QE GONE AMUCK

In a recent post, "Whatever It Takes," we noted the following:

In a weekend editorial, "No need for hostilities in the money currency war," one anointed genius writes, "The ECB should ignore accusations of competitive devaluation."


Much of the justification for EU QE we have read came from those citing U.S. and UK monetary policy, the assumption being they were not only successful but worth emulating. After all, it seem to work for them. Why not us and what's the holdup?

Talking that up with a litany of excuses why QE is pure and devoid of any nasty ulterior motives, especially those as nasty as competitive devaluation, the Financial Times quipped:

There is little to suggest that the ECB is skewing its policy easing towards weakening the exchange rate.


There were two points in our post, one about the currency wars--Singapore without any warning yesterday cut its interest rates and Denmark which cut rates there--and the idea as expressed in the above quote about emulating what as yet is an unproven successful consequence to the Fed's QE programs.

Reuters today reported:

The Danish central bank cut its key interest rate for the third time in two weeks to another historic low after intervening in the market to keep the crown within a tight range against the euro. 

The central bank cut its certificate of deposit rate to -0.5 percent from -0.35 percent, making a reduction of 45 basis points since Monday last week. 

While analysts said last week that its actions might not be enough to weaken the crown, few expected another cut so soon, especially as Denmark's rate went below the eurozone equivalent of -0.20 percent, making it less attractive than the euro. 


From MarketWatch, Stephen Roach, former chairman of Morgan Stanley Asia and now a Yale University faculty member, yesterday wrote: 

The ECB, however, will have a harder time making the case for wealth effects, largely because equity ownership by individuals (either direct or through their pension accounts) is far lower in Europe than in the U.S. or Japan. For Europe, monetary policy seems more likely to be transmitted through banks, as well as through the currency channel, as a weaker euro EURUSD, +0.06%  — it has fallen some 15% against the dollar over the last year — boosts exports.

The real sticking point for QE relates to traction. The U.S., where consumption accounts for the bulk of the shortfall in the post-crisis recovery, is a case in point. In an environment of excess debt and inadequate savings, wealth effects have done very little to ameliorate the balance-sheet recession that clobbered U.S. households when the property and credit bubbles burst.

MarketWatch

Real consumption has grown slowly since the recession, despite massive quantitative easing by the Fed.

Indeed, annualized real consumption growth has averaged just 1.3% since early 2008. With the current recovery in real GDP on a trajectory of 2.3% annual growth — two percentage points below the norm of past cycles — it is tough to justify the widespread praise of QE.

Japan’s massive QQE campaign has faced similar traction problems. After expanding its balance sheet to nearly 60% of GDP — double the size of the Fed’s — the BOJ is finding that its campaign to end deflation is increasingly ineffective. Japan has lapsed back into recession, and the BOJ has just cut the inflation target for this year from 1.7% to 1%.

Finally, QE also disappoints in terms of time consistency. 

For Roach's full article here's the link.

http://www.marketwatch.com/story/the-lemmings-of-qe-2015- 

THE EUROPEAN MESS

There is never a shortage of fear mongers. Like last year's Scottish referendum, the fear-inspiring crowd rolled out the big dogs the closer and the more in doubt the outcome came.

The same holds true for the current mess called Greece. Greece is a country like others in the EU which has lived above its means. Hardly anything new here, except one might get an argument about who is better at it, the Italians or the Greeks.

And despite what Brussels bureaucrats might be saying now, they knew way back when the EU was being formed, but decided as is their want to look the other way.

The Greeks have been getting handouts from the Brussels' crowd for a long time, far more monies than they sent to  Brussels. All this ranting against the Germans for their fiscal probity, including references to the Marshal Plan after WWII, is blatant verbal legerdemain to cover up the real issue:

Brussels bureaucrats rolled the dice on a known economic half-stepper and the dice came up snake eyes. End of story. Man up and take a tip from Moses--let the Greeks go. The globe will be better off and so will an ill-conceived, poorly-thought-out and improperly-executed creation called the European Union.

Give them the benefit of their beloved drachma.



For once in your pathetic bureaucratic existences, be a group of good cupcakes, suck up the losses and move on. You might even gain a little respect in the process. And for that matter, a name change is also in order, EM--European Mess, you've created.

For the record here's a brief recap of Greece's and the EU's problems. Looks like there's enough blame to go around.

