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QE2: An Unmitigated Disaster?
Submitted by asiablues on 03/06/2011 18:44 -0500
http://www.zerohedge.com/article/qe2-unmitigated-disaster
The Fed’s QE2 Traders, Buying Bonds by the Billions
Published: Tuesday, 11 Jan 2011 | 9:53 AM ET
By: Graham Bowley
The New York Times
http://www.cnbc.com/id/41019109//
NY Fed Bank [Getty Images]
Deep inside the Federal Reserve Bank of New York, the $600 billion man is fast at work.
In a spare, government-issue office in Lower Manhattan, behind a bank of cubicles and a scruffy copy machine, Josh Frost and a band of market specialists are making the Fed’s ultimate Wall Street trade. They are buying hundreds of billions of dollars of United States Treasury securities on the open market in a controversial attempt to keep interest rates low and, in the process, revive the economy.
To critics, it is a Hail Mary play — an admission that the economy’s persistent weakness has all but exhausted the central bank’s powers and tested the limits of its policy making. Around the world, some warn the unusual strategy will weaken the dollar and lead to crippling inflation.
But inside the Operations Room, on the ninth floor of the New York Fed’s fortresslike headquarters, there is no time for second-guessing. Here the second round of what is known as quantitative easing — QE2, as it is called on Wall Street — is being put into practice almost daily by the central bank’s powerful New York arm.
Each morning Mr. Frost and his team face a formidable task: they must try to buy Treasuries at the best possible price from the savviest bond traders in the business.
The smallest miscalculation, a few one-hundredths of a percentage point here or there, could unsettle the markets and cost taxpayers dearly. It could also embolden critics at home and abroad who say QE2 represents a dangerous expansion of the Fed’s role in the markets.
“We are looking to get the best price we can for the taxpayer,” said Mr. Frost, a buttoned-down 34-year-old in a striped suit and rimless glasses.
Whether Mr. Frost will reach that goal is uncertain. What is sure is that market interest rates have risen, rather than fallen, since the Fed embarked on the program in November. That is the opposite of what was supposed to happen, although rates might have been even higher without the Fed program.
Mr. Frost’s task is to avoid paying top dollar for bonds that could be worth less when the Fed tries to sell them one day.
Louis V. Crandall, the chief economist at the research firm Wrightson ICAP, said Wall Street bond traders were driving hard bargains. The Fed has tipped its hand by laying out which Treasuries it intends to buy and when, giving the bond houses an edge.
“A buyer of $100 billion a month is always going to be paying top prices,” Mr. Crandall said of the Fed. “You can’t be a known buyer of $100 billion a month and get a good price.”
Nevertheless, Mr. Frost and his team have been praised on Wall Street for creating a simple, transparent program. Neither the Fed nor Wall Street wants any surprises. The central bank is even disclosing the prices at which it buys.
Mr. Frost and his team work out of a small, beige corner office with arched windows that used to be a library. There, at about 10:15 most workday mornings, one of them pushes a button on a computer. Across Wall Street, three musical notes — an F, an E and a D — sound on trading terminals, alerting traders that the Fed is in the market.
On one recent Tuesday morning, what Mr. Frost and his five young colleagues did over a 45-minute period might have unsettled even a seasoned Wall Street hand: they bought $7.8 billion of Treasuries.
Mr. Frost and his team drew up the daily schedule for what the Fed calls its Large-Scale Asset Purchase program. And that program is, by any measure, large scale: through next June, these traders will buy roughly $75 billion of Treasuries a month — on top of another $30 billion it is reinvesting in Treasuries from its mortgage-related holdings.
But depending on daily market conditions, Mr. Frost can decide not to buy certain bonds if they are already in short supply.
As offers to sell Treasuries flash on a bank of trading screens, a computer algorithm works out which ones to accept. The computer compares the offers from Wall Street against market prices and the Fed’s own calculation of what constitutes a “fair value” price.
The real work is done by three traders who are referred to during the operation as trader one, trader two and trader three. They sit at a long table against the wall, tapping at seven screens.
On one recent morning, trader one was Tiffany Wilding, 26. While she reviewed the stream of offers and then the prices finally accepted by the algorithm, trader two, Blake Gwinn, 29, double-checked her decisions and trader three, James White, 29, made a duplicate of everything in case the computers crashed.
All the while, Mr. Frost stood behind his colleagues, ready to intervene — and even cancel the Fed’s purchases — at any sign of trouble.
They have their work cut out, trying to outwit the 18 investment firms that deal directly with the Fed. These so-called primary dealers — the Goldmans and Morgans of the world — employ some of the sharpest minds on Wall Street.
Mr. Frost — a Rutgers math grad who has worked at the Fed for 12 years, lives in the Borough Hall area of Brooklyn and takes the subway each day to work — is fairly well known within the dealer community. He and his team talk to the big banks most days.
The job carries great responsibility and is prominent within the Fed. But outside the Fed he and his colleagues are still seen more as staid central bankers doing a job, bankers say, not necessarily Wall Street hotshots likely to be snapped up by the likes of Goldman Sachs.
When devising the program, Mr. Frost and his team decided to focus most on buying Treasury notes with an average maturity of five to six years. That is because the yields on these notes have the biggest impact on interest rates for mortgage holders, consumers and companies issuing debt, and on banks’ decisions to lend to businesses. Over the weeks and months of the program, his purchases should drive up the prices of these securities — because they will be in greater demand — and consequently push down their yields.
The trouble is, though yields fell sharply between August and November as the markets anticipated the new program, they have risen since it was formally announced in November, leaving many in the markets puzzled about the value of the Fed’s bond-buying program.
Mr. Frost, and his boss, Brian P. Sack, insist the program has succeeded. Mr. Sack, 40, joined the Fed 18 months ago to run the entire markets group. He has a Ph.D. from M.I.T. and worked most recently for a Washington consulting firm. In 2004, he wrote a paper with Ben S. Bernanke, the future chairman of the Federal Reserve, and another economist about unconventional measures for stimulating the economy in extraordinary times — just like large-scale purchases of Treasuries.
“We didn’t know then that the Fed would be putting it to the test,” he said.
He said the Obama administration’s $858 billion tax compromise with Congressional Republicans in December complicated the macroeconomic picture.
But the biggest reason for the rise in interest rates was probably that the economy was, at last, growing faster. And that’s good news.
“Rates have risen for the reasons we were hoping for: investors are more optimistic about the recovery,” said Mr. Sack. “It is a good sign.”
This story originally appeared in the The New York Times
Deciphering Debt
Submitted by Northern Trust on Thu, 30 Dec 2010
http://www.financialsense.com/contributors/northern-trust/deciphering-debt
Same here, giff.
Waiting for precious metals to come down and will assess their effect on TIPS. Hope that deflation will bring down TIPS price so that I can add more in the future.
In the long run, i.e., the rest of our lives, there will be overall inflation, thus making it sense that TIPS becomes essential to our portfolio.
You have a Merry Christmas and Happy New Year.
sumi
I'm holding....
My 2011 Outlook: The Coming Year Will Provide Many Answers
by: Bernard Thomas December 23, 2010
http://seekingalpha.com/article/243345-my-2011-outlook-the-coming-year-will-provide-many-answers
The Holidays are here, and 2011 will soon be upon us. The liquidity scare from now through year-end 2011 should be the focus of all fixed income investors. 2011 is going to tell us much. It will tell us if the EU will hold together. It will tell us if the euro can survive as a currency. It will tell us if centralized monetary policy and localized fiscal policies is a feasible model in the long-term. 2011 will also tell us what a non-bubble U.S. expansion looks like.
Europe is going to be interesting. Its problems are not going to be solved with bailout funds and strong language. Troubled countries are either going to cut benefits to its citizens, adopt pro-growth policies or leave the euro and try to devalue their way out of their problems. The list of troubled countries may be expanding. Belgium may join the PIIGS among troubled European countries. I still haven’t come with a new acronym. The bottom line is that Europeans have some difficult choices to make.
One choice which will probably not be available is continuing with their market / welfare state hybrid while being part of a common currency. The ECB can do little to help distressed countries because it can’t ease or engage in QE to help a country like Greece without damaging the economies of countries like Germany. One way to solve this dilemma would be to give the EU the authority to dictate both fiscal and monetary policy for the entire bloc, a United Stated of Europe if you will. However, that would require member countries to give up their sovereignty and adhere to rules set by a central governing body. This will not go over well among the European populace. Although its demise is not certain make no mistake, the euro is in trouble.
Closer to home, we will soon see what the economic potential of a non-bubble-fueled U.S. economy looks like. Economic data during the first half of 2011 will be positively affected by the extension of the Bush-era tax cuts and the suspension of the worker portion of the payroll tax. However, as with all temporary stimulus measures, the benefits are likely to be short-lived and less affective than anticipated. By the end of 2011, the U.S. economy will have to fly on its own power. Not all stimulus will be removed. It is unlikely that the Fed will engage in QE3, but it is unlikely to raise rates in 2011.
Long-term rates may not have far to rise in 2011. The recent rise of long-term rates is mostly a correction following a smaller than anticipated QE2 program and better growth outlook. Current long-term rates probably have GDP between 3.50% and 4.00% mostly built in. We could see a 4.00% 10-year note by the end of 2011, but maybe not much higher. If the economy cannot gain more traction, long-term rates could languish in the mid-3.00% area. In fact, Philadelphia Fed President Charles Plosser, who has been one of the more hawkish and optimistic Fed officials gave his 2011 estimate today. He forecasts that 2011 will be in the 3.00% to 3.50% area.
Fixed income investing in this environment is not that difficult, if one manages expectations. Ladder your portfolio. Resist swapping into “sexy” products or overweighting on the long end of the curve (or the short end of the curve). Invest new money on the belly of the curve (5-10 years) unless that runs counter to your goals, objectives or risk tolerances. TIPS are rich. The break even between 10-year TIPS and the 10-year treasury is 230 basis points. With inflation likely to be tamer than what the alarmists are predicting us TIPS only as hedging vehicle. Watch out for bubbles in very-low-rated bonds (low B and CCC) and a correction in investment grade industrials. Financials, insurance and, to a lesser extent, telecom offer the best values.
Investors should consider callable agency bonds, including step-ups. I also believe that corporate step-ups offer value, more than do LIBOR-based floaters. CPI corporate floaters may be a better option. Not because inflation is going to run, but because even modest increases in inflation will be greater than what occurs in three-month LIBOR (the typical benchmark for floaters) as it is joined at the hip with Fed Funds and the Fed is not budging in 2011. Not unless housing takes off, removing significant headwinds facing the economy, but that probably will not happen.
Until next year.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Fed expected to make big bond buy; what will impact be?
Updated 2h 31m ago By Paul Davidson, USA TODAY
http://www.usatoday.com/money/economy/2010-10-29-fed29_ST_N.htm?loc=interstitialskip
The Federal Reserve next week is expected to give the economy the equivalent of a B-12 shot.
But many economists question whether it will be enough to perk up a listless recovery. Others say it ultimately will lead to rampant inflation.
Based on its signals since August, the central bank Wednesday will likely announce a new round of government bond purchases to lower long-term interest rates and stimulate economic growth. It would be the Fed's most aggressive bid to rev up the economy since it bought $1.7 trillion in bonds starting in early 2009 in the financial crisis.
Two-thirds of 33 economists who provided an estimate to USA TODAY expect the Fed to buy $400 billion to $750 billion in Treasury notes or other assets. Many say the purchases will be made in the next six to eight months. Expectations that it might snap up $1 trillion or more have been dampened lately, though it's possible. The goal: drive up the prices of long-term bonds, which pushes down yields. That, in turn, pulls down rates on mortgages and other loans, spurring consumers to buy homes and cars, and businesses to invest and hire workers.
Speculation about the program in recent months already has driven up stocks and lowered interest rates. The yield on the 10-year Treasury bond fell from 2.86% on Aug. 9 — when the Fed first telegraphed its intentions — to as low as 2.38% before rising to 2.66% Thursday. The S&P 500-stock index is up 4.7%. There's a good chance rates won't move much more when the Fed announces the purchases unless it spends at least $1 trillion, says MF Global chief economist Jim O'Sullivan.
The Fed feels compelled to act because the upturn from the recession remains painfully slow. Unemployment is near 10%. Economists expect the government Friday to report that the economy grew 2% in the third quarter — not enough to keep the 9.6% jobless rate from rising. New York Fed President William Dudley last week called today's unemployment and too-low inflation "unacceptable." Fed Chairman Ben Bernanke said last month there appears "to be a case for further action."
