Friday, August 31, 2012 - Trout Fishing in America Benny

Trout Fishing in America Benny

- by Sinclair Noe

DOW + 90 = 13090
SPX + 7 = 1406
NAS + 18 = 3066
10 YR YLD -.06 = 1.56
OIL + 1.75 = 97.51
GOLD + 36.30 = 1692.60
SILV + 1.30 = 31.84
PLAT + 33.00 = 1545.00

First, let's wrap up the month of August

compared to July 31:

DOW = 13,008 (up 82 for month)
SPX = 1379 (up 27 mo)
NAS = 2939 ( up 127 mo)
10 YR YLD = 1.49 ( up .07 mo)
OIL = 89.89 (up 7.62)
GOLD = 1615.90 (up 76.70)
SILV = 28.10 (up 3.74
PLAT = 1421.00 (up124.00)

Every August, the world's financial markets shift their attention from the centers of global commerce -- New York, London, Tokyo -- to a mountain valley in northwest Wyoming. And for a day at least, Jackson Hole becomes the financial center of the globe. Why? The answer is trout. And it goes back to former Fed chairman Paul Volker, who enjoyed fly fishing. And yesterday, Bloomberg News marveled at the sight of Ben Bernanke at the airport, wearing blue jeans. Even central bankers wear jeans. It's good to have these guys going fishing. It would be even better if they stayed in Jackson Hole and kept fishing and never went back.

Chairman Ben Bernanke sent a clear message that the Federal Reserve will do something. We still don't know exactly what or when.

Bernanke described the U.S. economy's health as "far from satisfactory" and noted that the unemployment rate, now 8.3 percent, hasn't declined since January.

He stopped short of committing the Fed to any specific move. But in his speech Bernanke said that even with interest rates already at super-lows, the Fed can do more. He acknowledged critics' arguments that further Fed action could fan inflation and inject other risks. Yet after raising such arguments, Bernanke proceeded to knock them down.

So now the best guess is the Fed will unveil some bold new step as soon as its Sept. 12-13 meeting, possibly a third round of bond purchases meant to lower long-term interest rates and encourage more borrowing and spending. That policy is called "quantitative easing," or QE.

In two rounds of QE, the Fed bought more than $2 trillion of Treasury bonds and mortgage-backed securities. Many investors have been hoping for a third round — a QE3. Of course, we still are not sure we'll see QE3. We might get something less dramatic: a plan to keep short-term rates near zero into 2015 unless the economy improves, perhaps followed by bond purchases later. I don't think so; this looks very much like QE3. If the Fed delivers anything short of QE3, the reaction could be ugly.

In his speech, Bernanke assessed the economy's weaknesses, defended the extraordinary steps the Fed has taken to date and insisted it can do more. Bernanke acknowledged that the Fed is operating in essentially uncharted territory. Traditionally, central banks stimulate weak economies by pushing down short-term rates. In December 2008, the Fed slashed such rates to record lows. Yet even with short-term rates as low as they can go, the economy still needs help.

Central banks can take what Bernanke called "nontraditional" measures when they've run out of conventional ammunition. And under Bernanke the Fed has tried many. It's made its public communications more explicit, but nobody truly believes the Fed is totally transparent, and even though there has been some increase in transparency, what does that matter to the economy?

The Fed has jawboned; trying to embolden investors and businesses by saying short-term rates will stay low as long as the economy is weak. The Fed originally said it expected to keep rates "exceptionally low" through mid-2013. It extended that target to late 2014.

And besides embarking on two rounds on QE, the Fed has sold short-term Treasurys and replaced them with long-term Treasurys. That shift is intended to push long-term rates down further.

Bernanke argued Friday that collectively, such measures have succeeded. He cited research showing that two rounds of QE had created 2 million jobs and accelerated economic growth; so it seems clear that Bernanke likes Quantitative Easing. But you have to question the effectiveness of even more QE. Even if the Fed does act further, would make much difference? Interest rates, both short- and long-term, are near historic lows. Borrowing — for those who have the credit — has never been cheaper. Yet the economy remains in a rut.

Critics have also argued that besides escalating inflation later, the Fed's easy-money policies could push individuals and institutions into riskier investments. That, in turn, could destabilize the financial system. Bernanke conceded that nontraditional policies carry risks. But he argued that these risks are "manageable." (Scary when he talks like that.) He noted that inflation remains around 2 percent despite "repeated warnings that excessive policy accommodation would ignite inflation." And he said "we have seen little evidence thus far of unsafe buildups of risk or leverage."

In his speech, Bernanke seemed to embrace a dual mission: Rebut arguments against further Fed action — and build a case for it. He echoed what the Fed had said in a statement after its last policy meeting July 31-Aug. 1: that it will act further, as needed, to stimulate economic growth and job creation.

In the weeks since then, somewhat better economic news had led some analysts to suggest that the Fed might now feel less urgency to act. Well, don't fall for that; the economy is still in tough shape and there is tremendous pressure for action and almost zero chance of action coming out of Congress, Bernanke didn't mention any recent economic improvements. And his reiteration of the Fed's readiness to provide more help suggested that his view of the economy remains dim. He called the weak job market "a grave concern" that causes "enormous suffering," wastes talent and can inflict lasting damage on the economy. We'll have another jobs report next Friday, and it would have to be a blockbuster jobs report to dissuade the Fed from taking additional steps for accommodation.

The result is that Treasuries moved higher, dropping the yield down. Both gold and silver had a nice pop. I'll remind you that the metals tend to move higher in response to Quantitative Easing. Stock also moved up, but I wouldn't feel complacent about any of this.

Next week we'll be watching the jobs report but also we'll keep an eye on Europe. Germany has scheduled a vote on the constitutionality of bailing out.., well the rest of Europe, and then the ECB meets and they will be expected to do whatever it takes.

Today, Spain injected emergency capital into the country's biggest bank and they enacted reforms to allow banks that are losing money to receive Euro-zone bailout money. Bankia admitted to losing more than 4 billion-euro. The Spanish government passed an ambitious banking law today, pledging once more that this would be the definitive shakeup for its finance sector that is looking for about $125 billion in bailouts.

A so-called "bad bank" will swallow large amounts of the toxic real estate that has brought down several Spanish banks and threatens several more. The property is left over from the housing construction bubble that burst in 2008, just as the credit crunch happened, and which lies at the root of Spain's double-dip recession and 25% unemployment.

The bad bank will receive building plots, unfinished developments and possibly tens of thousands of unsold homes from developers who went bust or are struggling to repay loans. It will be expected to sell this stock at a profit over the next 10 to 15 years. The creation of the bad bank – which the government hoped would be mostly privately financed – was one of the demands made by the eurozone countries providing the $125 billion loan facility to Spain's banks.

Spain is struggling. The economy is contracting at a rate of 1.3%. Unemployment topped 25%. Spanish bonds crept up to 6.9%. Money continues to flow out of the country; about $250 billion in net capital outflow in the first half of the year. And where does the bailout money go?

To the banks.

This is how central banking works. If you think there is any difference between the ECB and the Fed, think again. The bailouts in Europe are just another version of the bailouts by the Fed, whether they call it the Fund for Orderly bank Reconstruction in Spain (F-Rob), or the ESM, or QE-to-infinity and beyond. It's really all the same. It is private reward and public risk; it's an old game and it is getting worn out.