Thursday, May 15, 2014 - A Calm Port in a Stormy World

A Calm Port in a Stormy World

by Sinclair Noe

DOW – 167 = 16,446
SPX – 17 = 1870
NAS – 31 = 4069
10 YR YLD - .04 = 2.50%
OIL - .81 = 101.56
GOLD – 8.90 = 1297.80
SILV - .29 = 19.56

Today, it seems there is a lot going on. Let’s start with international hotspots.

Turks are angry following a deadly mine explosion that has killed at least 300 miners and trapped possibly 100 more; thousands of workers joined a protest strike, demonstrators clashed with security forces, and the discontent threatens the government. An aide to the prime minister was photographed assaulting a protester and there are claims that Prime Minister Erdogan himself struck a teenage girl; that after he was forced to flee an angry crowd and seek safety in a nearby grocery store. Turkish trade unions held a one-day strike over safety standards in the mining industry. Security forces deployed tear gas and water canons against protesters.

Meanwhile, reports of dozens of deaths from an explosion along the border between Syria and Turkey. Also, further allegations of ongoing chemical attacks by the Syrian government. Speaking in London today, Secretary of State John Kerry announced the US, Britain, and European and Arab states are increasing efforts to support rebels fighting to overthrow President Assad. Assad still has the backing of Russia, and that makes already tense relations with Russia even more edgy.

Fears of a civil war in Ukraine are mounting. Nobody wants to jump in with troops, and so there are clandestine forays by unidentified groups or squads of soldiers. And the major powers are only explicit with sanctions. Today, Russia announced it will halt the export of rocket engines crucial to US military defense and space programs. It must be very uncomfortable on the International Space Station these days.

Anti-Chinese sentiment has been running high in Vietnam ever since Beijing deployed an oil rig into disputed waters in the South China Sea on May 1st. There have been encounters including ramming and exchanges of water cannon between Chinese vessels operating near the rig and boats from Vietnam, which wants China out of the area. Today, Cambodia reports hundreds of Chinese nationals had poured across the border from Vietnam to escape riots.

Also, Japan’s Prime Minister, Shinzo Abe, has called for a review of how Japan interprets its pacifist constitution to allow its military to participate in conflicts beyond its borders for the first time since the end of the second world war; this in response to a growing conflict between China and Japan over islands claimed by each country; of course, it’s not just islands but the oil reserves around the islands.

Meanwhile, China issued a bunch of economic data this week, and it mostly points to a real estate slump; home sales fell 18%; housing starts were scaled back by 25%. Moody’s Analytics estimates that the building, sale and outfitting of apartments accounted for 23% of Chinese gross domestic product last year. That is higher than in the US, Spain or Ireland at the peaks of their housing bubbles. The scale of China’s building boom and the country’s reliance on infrastructure investment for growth is unprecedented. In just two years, from 2011 to 2012, China produced more cement than the US did in the entire 20th century, and it all seems to be on shaky ground these days. Each attempt to rein in China’s $25 trillion credit bubble seems to trigger wider tremors.

Brazil has sent army troops to Recife, the capital of the northeastern state of Pernambuco, after strikes lead to riots. State police walked off the job Tuesday. Schools and universities also closed down because of concerns for student safety. Today, further protests in Sao Paolo and Rio de Janeiro drew tens of thousands to the streets. The protests are centered on cities that will host the upcoming World Cup, the quadrennial global soccer championship games. Huge anti-government protests across Brazil last year overshadowed the Confederations Cup, a warm-up tournament for the World Cup. Some of the demonstrations saw clashes between activists and police, and at least six people were killed.

Many Brazilians are angry at the billions spent to host the World Cup. Protesters have said the government should focus spending instead on improving Brazil's woeful health, education, security, housing, and infrastructure systems. The World Cup starts in less than 30 days, and the whole world will be watching.

In one week, Europeans will elect a European Parliament. It’s the second biggest election in the world, after India. Voters look set to choose more assorted extremists, anti-Europeans and oddballs than ever. The Euroland economy is going nowhere, and with the razor thin exception of Germany, most countries are seeing economic contraction; that tends to lead to strange election results.

