Operation Twist was announced yesterday. Interesting back story -- there was a study put out in 2004 by three Fed heads to determine whether the first iteration in the 1960s served any meaningful end. The conclusion:
"Operation Twist is widely viewed today as having been a failure, largely due to classic work by Modigliani and Sutch."
Here's the punch line -- one of the three authors: Ben S. Bernanke.
Thursday, September 22, 2011
Ouch, baby. Very ouch.
Well, the past two days have been bad. Other than treasuries, there is seemingly no higher ground to run to. Well, I guess cash probably would have been a good option by the close on Tuesday. But, be that as it may, I thought I would offer my take on the technical picture.
Starting with the S&P 500 -- the key support is around 1120-1125. That level held today. But, if I am to stay consistent with the view that I expressed earlier this week, I don't expect that it will indefinitely. Nevertheless, I am not going to play it, because (again, to remain consistent) I fully expect Bernanke's hand to be forced and for a further response and intervention. And I don't want to be caught flat-footed when that happens. There are certain individual positions I own that look really tempting at these levels, so I may dabble with those. But, to be clear, these are ideas that I think about in terms of years, not days, weeks or months.
As for the gold chart, it also got beaten up pretty good, but it looks much healthier to me. For starters, it bounced right around the level I was expecting. (If you want to play along at home, pull up the gold chart, connect the lows on 8/8 and 8/25 with a line and keep going east -- see what I'm talking about?) The other part is that gold's decline is solely a US dollar story. Check it out in just about every other currency -- the buyers are there globally. For the moment, the fast money/hedge fund crowd is puking up everything, as the computer trading programs flash "SELL, ASSHOLE!". But, that too shall pass.
Anyway, that's how I see it for the moment. We'll see how it plays out.
Starting with the S&P 500 -- the key support is around 1120-1125. That level held today. But, if I am to stay consistent with the view that I expressed earlier this week, I don't expect that it will indefinitely. Nevertheless, I am not going to play it, because (again, to remain consistent) I fully expect Bernanke's hand to be forced and for a further response and intervention. And I don't want to be caught flat-footed when that happens. There are certain individual positions I own that look really tempting at these levels, so I may dabble with those. But, to be clear, these are ideas that I think about in terms of years, not days, weeks or months.
As for the gold chart, it also got beaten up pretty good, but it looks much healthier to me. For starters, it bounced right around the level I was expecting. (If you want to play along at home, pull up the gold chart, connect the lows on 8/8 and 8/25 with a line and keep going east -- see what I'm talking about?) The other part is that gold's decline is solely a US dollar story. Check it out in just about every other currency -- the buyers are there globally. For the moment, the fast money/hedge fund crowd is puking up everything, as the computer trading programs flash "SELL, ASSHOLE!". But, that too shall pass.
Anyway, that's how I see it for the moment. We'll see how it plays out.
Tuesday, September 20, 2011
I Sometimes Moonlight as a Soothsayer...
With about 24 hours to go until the Fed announces what comes next, I figured I should put myself on record with a prediction. Given that it will be based on nothing more than tarot card readings, the above title is entirely appropriate.
Operation Twist (the sale of shorter-term securities to buy longer-term securities) has gained traction as the most likely outcome right now. I think that means it has probably been priced in already. And if you look at a daily of the S&P 500 for the past two months, you could make the argument that the discussion of Operation Twist simply created a consolidation pattern (following the market crash that started on July 25th) before the next leg down. It certainly looks like a double top is forming, at a minimum.
Thus, I think the Fed will need to be bold, and probably will be bold, since the market has become a key metric by which it takes the economy's temperature (to borrow from David Rosenberg). And (to borrow from Bill Fleckenstein), whether I'm right or not, the Fed probably will be forced into something meaningful anyway, because the market will tank if there isn't a new program of easy money rolled out tomorrow.
