Risk Ratio Indicating More Correction Coming [View article]
Nice article.
Your directional bias squares with that of Ed Yardeni who has observed a tight correlation between oil prices and the CRB index and believes the correction has further to go, though his latest data does not suggest, at the moment, a major collapse.
Today's correction came on the back of disappointing data out of China later followed by statements that China would take steps to encourage growth. Being oversold, and after parsing the meaningless noise from the G8 meeting to mean an end to "austerity", that's all the markets needed to correct upwards.
Of course structural problems remain within both the EMU and China, and much time will be required before either sets of problems can be resolved against a backdrop of slowing global growth.
Dollar, Gold And Gasoline: Much Ado About Nothing [View article]
Oddly and due to complex comparative economics, we export about the same amount of finished gasoline products as we import; I'm geussing we get deals on our imports from Europe and a premium on our exports to the East. We are, though, net importers of other distillates.
Dollar, Gold And Gasoline: Much Ado About Nothing [View article]
About one half of the gasoline refining capacity along the East coast has been shuttered due stringent environmental regulations. Elsewhere, much refining capacity has been diverted to ethanol.
Euro And S&P 500 Correlations Revisited [View article]
Interesting.
I trade S&P futures and use the euro as one of my trading tools and as of late its usefulness has deteriorated.
Given the long history of correlation, perhaps the current divergence reflects varying views held by respective players with equity players inspired by such steps as LTRO while the currency and debt guys less convinced.
Some believe the correlation will be restored through a drop in US equities.
I have much respect for Marc Chandler but will politiely disagree and submit the euro will not work as presently constituted.
Because fiscal integration was never part of the treaties, each of the seventeen countries have been free to pursue independendent fiscal policies while housed beneath a common monetary policy. Additionally, there was never flexibility in wages and prices and there was not mobility in labor and capital, both necessary requisites.
The EMU treaties forged tight connections among the disparate economies of the 17 euro zone members by committing them to use a single currency without creating a strong governance structure that would force them to behave responsibly leading to deficits, current account imbalances, swelling levels of debt and vast variations in competitiveness.
The euro may survive but not without one or more members withdrawing and/or profound structural change.
What Happens Now That Draghi Takes Over The ECB? [View article]
By training at MIT and while head of the Italian Bank, Draghi has embraced very orthodox economics and focused exclusively upon price stability. His past does not suggest he is a dove but I do not believe he will want to see the EMU crater under his watch, suggesting he will risk price stability by lowering interest rates and continuing unconventional purchases of Spanish and Italian bonds.
Weighing the Week Ahead: Silver Bullet For Europe, Magic From The Fed? [View article]
Nice article Jeff.
I do not view coordinated central bank intervention as a positive, however, as it was initiated in response to liquidity challenges facing European banks. Both sovereigns and banks are seeing liquidity dry up as the evidence of insolvency grows.
Generally speaking, European banks are more reliant upon wholesale funding than US banks and these institutions are reducing their purchases of short term deposits and US money market funds are reducing their exposure through shortening maturities and reducing overall lending. Liquidity is becoming increasingly scarce and in the absence of the coordinated action by the central banks, the retail banks would need to constrain lending and/or consider selling assets.
With respect to our central bank, we might expect to see some twisting, possible reductions in interest paid on reserves and/or language changes which link short term rates increases to employment levels or prices increases. But internal studies of “Twist” by the Fed concluded “long-term interest rates cannot be substantially reduced by money market gimmicks.”
For this reason and those mentioned by Bill Gross in the FT* it’s unlikely the Fed would be more successful today than it was 30 years ago in attempting to twist the yield curve. A lasting decline will be achieved only if inflation expectations remain firmly anchored and people gain confidence in the long-term purchasing power of the dollar.
* By flooring maturities out to two years then, and perhaps longer as a result of maturity extension policies envisioned in a forthcoming operation twist later this month, the Fed may in effect lower the cost of capital, but destroy leverage and credit creation in the process. The further out the Fed moves the zero bound towards a system wide average maturity of seven to eight years the more credit destruction occurs, to a US financial system that includes thousands of billions of dollars of repo and short-term financed-based lending that has provided the basis for financial institution prosperity.
Collapsing confidence, civil unrest, anemic growth, massive sovereign debt, a fraudulent CPI, desperate monetary policy, artificially low interest rates, lack of capital formation, a depreciating dollar and the threat of higher interest rates. To this tableau I would add intractable deficits, slowing global growth and imported inflation through higher material and commodity prices effected by the Fed and QE beneficiaries seeking higher yields in equities, emerging markets and commodities. I don't know how this will play out but I'm inclined to believe the debt crisis in Europe and stagnating economic growth will be the catalysts for larger adjustments in whatever forms they might take.
