Betrayed

There is nothing new under the sun.

The great navigator Captain James Cook found, as did Bernanke, that the process of discovery can be violent, and he did so the hard way.

It was a different crowd, a different place and a different time - Feb/14/1779. The crowd, the natives of the Hawaiian island of Hawaii. Cook was mistaken to be an incarnation of Lono, the god of peace and productivity. Even the masts of his ships Resolution and Discovery resembled the design on the tapa that was the icon of Lono. So the islanders were taken in.

But soon things went very wrong. There were scuffles between crew and native. Some natives were killed. This didn’t seem to the crowd like the work of Lono. Next, one of Cook’s skiffs disappeared. The Discovery shelled a suspect village. Then Cook appeared on shore. Rocks were chucked, next spears and finally guns fired. Blood was drawn. Suddenly the crowd realized that deliverance was not part of the deal, that Cook was a mere mortal.

He’d seen his last sunrise.

So it is with Bernanke. The market crowd everywhere and always demands a god. They’re lost without one. When that god does not perform, they feel betrayed, made out to be fools. These gods are of course completely the stuff of invention. But Cook let it go, enjoying being the subject of idiolatry. So did Burns, so did especially Greenspan, and so has Bernanke.

Thus, these Chairmen claimed ownership to powers that were not in their possession, generally by simply going along. Until, that is, it was too late.
　
　
Robert Craven

Deliverance

The US remains the beacon. It comes down to this - we have to set the example.

That must come from Washington. Obama inherited a bad situation and made it much worse. He doesn’t have the sense to lead needed economic change; but he might be pulled along. If not, we’ll have to wait.

The Heritage Foundation figures, "The federal government today is claiming roughly one-fourth of total economic output -- about 25 percent of gross domestic product."

And the masses, before bored to death by things economic, have become listeners. This is our Renaissance; more, our salvation. They finally understand that this 25% is a drag because its paid for by either 1) taxes or 2) borrowing or 3) an inflationary Fed. That is, robbed of free enterprise.

Add to that the left’s fetish for regulation and intervention (being strangers to Hayek and Friedman) and we know why employers don’t employ. That was the first stage (Obamacare). Now it is reinforced as demand itself is reduced, giving further reason not to hire.

No one any longer believes that answers to our problem are just so, so complex that only the anointed can deliver us. Most of the unwashed now understand the answers are simple, clear, obtainable.

At worst, we wait for Nov/2012.

　
Robert Craven

Careful

World mkts tanking largely because the Fed has a sour outlook.  Be careful with this one.

We were going through some old files the other day. Our report from Mar/30/1998, then observing the Fed’s attitude re developments in Asia, and a St commentary that, "The Fed is waiting around. They’re on hold until they have a better idea of what the impact of Asia is going to be." But key then and key now is that by the time these technocrats "have a better idea," the horse is out the barn. These people cannot sense change. They are incapable of doing so.

So the Fed implying we’ll be years slogging along doesn’t make it so. In fact, if we are right about America, and an enlightened electorate, they are dead wrong.
　

Robert Craven

Thank you IMF, We'll Be Famous in No Time

We noted Monday in Thanks a Lot EU that key was that the banks be re-capitalized, now. Forget the sovereigns and forget all the long-term solutions.

The IMF read our piece, and then Tuesday proclaimed that key was that the banks re-capitalize.

As the Telegraph has it, "Most people will find the idea that more than four years after the banking crisis began, the banking system continues to require squillions of public money is almost beyond belief."

What if the public refuse to bail out these banker types? The banks will, tortoise fashion, seek to disappear. Credit extension will come to a halt.

What fun.


Robert Craven

Bulletproof Body Paint

Today’s violent rejection of FOMC policy is consistent with the sweeping change of mkt-crowd view regarding the Fed, first highlighted in our sketch, Renaissance, then Tuesday’s Crisis at the Fed.

Today the Fed warns the economy is slowing but resorts to gimmickry as a solution.

The media had today’s equity drop tagged to the Fed’s view that there are "significant downside risks." Instead, never before has the mkt crowd felt so entitled to sit as judge and jury. This is simply stunning.

The Fed is needed as lender of last resort. They did a commendable job, Q4 ‘08. Perfect. We could not praise them enough. But Bernanke's fatal error was in believing that experience was an anointing. Comanche medicine man Isa - tai claimed he had learned in a vision to make bulletproof body paint. Thus equipped, Comanche warriors mounted an attack on white buffalo hunters in 1874. It did not go well for the warriors.
　
Similarly painted, Bernanke extended his planning exercise, making a series of mistakes (the fate of all planners). Now he and the rest are profoundly out of their league.
　
Flip side: Just as the mkt crowd has rejected FOMC policy, next target will be that of the administration.