Typically, the Fed sparks growth by trimming its benchmark short-term rate. But that's been near zero since the financial crisis. The Fed in early 2009 launched an unprecedented program — buying $1.42 trillion in mortgage-backed securities and related debt and $300 billion in Treasuries. Mortgage rates fell as much as a percentage point.
Back then, the Fed was pumping cash into markets frozen by fear. Now, both banks and corporations have gobs of cash. Yet, many homeowners don't qualify to refinance their mortgages — which would put more cash in their pockets — as their homes are worth less than their mortgages, says Paul Ashworth of Capital Economics. Businesses, he adds, "are too cautious to hire or invest."
Philadelphia Fed President Charles Plosser, a non-voting member of the Fed's policymaking committee, has said it's "difficult" to see how asset purchases will have much impact on employment.
But Mark Zandi, chief economist of Moody's Analytics says the Fed has little choice; the risk of slipping back into recession is "uncomfortably high."
Zandi estimates $500 billion in Treasury purchases would boost economic growth next year to 2.7% from 2.4%, create 250,000 jobs and trim unemployment by two-tenths of a percentage point. Brian Bethune of IHS Global Insight says it could have a bigger effect by raising investor confidence and pushing down the dollar, which boosts exports.
Some say the modest gain is not worth the risk of inflation. It will be tough for the Fed to raise interest rates to head off inflation as the economy heats up when banks are sitting on so much of the Fed's cheap money. Kansas City Fed President Thomas Hoenig last week said of the Fed's plan that "you are making a bargain, I'm afraid, with the devil."
While the Fed may well do what many expect on Wednesday, it could also:
•Adjust the size of the program. Zandi expects the Fed to leave the door open to further asset purchases if the economy doesn't pick up in six months and ultimately buy $1 trillion by mid- 2011. That could boost growth to 3% next year and cut the jobless rate by half a percentage point.
"If you're going to do something, do something big," Ashworth says.
Alternatively, the Fed could buy $100 billion of assets and decide whether to do more when it meets every six weeks. That would placate Fed inflation hawks and make it easier to shelve the program if the recovery heats up. O'Sullivan says it's unlikely: It would disappoint investors, who would sell bonds, lowering prices and raising rates.
•Signal low interest rates for a longer time. The Fed has indicated short-term rates likely would stay low "for an extended period" — a phrase widely interpreted to mean about six months. It could suggest rates would stay low even longer in a bid to further drive down Treasury yields. Bethune says it could instead drive up rates as investors anticipate inflation. Bernanke has said it could be difficult to convey the Fed's intent "with sufficient precision."
•Allow higher inflation. The Fed could signal it's prepared to let inflation exceed its target of 2% a year for a brief period since it's been so low. Higher inflation could spur consumer purchases on fears prices will soon rise and on lower real — or inflation-adjusted — interest rates. But Bethune says communicating that policy to the public would be tricky.
•Cut the interest rate on reserves banks hold at the Fed. This could prompt banks to use that money for lending instead to get a bigger return. But the rate is already quite low. Bernanke has said the effect would be "relatively small."
Fed's Rosengren Warns Against Easing Too Slowly
Published: Thursday, 14 Oct 2010 | 4:04 PM ET
By: Reuters
http://www.cnbc.com/id/39674961
giff, my 401K information indicates a year-to-date return of 3.3% and a one-year return of 8.5%.
I guess I could keep a running log of monthly changes, but I find that unnecessary.
I'm happy with the investment; there will be times of deflation and inflation, but most of the future will be inflation. TIPS are good for this environment.
good luck,
sumi
What has your divy been for TIP?
IPE has paid me this...
5/11/2010 IPE SPDR SERIES TRUST BARCL CAP DIVIDEND OF IPE @ .07607
4/12/2010 IPE SPDR SERIES TRUST BARCL CAP DIVIDEND OF IPE @ .19376
2/9/2010 IPE SPDR SERIES TRUST BARCL CAP DIVIDEND OF IPE @ .09599
1/7/2010 IPE SPDR SERIES TRUST BARCL CAP DIVIDEND OF IPE @ .10948
12/9/2009 IPE SPDR SERIES TRUST BARCL CAP DIVIDEND IPE @ .09535
11/10/2009 IPE SPDR SERIES TRUST BARCL CAP DIVIDEND OF IPE @ .16637
giff, I'm getting the same drift from a friend's investment manager.
I was hoping that the price would decrease, so that I could double my holdings in TIPS.
Good luck and good investing.
sumi
My Financial Adviser says Stay in Tips for awhile... He expect inflation... maybe prolonged due to latest Euro stuff.. but long yes.
For nations living the good life, the party's over, IMF says
By Howard Schneider
Washington Post Staff Writer
Saturday, April 24, 2010
http://www.washingtonpost.com/wp-dyn/content/article/2010/04/23/AR2010042305258.html?sid=ST2010042306038
In the lingo of the International Monetary Fund, the future of the world hinges on "rebalancing and consolidation," antiseptic words that would not seem to raise a fuss.
But the translation is a bit ruder, something on the order of: "Suck it up. The party's over."
To keep the global economy on track, people in the United States and the rest of the developed world need to work longer before retiring, pay higher taxes and expect less from government. And the cheap imports lining the shelves of mega-chains such as Wal-Mart and Target? They need to be more expensive.
That's the practical meaning of a series of policy papers and statements issued in recent days by IMF officials, who have a long history of stabilizing economies and solving global financial problems, as they plot a course to keep the world economy growing and reduce the risk of another "great recession."
That message has been delivered subtly, woven into documents with titles such as "Resolving the Crisis Legacy and Meeting New Challenges to Financial Stability," and justified by concepts such as "raising retirement age in line with life expectancy," as IMF economic counselor Olivier Blanchard put it this week.
But fully deciphered, it means a pretty serious reworking of expectations in the developed world: changes in labor rules, product prices, currency values and even the social contract between governments and an aging citizenry.
"It is not that living standards will lower, but they will not increase as fast as they have been," said Domenico Lombardi, a former IMF executive director. The ideas being discussed by world leaders "are coded words," he said. "They don't like words like 'imposing higher taxes' and 'cutting spending.' "
Rebalancing
The IMF has long had a reputation as a bearer of bad news -- it dispatches well-educated and diplomatically deft teams to tell economically troubled countries how many people they have to fire and which programs they have to cut to get financial assistance. But the IMF now finds itself in the odd position of having that conversation not with a single ailing sovereign but with the developed countries at the core of the world system, including the United States.
Its prescription is centered on two concepts.
"Rebalancing" is an idea that most everyone endorses -- including the technicians at the fund and President Obama and the leaders of the G-20 group of economically powerful nations. In broad strokes, it means curbing what has been a massive transfer of capital from nations that consume more than they produce, such as the United States, to nations that produce more than they consume, such as China.
The imbalance has been key to China's modernization: The country buys U.S. government bonds by the tens of billions to keep the dollar stronger than it would be and to keep its domestic currency -- and its exports -- cheaper. Looked at one way, the flow of U.S. debt to the People's Bank of China has acted like a giant, collective credit card, underwriting consumers across the United States and driving the business models of major retailers such as Wal-Mart.
The message from the IMF is that the card is about maxed out and that the imbalance in trade flows needs to be corrected.
How to do it? One way is for China -- or Asian exporters, more generally -- to let their currencies rise on world markets. The other way, which IMF economist Blanchard raised this week, would be to devalue the dollar, the euro and other developed-world currencies.
"The advanced economies as a whole may need to depreciate their currencies so as to increase their net exports," Blanchard said.
The less well-advertised side of the equation: If the dollar is worth less, then imports, regardless of their source, will cost more. U.S. exports will be proportionately cheaper -- a good thing for American businesses trying to become more competitive in overseas markets -- but everything from iPods to jeans to the latest Barbie doll would jump in price.
The ideas offered by the IMF "could certainly reorder the balance of the international economy, but not in a way that benefits the average person in the U.S.," said J. Craig Shearman, vice president of government affairs for the National Retail Federation.
He continued: "If a few factories have an increase in exports, that is good for them, but it leaves the vast majority of people paying more for consumer goods. Talking about consuming less and saving more is a nice, ivory tower approach. But it is not real world economics. People have to put clothes on their children's backs and food on the table."
Wal-Mart declined to comment.
Consolidation
"Fiscal consolidation" is another idea promoted by IMF leaders. Again, the aim seems unobjectionable: The United States and other developed-world governments ran record deficits during the crisis, both to pay for stimulus programs and because tax and other receipts cratered. Across the developed world, the IMF says, government debt will rise from about 80 percent of economic output before the crisis to roughly 115 percent of output in 2014.
That's considered a dangerous trajectory, and IMF officials say that by next year, governments need to announce "credible" plans to cut their annual deficits, turn them into surpluses and start paying off what is owed.
The level of the correction needed is large, perhaps 10 percent of gross domestic product. In the United States, that would amount to roughly $1.4 trillion annually, to be cut from government programs or raised through new taxes.
Better-than-expected growth would help, or increases in productivity, or even surprises in the form of new technologies. But what's on the horizon is, more likely, a difficult reckoning -- one that Greece is facing and that other developed nations know is in the offing, French Finance Minister Christine Lagarde said in an interview Thursday.
"We're all in the same boat," Lagarde said as she looked ahead to a tough debate in France over changes in pension rules that will make not just government workers but also many in the private sector add years before their expected retirements.
The IMF is studying issues such as which taxes should be raised and which programs should be cut to make "consolidation" as painless as possible. But it views a longer working life as an important tool -- one that would save large amounts of money in the future without cutting spending and decreasing economic activity today.
In the United States, a new fiscal commission is beginning to study how to bring U.S. government debt into line.
"You will see many headlines complaining and moaning and stirring the pot," Lagarde said, as issues such as pension reform are debated. But ultimately, she said, "there is no way out."
Dollar Free Ride
by RYAN J. PUPLAVA, CMT | march 29, 2010
http://www.financialsense.com/Market/wrapup.htm
The U.S. dollar has enjoyed a free ride since Europe’s economic troubles with Greece. Sovereign debt downgrades had encouraged assets to begin leaving the European region causing the euro to drop. The euro zone’s current account balance fell pretty strongly in January. The balance fell to a deficit of 16.7 billion euros (unadjusted) from a revised 9.8 billion euro surplus in December. Representing 57.6% of the U.S. dollar index, the euro has helped cause the U.S. dollar index to rise from 74 in December 2009 to a high last Thursday at 82.24. This represents a retracement of 50% of the U.S. dollar’s drop since March 2009.
Greece’s budget deficit had reached 12.7 percent of gross domestic product in 2009 according to Bloomberg. With a number of downgrades on Greece’s debt rating, Greek bonds risked losing their eligibility as collateral at the European Central bank (ECB). Credit default swaps began rising to crisis levels and predatory funds began seeking other prey in Portugal, Italy, and Spain.
Credit Default Swaps
Source: Bloomberg
Last week, European leaders agreed to a proposal that would mix loans from the International Monetary Fund and loans from each euro-region country based on its stake in the ECB. Most of the loans would come from Europe. The proposal is only to act as a last resort should Greece run out of capital raising options.
Today, Greece offered seven-year bonds at a yield nearly five times the premium of similar Spanish bonds. The bond issuance would raise 5 billion euros. According to a Bloomberg article, Greece “must raise 53 billion euros this year, 15.5 billion euros of it by the end of May”. Greece’s ability to finance its funding needs throughout the rest of the year may still weigh in the balance, but the IMF and ECB backing is a step in the right direction to shore up financial stability in Europe.
The U.S. dollar’s rise is namely a euro phenomenon
If you look at the U.S. dollar’s other relationships, the rally loses less of its significance. Since the U.S. dollar index began rising in December, the U.S. dollar has been relatively flat versus the Japanese Yen (13.6 percent of the dollar index).
Over the same time period, the U.S. dollar has lost 3.4 percent of its value versus the Canadian dollar (9.1 percent of the dollar index).
Looking at another commodity-led currency like the Australian dollar, we can see that the Australian dollar has also been flat versus the U.S. dollar since December 2009. A flat Australian dollar is no small thing after rising nearly 50% versus the U.S. dollar since March 2009.
