the newest Gross-acon

Investors should position for eventual inflation as the“end stage of a supernova credit explosion” is likely to produce more inflation than growth by holding Treasury Inflation Protected Securities, Gross wrote. “Get used to slower real growth; QE and zero-based interest rates have negative consequences.

“Transition from financial to real assets if possible at the margin,” Gross wrote in the note today. “Buy something you can sink your teeth into - gold, other commodities, anything that can’t be reproduced as fast as credit.”

Build the mountain of Bernanke and they will come….

Fed Maintains $85 Billion Pace of Purchases as Growth Pauses

“Although strains in global financial markets have eased somewhat, the committee continues to see downside risks to the economic outlook,” the FOMC said.

The purchases will remain divided between $40 billion a month of mortgage-backed securities and $45 billion a month of Treasury securities. The central bank also will continue reinvesting any Treasury securities that mature and will reinvest its portfolio of maturing housing debt into agency mortgage-backed securities.

The Fed repeated that the purchases will continue “if the outlook for the labor market does not improve substantially.”

Kansas City Fed President Esther George dissented from the statement, saying she was concerned that -

“the continued high level of monetary accommodation increases the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations.”

GDP 4Q12

The 4Q12 GDP report is a shocker, falling 0.1% on the quarter. However, the underlying data is not nearly as bad as it looks. The two categories of activity which need to be stronger were. Personal consumption rose 2.2% on the quarter, a better pace than the 1.6% in 3Q. Private investment was buoyed by a strong quarter of business investment in equipment and software which rose 12%. This was much better-than-expected given the various uncertainties during the final quarter of the year. And the categories which were expected to fall back did, only they fell back even more-than-expected. There was a 15% decline in Federal spending which helped to drag 1.3% from the final GDP number via overall government spending. Private inventories also dropped sharply pulling another 1.3% from the GDP total.

moving up....

The 10-year Treasury sold off yesterday morning until the yield broke through 2.00%. After doing so, support finally came back in for Treasuries and they rallied a few basis points lower through the remainder of the day. This was the first time the 10-year yield has reached 2.00% since April. Coming into this morning, the yield is back at 1.97%. Stocks were flat yesterday as investors are increasingly anxious about how high they have run.

The S&P is just over 1,500, its highest price since 2007. However, the P/E multiple today is below 15 and it was between 17 and 18 back in 2007. If the market traded back to a 17.5 multiple with today’s earnings, it would mean another 17% increase, giving the bulls more reason for optimism. Fundamental valuations should be lower today, though, as the longer-term growth outlook is weaker than it was five years ago.

Moreover, much of the recent run in stocks is surely the result of Fed asset purchases which will presumably end at some point.

The Market Today ONLINE

Deleveragi​ng - the continuing story

Why Deleveraging Still Rules Markets in 2013

By A. Gary Shilling Jan 27, 2013

Deleveraging: The financial sector began its huge leveraging in the 1970s, as the debt-to-equity ratios of some financial institutions leaped. The household sector followed in the early 1980s. That’s when credit-card debt ballooned and mortgage down payments dropped from 20 percent, to 10 percent, to 0 percent. We even reached negative numbers at the height of the housing boom as home-improvement loans added to conventional mortgages pushed debt-to-equity ratios above 100 percent.

10 Years

The deleveraging process for both of these sectors has begun, though it has a long way to go to return to the long-run flat trends. I foresee about five more years of deleveraging, bringing the total span to about 10 years, which is about the normal duration of this process after major financial bubbles.

http://www.bloomberg.com/news/2013-01-27/why-deleveraging-still-rules-markets-in-2013.html

the mountain of bernanke

The graphic……pretty much speaks for itself!

The mountain that Bernanke built….

May the bubbly flow…..and may the increased pace be with you.

Fed Pushes Balance Sheet to Record $3 Trillion on Bond Buying

By Joshua Zumbrun -Jan 24, 2013

The Federal Reserve pushed its balance sheet beyond $3 trillion for the first time this week while undertaking open-ended purchases of Treasuries and mortgage-backed securities to combat 7.8 percent unemployment.
The Fed’s total assets climbed by $48 billion in the past week to $3.01 trillion as of Jan. 23, according to a release from the central bank today in Washington. Holdings of Treasuries climbed by $7.8 billion while mortgage-backed securities in the Fed portfolio rose by $35.6 billion.
The bond buying is part of Chairman Ben S. Bernanke’s campaign to use the full force of the central bank’s balance sheet to stoke the economic recovery. The Fed began purchasing $40 billion of mortgage-backed securities a month in September and this month added $45 billion inTreasury securities to that pace, bringing total monthly purchases to $85 billion.
The Fed’s balance sheet is now more than triple its size before the financial crisis. Fed assets stood at $924 billion on Sept. 10, 2008, the week before the bankruptcy of Lehman Brothers Holdings Inc. helped spark a global financial crisis.
The Fed responded to the financial crisis first with emergency credit programs, and then with bond purchases known as QE or quantitative easing. In the first round of purchases, the Fed bought $1.7 trillion of securities. In a second round of QE, begun in November 2010, the central bank added an additional $600 billion of Treasuries to its holdings.
Fed officials have said their $85 billion pace of purchases will continue until the labor market improves “substantially.”
To contact the reporter on this story: Joshua Zumbrun in Washington at jzumbrun@bloomberg.net
To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net

