viernes, mayo 20, 2016

VACACIONES MAYO 2016

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VACACIONES MAYO 2016

Jueves 28 de Abril del 2016

Queridos amigos,



Les escribo estas líneas con motivo de mi próximo viaje, el que me tendrá ausente de la oficina y de nuestras lecturas cotidianas, desde el lunes 2 hasta el lunes 23 de Mayo próximo, que me reintegro a mis labores.


Durante estos días no tendré acceso regular al Internet ni a mis correos.
  
  
En los últimos meses la situación económica y financiera internacional se ha seguido deteriorando aun mas, con el consiguiente aumento creciente de la volatilidad de los mercados financieros, según lo ya previsto en mi carta de Octubre pasado, replicada en algunos párrafos líneas más abajo para mayor abundancia, impactando duramente a los países emergentes, las monedas, el petróleo y los precios de los "commodities", el fortalecimiento notable del dólar norteamericano, típico de las épocas de crisis, y una retracción cada vez más marcada del crecimiento del producto mundial, ahora ya reconocido por todos los bancos centrales, lo que nos coloca claramente bajo la sombra del temor de una potencial deflación y de la recesión global, cada vez más inevitable.  
 
En los últimos dos meses el anuncio de una política de aumento de intereses menos agresiva que la anunciada previamente, por parte de la FED, ha debilitado ligera
y temporalmente al dólar, e impactado transitoriamente de manera positiva a los precios de las materias primas y los mercados de acciones.
 
La pregunta es cuanto tiempo puede durar esta situación en una economía global manipulada descaradamente por los bancos centrales y en franco camino de deterioro, con el continuo crecimiento de la desigualdad de los ingresos y una clase media cada vez mas disconforme, como lo reflejan las coyunturas políticas preocupantes de los últimos tiempos, tanto en los Estados Unidos de Norteamérica, como en Europa y el resto del mundo. La enorme volatilidad de los mercados financieros, que pensamos será cada vez mayor, es un síntoma de esta situación insostenible a mediano y largo plazo. 
El artículo de hace unos meses de Doug Nolan, "The Unwind", al que pueden acceder mediante el "link" anterior, describe claramente la situación precaria de la economía global, los mercados financieros, las deudas y el crecimiento económico mundial, por lo que me abstendré de mayores comentarios.  También pueden acceder al  articulo de Doug Nolan, "New World Disorder".  
 
La reciente creciente y notable volatilidad de los mercados financieros, las dudas hamletianas de la Reserva Federal sobre las tasas de interés y la reciente volatilidad de las bolsas, son solo una pequeña muestra de la descomposición de las economías y los mercados globales.

En realidad no podía ser de otra manera, si tenemos en cuenta que no se ha hecho nada en los últimos años para reparar los profundos desequilibrios estructurales en los fundamentos de la economía global, sino que más bien, por el contrario, se ha seguido "maquillando" por parte de los bancos centrales la insostenible situación económica y financiera global, profundizando los desequilibrios y la inestabilidad vía el constante crecimiento de las deudas, aumentando las ineficiencias y dilatando el necesario ajuste. El crecimiento estructural de la economía global es cada vez más frágil, dudoso e insostenible.


Hasta la crisis del 2000 y luego de la del 2008, ahora así llamada la Gran Recesión, la demanda global había sido “subvencionada” por un sistema financiero manipulado e intervenido, creando una demanda y una economía global ficticia, una recuperación así llamada "subprime", liderada por la FED mediante un crecimiento desproporcionado de las deudas, imposible de auto-sustentarse en un crecimiento de la economía real en el largo plazo. 


Deuda, deuda y más deuda, parece ser el mantra de la FED.

Desde entonces, la FED y el resto los bancos centrales de todos los países más importantes del mundo se han negado y se siguen negando a reconocer esta realidad, aceptando el inicio de un ajuste inevitable y estructural, regresando a un nivel real de la economía global de alguna manera manejable. Aún siguen abocados al esfuerzo de una gran represión financiera, manipulando e inflando irresponsablemente los mercados financieros vía una política monetaria de emisiones inorgánicas de papel moneda sin respaldo y muy bajas tasas de interés, o hasta tasas de interés negativas en muchos países del primer mundo. Actualmente se estima que existen aproximadamente 7 trillones de dólares de inversiones en tasas de interés negativas.

Las deudas de consumidores, empresas y gobiernos, eran y son insostenibles.

Por ello creemos que los bancos centrales no aumentarán de "motu propio" las tasas de interés de manera importante a corto plazo, salvo que este aumento provenga final y sorpresivamente de una crisis generada por la desaparición de la confianza de los inversionistas globales en los mercados financieros. Mas bien los bancos centrales seguirán, en la medida de lo necesario, con su política de seguir emitiendo e inyectando moneda sin respaldo a los mercados, bajando las tasas de interés a niveles aun mas negativos e interviniendo los mercados de capitales mediante compras de bonos y de acciones, distorsionando cada vez mas los precios de los activos financieros en todo el mundo.

Inmediatamente sus deudas se volverían obviamente impagables y la crisis que tanto han tratado de evitar reconocer, sobrevendría inevitable.

Solo para mencionar al país con la economía más importante, la deuda de los Estados Unidos de Norteamérica ha crecido por encima de los 18 trillones de dólares, a más del 100% de su PBI. Y si incluimos las deudas contingentes internas, como el Seguro Social y los Fondos de Pensiones, algunos analistas calculan que la deuda norteamericana podría llegar a sumar entre los 80 a 120 trillones de dólares, es decir, entre 5 a 7 veces el producto bruto anual. Y en aumento.

