John Taylor Interview, July 27, 2012

John Taylor, CEO of FX Concepts LLC is interviewed by Bloomberg's Sara Eisen on July 27,2012 and describes his opinions around the current level of GDP in the US, actions out of the FOMC meeting this week and the ECB meeting this Thursday, his outlook for the Euro, US$ the Yen and the Aussie $. This is a compelling interview in which he admits to being stretched emotionally to the point of wanting to pull his hair out. He contends that emerging market currencies are what he is looking to for a signal of sustainable risk-on sentiment.

James Rickards interviewed by James Turk

James Rickards is talking candidly with James Turk of GoldMoney.com, about economic issues around the world, especially the Euro countries, the US and China. A common thread throughout the interview is the impact on the value and uses of gold. He also speculates freely about what various outcomes might look like as politicians wrestle with ways to create a needed solution and still be reelected. The interview took place during August 2011 and is still relevant.

Author of "When Money Dies" Interviewed by James Turk

Adam Fergusson is interviewed by James Turk of GoldMoney.com. The focus is on Fergusson's understanding of inflation, and then hyperinflation, as researcher and historian of the Weimar Republic or 1920's Germany experience.

Economic Condition Review

Here at the end of the 3Q2011 all eyes are focused on the European Union (EU), the European Central Bank (ECB), the International Monetary Fund (IMF), the Federal Reserve Bank (FRB), and now laser like focus on the 17 European Monetary Union (EMU) parliaments who are individually considering their agreement to further assistance for Greece. The process is complicated by the complexity of the euro currency experiment. It is also complicated by the number of politicians in positions of influence. I hope cynicism is reaching high tide. The danger is extreme if there is not a plan developed to corral the ripple effects from what is expected to be substantial losses to major banks who are Greece's sovereign debt owners. One danger is that there is a known lack of adequate reserve capital at several European banks due to their investment in the sovereign debt of Greece and other over indebted countries. Compounding the problem is the lack of detailed information about credit default swaps intended to hedge risk on Greek debt. Lack of information deepens the fear.

The probability of Greece's default is high as reflected in the yields for their debt. Greek 2 year bonds yield 65.24% and their 10 year debt costs them 22.67% as of 9/29/2011. For reference, 10 year bond yields in other EMU countries are Germany at 2.01%, Italy at 5.58% and Portugal at 11.16%. The US Treasury 10 year is at 2.00%. The problem is how to contain the eventual wreck.

Economic Condition Review: August 2011

Looking back since my last review in June the world has recovered from the tsunami and earthquake damage in northern Japan (Japan is still in recovery/clean up mode), the civil revolt and dictator overthrow in Egypt has resulted in a power vacuum which will be resolved by election later, the dictator of Libya, Muammar Gadhafi, has been defeated by his opposition according to news reports. Other uprisings are beginning to build in several other oil producing countries in the region, including Syria and Persian Gulf states. The threat of crude oil shipments being interrupted is a growing concern for all countries importing from this region. Despite these pressures, the price of Brent Oil has softened recently from more the $120 to now $108.62.

In Europe, the socialist government of Portugal has collapsed and is now moving on with a new center-right government. The government of Greece has had to renegotiate the bailout terms with the ECB (Germany and France) as a condition of getting the last installment of their bailout package. The renegotiated plan now calls for Greece to liquidate much of its net worth (state owned assets like airports and transportation services) as well as agree to new austerity. Can it get any more dire in Greece? Misery likes company and Italy, the eighth largest economy in the world, is drawing attention to itself for having public debt at 120% of GDP. That's second, to Greece, in the euro zone. Spain is on the radar screen now as well.

China is still wrestling with internal high food and shelter inflation threatening the massive lower classes, potentially destabilizing the power of the ruling party. Published reports describe interest rate increases are the tool to fight inflation in China, to slow lending for business and personal discretionary consumption.

