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)

Quantitative Easing: Pushing on a String?

John Hussman has published another in his series of weekly articles that is a must read. In the article titled "Bernanke Leaps into a Liquidity Trap" he describes his opinion of what should be expected from more expansion of the 'monetary base' or quantitative easing. One of his points is...

Certain economic equations and regularities make it tempting to assume that there are simple cause-effect relationships that would allow a policy maker to directly manipulate prices and output. While the Fed can control the monetary base, the behavior of prices and output is based on a whole range of factors outside of the Fed's control. Except at the shortest maturities, interest rates are also a function of factors well beyond monetary policy. 

Market Data: Week Ending October 22, 2010

Market Index	2009   Close	10/22  Close	Week Change	Simple YTD %
Dow Industrials Avg	10428.05	11,132.78	0.63%	6.76%
S&P 500	1115.1	1,183.08	0.59%	5.75%
Fed Funds Rate	0.25%	0.20%	-0.02%	0%
10 yr T-note Yld	3.85%	2.55%	-0.01%	-1.30%
5 yr T-note Yld		1.15%	-0.04%
5 yr infl adj Note		-0.52%	-0.02%
Implied 5 yr Inflation %		1.67%	-0.02%
2 yr T-note Yld	1.14%	0.35%	-0.01%	-0.79%
2-10 Yr Slope	2.70%	2.20%	0.00%	-0.50%
90 day T-bill Yld		0.12%	-0.01%
Gold ($/oz)	$1,096.95	$1,325.10	-3.54%	20.80%
WTI Oil ($/brl)	$79.36	$81.69	0.54%	2.94%
VIX "Worry Index"	21.68	18.78	-1.31%	-13.38%
Credit Spreads		10/22  Close	Week Change
Inv Grade Credit Idx		4.30%	-0.04%
Low Grade Credit Idx		7.95%	0.01%
Markit CDX Inv Grd Idx		97	-1.02%
Markit CDX Mid Grd Idx		157	1.29%

One Eye on China: West Moving East

Here is an insightful, and brief, perspective from Hong Kong of the cultural and economic changes we are beginning to observe in frequent headlines. Andrew Sheng, the Chief Advisor to China Banking Regulatory Commission and former Chairman of Hong Kong Securities and Futures Commission, writes these comments in a 9/15/2010 opinion article in Caixin, the online newspaper, titled Confusing Hong Kong's Reversion with Submersion. There is a lot of critical rhetoric directed at China coming from elected and unelected politicians in the US. Their talk is cheap. Understanding the problem, understanding the culture, and working towards mutual agreement is the task. Jawboning is not going to help. The differences between the east and the west are big. However the need for both the east and west to cooperate is just as big. Doing so with a cooperative mind set will last a lot longer than cooperation out of single minded, self preservation motivations.

Out of the top 40 think tanks in Asia, Singapore had 4 and Hong Kong had only 1 (Hong Kong Center for Economic Research).

Of course, think tanks are not necessarily the best measure of thinking, because the rating system was based on publications in English.  My response to anyone who says that China is not transparent enough is that they often mean China is not transparent in English. It is pretty transparent in Chinese. But India comes out of this rating with 10 out of 40, Japan 7 and China 6.  These English-based think tanks assume that non-English speakers don't think.