6/20/2012 7:51 PM ET|
Get ready for the last-gasp rally
Central bankers seem committed to one more round of easy money that should lift markets and reward brave investors. It won't fix the economy, but it could prove profitable.
It's the final call. One last grand rally as central banks try to stimulate a global economy crippled by debt.
This is, essentially, the playbook for investors for the rest of the year. Already, stocks, commodities and precious metals are launching higher as the dollar weakens and the euro strengthens, based on confidence the Federal Reserve will provide more stimulus and Europe's leaders will cobble together another momentary solution to their intractable crisis.
So join in. This is our last dance with the devil of easy money. Ride the wave higher as policymakers pump liquidity into the financial system, just as they did late last year. They have, after all, fueled an impressive rally in the midst of an impotent recovery.
No, I haven't forgotten where this all leads. Inflation has eased, but it will return. America is barreling toward a "fiscal cliff" in 2013, with deep tax hikes and spending cuts ready to kick in. Greece is moving inexorably toward restoring the drachma and exiting the eurozone, though the pace has slowed with the recent election.
So keep an eye on the exits. Be ready to flee when another rush of food- and fuel-led inflation pinches real wages and consumer confidence, as it did earlier this year. You'll want to stand clear as the final tragedy plays out, when central bank supports end and governments impose real austerity.
But those are worries for another day. Right now, the central banks see a need to act, and they're going to give the economy -- and investors -- one last ride.
Here come the waves
On Wednesday, we learned that the Federal Reserve, worried about a slowdown in the economy, will extend its $400 billion "Operation Twist" initiative -- started in September and set to expire this month -- through the end of the year. In dollars, that's worth an additional $267 billion to be used to push down long-term interest rates.
With inflation expected to run at or below its target, the Fed noted that it is "prepared to take further action as appropriate to promote a stronger economic recovery and sustained improvement in labor market conditions." This is a marked change from its last policy statement, in which the Fed merely said it was "prepared to adjust its (portfolio) holdings as appropriate."
Essentially, this latest statement means that until we get solid 2%-plus GDP growth, or inflation over 3%, the Fed will continue to find new and innovative ways to force cheap cash into the financial system.
Foreign central banks have already acted.
The People's Bank of China surprised on June 7 with a 0.25% interest rate cut, its first since December 2008. It has also cut the reserve requirement ratio, the amount of money banks are required to hold rather than lend out, three times since November. Officials are saying that with inflation risks falling and deflation risks rising, two more rate cuts and three more reserve requirement ratio cuts are likely before the end of the year.
The Bank of England is moving ahead with two new initiatives to support the British economy -- in addition to the $500 billion worth of quantitative easing the bank has already done and its push to hold short-term interest rates at 0.5%, a record low.
The first will be a five-year offering of liquidity to banks in exchange for lending to the "real economy," such as households and non-financial institutions. The second will be an expansion of collateral acceptance terms, giving banks the ability to pledge a wider range of assets to the Bank of England in exchange for cash loans.
Overall, these actions are very similar to what the European Central Bank did late last year with its two separate three-year lending offerings.
You can expect the ECB to act again soon, likely cutting its short-term policy rate to near zero from 1% now.
Why the dramatic, coordinated response from central bankers? Let's set the scene.
Worldwide, economic fundamentals have stalled over the past few months on a combination of European weakness and consequences from crude oil's late winter rise to more than $110 a barrel. Not that the economy was going gangbusters before that.
Growth of the gross domestic product here at home has been below 2% in four of the past five quarters. Economists believe we need growth closer to 3% just to keep the unemployment rate steady.
Obviously, we're not getting that. And the only reason the unemployment rate isn't higher than 8.2% is because of a steady drop in the number of people actively looking for work. Essentially, the numbers aren't capturing the army of long-term unemployed who have simply given up.
Much of Europe is already in a new recession. The list includes the Czech Republic, Spain, Italy, Cyprus, Hungary, The Netherlands, Portugal, Romania, Greece and the United Kingdom. All have seen their quarterly economic growth rates sink into negative territory for two or more quarters. Harsh fiscal austerity measures are at work, with tax increases and spending cuts slicing growth right off the top.
According to data from the Organisation for Economic Co-Operation and Development, Greece is on track to cut government spending by 3.5% of GDP by 2013 even as the economy suffers through its fifth year of recession. In Spain, the drop in spending is nearly 4%. This is cutting things like pensions and unemployment benefits in the maw of depression.
