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Excerpted from Cliff Asness Op-Ed, originally posted at RealClearPolitics,

Quantitative easing (QE) and other inventive forms of loose monetary policy have simply been less than hoped or feared. Some may declare Fed policy a great success as we’re not in a depression, but they can’t show any counter-factual, and given that this money has largely sat dormant, albeit presumably lowering risk premia (raising asset prices), it’s likely we’d have a similar record-weak recovery with or without it. How this is a victory for one side of the debate or another is beyond me, but obviously clear to Paul and his back-up singers. Of course, it’s also clear to Paul that the 2009 stimulus package saved us from this same second Great Depression (but more stimulus would of course have been much better). Yep, and if we traded good cash for just one more “clunker” we’d be growing at 5% per annum by now with a normal labor participation rate.

…

In a field without a broad set of counter-factuals we all stick too much to our priors and ideologies, and perhaps I’m doing that now. But at least I see it, and that’s always step one. Paul [Krugman] is stuck on step zero (if he ever gets up to “making amends” I will be around but given his history he might never get to me). But, if you’d like to advance past step zero, Paul, we’re still waiting on why Keynesianism failed to fix the Great Depression (no doubt not quite enough stimulus; just one more Hoover Dam would have done it, or, as they called it back then, “Dams for Clunkers”), strongly predicted a deep post-WWII depression, didn’t predict stagflation, and generally was on a the downward spiral to the intellectual dustbin until the great recession resuscitated it, not as a workable intellectual doctrine, but as an excuse for politicians to spend on their constituents and causes.

Also remember, much like when the Germans bombed Pearl Harbor, nothing is over yet. The Fed has not undone its extraordinary loose monetary policy and is just now stopping its direct QE purchases. When monetary policy is back to historic norms, and economic growth is once again strong, a normal number of people are seeking and getting jobs, and inflation has not reared its head, I think we can close the books on this one, still recognizing that forecasting a risk and having it fail to come to bear is not a cardinal sin. But which one of those things has happened yet? Paul, and others, should by now know the folly of declaring victory too early.

…

So, to those who’ve been waiting for one of us to say it, you can have half the mea culpa you clearly want, but mostly Paul is wrong, and twisting the facts, and doing so as rudely and crassly as possible, yet again. The rest of the JV team of Keynesians who have also jumped on board are doing the same thing, just with more class and less entertainment value than the master.

Now for a real prediction: Paul will continue to be mostly wrong, mostly dishonest about it, incredibly rude, and in a crass class by himself (admittedly I attempt these heights sometimes but sadly fall far short). That is a prediction I’m willing to make over any horizon, offering considerable odds, and with no sneaky forecasts of merely “heightened risks.” Any takers?

via Zero Hedge http://ift.tt/1sOFkKU Tyler Durden

As we’ve reported for over 4 years, the Federal Reserve banks are private, not government agencies.

Indeed, the government admitted 86 years ago that the Fed banks are private. And the Fed has repeatedly reaffirmed this fact.

As Matt Stoller points out, they have just done so again … in the AIG trial. Specifically, government lawyers said:

Now, some of the documents … were not actually produced by the United States, they were produced by the Federal Reserve Bank of New York, which is a third party.

via Zero Hedge http://ift.tt/1u2dN54 George Washington

Via FBN Securities' Jeremy Klein,

In a secular rally, pullbacks will inevitably arise.  Market participants, though, should not view all drops in the same light.  In addition to the differences in the depth of the collapse, the magnitude of the changes of critical investor sentiment statistics may differ greatly.  Hence, identifying a potential trough with the use of a nondiscretionary quantitative trigger may not prove reliable.  Nevertheless, recognizing the amount of aggression contained within each selloff can be invaluable in forecasting a fortuitous buying opportunity.

I identified fourteen material declines for equities since July 2007.  Traders did not have the ability to short a common stock prior to this date.  I leveraged the following technical indicators for the study:  average session range, range as a percentage of index level, average monthly NYSE closing TICK, average monthly NYSE intraday TICK, the number of TICK readings below -1,000, average miles driven, miles driven as a percentage of index level, ratio of miles driven to range, open interest in the futures over the past week, volumes in the E-Minis, notional value transacted in the E-Minis, and relative performance between the Russell 2000 and S&P 500.