With credit defaults swaps falling in Europe and Greece shoring up its funding needs, the rally in the U.S. dollar index may be nearing a top for the time being. One of the first signs I look for in a reversal is a divergence between the Relative Strength Index (RSI) and price. Divergence occurs when price reaches a new low or high but the RSI does not. Looking at the U.S. dollar index, I can see some bearish divergence between peaks in the RSI during February versus now. Another warning sign of a possible trend change I like to look for is whether price can reach trend channel extremes. We can see here that the dollar looks to be reversing short-term without reaching the top of the trend channel.
Elliott Wave analysis is another form of charting that can help see the forest for the trees. Generally, the direction the market wants to move unfolds in 5-wave sequences (3 actionary waves in the direction of the trend divided by two corrections). Since the U.S. dollar index has risen to a new high in March, we can tell that the current move in the dollar has established at least 5 waves. There’s a possibility for an extension (like last year’s move in the dollar down) but that typically only happens in rare occasions of intense momentum. Once a motive mode finishes (five waves in a relative direction) then a corrective mode sets in. If wave 5 has topped here, then the U.S. dollar could be looking at a corrective mode straight ahead.
There are a number of “green lights” on the U.S. dollar that still hold bullish conditions that remain until broken. As each indicator reverses, a trend reversal will be made more credible.
*The bullish trend channel is intact since December
*The RSI is in a bullish shift until it caps at 60 and confirms a reversal with a break below 40
*The 13 versus the 34 exponential moving averages have not crossed into a sale yet
*The 50-day smooth moving average is rising below price
*The 200-day average is now rising
*MACD is positive
While the dollar has rallied in the past four months, it is largely a euro phenomenon. That phenomenon is based on a sovereign debt crisis concerning Greece’s ability to refinance its debt. For now, that crisis is beginning to wane as credit default swaps have dropped since February 4th, but Greece has a long road up ahead to refinance 53 billion euros in debt. It would be a good idea to continue watching Greece’s debt issuance throughout the year and the resulting effects on the U.S. dollar index if you’re invested in dollar denominated commodities, such as gold, that tend to fall when the U.S. dollar is rising.
Ryan Puplava, cmt
Registered Representative
Copyright © 2010 All rights reserved.
Very nice work looking at these... Thanks for the post...
U.S. Government Debt, U.S. Budget Deficit & Analog Swing Charts of the S&P Composite
BY ron Griess | march 23, 2010
http://www.financialsense.com/Market/griess/2010/0323.html
The following chart shows Gross Federal Debt and the "Debt Ceiling" at the end of February, 2010.
The following chart shows Gross Federal Debt and its 1 year, 5 years and 10 years rate of growth. The February, 2010 rates of growth are: 1 year - 14.37%, 5 years - 10.03% and 10 years - 8.05%.
The following chart shows Gross Federal Debt as a percentage of Nominal GDP.
The following chart shows the U.S. Federal Budget deficit at the end of February, 2010.
The following chart shows the U.S. Federal Budget deficit as a percentage of Nominal GDP. Using annual statistics, the record deficit was 13.00% in 1945. Using quarterly statistics, the previous record was 6.57% for the 3rd quarter of 1975.
We have drawn weekly charts of five previous market bottoms and overlaid each with the market bottom of the week ended March 6, 2009.
1938 and 2009
1942 and 2009
1974 and 2009
1982 and 2009
2003 and 2009
Ron Griess
Copyright © 2010 All rights reserved.
contact information
Ronald L. Griess | The Chart Store, Inc. | 235 South Adams Street, Westmont, IL 60559
Direct 630-663-9059 | Toll Free 800-245-0571
>I have 5% in my 401K and I will add should we go into a deflation late this year or next year due to a recession.
I just have to believe that eventually all of this fiat money issued by the Fed will make the TIPS an important investment.
good luck,
sumi
still holding about 5% in TIPS fund IPE...
this is good balance I think??
A Tip On TIPS
by Carl Swenlin
DecisionPoint.com
March 19, 2010
http://www.financialsense.com/editorials/swenlin/2010/0319.html
TIPS are bonds that provide inflation protection. While Erin covered this subject in yesterday's blog, I wanted to cover it with a little more depth and from a somewhat different perspective. Our default "first look" charts are usually set for one year, but I personally like to step back to a three-year chart to help put recent price action in a longer-term context.
I think the most prominent feature on the chart is the crash in October 2008. Before that you can see the strong advance, coinciding with people's belief that prices on everything would rise forever. Prices leveled in 2008 as the inflation belief began to be undermined. The crash in TIPS occurred when both real estate and stocks were crashing and fear of deflation took hold. TIPS began to advance again out of the depths of the crash.
Since the November 2009 top, TIPS have moved sideways into a triangle formation. This is also called a continuation pattern, meaning that prices are technically expected to continue higher once the consolidation phase has completed. Prices have been turned back from overhead resistance for a third time, and I think this could be the final pullback before an upside breakout occurs. Supporting this opinion is the fact that (1) the 50-EMA is above the 200-EMA (bull market for TIPS), (2) we have a PMO crossover buy signal in relatively oversold territory, and (3) the 20-EMA is close to crossing up through the 50-EMA, which will generate a Trend Model buy signal.
The outcome looks bullish, but I think it would be prudent for me to emphasize that this should not be considered a recommendation to buy.
A Brief Market Update
BY TIM W. WOOD | january 29, 2010
http://www.financialsense.com/Market/wood/2010/0129.html
Yield Curve Steepest Since 1980; Hard Times Ahead in 2010
BY MIKE SHEDLOCK | december 10, 2009
http://www.financialsense.com/Market/wrapup.htm
Hey sumisu
I've own the IPE since 1/8/09 at $47.50
http://ih.advfn.com/p.php?pid=squote&symbol=IPE
This one corresponds generally to the price and yield performance of an index that tracks the inflation protected sector of the United States Treasury market.
Four Reasons Hyperinflation Hasn’t Hit the US... Yet
Keith Fitz-Gerald Nov 04, 2009 11:30 am
http://www.minyanville.com/articles/hyperinflation-spending-bailout-consumer-hiring-cash-China-minyanville/index/a/25278
Everything we know about classic economic theory suggests the US economy should be experiencing Zimbabwe-like hyperinflation right now, thanks to the nearly $2.2 trillion the US Federal Reserve has pumped into the system.
But we’re not... yet.
Classic economic theory says that money supply can be used to stimulate the economy and our central bankers seem to agree. That’s why they’ve pumped more than $1 trillion dollars into the economy, engineered countless bailout bonanzas for zombie institutions, put Detroit on life support, and delivered a bunch of financial Band-Aids to the trauma ward -- all in a desperate bid to make Americans feel better about the global financial crisis.
To their way of thinking, the trillions of dollars have been a success. That’s why any meeting of the Group of Eight nations looks more like a mutual affection society with central bankers eager to claim credit and backslap each other in congratulations for having avoided the “Great Depression II.”
But by taking the Federal balance sheet to more than $2 trillion from $928 billion 2008, they’ve created a situation that should have resulted in an epic inflationary spike to accompany the 137% increase in liabilities.
Yet that hasn’t quite happened.
Core inflation -- which denotes consumer prices without food and energy costs -- has actually decreased from 2.5% in 2008 to 1.5% presently. And that has many investors who have heard the siren call of the doom, gloom, and boom crowd wondering if they’re worried about nothing.
So what gives?
Well, there are four reasons we haven’t yet seen hyperinflation:
1. Banks are hoarding cash.
Despite having received trillions of dollars in taxpayer-funded bailouts and lived through a litany of shotgun weddings designed to reinvigorate the shattered lending markets, most banks are actually hoarding cash.
So instead of lending money to consumers and businesses like they’re supposed to, banks have used taxpayer dollars to boost their reserves by nearly 20-fold, according to the Fed. The money the bailout was supposed to make available to the system is actually not passing “Go,” but rather getting stopped by the very institutions that are supposed to be lending it out.
Three-year average annualized loan growth rates were 9.6% before the crisis; now they are shrinking by 1.8%, according to Money magazine.
2. The United States exports inflation to China, which remains only too happy to continue to absorb it.
What this means is that low-priced products from China help keep prices down here. And this is critical to something that many in the “China-is-manipulating-their-currency” crowd fail to grasp. If China were to un-peg the yuan and let it rise by the 60% or more it’s supposedly undervalued by, we’d see a jump in prices here in everything from jeans to tennis shoes, toys, medical equipment, medicines, and anything else we import in bulk from China.
Chances are, the shift wouldn’t be dollar-for-dollar or even dollar-for-yuan, but there’s no doubt it would be significant.
Many economists I’ve talked to privately think 25% to 35% is probable. So the next time you hear a “Buy American” extremist, you might want to share this little inconvenient truth.
Now, before I get a bunch of hate mail about this, let me just say I want to “Buy American” too. I’m all for supporting our native industry and our own domestic job markets. But in today’s world, “made anywhere” is really hard to do and even harder to support.
The interconnected nature of businesses and global manufacturing chains, not to mention the payment system, makes that nearly impossible. Granted, perhaps that’s part of the problem, but that’s a subject for another time. The lessons we learned in the 1930s are clear, and they must be acknowledged -- protectionism only makes matters worse, no matter how we feel about it personally.
3. Consumers are still cutting back.
Therefore, the spending that normally helps pull demand through the system is simply not there. I don’t know how things are in your neighborhood, but where I live, people are still cutting back.
Indeed, data from the US Department of Commerce and the Federal Reserve Board show that consumer spending growth averaged 1.4% a year prior to the crisis and is now shrinking at a rate of 0.7%. What this means is that people have figured out that it’s more important to save money than it is to spend it.
And, given that consumer spending makes up 70% or more of the US economy, this is a monumental change in behavior that all but banishes the last vestiges of the “greed is good” philosophy espoused by Michael Douglas as Wall Street pirate Gordon Gekko in 1987.
4. Businesses continue to cut back rather than hire new workers.
Therefore, wages and wage inflation figures are lower than they would be if the economy was truly healthy and the stimulus was working.
This is especially tough to stomach because it means people are still being marginalized, laid off, and “part-timed” instead of being hired. And that means that most of the earnings growth we’ve seen this season has come from expense reductions rather than top line sales growth -- and those are two very different things.
But while this is tough, it’s also helped keep inflation lower than it would otherwise be. Prior to the financial meltdown, job growth averaged about 1% a year over the last three years, now it’s falling by 4.2%.
The upshot?
Any one of these factors could change at any time. And that means investors who are relying on the Fed’s version that everything is okay and that the government is managing inflation may be in for a rude awakening.
The only thing the Fed is doing is managing to manipulate the data, and even then, not very well.
Will the Dollar get an “Arab oil shock”?
author of Full Spectrum Dominance: Totalitarian Democracy in the New World Order
by F. William Engdahl
October 7, 2009
http://www.financialsense.com/editorials/engdahl/2009/1007.html
Arab oil producing nations and the some world’s largest oil consumers including China and Japan are reliably reported to be secretly planning a long-term exit from pricing their oil trade in dollars. If true, it would spell the death knell for the dollar as world reserve currency, and for the USA as “the” global economic power.
Ever since Washington tore up the Bretton Woods treaty in August 1971 and went onto a “dollar paper reserve system” instead of a dollar backed by gold, the United States, as the world’s most powerful military power, has been able to dictate financial terms to the world. Nations like Japan and later China, dependent on US export markets, would dutifully invest their trade surplus dollars into US Government debt, in effect financing wars such as Iraq or Afghanistan they opposed. They saw no choice. Arab oil producing countries, under US military pressure, were forced to sell oil only in dollars, a direct prop to the dollar when the US economy was in terminal decline. That may be rapidly about to come to an end.
According to a leaked report from Arab Gulf oil producers, there have been a series of secret meetings in recent months between the major Arab oil producers, including Saudi Arabia, and reportedly also Russia, together with the leading oil consumer countries including two of the three largest oil import countries—China and Japan.
Their project is to quietly create the basis to end a 65-year long “iron rule” of selling oil only in US dollars. Following the 400% oil price shock of 1973, which was deliberately blamed by US media on “greedy Arab Shiekhs,” a senior US Treasury official made a secret trip to Riyadh to tell the Saudis in blunt terms that if they wanted US military defense against potential Israeli attack, that OPEC must privately agree never to sell oil in currencies other than the US dollar. That “petrodollar” system allowed the US to run staggering trade deficits and remain the world reserve currency, the heart of its ability to dominate and control world financial markets, until the crisis of the sub-prime real estate securitization in August 2007.
