A Potential Premise that Fools the Crowd Big Time!
Posted 11-02-2009 at 05:31 PM by Black Swan Capital
A Potential Premise that Fools the Crowd Big Time!
Nov. 1 (Bloomberg) -- U.S. Treasury Secretary Timothy Geithner said the country’s economic recovery and job creation hinge on banks taking more risk and restoring the flow of credit to businesses.
“The big risk we face now is that banks are going to overcorrect and not take enough risk,” Geithner said in an interview today on NBC’s “Meet the Press” program. “We need them to take a chance again on the American economy. That’s going to be important to recovery.”
Excess Reserves on Bank Balance Sheets…this chart is almost comical in its appearance.
Thus, no surprise lending to the real economy has declined this year as financial markets soared…but still hard to fathom given the weight of all that money…
There seems a real disconnect between the two economies: financial versus real. Maybe that is about to change…from Morgan Stanley below [our emphasis]:
Excess reserves on the Fed's balance sheet will soon cross the US$1 trillion mark. Our US economics team expects the combination of more QE asset purchases, smaller further decreases in passive QE and the wind-down of the Supplemental Financing Program (SFP) of the Treasury to drive excess reserves in the US to US$1.2 trillion by January 2010. And balance sheets and reserves in other countries are at elevated levels too. Confronted with such massive amounts, even the normally straightforward task of draining excess reserves is no longer a simple task for central banks. While they retain so many excess reserves which are earning very low interest, commercial banks could well turn some of these reserves to lending when better opportunities show up later in the recovery, or purchase assets, pushing yields lower. More lending would lead to an increase in money supply, raising inflation risks. Ironically, commercial banks are most likely to find willing and suitable borrowers just as central banks start to tighten on the back of a sustainable recovery, lowering the impact of rate hikes.
QE created a surge in excess reserves: In September 2008, central banks opened up liquidity facilities to alleviate the stress from frozen fixed income markets. These operations resulted in the build-up of ‘excess reserves' (ER) and an expansion in central banks' balance sheets. In the past, such a build-up in ER would have been ‘sterilised' by central banks by selling government securities. This time around, however, that was not done for two reasons. First, we have argued that central banks have pursued QE with the intention of increasing the growth of money, given near-zero policy rates, while more ER would push overnight rates lower. Second, the sheer size of the increase in ER relative to the size of government securities held by or available to the Fed that could be used to drain reserves was at least partly responsible for central banks not being able to drain excess reserves. Under these extenuating circumstances, the Fed even turned to the Treasury for assistance and the Supplemental Financing Program was created to help drain ER.
So, we could see some surprises if/when the Fed starts draining (maybe they started):
“The irony may well be that just as nine months of weak economic data this year has been accompanied by a very strong market, so the strong economic data next year is likely to be accompanied by a weak stock market.”
Jeremy Grantham
Mr. Grantham, who called the rally from April till now, believes stocks are about 25% above fair value. So, let’s say Mr. Grantham is right again. And let’s say for grins the stock market and US dollar index correlation remain intact—tightly negatively correlated.
S&P 500 Index rally from March low = 65%
Dollar Index decline from March high = 16%
We know Europe doesn’t want its currency to go any higher. We know from a purchasing power parity aspect the euro is back in the ozone against the buck. We know all the reasons why we all hate the dollar—so many to choose from and so little time.
Here is the rub:
Premise #1: Any dollar bounce here will likely be attributed to stock market weakness i.e. risk aversion. [Though stock traders believe the stock market is falling because of dollar strength; we think stocks are the lead dog in this game.]
Premise #2: It therefore follows that when the stock correction ends (because we can always predict those things with such accuracy—NOT!], it is time to sell the dollar again.
But what if Mr. Geithner’s pleads for more risk taking by banks resonates. We know politicos have to now be putting lots of pressure on said banks to open up their purse to mom and pop on Main Street—as those guys tend to vote too.
Thus our Potential Premise that Fools the Crowd:
1) The stock market loses much of its liquidity prop as money shifts back to the real economy.
2) This movement of money back to the real economy accelerates US growth, especially relative to its industrialized world competitors (Europe and Japan)
3) This accelerated real growth allows the Fed some raw material to hint about hiking sooner rather than later—self-reinforcing process.
