Tag Archives: Federal Reserve

03/16/17

NO CHANGE IN THE MONETARY TIMETABLE

By: Kent Engelke | Capitol Securities

As expected, the Federal Reserve raised its benchmark lending rate a quarter of a point and continued to project two more increases this year. A minority had thought that the committee would suggest three increases as possible in 2017 given sentiment and employment levels.

Because the monetary timeline was left unchanged, stocks advanced and Treasuries surged. The dollar fell and oil rallied.

Commenting on the Treasury market, was the advance fueled by short covering, the result of the committee leaving its 2017 and 2018 forecasts unchanged? All must remember that over 90% of the trading in the Treasury market is the result of algorithmic or technology based activity.

One can make the case because of the strong advance in Treasuries, more than a minority expected the Fed to change its monetary policy timetable and expectations.

As also indicated, oil gained over 2.25%, the result of a falling dollar and inventory levels. Inventories have been growing over the preceding weeks, growth I believe was the result of OPEC’s decision to pump all out in the months leading to the January 1 production cut.

I had verbally commented that inventories may be on the verge of declining because it historically takes about 45-60 days to ship the oil once pumped, thus suggesting the current production glut is in its final hours. The International Energy Agency (IEA) echoed a similar view Tuesday evening.

I also verbally remarked about falling super oil tanker rates, down about 45% from January 1, the result of empty tankers sitting idly with no charter rates. For about 30 months, tanker rates were achieving consecutive record highs, the result of strong demand from OPEC countries. Are falling tanker rates a harbinger of falling inventories? Logic and history suggest yes.

What will happen today?

Last night the foreign markets were up. London was up 0.92%, Paris was up 0.67% and Frankfurt was up 0.84%. China was up 0.84%, Japan was up 0.07% and Hang Sang was up 2.08%.

The Dow should open nominally higher. Oil is up on inventory drawdowns, the FOMC’s dovish message and a pro-European victory in the Netherlands. The 10-year is off 8/32 to yield 2.52%.

03/2/17

IS DONALD TRUMP MORE POWERFUL THAN THE FEDERAL RESERVE?

By: Kent Engelke | Capitol Securities

Are the equity markets now rewarding tighter monetary policy? About 14 months ago, following the first increase in interest rates in about eight years, I opined the Federal Reserve just gave the “all clear signal.” Equities however were crushed during the following eight weeks, a rout that ended in mid-February 2016.

I had postulated a major reason for the considerable selloff was cross correlated and algorithmic trading as interest rates are a primary component of most valuation formulas. I also stated that any time since 2010 when there was any hint of a change in monetary policy, equities fell.

Fast forward to today. According to Fed fund futures, there is now an 80% chance of an increase in interest rates at the March FOMC meeting and for the first time since at least 2007, the market has fully discounted proposed Fed policy which is three interest rate hikes for the year.

As evidence to this view, I point to not only Fed funds futures, but also to the two-year treasury or the instrument most sensitive to monetary policy. The two-year treasury at a 1.31% yield is at the highest level since 2009.

There are several reasons for the radical change in the market’s expectations of monetary policy. Foremost is the PCE deflator, or a primary inflation indicator of the Federal Reserve. Currently it is at 1.9%. The FOMC’s mandated speed limit is 2.0%.

In every dimension monetary policy is extremely simulative, suggesting the overnight rate should be between 2.75% and 3.25% versus today’s current rate of 0.5%. Stating the overnight rate can rise to 1.25% is not superlative. In fact, such a level is still considered extremely simulative.

Equities have been strong since the election, predicated upon tax and regulatory relief, smaller government and infrastructure spending. I will also add I believe there is a complete breakdown of cross correlated trading which caused many sectors of the markets to plunge from June 2015-February 2016.

At some juncture, higher interest rates will impact the markets, especially the largest capitalized momentum issues that everyone owns because of the proliferation of ETFs and index funds. Moreover, the valuation of these issues can further become challenged because of the change in the geopolitical and macro-economic environment from globalism to nationalist economics.

What will happen today?

Last night the foreign markets were mixed. London was down 0.05%, Paris up 0.24% and Frankfurt up 0.05%. China was down 0.52%, Japan up 0.88% and Hang Sang down 0.20%.