There are other hotspots around the World. The president of Yemen has declared all-out war on Al Qaeda militants and army troops are now trying to dislodge Al Qaeda from the Arabian Peninsula. Political violence returned to Bangkok Thailand, and the Thai army killed a handful of protesters and threatened more military action if the protests continue. And of course, the Nigerian crazies, Boko Haram, and the kidnapping of hundreds of schoolgirls. And of course, all the old seething conflicts that haven’t been resolved. And don’t forget, the US is still at war in Afghanistan. I know, it’s easy to forget. Apparently, it’s even easier to forget the veterans that have served our country.

Today, Secretary of Veterans Affairs, General Eric Shinseki went before the Senate Veterans Committee to explain the mess that is the VA; this following revelations that as many as 40 veterans died while waiting for medical care at the VA facility in Phoenix.

Since the allegations arose last month that veterans were forced to wait months for appointments at the Phoenix VA medical center and that VA officials were covering up the problem, Shinseki said he has asked the VA's inspector general to investigate. He said he has also launched an intense investigation of scheduling practices at the VA's other 151 medical centers. Shinseki said he was “mad as hell” and the various Senators all acted very indignant. Of course, it wasn’t very believable theatre.

One of the documents brought forth today was an internal VA memo, written in 2008 by a team of VA managers, listing 25 ways that VA scheduling clerks were cooking the books to make it appear that veterans waiting for medical care actually were being seen on time, when in fact they were being made to wait weeks or months.

And then, 2 years ago, the Government Accountability Office reported that VA schedulers were fudging wait times for veterans seeking outpatient care and avoiding using the electronic waitlist as required. The GAO report includes a response from Shinseki's chief of staff at the time, writing that the VA has "proactively taken steps in response to GAO's findings." Clearly that didn’t happen.

Meanwhile, Southern California is on fire. Actually nine fires are burning in the greater San Diego area and they have already destroyed more than 10,000 acres, forcing evacuation of about 125,000 residents. California Governor Jerry Brown has declared a state of emergency to free up resources. It’s hot, it’s dry, and it’s just the start of the fire season.

The 2014 fire season is repeating a pattern of destruction established over the past decade by a combination of high temperatures, parched vegetation and more people living in wooded areas. Fires feeding on plentiful dry grass, brush and hardwood are requiring more personnel and money to bring them under control. More than twice as many acres burned across the US through May 9 this year than during the same period in 2013.

Last week, 96% of California was considered to be under “severe” or worse drought conditions, with about 4% of the southeastern tip of the state still in “moderate” drought conditions. A year ago, only 46% of the state suffered from “severe” or worse conditions. As of today, the National Drought Mitigation Center reports severe drought conditions now engulf 100% of California.

Meanwhile, former Treasury Secretary Tim Geithner is trying to polish his tarnished image; he’s on a book tour peddling the notion that the Wall Street bailout was a huge success. And while it might be argued it prevented a Great Depression, it is delusional to consider it a success. It was at best an experiment that did not result in a worse catastrophe. It did little or nothing for the tens of millions of Americans who lost billions of dollars in home equity and savings, and the millions more who lost their jobs. The toll was greatest on the poor and the middle class. Nor have reforms been enacted that will help the middle class and the poor the next time Wall Street implodes.

Economic data today showed industrial production in the US unexpectedly declined in April, held back by a plunge in utilities as temperatures warmed and a broad-based decrease in manufacturing. That contrasted with a higher-than-forecast reading on the Fed Bank of New York’s gauge of regional manufacturing, which climbed to 19.01 this month, from 1.29 in April.

Initial claims for state unemployment benefits declined 24,000 to a seasonally adjusted 297,000 last week. It was the lowest reading since May 2007.