Unsurprisingly, the drops associated with the financial crisis and the sovereign credit downgrade of U.S. debt ranked as the most violent over the period investigated.  I actually assess the slide that climaxed in August 2011 as more extreme than the beating share prices received in the wake of Lehman’s bankruptcy albeit this distinction is nothing more than splitting hairs.  While painful at the time, pullbacks such as the one that resulted from the fiscal cliff negotiations or the “taper tantrum” were mild in comparison.

Assessing the current retracement is a difficult prospect as we may have yet to reach its terminus.  Based on the initial sentiment statistics, the decline has more similarity to the aforementioned historic collapses.  Specifically, this most recent selloff scored highly in nearly all categories including the mileage driven, session ranges, the TICK averages, notional volumes, and the scale of underperformance exhibited by smaller capitalization names.

However, I do not anticipate that we have stumbled upon a full blown bear market but suspect that a bottom still sits in front of us.  The lack of any upward inertia in the open interest figures supplies me confidence in such an assertion.  At a minimum, institutions create 165K contracts over the previous five days when suffering from rapidly falling share prices.  Moreover, this metric usually climbs above 250K on these occasions and peaked at roughly 950K for the August 2011 correction.  Using the preliminary data from yesterday, the corresponding number computes to only 99K.

Consequently, portfolio managers have stubbornly refused to throw in the towel. 

I maintain that most firms desperately cling to the hope that the broader indices will enjoy a breathtaking rally as the calendar moves toward Christmas.  Reducing one’s exposure would constitute a forfeiture of the year such that investors who have struggled in 2014 are loath to lower their risk.  Thus, capitulation gets delayed which allows me to reiterate my bearish outlook even as the S&P 500 dipped to within 25 bps of my official target on Monday.

The macro data remains quiet until tomorrow to accentuate the impact of earnings which starts to build momentum this morning.  The usual swath of money center banks will provide their results over the coming days while INTC will hog the headlines tonight.  Although I do not expect a poor reporting season, the Fed has gifted corporate executives an excuse for any shortfall with its concerns over the strengthening dollar.  Any help from these announcements will therefore be modest at best.

 
S&P 500 Cash Key Technical Levels

Support:  1874.00/70.00, 1868.00/65.00, 1862.25/60.00, 1850.50, 1846.00/44.00, 1816.25 , 1800.00

Resistance: 1887.25, 1892.25, 1905.00, 1909.00, 1912.00, 1929.00, 936.00/37.00, 1938.50/1942.00, 1959.25

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By EconMatters

 

Not Holding Assets to Maturity

$4.5 Trillion is a lot of Assets Needing to find a Permanent Home

 

 

© EconMatters All Rights Reserved | Facebook | Twitter | Email Subscribe | Kindle

via Zero Hedge http://ift.tt/1pa2E0r EconMatters

Over the past 5 years, the shale industry, fabricated or real reserves notwithstanding, has been a significant boon to the US economy for four main reasons: it has been the target of billions in fixed investment and CapEx spending, it has resulted in tens of thousands of high-paying jobs, its output has been a major tailwind for the US trade deficit, and has generally been a significant contributor to GDP (not to mention various Buffett-controlled or otherwise railway corporations). And perhaps, most importantly, it has become a huge buffer to the price of global oil, as the cost curve of US shale is horizontal, with a massive 10,000 kbls/day available within pennies of $85/bl.

Goldman’s explanation:

We believe that the vast reserves that have been opened for development through shale oil in the US have flattened the cost curve meaningfully, at around a US$85/bl Brent oil price. We estimate shale reserves from the top three fields in the US onshore (the Permian, Bakken and Eagle Ford) at around 91bn boe, which to put it in context, is equivalent to roughly one third of Saudi Arabia’s current stated reserves (ZH: this number may be vastly overstated). Most of this resource has become available in the past five years, with few barriers to exploiting the reserves. Production in the US as a result is growing strongly, by more than 1mbpd currently, and we expect this pace of growth to continue over the coming three years as capital continues to be drawn in to these developments. The consequence is that costs of production and E&P capex/bl should stabilise as the marginal cost of production remains stable. We believe that shale oil has become effectively the marginal source of supply, providing the bulk of non- OPEC production growth. This is also the key driver of our oil price view: we continue to expect Brent oil to stay at c.US$100/bl for the coming few years.

For once, Goldman is spot on (even if their Brent price target may be a bit off): with shale oil profitable only above its virtually horizontal cost curve, it means that a whopping 11,000 kbls/day are available as long as Brent is above $85, a clear “red line” for all OPEC producers.

