CHART OF THE DAY: WEALTH EFFECT
8 August 2011 by Cullen Roche
81 Comments
It’s getting downright ugly out there as stocks are now collapsing 5% this session and are now off 17% in less than a month. The most interesting aspect of this whole collapse is that we’ve already wiped out all of the gains since QE2 officially started and we’re fast approaching the Jackson Hole levels when the program was first announced.
Apparently, Brian Sacks’ plan for keeping assets “higher than they otherwise would be” isn’t panning out so well. The wealth effect has turned out to be nothing more than confidence fairy economics. And now the scariest part is that, due to persistently misguided policies, the Federal Reserve appears to have completely destroyed their credibility with regards to future policy.
Figure 1 – Wealth Effect
This is beautiful, there’s complete liquidation in certain stocks. For the first time since the last Euro crisis I’m having trouble sorting through the potential bargains. Shorts are closed out. Cash balance has fallen to 40%. Hope all is going well Cullen.
I am reading this: http://www.federalreserve.gov/newsevents/speech/bernanke20100827a.htm
And playing this in the background: http://www.youtube.com/watch?v=_B0CyOAO8y0
Ha! So, what say you Cullen, does the Gladiator announce a return to the arena tomorrow? Care to give me your odds? With oil hurling towards $80 I’ve gotta think we’re over 50/50 on something happening.
I don’t know. Could he be so foolish to think that QE3 is the fix? Surely Ben doesn’t want to let everyone down. Maybe we continue to sell-off into the Fed meeting and he gives the market a layup trade? Then sell the rip? If he doesn’t say anything tomorrow the market will crater again and we all know Ben thinks the stock market is very important to the real economy…..
http://www.youtube.com/watch?v=WlBiLNN1NhQ&feature=related
Oldie, but goodie for a day like today.
Thought you might be playing REMs “Its the end of the world as we know it”
BTW Cullen your “call” on that radio spot where you told the guy you would be long gold and Treasuries is looking pretty damn prescient. Maybe these guys will start to listen to you more.
I’d like to see all of your critics come back and praise you for calling QE2 as perfectly as anyone possibly could have. Well done Cullen. Amazing work.
Fact based research. Weird how it turns out to be right more often than not!
I LOVE SALES…
A Shopper’s Delight.
DC- love the picture….good to see you shed the TPC pawn look.
I love days like today. It’s about time the bear awoke and slashed that stupid Lazlo Birini and Jeremy Seigal across the face.
I just got mildly bullish. What happend to the smart Wall St. year end predicitions?
Kudos Dr. Hussman..you’ve served my clients well this year.
” And now the scariest part is that, due to persistently misguided policies, the Federal Reserve appears to have completely destroyed their credibility with regards to future policy.”
I cannot figure out if that is a good thing or a bad thing.
Good long-term, bad short-term?
Would love to see a piece on the ramifications of a Bank of American bankruptcy. Could this be a Lehman event?
I can’t believe you find time to blog on days like this. This is my first stop for advice and wisdom….
Cullen:
Would you call this S&P credit rating downgrade a Black Swan Event? The first down grade in 70 years of S&P rating the US is coming as quite a shock to the markets worldwide.
The definition from the wiki:
The event is a surprise (to the observer).
The event has a major impact.
After its first recording, the event is rationalized by hindsight, as if it could have been expected (e.g., the relevant data were available but not accounted for).
Also, is anyone else chuckling when the media pundits refer to US debt as the ‘gold standard’ of debt. Umm….isn’t actual gold showing to be the investment of the day?
Cullen – there’s a layup post for you in here, which you can make into a lesson as well (Even though you basically wrote this piece last week, about how the debt = the money that we, the private sector, have)
http://www.cnbc.com/id/44054257
“The U.S. doesn’t deserve a AA-plus credit rating, much less triple-A, commodity bull and noted investor Jim Rogers told CNBC on Monday.
Rogers said the country was unlikely to be able to pay off its debt and Standard and Poor’s rating cut had come too late and should have happened long ago.
“It seems to me it’s physically, humanly impossible for the U.S. to ever pay off its debt”
Jim Rogers does not have much credibility as a commodity bull during the past week, does he?? All commodities are falling sharply, except for the “currency” commodity, namely Gold. Jim Rogers blew his forecast, he called for general inflation, not the deflation that we are seeing now.
