more money from Wall Street than both of the other current presidential candidates together. Just ask Bernie. 

And here's list from CBS of some others during that time who received loans from Countrywide:
Speaker of the House Nancy Pelosi's son Paul Pelosi, Jr. also received a loan with Countrywide. Barbara Boxer, Adam H. Putnam, Richard C. Holbrooke, James E. Clyburn, and Donna Shalala are among those with mortgages from Countrywide. CBS News has obtained the following list of then-Fannie Mae employees whose names have been turned over to investigators as having received VIP loans from Countrywide:^[19]

Even if Ms Warren's charges are true, apparently he's not the only prominent person who likes to make money on the cheap. Meanwhile, we don't know about Trump, but we can name three things Dodd-Frank does: nothing good, nothing good, nothing good. 

Now, Senator Warren, about that blood test.....?

FED FORECASTING

There are several things amiss with this article. That it appeared on Bloomberg, however, tells you most of what you need to know. That the author is a former member of the Fed is another. Then there's most likely the most damning part: he's an economist.

One could start with the old joke, economists have correctly predicted 10 of the last three recessions. Of all the social sciences, economists are probably the most pathetic. And that's saying something because sociologists are right up there, too.

In the main when it comes to clear writing neither one could pass a decent freshman composition class in even a subpar English department. But to be precise we'll focus on economists and their  econometric babble. A data wonk is a data wonk.

He writes:  bloomberg.com/view/articles/2016-05-25/the-fed-s-amazing-self-fulfilling-forecast

The Federal Reserve’s track record of economic forecasting is a lot better than many observers recognize. It might also offer some insight into the central bank’s approach to managing the recovery.

Criticism of the Fed’s forecasting has focused largely on its failure to recognize, as late as mid-2008, the depth and persistence of the recession that the global financial crisis would engender. I agree that this error -- which the Fed was not alone in making -- should lead economists at the central bank and elsewhere to do a better job of including financial markets in their forecasting models.

That said, the Fed’s forecasters did better after the recession. Consider, for example, the projections they supplied for the central bank’s November 2010 policy-making meeting (the latest for which staff materials have been released to the public). Here’s how their estimates of unemployment and inflation, formulated in October 2010, compare to what actually happened:

What the good author conveniently leaves out is the "actual"  numbers he cites are bogus. Actual unemployment numbers were far higher than that. It's just that this good economist and his friends at the Fed use their well selected indicators to tally the numbers not anyone else's. The same holds true for inflation. Obviously, this dude wasn't out looking for a job during this time.

To suggest, as he does, that the Fed's forecasts even remotely compare with what happened is what your mother used to threaten but is now politically incorrect, wash your mouth out with soap. Notice his little deceptive attempt to misplace the criticism of the Fed, saying most of it centers on the failure to see the recession coming.

Early on that might have been true, but not for the last few years. It's been about excessive money printing. One round of QE after another because they didn't' then and still don't have a clue about what they're doing. Many of the Fed's defenders are like the Trump critics. Trump is rattling cages, pointing out deep flaws in the system's fabric. It's a system, like the Fed, that's in dire need of substantial changes.

People are growing increasingly sick of a system that keeps screwing with their lives. And the same holds for an institution of non-elected, academic, out-of-touch bureaucrats who make up the rules and their bogus indicators as they go along. 

OVERNIGHT

A lot of people said it wouldn't happen and maybe it's only temporary, but Brent crude in Asia overnight just broke $50 a barrel. After recent weeks of trending up oil finally breached the $50 mark for the first time since November of last year. Part of the reasons being given for the surge in prices is supply constraints.

Meanwhile, Japan’s Nikkei Stock Average was up 0.3%, while Australia’s S&P/ASX 200 was down 0.2% and Korea’s Kospi slipped 0.1%. In China, the Shanghai Composite Index slipped 1%. Hong Kong’s Hang Seng Index was down 0.2%.

The WSJ reported: Chinese stocks also extended their retreat, in what could be the Shanghai Composite Index’s third straight day of losses. Energy shares, however, bucked the trend, as China’s CSI 300 energy subindex was up 0.3%.
Concerns about the health of the U.S. economy resurfaced, after an early reading of the Markit Economics’ services purchasing managers index came in weaker than expected overnight.
In a sign of investors’ caution, the price of gold, a traditional safe-haven asset, rebounded in early Asian trading Thursday to $1,232.30 a troy ounce.

Oil prices have been in the doldrums for nearly two years, but recent supply disruptions and growing demand from China and India have injected fresh optimism into the market. Prices are now nearly 80% higher than where they were in February when they hit a 12-year low.

