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EurAnalysis Kindergarten 24 replies

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  • #70,261
  • Edited 3:21pm Oct 2, 2013 3:08pm | Edited 3:21pm
Quoting lumesh
{quote} beautiful place...have a great vacation!
Quoting TraderPablo
{quote} nice gig..i spent some time (abt 1year) here http://www.lakedistrict.gov.uk/
Thanks for the nice send off. I'll check in from time to time while away.
Gotta go. Time to get the party started.


Attached Image
Those who say it cannot be done should not interrupt those who are doing it
  • #70,262
  • Oct 2, 2013 6:49pm Oct 2, 2013 6:49pm
Quoting PipTrapper
Thanks for the nice send off. I'll check in from time to time while away. Gotta go. Time to get the party started.

say hi to sheeps for me
How to Win at Sports Betting: DON'T DO IT!
  • #70,263
  • Oct 2, 2013 7:09pm Oct 2, 2013 7:09pm
Quoting PipTrapper
Well folks, I have reduced exposure, closed all my green U/CAD & AUD/NZD longs and placed Stops/limits on all remaining E/U & G/U trades. I'm leaving my SPX500 trades run however they want. Up/down, doesn't matter. So, "why?" you ask. It's because my loving wife and I are gonna go enjoy a week of stress free relaxation in the UK's South West... God's country. Airline tickets are booked, hotel and rental car are reserved and all we have to do now is pack our bags and print off the boarding passes. Woohoo. Anyway, I thought I would fill you all...
Enjoy your time PT, it is well deserved and you will be missed.
The world you desire can be won. It exists.. it is real.. it is possible..
  • #70,264
  • Oct 2, 2013 7:31pm Oct 2, 2013 7:31pm
Quoting PipTrapper
{quote} How can you quote a Marley lyric and not post the vid? Shame on you. http://www.youtube.com/watch?v=y0Zbqlq6AEs

thanks PT! Enjoy your vacation.
cryptocurrency everytime
  • #70,265
  • Oct 2, 2013 7:36pm Oct 2, 2013 7:36pm
Quoting theDHT
... Got an itchy trigger finger for an EJ long...

So do I actually. EJ reversed smack bang on the apex level of the triangle TL, after completing what looks like an expanding triangle down... going up with the Yen pairs has the advantage of BoJ being your friend, but lord! the EU looks ripe for reversal and recent EJ experience brings on a cold sweat...
cryptocurrency everytime
  • #70,266
  • Oct 2, 2013 10:54pm Oct 2, 2013 10:54pm
Quoting PipTrapper
Well folks, I have reduced exposure, closed all my green U/CAD & AUD/NZD longs and placed Stops/limits on all remaining E/U & G/U trades. I'm leaving my SPX500 trades run however they want. Up/down, doesn't matter. So, "why?" you ask. It's because my loving wife and I are gonna go enjoy a week of stress free relaxation in the UK's South West... God's country. Airline tickets are booked, hotel and rental car are reserved and all we have to do now is pack our bags and print off the boarding passes. Woohoo. Anyway, I thought I would fill you all...
Nice dude, enjoy your time off!
90% of people, are wrong about 90% of everything, 90% of the time...
  • #70,267
  • Oct 2, 2013 10:57pm Oct 2, 2013 10:57pm
Quoting venzen
{quote} So do I actually. EJ reversed smack bang on the apex level of the triangle TL, after completing what looks like an expanding triangle down... going up with the Yen pairs has the advantage of BoJ being your friend, but lord! the EU looks ripe for reversal and recent EJ experience brings on a cold sweat...

I am also not in this trade yet, but here is why my trigger finger is starting to get itchy:

multiple sequential buys + fibs + divergences 101...

I hear you regarding the EURO, but the JPY has been extremely strong for the last 10 days or so... imo, its unsustainable, and a matter of time before them boys turn on their printing press again...

on a daily measurement, upside targets are pretty far north... and risk can be kept tight (88 fib) yielding a good RR

I am already long GJ with an oversized position...

WIN-BACK BITCHES!!! lol

it may be safer to enter on a break above supply line, this would violate the 88 of the recent minor swing down 33455 - 31424

EJ
H4

Attached Image (click to enlarge)
Click to Enlarge Name: EJ H4 10.03.13.png Size: 50 KB
90% of people, are wrong about 90% of everything, 90% of the time...
  • #70,268
  • Edited Oct 3, 2013 11:58am Oct 2, 2013 11:10pm | Edited Oct 3, 2013 11:58am
Hi PT - have a great trip and if you get down into Devon and your are near Kingsbridge, try to drop in to the Millbrook Inn in South Pool - a tiny village about 8 miles away at the head of one of the creeks that run up from Salcombe.

