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Signs of the Times
"FOMC is
probably the most academically driven in history."
~ Dallas Fed
President, Richard Fisher, December 14
He was,
again, commenting on Fed policy and if you think it is Fed-Speak for
"dangerously impractical", you're right. He continued with:
"We're going
to have an engorged balance sheet and we may never be able to leave this
position. We are at risk of what I call a 'Hotel California' monetary policy,
going back to the Eagles song which is, you can check-out any time you want,
but you can't leave."
The old
saying is "Never fight the Fed", but what do you do when the Fed is
fighting itself?
"The
biggest year for debt backed by leveraged loans since the peak in 2007 will
be eclipsed in 2013."
~ Bloomberg,
December 12
"Spanish
regional governments have accumulated EU13 billion
of unpaid supplier bills in the first nine months of the year."
~ Bloomberg,
December 12
"Mohammad
Safi, a graduate of a medical school in Afghanistan, began working as
psychologist at a California mental hospital, making $90,680 in his first six
months. Last year, he took home $822,302, all of it paid by taxpayers. A
court forced the state to improve inmate care, forcing a bidding war."
~ Bloomberg,
December 12
Perspective
It seems to
be time to recall some comments on financial manias by Ludwig von Mises:
"There
is no means of avoiding the final collapse of a boom brought about by credit
expansion. The alternative is only whether the crisis should come sooner as a
result of voluntary abandonment of further credit expansion, or later as a
final and total catastrophe of the currency system involved."
It is a valid
assessment, but the last line should end with catastrophe of the credit
system.
That would be
the next step in our post-bubble contraction.
Essentially,
Richard Fisher is boldly making sense in a world of wild policymakers.
Benjamin
Anderson was an economist who wrote a monthly comment when he was with Chase
National Bank during the "Roaring Twenties". While many were not
fully aware of what was going on, Anderson got it right.
Will the next
liquidity crisis arrive "sooner....or later"?
Will it be
triggered by central bank decision, or by market forces?
Credit Markets
As the saying
goes, "Credit is money of the mind". In the early 1900s, J.P.
Morgan said that he would make a loan to a man, based solely on strength of
character. Showing less discrimination, the Fed has been able to "create
it out of thin air". More lately, Bernanke has the ability to
"throw it out of helicopters".
However,
another old saying may apply "Credit is suspicion asleep".
Essentially,
the two older observations represent generations of financial wisdom -
learned the hard way. As the term implies, credit markets are market driven.
And we have noting that the no matter how intense the
current central bank experiment has become it will not be successful.
The harder the push now, the more severe the pushback.
In the
meantime, while we've been complacent about corporate bonds there has been a couple of reversals. After reaching an
exceptional oversold, the Ted-Spread has taken a turn to widening. We don't
know how significant this is. With T-bill rates at almost zero a few ticks
one way or the other can change the yield ratio between bill and the euro
rates by an impressive amount. Especially when the Libor rate shows little
change.
We're not
sure if it really means anything, but the trend has changed.
It could have
something to do with the latest Fed folly. The policy of selling bills to buy
bonds (a ploy called Operation Twist) was changed in favor of buying bonds
and not selling bills. Just buy everything, other than bills!
Fiduciary
responsibility has been displaced by academic theories.
Over in the
municipals, the MUB soared up to the most overbought since September 2010 -
just before that mini-panic. The price plunged from 99.4 to 90. This time
around the plunge from the end of November was fast and amounted to only five
points.
A December 12
news report of a downgrade for Illinois from stable to negative might have
helped the slide. Oversold now, stability should follow.
Credit
markets will remain fascinating until the bubble bursts. The usual technical
tools have anticipated modest moves when bigger ones seem possible.
Commodities
Last week, we
noted that the stair-step decline in agricultural commodities was approaching
an oversold condition. The GKX has continued its decline from 470 last week
to 450. At the high of 533 in the July drought concerns, the daily RSI topped
at 75, it is now at 28.
Stability is
just around the corner.
The
interesting thing is that this sector is indicating that, so far as inflation
goes, the Fed just can't the some old "bang for the buck" that they
could in the 1970s. Much of the inflationary stimulus has been going into the
bond markets.
Coming out of
the early November low, base metals enjoyed a decent rally. Last week we
reviewed out position for a rally into January. The conclusion was that while
the RSI was approaching an overbought, it was time to "declare a
victory" and have some Christmas Punch.
Last week's
high was 397 and now it is at 382. There is support at the 375 to 380 level.
Overall, the
CRB and crude are at neutral momentum and could trade in a range over the
next six weeks.
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