Archive for September 14th, 2012
Why Am I So Tired? and Other Weekend Reads
Friday, September 14th, 2012
Here are this week’s reading diversions for your personal enlightenment. Have a terrific weekend!
Foods Before Bed: Foods You Should Never Eat Before You Snooze
“Foods that are high in fat, fibre or protein are slower to digest. If someone were to eat eggs and bacon right before bed, they’ll likely feel uncomfortable and won’t be able to sleep. They may also feel full and bloated in the morning,” she tells The Huffington Post Canada.
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Thin Man’s Diabetes : Diabetes : Men’s Health Spotlight : Men’s Health.com
America’s fastest-growing disease has a sugar-coated secret: You don’t need to be overweight for it to kill you
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12 Powerfoods : Diabetes : Men’s Health Spotlight : Men’s Health.com
Can controlling your blood sugar and preventing diabetes complications be as simple as eating the right foods? Yes. Certain foods are packed with nutrients that stabilize blood sugar levels, protect your heart, and even save your vision from the damaging effects of diabetes. These 12 foods can give you an extra edge against diabetes and its complications.
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What Causes Tiredness? The Surprising Things That Make You Sleepy | Women’s Health Magazine
Your extreme fatigue might be coming from one of these energy suckers
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Healthy foods: fennel – Health – redOrbit
One cup of fennel provides good portions of your recommended daily intake of fiber, folate, and potassium.Fennel contains nearly 20% of the vitamin C you need each day, too. In laboratory studies, the compound that gives fennel its licorice taste also gave it the potential to fight inflammation and the formation of cancer cells.
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Headaches: Kids get them too – Health – redOrbit
Yes, children can get headaches – more than 25% of children in the United States between the ages of 12 and 13 experience headaches at least once a week. Before puberty (when hormones haven’t yet kicked in), headaches are far more common in boys than girls.
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Aging & the nervous system – Seniors’ Health – C-Health
There are 3 major neurodegenerative disorders: amyotrophic lateral sclerosis (ALS – Lou Gehrig’s disease), Parkinson’s disease, and Alzheimer’s disease. These disorders appear to be related to the aging nervous system. At present, the only clearly recognized risk factor for all three conditions is increasing age. With increasing longevity of the population, they will become more common.
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Iced Tea’s Hidden Risk Of Painful Kidney Stones
Iced tea contains high concentrations of oxalate, one of the key chemicals that lead to the formation of kidney stones, a common disorder of the urinary tract that affects about 10 percent of the population in the United States.
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Crohn’s Disease Symptoms & Warning Signs: Sharp Abdominal Pain, High Fever, Blood in Stool
Crohn’s disease can cause osteoporosis, which is a condition that affects bone density. People with osteoporosis experience a higher risk of developing bone fractures. Other possible conditions that result from Crohn’s disease include seizures, strokes, peripheral neuropathy, headaches, and depression.
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‘Normal’ Blood Sugar May Still Affect Brain | MyHealthNewsDaily.com
High blood sugar levels are known to be detrimental to the brain, but even levels that are on the upper end of the normal range may be harmful, according to a new study.
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Women who don’t get enough vitamin D could develop brittle bones, or even worse, osteoporosis.
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Health and longevity benefits of dark chocolate | AGING SCIENCES – Anti-Aging Firewalls
I like this anti-aging medicine so much that I sometimes feel guilty when I eat it. There are some 380 distinct known chemicals in chocolate and many of those are bioactive. However, the main beneficial ingredient in chocolate is the flavonoid Epicatechin. “Cocoa, the major ingredient of dark chocolate, contains relatively high amounts of epicatechin and has been found to have nearly twice the antioxidant content of red wine and up to three times that of green tea in in-vitro tests(ref)(ref).” Epicatechin is also found in other foods including tea and grapes. Some research findings re chocolate:
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Brushing Your Teeth May Lower Dementia Risk (And 8 Other Reasons To Brush)
There are benefits to keeping your pearly whites so, well, pearly white that go beyond having a picture-perfect smile.
