Oct 302014
 October 30, 2014  Posted by at 9:45 pm Finance Tagged with: , , , , , , , , ,

NPC Grief monument, Rock Creek cemetery, Washington, DC 1915

It seems like every blue moon or so I need to return to Groucho’s definition of chaos theory, it keeps on popping up. The first time I used it in an article goes back to at least May 2009, incidentally for many people the starting date of the financial crisis in their part of the world. This time around, it’s there because it’s what a lot of people in the financial markets must be feeling. And I mean ‘must’ in the sense of ‘should’ be feeling, though I don’t think they are. Yet.

But if the demise of US QE means anything, it’s the end of certainty, of confidence that someone out there would be holding your hand all along the way to riches. The difference between complacency and volatility, in a nutshell. Which is, predictably, going to freak a lot of people out. Ain’t nothing feels as comfy as a bearded gnome or a grandma in charge of the mega money machine to do your work for you. Those days are over. Might as well get used to it. First, here’s Groucho once again:

Well, art is art, isn’t it? Still, on the other hand, water is water! And east is east and west is west and if you take cranberries and stew them like applesauce they taste much more like prunes than rhubarb does. Now you tell me what you know.

So what do you know after Yellen’s long and generally awaited announcement yesterday? Quo Vadis? Where are stocks going to go, and bonds, and oil, and gold, and the dollar now the reserve currency meta multiplier machine has been shut down? I know a lot of people, probably most, are thinking ‘they’ are going to find – other – ways to ‘save’ the economy and the markets.

If I were you, I’d ask myself a question or two in that regard. It market stability were one of the Fed’s priorities, their surest bet would have been to maintain at least some sort and some amount of QE. Meanwhile, their argument that jobs are so greatly improved is simple nonsense. So again, and I’m asking this a lot and not getting answers, why did they do it, and why the timing?

From what I can see, the Fed is -successfully – fooling Americans into believing their economy is doing well, if not great, and they used Greenspan yesterday to inject some doubt, or realism if you will, that Yellen couldn’t have included in her speech lest she’s be perceived as doubting her own words.

It’s all a message, a spin, a story that they want people, including you, to believe. It’s a certain version, a particular interpretation, of what goes on, but that says nothing about the level of thruthiness in that message. Yelllen’s speech was followed today by the first (preliminary) Bureau of Economic Analysis US Q3 GDP report, which cheered its way all the way into a 3.54% growth rate. So people think: she was right, we don’t need QE, we’re doing great!

But behind the veil of that growth number lie far less positive ones, as for instance described today by Rick Davis at the Consumer Metrics Institute:

In their first estimate of the US GDP for Q3 2014, the BEA reported that the economy was growing at a +3.54% annualized rate, down a little more than 1% from Q2. “Improving” imports and government spending are the stars of this report. Imports swung into positive territory with a +0.29% contribution to the headline number, up +2.06% from the prior quarter. Similarly, governmental spending contributed +0.83% to the headline, up over 0.5% from Q2 (with Federal defense “consumption expenditures” creating a +0.76% boost to the headline number all by itself even as growth in state and local spending softened).

Essentially all of the other line items were either flat or had a negative quarter-to-quarter impact on the headline. Inventories (as expected) reverted to mean and took -0.57% out of the headline. Commercial fixed investments grew at about half the rate reported during the prior quarter, the growth in exports lost about a third, the growth rate for consumer spending on goods was halved, and although consumer spending on services did increase, the increase was a relatively mild +0.10%.

Inflation (or disinflation/deflation) plays a major part in this report, since during the quarter dollar-based energy prices were plunging. US “at the pump” gasoline prices fell from $3.68 per gallon to $3.32 during the quarter, a 9.8% quarter-to-quarter decline and a -33.8% annualized rate – pushing most consumer oriented inflation indexes into negative territory. During the third quarter (i.e., from July through September) the seasonally adjusted CPI-U index published by the Bureau of Labor Statistics (BLS) was actually mildly deflationary at a -0.10% (annualized) rate, and the price index reported by the Billion Prices Project (BPP – which arguably reflected the real experiences of American households) was slightly more deflationary at -0.18% (annualized).

