- Money Morning Australia

How to Tell a Hawk from a Vulture


Written on 31 August 2011 by Kris Sayce

How to Tell a Hawk from a Vulture

“Participants noted that devoting additional time to discussion of the possible costs and benefits of various potential tools would be useful, and they agreed that the September meeting should be extended to two days in order to provide more time.” – Minutes of 9 August, Federal Open Markets Committee Meeting

It’s just a question of “when” not “if”.

Money-Printing 3 is on the way.

The mainstream likes to talk of monetary “hawks” and “doves” at the U.S. Federal Reserve.

The term “hawks” refers to those who are supposedly cautious about keeping interest rates low as they fear it will cause higher inflation.

The term “doves” refers to those who are supposedly not cautious about keeping interest rates low. They see higher inflation as a necessary payoff in the drive to boost the economy.

In reality there aren’t any hawks and doves at the Fed. They’re all just vultures in disguise.

They’re pro higher inflation and more money printing. It’s just some are more pro-inflation than others.

So whether it’s at the Fed’s September, November or December meeting (note: the Fed doesn’t meet monthly, it meets a total of nine times this year), it’s more likely than not that the Fed will unleash another round of money printing.

You only have to read the latest minutes and compare the language to previous minutes to see they’re gearing up for it.

The changing glass at the U.S. Fed

 

Here’s a quote from the March meeting noting non-farm payrolls:

“The labor market continued to show signs of firming. Private nonfarm payroll employment rose noticeably in February after a small increase in January, with the swing in hiring likely magnified by widespread snowstorms, which may have held down the employment figure for January.”

In other words, the Fed liked what it saw. Which is hardly surprising seeing as it was half-way through its money-printing 2 ruse.

Here’s what the Fed said at the August meeting:

“Private nonfarm employment rose at a considerably slower pace in June and July than earlier in the year, and employment in state and local governments continued to trend lower. The unemployment rate edged up, on net, since the beginning of the year, and long-duration unemployment remained very high. Meanwhile, the labor force participation rate moved down further through July.”

Now look at the following chart. It shows monthly non-farm payroll numbers over the last two years:

United States Non-farm Payrolls
Source: TradingEconomics.com

What do you notice the most? That’s right, non-farm payroll numbers are volatile. It’s pretty hard to analyse the data and draw conclusions on a monthly basis.

Yet back in March when the Fed met, the members looked at the January and February numbers and liked what they saw. Things were heading in the right direction… they thought.

Roll forward a few months and two months of low numbers, suddenly the Fed needs to do something.

The other thing you’ll notice from reading the August minutes is there’s no mention of the drop in the July unemployment rate from 9.2% to 9.1%… and no mention of the fact that four days before the meeting the Labor Department announced total payrolls had beaten market expectations.

A cause for celebration? Not on your life. As far as the Fed is concerned, it’s got to do something. If they highlight the positives, it’s less reason for them to meddle.

Stuffing the economy

So now the Fed has to focus on the negatives. We wouldn’t want the economy righting itself would we? Not when there’s meddling to be done…

But let’s get something straight. The actual underlying economy hasn’t changed. It was the same in June and July, as it was in March – stuffed.

The only difference is the Fed is now doing the old “glass half empty” routine… so it can keep printing money and keep propping up its pals at the banks.

And the markets can see the Fed money printing too. Traders are placing the same old bets. Gold has rebounded after the heavy sell-off last week. It’s now trading at USD$1,827 and AUD$1,713.

And as you’d expect, traders are selling the safety of the Swiss franc and buying the risky Aussie dollar.

As you know, the Swiss franc is one of our early warning signals for crashing markets. The climb back to CHF0.875 this morning has the alarm bells ringing again… albeit quietly at the moment.

It tells you traders are backing out of safety and plunging forward into risky bets.

Enemy of the People

The 500-point snapback in the Aussie market since the recent low proves this is happening. In fact, if you look at the charts, there’s almost a perfect correlation between the Aussie dollar/Swiss franc exchange rate (blue line), and the S&P/ASX 200 (red line):

Aussie Market Chart
Click here to enlarge
Source: Google Finance

But remember: don’t start thinking this is a sure sign of a strong Aussie economy and share market. The reality is that the extreme volatility is the result of the actions of one man… Dr. Ben S. Bernanke.

Or as we prefer to call him: Public Enemy No. 1.

And one thing is for sure, expect the volatility to continue as we approach and pass the next Fed meeting on September 20-21.