Para un análisis detallado del desarrollo de esta problemática y la verdadera situación actual, ver los artículos del blog, aquí, aquí y aquí.

Esta situación se ha seguido agravando en los últimos años y es insostenible en el mediano y largo plazo.  (ver articulo)

Para evitarlo, es que los bancos centrales han tenido que esforzarse en mantener ficticiamente una apariencia de normalidad en el "statu quo", inyectando cantidades innombrables de papel moneda sin respaldo a los mercados financieros y reducido las tasas de interés a niveles nunca vistos por largo tiempo, desde que la historia económica recuerda. (QE1, QE2, QE3, Q4, Abenomics, China, etc….)

Todo ello nos hace presumir que todo ello se lleva a cabo por el fundamentado temor a perder el control del esquema Ponzi mundial, que es lo que son ahora la economía global y los mercados financieros, y por ende se derrumbe el castillo de naipes enfrentando de golpe un ajuste económico enorme y hasta la posibilidad de una revolución social incontenible, guerras, etc.

El hecho es que el esfuerzo de política monetaria intervencionista llevada a cabo por la mayoría de los bancos centrales del mundo, en los últimos 15 años, más intensa y desproporcionadamente desde los últimos siete años, además, ha producido la transferencia más importante de riqueza que se recuerda en la historia, de manos de los pensionistas y los ahorristas, hacia las clases privilegiadas y los bancos. 

Mas importante todavía, se ha distorsionado y manipulado fundamentalmente las reglas de la economía del libre mercado con consecuencias funestas y aun impredecibles en el mediano y largo plazo para los consumidores e inversionistas del mundo, incrementando la locación  ineficiente de los recursos de inversión, además de multiplicar el costo de la inevitable implosión de los mercados financieros, tanto de las acciones, como de los bonos y otros instrumentos de inversión financiera.

Todo esto para no mencionar a los derivados financieros, estimados por algunos analistas en más de 1 cuatrillón de dólares (1000 trillones de dólares),  que se ciernen como una espada de Damocles, sobre todo el sistema financiero y económico internacional.

El mismo FMI ha advertido hace ya unos meses de la posibilidad que la economía global está entrando a un periodo de "stagnación" y a una probable nueva recesión, con las consecuencias que ello implicaría. (ver articulo) Y recientemente ha vuelto a reducir su estimado de crecimiento para la economía global de 3.6% a 3.2%. No nos extrañaría que estos estimados se sigan reduciendo en el futuro cercano, especialmente si tenemos noticias negativas del desarrollo de la economía China, en la que algunos analistas esta comenzando a prever un "hard landing" y de la enorme deuda interna de la economía China, influenciando negativamente de manera importante  a los mercados financieros globales.

Obviamente estos organismos no pueden decirnos toda la verdad. Ello sería propiciar ellos mismos el adelanto inevitable del descalabro global, el caos y el ajuste sin anestesia, con resultados imprevisibles. 

La pregunta de fondo es ¿hasta cuándo se podrá o podrán mantener esta realidad bizarra?
Y eso nadie lo puede responder con seguridad. La confianza de los inversionistas en los mercados financieros es la verdadera incógnita.

Por ello ahora tenemos que seguir preguntándonos seriamente, ¿Cuál de todos los potenciales "cisnes negros", conocidos o no, que hoy se ciernen sobre la economía global ,y que son muchos, económicos, sociales y geopolíticos, podrían ser el detonante de la nueva catástrofe?

Solo la historia nos responderá a esta crucial pregunta.


Por ahora, podemos especular que las próximas elecciones norteamericanas en Noviembre próximo son y serán un factor de gran importancia para el comportamiento de la FED, manipulando los mercados lo mejor posible, para influenciar de manera  positiva a la administración saliente, o dicho de otra manera, para evitar perjudicarla lo mayor posible, con un ajuste enorme y anticipado de las grandes incoherencias en la que se encuentra la economía norteamericana y la global como consecuencia de dichas intervenciones de los bancos centrales, en especial de la FED. 

Mientras tanto, en medio de este mundo bizarro, tenemos que insistir nuevamente y más que nunca, que la experiencia y la prudencia, el análisis y la inteligencia, la vigilancia y la paciencia, son los socios más importantes en las decisiones de políticas y estrategias de inversión a corto y mediano plazo.

En un cambio importante de ciclos como en el que pensamos que estamos envueltos hoy día, y en el que más allá de lo circunstancial, el pasado y el futuro se bifurcan y se oponen, los riesgos para los inversionistas son profundos. (ver articulo)

Con estas  anotaciones y advertencias que espero les sean de utilidad, me despido de Uds. con un cordial abrazo hasta el regreso a mis actividades, Dios mediante, a inicios de la tercera semana de Mayo próximo, cuando estaré nuevamente a su gentil disposición.

Gonzalo

PD. Para leer los artículos pueden subscribirse directamente entrando al blog:  www.gonzaloraffoinfonews.com


Op-Ed Contributor

Refugees Shouldn’t Be Bargaining Chips

By BEN RAWLENCE



 
TALGARTH, Wales — IN March, the European Union and Turkey struck a deal: Turkey would build camps to house refugees who were refused entry to Europe, and the European Union would pay for them — 3 billion euros (about $3.4 billion) in the first instance, with another 3 billion euros to follow. Other countries were watching closely, and we are now beginning to see the repercussions.
 