This development will be a major positive for this economy.
　
Robert Craven

Twist and the Implications

There are no implications for the economy. The level of interest rates is not the retardant. Nor is lack of liquidity.

This is pure cheerleading, but there’s no one on the field.

We know the answer. Look to Washington.
　

Robert Craven

US Curve

Sep/13 we recommended clients get long (L - S) the curve. This trade has done poorly. Two - 10 for example, the spread we preferred, last +169, vs +179. Sep/13.

We supposed on the 13^th that the better part of today’s Fed action was priced in, we expected an unfriendly CPI on the 15^th (the result) and finally, we expect more vigor ahead than most.

Instead, the IMF report yesterday flattened the curve some; today’s action leveled it.
　

Robert Craven

Crisis at the Fed

We have followed the Fed for 25 years. We’ve done our part to rectify past grievances - Greenspan’s habit of leaking FOMC decisions to WSJ reporters was one of these.

Yet during all these years never did the Fed resort to planning.

Now, driven by desperation the Bernanke Fed has birthed the beginning of the end of Fed credibility.

Knowing that cheerleading is all that is left to them, they resort to publicized gimmickry.

This offers to some a chance to make money. It offers nothing to the economy. And we know from discussions with staffers that Bernanke fears just that.

We are not alone in understanding this reality. Congressional leaders wrote Bernanke to refrain from further intervention at this week’s meeting!

The EU are soundly criticized, by us too, for making half-decisions, freighted with timidity. But the Fed is no less guilty; it cannot seem to be able to make a stand by the simple act of standing down.

Until that body abandons the dual mandate and next comes to understand that no individuals, no matter how gifted can decide for example if owning the 5, 10 or 30yr is best for the interests of the US, until then, we have a crisis at the Fed.


Robert Craven

Thanks a Lot EU

Let’s distill this mess.


The EU problem is made out to be profoundly complex. Naturally. Complexity offers refuge.

The problem instead is a simple one, composed of but two elements: First, the industrious are never eager to share with couch potatoes. Second, there is no monetary system that can accommodate seventeen sovereigns, each with its own identity.

The Euro may not be dead but the EU will assume some other form, sooner or later.

The current course of addressing problems timidly, by half measure is corrosive.

Italy was downgraded a moment ago. OK. But put the sovereigns aside for a moment. Right now, first is to see to the banks. Worry about the rest later.

The Fed, Bk of Eng and others on Sep/15 assured these banks of liquidity support. That bought them time.

But key is that these banks be re-capitalized.

Until we see that reality we can expect continued violent distortions in our markets.
　

Robert Craven

A Circus

Fed discretionary activity must become a thing of the past.

Policy makers are no more capable of planning than politicians.

And this is not a secret, which is why we have a growing movement underway to remove the dual mandate ("maximum employment" / "stable prices").

That is, abandon non rule-based activity. Set a target for inflation, and that’s it. The free market will then decide who is to be employed.

Remain lender of last resort. Fine. But leave it at that.

John Taylor: "During the 1980s and 1990s, Fed officials rarely referred to the dual mandate (even in the early 1980s, with unemployment rates as high as today). When they did so, it was to make the point that achieving price stability was the surest way for monetary policy to keep unemployment down." Amen.

Now we have the absurd scenario of Wall St types trying to guess which spot on the curve the Fed will decide to buy, and, which spot to sell. This is truly a circus.


Robert Craven

Beware of Sentiment Measures

These are useful for filler if the conversation stalls - you know the feeling - but not to set strategy.

The many years we have monitored the various sentiment measures we found that only one carried any leading characteristics - Sindlinger & Co - and Albert is no longer with us
　

Robert Craven.

RENAISSANCE

We sense a key change in the US, one we have highlighted in earlier sketches but that merits repeating: The electorate is undergoing a profound change in view, really an enlightenment regarding our economic situation. Lay folk have finally come to understand that the Fed cannot help and that Washington’s interventions have only caused problems.

The electorate’s awakening will translate through the political process.

This is a very bullish development for the US over the longer term. Every investor should take note, now, because in a few months this view will be taken for granted.

It means that we are not cursed to repeat past errors. It means we will thrive, 2012 and beyond.
　
　
　
The Fed we think is finished with its reckless activity, interventions which have only tanked the dollar and sparked less-than-deserving equities. It they try "the twist" it is only cheerleading. But the administration remains dangerous. The administration’s multiple interventions have not led to a recovery, simply to the reality of high deficits and exploding national debt, and now, everybody knows that.