Consumer prices recorded their largest increase in 10 months in April. The Consumer Price Index increased 0.3% last month as food prices rose for a fourth consecutive month and the cost of gasoline surged. In the 12 months through April, consumer prices rose 2.0%. Stripping out food and energy prices, the so-called core CPI rose 0.2% after advancing by the same margin in March. In the 12 months through April, the core CPI increased 1.8%, the biggest gain since August last year.

Normally you might expect higher inflation numbers to result in lower bond prices, which means bond yields would move higher; not today. The yield on the 10-year Treasury note dipped below 2.5% intraday. Of course, Treasuries are considered a safe haven investment, and it seems a lot of people are looking for a calm port in a stormy world.

Wednesday, November 13, 2013 - Cues for Yellen from Abe

Cues for Yellen from Abe

by Sinclair Noe

DOW + 70 = 15821
SPX + 14 = 1782
NAS + 45 = 3965
10 YR YLD - .07 = 2.70%
OIL + .84 = 93.88
GOLD + 16.10 = 1283.30
SILV - .09 = 20.71

Record high close for the Dow Jones Industrial Average. Record high close for the S&P 500 Index.

Janet Yellen starts her confirmation process tomorrow. Yesterday, a couple of Fed presidents, Dennis Lockhart of the Atlanta Fed, and and Minneapolis Fed President Narayana Kocherlakota both suggested that the current state of the economy still warrants aggressive monetary policy action.

Yellen is well known for her meticulous preparation, but it will be interesting to see how she handles questions from politicians looking for cheap shots and easy points. Political theatrics aside, Yellen is highly qualified with a very solid academic foundation, extensive policy experience, sound judgment over many years and the most effective researcher at the Fed. Her policy moves will likely be incremental and well communicated. Markets can look to a continuation of the Fed's current policy stance for now. When the time for taper comes, as it inevitably will, the central bank would partially compensate through more aggressive forward policy guidance.

None of that means much of a change and no guarantee the Fed can do much more than it is doing to help the economy break out of the doldrums of the past few years. Of course the Fed could do much more; adding $4 trillion to their balance sheet hasn't been enough to get the economy to escape velocity. There are all sorts of clever untried economic experiments that hold great promise, and then there are the tried economic experiments underway right now.

The S&P 500 has just hit a record high; it's up about 25% year to date. Very impressive, right? Ehh. The Nikkei 225 in Japan is up about 65% YTD. The yen has been devalued by about one-third. The Bank of Japan is printing more money than the Fed. Japanese companies have more cash and less debt than their American or European counterparts. Japanese manufacturing is making a comeback. And the third-largest economy in the world has rather suddenly switched from being a drag on global GDP to being one of the most potent players, and a significant net contributor to global growth. 

It's called Abenomics, after the Prime Minister Shinzo Abe, and the idea is kind of like the Fed's Quantitative Easing scheme, on steroids. And it looks like it's working, for now. Will it work in two years, five years, ten years? Who knows; but 20 years ago Japan tried to keep the yen strong, and avoid debt, and the Japanese economy was stuck and that went on for 20 years.

One of the consequences of the BoJ’s policy shift has been to weaken the yen and boost the dollar. In recent years, dollar strength has been associated with soft commodity prices and weak pricing power in the traded goods sector. That has hurt emerging markets with their high exposure to commodities and global supply chains.

In short, the initial impact of Abenomics has been to export deflation to the rest of the world. This can also be seen in the lower-than-expected inflation rates in the US and eurozone. These are the unintended consequences of the BoJ’s actions. You may not want to invest in Japan, but you do have to understand that it matters enormously whether Abenomics succeeds or fails.

Last week the ECB cut rates, and now they're indicating they still have room to move Euro interest rates even lower. And the latest edict from the Euro Commission tells the bigger Euro economies to help support the entire union: “By virtue of their size in the European economy, Germany and France have a special responsibility to contribute to the recovery in the rest of the euro area.” Over all, the European Union has shrunk its average budget deficit by around half since a peak of almost 7 percent of gross domestic product in 2009 and has “created room” for a reduced emphasis on austerity, according to a report issued by the commission. It's more of a warning than an edict, but it seems to indicate the Eurozone is growing weary of austerity.

