Thursday 2 April 2015

Did The Fed Ring A Bell.



Baltic Dry Index. 596 -06     Brent Crude 56.77

LIR Gold Target in 2019: $30,000.  Revised due to QE programs.

The world is a place that’s gone from being flat to round to crooked.

Mad Magazine.

We end for Holy Week returning to the Fed. Did the Fed send a clear signal last week that the next interest rate move is up, and it’s likely sooner than the stock and bond markets anticipate? To this old dinosaur trader in faraway London, they sent nt one, not two, but three clear signals that whatever the state of the US and global economy they intend to raise their key interest rate by a quarter of one percent. Ordinarily such a tiny move from zero would be meaningless. But in today’s central bankster orchestrated, crony casino gambling world of debt fuelled  stock buybacks and hedgies and pension funds buying up bonds with negative interest rates, we’re not in any ordinary world.

We long ago left “orthodoxy” for an uncertain dodgy world of scripted, leveraged malinvestment. The Great Nixonian Error of fiat money has long been drinking in the last chance saloon. Now events are about to overwhelm it. We have one last chance to take out gold and silver insurance. Whatever the outcome, the Fed has signalled it’s going to pull the trigger on unorthodox measures. The trouble for the Fed, is that in the Great Disconnect between the Squids and Main Street, no one on Wall Street believes them.

Yellen’s new argument on rates leaves inventor scratching his head

Published: Mar 30, 2015 4:15 p.m. ET
WASHINGTON (MarketWatch) — Federal Reserve Chairwoman Janet Yellen last week took a new argument for low rate policy for a spin, but a leading monetary policy academic thinks her theory isn’t ready for prime time.

The debate is pretty “textbook-y” to use a phase from former Fed Chairman Ben Bernanke’s new blog, but it does have a lot to do with the central question of how high and fast the Fed will raise interest rates in this cycle.

For decades, the Fed has used a simple monetary policy rule, design by Stanford Economist John Taylor, to help them decide when to raise interest rates.

At the moment, the classic Taylor rule calls for interest rates to be well above zero. Paul Ashworth, chief economist at Capital Economics, says the standard rule would put rates close to 3% now and 4% by 2017.

But , in a speech last Friday, Yellen said that “under assumptions that I consider more realistic under present circumstances, the same rules call for the federal funds rate to be close to zero.”

By coincidence, Bernanke used his new blog post to argue that the equilibrium rate was now much lower.

Yellen’s argument raised Taylor’s eyebrows, to say the least.

What changed?

Taylor pointed out in a blog post that Yellen simply made an assumption that the “equilibrium interest rate,” the rate assumed to be needed to get rates up to full employment was now zero, instead of Taylor’s estimate of 2%.

“Little or no rationale is given for slashing the equilibrium interest rate from 2% percent to 0%,” Taylor said.

In a footnote in her speech blog post, Yellen simply said “some statistical models suggest” the lower rate.

“In my view, there is little evidence supporting it, but this is a huge controversial issue, deserving a lot of explanation and research which I hope the Fed is doing or planning to do,” Taylor replied.

Ashworth said he also did not agree with Yellen’s assertion that the equilibrium rate is now as low as zero.

”We expect the fed funds rate to end 2016 at more than 2.5%,” he said.

Recently, Senate Banking Committee chairman Richard Shelby publicly floated the idea of putting Taylor, who has been a big critic of the Fed’s bond-buying, on the Fed policy committee.

What could possibly go wrong?

Junk Jumpers – the Era of Return-Free Risk

by Pater Tenebrarum • 
In one of those markets definitely not distorted by central bank policy (see “Bernanke’s Apologia” if you’re wondering what that is about), an outbreak of craziness has just been spotted by CNBC. We are informed that investors are “jumping into junk bonds”:

“The supply of U.S. companies with junk-rated debt is rising just as investor demand for higher yields is climbing.

Moody’s reports a two-year high in company debt rated B3 negative or worse—a.k.a. junk—as part of a trend that has seen the list of 184 companies grow by 26 percent over the period. The rise has been led by oil and gas firms, which accounted for 12 of the 28 additions to the junk list in February.

What’s more, the roster would be even longer but for companies falling off the list due to reasons including filing for bankruptcy. Of the 18 issuers no longer rated, 39 percent filed either for bankruptcy protection or “distressed exchange, and 33 percent withdrew, with just 28 percent getting off the list due to upgrades. This is a reversal from the previous two quarters, when most companies left the list via ratings upgrades,” Moody’s said. “If this reversal continues, it could signal tough times ahead for speculative-grade issuers.” Not so far, though.

Fueled by low default rates and generally favorable credit conditions, investors in 2015 have been pouring money into funds that invest in high-yield debt. In fact, the previous six weeks before the most recent week had the highest level of flows to junk funds since the financial crisis in 2008 and 2009, according to Morningstar.