Yeah, Rogers is too easy to smack down. He has his Austrian econ talking points that he reads off once every few weeks. If not for George Soros I wonder if we’d even know who Jim Rogers is.
I always wondered how they got along; they have diametrically-opposed economic POVs. He mustve been the salesman while soros was the man behind the curtain…
True but isn’t Rodgers right that the US will never payoff its debt? I mean there will always needs some outstanding amount of high powered money at least. And the most likely outcome is that the US rolls over its debt.
I’m sure he also said elsewhere the US would default. And when he is corrected that the US can always print USD to pay off any outstanding debts so it is not insolvent, he would rationalize it that debasement of the currency and inflation is a form of default as the bondholders are never made whole.
One other point saying his austrian view is incorrect because of the deflationary pressures are currently driving commodities prices down seems to be as faulty a conclusion as me saying we can’t be in a balance sheet recession because even oil and commodities were rallying just a few months ago.
US paid off its debt once…1835 from memory. Go see what happened after they did that.
Rogers is also the guy “long cotton” (US banknotes are 90% cotton) because he thinks the Treaasury and Fed are printing their socks off…..yes, a great mind….
Great calls so far but what have you done for me lately?
Nothing.
I’ve been sitting on my hands kind of amazed that my algo has NOT spit out a buy signal throughout all of this….
You aren’t alone. I’m eating lunch and looking at Intel below 20; buy signals are flashing in my greedy eyes.
But then I remember Ben has to open his mouth tomorrow. If he says nothing, he tells the market that he’s abandoning them. If he does something, he confirms the S&P downgrade by basically confirming their negative outlook.Rock, meet hard place.
My best guess is he follows the ECB and buys bonds — maybe even corporate — to calm markets. As they say in engineering, when all you have is a hammer, everything looks like a nail. This is dangerous, as an emergency round of QE may prompt Moodys to follow suit on a downgrade.
This is why I go with the sound-board approach…everything is on a slider, almost nothing is an on-off switch…started to sell some INTC, AEP and STO puts today…OOM, safest of the safe to start, as best i can tell…open to other suggestions
Sorry Cullen, has spit out or has not spit out a buy signal?
has NOT. Sorry.
Thanks Cullen. Barry R. and others said there should be some support at the 1130 level and we are just under that. I closed out some of my shorts today just in case.
TPC, a tip for your readers who want to be alerted of a potential “buy signal” from you, especially since the signals have often been buried in the comments sections:
Set up a Google Alert at http://www.google.com/alerts/ with the following parameters:
In the Search box–> site:pragcap.com “buy signal”
Type –> Everything
Volume –> Only the best results
How often –> As-it-happens
Deliver to –> email id
i am a buyer here.
oil is at its low for the year. no financial gridlock arising from the US downgrade (that was my greatest fear, but the AAA on short term treasuries seems to have helped there). the charts (for almost any index you care to look at) look to me like a capitulation over the past two weeks. corporations are doing far too well.
don’t know when the mean reversion will turn the indexes back up, but this sell-off seems to me to have gone its course.
Remember the old Wall Street maxim: don’t try to catch a falling knife!
Nice call! The buy signal now may not be that far off – technically oversold, possible government intervention. Being futile fundamentally, these interventions do help markets sometimes.
I think it is just a question of time before FED comes out and announces “We buy EVERYTHING”. The only difficulty I am having is deciding whether it happens tomorrow or next week. I am thinking it is next week, in which case it is still too early to buy.
Thankyou FAZ, that was one tasty snack. I may visit you or your evil twin again tomorrow after listening to your fairy godfather speak. Now it’s time for a drink.
wow 26.47%
Which one is the evil twin ?
Still long ILMN ?
Well played and well said.
Dimm, I believe the twinn is FAS. I’ve bee staring at FAS all day drooling telling myself for Bernanke to do something stupid.
Saw that when looking at FAZ. Thanks for the response Chris.
I’m sure your wish will come true sooner rather then later ; ).
Dimm,
I hope so! I know from hanging around here you’re definitely smarter than me and for all I know you a much more experienced trader than me. That being said, watch out for FAS & FAZ, I wouldn’t hold them overnight. Get in & out.
@ Chris,
You are too kind. Not a trader. No skin in the game for now.
I’m trying to learn how things work and why, mostly on macro level.
Good luck. We are all in for a bumpy ride one way or another.