The participants in the oil pricing project reportedly envision using a basket of currencies reflecting producer-consumer trade relations, one backed by gold as a solid backbone. It would not initially be a new currency as some have surmised, but rather an arrangement that would eliminate the risks of pricing oil sales in fluctuating and likely depreciating dollars.
Iran announced recently that in the future it would sell its oil for euros not dollars. According to these reports, the basket of currencies would include a mix of yen, euros, Chinese yuan, gold. Brazil would reportedly join as both a producer and consumer country.
The secret plan was first reported by Middle East correspondent, Robert Fisk, in the UK Independent.
I have confirmed from very senior and well-informed Gulf sources that the talks are in fact real. The oil producing countries have been fed up for years about having to price their oil in dollars or face US reprisals. They are steadily losing as the dollar depreciates against other currencies and against gold. As most Gulf Arab oil countries depend on imports for much of their economy, dollar pricing de facto introduces serious inflation into their economies as well. Most of their trade is with the EU or other countries outside the US, but now that trade must be mediated through a sinking currency, the dollar.
Following the US declaration of the War on Terror by the Bush Administration after September 11, 2001 most leading Arab oil producing countries privately saw US policy as being aggressively aimed at them. The un-justifiable US invasion and occupation of Iraq in 2003 merely confirmed that as well as subsequent US threats against Iran.
Initially various governments involved in the leaked plan have publicly denied vehemently such a plan. That in no way invalidates that such moves are afoot. The participating countries are well aware that the United States as a wounded tiger can be far more dangerous. The leak of the plans in the world media, whether every detail reported by Fisk is true or not, feeds what is an inevitable decline in the dollar as a reliable reserve currency for world commerce.
What is not clear is what the potential response of Germany and France, the two pivot powers within the EU will be. If they decide to cast their lot with oil producing and consuming countries, they open their doors to vast new trade and investment potentials from the countries of Eurasia. If they cringe from that and decide to remain with the British Pound and US dollar, they will inevitably sink along as the dollar Titanic sinks.
With that decline of the US dollar goes the lessening of the political power of the United States as sole economic and financial superpower. We face very turbulent waters ahead and gold not surprisingly is gaining in this uncertainty.
Copyright © 2009 F. William Engdahl
The Almighty Dollar
by Dave Cohen
Published Sep 3 2009 by ASPO-USA, Archived Sep 3 2009
http://www.energybulletin.net/node/50027
What is hateful to you, do not do to your fellow man. This is the law: all the rest is commentary
—One version of the rule of reciprocity, the Golden Rule
I only hope that we don’t lose sight of one thing—that it was all started by a mouse
—Walt Disney
Each week I look at the economic and energy data. While there are indeed some actual green shoots in the monthly reports, I can not escape the feeling that our society is like Disneyland, a magic kingdom where life is a fairy tale and dreams really do come true. I call it Disneyland because the crazy rise in the S&P 500 and the oil price in recent months has happened despite, not because of, fundamentals in the economy.
The disconnect between the markets and the economy is almost total. The markets reside in a fantasy realm, while most of us must deal with depressing day-to-day realities. There will eventually be a downward “correction” in the markets, but only because there’s no avoiding the fact that reality always gets the last word.
These market price movements do not happen by accident, of course. The “logic” behind these market rallies is best explained by movements in the value of the Almighty Dollar. Amy Jaffe and Kenneth Medlock of Rice University’s Baker Institute further confirmed that view this week with the release of their study Who Is In the Oil Futures Market and How Has It Changed?
This view of America as a Magic Kingdom will never be popular. People vested in a crazy system—consider the wacky idea that an economy can thrive based on trading in residential real estate while household debt grows and real income languishes—will remain vested in that system long after it has ceased to function.
I don’t know why I should take the world seriously if the world is no longer a serious place. Altruism is dead. Morality is considered quaint. Many of us are left with a survival problem—that is the only truly serious business at hand. We’ve been abandoned in the economic wilderness, left to fend for ourselves. Speaking of life, no one ever told me “you’ll need to be a currency trader if you want to survive the worst of it.”
Before turning to the dollar and the Baker Institute study, let us take a brief excursion through the Magic Kingdom. The first stop on our tour is not the must-see Indiana Jones™ Adventure, but rather the S&P 500 P/E (price to earnings) ratio as it exists today. The guided tour comes with a special Magic Kingdom graphic to enhance your chart-gazing experience.
Figure 1 — Barry Ritholzt’s Chart of the Day: S&P 500 PE Ratio from August 21st. “The price investors were willing to pay for a dollar of earnings increased during the dot-com boom (late 1990s) and the dot-com bust (early 2000s). As a result of the recent plunge in earnings and recent stock market rally, the PE ratio spiked and just peaked at 144 – a record high. Currently, with 97% of US corporations having reported for Q2 2009, the PE ratio now stands at a lofty 129.” Starting in about 1983—it’s always 1983 when the trouble starts!—stock prices became more and more disconnected with actual earnings. But that growing unreality was nothing compared to now. The S & P 500 P/E ratio is now in Disneyland.
Figure 2 — From Recent Concentration of Volumes in Financial Stocks: Coordinated Capital Infusion? C = Citigroup, FNM = Fannie Mae, and FRE = Freddie Mac. Trading volumes for these 3 stocks have been accounting for 40% of NYSE volume lately. Is this a coordinated capital infusion? Does a bear defecate in the woods? Thus, “the directionality of the involvement suggests that large financial institutions are systematically buying the beaten-up shares of the poster children for TARP: C, FNM, FRE, AIG, and the like. It is worth noting in this regard that other major (healthy) financial firms, such as Goldman Sachs (GS, alternative trading symbol = GVS) and J.P. Morgan Chase (JPM), have seen no such surge in their volume or their trading prices. Zero Hedge rightly wonders why this hasn’t triggered alarms at the exchange. And why is it happening with only the weakest financial institutions?” Well, that’s an easy question to answer: They are way too big to fail but they must be recapitalized on the sly.
Figure 3 — The Magic Kingdom meets the oil price. World oil demand is about 2.5 million barrels per day lower now than it was in the 3rd quarter of 2007, but the price of oil is the same. OPEC cuts have boosted the price, but it was the dollar trade that got us where we are today. There seems to be some “resistance” in the $72-74 range as reality intrudes. I’ll discuss the current oil price in some detail below.
Analyst Dave Rosenberg wants to know What Growth Is the S&P 500 Pricing In?
Based on past linkages between earnings trends and the pace of economic activity, believe it or not, the S&P 500 is now de facto discounting a 4¼% real GDP growth rate for the coming year. That is what we would call a V-shaped recovery. While it is possible, though in our opinion a low-odds event, it is doubtful that the economy is going to be better than that. So we have a market that is more than fully priced for a post-recession world — any further gains would suggest that we are moving further into the “greed” trade…
We realize that the market has to climb a wall of worry and that it will often price in a lot of bad news, but for the first time ever, it has rallied nearly 50% amidst a two-million job slide since March. That is either whistling past the graveyard or at the lows the market was indeed pricing in a full-fledged depression. Whatever the market was pricing in at the March lows was obviously a pretty bad outcome, but isn’t that what we saw in the end? To be sure, the government established a floor under the financials, but when you go back and think about the fresh lows posted in late 2002, it was about earnings and the economy, not about financials.
In the four months after the recent lows in March, employment plunged by two million, which is as much carnage as we saw in the entire 2001 recession — and we are talking about the entire cycle including the jobless recovery that spanned from March 2001 to June 2003! We will guarantee you one thing — it is doubtful that the two million folks who lost their jobs are going to be heading to the malls, dealerships or restaurants anytime soon. And while that is only a sliver of the 130 million U.S. workforce, change does occur at the margin.
Rosenberg understands that 4¼% annual real GDP growth will not happen anytime soon. As recently as 2002, when we were well into the Bubble Era, markets still moved on “earnings and the economy.” That doesn’t happen anymore, things are different in the Disney Era. I will quote again from the New York Times’ Rise of the Super Rich Has Hit A Sobering Wall—
Without a financial bubble, there will simply be less money available for Wall Street to pay itself or for corporate chief executives to pay themselves. Some companies — like Goldman Sachs and JP Morgan Chase, which face less competition now and have been helped by the government’s attempts to prop up credit market — will still hand out enormous paychecks. Over all, though, there will be fewer such checks, analysts say. Roger Freeman, an analyst at Barclays Capital, said he thought that overall Wall Street compensation would, at most, increase moderately over the next couple of years.
[My note: See my article The New Gilded Age.]
The recent rise in the S&P 500 is the financial bubble that makes it possible for Wall Street to pay itself the princely fortunes they think they so richly deserve—this is Rosenberg’s “greed” trade.
The rally in S&P 500 is as phony as a three dollar bill. It’s hard to know exactly how, and by whom, the market has been manipulated. We have important hints, of course. Trading volumes have been dominated by financials (Figure 2), volumes are generally low, and most trading is done by machines (Figure 4).
Figure 4 — From the Wall Street Journal’s Rivals Play Catch-Up As Goldman Thrives: “Goldman is known on Wall Street for its sophisticated computer-trading platform. It has become a dominant player in high-frequency trading, in which computers use complex formulas to conduct rapid-fire trades in markets around the world. In the week ending July 3, Goldman accounted for 24% of all program trading, or computer-generated trading, on the New York Stock Exchange, according to NYSE data, making it No. 1.” Nothing I could add here would make this any clearer than it already is.
Turning to the oil markets, it can easily be demonstrated that the price of crude moves with the S&P 500 (Bloomberg, August 14, 2009).
The Standard & Poor’s Index added 0.7 percent to 1,012.73, while the Dow Jones Industrial Average increased 0.4 percent, to 9,398.19. The S&P 500 has a correlation of 0.8 with New York oil futures in the past year. A correlation of 1 means the two move in lockstep.
Bloomberg reported on such tandem moves back on June 29th. The already record-setting simple correlation has only gotten stronger since then.
The S&P 500 has added 37 percent from a 12-year low in March, increasing on 56 percent of the days during that span. The Reuters/Jefferies CRB Index of commodities has advanced 27 percent from its trough, rising 58 percent of the time.
The gains pushed correlations between the [correlation] to 0.74 this month, based on percentage changes over the past 60 days. That’s the highest in at least five decades, data compiled by Bloomberg show. A reading of 1 means two assets move in tandem, while zero means no relationship.
The correlation never rose above 0.66 before this month.
Let’s sum up what life looks like in Disneyland—
*The S&P 500 “rally” is phony.
*Oil moves with the S&P 500, so the oil price is phony too. (See my Mr. Market Gets It Wrong Again.)
*We no longer live in a society that even bothers to pretend that things are on the up and up. The markets are manipulated in plain sight.
I don’t think this is what Adam Smith had in mind when he wrote about the miraculous powers of the “invisible hand.” Janet Tavakoli, founder and president of Tavakoli Structured Finance, explains whey she has liquidated almost all her market positions—
I just went to (almost) 100% cash in my favorite hedge fund, my personal portfolio…
On Monday, Austin Goolsbee, one of President Obama’s economic advisors, told The Daily Show’s John Stewart that the large deficit is necessary, TARP backed us away from the brink of disaster, and the stimulus is working. If only words were magic. Many more banks are in trouble, a chunk of housing activity is due to foreclosures/short sales/resales (the $8,000 housing incentive often went for down payments from people who couldn’t scare up one of their own), credit card problems are on the rise, one-quarter to one-third of all mortgages in the U.S. are underwater, the mortgage “modification” program is a failure with only around 200,000 done so far—half of which are already failing (the same fraudsters who got us in this mess are modifying mortgages), 3,000,000 mortgages are in serious default (90 days or more past due), the unemployment picture is grim, the cash-for-clunkers fake auto stimulus is a non-green short-term artificial pump-up, profits seem due to inventory management and cost cutting rather than demand, and industrial production has plummeted (other than military production which is up). More TARP money will be needed for many smaller banks that are in trouble due to current and coming loan losses. The international picture is mixed, but I’ve even liquidated those positions.
As Ms. Tavakoli knows all so well, we are in a giant game of Survivor. You’re on your own. If you’re skillful & lucky, you might not get kicked off the island. The Revolution will not be televised. In fact, The Powers That Be have postponed The Revolution indefinitely. They hope you will enjoy watching re-runs of Friends or Seinfeld instead, assuming you still have a roof over your head and you can still pay your exorbitant cable TV bill.
Let’s turn to the Baker Institute study to show how fluctuations in the value of the dollar drive market movements.
The Almighty Dollar
The next two graphs show how the markets have moved with the dollar in the 21st century.
