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OCTOBER ISSUE - 40 PAGES

Integrating Macro Research

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Gordon T Long

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READ ALL THE

"EXTEND & PRETEND" SERIES

 

 

Stage I Comes to an End!

 

A Matter of National Security

 

A Guide to the Road Ahead

 

Confirming the Flash Crash Omen

 

Its either RICO Act or Control Fraud

 

Shifting Risk to the Innocent

 

Uncle Sam, You Sly Devil!

 

Is the US Facing a Cash Crunch?

 

Gaming the US Tax Payer

 

Manufacturing a Minsky Melt-Up

 

Hitting the Maturity Wall

 

An Accounting Driven Market Recovery

FOR UPCOMING SHOW TIMES SEE: COMMENTARY READER 


 

 

 


 

READ ALL THE

"SULTANS OF SWAP"

 

ACT I

Sultans of Swap: Smoking Guns!

 

ACT II

Sultans of Swap: The Sting!

 

ACT III

Sultans of Swap: The Get Away!

 

 

ALSO

SULTANS OF SWAP: Explaining $605 Trillion in Derivatives!

 

SULTANS OF SWAP: Fearing the Gearing!

 

SULTANS OF SWAP: BP Potentially More Devastating then Lehman!

 

SULTANS OF SWAP: Gold Swaps Signal the Roadmap Ahead

 

FOR UPCOMING SHOW TIMES SEE: COMMENTARY READER

 


 

 

 

 

READ ALL THE

"EURO EXPERIMENT" SERIES

 

 

 

EURO EXPERIMENT: German Steel or Schmucks?!

 

 

 

FOR UPCOMING SHOW TIMES SEE: COMMENTARY READER

 

 

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Published November 2009

 

EXTEND & PRETEND

 

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READ ALL THE

"INNOVATION" SERIES

 

Innovate or Die

 

INNOVATION: America has a Structural Problem!

 

INNOVATION: What Made America Great is now Killing Her!

 

America - Innovate or Die!

 

FOR UPCOMING SHOW TIMES SEE: COMMENTARY READER

 


 

 

 

READ ALL THE

"PRESERVE & PROTECT" SERIES

 

 

 

 

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COMMENTARY for all articles by Gordon T Long

 

CURRENCY WARS: Debase, Default, Deny!

 

In September 2008 the US came to a fork in the road. The Public Policy decision to not seize the banks, to not place them in bankruptcy court with the government acting as the Debtor-in-Possession (DIP), to not split them up by selling off the assets to successful and solvent entities, set the world on the path to global currency wars.

 

By lowering interest rates and effectively guaranteeing a weak dollar, the US ignited an almost riskless global US$ Carry Trade and triggered an uncontrolled Currency War with the mercantilist, export driven Asian economies. We are now debasing the US dollar with reckless spending and money printing with the policies of Quantitative Easing (QE) I and the expectations of QE II. Both are nothing more than effectively defaulting on our obligations to sound money policy and a “strong US$”. Meanwhile with a straight face we deny that this is our intention.  

 

Though prior to the 2008 financial crisis our largest banks had become casino like speculators with public money lacking in fiduciary responsibility, our elected officials bailed them out. Our leadership placed America and the world unknowingly (knowingly?) on a preordained destructive path because it was politically expedient and the easiest way out of a difficult predicament. By kicking the can down the road our political leadership, like the banks, avoided their fiduciary responsibility. Similar to a parent wanting to be liked and a friend to their children they avoided the difficult discipline that is required at certain critical moments in life. The discipline to make America swallow a needed pill. The discipline to ask Americans to accept a period of intense adjustment. A period that by now would be starting to show signs of success versus the abyss we now find ourselves staring into.  A future that is now massively worse and with potentially fatal pain still to come. READ MORE

   

 

CURRENCY WARS: Misguided Economic Policy

 

The critical issues in America stem from minimally a blatantly ineffective public policy, but overridingly a failed and destructive Economic Policy. These policy errors are directly responsible for the opening salvos of the Currency War clouds now looming overhead.

 

Don’t be fooled for a minute. The issue of Yuan devaluation is a political distraction from the real issue – a failure of US policy leadership. In my opinion the US Fiscal and Monetary policies are misguided. They are wrong! I wrote a 66 page thesis paper entitled “Extend & Pretend” in the fall of 2009 detailing why the proposed Keynesian policy direction was flawed and why it would fail. I additionally authored a full series of articles from January through August in a broadly published series entitled “Extend & Pretend” detailing the predicted failures as they unfolded. Don’t let anyone tell you that what has happened was not fully predictable!

 

Now after the charade of Extend & Pretend has run out of momentum and more money printing is again required through Quantitative Easing (we predicted QE II was inevitable in March), the responsible US politicos have cleverly ignited the markets with QE II money printing euphoria in the run-up to the mid-term elections. Craftily they are taking political camouflage behind an “undervalued Yuan” as the culprit for US problems. Remember, patriotism is the last bastion of scoundres  READ MORE


READER ROADMAP -  2010 TIPPING POINTS aid to positioning COMMENTARY

 

 

 

POSTS:  FRIDAY 11-05-10

Last Update: 11/06/2010 03:20 AM

SCHEDULE: 1st Pass: 5:30AM EST, 2nd Pass: 8:00 AM, 3rd Pass 10:30 AM. Last Pass 5:30 PM