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Getting Better With Age: Why Seniors Are More Satisfied
What if you knew that everything was going to be OK? That life would work out just fine, maybe even infinitely better than that.
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Normal Memory Loss | 5 Signs It’s Not Serious | Caring.com
Everybody forgets stuff. The movie title on the tip of your tongue. The name of the dad on the soccer field. The occasional appointment or lunch date. What the heck you just came in the room to get.
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Migraines and Parenting: 6 Tips for Moms and Dads
Fortunately, there are steps you can take to manage your symptoms and line up extra help when you need it. Here are some ways that Halpern and parents with first-hand experience say you can cope better with migraines while caring for your kids.
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Why Am I So Tired? 10 Causes of Fatigue and Fatigue Treatment Tips
You may wonder if you’re doing too much. But surprise! The most likely answer is just the opposite: You’re not doing enough.
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6 Tips for Eating Healthy Over 50 | ThirdAge
I urge you to pay attention to changing nutritional needs as you grow older. Good food choices and exercise in your 50s can have a significant effect on your health and quality of life in your 60s, 70s and 80s, even if you haven’t eaten well before. It’s never too late to start.
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Can Naps Lead to Type 2 Diabetes? | ThirdAge
The study looked at an older Chinese population and found that the prevalence of type 2 diabetes was 36 percent higher in participants who reported napping four to six times a week and 28 percent higher in those who napped daily.
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Eating Less Red Meat Could Benefit Health And Environment, Study Suggests
Cutting down the amount of red meat we eat not only affects our physical health, but also the health of the environment, a new study from the United Kingdom suggests.
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Feeling Tired? It’s Probably What You Ate / Nutrition
Food sensitivities are another area that can make a person tired and fatigued. When your body is sick of being exposed to certain foods or chemicals, it can create inflammation in the form of irritable bowel syndrome, migraines, or fibromyalgia that make you feel run down. Many of my clients report having “lots more energy” after they’ve gone through the first several days of a food elimination diet. Your liver and kidneys have to do a lot of filtering all day, so it’s best to keep chemicals and additives out of your diet to be able to keep energy levels up.
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Tags: Canadian Market
Posted in Markets | Comments Off
QE ∞
Friday, September 14th, 2012
Guest post by Azizonomics.
The Keynesians and Monetarists who have so berated the Federal Reserve and demanded more asset purchases and a nominal GDP target to get GDP level up to the long-term growth trend have essentially got their wish.
This is a radical departure:
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.
The Committee will closely monitor incoming information on economic and financial developments in coming months. If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.
I tweeted this earlier in favour of the idea that the Fed would adopt open-ended asset purchases:
If Bernanke’s rationale for QE has been Okun’s law (increases in NGDP decrease unemployment) then NGDPLT seems likelier than most think.
— John Aziz (@azizonomics) September 13, 2012
Those who didn’t anticipate the possibility of open-ended asset purchases should have looked much more closely at Bernanke’s words at Jackson Hole:
If we are willing to take as a working assumption that the effects of easier financial conditions on the economy are similar to those observed historically, then econometric models can be used to estimate the effects of LSAPs on the economy. Model simulations conducted at the Federal Reserve generally find that the securities purchase programs have provided significant help for the economy. For example, a study using the Board’s FRB/US model of the economy found that, as of 2012, the first two rounds of large scale asset purchases may have raised the level of output by almost 3 percent and increased private payroll employment by more than 2 million jobs, relative to what otherwise would have occurred.
Essentially, this is nominal GDP level targeting. The reason why Bernanke has framed it in terms of lowering unemployment is that his mandate relates to price stability and unemployment, not nominal GDP level. But as Bernanke himself noted in his academic days:
Estimates based on data from more recent years give about a 2% decrease in output for every 1% increase in unemployment.
To those who accept Okun’s Law, raising nominal GDP level and lowering unemployment are effectively the same thing. Bernanke seems to believe unemployment will fall in a (roughly) linear fashion as asset purchases increase. By itself, this is a problematic assumption as the past is not an ideal guide to the future.
