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Sugar Rush - Why The Economy Will Run Hot, Then Crash

2021-03-01T20:47:00.001-08:00

Sugar Rush - Why The Economy Will Run Hot, Then Crash

Mar. 01, 2021 10:57 AM ETDDM, DIA, DOG...141 Comments61 Likes

Summary

The expected "sugar rush" from more stimulus is why the economy will "run hot" then crash.
The vast majority of the growth in the U.S. over the last decade was due to a variety of artificial inputs which are not indefinitely sustainable.
There is a massive disconnect between the "stock market" and the "real economy."

The expected "sugar rush" from more stimulus is why the economy will "run hot" then crash. As every parent knows, giving a child too much "sugar" leads to a "rush" of energy. Then comes the crash, where you find them in some odd place taking a nap.

The Coming Economic "Rush"

Recently, JPMorgan joined the rest of the Wall Street banks in predicting a surge in economic activity for 2021 of 6.4%. Of course, the entire reasoning behind the rise in activity was due to "stimulus."

"In a note to clients, JPM's chief economist Michael Feroli made the following forecast revisions:

We now look for a $1.7 trillion fiscal stimulus package (up from $900 billion) to be passed in March

Even before that kicks in, growth appears to be on firmer footing at the start of the year

All told we now expect 6.4% (4Q/4Q) GDP growth this year and 2.8% next year

We see the labor market getting back to full employment, or around 4% unemployment, by 2Q22 and expect core PCE inflation to reach 2.0% by 4Q22, with balanced risks around the outlook.

While the outlooks for growth and inflation are moving up, Fed rhetoric appears to be getting more dovish" - Zerohedge

Full article at: Sugar Rush - Why The Economy Will Run Hot, Then Crash | Seeking Alpha

Sugar Rush - Why The Economy Will Run Hot, Then Crash | Seeking Alpha

The expected "sugar rush" from more stimulus is why the economy will "run hot" then crash.

seekingalpha.com

The stock market is signaling a ‘severe’ drop is imminent, says contrarian strategist

2020-12-06T14:45:00.003-08:00

The stock market is signaling a ‘severe’ drop is imminent, says contrarian strategist

https://www.marketwatch.com/story/a-severe-drop-is-imminent-this-3-musketeers-stock-market-is-signaling-says-contrarian-strategist-11606824335?siteid=yhoof2

This year’s recovery for equity markets in the face of a deadly pandemic has been remarkable, so a strong December would seem to follow.

But a “pretty severe” stock drop may have already started, if not a week or so away, warns our call of the day, from the True Contrarian blog and newsletter’s chief executive officer, Steven Jon Kaplan. He says there are plenty of signals flagging this if investors know where to look.

“What I notice the most is investors crowding into the stock market and making record inflows, while insiders have never been selling more heavily than they have done in November 2020,” Kaplan told MarketWatch in an interview and emails.

He notes “intense selling” across the board via J3 Information Services Group, a website that tracks company director buying and selling, known as insiders. That means “most knowledgeable investors realize that some big drop is coming…and they’re preparing for it by reducing risk,” he says.

Kaplan says “a lot of things are going to be dropping by 30% or 40%,” and believes we are in a bear market, so suggests looking at pullbacks between 2000 and 2003 for an idea of what’s ahead.

The COVID-19 lockdown is squeezing real estate from all sides and threatens to burst the housing and mortgage bubble

2020-09-21T15:17:00.004-07:00

Recently the Federal Housing Finance Administration (FHFA) — conservator of Fannie Mae and Freddie Mac — extended the moratorium for both evictions and foreclosures until the end of the year. Many homeowners breathed a sigh of relief.

Indeed, over the past few months the number of borrowers with active forbearances has declined. But that’s no reason for optimism. The more serious matter is how many homeowners are now delinquent. By the end of 2020, several million borrowers who have received mortgage forbearance will have gone nine months without making a mortgage payment.

What impact will this have on U.S. housing and mortgage markets? Let’s start with FHA-insured loans. According to HUD’s July 2020 “Neighborhood Watch” report, 17% of 8 million insured mortgages are now delinquent. This percentage includes mortgages in forbearance as well as those not in forbearance. Hard-hit metropolitan areas include New York City with 27.2%, Miami with 24.4% and Atlanta with 21%.

