Media Abuzz with Prospective QEs (by the FED and the ECB)

Speaking of central banks determining market actions, it would seem that the mainstream (media, investors, academe, institutional analysts and other market participants) has been all over calling for the next wave of interventions.

From the Newsmax

Consensus is building fast that the Federal Reserve will roll out a third round of quantitative easing, possibly as high as $1 trillion and likely by the end of January, economists say.

The Fed has already carried out two rounds of quantitative easing, in which it buys assets from banks with freshly printed money with the aim of steering the economy away from deflation and contraction.

The Federal Open Market Committee, which sets monetary policy, meets next Tuesday and Wednesday and a decision could come then.

While improving economic indicators had many believing a third round, known as QE3 wouldn't be necessary, a slumping housing sector and the onset of recession in Europe may prove otherwise.

I know, there has been a lot of talk of QE3.0 since the last semester of 2010, but an official QE 3.0 has yet to be announced.

Yet as I keep pointing out, QE 3.0 has already been happening, as the Federal Reserve’s balance sheet began expanding at the start of last December. Perhaps this could be part of the backdoor bailout of the Eurozone being conducted via foreign exchange swaps between the ECB and the US Federal Reserve.

The resonant call for more interventionism has been the same in the Eurozone.

From Bloomberg,

European banks, shunned by investors and each other, may borrow as much next month from the European Central Bank as they did in a record offering in December as they seek refuge from frozen funding markets.

The ECB last month lent banks an unprecedented 489 billion euros ($637 billion) for three years. Analysts said they expect demand to be just as high at a second auction on Feb. 29 because the stigma associated with using the facility is dissipating and the list of what assets can be used as collateral in exchange for the loans will be extended. ECB President Mario Draghi said last week he expects demand for loans next month to be “still very high,” though “probably lower than in December.”

“February’s second three-year Long Term Refinancing Operation looks set to be extremely large,” Credit Suisse Group AG analysts led by William Porter wrote in a report to clients. “The last LTRO has removed any stigma, making managements who do not exploit the value on offer arguably careless at best.”

The ECB is flooding the banking system with cheap money in a bid to avert a credit crunch after the market for unsecured bank debt seized up and funding from U.S. money markets dries up. Politicians, including French President Nicolas Sarkozy, are pushing the banks to use the loans, which carry an interest rate of 1 percent, to buy higher-yielding southern European sovereign debt, thereby forcing down borrowing costs in the region.

The actions of central bank have consequences. Money printed from thin air will find their way into the markets and the economy on a distinct level and timing of impact. And making comparisons with any recent historical accounts are unjustified for the simple reason that the current wave of central bank interventions has been unprecedented.

As the great Ludwig von Mises explained in Theory of Money and Credit, (bold emphasis mine)

A government always finds itself obliged to resort to inflationary measures when it cannot negotiate loans and dare not levy taxes, because it has reason to fear that it will forfeit approval of the policy it is following if it reveals too soon the financial and general economic consequences of that policy. Thus inflation becomes the most important psychological resource of any economic policy whose consequences have to be concealed; and so in this sense it can be called an instrument of unpopular, i.e., of antidemocratic, policy, since by misleading public opinion it makes possible the continued existence of a system of government that would have no hope of the consent of the people if the circumstances were clearly laid before them. That is the political function of inflation. It explains why inflation has always been an important resource of policies of war and revolution and why we also find it in the service of socialism. When governments do not think it necessary to accommodate their expenditure to their revenue and arrogate to themselves the right of making up the deficit by issuing notes, their ideology is merely a disguised absolutism.

And part of the communications tool used by central banks to manage inflation expectations is called signaling channel. Hence we are currently being conditioned to accept inflationism as the only viable recourse to the present dilemma.

Banking Cartel Pressures ECB to Expand QE

The banking cartel lobbies the European Central Bank [ECB] to engage in more Quantitative Easing [QE] or asset purchases by central banks funded by “money from thin air”

Here is the Wall Street Journal Blog,

The banking sector’s international lobbying group on Wednesday joined the campaign to boost the European Central Bank‘s role in the euro-zone rescue, calling for the ECB to backstop struggling bond markets while the currency bloc implements its latest debt deal.

The comments by the Washington-based Institute of International Finance, which represents more than 450 financial institutions in 70 countries, add another major voice for a heightened ECB role despite concerns from some European officials — particularly in Germany — about the central bank’s bond purchases.

As Europe develops details around its new debt deal, “it is essential that all parties come together behind the continued active role of the ECB in the secondary government bond market,” IIF Managing Director Charles Dallara wrote in a letter to officials from the Group of 20 industrial and developing economies meeting in Cannes, France, this week. “This will allow time for national authorities’ adjustment efforts to take hold, and help stabilize markets at this crucial juncture.”

The ECB’s new president, Mario Draghi, who took his post Tuesday, faces the question of whether to continue or increase ECB purchases of Italian government debt to push yields lower. The ECB has bought an estimated 70 billion euros in Italian debt since August, but that hasn’t been enough to keep the 10-year yield on Italian debt below 6%.

Direct lobbying might not be enough though. A wider range of publicity tools would be required to justify these actions to the public, especially given the du jour populist demonstrations

So the politically embattled banking and finance sector would have to employ the same set of tools used by central banks to manipulate the public’s expectations—signaling channel (a.k.a propaganda).

And a lot of these will come from the academe or from the mainstream media.

An example of which is an excerpt from a recent article of Telegraph’s Ambrose Pritchard Evans, who uses the stereotyped deflation bogeyman to argue for more of ECB’s QE.