Yet more importantly the data shows no real job recovery in the post-2008 quantitatively-eased world. This is the prime-age employment-population ratio:
And even if unemployment falls without triggering large-scale inflation as per the Fed’s design, this is no cure for the significant long-term challenges that America faces.
As I wrote back in November 2011, when nominal GDP targeting was just appearing on the horizon America faces far greater challenges than can be solved with a monetary injection. Financial fragility, moral hazard, energy dependency, resource dependency,deindustrialisation, excessive private debt, crumbling infrastructure, fiscal uncertainty, and a world-policeman complex. The underlying problems are not ones that Bernanke really has power to address.
And how long before rising food prices cause more riots and revolutions? After, all handing over more firepower to speculators tends to result in increased speculation.
Meanwhile, US creditors and dollar-holders (particularly China) would seem from past comments to be deeply unhappy with this decision.
President Hu Jintao:
The monetary policy of the United States has a major impact on global liquidity and capital flows and therefore, the liquidity of the US dollar should be kept at a reasonable and stable level.
The dollars they accrued will lose purchasing power to every new dollar printed and handed over to the American banks in exchange for mortgage backed securities. The Chinese perspective on this will be that Bernanke is essentially engaging in theft. On the other hand, they should have considered this likelihood before they went about accruing a humungous pile of fiat dollars that can be duplicated at a press of a button. No, matter; China won’t get burnt like this again.
As PBOC official Zhang Jianhua noted:
No asset is safe now. The only choice to hedge risks is to hold hard currency — gold.
Chances of future trade and currency wars between the United States and China seem to be rising as fast as Chinese gold accruals.
Copyright © Azizonomics
One or Two Key Downsides of Open Ended QE
Friday, September 14th, 2012
by Mark Hanna, Market Montage
There are multiple downsides to such a program as an open ended QE as every thing has pros and cons but one I will point out now and will repeat into the future is, a large part of the magic of the Federal Reserve the past few years has been the “Don’t fight the Fed” mantra. Markets have generally gone up on quantitative easing/operation twist programs. And the market has been buoyed countless times by even rumors of new operations beginning in between programs.
So by having what is in effect permanent programs you lose both those advantages. There will be no more WSJ or Reuters leaks about the potential for an imminent QE 4, QE 5, or whatever number because this is QEn. More damaging than that is a lot of this is the emperor’s clothes theory ala Wizard of Oz. What do you think happens to the psyche of the market the first time there is a >10% correction during open ended QE?
For now none of this matters, but when the first real selloff happens during “open ended” QE – observing the reactions of the people in the marketplace will be fascinating. That said, make no mistake we are in a completely different era where the central bank owns the band, and everyone is dancing to their tunes. May we live in interesting times.
Copyright © Market Montage
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Shall We Not Revenge? (Grant)
Friday, September 14th, 2012
Via Mark J. Grant, author of Out of the Box,
“Though this be madness, yet there is method in it.”
-Hamlet
The gentleman, in this case, “protests too much” and in protest reveals the true meaning of his course which perhaps is a decline to bended knee and a supine position to his Master. It is scant days to the election and I cannot help but think that our continuing trip to the “presses of creation” is an act of contrivance to support “him that must be obeyed” while shameless in its purpose serves not the “greater good” but the lesser path of political contrivance. In reading the explanations and the rationale of the actions undertaken I am not swayed. In fact, there were too many reasons, too much offered of almost an apology that causes me to question the validity of the foundation of our present course. In a world where things are difficult and where our Central Bank rolls out the creation of money, once again, as the end all and be all of our supposed passage to financial Heaven; I mark the day and note the consequences. Down with the Dollar and up with equities and down with mortgage rates and all contrived and perhaps ill conceived and, unlike Europe, “all for one” but not one for all; for who does not wish to be named in any chapter of this ill-begotten play.
“Can one desire too much of a good thing?”
