Thursday, August 23, 2012 - No QE? Step Away From the Crack Pipe

No QE? Step Away From the Crack Pipe
-by Sinclair Noe

DOW – 115 = 13,057
SPX – 11 = 1402
NAS – 20 = 3053 
10 YR YLD -.05 = 1.67%
OIL – 1.05 = 97.69
GOLD + 17.00 = 1672.10
SILV + .75 = 30.68
PLAT + 6.00 = 1548.00

The Federal Reserve FOMC minutes were released yesterday and the interpretation called for monetary accommodation sooner rather than later; so we'll see QE3 August 31 at Jackson Hole on September 13 at the next FOMC meeting. They might not call it QE3, they might do some variation on the theme but the promise was that there will be big time accommodation unless the economy shows a strong and sustainable improvement. And if the Fed fails to deliver on QE3, you can expect a severely negative response from Wall Street; expect a move that would make today's 115 point drop look small; the economy would tank and the Fed would be forced to step in with QE3, only in crisis mode. 

So, this morning on CNBC, James Bullard, president of the Fed's St. Louis bank, said the minutes from the July 31-Aug. 1 meeting were "stale" because the economy had picked up since then. If it becomes "a bit stronger," he said, the Fed will hold off. And then he went back to smoking  his crack pipe. 

What do the economic reports suggest? The HSBC Flash China manufacturing purchasing managers index, a preliminary reading that provides an early peek at data for August,  fell this month to its lowest level since November.  A German business survey showed orders from abroad for the country's goods, a mainstay of its economic strength, fell at the fastest rate in more than three years.

The number of Americans filing new claims for jobless benefits rose last week while US manufacturing improved only slightly in August, worrisome signs for an economy struggling to create enough jobs. Sales of new single family homes rose in July, matching April's two-year high. That's nice. Maybe Mr. Bullard needs to visit Greenspansbodycount.com. This is a blog I just heard about that collects stories of suicides and murder-suicides linked to foreclosure trauma. The current count is 227. 


Earlier this week, Mitt Romney's economic adviser Glenn Hubbard told Reuters that Ben Bernanke's motives should not be questioned by politicians. Hubbard said:  "Ben is a model technocrat. He gets paid nothing for getting kicked around all the time. I think they ought to pat him on the back." Today, Romney said he would not re-appoint Bernanke to another term as chairman of the Federal Reserve. 

It's good to see agreement and communication in action. There are broad differences between the two parties this year, but when it comes to explaining their visions in more than a soundbite, each side is unwilling to trust voters to understand the full implications of their positions. 

Then Romney announced an energy plan which he claims will make the US energy independent by 2020. It basically boils down to more oil drilling. I didn't see much about alternative energy, green energy, or conservation.

A website called Gawker has posted more than 900 documents that include audits, financial statements and investor letters that catalog some of Romney's investments through Bain Capital. As the site explains: Bain isn’t a company so much as an intricate suite of steadily proliferating inter-related holding companies and limited partnerships, some based in Delaware and others in the Cayman Islands, Luxembourg, and elsewhere, designed to collectively house roughly $66 billion in wealth in its many crevices and chambers. It will be interesting to see what comes out of this over the next few days.

Securities and Exchange Commission Chairwoman Mary Schapiro called off a vote that would have changed the rules for the money-market-fund business; the votes didn't add up. Schapiro’s proposal would have required money funds either to float their share prices like other mutual funds, which might result in breaking the buck, or to post capital against losses on their asset holdings; that seems to make sense.  The proposal would also have made money funds hold back a small portion of investors’ cash for 30 days when investors redeem all their shares, to reduce the possibility of a run on the fund at the first hint of trouble. Of course, if you knew that your money would be kidnapped for a month, you might not want to put your money in the money market fund in the first place. The money fund industry is $2.6 trillion big; it carries implicit guarantees to individual investors – not explicit, just implicit; it is subject to runs; it is systemically important; and they still haven't figured out what to do with it. 

Only half of the previously foreclosed homes owned by Fannie Mae are either on the market or being prepared for sale. The remaining properties are currently locked away in some step of the foreclosure system.  The National Association of Realtors said in its existing home sales report yesterday that its officials were pressuring government agencies to release more of their REO in markets short of inventory.   It has long been suspected the government – including Fannie, Freddie Mac and the Department of Housing and Urban Development – are deliberately holding these homes off the market in order to get more for them when home prices recover. Fannie Mae says it has 109,000 repossessed homes currently available for sale but they also admit 47% of their inventory is unable to be marketed. That's a big chunk of inventory.

German and French leaders put the pressure on Greece to keep pursuing painful reforms, suggesting they are hesitant to accept the new Greek prime minister's demand for more time to fix his country's battered economy and public finances. The German's remain intransigent. The Greeks might default. Formal default might not have a huge impact but it sets the stage for Spain and Italy to default. That scares the Germans, so there is a chance the Greeks will get an extension, and that means another 6 months or another year of the Greek economy existing in a downward spiral without a functioning economy.

Hedge funds are having a hard go; only about 11% are matching or beating the performance of the S&P 500. Citigroup's private bank is pulling about $410 million from Paulson & Co., that's the hedge fund  run by billionaire John Paulson; the fund lost 18 percent this year through July in its Advantage Plus strategy; the fund posted a loss of 51 percent last year. This may be the first time Citigroup fired someone for underperformance, rather than being the one getting fired. 

If the Federal Reserve goes ahead with QE3, or rather when – who benefits? The Bank of England released a study on the distributional effects of quantitative easing. The research states: By pushing up a range of asset prices, asset purchases have boosted the value of households’ financial wealth held outside pension funds, but holdings are heavily skewed with the top 5 per cent of households holding 40 per cent of these assets. In other words; who benefits from QE? The rich. I think this should also prove there is a difference between quantitative easing and stimulus. 

Both gold and silver moved above their 200-day moving average, for you chart watchers; that's a very bullish sign. There are rumors the LBMA is having trouble delivering silver for large orders. Supplies are tight, demand is strong.  Sprott buying silver; Soros and Paulsen buying gold.  Basel III rules for making gold a tier 1 asset are in the works.  FOMC hints at pending QE, which is another way of saying print Benny, print.  Global economies still under duress. Don't get carried away with the move in metals but when the Fed announced QE2, gold and silver moved to highs.