ARTICLE SOURCE 1 2 3 4 5 6 7 8 9 10
                       
Berlusconi Partying With Minors Raises Risk of Italian Bonds: Euro Credit Bloomberg X                  
Double Dip Lurks Behind London's New Skyscrapers Gilbert X                  
Ireland is running out of time Prichard X                  
Irish Bond Surge Continues, Yield Now at 7.6% On The 10-Year BI X                  
Dublin increases Budget spending cuts FT X                  
Shirakawa Says Asset Fund Shows BOJ's Resolve to Support Economic Recovery Bloomberg X                  
USA                      
U.S. Added 151,000 Jobs in October, Unemployment Held at 9.6% Bloomberg X                  
Jobs Expand by 151,000, Unemployment Steady at 9.6% Mish X                  
                       
BNP Grows to Biggest Bank as France Says Size Doesn't Matter Bloomberg   X                
STIGLITZ- We Have To Throw Bankers In Jail Or The Economy Won't Recover BI           X        
Bank of America Edges Closer to Tipping Point Bloomberg           X        
US midterms muddy waters for derivatives FT           X        
                       
ARTICLE SOURCE 11 12 13 14 15 16 17 18 19 20
                       
The Strange Death of Fiscal Policy Krugman                 X  
GOP Leader McConnell Already Threatening To Make The US Default TPM                 X  
                       
                       
CENTRAL BANKING & MONETARY POLICY                      
U.S. Quantitative Easing is Fracturing the Global Economy Hudson                    
What the Fed did and why: supporting the recovery and sustaining price stability Bernanke                    
China central bank adviser calls QE2 'huge risk' Reuters                    
Germany Concerned About US Stimulus Moves Reuters                    
Emerging market policymakers vow to combat Fed's QE2 Reuters                    
Fed's $600bn gamble risks throwing away America's biggest asset Warner                    
Fed Gets Aggressive After Months of Holding Back Leonhardt                    
Bernanke christens QE2: Fed "on a very dangerous path": Axel Merk TTicker                    
Moment of Surrender: Musings on the Election and Fed Policy Sonders                    
Fed Ignored Foreclosed Homes in Asset Choices Baum                    
Empowered GOP may have fun kicking Bernanke around Hutchison                    
Bernanke Faces Greater Scrutiny After Republican Election Gains Bloomberg                    
Milton Friedman vs. the Fed Meltzer                    
The Fed's $600 Billion Statement, Translated Into Plain English NPR                    
Sailing QE2 around Charybdis Saloman                    
Goldman: QE2 Will Continue Into 2012, Will Be Over $2 Trillion, Models Do Not See Rate Hike Until 2015 ZH                    
This Is The Most Shocking Part Of Bernanke's Case For Quantitative Easing BI                    
David Rosenberg On QEII, The Long-Bond Collapse, And The Next Leg Of The Dollar Breakdown Glushkin Sheff                    
GENERAL INTEREST                      
                       
MARKET WARNINGS                      
Did QE Cause Equities to Move Higher in Japan? Prag Cap                    
Bill Fleckenstein: America's 20-Year Binge Of Speculating, Borrowing And Printing Is About To End King World                    

G20 MEETING

                     
China criticises US plan for G20 FT                    
Geithner's 4% Solution May Be `Unworkable' as APEC Gathers Bloomberg                    
                       

CURRENCY WARS

                     
Currency wars and the emerging markets VOX                    
Factbox: Emerging markets wary Fed policy may amplify inflows Reuters                    
Backlash against Fed’s $600bn easing FT                    
                       
Q3 EARNINGS                      
                       
MARKET & GOLD MANIPULATION                      
Comex Gold Sharply Higher as Dollar Sees More Selling Pressure Kitco                    
Hong Kong launches first local gold fund MW                    
China to buy thousands of tons of gold over next years IBTimes                    
China mulls strategic reserves for rare metals China Daily                    
                       
VIDEO TO WATCH                      
                       

Complete Legend to the Right, Top Items below.
Articles with highlights, graphics and any pertinent analysis found below.

1

         

1-SOVEREIGN DEBT

2-EU BANKING CRISIS
3-BOND BUBBLE

4-STATE & LOCAL GOVERNMENT

5-CENTRAL & EASTERN EUROPE
6-BANKING CRISIS II
7-RISK REVERSAL

8-COMMERCIAL REAL ESTATE

9-RESIDENTIAL REAL ESTATE - PHASE II
10-EXPIRATION FINANCIAL CRISIS PROGRAM
11-PENSION CRISIS

12-CHRONIC UNEMPLOYMENT

13-GOVERNMENT BACKSTOP INSUR.
14-CORPORATE BANKRUPTCY

TODAY'S TIPPING POINTS UPDATE

RED ALERT

AMBER ALERT

ACTIVITY

MONITOR

Click to Enlarge





11-05-10

 

 

1- SOVEREIGN DEBT & CREDIT CRISIS

 

SOVEREIGNS

 

 

ITALY

Berlusconi Partying With Minors Raises Risk of Italian Bonds: Euro Credit  BL

 

Fears of Berlusconi's resignation appear to be the main factor driving CDS spreads up to 182 basis points, and the yield premium on 10-year bonds to 152 basis points over German bonds.

 

The latest sex scandal involves a 17-year-old belly dancer whom Berlusconi allegedly paid to get out of prison -- and somehow this story also involves various prostitutes, planes filled with marijuana, and offensive comments. None of this, however, represents anything new or surprising for Berlusconi, whose wife divorced him last year for partying with another 17-year-old girl.

 

So we wonder if investors are just looking for an excuse to get out of Italy, while Ireland, Portugal and Greece are suddenly hitting the fan once again.