The Dow should open flat. The 10-year is off 5/32 to yield 2.48%.

02/15/17

WAS FRB CHAIR YELLEN’S TESTIMONY A NONEVENT?

By: Kent Engelke | Capitol Securities

If one uses fed fund futures, which are a gauge of market sentiment, FRB Chair Yellen’s testimony was almost a nonevent. Before she began testifying, the market was suggesting a 30% probability of a change in monetary policy in March. Now it is 34%.

Yellen said the Fed panel’s outlook for a “moderate pace” of growth is based on continued stimulative monetary policy and a pickup in global activity. She did not mention Trump administration proposals as a key element in the central bank’s forecast.

The Chair stated that consumer spending has continued to rise at a “healthy pace,” supported by gains in household income and wealth, favorable sentiment and low rates. The Fed chief said changes in fiscal and economic policies could affect the outlook, though she declined to speculate how, adding it is “too early to know” what policy changes will be put in place.

The longer dated Treasury market however had a different view of Yellen’s remarks. The 10-year increased in yield to around 2.50%. Last week, it was yielding about 2.32%. Will yields climb to December’s peak of 2.60%? The 30-year Treasury rose to 3.09% versus last week’s level of 2.92%. In December, the 30-year hit a 3.18% yield.

Did yields advance because of Yellen’s remarks suggesting a gradual increase in the overnight rate, which then may suggest the central bank could fall behind the proverbial inflationary curve?

Speaking of which, wholesale prices jumped in January by the most since September 2012, led by higher gasoline costs, thus suggesting inflation is beginning to stir. The 0.6% gain in the PPI followed a 0.2% advance in the prior month. Consensus called for a 0.3% rise.

Equites led by the financials, staged an advance on economic optimism.

Last night the foreign markets were up. London was up 0.49%, Paris up 0.50% and Frankfurt up 0.10%. China was down 0.15%, Japan up 1.03% and Hang Sang up 1.23%.

The Dow should open quietly lower assessing Yellen’s comments. The 10-year is off 3/32 to yield 2.49%.

06/24/15

Expect A Wave Of Consolidation In The Oil Industry

As stated previously, asset monetization by small E&P operators will start in earnest in the second half of this year out of cash flow necessity. Most, if not all, smaller market capitalization companies, public or private, are still free cash flow negative (operating cash flow less capital expenditure) and only a few of the larger ones are now, or will be, based on guidance. The point is, with volumes languishing (and probably poised to decline) tied to a flat oil futures price curve and with economics marginal at $60 per barrel, many E&P operators find themselves running through hedges in 2015 and still in need to finance their already reduced capital spending.

With Wall Street unwilling to lend anymore and prospects of fall credit line redeterminations looming, further reducing liquidity, it is likely small E&P operators will turn to either mature producing asset sales or, more likely, to undeveloped assets which require more capital spending. We are seeing this being factored into stock prices as we speak, as small cap E&P valuations have collapsed to 4-6 times the Enterprise Value/Earnings Before Interest, Taxes, Depreciation, and Amortization (EV/EBITDA) from 6-8X EV/EBITDA. This not only reflects solvency risk but also the natural course of bringing assets to a price more in line with their underlying sale value.

Wall Street is famous for getting public prices at levels that magically make deals happen and, with better funded E&P companies trading at substantial premiums vs. the leveraged ones, this is what is occurring. Take the collapse of Goodrich Petroleum (GDP) as a prime example as to what is now taking place and what will continue through the latter half of this year. Here is a company with $100million in liquidity but who continues to be free cash flow negative on current strip pricing in 2015 & 2016. However, it has a capital spending budget of $100 million for 2015 and 2016 and a free cash deficit of $60 million-$80 million in each of 2015 and 2016 depending on asset price assumptions. To plug the hole it hopes to sell its Eagle Ford assets this year.