On May 3, the West African country of Niger demanded 1.1 billion euros (about $1.2 billion) from the European Union to stop migrants on their way to Libya and the Mediterranean. Then, last week, Kenya’s government announced that it planned to close the world’s largest refugee camp, Dadaab, citing Europe’s example of turning away Syrians to justify its plan to forcibly return nearly 600,000 Somali refugees to Somalia.
 
Karanja Kibicho, a senior Kenyan government official responsible for counterterrorism, declared — tellingly, in a British newspaper — “we can no longer allow our people to bear the brunt of the international community’s weakening obligations to the refugees.” He also noted “a falloff in the voluntary international funding for the camps in Kenya, in favor of raising budgets in the Northern Hemisphere to refugees headed to the West.”
 
Refugee camps are chronically underfunded. But Kenya’s proposal is not about the needs of the refugees — it is a demand for ransom. Kenya has threatened to close the camps twice already, citing security concerns following terrorist attacks on the Westgate mall in Nairobi in 2013 and Garissa University in 2015. In response, Secretary of State John Kerry promised $45 million in extra aid for Kenya — aid that is unlikely to go anywhere near the camps, which are entirely paid for by the United Nations.
 
Having cried wolf before, Kenya has had to work harder to gain international attention. To prove its seriousness, last week it disbanded its Department of Refugee Affairs and revoked prima facie refugee status for Somalis seeking asylum, which ensures that future arrivals will be undocumented and at immediate risk of deportation. Kenya has also relentlessly scapegoated refugees for terrorism, undeterred by the lack of any evidence linking the camps to attacks.
Against the backdrop of the Turkey deal, refugees are a good currency to hold: a hedge against foreign criticism, a liability for which to blame domestic problems, and a bargaining chip for special favors from abroad. In its vulgar attempt to buy itself out of its international obligations, the European Union has started a bidding war.
 
This is dangerous. Eighty percent of displaced people in the world are hosted in developing nations.
 
The world is moving toward a situation in which the rights of refugees are enumerated not in international laws and treaties but in dollars and euros. Earlier this month, the European Union agreed to a change to its common asylum policy that allowed member states to refuse to accept their quota of refugees resettled from front-line countries, like Greece and Italy, for a “solidarity contribution” of 250,000 euros (about $283,000) per head.
 
This is madness for many reasons, but most of all because in refusing to accept a refugee, a country is refusing to admit an employable human being who will, most economic studies show, make a positive contribution to economic growth in the long run. This was, partly, the basis of the German chancellor Angela Merkel’s argument for accepting such a large influx of asylum seekers into Germany in 2015.
 
Along similar lines, David Miliband, head of the International Rescue Committee and a former British foreign secretary, called on Saturday for a huge international effort to resettle in rich countries the most vulnerable refugees currently living in camps, and for the rest to be accepted as productive residents with the right to work in their host countries.
 
It is a sound idea. As Dadaab’s 400,000 residents have done, refugees build economies and communities whether you allow them to or not. Despite Kenya’s attempts to keep Dadaab temporary, forbidding permanent structures, roads, sanitation and power, the camp is a full-fledged city. Denying Dadaab’s permanence wastes international funds and forgoes tax revenues and refugee talent. The United Nations has paid to educate three generations of people who are forbidden to work.
 
The choice facing host nations is actually between informal and formal economies. With a little more vision, 25 years of humanitarian funding for Dadaab could have been spent on investing in a city and a population that could, eventually, employ refugees and Kenyans alike, contributing millions in taxes and providing a bridgehead into Somalia for peace and development.
 
Despite the obvious common sense of the Miliband approach, the gap between such a generous global vision and the harsh realities of a xenophobic politics from Nairobi to New Hampshire is wide. Dadaab has survived as an isolated slum precisely because Kenya does not want to swell the Somali vote by up to one million refugees, or 2 percent of Kenya’s population.
 
It seems that most countries would prefer to deport potential taxpayers and pay huge fines in order to deny themselves economic growth. The World Humanitarian Summit, a United Nations-sponsored conference that will be held later this month in Istanbul, is an opportunity to shift the global discussion about refugees toward the potential benefits for all. But I fear it will simply turn into an auction.
 
 
 


This Is The Bubble That No One Is Talking About

by: Lawrence Fuller

- There has been an inexplicable divergence between the performance of the stock market and market fundamentals.

- I believe that it is the growth in the monetary base, through excess bank reserves, that has created this divergence.

- The correlation between the performance of the stock market and the ebb and flow of the monetary base continues to strengthen.

- This correlation creates a conundrum for Fed policy.

- It is the bubble that no one is talking about.

 
The Inexplicable Divergence
 
After the closing bell last Thursday, four heavyweights in the S&P 500 index (NYSEARCA:SPY) reported results that disappointed investors. The following morning, Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL), Microsoft (NASDAQ:MSFT), Starbucks (NASDAQ:SBUX) and Visa (NYSE:V) were all down 4% or more in pre-market trading, yet the headlines read "futures flat even as some big names tumble post-earnings." This was stunning, as I can remember in the not too distant past when a horrible day for just one of these goliaths would have sent the broad market reeling due to the implications they had for their respective sector and the market as a whole. Today, this is no longer the case, as the vast majority of stocks were higher at the opening of trade on Friday, while the S&P 500 managed to close unchanged and the Russell 2000 (NYSEARCA:IWM) rallied nearly 1%.
 