 

Italy accounts for more than a third of the 71 billion euros ($100 billion) of bonds EU governments will sell in November, HSBC Holdings Plc estimates. With the EU’s biggest debt at almost 120 percent of gross domestic product last year and the euro zone’s third-largest economy, Italy’s financing needs dwarf the other peripheral nations. Next year Italy will sell more than 225 billion euros of bonds, more than Spain, Portugal, Greece and Ireland combined, ING estimates

 

UK

Double Dip Lurks Behind London's New Skyscrapers Gilbert

IRELAND

Ireland is running out of time Pritchard

The spreads over German Bunds are mimicking the action seen in Greece in the final hours before the dam broke. Ireland has been desperately unlucky.

 

The bond crisis is snowballing out of control before the country has had enough time to let its medical, pharma, IT, and financial services industries (don’t laugh, some of it is doing well) come to the rescue.

 

Yields on 10-year Irish bonds surged this morning to a post-EMU high of 7.41pc.

Yes, Ireland is fully-funded until April – and has another €12bn in pension reserves that could be tapped in extremis – but that is less reassuring than it looks. The spreads over German Bunds are mimicking the action seen in Greece in the final hours before the dam broke.

Irish Bond Surge Continues, Yield Now at 7.6% On The 10-Year  BI

Ireland's sovereign debt is continuing to come under stress today. The yield on the country's 10-year sovereign debt has risen to 7.6% this morning.

The combination of things hammering Ireland right now is as follows:

  • - Worried over the country's budget, the sincerity of cuts, and its ability to grow tax revenue
  • - Concerns over the banking sector bailout, which is seeing its costs continue to rise
  • - And the European Union's new plan for crises, in which investors in bonds will take a hit

 

As a result, CDS is also spiking, now up to 512 bps.

But check out the movements on the 10-year yield, this a 6 month chart, now trading at 7.6%:

 

 

Dublin increases Budget spending cuts  FT

 

JAPAN

Shirakawa Says Asset Fund Shows BOJ's Resolve to Support Economic Recovery  BL

 
If you thought Bernanke's buying of U.S. government bonds was hardcore monetary stimulus, then check out Japanese central bank governor Masaaki Shirakawa.

Today's he's provided further detail on Japanese central bank plans to buy not just government bonds, but lower-rated corporate bonds, ETFs, and even Japanese real estate investment trusts (REITs).

 

The program “suggests that we stand ready to counter downside risks for the economy and that can provide relief to financial markets and have a positive effect on corporate sentiment,” Shirakawa said at an economic forum in Tokyo today. “We need to continue to take appropriate policy action.”

..

The bank will buy 3.5 trillion yen in government debt, 1 trillion yen in corporate debt, 450 billion yen in exchange- traded funds and 50 billion yen in J-REITs. It plans to buy lower-rated corporate debt than its purchases in 2009, a step to make it easier for companies to borrow funds.

 

Japan's buying program is only $62 billion at this stage, but it can A) become larger if Japan's central bank deems it necessary and B) will act on markets much smaller than the U.S. government bond market. What Bernanke is doing is experimental for the U.S., but Japan remains clearly on the experimental frontier when it comes to monetary stimulus. Though we're not sure it's something to be proud of.

 

The yen has weakened slightly since Bernanke's announcement, so it seems as though Japan is indeed winning the race to destroy currency credibility.

 

 

USA

 

time (et) report period Actual Consensus
forecast
previous

FRIDAY, Nov. 5
8:30 am Nonfarm payrolls Oct. 151,000 70,000 -41,000
8:30 am Unemployment rate Oct. 9.6% 9.7% 9.6%
8:30  am Average hourly earnings Oct. 0.2% 0.2% 0.1%
12:30 pm Pending home sales Sept. -1.8% N/A 4.4%
3 pm Consumer credit Sept. $2.1bln N/A -$3.3 bln

 

U.S. Added 151,000 Jobs in October, Unemployment Held at 9.6% BL BLS

 

Jobs Expand by 151,000, Unemployment Steady at 9.6%  Mish

 

Ø  151,000 jobs added

Ø  5,000 construction jobs added

Ø  7,000 manufacturing jobs were lost

Ø  154,000 service providing jobs were added

Ø  27,900 retail trade jobs were added

Ø  46,000 professional and business services jobs were added

Ø  53,000 education and health services jobs were added

Ø  5,000 leisure and hospitality jobs were lost

Ø  8,000 government jobs were lost

 

TRIM TABS

“The economy clearly improved in October,” said Madeline Schnapp, Director of Macroeconomic Research at TrimTabs. “Unfortunately, the gains probably aren’t sustainable.”

 

Multiple indicators suggest the labor market perked up last month. Real-time tax data shows wage and salary growth accelerated, TrimTabs’ proprietary measure of online job postings jumped 5.6%, and initial unemployment claims fell to the lowest level since August 2008.

 

In a research note, TrimTabs argues that the economy will remain stuck in slow-growth mode. October’s employment increase likely owes to temporary factors such as inventory building. Also, a cheaper dollar boosted exports, and record low mortgage rates spurred refinancing activity.

 

 

“Economic growth is likely to stay sluggish because the private sector isn’t able to pick up the slack from waning government stimulus,” Schnapp noted. “State and local government budget crises and the weak housing market will be significant drags on growth for a long time.”

 

 

The official unemployment rate is 9.6%. However, if you start counting all the people that want a job but gave up, all the people with part-time jobs that want a full-time job, all the people who dropped off the unemployment rolls because their unemployment benefits ran out, etc., you get a closer picture of what the unemployment rate is. That number is in the last row labeled U-6.

