- Gross distortion by the Fed-worshipping media… The 5 sets the record straight
- When will QE resume? Two educated guesses
- 30 days and counting to the Swiss gold referendum: Mainstream wakes up
- Yes, U.S. shale really is profitable at $50 a barrel
- $2,350 to give up being an “accidental American”
- Gold swoons… eulogy for a tapir… goats as the real criminal element in Detroit… and more!
The first warning that history was being rewritten in real time came while your editor was washing dishes last night.
“The U.S. Federal Reserve,” intoned an announcer from the BBC, “has announced it is ending its quantitative easing (QE) stimulus programme begun in 2008.”
I nearly dropped a coffee mug on the floor, so blatant was the distortion of reality.
Nor was the Beeb alone: “The Federal Reserve announced the end of its bond-buying program Wednesday,” said CNN Money, “marking the close of a six-year effort to stimulate the economy.”
And there’s this headline from PBS NewsHour: “Federal Reserve Ends 6 Years of Quantitative Easing.”
As you’ve no doubt heard by now, the Fed’s Open Market Committee (FOMC) has completed the process of “tapering” its bond purchases — a process begun last December and carried out in $10 billion increments at each Fed meeting since. And so we bid a fond farewell to an ongoing gag…
A proper obituary for the taper/tapir is posted at The Daily Reckoning.
Back to the media distortion. There’s an unspoken assumption behind the aforementioned headlines — that “QE” was a smooth, continuous process undertaken during a moment of crisis, carried on with grim resolve by wise individuals determined to “stay the course” no matter what.
The reality is this: There is no finer example than QE of making it up as you go along. It was carried out haphazardly, in fits and starts.
It was launched in December 2008 (QE1)… expanded in March 2009… ended in March 2010… resumed in November 2010 (QE2)… ended in June 2011… resumed in September 2012 (QE3)… expanded in December 2012… and gradually wound down starting in December 2013.
We won’t even get into variations on the theme we experienced over the last six years, like “Operation Twist.”
“Don’t ever think for a minute that the central bankers know what they’re doing,” Jim Rickards told us last spring before joining our editorial team. “They don’t.
“And that’s my own view, but I’ve heard that recently from a couple central bankers. I recently spent some time with one member of the Federal Open Market Committee and another member of the Monetary Policy Committee of the Bank of England, which is the equivalent of their FOMC — both policymakers, both central bankers.
“And they said the same thing: ‘We don’t know what we’re doing. This is a massive experiment. We’ve never done this before. We try something. If it works, maybe we do a little more; if it doesn’t work, we pull it away and we’ll try something else.'”
Which brings us to another media distortion, captured in this headline from the AFP newswire: “Fed Opens New Era With End of QE Stimulus Program.”
We beg to differ. As Mr. Rickards posted on his Twitter feed…
And if you go by one of the Fed’s own indicators, it might be sooner still.
First, we note that QE has done nothing for “the economy,” even as it’s pumped up asset prices to a fare-thee-well. Note the eerie correlation…
So about that Fed indicator: In the spring of 2012, Jonas Elmerraji of our trading desk gave The 5’s readers a heads-up about a measure known as the “five-year forward break-even inflation rate.” Using a formula involving Treasury inflation-protected securities (TIPS), Fed wonks take a stab at where investors believe inflation will be five years from now.
“Every time that inflation rate has dropped below 2.2%,” he told us, “the Fed has plowed money into the market.” The Fed fears deflation like nothing else — and 2.2% marks the Fed’s “oh sh*t” line.
Gee, look where the rate is now…
“It’s the first time five-year forward inflation has fallen below 2.2% since Operation Twist in 2011,” Jonas says.
“This chart makes me think we’ll see another big Fed initiative in the near future, and if that’s the case, that means we’re very likely to see a continuation of this long-term rally we’ve seen the last few years.”
Stocks had a muted reaction to the Fed statement yesterday, and it’s carried over into today. The S&P 500 is flat, at 1,983. The Nasdaq and the Russell 2000 are slightly in the red.
The Dow is the one outlier, jumping three-quarters of a percent for the sole reason that Dow component Visa turned in a strong earnings report. (Nearly everyone else has forgotten, but we’ve not: Visa was added to the Dow barely a year ago, a development our Byron King said rendered the index “a crack-smoking, hallucinatory index of pure fantasy.” Heh…)
The big economic number of the day is the nigh-meaningless GDP. But because traders think it matters, we pass it along nonetheless: Up an annualized 3.5% in the third quarter. Whatever. It’ll be revised next month and again at year-end.
Gold is testing the $1,200 level for the fourth time in 16 months.
Blame it on the Fed, blame it on the GDP numbers, blame it on the Giants winning the World Series again. Whatever the case, the bid is down to $1,196 as we write. And silver’s getting crushed — down more than 4%, to $16.37.
The greenback, meanwhile, is back to its recent highs — 86.1 on the dollar index.
The mainstream is starting to sit up and take notice of the Swiss gold referendum and its potential impact on the gold price.