In the US, the Treasury market is finding some strength on a risk-off move. The yield on the 90 day Bill is 0.00%, the 2 yr T-note is 0.19% and the 10 yr T-bond is 2.06%! The US$ is weak, trending between 73.50 and 76.00 during the past several months, and currently near the 74 mark. 'Risk off' has been a reaction to the US Congress displaying their lack of ability, building the case daily until the beginning of August when they finally extended the US public debt limit. The public display of incompetency was so much greater than expected that some economic activity slowed as a result of the spectacle and resulting loss of confidence in the leadership ability of the US government.

Calculated Risk has a summary of the recent economic reports which illustrate that the economy is not growing, but is not collapsing into recession. New home building is slow and existing home inventory is still large. Industrial production is  trending sideways or improving. Same trend for production capacity utilization.

The Federal Reserve is pulling the strings to guide global perception about the strength of the US$. The Fed has no choice but to continue it's zero interest rate policy and money printing practice. They will attempt to support the Treasury market when the primary dealers and global participants back away more than they have now. As mentioned above, yields are at historic lows. Doug Noland has this caution in his blog this weekend. "Fiscal and monetary policies are rapidly losing credibility.  Treasury prices may be inflated, but don’t mistake this for confidence in our system’s “core”." Financial markets around the world are expecting a return to quantitative easing (QE3) sometime soon. Bernanke is speaking at the annual Fed Conference at Jackson Hole where last year he hinted at QE2. The world will wait for his message on Aug. 26. Calculated Risk has a post on what he expects from this years Jackson Hole speech. There is a building awareness that the Fed is wrecking the currency. On top of the loss in confidence for the US government, the reaction to a new plan of quantitative easing does not guarantee support for financial markets. Doug Noland writes "The American people no longer buy the notion that piling on more debt and “money printing” offers a reasonable solution.  They are appreciating that it’s instead the problem, and there will be less tolerance for this “experiment” going forward."

If Big Bank in Crisis, Then Precious Metal for Safety

This is an interview of one great mind talking with another. They are James Turk, interviewer, and Eric Sprott, interviewed. This interview took place at GATA's Gold Rush 2011 conference in London on, or near, August 5, 2011. This is a segment of a thirty-three minute interview that is worth listening to for the range of topics and candid observations from two marketers of precious metals investments. They focus on metals they represent, silver and gold, and point to the possibility of copper maybe having a role in this movement. Even though they are "talking their book", they earned my respect by providing investment vehicles that represent direct ownership of the metals, something Sprott states in the interview about his fund.

Currency Risk, Debt and Gold

This is an interview of one great mind talking with another. They are James Turk, interviewer, and Jim Sinclair, interviewed. This interview took place following Sinclair's presentaion at GATA's Gold Rush 2011 conference in London on August 5, 2011.



Jim Sinclair interviewed by James Turk

One Eye on The Fed and the Other on the Yen

All eyes have been focused on The Fed and its various messages over the past several months. The FOMC met this week and said very little to change the expectation they have created for maintaining an easy money policy. Here is part of a FOMC Meeting Summary provided by Econoday.

Also reflecting a marginal upgrade to the recovery, the Fed dropped language regarding progress on unemployment as "disappointingly slow."

The FOMC decided to continue with its plans for QE2.

"To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to continue expanding its holdings of securities as announced in November. In particular, the Committee is maintaining its existing policy of reinvesting principal payments from its securities holdings and intends to purchase $600 billion of longer-term Treasury securities by the end of the second quarter of 2011. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability."

Most likely, the next (or even current) true debate at the Fed is what to do and when after QE2 concludes at the end of June. The Fed's balance sheet will top out at a little under $3 trillion and as soon as the Fed stops making additional purchases, the balance sheet will start to unwind on its own as securities mature and/or are paid down. So, the next key question is how fast does the Fed allow the unwinding to occur? The Fed may have to reinvest some pay down to keep the decline in assets at the desired pace. The next question is if this occurs, is it still QE2 or QE2.1 or QE3?

In addition, the natural disaster and follow on nuclear crisis in Japan is inspiring unexpected developments in the yen foreign exchange. As illustrated below, the yen has strengthened substantially today, in addition to the recent upward trend since the 11th of March when life turned upside down for much of Tokyo and northern Japan. A strong yen will slow exports and tourism while adding yield to government debt. The immediate issue will be the potential unwind of the yen carry. People who have borrowed at low rates in the yen are faced with suddenly more expensive costs and those will get resolved quickly. Tomorrow could be a big day down for the developed markets.

