Irish 2011 Elections And The Winner Is...

No one knows yet... They are still counting.  Do they hand count these things?  An exit poll was released though last night and shows Fine Gael and Labour together having enough of a majority to push back on the IMF and ECB bailout.  Both parties have already vowed to work towards senior bondholders taking a haircut.  Senior bondholders include to a very large extent German and French banks which means these bailouts of any PIIGS nation is a bailout of the German and French banks.  I'm working from memory here but I think Ireland exposure alone is north of 100 billion euros.

The Irish  Times released the following poll results last night.

According to the poll, Fine Gael is on 36.1 per cent, Labour is on 20.5 per cent, Fianna Fáil has slumped to 15.1 per cent, Sinn Féin is on 10.1 per cent, the Green Party were on 2.7 per cent and Independents and Others were on 15.5 per cent. The poll of 3,500 voters was carried out yesterday. The margin of error was 2.5 per cent.

Irish 2011 Elections And The Winner Is...

Irish Elections Begin Polls Close At 10PM Local Time

Today is a big day in the world of assigning risk. Senior bondholders have been protected for years but today may be the start of a shift in forcing those to profit, to also assume risk. Fine Gael is expected to win today and from their quote below, senior bondholders should be concerned. I don't suspect the results to be "news worthy" for some time, at least not in this "market."  Irish banks are bleeding both from falling asset prices and dwindling deposits.  They've resorted to the last straw of issuing bonds to themselves and using those as collateral.

Irish Independant

Opinion polls have put Fine Gael well in the lead to head the next government, securing as much as 40pc of the popular vote - potentially allowing for a single-party government propped up by independents.


Bloomberg

Fine Gael leader Kenny, 59, said this week his priority will be to renegotiate the 5.8 percent interest rate on the bailout. The party has said it may seek European agreement to share the burden of rescuing the country’s financial system with senior bank bondholders.

Irish Elections Begin Polls Close At 10PM Local Time

The Fed And DC's Next Move

I don't think many realize the complicated, twisted, interconnected situation we are in right now and figuring out how all of this plays out is beyond difficult.  A vast majority of those in risk assets right now have been conditioned for two years that you buy anything and just hold it.  Don't sell, don't buy protection, just sit on hands while fully invested. The longer this game goes on the smarter they feel.  They are truly oblivious to the world around them.

Anyone who has traded long enough knows the worst thing that can happen to you when starting out is to make money.  You begin to think things are easy and ignore the warning signs.  As Bill Fleckenstein says, "nonsense becomes knowledge."  Those who have not participated in this market or worse tried to short this market are frustrated beyond words right now.  We spend our days studying why the market is wrong and arguing with those who are "right."

I truly believe we have an amazing opportunity ahead of us.  The fiat currency based, debt fueled, rampant fraud financial system is near collapse.  The ponzi scheme has outlived its shelf life.  As investors, the opportunity is to make a lot money.  As a society, the opportunity is to reset our moral and financial compass.  Recession is a normal part of the economic cycle.  It is no different than a forest fire that results from excessive, unsustainable growth.  Not until the excess is removed, can new life form.

Depressions are to a society, what recessions are to an economy.  Talk to anyone from the great depression and you see someone who values money, hard work, the little they have in their lives.  Our society has lost its moral and financial compass.  We need a reset.  Since the 2008 financial crisis we have not removed the excess in our economy. Consumers have not learned how to live within their means.  We are literally using debt to pay debt.  We may have finally run out of a greater fool to hold up the system.

If you are in cash and not participating I think time is better spent understanding the world we truly live in.  I suspect in the not so distant future we will look back at this time as the quiet before the storm.  We know about the headwinds.  We know the banks are insolvent.  We know the economy is on life support.  The question is though, what course does the Fed and Federal government choose to take us on.  As hated as Bernanke is, he understands the tough choices facing him.  As political as DC is, they understand their endless budget deficit game is coming to an end.   Those in power do not go down without a fight, without deceit, without one last effort to hide the truth.  Every week we witness a different regime in the Middle East being brought down, yet their strategy to hold onto power is no different.

Gold and silver are the new flight to safety trade.  They have replaced the USD and possibly US Treasuries.  The Fed and Federal government must face the threat of losing reserve currency status and higher, uncontrollable interest rates beyond one year maturity.  The printing press cannot be removed.  Bernanke and DC are capable of anything to retain power.  Keynes believed "gold was a barbarous relic."  The demand for gold and silver is so strong that future markets are in historic backwardation.  The Comex is literally ready to blow up and JPM is massively short silver.