The two halves are locked together in a broken marriage. To pretend otherwise is no longer responsible. The structural gap cannot be closed by debt-deflation in the South – the current default setting of EU policy. It could arguably be closed if Germany were to let the European Central Bank reflate the whole eurozone system.

Instead, the ECB has done the opposite, opting to blight the chances that Spain might just be able to claw its way back to viability within the constraints of EMU.

Paradoxically, Mr. Evans is a popular columnist whose opinions easily flip-flops, i.e. from mainstream views towards espousing the contrarian [end the Fed] and backsliding again to the mainstream.

Nevertheless I am reminded by the great Murray N. Rothbard who presciently wrote [modifications mine]

An "impartial" Central Bank, on the other hand, driven as it is by the public interest, could and would restrain the banks from their natural narrow and selfish tendency to make profits at the expense of the public weal. The stark fact that it was bankers themselves who were making this argument was supposed to attest to their nobility and altruism.

In fact, as we have seen, the banks desperately desired a Central Bank, not to place fetters on their own natural tendency to inflate, but, on the contrary, to enable them to inflate and expand together without incurring the penalties of market competition. As a lender of last resort, the Central Bank could permit and encourage them to inflate when they would ordinarily have to contract their loans in order to save themselves. In short, the real reason for the adoption of the Federal Reserve European Central Bank [strike through and italic insertion mine], and its promotion by the large banks, was the exact opposite of their loudly trumpeted motivations. Rather than create an institution to curb their own profits on behalf of the public interest, the banks sought a Central Bank to enhance their profits by permitting them to inflate far beyond the bounds set by free-market competition. [bold mine]

Seems like a case of sleeping with the enemy

Ben Bernanke Dangles QE, Redux

Is the public being hypnotized by US Federal Reserve Chairman Ben Bernanke?

I will give you stimulus, I will give you stimulus, I will give you stimulus, I will give you stimulus…

For the umpteenth time, from the Bloomberg, (emphasis added)

Federal Reserve Chairman Ben S. Bernanke said unemployment is still “far too high” and the Fed may take further steps to boost growth, such as buying mortgage bonds or changing the way it communicates its policy goals to the public.

Additional stimulus “remains on the table,” Bernanke said today at a press conference in Washington, declining to specify conditions that would prompt a move. “While we still expect that economic activity and labor market conditions will improve gradually over time, the pace of progress is likely to be frustratingly slow.”

Bernanke spoke after the policy-setting Federal Open Market Committee said the economy picked up in third quarter and repeated its statement from September that there are “significant downside risks” to the outlook. Officials kept policy unchanged, saying they would lengthen the maturity of the Fed’s bond portfolio and hold the benchmark interest rate near zero through at least mid-2013 if unemployment remains high and the inflation outlook is “subdued.”

Bernanke and his colleagues on the panel cut their growth forecasts for 2012 and said unemployment will average 8.5 percent to 8.7 percent in the final three months of next year, up from a prior range of 7.8 percent to 8.2 percent.

“The medium-term outlook relative to our June projections has been downgraded” and “remains unsatisfactory,” Bernanke said. “Unemployment is far too high,” and “I fully sympathize with the notion that the economy is not performing the way we would like.”

Again the repeated dangling of QE 3.0 or additional stimulus, which represent a monetary policy tool used by Central Banks called as 'signaling channel' or as the article implicitly puts it—“changing the way it communicates its policy goals”—have been directed at conditioning or manipulating the public’s expectations.

We are being treated like Pavlov’s dogs. According to Wikipedia on Classical conditioning, Pavlov used a bell to call the dogs to their food and, after a few repetitions, the dogs started to salivate in response to the bell. The dogs are the financial markets, and the ringing bell is the signaling policy used, and the food is the QE 3.0. In essence, the financial markets are being conditioned to be dependent on US Federal Reserve or central bank policies.

Bernanke must be pleased with how equity markets has responded to his communication tool (see above table from Bloomberg), which seem to have neutralized the surprise developments in Greece.

Yet, the constant conditioning being applied to the market is most likely meant not only to project policy “transparency” but also to reduce political opposition to Bernanke’s favorite tool.

With US money supply growth exploding, which may perhaps be indicative of indirect tools being utilized by team Bernanke, QE 3.0 seems no more than a formality.

On the count of three, you will awaken…

Promises of Bailouts: How Sustainable will Positive Market Expectations Be?

The following news account[1] from the Bloomberg on Friday’s discernible jump in the US equity markets reasonably encapsulates what has been driving the global markets for a long time—financial markets highly dependent on political actions.

U.S. stocks advanced, giving the Standard & Poor’s 500 Index its longest streak of weekly gains since February, amid speculation of an agreement to contain Europe’s debt crisis and further Federal Reserve stimulus.

How Strong will the Market’s Expectations be?

So let me play the devil’s advocate: what if the market’s deepening expectations of the political resolutions from the above predicaments does not materialize?

These may come in many forms:

-adapted political actions may be inadequate to satisfy the market’s expectations (possibly from divergences in commitments or the inability to ascertain the optimal adjustments required)

-expected political actions don’t take place (possibly due to schisms or continuing disagreements over the measures or dissensions over the enforceability, degree of participations and or divisions over the efficacy of proposed measures)

-the festering crisis unravels faster than the applied political measures (possibly from miscalculations by the political authorities on the scale of the crisis or from unintended effects of their actions)

-sanguine markets expectations for an immediate resolution erode from either procrastination or persistent irresolution or indecisions (possibly from a combination of the above factors—divergences in calculations, variances in tolerable commitments and doubts on enforcement procedures and dissimilar political interests in dealing with the above junctures or more…)

October 1987 Risk Paradigm

I am in the camp that says that current dynamics suggest that the risks of a US are not as material as many mainstream experts have been projecting. Most of their projections have political implications, the desire for more government interventions.