Figure 5 — The chart is taken from U.S Dollar/S&P 500 Correlation (August 28, 2009). “A serious [inverse] correlation between the US$ and the US equity markets has developed over the last 9+ years. This correlation is strong and for policy makers in Washington, rather disturbing. The relationship is as follows: If the US$ loses value the equity markets have rallied and if the US$ strengthens equity markets have sold off.”
Figure 6 — The graphic is from Medlock and Jaffe. “Analysis of the dollar-oil price data for 2001-2009 shows a dramatic change in price correlation from historical patterns. Figure 6 indicates the daily oil price and daily value of the dollar against the currencies of major U.S. trading partners. For the period January 2001 through August 2009 [in the bottom panel], these two measures are very highly correlated, exhibiting a simple correlation of -0.82 [inverse correlation]. However, for data from a prior period—January 1986 through December 2009 [top panel]—the correlation was -0.08, implying virtually no correlation during that period. The strong -0.82 measurement implies that oil prices and the value of the dollar tend to have a negative [inverse] correlation. In plainer terms, depreciation in the dollar will very likely coincide with a rise in the price of oil or vice versa.”
Medlock and Jaffe are describing how the simple numéraire effect, in which the price of a commodity traded in dollars reflects changes in the dollar’s value, has overwhelmed fundamental (supply & demand) conditions in the marketplace. This has happened because non-commercial traders who could care less about physical oil are the ones doing most of the trading. (Of course the technical picture is more complicated than this, e.g. longs versus shorts, how futures prices push up spot prices, and so on.)
It just so happens—I am unhappy to report—that up until the recent Fall/Winter dollar bounce due to the view that Treasuries were a safe haven, the dollar had declined for 7 straight years. It appears now that dollar has now reverted to trend (i.e. it is declining again). Thus the price of oil has been rising since March at a time when the fundamentals are particularly weak (Figure 6).
I am not going to go through the Medlock and Jaffe paper in tedious detail. I just want to make the obvious points that need to be made, so read the original paper if you want to know more about how the Commodity Futures Modernization Act “effectively cleared the way for more lax regulation of new oil risk management products, including index funds and price swaps, setting the state for a rapid increase in financial players’ participation in over-the-counter (OTC) markets.”
The oil market has been financialized in the sense that it serves as a means for investors to hedge against a rising or (mostly) falling dollar. What can one say about this? I believe Judy Dugan, research director at Consumer Watchdog, put it best—
Using an essential commodity as [an investment tool] is crazy.
If you want a double dip recession, let’s just get $100 oil again.”
Of course it’s crazy. Investing in stocks to hedge against a deteriorating dollar is one thing, but jacking up the price of gasoline for everyone so a relatively few non-commercial players can cover their ass is quite another. Welcome to Disneyland.
Let be clear about what I am not saying. I am not saying that—
*All the price rise during 2003-2008 was due to dollar hedging, not the collision between a demand shock and a supply ceiling (peak oil). I covered this material in my article It’s Not Black Or White. Medlock and Jaffe say “analysis must also take into account that the physical crude oil market had to be tight in order for speculative activity to be able to exert such extensive upward pressure on price. Thus a more complete discussion of the physical characteristics of the market and its interactions with speculative trader behavior is needed for a more conclusive analysis.” This is not quite right because speculative activity is indeed exerting upward pressure on the oil price in the absence of a tight market.
The rumor on the street is that the CFTC is going to impose position limits on non-commercial oil traders. (This linked document is really worth reading if you care about these issues.) In the absence of new regulation of the oil market, and if no bona fide attempt is made by the Central Bank and the Federal Government to defend the dollar in future years, then the oil price, however high the fundamentals might drive it, will be higher still because of dollar hedging on the NYMEX.
So the future of the oil price becomes, to some extent, the future of the dollar, to which I now briefly turn.
The Future of the Dollar
A lot of ink has been spilt arguing about the future of the dollar. I am not going to add much fuel to that raging fire. Suffice it to say that—
[1] No serious attempt has been made to defend the dollar as far I can see.
[2] The official projected Federal deficit has now been raised to $9,000,000,000,000.
[3] The United States was already the biggest debtor nation in the history of the world and now we have lots more debt to look forward to.
[4] The Federal Reserve is printing lots of money to implement the financial system bail-out. They say they have an exit strategy. We’ll see.
Medlock and Jaffe add another important factor to the discussion. The large trade imbalance contributed to the dollar’s precipitous decline since 2000.
Figure 7 — The U.S. trade balance from Calculated Risk. Medlock and Jaffe say: “The high oil price contributed to a weakening of the dollar through mounting trade deficits and U.S. debt. In 2007 and 2008, dramatically rising oil prices fed the U.S. trade deficit leading to increased U.S. indebtedness. This, in turn, contributed to an even weaker dollar, which further drove oil prices higher in a self-perpetuating pattern. Oil-linked index funds became an asset class for investors wanting to escape the falling dollar and weakening stock market, adding to the speculative fervor in oil.” Theoretically, a declining dollar boosts exports and inhibits imports. The graph shows that the balance of trade has narrowed considerably since the economic crisis began. However, imports and exports are both down considerably.
Medlock and Jaffe are describing a dollar/oil death spiral, a positive feedback loop in which the declining dollar raises oil prices, which further deflates the dollar through the trade imbalance, which raises oil prices, and so forth.
I am not a seer of the stature of Nouriel Roubini. So let’s have him gaze into his crystal ball to discern how the economy might fare in coming years.
There are also now two reasons why there is a rising risk of a double-dip W-shaped recession. For a start, there are risks associated with exit strategies from the massive monetary and fiscal easing: policymakers are damned if they do and damned if they don’t. If they take large fiscal deficits seriously and raise taxes, cut spending and mop up excess liquidity soon, they would undermine recovery and tip the economy back into stag-deflation [recession and deflation].
But if they maintain large budget deficits, bond market vigilantes will punish policymakers. Then, inflationary expectations will increase, long-term government bond yields would rise and borrowing rates will go up sharply, leading to stagflation [recession and inflation].
Another reason to fear a double-dip recession is that oil, energy and food prices are now rising faster than economic fundamentals warrant, and could be driven higher by excessive liquidity chasing assets and by speculative demand. Last year, oil at $145 a barrel was a tipping point for the global economy, as it created negative terms of trade and a disposable income shock for oil importing economies. The global economy could not withstand another contractionary shock if similar speculation drives oil rapidly towards $100 a barrel.
Roubini thinks there are two possible outcomes: recession plus deflation, in which the purchasing power of the dollar will go up here at home, or recession plus inflation, in which the purchasing power of the dollar will go down. It is impossible to understand—at least, for me it is—how either scenario will affect the overall value of the dollar on international markets (the exchange rate) and thus the price of oil. There are too many variables to consider.
Almost anything is possible in Disneyland America, and most of it is not good.
Contact the author at dave.aspo@gmail.com
BOOMERS – WINTER IS COMING
by James Quinn
July 13, 2009
http://www.financialsense.com/editorials/quinn/2009/0713.html
iShares Barclays TIPS Bond Fund (ETF) (TIP)
Posted by leapleaf on Tuesday, June 23, 2009, 21:07
http://www.leapleaf.com/?p=629
iShares Barclays TIPS Bond Fund, formerly iShares Lehman TIPS Bond Fund, seeks investment results that correspond generally to the price and yield performance of the inflation-protected sector of the United States Treasury market as defined by the Barclays Capital U.S. Treasury Inflation Protected Securities (TIPS) Index (Series-L) (the Index). The Index includes all publicly issued, the United States Treasury inflation-protected securities that have at least one year remaining to maturity, are rated investment grade and have $250 million or more of outstanding face value. In addition, the securities must be denominated in United States dollars, and must be fixed-rate and non-convertible securities. The Index is a market capitalization-weighted index. The Fund invests in a representative sample of securities included in the Index that collectively has an investment profile similar to the Index.
-The Federal Reserve began a two-day meeting on Tuesday at which it is expected to dampen expectations for interest rate hikes this year, while holding steady on its plans for asset purchases. The Fed is widely expected to keep its key interest rate near zero. While periods of deflation would eliminate distributions for TIP holders, the downside of owning TIP is less than other Treasury funds in the long run. Because TIP owns government-backed, inflation-protected Treasuries, credit risk is practically nonexistent.
-While the inflation break-even rate (the difference between the 10-year Treasury and the 10-year TIPS yields) is off its lows, it is still lower than its historical average.
-TIP closed today at $100.83. So far it has hit a 52-week low of $84.14 and 52-week high of $109.17. It has near-term technical support in the $99.64 price area. If the shares can continue the recent rebound, we see overhead resistance around the $101.84 price levels. Bollinger Bands shows a sign that the market may be about to initiate a new trend. Technical indicators are strong buy. Here is the chart:
Warning II!
Counter-Trend Moves Continue to Spark False Hopes
BY TIM W. WOOD | june 19, 2009
http://www.financialsense.com/Market/wrapup.htm
The story remains the same. As a result, I feel that it is important to rehash the last article that I posted here a month or so ago. As I listen to the mainstream commentators, the public and even my local news, it is obvious that optimism remains high. William Peter Hamilton, the great Dow theorist who followed in the footsteps of Charles H. Dow, warned against allowing “the wish to father the thought.” I have listened and closely studied the words of many of the reporters and interviewees on the news and there is little doubt that their optimism is allowing “the wish to father the thought.” Wishing and optimism is not the basis for sound analysis. Based on the technical and statistical work that I do, the data is telling me that pretty much all of the moves we have been seeing over the last 2 to 6 months, depending on which market you are looking at, are counter-trend moves. As a result of these counter-trend affairs, the powers that be continue to think that they have the problem under control. The average person on the street sees that the markets are rising and they, too, begin to think that the worst is behind us and that maybe the bail-outs and various stimulus packages are working. It is my opinion that this false optimism and the lust for things to return to “normal” is going to cost the average investor dearly once this counter-trend move concludes. It is for this reason, along with the fact that some of you may not have read this article originally, that I wanted to update and republish it once again here today.
Gold bottomed in October and has moved up some 45% since that bottom. Gasoline was next to bottom in December and has now moved up some 168% into its recent highs. Crude oil followed with its bottom in February and has since advanced approximately 118% from its lows. The CRB index also bottomed in February and is lagging the advances seen in crude oil and gasoline, but is still up 33% from its low. The housing index bottomed in March and advanced 83% into its early May high. I also reported here in the May 15, 2009 Wrap Up that “based on what I see at this point, the Housing Index is at an important juncture and is at great risk of the annual cycle having topped.” Since the early May high the Housing Index is down 22%. Could it be that Housing is about to lead the next leg down again? Have you ever heard of a recovering economy with declining house prices? Hello! The equity markets also made a bottom in March and in the case of the Dow Jones Industrials Average it was up 37% as of the June 11th intraday high of 8,877.93.
Understand I do not allow the “wish to father the thought.” At the same time, I am not a pessimist either. Rather, I am a realist and look at statistics and technical data. The data I’m looking at continues to tell me that the bottom seen in these markets were not THE BOTTOM, but were rather temporary bottoms. The advances out of these bottoms are most likely counter-trend moves and should ultimately be followed by still lower prices. For the record, yes, my cycles work anticipated and allowed me to identify each of these bottoms as they occurred and this is all documented in my newsletters. At present, I must also say that my intermediate-term Cycle Turn Indicator, the cyclical structure of the market and the statistics will again be key in determining if these counter-trend moves are still intact and in identifying their tops. Once the intermediate-term Cycle Turn Indicator turns, the counter-trend moves will be at great risk of being done.
The danger that I see with these counter-trend moves is that they have fostered false hopes. These rallies have offered people the opportunity to recoup some of their losses. But, the longer a particular market rallies the more the false hopes set in. This in turn allows the wish to further father the thought. It is the greed to recover the losses that will ultimately cost the average investor even more in losses. As the advance continues the greed sets in and people wish for more and more of an advance as they hope to further recoup their losses. In the end, the bear market will take back the gift that it has given by these counter-trend rallies. Yes, in the end most investors will find themselves with even larger losses than they had at the previous bottom. The wishful public does not recognize these moves as counter-trend and they will sit on their wishes as the market turns back down and their recovered losses turn into yet bigger losses. One does not have to be blindsided by the coming downturns. It is indeed possible to identify the pending downturn out of these counter-trend moves with the proper technical tools, such as the time proven intermediate-term Cycle Turn Indicator. Sound unbiased technical methods are the only way I know to navigate the ongoing financial disaster that we are dealing with. The politicians, Republican or Democrat, nor the mainstream media warned you of the previous declines because they did not know they were coming, and even if they did they would not have told you. Do you really think they would tell you anything any different this time around?
