Wednesday, September 17, 2014

A History Of Money & Banking In the United States- Part 1

Watch the Canadian Dollar

I would not jump out on a limb here and make any grand prognostication or hard call here, as everything may change come this afternoon. That said, we are seeing some interesting trading dynamics in the Canadian Dollar, represented here by the Currency Shares Trust- FXC. Lets look at the chart-

What is interesting here is that despite the Euro, the yen, and the pound all breaking down below recent or long-term support levels, the Canadian Dollar has held the line. Of course the trend may be more of a story concerning interest rates in Canada, but it may also indicate a lack of conviction by Canadian Dollar traders as it pertains to the possibility of an interest rate increase by the Fed. More so, significant upside volume has come in at the support levels, which may also be another indicator that traders in the Canadian/US cross rate see little to muted changes in the interest rate differentials between the two nations. The Canadian Dollar trade should probably be on your screen of indicators to watch.

The Fed Has A Big Surprise Waiting For You

from The Automatic Earth

The topic of potential interest rate hikes by central banks is no longer ever far from any serious mind interested in finance. Still, the consensus remains that it will take a while longer, it will take place in a very gradual fashion, and it will all be telegraphed through forward guidance to anyone who feels they have a need or a right to know. Sounds like complacency, doesn’t it?

Now, it seems obvious that the Bank of Japan and the ECB are not about to hike rates tomorrow morning. In Europe, dozens of national politicians wouldn’t accept it, and in Japan, it would mean an early end to many things including Shinzo Abe.

But the Bank of England and the Fed are another story. Though if the Yes side wins in Scotland next week, the narrative may change a lot of Mark Carney and the City. That leaves the Fed. And it’s important to realize and remember that, certainly after Greenspan entered the scene, speaking in tongues, the Fed has become a piece of theater. The Fed is about perception. About trying to make people believe something, and make them act a certain way that they choose for them.

That’s why after the Oracle left they pushed first a bearded gnome and then a grandma forward as the public face. The kind of people nobody would perceive as a threat. Putting a guy who looks like second hand car salesman in charge of the Fed wouldn’t work.

Not when a big financial crisis looms, and then continues on for a decade and counting. That makes keeping up appearances the no. 1 priority. That’s when you want a grandma, or you’d lose your credibility real fast. You need grandma for your theater, for the next play you’re going to stage.

That market volatility today is at record lows is part of a big play, or a big scene in a play if you will. And the goal is not to make markets look good, as many people think. Making markets look good, making the economy look good, is just an intermediate step designed to lure everyone in.

You make people believe you got their back. All the big investors. Because they make tons of money, while they thought maybe the crisis could have really hurt them. Even the public at large feels you got their back. Because they don’t understand what the sleight of hand is.

The big investors understand, but you got them believing you will play that hand forever, or let them know well ahead of time when you intend to fold. The big investors think you will skim the public, but not them. They think you’re all on the same side. And the public thinks you’re healing the economy, and saving their jobs and homes and pensions.

When rate hikes are discussed, like I did two weeks ago in This Is Why The Fed Will Raise Interest Rates, most people have similar initial reactions. ‘They can’t do that, it would kill the economy, or at least the recovery’.
But the truth is, there is no recovery. It’s just a scene in a play. And the economy is completely shot, it only appears to be left standing because the Fed poured oodles of money into it. Or rather, into a part of the economy that it can control, that it can get the money out of again easily: Wall Street banks. And Wall Street equals the Fed.

Charles Hugh Smith, in What If the Easy Money Is Now on the Bear Side?, notices that there are hardly any bears left in the market, and that shorts are disappearing as a source of revenue for bulls. Interesting, but he doesn’t yet connect all the dots. CHS thinks big money managers can make ‘the play’, that they can fool the rest of the market and unleash a tsunami that will bury the bulls.

I don’t think so. I think what goes on is that the Wall Street banks, many times bigger than the biggest money managers, see their revenues plunge. As they knew they would, because free money and ultra low rates are not some infinite source of income, since other market participants adapt their tactics to those things as well.
Which is what Charles Hugh Smith points to, but doesn’t fully exploit. And it’s not as Wolf Richter presumes either:
After years of using its scorched-earth monetary policies to engineer the greatest wealth transfer of all times, the Fed seems to be fretting about getting blamed for yet another implosion of the very asset bubbles these policies have purposefully created.
The Fed doesn’t fret. The Fed has known for years that the US economy is dead on arrival. They’ve spent trillions of dollars backed, in the end, by American taxpayers, knowing full well that it would have no effect other than to fool people into believing something else than what reality says loud and clear.