But there could be a marked difference; stock markets may not be reflective of the actual developments in the real economy. In other words, actions in the stock market may depart from the economy.

Has there been an instance where there had been an adverse reaction to the stock markets from unfulfilled expectations from policymakers which had not been reflected on the economy?

Yes, the global stock market crash of October 19, 1987.

From the US Federal Reserve of Boston[2],

While in hindsight the data provide no evidence that interventions in foreign exchange markets were used to signal policy changes, it is possible that, at the time, market participants interpreted interventions as signals of future policy. If so, significant movements in the exchange rate would be expected at the time of interventions. Central banks actively intervened in foreign exchange markets after the Plaza Accord. Evidence suggests that combined interventions to increase the value of the dollar during this period did result in a significant decline in the deutsche mark/dollar exchange rate. As it became apparent that intervention was not signalling monetary policy changes, market participants apparently stopped interpreting intervention as a signal.

In short, market expectations diverged from the results intended from such political actions.

Many tenuous reasons have been imputed on non-recession stock market crash of 1987. However, the major pillar to this infamous event has been the boom policies of the Plaza Accord of 1985[3] which had been meant to depreciate the US dollar against G-7 economies via coordinated foreign exchange interventions, and the subsequent Louvre Accord of 1987[4], which had been aimed at arresting the decline of the US dollar or the reversal of the policies of Plaza Accord.

What had been initially perceived by policymakers as a US dollar problem, emanating from the advent of globalization, technological advances and the gradual transitory recovery of major Western from the recession of the early 80s, which affected the ‘goods’ side of the global economy, and the increasing financial globalization of the US dollar from the hyperinflationary episodes of some emerging markets (e.g. Latin American Debt Crisis[5]) which affected the ‘money’ side of the global economy, essentially transformed into a problem of policy coordination of interest rates[6] that led to an abrupt tightening of previously loose monetary policies which eventually got vented on global stock markets.

The decline of the trade weighted US dollar (apple green) stoked a boom in the US S&P 500 and similarly on the CRB Precious commodity metals sub-index (red) and an increase in inflation expectations as measured by the 10 year yield of US Treasuries (green). The yield relationship difference between stocks and bonds became unsustainable[7] which consequently culminated with the historic one day decline.

True, the dynamics of 1987 has been starkly different than today. We are experiencing a contiguous banking-welfare based crisis today which had been absent then in 1987.

But one striking similarity is how market expectations, which have been built on political actions, had completely diverged from what had been expected of the directions of policymaking.

Nevertheless the recent temblors experienced by the global financial markets following US Federal Reserve Chair Ben Bernanke’s no ‘QE’ stimulus[8] during last September 21^st resonates on a ‘1987 moment’ but at a much modest scale.

This is NOT to say that another 1987 moment is imminent. Rather, this is to say that the sensitiveness to such market risks increases as political actions meant to resolve on the current issues remain ambiguous or will remain in an indeterminate state.

And this is to further emphasize that while a grand “aggressive” “comprehensive” strategy may forestall any major market convulsion for the moment, they are likely to be temporary measures targeted at buying time for the policymakers from which another crisis would likely unravel in the fullness of time.

For now, it would be best to watch closely on how policymakers will react.

I believe that a monumental buying opportunity may arise soon.

---

[1] Bloomberg.com S&P 500 Caps Longest Weekly Gain Since Feb., October 12, 2011

[2] Klein Michael Rosengen Eric Foreign Exchange Intervention as a Signal of Monetary Policy US Federal Bank of Boston, June 1991

[3] Wikipedia.org Plaza Accord

[4] Wikipedia.org Louvre Accord

[5] Mises Wiki Latin American debt crisis

[6]Ryunoshin Kamikawa The Bubble Economy and the Bank of Japan Osaka University Law Review, 2006 In the U.S., on the other hand, the new FRB Chairman Alan Greenspan raised interest rates in September. However, the dollar depreciated. Then, the U.S. government requested Japan and West Germany to reduce interest rates. Both countries declined and the Bundesbank performed an operation for increasing in the short-term interest rates in the market. Secretary Baker resented this and stated that the U.S. tolerated a weaker dollar on October 16. Investors recognized that this statement meant the failure of international policy coordination and they moved their financial assets out of the U.S. for fear of collapse of the dollar. This caused the heavy fall in the New York Stock Exchange on October 19 (Black Monday). The depreciation of the dollar continued after that and inflated asset prices and bond prices collapsed in the U.S. Then, Secretary Baker persuaded West Germany to lower the short-term interest rates)

[7] Mises Wiki Black Monday (1987)

[8] See Bernanke Jilts Markets on Steroids, Suffers Violent Withdrawal Symptoms September 22, 2011

War on Commodities: US Regulators Approve Derivative Trading Curbs

The relentless politicization of the marketplace continues, with intensifying fixation on commodity trading curbs

From Bloomberg,

The top U.S. derivatives regulators voted 3 to 2 today to curb trading in oil, wheat, gold and other commodities after a boom in raw-materials speculation, record- high prices and years of debate and delay.

The rule has been among the most controversial provisions of the Dodd-Frank financial overhaul, enacted last year, which gave the Commodity Futures Trading Commission the authority to limit trading in over-the-counter commodity swaps as well as exchange-traded futures. The rule will limit the number of contracts a single firm can hold.

