Alfidi Capital Publishes New Venn Diagrams On The Bernanke-Yellen Asset Bubble

I've published my first ever professional use of the Venn diagram.  Check out the Alfidi Capital free flowcharts page and find the last link.  That's my "Bernanke-Yellen Asset Bubble Venn Diagrams" impression of what the Fed's monetary stimulus is doing to asset markets.  The circles are not drawn to scale because this arrangement depicts impressionistic relationships and not statistical ones.  The point of this report is to understand that investors riding the Fed's coattails are hopeless idiots.  Professional investment managers are even more hopeless than retail investors.  Anyone hedging outside the main asset classes, like me, is assuming that central banks cannot pump markets forever.

Please note that I'm trying a different digital architecture with this particular document.  I've displayed it in Google Docs instead of uploading it to my business site.  I will probably migrate all of my existing reports to Google's cloud service in the next few weeks because I'm considering a redesign of the site.  I don't want my work to get lost after I launch a revised site.  I've been writing about the cloud long enough to know that it's secure and reliable.  If you have difficulty viewing my reports, keep trying.  Hit the reload button if necessary. 

No Way Will The Fed End QE During Bernanke's Tenure

I did not have to listen to Fed Chairman Ben Bernanke's remarks yesterday to know what he was going to say.  I've chronicled the Fed's mentality for years on this blog.  The Fed isn't interested in reducing unemployment.  It is actually interested in encouraging spending by promoting a wealth effect in asset classes.

The Fed has liberally provided support to bond valuations and suppressed interest rates by purchasing government bonds and mortgage-backed securities.  Remove that demand, or even threaten to do so, and asset prices reset to a sustainable equilibrium.  That equilibrium for bond valuations is much lower than where it is today.

Suppressing nominal interest rates means investors are forced to search for yield in assets besides cash savings.  Investors have chased stocks.  Corporate profits have historically been an average of 6% of GDP, and lately they've been almost twice that figure.  Mean reversion in the earnings of a P/E ratio eventually affect the price as well.  The equilibrium for stock valuations is much lower than where it is today.

Low rates encouraged home buyers to once again buy more house than they could afford.  No one learned anything from the housing crash.  Private equity firms bought up vacant homes to use as rental properties.  Rising interest rates will cause them pain as home values sink to levels below what they levered up to buy.  The equilibrium for home prices is much lower than where it is today.

The market is reacting predictably to the Chairman's remarks, with stocks and bonds slumping.  Addicts react badly when they can't get their regular fix.  That's why I don't think the Fed is serious about ending its monetary stimulus.  Talking the markets down means nothing.  Some black swan event will force the Fed to lose control of the yield curve no matter what it purchases.

Cyprus Reaching Boiling Point After Russia Let-Down

Cyprus came away from a key meeting in Moscow with no bailout from the Russian government.  This throws the ball back into Europe's court.  Speculation is flying around the Web that Europe's pressure on Cyprus is designed to squeeze Russia, or alternatively that Russia is seeking a strategic breakout in the Eastern Mediterranean with a gas deal.  The intersection of business and geopolitics is always fascinating

First of all, Nouriel Roubini hinted in a March 20 Tweet that Russia wants a naval base in Cyprus as part of any bailout deal.  I'm not sure where Dr. Doom got that idea.  Cyprus has a heavy British military presence, so a Russian base there would make about as much strategic sense as a Russian base in Gibraltar or Malta.  The Atlantic Wire picked up on this idea too, citing speculation in a report from Ekathimerini.  IMHO Russia doesn't have an immediate need for a Mediterranean naval base unless it is concerned about losing access to its base at the Syrian port of Tartus.

The advantage to Russia of a Cyprus base is unclear until we consider sailing distances.
Cyprus is 238 nm (one day's sail) to the west of Tartus, Syria, measured to Kyrenia.
Alternatively, Cyprus is 206 nm (0.9 days' sail) from Tartus if the closer port of Larnaca is the destination.
Cyprus is 393nm (1.6 days' sail) from the Port of Suez, Egypt.
Tartus is 432 nm (1.8 days' sail) from the Port of Suez, Egypt.