The red line is conveniently shown on the chart below:

However, should the price drop below $85, and very bad things start to happen, not the least of which is what we warned about in May that “Shale Boom Goes Bust As Costs Soar.” That was when Brent was $110. It is now at $85 and sliding lower.

As a further reminder, we noted two days ago that shale is now in a bear market:

 

But that is nothing compared to the no bid market the (very, very levered) shale companies will find themselves in if and when, for whatever reason, Brent drops below $85 to a price where only Qatar is profitable on the global Brent cost curve.

So while we understand if Saudi Arabia is employing a dumping strategy to punish the Kremlin as per the “deal” with Obama’s White House, very soon there will be a very vocal, very insolvent and very domestic shale community demanding answers from the Obama administration, as once again the “costs” meant to punish Russia end up crippling the only truly viable industry under the current presidency.

As a reminder, the last time Obama threatened Russia with “costs”, he sent Europe into a triple-dip recession.

It would truly be the crowning achievement of Obama’s career if, amazingly, he manages to bankrupt the US shale “miracle” next.

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Via Nomura’s Bob Janjuah,

It is time to update my last note (Bob’s World – Just mild indigestion then…, 8 September 2014). My forecast for the market set out in that note, whereby I was looking for a period of risk-off from mid-September through to early October, has proven accurate. Specifically, I was looking for this risk-off phase to take the S&P 500 from the low 2000s down 5% to the 1905 level. Credit spreads have widened and core bond yields fallen with the UST 10yr now trading closer to 2% than 2.5%. Being a core bond bull through 2014 has been a little lonely but rewarding, especially now that equity markets across the globe are broadly down year to date.

The drivers of this risk-off phase that I have highlighted repeatedly this year are global growth weakness, deflation, and concerns about policymakers in the eurozone, Japan, China and, importantly, the US. Broad markets have been looking for decent growth recoveries in Europe and Japan all year, and have been looking for the Fed to start its rate hike cycle. At the risk of being repetitive, I will state clearly in my view that we will not see strong sustained economic recoveries in the major global economies anytime soon, particularly in Europe and Japan. Global deflation should remain the dominant theme, and I repeat the message from my last note that I do not expect the Fed to be hiking rates for a long time – late 2016/2017 seems to me the earliest possible time that the Fed may hike.

In my last note I made particular mention of the fact that, in my view, the US economy was nowhere near strong enough to offset the deflation it would import and is already importing through USD strength vs EUR and JPY in particular, and this has now become a key market theme. In particular, much of the evidence I see points to the fact that the US consumer is neither willing and/or able to lever up to support or boost its consumption (thereby dragging the global economy into a period of sustained stronger growth). I think markets are not fully appreciating the longer-term consequence of the events of 2007 through to 2009 in particular. Confidence has been hit hard in a semi-permanent manner. And in the absence of the US consumer it is not clear who is going to drive global growth, particularly as the growth model for Europe, Japan, and the emerging economies is built around competitive devaluations all designed to boost exports, especially into the US. Governments are retrenching, and the corporate sector, increasingly globally, is focused on financial engineering to optically boost earnings, as opposed to focusing on capex, investment and hiring.

I think markets are now collectively having to consider what I think is the reality – that annual trend global growth is converging down at around 2.5%, well short of the pre-crisis levels of over 4%. And even more worryingly, trend annual global NOMINAL growth is converging down around 3.25%, some 200bp+ short of the pre-crisis levels. In this context the big swings are China and the US, both of which are underperforming vs where expectations were even only a few months ago let alone compared with the highly optimistic consensus forecasts laid out early this year.

In this context, some market commentators have expressed a hope that weaker commodity prices, primarily in USD terms, will provide a consumption boost. This assumes that commodity prices are softer because of oversupply. I would suggest that the market is ignoring the obvious – that commodity prices are softer due to weak demand. If this is the case, then I see no reason to expect a material bounce in consumption from weaker commodities (other than perhaps at the margin in the US), and as such I see no reason why the price of some commodities cannot continue to fall. Crude may be different as USD80/barrel is roughly where the world’s big swing producers start to see their profitability vanish.

