Market Talk

Compliments to the Bank of Japan, for keeping it real.

While the Federal Reserve continues to pretend its easy money policies aren’t juicing commodity markets, the BoJ isn’t afraid to acknowledge the obvious. Colleague Kevin Kingsbury alerted us to this commentary issued by the BoJ last week titled: “Recent Surge in Global Commodity Prices – Impact of financialization of commodities and globally accomodative monetary conditions.”

And if anyone knows a thing or two about accommodative monetary conditions, it’s Japan.

The report certainly gives credit to global economic growth for pushing up commodities, but it also says “speculative investment flows into commodity markets have amplified the intensity of the price surge.”

Here’s a sentence from the summary that should have Bernanke, Dudley and other deniers at the Fed turning crimson: “Furthermore, globally accommodative monetary conditions have played an important role in the surge in commodity prices, both by stimulating physical demand for commodities and driving more investment flows into financialized commodity markets.”

It’s almost embarrassing to watch the contortions the Federal Reserve is engaging in to absolve itself of any role in fueling the run-up in commodity prices since the end of August.

The latest comes in the form of an “Economic Letter” from San Francisco Fed economists Reuven Glick and Sylvain Leduc. That’s right, who better to objectively state that the Fed’s policies aren’t pumping up commodities…than a branch of the Fed? This four-plus pager, best I can tell, rests on the conclusion that the Fed’s QE measures aren’t to blame for the spike in commodity prices because “commodity prices actually tended to fall” following Fed announcements on large-scale asset purchases.

Sounds as if Glick and Leduc aren’t familiar with the old adage “buy on rumor, sell on news.”

For my money, the only “announcements” that mattered were Bernanke’s late-August Jackson Hole speech, which got the whole commodities complex (not to mention stocks) a-running, and the fait accompli announcement November 3rd with the program details. And whether or not commodities dipped on those days — or any other LSAP announcement days — is irrelevant because the trend has remained higher since Jackson Hole.

While some Fed officials have been more frank about the role of QE II in pushing up commodity prices, others have dismissed it out of hand, instead placing the blame squarely on supply and demand and surging growth in emerging markets. Indeed, that’s the official story from the central bank, as if that global growth trend only became obvious seven months ago, coincidentally at the same time Fed chair Bernanke first suggested QE II was a real possibility.

We’ve taken issue with the Fed a few times before (here, here and here) over this “don’t-look-at-me” attitude, pretending its free-flowing liquidity measures aren’t affecting commodity prices. In some cases, like cotton, we’re sure there are legitimate supply and demand issues. But we’re not buying that story for every commodity across the board.

Silly exercises like the one from the San Fran Fed are wholly unconvincing and, as we’ve noted before, only serve to further undermine the central bank’s credibility.

- The Fed is often accused of being behind the curve, and for good reason. Look at this headline that ran earlier on the broadtape, quoting Dallas Fed’s Richard Fisher:

*DJ Fisher: Sees Early Signs Of Unconstructive Market Speculation

Early signs? Take a look at a chart of any commodity or major stock index. Early signs of unconstructive speculation? And this comes from a guy who’s considered to be one of the FOMC’s biggest hawks. Good heavens. Here’s his quote, reported by Newswires’ Frances Robinson in Brussels:

“We have abundant liquidity, now there’s excess liquidity, which is working through the system,” Fisher said. “There are in my view, early signs of speculative activity that I don’t consider constructive.”

If he’s only seeing “early signs,” how far behind the curve do you think the rest of the Fed gang is? By the way, Fisher quipped that protectionism is “the syphilis of economics.” Interesting analogy. What’s the gonorrhea of economics? Probably speculation. It’s bad, but you can get rid of it pretty quickly.

Meanwhile, Philly Fed’s Plosser is dishing up some hawkish comments, saying headline inflation is “all that matters,” and core is just for filtering noise. The frank talk is welcome, but stock market ignores him because his hawkish tendencies are well know.