How did Greece and the EU get into this mess in the first place? The seeds were sown back in 2001, when Greece finally qualified to adopt the euro as its currency. Greece had been an EU member since 1981, but its annual budget deficit was never low enough to satisfy the eurozone's Maastricht Criteria.

All went well for the first several years. Like other eurozone countries, Greece benefited from the power of the euro, which meant lower interest rates and an inflow of investment capital and loans.
http://useconomy.about.com/od/Europe/p/What-Is-The-Greece-Debt-Crisis. 

However, in 2004, Greece announced it had lied to get around the Maastrict Criteria. Surprisingly, the EU imposed no sanctions! Why not? There were three reasons.

1. France and Germany were also spending above the limit at the time. They'd be hypocritical to sanction Greece until they imposed their own austerity measures first.
2. There was uncertainty on exactly what sanctions to apply. They could expel Greece, but that would be highly disruptive and possibly weaken the euro itself.
3. The EU wanted to strengthen, not weaken, the power of the euro in international currency markets. This would put pressure on other EU countries, like the UK, Denmark and Sweden, to adopt the euro. (Source:Bloomberg, Greece Cheated, May 26, 2011; BBC News, Greece Joins Eurozone, January 1, 2001; Greece to Join Euro, June 1, 2000).

As a result, Greek debt continued to rise until the crisis erupted. Now, the EU must stand behind its member or face the consequences of either Greece leaving the eurozone, or even worse, a Greek default.

http://useconomy.about.com/od/Europe/p/What-Is-The-Greece-Debt-Crisis.

CROSS POLLINATION HAS ITS RISK

The dismal science is another of those institutions we've alluded to that are hardly held in high esteem by the public today. From our interesting trips and reads around the web here's the best line in the post.

The whole field may end up doomed to failure and hopefully won't become another dismal science, but I thought it was worth a look, and was wondering if any other specs are familiar with it.

If nothing else, it might cross pollinate with some ideas for trading.

source: .dailyspeculations.com
 

Cliodynamics, from Dylan Distasio January 27, 2015 | Leave a Comment

  

 
 
I recently stumbled across the work of Peter Turchin, an evolutionary biologist, who is attempting to applying quantifiable scientific techniques to the study of history as part of a field known as cliodynamics. From the Santa Fe Institute's blurb on it:

The past does not repeat itself, but it rhymes," Mark Twain once said, a reference to the patterns of history, perceived anecdotally. Today, a new field is coalescing around the notion that historical patterns are, to some degree, measurable, and that the future can, also to some degree, be predicted. Researchers involved in the field call it "cliodynamics" after Clio, the Greek muse of history.

Scholars of human history traditionally have studied the past as a chain of idiosyncratic events, with each event a unique response to unique circumstances, says SFI External Professor David Krakauer. Historical fields such as paleontology have relied on collections of evidence—fossils, for example—to draw inferences about the past.

A few fields have made strides in approaching history as a science. In archaeology, for example, rigorous field survey methods have provided new, quantifiable information about the location, distribution, frequency, and organization of certain human activities. In population genetics, evolutionary outcomes are modeled as probabilities. Cliodynamicists would like to see the historical fields sharing methods among themselves and adopting approaches and theories from physics and other long-quantified fields.

The tools of complexity science are now beginning to make the task tractable, Krakauer says. Mathematical and computational techniques such as agent-based models, power-law relations, and more classical differential-equation models are in several fields helping scientists develop new theoretical frameworks, for example.

Although he did not perhaps agree with how reductionistic cliodynamics seems at first glance, I can't help but see echoes of Giovanni Battista Vico's New Science in this effort.
I have to give credit for the sheer audacity of this pipedream.
Turchin has published a book called Secular Cycles related to this topic and also maintains a website. I started to wade through his paper on analyzing the "Dynamics of political instability in the United States, 1780–2010" also. It's not without flaws, but is worth a look.
The whole field may end up doomed to failure and hopefully won't become another dismal science, but I thought it was worth a look, and was wondering if any other specs are familiar with it.
If nothing else, it might cross pollinate with some ideas for trading.

anonymous writes: 

This sounds VERY much like the premise behind Isaac Asimov's Foundation Series, the books that got me hooked on his work and Sci-Fi in general.

From the above wiki:
The premise of the series is that the mathematician Hari Seldon spent his life developing a branch of mathematics known as psychohistory, a concept of mathematical sociology. Using the laws of mass action, it can predict the future, but only on a large scale.  

As long as it doesn't cross pollinate into the dismal science, we're all for it. 









 

YOU DECIDE

We continue to write about what many want to overtly deny, currency wars.

