July 2010


Amend Short Sell Limit to $111.00 just to be safe.

*Note took the fill @ $110.97

From Mish, who received an e-mail from a mother with a son in the 101’st paratroopers currently in Afghanistan. I’d never heard [of] this song before.

Afghanistan, is of course the graveyard of superpower armies. We [the British] died there, the Russians, or Soviets died there, as will the US. Time to cut your losses chaps, bail-out.

Well, come on all of you, big strong men,
Uncle Sam needs your help again.
He’s got himself in a terrible jam
Way down yonder in Vietnam Afghanistan
So put down your books and pick up a gun,
We’re gonna have a whole lotta fun.

And it’s one, two, three,
What are we fighting for ?
Don’t ask me, I don’t give a damn,
Next stop is Vietnam Afghanistan;
And it’s five, six, seven,
Open up the pearly gates,
Well there ain’t no time to wonder why,
Whoopee! we’re all gonna die.

Come on Wall Street, don’t be slow,
Why man, this is war au-go-go
There’s plenty good money to be made
By supplying the Army with the tools of its trade,
But just hope and pray that if they drop the bomb,
They drop it on the Viet Cong Taliban.

And it’s one, two, three,
What are we fighting for ?
Don’t ask me, I don’t give a damn,
Next stop is Vietnam Afghanistan.
And it’s five, six, seven,
Open up the pearly gates,
Well there ain’t no time to wonder why
Whoopee! we’re all gonna die.

Time for the US to stand up to the half-wits in government.

From the Federal Reserve

There is of course an answer, and I shall provide the analysis and answer later. For the moment, peruse the article and have a think on it.

Our St. Louis Fed colleague David Andolfatto declares it is time to bury the old saw that says when it comes to inflation, follow the money:

“One of the ideas that stuck in my head as an undergrad was the proposition that ‘inflation is always an[d] everywhere a monetary phenomenon.’ The idea is usually formalized by way of the Quantity Theory of Money (QTM)—or more precisely—the Quantity of Money Theory of the Price-Level. (QTM is not a theory of money, it is a theory of the price-level).

“In its simplest version, the QTM asserts that the equilibrium price-level is roughly proportional to the outstanding supply of money (however defined). As inflation is the rate of change in the price-level, the phenomenon of inflation is attributed primarily to excessive growth in the money supply (typically viewed as being controlled by the monetary or fiscal authority).”

Andolfatto goes on to note that the monetary base—the sum of currency in circulation and the banks’ reserve balances held at the Federal Reserve (at that page, search “reserves”)—more than doubled since fall 2008, while the rate of inflation fell.

That’s certainly true, though most versions of the quantity theory applied to monetary policy discussions lean on broader measures of money—for no better reason than those measures help the theory fit the facts. Specifically, since the 1980s the phrase “inflation is everywhere and always a monetary phenomenon” has in effect meant “inflation is everywhere and always a monetary phenomenon when we measure money by M2.”

And here’s an interesting thing. If you look at the relationship between M2 growth and core inflation over the past decade and a half, it appears that the money-inflation nexus has been gaining in strength:

Could it be that the death of the quantity theory has been greatly exaggerated?

There are plenty of reasons to be cautious. For one thing, it is oft-noted that any connection between money and inflation could be purely coincidental. In fact, if you stare hard at the picture it does appear that changes in inflation often precede changes in money growth. One interpretation is that the same factors that push trend inflation around also result in responses by policymakers or private market participants that ultimately cause the money supply to move in a sympathetic direction.

But even if causation does run from money to prices, the case is not quite solved. The monetary base measure that the Andolfatto post emphasizes has a lot to recommend itself, not least being that it is the measure of money that central banks actually control. The stark disconnect between the growth in currency and bank reserves (the quantity of which is determined by the Fed) and M2 growth (the quantity of which is determined by the decisions of banks to expand their balance sheets) raises legitimate questions about how policymakers would exploit an M2-inflation connection in an environment when the monetary base–M2 connection—the so-called “money multiplier”—has changed so dramatically.

There could be lots of answers to that question. The relatively new Federal Reserve policy of paying interest on bank reserves is one possibility. Andolfatto’s suggestion that all changes in money are not created equal might contain the germ of another explanation. For our part, we think the question is quite a bit more than academic.

By Dave Altig, senior vice president and research director at the Atlanta Fed, and Brent Meyer, economic analyst at the Cleveland Fed

Placing a day market order [limit] Sell Short SPY @ $111.10

I can now go and make myself a coffee. I’m guessing that I’ll be covering the short [if profitable and if filled] circa $108’ish [when the trigger is reached]

Barry Ritholtz enters the debate with a really poor post.

The Inflation/Deflation debate seems to be constantly coming up — from clients, institutional accounts, and the media. Let’s look at a few points on this:

It is the question that from an economic point of view is probably the most important one there is.

Deflation is a fact. It is happening now, it is real, and we see it in the actual data.

Really – where is that exactly?

Inflation does not exist presently. It is, at best, an opinion. It might happen in the future, or it might not — but it does not exist, at least on a measurable form, presently.

What about deficits? Debt? Overspending? QE/ZIRP/Low rates?

All evidence of inflation.

Well, Japan cut rates, wildly overspent, borrowed like loons — and they had a decade plus of deflation, not inflation. We may not be Japan, but they are the 2nd largest economy in the world, and represent an actual economy that behaved, well, the way the US is.

Japan devalued their currency via inflation and practiced mercantilism to the American consumer, again grossly expanding their higher stages of productive structure. In an expanding global economy, the effects of an inflation are muted.

Until the slack in the labor market is reduced — near record low weekly hours, 16% U6 unemployment, etc. — inflation simply is not a threat.

Really? What exactly happened in the 1970-1982 period?

The 10 year Treasury Bond is at record low yields, so bond buyers are looking for more economic softness, not inflation.

Who are these Bond buyers exactly? The banks? Then surely you jest.

The first heads up about inflation you will see will be when the Bid to Cover ratio of the Treasury Bonds — how many buyers are there relative to bonds for sale at US auction — right now, its oversubscribed 3X. Once buyers start insisting on greater yield, the Treasury department will have to start raising the bond rates they offer — we will know that Bonds are a short, due to impending inflation.

Nonsense.

That will be your early inflation warning.

But now? Its nowhere in sight . . . .

Then you really have no idea of what you are talking about.

To go short, we are now waiting for a pullback to circa $110.80’ish. However, the daily chart is still a long, therefore, if we hit circa $107.50 intraday, you could choose an aggressive long position.

I suspect the signal will be triggered for a short entry against the daily trend tomorrow. Obviously as a contra-trend trade, any targets to the downside must be taken [profits] quickly.

For the less aggressive, the pullback can be used to place new long positions.

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