Perhaps the best way to summarise my view on the global outlook for growth and inflation is to repeat the summary message from the client conference call I held with Kevin Gaynor a few weeks ago. Namely, that I think we will see UST 10yr yields closer to 1.5% before they get anywhere near 3.5%, with 10yr Bund yields at 50bp; that China is getting closer to the point where it will have to join the global FX wars – March next year is the focal point for me in this regard; and in terms of the Fed, I think it is 50/50 that we will see the Fed EASING monetary policy from here over the next 12 months vs the risks of the Fed starting a rate hike cycle. Here the focus on the US unemployment rate is covering up much weaker employment/aggregate income and deteriorating demographic trends that are playing out beneath the surface. And ultimately I feel the Fed will have to adopt policies that seek to weaken the USD vs the world.

In terms of markets, a weekly close on the S&P 500 below 1905 was and remains my key pivot point. The S&P 500 needs to start closing above 1905 on a weekly basis this week and/or next. If this does not materialise this week then, as I said in September, I would start to get very excited, as then the door would be open to a much deeper correction. If we see consecutive weekly closes below 1905 then it would suggest to me that a very deep correction is under way.

So notwithstanding that my 1905 S&P 500 level is key, what would I do now? It seems to me that unless we get a major unexpected policy and/or sentiment shift this week, the S&P 500 will close below 1905 this Friday. I would then target 1770 as the next stop. This would lead to UST 10yr yields at or below 2% and the new iTraxx XO index would then trade well above 400bp, perhaps closer to 425bp/450bp. And if the S&P 500 also fails to regain 1905 by next Friday’s close (24 October), then I think it is entirely possible that by late November the S&P 500 could take out not just 1660/1650, but also perhaps 1600/1570. This would take UST 10yr yields well below 2%, perhaps as low as 1.75%, and we could see the new iTraxx XO index closer to 475bp/500bp. Throughout all of this I would expect the USD to sell off a little vs the global basket.

Key to remember and watch is 1905 on the S&P 500 on a weekly closing basis. It is also important to remain vigilant on sudden policy and sentiment shifts. I think the likelihood of a much more dovish Fed, and of further easing of policy in the eurozone and Japan this year is rising. If the market experiences the kind of risk-off moves described above over the next four to six weeks, whereby markets reprice their expectations around global growth and inflation more in line with my view already discussed, then I think it is almost certain we will get a policy response from the Fed and/or the ECB and/or the BOJ and/or the PBoC.

If it materialises, this could then set up a meaningful risk bounce from late November into year-end and a little beyond. In the interim, and over and above the S&P 500 1905 caveat, we should not expect markets to move in straight lines. So even if we the S&P 500 trades down to the 1770/1660/1570 area by late November, there should still be occasional short sharp counter-trend bounces. But the S&P 500 will need to recapture 1905 on a weekly closing basis before I change my bearish outlook for the next four to six weeks.

Lastly, I want to remind readers of a message that may be buried in the past:

When QE1 ended the S&P 500 fell just under 20% in a roughly three-month period before the QE2 recovery. When the QE2 ended the S&P 500 fell about 20% in a three-month period before the next Fed-inspired bounce (aided by the ECB). QE3 is ending this month. The S&P 500 peaked in the low 2000s in Aug/Sept. So, -20% and three months would take us to 1600 by late November.

This is clearly not a scientific analysis, but it may provide some food for thought.

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While today’s trading volume was better than in recent weeks (as it has been for the last 4 days of collapse), quote activity spiked to the 2nd highest ever on record. As Nanex’s Eric Hunsader notes, quote cancellations were higher than ever and are accelerating even as the overall market volume slides lower and lower. What is intriguing is that the last 3 times quote activity spiked this much corresponded with a ‘sudden’ v-shaped recovery from a significant market weakness – which extended notably for six months or more… is this time different?

 

Nanex’s Eric Hunsader shows the hidden reality behind trading volume in these “markets”… to be clear – actual traded volume continues to tumble structurally but the number of actual quotes (subsequently cancelled) continues to rise as machines dominate more and more of the ‘flow’… However, today’s spike (just like the other 3) stood out

h/t @nanexllc

 

And each of those spikes corresponds to market v-shaped bottoms…

 

Is this the Fed’s hidden signal “all-clear”? Along with Fed’s Williams idiotic statements about QE4, who knows?

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Via Scotiabank’s Guy Haselmann,

In 2008, various liquidity facilities, designed by the Fed, unclogged broken capital markets.  Shortly thereafter in early 2009, QE1 was implemented to improve market liquidity and transform investors’ general revulsion to financial assets.  The combination helped avert economic and financial disaster. The Fed responded well at that time; however, the cost-benefit equations for QE2 and QE3 are much less clear.

