Month: October 2011

The world’s foremost Elliott wave expert goes “behind the scenes” on the Federal Reserve
October 18, 2011

By Elliott Wave International

This is Part II of our three-part series, “Robert Prechter Explains The Fed.” You can read Part I here.

Money, Credit and the Federal Reserve Banking System
Conquer the Crash, Chapter 10
By Robert Prechter

… Let’s attempt to define what gives the dollar objective value. As we will see in the next section, the dollar is “backed” primarily by government bonds, which are promises to pay dollars. So today, the dollar is a promise backed by a promise to pay an identical promise. What is the nature of each promise? If the Treasury will not give you anything tangible for your dollar, then the dollar is a promise to pay nothing. The Treasury should have no trouble keeping this promise.

In Chapter 9 [of Conquer the Crash], I called the dollar “money.” By the definition given there, it is. I used that definition and explanation because it makes the whole picture comprehensible. But the truth is that since the dollar is backed by debt, it is actually a credit, not money. It is a credit against what the government owes, denoted in dollars and backed by nothing. So although we may use the term “money” in referring to dollars, there is no longer any real money in the U.S. financial system; there is nothing but credit and debt.

As you can see, defining the dollar, and therefore the terms money, credit, inflation and deflation, today is a challenge, to say the least. Despite that challenge, we can still use these terms because people’s minds have conferred meaning and value upon these ethereal concepts.

Understanding this fact, we will now proceed with a discussion of how money and credit expand in today’s financial system.

How the Federal Reserve System Manufactures Money

Over the years, the Federal Reserve Bank has transferred purchasing power from all other dollar holders primarily to the U.S. Treasury by a complex series of machinations. The U.S. Treasury borrows money by selling bonds in the open market. The Fed is said to “buy” the Treasury’s bonds from banks and other financial institutions, but in actuality, it is allowed by law simply to fabricate a new checking account for the seller in exchange for the bonds. It holds the Treasury’s bonds as assets against — as “backing” for — that new money. Now the seller is whole (he was just a middleman), the Fed has the bonds, and the Treasury has the new money.

This transactional train is a long route to a simple alchemy (called “monetizing” the debt) in which the Fed turns government bonds into money. The net result is as if the government had simply fabricated its own checking account, although it pays the Fed a portion of the bonds’ interest for providing the service surreptitiously. To date (1st edition of Prechter’s Conquer the Crash was published in 2002 — Ed.), the Fed has monetized about $600 billion worth of Treasury obligations. This process expands the supply of money.

In 1980, Congress gave the Fed the legal authority to monetize any agency’s debt. In other words, it can exchange the bonds of a government, bank or other institution for a checking account denominated in dollars. This mechanism gives the President, through the Treasury, a mechanism for “bailing out” debt-troubled governments, banks or other institutions that can no longer get financing anywhere else. Such decisions are made for political reasons, and the Fed can go along or refuse, at least as the relationship currently stands. Today, the Fed has about $36 billion worth of foreign debt on its books. The power to grant or refuse such largesse is unprecedented.

Each new Fed account denominated in dollars is new money, but contrary to common inference, it is not new value. The new account has value, but that value comes from a reduction in the value of all other outstanding accounts denominated in dollars. That reduction takes place as the favored institution spends the newly credited dollars, driving up the dollar-denominated demand for goods and thus their prices. All other dollar holders still hold the same number of dollars, but now there are more dollars in circulation, and each one purchases less in the way of goods and services. The old dollars lose value to the extent that the new account gains value.

The net result is a transfer of value to the receiver’s account from those of all other dollar holders. This fact is not readily obvious because the unit of account throughout the financial system does not change even though its value changes.

It is important to understand exactly what the Fed has the power to do in this context: It has legal permission to transfer wealth from dollar savers to certain debtors without the permission of the savers. The effect on the money supply is exactly the same as if the money had been counterfeited and slipped into circulation.

In the old days, governments would inflate the money supply by diluting their coins with base metal or printing notes directly. Now the same old game is much less obvious. On the other hand, there is also far more to it. This section has described the Fed’s secondary role. The Fed’s main occupation is not creating money but facilitating credit. This crucial difference will eventually bring us to why deflation is possible.