This isn’t intended to make a case on GDP but to demonstrate the quantifiable ongoing stupidity of perpetuating models that aren’t self-funded which were being fueled by easy money from the Federal Reserve. This also demonstrates how the OPEC strategy of maintaining an oil price ceiling is affecting U.S. E&P companies, forcing a consolidation which I believe will be unprecedented in size and scope. This will eventually improve the industry cash flow break even points, based on improved cost and scale and, as a result, cast doubt over the long term viability of the OPEC strategy. It appears the Saudis, despite being educated here in the US, have neglected their capital market & economic classes as we are witnessing the E&P model self-correcting itself. State run oil companies don’t do this very well and usually fail to adjust to price movements while free market capital-based societies do.

The revival of the US oil industry will occur after the upcoming consolidation and will reduce the number of cost inefficient players as well as the short selling in group while ultimately, self-healing the industry by improving cash flows, given the likelihood of oil remaining below $100. I fully expect valuations to expand in 2016, once the wave of asset sales starts in the months ahead. These operators with plenty of cash will be the biggest beneficiaries.

On a final note, listening to the Federal Reserve yesterday it was clear that the pressure on the dollar rise is being lifted as they now realize that, despite attempts to fudge economic statistics, the US economy is in recession and rate hikes are a farce based on hope and little else. Expect the dollar to weaken considerably, breaching the 2015 lows thus supporting oil prices now and into 2016. This reality is not baked into expectations and the 1-2 percent dollar correction which took many by surprise is only the beginning.

Source: http://oilprice.com/Energy/Crude-Oil/Expect-A-Wave-Of-Consolidation-In-The-Oil-Industry.html

By Leonard Brecken of Oilprice.com

06/3/15

QE is Back! $1 Trillion per quarter | Jim Willie

IN PART 1:
​- The Federal Reserve is using Belgium, Luxembourg, Ireland, the Cayman Islands, and Switzerland to export over $1 trillion of QE per quarter.
– U.S. Treasury Bond market volume is dangerously low. What lies ahead for US Treasury Bonds?
– China has taken control of the International Monetary Fund.
– The Eastern banking system will not accumulate U.S. Treasury Bonds anymore. Instead, they will convert U.S. Treasury Bonds into Gold bullion. Will the entire world follow suit?
– In what way will Silver play a role in the new monetary system?

IN PART 2:
– The conversion to Gold bullion by Eastern nations will be seen as a declaration of financial war. How can the U.S. government respond?
– Jim Willie’s two biggest disappointments about the big picture.

05/30/15

The Americans

By: Paul E. Vallely and Charles Jones
The American Report

Published by Stand Up America

For: Limited Distribution

The AMERICANS strongly believe that life, liberty, citizenship and the pursuit of happiness are the unalienable RIGHTS of every American Citizen that cannot be taken or transferred. However, not until We the People become brutally frank with ourselves and with each other will the Constitution be taken off the shelf and once again become operational. Only then can the Republic can be restored and preserved in its original ordained Constitutional Power and form.

We The People have suffered enormously since 1913 under the combined rule of two domineering political parties of 536 elected politicians along with those they have appointed. Tax and Spend, along with whatever it takes to rule, is the quest of one of the domineering parties. In the opposing party, weak backbones, failing to stand up and lead for what a majority of citizen voters want, coupled with the elite of the party stealthfully blending in with the tax and spend party, have destructively allowed the confiscation of far too much of the wages and retirement incomes from the citizens who pay income taxes.

These facts are now becoming more recognized with the most recent dastardly additions of: countless political deceptions, lies, national economic destruction, purposeful job-killing, the stealthful demise of America’s middle class, no Administration help for the massive unemployment of Black Americans plus the politically purposeful illegal alien invasion of the United States. Along with forty percent of the people within the fifty state borders who are receiving food stamps. This all is treason to each separate state and to the citizens within the several states and it is perpetuated by the elected and appointed inside the Washington DC beltway.

The Constitution requires that all laws must be faithfully executed, but far too many are not and have not been – – – specifically by the Executive Branch. Nor has the Oversight Power of Congress been exercised to ensure Executive Leadership enforcement of United States laws. These self-serving political failures have become destructive to the well-being, liberty and happiness of most American citizens. It must be recognized that “New Guards” for future personal safety and National Security must peacefully be put into place by citizens beginning with votes at the ballot box. Failed leadership can no longer stand if the Constitution and the Republic are to be preserved for our children and all future generations.