-As You Like It
In our world it is reality in the long term and perhaps the much too long term and in the short term; perception and the capture of the winnings. The Great Game is played to win and not too be right and so bragging rights accrue to those that called the ball and a nod to the win of their endeavors and a respectful nod it is but for the perpetrator; a disrespectful shrug and a fair amount of insolence. Not that it was ever disconnected perhaps, the Banker from the State, and the charade is useful no doubt but still; I do not applaud this characterization or any ones that occurred in the earlier chapters. What is difficult now will be made all that more difficult later by the actions of our Fed but then the players will be gone and it is only the barely considered members of the nation that will suffer as a result of these slings and arrows tossed so carelessly across the bow of our nation’s future.
“Conscience is but a word that cowards use, devised at first to keep the strong in awe.”
-King Richard III
So, along with the rest, it is to be commodities up, oil up, gold up but what of the citizens; what of the people and no hooray from me for the abuse of power. It is a bill that will have to be paid and a scheme that has a cost and a stroke for the government and a stroke against those that have to pay for it. The dislocation between the governing and the governed could not be greater and I take no pride in watching the machinations of men with no thought for this generation; much less those who will follow. A shameless rout and ill gotten gains and a certain sadness for America.
“If you prick us, do we not bleed, if you tickle us, do we not laugh, if you poison us, do we not die and if you wrong us; shall we not revenge?”
-The Merchant of Venice
Tags: China, Commodities, energy, Equities, Gold
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The Carrot and The Carrot
Friday, September 14th, 2012
by Peter Tchir, TF Market Advisors
Two Carrots Don’t Make a Stick
I’ve always assumed the adage about a carrot and a stick had something to do with donkeys specifically, but was a great way of summarizing reward and punishment. The “carrot” was the reward. You dangle the carrot as a reward for good behavior. The stick was there to punish failure. In many ways, the Fed removed the stick yesterday. We now live in a carrot and carrot world. I know a few places I would like to stick a stick right now, but I can’t help but think this change is going to have negative repercussions in the longer term.
Two Wrongs Don’t Make a Right
I was wrong yesterday. I didn’t think the Fed would do it. I also thought the initial muted reaction was a sign that it was priced in. I was wrong, but I’ve been right for the most part for awhile, so I can live with yesterday’s mistakes. It bothers me, but not immensely.
What concerns me more is that I was wrong in September 2010. I underestimated the impact of QE2. That is what is bothering me now. Is this a replay of the fall of 2010 where we are at the start of a long relentless march higher, or is that so priced in, that it doesn’t happen again? That is the real question. Will the open ended QE spark another spurt higher, or is it different and too much priced in? I’m trying to get my hands around that, and being wrong in 2010 is clouding my judgment.
Two Mortgage Providers Don’t Make a Fed
If Fannie and Freddie announced that they were going to underwrite more mortgages yesterday, would we have rallied so much? While Fannie and Freddie cannot print, they are as much a part of the U.S. government as the Fed (technical accounting issues aside).
In fact, Fannie and Freddie are shrinking. The government wants their balance sheet reduced. The Fed has stepped in to pick up the slack. Why are we so much more excited about the Fed buying mortgages than Fannie and Freddie? Yes, I can see the printing argument, but the reality is that at least a part of yesterday’s announcement is picking up the slack rather than creating new additional demand.
I am not sure how that plays out, but it is a question we need to ask ourselves. Why does the Fed buying something count more than Fannie and Freddie buying something?
Fed Buying Mortgages Doesn’t Create Final Demand
While the Fed ignited a ramp up in risk assets and commodities, did they do anything for final demand? I spoke to some friends who are senior in real companies (those that manufacture something as opposed to financial services) and they quickly confirmed that nothing had changed on their end. Their stock options were worth more, they had now exceeded their stock price targets for the year, but they weren’t about to change plans. They need to see final demand increase before they change their business plans so nothing about more Fed buying affects businesses immediately.
On the home front, with a bias to people located in overpriced NYC related housing, most people hope this means that their property goes up in value. I haven’t run into anyone looking to buy now because of this. Across the country will this help? Maybe, but rates have been low for awhile, so I’m not sure what benefit this will have in the real world.
Banks Win Big
Anyone long mortgages ahead of this is in good shape. U.S. banks will benefit. European banks looking to shrink will benefit as they now have a ready buyer of a part of their portfolio.