Countries are no different from people. Most will not sit sidle when threatened. The present mess currently called Greece is an example irrespective of the debate. There are other examples. Just before the super rich convened their annual party in Davos reports surfaced how widely disgruntled many felt.

Confidence and respect for elected officials around the globe is sinking faster than a leaky boat. A recent report in the U.S. showed confidence in Congress at all time lows. The same holds for other institutions like MSM.

Most people now suspect research whether its about markets, unemployment or climate change. Many now realize much of it is produced to serve those who paid for it and little if anything about accuracy and truth.

People are beginning to have a much better idea of what's going on than any other time in history, thanks in part to the Internet. For the establishment crowd that a dangerous turn. Central bankers are part of that establishment.

What many fail to discern is, "Doing what it takes" is about as financially dangerous as it gets because the flip side of that is starting currency wars. Push beget push back, not pull.

Here's just one more warning about currency wars.

SOURCE: ZERO HEDGE

Merv "The Swerv" King - former governor of The Bank of England - has joined the ranks of thoseex-central-planners-who-feel-the-need-to-protect-their-legacy-by-rewriting-history-and-admitting-the-entire-thing-is-crazy. Speaking in Tokyo overnight, King said he’s concerned that financial markets believe real interest rates will remain very low for a very long time which has created "a significant disequilibrium in the world economy," adding that he does "not believe and expect a market economy to thrive on real interest rates that are close to zero." Warning that many nations realize "they have pushed monetary policy as far as it can go," King added that with the additional risk of currency wars, "markets will discover that they have been pushing asset prices to an excessively high level and there will be a major downward shock to asset prices."

As Bloomberg reports, Former Bank of England Governor Mervyn King says central banks and governments are becoming more and more strident in their determination to talk down their exchange rates.

“Many countries today can see that they have taken monetary policy as far as they can go.”

“Exchange rate policy may now become an instrument of monetary policy.”

“Since exchange rate changes are a zero sum game, there is a risk of currency war.”

King says disequilibrium in world economy is causing chronic weakness in demand

The must be addressed, says King, noting that monetary and fiscal stimulus may not be able to bring a recovery unless the disequilibrium is addressed

King also explained that he’s concerned that financial markets believe real interest rates will remain very low for a very long time.

“They may be right, they may be wrong,”

“If they are right, I think we have a significant disequilibrium in the world economy. I do not believe and expect a market economy to thrive on real interest rates that are close to zero.”: King

“If they’re wrong, then at some point markets will discover that they have been pushing asset prices to an excessively high level and there will be a major downward shock to asset prices and with debt levels fixed in nominal terms, that could cause some serious problems at some point in the future.”: King

Former central bank chief or not, King is obviously just one guy. So it's just as obvious that the in-crowd will claim the disgruntled-lone wolf defense to marginalized him or anyone else who bothers to question their tactics.

By the same token it's most likely much more dangerous to speak up now than at any other time. So we'll leave you for now while you enjoy the Super Bowl with one of our favorite sayings: 

You decide.

STRONG DOLLAR WINDS

In case you didn't know it, Procter and Gamble, the largest consumer goods firm by sales, is 178 years young.

Back to that in a bit.

Falling energy prices were touted as a big positive for consumers who were expected to get those savings out of their hot little hands in a hurry.

In fact, this was a popular MSM meme second only to last year's big Wall Street one about rising bond yields, something that never happened.

Such memes usually come gift wrapped in the typical, arrogant Wall Street "No-Brainer" packaging. Race track touts used to call them "Sure things."

Consumers and the economy in the eyes of most half-blind economists are Siamese twins attached at the pocketbook. Consumer spending numbers may get revised upwards when they hit the street next month. But the spillover effect has yet to hit industrial firms reporting 4Q earnings, the Financial Times reports.

Headwinds so far include a stronger U.S. dollar, low energy prices, slow global growth and, yes, even those much revered by many bureaucrats, economists and politicians, low interest rates. And a once popular advertising slogan, "Where's the beef?' has now become--with the so-called unemployment rate at 5.6%--where's the average hourly earnings?

Wage growth for all the talk about economic strength in the U.S. has disappointed so far. And that brings us back to Procter and Gamble, the 178-year-old largest consumer goods company by sales and its recent announcement that it's been hit by the "most significant fiscal year currency impact" in its history. 

Those are pretty big words covering a pretty long time.