Here at home, a surge of inflation earlier this year took the shine off the confidence earned by the multiple injections of cheap cash conducted by the European Central Bank (those two offerings of three-year loans to banks) and the Federal Reserve ($400 billion worth of "Operation Twist" in September and an expansion of dollar swap lines with other central banks to keep currency flowing smoothly) .
With wages flat, consumers started drawing down their savings to keep up with the rising cost of living, especially at the gas pump. This was never going to be sustainable. Sure enough, retail sales have stalled and, in fact, suffered their first back-to-back monthly declines since 2010. As a result, economists at Barclays Capital and Bank of America Merrill Lynch are tracking second-quarter U.S. GDP growth at sub-2% levels. That would make for the fifth subpar economic performance in six quarters.
So will the cheap money wave cure what ails us? No it won't, unfortunately.
Remember, policymakers haven't addressed the two main structural problems in the economy (see "Washington vs. the midde class") for some time: demographics, with aging boomers unable to retire, and deleveraging, the need to pay down excessive government and household debt. (See "Are baby boomers to blame?" and "The world's $8 trillion debt hole" for more on these topics.)
There are other problems too, including unfunded pubic entitlements (mainly health care spending), a dilapidated infrastructure, an inefficient educational system and the predatory trade policies of countries such as China.
Until these are addressed, subpar growth will continue despite all the stimulus the bankers can pump in -- and stimulus is becoming increasingly dangerous and inflationary with each iteration.
Since the recession started, central bankers have been busy: Federal Reserve assets have jumped from around 6% of GDP to nearly 20% now, the Bank of England has followed a similar path, the European Central Bank has increased its holdings from around 15% of GDP to nearly 30%, and the Bank of Japan has gone from around 20% of GDP to more than 30% now.
These expansions are fueled by new money that authorities create out of the ether and use to buy assets such as Treasury bonds or mortgages, putting more cash into the system.
After a brief reprieve, they're at it again -- big time. What we may be seeing is one last epic, globally coordinated dose of stimulus before inflation kicks in hard and takes that weapon away from policymakers. Drivers of this structural inflation include an inefficient labor market with persistently high unemployment (represented by an upward shift in what economists call the "Beveridge curve"), a peaking of China's workforce, the rising expense of harvesting commodities from the Earth, and tightening food supplies in a world adopting protein-rich Western diets.
All of this stimulus will fuel speculation in the global markets -- pushing down the dollar, a safe-haven asset, while boosting riskier investments such as stocks, the euro and commodities. But it will do little to help the real economy and address the deeper, structural problems. That's because, in a balance-sheet recession like the one we have now, the problem is too much debt. Making credit cheaper is like offering a strict vegan a big steak.
Nomura economist Richard Koo notes: "Monetary policy is largely ineffective in this type of recession, because those whose balance sheets are under water are not interested in increasing their borrowings at any interest rate." And even if they were interested, tightened credit standards and stricter regulatory oversight of banks mean many can't take advantage of low rates anyway.
Any real solution would need to address the debt overhang and the lack of demand in the overall economy.
In other writings, I've thrown out two ideas: debt restructuring (especially mortgage debt) for households and a call for a national renewal, with increased public investment financed by ultracheap Treasury rates. With inflation-adjusted Treasury yields in negative territory, investors are essentially begging Uncle Sam to borrow from them to rebuild crumbling infrastructure, increase productivity and boost the economy's potential growth. In fact, they're paying him to do that, courtesy of negative inflation-adjusted interest rates.
The government's unwillingness to boost the economy -- amid calls for immediate budget austerity -- is the ultimate expression of the dynamics of Koo's balance-sheet recession. People aren't maximizing profits, they're minimizing debt. Government is doing the same. (Yes, I know we have a large annual deficit, but that's mostly a result of paying for things like Medicare, unemployment benefits and aircraft carriers, not roads and bridges.) And if everyone tightens at the same time -- governments, households and businesses -- you get the mess we're in now.
I don't think my suggested solutions will be implemented. Not only that, but Washington will likely bungle its response to the fiscal cliff problem as Election Day approaches. It's going to be a mess. So, enjoy the reprieve granted by unelected central bankers and try to cash in when we rally. It's not going to last.
For now, I continue to recommend that my readers and newsletter subscribers focus on stocks and exchange-traded funds in areas poised to benefit the most from the liquidity waves: precious metals and related mining stocks, emerging market equities and fast-moving "high beta" plays in the pharmaceutical and biotechnology spaces.