“Our duty is to protect both market participants and the American public from fraud, manipulation and other abuses,” Chairman Gary Gensler said at the commission’s meeting in Washington in support of the rule. “Position limits have served since the Commodity Exchange Act passed in 1936 as a tool to curb or prevent excessive speculation that may burden interstate commerce.”

The rule limits traders to 25 percent of deliverable supply in the month nearest to delivery. The spot-month limits apply separately to physically settled and cash-settled contracts. Deliverable supply will be determined by the CFTC in conjunction with the exchanges.

Gas Contracts

Cash-settled natural gas contracts will be subject to a different regime. Traders will be permitted to hold contracts equal to five times deliverable supply in Henry Hub swaps, derivatives that settle in cash instead of the delivery of the underlying commodity. Henry Hub is a natural gas delivery point in Erath, Louisiana, and the benchmark for U.S. futures.

Outside the spot month, the caps limit traders to 10 percent of the first 25,000 contracts of open interest and 2.5 percent thereafter.

“You want speculation or you don’t have any markets,” said Commissioner Bart Chilton in an interview today on Bloomberg TV. “There’s nothing wrong with speculators. It’s when it begins to get excessive. We’ve seen where you can have 30, 35, 40 percent plus in some markets with just one trader holding onto that concentration. That can impact markets.”

The commission estimates that the limits will affect 85 energy traders, 12 metals traders and 84 traders of certain agricultural contracts. The caps will go into effect 60 days after the agency defines the term “swap.” The agency declined to estimate when that will be. Limits outside the spot month are likely to go into effect in late 2012.

Affected Contracts

The limits will apply to 28 physical commodity futures and their financially equivalent swaps including contracts for corn, wheat, soybeans, oats, cotton, oil, heating oil, gasoline, cocoa, milk, sugar, silver, palladium and platinum.

The rule calls for traders to aggregate their positions, a change that may affect large firms with multiple strategies. It also would tighten an exemption allowing so-called bona fide hedgers to exceed the caps.

The new ruling is certainly not about protecting the public from fraud, which has always been used as excuse for interference.

The flurry of various interventions in the commodity spectrum has been directed at controlling prices with the ultimate goal of containing consumer price inflation. This opens the doors to further interventions in the marketplace and the economy which most likely will be channeled through monetary policies.

This has been part of the signaling channel policies designed to manage inflation expectations or to camouflage the untoward effects of current policies.

Again this will likely impact the commodity markets on the short term.

The markets will always find a way to go around or skirt regulations. Price controls or edicts won’t stop the laws of economics, especially from venting on the negative consequences from arbitrary regulations. Price controls only skew the economic balance of these commodities which leads to even more volatility.

The sad thing is that it has been the nature of politics not to penalize authorities or hold them accountable for any failure of their actions. On the other hand, policy failures translates to even more interventions.

China Announces Bank Bailouts

My hunch about China's bursting bubble has been getting some validation.

The Chinese government has announced that it will intervene by buying shares of select banking stocks.

From the Financial Times (bold emphasis added)

The Chinese government will boost its stakes in the country’s largest banks, as it attempts to shore up slumping financial stocks and to restore investor confidence.

Central Huijin, the domestic arm of China’s sovereign wealth fund, will purchase shares in Agricultural Bank of China, Bank of China, China Construction Bank and Industrial and Commercial Bank of China, the official Xinhua news agency announced on Monday. Xinhua added that the purchases by Huijin – its first such public intervention since a similar decision at the onset of the financial crisis three years ago – would “support the healthy operations and development of key state-owned financial institutions and stabilise the share prices of state-owned commercial banks”.

The announcement came too late for the Chinese stock market, which had closed at a 30-month low, but had an immediate effect on late trading in Hong Kong. ICBC’s Hong Kong-listed shares, which had been down 3 per cent, rallied to close up 1 per cent

Beijing also allowed the renminbi to record its biggest one-day gain in years on Monday. It rose 0.6 per cent against the dollar, squeezing traders who have been betting that the currency will weaken in tandem with a slowing economy.

Adding to my earlier commentary, a bust process-in China’s bubble economy or following an earlier money supply growth driven boom-is also a result of a rising yuan.

Corporate finance analyst and author Kel Kelly at the Mises.org provides an eloquent explanation

Therefore, letting its currency rise will cause a recession, since reduced money-supply and credit-growth rates are the usual initiating factors that bring on recessions (reduced rates of spending alone can cause recessions, but they are usually preceded by prior reductions in money and credit). It has been rapid increases in money and credit that have driven the current boom in China, and it will be the reduction in the growth rate of those variables that causes the bust.

The economic boom in China has consisted of rapid increases in true economic growth accompanied by — but not driven by — an increase in monetary spending. The increase in monetary spending, in turn, has been driven by wild credit growth, and has resulted in massive overinvestment in particular industries. There has been no shortage of commentaries and videos highlighting building booms, mania-type herd-mentality home buying, and the mass creation of buildings, shopping malls, and even multiple entire cities in China that stand unoccupied — all dramatic yet classic symptoms of credit bubbles.

So like the Eurozone, we see China’s government providing explicit support by jawboning or providing promises to buttress her banking sector.

However, the problem is that China’s current currency policies appear to contradict this (see chart below from Mr. Kelly).

The left hand does not know what the right hand is doing.

Again, we should see if such guarantees would suffice to forestall a bust or if market forces will continue to put pressure on China’s government, not only to make promises, but to forcefully act.

Very interesting times indeed.

Global Equity Markets: Bottom or Dead Cat’s Bounce?