Its a great little pub that is owned by a consortium of locals - I know a couple of them. Good food, great company

Best

Islander
Trading Levels with WRBs
  • #70,269
  • Oct 2, 2013 11:14pm Oct 2, 2013 11:14pm
Quoting theDHT
{quote} I am also not in this trade yet, but here is why my trigger finger is starting to get itchy: multiple sequential buys + fibs + divergences 101... I hear you regarding the EURO, but the JPY has been extremely strong for the last 10 days or so... imo, its unsustainable, and a matter of time before them boys turn on their printing press again... on a daily measurement, upside targets are pretty far north... and risk can be kept tight (88 fib) yielding a good RR I am already long GJ with an oversized position... WIN-BACK BITCHES!!! lol it may...

hi DHT,

Yes, your reasoning is good. I would go with the confirmation of waiting for EJ to close and re-open above that red TL as well as taking supply breach into reckoning (if you want to be super-careful). From just a pattern/fractal prespective (and sorry I can't illustrate this with a picture), I reckon one more low (between 131-132) is called for and perhaps that can also be a good entry point too. I'm shorting UJ for this expected low, but am focusing on Gold which is has good range that seems to suit my current strategy. Gonna give EJ a miss, unless that low puts in!

I would so love to take back everything EJ damn-well OWEs me!
cryptocurrency everytime
  • #70,270
  • Oct 2, 2013 11:17pm Oct 2, 2013 11:17pm
Quoting venzen
{quote} hi DHT, Yes, your reasoning is good. I would go with the confirmation of waiting for EJ to close and re-open above that red TL as well as taking supply breach into reckoning (if you want to be super-careful). From just a pattern/fractal prespective (and sorry I can't illustrate this with a picture), I reckon one more low (between 131-132) is called for and perhaps that can also be a good entry point too. I'm shorting UJ for this expected low, but am focusing on Gold which is has good range that seems to suit my current strategy. Gonna give...

Im holding a couple of small gold shorts atm...

whats your thinking on gold?
90% of people, are wrong about 90% of everything, 90% of the time...
  • #70,271
  • Oct 2, 2013 11:19pm Oct 2, 2013 11:19pm
Quoting venzen
{quote} hi DHT, Yes, your reasoning is good. I would go with the confirmation of waiting for EJ to close and re-open above that red TL as well as taking supply breach into reckoning (if you want to be super-careful). From just a pattern/fractal prespective (and sorry I can't illustrate this with a picture), I reckon one more low (between 131-132) is called for and perhaps that can also be a good entry point too. I'm shorting UJ for this expected low, but am focusing on Gold which is has good range that seems to suit my current strategy. Gonna give...

Oh, and in addition to the fractal "mojo-analysis" I see RSI and MACD are giving reverse divergence signals, strengthening the case for another EJ and UJ low - the presence of regular divergence reinforces this as a definite maybe
cryptocurrency everytime
  • #70,272
  • Oct 3, 2013 1:17am Oct 3, 2013 1:17am
Quoting theDHT
{quote} Im holding a couple of small gold shorts atm... whats your thinking on gold?
I'll post at Sultans of Swing, ok?
cryptocurrency everytime
  • #70,273
  • Oct 3, 2013 2:40am Oct 3, 2013 2:40am
Quoting theDHT
{quote} I am also not in this trade yet, but here is why my trigger finger is starting to get itchy: multiple sequential buys + fibs + divergences 101... I hear you regarding the EURO, but the JPY has been extremely strong for the last 10 days or so... imo, its unsustainable, and a matter of time before them boys turn on their printing press again... on a daily measurement, upside targets are pretty far north... and risk can be kept tight (88 fib) yielding a good RR I am already long GJ with an oversized position... WIN-BACK BITCHES!!! lol it may...
Closed out gj for +30 pips

Too much event risk
90% of people, are wrong about 90% of everything, 90% of the time...
  • #70,274
  • Oct 3, 2013 2:40am Oct 3, 2013 2:40am
Quoting venzen
{quote} I'll post at Sultans of Swing, ok?
Cool!
90% of people, are wrong about 90% of everything, 90% of the time...
  • #70,275
  • Oct 3, 2013 9:35pm Oct 3, 2013 9:35pm
hello my friends i've missed you all


finally settled in to my new full-time job, trading account funded and back online, ready to trade again!
  • #70,276
  • Oct 3, 2013 11:25pm Oct 3, 2013 11:25pm
Good DXY analysis at ElliottwaveReboot:
http://elliottwave5pointzeroreboot.b...y-elliott.html
cryptocurrency everytime
  • #70,277
  • Oct 3, 2013 11:28pm Oct 3, 2013 11:28pm
Quoting neuron
hello my friends i've missed you all finally settled in to my new full-time job, trading account funded and back online, ready to trade again!