The Fed’s (subsequent) QE and ZIRP policies have enabled fiscal stalemate, turbo-charged wealth inequality, and arguably led to financial asset bubbles.  For these reasons, I believe they have become counter-productive.   New tactics, should they be needed, would therefore be welcomed.

• It is counterfactual to know, but it could be argued that current market turmoil is partially the result of the Fed purposefully encouraging asset price inflation, and staying in crisis mode long after the economy began to heal, and after the financial markets were operating smoothly on their own.  Over the past few years, too many investors, piggy-backing off of Fed policy, have diverged valuations away from economic fundamentals.  Recent down -grades to forecasts of global growth and inflation by the IMF and World Bank further expose this fact.  In turn, wrong-footed investors are now belatedly trying to recalibrate.

The Fed’s feeling as if it is ‘the only game in town’ has been a factor leading to its unusual measures. Polarized politicians should take some blame. They are too frequently reactive (as opposed to proactive), so it could take a financial crisis to get them to act.

Another intention of the QE programs was to sufficiently boost GDP enough to deal with, and reduce, the problem of excessive debt.   Since sovereign and non-financial corporate debt-to-GDP levels have risen significantly during the programs, QE, under this metric, has been a failure.

Financial repression unintentionally created growth in debt, but not in money or inflation as intended (thus resulting in higher debt-to-GDP).   Furthermore, punishing savers at the expense of helping risk-takers and speculators is bad long-run policy for any country.  Therefore, using zero interest rates and QE, as tools to ‘inflate away’ debt, will have to be replaced at some point with new tactics and remedies (below).

• Attempts to reflate will not be abandoned altogether, because rising debt levels and falling velocity of money means the US is now even more vulnerable to a deflation shock, but other tactics will have to be found.
• I believe that SF Fed’s Williams comment today about potentially revisiting QE if necessary is a complete non-starter.

Should the negative aspects of QE policies continue to materialize, the Fed’s efforts to ‘normalize’ rates (i.e., hike rates) may certainly be deferred.  The real question is what remedies will, or can, the Fed turn to should market turmoil become unhinged, or should the US recovery falter?  The answer, of course, is that the Fed will turn to “macro-prudential” polices.  If you are wondering what this means, Kevin Warsh said it well at the IMF meeting this past weekend: “macro-prudential policies are vital, but we have no idea what they are”.   

I have a theory.  New onerous banking regulations have restricted the ability and willingness of banks to lend, shrinking bank credit growth and the velocity of money.  The Fed’s enlargement of its balance sheet by more than $3 trillion via QE has been unable to offset these regulatory factors, because most money creation occurs as a function of lending in the fractional-reserve banking system. Therefore, I suspect that part of the “macro-prudential” remedy will include the Fed (or some other type of government agency) playing a role in targeted credit allocation.

Such a tactical shift will mean that the holders of capital who were so amply rewarded under QE will be badly hurt.  The Fed (or other activist gov’t agencies) will decide the winners and losers.

This plan likely has many political obstacles, but it should not be considered a far-fetched idea.  State-directed (subsidized) credit is not unprecedented and not dissimilar to the BoE’s ‘Funds for Lending’ scheme, or the ECB’s TLTRO program.  Certainly, the Fed needs to find a way to better way to control credit growth with tools other than interest rates or security purchases.

The Fed has provided years of uber-accommodation.  Its stimulus efforts were assisted by entities abroad. Today, global quasi-coordination has fractured with other countries now focusing on domestic issues.   Markets are already showing signs of worry.  Since the Fed’s balance sheet is still growing, withdrawing accommodation (the second half of the game) has yet to even start.

After years of one-way accommodation, markets are likely in for a messy unwind process; particularly as (and when) Fed tactics change. The US Treasury 30-year dropped below 3% well-prior to my “before Thanksgiving” prediction, and now sets its sight on my prediction “of a move toward 2.5% in 2015”.  As I outlined in last week’s note, the global factors are aligning in the perfect storm.  It is always easier to provide accommodation than to remove it.

“I took a course in speed waiting.  Now I can wait an hour in only ten minutes.” – Steven Wright

via Zero Hedge http://ift.tt/1v9Tw1P Tyler Durden