Guys, we are in the midst of Kondratieff Winter, not the beginning of a new bull market. These counter-trend moves are more like “Indian Summer” and the deep freeze of winter will return. In David Knox Barker’s book The K- Wave, is a brief list of the events that have historically marked the Winter season:
“Global Stock Markets Enter Extended Bear Markets”
This should be obvious to all.
“Trends During Winter: Stocks Down, Bonds Up, Commodities Down”
These longer-term trends remain intact and the recent moves to the contrary are counter-trend.
“Interest Rates Spike In Early Winter Then Decline Throughout”
In June 2004 the Discount rate was at 2.00%. By June 2006 it was at 6.25% and since August 2007 the Fed has been forced to cut the Discount rate back to .50%. So this too, fits.
“Economic Growth Slow or Negative During Much of Winter”
I doubt that many will argue that growth is now slow and in many cases negative.
“Commercial and Residential Real Estate Prices Fall”
This obviously began back in 2006 and there is still much more to come.
“Bankruptcies Accelerate and High Debt Eliminated by Bankruptcy”
This has obviously begun and is no doubt related to the housing and credit bubbles.
“Social Upheaval and Society Becomes Negative”
We are only just beginning to see this.
“Banking System Shaken and New One Introduced”
The banking system is now only beginning to be shaken. There should be much more to come.
“Free Market System Blamed and Socialist Solutions Offered”
This has not yet happened, but just wait.
“National Fascist Political Tendencies”
Just wait, there is much more to come.
"Debt Level Very Low After Defaults and Bankruptcy"
This has not happened.
“Trade Conflict Worsen”
This basically has not happened.
“View of the Future at a Low Ebb”
This has not happened as everyone seems to be looking for the bottom.
“New Work Ethics Develop Since Jobs are Scarce”
If I can assure you of one thing it is that this has not happened.
"Greed is Pruged from the System"
I can absolutely assure you that this has not happened yet.
“Real Estate Prices Find Bottom”
This has not happened.
“There is a Clean Economic Slate to Build On”
Not happened yet.
“Investors are Very Conservative and Risk Averse”
Again, this has absolutely not occurred.
“Interest Rates and Prices Bottom”
Not happened.
“A New Economy Begins to Emerge”
Has not happened
“Stock Markets Reach Bottom and Begin New Bull Markets”
Again, we aren’t there yet.
Tim W. Wood
Copyright © 2009 All rights reserved.
Get Ready for Inflation and Higher Interest Rates
The unprecedented expansion of the money supply could make the '70s look benign.
JUNE 11, 2009
By ARTHUR B. LAFFER
WALL STREET JOURNAL
Rahm Emanuel was only giving voice to widespread political wisdom when he said that a crisis should never be "wasted." Crises enable vastly accelerated political agendas and initiatives scarcely conceivable under calmer circumstances. So it goes now.
Here we stand more than a year into a grave economic crisis with a projected budget deficit of 13% of GDP. That's more than twice the size of the next largest deficit since World War II. And this projected deficit is the culmination of a year when the federal government, at taxpayers' expense, acquired enormous stakes in the banking, auto, mortgage, health-care and insurance industries.
With the crisis, the ill-conceived government reactions, and the ensuing economic downturn, the unfunded liabilities of federal programs -- such as Social Security, civil-service and military pensions, the Pension Benefit Guarantee Corporation, Medicare and Medicaid -- are over the $100 trillion mark. With U.S. GDP and federal tax receipts at about $14 trillion and $2.4 trillion respectively, such a debt all but guarantees higher interest rates, massive tax increases, and partial default on government promises.
But as bad as the fiscal picture is, panic-driven monetary policies portend to have even more dire consequences. We can expect rapidly rising prices and much, much higher interest rates over the next four or five years, and a concomitant deleterious impact on output and employment not unlike the late 1970s.
About eight months ago, starting in early September 2008, the Bernanke Fed did an abrupt about-face and radically increased the monetary base -- which is comprised of currency in circulation, member bank reserves held at the Fed, and vault cash -- by a little less than $1 trillion. The Fed controls the monetary base 100% and does so by purchasing and selling assets in the open market. By such a radical move, the Fed signaled a 180-degree shift in its focus from an anti-inflation position to an anti-deflation position.
The percentage increase in the monetary base is the largest increase in the past 50 years by a factor of 10 (see chart nearby). It is so far outside the realm of our prior experiential base that historical comparisons are rendered difficult if not meaningless. The currency-in-circulation component of the monetary base -- which prior to the expansion had comprised 95% of the monetary base -- has risen by a little less than 10%, while bank reserves have increased almost 20-fold. Now the currency-in-circulation component of the monetary base is a smidgen less than 50% of the monetary base. Yikes!
Bank reserves are crucially important because they are the foundation upon which banks are able to expand their liabilities and thereby increase the quantity of money.
Banks are required to hold a certain fraction of their liabilities -- demand deposits and other checkable deposits -- in reserves held at the Fed or in vault cash. Prior to the huge increase in bank reserves, banks had been constrained from expanding loans by their reserve positions. They weren't able to inject liquidity into the economy, which had been so desperately needed in response to the liquidity crisis that began in 2007 and continued into 2008. But since last September, all of that has changed. Banks now have huge amounts of excess reserves, enabling them to make lots of net new loans.
The way a bank or the banking system makes new loans is conceptually pretty simple. Banks find an entity that they believe to be credit-worthy that also wants a loan, and in exchange for the new company's IOU (i.e., loan) the bank opens up a checking account for the customer. For the bank's sake, the hope is that the interest paid by the borrower more than makes up for the cost and risk of the loan. The recently ballyhooed "stress tests" on banks are nothing more than checking how well a bank can weather differing levels of default risk.
What's important for the overall economy, however, is how fast these loans are made and how rapidly the quantity of money increases. For our purposes, money is the sum total of all currency in circulation, bank demand deposits, other checkable deposits, and travelers checks (economists call this M1). When reserve constraints on banks are removed, it does take the banks time to make new loans. But given sufficient time, they will make enough new loans until they are once again reserve constrained. The expansion of money, given an increase in the monetary base, is inevitable, and will ultimately result in higher inflation and interest rates. In shorter time frames, the expansion of money can also result in higher stock prices, a weaker currency, and increases in commodity prices such as oil and gold.
At present, banks are doing just what we would expect them to do. They are making new loans and increasing overall bank liabilities (i.e., money). The 12-month growth rate of M1 is now in the 15% range, and close to its highest level in the past half century.
With an increased trust in the overall banking system, the panic demand for money has begun to and should continue to recede. The dramatic drop in output and employment in the U.S. economy will also reduce the demand for money. Reduced demand for money combined with rapid growth in money is a surefire recipe for inflation and higher interest rates. The higher interest rates themselves will also further reduce the demand for money, thereby exacerbating inflationary pressures. It's a catch-22.
It's difficult to estimate the magnitude of the inflationary and interest-rate consequences of the Fed's actions because, frankly, we haven't ever seen anything like this in the U.S. To date what's happened is potentially far more inflationary than were the monetary policies of the 1970s, when the prime interest rate peaked at 21.5% and inflation peaked in the low double digits. Gold prices went from $35 per ounce to $850 per ounce, and the dollar collapsed on the foreign exchanges. It wasn't a pretty picture.
Now the Fed can, and I believe should, do what it must to mitigate the inevitable consequences of its unwarranted increase in the monetary base. It should contract the monetary base back to where it otherwise would have been, plus a slight increase geared toward economic expansion. Absent this major contraction in the monetary base, the Fed should increase reserve requirements on member banks to absorb the excess reserves. Given that banks are now paid interest on their reserves and short-term rates are very low, raising reserve requirements should not exact too much of a penalty on the banking system, and the long-term gains of the lessened inflation would many times over warrant whatever short-term costs there might be.
Alas, I doubt very much that the Fed will do what is necessary to guard against future inflation and higher interest rates. If the Fed were to reduce the monetary base by $1 trillion, it would need to sell a net $1 trillion in bonds. This would put the Fed in direct competition with Treasury's planned issuance of about $2 trillion worth of bonds over the coming 12 months. Failed auctions would become the norm and bond prices would tumble, reflecting a massive oversupply of government bonds.
In addition, a rapid contraction of the monetary base as I propose would cause a contraction in bank lending, or at best limited expansion. This is exactly what happened in 2000 and 2001 when the Fed contracted the monetary base the last time. The economy quickly dipped into recession. While the short-term pain of a deepened recession is quite sharp, the long-term consequences of double-digit inflation are devastating. For Fed Chairman Ben Bernanke it's a Hobson's choice. For me the issue is how to protect assets for my grandchildren.
Mr. Laffer is the chairman of Laffer Associates and co-author of "The End of Prosperity: How Higher Taxes Will Doom the Economy -- If We Let It Happen" (Threshold, 2008).
7 Ways Your Money Will Never Be the Same
Don't expect the economy to "get back on track." It's a new track, folks, and here's how to navigate it.
By Jeffrey R. Kosnett, Senior Editor, Kiplinger's Personal Finance
June 4, 2009
http://www.kiplinger.com/features/archives/2009/06/7-ways-your-money-will-never-be-the-same2.html?kipad_id=2
There's a whiff of economic recovery in the air, and investors have been feeling frisky as of late. Just another bout of irrational exuberance, you ask, to be followed by another bust?
One thing that's certain, however, is that the Great Recession, the credit crisis and the past year's meltdown in financial markets will change how you handle your finances. In many ways, your money will never be the same.
1. Investments: Less risk
In the old days -- before 2008, that is -- an aggressive portfolio had 80% or more of its assets in stocks. No matter how well you're doing now or how well you or others think stocks will do in the years ahead, investors are so shell-shocked from their bear-market losses that it will be a long time before they will be confident enough to justify that high a proportion of stocks within their total portfolio.
The new normal for an aggressive investor, for example, may be just 60% or 70% in stocks, and someone who accepts only moderate risks may be comfortable with 40% or 50%. That may not be the right way to go -- barring a catastrophe, we think stocks will outpace bonds, and handily at times -- over the next ten to 20 years. But that's the reality when a generation of investors takes such a shellacking.
2. Markets: Greater volatility
Daily, hourly and even minute-to-minute swings will continue to be wild and sometimes vicious. Experts blame the heightened volatility on the ceaseless flow of information, or misinformation, which encourages misguided trading.
One blatant example: On April 19 a crank posted a Web "newscast" claiming that he had possession of a leaked government report saying that 16 of the country's top 19 banks would be exposed as dead when the Treasury Department released the results of its stress tests a few days later. Standard & Poor's 500-stock index promptly fell 4.3% the next day, even though Treasury discredited both the post and the source.
Enormous volumes in trading-oriented products, particularly exchange-traded funds, exacerbate the volatility. That's especially true early and late in the trading day.
How to cope? Keep your eye on the long-term prize and don't get caught up in day-to-day, or minute-to-minute nuttiness. Plus, "Don't trade in the first or the last hour, or you'll get whipsawed," says Tim Kober, of Cedar Financial Advisors in Portland, Ore.
3. Diversification: More choices
The recent market unpleasantness tarnished the concept of diversification; nothing worked well save cash and Treasury securities. So much for the traditional advice to keep fairly equal holdings in various stock categories -- such as growth and value, small-company and large-company, foreign and domestic -- and to own different kinds of bonds, including super-safe Treasuries, municipals, corporates and so on.
The new plan is to add a variety of investments, some of which might be considered highly risky, that really have a chance to zig when the ordinary stuff zags.
That could mean putting a greater amount of your money into such things as gold, foreign currencies, real estate, energy and other commodities (see Low-Risk Commodities Investing). "Defense is not just diversification by allocation. It also means keeping defensive funds in the mix," says investment adviser Dennis Stearns, of Greensboro, N.C.
For instance, you may want to look into a fund such as Pimco Unconstrained Bond (symbol PUBDX). Launched in June 2008 by the pre-eminent bond manager in the U.S., the fund invests in any part of the bond market without any sector limitation. Year-to-date through June 2, the fund gained 5.7%.