Yellen's testimony isn't until tomorrow, but this afternoon we got a look at the text of her prepared opening remarks; an advance copy. Yellen says the Fed has has "more work to do" to help an economy and labor market that are still underperforming. Her prepared remarks also say: "I believe that supporting the recovery today is the surest path to returning to a more normal approach to monetary policy." Yellen said the economy and labor market were performing "far short" of their potential, while price pressures remained muted. "Inflation has been running below the Federal Reserve's goal of 2 percent and is expected to continue to do so for some time." 

Nothing radical from Yellen.

About 106,000 people in the U.S. signed up for private health insurance through Obamacare last month, and 396,261 for Medicaid plans, according to data today that puts the U.S. government well behind its enrollment goals. While the government had an early target of about 800,000 sign-ups in private plans for the first two months, it has scaled back expectations as delays and software flaws plagued the online federal exchange. Only 26,794 sign-ups for private plans were through the federal marketplace serving 36 states.

While enrollment in private plans barely broke the 100,000 mark, state and federal exchanges received 846,000 applications in October, covering 1.5 million people, suggesting a large population in the pipeline if the government can get the website fixed. About 275,000 people who tried and failed to sign up for health plans are being asked this week to return to the website as the software flaws that initially shut them out are being corrected. Additional people who weren’t able to complete applications on the insurance exchange will be solicited later. The enrollment numbers include people who have already paid their first month’s premium and those who have only selected a plan without paying for it.

Last week, the U.S. Department of Agriculture released its annual survey of rural America, which puts the divergence in stark relief. Non-metropolitan areas experienced their first recorded period of population loss, and a decline in the labor force participation rate pushed unemployment down slightly (though the jobless rate surpassed the urban unemployment rate earlier this year). In other words, the cities slickers are doing better economically than their country cousins.

The Department of Agriculture has a whole division devoted to rural issues, which is aimed at fixing the jobs problem through initiatives such as farming cooperatives and infrastructure development. But the long-term problem might be more structural in nature, as the USDA suggests in its finding that suburbanization is slowing down:

The housing mortgage crisis slowed suburban development and contributed to an historic shift within metro regions, with outlying metro counties now growing at a slower rate than central counties. Similarly, nonmetro counties adjacent to metro areas that had been growing rapidly from suburban development for decades declined in population for the first time as a group during 2010-12. This period may simply be an interruption in suburbanization or it could turn out to be the end of a major demographic regime.

Of course, not all cities have been enjoying a robust economic recovery; some are better than others, and some just stink.

Tuesday, May 07, 2013 - Good Times Roll

Good Times Roll

by Sinclair Noe

DOW + 87 = 15,056
SPX + 8 = 1625
NAS + 3 = 3396
10 YR YLD + .01 = 1.78%
OIL - .64 = 95.52
GOLD – 17.70 = 1453.60
SILV - .08 = 24.06

The fun started in Asia as a weak yen sent Tokyo stocks to their highest level in almost five years while Australian shares closed lower after briefly erasing declines following the Reserve Bank of Australia's to cut key interest rates. The yen has now lost one percent since Thursday; the result is a rally in the Nikkei, supported by upward revisions in earnings expectations for Japanese companies. Japan's Nikkei 225 is up more than 50% in the past six months and overnight breached 14,000 for the first time since 2008. This is known as Abenomics, named after Shinzo Abe, the Japanese prime minister who has instituted a very aggressive form of monetary easing, much more aggressive than what the Federal Reserve is doing in the US; the plan will double Japan's monetary base by the end of 2014.

Later in the week, we'll see if Abenomics is gaining traction as Japanese automakers report earnings; of course, it may still be too early to see Abenomics result in stronger earnings, but over time, a weaker yen should result in more car sales for the likes of Toyota and Honda. The world has done OK while Japan has stagnated. If Japan were to go back to something like a 3% growth rate, that would make a big difference to the global economy. This might be a potentially serious opportunity to improve the pace of global growth.