This is but one example of the inexplicable divergence between the performance of the stock market and the fundamentals that it is ultimately supposed to reflect - a phenomenon that has happened with such frequency that it is becoming the norm. It is as though an indiscriminate buyer with very deep pockets has been supporting the share price of every stock, other than the handful in which the selling is overwhelming due to company-specific criteria. Then again, there have been rare occasions when this buyer seems to disappear.
 
Why did the stock market cascade during the first six weeks of the year? I initially thought that the market was finally discounting fundamentals that had been deteriorating for months, but the swift recovery we have seen to date, absent any improvement in the fundamentals, invalidates that theory. I then surmised, along with the consensus, that the drop in the broad market was a reaction to the increase in short-term interest rates, but this event had been telegraphed repeatedly well in advance. Lastly, I concluded that the steep slide in stocks was the result of the temporary suspension of corporate stock buybacks that occur during every earnings season, but this loss of demand has had only a negligible effect during the month of April.

The bottom line is that the fundamentals don't seem to matter, and they haven't mattered for a very long time. Instead, I think that there is a more powerful force at work, which is dictating the short- to intermediate-term moves in the broad market, and bringing new meaning to the phrase, "don't fight the Fed." I was under the impression that the central bank's influence over the stock market had waned significantly when it concluded its bond-buying programs, otherwise known as quantitative easing, or QE. Now I realize that I was wrong.
 
The Monetary Base
 
In my view, the most influential force in our financial markets continues to be the ebb and flow of the monetary base, which is controlled by the Federal Reserve. In layman's terms, the monetary base includes the total amount of currency in public circulation in addition to the currency held by banks, like Goldman Sachs (NYSE:GS) and JPMorgan (NYSE:JPM), as reserves.
 
Bank reserves are deposits that are not being lent out to a bank's customers. Instead, they are either held with the central bank to meet minimum reserve requirements or held as excess reserves over and above these requirements. Excess reserves in the banking system have increased from what was a mere $1.9 billion in August 2008 to approximately $2.4 trillion today. This accounts for the majority of the unprecedented increase in the monetary base, which now totals a staggering $3.9 trillion, over the past seven years.
 
 
The Federal Reserve can increase or decrease the size of the monetary base by buying or selling government bonds through a select list of the largest banks that serve as primary dealers.
 
When the Fed was conducting its QE programs, which ended in October 2014, it was purchasing US Treasuries and mortgage-backed securities, and then crediting the accounts of the primary dealers with the equivalent value in currency, which would show up as excess reserves in the banking system.
A Correlation Emerges
 
Prior to the financial crisis, the monetary base grew at a very steady rate consistent with the rate of growth in the US economy, as one might expect. There was no change in the growth rate during the booms and busts in the stock market that occurred in 2000 and 2008, as can be seen below. It wasn't until the Federal Reserve's unprecedented monetary policy intervention that began during the financial crisis that the monetary base soared, but something else also happened. A very close correlation emerged between the rising value of the overall stock market and the growth in the monetary base.
 
 
It is well understood that the Fed's QE programs fueled demand for higher risk assets, including common stocks. The consensus view has been that the Fed spurred investor demand for stocks by lowering the interest rate on the more conservative investments it was buying, making them less attractive, which encouraged investors to take more risk.
 
Still, this does not explain the very strong correlation between the rising value of the stock market and the increase in the monetary base. This is where conspiracy theories arise, and the relevance of this data is lost. It would be a lot easier to measure the significance of this correlation if I had proof that the investment banks that serve as primary dealers had been piling excess reserves into the stock market month after month over the past seven years. I cannot. What is important for investors to recognize is that an undeniable correlation exists, and it strengthens as we shorten the timeline to approach present day.
 
The Correlation Cuts Both Ways
 
Notice that the monetary base (red line) peaked in October 2014, when the Fed stopped buying bonds. From that point moving forward, the monetary base has oscillated up and down in what is a very modest downtrend, similar to that of the overall stock market, which peaked a few months later.
 
What I have come to realize is that these ebbs and flows continue to have a measurable impact on the value of the overall stock market, but in both directions! This is important for investors to understand if the Fed continues to tighten monetary policy later this year, which would require reducing the monetary base.
 
If we look at the fluctuations in the monetary base over just the past year, in relation to the performance of the stock market, a pattern emerges, as can be seen below. A decline in the monetary base leads a decline in the stock market, and an increase in the monetary base leads a rally in the stock market. The monetary base is serving as a leading indicator of sorts. The one exception, given the severity of the decline in the stock market, would be last August. At that time, investors were anticipating the first rate increase by the Federal Reserve, which didn't happen, and the stock market recovered along with the rise in the monetary base.
 
 
 
If we replace the fluctuations in the monetary base with the fluctuations in excess bank reserves, the same correlation exists with stock prices, as can be seen below. The image that comes to mind is that of a bathtub filled with water, or liquidity, in the form of excess bank reserves. This liquidity is supporting the stock market. When the Fed pulls the drain plug, withdrawing liquidity, the water level falls and so does the stock market. The Fed then plugs the drain, turns on the faucet and allows the tub to fill back up with water, injecting liquidity back into the banking system, and the stock market recovers. Could this be the indiscriminate buyer that I mentioned previously at work in the market? I don't know.
 