4) I think you know where I am going with this…a growth and yield surprise means expectations the US dollar bounced only on risk aversion i.e. Premise #2 above, would be scuttled.
5) Scuttling Premise #2 means there is something real behind the dollar rebound.
6) Our initial forecast, many months ago, the dollar has put in a long-term bottom in March 2008 proves true by the skin of our chinny-chin-chin.
7) We all live happily ever after—at least those of us positioned for a dollar rally and stock market sag.
There is only one major problem with my Potential Premise that Fools the Crowd argument. US policy in all things financial seems so flawed at almost every level. Yet, hope springs eternal from an entrepreneurial perspective (a prerequisite to being an entrepreneur is optimism). If you put the money in hands of real people in the real economy that make real things happen, instead of in the hands of those who only talk about making things happen, good things really can happen.
Stay tuned.
Jack Crooks
Black Swan Capital LLC
www.blackswantrading.com
Nov. 1 (Bloomberg) -- U.S. Treasury Secretary Timothy Geithner said the country’s economic recovery and job creation hinge on banks taking more risk and restoring the flow of credit to businesses.
“The big risk we face now is that banks are going to overcorrect and not take enough risk,” Geithner said in an interview today on NBC’s “Meet the Press” program. “We need them to take a chance again on the American economy. That’s going to be important to recovery.”
Excess Reserves on Bank Balance Sheets…this chart is almost comical in its appearance.
Thus, no surprise lending to the real economy has declined this year as financial markets soared…but still hard to fathom given the weight of all that money…
There seems a real disconnect between the two economies: financial versus real. Maybe that is about to change…from Morgan Stanley below [our emphasis]:
Excess reserves on the Fed's balance sheet will soon cross the US$1 trillion mark. Our US economics team expects the combination of more QE asset purchases, smaller further decreases in passive QE and the wind-down of the Supplemental Financing Program (SFP) of the Treasury to drive excess reserves in the US to US$1.2 trillion by January 2010. And balance sheets and reserves in other countries are at elevated levels too. Confronted with such massive amounts, even the normally straightforward task of draining excess reserves is no longer a simple task for central banks. While they retain so many excess reserves which are earning very low interest, commercial banks could well turn some of these reserves to lending when better opportunities show up later in the recovery, or purchase assets, pushing yields lower. More lending would lead to an increase in money supply, raising inflation risks. Ironically, commercial banks are most likely to find willing and suitable borrowers just as central banks start to tighten on the back of a sustainable recovery, lowering the impact of rate hikes.
QE created a surge in excess reserves: In September 2008, central banks opened up liquidity facilities to alleviate the stress from frozen fixed income markets. These operations resulted in the build-up of ‘excess reserves' (ER) and an expansion in central banks' balance sheets. In the past, such a build-up in ER would have been ‘sterilised' by central banks by selling government securities. This time around, however, that was not done for two reasons. First, we have argued that central banks have pursued QE with the intention of increasing the growth of money, given near-zero policy rates, while more ER would push overnight rates lower. Second, the sheer size of the increase in ER relative to the size of government securities held by or available to the Fed that could be used to drain reserves was at least partly responsible for central banks not being able to drain excess reserves. Under these extenuating circumstances, the Fed even turned to the Treasury for assistance and the Supplemental Financing Program was created to help drain ER.
So, we could see some surprises if/when the Fed starts draining (maybe they started):
“The irony may well be that just as nine months of weak economic data this year has been accompanied by a very strong market, so the strong economic data next year is likely to be accompanied by a weak stock market.”
Jeremy Grantham
Mr. Grantham, who called the rally from April till now, believes stocks are about 25% above fair value. So, let’s say Mr. Grantham is right again. And let’s say for grins the stock market and US dollar index correlation remain intact—tightly negatively correlated.
S&P 500 Index rally from March low = 65%
Dollar Index decline from March high = 16%
We know Europe doesn’t want its currency to go any higher. We know from a purchasing power parity aspect the euro is back in the ozone against the buck. We know all the reasons why we all hate the dollar—so many to choose from and so little time.