So banks should do well. Bank credit spreads should do well. One consistent theme we’ve had is that bank credit spreads, CDS in particular, have remained stubbornly high relative to their equity valuations. This may be the catalyst that drives them tighter. Any notion that this Fed will somehow let a big bank fail seems ludicrous. They just printed money that helps them at a time when stocks are already at multi year highs and amid signs that housing has bottomed. If there is one trade where you are supposed to shut your eyes and ignore the volatility for 6 months, it is bank CDS. Hit a bid and walk away. As SEF’s come on line, the last and final bid for bank CDS, the counterparty hedging, will go away.
Commodities and the New World Order
As I try and understand what the Fed did, I keep coming back to the idea that commodities will win. In the short term gold may do well, but the reality is that you need useful commodities. Gold may well have been a store of value, but you can’t eat it, build shelter with it, or burn it for heat. Commodities that let you do that may well become the play.
As the Fed abandons any form of restraint in its efforts to keep rates low, debase the currency, and spur asset inflation, the mindset of investors, companies, and countries is likely to change. China is likely to be the leader in that. Stockpiling useful things, basic resources, seems like the trade.
The Fed isn’t “pushing on a string” it is sitting on a water balloon. That balloon will burst and the consequences of that will be something we have never dealt with before, and quite frankly, aren’t prepared to deal with. Maybe everything will work out, and for now it is hard to be bearish, so I will be neutral, but that doesn’t mean the end game didn’t get uglier.
Neutral, Confused, and Annoyed
I’m pretty much dead neutral in terms of positioning. Too much going on that is too confusing to form a solid opinion. At 1,460 on the S&P, at 118 on MAIN (no that isn’t a typo, IG18, so recently at 102 is now at 82) and highs on so many other asset classes, it is hard to say there is a lot of upside. With the Fed printing money monthly, it is hard to say there is any downside, so I will go with neutral and confused.
I think I have separated my anger from my investment decision, but I am angry. Everything about this move strikes me as dangerous. The one thing that I think the Fed does a HORRIBLE job at, is understanding that human behavior changes. The economists don’t seem to understand that the same inputs into the same model don’t produce the same results because behavior changes over time.
I for one, miss the stick, and I don’t even consider myself a masochist, just a believer in meritocracy and that failure is a necessary part of success.
Copyright © TF Market Advisors
Tags: China, Commodities, Gold
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Afraid of QE3? Buy Real Assets
Friday, September 14th, 2012
by Seth J. Masters, AllianceBernstein
In the past few weeks, central banks have reaffirmed their intent to do “whatever it takes,” in European Central Bank (ECB) President Mario Draghi’s words, to address the various ailments afflicting the global economy. While central bank actions may or may not have their desired effects on the real economy, they do create short-term opportunities and medium-term risks for investors, as my colleague Jon Ruff explains below.
Today, the Federal Reserve reiterated that it will “increase policy accommodation” because they are concerned that “without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook.”
These comments follow Fed Chairman Ben Bernanke’s speech two weeks ago in Jackson Hole, Wyoming, in which he reiterated that quantitative easing (QE) works primarily by reducing the “supplies of various assets available to private investors” and therefore “affect(ing) the prices and yields of those assets.” In other words, the primary objective of QE is to inflate asset prices. The Fed buys US Treasury bonds from investor A, who turns and buys US high-yield bonds from investor B, who turns and buys US equities from investor C.
US yields go down. US asset prices go up. Everybody is happy—except for two things.
First, these liquidity flows invariably end up in areas of the market least able to handle them. Investor C gets taken out of the highest return opportunities in the US, leaving emerging-market-related assets as the only place left with yield and growth opportunities. Subsequently, money flows to commodities, higher-yielding currencies and emerging-market real estate. Unfortunately, these markets are not as liquid as US stock and bond markets, so the liquidity flows have a disproportional impact on prices. While that’s good for owners of these “real assets” in the near term, it is not good for emerging-market economies that have to deal with food inflation, strengthening currencies and domestic real estate bubbles.