In the same vein, you'll see a push to introduce new products aimed at immunizing you from wrongheaded forecasting or missed trading signals. The new buzzword will be "buckets," or places where you store built-up savings to shield them from untimely losses. Some examples: annuities and insurance polices designed to lock in gains; easy-to-purchase packages of laddered certificates of deposit; and, in general, more passive-type investments with guaranteed floors and plenty of liquidity.
4. Dividends: No guarantees
The association between constant dividends and financial health is broken. Companies that paid dividends continually for many years were considered the strongest. Those that raised them the longest were really regarded as solid. But the recession and other developments showed that there are few safe havens nowadays. General Electric, Pfizer, Alcoa, many other industrial companies, and just about every major bank and many insurance and real estate firms cut or eliminated payouts over the past year.
The new thinking: If a company is convinced it has a better use for its cash than to distribute it to shareholders, then don't necessarily punish the stock because of a dividend cut. After all, GE's stock (GE) surged 59% from February 27, when it slashed its dividend 68%, through June 3. Shares of Alcoa (AA) have skyrocketed 65% since the aluminum giant chopped its payout 82% on March 16.
This doesn't mean you cannot find solid dividend payers. The key, though, is for dividend growth, not a very high yield. Consider these three serial dividend boosters as an excellent foundation for a long-term portfolio of growth stocks: Abbott Laboratories (ABT), Coca-Cola (KO) and Sysco (SYY).
5. Credit: Tougher to come by
More than liar loans and other sketchy subprime credit is by the boards. Even after home prices stabilize, the 30-year fixed-rate mortgage with a substantial down payment will once again become the cornerstone of the housing industry.
Partly that's because big banks under financial stress are and will remain under pressure from regulators and shareholders to tighten up. Also, local and community banks will be making a larger share of mortgages. Those institutions tend to keep loans on their books rather than buy and sell them for inclusion into mortgage securities, so they're more selective about saying yes or going easy on borrowers.
Adjustable-rate loans with teaser rates will still be available. But they'll be targeted toward people who really do have the potential to earn more in the future -- think doctors during their medical residency, for example -- instead of flippers, investors, or borrowers with marginal income and credit.
As for credit cards, they'll come with stiffer terms. Gone are the days when you could hop from one 2.9% offer to another. New credit-card legislation that curbs punitive late fees and interest penalties is popular with consumer advocates. But there's a flip side. Look for banks to reinstate annual credit-card fees, demand higher credit scores, and offer fewer perks to customers who use their cards frequently. In fact, a study by Synovate, a market research firm, found that U.S. households are already receiving dramatically fewer card offers in the mail. An increasing number of those offers are for fee-based cards.
6. Retirement: Getting a makeover
Traditional fixed pensions are disappearing, strapped employers are ending matching contributions to 401(k) plans (at least temporarily) and many plan participants have lost one-third to one-half of their savings. As a result, the retirement system will get a makeover and more oversight.
In general, the system will become more compulsory and less voluntary. For instance, you'll be automatically enrolled in a 401(k) or equivalent plan sponsored by your employer. You'll have to make required minimum contributions that automatically increase over time. Instead of being offered a lump sum at retirement, you'll be paid in the form of an annuity, which will resemble a traditional pension plan.
Private managers, such as Fidelity, Vanguard and TIAA-CREF, will still handle the money and offer a range of investment choices, but fees will be lower and will be disclosed. And plan managers will try to make payouts more predictable. One possibility: Require target-date retirement funds to hold more cash as you approach retirement age.
7. Government: A visible hand
President Obama has said he hopes a more stable financial system will "help speed the day that the government can get out of the way and let the private sector grow the economy." But the Federal Reserve's buying binge of Treasury securities extends Washington's influence over interest rates -- which traditionally has affected short-term overnight rates or 30-day maturities -- to as long as 30 years. And there's talk of establishing a "financial product safety commission" to vet the exotic creations of financial engineers.
The idea is to foster more predictable and less risky investment markets. For a while the government did succeed in flattening the business cycle, and the U.S. experienced more than 20 years without a harsh recession. It remains to be seen whether this time around the hand will be smoother, or just heavier.
A Tipping Point In Bonds?
Treasuries and municipal bonds could be on treacherous ground.
By Elizabeth Ody, Associate Editor, Kiplinger's Personal Finance
May 29, 2009
http://www.kiplinger.com/columns/fundwatch/archive/2009/fundwatch0529.htm
A 27-year-long bull market in bonds is over and a brutal bear market is under way, says Tom Atteberry, co-manager of FPA New Income (symbol FPNIX). That's bad news for bond investors, particularly those holding Treasuries and municipal IOUs.
Atteberry, who spoke with us at the annual Morningstar Investment Conference in Chicago, says there's good reason to believe that the run-up in Treasury yields that began late last year will continue. Between December 18 and May 28, the yield on the ten-year Treasury has zoomed from 2.04% to 3.67%. That has led to big losses for holders of Treasury bonds because bond prices move inversely with yields. Year-to-date through May 28, the Barclays Capital US Treasury 10-Year Term index has lost 7.9%; an index of Treasuries with maturities of 20 years and longer has plunged 22.2%
Atteberry says he's seeing anecdotal evidence that Chinese investors, huge holders of Treasuries, are beginning to sell their government-bond stakes. "They are very, very nervous" about the Federal Reserve purchasing Treasury debt because of the move's potential for stoking inflation, one of the prime enemies of bond holders.
The arguments for the sell-off in bonds are well known. The U.S. is issuing an enormous amount of debt -- Pimco bond guru Bill Gross estimates that gross issuance in 2009 will total $3 trillion. And eventually, once the deflationary undertow of unemployment and slack capacity in the U.S. weakens, inflation will move front and center in the minds of investors.
View those assumptions against the backdrop of the terrific bull market in bonds over the last few decades -- the yield on the ten-year Treasury peaked at nearly 16% in 1981 -- and you'll start to share Atteberry's anxiousness. "This spells secular bear market," he says. "The good times, in bonds, are behind you."
Atteberry's thesis spells trouble for municipal bonds, which analysts have been pointing to for months as attractive alternatives to Treasuries. Interest from muni bonds is free from federal taxes, and the sector historically has seen extremely low default rates. Thanks to those benefits, munis have historically offered about 80% of the yield of Treasuries.
As munis were pummeled during the panic of 2008, they at one point offered twice the yield of Treasuries, making them even more attractive than usual. As long as munis offered a substantial yield cushion over Treasuries, they didn't necessarily stand to suffer from a rise in government-bond yields.
But as bond investors regained their appetite for risk in 2009, they pushed up muni prices -- and pushed down their yields -- to the point where that cushion has essentially disappeared. As of May 22, the yield on ten-year triple-A-rated municipal bonds had fallen to 81% of the yield on the ten-year Treasury.
"The ten-year part of the muni yield curve will probably track the ten-year Treasury" from here on, says Hugh McGuirk, head of T. Rowe Price's municipal bonds department. That suggests that if Treasury yields continue to rise, muni yields will rise in lockstep, causing their prices to fall roughly in tandem with Treasuries.
Atteberry, meanwhile, finds little in the bond market to be compelling. He points to a recent increase in corporate-bond issuance as evidence that executives expect their borrowing costs to head higher. And, still concerned about the health of the U.S. economy, he is avoiding high-yield, or junk, bonds.
He likes selective mortgage backed-securities that he thinks could weather a rise in rates without losing money, in addition to the debt of government agencies, such as the Federal Home Loan Bank. And he's still holding on to a giant wad of cash-recently totaling about 21% of fund assets.
If Atteberry is wrong, his missteps will be well exposed in FPA New Income, which he will be piloting solo in 2010 as co-manager Bob Rodriguez goes on sabbatical. And if he's right? "It's going to be pretty ugly."
Inflation Ahead: What's an Investor to Do?
by: Thomas J. Gordon May 18, 2009
http://seekingalpha.com/article/138132-inflation-ahead-what-s-an-investor-to-do?source=yahoo
This The hard bitten investor in you is having thoughts like this as regards our current economic situation. “In the U.S., the government is spending a lot of money it doesn’t have on stimulus, pork barrel projects, TARP/TALF rescue, etc.. That can’t be good. They must be either printing or borrowing money to do this. Interest rates on government bonds and inflation have to be going up in the future.” Two things fly in the face of this thinking. The 30 year Treasury had yields of less than 3% in January of 2009 (I would argue this was a flight to safety from other investments). During the Great Depression, a dollar in 1939 was worth a lot more than a dollar in 1928 (see chart) and bond rates fell from 1928 to 1939.
I generally don’t like to compare the current situation with the Great Depression but there are some parallels:
- There was a financial panic (troubles with Banks, extensive counter party risk).
- Stock Market values fell dramatically.
- There was excessive borrowing by consumers and businesses in the times leading up to the downturn.
- There was heavy government intervention by both Democratic and Republican regimes to try to turn the economy around.
So if we were to take the Great Depression as our standard of comparison, our conclusion would be that in 2019 a dollar will be worth at least what it is now and the 30 year bond yield will be under 5%. Some economists would tell you that severe economic downturns decrease the Velocity of Money, driving up the value of the currency and interest rates down.
I am going to argue that there are significant differences between the current situation and the Great Depression, and that we do have inflation and higher interest rates in our future. Here are those differences:
- Milton Friedman famously complained that the Federal Reserve reduced the money supply at the onset of the Depression and therefore made the situation much worse. The current Federal Reserve is expanding all Money Supply indicators (M1 is up 15.1% the last 12 months, M2 is up 9.8% the last 12 months) at more than adequate rates.
- The Depression situation was more constrained by a Gold Standard for the U.S. Dollar than is currently the case. Until Bretton Woods ended the gold convertibility of the U.S. dollar in 1971, at least lip service had to be paid to the gold convertibility of the U.S. dollar. Roosevelt famously outlawed private ownership of gold during the depression, so you can see the government chafing under the constraint of hard money.
- Government Spending was more restrained before and during the Great Depression and thus there was less pressure to monetize the national debt (print/create paper money). The Coolidge and Hoover administration ran surpluses up to the Great Depression and if you look at this graph, Roosevelt did a good job of matching government spending outlays to the tax take up to WWII (few would fault him for deficit spending in WWII).
So if we are in for unexpected inflation and corresponding higher interest rates (Nominal Interest Rate = Inflation + Real Interest Rate) what’s an investor to do? Lighten up on fixed rate long term bonds, obviously (I would argue both government and corporate). If you still think the government is a safe investment, two government TIP funds are TIP and IPE. If you are long the following vehicles it may be the time to sell: GKD, GKE, TLH, TLT, ITE, TLO. If you are ready to short government bonds, there are the hedge fund/smart money favorites: PST, TBT, and TYO. Concerning PST, TBT and TYO, many of us have been bitten by the index fatigue of the ultra short vehicles. It may be better to short TLT, TLO and GKE rather than be long PST, TBT and TYO.
I don’t recommend currency speculation as a response to unexpected inflation or higher interest rates. My guess is that all fiat currencies are going to lose purchasing power relative to real assets and perhaps not change in value much relative to each other. Maybe the Chinese have the only disciplined economy left in the world, but they are still ostensibly a totalitarian country and the government mostly fixes their exchange rate. Precious metals (GLD, SLV and others) is an obvious response to unexpected inflation. For some reason gold mining ETFs have not held value over the last year the way precious metal ETFs have. Hard assets such as real estate and commodities also prepare you for unexpected inflation
Disclosure: The author is long TBT. No position in the other ETFs mentioned.
Pick Your Poison: Inflation, Deflation, Stagflation
Lauren Young
On Friday April 24, 2009, 8:08 am EDT
http://finance.yahoo.com/news/Pick-Your-Poison-Inflation-bizwk-15023223.html?.v=1
Will the real 'flation please stand up?
Experts are arguing about where the U.S. economy is heading as the global financial system tries to right itself. Is it on the path to inflation, deflation, or, worse, stagflation? Rising unemployment and excess production capacity are making it hard for the U.S. economy to climb out of recession. And that, in turn, is putting a strain on pricing power and wage growth -- raising fears of deflation, which develops when a broad decline in prices amid falling demand feeds further price-cutting.
But what happens if the Federal Reserve's efforts to jump-start the economy take effect? Stimulus to the tune of $787 billion is supposed to rev up economic engines. Prices could climb too high as too much money chases after available goods and services -- the classic formula for inflation.
"I describe (the potential dangers in) this economy in the form of a snowy Minnesota road," says Peter Rekstad, a financial adviser at TruNorth in Oakdale, Minn. "A car slid off the road into the deflation ditch. The way out of the ditch is to get a bunch of friends pushing while you rock the car back and forth. The big danger is that you get out of the deflation ditch and race across the road into the inflation ditch."