Full article at:

https://www.marketwatch.com/story/the-covid-19-lockdown-is-squeezing-real-estate-from-all-sides-and-threatens-to-burst-the-housing-and-mortgage-bubble-2020-09-21?siteid=yhoof2&yptr=yahoo

Second, small landlords have been devastated by the lockdowns. The results of the latest survey published by the National Association of Independent Landlords (NAIL) revealed that the percentage of respondents who received a full rent payment from their tenants plunged to 55% in June from 83% in February. Almost 20% had vacant rental properties due to COVID-19, while 60% were in a financial position to offer some kind of payment plan for tenants to pay back rent.

Keep in mind that there are at least 15 million properties owned by these small landlords nationwide. Many were in a precarious financial situation even before the lockdowns began. Unless the job situation of their tenants improves, millions of these investors could be wiped out and compelled to throw their properties onto the market. Sooner or later, the piper must be paid.

..see mounting evidence that global markets are in the last stage of their rallies..

2017-08-25T12:22:00.001-07:00

HSBC Holdings Plc, Citigroup Inc. and Morgan Stanley see mounting evidence that global markets are in the last stage of their rallies before a downturn in the business cycle.

Analysts at the Wall Street behemoths cite signals including the breakdown of long-standing relationships between stocks, bonds and commodities as well as investors ignoring valuation fundamentals and data. It all means stock and credit markets are at risk of a painful drop.

“Equities have become less correlated with FX, FX has become less correlated with rates, and everything has become less sensitive to oil,” Andrew Sheets, Morgan Stanley’s chief cross-asset strategist, wrote in a note published Tuesday.

https://www.bloomberg.com/news/articles/2017-08-22/wall-street-banks-warn-winter-is-coming-as-business-cycle-peaks

Bank of Tokyo-Mitsubishi UFJ formally quit its role as a primary dealer of Japanese government bonds this July 15

2016-08-11T15:24:00.001-07:00

TOKYO -- Bank of Tokyo-Mitsubishi UFJ formally quit its role as a primary dealer of Japanese government bonds this July 15, a move that reflects the lender's heightened sense of risk over a possible crash in the JGB market.
The Mitsubishi UFJ Financial Group unit ran simulations gauging how fluctuating yields would affect its capital base. The results were not pretty.

The number crunchers found that the capital adequacy ratio would decline by roughly five percentage points if JGB yields increase by 200 basis points across the board. Yields move inversely to bond value. The numbers may be somewhat exaggerated since the estimate was done using earnings figures for fiscal 2012, near the peak of the bank's JGB holding. That said, the lender would have seen its capital ratio cut by a third.
For a long time, Japanese banks regarded JGBs as essentially zero-risk assets when computing capital ratios. Once saddled with mountains of bad loans, the lenders had shied away from smaller businesses -- risky borrowers -- and instead flocked to JGBs, which promised quick profits, and developed a dependency on those instruments.
Nowadays, the safe-haven myth surrounding JGBs is starting to look shaky. When JGBs were generating yields on the plus side, investors suffered no loss if they held on to the bonds to maturity. But now, under the Bank of Japan's negative interest rate policy, JGBs have transformed into loss-laden assets.

Full article at:
http://asia.nikkei.com/Markets/Capital-Markets/Banks-raising-guard-against-possible-JGB-crash?page=1

BIS Highlights Trouble Spots for Global Economy

2015-09-14T15:52:00.001-07:00

FRANKFURT—A mix of weaker growth in China, the U.S. dollar's rise in value and high levels of dollar-denominated corporate borrowing pose a risk to emerging markets, the Bank for International Settlements warned in a report issued Sunday that highlighted many trouble spots for the global economy.

"China's economic slowdown and the U.S. dollar's appreciation have confronted [emerging-market economies] with a double challenge: growth prospects have weakened, especially for commodity exporters, and the burden of dollar- denominated debt has risen in local currency terms," the Switzerland-based consortium of central banks said in its quarterly report.

"We are not seeing isolated tremors, but the release of pressure that has gradually accumulated over the years along major fault lines," said BIS chief economist Claudio Borio.

Financial markets have swung wildly in recent weeks, due in part to a decision by China last month to devalue its currency. This raised fears that the world's second-largest economy had lost momentum, threatening an already tepid global economic recovery. Uncertainty over the timing of future interest-rate increases by the U.S. Federal Reserve has added to the volatility in markets.