It reflects how unemployment feels to the average Joe on the street. While the "official" unemployment rate has held steady, at an unacceptable 9.6%, U-6 is much higher at 17.0%

Looking ahead, there is no driver for jobs. Moreover, states are in forced cutback mode on account of shrinking revenues and unfunded pension obligations. Shrinking government jobs and benefits at the state and local level is a much needed adjustment. Those cutbacks will weigh on employment and consumer spending for quite some time.

Expect to see structurally high unemployment for years to come.

Keep in mind that huge cuts in public sector jobs and benefits at the city, county, and state level are on the way. These are badly needed adjustments. However, economists will not see it that way, nor will the politicians.

Recap and Reflections

This is the first respectable jobs report in years. The reports earlier this year were padded by part-time census hiring. This report was all private hiring, a very good thing.

However, it is important to put this into perspective. It takes approximately 125,000 jobs a month just to hold the rate steady. Here we have +151,000 and a falling participation rate with the unemployment number flat. This apparent anomaly can be explained by the fact that unemployment numbers are derived from the household survey while the reported jobs number comes from the establishment survey.

The key point to remember is even if we were to see +150,000 jobs a month for the next year, it would not put a dent in the unemployment rate. In fact, if the participation rate rose, it could even go up.

Moreover, it is highly unlikely jobs rise by +150,000 jobs a month, on average, for a whole year.

This month's rise in jobs was fueled by retail hiring. Retail hiring is not sustainable. Nor is the rise in manufacturing. We might see a few more months of this (or not), but this is highly unlikely to be the start of something big or sustainable.

I still expect to see the unemployment rate back up above 10% in this cycle. While today's report may not be as good as it gets, it certainly is close to as good as it gets on a sustainable basis.

Expect to see the unemployment rate stubbornly high for a decade.

 

 

2- EU BANKING CRISIS

 

 

BNP Grows to Biggest Bank as France Says Size Doesn't Matter  BL

 

The world’s biggest bank isn’t in the U.S., where regulators banned lenders from proprietary trading, nor in Switzerland, which is doubling capital requirements. BNP Paribas SA is in France, which is doing neither.

 

BNP Paribas’s assets rose 34 percent in the three years through June, reaching 2.24 trillion euros ($3.2 trillion), equal to the size of Bank of America Corp., the largest U.S. bank, and Morgan Stanley combined. The Paris-based company may also have one of the lowest capital ratios among major European banks under new Basel rules, Morgan Stanley analysts estimated.

 

The Basel Committee on Banking Supervision, which sets capital standards for banks worldwide, softened planned capital and liquidity requirements in September and gave lenders about a decade to comply. France and Germany led efforts to weaken regulations proposed by the committee in 2009, concerned that their banks and economies wouldn’t be able to bear the burden of tougher rules until a recovery takes hold, according to bankers, regulators and lobbyists involved in the talks.

“The French government clearly desires to defend and promote French banks’ capacity to expand abroad,” said Nicolas Veron, a senior economist at Brussels-based economics research organization Bruegel. The fact that French banks did better in the last crisis “doesn’t mean that France has no systemic-risk problems. You must think about scenarios of future risks.”

 

France has four banks with more than $1 trillion in assets, as many as the U.S., whose economy is five times the size. In the euro region’s four largest nations, Spain’s Banco Santander SA is the only bank aside from BNP Paribas with assets that exceed its home country’s gross domestic product.

 

BNP Paribas’s exposure to Portugal, Ireland, Greece and Spain amounts to 15.4 percent of the bank’s tier 1 capital, Hoffmann-Becking said. That’s higher than 14.4 percent at Societe Generale, 9.5 percent at Credit Agricole, or 4.7 percent at Deutsche Bank AG of Frankfurt, and increases to 75.6 percent if Italy and Belgium become affected, he said.

 

3- BOND BUBBLE

 

 

4- STATE & LOCAL GOVERNMENT

 


5- CENTRAL & EASTERN EUROPE

 


6-BANKING CRISIS II


STIGLITZ- We Have To Throw Bankers In Jail Or The Economy Won't Recover  BI
As economists such as William Black and James Galbraith have repeatedly said, we cannot solve the economic crisis unless we throw the criminals who committed fraud in jail.

And Nobel prize winning economist George Akerlof has demonstrated that failure to punish white collar criminals – and instead bailing them out- creates incentives for more economic crimes and further destruction of the economy in the future. See this, this and this.

 

Nobel prize winning economist Joseph Stiglitz just agreed. As Stiglitz told Yahoo’s Daily Finance on October 20th:

 

This is a really important point to understand from the point of view of our society. The legal system is supposed to be the codification of our norms and beliefs, things that we need to make our system work. If the legal system is seen as exploitative, then confidence in our whole system starts eroding. And that’s really the problem that’s going on.


Bank of America Edges Closer to Tipping Point  BL

Judging by its shrinking stock price, though, investors are acting as if Bank of America is near a tipping point. Its market capitalization stands at $115.6 billion, or 54 percent of book value. That’s the second-lowest price-to-book ratio among the 24 companies in the KBW Bank Index, and well below the 76 percent ratio the company was at in October 2008 when it landed its first round of TARP dough. Put another way, the market is saying there’s a $96.8 billion hole in Bank of America’s balance sheet.


The problem for anyone trying to analyze Bank of America’s $2.3 trillion balance sheet is that it’s largely impenetrable. Some portions, though, are so delusional that they invite laughter. Consider, for instance, the way the company continues to account for its acquisition of Countrywide Financial, the disastrous subprime lender at the center of the housing bust, which it bought for $4.2 billion in July 2008.

