» Q.E. » Hedge Fund Blogs From HedgeCo.Net

Is Quantitative Easing Alive and Well? Evidence Mounts Suggesting the Answer Is Yes

Posted By Bret Rosenthal, May 5th, 2010 : Permalink

Today, I’d like to address a curious phenomenon developing in the Treasury market.

March 31st supposedly marked the end of the Fed’s quantitative easing (Q.E.) phase. We were told the Fed would no longer print money and buy mortgage backed securities. There was, of course, no discussion about the Fed printing money and buying other assets. However, ‘ending Q.E.’ carries certain implications and it would not be a stretch to say market participants were led to believe Q.E. in all forms was coming to an end.

Enter ‘curious phenomenon’: Treasury market behavior since March 31st would suggest Q.E. is alive and well. During the month of April, long rates rallied from about 4% to roughly 3.7%. Treasury prices went up as rates went down after the Fed allegedly stopped Q.E.?! Needless to say this is not the response most market participants would expect.

I’m sure we can come up with more than one reason for this Treasury strength. Perhaps the issues emanating from Europe have driven investors into the relative safety of US debt. Or maybe Goldman Sachs led financial fears are responsible for the Treasury bid.

However, the following excerpt from ‘The Privateer’ (A favorite publication of ours) offers a compelling argument supporting the theory that the Fed is continuing a Q.E. assault on the credit markets. If this theory is accurate, we would expect any equity market selloff to be contained to a normal uptrend retracement. Moreover, precious metals prices should continue to advance as more Q.E. equals further currency debasement which is a tasty recipe for higher Gold and Silver prices….

The US Treasury auctioned $11 Billion worth of “TIPS” on April 26. They started to sell the regular stuff on April 27 with an auction of $44 Billion in two-year paper. With the Greek debt downgrade to “junk”, hardly anyone noticed. Hardly anyone, that is, except the bidders for US Treasury paper. Indirect bidders (read foreign central banks and governments) bid for only 28 percent of the paper, down substantially from the average demand in 2009.

But much more troubling was the massive 24 percent of the paper on offer taken by the so-called “direct bidders”. The rest was presumably taken by the “primary dealers” in Treasury paper. The “direct bidders” had taken as much as 10 percent of the auction on only 12 of 42 auctions since July last year. They had taken that much only six times in all the auctions held by the US Treasury in the FIVE years from the beginning of 2004 until the end of 2008.

Even more disquieting, the identity of those who are included as “direct bidders” is never disclosed. The fact that the amount of Treasury debt taken by “direct bidders” has blown out since the Fed officially ended its quantitative easing at the end of October 2009 has led to speculation that the Fed has not REALLY ended its policy of monetising Treasury debt after all. More and more analysts (including some mainstream analysts) have come to the conclusion that the “direct bidder” is none other than the Fed. They are almost certainly right, but nobody can know for sure because the “direct bidders” are secret….

Tags: Fed, gold, Goldman Sachs, precious metals, Q.E., Quantitative Easing, silver, treasury market, U.S. Debt

Comments feed (RSS 2.0), comment or trackback from your site.

Credit Markets Warning Signal, Foreign Demand for US Treasury Falls

Posted By Bret Rosenthal, February 18th, 2010 : Permalink

The following story represents perhaps the largest obstacle facing equity market integrity today. The previous statement is not hyperbole. The collapse of equity prices in 2008 was presaged by a python-like constriction of credit. If the private sector cannot access credit then business grinds to a halt and as we saw in 2008 economic cataclysm ensues…

Credit markets flash hottest warning signal since crisis

European credit markets are flashing the most serious warnings signs in a year as the yields on risker bonds rise sharply and a string of companies cancel share flotations, raising fears that the recovery may falter in coming months.

The Markit iTraxx Crossover index measuring yields on lower-grade debt has jumped by almost 130 basis points since mid-January to 514, while the main index of investment grade bonds has jumped by a third to 93. “This is the biggest move since the financial crisis in early 2009, said Gavan Nolan, Markit’s credit analyst.

The rating agency Moody’s said market ructions have led to a “material” rise in borrowing costs over the last month, prompting the cancellation of debt issues by the Dutch energy group New World Resources, Italy’s Snai betting group, and the UK’s Travelport. Sixteen companies wordwide have pulled debt issues worth a $7.3bn (£4.66bn) since mid-January, including Canada’s Bombardier.

US$ vs. Gold Prices: A Little Perspective, Obama 2010 Budget, $1.9 Trillion Increase in Debt Ceiling

Posted By Bret Rosenthal, February 3rd, 2010 : Permalink

Perspective: US$ vs. Gold

-US$ tops out on March 2nd, 2009 and declines by 18% at the low on December 1st.