The U.S. dollar lost 0.5% against the yen to trade at 109.64 in early trade notwithstanding the expected raise in interest rates.

GOLD AND CENTRAL BANKS

This is really an article about confidence or the lack thereof in central banks.

One might ask, is it just being sage or fearful to hedge one's own policy? We'll leave that up to you, but that appears what central bank policymakers are doing, hedging their own policies.

As pointed out in this article central banks up to about 2010 were selling gold. Remember, it doesn't yield anything. We recall a bit earlier when the German central bank sold a bunch of it claiming it had done so just for that reason. Now it seems things have changed a bit. They want to own this non-yielding asset. Apparently, they don't read MSM.

The author, Frank Holmes, has been running funds related to gold for more than a generation. This could be a positive or negative, depending on how one slices it. Here's how we slice it: We own gold.

Beginning in 2010, central banks around the world turned from being net sellers of gold to net buyers of gold. Last year they collectively added 483 tonnes—the second largest annual total since the end of the gold standard—with Russia and China accounting for most of the activity. The second half of 2015 saw the most robust purchasing on record, according to the World Gold Council (WGC).

Not every top bank is a net buyer. The Bank of Canada has liquidated close to all of its gold, mainly in coin sales, while Venezuela is in the process of doing the same to pay off its debts.

But most of the world’s central banks right now are accumulating, holding and/or repatriating the precious metal. As of this month, they reportedly owned 32,754 tonnes, or about 17.8 percent of the total amount of gold ever mined, according to the WGC.

It’s worth noting that this global gold-buying spree coincides perfectly with the rise of unconventional monetary policies following the financial crisis—massive bond-buying programs, rapid money-printing schemes and near-zero or, in some cases, negative interest rates. The jury’s still out on whether these measures have been a success or not, but for now, it appears as if banks are hedging against their own policies.

Investors would be wise to do the same. Confidence in central banks’ ability to stem further economic deterioration continues to deflate.

Below are the top 10 countries with the largest gold holdings...

.businessinsider.com/top-10-countries-with-the-largest-gold-holdings-2016-5?

A POLITICIAN'S POCKET

Don't know about you, but when I was a small kid my mother always warned: "Don't put money in your mouths. It's dirty and you never know where's it's been."

Part of that warning I always figured, since she was an RN, came from that side of her. But now that we're all facing what the power elitists want, a cashless society, my opinions have grown. Apparently, in their view, judging from this lead to a recent Bloomberg piece, it's even dirtier today than it was then.

"Cash had a pretty good run for 4,000 years or so. These days, though, notes and coins increasingly seem declasse; they’re dirty and dangerous, unwieldy and expensive, antiquated and so very analog.”

Now we're going to go out on a limb here. It's territory we don't mind occupying. It turns out dear mom was right. It was just at that early age one of the places then that never occurred to us was a politician's pocket.

To be sure there are some dirty places, rest rooms and kitchen floors, Colorado Boulevard after the annual Rose Parade. A business acquaintance runs a scrap iron business, one of the backbones of the global economy. It's a place with enough dirt and grime and dust that several times a year he gets a visit from the climate change police. They usually want some of that dirty stuff mother warned against. You and I know it as a fee.

So if you don't get hung up on the short term implications of things and focus on the long terms ones, you realize where this is headed and just how dirty it all is.

Yes indeed.  Cash is, as they say, “déclassé,” a characteristic of the lower classes. Hmm, what does that mean exactly? Anyone other than the 1% of the population?  Maybe they are concerned about us plebeians, who stalk farmer’s markets for non-GMO food and who dare to pay cash to support a local farmer. Or perhaps the Congressional lobbyists have discovered that envelopes with cash are just too blasé. 

Remember when those pallets of one hundred dollar bills – to the tune of $12 billion – were sent from the New York Federal Reserve Bank to Iraq?  They just lost track of it. This falls under the Bloomberg category of unwieldy and expensive. When digital currency is a way of life, funding illegal wars won’t be so messy. Bloomberg editors also compare cash to being analog in a digital world. 

Personally, I like individual freedom and the sound of vinyl records, but hey, I’m old school. This rise of digital currency is just one more step toward one world government and total domination. But hey, don’t worry your pretty little head about it, because the beast had already collected your health records, all transactions, emails, tweets and twitters, phone calls, likes, dislikes, social networks and anything else you’ve willingly yielded. 

prophecy.news/2016-05-23-your-dirty-cash-will-soon-be-extinct-for-your-safety-of-course.

