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Who Invited Him?

14 Jan

The reasonableness and straightforwardness of comments by Fed Governor Richard Fisher makes one wonder: Who Invited this guy to the Party? Mr. Fisher, in a speech much similar to one given several weeks ago, continued to question the sanity of providing additional liquidity to a market that clearly does not need it. One has to wonder whether Mr. Fisher is even on the same team as other Fed officials when he states ” Of greatest concern to me is that the risk of scrutiny and criticism might hinder policymakers from acting quickly enough to remove or dampen the dry inflationary tinder that is inherent in the massive, but currently fallow, monetary base”. Compare this with other Fed Governors who have made numerous calls to tie further Treasury purchases to some minimum level of inflation. We have to believe that mentality of the group advocating higher inflation has been driven to such conclusions by their perception that each new iteration of QE deals with the micro rather than the macro. These Fed officials know we are not dealing with bazookas anymore like we were in 2008/2009, but instead most at the Fed believe we are simply working around the edges of a precise, targeted balance sheet management program, which can be reversed at any time. This would all be wonderful if this thinking even came close to resembling the reality of Fed policy transmission. As we have stated before, Fed policy even under the most normal of circumstances, works with a most undefined lag. Governor Fisher understands this, the others understand this as well but have chosen to ignore it(For Now). There is no new Central Bank Paradigm: Buy Stuff.

The Road Never Travelled

18 Dec

Once again, another year has passed and we are now inundated with the end of year projections as to what will happen in 2014. We generally find these projections without merit, but we have a particular distaste for such guesstimates given the self-reinforcing behavior that currently overwhelms todays capital markets. Early on in these various monetary science experiments market participants looked at the potential mismatch between objectives and the measures taken. Today, however, it would appear that this analysis has fallen by the wayside along with any concern over the possible unintended consequences.  There is no longer talk of whether we should be going down this path, but rather what will be the harm if we shift to another path. Forget the fact that the current path may take us in directions or places we never imagined. Many scoff at comparisons between today’s Central Bank actions and those of the Central Bank of Japan during the 90s and beyond. However, recent comments by the BOJ Governor should validate those comparisons. In a recent FT interview, the BOJ Governor remarked that they were the first to enact quantitative easing back in 2001, and even though it has essentially accomplished nothing, they continue to push forward with a program to double (at least) its holdings of JGBs. The recent actions by the BOJ are driven by a desire to break the deflationary spiral that has existed in Japan for over a decade, the question however becomes at what price. If Inflation comes purely as a result of a rapidly depreciating currency, and does not necessarily translate into wage growth then the “benefits” of inflation for the population in general is moot. More importantly, the BOJ Governor also does not rule out using other more radical tools should the current ones prove, yet again, unsuccessful. What also stands out from this interview is the  disconnect between what is happening on the monetary side and what is occurring on the fiscal side. The Governor acknowledges the potential for a sharp rise in rates as a result of their current strategy, however he soft peddles the effect such a rise would have on Government finances. The BOJ has travelled down this QE path for years, but rather than shifting to another possibly more advantageous side road, they have instead chosen to simply proceed at a higher rate of speed. If the definition of insanity is doing the same thing over and over and expecting different results, choose rational thought: Buy Stuff.


10 Dec

Fed Governor Richard Fisher’s recent remarks at an Ag Summit in Chicago appeared to have gone almost completely unnoticed by Mr. Market. While we understand that Mr. Fisher is one of the more reasonable Fed Governors, we were taken aback by the veracity of his arguments against further Fed purchases. His exact words were as follows ” …we have a surfeit of excess liquidity sloshing about in the system, the idea of ramping up inflation expectations from their current levels strikes me as short-sighted and even reckless. We already have enough kindling for potential long-term inflation, which will sorely test our capacity to manage policy going forward. I do not wish to add further to that wood pile”.  The markets inattention to this comment was as expected, given the fact that markets prefer to respond to a fire only once it has completely engulfed the residence. This indifference should also not surprise as all forms of fire insurance (inflation protection) have steadily fallen out of favor:gold, precious metals, TIPs, etc.. As with most insurance, it is cheapest to purchase in an environment not seemingly conducive to any potential payout by the insurer. Get your fire insurance, buy stuff.