 
 
What I can't do is draw a road map that shows exactly how an increase or decrease in excess reserves leads to the buying or selling of stocks, especially over the last 12 months. The deadline for banks to comply with the Volcker Rule, which bans proprietary trading, was only nine months ago. Who knows what the largest domestic banks that hold the vast majority of the $2.4 trillion in excess reserves were doing on the investment front in the years prior. As recently as January 2015, traders at JPMorgan made a whopping $300 million in one day trading Swiss francs on what was speculated to be a $1 billion bet. Was that a risky trade?
 
Despite the ban on proprietary trading imposed by the Volcker Rule, there are countless loopholes that weaken the statute. For example, banks can continue to trade physical commodities, just not commodity derivatives. Excluded from the ban are repos, reverse repos and securities lending, through which a lot of speculation takes place. There is also an exclusion for what is called "liquidity management," which allows a bank to put all of its relatively safe holdings in an account and manage them with no restrictions on trading, so long as there is a written plan. The bank can hold anything it wants in the account so long as it is a liquid security.
 
My favorite loophole is the one that allows a bank to facilitate client transactions. This means that if a bank has clients that its traders think might want to own certain stocks or stock-related securities, it can trade in those securities, regardless of whether or not the clients buy them. Banks can also engage in high-frequency trading through dark pools, which mask their trading activity altogether.

As a friend of mine who is a trader for one of the largest US banks told me last week, he can buy whatever he wants within his area of expertise, with the intent to make a market and a profit, so long as he sells the security within six months. If he doesn't sell it within six months, he is hit with a Volcker Rule violation. I asked him what the consequences of that would be, to which he replied, "a slap on the wrist."
 
Regardless of the investment activities of the largest banks, it is clear that a change in the total amount of excess reserves in the banking system has a significant impact on the value of the overall stock market. The only conclusion that I can definitively come to is that as excess reserves increase, liquidity is created, leading to an increase in demand for financial assets, including stocks, and prices rise. When that liquidity is withdrawn, prices fall. The demand for higher risk financial assets that this liquidity is creating is overriding any supply, or selling, that results from a deterioration in market fundamentals.
 
There is one aspect of excess reserves that is important to understand. If a bank uses excess reserves to buy a security, that transaction does not reduce the total amount of reserves in the banking system. It simply transfers the reserves from the buyer to the seller, or to the bank account in which the seller deposits the proceeds from the sale, if that seller is not another bank. It does change the composition of the reserves, as 10% of the new deposit becomes required reserves and the remaining 90% remains as excess reserves. The Fed is the only institution that can change the total amount of excess reserves in the banking system, and as it has begun to do so over the past year, I think it is finally realizing that it must reap what it has sown.
 
The Conundrum
 
In order to tighten monetary policy, the Federal Reserve must drain the banking system of the excess reserves it has created, but it doesn't want to sell any of the bonds that it has purchased. It continues to reinvest the proceeds of maturing securities. As can be seen below, it holds approximately $4.5 trillion in assets, a number which has remained constant over the past 18 months.

Therefore, in order to drain reserves, thereby reducing the size of the monetary base, the Fed has been lending out its bonds on a temporary basis in exchange for the reserves that the bond purchases created. These transactions are called reverse repurchase agreements. This is how the Fed has been reducing the monetary base, while still holding all of its assets, as can be seen below.
 
 
There has been a gradual increase in the volume of repurchase agreements outstanding over the past two years, which has resulted in a gradual decline in the monetary base and excess reserves, as can be seen below.
 
 
 
I am certain that the Fed recognizes the correlation between the rise and fall in excess reserves, and the rise and fall in the stock market. This is why it has been so reluctant to tighten monetary policy further. In lieu of being transparent, it continues to come up with excuses for why it must hold off on further tightening, which have very little to do with the domestic economy. The Fed rightfully fears that a significant market decline will thwart the progress it has made so far in meeting its mandate of full employment and a rate of inflation that approaches 2% (stable prices).
 
The conundrum the Fed faces is that if the rate of inflation rises above its target of 2%, forcing it to further drain excess bank reserves and increase short-term interest rates, it is likely to significantly deflate the value of financial assets, based on the correlation that I have shown.
 
This will have dire consequences both for consumer spending and sentiment, and for what is already a stall-speed rate of economic growth. Slower rates of economic growth feed into a further deterioration in market fundamentals, which leads to even lower stock prices, and a negative-feedback loop develops. This reminds me of the deflationary spiral that took place during the financial crisis.

The Fed's preferred measurement of inflation is the core Personal Consumption Expenditures, or PCE, price index, which excludes food and energy. The latest year-over-year increase of 1.7% is the highest since February 2013, and it is rapidly closing in on the Fed's 2% target even though the rate of economic growth is moving in the opposite direction, as can be seen below.
 
 
The Bubble
 
If you have been wondering, as I have, why the stock market has been able to thumb its nose at an ongoing recession in corporate profits and revenues that started more than a year ago, I think you will find the answer in $2.4 trillion of excess reserves in the banking system. It is this abundance of liquidity, for which the real economy has no use, that is decoupling the stock market from economic fundamentals. The Fed has distorted the natural pricing mechanism of a free market, and at some point in the future, we will all learn that this distortion has a great cost.
 
