U.S. Monetary Policy that Encourages Malinvestment

By: Richard_Daughty

Thorsten Polleit, of the Frankfurt School of Finance & Management, penned an article in The Free Market newsletter of the Ludwig von Mises Institute titled "The Many Names for Money Creation."

It starts off almost humorous, reading more like an interesting, mood-lightening sidebar to a banner article titled "We're Freaking Doomed (WFD)!" as he notes that the dire economic conditions are such that "euphemisms have risen to great prominence. This holds true in particular for monetary policy experts, who are at great pains to advertise a variety of policy measures as being in the interest of the greater good, because they are supposed to 'fight' the credit crisis."

He then illustrates how the term "unconventional monetary policy" is meant to convey the happy virtues of "courageous and innovative", as opposed to the bad old "conventional" monetary policy, which is now "outdated."

In a similar vein, he notes that "Aggressive monetary policy" is meant to signify "bold and daring action for the greater good," and "quantitative easing" is just a confusing term used to make it difficult for people to see "what such a monetary policy really is - namely, a policy of increasing the money supply (out of thin air), which, in turn, is equal to a monetary policy of inflation."

A policy of inflation! Yikes! What was in that article "We're Freaking Doomed (WFD)!"?

From the perspective of the Austrian school of economics (the only true economic theory!), this is not going to be the ordinary kind of inflation, either, but the really nasty, evil kind, where "monetary policy pushes the market rate of interest below the natural rate of interest (the societal time-preference rate), thereby necessarily causing malinvestment rather than ushering in an economic recovery."

In other words, the Fed and the government are making it worse.

And if you want to know about malinvestment, then ask my boss, who never tires of telling me that I am the only employee, alone, apparently in the whole freaking history of employees, that has a consistent negative value to the company, meaning that the bottom-line of the company would be immediately improved if I was, to coin a rhyme, removed.

So I asked her, "What's with that 'improved if I was removed' stuff?" to which she asked, "What are you talking about? You are the one that said that in the previous paragraph, you moron!" to which I asked, "What?" and then she asked, "What?" and then we just looked at each other, confused as hell.

There was an awkward silence, as I struggled as if I was in some weird parallel universe, since her point was that she is, only now, realizing that I am, as an employee, a huge mal-investment, but I can't be fired since I am too old and too savvy not to sue the hell out of all of them for my termination, even though their case is air-tight and I should have been fired long ago.

And, as I never cease saying, some other, much worse mal-investments, such as the stock market bubbles, and the bond market bubbles, and the derivatives bubbles, and the debt bubbles, and the housing bubbles, and the bubbles in the sheer, staggering size of governments, were NOT my fault, but are all the fault of the Federal Reserve creating the money that made it all possible

Now, as if playing right into my hands, Mr. Polleit writes, "Sooner or later the dependence of the people on government handouts reaches, and then surpasses, a critical level," which I assume we have reached.

The worse news is that he figures that "People will then view a monetary policy of ever-greater increases in the money supply as being more favorable than government defaulting on its debt, which would wipe out any hope of receiving benefits from government in the future."

The terrifying point of all of this is when he writes, ominously, "In other words, a policy of inflation, even hyperinflation, will be seen as the policy of lesser evil." Hyperinflation! Gaaahhh!

Hyperinflation! Immediately, I go into We're Freaking Doomed (WFD) mode, which usually involves a lot of hyperventilating and a feeling of panic until I realize that all I have to do is buy gold and silver to keep what is going to happen to everyone else from happening to me, and make a lot of dollars in the process, which always makes me feel better, leading to euphoria, as in, "Whee! This investing stuff is easy!"

See the original article >>

Gold and Silver Correction Ending

By: Mike_Paulenoff

Although gold and silver have yet to show much, if any, upside volatility amidst the Japan crisis, the patterns carved out during the past several sessions strongly suggest corrections are ending and new uplegs about to emerge.

Given the uncertain and chaotic environment in the financial markets, this move could be powerfully higher -- towards $1525 in gold and $40.00 in silver -- against a backdrop of a rising euro/USD (falling US Dollar). ETFs that would be benefit include the SPDR Gold Shares (GLD) and iShares Silver Trust (SLV).

See the original article >>

Time for More QE?

By: Guy_Lerner

We have heard it all before. The market is going up because of QE2. The Fed has got your back. And yes, from early November to mid- February that is all the market did -- it went up. But a funny thing happened along the way -- just when investors got comfortable with the idea of a sure thing -- somebody or something pulled the rug out from underneath them. And oh my goodness, the SP500 is down a whopping 5% from its highs. Ruin!!