Any Russian navy power projection into the Mediterranean would probably pass through the Suez Canal, so Russia would shave about 40nm off the trip of any warships it sends (depending on where in Cyprus it wants to relocate its floating workshop).  That seems like a negligible advantage unless it wants to add other things like a listening post to monitor British and/or NATO activities in the area.  I just don't see the strategic impetus for Russia to make this part of a bailout deal.

A much more likely deal would be for Gazprom to acquire Cyprus' natural gas rights if Cyprus takes Russia's bailout deal.  Gazprom likes its dominant pricing power over Europe's natural gas supplies.  This deal is now much less likely IMHO because the Russian government is unwilling to provide a backstop by bailing out Cyprus' banks.  It is also noteworthy that Russia is deferring to the European troika on further details of a Cyprus bailout and that European Commission head Jose Barroso was in Moscow together with Prime Minister Dmitry Medvedev when Cyprus came away empty-handed.  If there is any intrigue between Brussels and Moscow over Cyprus, or any daylight between their public stances, it is not apparent from these indications.

Cyprus' precarious finances pose an immediate economic threat to Europe.  S&P downgraded Cyprus' sovereign debt again.  No one but crazy hedge fund managers is going to buy that debt without a bailout from Brussels.  Europe is going to have increasing difficulty with further bailouts as its industrial activity continues to decline.  Cyprus is now scrambling to impose severe capital controls on its citizens and Germany is warning that Cypriot banks may be shut permanently if the country won't accept the troika's bailout offers.

The unraveling proceeds apace.  I've criticized public officials like Ben Bernanke on this blog but I can see how even he would look for a way out of the Fed's leadership before things get really bad in Europe and the U.S. ultimately feels the effects.  I'll wait until Helicopter Ben makes his resignation official before I send my resume to the Obama Administration because I don't want to look too eager.

Oh, BTW, Boris Berezovsky died today.  I guess he won't be part of any bailout deal.

‘Twas The Night Before Christmas At Alfidi Capital

‘Twas the night before Christmas, and all through my head

Not a stock pick was stirring, ‘cuz the market was dead

The blog posts were published on the Web with no care

In hopes that some readers would soon be aware

My female admirers were home in their beds

While visions of Yours Truly danced in their heads

When on CNBC.com there arose such a clatter

I clicked on live streaming to see what was the matter

I zoomed to full screen view and turned up the sound

In case some “money honey” was hanging around

When what to my wondering eyes did appear

Why, it’s ol’ Ben Bernanke, smirking from ear to ear

More rapid than QE, his big banks all came

He read off the ticker and called them by name

“Goldman Sachs!  Morgan Stanley!  JPMorgan and more!

Wells Fargo, Bank of America, more bailouts in store!

To the top of the market!  To the top of the charts!

I’ll bail you all out with fancy monetary arts!”

So out of my laptop the big bankers flew

With a sleigh full of cash, and Helicopter Ben too

He was dressed in Brooks Brothers, a well-tailored suit

No doubt it was paid for with middle-class loot

He demanded I hand him my brokerage account

I told him “No way!  I’ll give you no such amount!”

He pleaded on behalf of some fat banker elf

He was shocked when I told him, “Go eff-yourself.”

Ben remained indignant, he wanted to know

Why I wouldn’t relent, so I told him so

“I work hard for my money, and I save and invest

I pay some in taxes and keep all the rest

I’m tired of bailing out bankers and fools

You don’t know what you’re doing, even with all your tools.”

I gave him the finger, right in front of his nose

He turned on his heel once he knew he was hosed

He slumped in his sleigh, to his team gave a whistle

They flew back to the Fed, like a heat-seeking missile

But I heard Ben exclaim, ‘ere he drove out of sight

“Christmas won’t be so merry once there’s capital flight!”