hi neuron!

welcome back. best wishes for your new job: hope the trades come easy to you!
cryptocurrency everytime
  • #70,278
  • Oct 5, 2013 7:27am Oct 5, 2013 7:27am
4h chart..
3504 may be the key for this week ..to target 3400 zone !?
Attached Image (click to enlarge)
Click to Enlarge Name: Captura de ecra de 2013-10-05 15:22:21.png Size: 139 KB
  • #70,279
  • Oct 5, 2013 3:44pm Oct 5, 2013 3:44pm
Some Thoughts On What Is Really Going On In Washington

http://www.prudentbear.com/2013/10/n...l#.UlCTP9Jg9KA

Snippet:

At least so far, markets seem fine with a pathetically dysfunctional Washington.

The question arrived via Prudentbear.com and appeared simple enough: “Can you explain how QE funds are inflating the asset markets if these monies are being parked back with the Fed, collecting interest? Can they be in two places at the same time?”

The impact of the Fed’s experimental quantitative easing (QE) program is an issue of great interest. In his talk yesterday, Federal Reserve Bank of San Francisco president John Williams noted that considerable Fed resources have been devoted to researching the issue. Mr. Williams spoke of initial findings, stating the impact on Treasury yields in meager basis points. A cacophony of Fed comments leads me to believe Federal Reserve analysis is oblivious to the key impacts of its ongoing monetary inflation.

In early CBB’s, I was fond of employing my old CPA skills, as I used scores of debit and Credit journal entries (“double-entry bookkeeping”) to illustrate the “infinite multiplier” potential inherent to contemporary non-bank Credit expansion. In particular, I remember a rather exhaustive (exhausting) series of debit and Credit entries explaining how the growth of GSE IOUs (debt) intermediated through the money market and hedge fund channels was behind unconstrained growth in New Age “money” and Credit. I was convinced at the time this atypical monetary inflation was fundamental to a historic Credit Bubble and myriad attendant asset price and economic distortions. I still believe it was among some of my most insightful analysis, and I’ll note that it did seem to resonate strongly with perhaps a handful of readers (including Ed McCarthy, who became a dear friend).

I'll spare readers a tedious debit & Credit exposition. I will instead highlight “Flow” analysis in an attempt to illuminate some of the myriad systemic inflationary impacts from the Fed’s QE laboratory.

Let’s begin with a brief look at the Fed’s balance sheet – where Assets (as of 6/30: $3.526 TN) essentially equal Liabilities ($3.499 TN). On the Assets side, the Fed holds $34.3bn of “U.S. Official Reserve Assets.” There is also $228bn of “Other Miscellaneous Assets.” Yet the vast majority of Fed holdings are within its $3.214 TN portfolio of “Credit Market Instruments.”

As of the end of the second quarter, the Fed held $1.937 TN of Treasury notes and bonds, up from $476bn at the end of 2008. Fed holdings also included $1.277 TN of “Agency- and GSE-Backed Securities,” up from 2008’s $20bn. While the Asset side of the Fed’s balance sheet has ballooned in historic proportions, its holdings are for the most part straightforward.

Things tend to get murkier on the Liability side. The Fed is on the hook for tons of Federal Reserve notes - $60bn of “Vault Cash of Depository Institutions,” as well as $1.134 TN of “Currency Outside Banks.” The Fed also ended Q2 with Liabilities “Due to Treasury General Deposit Account” of $135bn and “Due to GSEs” at $20bn. Yet, at $2.013 TN (up from $21bn to end ’07), the Fed’s largest – and fasted growing – Liability is “Deposit Institution Reserves.”

The surge in Fed “Reserves” has in recent years been a hot topic. The conventional view holds that these Reserves, for now resting harmlessly in the bowels of the banking system, create a potential inflationary tinderbox once the recovery and bank lending gain a head of steam. The Fed has gone to great lengths to explain how it will contain potential inflation risks, most directly by increasing the interest-rate it pays banks on these reserve balances (hence incentivizing retaining Fed reserves rather than lending them in the real economy).

