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Market Shadows: Group of writers and investors: Paul Price, Lee Adler, and Ilene.
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  • The Banker Who Was God
    The Banker Who Was God

    From this week's Market Shadows Newsletter, The Banker Who Was God (6-23-13).

    American writer and cartoonist James Thurber wrote, "The Owl Who Was God" in 1940, long before the Chairman of the Federal Reserve would become the de facto ruler of the world's financial system. It begins as a typical fable about relationships among animal characters. "Once upon a starless midnight there was an owl who sat on the branch of an oak tree. Two ground moles tried to slip quietly by, unnoticed. 'You!' said the owl. 'Who?' they quavered, in fear and astonishment, for they could not believe it was possible for anyone to see them in that thick darkness."

    The owl soon demonstrated accidental highness and gained a reputation as the greatest and wisest creature of the region. He could see in the dark and answer all questions. Except for a particularly observant fox, the neighborhood animals became intoxicated with the owl's splendor and selected him as their leader.

    The animal fan-club blindly trusted the owl and followed him everywhere. "He walked very slowly, which gave him an appearance of great dignity, and he peered about him with large, staring eyes, which gave him an air of tremendous importance... So they followed him wherever he went and when he bumped into things they began to bump into things, too.

    "Finally he came to a concrete highway and he started up the middle of it and all the other creatures followed him. Presently a hawk, who was acting as outrider, observed a truck coming toward them at fifty miles an hour, and he reported to the secretary bird and the secretary bird reported to the owl. 'There's danger ahead,' said the secretary bird. 'To wit?' said the owl. The secretary bird told him. 'Aren't you afraid?' he asked. 'Who?' said the owl calmly, for he could not see the truck. 'He's God!' cried all the creatures again, and they were still crying 'He's God' when the truck hit them and ran them down. Some of the animals were merely injured, but most of them, including the owl, were killed.

    "Moral: You can fool too many of the people too much of the time."

    [Source: James Thurber, Fables for Our Time and Famous Poems Illustrated (New York, 1940), pp. 35-36.]

    Last week, Bernanke spoke about the possibility of ending quantitative easing (QE) earlier than originally anticipated if warranted by a growing economy. The stock market reacted negatively, bonds sold off and yields spiked up. In Don't Fear the Taper, we surmised Bernanke may talk the taper, but ultimately cannot risk soaring interest rates and a falling stock market.

    Lee Adler of the Wall Street Examiner pointed out that the Fed is lousy at predicting how the economy will do, anyway. "Bernanke said today that the taper will depend on the economy sticking around the Fed's forecasts. The problem is that the Fed has never been able to forecast the economy correctly. It hasn't even been able to forecast present conditions correctly.

    "This is true not just of the aggregate FOMC forecast, but of each individual member surveyed. The Washington Post covered this issue today. I wrote a report on this in 2010 covering the period of 2007 to 2010. I think the market woke up today to just how clueless, delusional, manipulative, and incompetent Ben Bernanke really is." (Fed Will Taper If Economy Goes As Forecast--Uh Oh! Fed Sucks At Forecasting.)

    James Howard Kunstler commented on the Fed's dilemma, "If the Fed were to reduce its purchases of this debt paper, nobody else would buy it. The reason the Fed buys the quantity it does in the first place ($85 billion-a-month) is that nobody else would touch it at the offered zero interest rates. The US Treasury and the mortgage bundlers could only sell the stuff if they paid higher interest rates. But the US government would choke to death on higher interest rates because its aggregate debt is so huge and the scheduled interest payments so gigantic that a one percent increase would destroy even the fantasy of economic equilibrium." (James Howard Kunstler's Mid Year Digest)

    Read the full newsletter: Market Shadows Newsletter, The Banker Who Was God (6-23-13)

    Jun 25 1:49 AM | Link | Comment!
  • Don't Fear The Taper

    Don't Fear the Taper

    By Market Shadows

    Quantitative easing (QE) programs, courtesy of the Federal Reserve, have pushed cash into Primary Dealer accounts at the fastest rate in history. This has been massively bullish for equities over the past four years, as the Primary Dealers used some of that cash to bid up equity prices. This will likely continue until the Fed significantly curtails or discontinues its QE operations.

    US stock indices have been marking time during the past four weeks gauging "talk" about whether Chairman Ben Bernanke will slow down his printing presses. Notwithstanding the rumors, we doubt that QE tapering is on the horizon.

    In our view, unless the Fed stops funneling money to the Primary Dealers, which we deem doubtful, pullbacks in stock prices are likely temporary pauses along an upward path. Therefore, in both of our Virtual Portfolios (Value and Put Selling), we are remaining long and unhedged.

    (click to enlarge)

    The Fed is Unlikely to Taper

    America's national debt now runs approximately $16.5 trillion. President Obama use his power to hold rates down because the cost of higher debt service would devastate his political agenda.

    Bernanke does Washington's bidding so he is probably just 'talking down' market enthusiasm by leaking news of a coming 'taper.' In this fashion, he uses fear of reduced QE to contain equity prices without actually changing the Fed's policy.

    During the fiscal cliff debate in December 2012, people assumed tax rates would be much higher in following years. That precipitated an enormous amount of accelerated income and dividend payments that would have been made in 2013. Because of the higher income booked in Q4 2012, estimated tax payments due January 15, 2013, soared. This reduced the size of the expected Q1 deficit.

    Bernanke's primary mission is to monetize the debt created by federal budgets that far exceed revenues. We see no way for the Fed to reverse course on QE regardless of the whispers to the contrary.