Those of you who know me also know I have a hard time seeing people equating price rises one on one with inflation, since that’s far too crude a definition, which renders itself useless in short order. There’ll always be things whose prices rise or fall, but that can be for a thousand reasons, and you want to know those reasons, or you should. What counts today when it comes to inflation is really just one single factor: spending. By people like you and me. And that kind of spending is way down, as reflected in velocity of money stats.

Which is why all the efforts to raise inflation numbers are doomed to fail before they begin. Why is spending falling the way it is? Unemployment in all its facets including persistently high personal debt, a shrinking labor participation rate, alt-control-deleted benefits and lower wages. Add to that the at best jittery numbers for M2, M3 money supplies and you’ll never get any inflation by definition. That doesn’t mean some prices won’t rise, but that just adds to the pain, it’s not the root cause.

So what do we see today in the markets? Stocks are up, because the crowd just can’t believe grandma left them to fend for themselves. Hey, it’s only been a day. Give it time. The euro falls below $1.26, first time in a while, because dollar hunger must set in for real with the free for all punchbowl taken away, oil has a hard time negotiating the $80 a barrel divide, and gold lost its battle with $1,200.

Yeah, I know Greenspan said something about holding gold yesterday, but why pay attention to that if you don’t believe one single other word he says? Gold has lost a lot of people a lot of money over the past few years, it’s not hard. And you can say that gold has been solid over the past 4000 years, as a commenter at the Automatic Earth did today, and that’s absolutely true, but your life is way shorter than that, and there’ve been many longer times of depreciated values. And there’s no way for you to know how it will keep up as a safe haven during your lifetime. So don’t bet your life on it. Don’t make it a religion.

Sure, the dollar will die at some point, but that point is not near. There’s a whole slew of fiat currencies dying to precede the greenback’s demise, first and foremost the euro, which will be killed by simple politics. And whatever the weakness of the USD may be, it’s not that Kansas will fall out with Idaho and decide to mint its own coin. Still, that’s exactly the euro’s foreland.

The US economy is much weaker than Janet Yellen and the BEA let on. But it’s not the weakest animal in the herd, not by a long shot. The American leadership can keep its predominance alive for a whole longer, albeit only at the – further – expense of the American people. Who soon won’t be able to afford even the cheaper gas prices.

Meanwhile, the Europeans still make faint attempts at convincing us their economies are doing well, but their messengers are too scattered to present a coherent picture. And Draghi’s 2-year old ‘whatever it takes’ shows wear and tear. It’s all out QE or the big flood. And QE has been a horror for the American people, even if they don’t yet realize it, so Mario won’t be allowed to unleash it. He’ll soon be campaigning for leader of Italy. Unless he’s got even darker skeletons in his closet than the rest of the candidates. Which I wouldn’t rule out.

China, like the US, survives through manipulated data, claiming a 7%+ growth rate where they have probably just 3-4%, but who’s going to know? Smarter investors are, that’s who, once they’ve dumped the dupes who clung to grandma’s aprons.

The US dollar will come home in very large amounts, because there’s nowhere else to go that feels anywhere near safe. That can be a big problem for the US economy, but then, that’s what the Fed is preparing for today. It’ll all leave China, Japan, Europe et al scrambling for the crumbs that fall off the table, unless and until some regions or smaller nations decide to go it alone and ditch the larger networks and organizations and treaties they’re presently subjected to. But that will take time.

Until then, it’s chaos theory. If you can figure out why if you take cranberries and stew them like applesauce, they taste much more like prunes than rhubarb does, you’ll have it made.

Home Forums QE Is Dead, Now You Tell Me What You Know

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    NPC Grief monument, Rock Creek cemetery, Washington, DC 1915 It seems like every blue moon or so I need to return to Groucho’s definition of chaos the
    [See the full post at: QE Is Dead, Now You Tell Me What You Know]

    Ken Barrows

    The perception, IMO, is that the Fed still is ready to backstop if needed. When that goes, look out!