Hi Dimm,
I sold everything in May with the exception of precious metals (including ILMN) and went primarily to cash. A little while later I opened a whole swath of shorts on US and Australian banks (but stayed away from Europe as I don’t know European banks well enough), and shorted the Euro against the Swiss Franc. These positions weren’t massive though, I went mostly to cash.
Last night I closed out some shorts (took profits) and even exited most of my stock-based precious metal plays, as even these will get hammered in a crisis (despite what gold bugs might want to believe). I’m holding onto the Euro trade a bit longer but right, and some physical PMs, but I’m now mostly on the sidelines taking a few intraday punts on things like FAZ.
On FAZ and FAS and any other leveraged ETF. Do not EVER hold them overnight as they are designed to track intraday movement. Their design means that they are guaranteed to lose money over time if you hold them overnight. They are purely for big news days (like yesterday). Best advice is to just stay away from them if you’re not absolutely sure how they work.
Mediocritas,
Feel the need to say its nice to see you back here. Its been a little while. Nice to have a mind like yours around here.
Best regards
I decided to take a break from commenting at PC after getting into a heated difference of opinion with CR regarding QE2. (The same argument prescient is getting into below). I often have different perspectives on things and enjoy discussing the differences but I don’t care much for it when the tone gets snarky. Out of habit, I take a timeout when it happens.
Thanks for the response Mediocritas.
You have a unique perspective and your commentary is always excellent.
Futures at about 1087, they were below 1080 for a lil.
D. Nathan Sheets, Director of the Division of International Finance at the Fed, responsible for breifing Bernank & other officials on economic developments outside the U.S. and represented the Fed at international meetings, QUIT today.
http://www.bloomberg.com/news/2011-08-08/fed-s-d-nathan-sheets-resigns-as-bernanke-s-chief-international-adviser.html
Thoughts anyone?
(Sorry for the double posting)
Cullen,
Thank you for the hard work on this blog. You have made me a better investor.
For what it’s worth I have been advising clients that market will continue to decline until we see some sort of resolution on the Euro. The u.s. Downgrade is nothing but a red herring. Don,t get me wrong, it matters, just not as much as the Europe breakdown.
I mean, why would smart money put risk on when they could wake up to a broken European union.
WHAT DO U THINK?
The Fed Mandate Scorecard
1. Price Stability – Pass (though I’m sure some will say they failed)
2. Employment – Fail
3. Stock Market – Fail
Though I still wonder if they can ruin price stability too?
The cure to all of our problems is to cut taxes further and deregulate even more. I know it must be true because it was in the WSJ editorial page . . .
Cullen or MMTer can you confirm if my conclusion is correct.
I was reading Pimco’s Elrian Bloomberg transcript (quote below) about the downgrade and it seems the MMT message is filtering yet he seems reticent to acknowledge that regardless of credit risk the Fed can largely set the interest rates (borrowing costs rather than the market itself)?. Am I getting this?
———-
“There is credit risk and default risk. Credit risk is whether borrowing costs go up because the country’s deficit and debt is out of control. Default risk is whether a country actually defaults. The U.S. is a very long way from default risk. In addition, it has a printing press. Unlike Greece, Portugal, and Ireland, the U.S. has a printing press. It has many ways to avoid default. The best way is through growth and fiscal soundness. But there are other ways–they have collateral damage. The U.S. has many more degrees of freedom than Greece, for example.”
I am not so sure. El-Erian and Gross have consistently displayed no understanding of federal finances.
I know you said once great money manager needs not understand the monetary system well rather he/she needs to be a superior risk manager.
I don’t know, man. I am not a money manager nor even an investor beside my 401k, but isn’t the risk management just the defense part of investing.
I would never invest with Mr. Gross.
Helicopter Ben is coming. As soon as he sees “the deflation”. Not sure what his next big idea will be. Probably buying mortgages. Which would actually be good.
Ah, the ridiculous straw man argument is touted again!!! On this blog!!!
Aren’t the MMT’ers supposed to be above this?
How many times did BB have to say that he was not printing money (thus no asset/commodities inflation should really result). TPC specifically recognized this and agreed with it.
So how exactly did QE2 fail??? Quite the opposite. It was a spectacular success and continues to be so. Compare our leverage with Euro zone bank leverage, it’s night and day.
QE1 and 2 were to shore up the banks. Nothing else.
Methinks we could get some interesting comments from this meeting, however.