Examples in my Edge Letter Sample Portfolio include the Direxion Daily Emerging Markets Bull 3x (EDC), up 15% since I added it on June 6, and Market Vectors Junior Gold Miners (GDXJ), up 12.5% since late May.
For more conservative investors, the best advice in the months to come is to hang on tight and keep an eye on the exit.
At the time of publication, Anthony Mirhaydari did not own or control shares of any company or fund mentioned in his column in his personal portfolio.
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I am not a Ron Paul fan, but his philosophy of wanting to totally eliminate any government agency that is not Constitutionally authorized under Article 1, Section 8, is absolutely correct.
You will never spend less as long as you keep spending more and more, and the only way you will ever spend less is when you start eliminating entire segments of the Federal Government.
That's not to say that those agencies don't provide some value, but given the point we are at, the fact is that we simply can not continue to fund them.
So, what to do? That's where the states come in. The individual states are going to have to decide what services, previously provided by the Federal Government, they wish to keep, and then the several states will figure out on a state level how to fund them.
It doesn't have to be done overnight (although I certainly wouldn't be opposed to that either) but you start by cutting agency budgets by a pre determined percentage across the board on a yearly basis, and you keep cutting for as long as it takes to dissolve them. We tell them in advance the cuts are coming and that the people in those agencies should go start looking for other employment NOW. The states are told that they are to determine which services they wish to keep and to start devising plans to maintain those services. When a state has a plan, then they are exempt from paying whatever their percentage was for that federal agency and the state then takes over that function. If the state doesn't wish to keep, or doesn't need to keep any part of the services of a particular agency, then they are cut off from those services immediately. The federal agency budget is then reduced automatically by that amount in addition to the pre determined percentage cut.
Whatever functions of those agencies, be it dept. of Energy, Education, Fannie Mae, Freddi Mac...whatever....are constitutionally authorized, they will then be combined with other Constitutionally authorized agencies to which the appropriate purpose could be assigned.
This is the only way we will ever start reducing the debt. It's not just the USA, it's a problem endemic to the entire world: Too many governments spending too much money that they don't have. Taxes are not the problem. Spending is.
wall street is fixed...an individual investor CANNOT compete with computerized trading
where millions of shares are bought and sold in a nano second....all the pundits who just
a few months ago told you to buy "safe" dividend US stocks were of course wrong again
whether its mcdonalds or p and g..these stocks are going nowhere and you lose your
dividend on one bad day in the market...the problem is that baby boomers can't get any income
on their savings so they can't spend..and their kids can't get jobs so they can't spend either
and the economy which depends 70% on consumer spending is therefore going back into
Since Obama took office the money supply has tripled. I don't know about the rest of you but my bills have also doubled/tripled. And yet we are told there is no inflation.
Gas is $3.60 a gallon. That's high. Not as high as it was a few years ago but high enough to increase the cost of groceries and anything else that is shipped. Which is everything.
The only item I purchase that has gone down a bit is clothing.
So all the QE crap is costing us. We pay for it everyday in the cost of living. And in forgone interest on our savings.
For me, these tow statements stand out:
1. "Monetary policy is largely ineffective in this type of recession, because those whose balance sheets are under water are not interested in increasing their borrowings at any interest rate."
2. In other writings, I've thrown out two ideas: debt restructuring (especially mortgage debt) for households and a call for a national renewal, with increased public investment financed by ultracheap Treasury rates.
I can pay my mortgage. The rate is over 7.5%. My equity in the house is 25%. But I can not refi. I am a small business owner with no ability to "conform" to the mortgage underwriting guidelines. Figure out a way I can do this so i can improve my cash flow and improve the productivity of my buiness by investing in plant and equipment.
Also, I live in Atlanta. On July 31, we vote on a 20 county wide 1% sales tax to fund transportation. I tell everyone to vote no. Why? First, we already have a federal and state gas tax. Second, few people ride mass transit. Third, all transportation projects are partially funded by federal dollars. So by paying the gas tax, sending the money to DC, having 35% skimmed off for mass transit that never reduces congestion or improves transporation, having the feds impose regulations such as Davis Bacon, which forces the payment of union wages, and having Congress distribute the funds amoungst the states and cities, Atlanta will pay an addtional tax so Congress can syphin off more money to other locations. The only thing this country needs to do is get rid of a whole bunch of industrial age regualtions now that we are in the information age.
