TheCenterLane.com

© 2008 – 2019 John T. Burke, Jr.

Running Out of Pixie Dust

Comments Off on Running Out of Pixie Dust

On September 18 of 2008, I pointed out that exactly one year earlier, Jon Markman of MSN.com noted that the Federal Reserve had been using “duct tape and pixie dust” to hold the economy together.  In fact, there were plenty of people who knew that our Titanic financial system was headed for an iceberg at full speed – long before September of 2008.  In October of 2006, Ambrose Evans-Pritchard of the Telegraph wrote an article describing how Treasury Secretary Hank Paulson had re-activated the Plunge Protection Team (PPT):

Mr Paulson has asked the team to examine “systemic risk posed by hedge funds and derivatives, and the government’s ability to respond to a financial crisis”.

“We need to be vigilant and make sure we are thinking through all of the various risks and that we are being very careful here. Do we have enough liquidity in the system?” he said, fretting about the secrecy of the world’s 8,000 unregulated hedge funds with $1.3 trillion at their disposal.

Among the massive programs implemented in response to the financial crisis was the Federal Reserve’s quantitative easing program, which began in November of 2008.  A second quantitative easing program (QE 2) was initiated in November of 2010.  The next program was “operation twist”.  Last week, Jon Hilsenrath of the Wall Street Journal discussed the Fed’s plan for another bit of magic, described by economist James Hamilton as “sterilized quantitative easing”.  All of these efforts by the Fed have served no other purpose than to inflate stock prices.  This process was first exposed in an August, 2009 report by Precision Capital Management entitled, A Grand Unified Theory of Market ManipulationMore recently, on March 9, Charles Biderman of TrimTabs posted this (video) rant about the ongoing efforts by the Federal Reserve to manipulate the stock market.

At this point, many economists are beginning to pose the question of whether the Federal Reserve has finally run out of “pixie dust”.  On February 23, I mentioned the outlook presented by economist Nouriel Roubini (a/k/a Dr. Doom) who provided a sobering counterpoint to the recent stock market enthusiasm in a piece he wrote for the Project Syndicate website entitled, “The Uptick’s Downside”.  I included a discussion of economist John Hussman’s stock market prognosis.  Dr. Hussman admitted that there might still be an opportunity to make some gains, although the risks weigh heavily toward a more cautious strategy:

The bottom line is that near-term market direction is largely a throw of the dice, though with dice that are modestly biased to the downside.  Indeed, the present overvalued, overbought, overbullish syndrome tends to be associated with a tendency for the market to repeatedly establish slight new highs, with shallow pullbacks giving way to further marginal new highs over a period of weeks.  This instance has been no different.  As we extend the outlook horizon beyond several weeks, however, the risks we observe become far more pointed.  The most severe risk we measure is not the projected return over any particular window such as 4 weeks or 6 months, but is instead the likelihood of a particularly deep drawdown at some point within the coming 18-month period.

In December of 2010, Dr. Hussman wrote a piece, providing “An Updated Who’s Who of Awful Times to Invest ”, in which he provided us with five warning signs:

The following set of conditions is one way to capture the basic “overvalued, overbought, overbullish, rising-yields” syndrome:

1) S&P 500 more than 8% above its 52 week (exponential) average
2) S&P 500 more than 50% above its 4-year low
3) Shiller P/E greater than 18
4) 10-year Treasury yield higher than 6 months earlier
5) Advisory bullishness > 47%, with bearishness < 27%

On March 10, Randall Forsyth wrote an article for Barron’s, in which he basically concurred with Dr. Hussman’s stock market prognosis.  In his most recent Weekly Market Comment, Dr. Hussman expressed a bit of umbrage about Randall Forsyth’s remark that Hussman “missed out” on the stock market rally which began in March of 2009:

As of last week, the market continued to reflect a set of conditions that have characterized a wicked subset of historical instances, comprising a Who’s Who of Awful Times to Invest .  Barron’s ran a piece over the weekend that reviewed our case.  It’s interesting to me that among the predictable objections (mostly related to our flat post-2009 performance, but overlooking the 2000-2009 record), none addressed the simple fact that the prior instances of this condition have invariably turned out terribly.  It seems to me that before entirely disregarding evidence that is as rare as it is ominous, you have to ask yourself one question.  Do I feel lucky?

*   *   *

Investors Intelligence notes that corporate insiders are now selling shares at levels associated with “near panic action.”  Since corporate insiders typically receive stock as part of their compensation, it is normal for insiders to sell about 2 shares on the open market for every share they purchase outright.  Recently, however, insider sales have been running at a pace of more than 8-to-1.

*   *   *

While investors and the economic consensus has largely abandoned any concern about a fresh economic downturn, we remain uncomfortable with the divergence between reliable leading measures – which are still actually deteriorating – and more upbeat coincident/lagging measures on which public optimism appears to be based.

Nevertheless, Randall Forsyth’s article was actually supportive of Hussman’s opinion that, given the current economic conditions, discretion should mandate a more risk-averse investment strategy.  The concluding statement from the Barron’s piece exemplified such support:

With the Standard & Poor’s 500 up 24% from the October lows, it may be a good time to take some chips off the table.