I don’t completely dismiss their inflationary potential, but the whole bank reserve discussion misses more salient points. First, there are the more immediate impacts Fed purchases have been cultivating throughout the financial markets. Second, with contemporary unfettered Credit having expanded outside traditional constraints (i.e. bank lending restricted by reserve and capital requirements) for years now, it’s difficult for me to get all worked up about so-called “latent” inflationary firepower. Again, I would argue the key inflationary effects are here and now – and today’s analytical focus should be fixated on the present.

It might be helpful to remind readers that what we’re really discussing here are electronic debit and Credit entries within an immense global “general ledger” accounting system. This globalized Credit system comprises myriad domestic and international relationships interconnected by various asset, liability and equity relationships. For the most part, innumerous financial, governmental, institutional, corporate and individual debtors have electronic IOUs that are the electronic assets of innumerous lenders.

CurrencyMan

You will never read the above in the Mainstreet Press or hear a serious discussion on this topic on CNBC

Snippet:

Since mid-November (just prior to the Fed commencing its $85bn monthly QE), the Biotech index is up 56%. The small cap Russell 2000 has returned 42%. The InteractiveWeek Internet index is up about 41% and the Semiconductors 40%. The Securities Broker/Dealers index has surged 70%. The Mid-Caps have returned about 34% and the S&P500 27%. Treasury yields, well, they’re up about 1% (100bps) and benchmark MBS yields about 1.2% (120bps).


I have posited that today’s QE is having altogether more powerful inflationary effects than QE1. First and foremost, the Fed’s current monetary inflation is not accommodating financial sector de-leveraging – i.e. newly created Fed liquidity is not immediately extinguished through the retirement of securities speculative leveraging. Indeed, I would argue that the Fed’s $85bn is injecting new liquidity directly into the securities markets, while also incentivizing further risk-taking and speculative leveraging. 2009 QE is Night and Day to 2013 QE.

Today, when the Fed goes into the marketplace to purchase Treasury bonds, they create immediately available funds that the seller can then use to purchase other securities. A Fed transaction with a hedge fund, for example, would provide purchasing power for whatever asset class the manager believed offered the best (immediate) return opportunity. Importantly, if the Fed chooses to inject liquidity into a speculative marketplace, the new purchasing power will not gravitate to low-risk strategies. Indeed, some years ago I would write “Liquidity Loves Inflation,” noting the strong proclivity for liquidity to chase (outperforming) asset classes demonstrating the most acute “inflationary biases.” Since mid-November, SunPower is up 614%, Tesla 480%, Netflix 302%, Green Mountain 224% and Facebook 128%. Treasury and MBS prices are down slightly.

The Fed is delusional if it doesn’t believe QE is inflating speculative Bubbles. In a highly-charged “risk on” backdrop, QE converts to rocket fuel. And, amazingly, this rocket fuel is flooding into the markets at about a Trillion dollar annualized clip. The inflationary impact on various asset prices can be gauged to be in the multi-thousand basis points rather than the few contended by Fed research. Not only is there the direct impact of hedge funds using the proceeds from Treasury or MBS sales (to the Fed) to purchase outperforming stocks, there is the issue of the Fed’s liquidity backstop incentivizing leveraged speculation in higher-yielding junk, corporate bonds and leveraged lending more generally. The resulting ultra-loose market liquidity backdrop furthermore spurs aggressive mergers & acquisition activity.

Less directly, but no less importantly, the Fed rate and QE backdrop has created self-reinforcing investor flight away from lower-risk deposits and other low-yielding instruments out in search of higher market returns. These days, Fed QE purchases work to accommodate flows out of bond bunds and into equities. And if it had been up to household savings (as opposed to Fed monetization) to finance the massive surge in federal debt, it would be a very different financial landscape today (much higher Treasury, MBS and corporate yields - and significantly lower equity and asset prices). Pension funds wouldn’t have to rely on hedge fund and private-equity leverage in order to meet return bogies. And without all the speculative leveraging throughout fixed income, there’d be a lot less liquidity available to flow effortlessly into equities.

How many Trillions have flowed into higher-yielding corporate debt and equities, EM, various ETFs, commercial and residential real estate, leveraged lending, hedge funds, private equity and basically any investment that provides a yield after Fed QE and rate policies pushed the entire yield curve to such artificially low levels?

CurrencyMan

In effect we have not a Free Market as it has to be clear to anyone knowledgeable and able to read. Here we have the SPIN to the USA Public and the World that there is a Government SHUTDOWN and what happens if they cannot agree by October 17, 2013 ?