Operation Twist (the sale of shorter-term securities to buy longer-term securities) has gained traction as the most likely outcome right now. I think that means it has probably been priced in already. And if you look at a daily of the S&P 500 for the past two months, you could make the argument that the discussion of Operation Twist simply created a consolidation pattern (following the market crash that started on July 25th) before the next leg down. It certainly looks like a double top is forming, at a minimum.
Thus, I think the Fed will need to be bold, and probably will be bold, since the market has become a key metric by which it takes the economy's temperature (to borrow from David Rosenberg). And (to borrow from Bill Fleckenstein), whether I'm right or not, the Fed probably will be forced into something meaningful anyway, because the market will tank if there isn't a new program of easy money rolled out tomorrow.
Fiscal Stimulus...The Side Effects
An interesting anecdote from the comments section of Scott Sumner's blog:
"The Obama stimulus sent $350 million to New York City's Metropolitan Transit Authority to fund construction of the infamous Second Avenue Subway.
This while the Transit Workers Union, a hugely politically powerful government employees monopoly, was negotiating its next contract and threatening an illegal strike, as always. The Democratic politicians kicked the contract dispute to mediation with a pro-union mediation board (headed by the previous head of the union). The board found $350 million of excess funds available in the MTA's construction account -- excess because they weren't in the MTA's original construction plans, and money is fungible -- and used them to give the union an 11% pay raise.
This happened while the MTA was so broke that it was not only raising fares but also being bailed out by a new state-leveled employment tax imposed on workers in communities up to 80 miles away from the nearest subway station.
So at the height of the Great Recession, with unemployment going up to 10%, the union got an 11% pay raise paid for with stimulus money.
Net result: Zero new construction, zero new jobs, and when the stimulus funds run out the MTA will have no means to finance the permanently higher wage level (except more fare hikes and bigger tax increases) which will be the base from which the next demand for a raise is made ... all at the mere cost of $350 million added to the national debt."
"The Obama stimulus sent $350 million to New York City's Metropolitan Transit Authority to fund construction of the infamous Second Avenue Subway.
This while the Transit Workers Union, a hugely politically powerful government employees monopoly, was negotiating its next contract and threatening an illegal strike, as always. The Democratic politicians kicked the contract dispute to mediation with a pro-union mediation board (headed by the previous head of the union). The board found $350 million of excess funds available in the MTA's construction account -- excess because they weren't in the MTA's original construction plans, and money is fungible -- and used them to give the union an 11% pay raise.
This happened while the MTA was so broke that it was not only raising fares but also being bailed out by a new state-leveled employment tax imposed on workers in communities up to 80 miles away from the nearest subway station.
So at the height of the Great Recession, with unemployment going up to 10%, the union got an 11% pay raise paid for with stimulus money.
Net result: Zero new construction, zero new jobs, and when the stimulus funds run out the MTA will have no means to finance the permanently higher wage level (except more fare hikes and bigger tax increases) which will be the base from which the next demand for a raise is made ... all at the mere cost of $350 million added to the national debt."
Sunday, September 18, 2011
Quote of the Day
"A bubble is a bull market in which the user of the word 'bubble' has not fully participated."
-Jim Grant
If I were going to change anything about the above, it would be to add the words "These days..." right at the beginning.
-Jim Grant
If I were going to change anything about the above, it would be to add the words "These days..." right at the beginning.
Get Over It
Having not watched it live, I just saw video of Mayweather's "controversial" knockout of Victor Ortiz. I don't see what the hoopla is about. Let's run through it.
Ortiz blatantly head-butts Floyd during an exchange in the corner at the end of the fourth round -- literally bending his legs to get more propulsion as he smashes up with his forehead (the hardest part of the body, for those keeping track at home) into Floyd's chin. The ref sees it and calls for time so he can admonish Ortiz and deduct a point. He then puts them in separate corners and puts his hands together (the sign to resume action). Ortiz seems to realize what he did and is trying slap hands with Floyd again. Floyd does not really respond and there is this second where nothing is happening but Victor is standing there with his hands down as if there's something else to talk about. Floyd tags him left-right and the fight is over. I'm sorry, but there was nothing "controversial" -- if anything, Ortiz got what was coming to him.