Read more: http://www.nasdaq.com/article/bis-highlights-trouble-spots-for-global-economy-20150913-00010#ixzz3lkvvJ5MM

Long U.S. Stocks? Caveat Emptor

2014-12-11T17:29:00.001-08:00

Owen Williams, CFA, Williams Market Analytics (217 clicks)

Long only, momentum, research analyst, investment advisor

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Long U.S. Stocks? Caveat Emptor

Dec. 9, 2014 8:03 AM ET | 34 comments | About: SPDR S&P 500 Trust ETF (SPY)

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)

Summary

Our thoughts on the impact of extraordinary monetary policy on markets.
Several indicators that will give equity Bulls many sleepless nights.
A worldwide obsession of buying stocks on QE…here we go again….

In life, it is said, only two things are certain: death and taxes. In the current financial markets, there are also two certainties: (1) we are in a period of extreme, never-seen-before monetary stimulus, and as such no one can know the extent nor the duration of current market distortions; and (2) that free market forces will one day retake the upper hand and current distortions will end badly. Perhaps very badly.

We give our two cents on the current state of financial markets and review several key market indicators in this article.

The Root Cause: Inappropriate Monetary Policy

Back in the Good `Ole Days, successful investors used to rely on either a superior analysis of company fundamentals and/or an accurate reading of technicals to make money in financial markets. Neither of these skills have been very useful of late. It's difficult to explain to a fundamental analyst why a company's shares are trading at record highs when earnings are lackluster and aggregate demand is relatively weaker in comparison to past cycles. Similarly, a technical analyst may not understand how the sell-off in October, for example, which broke through major supports on many key equity indexes, saw an even quicker V-shaped rebound without evening forming a base.

Today, trading fundamentals and technicals is no longer the game…it's all about trading market liquidity. For this we can thank our Central Bankers. Most astute market observers understand that equities are making successive new highs almost solely on the back of zero interest rate policy (ZIRP) and quantitative easing (QE). Equity price action is just one form of market distortion resulting from current monetary policy. Whether your portfolio is profiting from current Federal Reserve policy or not, most objective observers agree that current monetary policy is no longer appropriate. As a favorite commentator on CNBC aptly summed up: "the Fed has given us a 6-year cure for a 2-year flu". Two important consequences of this 6-year cure are:

Asset prices have raced ahead of earnings and fundamentals. This is nothing more than the definition of an asset bubble.
The Fed will most likely end up tightening at the very end of this business cycle and screw up the next several generations.

A real concern is that the Fed does not manage to raise rates significantly before the next recession. Will QE become the principle counter-cyclical monetary tool, with the Fed Funds rate permanently at zero? What would be the implication for asset prices?

Full article at: http://seekingalpha.com/article/2741815-long-u-s-stocks-caveat-emptor?ifp=1

China Services Gauge Joins Manufacturing in Slowing Down

2014-11-03T16:28:00.003-08:00

A gauge of China’s services industry fell to a nine-month low in October, joining manufacturing in signaling a broadening economic slowdown.

The government’s non-manufacturing Purchasing Managers’ Index (CPMINMAN) fell to 53.8 last month from 54 in September. The official manufacturing PMI released Nov. 1 was at 50.8 in October compared with September’s 51.1. Readings above 50 for both measures indicate expansion.

The pullback in services and manufacturing will test the government’s determination to refrain from increased stimulus as the world’s second-largest economy heads toward the slowest full-year growth since 1990. The economy expanded 7.3 percent in the third quarter, the weakest pace in more than five years.

“The momentum looks weak,” said Hua Changchun, a China economist at Nomura Holdings Inc. inHong Kong. The effectiveness of the government’s targeted measures to boost the economy has waned, Hua said.

The non-manufacturing PMI (CPMINDX) report showed a measure of expectations dropped 1 point from a month earlier, while readings of new orders, input prices and prices charged all increased from September, the report showed.

Both PMI gauges are released by the National Bureau of Statistics and China Federation of Logistics and Purchasing in Beijing.

A separate PMI index from HSBC Holdings Plc and Markit Economics for October was at 50.4, unchanged from the preliminary figure and up from September’s final reading of 50.2. Higher new-export business was attributed to stronger demand from customers across key export markets, suggesting robust external demand is helping underpin the economy.