"With inflation expected to run at or below its target" is an interesting concept. The cost of living continues to escalate as one can notice by the price of groceries and gas on a daily bases.
8.2 unemployment is another loose number the government throws out there to keep us from panicing. It is more like 20% in reality but they will not print such numbers.
This country needs some revamping and some new leadership.
We have become a welfare nation in just 4 short years. It wasn't so long ago that this nation was the strongest nation in the world but has quickly declined into an abyss....
Here"s an idea. If your so lonely get on a chat line and occupy yourself masturbating instead of being an annoying pos spammer.
Really? These aholes get reported as spam dozens of times and you don"t block them? Are you lonely too?
This out of Reuters last night:
“Wells Fargo & Co , the fourth-largest U.S. bank by assets, is looking to move some jobs outside the United States as it pushes forward with a company-wide cost-cutting program, a spokeswoman said on Wednesday. “
"The bank is considering sending work in its retirement division, technology areas and other business lines to India and the Philippines……”
The upbeat words regarding jobs and initiating jobs is BS according to Wells Fargo. I’d bet a dime to a dollar that no one will say a word. That’s just the way it goes. Too bad there is no sort of santion to put on these a$$holes excepting for Wells Fargo customers to go elsewhere, but that won't happen either.
Anthony is right on this. We have too much debt from inefficient government spending. Our infrastructure would not be crumbling if tax dollars were used for it instead of paying people to produce more fatherless children.
Cutting taxes increases tax revenue which reduces debt. Couple that with cutting the federal government's budget by 50% (which is the amount the government spends on things they are not responsible for like welfare, a horrible retirement plan and health care) and use the cash to pay down debt at $1 trillion per year and we're debt free in 15 years.
So here's a question:
Do you think Romney's idea to repeal all of the laws will make all of the job creators let their cash flow more freely and start hiring?
Or do you think that most businesses are waiting for a good increase in consumer demand?
And then what if consumer demand increased?
All of the current stimulus programs, it all seems to be too little too late.... we've lost so many jobs. Some sectors don't seem to be recovering at all. Too many people are unemployed and underemployed. Jobs with decent pay is the key to our first step in recovery. This is the real economy globally.
No need to get poetic on this.
We have a simple fact that I am confident that others will comment on.
Not having the exact figures I am confident that what I say is true.
The amount of revenue that the government will take in this year is somewhere about equat to the entitlements that we must pay per our current laws.
That means that everything else is payed for by borrowed money.
Every penny that we spend on everything to run the government including the military, the infrastructure, the parks, oshand everything that we can think of that the federal government spend money on is borrowed money.
Obama and Bush are not the root cause of this. They cannot spend a penny.
"Already, stocks, commodities and precious metals are launching higher as the dollar weakens and the euro strengthens"
What? Better check your charts this morning. Uncle Ben sunk that. Just like I said QE3 wasn't going to happen. And of course the traders are now just walking away pouting like babies.
"At least $30's possible given the flood of crude on the market."
World oil margin is still only a few hundred thousand to about 1 million barrels a day. Even in this environment of slow growth. Oil reacts like it does because of financialization, demand and supply is actually a less important factor.
"Last gasp rally"
Isn't it late? I seem to recall some article about the end being nigh early last week only to have a rally run the face of that prediction.
hava, that should be higher taxes and lower spending.
bear in mind that two plus two actually does equal four. lower taxes and lower spending would simply offset each other and have little impact on the federal revenue stream. only with higher taxes and lower spending can we implement the balanced approach from simpson-bowles and achieve a balanced budget combined with long-term reduction in the national debt.
we either do this, and reduce our inflated standard of living, or we go the Greek route to infamy and second-tier global status while we go to work for the Chinese. get your checkbook ready ....
No matter what you do to force banks into consumer lending, without enough margin to service and collect, the initiative ends in a wreck.
Here in America, our best hope is to abolish "incorporation". We have no Founders in control of their enterprises, these are hired-in financial people. The operations, personnel and machines are all gone. Expose the remaining "platforms" to real responsibility instead of anonymity and a new era of tangible progress replaces the smoke and mirrors. We need reconciliation and we need accountability. We are TRILLIONS in the hole and nobody out here knows where it goes. It doesn't go toward Main Street and our government isn't hoarding record amounts of it. No... the corporations are. Sorry, but an American Iconic Brand is worthless unless Iconic American Quality is making it here in America.
JOB RECOVERY. Right now.
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