And QE2 still continues. So was the reason the market went up in the first place --i.e., QE2 -- the real reason? Or were gains driven by the usual mis-placed perceptions and psychology? If the market continues lower despite QE2, I guess investors will need to reassess their notion about QE2 and possibly QE3.

So how good has QE2 been? Looking at a daily chart of the QQQQ (figure 1), we note that yesterday's lows were in right at the November breakout point that lead to 55 day speculative rip higher that was fueled by never ending QE2 and Fed support for the market. Our virtuous cycle isn't virtuous at all as stock prices are nearly back to the levels when the asset purchase program started.

Figure 1. QQQQ/ daily 

So I guess QE2 hasn't been that good. Stocks haven't gone anywhere. Yields aren't lower. The housing market isn't better. The labor market isn't better. Inflationary pressures are starting to percolate under the surface.

Ahh, but in bureaucratic speak we can only imagine how terrible things would really be if we didn't have QE2. Thus we can spin QE2 as an unqualified success.

And so what is our response to all the recent ills afflicting this market? Of course, more intervention.

This is all you hear these days in response to a lower market or market that isn't doing what the "authorities" want it to do: intervention. The Yen is up (and not doing what we want it to do), so let's intervene. The markets are off their highs, so the G7 should discuss ways to prop up the markets. Stocks are opening lower because of the problems in Japan, and one well known TV commentator pondered if the Fed should signal its intention to intervene and support the markets if needed. And on and on.

Where is the free market? And shame on those who call themselves capitalists yet expect continued intervention.

And remember, the SP500 is only off its highs by about 5%. I cannot wait to hear the clamor if the markets slip another 5%.

See the original article >>

Japanese Banking Crisis is Inevitable Despite G7 Currency Market Intervention

By: Money_Morning

Keith Fitz-Gerald writes: The United States and Canada today (Friday) joined other Group of Seven (G-7) nations to intervene as a means of weakening the Japanese yen in an effort to help Japan deal with last week's catastrophic earthquake and tsunami.

This G-7 intervention is a substantial development, although there are precious few details, since none of the world's central bankers (a list that includes the U.S. Federal Reserve) have commented on exactly what "intervention" entails.

Nor have they identified what currencies will be involved.

I believe the G-7 leaders are underestimating the implications of their actions. For starters, there will be Japanese banking failures - caused by the simple fact that huge numbers of people who lost everything and weren't insured (and whose places of employment may have been washed away, as well) won't be able to pay their mortgages, their credit card bills, or their car payments.

There will also be a group of folks who simply won't pay - with a backdrop of uncertainty of this magnitude, they either want, or need, to hold onto every single yen they can in order to survive. I cannot fault them one bit.

Such realities almost certainly will result in Japanese banks writing down or writing off segments of their loan portfolios, either this year or next (at the very latest).

In other words, I'm predicting a Japanese banking crisis - something the central bankers aren't even contemplating right now.

I also believe the very fact that the G-7 had to step in (presumably because the Japanese government, with debt already at 225% of gross domestic product (GDP) before the earthquake, couldn't pull it off alone) means things are much worse (in terms of the world's financial system) than we are being led to believe.

The bottom line: Japan's financial system may crash when the capital inflows that everybody (including the G-7) is now counting on stop - as they ultimately have to. History shows that interventions can only last for so long.

Doubling losses in the Japanese markets from here is not inconceivable and investors must be prepared for that possibility.

Needless to say, that kind of scenario has major implications for global markets, including our own - the most likely of which is a dawning realization that central bankers cannot manipulate currencies and economies the way you turn a thermostat up or down to control the temperature in your home.

By intervening repeatedly - as they have throughout our own financial crisis, throughout the European Union's banking disaster, and now in post-quake Japan - those central bankers are solving short-term problems, to be sure.

However, by removing risk and failure from the marketplace, they are also perpetuating the illusion that they are in control.

If there is ever a situation where I hope I am wrong, this is it.

Here's the rub ... I do not believe that politicians anywhere in the world understand this, which is why their collective strategy of postponement is being conducted in the hope that time will cure all and eventually bail them out.

The only effective discipline will be defaults, as lenders are held accountable for the speculative madness they have engendered. And the only question is when.

In the meantime, there are plenty of opportunities for those investors willing to take a hardnosed look at the world today ... warts and all.

See the original article >>

What the Jump in Global Markets Volatility Means?

By: Julian_DW_Phillips

After the earthquake and Tsunami wreaked horrendous damage in Japan and was blamed for huge drops in equity and other markets, extreme volatility was the best description of most global markets for this last week. The media even blamed the nuclear threat in Japan for the fall in the Dow Jones in the U.S. Clearly, this was not the case, but the extreme nature of the volatility has raised large questions as to what really is going on globally. To see why there is such high volatility over global markets we have to stand back so as to see the full picture.