Economic Headwinds

The official PMI report released Nov. 1 showed growth slowed from September for output, new orders, new export orders, stockpiles and expectations. The economy “still faces some headwinds” although a downward trend is unlikely after the government implemented policies to stabilize growth in the third quarter, the statement said.

“The biggest drivers of growth such as fixed-asset investment are still slowing,” Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd., said after the official manufacturing PMI. “Heavy industries like steel and coal are contracting on lower prices, and the negative impact of the weakproperty market is becoming more pronounced.”

China will “stabilize” property-related consumption and make it easier for people to access mandatory housing savings, according to a government statement citing a State Council meeting chaired by Premier Li Keqiang. This came after the central bank on Sept. 30 relaxed mortgage rules for homebuyers who have paid off existing loans.

Full news at: http://www.bloomberg.com/news/2014-11-03/china-s-services-gauge-joins-manufacturing-in-showing-slowdown.html

Investor Icahn sees stock market correction coming: CNBC

2014-10-10T12:20:00.001-07:00

(Reuters) - Billionaire investor Carl Icahn said on Thursday a stock market correction is "definitely coming" and he is worried about the economy, as U.S. stocks tumbled on fresh worries about global growth.

Icahn told CNBC in an interview that he still has a lot of money invested in the stock market and has taken measures to protect his portfolio.

"I've been putting on quite a bit of hedges," Icahn said, adding that he was shorting the benchmark Standard & Poor's 500 .SPXstock index, which was down 1.77 percent.

The blue-chip Dow Jones industrial average tumbled more than 300 points, or 1.78 percent.

In November Icahn said at a Reuters Summit the market could "easily have a big drop," a sentiment he reiterated on CNBC.

"I've been quite concerned for the last year or so, but we still have a hell of a lot of stocks in our portfolio, so ... but I have a lot of hedges on," Icahn said.

Asked about a possible stock market correction, Icahn said, "It's definitely coming."

Stocks had rallied steadily for months, underpinned by central bankers' easy money policy designed to stimulate growth. But "you can't keep an economy up just with the Fed," Icahn said. "The Fed alone can't do it."

Icahn was being interviewed with his son, Brett, and another portfolio manager, David Schechter, about their open letter to Apple Inc (AAPL.O) urging the company to buy back shares.

Brett Icahn and Schechter said they still own shares of on-demand media company Netflix(NFLX.O), another of their big and successful investments.

Full article at:
http://www.reuters.com/article/2014/10/09/us-markets-icahn-idUSKCN0HY27P20141009

USA Economy shrank during first quarter, government data show

2014-05-30T17:23:00.001-07:00

The U.S. economy shrank for the first time in three years during the first quarter, according to government data released Thursday morning, but many analysts believe the recovery has already regained its mojo.

Businesses depleted their inventories and cut back on investment in the first three months of the year, while harsh winter weather curtailed construction. As a result, the nation's gross domestic product fell at an annualized rate of 1 percent. The government's previous estimate had showed the economy essentially flatlining.

The decline highlights the fragility of the nation's recovery but is not likely to derail it altogether. Several forecasts for the current quarter show the economy growing at a healthy 3 percent annual rate or faster.

"I think it just frankly coils the spring even tighter for a snapback this quarter," said Stuart Hoffman, chief economist at PNC Financial Services. "Boiiiing."

Wall Street shrugged off the report as old news. The major U.S. stock indexes were slightly up in mid-morning trading, with the tech-heavy Nasdaq leading the way with a 0.2 percent gain.

Full article at:

http://www.washingtonpost.com/blogs/wonkblog/wp/2014/05/29/economy-shrank-during-first-quarter-government-data-show/

Home price gains continue to slow

2014-02-26T08:40:00.001-08:00

Home prices fell for the second consecutive month in December in another sign of a sagging real estate market, according to a closely-watched barometer.

December prices dropped 0.1% from November based on the Standard & Poor's/Case-Shiller 20-city index.

Year over year, the index was up 13.6%, but that was less than November's annual gain.

Home prices showed monthly gains in only six cities in the 20-city index — Dallas, Las Vegas, Miami, San Francisco, Tampa and Washington, D.C.