Fear is the foundation of most governments; but it is so sordid and brutal a passion, and renders men in whose breasts it predominates so stupid and miserable, that Americans will not be likely to approve of any political institution which is founded on it.- John Adams

It’s nice to see global equity markets bounce off newly established lows.

The ASEAN-4, represented by the Philippines (PCOMP-yellow), Thailand (SET-green), Indonesia (JCI-orange) and Malaysia (FBMKLSE-red), once again demonstrating tight correlations of price actions even on a near term or 3 months basis.

Bottom or Dead Cat’s Bounce?

But has the recent lows been indicative of a bottom or has last week’s actions signified a dead cat’s bounce?

First of all, last week’s highly volatile actions in the global equity markets exhibited lucid conditions of boom bust cycles as the market’s principal drivers

This has been especially evident last Tuesday.

As US equity markets encroached on the bear market threshold of 20%, the announcement of the bailout of Belgium’s biggest bank Dexia SA by French and Belgian governments seemed to have spurred a dramatic 4% upside swing on the final hour of trading session where US major equity benchmarks closed significantly higher[1].

This signifies as the second bailout of Dexia SA.

At the height of the maelstrom in 2008, Dexia was the first among the many European banks to fall and subsequently became one of the major borrowers from the US Federal Reserve[2].

The possible implication of this is that the US central bank could be part of the consortium that determines how the bailout will be conducted.

Although current reports say that Drexia would be split into two banks, where one of the banks will hold troubled assets or serve as a ‘bad bank’[3]; there has been no mention of any participation of the US Federal Reserve yet. So this would signify as speculation on my part.

Like Greece, this serves as another example which reveals how bailout policies:

-usually don’t work,

-signify as inefficient approach in rectifying an imbalance,

-account as short term patches that only defers the problem,

-and function like a black hole where scarce economic resources are not only diverted, but drains on the productive sectors which ultimately enfeebles the overall system

Additionally, while credit margins for commodity markets have been serially squeezed, the CME Group, the biggest futures exchange, recently went to the opposite direction for financial securities, where the CME eased credit margins a whopping 33%[4].

This serves as another evidence where indirect market manipulation by policymakers has been biased towards bolstering the financial sector at the expense of the commodity markets.

The S&P 500 closed the week up by 2.12% while the Dow Jones Industrials and the Nasdaq were higher 1.74% and 2.65% respectively.

Technically speaking, the S&P remains below the 50-day and 200-day moving averages which points to the likelihood of a temporary bounce, until proven otherwise.

Yet the rest of the week has been distinguished by an environment directed towards more bailouts.

The Bank of England (BoE) reactivated her version of Quantitave Easing (QE) 2.0[5], whom will be expanding bond purchases to 275 billion pounds ($421 billion) from 200 billion over the next four months.

The BoE, through governor Mervyn King, has preempted European governments. Mr King claimed that this action has been made because they have lost faith in European governments’ ability to resolve the region’s debt crisis[6].

However, in doing so, Mr. King utilized fear anew to justify such interventions.

To quote BoE governor Mervyn King[7]

This is the most serious financial crisis we’ve seen, at least since the 1930s, if not ever. We’re having to deal with very unusual circumstances, but to act calmly to this and to do the right thing

This essentially validates my theory that markets today are increasingly being massaged, not only through direct policies, but through communications management, or technically known as signaling channel[8], in order for the public to politically accommodate on such interventions.

Fear has served as an ever convenient tool to impose political controls over society.

And just hours after the BoE’s move, the European Central Bank (ECB) announced that they will be expanding her coverage of QE or asset purchasing program, by including ‘covered bonds’ or pooled securities backed by mortgages and public sector loans.[9] The ECB will buy 40 billion euros or $53 billion next month.

In addition, the ECB will give banks unlimited access to cash through January 2013 or loans in the duration of 12 and 13-months[10].

Also, speculations had been rife that ‘policy makers are working on plans to boost bank capital’.

European stocks have rallied off from a 2 week low as represented the STOX 50[11] or a blue chip index which covers 50 stocks from 12 Eurozone countries.

All these developments reveal of how global equities has been artificially buttressed by serial bailouts and policies of inflationism.

Also, interventionism, meant to prevent markets from reflecting the real values of financial securities, has massively skewed the pricing process that has led to severe volatility or sharp fluctuations.

Moreover, as further manifestation of distorted markets, price actions of so called risk assets have become tightly correlated when strains to the financial system emerges.

Finally price trends or the fate of asset prices are most likely to be determined by the prospective actions of policymakers. This makes governments the ultimate practitioners of insider trading—where governments manipulate markets to benefit certain segments of society.

With almost every major central banks expanding on their balance sheets today, most notably the very aggressive Swiss National Bank (SNB), see green line from Danske Bank chart[12], I would presume the US Federal Reserve’s participation will be a matter of political timing.

Blanc De L'oeil (White of the Eye)

It is important to note that announcement and implementation of QEs does NOT imply that markets would automatically or mechanically respond favorably. QE policies will likely be size-dependent and or highly sensitive to market expectations based on the timing, scale and duration of the program.

The efficacy on the marketplace from the current programs initiated by the BoE and the ECB which seem to be less in size than the previous measures, has yet to be established. Thus, the sustainability of the recent QE-led rebound can only be arrived at when chatters of bailouts diminishes—which implies that the market has began to discount the momentary adverse impacts of the underlying crisis.

Also, I am in the camp that sees that the US as unlikely to succumb to an economic recession. For example the chart above shows that the US Purchasing Managers Index PMI of New Orders and Employment remain in positive non-recession territories in spite of the recent slowdown[13]. And as I have been pointing out money supply growth in the US has been growing at a substantial pace[14] which poses as unlikely indicators of a looming recession.