Philip Van Doorn, who I quoted two weeks ago, got quite a bit closer in Big US Banks Prepare To Make Even More Money
For most banks, the extended period of low interest rates has become quite a drag on earnings. Net interest margins – the spread between the average yield on loans and investments and the average cost for deposits and borrowings – are still being squeezed, since banks realized the bulk of the benefit of very low interest rates years ago
That is the essence, and that is why grandma will announce higher rates, against a backdrop of 4% GDP growth numbers and a plethora of other ‘great’ economic data and military chest thumping abroad.
The US economy is dead. The Fed has known this for a long time, but pumped it up to where it is now to draw in all the greater fools, the so-called big investors who have made money like honey from QE and ZIRP. They are the greater fools. The American real economy ceased being a consideration long ago.

We’re in for big surprises, and they won’t be pretty, they’ll be pretty nasty. There are far too many people who think of themselves as smart who don’t see the difference between a theater play and a reality show. And I don’t mean CHS or Wolf, they’re much more clever than your average investment advisor.

The Fed will raise rates because that will make the biggest banks the most money. There’s nothing else that matters. The Fed can’t revive the US economy, that’s just a foolish notion. But it can suck a lot of wealth out of it.

Cycles Suggest......... With David Gurwitz of Charles Nenner Research

 A rather interesting interview with David Gurwitz of Charles Nenner Research. Cannot say I have heard of the research firm before this but my guess is that I will doing some reading soon.

Tuesday, September 16, 2014

Creative Benefits of Boredom

A rather compelling article from the Harvard Business Review

In a past life, I used to be required to participate in quarterly sales meetings. These meetings followed a typical format: fly everyone in the company to an amazing destination, then lock them inside a hotel ballroom for 10 hours a day and force them to listen to speeches from sales leadership, as well as marketing, research, and legal departments (usually with a motivational speaker to close it all out). Try as they might, these meetings were boring. The real shame was that they were intended to rally troops and get the sales organization excited about new initiatives, as well as inspire them to think up new and better ways to increase sales in the field. The only saving grace: the late-night dinners. After 10 hours of being talked at, my colleagues and I would escape the hotel, find a local restaurant and talk to each other. Despite our best efforts, these dinner conversations were always about work – and good thing too. These chats were filled with new ideas for dealing with problem clients or increasing sales of new products. Late-night dinners became the source of the new and exciting our meetings were supposed to elicit.

Boredom at work (and meetings) is something nearly all of us feel at times, but admitting that boredom to coworkers or managers is likely something few of us have ever done. It turns out, however, that a certain level of boredom might actually enhance the creative quality of our work. That’s the implications of two recently published papers focused on the link between feeling bored and getting creative.

In the first paper, researchers Sandi Mann and Rebekah Cadman, both at the University of Central Lancashire, explained the creativity-boosting power of boredom in two rounds of studies. In both rounds, participants were either assigned the boring task of copying numbers from a phone book or assigned to a control group, which skipped the phone book assignment. All participants were then asked to generate as many uses as they could for a pair of plastic cups. This is a common test of divergent thinking—a vital element for creative output that concerns ones ability to generate lots of ideas. Mann and Cadman found that the participants who had intentionally led to boredom through the phone book task had generated significantly more uses for the pair of plastic cups.

The remainder of the article can be found here

Guessing this implies that if you want more creative and thought provoking investing ideas, undertake some boring objectives before your search.

Are Rate Hikes Now Off the Table

Judging by today's intraday action, either the market is pushing out their expectations for a rate hike further out or discounting the idea of Yellen raising interests at all.

The Dollar trade

The Gold/Precious metal trade



The oil trade

Medium term treasury rate- 5yr CBOE

and finally equities, the SPY

Stocks Going Up for the Wrong Reasons

Let me say this, I think that equities will continue to rise until they don't. That said, I have limited exposure to the broader market overall and would rather pick my spots carefully. My thoughts fall more in line with Schiff's below, the economy remains towards the weaker than assumed, but the money pumping should continue to help risk assets..... until it doesn't.