"The S&P/Case-Shiller Home Price Index ended its best year since 2005," says David Blitzer, chairman of the Index Committee at S&P Dow Jones Indices. "However, gains are slowing from month-to-month and the strongest part of the recovery in home values may be over."

http://www.usatoday.com/story/money/business/2014/02/25/dec-home-prices-case-shiller/5803101/

Japanese Investors Flee Foreign Debt on Fed Tapering News

2013-07-09T15:18:00.001-07:00

Personal note: This is beginning of a new trend. When FED says that they are not buying, more and more nations/investor will come out to sell ahead of FED's selling.

***
Japanese investors stampeded out of foreign debt in June, selling a record amount, as Treasurys and other global bonds fell on signs the U.S. Federal Reserve may slow its bond buying soon.
Investors based in Japan sold a net 2.958 trillion yen ($29 billion) in foreign bonds and notes in June – a record amount – Ministry of Finance data showed Monday.
The moves were sparked by comments from U.S. Fed Chairman Ben Bernanke that the central bank could pull back on its bond buying if the U.S. economy continues to improve, with prices on sovereign debt in the U.S. and other industrialized countries tumbling heavily. Fund managers said that left Japanese investors with significant unrealized losses – meaning the assets had fallen in price leaving investors with paper losses – especially on U.S. mortgage-backed securities, which they then sold.

Full article:
http://blogs.wsj.com/moneybeat/2013/07/07/japanese-investors-flee-foreign-debt-on-fed-tapering-news/

Chinese Manufacturing Gauges Fall as Slowdown Persists

2013-07-03T15:50:00.001-07:00

Two gauges of China's manufacturing fell in June, underscoring a sustained slowdown in the nation's economy as policy makers seek to rein in financial speculation and real-estate prices.

An official Purchasing Managers' Index dropped to 50.1, the lowest level in four months, from 50.8, the National Bureau of Statistics and China Federation of Logistics and Purchasing said today in Beijing. A private PMI from HSBC Holdings Plc and Markit Economics was 48.2, the weakest since September. Readings above 50 signal expansion. (CNGDPYOY)

Enlarge image

China's Manufacturing Expands at Slower Pace Amid Credit Crunch

Tomohiro Ohsumi/Bloomberg

Workers assemble Beijing Hyundai Motor Co. cars on the production line at the company's plant in Beijing.

Workers assemble Beijing Hyundai Motor Co. cars on the production line at the company's plant in Beijing. Photographer: Tomohiro Ohsumi/Bloomberg

Weaker gains in manufacturing and a cash squeeze in the banking system add to odds that Li Keqiang will become the first premier to miss an annual growth target since the Asian financial crisis in 1998. In the latest signal that policy makers will tolerate slower expansion, President Xi Jinping said local officials shouldn't be judged solely on their record in boosting gross domestic product.

Full article at:

http://www.bloomberg.com/news/2013-07-01/china-s-manufacturing-expands-at-slower-pace-amid-credit-crunch.html

FW: Low Interest rates, plenty of money injected into economy. What now? Where are markets heading?

2013-06-12T17:15:00.001-07:00

By DAVID WESSEL

The tectonic plates of the world economy are shifting, moving the yield on the 10-year Treasury to the highest level in more than a year and shaking financial markets from Tokyo to Mumbai and Johannesburg to São Paulo.
For the past few years, the global economy, struggling to recover from a financial crisis, has relied on a few constants: The U.S. would print plenty of money and keep interest rates very low. China would provide a lot of demand and vacuum up commodities from around the world. And Japan was largely irrelevant.

Enlarge Image

Scott Eells/Bloomberg News

On the New York Stock Exchange floor on Tuesday, traders saw a day of global market gyrations.

Suddenly, all three of those are being questioned in markets, triggering paroxysms in stocks, bonds, commodities and—particularly, in the past couple days—the currencies of emerging markets.
The big questions hanging over markets and the global economy now: Is this is the inevitably bumpy beginning of a welcome return to normal—a world in which the U.S. economy doesn't need big and repeated doses of monetary stimulus, Japan grows again and China's economy gently slows to a sustainable speed?

Full article:
http://online.wsj.com/article/SB10001424127887324904004578539730750353330.html?mod=dist_smartbrief

Fed on Track to Ease Up on Bond Buying Later This Year .

