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Which Way Wednesday - Hilsenrath Loses His Touch

The Huffington Post The Huffington Post 9/03/2016 Phil Davis

SPY 5 MINUTE © Provided by The Huffington Post SPY 5 MINUTE Fool me once, shame on you.

Fool us every time there's a Fed meeting - then we're just idiots who will believe anything just because it's printed in the Wall Street Journal.  That's right, Jon Hilsenrath, the Fed Whisperer, was at it again yesterday with his 3:18 prediction that the Fed will leave rates on hold next week to which we say: "Duh!"  I've been on record all year that the Fed will have no more than two (2) hikes in 2016 and likely 0.25 each and not likely for the first one until June - now can I get a job where I only have to write one column per month?   

Market expectations for rate increases have shifted down since the Fed met in December (aligning with PhilStockWorld's projection). Traders in futures markets see an average fed-funds rate of 0.6% in December and 0.9% at the end of 2017, well below the Fed’s median projections of 1.375% at the end of 2016 and 2.375% at the end of 2017. The Fed’s rate projections could recede as officials delay raising rates.

You can see the little bump in the S&P, right when that article came out at 3:18 but it didn't last because everyone was getting out and we still have 10-year notes to sell this afternoon so we don't want investors being too complacent about equities or they won't hand the Government their money to hold for 10 years at, LOL, 1.62% interest.  By the way, anyone who feels the urge to spend $20Bn on today's auction - just send the money over to PSW and we'll pay you 2.5% interest only for 10 years, no problem!  

There is something very interesting going on in these auctions.  If you follow that link, you'll see that we currently have $24.8Bn in outstanding 10-years (for this cycle) and we're only rolling $20Bn over because that awful Obama has cut our deficit once again and we don't need to borrow money (when will the madness end?).  That then forces $4.8Bn to find somewhere else to go and that's why there's such a high demand for notes - even at these incredibly low rates - like Richard Gere, they've got nowhere else to go

© Provided by The Huffington Post

Since 2012's QE3 (infinity, as it never ended), we've been hovering around 1.6-2% and, currently, we're at the low end of the range because the US is borrowing less and less money and other countries are offering less and less interest for their bonds - even as they step up borrowing.  So it's not about US rates being ridiculously low, it's about other countries being ridiculously lower so, relatively, we're a pretty good deal (and so, then, is PSW's offer, so please send cash or certified check for $20Bn before 1pm!).  

© Provided by The Huffington Post While leading economorons are unwilling to call this a Depression, clearly the global economy is about as depressed as it was leading into WW2 and, once again, a madman is trying to take power in one of the World's largest democracies.  As our friend Keynes likes to tell us, higher prices in the Aggregate Demand Formula are due to a LOWER real money supply and HIGHER interest rates that result from financial market equilibrium which, in turn results in lower investment spending on new physical capital and hence a lower quantity of goods being demanded in the aggregate.

So don't let Conservatives tell you what the Fed is doing is Keynesian Economics - it's nothing of the sort.  They have been (successfully) labeling QE as Keynesian in order to discredit what Keynes actually said, which is that the money supply must be increased FROM THE BOTTOM UP - by paying higher wages and creating labor demand through infrastructure projects that may cause the Government to borrow money but leave hard, durable assets in their wake that provide a long-term benefit for GDP growth.

© Provided by The Huffington Post Does that sound even remotely like what the Government has been doing?  What we have is what Keynes warned against, artificially low interest rates keep money trapped in the bank (it's not growing via interest so people feel the need to save more of it to grow their retirement accounts) and austerity has pulled back Government spending to unhealthy low levels.  

Our Government is spending 5% of our GDP ($1Tn) less than it did just after the crash and yes, that's getting back to "normal" but we haven't really fixed anything, have we?  All we've done with those extra Trillions we spent is bail out the banks but we have done absolutely nothing to fix the actual economy - leaving it up to the "job creators" who have continued to ship manufacturing jobs overseas and created only low-paying service work for American workers - THAT IS NOT KEYNESIAN AT ALL!!!  