Even if they come to a Resolution NONE of the REAL issues are being discussed. This will NOT END GOOD and there is NO SOLUTION regardless of what The Wizard of Oz does or his successor, Lady Janet ...

Conclusions













The question arrived via Prudentbear.com and appeared simple enough: “Can you explain how QE funds are inflating the asset markets if these monies are being parked back with the Fed, collecting interest? Can they be in two places at the same time?”

The impact of the Fed’s experimental quantitative easing (QE) program is an issue of great interest. In his talk yesterday, Federal Reserve Bank of San Francisco president John Williams noted that considerable Fed resources have been devoted to researching the issue. Mr. Williams spoke of initial findings, stating the impact on Treasury yields in meager basis points. A cacophony of Fed comments leads me to believe Federal Reserve analysis is oblivious to the key impacts of its ongoing monetary inflation.

In early CBB’s, I was fond of employing my old CPA skills, as I used scores of debit and Credit journal entries (“double-entry bookkeeping”) to illustrate the “infinite multiplier” potential inherent to contemporary non-bank Credit expansion. In particular, I remember a rather exhaustive (exhausting) series of debit and Credit entries explaining how the growth of GSE IOUs (debt) intermediated through the money market and hedge fund channels was behind unconstrained growth in New Age “money” and Credit. I was convinced at the time this atypical monetary inflation was fundamental to a historic Credit Bubble and myriad attendant asset price and economic distortions. I still believe it was among some of my most insightful analysis, and I’ll note that it did seem to resonate strongly with perhaps a handful of readers (including Ed McCarthy, who became a dear friend).

I'll spare readers a tedious debit & Credit exposition. I will instead highlight “Flow” analysis in an attempt to illuminate some of the myriad systemic inflationary impacts from the Fed’s QE laboratory.

Let’s begin with a brief look at the Fed’s balance sheet – where Assets (as of 6/30: $3.526 TN) essentially equal Liabilities ($3.499 TN). On the Assets side, the Fed holds $34.3bn of “U.S. Official Reserve Assets.” There is also $228bn of “Other Miscellaneous Assets.” Yet the vast majority of Fed holdings are within its $3.214 TN portfolio of “Credit Market Instruments.”

As of the end of the second quarter, the Fed held $1.937 TN of Treasury notes and bonds, up from $476bn at the end of 2008. Fed holdings also included $1.277 TN of “Agency- and GSE-Backed Securities,” up from 2008’s $20bn. While the Asset side of the Fed’s balance sheet has ballooned in historic proportions, its holdings are for the most part straightforward.

Things tend to get murkier on the Liability side. The Fed is on the hook for tons of Federal Reserve notes - $60bn of “Vault Cash of Depository Institutions,” as well as $1.134 TN of “Currency Outside Banks.” The Fed also ended Q2 with Liabilities “Due to Treasury General Deposit Account” of $135bn and “Due to GSEs” at $20bn. Yet, at $2.013 TN (up from $21bn to end ’07), the Fed’s largest – and fasted growing – Liability is “Deposit Institution Reserves.”

The surge in Fed “Reserves” has in recent years been a hot topic. The conventional view holds that these Reserves, for now resting harmlessly in the bowels of the banking system, create a potential inflationary tinderbox once the recovery and bank lending gain a head of steam. The Fed has gone to great lengths to explain how it will contain potential inflation risks, most directly by increasing the interest-rate it pays banks on these reserve balances (hence incentivizing retaining Fed reserves rather than lending them in the real economy).

I don’t completely dismiss their inflationary potential, but the whole bank reserve discussion misses more salient points. First, there are the more immediate impacts Fed purchases have been cultivating throughout the financial markets. Second, with contemporary unfettered Credit having expanded outside traditional constraints (i.e. bank lending restricted by reserve and capital requirements) for years now, it’s difficult for me to get all worked up about so-called “latent” inflationary firepower. Again, I would argue the key inflationary effects are here and now – and today’s analytical focus should be fixated on the present.

It might be helpful to remind readers that what we’re really discussing here are electronic debit and Credit entries within an immense global “general ledger” accounting system. This globalized Credit system comprises myriad domestic and international relationships interconnected by various asset, liability and equity relationships. For the most part, innumerous financial, governmental, institutional, corporate and individual debtors have electronic IOUs that are the electronic assets of innumerous lenders.

The U.S. banking system's assets “Reserves at the Federal Reserve” – are simply the liabilities of our central bank – aka Federal Reserve IOUs. When the Federal Reserve goes into the marketplace to purchase Treasuries and MBS, it creates brand new Fed IOUs in the process. And these IOUs are in the form of electronic debit and Credit entries that, importantly, create immediately available new purchasing power in the system.