2013-06-10T11:09:00.001-07:00

Federal Reserve officials are likely to signal at their June policy meeting that they're on track to begin pulling back their $85-billion-a-month bond-buying program later this year, as long as the economy doesn't disappoint.

Enlarge Image

Full article: http://online.wsj.com/article/SB10001424127887324299104578531280408882450.html?mod=dist_smartbrief

Bloomberg News

Fed chief Ben Bernanke is likely to repeat the bond-buying refrain: An easing may start 'in the next few meetings.'

A good-but-not-great jobs report Friday ensured officials wouldn't want to act right away and would instead want to see more data before taking a delicate step toward winding down the program. But they could point at their next meeting to improvement they're seeing in the economy, a prerequisite to reducing the so-called quantitative-easing program.

Plotting out a move is a tricky task, in part because investors are on edge about the Fed's plans for the program. Fed Chairman Ben Bernanke signaled last month that the central bank could start pulling back the program "in the next few meetings," a view echoed by other officials in recent weeks, including some of the program's most vocal supporters.
The Fed's next meeting is June 18-19, and after that at the end of July and in mid-September.

US Debt: Highest since WWII

2011-02-23T15:17:00.000-08:00

The daunting tower of national, state and local debt in the United States will reach a level this year unmatched just after World War II and already exceeds the size of the entire economy, according to government estimates.

But any similarity between 1946 and now ends there. The U.S. debt levels tumbled in the years after World War II, but today they are still climbing and even deep cuts in spending won't completely change that for several years.

As President Obama and Republicans squabble over whose programs to cut and which taxes to raise, slow growth and a rising tide of interest payments - largely beyond their control - are making the job of fixing the budget much harder than in the past. Statehouses and governors face similar challenges.

After World War II, the federal debt - including debt purchased by the Social Security Trust Fund - hit nearly 122 percent of gross domestic product. State and municipal debt back then was minimal. By the time Dwight Eisenhower was elected president six years later, the federal government's debt had dipped to about three-fourths of GDP.

The key factor in the rapid drop in government debt, said Harvard University economist Kenneth Rogoff, was fast economic growth. Spurred by a young labor force, world-leading manufacturers, high personal savings rates, a pent-up demand for consumer goods after years of war and the Depression, and a bout of inflation, the economy grew 57 percent in six years. Thanks to sharp postwar cuts in defense outlays, federal government spending also tumbled for a couple of years.

But today the U.S. economy is in a polar opposite condition. The labor force is aging, U.S. manufacturing often lags behind Asian and European rivals, households are in hock up to their eyeballs, and consumer appetite for goods is tepid. In addition, inflation is tame and government spending locked into entitlement programs and debt service that will be hard or impossible to alter.

Full store in Washington Post: http://www.washingtonpost.com/wp-dyn/content/article/2011/02/20/AR2011022003201.html?hpid=topnews

Delta Airlines- DAL- Stock shows REVERSE signal

2011-02-23T14:39:00.000-08:00

Delta Airline stock, DAL, showed a strong trend reversal today. Overall market was very bad and DAL was also bad when the day started but later in the trading session, the stock showed remarkable uptrend, from today's low price, with strong volume.
DAL can be bought for short to medium term with a stop loss at $10.25.

Stock chart- courtsey of http://www.stockcharts.com/

European Central Bank warns of decisive action if eurozone inflation continues to rise

2011-01-14T08:26:00.001-08:00

Fears that rising inflation will push up interest rates before summer intensified today following hawkish comments from the head of the European Central Bank indicating that he would move decisively to prevent any sustained increase in prices.
Jean-Claude Trichet's robust statement, analysts said, was a warning to Europe's politicians that, without further austerity measures to dampen demand, interest rates would have to rise.

Full article at : http://www.guardian.co.uk/business/2011/jan/13/european-central-bank-eurozone-inflation

U.N. Data Notes Sharp Rise in World Food Prices

2011-01-10T15:15:00.001-08:00

Prices are expected to remain high this year, prompting concern that the world may be approaching another crisis, although economists cautioned that many factors, like adequate stockpiles of key grains, could prevent a serious problem.
The United Nations data measures commodity prices on the world export market. Those are generally far removed from supermarket prices in wealthy countries like the United States. In this country, food price inflation has been relatively tame, and prices are forecast to rise only 2 to 3 percent this year.