Alan Greenspan once said, "how do we know when irrational exuberance has unduly escalated asset values?" Open your eyes.
 
What you see in the chart below is a bubble. It is much different than the asset bubbles we experienced in technology stocks and home prices, which is why it has gone largely unnoticed.
 
It is similar from the standpoint that it has been built on exaggerated expectations of future growth. It is a bubble of the Fed's own making, built on the expectation that an unprecedented increase in the monetary base and excess bank reserves would lead to faster rates of economic growth. It has clearly not. Instead, this mountain of money has either directly, or indirectly, flooded into financial assets, manipulating prices to levels well above what economic fundamentals would otherwise dictate.
 
 
The great irony of this bubble is that it is the achievement of the Fed's objectives, for which the bubble was created, that will ultimately lead it to its bursting. It was an unprecedented amount of credit available at historically low interest rates that fueled the rise in home prices, and it has also been an unprecedented amount of credit at historically low interest rates that has fueled the rise in financial asset prices, including the stock market. How and when this bubble will be pricked remains a question mark, but what is certain is that the current level of excess reserves in the banking system that appear to be supporting financial markets cannot exist in perpetuity.

The Fed Surprise

 
 scary
 

There isn’t much away from what the Fed does—not earnings, economic data, or the price of widgets—that matter to investors over the past 7+ years.

Wednesday Fed Minutes were released from the most recent meeting and they surprised investors as members were poised to raise interest rates at the June meeting if the gods and conditions permitted.

Markets were higher before this release but this news caused markets to sell-off slightly. In fact, the news allowed financials and bank sectors to soar given higher interest rates would help the sector. Given the higher weight financials carry on indexes markets only fell to unchanged for the most part. Bottom line, the sizable increase in financials was misleading overall given large declines in other sectors.

But commodities (precious metals, crude oil and so forth) declined given the negative impact higher interest rates typically imply. The dollar was also stronger as higher interest rates would attract yield hungry investors.
Sectors that rose included small caps, biotech and tech sectors. Why? The generally rally since higher interest rates attract investors to higher PE sectors where risks and growth are higher. 

A feature of the past two weeks, and more, is the two-way action with a low volume short squeeze followed by a higher volume round of selling. This means confusion, especially for chartists like myself.

Below is the heat map from Finviz reflecting those ETF market sectors moving higher (green) and falling (red). Dependent on the day (green) may mean leveraged inverse or leveraged short (red).

5-18-2016 3-22-06 PM

Volume rose sharply on Fed release and breadth per the WSJ was negative especially when the Money Flow is viewed.

5-18-2016 3-22-45 PM
 
 
12-17-2015 9-04-44 PM Chart of the Day
 
 
 
5-18-2016 3-23-09 PM KBE



Charts of the Day


  • SPY 5 MINUTE

    SPY 5 MINUTE

  • SPX DAILY

    SPX DAILY

  • SPX WEEKLY

    SPX WEEKLY

  • INDU DAILY

    INDU DAILY

  • INDU WEEKLY

    INDU WEEKLY

  • RUT WEEKLY

    RUT WEEKLY

  • NDX WEEKLY

    NDX WEEKLY

  • NYMO DAILY

    NYMO DAILY
    The NYMO is a market breadth indicator that is based on the difference between the number of advancing and declining issues on the NYSE. When readings are +60/-60 markets are extended short-term.

  • NYSI DAILY

    NYSI DAILY
    The McClellan Summation Index is a long-term version of the McClellan Oscillator. It is a market breadth indicator, and interpretation is similar to that of the McClellan Oscillator, except that it is more suited to major trends. I believe readings of +1000/-1000 reveal markets as much extended.



  • VIX WEEKLY

    VIX WEEKLY
    The VIX is a widely used measure of market risk and is often referred to as the "investor fear gauge". Our own interpretation has changed due to a variety of new factors including HFTs, new VIX linked ETPs and a multitude of new products to leverage trading and change or obscure prior VIX relevance.















Without question there’s confusion aplenty.

Clearly higher interest rates would throw markets off. After all the last interest rate highe was last fall.

Since then, markets have become unstable.

Clearly the Fed wants to raise interest rates but are stuck by the box they’ve put themselves in—staying too long with low rates.

Let’s see what happens. 

The Midas Touch Consulting Report

By: Florian Grummes
. 

.
1. Market Update

During the last three weeks gold broke out to the upside and posted a sharp rally until $1,303 missing the January 2015 high only marginally. Since then prices have come back down to $1,257 retracing all of the previous gains. Overall the bulls remain in control and gold could still rally towards $1,333 - 1,355 before the first wave up is finally finished. In a new bull market gold will stay overbought much longer than anyone can imagine. But sooner or later the laws of gravitation and regression will force the corrective second wave down. Since gold is acting strong but making no progress overall since February it is very likely that we won't see prices below $1,180 anymore. In fact I see $1,180 - $1,215 as the zone where a pullback/dip should already end. This means the important 200MA ($1,156) will need quite some more time before it can act as massive support in this zone.

The gold- and silver-miners had a spectacular start into 2016. Some of them exploded more than 300% and 400% after being beaten down for nearly five years. Although it might be tempting to chase this sector the reality will bring us a pullback sooner or later. This dip will offer a great opportunity cause this sector has a long way to go up. I will present the first mining recommendation today and plan to add more during the next couple of months.