Global Rebalancing Will Come, But With Stagflation [View article]
Like Jeremy Grantham I believe we live in a resource constrained world and the financialization of commodity markets along with emerging market growth and domestic polices, which are shockingly similar to ours, has simply brought forward the inevitable price increases in tradeables, raw materials and agricultural products. And it should not be left unsaid the Fed has played a pivotal role in accelerating these developments.
It's not a typical panic that one should be buying.
The fear factor comes from what we don't know:
We don't know whether U.S. economic growth is going to recover from the soft patch or is slipping into a lengthy recession. We don't know whether Canadian banks are going to report good Q3 earnings in a few weeks, or lousy earnings (hint - $57 billion in Canadian M&A in the last quarter would indicate good earnings). In the face of not knowing, you need to make sure you have an asset allocation that fits your personality and risk tolerance.
______________________...
You never buy amid panic and the uncertainties are larger than what you mention. In addition to an anemic US recovery which is likely to stall, there is much worry over global growth and the mountains of debt weighing upon the US and Europe. The debt ceiling deal was a week bid to fix our problems and Europe simply lacks the resources to intervent to prevent a default by either Spain or Italy.
Austerity Bites: A Tough Outlook for Stocks, Risk Assets [View article]
On the fiscal side, the money has essentially all been spent. Global governments including the U.S. spent aggressively in the days following the financial crisis in an effort to jump start the economy. But government finances in many countries are now stretched and austerity is now the call of the day. Thus, little to no fiscal policy support is coming in the pipeline any time soon. If anything, any existing support is now going to start getting taken away. ______________________...
Before you make these assertions about the US withdrawing fiscal support, let me suggest you visit the CBO site and review the baseline scenario and the adverse scenario. And when the baseline is adjusted for dubious assumptions about GDP growth and tax receipts, we are staring at $trillion deficits indefinitely. Is reducing rates of increases in unsustaianable spending austerity?
U.S. Debt Downgrade and Its Consequences Too Close for Comfort [View article]
To date I have not read or heard one report that says if S&P, Moody’s and Fitch had done their job properly we would not be in this economic morass we find ourselves in. They seem to project an air of innocence and wisdom as they dictate the terms that would be suitable for them to allow us to keep our “AAA” credit rating. ______________________... I am not defending their record but we should note that their performance was no worse than Bernanke's who saw no housing bubble only later to say that any fallout from excesses would be contained to sub-prime. Days later the global economy fell into an abyss.
Chairman of the Financial Services Committee Barney Frank even insisted that the mortgage and accounting practices of both GSEs, especially Fannie Mae, were safe and sound. Democrats showed strong, public support for sub-prime mortgages over the last decade and continued to do so until September, 2008, the month Fannie and Freddie went into conservatorship.
And Christina Romer made some absolutely absurd projections to support the buckets of lard spent under the ARRA (Stimulus Package). By her accounts we would have an unemployment rate below 7% at this time, not the 9.2% we have.
To add insult to injury all of these buffoons, including the agencies, continue to enjoy respect and are held in high esteem.
How a Downgrade of U.S. Debt Will Impact Stock and Bond Prices [View article]
Interesting article.
I tend to believe the credit and currency markets are aware of our dire circumstances and any downgrade would be simply an acknowledgement of what is already known.
Over the last 25 years real economic growth has been 2.6%; in the last decade it has been 1.6%.
Only Ireland and Mozambique have appreciably larger fiscal deficits as a percent of GDP than we do. And only Japan, Italy and Greece have more debt as a percent of GDP than we do.
Since these are hardly secrets and point to an unsustainable path, it's only a matter of time before our debt is downgraded. Failure to raise the debt ceiling will simply accelerate the inevitable.
So What's It Going to Be, Bernanke? [View article]
Sadly, Chairman of the Fed Ben Bernanke is stuck in his Depression Era time warp, a period that he has never understood, and he appears to be warming up to getting back to the plate to fill it up with more bonds in order to try to "provide the stimulus" necessary to finally push the U.S. economy into a solid recovery mode. And make no mistake: there are very few politicians in Washington that want anything different, at least until the elections of 2012 are over and done with.
______________________... It's tempting to think Ben will fire up the Fed helicopter and start dropping money from the sky in a futile attempt to revive an economy suffering from the effects of deleveraging and a liquidity trap. He stubbornly refuses to accept that accommodative monetary policies are very blunt, ineffective instruments in this environment.
There is hope, though, because in reading the last Fed minutes it's very clear that two conditions must be present for another round of QE: persistent economic weakness and deflation. Core inflation, which increased last month at a rate exceeding levels desired by the Fed, is pretty close to their targets on a YOY basis; there are no signs of deflation.