The U.S. economic scene

Putting the Japanese tragedy to one side and looking at it simply as part of the trigger to the volatility, we have to look at the situation in the U.S. financial markets. Inflation, from food and energy, has risen sharply all over the world. Yes, there is a need to tackle it, but the tools required for the task work in healthy economic climates only.

The U.S. recovery is limping along at best. Housing starts for February dropped 22.5% against a rise of 18% in the previous month, undermining confidence that was in the recovery picking up momentum. So the Fed was right to hold interest rates at their lows and indicate they are continuing to use Q.E. There is a need to combat inflation with higher interest rates but not to combat food and energy inflation. In themselves this type of inflation reduces funds available for spending in other areas and would not be affected by higher rates. So, real interest rates drop further into negative territory, while growth is further undermined. In turn, such a picture points to overvaluations in equity markets. There is every reason to believe that the best current investment is cash in one form or another. With the bond markets overpriced and the prospect of further quantitative easing possible after June to prevent any threat of deflation as growth stumbles even more, the buying power of the dollar, both locally and internationally, is set to decline further. This seems also to be the future of the dollar exchange rate.

At the moment markets are tipping over into negative territory and providing an underlying reason why markets are now vulnerable to heavy volatility.

With the wide ability, at low cost, to leverage investor positions the system of 'stop losses', so important for limiting losses are also volatility precipitants. With a proliferation of day traders in most markets from equity to currencies and beyond, any market condition that produces uncertainty or fear, will become volatile quicker and deeper than were such leverage not so freely available.

In an investment climate that is essentially parochial in the States confidence in the system is higher than in nations who have a less uncomplicated past. In these countries you will find far less confidence in financial systems or in the governments of those nations, so volatility may be sharp but more easily reversed when the emotions drain away.

The state of the developed world

Since the start of the developed world's financial crisis in 2007 we have seen a deepening and widening of the maladies of the financial system there. As with the degeneration of a healthy man into sickness and weakness, the emotions claim a growing percentage of his mind and the vigorous health of the man sinks into declining confidence and fears of what lies ahead. The Eurozone debt crisis, the coming debt crises within the U.S. states and government, the limpness of the economic recovery are similar in nature to that ailing man. That's where we are today.

In fact, the way fear and volatility washed over the developed world's markets on the news of the Japanese woes was symptomatic of the condition of the developed world. That condition will remain even as Japan recovers into the growth of its ravaged areas. The indebtedness of Japan before the crisis and its growing debt afterwards will weaken the Yen promote Japanese exports and produce a level of growth not seen in the developed world for some years now.

Looking ahead to the rest of 2011 and into 2012, we expect the condition of the developed world to ensure that the new crises that are certain to arise will barge into one another making them worse still. The market reactions will continue to reflect the sort of volatility we have seen in the last week. Where real cause for weakness is found we have no doubt that markets will continue to overreact and possibly that overreaction will cause fundamental damage in itself.

We are in a financial winter of a destructive nature. Unfortunately the systems of the developed world are not designed or inclined to the deep reformation needed to bring an economic health, vigor and stability needed to put the developed world onto a long lasting growth path that we all had hoped for.

See the original article >>

Welcome to Volatility

By: Alan Brugler

Traditionally, futures volatility is tied to the growing season, at least in the grains. When things are in the bin or the bag, say November to February, price volatility has typically been at the lowest levels of the year. It picks up during the growing season. If that is the case this year, things are going to get REALLY crazy. Implied volatility in corn peaked at 45% this past week, the highest reading since last October. In March of 2010, it was only around 31%. Cotton implied volatility has been around 60% since mid-February, so corn is still comparatively quiet compared to what COULD happen. Past performance is, of course, not necessarily indicative of future results.

 

Corn prices were 19 cents per bushel higher on Friday night than they were the previous Friday. That would have surprised a lot of folks if you told them you expected that outcome on Tuesday. Low prices cure low prices, and some buyers just couldn’t wait any longer to take advantage of the drop since the beginning of the month. South Korea came in, there were rumors of Chinese buying interest, and the USDA confirmed stronger than expected sales were made in the week ending March 4 at 1.337 MMT (52.6 million bushels) of combined old and new crop sales. A private forecasting firm on Friday projected 2011 corn plantings in the US at 91.758 million acres, regarded as a neutral number.  