The conventional view holds that since these reserves are sitting inertly on bank balance sheets, they are basically having no inflationary impact. I would counter that they by definition exist only on bank balance sheet accounts, yet this in no way indicates that they haven’t had major pricing impacts. Think of it this way: when the Fed creates its new IOUs in the process of purchasing securities in the markets, this new electronic purchasing power is unleashed upon the system, initiating potentially a series of transactions (the Fed buys from A, A takes proceeds and buys from B who uses the “money” to buy From C, and so on).

As these various trades/transactions settle, the Fed’s electronic IOUs must make their way to institutions that have a direct accounting relationship with the Federal Reserve. The Fed’s newly created electronic purchasing power might in its journey be an electronic payment to a hedge fund, a home seller or even Samsung. But since they don’t have deposit accounts with the Federal Reserve, a series of debit and Credit entries will flow through various (“correspondent”) financial relationships until balances finally arrive at an institution within the Fed’s payment system (i.e. a U.S. bank or U.S. branch of a foreign financial institution). Reserves might not be at two places at the same time, but they can certainly make their way through multiple places and transactions along the way.

By definition, when the Fed creates new electronic (as opposed to paper currency) liabilities, the other side of the ledger is the creation of an asset within its system of electronic relationships – and this asset is identified as “bank reserves.” Importantly, however, this is only a static (level/“stock”) recording of accounting relationships at a point in time - and in no way indicates a lack of inflationary effect. Indeed, the creation of new system purchasing power has myriad (“flow”) impacts, both direct and indirect.

I have attempted to differentiate the impact of current QE operations from that of initial “QE1.” I have explained how the Fed’s original QE was essentially an operation that accommodated de-leveraging/de-risking. The Fed intervened in the marketplace, purchasing securities from banks, Wall Street firms, “special purpose vehicles,” hedge funds and the GSEs that needed to significantly pare back leverage after suffering major market losses. In one impactful operation, the Fed’s collapsing of interest rates incited a major refinancing boom for problematic “private-label” mortgages. Many of these newly refinanced mortgages were intermediated (guaranteed) through the GSEs, and then conveniently shifted from troubled institutions and speculators to the Federal Reserve (as agency-MBS).

Basically, the Fed accommodated a historic transfer from impaired leveraged players to the Fed’s impenetrable balance sheet. In that circumstance, much of the new purchasing power created by expanding Fed IOUs was used immediately to retire market borrowings (“securities finance”).

In the case of QE1, newly created Fed purchasing power/liquidity was largely “extinguished” – one could say it went to “money heaven” – as market-based (i.e. “repo”) borrowings were retired in a major collapse of speculative leverage. Hence, overall inflationary effects were muted, especially considering the unprecedented scope of the “liquidity” operations. The “flow” of purchasing power/liquidity analysis is rather short and Fed statistical studies of this period – focusing on Treasury bond yields – have come to the conclusion that quantitative easing measures are by and large benign.

Since mid-November (just prior to the Fed commencing its $85bn monthly QE), the Biotech index is up 56%. The small cap Russell 2000 has returned 42%. The InteractiveWeek Internet index is up about 41% and the Semiconductors 40%. The Securities Broker/Dealers index has surged 70%. The Mid-Caps have returned about 34% and the S&P500 27%. Treasury yields, well, they’re up about 1% (100bps) and benchmark MBS yields about 1.2% (120bps).

I have posited that today’s QE is having altogether more powerful inflationary effects than QE1. First and foremost, the Fed’s current monetary inflation is not accommodating financial sector de-leveraging – i.e. newly created Fed liquidity is not immediately extinguished through the retirement of securities speculative leveraging. Indeed, I would argue that the Fed’s $85bn is injecting new liquidity directly into the securities markets, while also incentivizing further risk-taking and speculative leveraging. 2009 QE is Night and Day to 2013 QE.

Today, when the Fed goes into the marketplace to purchase Treasury bonds, they create immediately available funds that the seller can then use to purchase other securities. A Fed transaction with a hedge fund, for example, would provide purchasing power for whatever asset class the manager believed offered the best (immediate) return opportunity. Importantly, if the Fed chooses to inject liquidity into a speculative marketplace, the new purchasing power will not gravitate to low-risk strategies. Indeed, some years ago I would write “Liquidity Loves Inflation,” noting the strong proclivity for liquidity to chase (outperforming) asset classes demonstrating the most acute “inflationary biases.” Since mid-November, SunPower is up 614%, Tesla 480%, Netflix 302%, Green Mountain 224% and Facebook 128%. Treasury and MBS prices are down slightly.