Despite many discussions about Bitcoin, the cryptocurrency is holding up very well and is consolidating the breakout above the downtrend-line for nearly three weeks now. I continue to think that the up trend will push Bitcoin towards $480-$500 in the next one or two months.

Now that "sell in may" has arrived and the US-Dollar is recovering as expected there is no need to chase any market. Instead let's be patient and wait for the inevitable pullback in gold, silver and the miners.

  2. Bitcoin - in a consolidation but $500 is very likely

Bitcoin Chart

Since the dynamic breakout above the downtrend-line and the spike towards $470 Bitcoin is in a consolidation for 19 days now. The bulls are still in control. The Bollinger Bands are moving sideways and pressure is building. Therefore soon or later we will get a big move here. I continue to believe that $500 is the next target. A breakout above this resistance zone will activate $800 as a mid-term target.

On the downside Bitcoin is very well supported with the 50MA ($438), the lower Bollinger Band ($442) and the 200MA ($408).The up trend since November is already coming in at $441.To avoid of being stopped out in the noise we keep our stop @ $410.

Action to take: Hold your Bitcoins and let your winnings run. Don't buy here.

  Stop Loss: Keep your stop at $410

  Profit Target: $800

  Timeframe 6 -18 months

  Initial Risk($80) / Reward($430) = 1 : 5.4 (very good ratio!!)

  Position Sizing: Don't risk more than 1% of your equity.

  3. The Midas Touch Gold Model neutral since May 9th

Midas Touch Gold Model


My Gold Model quickly jumped to a Buy Signal on April, 28th. Yet two weeks later it flipped back to a Neutral Signal.

Compared to my last public report we have two new bullish signals:

  SPDR Gold Trust Holdings

  Gold in $, €, £, ¥

Six new bearish signals are coming from:

Gold in USD - Daily Chart

 Gold Seasonality May


 Gold in Indian Rupee


 Gold in Chinese Yuan


GDX Gold miners - Daily Chart


 US-Dollar - Daily Chart


My model is neutral again. It will probably need a push above $1,295 in gold to get back into full Bull Mode.

  4. Gold not convincing but still strong

Daily Gold Chart

While the general markets are ruled by uncertainty these days gold leaves a somewhat mixed impression. On the one hand prices managed to climb all the way up to $1,303 missing the January 2015 high only marginally. The following pullback towards $1,257 has met immediate demand and the ETF investors have added more than 47 tones of gold during the last two weeks to their vaults.

This high physical demand in combination with the newly established Chinese gold-fixing has likely prevented any larger pullback. Actually since February we have not witnessed any of these waterfall sell offs in the gold market anymore. The only thing missing is a higher high above $1,307 to confirm that gold indeed is in a new bull-market. Personally I believe we are already on the way towards $1,500 but should get at least one or two larger pullbacks before gold is hitting this big horizontal resistance.

The bears might argue that Gold is basically still sitting at its February high around $1,262 and did not make any progress over the last three months. Looking at the extreme negative CoT-numbers and the ETF demand one can only wonder how much "new" speculative money is on board of the gold train now. It's still a small market and once everybody wants or needs to get out you will get this waterfall sell off again. But so far the CME Group has not raised the margin levels for gold futures and neither has the unfavorable seasonal cycle stopped the bulls.

Looking at the chart another run towards $1,300 is confirmed if gold can push above $1,280/1,285. This could happen within the next couple of days or after another brief intraday test of the 50MA ($1,249). A breakout above $1,285 would turn the current consolidation into a bull flag. In that case the odds for powerful rally towards $1,333 - $1,355 do increase dramatically. In fact this target zone should then be met rather soon and fast, marking the end of the first wave up from $1,046. It should be followed by a larger pullback towards $1,180 - $1,215. As long as gold can hold above $1,262 on a daily and especially on a weekly basis this bullish scenario has an increased probability. Note that if gold disregards the seasonal cycle now we might get a weaker 3rd quarter as a surprise.

The bears need to push prices below the last low at $1,257 to get anything going. And even then all they will meet is one strong support after the other. The path of least resistance remains to the upside for now.

Action to take: Wait until you can buy the VelocityShares 3xLong ETN (UGLD) below $10.50
Stop Loss: $8.50


  Profit Target: $18.25


  Timeframe: 8-10 months


  Risk ($1.50) / Reward ($7.75) = 1 : 5,1 (very good ratio)


  Position Sizing: Don't risk more than 1% of your equity


Investors should buy physical gold with both hands if prices move below $1,185 again. As well buy silver below $16,00. Buy both metals until you have at least 10% of your net-worth in physical gold and silver. But do not over expose yourself neither. 25% of your net worth should be the absolute maximum. If you want to be more aggressive put 2/3 into silver and 1/3 into gold.

  5. Portfolio & Watch List

Portfolio and Watch List

6. Long-term personal beliefs (my bias)

Officially Gold is still in a bear market but the big picture has massively improved and the lows are very likely in. If Gold can take out $1,307 we finally have a new series of higher highs. If this bear is over a new bull-market should push Gold towards $1,500 within 1-3 years.

My long-term price target for the DowJones/Gold-Ratio remains around 1:1 and 10:1 for the Gold/Silver-Ratio. A possible long-term price target for Gold remains around US$5,000 to US$8,900 per ounce within the next 5-8 years (depending on how much money will be printed..).