Then the fun spread to Europe. ECB President Mario Draghi has said he'll do whatever it takes to push the euro zone economy forwards. Last week the ECB cut rates, keeping downward pressure on the euro although the stronger German data pushed it back above $1.31 against an easing dollar. Germany, the region's largest economy, reported a rise in industrial orders in March, confounding expectations for a drop. The German DAX Index finally topped the highs of 2007. For the first time in a couple of years, Portugal completed a sale of 10-year bonds. The bond sale puts Portugal on course to exit its bailout on time, and qualifies it for a ECB debt support program. The 10-year note yields 5.6%, safely below the 6% level that is considered a danger zone. The MSCI Global Index edged past its June 2008 high.

The good times then spread to the US, where Wall Street saw new record highs. There isn't much economic news to move the markets this week. The economic news last week wasn't great but it was better than expected, and so everything is moving higher. Small caps moved to new highs; Dow Transports are confirming with new highs; even emerging markets are pulling out of a skid; the S&P 500 has been up 11 out of the past 13 sessions; we've seen 10 record highs this year. It has been an impressive run. Will it last forever? Of course not. Will it continue longer than you think? Probably, or it could end tomorrow.

More than 400 earnings reports from S&P 500 companies are now in the books, with 47% beating estimates on sales, 72% beat on earnings per share; the aggregate earnings per share beat is 5.4%, and year to year earnings per share grew by 2.5%. Annual sales growth is negative 1.4%; that indicates companies are still cutting costs; there are limits to this strategy.

Of course, it's difficult to make sense of earnings reports these days. A new report from Ernst and Young surveyed 3,500 staff in 36 countries; 20% said they had seen financial manipulation in their companies in the last 12 months. In addition 42 percent of board directors and top managers surveyed said they were aware of "some type of irregular financial reporting".

And despite scandals and regulatory failures in the wake of the credit crunch, almost a quarter of top financial services staff surveyed said they were aware of manipulation and almost 10 percent of all staff said their companies had understated costs, overstated revenues or used unprincipled sales tactics.

At some point demand has to increase or the fun stops. Consumer credit expanded at a slower pace in March. Non-revolving debt led the way; things like auto loans and student loans. Credit card debt fell by 2.4%.

In a follow-up to last Friday's jobs report, today the Bureau of Labor Statistics released its Job Openings and Labor Turnover Summary, also known as the JOLTS report. There are about 3.8 million job openings in the country; there are about 12 million unemployed people looking to fill those jobs. Employers aren't firing people any more, but they're not hiring people, either. Employers still see demand as too weak to justify ramping up hiring. Consumers have been too busy picking through the wreckage of their finances to spend a lot of money.

So the stock market is flying high even as customers are pulling in their wings. What's keeping the markets at these highs? Central banks keep pumping up the bubble. This year is a year where all market behavior is basically nonsense. In an environment where you have the central banks pushing down all yield levels on whatever is supposed to be a fixed-income investment. With key economies like the United States seeing a patchy recovery but others struggling to maintain growth, major central banks around the world have shown over the last few weeks they intend to keep stimulus flowing freely for the time being. Let the good times roll.

A follow-up to reports that New York Attorney General Eric Schneiderman will sue Bank of America and Wells Fargo for violating terms of the National Mortgage Settlement; this was the $25 billion dollar settlement for allowing banks to overcharge people, use fake documents and otherwise abuse customers; and it wasn't really $25 billion because the banks could write off full amounts of short sales and loan mods; and this will shock you – most of the write-offs are short sales. Part of the deal would require the banks to actually respond to loan modification requests and to stop losing paperwork and stop abusing customers. This has proved to be too much for Bank of America and Wells Fargo, so the New York AG has said he'll sue; not for money; apparently he'll sue for equitable relief.

What is equitable relief? Apparently it would be an injunction to force BofA and Wells to comply with the servicing standards in the Settlement. Now, they didn't comply with the original settlement, so why would they comply with an injunction? Who knows.