A deep look has been taken into the several national crises by “The Americans” leadership who care greatly about the Republic, the People and the Constitution. Necessary and workable solutions have been developed to help solve and fix what has without question stunted our Nation’s ability to clearly, legally and peacefully function as a Constitutional Republic.

KEY NATIONAL ISSUES that must be solved if the separate and collective States of The United States of America are to become economically solvent, remain peaceful and nationally secure are:

  • The Constitution of the United States as originally established and amended will remain in absolute and total effect. The original XIII Amendment as written and ratified is an operational Amendment and will be adhered to immediately. (The original XIII Amendment was falsely hidden by less than honorable men of the times). Congress shall make all laws necessary for carrying into execution the Powers authorized in the Constitution and that all bills for raising revenue shall originate in the House of Representatives. Constant Congressional leadership oversight will be maintained at all times. All Laws requiring Executive action will be faithfully executed upon receipt from Congress by the President and appropriate departments and selected agencies of Government under the President’s sworn responsibility and authority.
  • A strong National Defense of well-trained Active Duty, Guard and Reserve Forces maintained with proper equipment that can deter any enemy activism, or fight and win if deterrence fails will be assured by both the House and Senate of the US Congress for the protection of “We the People” and the preservation of the Constitution and the Republic. Readiness at all times will include a nuclear capability to win if Congress declares war against an enemy aggressor. The United States Military will in no way be used against United States Citizens. To do so will trigger expeditious Congressional actions to immediately and permanently remove anyone exercising such orders from elected or appointed office.
  • The United States Government cannot rebound from the man-made economic crises without satisfactory employment for a majority of American citizens. In turn, satisfactory and sustainable employment for American citizens simply cannot be achieved with the excessive tax rates that now exist for US businesses and the American people. All political plundering of the people’s wealth via taxation will be stopped. Our banking system and wealth management has been corrupted with the 1913 establishment of the Federal Reserve System, placing monetary and economic control in the hands of a few (now partisan) individuals. The Federal Reserve System will be abolished and all US Government financial and economic functions will be turned over to the US Treasury including the coining and printing of currency and the issuing of currency. US green-back bills will be printed and a one –for- one exchange to replace Federal Reserve notes will take place.
  • The IRS will immediately be abolished and that form of US government taxation will cease and desist. A zero-interest National Debt will be established at the US Treasury and a GDP annual growth limit not to exceed 3% will be tied to the previous year GDP growth.  A transition to a “fair or flat” tax must be accomplished as a priority.
  • The Illegal Alien Invasion of the United States will be stopped with a Secured Borders Double Fence on The US Southern Border and more Border Guards stationed on the Northern Border. All US borders will be further controlled and severe penalties (financial and incarceration) for employers who hire illegal aliens. Foreign countries will have named financial and trade restriction obligations to the United States for all of their citizens who come over US Borders illegally. There will be absolutely no jobs, no social services, no welfare nor medical services allowed to be provided to illegal alien invaders. (Emergency medical care only will be provided until they deported to home from which departed). American jobs are for US citizens, returning military veterans, part time high school students and the elderly. When US employers cannot find workers and can fully justify seeking foreign workers, Government permission will be granted for hiring temporary foreign workers.
  • The DHS with functions for national security and FEMA for emergencies have both grown far beyond the intentions of reasonable and responsible leadership control, budgeting, manpower, equipment and facilities. Deceptive political intentions for the potential use of facilities, weapons, massive purchases of ammunition plus military-type vehicles and railroad cars are greatly objectionable to American citizens and an insult to the economic deficit of the Nation. America’s leadership needs to be well-versed with the Active Military, County Sheriffs, Local Law Enforcement and National Guard overall capabilities within the continental limits of the United States that can handle any and all emergency situations, foreign or domestic, that might be faced. The DHS will be disbanded and certain functions will be merged into the Department Of Defense (DOD) and the Department of Interior (DOI). The FEMA name will be changed to “The National Emergency Agency” (TNEA) and manpower will be greatly reduced and merged into the DOI to be used for national emergency situations only. Their budget and emergency dispatch activities in the east, central and western parts of the country will be managed through the three numbered Air Forces of the Air Force Reserve Command.  All weapons, munitions and military-type vehicles will be transferred to the DOD immediately. All holding and or compound-type facilities will be closed and transferred permanently to local governments for non-detention uses only.
  • The Department of Energy will be abolished and certain specified oversight functions would be moved to the Department of Commerce.
  • The Department of Education will be abolished and its functions and all funding responsibility will be returned to each individual state, territory and the District of Columbia.
  • The Environmental Protection Agency (EPA) will be abolished with responsibilities and functions removed to each individual state. Conflicts will be resolved at the Department of Commerce while working with the states.
  • In addition, selected Agencies will be moved from the National Capitol area and disbursed into the interior for cost-effective and long-term security reasons as well as seeking more diversified hiring of high quality civilian personnel throughout a larger portion of the Nation. (Rust-belt areas of high unemployment in the mid-west and other locations of far greater physical expansion capability will be given priority consideration for these moves and jobs.
  • The partisan and destructive Democrat Affordable Health Care Plan will be repealed and pre-2009 Medicare Programs will be fully reconstituted. Necessary changes and revisions to the existing Social Security System to ensure self-funding.
  • The Executive order that allows unions to exist in government and do collective bargaining in any and all tax-payer funded government jobs will be rescinded.
  • It will be the policy and understanding within the entire Republic to recognize each County Sheriff as the Elected Senior Law Enforcement Officer in each respective County and that a well-regulated militia, if formed, will be responsive to his Constitutional Sworn Oath as necessary requirements for security of a free state.
  • The United Nations will be defunded from the excessive monetary proportions US taxpayers have been forced to fund and a strong effort will be made to move this overbearing activity out of the United States. Politicians must come to realize that no United Nations deliberations can override the US Constitution.
  • Education, kindergarten through grade twelve, is a fundamental right for American school-age children and is a responsibility of county or city taxpayers to insure funding for that right. Citizen school children in far too many public schools have been denied that fundamental right to an education due to handicaps in classroom and interferences caused by countless non-English speaking children plus overcrowding and scarce tax dollars used to accommodate illegal alien school children. In addition to US Borders becoming secure, the 5 to 4 decision by the Burger Supreme Court that allowed all who choose to attend American taxpayer-funded schools regardless of citizenship will be revisited using Chief Justice Burger’s dissenting opinion as grounds for new litigation.
  • Defund the United Nations and have moved from New York to a location such as Athens, Greece, where the original nation-state was established.
  • Begin a systematic process to reorganize the Department of Defense into an organization of National Security that can prepare us for today and tomorrow with “forward strategies” that secure America.