mortgage apps

Refinance appears to have reached this cycle's peek - will the drop off be precipitous?
Purchase still reflecting flat line status......

roller coaster ride down....wh​at will the ride back up look like?

The beginning of an upward trend developing….

quote of the year

“Uncertainty is becoming the new normal”

Consumer Confidence Index

By Jeanna Smialek -Jan 18, 2013

Consumer confidence in the U.S. unexpectedly fell in January to a one-year low as higher payroll taxes began to take hold.

The Thomson Reuters/University of Michigan preliminary index of consumer sentiment dropped to 71.3, the lowest since December 2011, from 72.9 the prior month. The gauge was projected to rise to 75, according to the median forecast of 74 economists surveyed by Bloomberg News.

Less take-home pay this year after an increase in taxes used to fund Social Security is a hurdle for a pickup spending, as discounters such as Target Corp. (TGT) try to attract shoppers with year-round price matching. At the same time, job gains, rising home values and cheaper fuel may help sustain retail sales.

“Uncertainty is becoming the new normal,” Kurt Rankin, an economist at PNC Financial Services Group in Pittsburgh, said before the report.“Consumer confidence is still depressed.”

Estimates for the confidence measure ranged from 70 to 84, according to the Bloomberg survey. The index averaged 64.2 during the last recession and 89 in the five years leading up to the economic slump that began in December 2007 and ended in June 2009.

The figures are in line with Bloomberg’s Consumer Comfort Index, which dropped last week to a three-month low, reflecting a fourth straight decline in the buying-climate gauge.

The Michigan index of expectations six months from now, which more closely projects the direction of consumer spending, dropped to 62.7, the lowest since November 2011, from 63.8 the prior month.

Current Conditions

The measure of current conditions, which reflects Americans’ perceptions of their financial situation and whether it is a good time to buy big-ticket items like cars, decreased to a six-month low of 84.8, from 87 in December.

While Americans took comfort in resolution of the so-called fiscal cliff, in which lawmakers averted income-tax increases on 99 percent of households, payroll taxes went up. As part of its budget agreement on Jan. 1, Congress agreed to let the tax, used to pay for Social Security benefits, return to its 2010 level of 6.2 percent from 4.2 percent. That reduces the paycheck by about $83 a month for someone who earns $50,000.

“Things like increases in payroll taxes are not a positive from my perspective,”Howard Levine, chief executive officer atFamily Dollar Stores Inc. (FDO), the second-largest U.S. dollar-store chain, said on a Jan. 3 earnings call. “What I think happens is there will be some further impact to our core customer as a result of some of these tax increases. But I also think we’re positioned very nicely for a trade-down customer.”

Retailer Discounting

Target, the second-largest U.S. discount retailer, said earlier this month that it plans to match the prices year-round charged by e-commerce sites of Amazon.com Inc., Wal-Mart Stores Inc., Best Buy Co. and Toys “R” Us Inc. in a bid to boost sales.

The new policy combines Target’s holiday-season price policies into one year-round and easy-to-use system, the Minneapolis-based company said in a statement. Target’s stores will also match the prices of goods found on its own website, it said.

Still, consumers have benefited from rising home values and cheaper fuel prices. A gallon of regular gasoline at the pump averaged $3.29 nationally yesterday, down from a recent high of $3.87 in September, according to AAA, the biggest U.S. motoring group.

Debt Ceiling

Further debate over government spending and raising the debt ceiling may restrain optimism.

Automobile sales, meantime, have been a bright spot as consumers take advantage of cheaper borrowing costs. Motor vehicle purchases are expected to grow in 2013 by 3 percent, Jim Lentz, U.S. sales chief for Tokyo-based Toyota Motor Corp. (7203), said at an industry conference this week.

“The U.S. economy is expected to continue to improve,” Lentz said. “Consumers appear to be more upbeat about the business and labor conditions.”

Consumers expect an inflation rate of 3.4 percent over the next 12 months, compared with 3.2 percent in the prior survey, today’s report showed. Over the next five years, Americans expect a 2.9 percent rate of inflation, the same as in the previous report.