Flows to junk-focused funds have taken in a net $12.2 billion so far in 2015 as part of a broader interest in fixed income amid a turbulent stock market, Bank of America Merrill Lynch reported. In addition to the big cash attraction to junk, high-grade bond funds have seen net inflows of $36.4 billion.
(emphasis added)

The sentence about “companies falling off the list due to bankruptcy” is actually quite funny in this context. This sure hasn’t fazed the herd of greater fools just yet. We already discussed the fact that loan covenants have gone the way of dinosaurs in a previous post, but below is a reminder via the CNBC article. This in turn is enticing soaring issuance of junk debt:
More

Experience is what makes you pause briefly before going ahead and making the same mistake.

Mad Magazine.

At the Comex silver depositories Wednesday final figures were: Registered 70.29 Moz, Eligible 106.36 Moz, Total 176.65 Moz.  

Crooks and Scoundrels Corner

The bent, the seriously bent, and the totally doubled over.

Today, Greece in the dock again. Greece threatens to default to the IMF and then denies it. Bad things happen next. A forced Grexit now looks all too likely.

Greece threatens default as fresh reform bid falters

Creditors likely to continue squeeze on anti-austerity government with IMF payment looming

The Greek government has threatened to default on its loans to the International Monetary Fund, as Athens continued its battle to convince creditors for a fresh injection of bail-out cash.

Greece's interior minister told Germany's Spiegel magazine, his country would not respect a looming €450m loan repayment to the fund on April 9, without a release of much-needed bail-out funds.

"If no money is flowing on April 9, we will first determine the salaries and pensions paid here in Greece and then ask our partners abroad to achieve consensus that we will not pay €450 million to the IMF on time," said Nikos Voutzis.

The cash-strapped government has struggled to keep up with its wage and pensions obligations having agreed a bail-out extension on February 20.

Athens insists it has enough money to last it until the middle of April, but a final agreement on any deal is unlikely to be secured before the end of the month.

A Greek government spokesperson later denied the reports of a deliberate default, saying the country still hoped for a "positive outcome" to its debt negotiations
More

Greek defiance mounts as Alexis Tsipras turns to Russia and China

Alexis Tspiras is playing an escalating game of brinkmanship, trying to force Europe to give ground or risk a chain-reaction that could cripple the EU

Two months of EU bluster and reproof have failed to cow Greece. It is becoming clear that Europe’s creditor powers have misjudged the nature of the Greek crisis and can no longer avoid facing the Morton’s Fork in front of them.

Any deal that goes far enough to assuage Greece’s justly-aggrieved people must automatically blow apart the austerity settlement already fraying in the rest of southern Europe. The necessary concessions would embolden populist defiance in Spain, Portugal and Italy, and bring German euroscepticism to the boil.

Emotional consent for monetary union is ebbing dangerously in Bavaria and most of eastern Germany, even if formulaic surveys do not fully catch the strength of the undercurrents.

This week's resignation of Bavarian MP Peter Gauweiler over Greece’s bail-out extension can, of course, be over-played. He has long been a foe of EMU. But his protest is unquestionably a warning shot for Angela Merkel's political family.

Mr Gauweiler was made vice-chairman of Bavaria's Social Christians (CSU) in 2013 for the express purpose of shoring up the party's eurosceptic wing and heading off threats from the anti-euro Alternative fur Deutschland (AfD).

Yet if the EMU powers persist mechanically with their stale demands - even reverting to terms that the previous pro-EMU government in Athens rejected in December - they risk setting off a political chain-reaction that can only eviscerate the EU Project as a motivating ideology in Europe.

Jean-Claude Juncker, the European Commission’s chief, understands the risk perfectly, warning anybody who will listen that Grexit would lead to an “irreparable loss of global prestige for the whole EU” and crystallize Europe’s final fall from grace.

-----Forced Grexit would entrench a pervasive suspicion that EU bodies are ultimately agents of creditor enforcement. It would expose the Project’s post-war creed of solidarity as so much humbug.

Willem Buiter, Citigroup’s chief economist, warns that Greece faces an “economic show of horrors” if it returns to the drachma, but it will not be a pleasant affair for Europe either. “Monetary union is meant to be unbreakable and irrevocable. If it is broken, and if it is revoked, the question will arise over which country is next,” he said.
More

"As fewer and fewer people have confidence in paper as a store of value, the price of gold will continue to rise. The history of fiat money is little more than a register of monetary follies and inflations. Our present age merely affords another entry in this dismal register."

Hans F. Sennholz

Have a Great Easter break everyone.

The monthly Coppock Indicators finished March

DJIA: +118 Down. NASDAQ: +209 Down. SP500: +161 Down.  

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