March 17, 2011: Peter Boockvar had this comment this morning. He was using a USD/Yen chart for reference. The chart below is a Yen/USD chart. "Overnight, the Nikkei started to bounce off its lows just 17 minutes into their day (still closed lower by 1.4%) and as it steadily recovered most of its losses, the S&P futures rallied too. The yen continues to rip higher vs the US$ as the repatriation process continues but is 2 yen off its overnight highs. Let’s hope we get facts from authorities today on what is going on rather than opinions of nuclear chief’s outside of Japan"

How to Export Inflation

The economic concept of currency exchange rates and it's economic cousin, importing inflation/deflation, have been difficult to grasp. Here is a link to a Caroline Baum article on Bloomberg that goes a long way to clearing the fog. Here are a couple of salient points that helped a lot.

"First, let’s define inflation so we’re all on the same page. Inflation is, depending on one’s orientation, too much money chasing too few goods and services or, in the extreme case favored by Austrian economists, an increase in the money supply. In other words, money is key.
The Fed can print dollars, and those dollars may very well find their way into global commodities prices, emerging debt and equity markets or country-specific goods. That’s not inflation. No matter how many dollars the Fed prints, it cannot affect another country’s inflation unless that country is complicit in increasing its own money supply to prevent its currency from appreciating.
China is making a choice to import inflation. (Actually, in pegging the yuan to the dollar, the PBOC is choosing to cede control over its domestic monetary policy to the Federal Reserve. Inflation is the result.)"

"Sovereign nations need sovereign monetary policies. The European Central Bank is learning just how hard it is to fashion a one-size-fits-all short-term interest rate for 17 very different countries.
No single central bank can play that role for the world (gold standard bearers, hold your fire), just as no central bank can export inflation without a willing importer on the other side."

Stephen Roach on Currencies, EM's, the US Consumer and Muni's

                  

Watching DXY Correlation

It's a New Year and looking backwards can be interesting. We saw currency markets turning exceptionally volatile and solid results continuing in both bond and stock markets. Precious metals and commodities provided outperformance in 2010.  

Today, it's time to look at now and into the future. It looks to me like the time to reduce equity market risk for conservative portfolio's and to look for an attractive entry point for the new positions. More aggressive portfolio's can tolerate the equity markets better. IMHO, it may be that the equity indexes have more upward resistance from the US$ index which has been busting higher, currently through 81. This can be illustrated with the price correlation between the two prices, which as seen next, no longer seems intact, at least for the recent past.

The graph below shows the scenario as of last night, illustrating the US$ index in candlesticks and the S&P 500 in the black line.

Next is a look at the US$ index with the DBP (precious metals) ETF as a metals proxy. Price weakness is already seen in the metals. The price correlation between these two prices still seems intact.

Fundamentally Speaking, Now is a Confusing Time

Quantitative easing (QE 2) has begun and the markets are pretty confused, based on volatility of commodity prices and daily currency exchange swings, and the VIX. It's a terrible time to try forecasting a market's direction amidst all the financial situations around the world (Ireland banks, China inflation, Yen direction, euro direction, US$ direction) as well as the economic influence of QE 2 operations. There is also speculation about the process the Fed has chosen for it's QE 2 plan and whether it will be successful soon, if ever. An interesting observation of the plan is described in "They Just Don't Get It", written by Paul Kasriel.

Kasriel observes that the Fed is targeting the middle-term sections of the maturity spectrum, avoiding the bill's, or short-term issues. He contends that the Fed may have to deliver more easing until they can move the needle of credit outstanding up. He writes "The Federal Reserve has the unique ability to be able to create credit figuratively "out of thin air." So does the commercial banking system, if the Fed provides the "seed money." The ability to create credit out of thin air implies that the recipients of that credit can increase their current spending without any other entity in the economy having to cut back on its current spending. 