Full details at http://www.nytimes.com/2011/01/06/business/global/06food.html?_r=1&hpw

Republicans acknowledge debt limit should rise

2011-01-10T15:11:00.000-08:00

Republicans acknowledged on Thursday they will have to sign off on more deficit spending to avoid a debt default that would roil financial markets and bring the government to a grinding halt.
Treasury Secretary Timothy Geithner pressed lawmakers to raise the nation's $14.3 trillion debt limit to allow the United States to borrow more and avert a crisis in the coming months.
House Budget Committee Chairman Paul Ryan, a Republican, said he recognized the need to allow the government to go deeper in debt.
"Will the debt ceiling ... have to be raised? Yes," said Ryan, who leads Republican efforts to slash deficit spending.

For full details: http://www.reuters.com/article/idUSTRE70606E20110107

Trade Inflation for More Jobs

2011-01-10T15:08:00.001-08:00

Analysis: Higher inflation is the key adding jobs
If an economic model presented at the American Economic Association's annual meeting is correct, the Federal Reserve is on the right track in boosting inflation to bring down unemployment, according to The Economist. The model concluded that a real interest rate of -2.5% would get the labor market on its feet. If the central bank can get inflation up to 2.5% and hold the nominal interest rate at 0%, which is pretty much where it is now, the real interest rate will, in fact, be -2.5%. "The Fed is the answer to the problem; it needs to get off its butt and create rising inflation expectations," the magazine noted. The Economist/Free Exchange blog (09 Jan.)

Is Fed getting into the business of making money?

2011-01-10T15:00:00.000-08:00

The following news caught my attention:

"The Federal Reserve will deliver a record $78.4 billion to the Treasury from its investments last year, a 65 percent increase from the $47.4 billion it transferred in 2009, according to preliminary estimates released Monday. "

So I was wondering from where the profit is coming and I found the biggest arbitrage business of the world! Fed is a big hedge fund and has found a great arbitrage opportunity in the name of saving the US.

The bank reserves with Fed have balloned over last two years!

* In 2008 Fed/US Government started paying interest (@ fed funds rate - 10 bp) on Bank Reserves with Fed so the reserves have ballooned from 40b to 1,040 billions!!!

* Besides the temptation of earning interest, other reason behind this jump is the hesitation by US banks in lending/investing this money. You, I and everyone have money in bank accounts which earn almost nothing. It seems that the banks are not lending this money to anyone either or they are not investing in mortgage or other higher interest instruments. Instead, seems like, banks are keeping these extra fund on demand deposits (I mean Reserves) with Fed.

See the following table that shows the jump in Reserves with Fed.

(see data here: http://www.federalreserve.gov/releases/h3/hist/h3hist1.txt

Month (Reserves with Fed in millions)

May 2008 45711
Jun 2008 45750
Jul 2008 45384
Aug 2008 46412
Sep 2008 103529
Oct 2008 315521
Nov 2008 609285
Dec 2008 820375
Jan 2009 857124
Feb 2009 700350
Mar 2009 779425
Apr 2009 880691
May 2009 900807
Jun 2009 809347
Jul 2009 795376
Aug 2009 828877
Sep 2009 922604
Oct 2009 1056642
Nov 2009 1140795
Dec 2009 1139002
Jan 2010 1108995
Feb 2010 1224790
Mar 2010 1185964
Apr 2010 1116368
May 2010 1109412
Jun 2010 1099258
Jul 2010 1087162
Aug 2010 1085607
Sep 2010 1048360
Oct 2010 1040217
Nov 2010 1038710

Fed announced few months back that they would be buying additional 600b dollars worth of mortgages. This is where yours, mine and everyone's money in our bank accounts is going. We are aware or we are not, but our money is used to hold our own mortgages!

Think of this situation: Your money in bank accounts earn no interest but you are probably paying 5-7% interest on home mortgage. Fed is exactly in the opposite- they have money that costs very little but they are earning interests in the range of 4-6% by investing in our mortgages! - earning in my opinion 50-70 billion dollars!!

This arbitrage may not be the main objective of Fed, but I am sure, Fed, Treasure and deficit-ridden US goverment would be loving this additiona cashflow of 50 plus billions.