Second, the Fed buys bonds with new money that is tinder for a potential inflationary fire. Currently, banks don’t want to lend and the private sector doesn’t want to borrow, so the new money sits idle as bank reserves. But if (when?) a spark ignites the supply and demand for credit, watch out: the Fed will have to properly identify, time and execute an exit strategy or face an inflationary outbreak that will make the 1970s look tame. Such an outbreak would likely prove to be good for owners of real assets, at least relative to traditional stocks and bonds, but it would not be good for the US economy.
We expect to see continued asset-buying announcements from central banks around the world: the ECB last month, the Fed today, the Bank of Japan imminently. The impact of these announcements, and ensuing implementations on the real economy, are likely to be ambiguous at best. However, our research suggests that “real assets” such as real estate and commodities will profit from asset purchases in the near term and protect from related inflationary risks in the medium term.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio- management teams.
Seth J. Masters is Chief Investment Officer of Defined Contribution Investments and Asset Allocation at AllianceBernstein and Chief Investment Officer of Bernstein Global Wealth Management, a unit of AllianceBernstein. Jon Ruff is the lead Portfolio Manager and Director of Research—Real Asset Strategies at AllianceBernstein.
Tags: Commodities, Emerging Markets, Equities
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Back to the Future: What’s at Stake for the Economy in the Obama-Romney Contest
Friday, September 14th, 2012
To hear the two candidates tell it, the U.S. presidential election offers a dramatic choice on the economy: Vote for me, each says, if you want a robust recovery; pick my opponent, and we’ll plunge back into recession.
But regardless of who wins, important economic factors will remain facts of life. Millions of American homeowners are “underwater,” owing more than their homes are worth and weakening the consumer demand that is key to the economy. Employers, even if they are flush with money, won’t hire more workers until they need them — when demand rises or appears ready to.
The debt crisis in Europe resists a quick solution, and deficits and overhanging debt in the U.S. are too big to be whittled down very fast. These deficits will compete for federal revenue that could stimulate the economy through more spending or cuts in taxes.
Given the size of these problems, what is the most likely economic landscape to emerge after the election if President Barack Obama, a Democrat, wins, or if Republican challenger Mitt Romney wins?
Three Wharton faculty members say that, either way, the future is likely to look much like the present, for several years at least. “The notion in the political debate is that if you just do something a little bit differently, things will get much better. But it doesn’t work like that,” says Wharton finance professor Franklin Allen.
“It seems to me that one of the most depressing things about this campaign has been that it’s more or less tit-for-tat, gotcha issues that have emerged, rather than any serious talk about what [the candidates] are going to do [regarding] the looming problems with the economy,” says Wharton finance professor Richard J. Herring.
Whoever he is, the next president will face an immediate economic crisis, including the “fiscal cliff,” tax increases and deep spending cuts that will kick in automatically unless Congress and the White House can agree on an alternative. The cliff is a result of a standoff in 2011 over raising the debt ceiling. “I think once the election’s over, that’s going to be the big issue,” says Allen.
What if the Democrats, who support tax increases on the wealthy, and the Republicans, who do not, cannot agree, and the automatic provisions kick in? “I think it’s quite likely that would lead to recession,” Allen states, predicting that tax hikes and cuts in government spending would reduce gross domestic product by about 3%.
While both candidates say their policies would speed job creation, the problems run too deep to be resolved quickly, Allen adds. “It’s become a much more serious problem than we have ever had in this country before,” he says, arguing that many of today’s unemployed will remain so unless they are retrained, a lengthy and expensive process that he says is currently inadequate.
Indeed, according to Allen, the current economic problems are unique in American history. The clearest analogy is Japan, which has been struggling for many years. What’s the solution? “I don’t think anybody really knows,” Allen says.
A Divided Government
Obama proposes a continuation of the policies of his first term, which included efforts to stimulate the economy through federal spending and modest tax reductions focused mainly on people with low and middle-class incomes. He would allow the Bush-era tax cuts to lapse for people earning more than $250,000 a year, but would keep them for people earning less. He would stay the course with his health care overhaul — the Patient Protection and Affordable Care Act, or Obamacare — and would keep most of the regulations imposed on the financial services industry after the financial crisis.