Ortiz blatantly head-butts Floyd during an exchange in the corner at the end of the fourth round -- literally bending his legs to get more propulsion as he smashes up with his forehead (the hardest part of the body, for those keeping track at home) into Floyd's chin. The ref sees it and calls for time so he can admonish Ortiz and deduct a point. He then puts them in separate corners and puts his hands together (the sign to resume action). Ortiz seems to realize what he did and is trying slap hands with Floyd again. Floyd does not really respond and there is this second where nothing is happening but Victor is standing there with his hands down as if there's something else to talk about. Floyd tags him left-right and the fight is over. I'm sorry, but there was nothing "controversial" -- if anything, Ortiz got what was coming to him.
Friday, September 16, 2011
Drawing Parallels
In America's Great Depression by Murray Rothbard, the argument is made that the "Roaring 20s" was a time marked by a natural trend of deflation, which was distorted by the intervention of government. Now, deflation is normally a dirty word and most presuppose that the state should step in to help out; but, in that case, it was a function of increased productivity -- in the same way that technological advances now have made the costs of TVs, computers and other similar items more affordable than 10 or 15 years ago (a type of deflation most people, I would argue, don't complain about).
The problem in the twenties, and what led to the bust, was the prolific money printing done by the Fed. Now, the statistics as it relates to CPI-type measures would not bear that out -- again, the natural trend was deflation, so most prices ended up looking flat on a net basis. But, if you look at the money supply, it increased by nearly 62% from 1921 to 1929, a robust 7.7% per year. The logic, of course, was the Fed's mandate to keep prices stable -- and it doesn't hurt that, as an institution, its historical bias has been to prefer inflation to deflation. So, not surprisingly, the easy money that resulted found its way into the economy, caused distortions, and culminated in the contraction.
So, with the Rothbard context in mind, I have been thinking through what we've seen today. I think it's safe to say that most people feel that we are in the midst of a deleveraging cycle, which is deflationary. And, as I've commented before, but for the machinations of activist monetary and fiscal policy, deflation would be the obvious trend. However, even though inflation is not raging per the statistics, CPI is still up about 4% YoY already. And that's without bank reserves really getting unleashed. And without the impact of the Fed's likely next bold step. Circumstances are always different, but I guess my point is that a lack of substantial "inflation", as many pundits like to think about it, does not tell us the real story. And its "absence" certainly does not preclude a bust premised on the foundations of what caused the crashes in 1929 and 2008.
The problem in the twenties, and what led to the bust, was the prolific money printing done by the Fed. Now, the statistics as it relates to CPI-type measures would not bear that out -- again, the natural trend was deflation, so most prices ended up looking flat on a net basis. But, if you look at the money supply, it increased by nearly 62% from 1921 to 1929, a robust 7.7% per year. The logic, of course, was the Fed's mandate to keep prices stable -- and it doesn't hurt that, as an institution, its historical bias has been to prefer inflation to deflation. So, not surprisingly, the easy money that resulted found its way into the economy, caused distortions, and culminated in the contraction.
So, with the Rothbard context in mind, I have been thinking through what we've seen today. I think it's safe to say that most people feel that we are in the midst of a deleveraging cycle, which is deflationary. And, as I've commented before, but for the machinations of activist monetary and fiscal policy, deflation would be the obvious trend. However, even though inflation is not raging per the statistics, CPI is still up about 4% YoY already. And that's without bank reserves really getting unleashed. And without the impact of the Fed's likely next bold step. Circumstances are always different, but I guess my point is that a lack of substantial "inflation", as many pundits like to think about it, does not tell us the real story. And its "absence" certainly does not preclude a bust premised on the foundations of what caused the crashes in 1929 and 2008.
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