The Middle East is erupting right now.  Regimes are changing and the threat to oil, the fuel of the global economy is rising.  Every passing day countries are slowly moving military assets into the region.  The global economy will do all it can to protect the flow of oil.  Iran will not sit and watch the world move in while their own people revolt.  Al Qaeda is losing importance in the region and desperately wants another base to operate out of. Israel is facing renewed threats from Hamas and Hezbollah.

The US is experiencing its own revolution.  Although peaceful, that can change fast. Wisconsin was the beginning but protests have spread to other states.  The global revolution started in Tunisia and very quickly grew throughout the Middle East.  Never underestimate the power of those with nothing.  They will fight to the end for they have nothing else to lose.

China is fighting massive inflation and eventually another Tiananmen square.  Bernanke is exporting inflation and hoping that will pressure the Chinese to strengthen the RMB. Their choice is either high inflation or weaker growth.  Bernanke wants jobs back from China.

• If the Fed continues QE they risk pushing bond yields to unsustainable levels.  

• If the Fed ends QE, who will buy treasuries?  Ending QE will take pressure off China to revalue the RMB something neither Bernanke nor DC wants.

• If the Fed continues QE they will strengthen gold and silver which will put more pressure on those like JPM and on the future of the fiat currency system.  

• If Fed ends QE there will be no stimulus left for the economy and it will double dip just like it was going to last summer.

• If the Fed continues QE they will raise interest rates putting more pressure on bank balance sheets, on the 500 trillion interest rate derivative market and choke off what little demand is left in the economy.

• If the Fed ends QE they will no longer be able to inflate the US economy.

This post has become far too long as this is no easy question to be answered.  Do we see war in the Middle East?  Are gold and silver the best long term investments?  Will the global revolution move fast enough to stop more reckless moves by world leaders?  I'll leave you with Hank Paulson's quote about the 2008 financial crisis for comfort on our leaders ability to make the right decisions.


"We had no choice but to fly by the seat of our pants, making it up as we went along."

The Fed And DC's Next Move

Oil Is NOT The Only Headwind

Stay focused as we have far more headwinds than just oil.  I'm reading articles and hearing pundits say that once the uncertainty in Libya passes then markets will move up. The upheaval in the Middle East is far from over.  In fact should Gaddafi "pass along" then with over 130 tribes in that country civil war is almost certain.  Beyond the Middle East though, tomorrow we have elections in Ireland with Fine Gael expected to win (possibly a 40% majority) and the risk to senior bondholders will be huge.  Portugal is now in need of a bailout as well.  I won't go into all the headwinds facing the global economy right now.  Just a reminder that risk is not simply contained in Libya.  

Oil Is NOT The Only Headwind

Tuesday's Market

I've been a little quiet in the posting category.  I spent the entire weekend and then some editing code for a new site that will launch next week and expand upon the blog.  More to come on that in the following days.

Today's market action was nice to see for a change.  As always, down days have massive volume versus up days.  Anything is possible, and this market may set new highs in a few days again but the risk / reward is getting far more skewed to the risk side of the equation.

The bond market caught somewhat of a bid today but still is not showing any real bullish tendencies.  The 2 year auction today saw a bid to cover around 3.03 versus the 3.40 trend of late so that does not bode well for treasury demand, especially with the recent run up in yields.  The implications to risk sensitive assets (swaps, housing, CRE, etc) are huge and the Fed has to be careful how much they push future QE.

The USD is done, put a fork in it.  Precious metals are the new reserve currency, flight to safety.  I won't call them a flight to safety trade, because they really are not a trade. They are another form of currency.  When you go all cash in your trading account, that is not considered a trade, nor should owning precious metals.   Ever hear anyone talk about how their cash balance takes a hit when the USD is weak or rejoices when the USD is strong?  For some precious metals is a trading vehicle but for most it is a hedge against a dying fiat currency system.

Copper has really begun to roll over as are emerging markets, DOW Transports, Utilities. The VIX was up huge today and the AD line was heavily in the declining category.  The only thing catching a bid is oil and the headwinds from rising prices will hurt the cash strapped consumer.

Libya is only going to grow in violence with Gaddafi now preparing to be a martyr.   Bahrain is continuing to boil over and I read reports that Iran may see protests as early as Tuesday or Wednesday of this week.  The global revolution is even happening in the US. First Wisconsin now Ohio and Indiana. Expect many other states to protest just how the budget gaps will be filled.