Goodwill Purchase

 

Here’s how Bank of America allocated the purchase price for that deal. First, it determined that the fair value of the liabilities at Countrywide exceeded the mortgage lender’s assets by $200 million. Then it recorded $4.4 billion of goodwill, a ledger entry representing the difference between Countrywide’s net asset value and the purchase price.

 

That’s right. Countrywide’s goodwill supposedly was worth more than Countrywide itself. In other words, Bank of America paid $4.2 billion for the company, even though it thought the value there was less than zero.

 

Since completing that acquisition, Bank of America has dropped the Countrywide brand. The company’s home-loan division has reported $13.5 billion of pretax losses. Yet Bank of America still hasn’t written off any of its Countrywide goodwill.

 

Dubrowski, the company spokesman, declined to comment when I asked him why not. In its latest quarterly report with the SEC, Bank of America said it had determined the asset wasn’t impaired. It might as well be telling the public not to believe any of the numbers on its financial statements.


US midterms muddy waters for derivatives  FT

7- RISK REVERSAL

 

 

8- COMMERCIAL REAL ESTATE

 

 

9-RESIDENTIAL REAL ESTATE - PHASE II

 

 

10- EXPIRATION FINANCIAL CRISIS PROGRAM

 

 

11- PENSION & ENTITLEMENTS CRISIS



12- CHRONIC UNEMPLOYMENT



13- GOVERNMENT BACKSTOP INSURANCE

 

 

14- CORPORATE BANKRUPTCIES

 

 

17- CHINA BUBBLE



19- PUBLIC POLICY MISCUES

 

 

The Strange Death of Fiscal Policy Krugman

 

GOP Leader McConnell Already Threatening To Make The US Default TPM

 

Now that Dems have lost one house in Congress, and seen their majority diminished in the other, Republicans have much more leverage, and are already threatening to use it.

 

Their chief goal, they say, is repealing Obama and Pelosi's signature accomplishment: health care reform. Acknowledging that they could undercut that achievement, Pelosi said such an outcome would be "most unfortunate," but that she doesn't think a full repeal is in the cards.

 

In an interview with Fox News this evening, Senate Minority Leader Mitch McConnell said Congress would not vote to increase the nation's debt ceiling -- legislation that must pass to avoid a global economic panic -- without "strings." Those strings could be attached to anything, including health care legislation.



 


OTHER TIPPING POINT CATEGORIES NOT LISTED ABOVE

 

24-RETAIL SALES

 

 

26-GLOBAL OUTPUT GAP

 

 

31-FOOD PRICE PRESSURES

 

 

32-US STOCK MARKET VALUATIONS

 




BP - British Petroleum

SULTANS OF SWAP: BP Potentially More Devastating then Lehman!

------------

 






   

CENTRAL BANKING MONETARY POLICIES, ACTIONS & ACTIVITIES

------------

 

U.S. Quantitative Easing is Fracturing the Global Economy  Hudson

What the Fed did and why: supporting the recovery and sustaining price stability Bernanke

China central bank adviser calls QE2 'huge risk' Reuters

Germany Concerned About US Stimulus Moves Reuters

Emerging market policymakers vow to combat Fed's QE2   Reuters
The frosty reaction from emerging economies makes any substantive deal on global imbalances and currencies at next week's Group of 20 meeting that Seoul is hosting even less likely.

Fed's $600bn gamble risks throwing away America's biggest asset Warner

Fed Gets Aggressive After Months of Holding Back Leonhardt

Bernanke christens QE2: Fed "on a very dangerous path": Axel Merk TTicker

Moment of Surrender: Musings on the Election and Fed Policy
Sonders
The Fed's balance sheet could look "very ugly, very fast”

Fed Ignored Foreclosed Homes in Asset Choices Baum

Empowered GOP may have fun kicking Bernanke around Hutchinson

Bernanke Faces Greater Scrutiny After Republican Election Gains BL

Milton Friedman vs. the Fed Meltzer
The Nobel laureate would never have endorsed increasing inflation to stimulate the economy.

The Fed's $600 Billion Statement, Translated Into Plain English NPR

Sailing QE2 around Charybdis Salmon

Goldman: QE2 Will Continue Into 2012, Will Be Over $2 Trillion, Models Do Not See Rate Hike Until 2015  ZH

Goldman: "In practice, QE2 is likely to continue well beyond June 2011—at least well into 2012—if our forecasts for unemployment and inflation are close to the mark. We believe that purchases could ultimately cumulate to around $2 trillion...Under our longer-term projections it is easy to come up with models that show no tightening until 2015 or later." In other news, the economy will not recover for the next five years, but under the Centrally Planned Feudal State of Bernanke, the economy is irrelevant. Incidentally, Zero Hedge now believes a $5 trillion QE3 program will be announced by July 2011, when gold is trading at $10,000, the entire Treasury curve is at zero, and stock prices are meaningless courtesy of a DXY sub 50, and every commodity opening limit up daily.

 

Goldman's prior observations which concluded that a $4 trillion QE is needed now, not in 2011, now, and not $2 trillion as CNBC keeps saying, can be found here.

Jan Hatzius' observations below presented without commentary. Watching this country implode in slow-motion courtesy of a few openly insane economists is self-explanatory.