We heard from BlackRock manger Bob Doll that companies are more likely to buy back shares than invest and hire as they don’t know what policy to expect from Washington. This echoes the consensus we also hear from CEO’s across the country.

CEO’s are paid to take risk. But they won’t play in a game where someone constantly intervenes, changing the rules mid play.

The electorate has finally come to grips with this reality as the key cause of their plight. Thus, they will insist on the rescinding of the worst and then leveling of the rest of regulations; they will insist on a fixed (and lower) tax policy, and finally, they will insist on a non-interventionist administration.

This is a very hopeful development because Washington is listening.

　
Robert Craven

US Term Structure

A reminder - look to get long (L - S) the US curve. Clients were advised to do so, Sep/13.

This can be done in any number of ways with any number of instruments.

The Fed is expected to sell the curve, become of buyer of the long end, a seller of the short end. This will accomplish nothing of note, is in fact foolish; thus, it is consistent with recent policy.

Still, we want the reverse position ahead of that meeting. Preferable is 2 - 10, but even a longer (S) leg will do.

Robert Craven

Old Faithful

We received inquiries today regarding "Old Faithful," the US 10 yr to the Bund. After a recent satisfactory result from Aug/8, we recommended Sep/11 that clients exit this spread (S) US / (L) Bund, at +17 or so. Last, perhaps +11. We’ll leave it alone for a while.

We did recommended Tuesday am that clients look to own (L / S) the US curve, 2 - 30, +307, 10 - 30, +131. Last, + 310, +130. Nothing. But let’s take this into the Fed meeting.
　

Robert Craven

Finally!

Headline - "Obama Approval Rating Plummets on Jobs Plan"

This is very encouraging. The masses were hoodwinked two years ago. They’ve now caught on.

The tuition has been expensive but folks have finally come to understand that this stuff does not work. This major change in consciousness was highlighted in a recent sketch - Under The Radar.
　

Robert Craven

Tragedy II

Picture an individual, bucket in hand, dipping out of the deep end of the pool and pouring into the shallow end of the pool. That was FDR. Now picture the same individual spilling some along the way. That is Obama.

We knew up front that stimulus I was a tragedy. We know this campaign ploy, this second jobs bill, is as much a tragedy - job-killing new taxes, money taken from free enterprise and re-distributed.

Why wait for it to fail? We know it will fail.


Robert Craven

US Curve

At this juncture we want to look for the opportunity to own the curve (L - S). Course of least resistance - wider over the intermediate term.

We doubt the so-called operation twist will happen. Or if it does, it is already priced in.


　
　
Robert Craven

Under The Radar

All eyes are on our EU friends. Instead, let’s consider the very significant change of view that has occurred here at home, under the radar.

Many of us have known there is little the Fed can do. Now, policy makers are beginning to understand that (a few still feel they have to act like cheerleaders). The market crowd will abandon Bernanke as a god.

Next, there has been an awakening of sorts, even among lay folk. That would be that a planned economy is a failed economy. Hayek is smiling. Obama can’t make those kinds of decisions because no one can.

Thus, and again an awakening of sorts is the (belated) realization on the part of the masses that government spending is at best a wash. Recall the words of FDR’s Treasury Secty. Most, not to be taken in again, suspect that the latest rescue plan is little more than noise.

Finally, the fact that businesses won’t hire because the regulatory and tax outlook is too uncertain rings true with most folk because they have heard it over and over from so many business leaders.

And so there is growing consensus in this country that we must wait for Nov/2012 for substantive change.


Robert Craven

Asia - A Bright Spot

Asia to remain a bright spot, amid the carnage, with China in the lead.

Late Q1 we predicted that China would remain resilient, despite braking efforts by the central bank. Wall St, the mkt herd, were looking the other way. The consensus notion of a "hard landing" was just that, only a notion, and wrong. China’s domestic demand continues to be robust; her imports reflect that.

Next, China’s past policy of mercantilism penalized locals. That policy has eased, and so have prices.

Still, exports are at a near record level. There’s still world demand out there and China’s found it.

Asian markets are today bothered by EU concerns. We would consider this an opportunity.
　

Robert Craven

STRATEGY

Although most strategy is conveyed through our private consultancy, we do highlight a trade from time to time in this blog for purpose of illustration.

The relative dynamics, US / Ger, often provide opportunity. In the June/9 blog we recommended that the US 10 yr leg be sold to the Bund (2.99% / 3.03%). In the blog of July/8 we recommended an exit (3.07% / 2.86%) because of the weak NFP print. This spread was inspired by relative, real sector developments; we did not work quality flight into the equation.