Guessing Game

9 Dec

The surfeit of articles and research pieces  on deflation/dis-inflation and the end of the commodity supercycle does not seem to be showing any signs of slowing down, particularly as we near years end. What we find lacking in most of this research is a clear understanding of the role of price in the supply/demand dynamic. We find it laughable to hear of price projections for  such diverse commodities as copper and corn not only extending out several years but to several decimal points as well. What is missing in these projections is the disruptive nature inherent in a price that does not adequately reflect reasonable economics. In short, prices send very loud signals to the market, the volume of which we maintain will only increase going forward. We understand the  often long -lived nature of commodity production, but after a three year drought in capital market access, many new projects can already be discounted as scrapped. However, the linear projections involved in many of these commodity price projections still simply do not reflect this reality. We would maintain that the physical nature of  commodity production exerts more mean reverting pressure  on price than something like, for example, technology. Think about that when reading “research” pieces projecting the future value of a Bitcoin.

Treasury and The Fed: BFF’s ?

7 Nov

The recent announcement that the Treasury would be issuing floating rate notes in an effort to feed the appetite for those investors not satisfied by the TIPS markets makes us wonder about whether the Fed and the Treasury are still on speaking terms. We are sure that the Treasury appreciates the  Fed’s help, and by help we mean taking down 70% of all new issuance. But the issuance of floaters, juxtaposed with a Central Bank that aspires to create inflation, would seem to represent a situation where the two parties are at cross purposes. While it is true that the issuance is small ($10-15 Bln), and that interest rate movements are not necessarily correlated only with inflation, the fact that the Treasury would structure part of its issuance in direct opposition to what the Fed is trying to explicitly accomplish seems odd. The fact that all Central Banks( for the most part) are currently inflation wannabes, as evidenced by the ECB rate cut today and comments by Mario Draghi, might give potential buyers of said notes cause for concern. If Central Banks do indeed get their way, floating rate notes will most likely provide some protection from the collateral damage of higher inflation, but a better bet would be a position in hard assets. Continue to sell paper and buy stuff.

From Alan Greenspan’s new book: ” It is easy to contemplate price acceleration, with today’s Federal Reserve balances unchanged, ranging from 3 percent per annum to double digits over the next five to ten years.”

Act One

8 Oct

One has to wonder whether we are seeing Act One in what we have termed the “flight to tangibility”. Our original thesis involving  the shift towards hard assets involved a sharp decline in the dollar brought about by a crisis of confidence involving governmental finances. While we have no doubt that this latest food fight in Washington will be resolved, the ease with which lawmakers were willing to create a crisis of their own making gives us pause as to their ability to make the truly hard choices should a real crisis occur. I am absolutely staggered by the ignorance displayed on both sides regarding the real world implications of a default( soft or not).  While large scale holders such as the Chinese and Japanese sit in amazement at our inability to exhibit any kind of fiscal restraint, they should both hold their fire to some extent as they have both been willing participants (Japan especially) in this world wide game of print and spend.

Inflationary Bumps and Grinds

2 Oct

I recently sat on a panel with Marc Chandler of BBH in which he gave an excellent talk where  he mentioned “bumps and grinds”. In this talk, Mr. Chandler talked of the events of 9/11 as a bump in the  growth road as opposed to the events of 2008 which has given way to a grinding environment in which growth is challenged anywhere above 2%. This got us thinking about the transitional period between deflation/dis-inflation towards something much, much different.  One might think of the events of 2008 as a bump in the long road back towards reflation/inflation. During this period, the synchronized global growth that we had experienced since 2004 gave way to a bifurcation between developed and developing economies. This bifurcation would have serious ramifications for the duration and shape of that transition. Eventually this bifurcation has subsided leaving us with the “grind” towards higher levels of inflation. This grind is reinforced by generally slack global production and oversupply across many input markets. Markets, by their very nature, are short term oriented and not prone to  have much appetite for “grinding” environments. This is evidenced by their almost universal disavowal of any potential for a resurgence in inflation. In our estimation, therein lies the opportunity, given that the prices of assets that would benefit from such a transition are currently severely under-priced. While some might claim that being early is the same as being wrong, we would vehemently disagree, particularly during such large secular shifts.  Sell Paper Buy Stuff (early)