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How markets react over the next few days will be very interesting. I have to say, I’m surprised by Ben Bernanke’s comments that the <b>US economy</b> is healing.

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The US Economy Butterfly Effect

Posted on 20 June 2013 by Murray Dawes

The Bernank has spoken. All hail the Bernank. 

According to Ben Bernanke, Chairman of the US Federal Reserve, the US is doing swimmingly and he will be able to start lowering Quantitative Easing (QE) towards the end of the year. 

The key news points that came out of the press conference, as reported on ZeroHedge, were:

‘BERNANKE SAYS JOB GAINS, HOUSING INCREASED CONSUMER CONFIDENCE’

‘BERNANKE SAYS MONETARY POLICY WILL CONTINUE TO SUPPORT RECOVERY’

‘BERNANKE SAYS FOMC `MAY VARY’ PURCHASE PACE ON ECONOMIC DATA’

‘BERNANKE: FOMC MAY `MODERATE’ PACE OF PURCHASES LATER IN 2013′

‘BERNANKE SAYS FED MAY END PURCHASES AROUND MID-YEAR 2014′

‘BERNANKE SAYS FED WILL EASE QE PACE IF ECONOMY IMPROVES’

‘BERNANKE SAYS PURCHASE REDUCTION REPRESENTS FOMC CONSENSUS’

Credit markets reacted swiftly to the news and sold off aggressively. US 10 year Treasury rates increased by 16 or so basis points to a yield of 2.36%. That’s the highest level in over a year. Stocks plummeted, with the S+P 500 falling by 22 points or 1.4% to 1629.

How markets react over the next few days will be very interesting to watch. If the initial knee jerk reaction to sell gathers steam and the S+P 500 falls below the last couple of weeks’ low of 1598 my conviction levels will increase dramatically that further large falls are in the offing…

I have to say I’m surprised by Bernanke’s comments that the US economy is healing and will be strong enough within the next few months to withstand a tapering of QE. It doesn’t really stack up against the flow of soggy data we’ve seen in recent weeks.

As you can see in the chart below the current flow of macro data is far from rosy:

US Macro Data Still Weak



Source: ZeroHedge.com

I can’t see how Bernanke could justify tapering based on a strengthening in the US economy. My view is that the Fed is scared stiff it has created a monster by blowing so many bubbles all over the world. So they have decided that the sooner they take some steam out of the markets the better.

I’m sure their main aim is to ensure they don’t create a crash, but instead engineer a slow deflation from lofty levels.
The first act in this saga involved hinting loud and clear to the market that tapering was on the table as an option.

The hugely volatile swings we saw across all markets as a result, with carry trade unwinds leading to a large rise in rates and massive currency swings, are sure to have frightened the hell out of them.

Watch These Two Countries

The carry trade has become an incredibly crowded trade. It has been the catalyst for the big rallies we’ve seen over the past year. The mere hint that this game was going to become riskier saw punters heading for the door. And we know what happens when everyone wants out at the same time.

The interesting things to watch from here are the reactions in Japan and China. Japan’s bond markets have been under increasing pressure due to the crazy money printing policies of the Bank of Japan.

They have somehow managed to keep rates below the 1% threshold after intervening in the markets the last time that level was tested a few weeks ago.

But a large rise in US rates will necessarily place upward pressure on Japanese rates as investors switch out of JGB’s and into US bonds.

You also need to watch China closely from here due to the large cracks appearing in their shadow banking system.

We’re starting to see the initial signs of stress in the Shibor (Shanghai Interbank offer rate) with the rate spiking towards 10% recently.

Shibor Rate Spikes



Source: Shibor.org

The Shibor is the Chinese equivalent of the Libor (London interbank offered rate) which is the rate banks charge each other for overnight loans. It’s an important rate which shows signs of stress within the banking system when it shoots higher.

An article in the Age on Tuesday by Ambrose Evans-Pritchard has caused quite a stir. It arrived in my inbox from multiple sources.

The opening line says, ‘China’s shadow banking system is out of control and under mounting stress as borrowers struggle to roll over short-term debts, Fitch Ratings has warned.