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Oct. 19 (Bloomberg) — Chris Weafer, chief strategist at Troika Dialog Group Ltd., discusses the outlook for foreign investment in Russia and the risk of slower demand for commodities. He spoke yesterday with Francine Lacqua on Bloomberg Television’s “Last Word.”

“Concerned” Billionaires Can’t Save the Euro Right Now…

by Jason Jenkins, Investment U Research
Wednesday, October 19, 2011

George Soros – the man who helped bring you the Quantum Fund and sold short more than $10 billion in pounds to break the Bank of England – is now turning his attention to the European Union sovereign debt crisis.

In the Financial Times, Soros, along with 95 other notable officials from the world of government and finance, sent an open letter to Europe Union hierarchy demanding fiscal integration in order for the EU to continue.

The group, calling themselves “concerned Europeans,” appealed to governments to establish an institution that can provide liquidity to the whole Eurozone, a strengthening of financial market oversight and a revised EU growth strategy.

Here is the segment of the letter we should be focusing on:

“We, concerned Europeans, call upon the governments of the Eurozone to agree in principle on the need for a legally binding agreement that would:

• Establish a common treasury that can raise funds for the Eurozone as a whole and ensure that member states adhere to fiscal discipline;

• Reinforce common supervision, regulation and deposit insurance within the Eurozone; and

• Develop a strategy that will produce both economic convergence and growth because the debt problem cannot be solved without growth.”

The EU’s attempts to enforce a common monetary policy without a common treasury was heavily criticized as the principle reason for their current crisis. However, many Eurozone member states are terrified that a common treasury would infringe their sovereignty.

Nationalism Trumps Practical Solutions

And here lies the problem. The EU wants a common currency, but no common practical solutions in case problems arise. Well, problems have arisen and the global economy is being held hostage over feelings of nationalism.

Is it me or didn’t Alexander Hamilton see and address this problem about three and half centuries ago with the colonies and the need for a bank of the United States?

Soros and the other concerned Europeans went on to say that until such a legally binding agreement is in place, Eurozone countries should empower the European Financial Stability Facility (EFSF) and the European Central Bank (ECB) to cooperate in bringing the crisis under control.

The EFSF and the ECB could then guarantee, and, over a period of time, recapitalize the banking system and enable countries in need to refinance their debt, within agreed limits. This could take place at practically no cost by issuing Treasury bills that can be re-discounted at the ECB.

Most importantly, the Eurozone crisis needs a European solution, they said. “The pursuit of national solutions can only lead to dissolution,” the letter concluded.

Talk is Cheap but the Problems Are Real

Remember, pay no attention to all the market news coming out of Europe until a statement of restructuring and consolidation is made regarding the make-up of the EU. This market reacts any time Germany or France makes a promise to help Greece.

The real issue is that if the status quo remains the status quo, these issues will continue to resurface in the face of bigger issues. And until these changes are made, the dollar will keep making gains against a euro with an uncertain future.

Good investing,

Jason Jenkins

Article by Investment U

I think everyone of us ever bought a lottery ticket or approached somewhat they call a “bandit.” I did… before I started my own “Forex way.” And still there is a single question I can watch us, the traders, arguing about: it’s not life forms on Mars, but IF there is gambling than Trading with Forex? Ok. Before I’ll hit you with those ultimate “five” non-gambling Forex features I just want to admit: there is something to that gambling-trading question.

When we are opening up a Forex position, there is some percentage of a gamble. Why? No Forex “veteran” or expert can tell you which way the US Dollar is going today.   Of course, there many helpful tools that will make your decision more educated. And here BEWARE of so called Forex experts who tell you they’ve got the entire currency picture clear. They won’t beat math and simple logic’s as a person holding a trillion-dollar day market in hands must be a billionaire. And of course this “minion of fortune” would not waist his precious time to convert you into a Forex trader.

The core is… there is always risk as there is NO “Forex Secret.” Even if you handle all the technical indicators and totally “fall in love” with fundamental analysis, there is still some risk and a gambling factor.