 

From Goldman's Jan Hatzius   

QE2: Slightly Slower Pace, But Long Time Frame (Hatzius)

  • Today’s statement by the Federal Open Market Committee (FOMC) shows a slightly slower-than-expected pace for the second round of quantitative easing (QE2), with purchases of “only” $75 billion per month.  However, the committee made up for this potential disappointment by signaling a longer-than-expected time period of purchases, cumulating to $600 billion through June 2011.
  • In practice, QE2 is likely to continue well beyond June 2011—at least well into 2012—if our forecasts for unemployment and inflation are close to the mark.  We believe that purchases could ultimately cumulate to around $2 trillion.  Moreover, it is likely to take even longer—perhaps several years—before the FOMC starts to increase short-term interest rates, although the outcome as always will depend on the performance of the economy.


We see two main takeaways from today’s FOMC statement:

1. Large-scale asset purchases (LSAPs) are on a slightly slower-than-expected schedule, but will likely grow significantly over time.

In a widely anticipated move to provide more support to economic growth, the FOMC announced that it would purchase $600bn in Treasury securities by June 2011. This is over and above the amount that will be purchased as part of the program to reinvest repayments of principal on agency and MBS, which the committee expects to total $250bn-$300bn over the same period. Thus, overall purchases will be in the $850bn-$900bn range between now and mid-2011. Previously planned purchases for reinvestment will take place as scheduled on Nov 4 and 8, after which the two programs will be combined with the anticipated publication of a new purchase schedule on Nov 10 at 2pm.

While the headline figure for the new program is a bit higher than the $500bn that we and many others had expected, the time period is also longer (eight months instead of six), implying a monthly purchase rate of $75bn. We and others had thought that this figure would be about $100bn.  If we focus on a measure such as the expected stock of Fed asset holdings at a 6-12 month horizon—consistent with our research showing that it is mainly stocks rather than flows of Fed purchases that matter for bond yields—these two surprises probably roughly cancel out.

We believe that the program will grow significantly beyond the initial $600 billion.  Today’s statement says that the committee will "regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability." If our forecasts of a 10% unemployment rate and a further decline in core inflation to around 0.5% by late 2011 prove correct, we believe the committee will continue buying assets well beyond June 2011.  At a minimum, we expect purchases into 2012 and still believe that they could ultimately cumulate to around $2 trillion.  (See “QE2: How Much Is Needed?” US Economics Analyst, 10/42, October 22, 2010.)

2. The statement is consistent with our expectation that rates will stay near zero for a very long time, possibly several years.

One implication of the slightly longer time frame for QE2 is that, at the margin, the likelihood rate of hikes anytime soon has receded further.  If Fed officials are committed to buying assets through June 2011, it is very hard to see how they would turn around a few months thereafter and start hiking the funds rate, barring a massive surprise in the economic data.  This is likely to warrant some additional adjustments in the expectations of many economic forecasters.  Although the OIS curve has already removed any rate hike expectations from the 2011 outlook, the median economic forecast in the October Blue Chip Economic Indicators survey still has the first rate hike in the third quarter of 2011.  This is likely to change in coming months.

How long will rates stay near zero?  Of course, the answer depends on the economic outlook, but at least under our longer-term projections it is easy to come up with models that show no tightening until 2015 or later.  (See “No Rush for the Exit,” Global Economics Paper No. 200, June 30, 2010.)  Fed officials will not commit themselves that far out.  However, it is quite possible that senior members of the FOMC will provide further guidance about the short-term interest rate outlook in coming months to explain to market participants just how distant the prospect of interest rate hikes really is.  This could take the form of a version of our Taylor rule or policy reaction function analysis, with a strong implication that even the current market expectation of rate hikes in 2012 may well prove premature.


This Is The Most Shocking Part Of Bernanke's Case For Quantitative Easing BI

What's amazing about the latest bout of quantitative easing is the total lack of pretense. By that we mean Bernanke isn't even pretending that that QE would actually benefit the real economy.

 

We noted yesterday that buy concentrating buying at the short end of the yield curve, Bernanke was punishing savers (pinning short-term rates to the mat) and bailing out banks (keeping the yield curve steep).

 

But check out this line from his op-ed in the Washington Post:

This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action.

 

Amazing. Bernanke's evidence of success is the market pump-up. There's not necessarily anything real behind it (though the economy is improving, at least against expectations), but Bernanke's just happy to see the market rise.

 

Of course, he hopes the wealth effect from stocks will spill over into real economic gain, but it still reeks of manipulation and intentional bubble-blowing.


David Rosenberg On QEII, The Long-Bond Collapse, And The Next Leg Of The Dollar Breakdown Gluskin-Sheff

There was nothing in the Fed press release yesterday that was really surprising. In fact, the market’s initial dramatic reaction (all over the map) was what’s most surprising. The Fed is going to be buying $600 billion of Treasuries (in the 5-10 year part of the curve) through mid-2011 and another $250-300 billion via coupon reinvestments, which they were going to do anyway.

The “number” that was key for the markets is that $600 billion figure, which is about $75 billion per month. That is in the middle of consensus expectations of $50-100 billion. Not “shock and awe”, based on what was broadly expected, but not “light” either considering that the economy, at least so far, has managed to avoid double-dipping.

For all the excitement, this further expansion of the Fed’s balance sheet will add between 0.25-0.5% to real GDP growth; however, this will take the size of the Fed’s balance sheet to a Japanese-style 20% of GDP!
What the Fed is clearly trying to do is reflate asset values in order to generate a more positive wealth effect on personal spending and pull the cost of debt and equity capital down in order to re-ignite business “animal spirits” and hence corporate investment and hiring. In a balance sheet or deleveraging cycle, success is not always guaranteed even by the most aggressive of monetary policies.