QE2 has played out exactly (EXACTLY) as I predicted it would. I have explained operationally, psychologically and factually why it would result in no economic recovery and would only create an excessively risky market environment. So, rather than call much of my work from the last year a “strawman” why don’t you actually make a fact based argument?
It may have played out how you thought, and i think that comment is pretty accurate.
But one should not state that Bernanke’s whole plan with QE2 was to juice everything. that was merely the “psychology” that people took from it.
In this piece you appear to state that BB was doing just that, which of course he was not.
QE2 did exactly what it was supposed to do, nothing more.
Come now Prescient. I’ve been very clear about the Fed’s goals via QE2 and I debunked all of them in real-time. I have never said that QE2 was merely to juice everything. That was certainly a component though….http://pragcap.com/quantitative-easing-3-another-monetary-non-event
I am the only person I know of who accurately described QE2, said exactly why it would not work AND correctly attached the market movements and psychological risks to it. I don’t ever ask for credit on anything, but implying that I have been wrong is far from accurate.
Well, that’s why I’m getting confused I suppose.
Not to belabor the point, but QE2 was NOT SUPPOSED to juice the economy. It DID NOT work if one supposed its purpose was to juice the economy.
So, when you state that it did not work, that is correct insofar as it was never meant to do so.
However, on the other hand, it did work to do exactly what it was supposed to, which was shore up the financial system which was still bleeding.
For my part, I think BB is going to pull the gloves off very soon. What a tough time it’s been lately, for sure.
Wrong, it was “meant” to create an upward spiral of confidence through wealth effects that would miraculously spawn a sustainable and everlasting economic recovery. So yes, it was in fact meant to juice the economy via this channel, and the Fed has been pretty clear about this. However, it is neoliberal dogma and trickle down economics by another name and, surprise surprise, didn’t quite work out as intended. What the Fed should be doing is working out why. I’m getting a little tired of them, and noted macoreconomists (a term I use almost loosely) either prescribing more of the same, or throwing their hands up and proclaiming a lack of options when they have clearly not actually thought about alternatives.
All I’ve been hearing about the Fed for 2wks is their options/toolbox, comprising “communication” and extending maturities. What a crock. The markets are well aware rates aren’t going up. And markets are already responding to the dim prospects for the US economy by pulling rates lower anyway. Does the Fed think rates need to be lower again? If so, cap ‘em lower. But the same problem, the veritable elephant, remains – lack of demand for credit.
Policy makers’ subordination of all policy responsibility to the Fed has not only distorted the US budget, but has (and is) materially consigning the US economy and millions of people to sub optimal living standards. Funny how the term “dependency ratio” amongst others is trotted out, and yet, nothing is done to support employment for those, the younger age groups particularly, that would make a difference. It has enriched a fortunate few though, and we know who they are.
FYI…there is no press conference tomorrow. Don’t hold your breath expecting any magic words until Jackson hole Aug 26th
There will at least be minutes on the meeting? No? I’ll trade what is or isn’t in those minutes.
Yes Chris,
But you see, those minutes won’t be released until August 30th, making MacroTrader’s comment about Jackson Hole rather dead on.
#CowersAtSelfInIgnorance
Coolidge Low”s post is offensive and should be eliminated.
While we are at it why don’t we ban any post from the Monty Python channel? http://www.youtube.com/user/MontyPython
You would fit right in, here, in Hugo Chavez land (Venezuela), where anything he doesn’t like gets banned.
Ha! They were playing some melodious tune as the Titanic sank also.
Nah, leave it. The market always has room for gallows humor.
BTW, have you guys noticed that the S&P500′s drop today was 666 (i.e. -6.66%)?
Ha! That’s twice now. First was the S&P low back in 2009. So you think we may be near the end? Supposedly the clock started ticking for the last generation when the Jevvs took back Jerusalem in 1967. Let’s see hmmm: 67 plus (roughly 50) equals 2017. Could start to get interesting real soon.
Cullen.
What do you think is going to become of Fannie and Freddie?
Voice of reason and great coverage through all this TPC, thanks.
Nice post from the “other CR”
http://www.calculatedriskblog.com/2011/08/dow-down-600-s-500-down-666.html
Nice chart. Stock market has really taken it on the chin since the 2007 peak.