Ireland elections are on Friday and no one seems to be talking about it.  Angela Merkel was handed quite the set back in this weekend's elections as well.  Neither bode well for senior bondholders staying whole.  Italy had to close its stock market today, Japan has been put on credit watch negative, Spain is acknowledging how bad their banks are finally, The UK is contracting (oh yeah, Japan too), Korea is a seeing a bank run (oh yeah Ireland too).  I am sure I missed something but you get the point.


If this market is going to turn, don't think the dip buyers will give up without a fight.  A majority of traders and investors have made money for two years by literally doing nothing but holding stocks.  It was an easy way to make money and they won't give up without a fight.  They will pour money into any weakness as they have been conditioned. They will focus on the Bernanke put which in reality expires soon unless QE3 is hinted at in the next few weeks. Today had the sign of a buy the dip trade working yet again but failed. It may still work but one thing  is for sure, one day it won't work.  Stay focused on the issues that the media is not covering.  The issues are real and the opportunities to profit from them are very large indeed.

Tuesday's Market

Oil Production By Country

Below is a chart of the top 30 oil producing countries.  The data varies considerably based on sources although this source seems to be most consistent (CIA The World Factbook).  Libya is fairly far down the ranking at 18 and so far oil disruptions appear to be relatively small.  Iran and Saudi Arabia are the big question marks though.  It will be very interesting to see over the next few days what if anything comes out of Iran.

The global revolution is moving so fast and government responses have been as illogical as their style of government.  No one really understands the Middle East and Iran plays a large role in destabilizing the area.  Saudi Arabia is now surrounded by protests which cannot be a positive for stability in that country.  One also has to wonder where Al Qaeda is right now.  What role will they play in shaping the future of the Middle East?  Will they attempt to overthrow a weakened government or fill a power vacuum?  Israel is possibly more isolated now than ever before.  Hezbollah has declared they are ready for a new war with Israel and the ability of the US to maneuver in the region has been weakened.

The future of the US and global economies right now are in the hands of the global revolution. If oil production is impacted in Iran and or Saudi Arabia the shock to the system will be massive.  Consumers already squeezed from rising food prices will spend any remaining discretionary income to heat their homes, fuel their cars.  Treasuries so far are failing to rise in the face of geopolitical risk which will only put greater pressure on the US economy (a 100 bp rise in yields equates to an additional $140 Trillion in interest expense annually).   There are so many moving parts right now all of which are intertwined.

It's quite possible the Fed injects greater levels of QE to offset any shocks.  They may be forced to do all they can to hold up asset prices but that very action will further weaken the USD and treasuries.  The Fed may have entered a negative feedback loop they cannot get out of unless they wish to finally confront the structural issues facing the US economy.

Watch Iran for signs of the 2009 revolution awakening.

Oil Production By Country

Data Overload And The Global Economy

The stock market is going to face data overload at the opening bell on Tuesday.  How the market reacts will be interesting.  Perhaps the dip will get bought.  It's become laughable at this point how inefficient this market has become at pricing in reality and risk.   The amount of risk hitting the global economy is mind boggling right now.

• South Korea is experiencing a run on their banks.

• On Tuesday Iran will send two navy ships through the Suez canal for the first time since 1979, while Israel views this move as provocative.  

• Ireland elections are on Friday which threaten to force senior bondholders to incur a loss. Irish banks are experiencing an accelerating bank run and have resorted to issuing debt to themselves and then using that debt as collateral for additional funding.

• Libya is falling into civil war which puts about 2% of oil production in jeopardy.

• Revolutions continue in Bahrain, Algeria, Yemen.  Saudi Arabia is now surrounded by revolutions.

• Iran is facing their own very serious revolution since the 2009 uprising.  Iran will not fall like Egypt fell.  It's been very quiet in Iran the past few days and one has to wonder when that country will erupt.  It's quite possible Iran sending ships through the Suez canal is meant to deflect attention from their own efforts to suppress the pending protests.

• The USD is falling while gold and silver rally.  The USD reserve currency and fiat currency as a whole are dying.

• Oil has risen over 10% in the past 48 hours.  If oil moves higher or at least holds these levels, the impact to the global economy will be devastating.  

• Moody's just downgraded Japan to credit watch negative from stable.

• China is raising reserve requirements to slow growth.

• Equity markets have seen a parabolic rise on dwindling volume and rising margin.  Margin debt now stands at pre Lehman levels.

• Food and energy inflation is rising to an unsustainable level worldwide.