    The Fed has painted itself into a corner and there is no way to unwind the QE trade without debt service costs eating everyone alive. Unwinding would cause interest rates on U.S. sovereign debt to soar, because no one would buy debt at interest rates the government could manage. For every one percent rise in interest rates, there would be an estimated $80Bn in increased annual debt service costs at the federal level. The payment of interest would overwhelm all other spending.

    In Love with TINA explains why stocks are attractive. There are no viable competing investments if you seek to protect your life saving's long-term buying power. Absent a major change in policy, a full allocation to equities seems reasonable, as does avoiding fixed income. Bonds today are in a bubble, and a pop of the fixed income bubble is apt to be louder and more astonishing than anything we will see in the equity markets.

    Chart by Lee Adler of the Wall Street Examiner.

    For the complete newsletter, click on link: Don't Fear the Taper, 6-14-13.

    Jun 16 4:58 PM | Link | Comment!
  • Sea Of Money
    Sea of Money

    Glimpse into Future

    In this issue of the Market Shadows Newsletter, we index previous educational articles by Paul Price for easy access and review recent moves in the virtual portfolios. Lee Adler provides an update on current market conditions.

    Read the whole newsletter: Sea of Money: Market Shadows Newsletter 5-7-13

    Excerpt from Glimpse into Future

    Lee Adler of the Wall Street Examiner reported on May 1 that the Federal Government is "rolling in cash" due to higher-than-predicted tax collections and possibly reduced spending due to the sequester cuts. In Wildly Bullish Liquidity Flows Should Benefit Stocks More Than Treasuries (subscription required), Lee noted,

    "Overall, the TBAC sees a net paydown of $21 billion from now through the end of the second quarter. That's a far more bullish forecast than they had in February for this period when they were expecting that the Treasury would need to raise cash from net new supply of $83 billion from now until the end of the quarter. That's a positive swing of $104 billion from the last quarterly TBAC update until the one just released at the beginning of May."

    Thus, the Treasury's revised projection that it will pay off $21 billion in net borrowing by the end of June resulted from higher than expected tax revenues and the much maligned sequester cuts. This is equivalent to a family being able to reduce their credit card's monthly balance by paying more to the bank in a given period than they incur in new charges.

    Reduced federal borrowing will free up $21 billion investor money that would have been soaked up by new T-bond issuance. A good part of that sum will likely find its way into the stock market, providing fuel for a stock market melt-up. This excess liquidity is bullish for stocks, as Lee Adler explains in the following excerpt from The Irony Of The Fed's Manipulation - Professional Edition (subscription required):

    The only change in today's FOMC statement was the addition of some words to the effect that the Fed would consider increasing quantitative easing (QE, colloquially known as 'money printing'). Apparently its strategy of jawboning and manipulating commodity prices worked too well, so now instead of threatening to end or taper QE, it now must resort to threatening to add to it to keep commodities from continuing the decline that the Fed seemed to want.

    It would seem that too little inflation is a worse fate than too much.

    Regardless of all the words, the policy remains the same. Print mass quantities of money and jam it into the accounts of the Primary Dealers every month. Today (May 1) there's some profit taking as traders and algos digest weak economic data, but I'm sure that once they've had a chance to consider and recalibrate the implications of the Fed continuing to increase the size of the numerator that goes into the pricing equation, they'll be back at the table shortly.

    The composite liquidity indicator rose last week, mostly from the Fed's weekly Treasury purchases.

    (click to enlarge)

    Gains in most indicators were slight. April, the period of the strongest liquidity flows of the year from the massive paydowns of Treasury debt, has now ended. Liquidity will slack off a little in May as the Treasury returns to being a net borrower, but river of cash will continue until the Fed ends QE. The Bank of Japan's (BoJ) massive new QE program will also add to US market liquidity."

    The biggest surges of cash come after the Fed settles its MBS purchases around mid month. That pattern will go on until the Fed ends this round of QE. News flow will cause stock and bond prices to continue to fluctuate around the liquidity trend. Buyers will get fatigue from time to time, as they did today. No doubt there will be more efforts to manipulate commodity prices, particularly gold and silver, but now that the Fed sees that it may have been too successful in scaring speculators away from commodities, they'll probably try to say stuff that gets them buying again. Fed policy is nothing if not ironic...

    Some of the money that the BoJ prints not only can but does move into US paper, whether Treasuries or stocks. It will show up in the Foreign Central Bank measure and in banking measures. There's a strong correlation between the BoJ balance sheet and US stock prices, both over the long term, and in intermediate swings."

    The correlation between the direction of stock prices and the size of these central bank balance sheets is remarkable.

    Fed Cash to Primary Dealers measures the flow of cash into Primary Dealer accounts from Fed securities purchases. This indicator has the heaviest weighting in the composite. The current growth under QE3/4 is the fastest in history. It will be bullish until the Fed ends QE. Stocks will stall or pull back from time to time, hemmed in by resistance and news flow, but the Fed's cash will find its way into equities sooner or later.

    *****

    Read the whole newsletter: Sea of Money: Market Shadows Newsletter 5-7-13

    Get regular updates the machinations of the Fed, Treasury, Primary Dealers and foreign central banks in the US market, in the Fed Report in the Professional Edition, Money Liquidity, and Real Estate Package. Click this link to try WSE's Professional Edition risk free for 30 days!

    May 09 1:21 PM | Link | Comment!
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