And with respect unemployment and labor market weakness, I believe there is a growing realization that structural forces are at work and further easing will not prevail over these dynamics which include globalization, downsizing, lack of business confidence (taxes, regulations, and Obamacare), deteriorating employment skills and chronic mismatches between what is needed and what is available.
If there is further QE, it will be conducted only at the behest of politicians watching the economy roll over into an economic abyss.
Why Last Week's Rally Signals More Trouble Ahead for Stocks [View article]
Logical you and Diva have offered some interesting insights. I use the fundamentals to help me grasp the big picture and a host of technicals to time or implement decisions drawn from the big picture.
The S&P touched its 200 day MA twice, the second time being the 26th of June and this along with indications that Greece would approve further austerity measures, the EU would release the fifth tranche and some general favorable US releases propelled the market up with the S&P closing at 1339 on Friday.
The market moves in a progression of higher highs and higher lows and presently it is doing just that. Breakdowns occur, however, when the current series of higher highs and higher lows fail to rise above levels established in prior cycles of swing highs and lows. Looking forward, we can be bullish if the S&P closes above 1347, then 1360 and then 1372.
The latter is where the market starting breaking down in early May and if we move off 1372 we can be quite bullish until the next shock or swan hits us in the face. Like you I have bearish bias but I have trained myself to trade what I see.
Risk Ratio Indicating More Correction Coming [View article]
Your directional bias squares with that of Ed Yardeni who has observed a tight correlation between oil prices and the CRB index and believes the correction has further to go, though his latest data does not suggest, at the moment, a major collapse.
Today's correction came on the back of disappointing data out of China later followed by statements that China would take steps to encourage growth. Being oversold, and after parsing the meaningless noise from the G8 meeting to mean an end to "austerity", that's all the markets needed to correct upwards.
Of course structural problems remain within both the EMU and China, and much time will be required before either sets of problems can be resolved against a backdrop of slowing global growth.
Dollar, Gold And Gasoline: Much Ado About Nothing [View article]
Dollar, Gold And Gasoline: Much Ado About Nothing [View article]
Euro And S&P 500 Correlations Revisited [View article]
I trade S&P futures and use the euro as one of my trading tools and as of late its usefulness has deteriorated.
Given the long history of correlation, perhaps the current divergence reflects varying views held by respective players with equity players inspired by such steps as LTRO while the currency and debt guys less convinced.
Some believe the correlation will be restored through a drop in US equities.
The Euro Experiment Is Failing [View article]
Because fiscal integration was never part of the treaties, each of the seventeen countries have been free to pursue independendent fiscal policies while housed beneath a common monetary policy. Additionally, there was never flexibility in wages and prices and there was not mobility in labor and capital, both necessary requisites.
The EMU treaties forged tight connections among the disparate economies of the 17 euro zone members by committing them to use a single currency without creating a strong governance structure that would force them to behave responsibly leading to deficits, current account imbalances, swelling levels of debt and vast variations in competitiveness.
The euro may survive but not without one or more members withdrawing and/or profound structural change.
What Happens Now That Draghi Takes Over The ECB? [View article]
Weighing the Week Ahead: Silver Bullet For Europe, Magic From The Fed? [View article]
I do not view coordinated central bank intervention as a positive, however, as it was initiated in response to liquidity challenges facing European banks. Both sovereigns and banks are seeing liquidity dry up as the evidence of insolvency grows.
Generally speaking, European banks are more reliant upon wholesale funding than US banks and these institutions are reducing their purchases of short term deposits and US money market funds are reducing their exposure through shortening maturities and reducing overall lending. Liquidity is becoming increasingly scarce and in the absence of the coordinated action by the central banks, the retail banks would need to constrain lending and/or consider selling assets.
With respect to our central bank, we might expect to see some twisting, possible reductions in interest paid on reserves and/or language changes which link short term rates increases to employment levels or prices increases. But internal studies of “Twist” by the Fed concluded “long-term interest rates cannot be substantially reduced by money market gimmicks.”
For this reason and those mentioned by Bill Gross in the FT* it’s unlikely the Fed would be more successful today than it was 30 years ago in attempting to twist the yield curve. A lasting decline will be achieved only if inflation expectations remain firmly anchored and people gain confidence in the long-term purchasing power of the dollar.
* By flooring maturities out to two years then, and perhaps longer as a result of maturity extension policies envisioned in a forthcoming operation twist later this month, the Fed may in effect lower the cost of capital, but destroy leverage and credit creation in the process. The further out the Fed moves the zero bound towards a system wide average maturity of seven to eight years the more credit destruction occurs, to a US financial system that includes thousands of billions of dollars of repo and short-term financed-based lending that has provided the basis for financial institution prosperity.