Romney’s most dramatic economic proposal is to reduce tax rates even below the Bush levels in effect today, while making up for the lost revenue by eliminating some unspecified deductions and tax loopholes. Romney wants to repeal parts of Obamacare and many of the financial regulations. He would loosen environmental regulations and, compared to Obama, place heavier emphasis on exploiting coal and oil.
While the candidates’ economic philosophies and positions are dramatically different, neither is likely to engineer a sweeping policy change, says Herring. The reason: divided government.
Polls predict a close election, with neither contender’s coattails long enough to ensure massive wins by his party’s congressional candidates. The odds thus seem to favor a continued division in government, with neither party getting a veto-proof majority in Congress or a filibuster-proof super-majority in the Senate.
“We have to recognize the fact that whoever wins isn’t going to get a huge, sweeping mandate to do whatever they want,” Herring says. Severe problems undermining the economy are therefore likely to remain unsolved, including the decay of roads, bridges and other infrastructure, debt problems, the eventual insolvency of Medicare and American students’ lagging educational achievements compared to other developed countries.
“The question is, what are they going to do on the margins?” Herring asks.
Federal tax policy is, as most agree, far too complex and confusing, Herring says. But neither candidate is likely to have the mandate it would take to change this, given the vested interests that would resist. While Romney, who has emphasized tax overhaul more than Obama, says he would strip out many deductions and loopholes, he has not said which ones, but has indicated he would not go after popular ones like the income tax deduction on mortgage interest.
‘The Worst Possible Consequence’
The presidential campaign has also focused on two health care issues with significant impact on the economy: Obamacare, the 2010 law that overhauled medical insurance, and Medicare, the financially troubled health care entitlement program for the elderly.
Obama considers the Patient Protection and Affordable Care Act his greatest achievement and has promised to preserve it, while Romney wants to repeal much of it and replace it with a plan that he has not fully detailed. With a continuation of divided government, Obamacare will likely survive, Herring predicts. “Romney has not clearly articulated a workable alternative, though heaven knows we don’t really understand the thing we’ve got.”
From an economic perspective, a key problem with Obamacare as written, says Herring, is the requirement that businesses with 50 or more workers provide health insurance. That has dampened the creation and growth of small businesses, which are the primary source of new jobs, he argues. Unemployment stands at just over 8%.
In the long run, problems with Medicare will have more economic impact than issues surrounding Obamacare, says Mark V. Pauly, professor of health care management at Wharton. By providing insurance to the previously uninsured, Obamacare will “give you a clean conscience,” he jokes, “but Medicare will clean out your bank account. So, from an economic point of view, Medicare is much more consequential.”
Both issues, Pauly says, create uncertainties that weaken business confidence, which in turn helps stifle economic growth. Many business people favor the Republican promise to repeal Obamacare, but worry about what would come next, while Obamacare’s business mandates are a known quantity for now. “If Republicans win and I’m a business providing health insurance, I have a hard time knowing what to expect,” Pauly notes.
In a similar way, Republicans have a more aggressive plan for reducing the Medicare funding shortfall by subsidizing participants who would shop for health insurance on the free market. But polls show that many Americans worry they would then end up shouldering more of their own health care costs in retirement, so it is unclear Republicans would push for all the changes they have proposed even if they swept the election.
On the other hand, says Pauly, Democrats have yet to propose a clear plan for preserving the current Medicare system for the long term, making the outlook unclear for future beneficiaries. “That kind of uncertainty, in the short run, is about the worst consequence of all the debate about health care,” he says.
Divided government would also make it difficult, if not impossible, to resolve problems with the 2010 Dodd-Frank financial reform law, which has business-dampening features like heavy reporting requirements to multiple agencies, Herring says. One of that law’s key goals was to prevent the need for future bailouts of financial services companies deemed “too big to fail,” but there are serious questions about whether the Dodd-Frank safeguards would work, he adds.
