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Fade-the-fade-from-FED-is-the-game
The first news that caught my attention this morning(and made me laugh so much I almost cried!) was a “leaked” piece by Fed via the “Senior Economic Reporter” Steve Liesman of the CNBC – Apparently he is led to – and then needing to share with us – believe we should not expect much from the Fed Chairman this coming Friday at Jackson Hole. Nice try Fed ! Managing expectations and through the PR agent for Buffet/Fed/Treasury and anyone who is playing the “political” game of “spinning” is a nice try – I will however “fade the fade” so to speak.
Think about it: Chairman Bernanke has used 3.000 billion US Dollars to create what? Nothing? Unemployment is still above 9.0 per cent, Housing market is still in a slump, and now the only success going for the Fed, the stock market, is falling apart with talks of interbank funding crisis, unrealized loss’ – smells like 2008 ? Certainly does. Smells like August 2010? – Yes! It is an almost 100 per cent analogy to last year.
Now, you are FED Chairman Bernanke – what will you do? Raise your hand and say: Sorry! I was wrong – dealing with debt through issuing more debt was wrong – I should have known better, but I was the world class expert on Japan, before I got this, my first real, job – I am extremely sorry!
Not likely to happen is it? No rather, when looking at what you can expect from Bernanke you should look at his academic work, at his policy response when faced with low growth, falling inflation expectations, a banking sector under pressure, and alarming unemployment numbers: The response has always been the same: Print more money.
See, often the argument Bernanke has with Japan and the newly coined economic model called Japanisation is that they did too little and too unannounced. Meaning: QE3 is coming – whether he has the political establishment and full FOMC board behind him or not, he will move to some shape or form of QE – it’s in his genes so to speak – he may delay the “official” start and announcement of it until the S&P tanks to below 1.000, but that would happen on Friday if he is seen “failing” to give the market what it needs. No certainly, fade-the-fade-from-fed is the game.
I should note in the survey’s I have seen on the expected outcome from Jackson Hole, the QE option has little support anyhow – people are mainly expecting a continuation of last FOMC meeting – indicating lower rates for longer, a negative assessment of the outlook for the US economy and some underlining on their willingness to do everything needed to re-start the US economy.
The second highest probability in the survey is Operation Twist – and this paper called: “Operation Twist and the effect of Large-Scale Asset Purchases” from Federal Reserve Bank of San Francisco, written by Titan Alon and Eric Swanson, from April 25,2011 is of extreme essence to understand Fed and its thinking. The paper links Operation Twist of the Kennedy Administration with the QE2.
I did small Saxo Video on the Jackson Hole yesterday:
Link to video: Jackson Hole precursor.
Strategy Update August 2011
Now in terms of the market and allocation it has been a while since my latest update – to recap recent “signals” – I went short in May with the note: No Silver Bullets and went to neutral in July and has stayed there since. I am now willing to go outright long again (with tight mental stop/loss below 1080 in S&P cash) based on reasons which are more tactical short-to-medium term based than an outright believe the market is cheap. It would be a 4th wave correction – after the steep 3rd wave down and ahead of the final 5th wave – which I think will be the end Dirigisme (or managed economies).
Reason # 1: Yield is getting to low end of long-term trend – indicating some “turn around” in risk-off
Source: Stockcharts.com
Reason # 2: Market is over-sold and in-flow has started (and Bernanke can only surprise positively)
Source: Stockcharts.com
Reason # 3: The perceived “funding crisis” is overdone for now at least….. USD into EUR basis swap
Source: Bloomberg LLP
A Morgan Stanley Research paper pointed out that the largest European banks are >90 per cent through their funding targets for 2011 – which does not mean there could not be renewed pressure, but for now they can “live” through 2011 and the real issues is in Q1-2012. Furthermore it should be noted the LIBOR & EURIBOR is fixing higher every single day – small increments, yet higher.
Reason # 4: The rest of the arguments…..
- Dividend yield above 10 year yield in the US
- The always bullish analyst’ are all turning bearish – actually recommending selling stocks
- Lack of understanding from Anglo-Saxons on the true dilemma in Europe. (The political will to do whatever needed in the last minute modus operandi of European history)
- Relatively higher consumer spending in my favorite leading indicator: http://www.consumerindexes.com/
- Growth forecast now at 1.7% for 2011 among the pundits(Ivory Tower economists) – down from bigger than 3% at the start of the year and 2.5% only in July – there is major mean-reversion in economic projections, now the market is probably too low relative to where we end up.
- Limited risk: You are wrong if S&P cash trades two days below 1080/1090 on a closing basis.
New low in EU commitments
It’s hard not to laugh, again, when reading the recent own goals produced by every single player in the EU debt crisis, but there are starting signs of a Mexican Stand-off and this week was certainly a new low in commitments and solidarity in Europe.
This week I read three excellent piece on the EU which gave me plenty to think about. I will leave the link for you to read – in particular the paper from Daniel Gros and Thomas Mayer should be a must read research as they are outlining what I increasingly think will be the compromise in this standoff:
- CEPS Commentary - August 2011: What to do when the euro crisis reaches the core, Daniel Gros, Thomas Mayers – download link: Euro crisis reaches the core. They come up with solution which seems in line with Maastricht and which create European Monetary Fund with ECB as lender-of-last-resort. Extremely interesting and insightful.
- Spiegel Online: Dutch Finance Minister on the debt crisis: “We are all threatened by contagion” – key paragraphs: “…Should the Greek government not be in a position to fulfill the terms of the bail-out program, then the Netherlands will refuse to provide any further aid”. Talking about the Finland Clause (Finland getting collateral reference): “As far as we are concerned, no deal has been made” – then he – after this interview move to state: “The only thing that helps is for everyone involved to practice verbal discipline”.
- Deutsche Bundesbank, Monthly Report, August 2011: The comment in this report clearly shows Bundesbank’s reservation for what’s going on: “With the sovereign debt crisis spreading to other euro-area member states, the Governing Council also reactivated its Securities Markets Programme (SMP). This would, it argued, help restore better monetary policy transmission” – and the whole final paragraph is about how we may need to go a “worse” place to get to a better place is again must read:
I know – too much reading in this report, but all of it important in my view.
Keep the powder dry,
Steen
Med venlig hilsen | Best regards
Steen Jakobsen | Chief Economist
Saxo Bank A/S | Philip Heymans Allé 15 | DK-2900 Hellerup
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