Here is the rub:
Premise #1: Any dollar bounce here will likely be attributed to stock market weakness i.e. risk aversion. [Though stock traders believe the stock market is falling because of dollar strength; we think stocks are the lead dog in this game.]
Premise #2: It therefore follows that when the stock correction ends (because we can always predict those things with such accuracy—NOT!], it is time to sell the dollar again.
But what if Mr. Geithner’s pleads for more risk taking by banks resonates. We know politicos have to now be putting lots of pressure on said banks to open up their purse to mom and pop on Main Street—as those guys tend to vote too.
Thus our Potential Premise that Fools the Crowd:
1) The stock market loses much of its liquidity prop as money shifts back to the real economy.
2) This movement of money back to the real economy accelerates US growth, especially relative to its industrialized world competitors (Europe and Japan)
3) This accelerated real growth allows the Fed some raw material to hint about hiking sooner rather than later—self-reinforcing process.
4) I think you know where I am going with this…a growth and yield surprise means expectations the US dollar bounced only on risk aversion i.e. Premise #2 above, would be scuttled.
5) Scuttling Premise #2 means there is something real behind the dollar rebound.
6) Our initial forecast, many months ago, the dollar has put in a long-term bottom in March 2008 proves true by the skin of our chinny-chin-chin.
7) We all live happily ever after—at least those of us positioned for a dollar rally and stock market sag.
There is only one major problem with my Potential Premise that Fools the Crowd argument. US policy in all things financial seems so flawed at almost every level. Yet, hope springs eternal from an entrepreneurial perspective (a prerequisite to being an entrepreneur is optimism). If you put the money in hands of real people in the real economy that make real things happen, instead of in the hands of those who only talk about making things happen, good things really can happen.
Stay tuned.
Jack Crooks
Black Swan Capital LLC
www.blackswantrading.com
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Bio: John (Jack) Ross Crooks Jr. is the president and Chief Trading Officer Black Swan Capital. Mr. Crooks has nearly 20 years experience in the currency, equity, and futures arena. Jack is a seasoned investment advisor who has held key positions in brokerage, money management, trading, and research. Mr. Crooks was also founder of Ross International Asset Management and General Manager of Plexus Trading, a discretionary money management firm, Ross International specialized in global stock, bond, and currency asset management for retail clients. Prior to entering the investment arena, Jack held various corporate finance positions. Mr. Crooks has written extensively on the subject of global currencies and international economics.
Trading Methodology: Black Swan's approach rests on three areas of analysis: fundamental, technical, and sentiment. Black Swan analyzes macro economic variables to develop an underlying theme. Black Swan also uses pattern recognition, wave analysis, oscillators, and inter-market correlations when examining price analysis over multiple time-frames. Prior to making a recommendation, Black Swan establishes risk/reward parameters by defining a stop-loss and a target for the position-vital to long-term success.
_________________
John Ross Crooks III
Black Swan Capital
*No warranties or guarantees are made with respect to the content contained herein. The website and the guests on this site do not take into account the investment objectives, financial situation or particular needs of any particular person. The advice and trading ideas provided on this website are for informational purposes only and are not intended as a trading ideas. Under no circumstances does any advice or trading idea contained herein constitute a solicitation to buy and sell currencies. We do not endorse and cannot vouch for any of the guest traders on this site.
Trading Methodology: Black Swan's approach rests on three areas of analysis: fundamental, technical, and sentiment. Black Swan analyzes macro economic variables to develop an underlying theme. Black Swan also uses pattern recognition, wave analysis, oscillators, and inter-market correlations when examining price analysis over multiple time-frames. Prior to making a recommendation, Black Swan establishes risk/reward parameters by defining a stop-loss and a target for the position-vital to long-term success.
_________________
John Ross Crooks III
Black Swan Capital
*No warranties or guarantees are made with respect to the content contained herein. The website and the guests on this site do not take into account the investment objectives, financial situation or particular needs of any particular person. The advice and trading ideas provided on this website are for informational purposes only and are not intended as a trading ideas. Under no circumstances does any advice or trading idea contained herein constitute a solicitation to buy and sell currencies. We do not endorse and cannot vouch for any of the guest traders on this site.