Monday, September 15, 2014

BIS: All Asset Prices Elevated

In its quarterly review, released Sunday, the Bank of International Settlements (BIS) stated that the Central Banks have elevated prices of all asset prices. As reported by Reuters-

In its quarterly review, the BIS said financial market volatility spiked higher in August on the back of geopolitical concerns and worries over economic growth, but quickly returned to "exceptional lows" across most asset classes.

"By fostering risk-taking and the search for yield, accommodative monetary policies thus continued to contribute to an environment of elevated asset price valuations and exceptionally subdued volatility," the BIS said.

The comments echoed the institution's warning earlier this year that rock-bottom interest rates had led to "worrying" signs of unsustainable growth in property and credit markets in some countries.
At some point,  manipulating asset prices will lead to another downturn, and with all prices being manipulated the risks we see an event paling the 2008/2009 recession are increased. But similar to the Heidelberg Uncertainty principle, you can place a probability on what or when but rarely both. Historically, downturn has corresponded with a contraction in the central banks balance sheet and/or high powered money, but will this time be different? Will it be a change in the rate of change that sends events down?

The Dollar Is Not What It Used to Be

Via- The Burning Platform blog

Let Banks Fail!- Dr. David Howden

From the Mises Institute

The Dollar Rally Won't Give Up the Ghost

The rally in the dollar just won't give it up.

This is as the many of the technical measures are flattening on the momentum side, and have been, while flashing the recent price rise has moved to more extreme levels relative to the recent past. However, this move in the dollar makes sense in regards to the analogy of saying the ugly sister looks beautiful relative to her even worse off siblings. Just look at the price trends of the British Pound, the Euro, and the Yen.




A virtual litany of who's-who in money printing and currency debasement. By proxy, and despite the unlikely event the Fed will reduce an overly bloated balance sheet that stands leveraged over 50-to-1, the dollar is the winner. When seeing this dynamic, I am reminded of comments from many Austrians For instance, like the comments from Jim Roger's below. 

“Brazil, China and Russia could easily put something together to compete with the US dollar,” Rogers said, leaving out one component of the BRICs alliance. “The US dollar is a terribly flawed currency. I’m an American. I hate to say that. But the US has serious problems, the world has serious problems. We need something else” and potentially a competing world currency could be developed. If this were to occur, the US and its economy might be put in a straight jacket as the ability to engage in large deficit spending could be curtailed." 

For now, the ugly sister that is the dollar is winning, but that does not make her pretty.

An Argument for Behavioral Finance/Contrarian Investing

I was reading this article from the WSJ earlier today and it provides a very good, indirect argument for contrarian investing.

It happened last Sunday at football stadiums around the country. Suddenly, 50,000 individuals became a single unit, almost a single mind, focused intently on what was happening on the field—that particular touchdown grab or dive into the end zone. Somehow, virtually simultaneously, each of those 50,000 people tuned into what the other 49,999 were looking at. 

Becoming part of a crowd can be exhilarating or terrifying: The same mechanisms that make people fans can just as easily make them fanatics. And throughout human history we have constructed institutions that provide that dangerous, enthralling thrill. The Coliseum that hosts my local Oakland Raiders is, after all, just a modern knockoff of the massive theater that housed Roman crowds cheering their favorite gladiators 2,000 years ago.
(For Oakland fans, like my family, it's particularly clear that participating in the Raider Nation is responsible for much of the games' appeal—it certainly isn't the generally pathetic football.)

In fact, recent studies suggest that our sensitivity to crowds is built into our perceptual system and operates in a remarkably swift and automatic way. In a 2012 paper in the Proceedings of the National Academy of Sciences, A.C. Gallup, then at Princeton University, and colleagues looked at the crowds that gather in shopping centers and train stations.

Other social animals have dedicated brain mechanisms for coordinating their action—that's what's behind the graceful rhythms of a flock of birds or a school of fish. It may be hard to think of the eccentric, gothic pirates of Oakland's Raider Nation in the same way. A fan I know says that going to a game is like being plunged into an unusually friendly and cooperative postapocalyptic dystopia—a marijuana-mellowed Mad Max. 

The remainder can be found here.

Fed Haters vs. Fed Cheerleaders

I am siding the with Austrians on this debate.

How to Stay Disciplined in Investing

Some great advice here. Jives with an article I was reading earlier today about crowd following.