Cheers.
Kris

PS. Slipstream Trader Murray Dawes is releasing another free market update on You Tube this afternoon. I highly suggest you watch it. The volatility index (VIX) is pushing 30. And this month alone, billions has been wiped off the market (and billions put back on again). This market action is causing havoc for most traders. But Murray has been picking the swings like a peach. In fact, he’s put his readers in a position to bank big gains. To see where Murray expects the market to head next, click here… It’s completely free.

 



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Kris Sayce
Kris is never one to pull punches when discussing market developments and economic events that can affect your wealth. He’ll take anyone to task — banks, governments, big business — if he thinks they’re trying to pull a fast one with your money. Kris is also the investment director for Australian Small-Cap Investigator, Diggers and Drillers and Revolutionary Tech Investor. If you’d like to more about Kris’ financial world view and investing philosophy then join him on Google+. It's where he shares investment insight, commentary and ideas that he can't always fit into his regular Money Morning essays. Read more about Publisher and Investment Director Kris Sayce.

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47 Comments For This Post

  1. lb Says:

    The latest rally in S&P500 with meager volume is a sign of impending QE3 announcement.
    After watching the documentary “Inside Job”, I’m not surprised to know that the US Govt nowadays is being run by the Big Boyz in Wall Street.

  2. lb Says:

    Oh, BTW nice article from SMH today regarding housing affordability myth……

    http://www.smh.com.au/business/how-the-rba-undervalues-housing-20110831-1jl3f.html?comments=11#comments

  3. SG Says:

    Cheers Ib

  4. Drood Says:

    The difference between the last depression and this one is that in the 30,s your average man in the street didnt have any interest in shares.
    The current market volatility is akin to gamblers at a casino trying to win their money back.

  5. The Wolf Says:

    The markets (both regulated and OTC) are casino’s… nothing more… nothing less… they might have started out many years ago serving worthy goals and have a certain level of legitimacy… but now… then they might have resembled the presidential suite at the Bellagio… now they have more in common with a pay-by-the-hour motel in a very seedy part of town…

  6. The Wolf Says:

    lb… nice link… just finished reading the story… who would have thunk it that you could “pay” current consumption items from imputed owner occupier rent and super pre 65yrs of age…

    haven’t checked the Super Troopers website yet, but expect Leith will cop a several page written response from El Joye with plenty of adjectives, metaphors and similes…

  7. The Wolf Says:

    http://www.zerohedge.com/news/it-time-financial-world-panic-25-reasons-why-answer-may-be-yes

    Noteables

    According to Bloomberg, since World War II almost every time that the year over year change in real GDP has fallen below 2% the U.S. economy has fallen into a recession….since 1948, every time the four-quarter change has fallen below 2 percent, the economy has entered a recession. It’s hard to argue against an indicator with such a long history of accuracy

    It is only a matter of time until Europe has a true crisis, which will happen faster – BANG! – than any of us can now imagine. Think Lehman on steroids. The U.S. gave Europe our subprime woes. Europe gets to repay the favor with an even more severe banking crisis that, given that the U.S. is at best at stall speed, will tip us into a long and serious recession. Stay tuned.

    In Greece, government debt now represents almost 160% of GDP and the average yield on Greek debt is around 15%. Thus, if Greece’s debt is rolled over without restructuring, its interest costs alone will amount to approximately 24% of GDP. In other words, if debt pardoning does not occur, nearly a quarter of Greece’s economic output will be gobbled up by interest repayments!

  8. Peter Fraser Says:

    Drood – there was a lot of share market speculation by ordinary men and women in the roaring twenties – it became a casino, much as wolf describes @ 5. The market crashed in 1929, and the small holders were all wiped out, along with many larger holders.

    The fact that we all know that we have day traders, futures traders, cfd, etc really tells us that has again become a casino where tactics and derivatives designed to be used as a hedge or insurance have just become gambling chips. Thats fine if people want to risk their money, but if the collective losses are huge it takes money out of the system, and the resultant herding really creates problems.

    I’m against regulations preventing speculation as I can see the future problems that we will face as a result of recent lending regulations constricting business, which will affect employment in a year or so. Some changes to the market would be beneficial, perhaps a return of the uptick rule before resuming auto trades which can swamp the market with sell orders.

    I really don’t know, but some restriction should be placed on the market, without using complete bans.

  9. garyb Says:

    “Or as we prefer to call him: Public Enemy No. 1.”
    No, the bearded one is “Public Enema No 1″. An enemy is just someone who is against you, but an enema gets right up you and gives you the shits.