The Haiku of Finance for 12/13/12

Fed sees jobless rate
More hiring will change Fed's stance
Until then, inflate

Financial Sarcasm Roundup for 09/17/12

I never have a hard time seeing the silliness in business.  Here comes proof.  Check it out.

The Fed's QE3 does a funny thing to commodity prices.  It can't magically create more supply to satisfy demand, so any new demand is panic buying by hedge funds and other money managers who stampede into hard assets.  That's happening in the oil markets now.  Blame Helicopter Ben for making your driving addiction more expensive.  There's plenty of blame for hedge funds too; their HFT algorithms play so much havoc with prices that they probably caused a flash crash in oil prices today.  The onset of hyperinflation often brings uncontrollable swings in short-term input prices that make it impossible for producers to reliably plan production.  This eventually hits the real economy with shortages of finished goods.  People will be queuing in line at your favorite grocery store, hardware store, appliance store, and car dealer to draw lots for the chance to buy goods that might become available with no notice.  Once again, thank Helicopter Ben for making your life more difficult.

The slowdown in U.S. manufacturing activity is coming just in time to make the national election season interesting.  Hardly any Americans work in manufacturing anymore so they won't see the effects until their service jobs stocking shelves at Wal-Mart are eliminated.  You can't put stuff on shelves if it's not getting made.

Even Wall Street analysts are figuring out that the U.S. is slowing down and that businesses will see reduced earnings.  I'd like to think they all took a break from playing drinking games in the office long enough to read my blog but that would be giving these folks too much credit for original thinking.  Investors who bought stocks on he assumption that the Fed's QE3 can keep the market afloat are in for a rude awakening when the reality of lower earnings becomes official.

The ECB's attempt at QE won't be any more successful than the Fed's at propping up equity prices, given the restrictions on debtor countries' eligibility for the bond-buying program.  I've written quite a bit on the political games European leaders have been playing to make the markets think everything will be okay.  The market loses interest in the shuttle diplomacy of finance ministers if it doesn't produce corporate earnings or restore solvency to bankrupt countries.  The markets can figure this out, unexpectedly.  Politicians can't figure this out, which is expected.  

The Haiku of Finance for 09/14/12

Egan-Jones new cut
Calls out Fed on QE3
Harm will soon follow

The Haiku of Finance for 08/31/12

Ben makes clear statement
Fed will do "forceful" QE
Hyperinflation!

The Haiku of Finance for 08/28/12

Jackson Hole coming
Ben will speak his mind on rates
I don't see big change

Helicopter Ben Sentences Millennials To Penury

The American generations coming up just behind mine (Generation X, for the record) are wringing their hands about their dire economic prospects.  Younger folks are putting off purchases of cars, homes, and other marks of adulthood because they are crushed by a dearth of opportunity.  A major contributor to this malaise is the pile of student loan debt that college admissions counselors and banks begged them to accept.

The ruling elite's response to this distress is to trot out its chief financial officer, the Fed Chairman, to explain to the younger folks that their crushing student loan burden is a wonderful blessing.  Helicopter Ben is telling the teachers of these impressionable youth that student loan debt is not a problem for the economy.  I guess Ben didn't read the link in my first paragraph about how new graduates devote their incomes to debt service instead of investment.  I feel sorry for the next crop of students/suckers who will hear their teachers repeat this nonsense.

The Fed daddy's assurance that federal government backing of student loans is dangerous in the extreme.  One trillion dollars is still a lot of money.  A bailout of that magnitude would dwarf the size of TARP and send foreign central banks sprinting away from dollar holdings.  Ben probably assumes a bailout won't be necessary as long as student debt remains exempt from liquidation in personal bankruptcy.  Our rulers think they are too clever by half, counting on naivete and financial repression to keep debt service payments coming their way.  A debt-destroyed peasantry won't put up with such smugness indefinitely.

Nota bene:  I have never had a student loan, or any debt of any kind other than the single credit card which I pay off in full every month.

The Haiku of Finance for 07/18/12

Bernanke warning
Budget fix or recession
Yeah, what does he know?