Sitting on a Signal: What Happened

The FOMC meeting held earlier this week resulted in the QE2 announcement. They will use the Fed's balance sheet to enable the additional purchase of $600 billion of Treasury securities using a monthly purchase plan until the end of 2Q2011. This is in addition to the reinvestment of principal payments on their MBS portfolio, estimated to average $35 billion per month, that they announced at their meeting in August.
The following comments on the plan from foreign government official's are from Bloomberg News articles found on November 5. Obviously concern about the plan is global because the US$ is a reserve currency and also the denomination of trade of many commodities.

Bernanke came under fire today from officials in Germany, China, and Brazil, who said his plan to pump cash into the banking system may jar other economies and fail to fuel U.S. growth. Critics including Michael Burry, the former hedge-fund manager who predicted the housing market’s plunge, have said Fed policy is encouraging investors to take on too much risk and threatens to undermine the dollar.

“It’s our problem as well if the U.S. is no longer certain that the old recipes don’t work anymore,” German Finance Minister Wolfgang Schaeuble said today in Berlin. The Fed’s injection of $600 billion was “clueless” and won’t revive growth, he said.

Brazil’s central bank president, Henrique Meirelles, said “excess liquidity” in the U.S. economy is creating “risks for everyone.” In China, Vice Foreign Minister Cui Tiankai said “many countries are worried about the impact of the policy on their economies.” He also said the U.S. “owes us some explanation on their decision on quantitative easing.” 

Asked by a student if “skyrocketing” commodities prices may threaten his inflation outlook, Bernanke said rising commodities prices are “the one exception” to a broad reduction in inflationary pressures. Overall, excess slack in the economy will make it difficult for producers to push through higher prices to consumers, he said.

“Emerging markets are growing quite quickly,” Bernanke said. “Demand for those commodities is pretty strong. That is going to be a contributor to inflation in the U.S. because it will affect gas prices, for example, and so on.”

Sitting on a Signal: Clear(?) Signal Expected on 11/3

The Federal Reserve Open Market Committee (FOMC) last met to discuss the condition of the economy on Sept 21. The U.S. central bankers said they were “prepared to provide additional accommodation if needed to support the economic recovery.” They also left the benchmark lending rate in a range of zero to 0.25 percent while noting that inflation measures were at levels “somewhat below” the central bank’s mandate to achieve stable prices and full employment. The Fed statement boosted speculation that the central bank will buy more Treasuries sometime later this year.

Fed observers are expecting that the FOMC will announce a new program of quantitative easing (QE) after they meet on November 2-3.

In a post on October 8, I asked myself "what are some signals to look for? A rally up to S&P 1170 might inspire some profit taking, with bargain hunters looking to test the water around 1130. Breaking through and closing below 1130 should alert investors to look for signs of a shifting mood." The thresholds were breached in stride and all in apparent anticipation of the expected new QE.

Now, look at the graphs used in that post, updated to the most recent info. There is also a new look with the US dollar index line added in these graphs to illustrate the level of correlation to the currency which has been strong since the end of May in many markets.

One Eye on The Fed: The Other Eye on The Dollar

Here is a 9 minute video clip that is timely and helpful in understanding the currency challenges facing the major global economies. The discussion revolves around more money printing from the Fed and what Taylor believes will be the impact on the US$. Taylor then offers a high conviction trade suggestion at the very end.

John Taylor, chairman and founder of FX Concepts Inc., discusses the outlook for currency markets. Taylor, speaking with Erik Schatzker on Bloomberg Television's "InsideTrack," says another round of quantitative easing is mostly priced into the market and that the U.S. dollar will weaken through the end of November before recovering. (Source: Bloomberg)

Sitting on a Signal

The Fed last met to discuss the condition of the economy on Sept 21. The U.S. central bankers said they were “prepared to provide additional accommodation if needed to support the economic recovery.” They also left the benchmark lending rate in a range of zero to 0.25 percent while noting that inflation measures were at levels “somewhat below” the central bank’s mandate to achieve stable prices and full employment. The Fed statement boosted speculation that the central bank will buy more Treasuries sometime later this year.