Apparently Bank Everbright (unfortunate name really…) defaulted on an interbank loan a couple of weeks ago amid the big spikes in the Shibor that you can see in the chart above. I’m sure they’re not feeling so bright after all. According to the article:

Fitch warned that wealth products worth $US2 trillion of lending are in reality a "hidden second balance sheet" for banks, allowing them to circumvent loan curbs and dodge efforts by regulators to halt the excesses.

This niche is the epicentre of risk. Half the loans must be rolled over every three months, and another 25 per cent in less than six months. This has echoes of Northern Rock, Lehman Brothers and others that came to grief in the West on short-term liabilities when the wholesale capital markets froze.

The other very interesting point made in the article was the potential for an exodus of hot money out of China once the US Fed starts tightening monetary conditions.

In the article it states that China’s security journal said ‘foreign withdrawals from Chinese equity funds were the highest since early 2008 in the week up to June 5, and withdrawals from Hong Kong funds were the most in a decade.

So with US rates spiking higher on the fear of a withdrawal of monetary morphine by the US Federal Reserve, we may see the unintended consequences of their actions unravelling fragile markets all over the globe.

Murray Dawes
Editor, Slipstream Trader

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Don’t get sucked into this <b>central bank</b> game-playing. The market is a voting machine in the short-term, and a weighing machine in the long run.

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How to Protect Your Portfolio from Central Bankers’ Mind Games

Posted on 18 June 2013 by John Stepek

Sir Mervyn King has an oft-quoted story about central banking. He talks about Diego Maradona scoring a particular goal.

He looked like he was going to move left, so the defenders reacted. Then he looked like he’d move right, so they reacted to that. And in the end, he scored by simply running in a straight line down the middle of the pitch.

I’m sure someone who’s actually interested in football could give you a much more compelling rendition of that story, so my apologies to any fans out there.

But the outgoing Bank of England governor’s point is that a big part of a central banker’s job is to manage expectations. What the market thinks you’ll do is at least as important as what you actually do.

So the big question for this week is: what does Ben Bernanke want us all to think?

Ben Bernanke Tries to Do a Maradona

The big central bank story this week is the meeting of the Federal Reserve’s policy making team on Wednesday. Fed chief Bernanke will make a statement afterwards, and investors will be hanging on his every word.

Why does this matter so much? Well, in case you hadn’t noticed, the big slump in most stock and bond markets around the world is down to fears that the Federal Reserve is going to turn the money taps off by ending its quantitative easing (QE) programme.

At the start of this year, we’d hit a ‘Goldilocks’ moment. Growth wasn’t strong enough to justify stopping QE. But it was good enough to justify rising stock markets.

But then Bernanke and other Fed members opened their mouths and hinted that it might be time to start thinking about possibly winding things down, depending on how the economic data panned out.

It’s important to understand: all the Federal Reserve has done is suggested that it might pull back if the US economy looks like it’s recovering. It’s still manning the monetary pumps. There’s still $85bn being shoved into the markets every month.

Yet the suggestion it would end has been enough to inspire a correction in most markets (that’s a 10% fall), and send others into a bear market (a 20% or more fall).

So is Bernanke pulling a Maradona? Is he faking this move to tighten things up, just to keep markets on their toes?

The Federal Reserve Has Every Excuse to Keep the Money Flowing

The truth is, I find it hard to believe that the Federal Reserve will start tightening monetary policy as early as markets are worried that it will.

Bernanke is probably the most famous student of the Great Depression on the planet. It’s his view that the problem both back then and in Japan is that the central banks didn’t do enough. Any time it looked as though they were going to succeed, they pulled out too early.

He’s not going to take that risk, and he doesn’t have to. The Fed has all the excuses it needs to keep monetary policy slack.

Inflation – at least by official measures, which is all that counts for Fed policy – is really not a problem in the US. With commodity prices under pressure, you could even make an argument that deflation is a threat.

I don’t want to get into a debate over the merits or otherwise of deflation here (though I’d argue that falling commodity prices are a good thing, and not to be countered by monetary policy). The point is, Bernanke is under no pressure to withdraw QE.

So having given over-exuberant investors a sobering reminder of the abyss we are all tightrope-walking over, I suspect the Fed will extend some words of comfort at its meeting this week. And if that’s the case, then markets would probably bounce.