The Fed is delusional if it doesn’t believe QE is inflating speculative Bubbles. In a highly-charged “risk on” backdrop, QE converts to rocket fuel. And, amazingly, this rocket fuel is flooding into the markets at about a Trillion dollar annualized clip. The inflationary impact on various asset prices can be gauged to be in the multi-thousand basis points rather than the few contended by Fed research. Not only is there the direct impact of hedge funds using the proceeds from Treasury or MBS sales (to the Fed) to purchase outperforming stocks, there is the issue of the Fed’s liquidity backstop incentivizing leveraged speculation in higher-yielding junk, corporate bonds and leveraged lending more generally. The resulting ultra-loose market liquidity backdrop furthermore spurs aggressive mergers & acquisition activity.

Less directly, but no less importantly, the Fed rate and QE backdrop has created self-reinforcing investor flight away from lower-risk deposits and other low-yielding instruments out in search of higher market returns. These days, Fed QE purchases work to accommodate flows out of bond bunds and into equities. And if it had been up to household savings (as opposed to Fed monetization) to finance the massive surge in federal debt, it would be a very different financial landscape today (much higher Treasury, MBS and corporate yields - and significantly lower equity and asset prices). Pension funds wouldn’t have to rely on hedge fund and private-equity leverage in order to meet return bogies. And without all the speculative leveraging throughout fixed income, there’d be a lot less liquidity available to flow effortlessly into equities.

How many Trillions have flowed into higher-yielding corporate debt and equities, EM, various ETFs, commercial and residential real estate, leveraged lending, hedge funds, private equity and basically any investment that provides a yield after Fed QE and rate policies pushed the entire yield curve to such artificially low levels?

The Fed apparently does not buy bonds directly from the Treasury. But let’s say the Fed purchases Treasuries in the open market from a hedge fund or Wall Street “primary dealer” that had recently acquired these securities at Treasury auction. In this case, the Fed’s newly “minted” liquidity would flow to a speculator or dealer that could use these funds to acquire Treasuries at the next auction. The Treasury would then use this liquidity/purchasing power to make disbursements throughout the economy (i.e. federal worker and armed forces compensation, jobless and veteran benefits, social security, and Medicare), in the process boosting incomes, spending and savings. This spending boosts GDP, right along with corporate cash flows and earnings.

“Savings” (that indirectly originated with Fed purchases) then flow predominantly as buying power for risk market assets. Meanwhile, inflated corporate earnings/cashflows coupled with general loose finance (i.e. abundant inexpensive marketplace liquidity) spur corporate borrowing and stock buybacks. Corporate buybacks then work to inflate stock prices, directly as well as indirectly through inflating earnings per share growth along with increasing the attractiveness of speculative buying (i.e. a leveraged hedge fund increasing its equity allocation because of the bullish perception that ongoing stock repurchases significantly improve the equities market risk vs. reward calculus).

And if Fed liquidity injections and market backstops are ongoing, this ensures that speculative flows and trading dynamics become deeply entrenched in the marketplace. The bulls become more emboldened and the bears increasingly impaired. The chips shift to one side of the poker table, ensuring that the bulls raise the stakes and try to force the bears out of the game. Targeting the bears – with resulting “rip your face off” short squeezes - works to transform the marketplace into a speculative casino. Over time, QE ensures an unsound marketplace bereft of stabilizing supply/demand dynamics and typical checks and balances (including the shorting of over-valued securities). The upshot are market Bubbles with destabilizing inflationary biases. The Goldman Sachs Most Short Index is up 58% since November 15, 2012.

In a replay of the late-nineties, over-liquefied markets help enrich hundreds of thousands of insiders and fortunate employees at scores of companies enjoying hot stocks. Delving into more “flow” analysis, think of the Fed buying MBS from a hedge fund, and the fund then using this newly created liquidity to boost holdings of its best-performing positions. The sellers – say, employees from Tesla, Netflix, Facebook and Google cashing out of stock option grants – use sales proceeds for cash purchases of million-dollar three-bedroom homes in hot California real estate markets. The home sellers can then use this “cash” to pay down debt, as a down-payment for a larger home, or perhaps to take their own dive into the risk markets. And let’s not forget the Bubble’s impact on local, state and federal tax receipts, a temporary bounty quickly extrapolated and spent.