What is the cost/catch here?
1) If banks start withdrawing this excess reserve, Fed will have to sell the bonds (causing rates to go up sharply) or print money. If they start selling these bonds, the bond prices will tend to fall. Lower bond prices mean higher interest rates. Higher rates in the economy--- lower economical growth.
See some notes, taken from an article on NYTimes:

Interest income from its investment portfolio has produced record profits for the Fed for two consecutive years. But over time, when economic conditions improve, the portfolio could become a risk, because the investments could lose value when interest rates eventually rise.

“From the taxpayers’ view, I think it is a mistake to make much of this number either way,” said John H. Cochrane, an economist who has been critical of the central bank. “The Fed is acting like a huge hedge fund on our behalf. It is borrowing at very low short-term rates and investing in long-term government bonds, mortgages and other risky loans. It made a profit on those investments last year, but it is bearing a lot of risk.”

Mr. Cochrane, a University of Chicago finance professor, said the Fed was intentionally bearing those risks to support housing and other markets.

“But inevitably, with a big portfolio of long-term bonds, mortgages and risky securities, the day will come when the Fed loses money on those investments, at least on a mark-to-market basis,” Mr. Cochrane added, referring to the accounting the Fed uses to fairly value its balance sheet.

2) If Fed does not want to sell the bonds, they will probably have to resort to print money to pay back those reserves. I am sure none of us would like this...

3) Money spoils everyone. Though the Fed is entrusted with non-profit motives, it is very likely that their motives may be biased now. Directly or indirectly, the profit will keep coming in their economical decisions. Washington will also hate to lose this billions of dollars....so in the name of keeping the US vibrant, loweing unemployment, they would like to keep the game going! This is a perfect game- Fed gets an image of doing good for the nation, Washington looks good because they seem be very concerned about common good, and we also feel good and secured by having such a great Fed and Government lol
Mr. Bernanke is quoted, the Fed “is a profitable program, from the perspective of the federal deficit.”

4) We blamed Greenspan for causing housing bubble by keeping interest rates artificially lower... Current game is even bigger! The rates are artificially lower for long time...coupled with many benefits to troubled home-owners. If the home prices have to start booming, there will be even more players in the next housing boom because Real Estate investment now comes with a free Put option! If you get in losses, government is always there to bail you out! If you have profit in your real estate investments, it is yours to keep! Very advantageous proposition for investing in Real Estate compared to trading stocks or putting money in Cisco or Citibank!

Will appreciate your comments:
Jayesh Patel

China's Real Estate Bubble Threatens to Burst

2010-08-04T10:34:00.001-07:00

China's Real Estate Bubble Threatens to Burst

Two years after the US subprime crisis, China is seeing its own real estate bubble as a result of massive state stimulus programs. Many economists are warning it could burst soon, with unpredictable results for the global economy.

An interminable sawing, screeching, drilling and hammering rips through the oppressive summer heat and humidity in the northern Chinese city of Tianjin. Here, on the city's dusty outskirts, hundreds of new apartment buildings and houses in every imaginable style are springing up.

In an air-conditioned showroom, salespeople in yellow uniforms take potential buyers on tours of the facility. "In one year, we already sold 90 percent of North America, Asia and Europe," customer consultant Qi Yunbu says proudly. "Now we're preparing Africa, Oceania and South America for sale."

Full Article at http://www.spiegel.de/international/world/0,1518,709688,00.html

Weaker EU members' dependence on the ECB is at a record high

2010-07-26T16:50:00.001-07:00

Weaker EU members' dependence on the ECB is at a record high
Data show that weaker members of the EU are more dependent on the European Central Bank than ever before. The revelation comes as European regulators prepare to release results of stress tests on 91 banks, part of efforts to reassure markets about the stability of the financial sector. However, sources said some regulators are urging that results be released before the start of trading in Europe, rather than after, as planned.

Read full article at The Wall Street Journal

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Analysis: U.S. labor market remains in serious trouble

2010-07-26T16:48:00.000-07:00

Analysis: U.S. labor market remains in serious trouble
Recent congressional action to extend unemployment benefits for 2.5 million people is a reminder that although the recession probably ended in June 2009, something is still wrong with the U.S. labor market, according to The Economist. The prolonged downturn and a slow recovery have led to an unprecedented number of long-term unemployed workers, and nothing seems to be helping. "Sadly, no quick fix is available," The Economist notes. "But the failure to change tack may prove costly, leading to slower growth and larger fiscal burdens."

Read Full article on The Economist

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