-During the same time period (March 4th – Dec. 3rd) Gold prices rise 34.8%

-From Dec. 1st to Jan. 29th the US$ rallies 6.5% while Gold prices fall 12.28%

-The US$ rally has failed to break above the 200-day moving average and remains in a long-term downtrend.

-The Gold price advanced 30% from Sept. thru Dec. to reach a high of $1,225, has since retraced 50% of that move and has settled around $1,100. This is normal action in the context of an overall uptrend and it is action that would be considered healthy.

Question: What is the fundamental basis for a US$ rally or decline?

Answer: The continuation or cessation of Quantitative Easing/easy credit in all forms.

This is a simple answer to a complex question, you say? Respectfully, I say, “Wrong, the question is not complex.” Traditional financial news outlets would like you to believe the question is complex so you continue to waste time and money in your effort to understand.

For two months the US$ has rallied, not because the economy is recovering or company earnings are improving, but because the possibility of continued Q.E. was in question. All of the participants involved in the events I list below benefited from a stronger US$ and created all sorts of sound bytes during the last two months to champion their cause. The biggest beneficiary of this jawboning — and perhaps most important — was, of course, Ben Bernanke. The US$ had declined 18% and word began to spread that Ben may not be reappointed. So Ben and his cohorts began to talk about tightening policy in all of its forms. I stress the word, talk, as no actions have been taken to reduce liquidity.

List of the events:

The State of the Union address

Ben Bernanke’s Reappointment

The FOMC meeting (for months now the US$ has rallied in front of FOMC events)

The Geithner grilling on Capitol Hill

All of the above happened in the same week, the last in Jan., and one can argue all participants appreciated the US$ appreciation. Coincidence? We think not.

That was then, this is now…

Bearish US$ developments as of Feb. 1:

-2010 Budget released: After parsing the numbers the increase in spending looks real, the “savings” as usual appear dubious. Evidence the insanity below:

The Wall Street Journal reports President Obama will propose on Monday a $3.8 trln budget for fiscal 2011 that projects the deficit will shoot up to a record $1.6 trln this year, but would push the red ink down to about $700 bln, or 4% of the gross domestic product, by 2013, according to congressional aides. The deficit for the current fiscal year, which ends on Sept. 30, would eclipse last year’s $1.4 trln deficit, in part due to new spending on a proposed jobs package. The president also wants $25 bln for cash-strapped state governments, mainly to offset their funding of the Medicaid health program for the poor. To get the deficit down by the middle of the decade, Mr. Obama will be relying on some cuts that have previously been proposed without success, on cooperation from a wary Congress and on a yet-to-be set up debt commission to suggest politically difficult choices.

Reuters.com reports the White House budget proposal released on Monday assumes the U.S. economy is heading for a six-year run of above-average economic growth with no sign of a worrisome spike in inflation or interest rates. The forecasts underlying President Barack Obama’s budget plan show real gross domestic product rising 2.7 percent this year, which is largely in line with private forecasts. Beginning in 2011, the White House’s projections diverge. It expects six consecutive years of strong growth ranging from 3.2 percent to 4.3 percent — well above what most economists consider the longer-term trend of around 2.6 percent. The last time the economy saw a similar streak of strong growth was in the late 1990s, during the dot-com boom. Obama has said both that expansion and the housing-powered growth in the mid-2000s were bubble-driven, and he wants the next expansion phase to rest on sturdier pillars. If the White House is assuming stronger economic growth, that implies bigger tax revenues and a smaller budget gap. The proposal shows the deficit shrinking to just under 4 percent of GDP by 2014, from an estimated 10.6 percent this year.

-Senate votes 60-39 to increase US debt ceiling by $1.9 trillion – DJ (This vote was delayed in Dec. adding to the US$ rally at that time)

-Personal Consumption and Income Weaken

-Construction Spending Dips in December

I will leave you with the following quote from White House Economic Advisor Romer, “ …strong GDP forecasts included in the budget are based on a history of growth after recessions.”

To recap, the “strong” GDP numbers carried in the budget are the primary source of deficit reduction going forward. Does anyone else see the Lewis Carroll nature of the 2010 budget, or am I just a madhatter? Romer says, “history of growth after recessions.” This assumption would imply we have just experienced a normal recession but we all know that to be untrue. We can all agree a credit crisis of epic proportions led to a real estate collapse that has defied all expectation. These events were not normal or historic, hence the growth of GDP going forward should not be normal either. Previous “normal” recessions were preceded by sharply rising interest rates. “Normal” recoveries were preceded by sharply declining interest rates. According to Romer’s logic the Fed will need to take interest rates substantially below zero to foster a “normal” recovery. Pay close attention to the appearance of President Obama during his next speech and see if he looks like a Cheshire Cat.