A rather long book could be written on this subject matter. My QE inflationary effects analysis would be lacking without at least brief mention of international consequences. I would argue that QE has had particularly momentous effects on global finance. QE worked first to reflate U.S. incomes and, more recently, to further inflate them. This has spurred spending and sustained large trade deficits. The weak dollar and resulting enormous trade, investment and speculative flows into the emerging markets (EM) worked to inflate historic Bubbles.

Mortgage finance was the “fledgling” Bubble that acted as an increasingly powerful magnet for liquidity and speculative excess during the Fed’s post-tech Bubble reflation. After the bursting of the mortgage finance Bubble, EM was the fledgling Bubble. Of late, serious cracks have formed in some emerging markets and economies, fragility that I believe has played a role in QE decisions over the past year. Over coming weeks and months we’ll stay focused on the comings and goings of “flow” analysis. Does the Fed’s ongoing QE help to reverse liquidity flows back to EM and their struggling economies? Or perhaps that’s just so 2012, with current animal spirits keener to play Bubbling U.S. stocks and corporate debt.
  • #70,280
  • Oct 5, 2013 3:50pm Oct 5, 2013 3:50pm
Imagine That - Rigging Going On By The Banks !!!

http://www.reuters.com/article/2013/...9930B420131004

Snippet:

(Reuters) - Switzerland's financial markets regulator is working with authorities in other countries to investigate possible manipulation in the $5 trillion-a-day foreign exchange market potentially involving multiplebanks.


Regulators and investors are concerned about the integrity of financial benchmarks in the wake of a global investigation into the rigging of benchmark interest rates that has so far led to four financial firms, including Switzerland's largest bank UBS, being fined around $2.7 billion and seven men being charged.

"FINMA is currently conducting investigations into several Swiss financial institutions in connection with possible manipulation of foreign exchange markets," the Swiss regulator said in a statement on Friday.

"FINMA is coordinating closely with authorities in other countries as multiple banks around the world are potentially implicated."

Switzerland's competition commission WEKO also on Friday said it had opened a preliminary investigation after learning about potential manipulation of foreign exchange markets by banks. They declined to name the banks under investigation.

The Swiss federal prosecutor's office said it was in contact with FINMA about the issue.


UBS and Credit Suisse declined to comment. Zuercher Kantonal Bank said the bank was currently not aware of a FINMA investigation. Marc Buerki, CEO of Swiss foreign exchange broker Swissquote, said it was not part of the investigation.

Britain's Financial Conduct Authority (FCA) said in June it was examining allegations banks had manipulated foreign exchange benchmarks by trading ahead of their own customers' orders, a practice known in the markets as "front running".

A spokesman for the FCA declined to say whether it was working with FINMA on its probe.

A spokeswoman for the Hong Kong Monetary Authority said the HKMA did not comment on supervisory work with other authorities.

"The HKMA will closely monitor the developments," she said.


The U.S. Commodity Futures Trading Commission could not be reached for comment because of the government shutdown. The U.S. Department of Justice declined comment.

With probes already underway into benchmarks for crude oil and the swaps market as well as Libor interest rates, global regulators recently published principles to improve the transparency and oversight of hundreds of financial benchmarks, covering everything from interest rates to gold.


THE BIGGEST MARKET

The key foreign exchange benchmark rates, WM/Reuters, are calculated using actual trades hourly through most of the trading day, with closing rates "fixed" at 4 p.m. in London.


Many banks provide a service to their customers where they guarantee to trade at the WM/Reuters rates. It is useful for buyside investors like large funds to value and benchmark their portfolios because most main stock and bond index compilers use these rates for their calculations.

Corporates also use the WM/Reuters rates to value currency holdings worldwide at a uniform rate. Auditors accept the WM/Reuters rates as independently fixed.

The WM/Reuters benchmark rates cover 160 currencies. Data from Thomson Reuters systems are a primary source of the exchange rates used to calculate the benchmarks. World Markets, a unit of Boston-based State Street Corp., applies its methodology and calculates the benchmark.

A report by Bloomberg in June said traders at some of the world's biggest banks had used their advance knowledge of customer orders to push through trades before and during the 60-second window when the WM/Reuters benchmark rates are set.

The report said traders had colluded with counterparts at other banks to boost their chances of moving the rates.

The currency market, the biggest market in the financial system, is one of the least regulated with most trading taking place away from exchanges.


Currency traders contacted by Reuters said it was unsurprising that dealers tried to profit from advance knowledge of client orders but given the size of the market, manipulating the benchmarks would be difficult unless the trader had a very large order or was dealing in two rarely traded currencies.

CurrencyMan

Thoughts Anyone ?
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