Beyond that, Mr. Forsyth explained how the outlook expressed by Walter J. Zimmermann concurred with John Hussman’s expectations for a stock market swoon:

Walter J. Zimmermann Jr., who heads technical analysis for United-ICAP, a technical advisory firm, puts it more succinctly:  “A perfect financial storm is looming.”

*   *   *

THERE ARE AMPLE FUNDAMENTALS to knock the market down, including the well-advertised surge in gasoline prices, which Zimmermann calculates absorbed the discretionary spending power for half of America.  And the escalating tensions over Iran’s nuclear program “is the gift that keeps on giving…if you like fear-inflated energy prices,” he wrote in the client letter.

At the same time, “the euro-zone response to their deflationary debt trap continues to be further loans to the hopelessly indebted, in return for crushing austerity programs.

So, evidently, not content with another mere recession, euro-zone leaders are inadvertently shooting for another depression.  They may well succeed.”

The euro zone is (or was, he stresses) the world’s largest economy, and a buyer of 22% of U.S. exports, which puts the domestic economy at risk, he adds.

Given the fact that the Federal Reserve has already expended the “heavy artillery” in its arsenal, it seems unlikely that the remaining bit of pixie dust in Ben Bernanke’s pocket – “sterilized quantitative easing” – will be of any use in the Fed’s never-ending efforts to inflate stock prices.


 

wordpress stats

The Biggest Challenge For Hillary

Comments Off on The Biggest Challenge For Hillary

December 1, 2008

The recent attacks in Mumbai, India focused international attention back to the continuing problem of organized terrorist activity.  As Hillary Clinton is presented to the world as our next Secretary of State, the more sensationalist elements of the media have their focus on terrorism.  Terrorism is highlighted to the exclusion of the other pressing matters to be faced during Secretary Clinton’s upcoming tenure, presiding over that all-important bureaucracy in the neighborhood known as “Foggy Bottom”.  Nevertheless, Secretary Clinton will have several other pressing issues on her agenda  — “leftovers” that have stumped the previous administration for the past eight years.  Among these abandoned, stinking socks on the floor of the Oval Office, the least fragrant involves the situation with Iran.  The Bush years took that bad situation and made it far worse.  A December 1 article in the Tehran Times focused on the remarks of Majlis Speaker, Ali Larijani, about what might lie ahead between the United States and Iran.  While suggesting that the Bush Administration “sabotaged” efforts to resolve the dispute over Iran’s nuclear program, the article mentioned Larijani’s criticisms of what was described as the Democrats’ Iran containment policy.

A report in the December 1 Los Angeles Times examined the expectations of Arabs and Israelis, with Hillary Clinton as Secretary of State.  Discussing various forecasts concerning American strategy towards Iran, the article noted:

Some analysts predict the Obama administration will try instead to broker an Israeli-Syrian accord, aimed at drawing Syria away from Iran’s influence and diminishing Iran as a threat to the Jewish state.

Elizabeth Bumiller’s article in the November 22 New York Times described the “working chemistry” that has developed between Barack Obama and Ms. Clinton.  This chemistry resulted in a softening of Clinton’s position, expressed during the primary season debates, about negotiating with Iran:

But although Mrs. Clinton criticized Mr. Obama for being willing to sit down and talk to dictators, he has said he would have a lower-level envoy do preparatory work for a meeting with Iran’s leaders first.  Mrs. Clinton has said she favors robust diplomacy with Iran and lower-level contacts as well.

In the November 24 Jerusalem Post, Douglas Bloomfield gave us a refreshing look at how the Obama – Clinton foreign policy team might function:

Hillary’s great challenge will be to remember who IS President, who ISN’T and who WAS.  She will have to focus on rebuilding relationships damaged during the Bush years of “my way or the highway” foreign policy, taking the lead from the man she once described as not ready to be president.

*  *  *

In the Middle East peace process, as in other policy areas, Obama seems intent on charting a pragmatic, centrist course.  While that will disappoint both the Jewish Right and Left, it could prove a welcome change after eight years of the Bush administration’s faith-based foreign policy and not-so-benign neglect of the peace process.

As Inauguration Day approaches, the Bush Administration’s legacy of complete incompetence in nearly all areas is being documented by countless writers around the world.  By invading Iraq, Bush-Cheney helped Iran realize its dreams of hegemony.  Bush’s mishandling of Iran’s rise as a nuclear power became the subject of a thought-provoking opinion piece by David Ignatius in the November 30 Washington Post.  Mr. Ignatius noted that Iran had neither enriched uranium nor the technology to enrich uranium (centrifuges) when Bush took power.  As Bush’s days in the White House wind down, we now see Iran with nearly 4,000 centrifuges and approximately 1,400 pounds of enriched uranium.  The 2006 precondition that Iran halt uranium enrichment before the United States would participate in diplomatic efforts to address this issue, exemplifies the handicapped mindset of the Bush-Cheney regime.  As Mr. Ignatius pointed out:

It’s impossible to say whether Iran’s march toward nuclear-weapons capability could have been stopped by diplomacy.  But there hasn’t yet been a good test.  Because of bitter infighting in the Bush administration, its diplomatic efforts were late in coming and, once launched, have been ineffective.

By the time we finally have a President and a Secretary of State who are capable of taking on the dicey task of negotiating with Iran on the nuclear issue, it may be too late.  Hillary Clinton’s biggest challenge in her new job has already been cut out for her by the Bush Administration’s nonfeasance.