If you’re a newbie, opening your Forex account, you better say your money a warm “farewell” to know that you might lose it. Face the fact! And face the common statistics: because of a small piece of gambling too many Forex traders just lose.

Are you still with me..? OK, heads up! With Forex there is the REWARD that we cannot ignore. The money-making potential is endless! I call it “the FX-Galaxy”.  Below I put the gambling-trading comparison that basically differentiates “the FX Galaxy” from “Gambling Space”.

1. NUMBERS & numbers

Let’s put off all the morals, ethics and speak about MONEY! That’s why we trade/gamble Forex. I admit that money circulation within the whole of gambling arena is huge. However, still it’s a fly in comparison to “a Forex elephant.” Nearly two trillion dollars change hands each day with Forex environment! I am unaware of exact casino numbers but pretty sure they do not compare.

2. Safety Players

FX market has the biggest “bodyguards” behinds its back. The highest level of legitimacy is supported by the most important financial institutions on the globe. So what about gambling..? It constantly struggles on the legal front while Forex legitimacy is as proven as of stocks or commodities. Ask your hard earned “greens” of the way to be invested: where law and moral is on your side or… elsewhere?

3. Tools or Trumps

When starting with Forex, you must know that it’s not about luck. The light bulb in the darkness of the unknown is presented by different schools of thought. Their goal is to lower as much of risk as possible. You can trust in the technical analysis and “Trend is your friend” saying. On the other hand, you can just live constantly “hunting” all the Forex news and be the disciple of fundamental analysis, etc. It’s definitely like hunting… you wait for your victim until make a shot. And so is with Forex. Analysis and close watching do precede opening a trade. You are keeping a close eye on the desirable currency and only then, after studies, make a move.   I don’t think that gambling keeps such tools for your success.

4. Motions and Emotions

Gambling often causes addiction. Common fact. It happens when emotions rule the people so their mind totally belongs to the game.  And yet it is still unproven: whether a loss or win is more dangerous for the appearing addiction. You lose – you want to carry on getting your money back and gaining your profit. You win and here comes greed saying: “What are you afraid of? You are lucky today, son, grab it while you can!” It is a big problem. The first Forex rule is put off emotions aside. You have your objectives set up so stick to them. It saves you from overcompensating with trades (money loss) or beats up your greed when profits come to you. Follow the strategy, Forex-soldier!

5. Non-Military Strategies

Many Forex traders end up losing this… um… “Money war.” Let’s call it like this. Why? They trade blindly and have no strategy. Biggest mistake! When start trading, you must know your goals and limits. Only then try to implement them with your trading platform:

• use Stop Losses: it prevents you from staying in the trade waiting for it to go up eventually
• use Take Profits: defeat your human greed when it tells you not to get out because your currency is increasing value.

These are only five differences between FX trading and gambling that I think are crucial. If you find them useful, just say, “Yeah!” (I’ll feel it. I promise). If you have something to add, or you disagree, please, feel free to add your comments.

Article was written by Alexander Collins, who is CEO of ForexEAsystems and developer of Forex trading strategy and other useful Forex trading tools.

Oct. 19 (Bloomberg) — Former Japanese Finance Ministry official Eisuke Sakakibara speaks about the nation’s bond market. Sakakibara said he isn’t concerned about the market for the nation’s government bonds for the next five to six years because domestic demand will support the securities. He made the comments at a Bloomberg conference in Tokyo. (Excerpt. Source: Bloomberg)

You Can No Longer Trust This “Leading” Economic Indicator

by David Fessler, Investment U Senior Analyst
Wednesday, October 19, 2011

There are many economic indicators. The U.S. Census Bureau lists and tracks 13 of them.

The Journal of Commerce has indicators, too. It’s a weekly magazine read by logistics executives to help them execute their day-to-day shipping and logistics, as well as their global supply chains.

Not too surprisingly, the Journal of Commerce tracks truck and rail transportation. Historically, transportation was always viewed as a leading indicator of economic activity and growth.