Fed observers/speculators are guessing that the FOMC will be announcing a new program of quantitative easing (QE) when they meet next on November 2-3. Some members of the FOMC are speaking about their need for evidence of trends that would threaten the Fed's mission of price stability (keep a lid on inflation) and full employment. Today they get the release from the BLS of the last employment data before the FOMC meets in early November. There is the suggestion is that a report indicating no, or little, improvement would support a new QE program announcement in November. Here is a brief look at the highlights. Payroll employment in September declined 95,000, following a revised 57,000 dip in August and a 66,000 decrease in July. The September fall was significantly more negative than the median forecast for an 8,000 decrease. But on the positive side, private nonfarm employment continued to rise, advancing 64,000 in September, following a revised increase of 93,000 the prior month. The median market forecast was for an 85,000 boost for private payrolls.

Fundamentally, toxic assets are still on the balance sheets of the TBTF banks in the US, UK and Europe. (See the second graph). The threat of a renewed crisis caused by the collapse of the global credit system is still a possibility. Banks are the lynch pin in our credit based world and they hold all the political cards too. Fundamentally, the continuing concern is that consumer and commercial lending do not recover with enough volume to contribute to a real economic recovery. That leaves the economy to look to the government for stimulus of some shape.

Sitting on a Signal

The Fed met to discuss the condition of the economy on Sept 21. The U.S. central bankers said they were “prepared to provide additional accommodation if needed to support the economic recovery.” They also left the benchmark lending rate in a range of zero to 0.25 percent while noting that inflation measures were at levels “somewhat below” the central bank’s mandate to achieve stable prices and full employment.
The Fed statement boosted speculation the central bank will buy more Treasuries sometime later this year.

Fundamentally, toxic assets(?) are still on the balance sheets of the TBTF banks in the US, UK and Europe. (See the second graph). Banks are the lynch pin in our credit based world and they hold all the political cards too. Fundamentally, the continuing high probability (99%) danger is that consumer and commercial lending does not occur with enough volume to contribute to a real economic recovery. That leaves the economy to look to the government for stimulus of some shape.

Sitting on a Signal

Looking at the S&P 500 Index chart below, it looks like making money from May to now was easy. Buy low, sell high. There have been some good percentage moves. The axiom, "sell in May and go away" is also looking like it was good advice back at the end of April. Since mid-May the trading range has been well defined.

Fundamentally, toxic assets(?) are still on the balance sheets of the TBTF banks in the US, UK and Europe. (See the second graph). Banks are the lynch pin in our credit based world and they hold all the cards. Fundamentally, the continuing high probability (99%) danger is that consumer and commercial lending does not occur with enough volume to contribute to a real economic recovery. That leaves the economy to look to the government for stimulus of some shape.

Individual Currency Charts Replace the DXY Chart

The DXY index represents a bucket of six currencies weighted as follows... the Euro 57.6%, Yen 13.6%, Sterling 11.9%, Canadian Dollar 9.1%, Swedish Krona 4.2%, and Swiss Franc 3.6%. This design was created by J.P. Morgan in 1973.

Scanning for more US$ knowledge

Merk Funds specializes in global bonds and currency investing. They offer an example of what might cause downward pressure on the dollar in light of today's environment. Their web site provides much more depth for inquiring minds.

Numerous factors affect the value of a currency. Although financial pundits within the media give a reason(s) for every move, it is usually not possible to pinpoint exactly why a currency has moved. What we can do, however, is to look at the big picture: we can analyze large forces weighing on the markets.

In explaining the fall of the U.S. dollar, one factor we focus on is the current account deficit. The current account deficit is the difference between what Americans earn from other countries (exports, services, investments abroad) and what we pay out to other countries (imports, services, loans). This shortfall in trade and investment income between the U.S. and the rest of the world amounted $673.3 billion in 2008. As a share of gross domestic product (GDP), the deficit amounted for 4.7% in 2008. Foreigners must absorb this shortfall by buying about $2 billion worth of U.S. dollar denominated assets every single day, just to keep the U.S. dollar from falling.