Through its actions, the Fed creates excess reserves in the banking system. But with one-third of the household sector gripped with a sub-620 FICO score, 1-in-7 mortgage debtors are either in arrears or in the foreclosure process, and with an estimated 25% of homeowners “upside down” in their mortgage (negative equity), there is at least some non-trivial probability that, as was the case with QE1, there will be no visible impact on the willingness to borrow, the money multiplier or velocity, which is what we would need to see to declare this radical policy experiment a success.

In a nutshell, with core price trends running below 1% and the economy past the peak of growth for the cycle, the Fed is not far off the mark in its deflationary concerns. The critical aggregate here is the unemployment rate — policy is aimed at redressing the glaring “gap” or chronic excess capacity in the labour market.

Go back two years ago when the Fed was on the brink of cutting the Fed funds rate to zero and the central bank was expecting to see, by now, a 7% unemployment rate. On the eve of QE1 in the opening months of 2009, the Fed’s base case was an 8% jobless rate by now. Instead, the jobless rate is sitting near 10% and only an atypically low participation rate has prevented the official unemployment rate from being higher than 12%. Moreover, counting in the vast degree of “under- employment”, the real unemployment rate is closer to 17%.

The one asset that has responded miserably to the Fed announcement is the long bond — it is getting clobbered, in part because the Fed bond buying is in the mid-part of the curve. Looking at the huge spread between 30-year bonds and the 5-year note, if inflation does not rear its ugly head, the best risk-reward is now really at the long end, which is universally despised and may be one reason to like it even more!

 

The U.S. dollar is on the verge of breaking down — the recent countertrend rally in the DXY may well be snuffed out quickly. The 50, 100, and 200-day moving averages in gold are all in major uptrends despite the corrective phase from overbought levels.

It’s difficult to see how equities can rally on this Fed move alone or the election results for that matter seeing as a GOP victory in the House and QE2 had both been widely discounted in recent months. There have been no surprises here over the past 24 hours. Just confirmations on what had already been priced in.


Meanwhile, risk assets from equities, to credit, to emerging markets have, in recent months, become correlated with a weaker U.S. dollar in an unprecedented fashion. A weaker dollar, in turn, fits in very well with Ben Bernanke’s reflationary strategy by cheapening exports and buying jobs from abroad, not to mention adding extra impetus to foreign-currency translated corporate earnings. The question is whether the dollar’s descent becomes destabilizing or what the responses to this overt weak dollar policy will be in other parts of the world. Currency wars tend to lead to trade wars and trade wars do not tend to end very well (gold being an exception).

 

In the interim, the risk the market faces in the near-term is economic disappointment from three possible sources that could inflict some pain on the consumer:

1. The five million 99ers who are about to lose their jobless benefits (can even a lame duck Congress be that heartless?);
2. The looming tax hikes on January 1 if a GOP-White House deal isn’t brokered, and;
3. The bite into discretionary spending from the spike in food and energy prices — at exactly the most important shopping time of the year. Look out for a big bite out of GDP from what will likely prove to be at least a sharp upward move in the price deflator (have a look at Food Sellers Grit Teeth, Raise Prices on page B1 of today’s WSJ as well as Apparel Makers To Lift Prices on page B2).

The equity market loves the liquidity boost but as I said, it is priced in. There are twice as many bulls as there are bears in the sentiment surveys and the stock market is trading near the top end of the 2010 range. Moreover, the two “critical” events that got Mr. Market all excited in the last two months are now yesterday’s news. The recent Barron’s Big Money Poll smacked of the complacency we saw in the fall of 2007 when nobody seemed to see a recession looming. Today, 4 in 5 surveyed in the Barron’s poll are dismissive of double-dip risks, perhaps prematurely. The mistake here may be in confusing derailment with delay.

 

 GENERAL INTEREST

 

 

FLASH CRASH - HFT - DARK POOLS

 

 

MARKET WARNINGS

Did QE Cause Equities to Move Higher in Japan?  Pragmatic Capitalist

 

There appears to be some confusion over the response of equity markets to quantitative easing.  Of course, the Fed is hoping that they can ignite a “wealth effect” by driving stocks higher.  But as we saw in Japan this failed to materialize.  In fact, anyone buying in front of the QE announcement in Japan ultimately got crushed in the ensuing few months and years.  When the BOJ initially announced the program in March 2001 the equity market rallied ~16%.

 

But the euphoria over the program didn’t last long.  In fact, within 6 weeks of the announcement the Nikkei began to crater almost 30% over the course of several months.   In the ensuing two years the Japanese stock market fell a staggering 43%!  It wasn’t until the global economic recovery in 2003 that Japanese equities finally bottomed and went on a tear.  Ultimately, the BOJ ended the program in March 2006 and deemed it a failure.

 

 

Bill Fleckenstein: America's 20-Year Binge Of Speculating, Borrowing And Printing Is About To End  King World

 
Although Bill Fleckenstein is afraid to quit the Bernanke-fueled stock market, he says quantitative easing marks a long-term inflection point.
 

"If you debase the paper enough, no one's going to hold it and the markets are going to have to turn against the easing. The markets are going to have to finally become vigilantes and say we're not going to buy when you ease, now we're selling," he said on King World News.

 

"That's the funding crisis, the final leg to this pass we've been on for twenty years. First Greenspan printed too much money and we tried to speculate our way to prosperity, then in the housing boom we tried to borrow our way to prosperity and now we're trying to print our way to prosperity. This will end like those others did in disaster, but we can't take the printing press away from ourselves anymore then if the Greeks had a printing press they would have taken that away from themselves. The difference between the United States and Greece is essentially a printing press."