- US stock markets seemed to find euro strength a source of comfort yesterday, and have frolicked with the single currency again today. But euro’s lost some zest in early afternoon trading and is catching some notice from stocks, which have since pulled back from their earlier highs.

As is often the drill, IBM and CAT together account for roughly 40% of the DJIA’s advance, at this point up 70.

- Now to the absurd file. JPMorgan strategist Thomas Lee takes the cake today for the headline on his morning US equity strategy note: “History showing post-nuclear disaster bounce is 9.6% for the next 3-mos plus negative investor sentiment point to upward bias in next few weeks.”

We kid you not. That’s what he wrote. After nuclear disasters, stocks usually bounce about 10% in the next three months. Uh, yes, sample size is a little small, so be careful taking this one to the bank, citizens.

Question for Mr. Lee: What are the returns for stocks three months after two regimes are deposed in North Africa, another nation erupts in civil war, a third European nation collapses financially and needs a bailout, and the world’s third-largest economy gets hit with a 9.0 earthquake, followed by a tsunami, followed by a nuclear crisis?

(Paul Vigna contributed to this post.)

Sitting out the past week on vacation, one thing I was struck by is the vibe from Wall Street analysts, strategists, pundits, etc., that the stock-market pullback driven by the Japan disaster is just another buying opportunity. Just another chance to load up.

The sense of assurance in the voices of guests on CNBC, or in written missives, reminds me of the same widespread attitude in the months following the tech bubble bursting in early 2000. Every dip was to be bought, stocks were “on sale” and each sell-off just created another “buying opportunity.”

I admit to eventually buying into the logic myself, by picking up 50 shares of Cisco (CSCO) in an IRA in early 2001 after the stock had fallen more than 50% from its 2000 peak. How much further could a blue-chip tech darling like CSCO fall, anyway? Another 60% from where I bought it, that’s how far. Ten years later it still hasn’t recovered all the way.

Looking back, the bursting of the tech bubble seems like a brief rain shower compared to the mayhem in the global picture today. As Paul noted earlier, how can anyone say with reasonable accuracy that “the worst is over”? Simply absurd.

Another grabber while I was away was the Fed noting “that the economic recovery is on a firmer footing.” Maybe so. But how firm can it be if the committee, without a single dissenter, caps off the statement by saying it “continues to anticipate that economic conditions…are likely to warrant exceptionally low levels for the federal funds rate for an extended period”?

If things are firming so nicely, then why not cease with the QE2 and ease up interest rates a quarter or even half a point? Don’t hold your breath for that, citizens. The only thing on firm footing is Ben Bernanke’s loafer, pressing the liquidity pedal to the floor.

Bernanke and company’s continued insistence this week that the Fed’s uber-accommodative policy hasn’t played a role in driving up commodity prices continues to grate, and undermine the central banker’s credibility.

We’ve highlighted the extensive (and comprehensive) list of commodities with rising prices in ISM’s manufacturing survey, with few commodities reported as being in short supply. And no commodities — zilch — falling in price.

Well, no surprise, ISM’s February non-manufacturing survey out today shows essentially the same thing. Count 41 separate items listed as commodities up in price, while only three — cotton, cotton products and electrical components — are considered in short supply. Two commodities were down in price –  computer supplies and janitorial services.

Perhaps there are some nuances to supply and demand, and their effect on commodity prices that Dr. Bernanke has uncovered to explain all this. I’m certainly not an expert, but I can read a chart, and just about every commodity I look at began rising right after the Fed chairman’s Jackson Hole QE2 warm-up speech in late August.

To illustrate this even better, let’s go back to ISM’s reports, pre-Jackson Hole. Take a glance at the August manufacturing survey. Just three — three commodities – up in price (caustic soda, copper and corrugated containers); three down in price (polyethylene, polypropylene and steel) and only one — capacitors — listed in short supply. Continue reading…

Some fresh-air comments from Dallas Fed President Richard Fisher, from a speech today. Expect him to pick up Hoenig’s banner of dissent. Newswires’ Mike Derby reports:

The official said none of his business contacts “are complaining about the cost of borrowing, the lack of liquidity or the availability of capital.”