To contact the reporter on this story: Jeanna Smialek in Washington at jsmialek1@bloomberg.net
To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net

stay bubbly my friend

Bubble, bubble, toil and trouble…..bubbles away, bubbles for all!

I don't normally imbibe in bubbles but when I do I like Bernanke's Fed bubbles - stay bubbly my friend.

Fed Concerned About Overheated Markets Amid Record Bond-Buying

By Craig Torres -Jan 17, 2013

Federal Reserve officials are voicing increased concern that record-low interest rates are overheating markets for assets from farmland to junk bonds, which could heighten risks when they reverse their unprecedented bond purchases.

Investors have been snapping up riskier assets since the Fed boosted its bond buying to reduce long-term borrowing costs after cutting its overnight rate target close to zero in December 2008. Enthusiasm for speculative-grade bonds is at unprecedented levels, driving a Credit Suisse index that tracks the yield on more than 1,500 issues to a record-low 5.9 percent last week.

Now, as central bankers boost their stimulus with additional bond purchases, policy makers from Chairman Ben S. Bernanke to Kansas City Fed President Esther George are on the lookout for financial distortions that may reverse abruptly when the Fed stops adding to its portfolio and eventually shrinks it.

“Prices of assets such as bonds, agricultural land, and high-yield and leveraged loans are at historically high levels,” George said in a speech last week. “We must not ignore the possibility that the low-interest rate policy may be creating incentives that lead to future financial imbalances.”

Bernanke himself raised that concern this week, saying the central bank has to “pay very close attention to the costs and the risks” of its policies during a Jan. 14 discussion at the University of Michigan’s Gerald R. Ford School of Public Policy in Ann Arbor.

The 59-year-old Bernanke, who helped the U.S. economy weather the worst financial crisis since the Great Depression, finishes his second term in a year and his legacy will be defined partly by whether the Fed withdraws stimulus without causing a collapse in markets that hurts economic growth.

Policy makers in recent weeks have voiced concern about market imbalances.

Fed officials are “worried” and “working very hard on trying to make sure that we are aware of where imbalances or distortions are showing up and we don’t go too far down the road before we try to address those,” Philadelphia Fed President Charles Plosser said to reporters last week.

“Policy makers are right to worry about the risks to financial stability from large-scale asset purchases,” said Richard Barwell, a former Bank of England economist now at Royal Bank of Scotland Group Plc. “There is a delicate balancing act between providing much needed stimulus and encouraging another search for yield with investors over-stretching themselves.”

Monitoring Conditions

Bernanke said this week that the central bank since the financial crisis has “increased enormously the amount of resources we put into monitoring financial conditions.”

Bernanke set up a new Office of Financial Stability Policy and Research headed by Nellie Liang, an economist, to conduct financial system surveillance. Daniel Tarullo, the Fed governor in charge of bank supervision and regulation, established the Large Institution Supervision Coordinating Committee (LISCC), a group of economists, quantitative modelers, lawyers, payment systems specialists and reserve bank supervisors who look for risks among the largest financial institutions. (and what were they doing before??)

Both groups seek to identify the links between financial firms that could rapidly spread instability, much like subprime assets during the financial crisis last decade.

While saying officials need to be “open-minded” about how monetary policy can lead to excessive valuations, Bernanke said this week he considers supervisory tools “the first line of defense” against asset-price bubbles. (yep…it worked in the past!)

Yet bank regulators don’t always act quickly enough to defuse challenges to financial stability, said Sheila Bair, former chairwoman of the Federal Deposit Insurance Corp.

“Sometimes we know a lot and the problem is we are not acting on what we know,” said Bair, a senior adviser to The Pew Charitable Trusts. “I worry that there is still too much” inertia among supervisors of financial firms.

http://www.bloomberg.com/news/2013-01-17/fed-concerned-about-overheated-markets-amid-record-bond-buying.html

home prices

Trend is heading upward….what will 2013 bring? A continuation or a market lull…..

Here's a look at trajectory of home prices since 2002:

direction for 2013?

Peaked at end of 2011, downward trend during 2012; what will 2013 hold?

Fed’s Plosser Says Stimulus May Backfire, Fuel Inflation

Federal Reserve Bank of Philadelphia President Charles Plosser said the central bank’s record stimulus risks a surge in inflation and may impair efforts by households to repair their finances.

Plosser's comments:

“Attempts to increase economic ‘stimulus’ may not help speed up the process and may actually prolong it”

“Monetary policy accommodation that lowers interest rates is unlikely to stimulate firms to hire and invest until a significant amount of the uncertainty has been resolved”

"The Fed is looking for evidence of distortions in financial markets that may stem from a lengthy period of low interest rates and asset purchases."