The stock market, after plunging in 2008 amid the financial crisis, has recouped nearly all of its losses. But Herring notes that a key factor in this rebound was the Federal Reserve’s efforts to keep interest rates low. Stocks may not do as well after these efforts end, as they must at some point. “We’re clearly relying much too much on monetary policy,” he says. “The Fed has basically been turning cartwheels” to bolster the markets and economy.
The alternative — better fiscal policy to reduce the danger from factors like the federal government’s huge deficits and debt — seems unlikely given divided government, according to Herring. As things stand now — and are likely to stand after the election — major problems like the deficits, debt, growing health care costs and eventual insolvency of Medicare will be kicked down the road to be dealt with later, after they have become worse and the solutions more costly, he predicts. “If we actually wait until there’s no choice, it’s going to be very painful.”
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Longer-term Inflation Expectations Spike in Reaction to the Fed
Friday, September 14th, 2012
by Sober Look
Last Friday’s action (discussed here) indeed turned out to be a good indicator of how markets in the current environment would react to Fed’s balance sheet expansion. Markets performed as expected: commodities and equities spiked, the dollar weakened, and the treasury curve steepened.
The MBS purchases the Fed has promised today (discussed here) will result in taking out medium to shorter duration paper out of the market. Even your average FNMA 30y 3% coupon bond has a duration of 6-10-years – depending on treasury yields.
Source: Bloomberg
That means QE3 purchases will not directly impact longer duration bonds (at least not as much as the 5yr notes). The longer term part of the curve will therefore be driven by inflation expectations. And longer term inflation expectations, as implied by the TIPS yields, rose sharply today.
10y inflation expectations (10y breakeven)
The combination of the Fed’s expected shorter duration purchases and longer term inflation expectations forced the treasury yield curve to steepen. The market is beginning to price in rising inflation and there is only so much negative real yield investors will tolerate.
Tags: Commodities, Equities
Posted in Markets | Comments Off
Overbought and Oversold ETFs (Bespoke)
Friday, September 14th, 2012
Of the 200 or so key ETFs across all asset classes that we track in our daily ETF Trends report over at Bespoke Premium, 95% are currently trading above their 50-day moving averages. That’s about as high as the reading has gotten over the past few years. And the majority of the 10 ETFs that are trading below their 50-days are fixed income ETFs. It has been a good few months for risky assets.
Below is a list of the ETFs from our report that are trading the farthest above their 50-days. As shown, Spain (EWP) and Italy (EWI) rank #1 and #2, and both countries are trading more than 15% above their 50-days. On July 23rd, Spain was the most oversold ETF, while Italy was the fourth most oversold! Two silver products (DBS and SLV) rank 3rd and 4th, followed up by Europe (FEZ) in 5th.
The US Dollar (UUP) is actually the farthest below its 50-day at -3.21%. The 20+ year Treasury ETF (TLT) is the second farthest below at -3.19%. Just a few months ago, the Dollar and Treasuries were the only asset classes going up. Now they’re the only ones going down.
When You Should Stop Buying Gold
Friday, September 14th, 2012
September 13, 2012
Economists and politicians have debated the merits of gold for decades. In the last 10 years, the discussion has been even more hotly contested, as the price of the yellow metal has skyrocketed. Ron Rimbus, CFA, in a blog for the CFA Institute, is the latest person to take on the subject.
Rimbus argues that the intrinsic value of gold is intricately linked to what’s going on in the financial system, even after the end of the gold standard in 1971. He writes,
“Just because the world switched to a fiat money system, does not mean that the virtues of gold have changed at all in the past 40 years. Quite the contrary, the virtues of gold have remained the same. It is the political climate that has changed. The hardest thing for an investor to wrap his mind around is that the intrinsic value of gold is not a singular price per se. Rather, gold derives its value as a put on government finances. The more egregious the fiscal and monetary policy, the most valuable gold becomes.”
A “circular loop of debt and easy money,” as Rimbus puts it—skyrocketing debt burdens held by the largest economies along with the fact that these nations seem to lack the courage for fiscal discipline—should make gold all the more valuable to investors.
He concludes by saying, “When the world appears ready to give up on debt and easy money, then you should give up on gold … but not a moment sooner.”
Read Ron’s post to find out when you should stop buying gold.
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