    Golden Oxen

    The madness has reached a point where it might be wise to question the sanity of those running the show imho.

    How can the lies, distorted economic figures, crazed stock and bond valuations, violent markets, Fed blabber, economic recovery nonsense, etc, be seriously analyzed by anyone who has remained somewhat sane and sober?

    We may be wise to just watch the dementia in astonishment, wondering what lunacy is next, rather than succumb to the desire of the sane to make order or understanding out of the chaos.

    Just as one small example, was perusing Ali Baba for a possible short sale if the end of this current QE might possibly cause some rational thinking. It has a market cap of 250 billion and sells at 25 times it’s sales and also 25 x book value. It is only one of dozens with such insane valuations.The market, of course, went up 200 rather than the other way that I expected, and it became apparent to me that to enter such an asylum would probably mean I had gone mad as well.

    Best to watch Mad Money, let crazy Cramer make predictions, and wonder when, if ever, sanity will return.


    I wouldn’t be surprised at all if Ferguson and the stock market both blew up just before the elections.


    QE as a brand name is dead. Call the “New Improved” what you will, the fact is, the Fed now owns all this.

    It’s theirs to either save or lose. There is nothing representing intrinsic value behind their currency, only faith and credit psychology. Put another way, Bullshit.

    On gold as religion, money is money. About all one can do is try and guesstimate median production cost and fundamentally base purchases on that. Certainly, Au will be around longer than Granny and her Cookie Dough.

    Likely Au, Ag, Cu, Zn, et al, will be around even longer than present systems of government, as well. Rather than thinking of things “real” as religious, I like to think of them more as a bridge, on which to cross over to the other side, when all the “Great Ones” finally swamp their little fiefdoms, and are exposed as the phony alchemists they really are.

    Or is this Empire somehow immune to the fate of all others that have gone before?


    Agree, Oxen. These “markets” are muppet bait. That said, shorting them is akin to shorting the Fed. Do ya feel lucky?


    I wholeheartedly agree that gold cannot become religion and one should not “bet his life” on it. But in prior posts Ilargi seemed to recommend hoarding cash instead, fearing a deflationary collapse. I would not “bet my life” on cash either.

    Perhaps common ground (and common sense) is to hold at least some assets outside of the banking system — perhaps a combination of cash and gold and other physical assets. I remember a Marc Faber interview where he commented that any rational adult who sees what central banks are doing is crazy to not invest at least a small amount in physical gold on a regular basis — simply because of the uncertainty about what will happen when all of this eventually unwinds.

    V. Arnold

    What do I know?

    Not much really. Maintain zero debt and up ones savings as much as possible. Live small and sufficiently.
    And I think you’re correct about the viability of the dollar, at least in the not so foreseeable future…


    Yves Mersch of the European Central Bank at the Corporate Credit Conference in Zurich on October 17th. He addressed QE and how it creates inequality. He said:

    “Non-conventional monetary policy however, in particular large scale asset purchases, seem to widen income inequality, although this is challenging to quantify.

    Still, a central bank with a clear mandate to safeguard price stability needs to act forcefully when push comes to shove. These distributional side-effects then need to be tolerated. But they clearly should not last too long. They are one more reason to recognise that the non-standard measures we have introduced have to be temporary.”


    Temporary, should not last too long. He also quotes Bullard (Mr. “I’ll Save the Stock Market Until I Have Time to Get Out Myself”, who says the same thing. Low rates don’t help people without a job because they can’t get a loan. They don’t help the elderly savers or the young. They really only help those already in debt and those who are able to borrower for essentially nothing.

    This guy, Bullard, Greenspan – all talking inequality. And, hey, it’s not like it hasn’t been happening, but they’re finally addressing it. They’re trying to let on that the economy is great and the unemployment rate is down because they’re afraid of what might happen to their spindly little necks if the truth really got out there, that they’ve been helping the banks and their friends. Oh, that’ll go down well when it sinks in, and it will.

    The wizard has been seen.

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