But my stance would be conditional based on factors that may turn out to be shocks, such as further deterioration in the Eurozone or a China bubble meltdown.

In addition, I harbor a deep suspicion that markets are presently being used as fulcrum by politicians to secure their preferred political actions. This can be exemplified by BoE’s Mervyn King recent scare tactics, where such jawboning risks becoming a self-fulfilling prophesy.

And I would think that the US Federal Reserve chief Ben Bernanke may probably be discreetly wishing for more of market stress that would clear the way for him to impose his signature creed contribution to modern central banking—the modified helicopter option or the QE version 3.0.

It is important to note that US Banking and finance stocks appear to be highly dependent on Bernanke’s QE where the latter’s absence has led to declining share prices[15]. So aside from lethargic property markets, falling equity prices may affect the banking sector’s capital adequacy ratios that would prompt for further asset liquidations.

In addition, the interconnectedness of global banking system and the considerable exposure of US banks to crisis affected Eurozone banks leaves US banks highly vulnerable to a contagion[16].

These reasons would have been enough impetus for Mr. Bernanke to resort to QE 3.0. However, Mr. Bernanke appears to be have been inhibited by the recent political impasse with other political agents where his failure to incorporate QE 3.0 during the last FOMC meeting triggered a convulsion in the global financial markets[17]

This turns out to be one instance where supposed transparency of government policies meant to stabilize the markets morphed into an expectations failure because of politics. In short, like typical politicians, promises are meant to be broken.

Furthermore, resonant calls of greater odds of recession by his private sector allies could be part of this campaign to inculcate ‘fear’ in order to warrant political intervention through inflationism.

And I would add that the price action of gold has been indicative of the current state of limbo.

Despite the newly announced QEs, gold prices continues to fumble along which appears to deviate from the actions of the equity markets. Such variance puts emphasis on the aura of heightened uncertainty.

As for my position in the local equity markets, as stated last week

I would need to see the blanc de l'oeil or the French idiom for seeing ‘the white of their eyes’ before taking my shots.

---

[1] See Reported Bailout of Belgium’s Dexia Spurs a fantastic US Equity Market Comeback, October 5, 2011

[2] Telegraph.co.uk Belgian bank Dexia was biggest borrower from Federal Reserve discount window, March 31, 2011

[3] Bloomberg.com Dexia Board Meets as France, Belgium Tussle, October 8, 2011

[4] Zerohedge.com Soaring Financial Vol Leads CME To Announce A 33% Margin...Cut, October 4, 2011

[5] See Bank of England Activates QE 2.0, October 6 2011

[6] Bloomberg.com BOE Loses Faith in Europe, Announces Stimulus, October 7, 2011

[7] Telegraph.co.uk World facing worst financial crisis in history, Bank of England Governor says, October 9, 2011

[8] See War on Precious Metals: The Rationalization Process For QE 3.0, May 7, 2011

[9] See European Central Bank expands QE to include Covered Bonds October 6, 2011

[10] Bloomberg.com ECB Keeps Banks Afloat as Governments Act on Greek Risk, October 7, 2011

[11] Stoxx.com EURO STOXX 50

[12] Danske Bank Japan: BoJ can afford to be on hold for now October 7, 2011

[13] Dr. Ed’s Blog US Purchasing Managers Indexes, October 6, 2011

[14] See US in a Deflationary Environment, NOT! (In Charts) September 16, 2011

[15] See The US Banking Sector’s Dependence on Bernanke’s QEs, October 5, 2011

[16] See US Banks are Exposed to the Euro Debt Crisis, October 8, 2011

[17] See Bernanke Jilts Markets on Steroids, Suffers Violent Withdrawal Symptoms, September 22, 2011

The US Federal Reserve Moves towards Social Media Censorship

I have been saying that signaling channel is a policy tool used by central banks to manage the public’s ‘inflation expectations’ or price levels of exchange rates. This tool seems to be prominently used since the post Lehman collapse.

I have associated the repeated assaults on the commodity markets as part of this tactical move to project subdued inflation in order to justify more inflationism.

And managing the market’s mindset seems to be on a slippery slope that will perhaps entail escalating information control or censorship on the web.

The Economic Collapse Blog writes,

The Federal Reserve wants to know what you are saying about it. In fact, the Federal Reserve has announced plans to identify "key bloggers" and to monitor "billions of conversations" about the Fed on Facebook, Twitter, forums and blogs. This is yet another sign that the alternative media is having a dramatic impact. As first reported on Zero Hedge, the Federal Reserve Bank of New York has issued a "Request for Proposal" to suppliers who may be interested in participating in the development of a "Sentiment Analysis And Social Media Monitoring Solution". In other words, the Federal Reserve wants to develop a highly sophisticated system that will gather everything that you and I say about the Federal Reserve on the Internet and that will analyze what our feelings about the Fed are. Obviously, any "positive" feelings about the Fed would not be a problem. What they really want to do is to gather information on everyone that views the Federal Reserve negatively. It is unclear how they plan to use this information once they have it, but considering how many alternative media sources have been shut down lately, this is obviously a very troubling sign.

You can read this "Request for Proposal" right here.

Read more here.

Monetary central planners think that they can repeal the laws of economics by applying Orwellian approach in communications management.

More signs of an increasingly desperate US Federal Reserve.

War on Precious Metals: Amidst Market Slump, Credit Margins Raised Anew!

From Barrons,

The CME Group (CME) on Friday raised margin requirements for some gold, silver and copper futures contracts. The hikes will be effective after the close of business on Monday, according to the exchange operator.