What the Central Banksters have accomplished is a MASSIVE increase in the money supply as they pour money onto their Top 1% friends who use it to short up balance sheets and buy back their own stock.  What the Central Banksters have NOT done is to restore confidence in the system and the lack of consumer confidence (spending) and the lack of corporate confidence (hoarding) has caused the VELOCITY of money to drop as fast as they can increase the supply:

© Provided by The Huffington Post

That's the Fed's own chart!  Notice there's a pretty good correlation between the velocity of money and the interest rates but also the supply of money, as it increases, leaves it with nowhere else to go and causes the current situation, where the Government has to say "sorry" to $4.8Bn worth of 10-year note buyers, because we simply have more than we need.  The reason the Fed had to tighten in December (despite my warning not to) was because the velocity of money was falling below 1.3 in December - way too low!

While we have increased the supply of money by almost 200% since the crash, it's not free-range money - meaning it's not in the hands of the consumers via higher wages.  Most of the money went to reanimate the balance sheets of the almost-bankrupt Banking Industry, which was and still is a black hole into which all the available money gets sucked in but doesn't come back out (low rates for deposits, less lending).  Meanwhile, the velocity of the money that does find it's way into the wild has dropped 33% - leading to this very stubborn Recession/Depression we're still in.  

© Provided by The Huffington Post That all sounds depressing but wages are finally pushing up (thanks to those Socialist minimum wage increases that force all of our wages to finally be ratcheted higher) and that, finally, shakes some of that money out of the corporate coffers and puts it into the hands of consumers who might actually spend it - rather than stick it on their balance sheet like an endangered species trophy.  That's right, Corporations are like a giraffe hunters - they prey on weak, easy targets with terrible weapons and then act like they are the kings of the World for having the "skill" to bludgeon the oppressed (call it the Scalia Legacy, in his honor).  

Tomorrow is the ECB policy meeting and next week (15th) the BOJ will have their rate decision and our beloved Fed will announce their decision the following day (next Thursday) so we are going to have some wild and crazy market moves ahead and, as I warned on Monday, we topped out at S&P 2,000 and it's not likely we'll be over it again unless all 3 Central Banksers get it JUST RIGHT (yeah, right!). 

© Provided by The Huffington Post Speaking of blatant market manipulation, Whitney Tilson was on CNBC bashing Lumber Liquidators (LL) again, using the same BS arguments he used last month, only action like it was new information to spook investors (debunked by me on 2/22 here).  We saw it as a huge buying opportunity for those who missed our original call as the stock fell from $14 back to $11.77 so, if you want to give Whitney's shorts a tight squeeze (and who doesn't, he's such a cutie!), you can offer to buy all the LL stock he wants to short with the following trade:

  • Sell 5 LL 2018 $13 puts for $5.20 ($2,600) 

  • Buy 10 LL 2018 $13 calls for $5.20 ($5,200) 

  • Sell 10 LL 2018 $20 calls for $2.30 ($2,300) 

That nets you into the $7,000 spread for just $300 in cash and your worst case is you end up owning 500 share of LL at net $13.60.  If LL recovers and gets back over $20 by Jan 2018 expiration (19th), you make $6,700 in profits, which is a return of 2,233% of your cash invested and the ordinary margin on the short puts should be about $2,400 - so it's a very margin-efficient trade as well (248% gain on cash + margin).  

We're already long in our portfolios but might add more if we get a good entry.  If LL bounce back quickly, Tilson, who claims to have shorted 4% of the company on this "news" will be forced to quickly become a buyer of 4% of the company's stock to cover his failed attempt to manipulate the price and that would be about 1M shares, which would be half of an ordinary day's trading.  So watch that $14 line because, if we go back over it, Whitney is in the red and we could have quite a squeeze to drive us higher as he scrambles to cover!


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