The Credit Crisis Financial Stocks Short Journal

CPI inflation: -1.5% yoy
Core CPI: +1.5% yoy(down from 2.5% in 2008)
Unemployment: 9.7% and rising
Last NFP: -216K
M2: YTD barely up
10y inflation expectations derived from bonds: 1.83%

Anyone with any understanding of the Fed's mandate can guess its virtually impossible for the Fed to raise in this enviroment. The only reason people keep talking about exit strategies and other BS is because the equity market keeps going up and the media keeps getting bullish on that, that is infecting everyone(including the three huge hawks from the Fed), anyone looking at the data can guess there is no way the Fed does anything(including signaling a coming exit)
Meanwhile UST bonds are also going up, so have been short term interest rate futures, directly contradicting the stock market forecast

Today the Fed will likely keep 'extended period', the statement will be a bit hawkish but they will not signal an exit
 
Bullard from the Fed, it seems has argued the Fed cant just look at unemployment because it might not correlate with inflation well. He says in the 70's unemployment was high and inflation was also high, in the 90's unemployment was low yet inflation was low so the cyclical philips curve relationship that the doves are using might be a bad one.

That is true, it might not correlate well sometimes but he misses the point, the point is that is it doesnt frigging help either.

Labor costs are an important part of final goods and services costs(According to Bernanke its a bigger share than commodities or the fx value of the dollar), therefore yes its possible to have inflation with labor costs plunging, just like its possible to get a CEO job without a college degree, but its not likely, it certainly helps to have the degree as evidenced by the fact that most CEOs do.

So as the UR rises there will be a downward pressure on price indices, the offsetting elements will commodities(but even they might decline), weak USD, monetary expansion(M2 barely growing, this doenst resemble the 70's at all) and inflation expectations getting out of line(Velocity would rise, so far it has not occured but its probably the biggest risk to my euro$ call bet)
 
Quote from Daal:

CPI inflation: -1.5% yoy
Core CPI: +1.5% yoy(down from 2.5% in 2008)
Unemployment: 9.7% and rising
Last NFP: -216K
M2: YTD barely up
10y inflation expectations derived from bonds: 1.83%
More...

And I forgot to add
Credit growth: Negative
Fed Senior Loan Officer Survey: Banks tightening credit standards

The last credit crunch it took anywhere from 1 to 2 years after banks started doing net loosening of standards in different kind of loans for the fed to put the first hike. This time around banks are still tightening, I wish there was a pratical way to bet the fed won't raise in 2011 getting huge odds, this 'black swan' is looking more and more like a simply low percentage play. But the eurodollar calls there are not liquid and not priced too differently from the ones I own already
 
Maybe this is why Bernanke ok'ed Geithner's QE move. Montary aggregates are plunging latetly(probably due the additional tightening of bank credit standards)
http://research.stlouisfed.org/publications/mt/page6.pdf

Therefore the necessary amount of QE needed to keep the money supply stable is higher(possible much much higher) than the current one.

Frankly these charts are scary, if this Fed doesnt show the market its true collors soon and start to expand the money supply it will be like the 30's Fed or the BOJ all over again.
I mean they got declining monetary aggregates, declining prices, declining employment, weak growth and all Lacker, Lockhart, Bullard and Hoeing care about are the green shoots and the stock market(indirectly of course)
 
Marc Faber seems to be on crack. His theory seems to be that the equity market is rallying because of all the monetary base printing(essentially the fed balance sheet) asset markets are rallying in fears of inflation which would take everything up in nominal terms. He fails to answer why is that the 10y expected inflation derived from treasuries is bellow 2%, and why both the Michigan and Philly inflation expectations are bellow 3%
http://research.stlouisfed.org/publications/mt/page8.pdf

The only market getting out of line is the gold market, and its not as liquid and deep as others
 
UST bonds, Fed futures and eurodollars taking off.
I'm not sure the market fully understands this though
"The Committee will gradually slow the pace of these purchases in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the first quarter of 2010"

If they fed is buying by Q1 2010, this probably means no hike 6 months after that, that is because the Fed doesnt usually change its stance quickly, if they think the financial system needs more monetary base and lower interest rates by the end of Q1 2010 chances are they wont turn around and start to dump assets one week after that, they need to prepare the market, see if the data holdsup, etc. This means the first hike is by Sep 2010 at the earliest
 
Some things from the FOMC statement

This is a bit hawkish
'However, it indicated it is slowly retiring some of the tools used to fight the crisis, saying it would “continue to employ a wide range of tools to promote recovery” rather than “all available tools” as in past months.'

This is quite dovish, from Morgan Stanley:

Today’s statement contained an interesting nuance in the wording used to describe the amounts that will be purchased. Previous statements had always indicated that “up to $1.25 trillion” (for MBS) or “up to $200 billion” (for agencies) would be purchased. But, in this statement, the wording for the MBS program was changed to “a total of $1.25 trillion” while the reference to the agency program was still “up to $200 billion.” So, the Fed is now committing to the full $1.25 trillion of MBS purchases but leaving themselves some wiggle room to do less in the agency space. As seen in the accompanying slide, they have been falling well short of the implied trend in the agency purchase program. According to our trading desk, this reflects the fact that there has not been a lot of paper for the Fed to buy. –David Greenlaw, Morgan Stanley
 
Stock market is looking sick, but I'm not excited about buying more XLF puts unless ES breaks the 50MA(1005), it hasn't happened many times since the rally began so there will be a 'its different this time' tone to it when it does with all these numerous contrarian signals hanging around(Busiest IPO week since 2007, tons of secondaries offerings)
 
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