Initial requirements to trade and hold gold’s benchmark contract rose 21% to $11,475 per contract. Meanwhile, maintenance margins climbed to $8,500 from $7,000 per contract.

At the same time, initial requirements for silver rose 16% to $24,975 a contract and maintenance margins increased to $18,500 from $16,000 a contract.

Initial requirements for copper jumped 18% to $6,750 per contract, from $5,738. Also, maintenance margins were increased to $5,000 from $4,250 per contract.

Margin hikes have been blamed by traders for curtailing rallies earlier in the year. This time around, however, CME’s attempt to again dampen speculation comes at a time when market forces are already seemingly at work doing much the same.

Here is how the gold and the precious metal markets responded.

From Barrons,

Silver futures kept heading down on Friday, finishing with an 18% fall marking the metal’s biggest drop in decades. Meanwhile, the most active gold contract in New York sank 5.9% to register its largest percentage loss since June 2006.

More from Bloomberg,

Commodities fell to a nine-month low, led by routs in metals, on deepening concern that governments are running out of tools to avert a global recession, eroding prospects for raw-material demand.

European officials may accelerate the setup of a permanent rescue fund as the sovereign-debt crisis mounts. On Sept. 21, the Federal Reserve said the U.S. economy faces “significant downside risks.” In the next two days, gold plunged the most since 1983, and copper had the biggest slide in almost three years. Today, silver posted the largest drop in 32 years…

“We are seeing commodity prices correcting, so they are more compatible with the global economy,” said Christin Tuxen, a senior analyst at Danske Bank A/S in Copenhagen. “When we have fears over the economic cycle as we have now and a higher probability of contraction, it hits industrial metals and commodities.”

“We are not predicting a recession in the Western world, but low growth for the long term,” Tuxen said. “We are looking for a rebound in China and Asia in the fourth quarter and in 2012, which will help copper and aluminum.”

Some things to note here

The current financial market carnage has been indicating of an ongoing liquidity contraction, given that Mr. Bernanke’s has thwarted expectations of further aggressive rescue policies. Yes, Bernanke’s non inflation stance is something to cheer at, but this has not been about political-economic apostasy but rather about political obstacles.

Second, the timing of CME’s intervention appears suspicious. Such needless interventions have been weighing on an already bleak sentiment.

Yet the public is being impressed upon by media and experts that this has been about economic performance. If current environment is “not predicting a recession” then the dramatic selloff in commodities would seem unwarranted, except for liquidity and or manipulation issues.

I deem this continuing series of credit margin hikes as part of the signaling channel tool employed by team Bernanke to project on the intensifying risk environment of a deflationary bust, which will be used to rationalize QEs and to quell QE policy dissenters. As stated above, I am don’t think that Mr. Bernanke has backtracked from his activist central banking dogma.

And as pointed out earlier, Mr. Bernanke appears to be implicitly challenging his political detractors by laying the recent market carnage on their doors.

My guess is that eventually the divided FOMC will accede to Bernanke’s policy preferences, but that would entail more market pressures. In other words, the global financial markets would remain hostage to, or will be used as negotiation leverage by the political class in furtherance of their interests.

But until there will be clarity in the directions of policy actions, it would be best to stay clear from the current environment whom signifies as victims of the imbroglio or the bickering of political stewards.

Nonetheless, despite the slump in precious metals, these are likely to be temporary events.

Bloomberg Editorial: European Central Bank needs to Inflate Aggressively

The Editors of the Bloomberg write, (bold emphasis mine)

In the short term, then, somebody other than German Chancellor Angela Merkel and French President Nicolas Sarkozy will have to take on the task of avoiding disaster. The only candidate is ECB President Jean-Claude Trichet. Unlike Merkel and Sarkozy, Trichet is not constrained by short-term political concerns, and the ECB has access to an almost unlimited resource: the power to print euros. It has already demonstrated a willingness to use that power by purchasing tens of billions of euros in Spanish and Italian bonds to keep those governments’ borrowing costs from skyrocketing.

In its simplest form, ECB intervention would entail the central bank buying Greek and other euro-area government bonds. To keep countries’ borrowing costs in check until European leaders come up with a more comprehensive solution, such purchases would go far beyond the 440 billion euros available to the European Financial Stability Facility (the euro area’s bailout vehicle). The ECB would be buying bonds from banks at an artificially high price, leaving the central bank to suffer losses if and when some of the debts are written off.

The ECB could also be more activist, spurring governments to restructure their debts and get their fiscal affairs in order. The central bank, for example, could pledge to buy newly issued bonds at full face value only if governments adopt credible rules to balance their budgets over the economic cycle; the bank would guarantee existing euro-area debt at only half its face value. Market prices for existing debt would quickly fall to what investors believed governments could actually afford to pay, putting them in a position to negotiate debt- relief deals with creditors. As with the issuance of euro bonds, this approach would require governments to recapitalize banks that take heavy losses as a result of debt restructurings.

To be sure, ECB intervention would come at great cost, including threatening to undermine the central bank’s inflation- fighting mandate. It would not substitute for a real fix to the euro area’s flaws. Europe is reaching a point, though, where aggressive ECB action could be the lesser of all possible evils.

Well, the above sentiment are emblematic of what I had earlier written about,

That’s because central banks can always surreptitiously work for the state’s political agenda camouflaged by the esoteric nature of the operations of central banking.

In the fitting and resonant words of Henry Ford,

“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”

So while the fiscal side of governments may be scrutinized by a vigilant public over the perceived profligacy of a government, central banks actions can and will likely substitute for such a loss.