“I'm going to put if very bluntly. I regard the moral environment as pathological...these people are out to make billions of dollars and nothing should stop them from that. They have no responsibility to pay taxes. They have no responsibility to their clients... to counter-parties in transactions. They are tough greedy aggressive and feel absolutely out of control...and they have gamed the system to a remarkable extent.”

That's a quote from a recent speech by economist Jeffrey Sachs. It's only remarkable because Sachs is considered part of the establishment; a former economic advisor for the IMF and the United Nations. But the abuses by the banksters have become so blatant that they can't be overlooked. The Too Big To Fail Banks have admitted to money laundering to the worst drug cartels and terrorist organizations. No indictments. The banksters admit to millions of separate counts of perjury in the robo-signing scandal. No indictments, instead they reach a settlement and then violate the settlement. Again, no indictments. 

And if the Big Banks don't comply with the injunction to make them comply with the settlement..., well, I'm not sure but I'm guessing there won't be any indictments, just another limp wet noodle lashing.

Thursday, April 04, 2013 - Experimental Therapies

The Wealth Protection Conference kicks off tomorrow afternoon in Tempe, Arizona. I will be the keynote speaker, starting at 4PM. This year's roster of speakers includes Mark Liebovit, Nathan Liles, David Smith, Roger Weigand, Arch Crawford, Ian McAvity, and Bill Tatro. These are some of the best technical analysts in the markets and top researchers and economic minds, and me. The conference is Friday and Saturday. For more information: www.buysilvernow.com. To make a reservation, please call 480-820-5877. I hope to see you there.

Experimental Therapies

by Sinclair Noe

DOW + 66 = 14,606
SPX + 6 = 1559
NAS + 6 = 3224
10 YR YLD - .05 = 1.76%
OIL – 1.07 = 93.38
GOLD – 4.30 = 1554.60
SILV- .08 = 27.00

A big day for central bankers. The European Central Bank left its benchmark interest rate unchanged at 0.75%, while the Bank of England held its key rate steady at 0.5%. With both central banks’ rates already at record lows, there might be little room to use interest rates as a stimulus. But the euro zone economies, like that of Britain, are stagnant and in need of help wherever they can find it. What to do when interest rates are already near zero? The Fed playbook calls for Quantitative Easing, and today the Bank of Japan took that playbook and put it on steroids.

First in Europe, ECB President Mario Draghi says the ECB was looking for new ways to stimulate lending in the weak euro zone economy, and could move quickly, but he didn't offer details of any new stimulus plan. Instead, Draghi tried to clean up some of the mess left by the botched Cyprus Bank Heist. Draghi emphasized the ECB's determination to shore up the euro and insisted that Cyprus is not a template for the future and is not a turning point in euro policy.

Draghi said the plan to steal small depositor was not smart, but things changed and they didn't steal from small depositors, only big depositors, and heck, a lot of them may or may not be Russians.

Meanwhile, economic reports showed a drop in business activity in France Germany. Draghi thinks the Eurozone will recover, but he acknowledged tight credit conditions are weighing on economic activity, and he generally looked like he didn't have any tools in his toolbelt.

Meanwhile, the Bank of England left rates unchanged. The BOE governor, Mervyn King has said he wants to try Quantitative Easing but he's been overruled by other members of the central bank’s interest rate setting committee; apparently content to wait a few months for the new governor, Mark Carney to see if he brings any new and exciting tools to his new job.

For a long time, Japan has resisted QE, and then they got a new Prime Minister in December, Shinzo Abe, and a new governor of their central bank, Haruhiko Kuroda; and today they announced an aggressive bid to end years of stagnation and deflation. The Japanese central bank said it would aggressively buy longer-term bonds and double its holdings of government bonds in two years, in effect doubling the money in circulation in the process.  They anticipate this will result in inflation; they hope it will result in inflation; they would love to see inflation surge to 2%. And if prices do not rise as expected, they promise to step up the bank’s easing program.  That represents a sea change from his predecessors, who were faulted for being too ready to pull back at the first sign of higher prices for fear of runaway inflation.