  10. TRB Says:

    I know some of you share investors will be upset but the true heroes in this climate are the short sellers and eventually the bond vigilantes.
    Why?
    Because no regulation and transparency of balance sheets, companies massage their earning to increase their share price.
    Short sellers pull the balance sheet apart look at the true earning.
    Macqaurie Bank is famous for increasing it’s fix capital assets every year.
    No real cashflow only a bubble paper gain of a overvalued asset.
    So if you want integrity and the truth don’t buy shares in companies where good short sellers are attacking.
    Cashflow is king in any business not a fix capital asset that you borrow against every year.
    Lets clean out the corrupt system and give short sellers a fair go they are good vigilantes not the villians as the corrupt status quo want the plebes to think.

  11. Drood Says:

    PF….. They could start by completely banning short selling the market. As soon as things look bad many countries do anyway.
    As for speculation, it by its very nature drives hoarding and greed. If people want to gamble they should go to a casino and stop gambling with other peoples lives and hard work.
    Thats the trouble with speculators. They think everyone else is the parasite. They think they earn their money.
    Speculators turn farmers and manufacturers into gamblers.
    Speculative volatility actually stifles innovation. No money no research.
    Kris is always banging on about innovation, when did you ever hear anything innovative here.
    In a pure resource economy innovators would be given the resources they need to create a better life instead of having to beg for them at present.
    Kris and his comrades only promote themselves.

  12. Drood Says:

    PF……….You only have to look at the population figures to see that there were far less traders in the 20,s. Most people simply couldn,t afford them.

  13. Peter Fraser Says:

    Drood @ 10 – I don’t want to ban anything, but slowing the auto trades down would help when we get a “run” type situation. If everyone keys in a sell order as a stop loss, then if we see a sudden fall that hypothetically may reduce the price by 12% and in the normal course of events, then recover to say a loss of 5% – then that would be the end of it, but now with everyone on electronic trading, the auto sell feature creates a panic, perhaps we need to re-introduce the uptick rule which didn’t stop this, but it slowed it down a little, perhaps allowing people time to make rational judgements.

    Investors must have the right to take chances, but in a time of very fast volume trading (in contrast to the old days of floor trading) new rules have to be made to take the current technology into account.

    As far as completely separating the sound investment from the gambling on the market, I don’t have any ideas on that, I don’t think it can be done. We are living in an age when traders are gambling on houses, shares, currencies, silver and gold, corn futures, absolutely everything really. It’s a game of musical bubbles, but we just can’t dumb down everything and stop it completely.

    During WW2 rents and house prices in Australia were strictly controlled – the result was no investment, an undersupply, and then a massive boom post war when controls were lifted. Controls are also market manipulation.

  14. J.C. Says:

    Drood@10,
    I’m not really sure how you draw the link between speculation and the suffocation of innovation. For example, private equity and angel investors are usually the only means by which start-ups can get funding for launching technology-intensive businesses. The investors are actively seeking out start ups with a bend for innovation. That’s where the greatest returns are found. If there were no speculation, theses companies would have no chance whatsoever. How do you think Apple got off the ground? With a loan from a bank?

  15. Peter Fraser Says:

    Drood @ 11 – but its relative. Can you see when the public got into shares in this graph – http://www.sharelynx.com/chartsfixed/USDJIND1920.gif

    It was called the “roaring twenties” for a good reason.

  16. TRB Says:

    Drood why do you want to banned short selling?
    It’s the only honest true regulation still standing?
    Please no government organisation is strong enough to police corrupt dodgy balance sheets.
    APRA and ASIC are a bloody joke they fell a sleep on HIH,Onetel,Babcock and Brown,ABC childcare the list is endless.
    All these police government organisations are toothless tigers they hope the insolvent companies will trade their way out before the suckers in the market work it out.

    Short sellers send these companies to their grave yards before more Mum and Dad retirement saving are wasted or ripped off.
    Not all speculators are evil Drood?

    Actually good short sellers warn investors of the TRUE dangers?
    Drood you want good investment advice go to a shortseller and he will tell you what stocks to avoid.

  17. M&M Says:

    TRB

    Heh heh….. Remember Danny Devito in Other Peoples Money or Michael Douglas in Wall Street.

    They were doing a service and putting companies out of their misery.

  18. J.C. Says:

    Of course nobody here gives two hoots about banks shorting currencies or equities while the implicit guarantees ensure that they are protected by taxpayers should their businesses crumble. What a pack of hypocrites.

  19. TRB Says:

    J.C. not all banks are protected ask shareholders of Lehmann Brothers and Bear Stearns.
    Macqaurie Bank recieve billions in taxpayer gaurantee government bonds and share price is still down over 70%.
    If you have high levelaged and toxic assets eventually you blow up it’s a matter of time.
    Social mood is changing J.C. it’s getting harder to justify large taxpayer bail outs for greedy corrupt balance sheets.