If it passes, “it could provide a hell of a lift to the gold price over the next few years — it will very much underpin it,” Ross Norman of the bullion broker Sharps Pixley tells the Financial Times. “Perhaps the Swiss people know better than other Europeans that gold is something that custodians of the reserve assets should have more of.”
Polls show the referendum still has a plurality of “yes” votes… with a big number of undecideds, though.
The proposal would forbid the Swiss National Bank from selling any gold and require it to hold 20% of its foreign exchange reserves in gold… and Swiss gold held at the New York Fed would be returned to Switzerland.
It’s the second of those three provisions that caught the FT’s eye today: The Swiss central bank “could be forced to buy gold equivalent to just over half the world’s annual mine supply,” according to an analysis by Barclays.
Yes, but what would that mean? As Jim Rickards said in this space 30 days ago, “This would deliver both a demand shock (in terms of requiring new purchases) and a supply shock (in terms of depleting the gold in New York used to manipulate the market).”
Thirty more days till the vote…
“Energy Boom Can Withstand Steeper Oil Price Drop,” says this morning’s Wall Street Journal — in yet another case of the elite media catching onto something our editors brought to your attention weeks ago.
Crude is still holding the line on $80 a barrel this week… but $85 is the figure below which conventional wisdom says U.S. shale operations can’t make a profit.
Our resident oil field geologist Byron King took issue with the conventional wisdom earlier this month: “The U.S. has plenty of players with sites to drill and a business model to drill ’em, and a good many can afford to conduct business all the way down to $50 per barrel and lower.”
Cue today’s Journal: “Oil prices would need to fall at least another $20 a barrel to choke off the U.S. energy boom, industry experts say, though some smaller American producers would face serious problems from a more modest decline.”
Shale drillers keep finding ways to produce oil more efficiently, so they’ve cut their costs and can withstand lower prices. ConocoPhillips chief economist Marianne Kah says it would take a tumble to $50 “to really harm oil production” in the shale patch.
One other interesting “tell”: The number of U.S. oil rigs has actually grown a bit since oil prices peaked on June 20.
Yes, the trend is still investable… as Byron explains right here.
And now, the shakedown of “accidental Americans.”
That was the thought that crossed our mind this week seeing the feds’ latest expatriation numbers: 776 Americans gave up their citizenship during the third quarter of 2014. The year-to-date total is 2,353. At that rate, 2014 will break last year’s record.
We’ve chronicled the growth of these numbers for more than three years — starting with the cries of “Tax evaders!” against the likes of Tina Turner and Facebook co-founder Eduardo Saverin.
By last year, we noticed most of the people expatriating were people of modest means who can’t afford the $2,000 a year of paperwork required to comply with IRS regulations on folks who live overseas. That’s a lot of money if you’re a teacher pulling down, say, $35,000.
Then then there are the people who are U.S. citizens without realizing it — mostly Canadians.
ABC News tells the story this week of a fellow “who insisted on anonymity because he is still in the process of renouncing his American citizenship — which he didn’t even realize he had until, on a 2011 trip south of the U.S.-Canada border, he was told he needed an American passport in order to re-enter the United States.”
He was born in the United States and brought to Canada right after birth.
“He learned he could either declare five years of back taxes to the IRS under a new voluntary disclosure program, which he said would have cost him thousands of dollars in legal and accounting fees, or renounce his American citizenship, which so far has taken him more than a year and several trips to his nearest consulate to do.”
And as we mentioned three months ago, the cost of renouncing your citizenship just exploded from $450 to $2,350. “A renunciation is a serious decision,” a State Department flunky explained to ABC, “and we need to be certain that the person renouncing fully understands the consequences.”
Don’t you love it when bureaucrats justify their own existence?
Speaking of which…
Don’t Detroit police have anything better to do than enforce petty regulations?
A couple named David and Sky Brown are holdouts in in a neighborhood gone to seed, plagued by crime and arson. They raise six chickens and three goats on their property.
Or they did until animal control and two cops showed up last week. Because even though huge swaths of Detroit are returning to the farmland from whence they came, it violates city code to keep farm animals unrestrained.
“She told us she was taking all of our animals,” Sky Brown told the Motor City Muckraker. “I began to cry.”
There’s a semi-happy ending: Original plans to euthanize the animals were scrapped once the story started making news. Now the Browns will be allowed to find someone outside city limits to take care of them
“Do Detroit police really have so much time on their hands,” wonders Robby Soave at Reason, “that goat confiscation merits their involvement? Keep in mind that the average police response time to an emergency call in Detroit is 58 minutes. Nationwide, it’s 11 minutes.”
Oy. Are there petty tyrants causing trouble in your backyard? Or even your front yard? Drop us a line with your own tales of bureaucratic excess…
Best regards,
Dave Gonigam
The 5 Min. Forecast
P.S. We’ve just been informed that a major U.S. government agency plans to “disrupt” sections of the stock market on the following dates…
- Wednesday, Nov. 5, 2014
- Friday, Dec. 5, 2014
- Tuesday, Dec. 23, 2014
- Tuesday, Dec. 30, 2014
If you’ve got any money in the markets right now (or are thinking of getting in)…
Put these critical dates on your calendar now.