The Haiku of Finance for 06/07/12

Ben calls off QE
Comments downplay stimulus
Needs bigger bear run

The Haiku of Finance for 06/06/12

Spain, Greece almost broke
Fed swap lines ready to loan
Ben wants to push "go"

The Haiku of Finance for 06/02/12

Stage set for QE
Wall Street addicted to Fed
Ben wants to do it

Resurgent Inflation Hawks Question Fed's Next QE

Helicopter Ben may be getting impatient with the Fed's lack of unanimity.  Senior Fed officials are now openly stating they will not support further monetary easing without first seeing evidence of the broader economy's deterioration.  Couching it in language like "we'll do all we can to support growth" is political cover.  I read these statements as a sign that the Fed minutes showing how some Fed members were questioning the QE approach weren't just a smokescreen to fool investors.  There are real inflation hawks at the Fed who are willing to stand against the Chairman's predilection for monetary creation.

The Fed is now torn between keeping the exit strategy for ZIRP in mind and keeping the monetary spigot open so the Chairman can deliver on his "printing press" promise (thus immortalizing his pro-inflation PhD thesis).  This potential paralysis is a salient indicator for investors.  It means the hawkish holdouts who question further stimulus can try to delay Ben's next QE round until the deflationary depression signs are too obvious to ignore.  Those deflationary signs may become very obvious if further European market troubles spill over into US equity markets.  

The lesson I draw from all of this seemingly convoluted reasoning is simple.  A deflationary crash followed by a hasty monetary attempt at reflation is the most likely scenario I can foresee based on this tug-of-war between Ben's pro-inflationists and the Fed's anti-inflation hawks.  This is why I have reserved a large amount of cash in my portfolio for large and fast purchases of equities once US stocks take the severe discounts I expect to see in a market crash.  Any stocks I do decide to purchase in the event of a crash must be aligned with sectors that will respond well to a hasty Fed attempt at reflation, and I've concluded that hard assets (minerals, energy, agriculture) and sectors that support them (railroads, pipelines, some utilities and service providers) are aligned with my own knowledge base and risk tolerances.  

I cannot predict the future with any certainty and I could be wrong; any wrong move I make will hurt me financially.  If high inflation comes first, contrary to my expectations, I'd be forced to buy things like TIPS and hard assets at their very high current valuations.  The difference between me and most preppies on Wall Street is that I'm actually thinking through a methodology for surviving a hyperinflationary great depression. 

Nota bene:  None of the above discussion is actionable advice for any investor.  Consider it a form of entertainment to watch me think out loud.  

The Haiku of Finance for 04/09/12

Ben wants capital
Banks need a bigger buffer
So he can QE

The Haiku of Finance for 03/20/12

Ben hates gold standard
Thinks QE is better tool
Paper doesn't shine

Fed Confirms Structural Problems But Ignores Bank Exposure

Leave it to the Fed to be last to the party.  Recall the past pronouncements of Helicopter Ben wherein he claimed things were getting better.  Well, they're not.  The Fed says the economy is slowing down and the near future will not offer improvements.  I knew this months ago.  Read my past blog posts and you'll see how far ahead I was of the Fed's own analysts. 

Given the Fed's track record of inaccurate prognostications, one must wonder whether any predictions it makes are accurate.  Right now the Fed Chairman claims a Greek default won't harm U.S. banks.  He said pretty much the same thing about the subprime mortgage crisis in 2007 and how its effects were contained from the rest of the economy.  The European Central Bank has a much more sober view of how dangerous the Greek crisis can get for banks.  U.S. money market funds heed the warning signs and scale back their exposure to European debt.  They must not be paying much attention to the Fed. 

The credit crisis is back.  It's not pretty or exciting. 

The Haiku of Finance for 02/09/11

Inflation threat looms
Ben says, "Raise the debt limit"
That won't solve a thing

The Limerick of Finance for 12/05/10

Bernanke says bond buys are great
But he's got a lot on his plate
Helping bond market out
Will spark a dollar rout
Gee, Fed Board's a job I would hate