The BOJ will buy about 7-trillion-yen a month, which is equivalent to a bit more than 1% of gross domestic product, or about twice the pace of the Federal Reserve's QE bond buying plan. The policies are part of a new asset purchase framework that focuses on the monetary base instead of the overnight interest rate, which has remained close to zero for years doing little to increase prices or otherwise help the real economy. The bank will also consolidate all its purchases in a single operation in an attempt to improve transparency of the bank’s purchases.

Also, the bank will suspend a longstanding rule that limits its bondholdings to the amount of money in circulation, a limit that has already been surpassed.

Kuroda said that risks or doubts should not hold the central bank back from fighting deflation. He said: “We have debated the side effects, but we are currently not concerned that long-term interest rates might spike, or conversely, that there would be an asset bubble. That risks exist should not hold us back from pursuing much-needed monetary easing. We will keep in mind those risks, but push ahead.”

He also said that once Japan had fought off deflation and reignited its economy, lending would surely follow, spurring more economic growth in a virtuous cycle. One little side effect is a noticeable drop in the value of the yen.

So, we now have diametrically opposed central bank policy, a broad spectrum of plans to watch and evaluate. Japan has tossed the switch on wide open easing; the US has embraced Quantitative Easing with the effects muted by fiscal austerity; and the Eurozone seems content to accept month after month of seemingly meaningless and self-inflicted pain, or hyper-austerity. New numbers this week show the self-inflicted torment has resulted in 12% unemployment across the Eurozone; meaning some countries are in a worse economic condition than back in the Great Depression, which you may recall, ended in a bang, not a whimper.

Also this week we had some Federal Reserve doves indicating they would like to wean the US economy from QE to infinity and beyond, but this appears based on overly optimistic assumptions about the labor market. Of course we know this is just jawboning. Quantitative easing looks like it will never be reversed. Today's QE relies on pushing down borrowing costs. The idea is to encourage more credit, or more accurately it encourages more debt. That is a very blunt tool in a deleveraging bust when nobody wants to borrow.

The flip side is to push demand, a strategy that would require a more direct injection of capital into the economy, bypassing the debt cycle (and the banks); largely because the current policy has become dangerous, yielding ever less returns, with ever worsening side-effects.  It would be better for central banks to put the money into railways, bridges, clean energy, smart grids, or whatever does most to regenerate the economy. In other words, a direct injection that doesn't raise the debt; in other words, money printing. Yes, there might be some unintended side effects, but obviously, these are the days of grand experiments by central banks. In other words, nothing seems to be working, let's try flipping this switch.

The hope is that the hard days are passing and happy days will return, and the need for experimental therapies won't be necessary. Maybe the stock market is signaling a return to better days. Or maybe the stock market bull run is just an unintended side effect of the QE experiment. The stock market certainly seems disconnected from the economy. The M2 money stock has contracted over the past three months, and M2 velocity has dropped to the lowest ever recorded at 1.5. The country still has to navigate the sequester, a fiscal squeeze worth 2.5% of GDP over the rest of the year. Copper futures have dropped 10% since mid-February. Copper is the early warning signal for housing. The bull case for global recovery rests on US recovery, where the US is the economic engine pulling the world from the abyss; a seductive story as the housing market comes back to life and the shale boom revives the US chemical industry.

Tomorrow morning, we will get the monthly unemployment report for the Bureau of Labor Stats. It is expected the economy added about 190,000 jobs last month and the unemployment rate will hold steady at 7.7%.

The economy must add more than 360 thousand jobs each month for three years to lower unemployment to 6 percent. That would require growth in the range of 4 to 5 percent and is not likely with current policies. Tomorrow's jobs report will come 5 weeks after the start of the sequester; maybe too early to really feel the impact. Still, we'll watch the jobs report; since jobs are one of the better indicators of demand. And there will be no virtuous cycle without broad-based demand. If things truly start to get better, we'll happily get in line and march back to normalcy. If the jobs picture deteriorates, the experimental therapies will continue.