Month: January 2012

The Central Banker’s Toy

Hamilton

central banks BS

This is a pretty neat chart from J. Mauldin’s weekly e-letter taken from http://www.ritholtz.com/blog/2012/01/living-in-a-qe-world/

These are the BS’s (Balance Sheets) of the 4 main central banks in the world, the Fed, the ECB, the BoJ and the PBoC. Notice that up and un till the beginning of 2007 the total for all four was about 4 trillion. Today the total is about 13 trillion. Roughly the same size as US GDP, and close to 1/3 the value of all equities in the world. This is how you get cows to $30,000 (see previous blog). The numbers for the US and the Euro zone are, not surprisingly, pretty close as their economies and populations are roughly equal. The outlier here is clearly China. With an economy less than 1/2 the size of the US and/or the Euro-zone and more or less equal to Japan, it’s 4.5 trillion  central bank’s balance sheet is proportionately 3x the size of the next two and more than 2x Japan’s. All of this is essentially created out of thin air. For the moment this was done with impunity as the velocity of money, however measured , dropped as fast as the balance sheets expanded. But some day this will have to stop and be reversed. Going by the ECB and the Fed, we suspect that it will be soon.

ECB BS jan 2012Fed BS jan 2012

You can click on either chart to enlarge. For the ECB I could only get a Bloomberg chart for the last 5 years but it will do. There is a very clear two year period of consolidation that requires very little imagination to see a triangle. These , of course as we know, occur at the end of the ride which should then reverse itself. The chart from the St. Louis Fed. is much longer and allows for a 5 wave count. What this means and if it is appropriate to apply EW to these charts is an open question, but something is about to happen.

COW, Claymore Global Agriculture ETF

Hamilton

COW jan 28 2012

Mid last year we had a look at COW and the US MOO (not shown) Etf’’s. Both have performed roughly as expected except, perhaps, that they did not go down as far as they could have in the first wave of C. In this case the “logical” level would have been about $16, the level of the b wave in the larger B rebound. Wave 2 may still go a little higher, but not much so if, for some reason, you still own this ETF, it is now a very good time to get out.

Speaking of cows, Canada still believes in a “supply management” system for dairy cows, eggs, chickens etc. These systems, despite a lot of hype to justify them, are all essentially kartels where production levels are controlled by a central (government) agency and competition is kept out by very high tariffs.  Central Banks operate along precisely the same lines. The authorities invariable believed in the ability of markets to self-police and find their equilibrium on their own when it came to dismantling  Glass-Steagall, the 5 pillars and just about every other regulation. Not so when it comes to setting interest rates or milking cows! The distortions this creates are immense. In Ontario the consumer pays about twice as much for milk or cheese as in the US or Europe. Consumption has consequently gone down steadily. What is even more interesting is what it does to asset prices.  A typical farm in Ontario is about 100 acres (25 hectares) in size, but usually additional land is rented to get to some sustainable level of efficiency. The price about $750,000 to 1 mln. if growing crops is the farm’s business. But if it is an operational dairy farm with 100 head of milk cows, the price goes up to nearly $4 mln, or $30,000 a head on top of that! Bernanke &Co. seem to be oblivious to the unintended consequences and continue to justify their actions by the preposterous notion that interest exist only for the purpose of providing central bankers with a toy.

DJIA , Dow Jones update.

Hamilton

From stockcharts the high reading on the Dow, on the 2nd of May 2011 was 12876, intraday. The recent high on Jan.  26, 2012 was 12841, intraday. Ergo we did not make a new high (yet?) and the count still stands, that is this is the top of a wave 2 of 3. 3 of 3 is about to start. Apart from the price itself, the structure definitely supports this view. So does, of course, the fact that only the Dow has managed to retrace, for practical purposes, 100% of the preceding drop. No other index comes even close. One has to be careful not to embrace conspiracy theories  too readily, but the simple fact that the Fed would announce the extra year of ultra low rates and think out loud about QE3 exactly at such a critical point, in the absence of any fundamental reasons, makes you wonder.