It's another way of saying earnings are taking a hit. To date much of the price in p/e ratios, it's no secret, has been supported by share buybacks and raised dividends. Some of those dividends paid for with borrowed money. 

So p/e ratios become a concern. Who wants to pay more for less?

Rising interest rates could pose a threat to the wind beneath the wings of those rising dividends without support from rising earnings irrespective of what the Fed does.

SECOND WARNING

 

This is the second warning we've seen in a week about the possibility of oil hitting $200 a barrel in the near future if  searching for new supply dries up owing to a lack of  investment as most majors roll back their E&P spending and cut jobs.

See our earlier post, The Frack Thickens.

Brent crude prices steadied above $48 a barrel today, recovering from earlier losses as the dollar weakened against the euro. Prices were also supported after OPEC's Secretary-General, Abdullah al-Badri, commented yesterday that prices may have bottomed and warned of a risk of a future jump to $200 a barrel if investment in new supplies was too low. Brent is 0.7% higher at $48.49/bbl, while WTI is up 0.6% at $45.40.

Certainly, this could be smoke and mirrors owing to the pain lower energy prices seem to be causing the industry. But just today the newest  bond king, CEO of Doubleline Capital, Jeffery Gundlach, stated oil would not reach $90 a barrel this year, a view somewhat at odds with one oil magnate T. Boone Pickens had suggested earlier. 

Gundlach admitted he knew less about oil markets than Pickens but noted he knew a lot about markets and had put lots of his own money where his view was. So this ought to make for some interesting theater as 2015 rolls on.

In fairness to Gundlach he did mention that geopolitical risk were still there. As an aside, here's one of our favorite recent Gundlach quotes:  “People often repeat things people tell them without thinking,“ he said. “There are phrases in [markets] that make absolutely no sense, kind of like talk from central bankers.”

ECONOMIC OLD MAID

The skeptics--especially those who worship at the alter of central banks--will claim currency wars are more myth than truth.

Someone apparently forgot to tell the Chinese. The Wall Street Journal reported today, "China Nudges Yuan to 7-Month Low," pushed lower by China's central bank to boost growth.

The People's Bank of China set the morning reference rate--which typically sets the daily direction--weaker, with traders in Asia then pushing the yuan down to 6.2537 to the dollar, the closest it's ever been to the weak side of its 2% daily trading band.

A weaker currency should help ease two concerns confronting the world's second biggest economy: weakening exports and softening inflation.                                        

Chinese is reported;y growing at it slowest in almost 25 years, not something that a country with a billion potentially restless people favors. With falling inflation numbers, the fear about deflation spreads and like a room full of measles apparently doesn't discriminate.

The drop on the yuan engineered by the People's is the latest response to persistent global economic weakness that is a legacy of the global financial crisis.

Many central banks have resorted to letting their currencies fall against their trading partners. In the short term, weakening a currency helps exporters by making their goods more competitive in foreign markets.

This is an economic replica of a once popular card game some played growing up called Old Maid. The object was not to get stuck holding the Old Maid card at the end of the game. With Japan already at the table--not to mention other central banks--and the ECB now pulling up a chair, the picture should be getting clearer.

With the U.S. economy being held up as the big recipient of all the Fed's QE and the big dollar rally, one should by now have a decent idea about who the Old Maid is.
  
The skeptics tell whoppers. 

AMERICA EUROPEAN STYLE

From time to time we select pieces we see from the web we think our readers will find interesting. Here's one we like from
http://www.dailyspeculations.com/wordpress/.

It's unlikely that many have heard of the Ten Thousand Commandments. It's the title of an annual report which measures Congressional legislative progress and then contrasts its record with that of the "rules and regs" initiated by a host of federal agencies in the same period.

The most recent report reveals that Congress managed to enact 72 pieces of legislation. Federal agencies, chief among them the Departments of the Treasury, Commerce, Interior, Health and Human Services, Transportation, and the Environmental Protection Agency pumped through 3,659 new rules. The annual "rules and regs" price tag? $1,863 trillion - to put that amount in perspective, the Feds annual "take" from individual taxpayers was $1.234 trillion.

In addition to the enacted rules and regs, there are an additional 2,500 "proposed" regs awaiting a final go-ahead. There are also over 24,000 "public notices" regarding many of our daily concerns. Among these are issues of health care, education, energy production, finance, land and resource management, etc.

It's imperative to understand that agency rules and regs are legally binding decisions which are written and implemented by groups of nameless, faceless, and unelected individuals — many of whom, like members of Congress, have agendas of their own, but unlike members of Congress, are unanswerable to the American public.

