Event Risk is Coming

[traderchild]

Guess what?

Accommodative monetary policies won’t be around for much longer. Everyone knows it. The big question is…can Bernanke (or whoever happens to be holding the reigns) bring us down for a safe landing – without a debilitating sell-off?

If the records being shattered by the major indices feel hollow – it’s because they are. Recognize the underlying sparks that have driven equities to new heights. We aren’t experiencing a traditional growth market. At the end of the day, this is a stimulus-backed market with dramatic exposure to risk from stimulus reduction.

Yes. Taper mania isn’t going anywhere.

What’s more, the very act of tapering represents a return to what was considered “normal” just several years ago. Before we had any quantitative easing, market movements were based purely on economic fundamentals – on risk/reward. Sometimes those days seem so long ago…

Don’t misunderstand me, I’m not decrying the evils of an artificial market. The Fed did its job, and did it very well. I’m just being realistic. Even before QE comes to a halt, equities will begin the path to mean reversion. We will all have to find a way to cope.

As for this week? Event risk is fast approaching. But who knows, maybe the rains won’t fall as hard as some expect.

 

[new_trader]

The Fed did its job, and did it very well.

 

[traderchild]

I stand by my statement.
On both relative as well as absolute terms, I believe that history will look favorably on the Fed’s actions over the past several years.

 

[new_trader]

I stand by my statement.
On both relative as well as absolute terms, I believe that history will look favorably on the Fed’s actions over the past several years.

I doubt that very much, like most you will revise history and blame any future problem on someone else. I am sure you blame even the current problems in the US on someone other than Bernanke.

I can't understand why anyone thinks that creating $Trillions out of thin air to artificially support the US economy makes Bernanke a genius...it isn't working and has never worked.

I suppose you expect the Fed to bail out Detroit? If not, why? What's the difference between Detroit and GM and all the other zombie institutions they bailed out?

 

[Mr. Charts]

I stand by my statement.
On both relative as well as absolute terms, I believe that history will look favorably on the Fed’s actions over the past several years.

This rather depends on whether the medium term result is galloping inflation.
Artificially supporting the value of one asset class usually leads to a painful re-alignment. Whether a so-called soft landing can be engineered remains to be seen.
I get the sense the Fed is a little bit fearful of a collapse in equity prices and that will discourage it from acting at the right time or firmly enough.
It is certainly possible event risk turns into an event horizon

 

[traderchild]

I doubt that very much, like most you will revise history and blame any future problem on someone else. I am sure you blame even the current problems in the US on someone other than Bernanke.

I can't understand why anyone thinks that creating $Trillions out of thin air to artificially support the US economy makes Bernanke a genius...it isn't working and has never worked.

I suppose you expect the Fed to bail out Detroit? If not, why? What's the difference between Detroit and GM and all the other zombie institutions they bailed out?

Don’t misunderstand me - I’m in no way a Fed-fan boy. I believe that the Fed bears much of the blame for the financial meltdown after it lowered interest rates to 1% post 9/11. I’m actually in favor of limited government in most respects. But I understand problems of scale require proportional solutions.

Bernanke’s no genius, but he’s basically dealing with a “screwed if you do, screwed if you don’t” scenario. Like I said, the Fed’s thus far managed to stave off deflationary pressures that DO exist (look at wages, output gap, unemployment, etc.). As the Fed Chair, and in the absence of dramatic policy changes in trade theory or a legislative body that has any idea what it’s doing, he had little choice but to devalue the US currency.

And I do think we’ve managed to resurface from the liquidity trap of just a few years back.

- By the way, I didn’t agree with the GM bailout (which I believe was different in nature from the bank bailouts) nor should the federal government provide any sort of help for Detroit. Detroit deserves to burn in its $ billions of unfunded pension liabilities. After that, I’d sow salt where it used to stand so that nothing ever grows there again.

 

[traderchild]

This rather depends on whether the medium term result is galloping inflation.
Artificially supporting the value of one asset class usually leads to a painful re-alignment. Whether a so-called soft landing can be engineered remains to be seen.
I get the sense the Fed is a little bit fearful of a collapse in equity prices and that will discourage it from acting at the right time or firmly enough.
It is certainly possible event risk turns into an event horizon

I agree. I don't think anyone really knows whther a soft-landing is even possible. That's why you've got so much potential for volatility surrounding the Fed meetings.

I certainly don't blame them for wanting to pull the rug out gently!

 

[Mr. Charts]

"nor should the federal government provide any sort of help for Detroit. Detroit deserves to burn in its $ billions of unfunded pension liabilities. After that, I’d sow salt where it used to stand so that nothing ever grows there again."

Giving Detroit the Carthage treatment isn't the American way. It needs the opportunity to rise Phoenix-like. The outer suburbs are still ok but the inner areas where the factory floor people worked is desolate. I do feel sorry for all those workers now struggling to survive whilst the automobile bosses salted away millions of $$$.

 

[new_trader]

Bernanke’s no genius, but he’s basically dealing with a “screwed if you do, screwed if you don’t” scenario. Like I said, the Fed’s thus far managed to stave off deflationary pressures that DO exist (look at wages, output gap, unemployment, etc.). As the Fed Chair, and in the absence of dramatic policy changes in trade theory or a legislative body that has any idea what it’s doing, he had little choice but to devalue the US currency.

Maybe you can provide a detailed example from History where deflation has destroyed an economy. (It's easy to find examples where current inflationary policies (debasement) has completely destroyed economies, History is full of examples going right back to the fall of the Roman Empire and possibly further)

Nobody has provided any credible reason why deflation should be feared, we only hear the rhetoric from Government Central planners.