CUTS TWO WAYS

Markets are touted as discounters. Buy on the rumor, sell on the fact stuff.

That the Federal Reserve is completely dumbfounded, despite its defenders, should no longer be debatable. Much of this week, as nearly everyone now knows, they have their minions, voting members and otherwise, appearing in public, softening up investors for future rate hikes.

The fix to make the dollar stronger is already in as an apparent deal's been struck to have America and it's historical consumer-crazy hordes bail out other economies. Under the guise that the world's largest economy is doing better than most after it's long drenching in free money from the Fed, we'll buy the rest of the globe's crap. That's what we're good at.

Problem is these bureaucrats apparently never heard of yin or yang. As noted in today's WSJ, their dollar index is up 3.2% so far this month. Like everything else, however, the dollar doesn't exist in a vacuum. If it's going up, something else must be going down. Like for starters emerging markets currencies as in the Mexican peso, 7.1%, the Turkish lira, 5.1% and the Colombian peso 6.8%, to name a few.

Then there's the yen and the yuan and a gaggle of commodities like copper, silver and gold. The S&P GSCI Industrial Metals index is off nearly 9% this month also since many commodities have to go through the dollar to trade. Why is this important? Well, it's hard to engineer a global recovery without some demand for basic stuff.

Long suffering emerging markets surprised many so-called pundits by starting off this year on the upswing only now since March when the dollar rally began to reverse course. Money of late is exiting emerging market funds like a band of Chinese investors were pulling capital out of their homeland earlier this year before government officials stepped up the penalties. But here's another view, one investors might find interesting from Deutsch Bank.

But the problem, according to Deutsche Bank's global economics team, is that by preparing markets for future interest rate hikes the Fed potentially hampers its ability to actually carry out those hikes in the future. Said another way, the Fed appears stuck in a negative feedback loop wherein suggestions that higher rates are coming create the unsettled conditions that ultimately force the Fed to keep rates right where they are.

And so on. Deutsche Bank's latest note looks most closely at the Fed's relationship to financial conditions and whether a tightening of these conditions — basically, interest rates rising, credit issuance slowing — would prevent an interest rate hike. The short answer is maybe.
 
But in my view the main takeaway from the report is that right now there are a number of tides the Fed is swimming upstream against, making its prospects for carrying out future rate hikes a potential challenge. Almost the least of which are how tight financial conditions either are or are not.

 

Deutsche Bank Financial conditions matter except when they don't, according to this chart.

Here's Deutsche Bank (emphasis added):

The recent drumbeat of hawkish commentary from the Fed, along with last week’s release of the minutes from the April FOMC meeting, has triggered a sharp re-pricing of expectations for Fed rate hikes by the market. While the market was only pricing about 4% odds of a rate increase in June less than two weeks ago, those odds now stand close to one-third.

It is believed that this shift in rhetoric toward a more hawkish message will ultimately be self-defeating. By signaling rate hikes, interest rates adjust higher, the dollar strengthens, and risk assets may come under pressure. This produces tighter financial conditions, which ultimately prevent, or at least limit, the eventual rate increase. This natural tightening of financial conditions in response to rate hikes is expected.

But there are reasons to believe that this negative feedback loop may be more severe in the current environment: a stronger dollar is likely to increase pressure on China’s currency and weigh on commodity prices, thereby re-introducing the key elements of stress that led to a sharp tightening of financial conditions earlier this year.

If this view is correct, the scope for further rate increases by the Fed is reduced. 

So again, by saying higher rates are coming the Fed creates a sort of chain reaction in financial markets that lead, among other things, to tighter financial conditions, a strong dollar pressuring commodity prices, and stock markets potentially getting rattled.

This is the thinking that undergirds the idea that the Fed can never really raise interest rates.
If you view the Fed's ultimate goal as raising interest rates from current levels, this is a problem. But if you view the Fed's posturing as merely that, well, none of this is really a surprise.
In the end, Deutsche Bank's conclusion is really just mealy-mouthed economist speak (again, emphasis mine):

The evolution of financial conditions will be critical for whether the Fed will be able to raise rates in the coming months. Our analysis finds evidence that a negative feedback loop does exist between the market’s expectations for the Fed and financial conditions. However, we believe that, absent a shock from China in the months ahead – which is clearly difficult to predict – it is unlikely that a negative feedback loop that tightens financial conditions will prevent the Fed from hiking.

Alternatively: here is a problem for the Fed, except right now it isn't a problem, unless it becomes a problem. So as tends to be the case with Fed-related forecasting, whatever you were already thinking can probably be justified. 
It cuts both ways. So we will see.