Things Are About To Get Much Worse [View article]
Global Rebalancing Will Come, But With Stagflation [View article]
U.S. Debt Deal Was a Red Herring [View article]
The fear factor comes from what we don't know:
We don't know whether U.S. economic growth is going to recover from the soft patch or is slipping into a lengthy recession.
We don't know whether Canadian banks are going to report good Q3 earnings in a few weeks, or lousy earnings (hint - $57 billion in Canadian M&A in the last quarter would indicate good earnings).
In the face of not knowing, you need to make sure you have an asset allocation that fits your personality and risk tolerance.
______________________...
You never buy amid panic and the uncertainties are larger than what you mention. In addition to an anemic US recovery which is likely to stall, there is much worry over global growth and the mountains of debt weighing upon the US and Europe. The debt ceiling deal was a week bid to fix our problems and Europe simply lacks the resources to intervent to prevent a default by either Spain or Italy.
Austerity Bites: A Tough Outlook for Stocks, Risk Assets [View article]
______________________...
Before you make these assertions about the US withdrawing fiscal support, let me suggest you visit the CBO site and review the baseline scenario and the adverse scenario. And when the baseline is adjusted for dubious assumptions about GDP growth and tax receipts, we are staring at $trillion deficits indefinitely. Is reducing rates of increases in unsustaianable spending austerity?
U.S. Debt Downgrade and Its Consequences Too Close for Comfort [View article]
______________________...
I am not defending their record but we should note that their performance was no worse than Bernanke's who saw no housing bubble only later to say that any fallout from excesses would be contained to sub-prime. Days later the global economy fell into an abyss.
Chairman of the Financial Services Committee Barney Frank even insisted that the mortgage and accounting practices of both GSEs, especially Fannie Mae, were safe and sound. Democrats showed strong, public support for sub-prime mortgages over the last decade and continued to do so until September, 2008, the month Fannie and Freddie went into conservatorship.
And Christina Romer made some absolutely absurd projections to support the buckets of lard spent under the ARRA (Stimulus Package). By her accounts we would have an unemployment rate below 7% at this time, not the 9.2% we have.
To add insult to injury all of these buffoons, including the agencies, continue to enjoy respect and are held in high esteem.
How a Downgrade of U.S. Debt Will Impact Stock and Bond Prices [View article]
I tend to believe the credit and currency markets are aware of our dire circumstances and any downgrade would be simply an acknowledgement of what is already known.
Over the last 25 years real economic growth has been 2.6%; in the last decade it has been 1.6%.
Only Ireland and Mozambique have appreciably larger fiscal deficits as a percent of GDP than we do. And only Japan, Italy and Greece have more debt as a percent of GDP than we do.
Since these are hardly secrets and point to an unsustainable path, it's only a matter of time before our debt is downgraded. Failure to raise the debt ceiling will simply accelerate the inevitable.
So What's It Going to Be, Bernanke? [View article]
______________________...
It's tempting to think Ben will fire up the Fed helicopter and start dropping money from the sky in a futile attempt to revive an economy suffering from the effects of deleveraging and a liquidity trap. He stubbornly refuses to accept that accommodative monetary policies are very blunt, ineffective instruments in this environment.
There is hope, though, because in reading the last Fed minutes it's very clear that two conditions must be present for another round of QE: persistent economic weakness and deflation. Core inflation, which increased last month at a rate exceeding levels desired by the Fed, is pretty close to their targets on a YOY basis; there are no signs of deflation.
And with respect unemployment and labor market weakness, I believe there is a growing realization that structural forces are at work and further easing will not prevail over these dynamics which include globalization, downsizing, lack of business confidence (taxes, regulations, and Obamacare), deteriorating employment skills and chronic mismatches between what is needed and what is available.
If there is further QE, it will be conducted only at the behest of politicians watching the economy roll over into an economic abyss.
Why Last Week's Rally Signals More Trouble Ahead for Stocks [View article]
The S&P touched its 200 day MA twice, the second time being the 26th of June and this along with indications that Greece would approve further austerity measures, the EU would release the fifth tranche and some general favorable US releases propelled the market up with the S&P closing at 1339 on Friday.
The market moves in a progression of higher highs and higher lows and presently it is doing just that. Breakdowns occur, however, when the current series of higher highs and higher lows fail to rise above levels established in prior cycles of swing highs and lows. Looking forward, we can be bullish if the S&P closes above 1347, then 1360 and then 1372.
The latter is where the market starting breaking down in early May and if we move off 1372 we can be quite bullish until the next shock or swan hits us in the face. Like you I have bearish bias but I have trained myself to trade what I see.