 

[Mr. Charts]

The answer is not to pump federal tax dollars into the Detroit economy for even more to be wasted by vote chasing mayors, but maybe to provide some re-training and re-skilling through tax incentives and breaks to businesses starting out there, sort of enterprise zones.

 

[new_trader]

"nor should the federal government provide any sort of help for Detroit. Detroit deserves to burn in its $ billions of unfunded pension liabilities. After that, I’d sow salt where it used to stand so that nothing ever grows there again."

Giving Detroit the Carthage treatment isn't the American way. It needs the opportunity to rise Phoenix-like. The outer suburbs are still ok but the inner areas where the factory floor people worked is desolate. I do feel sorry for all those workers now struggling to survive whilst the automobile bosses salted away millions of $$$.

Don't be naïve Mr.Charts...it is run by Democrats, that's why it went bankrupt, just like Greece...Politicians promising free stuff if they win and the public wanting the free stuff voting them in.

 

[Mr. Charts]

One of the potential problems with deflation is a fall in consumer spending (a large part of the US economy) in anticipation of lower prices - at least that's the theory. Of course if earnings fall too....

 

[traderchild]

"nor should the federal government provide any sort of help for Detroit. Detroit deserves to burn in its $ billions of unfunded pension liabilities. After that, I’d sow salt where it used to stand so that nothing ever grows there again."

Giving Detroit the Carthage treatment isn't the American way. It needs the opportunity to rise Phoenix-like. The outer suburbs are still ok but the inner areas where the factory floor people worked is desolate. I do feel sorry for all those workers now struggling to survive whilst the automobile bosses salted away millions of $$$.

Ok... I admit I do have a little bias against Detroit and what the government/unions did to the city. But even with the bankruptcy I see situations getting far worse there before they get better. It is pretty much Greece on a smaller scale.

 

[Mr. Charts]

NT, I did say, "The answer is not to pump federal tax dollars into the Detroit economy for even more to be wasted by vote chasing mayors"

 

[new_trader]

One of the potential problems with deflation is a fall in consumer spending (a large part of the US economy) in anticipation of lower prices - at least that's the theory. Of course if earnings fall too....

This theory has been completely discredited by the gentle price deflation experienced during the period the US was on a gold standard. The US economy experienced its greatest period of economic growth ever under a so called "deflationary" environment.

The consumer electronics industry discredits this theory too...falling prices creates demand, this is observed in almost every aspect of consumer behaviour.

Would you stay hungry just because you thought food will be cheaper tomorrow?

As for inflation:

American Dream Slipping as Homeownership at 18-Year Low
American Dream Slipping as Homeownership at 18-Year Low - Bloomberg

Rather than allowing house prices to fall to affordable levels, the FED has inflated prices and now the Government is seeking ways to make them "affordable" through easier credit. The result? MORE DEBT.

The FED is killing the US economy through debt. The original problem was a debt problem, the FED made it worse, and continues to make it worse. The debt should have been allowed to liquidate, like the 1920/21 depression...short, sharp, sweet!

 

[Mr. Charts]

I certainly agree that a squeeze created by increased savings ratios is worthwhile to reduce household debt and that paying down of debt has been happening to a modest extent in the UK. In other words our UK economy is slowly firming up as it bounces along the bottom.
The bottom line is always to drastically reduce government spending and allow the private sector to expand. The former has not been addressed by the UK govt.

 

[Purple Brain]

In part of a post on the Gold 2013 thread which disappeared earlier today I suggested the current unsustainable low interest rates will potentially lead to a major slump across all asset classes on the failure of continued expectations of those rates being maintained, let alone any actual rise. Virtually all assets are net price enhanced on the basis of nowhere else for cash to go at present.

The current period is traditionally risk-off and liquidity at its lowest, so any movement into major selling at this time will meet very little interest thus exacerbating any slump.

I don’t trade commodities or derivatives as I don’t understand them sufficiently and don’t have the resource to trade them even if I did, but my reading of current derivative premiums to the short side do not seem to fit with any of the standard pricing models. I’m sure I’m just reading it incorrectly, but if not, I’d be long term short across the board.

 

[numbertea]

It is not an economy bubble of just the United States. Deals are being made in relation to the whole world economy. China just started to allow 2 kids to be born with no penalty. Gold sales in China are and have been restricted for the past hundred years. The amount of oil available in the US at any time in the last 80 years has far exceeded the allowed refining levels that the oil companies have set. Even throughout the 70s. Currently refinery production is less than 40% of what it could be. The amount refined is part of political dealings and price gauging. Capitalism is being controlled on a huge scale.

The art of being a trader is in identifying and utilizing that which repeats for gain. The market is not truly free and it doesn't have to be. The powerful step down hard and the cockroaches scatter. It is the traders job to smash them with as elegant a hammer as we can find. The art is in the entrails of the capitalistic dogma.

Cheers

 

[Purple Brain]

A useful reminder of how things really work. The top 5 oil refining companies in the US (ExxonMobil, ConocoPhillips, BP, Valero and Royal Dutch Shell) now control over 50% of the domestic market, up from a little over a third a decade back. The top 10, control over 80%. This squeezing out of smaller players puts them all in a far better position to control prices through controlling output. Which is what OPEC also does of course.

The US became a net exporter of fuels at the beginning of the current decade and not just as a result of increase in supply provided by shale gas extraction technologies. US demand is falling while that in the emerging markets, though currently stalling on the global recession, is soaring - Latin America and China being the primary markets for its energy products. The US has been in a position to be a net exporter of energy since the early 1950s.

I don’t believe any of this could or should be classed as conspiracy or cartel operations, more simply producers getting the best price for their products. Restricting supply to enhance demand and markup is as valid a competitive strategy as any other and represents a genuinely free market. While as consumers we may find this one of the less attractive aspects of the free market, the producers have a somewhat different view, as would we if we were in that camp.