Instead, “all express concern about taxes, regulatory burdens and the lack of understanding in Washington of what incentivizes private-sector job creation.” He added “all are stymied by a Congress and an executive branch that have appeared to them to be unaware of, if not outright opposed to, what fires the entrepreneurial spirit.”

Derby notes that Fisher “hit back” at the widespread criticism the Fed has gotten in Congress. “Those lawmakers who advocate ‘Ending the Fed’ might better turn their considerable talents toward ending the fiscal debacle that has for too long run amuck within their own house.” Fisher said “the Fed could not monetize the debt if the debt were not being created by Congress in the first place.”

Well said, Mr. Fisher.

One thing’s fairly obvious in this broad stock-market selloff today — every asset that’s benefited from a strong bid courtesy of QE2 expectations is getting hit…hard.

Metals, oil, Treasurys, stocks and the euro all tanking, after a near vertical run-up since the Fed first began to telegraph its easing intentions at the end of the summer. Maybe this selling will end as a bout of short-term profit taking. Perhaps it turns into a well-deserved correction, a consolidation of gains reaped since September. Or could it be something more? At some point, the traders who’ve piled into risky assets at the Fed’s behest will decide the easy money has been made. Time to cash out and go elsewhere. Maybe we’re near that time.

It’s been a rocky week for the Fed’s latest monetary easing plan. Outside of Wall Street, QE2 has been savaged by nearly everyone, raising questions about a program that seems hard to defend. In addition, turmoil in Europe appeared to be under wraps when the QE2 trade really began to catch on, and the latest troubles with Ireland and others in the periphery presents a big fly in the ointment. If gains in the euro — a key beneficiary of the QE2 trade — come undone, so will much of the stock-market rally since September.

We suggested Tuesday there may be some cracks forming in the QE2 trade. It’s become crowded, and we may be seeing the least-committed heading for the exit. Certainly no panic evident in today’s action. But there is a whiff of smoke.

Some interesting action in financial markets yesterday and today, with the US dollar looking perkier, euro having a harder go of it along with stocks, Treasurys retreating and gold still scorching.

Leaves us wondering just a little if the QE2 trade — buy Treasurys, short dollar, buy stocks and commodities — has reached the saturation point. Heading into the Fed’s expected QE2 announcement, we were thinking that expectations for easing were all priced into stocks, at least, and the eventual announcement would likely get greeted with more sellers than buyers. Wrong, as Dow Industrials ripped more than 200 points higher the next day.

Perhaps that was the final capper on the trade, though, since stocks and the euro haven’t made much headway since, and Treasury yields are probing back to the high end of their recent range. Gold continues to streak higher, but could be driven much more now by those searching for safe, hard assets, rather than as a weak-dollar, long-commodities play. Continue reading…

Verbal jousting over currencies has heated up in the wake of the Fed’s QE2 launch last week, with German finance minister Wolfgang Schaeuble firing off a fusillade in a Der Spiegel interview over the weekend, countered by a rather limp but pointed retort from President Obama today.

“It doesn’t add up when the Americans accuse the Chinese of currency manipulation and then, with the help of their central bank’s printing presses, artificially lower the value of the dollar,” Schaeuble said.

Got to admit, the gentleman has a point.

Meanwhile, President Obama responded by saying his and the Fed’s mandate “is to grow our economy, and that’s not just good for the U.S. That’s good for the world as a whole.”

Careful, Mr. President. Be very careful. As we are all too well (and perhaps painfully) aware, what’s bad for the US — like an asset bubble disguised as economic growth (see, um, housing) — is also bad, in fact, for the world as a whole. Continue reading…

David Stockman, former OMB director under Ronald Reagan, had some spirited comments on the Fed’s QE2 gambit during a Bloomberg TV interview yesterday, well worth a watch. He finishes with a flourish by saying the central bank is “injecting high-grade monetary heroin into the financial system of the world, and one of these days it is going to kill the patient.”

Hat tip to Art Cashin’s daily morning comment for heads up on the Stockman interview.