Or to take Rekstad's analogy further, say a car is straddling the road, with its wheels mired in both ditches at once -- the worst of both worlds. That situation, where growth slows while inflation soars, is known as stagflation.
Here's an investor's guide to protecting your portfolio from these three forces.
Deflation
Deflation is the threat dominating headlines. "You've got a strong supply of goods and weak demand. That's a recipe for prolonged deflation," says A. Gary Shilling, economist and author of Deflation: How to Survive & Thrive in the Coming Wave of Deflation (McGraw-Hill (NYSE:MHP)). The problem is deflation's ripple effect: When banks stop lending, businesses stop expanding and wages fall. Consumers stop spending, which pushes prices lower. Why won't massive stimulus pull the economy out of the deflationary lane? Shilling fears that the U.S. government's economic tampering will have a "Big Brother effect," hurting innovation and permanently curbing growth.
The Signs
The surest sign of deflation is a decline in the consumer price index, which tracks the prices of consumer goods and services. But it's hard to ignore lower real estate values, which aren't in the CPI. Home prices fell more than 18% in 2008, according to the S&P/Case-Schiller U.S. National Home Price Index. Another deflation indicator: the higher savings rate, which we're seeing for the first time in 25 years. Shilling expects the savings rate to rise from 4.2% to 10% in the next decade.
Investment Strategy
"Quality is paramount in deflationary markets," Shilling says. He thinks most investors should be in short-term certificates of deposit or money-market funds. Those with a 10-year time horizon should also buy tech stocks, such as semiconductors, he says. Companies facing deflation can't cut prices and must boost productivity through technology.
Inflation
The Argument
Many of the economists and financial advisers polled by BusinessWeek for this story believe the huge amount of money being pumped into banks by the Federal Reserve makes inflation a real threat. Hans Olsen, chief investment officer for JPMorgan Chase (NYSE:JPM)'s private wealth management business, says the stimulus plan ultimately will lead to higher inflation. However, total inflation is basically nonexistent at -0.4%. The trick is figuring out when it will be a problem. "The nasty thing about inflation is that it's insidious," Olsen says. Banishing inflation from the economy once it is "infected" is hard.
The Signs
The leading indicator used to measure inflation is the CPI. Commodity prices, particularly those of oil and copper, are another bellwether. One indicator Olsen tracks is government debt as a percentage of gross domestic product, which he sees surging from 40% to 80% over the next few years.
Investment Strategy
Mild price inflation is considered healthy for stock investors because it is a sign that the economy is growing. But when inflation spikes, as it did when it hit 13% in the 1970s, interest rates rise and borrowing stops. For bondholders, soaring inflation eats away at asset values over extended periods.
The most direct way to fight this is to buy Treasury Inflation-Protected Securities (TIPS) -- government-backed bonds pegged to inflation via the CPI. (TIPS belong in tax-deferred accounts because they are not tax-efficient.) A study by economic consultancy Peter L. Bernstein Inc. found that, for an aggressive investor who is worried about inflation, a 47%/53% proportion of TIPs to stocks (the study tracked broad stock market indexes) provided the best risk-adjusted real returns over a wide range of inflationary environments.
Among mutual funds, advisers favor the Vanguard Inflation-Protected Securities Fund (NASDAQ:VIPSX), which had an annualized return of 5% for the past three years. Other plays include the iShares Barclays TIPS Bond exchange-traded fund (NYSEArca: TIP) and Pimco Real Return Fund (NASDAQ:PRTNX).
Commodities are another classic hedge. A well-diversified commodity play is the Pimco Commodity Real Return Fund (crixf.pk.PK), which combines commodities with TIPS. Many advisers also like the SPDR Gold Trust ETF (NYSEArca:GLD) and the First Eagle Gold Fund.
Stagflation
Stagflation is caused by the combination of slow growth and surging inflation. Slower growth will come from extreme caution by lenders, households, and businesses, while a shortage of production capacity will create inflationary bottlenecks, argues Mohamed El-Erian, chief executive officer at Pimco. "Stagflation will be part of the new normal," he says.
The Signs
The misery index, which combines the unemployment and inflation rates, is the best gauge of stagflation. In March it was at 8.1%. El-Erian predicts that unemployment will hit 10% by yearend, and 2% inflation could bring the misery index up to 12% by the end of 2010.
Investment Strategy
Insulating your portfolio from stagflation is tough. Equity investors need to take a very conservative stance, focusing on high-quality growth stocks such as Johnson & Johnson (NYSE:JNJ - News) and PepsiCo (NYSE:PEP), says John Boland, financial adviser at Maple Capital Management. Gold, as well as TIPS, will help mitigate some of the inflation risk. El-Erian considers TIPS a bargain because 10-year TIPS are pricing in inflation of less than 1.5% for the next decade, and he sees inflation jumping as high as 6% by 2011.
Government Lives for Today, Ignores Tomorrow
By Mike Pienciak
April 20, 2009
http://www.fool.com/investing/dividends-income/2009/04/20/government-lives-for-today-ignores-tomorrow.aspx
Barclays Sells iShares
ETFguide.com
Monday April 13, 2009, 1:49 pm EDT
http://finance.yahoo.com/news/Barclays-Sells-etfguide-14911782.html
Less than two years ago the mere rumor of iShares being up for sale would have been enough to engage dozens of companies into a bidding war over the world's largest ETFs provider.
Not only are ETFs the fastest growing segment of the asset management business, iShares (a subsidiary of Britain's Barclays Bank PLC) represents the crme' de la crme' of ETF investing. Today, even good businesses on the selling block are attracting scant interest.
Like other global banks, Barclays Bank (the parent company of Barclays Global Investors) is feeling the economic pinch and was forced to take mammoth losses on mortgage related investments. The thinly capitalized financial giant is caught between a rock and a hard place. To raise money, Barclays must sell profitable parts of its business or be forced to sell shares to the British government.
Under the deal, which is valued at $4.4 billion, Barclays PLC agreed to sell the iShares ETF unit to CVC Capital Partners, the only serious bidder. According to Credit Suisse, CVC is paying 15 times iShares' annual earnings for one of the bank's most profitable business segments.
CVC Capital Partners is a European private equity firm which manages approximately $21 billion in investment capital on behalf of more than 250 investors from North America, Europe, Asia and the Middle East. Among them are many leading pension funds, financial institutions and funds of funds.
CVC funds own 52 companies worldwide with combined sales of approximately $100 billion, employing some 450,000 people. The portfolio of companies includes the Belgium postal services, Formula One, Tower Records and many others.
According to their website, CVC focuses on building business over the long-term, typically holding investments for five years or more. CVC tends to work closely with the existing management to make sure the companies they invest in perform to its full potential.
Barclays remains tied to the iShares unit as the bank retains a 20% share in future increases of iShares' value.
According to a Wall Street Journal report, Barclays still has until June to seek a higher offer. It is however unclear whether any of CVC's rivals in the auction will resubmit bids. Barclays would have to pay CVC a $175 million break-up fee if it decides to break this deal in favor of a better offer.
Some of the most popular iShares index ETFs include the iShares MSCI EAFE ETF, iShares MSCI Emerging Markets ETF, iShares S&P 500 ETF, iShares Barclays TIPS Bond ETF and iShares Barclays Aggregate Bond ETF.
The ten largest iShares ETFs account for some $120 billion of assets.
Just what the sale to the new owner will mean for iShares' shareholders in terms of fees and continuity is yet to be determined.
Take Cover From Inflation With TIPS
Herb Morgan, 04.14.09, 12:05 PM EDT
You don't need to buy your Treasury Inflation Protected Securities at auction. It's much easier with an ETF.
"Inflation is always and everywhere a monetary phenomenon." -Milton Friedman
We are in a most interesting period as it relates to inflation. Just about a year ago, commodity prices were surging higher and investors were convinced of inflation's presence.
One particular investment policy meeting at my own firm comes to mind when members of the committee debated the rise in commodity prices and its effect on inflation. I viewed the spike in commodity prices as simply a matter of supply and demand. I opined that the demand curve had moved sharply higher as commodities were being driven up both by levered speculators playing a dangerous momentum game and asset allocators who had new low-cost easy access to an asset class being aggressively marketed to them.
I opined further that, without expansion of the Federal Reserve's balance sheet, we were experiencing merely commodity price inflation, a relatively benign and self-correcting phenomenon. The end result was a firm-wide sell of our favorite tool for owning commodities, Powershares DB Commodity Index Tracking Fund in July of 2008.
Now that the Federal Reserve has significantly expanded its balance sheet, and the monetary base has swelled, the inflation topic is again an important item in my firm's policy meetings. In order for the increased money base to manifest itself in the form of inflation, we need to see a sustained increase in economic activity.
The increased "velocity" of money associated with the expansion of aggregate demand would also need to be paired with a lack of reduction of the money base. Fed Chairman Ben Bernanke is aware of the inflationary risks of current policy and has set the table for relatively easy money-supply reduction by managing the Fed's balance sheet "short." If economic activity picks up, the monetary expansion should run off, reducing inflationary pressures.
Still, some preparation for inflationary pressures is warranted.
Inflation is not only a stealth tax but a very powerful form of wealth redistribution. Inflation redistributes wealth from lenders to borrowers. Inflation will benefit those with large fixed dollar debt such as levered homeowners and other real estate investors. Inflation will hit the hardest for those on a fixed income.
Equities have historically been a good source of protection from the ravages inflation (over the long term), but a vicious bear market has frightened many retirees to swear off equities for good.
While I don't think a run up in commodity prices can cause inflation, I do believe inflation can cause a run up in the price of commodities. Therefore, the previously mentioned DBC would be a reasonable component to a portfolio with inflationary concerns. For others, an investment in Treasury Inflation Protected Securities (TIPS) via either the iShares TIPS Fund (TIP) or the State Street Spider TIPS Fund (IPE). The former charges a miniscule 0.20% while the latter will run you a meager 0.185%.
There is a valuable benefit to owning the ETF over straight TIPS. TIPS pay a very low rate of interest. The principal value of the bond is adjusted higher or lower for movements in the Consumer Price Index on a semi-annual basis. In order to spendupward principal adjustments, you would need to periodically sell a portion of your holdings. Using an ETF removes this burden.
The two ETF funds mentioned above will adjust their cash distributions to shareholders to reflect the upward adjustments in face value of the TIPs. The two providers do a great job of monetizing the upward principal adjustments on your behalf.
I'm not as convinced as some that double-digit inflation is imminent. However, given the Fed's balance sheet expansion, the high debt level of the U.S. government and the need to stabilize--if not prop up--the value of real estate assets backing toxic loans, some inflation is surely coming. Be prepared.
Herb Morgan is president and chief investment officer of Efficient Market Advisors, LLC, an ETF separate account manger serving financial advisers and their clients. His weekly podcast is available free on iTunes. Contact Herb via e-mail: herb@efficient-portfolios.com.
Federal Reserve Activity
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[compliments and credit to Bullwinkle]
Barkleys TIPS Bond Fund [TIP]
The iShares Barclays Treasury Inflation Protected Securities Bond Fund seeks results that correspond generally to the price and yield performance, before fees and expenses, of the inflation-protected sector of the United States Treasury market as defined by the Barclays Capital U.S. Treasury Inflation Protected Securities (TIPS) Index (Series-L).
Overview in following link:
http://us.ishares.com/product_info/fund/overview/TIP.htm
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The iShares Barclays Treasury Inflation Protected Securities Bond Fund seeks investment results that correspond generally to the price and yield performance of the Barclays Capital U.S. Treasury Inflation Protected Securities (TIPS) Index (Series-L). The fund generally invests at least 90% of its assets in the bonds of the underlying index and at least 95% of its assets in U.S. government bonds. The underlying index measures the performance of the inflation-protected public obligations of the U.S. Treasury. Inflation-protected public obligations of the U.S. Treasury, commonly known as "TIPS," are securities issued by the U.S. Treasury that are designed to provide inflation protection to investors.
Barclays TIP Overview
http://us.ishares.com/product_info/fund/overview/TIP.htm
Yahool information link
http://finance.yahoo.com/q?s=TIP
TreasryDirect
http://treasurydirect.gov/indiv/products/products.htm
Treasury securities by Bankrate.com
http://www.bankrate.com/rates/interest-rates/treasury.aspx
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U.S. Debt Clock http://www.usdebtclock.org/
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