  20. Peter Fraser Says:

    JC – Banks do traditionally lend for small startups. It’s just getting very hard with the new NCCP legislation introduced via APRA who really don’t understand finance or business.

    A large startup does require investors or angel funding. Angel funders in Australia are almost non existent.

  21. J.C. Says:

    PF@19,
    Best you read again. I said where did Apple get their start-up capital from. You missed the point. With all this rallying against “speculation” and and its supposedly negative consequences for innovation, I was making the point that banks are not the best partners for innovative start-ups becuase they’re unable to stomach the risk nor are they particularly visionary.

  22. J.C. Says:

    TRB@18,
    Beside the point. Point is that speculation doesn’t kill innovation.

  23. TRB Says:

    J.C. I agree speculation and investments in productive business is great, few great examples in Australian like Cochlear and CSL.
    Banks who give people with good ideas a fair go have my support.
    Infact plenty of cash around in Angel investments but the real issue is the quality of the people and the productive cashflow ie profit.
    J.C. in context about big banks having a monolopy and a sure bet on the market because of taxpayer bail out is fallible thinking.
    History has proven eventually hubris thinking and high levelaged companies blow up.
    Is a critical tipping point as Nassim Taleb would say.

  24. Peter Fraser Says:

    JC @ 19 _ I agree, banks are not good at risky start ups, which is where the best innovation is from.

    Did you actually read my post, I said small startups. I’m not rallying against speculation, I support it absolutely, I just have concerns over the speed of electronic trading promoting unintended runs. My view is that people should have the right to fail in business.

    It’s you who seems to be constantly missing the point because you don’t actually read any written words, you seem to substitute what has been written with what you think we will say.

    Take your time when reading in future.

  25. The Wolf Says:

    hear hear TRB… agree with you… there is nothing wrong with short sellers… and take a look at Europe… forget all the hyperbole and bullshit that you read in the headlines… just focus on what yields each countries is selling for… you cannot hide from that…

    The exception to the rule is the US… whereas it should be yielding triple what it currently is… the US Treasury is now the equivalent of a shoebox under the mattress (after inflation)… just a place to not lose more than the next guy… but it will turn… and sheep will get slaughtered…

  26. The Wolf Says:

    just focus on what yields each countries DEBT is selling for

  27. The Wolf Says:

    JC… PF is correct…banks will lend…so long as you post collateral… whereas angels, demons and their ilk will back you for some equity…true start-up funding…

  28. Peter Fraser Says:

    Wolf – Correct. Banks are only useful when someone can put up solid security – I’ve written many many loans for small start ups, but banks are also conservative because of recent regulations, so it isn’t easy. APRA have now stuck their unwanted head into this area of lending.

    Angels play in the higher end. The risks are higher and so the reward is high, whereas banks just take a percentage against capital lent, but they take that regardless of success or failure. The two sources are entirely different.

  29. J.C. Says:

    The banking industry can arguably be an impediment to innovation as the politico-housing cartel ensures that they can make a relatively risk-free investment in mortgage. Unfortunately, what has been shown globally, is that their “sure bet” has failed miserably. Central banks, govts, the finance industry, and the various other ad hoc services have benefited from the propensity of individuals to take on debt a the huge charade. And of course, the taxpayer is there to pick up the pieces, including Lehman Bros, Goldman Sachs, etc (contrary to what other people may say or think).
    So next time you want to harrass “speculators” for stifling innovation, take a look at your own hand. By the way, the Small Cap Newsletter has some excellent Australian companies involved in innovation.

  30. J.C. Says:

    The Wolf@27,
    What do banks know about picking winners and innovation anyway? Banks only take risks when someone else carries the can.

  31. Drood Says:

    JC… What did Apple innovate?

  32. Drood Says:

    The market is just a way of distributing innovative ideas. Thats what you don,t get. Innovation comes from imagination not capital.

  33. Drood Says:

    Eg, …….South Park started in a garage. The market just stuck it on TV.

  34. J.C. Says:

    Drood@31,
    The PC experience. The way in which we buy music. Mobile phone communications. Was that really a serious question?

  35. The Wolf Says:

    JC… you are correct… banks are not interested in picking winners and innovation (other than creating some exotic triple chocolate synthetic resettable interest rate forex cross hedged convertible preferable <insert important sounding word like…. um… "instrument" here)

  36. Drood Says:

    JC …They didnt innovate any of that , they just packaged it up and made it look nice. the only clever bit was the marketing to the idiot masses who are now in their pockets.
    They didn,t even innovate the sweatshop although they did up the chinese suicide rate.