Next, clients were urged to again sell the US leg to Germany on Aug/8 (2.25% / 2.33%). Last (1.92% / 1.75%). That trade was inspired by both real sector developments, plus what we expected to be an intense flight to sanctuary into the Bund. We no longer have a view regarding this relationship. We have recommended that our clients consider exiting this trade. Others may wish to do likewise.
　

Robert Craven

Like a Rocket

Traders, planners must wait for the presidential election to receive the stuff of a major spark for the economy.

The latest plan puts another $200 bln into new spending - unemployment benefits, infrastructure, aid to local and state gov’t. That $200 is tossed into the outhouse; it will do nothing (our prediction ahead of the last boondoggle).

The $250bln of temporary payroll taxes are just that - temporary. Employers see only a piano overhead for 2013 so will do nothing.

Once Washington sets out to reduce taxes permanently and rescind pregnant regulations, and then pledges to get out of the way, we will take off like a rocket.


Robert Craven

Failed Experiment

As we noted first a year ago, the EU will fail. That is, it will not continue to exist in its present form.

There is no need to resort to complexity. "Oh, but Mr. Craven, you are simply not equipped to comprehend the complexities of this situation, obviously you are without pedigree," observed an acquaintance in Rome just yesterday.

Bull.

Human nature and the EU cannot co-exist. One or the other must yield. Guess which one?

A lot of folk, perhaps now even Germans think the cost of getting out is cheaper than the cost of staying in.

To the US, it is exposure to European banks that worries, and we don’t need to wait for a sovereign default to have a run on a European bank.

But what else could we expect of a system birthed of a paranoia to US competitiveness?

That was amusing. This is annoying. So get it over with and quit bothering us.
　

Robert Craven

Obama's Big Surprise

You don’t need to be an economist to judge Obama’s big surprise tomorrow night.. There are just two main considerations: Tax cuts of any sort are just fine. Gov’t spending is at best a wash.

The masses fell for the first "stimulus" because both history and economics are a bore, at least to most folks. This allows individuals like Obama and his co-conspirators to put one over. We don’t think even they ever believed that it would work. It was that they had to posture.

The US does not maintain a slush fund for "stimulus" money. Then where does it come from? From 1) taxes, 2) borrowing or 3) the Fed’s printing press. Taxes discourage business; US borrowing crowds out the private borrower; inflation hurts everyone. This is why FDR’s own Treasury Sect, Henry Morgenthau, told the Senate that he’d spent a ton of money and for squat. It didn’t work.

Oh, but then what did he know.

And if Obama cooks up a new regulation or two, witness this recent complaint from free enterprise: John Schiller, chairman and CEO of Energy XXI, said "if the government would get out of the way, from a regulation standpoint, and let us [XXI] do what we do good you'll see us continue to hire and grow this economy."

Oh, but then what would he know?
　

Robert Craven

CAUTION

It is very easy to allow today’s NFP result to imprint one’s view ahead, to gain more leading muscle than it deserves, and, just as easy to allow recent consumer confidence reads to gain more muscle than they deserve.

The consumer never heard of the Conference Board; Michigan means football. Not knowing they are supposed to be in a sour mood, they continue to spend.

Chain store sales were up 4.4% in Aug. A broader measure by Master Card for July-Aug had sales up 3% yr to yr, the largest increase since 2006!

Recall from Econ 1-A that consumer activity represents maybe 70% of the economy.

　

Robert Craven

Consumer

Today’s Aug Vehicle sales print (12.1MM units) was much better than expected, fitting our consumer anchor quite nicely (as has other recent data). Vehicle sales are now 5% above their year ago level.

Despite recent negative confidence reads, and despite today’s employment print, we expect consumer activity to continue to broach expectations over the near term.

Robert Craven

ZERO!

We had set an anchor (or overlay) earlier for clients to expect employment to exceed expectations; not strong, but through consensus. Yesterday’s Claims print cooperated but today’s NFP read, even considering special factors, does not provide a lot of cheer.

Robert Craven

Tuition

Only a fool believes the government can create jobs on net.

From FDR’s Treasury Secty Henry Morgenthau, Jr. in a private meeting at the Treasury Dept, May, 9, 1939, "Gentlemen, we have tried spending money. We are spending more than we have ever spent before and it does not work. ...I say after eight years of this Administration we have just as much unemployment as when we started."

　
We get paid at this shop because we can close the pattern up front.

Thus, we predicted ahead of BO’s stimulus that it would fail; worse, that it was a tragedy.

We are paying an awful tuition to get Obama educated. Has it worked? We’ll find out Sep/8.
　

Robert Craven