ECONOMIC DUELING

 

Back in the day dueling was often the solution of choice to solve a problem or difference.

Weapons varied from pistols to swords to whatever. Today dueling still exists, but the weapons have changed. Today's weapons of choice are QE and beggar thy neighbor.

A host of central banks recently picked up the trend, Canada, Denmark among others, with the 800 pound gorilla, Japan, sending out a shock wave of jitters with their own form of "Whatever it takes."

To cover its tracks Japan's central bank counterpart to Super Mario, a relaxed Haruhiko Kuroda, taking a theme from a popular song not too long ago, urged the world, don't worry, be happy.

The money-printing crowd will no doubt deny this for obvious reasons. They want what they want, a good old fashioned exterior house painting, in many circles known as a feel good factor notwithstanding that the interior is as usually rotting away. We call it monetary curb appeal.

We have written before and we will mostly do so again that the worst nightmare of politicians and bureaucrats is the Internet. With most of MSM in their hip pockets, it's a medium that's prevented these denizens of the world capitols and Davos from wreaking more unquestioned havoc on the masses.

The only creditability that Super Mario and his fellow dolts at the ECB will bring in the end is the current growing mistrust of these folks is warranted by 10 to the 10th power. 

When it fails to improve things these power-seekers will do just that, call for more independence, a receipt for further enslaving the masses and a clear shot at rolling back one of the major benefits of the Internet.

The journalistic meme waiting in the wings is what Financial Times columnist Martin Wolf floated last week when he wrote that if the ECB QE plan fails it won't be because it's independent but because "it's not independent enough."

EU inflation in December was positive, though it might not have been anywhere near what these bureaucrats wanted to cover up their perfidia. But the problem isn't one of printing more money. Europe is a cesspool of over-regulation, a chastised banking system and a cauldron spineless politicians.

In the end, the Super Duper Mario's legerdemain will be discovered just for what it is, economic sleight of  hand.

Meanwhile, expect the dueling to continue.And plan your investments accordingly.

EITHER WAY THE TRUTH GETS FRACKED

The possibility of more fracking woes seems to be spreading faster than a big oil spill. Low energy prices along with deflation worries are only a couple of many facing the industry.

Hydraulic fracturing in shale for oil and gas should be put on hold in the U.K. because of risks to public health and the environment, a panel of lawmakers said.
A moratorium on fracking is needed to prevent the U.K. from missing its carbon targets and allow time to stiffen regulations for the industry, Parliament’s cross-party Environmental Audit Committee said in a report Monday.

It called for measures including a ban on venting methane, public disclosure of chemicals used for hydraulic fracturing, and a regulatory regime to be written specifically governing fracking.
“Fracking cannot be compatible with our long-term commitments to cut climate-changing emissions unless full-scale carbon-capture-and-storage technology is rolled out rapidly,” Committee Chairwoman Joan Walley, a member of the opposition Labour Party, said in a statement. “There are also huge uncertainties around the impact that fracking could have on water supplies, air quality and public health.”

The Conservative-led government has promoted fracking by Cuadrilla Resources Ltd., IGas Energy Plc and other companies by cutting taxes and opening up swathes of the countryside to bidding for drilling licenses. 

The Bowland basin in Lancashire alone is estimated to hold as much as 1,300 trillion cubic feet of gas, enough to meet U.K. demand for half a century.
Lawmakers will debate Monday an Infrastructure Bill that would allow fracking companies to drill deep under land without the owner’s permission.

‘Profoundly Undemocratic’

Six thousand residents of a small northern Montana town recently awoke one morning to find that their tap water smelled and tasted like hydrocarbons. 

That turned out to be a good call as a pipeline beneath the Yellowstone River has sprung a leak and contaminated their water. Officials had to truck in bottled water.

Make no mistake in the UK and other places there's a huge egotistical political war being waged with huge goodies at stake. Besides some innocent folks like you and me the real victim will turn out, as usual, to be the truth.

What's interesting about the cited article is the phrase, "Profoundly undemocratic."

We like it. It sounds a lot like what the ECB and Super Duper Mario did just last week--endanger peoples' future without their permission.

So if you want to do your part to bring back higher energy and gasoline prices at the pump, grab your cardboard sign with the witty slogan and join the protestors. We  know more than a few speculators who will thank you profusely for it once prices start back up.

http://fuelfix.com/blog/2015/01/25/u-k-lawmakers-urge-fracking-moratorium/