Wednesday, August 31, 2011


High-frequency trading took us up in the mid-afternoon, then took us down at the close.

Here is Miller Tabak's Peter Boockvar's take on the Fed minutes:

"In response to the FOMC's concern with the lackluster economic recovery and the mostly benign outlook on inflation (some were more concerned about inflation), members on Aug 9th discussed doing more. They discussed selling short term maturity debt they own and buying longer term debt with the proceeds. They talked about lowering the interest rate paid on bank reserves to encourage bank lending (.25% rate is certainly no impediment) and they debated the only thing they followed thru on, that of explicitly defining the time frame of an 'exceptionally low' fed funds rate. The 1st and 3rd options were meant to lower further the level of long term interest rates as many on the committee still believe that even lower rates will somehow help. Some didn't want more because they didn't think it "would likely do much to promote a faster economic recovery" and "that providing additional stimulus at this time would risk boosting inflation without providing a significant gain in output or employment." The majority of members "agreed that the economic outlook had deteriorated by enough to warrant a Committee response at this meeting." Remember that this is only 5 weeks after the end of QE2 that they felt the need to act again. Some members even wanted more and will likely use the Sept meeting to push for it. Bottom line, after hearing from Bernanke on Friday, Evans and Kocherlakota today and Fisher and Plosser (dissenters) after Aug 9th, we got a good read of what the Fed is thinking and it seems that the majority still want more."

My take on the Fed minutes is that the Federal Reserve is as divided as our Congress is on the major factors influencing and the causality of weaker-than-expected domestic economic growth.

There is no historic game plan to deal, either monetarily or fiscally, with structural problems plaguing economic growth.

Extraordinary monetary accommodation didn't work and, as we move closer and closer to the November 2012 elections, the odds of meaningful bipartisan fiscal policy diminishes.

Enough is enough.

"In a famous Saturday Night Live skit, Christopher Walken plays a legendary rock music impresario whose advice, his only advice, to a young band is "more cowbell." The actor Will Ferrell furiously pounds away on a cowbell but it's never enough for Mr. Walken, who ultimately shouts, "I got a fever, and the only prescription is more cowbell!" Federal Reserve Chairman Ben Bernanke must be a fan of that skit because he is applying the same logic to monetary policy: The economy isn't growing fast enough, and the only prescription is more money." -- Wall Street Journal Op-Ed

My vote is for no more cowbell.

No more fast and easy money.

Enough is enough.

The authorities should either engage in pro-growth fiscal policies or recognize that we must be patient and let the markets clear (as private and public sectors delverage) by themselves.

Pay heed to the message of higher gold prices over the last week.

From my perch the message is clear cut.

Continued easing and mo' money will not deliver economic growth, clear excessive home inventory or result in improving (and higher wage) jobs (what the Fed wants), but rather will result in higher costs of the necessities of life that squeeze the Average Joe and will likely translate into a further drop in our currency (and the further loss of US hegemony) -- that will, in the fullness of time, serve as a headwind to domestic economic growth.

Mark-ups aside, lower interest rates and higher gold are troubling.

I suspect that in combination with momentum-based high-frequency trading strategies, some portion of the rally over the past few days is due to mark-ups.

That said, what concerns me today is the drop in interest rates and the rise in gold prices.

MKM Partners' Mike Darda has been very right about the markets and the economy over the last three years. He forecast the rally and is now quite negative.

As I have written repeatedly, Europe is a wild card.

Darda expounds:

European credit markets are a mess. As we noted yesterday, euro two-year swap spreads, one measure of systemic/banking stress, are pushing the 90 bps threshold, a very high level historically.

Corporate bond spreads in the eurozone have exploded to 221 bps, the highest level since the spring of 2009. Indeed, the action in European corporate debt markets looks a lot like the late 2007- early 2008 period. Moreover, credit default swap spreads on European banks are wider than they were at the height of 2008 crisis. While many continue to argue that whatever we’re heading for cannot possibly be worse than 2008, it may indeed be worse than 2008 for the eurozone. This may sound semi-hysterical, but there is a powerful case to be made that a collapse of the eurozone as we know it is more probable than the more benign alternative. We wish we could disagree.

The June Case-Shiller 20-City Home Price Index was in line with consensus forecasts, falling 0.1% over May 2011 and down 4.6% year over year.

The vote was unanimous -- all 20 cities dropped in price.

The weakness in residential real estate will be with us for years. It's one of the more important nontraditional factors that will weigh down domestic economic growth.

Fed member Charles Evans is out with some very dovish remarks, joining fellow doves Ben Bernanke, William Dudley and Janet Yellen.

Not surprisingly, gold is exploding to the upside.

Italian bond yields have risen to monthly highs after the sale of 3- and 10-year notes (less than expected). Nevertheless, the yields were below last month's record levels. The italian auction shoud be viewed somehat negatively and coud adversely affect risk assets.

Italian business confidence rose modestly (month over month) but was still at the second-worst level in a year. The eurozone confidence index dropped to a level last seen almost 16 months ago.

In Japan, the unemployment rate rose a tad.

Meanwhile, Chinese stocks are dipping again.

Yesterday the administration announced that Alan Krueger will be nominated to become the new chairman of the Council of Economic Advisers.

Like many of the president's economic positions, the choice was predictable. Krueger worked in the Clinton administration and is very close with (and plays tennis with) Larry Summers and Tim Geithner. And he, like Ben Bernanke, is a member of the Princeton University Economics Department.