Fundamentally, as soon as the current bear market is over, Gold should start the final 3rd phase of this long-term secular bull market. 1st stage saw the miners closing their hedge books, the 2nd stage continuously presented us news about institutions and central banks buying or repatriating gold. The coming 3rd and finally parabolic stage will end in the distribution to small inexperienced new traders & investors who will be subject to blind greed and frenzied panic.

Bitcoin could become the "new money" for the digital 21st century. It is free market money but surely politicians and central bankers will thrive to regulate it soon.


Weekend Edition: How I’m Prepping for the Next Recession

Editor's Note: The U.S. is close to recession territory.

In today’s Weekend Edition, Agora founder Bill Bonner explains that the Fed created an economic bubble with phony credit…and the bubble is about to burst.

Bill originally wrote this essay on April 20, 2016, in Bill Bonner’s Diary.
________________________________________

By Bill Bonner, editor, The Bill Bonner Letter

Stocks are going up all over the world.

Meanwhile, it appears to us that the U.S. economy is going down. Go figure.

For instance, a labor-market index created by Fed economists… and closely watched by Fed chief Janet Yellen… has fallen for three straight months. It’s the first time that’s happened since 2009.

And the Atlanta Fed adds that GDP growth in the first quarter of 2016 was only 0.3%.

That’s not quite recession territory (commonly defined as two back-to-back quarters of negative growth)… but it’s not far off.

“Prepping” for Recession

If the recession doesn’t appear this year, it won’t be the first time we’ve been wrong… or early.

But despite claims that the feds have mastered the business cycle, a recession is bound to come someday.

And when it does, we’ll be ready… at least, here at the ranch.

We still have 700 head of cattle – tough, but edible. We have a couple hundred bottles of Malbec wine stocked in the depósito (store room). We have corn and tomatoes in the garden.

What else do we need?

We don’t know. But we’d rather not find out.

And neither does anyone else. But bad stuff still happens. And it is unlikely that recessions have been completely banished.

Then again, recessions are not bad things – not in our book.

They are nature’s way of clearing out mistakes. Recessions are when the destruction part of economist Joseph Schumpeter’s “creative destruction” comes into play.

The “creative” part follows. But you can’t have one without the other. Marginal businesses… bad investments… weak competitors – they all need to get out of the way so better uses can be found for the capital at work.

Why?

Believe it or not, capital is limited. If you use it for bad projects, you get poorer, not richer.

Which projects are good? Which are bad? Typically, a rise in real interest rates (increasing the cost of funding) is the way to find out. Higher rates “put the hurtin’” on company finances. The weak give way.

Recessions are not necessarily pleasant. But they are as necessary as growing pains and family budget discussions.

Debt Bubble

But we are in a minority. Most economists fear recessions; they want to avoid them in the worst possible way.

What’s the worst way to avoid a recession?

Just throw some more money at it!

Most serious economists realize that we have a problem on our hands. Debt goes up and up… much faster than the economy that has to pay it.

It is a “debt bubble,” floating around in a knife store.

In the last eight years, for example, the U.S. federal government added $9 trillion to the public debt – more than it had amassed in the previous 246 years.

And total debt increased in the U.S. last year by $1.9 trillion… while GDP only went up $599 billion.

For the corporate sector, it was worse. Companies took on $793 billion of extra borrowings against just $161 billion of extra output – five times as much debt as growth.

Some analysts, such as our friend Richard Duncan at Macro Watch, believe we have no choice but to keep inflating the credit bubble.

He likens our situation to a man who has gone up in a hot air balloon. Suddenly, he realizes that the hot air is not taking him where he wants to go.

But what can he do?

If he releases the hot air, the balloon will fall and he will die. To survive, he has to keep putting in more hot air.

Other economists, such as Paul Krugman, believe in hot air, too.

“Demand,” they call it. They cling to the balloon, hoping that more credit will increase growth and can make the debt more bearable.

More Hot Air

We think both Duncan and Krugman are wrong.

An economic boom, based on nothing but hot air (phony credit, with no real resources behind it), is fraudulent. It will never take us to real growth. Just the contrary.

The best thing to do is to pop the bubble… and then pick up the pieces. Besides, it will pop whether we want it to or not.

Heck, we believe in magic as much as the next guy.

But the magic act is wearing a little thin. The smoke is dispersing. The rabbits have disappeared. All the glam and sparkle, the shock and awe, the claptrap and hokum – they’re all giving way to economic reality.

We are beginning to see more clearly: the Fed’s theory is nothing but hot air. Now, its funny money is doing something even funnier than it imagined: the exact opposite of what the central planners intended.

In yesterday’s Market Insight, Chris Lowe showed how the “velocity of money” is plummeting.

This is serious. The velocity of money tracks how often each dollar is used to buy something in the economy. Falling velocity shows that consumers and businesses are pulling back… becoming more reluctant to spend and invest… downsizing… and holding onto dollars rather than spending them.

This has a similar effect as reducing the supply of money bidding for goods and services. Prices drop.

Deflation, in other words.

The bubble has developed a leak. The hot air is gushing out.

Look out below…

Regards,

Bill
________________________________________
Editor’s Note: Bill believes the Fed’s credit-financed phony boom has begun to crumble. He says the coming financial collapse will be worse than the market crashes in 1987, 2000, and 2008. But this time, he says, it will affect everything from your portfolio…to your bank account…to the cash in your wallet. Get the details here.