It is the general consensus of The Americans Project that If the Republican Party does not hold the line in the US House of Representatives to secure the Southern US Border, plus demand existing immigration laws be faithfully executed by the Executive Branch, then stop all Senate Immigration Reform and also stand firm for defunding Obama-care, the results will be the demise of the Republican Party in the 2014 and 2016 elections. The 2008 and 2012 Presidential elections were lost because many Republican and Independent voters stayed home. There must be Honest National Leadership in place for the America First voters who care about the Constitution, the Republic and a secure future for their children.

Independent Constitutional Leadership selected by The Americans Project will be that Leadership. It will also become more evident to the voters that the course the Democrats have planned for America is destructive far beyond the imagination. This nation is being torn apart daily as the crises facts become known. Also most disturbing to Americans who care is the fact many are not confident We the People have a Constitutional Government in place because to this date absolutely no one has seen one document verifying Constitutional qualification of the person occupying the White House. Congress ignores all petitions for a redress of grievances and the Judiciaries at all levels of government have dismissed every attempt at addressing a legal option. The Democrat Party leadership signed two separate and different documents certifying eligibility to run for office as well as re-election eligibility. This is pure and simple elected and appointed sworn politicians run amuck. Enough is enough. If the United States of America and the separate states are to survive these greedy self-serving destructive political onslaughts, new leadership in existing elective offices is a must for every citizen.