CR, you will love this one!
http://advisorperspectives.com/commentaries/rbernstein_080811.php
Basically, the US was the ONLY large economy in the world trying to stimulate its economy. Now with all the austerity talk kick started by the TP guys and quickly embraced by the White House. The world economy has turned into a black-hole. What is going on in the markets is actually quite rational. Yes, some of it is panic and excessive margin but there are good reasons for the drop.
Maybe someone more fluent in MMT than I can straighten me out on this one:
When we borrow we expand the money supply and grow the economy with an impulse. When the govt buys stuff those funds also grow the economy right? So if we brought home some/most of our troops would their spending here be a more immediate boost than say spending abroad? Is there a lag time in spending abroad and seeing the growth effects here?
El Viejo,
I think if a lot of them came home a staggering amount would be able to leave the service almost immediately, and while they would have some discretionary spending for a while, they’d be looking for a job rather soon. That said, they would all have GI bill money to spend, but only on what that is allowed to be spent on (which I cannot say beyond edu. off the top of my head).
Just my dumb thoughts.
Thanx for the response. I luv the brainstorming. (I learn faster that way)
I have to wonder how many would get out knowing that there are no job prospects and since they are here and not in Iraq or Afganistan this would be Cadilac duty. I live near a small town that has a military base and their economy has suffered over the years as the base was closed temporarily and then reopened. Somehow I think the velocity of money must play a part in this spending dollars overseas and spending them here.
Seem like good thoughts to me, El Viejo.
Always look on the bright side of life!
http://blogs.wsj.com/economics/2011/08/08/vital-signs-brightening-mood-in-japan/
We keep hitting 666 in the S&P because superstitious algos keep plugging in buy stops that produce these crash floors. Or, maybe it is just coincidence.
Here is what I said last night (Sunday) on this site: “I put in a bunch of buy limit orders today for execution tomorrow at 20% to 25% off of the closing price on Friday. We might have a sequel to that disaster movie, “Lehman Brothers: The Implosion”. Or, maybe not. If not, the limit orders are free.”
If Monday is repeated, it will become clear that derivatives are being triggered by the downgrade, and the TBTF banks are exposed. If that is the case, then welcome to GFC Part II. A 10% down buy stop was triggered today; things are getting interesting.
TPC, great line: “confidence fairy economics”
Given your self-described use of behavioural paychology in your trading, have you explicitly tried to exploit these types of confidence economics, e.g.
(a) trading based on changes in household balance sheets
(b) QEx (I know you’ve discussed a lot about QE, but I was never clear whether you ever traded off of public misunderstanding of it or misplaced confidence in it)
… etc.
Or is confidence economics just not a concrete enough thesis to do so in a risk-managed way?
http://www.businessinsider.com/soros-likes-hard-assets-says-weak-dollar-is-unsustainable-and-sees-big-risk-of-a-downturn-2009-10
Soros: Buy Hard Assets, And Don’t Keep Betting On A Weak Dollar
So…here are what the Bernank says are his options from the 2010 august jackson hole speech:
“A first option for providing additional monetary accommodation, if necessary, is to expand the Federal Reserve’s holdings of longer-term securities.
A second policy option for the FOMC would be to ease financial conditions through its communication, for example, by modifying its post-meeting statement.
A third option for further monetary policy easing is to lower the rate of interest that the Fed pays banks on the reserves they hold with the Federal Reserve System. Inside the Fed this rate is known as the IOER rate, the “interest on excess reserves” rate. The IOER rate, currently set at 25 basis points, could be reduced to, say, 10 basis points or even to zero.
A rather different type of policy option, which has been proposed by a number of economists, would have the Committee increase its medium-term inflation goals above levels consistent with price stability. I see no support for this option on the FOMC……….However, such a strategy is inappropriate for the United States in current circumstances. Inflation expectations appear reasonably well-anchored, and both inflation expectations and actual inflation remain within a range consistent with price stability. In this context, raising the inflation objective would likely entail much greater costs than benefits.”
My question to the wiser members of this board is whether any of these options can move the markets in a short term positive direction??………..OR, does he really HAVE other options?? I’m thinking #2 “communication” is the only one that might spin a positive psychology.
rhp
QE 2 may have created wealth, but unless you got out of the markets in June/July, it has now also destroyed wealth. Anyone who pre spent their wealth is now in an even worse position. I honestly think that the only thing that can help the US economy now is Obama announcing HIA 2 and linking it to employment.