And the indicators for transportation seemingly point to a growing economy:

• Truck tonnage rose strongly, up 5.2 percent from a year ago.

• The American Trucking Association numbers seem to point towards a recovery, as well. Its index tracks the change in freight tons hauled by carriers. It increased 10.9 percent from July, and is up 9.1 percent from a year ago.

• More good news: In the third quarter, all the major railroads in the country broke records. They set an all-time high of 313,026 intermodal container and trailer loadings, according to the Association of American Railroads.

So how could we possibly be headed back into a recession with this leading indicator pointing towards a recovery?

Analysts Are Missing Out on the Big Picture

Well, according to Satish Jindel, President of SJ Consulting Group in Pittsburgh, analysts who watch cargo numbers are missing the bigger picture.

He believes there’s a growing disconnect between the overall economy and the amount of freight shipped.

In a recent article in the Journal of Commerce, he pointed out that freight carriers “touch” less of the economy every year. His estimates that freight really only touches 40 percent of our overall GDP.

The other 60 percent? It’s the service sector. It doesn’t ship or produce anything that requires shipping. According to the U.S. Bureau of Economic Analysis, the numbers are even worse than that.

Its statistics indicate a measly 35 percent of GDP relates to personal consumption and fully 65 percent relates to the service sector.

Two great examples of huge service businesses that don’t require shipping are Facebook and Google (Nasdaq: GOOG). Both companies generate tens of billions of dollars of revenue while making absolutely nothing.

Throw in all the big banks, insurance companies and numerous other professional services, and you start to get the picture.

Leading Economic Recovery Indicator Starts Lagging

The more that the overall economy shifts towards companies that produce no physical product, the less the transportation indicators can be relied on as a leading indicator of economic recovery or downturn.

In fact, it could be that the transportation indicator shifted to a lagging indicator. Most trucking companies are handling goods that were already imported. They’re already on their way to the end user by the time the consumer stopped spending.

That means trucking companies could continue to have one or two good quarters after things begin to slow down.

It’s something to think about the next time you hear the talking heads on TV suggesting that transportation is a leading indicator. The reality is, that line of thinking may be quickly coming to an end. Adjust your own thinking and investment strategies accordingly.

Good investing,

David Fessler

Article by Investment U

Oct. 19 (Bloomberg) — Stefanos Manos, former Greek finance and economy minister, discusses labor unrest in Greece and the outlook for a debt default. He speaks from Athens with Linzie Janis on Bloomberg Television’s “Countdown.”

FOMC meeting flash: Bernanke does the twist

The Federal Reserve has just announced, after an unusual delay, that it will undertake a programme to flatten the yield curve, the famous Operation Twist, as was expected by most analysts ahead of this week’s FOMC meeting.

Overview:

• Fed will buy USD 400 billion long-term securities (6-30 year), sell 400 bln short-term securities (3 year and less); average maturity will be extended.
• Fed Funds Rate stays at 0-0.25 percent, as expected. Also the pledge to keep it steady until mid-2013 was repeated.
• The Fed does not change the Interest on Excess Reserves (IOER) of 0.25 percent.
• The Fed changes its view of the economy as well, saying that “[t]here are significant downside risks to the economic outlook, including strains in global financial markets”.
• The Fed also says inflation “appears to have moderated”.
• The Fed sees “continuing weakness” in the labour market.
• Three dissenters (Plosser, Fisher, and Kocherlakota), they “did not support additional policy accommodation at this time”.
• S&P 500 down roughly one percent immediately afterwards.
• EURUSD dives half a percent after a run-up ahead of the announcement.

Not only does Ben Bernanke signal yet again that he has no clue – or even worse no potent weapons – to combat the second round of double dip fears in little over a year. With the Fed launching Operation Twist Bernanke furthermore runs the risk of arriving too late at the party with a solution for the second time in 10 months as his QE2 programme last November came so late that the economy had long rebounded and the programme fuelled a massive commodity rally instead, which ultimately weighed on U.S. consumers in the first half of this year and forced the economy into a halt yet again.