  37. J.C. Says:

    Drood, ok I got it. They did alright for a bunch of beauticians. I think someone’s mad old uncle told me something similar once.

  38. Drood Says:

    JC……..Cat got your tongue?

  39. TRB Says:

    Kris should the heading be how to tell a vulture from a eagle?
    Short sellers are seen as vultures nasty unscrupulous traders infact they are eagles.
    The masses have been watching too many comedy movies.
    Other Peoples Money Danny Devito seen as the ruthless trader and Gregory Peck as the honourable and honest CEO.
    Wall Street Gordon Gekko(Michael Douglas) again as seen as a nasty greedy trader while the unions at Bluestar Airlines are the good guys.
    Please masses wake up!
    It’s the complete opposite go ask any shareholders of a collapse company Babcock and Brown,HIH,ABC child care the shareholders will tell you that the CEOs grap millions before the collapse and did not give a stuff about anybody except themselves.
    Same with the union movement cash bonus for call girls and booze.
    So what’s the answer soar like a eagle not a turkey and do not invest your money in corrupt and high levelaged companies who short sellers are sending to their grave.
    Atleast some poor Mum and Dads will save money if these rotten companies are wiped out EARLY!
    If you ignore this advice your shares maybe a turkey.

  40. Drood Says:

    TRB ….what sbout the employees?

  41. TRB Says:

    Drood that’s where intregity and responsibility has been lost in our society.

    As Viktor Frankl said “Man has the freedom to choose”.

    As for HIH and Babcock Brown employees they knew, rejecting insurance policies to people in a very bad situation was wrong.
    Babcock & Brown Employees knew alot of the financial products they were selling 100% sure to blow up.
    Milgram experiment increase the volts to 400 volts and kill the person as long as I don’t need to take responsibility and I still pick up my money every week.

  42. M&M Says:

    Drood

    A business might have been overleveraged and badly run, they may fail becasue of it, but if their product or service is good (not toxic, not a saham) and the demand for their product or service still exists then many of the employees will find a job elsewhere in the industry….. eventually.

    But yes there will be dislocation.

  43. Drood Says:

    TRB and M&M ….I dont disagree with what your saying , what i advocate is a little bit of the innovation youre so fond of. Everyone agrees the system has failed. People may differ on the reasons for failure but the fact remains. We need a new , completely different system if we are ever going to move on.

  44. M&M Says:

    Drood

    Until the system changes – the government and private sector will continue to act the same.

    When times are good we borrow & spend like drunken sailors, when really we should rat hole most of the surpluses or invest them in something productive.

  45. J.C. Says:

    Drood@38,
    “Cat go my tongue”? I answered your post! But is it serious??

  46. TRB Says:

    Drood
    We are showing innovation how offer do you hear short sellers are the good honest guys?
    Never the media thinks they are public enemy number one.
    Drood innovation is to happen you must have responsibility and deep sense of purpose.
    Example is Cochlear that invention the professor who made that happen did not do it for a bunch of money or share options.
    He did for a meaning a purpose to help humanity as Viktor Frankl would say.
    So you want society to change needs to start by taking responsibility not the victim mentality of today.
    I lost my money in the sharemarket who can I sue.
    I lost my job because those nasty shortsellers.
    People lose money because they herd, do not think independently and do not do the hard research themselves.
    People lose jobs fact of life, get over it look to help humanity in a productive way.

  47. Drood Says:

    TRB…. Drood innovation is to happen you must have responsibility and deep sense of purpose.

    Where,s yours?
    Is short selling someone the only idea you have?
    Its not even yours.
    You guys really are dinosaurs. What about a system that doesnt use money (and i have lived in one).
    The free market that you guys so espouse would work perfectly if there was no money.
    Innovation means coming up with something new, something that has not been tried before.
    It has absolutely nothing to do with losing jobs or who pays what taxes.
    It has everything to do with helping each other to achieve more.
    In my teens , talk was of a future where all people worked less , had great healthcare and more leisure time to enjoy with their families.
    What future has your system brought so far, nothing but negativity. you can only have it if you have the money.
    What exactly do you do that is so productive? You tell everyone to stop whingeing and earn their living, while you gamble your lazy ass off, screwing their living over and whining about about it being the banks, governments anyone but your own fault that you cant make money.
    Hows about taking a leaf out of your own responsibility manual and earning your living through actual productive work.
    What is your ambition? To die laid on top of a bigger pile of money than anyone else?
    Tell me something new, tell me how you intend to make the world better for your children to live in.
    Innovate.



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