Our government (all branches) of, by and for the people has lost control and has led us down a very destructive path of tyranny, corruption, cover-ups and deceit. We have to a degree lost the necessary checks and balances designed to provide an essential balance of power. That has led to a far-reaching federal government and an infringement on states’ rights. We must save the Republic and the country before we get to the point of no return. A National Call to Action is required by all of us to get our country on track! God save the Republic!

THE AMERICANS PROJECT

Paul Vallely
Major General, US Army (Ret)

Charles Jones
Brigadier General US Air Force (Ret)

05/12/15

This one policy has correlated with higher unemployment, more bankruptcies and greater inequality. Can you guess what it is?

By: Benjamin Weingarten
TheBlaze

In a new book titled “The Floating Kilogram,” former long-time Wall Street Journal editor and founder of the New York Sun Seth Lipsky makes an impassioned, reasoned, common sense case for returning America to sound money in the form of the gold standard.

Much like Steve Forbes and Jim Grant with whom we have touched on this issue before, as Seth and I discussed during an in-depth interview, Lipsky believes there is significant economic and moral merit to backing currency with a tangible asset, with benefits for all Americans.

One of his more interesting and overlooked arguments concerns some of the devastating consequences for the country since we officially severed the link between the dollar and gold under President Nixon in 1971. Lipsky explains:

From 1947 when [the] Bretton Woods System really got operating to 1971, when the dollar was convertible into gold at a 35th of an ounce, unemployment in America averaged 4.7 percent. And then we got rid of the Bretton Woods system — we defaulted on it — we went to fiat money, and in the years from 1971 to today, unemployment has averaged significantly above 6 percent. Low unemployment: gold standard. High unemployment: fiat money.

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But it’s not just unemployment. The bankruptcy rate which Elizabeth Warren likes to focus on was one point something per thousand for years, and suddenly it shot up. When did it do that? The mid-1970s when we went off the gold standard and moved to the age of fiat money.

And you’ve no doubt read about this economic Thomas Piketty who likes to warn about the inequality rate. It was trending gently downward for years and suddenly it began to shoot up. That was the mid-1970s when we abandoned the gold standard and went to a system of fiat money.

So there are a lot of reasons to start looking at this and to see whether the absence of a sound dollar is the root cause of our system of growing inequality and high unemployment and lack of jobs and high bankruptcy rate, and to see whether something can be reformed so as to bring us back to a system of sound money. [Links ours]

The title for Lipsky’s book, “The Floating Kilogram,” reflects an editorial published in 2011 in his New York Sun, in which Lipsky asked the question, “Why don’t we let the kilogram float?” The implication is that if weights and measures are no longer defined, why shouldn’t the kilogram — a man-made measure which the New York Times noted may have been losing mass — fluctuate just as a dollar fluctuates in value. Lipsky wrote:

[H]ere in the modern age, the members of the Federal Reserve Board don’t worry about how many grains of silver or gold are behind the dollar. They couldn’t care less. And when the value of a dollar plunges at a dizzying rate, the chairman of Federal Reserve, Ben Bernanke, goes up to Capitol Hill and, in testimony before the House, declares merely that he is “puzzled.” No “new urgency” to redefine the dollar for him. The fact is that we’ve long since ceased to define the dollar, and it can float not only against other currencies but against the 371 ¼ grains of pure silver.

So why not the kilogram? After all, when you go into the grocery to buy a pound of hamburger, why should you worry about how much hamburger you get — so long as it’s a pound’s worth. A pound is supposed to be .45359237 of a kilogram, of course. But if the Congress can permit Mr. Bernanke to use his judgment in deciding what a dollar is worth, why shouldn’t he — or some other PhD from Massachusetts Institute of Technology — be able to decide from day to day what a kilogram is worth?

During our interview which you can listen to in full below, we discuss the fundamental flaws in and immorality of floating fiat money and several other topics including:

Note: The link to the book in this post will give you an option to elect to donate a percentage of the proceeds from the sale to a charity of your choice. Mercury One, the charity founded by TheBlaze’s Glenn Beck, is one of the options. Donations to Mercury One go towards efforts such as disaster relief, support for education, support for Israel and support for veterans and our military. You can read more about Amazon Smile and Mercury One here.