It is time to allow the economy to heal on its own, which means going the old fashioned way. In other words, we need to rebuild capital reserves, which in turn implies that savings need to be encouraged not opposed. Sadly, there is no hope of Bernanke heeding our advice, so prepare for another Fed programme and let us hope that it is only useless and not outright harmful.

Mads Koefoed

Article by Mads Koefoed  a Macro Strategist at Saxo Bank. Mads’ primary focus is macroeconomics and equities, and he is responsible for the bank’s Macro Forecast model. He has a master’s degree in economics from the University of Copenhagen. Prior to joining Saxo Bank in 2009, Mads spent two years with Danske Capital, where he worked in the Danish Equities team. At Saxo Bank Mads primarily concentrates on macroeconomic topics and develops and maintains macroeconomic models based on econometrics. Mads regularly publishes comments and analysis on macroeconomic topics and is responsible for the bank’s macroeconomic models and the Saxo Fundamental FX Portfolio. Read more of Mads’ articles and commentary on Trading Floor (http://www.tradingfloor.com), the home of Saxo Bank’s trading commentary, financial research.

Saxo Bank is an online trading and investment specialist, enabling clients to trade  Forex ,  CFDs , Stocks, Futures, Options and other derivatives, as well as providing portfolio management via SaxoWebTrader and SaxoTrader, the leading online trading platforms.

By Mike Conlon, ForexNews.com on Oct 19, 2011

Yesterday’s market turn-around exemplifies the type of market action we may continue to see until the Euro debt crisis is finally resolved to the satisfaction of the world. Yes, I said the world. Markets yesterday were selling off on lowered expectations that this weekend’s European summit would produce that resolution, but a rumor hit the tape from a newspaper in Euro that said that France and Germany had agreed to expand the size of the ESFS to 2 trillion euros, much larger than had been previously agreed upon.

This sent markets screaming higher into the close as it was risk-on again and the correlations not only held up but also lead the way. This kicked the weaker economic data to the back again as the hope of a credible deal left markets wanting more. Moody’s attempted to rain on the risk appetite parade by downgrading Spain again but the markets will have none of it. Riots in Greece make the Occupy Wall St. crowd look like rank amateurs as the new austerity measures are announced.

So we have the carry-over affects this morning taking place, and better than expected economic data from today’s docket has confirmed the move. US corporate stock earnings are starting to look better, though Apple missed earnings for the first time in 4 years last night. The markets seemingly want to go higher if not for the specter of risk hanging over them in the form of the Euro debt crisis.

In the UK, the BOE released the minutes to their most recent rate policy meeting which showed a unanimous vote to expand their QE program by 75 billion pounds, even though yesterday’s inflation data pushed above 5% for the first time in 3 years. BOE policy-makers believe this to be a temporary spike, but that remains to be seen. Especially if a Euro debt resolution allows markets (including commodities) to fly again.

Here in the US, CPI data came in as expected and slightly lower which some might find surprising after yesterdays higher than expected PPI data. Core CPI came in at 2% vs. an expected 2.1% and the headline number came in at 3.9% as expected. Indeed the Fed is dodging bullets as the money-pump continues. My feeling is that it is just a matter of time before inflation rears its ugly head and when it does it will be fast and furious.

But the best news of the morning may be the housing starts figures which show a gain of 15% vs. an expected 3.3%. Recent lousy weather may have distorted those figures as housing starts were delayed, but nevertheless it is an impressive number. Building permits came in lower than expected, posting a decline of 5% vs. an expected decline of 2.4%.

It will be interesting to see how the rest of the day plays out as stocks here in the US are set to open higher and risk appetite is also increased. However, a closer inspection of the numbers and rumors may prove to warrant a more reserved position as perhaps the market is getting a bit ahead of itself.

Regards,

Mike Conlon,
Senior Forex Mentor
forexnews.com

Oct. 19 (Bloomberg) — Tom Vosa, director of economic research at National Australia Bank Ltd., discusses the Bank of England’s latest asset purchase program and the U.K. economy. He talks with Maryam Nemazee on Bloomberg Television’s “The Pulse.”