Is it any wonder the price of Gold jumped 4.2% in the two days following the budget release?

Tags: ben bernanke, debt-ceiling, economy, GDP, Geithner, gold, gold prices, obama, Q.E., Quantitative Easing, U. S. economy, US$

Comments feed (RSS 2.0), comment or trackback from your site.

Q.E. Will Not and Cannot End at This Time, Zero Hedge/Fed’s Bullard, US Mortgage Originations Seen Plummeting

Posted By Bret Rosenthal, January 13th, 2010 : Permalink

I wrote yesterday: THE FED WILL NOT REDUCE LIQUIDITY AT THIS TIME.

Today, I will reiterate and state: QUANTITATIVE EASING WILL NOT AND CANNOT END AT THIS TIME.

This statement may appear to be rather bold in light of the noise emanating from traditional news outlets and the occasional Fed comment. However, a review of the facts support the notion an end to Q.E. would be catastrophic for the economy and therefore unlikely to occur under the present administration. I would also like to add, 2010 is an important mid-term election year. This fact would lay credence to the idea of further stimulus in 2010 not a reduction.

In order to support my thesis I have included three stories from a varying array of sources. The first story, brilliantly styled by Zero Hedge, highlights a voting member of the Fed. The second, reveals the dire situation of the real estate market as told by the Mortgage Bankers Association. And the third story, quotes the respected Bill Gross of Pimco. Bill explains, in plain English, the conundrum of Q.E..

Enjoy…

Bullard Acknowledges Asset Bubble, Yet Fed Policy Will Remain Unchanged As Change Would Destroy Banks. By Zero Hedge

…Ah, the fabled “extended period” clause. Well, thanks to Bullard’s clarification, we now know that this determination defines not an interest rate duration ambiguity, but rather one of the Q.E. program itself. The latter, in turn, is inextricably linked to the $1.1 trillion in excess reserves. So long as that massive overhang exists, and continues growing, any hopes for an end to Q.E., let alone rate increases, are a deluded myth. And all that posturing about extracting excess liquidity and adjusting the liability side of the Fed’s balance sheet, well, we’ll believe it when we see it. Until then, we, and judging by the dollar’s response to this speech, the broader market as well, fully expect another several hundred billion in tack-on MBS and, who knows, maybe even Treasury purchases by the Fed. The dollar carry trade is back, just as it seemed that Japan may regain the dubious distinction of being the supreme annihilator of one’s own currency. Sorry Japan, Ben is the man. READ MORE…

US mortgage originations seen plummeting – MBA

WASHINGTON, Jan 12 (Reuters) – U.S. residential mortgage originations will plunge 40 percent this year to the lowest level in a decade as home refinancing demand sinks with rising mortgage rates, the industry’s main trade group said. Lenders will underwrite $1.28 trillion in home loans this year, down from $2.11 trillion in 2009, the Mortgage Bankers Association said in its annual forecast on Tuesday. That would be the lowest since $1.14 trillion in 2000. The forecast was downgraded from December, when the MBA predicted originations would fall about 24 percent. READ MORE…

Pimco’s Bill Gross on Fed Q.E. Conundrum:

Here’s the problem that the U.S. Fed’s “exit” poses in simple English: Our fiscal 2009 deficit totaled nearly 12% of GDP and required over $1.5 trillion of new debt to finance it. The Chinese bought a little ($100 billion) of that, other sovereign wealth funds bought some more, but as shown in Chart 2, foreign investors as a group bought only 20% of the total – perhaps $300 billion or so. The balance over the past 12 months was substantially purchased by the Federal Reserve. Of course they purchased more 30-year Agency mortgages than Treasuries, but PIMCO and others sold them those mortgages and bought – you guessed it – Treasuries with the proceeds.

Rosenthal Capital Management runs the Fortune’s Favorite Family of Funds, including Fortune’s Favor I, Fortune’s Favor Precious Metals and Fortune’s Favor Offshore. For more information visit www.rosenthalcapital.com

Tags: Fed, mortgage, mortgage bankers association, Q.E., Quantitative Easing

Comments feed (RSS 2.0), comment or trackback from your site.

Hedge Fund Blogroll

Is Quantitative Easing Alive and Well? Evidence Mounts Suggesting the Answer Is Yes

Credit Markets Warning Signal, Foreign Demand for US Treasury Falls

US$ vs. Gold Prices: A Little Perspective, Obama 2010 Budget, $1.9 Trillion Increase in Debt Ceiling

Perspective: US$ vs. Gold

Q.E. Will Not and Cannot End at This Time, Zero Hedge/Fed’s Bullard, US Mortgage Originations Seen Plummeting

Investors

Hedge Fund Managers

My Account

Information / Support