But we can’t be sure. This is the problem with expectations management. Maybe the Federal Reserve doesn’t think investors are scared enough yet. Or maybe now that investors have had a wake-up call, it’ll take more than a few soothing words to get them to stop fleeing risky assets.

So what can you do? Simple. Don’t get sucked into this central bank game-playing. Warren Buffett once said that the market is a voting machine in the short-term, and a weighing machine in the long run.

So from day to day, it’s all about how investor mood swings and fads affect where money is flowing to. But in the longer term, quality and value will out – buy decent companies and assets at relatively cheap prices, and you’ll make money.

John Stepek
Contributing Writer, Money Morning

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bank Credit of All Commercial Banks

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Bernanke’s Excuse for Mass Looting

Posted on 22 December 2012 by MoneyMorning

Bernanke said that to remedy the unemployment problem he will continue the Fed’s program of asset purchases. Specifically, the Fed will continue to buy and hold mortgage-backed securities (yes, they are still sloshing around the banking system) and US Treasury securities – $40 billion-plus per month. Plus, he will keep the federal funds rates at near zero.

The great change, he said, is the intense focus on the policy objective of unemployment. The committee sees no inflation threat, so it might as well turn its attention to the labor markets. The Fed loves the unemployed, you see, and wants to help them.

But here’s the disconnect. What the devil does buying bad debt from zombie banks have to do with getting people jobs? The relationship between assets purchases and policy goals is murky at best.

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Emini S+P 500 futures

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An Addicted Stock Market About to Suffer Withdrawals

Posted on 20 June 2012 by Murray Dawes

I have rarely seen a stock market so beautifully poised for disappointment. Pavlov’s dogs are salivating at the thought of more free money spewing out of the Fed tonight. If the Fed disappoints you are going to wake up to a US market down 2–3% tomorrow morning.

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Not Much of a Debate: Inflation is Part of the US Plan

Posted on 02 February 2012 by MoneyMorning

Forget about lost decades. Forecasts that we’ll be turning Japanese couldn’t be further from the truth.

Here’s why.

It’s simple, really. Deflation is not in the interest of anybody in power, so it’s very unlikely to happen.

The U.S. Federal Reserve’s policy move to target inflation just re-emphasises this point.

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consumer price index chart

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Fed Up With Inflation…

Posted on 03 November 2011 by Kris Sayce

Are You Prepared to Make This Sure Bet?

Making predictions is a tricky business.

The probability of picking six correct numbers in a 49-ball lottery is one in 10 billion.

In a two-horse race you’ve got a one-in-two chance. But there’s still no guarantee you’ll back the winning nag… even favourites get beaten sometimes.

As a stock picker, we know that all too well.

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High Tide for Liquidity

Posted on 04 March 2011 by Greg Canavan

Yesterday we discussed the prospect of the US dollar no longer benefiting from ‘safe-haven’ inflows in times of turmoil. Soon after we read that 78-year-old US hedge fund manager Julian Robertson, who runs the Tiger Funds, wasn’t too impressed with the greenback either.

‘It’s not my refuge’, he said.

Robertson was in Sydney yesterday trying to get a slice of the superannuation market for his Tiger Management Group. He told the audience that authorities were obsessed with not wanting to do anything about the US debt burden.

There’s a bull market in opinions at the moment. But not all opinions have the weight of money behind them like Robertson, a veteran of the hedge fund industry. Continue Reading

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Learning From Past Mistakes

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Learning From Past Mistakes

Posted on 02 February 2011 by Murray Dawes

Economic figures released in the States overnight show the recovery could be picking up steam. The Institute of Supply Management (ISM) manufacturing index rose to 60.8% in January from 58.5% in December. If the ISM figure is above 50% it means manufacturing is expanding. A 60.8% figure is a strong number.

Equity markets reacted with a cheer and the S+P 500 closed above 1300 for the first time since August 2008. The rally that started in late August 2010 – after Bernanke’s speech – appears to be in full swing. Equity funds in the US have seen inflows exceeding $2 Billion for two weeks in a row. It’s the first time since June 2009. Meanwhile Bond funds are seeing outflows after two years of record inflows over 2009 and 2010.
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