The call to action for more intensive short term fixes had been predicted by the great Ludwig von Mises (Theory of Money and Credit), [bold emphasis mine]

A government always finds itself obliged to resort to inflationary measures when it cannot negotiate loans and dare not levy taxes, because it has reason to fear that it will forfeit approval of the policy it is following if it reveals too soon the financial and general economic consequences of that policy. Thus inflation becomes the most important psychological resource of any economic policy whose consequences have to be concealed; and so in this sense it can be called an instrument of unpopular, i.e., of antidemocratic, policy, since by misleading public opinion it makes possible the continued existence of a system of government that would have no hope of the consent of the people if the circumstances were clearly laid before them. That is the political function of inflation. It explains why inflation has always been an important resource of policies of war and revolution and why we also find it in the service of socialism. When governments do not think it necessary to accommodate their expenditure to their revenue and arrogate to themselves the right of making up the deficit by issuing notes, their ideology is merely a disguised absolutism.

So goes part of the political process aimed at conditioning the public for the acceptance of the ideology of ‘disguised absolutism’

US Mulls ‘official’ QE 3.0, Operation Twist AND Fiscal Stimulus

Again, it’s almost too predictable that the path dependency of political authorities have been to resort to more central bank activism and to apply additional government spending on emergent signs of economic weakness.

In the US, the QE 2.0 has still been in motion despite the official program for its closure last June.

Yet, over the interim there have been modified actions which can be extrapolated to stealth QE 3.0: such as extended zero bound rates until 2013 and the reinvesting of principal payments (whose mix of asset purchases would be altered partly to induce mortgage refinancing).

This news account gives light to the potential course of action by Team Ben Bernanke after his speech last night, from Bloomberg, (bold highlights mine)

Federal Reserve Chairman Ben S. Bernanke said policy makers will discuss the tools they could use to boost the recovery at their next meeting this month and stand ready to use them if necessary.

Policy makers “are prepared to employ these tools as appropriate to promote a stronger economic recovery in the context of price stability,” Bernanke said today in Minneapolis, echoing points from his Aug. 26 remarks in Jackson Hole, Wyoming.

The Fed chief, in a speech to economists, stopped short of signaling what he believes is the central bank’s best option to aid the economy. He said in previous remarks that the Fed’s measures to bolster growth include lengthening the duration of securities in its $1.65 trillion Treasury portfolio and buying more government bonds.

Media calls this portfolio rebalancing towards the lengthening of the duration of securities held as ‘Operation Twist’ which apparently aims to lower long term interest rates in order to induce the marketplace to get exposed into more risk assets. This has been part of Bernanke’s dogma of the wonkish Financial Accelerator where

changes in interest rates engineered by the central bank affect the values of the assets and the cash flows of potential borrowers and thus their creditworthiness, which in turn affects the external finance premium that borrowers face

The constant alterations of monetary policy reveal of how the previous QEs has failed. And such experiment/s will likely be put in place ahead of another official QE. The next FOMC meeting will be on the third week of September.

Of course, Ben Bernanke sees inflation as having little risk for him to have the mettle to toy around with such experimental measures.

From Marketwatch.com

see little indication that the higher rate of inflation experienced so far this year has become ingrained in the economy

The perceived low risk inflation regime has partly been because of the way the bond markets have been structured which many ideologically biased experts use as measure for inflation, and also of the constant manipulations of the commodity markets as part of their signaling channel to manage ‘inflation expectations’. Even gold markets have been subjected to price suppression scheme according to the Wikileaks

And the barrage of QE in the headlines of late, which I read has been part of this communications management tool being employed to condition the public for the next official QE.

Of course, the last act won’t come from the Bernanke’s Federal Reserve, as President Obama has offered to join in by introducing more government spending coupled with temporary tax cuts to please the opposition (Republicans).

This from the Bloomberg,

President Barack Obama called on Congress to pass a jobs plan that would inject $447 billion into the economy through infrastructure spending, subsidies to local governments to stem teacher layoffs, and cutting in half the payroll taxes paid by workers and small-business owners.

The package is heavily geared toward tax cuts, which account for more than half the dollar value of the stimulus, and administration officials said they believe that will have the greatest appeal to Republican members of Congress.

“The question is whether, in the face of an ongoing national crisis, we can stop the political circus and actually do something to help the economy,” Obama told a joint session of Congress tonight, according to a text of the address released by the White House.

A $105 billion infrastructure proposal includes money for school modernization, transportation projects and rehabilitation of vacant properties. Most of the economic impact from the infrastructure spending would be next year though some of it would come in 2013, an administration official said.

“Ultimately, our recovery will be driven not by Washington, but by our businesses and workers,” the president said. “But we can help. We can make a difference.”

The administration estimated that $35 billion it’s seeking in direct aid to state and local governments to stem layoffs of educators and emergency personnel would save the jobs of 280,000 teachers, according to a White House fact sheet.

It has never been the question whether past policies worked. It’s just doing the same thing over and over with practically the same results which represents as plain insanity and the misplaced belief on miracles from centrally planned actions.

Economic reality will eventually unmask the charade of shifting resources from productive activities to non-productive activities that will not only lead to capital consumption but also lead to cronyism, corruption, regime uncertainty, economic and financial fragility and political instability. Obviously Obama's is desperately trying to shore up his re-election odds, whose popularity rating has fallen to new lows.

Nonetheless we will be seeing expanded stimulus from all fronts in the US and the world which means a vastly distorted financial markets. More stimulus on top of the existing ones which means increasing systemic risks from artificial boosters or substance dependency.

This also means traditional metrics in the assessment of the financial marketplace will hardly be effective.