"Businesses need to be alert to accumulating too much risk from a potential rise in interest rates over time."

…favors halting additional bond purchases because their benefits are “pretty meager” and “there are lots of risks” including disruptions in the economy.

"The more of these assets we have, the more complicated the exit strategy will be”

(Bloomberg; Jan 11, 2013 S. Matthews and C. Salas Gage)

10 yr t-bill moving?

We have been range bound but are we beginning to see a break from the range and a new upward threshold developing? Will the long end of the curve begin to move up as we face (and continue to not resolve) our nation's financial issues and the Fed becomes a split decision...

inflation - to be or not to be

After four years of unprecedented balance sheet expansion and monetary easing by the Federal Reserve, many critics of Fed policy have warned of the potential for massive inflation (or even hyperinflation) as a consequence. Peter Schiff, CEO and chief global strategist of Euro Pacific Precious Metals, is one of them.

Meanwhile, the headline Consumer Price Index most recently showed a 1.8% increase, a number that monetary doves lean on as evidence that there is no inflation and that central banks should not be constrained in their money printing ways.

New York Times columnist and economist Paul Krugman is among those who recently took aim at Schiff for his inflation predictions, saying people in Schiff’s camp need to rethink their approaches to modeling the economy. Schiff in turn has responded in an article and video post, attacking the CPI as “meaningless.”

“It is sheer propaganda,” Schiff tells The Daily Ticker. “Prices are rising at a much more rapid rate than the CPI would suggest.”

Schiff points to changes in methodologies for calculating CPI as one problem. The index reports on price movements and consumer choices and substitutions. Schiff looked at Bureau of Labor Statistics price changes for 20 goods and services between 1970 to 1980 and again between 2002 and 2012, decades that Schiff says were both periods of large deficits and loose monetary policy.

Schiff found that his basket of goods increased 61% faster than CPI for the period between 2002 and 2012. In contrast, his basket rose just 5% faster than CPI from 1970 to 1980.

“How can you believe these statistics when the numbers are so flawed?” Schiff asks in response to his research on CPI. “I don’t care what the government is telling me. If the government weatherman tells me it’s a sunny day and I can see it’s pouring rain, I’m not gonna believe the government, I’m gonna go outside with an umbrella.”

As for the true state of inflation, Schiff argues it’s closer to 7% or 9% and going higher. And he sticks to his claims that we could have hyperinflation if foreign central banks start selling dollars.

(source unknown)

range bound?

Looks like we have been range bound throughout 2011 and 2012 – will we break out of this range in 2013?

Employment Change Indices

Lacker votes against....again

Minutes of the Federal Open Market Committee

December 11-12, 2012

Voting against this action: Jeffrey M. Lacker.

Mr. Lacker dissented because he objected to the asset purchases and to the characterization of the conditions under which an exceptionally low range for the federal funds rate would remain appropriate.

He continued to view asset purchases as unlikely to add to economic growth without unacceptably increasing the risk of future inflation, and to see purchases of MBS as inappropriate credit allocation.

With regard to the funds rate, Mr. Lacker was concerned that linking the forward guidance to a specific numerical level of the unemployment rate would inhibit the effectiveness of the Committee's communications and increase the potential for inflationary policy errors; he preferred qualitative guidance instead.

from FOMC Minutes - December meeting

Financial conditions in the commercial real estate (CRE) sector were still generally strained amid elevated vacancy and delinquency rates. However, prices for CRE properties continued to increase in the third quarter, and issuance of commercial mortgage-backed securities remained at a solid pace in the current quarter.

Residential mortgage rates declined modestly over the intermeeting period, largely in line with the decline in MBS yields. Refinancing expanded a bit further in October and November. House prices continued to increase despite a rise in the proportion of properties sold through foreclosures or short sales. The share of existing mortgages that were seriously delinquent fell in the third quarter but remained elevated.

Consumer credit continued to expand briskly in September, led by sizable increases in auto and student loans. Revolving credit decreased in September but was little changed, on net, over the previous few months. Issuance of consumer asset-backed securities continued to rise at a strong pace. Delinquency rates on consumer credit generally remained low, with the notable exception of student loans.

Bank credit was about flat, on balance, over October and November. Growth in C&I loans and consumer loans was offset by a decline in banks' residential real estate loans. The November Survey of Terms of Business Lending indicated some easing in loan pricing and terms.

M2 growth was rapid in October but slowed in November. Liquid deposits continued to grow at a strong pace, as yields available on alternative money market instruments remained low. Reserves increased over the intermeeting period, in part because of the settlement of the ongoing MBS purchases announced at the September FOMC meeting

http://www.federalreserve.gov/monetarypolicy/fomcminutes20121212.htm