 

The trick is finding a way to short a market that keeps rising.

 

"Even if it is an inflection point, the machinations of the market convince you that you're wrong even if you're right, so yes I'm tempted [to short], and I may do something and we'll have to see."

Hear the full interview at King World News

 

G20 MEETING

China criticises US plan for G20  FT

Beijing also questions policy on quantitative easing

 
China has curtly dismissed a US proposal to address global economic imbalances, setting the stage for a potential showdown at next week’s G20 meeting in Seoul. Cui Tiankai, a deputy foreign minister and one of China’s lead negotiators at the G20, said on Friday that the US plan for limiting current account surpluses and deficits to 4 per cent of gross domestic product harked back “to the days of planned economies”.

“We believe a discussion about a current account target misses the whole point,” he added, in the first official comment by a senior Chinese official on the subject. “If you look at the global economy, there are many issues that merit more attention – for example, the question of quantitative easing.”

 

China’s opposition to the proposal, which had made some progress at a G20 finance ministers’ meeting last month, came amid a continuing rumble of protest from around the world at the US Federal Reserve’s plan to pump an extra $600bn into financial markets.

 

Officials from China, Germany and South Africa on Friday added their voices to a chorus of complaint that the Fed’s return to so-called quantitative easing would create instability and worsen imbalances by triggering surges of capital into other currencies.

Tim Geithner, the US Treasury secretary, has proposed using what the US refers to as current account “guidelines” to accelerate global rebalancing, partly as a way of changing the debate away from simply pressing China to allow faster appreciation in the renminbi.

 

But on Thursday and Friday, governments focused instead on the global impact of the Fed’s action. “With all due respect, US policy is clueless,” Wolfgang Schäuble, German finance minister, told reporters. “It’s not that the Americans haven’t pumped enough liquidity into the market,” he said. “Now to say let’s pump more into the market is not going to solve their problems.”

 

Pravin Gordhan, finance minister of South Africa, a key member of the emerging market bloc, said the decision “undermines the spirit of multilateral co-operation that G20 leaders have fought so hard to maintain during the current crisis”, and ran counter to the pledge made by G20 finance ministers to refrain from uncoordinated responses.

 

The US Treasury declined to comment on Friday.

 

Experts say the mood has soured since the G20 Toronto summit in June and worry that unless the summit can patch up differences on trade imbalances and exchange rates, the outlook for international economic agreement is poor.

 

Ousmène Mandeng of Ashmore Investment Management and a former senior International Monetary Fund official, said: “The G20 will also have to show [in Seoul] it can work on the issue or its very existence will be in question.”

 

In recent weeks, there had been some hints that China was favourable to the idea of current account targets. Yi Gang, a deputy central bank governor, said China aimed to reduce its surplus to 4 per cent of GDP in the medium-term

 

But Mr Cui’s comments suggest that China’s senior leaders have decided to reject Mr Geithner’s proposal. “We believe it would not be a good approach to single out this issue and focus all attention on it,” he said.

 

Separately, the deputy foreign minister also had a stern message for European leaders, warning them not to attend next month’s Nobel Peace Prize ceremony for Liu Xiaobo, an imprisoned Chinese democracy activist.

 

Geithner's 4% Solution May Be `Unworkable' as APEC Gathers  BL

 

 

CURRENCY WARS

Currency wars and the emerging markets VOX

 

Factbox: Emerging markets wary Fed policy may amplify inflows Reuters

 

Backlash against Fed’s $600bn easing  FT

 

Q3 EARNINGS

 

MARKET & GOLD MANIPULATION

Comex Gold Sharply Higher as Dollar Sees More Selling Pressure Kitco

 

Hong Kong launches first local gold fund MW

 

China to buy thousands of tons of gold over next years IBTimes

 

China mulls strategic reserves for rare metals China Daily

 

AUDIO / VIDEO

 

 

QUOTE OF THE WEEK

It’s easy being a humorist when you’ve got the whole government working for you.

— Will Rogers



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Gordon T Long is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. Of course, he recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you confirm the facts on your own before making important investment commitments.ont>

 

© Copyright 2010 Gordon T Long. The information herein was obtained from sources which Mr. Long believes reliable, but he does not guarantee its accuracy. None of the information, advertisements, website links, or any opinions expressed constitutes a solicitation of the purchase or sale of any securities or commodities. Please note that Mr. Long may already have invested or may from time to time invest in securities that are recommended or otherwise covered on this website. Mr. Long does not intend to disclose the extent of any current holdings or future transactions with respect to any particular security. You should consider this possibility before investing in any security based upon statements and information contained in any report, post, comment or recommendation you receive from him.

 

         

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Gordon T Long is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. Of course, we recommend that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you confirm the facts on your own before making important investment commitments.

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© Copyright 2010, Gordon T Long. The information herein was obtained from sources which the Gordon T Long. believes reliable, but we do not guarantee its accuracy. None of the information, advertisements, website links, or any opinions expressed constitutes a solicitation of the purchase or sale of any securities or commodities. Please note that the Gordon T Long. or its principals may already have invested or may from time to time invest in securities that are recommended or otherwise covered on this website. Gordon T Long does not intend to disclose the extent of any current holdings or future transactions with respect to any particular security. You should consider this possibility before investing in any security based upon statements and information contained in any report, post, comment or recommendation you receive from us.