 

The soybean complex was mixed. While energy was still a popular topic, it was of the nuclear persuasion. Crude oil kept hanging around $100, but that wasn’t enough to get soy oil higher for the week. Soy meal rallied, pulled higher by corn and the other feed grains. Weekly export sales for soybeans were disappointing, but some firms lowered their projected Brazilian production to 69-70 MMT due to quality problems caused by ongoing heavy rains. China announced the third increase since January 1 in the bank reserve requirements, in another attempt to slow inflation. That didn’t appear to have any impact on the soybean market there, or here. A private forecasting firm estimated soybean acreage this spring will be only 75.269 million bushels. Futures prices did not appear to react to the news, probably because it has been assumed that corn picked up intentions at the expense of beans based on the $6.01 per bushel revenue insurance guarantee price.

 

Wheat futures saw the steep slide grind to a halt and a little bit of a bounce unfold. Prices were up anywhere from .59% to 2.46%. KC was in the bullish lead, thanks to ongoing crop problems in TX and OK that will likely mean some wheat being ripped up and replaced with cotton or milo. HRW wheat also has been in demand for export. Gains were slowed a little by Japan worries, with the MOA buying only about a third of its normal weekly tender, and all of that coming from Canada.

 

Cotton futures continued to be plagued by limit moves almost day, in both directions. Despite the increase in allowable daily moves to 700 points per day, the market appeared to want to be even more volatile. Prices lost 2.8% for the week, but that camouflaged a couple limit up days at the end of the week in the front month futures. Weekly export sales were larger than expected on Thursday morning, which helped boost prices. Dryness continues to plague a swath of the southern cotton belt.

 

Here are the Friday night closes for the past four weeks, along with the net change for this week vs. the previous week:

 

	Commodity					Weekly	Weekly
Month		02/25/11	03/04/11	03/11/11	03/18/11	Change	% Change
May	Corn	$7.22	$7.28	$6.64	$6.84	0.19	2.90%
May	CBOT Wheat	$8.11	$8.32	$7.19	$7.23	0.04	0.59%
May	KCBT Wheat	$8.99	$9.29	$8.23	$8.43	0.20	2.46%
May	MGEX Wheat	$9.29	$9.65	$8.59	$8.68	0.09	1.05%
May	Soybeans	$13.75	$14.14	$13.35	$13.63	0.28	2.10%
May	Soybean Meal	$364.70	$369.70	$350.00	$367.90	17.90	5.11%
May	Soybean Oil	$57.58	$59.48	$55.90	$55.77	0.13	0.23%
Apr	Live Cattle	$114.10	$114.05	$117.13	$111.65	5.47	4.67%
Mar	Feeder Cattle	$129.83	$129.95	$131.55	$128.00	3.55	2.70%
April	Lean Hogs	$90.20	$88.48	$88.15	$88.33	0.17	0.20%
May	Cotton	$184.23	$212.80	$204.94	$199.12	5.82	2.84%
May	Oats	$3.79	$3.90	$3.51	$3.52	0.02	0.43%
May	Rice	$14.31	$14.19	$13.01	$13.64	0.63	4.80%

 

Cattle futures were the biggest loser, sinking 4.67% for the week. Cash cattle prices surged to $118 the previous week from $114, an unusually large jump. They went back where they came from this past week, taking futures with them, and then some. Heavy speculative selling took the spot April $2 past the cash market, trying to anticipate further weakness next week. The wholesale market was up more than 5% for the week, but still comfortably below the 2003 peak. The Friday afternoon Cattle on Feed report was neutral, with March 1 numbers 105% of year ago. While that is yet another month of expansion, it matched the average trade guess exactly. Marketings were on the high side of guesses, while placements were also a little larger.

 

Hog futures eked out a 17 cent gain for the week. Japan’s woes translated into opportunity, with losses of refrigeration and disruptions of slaughter and feeding programs there. They were thought to want more packaged pork products for immediate shipment. On a Thursday/Thursday basis, the pork cutout value was up 1%, or about 9.4 cents per pound. That is a reflection of wholesale demand vs. supply. The preliminary estimate for weekly pork production was down 0.7% from the prior week, but production since January 1 is still about 0.8% larger.

 

Market Watch:  Spring has sprung, or at least it will officially be Spring when traders get back to work on Sunday evening. They will initially be reacting to Friday’s Cattle on Feed report. Livestock reports will be featured this week, with the monthly Cold Storage report due out on Tuesday afternoon, and the quarterly USDA Hogs & Pigs report coming out on Friday afternoon. The Census Crush report will be on Thursday morning, along with Census Cotton Consumption and USDA weekly Export Sales. Friday will also mark the last trading day for April grain options.

See the original article >>