• The US is experiencing its own revolutions in Wisconsin and now Ohio as the reality of massive budget gaps is realized.

• The US appears to be headed for a government shutdown as the debt ceiling fight lingers and the clock ticks.

Data Overload And The Global Economy

Middle East, Ireland and Rick James

Middle East

The world has quite the week ahead of itself.  What is evolving in the Middle East is inspiring, sad and extremely explosive.  Tunisia was truly a microcosm of the global revolution now taking place.  Tunisia and Egypt fell far faster than anyone imagined and the same will be true with the coming Middle East revolution.  It is truly sad though to see the level of brutality governments will use to maintain power.  Hundreds have been killed this weekend and unfortunately that number will probably grow quickly.

Few, if any truly understand the Middle East.  With each passing day it is becoming even more complex.  On Monday we will see the Iranian navy pass through the Suez canal, Israel has threatened a response and Saudi Arabia is now surrounded by protests.  In Egypt even though the Mubarak regime has been toppled, banks still cannot open nor can the stock market.   The global economy cannot handle a shock event and should the Middle East explode as it appears it is headed, the effects on oil prices could be devastating.

Ireland

Friday we will see the Irish Elections and right now it appears Fine Gael and Labour will win a majority of the vote with Fine Gael possibly winning the 40% majority on their own. This will further threaten Irish bailouts and hopefully force losses upon senior bondholders.   It also appears the Irish banks are truly on life support right now as they are faced not only with falling assets prices but a growing run on deposits.

The global equity markets are completely ignoring geopolitical risks right now.  Just like the global revolution has evolved faster than anticipated, so to may be the repricing of risk in the capital markets.



Rick James

With all due respect to the late "super freak," what western star do you think Gaddafi, the modern "super freak" has modeled himself after?

Middle East, Ireland and Rick James

The Fear Trade

The Middle East is heating up fast with reports of troops firing on protestors in Bahrain and Libya.  Iran has formally requested passage of its navy through the Suez canal and Israel has threatened to attack if they do in fact pass through.  So the news grows as we head into a three day weekend in the US and we see precious metals and oil catching a bid while the USD sells off.  This never would have happened a few years ago but it is a sign of the times and the lack of confidence in the USD.

USD

Silver

Oil (Nymex)

The Fear Trade

The Flight To Safety Trade

This is pretty interesting to watch the USD sell off while gold and silver catch a bid in the face of tension between Israel and Iran.  This is more of a sign that the USD is truly losing its reserve currency status.  This does not bode well for a USD bounce in the short term.

The Flight To Safety Trade

The Latest On The Irish Elections - Fine Gael Close To Majority

With the Irish Parliamentary elections less than two weeks away (February 25, 2011) things are getting interesting.  The IMF, ECB, EU, German and French banks and pretty much anyone trying to protect senior debt holders must be squirming.  The most recent polls show the two opposition groups Labour and Fine Gael with a pretty decisive lead. They could join forces but Fine Gael currently at 38% could also win the 40% needed for a majority without Labour.

What is interesting about this and something bulls should fear are the following quotes from the Irish Times regarding the views of each party towards future bank bailouts.

From the Irish Times

"THE LEADERS of the two main Opposition parties have ruled out any immediate recapitalisation of the banks if they are elected to form the next government."

"Under that renegotiation, Labour would insist on “burden sharing” with bondholders as part of bank restructuring, he said."

This would be a wonderful development should senior bond holders be forced to accept risk for a change.  

The Latest On The Irish Elections - Fine Gael Close To Majority

Amazing Video Of Egypt

I originally posted this on January 29.  In light of what is happening in Egypt right now and the inspiration the people are showing, it is worth highlighting this video again.

People have been oppressed for years.  Push people enough and their spirit does not break.  No, their spirit comes alive and they demand freedom, justice, fairness.  We are witnessing a movement across the entire world today.  Many saw it coming.  Our system of fraud and debt is broken.  We may now be at the point where the system breaks.  The point where the lies and fraud can no longer be hidden behind unsustainable debt.

Amazing Video Of Egypt

USD Showing A Little Strength

The USD looks like it is finally catching a little of a bid having broken through resistance at 78.32 tonight.  Next test will be around 78.78.  Considering what is occurring in Egypt today, and the recent weakness in the USD I'm surprised it has not caught more of a bid.

USD Showing A Little Strength

What Was That?

This remains one broken market.  As the closing bell approached, the Mubarak speech seemed to put a bid in the market until it became clear he was NOT stepping down.  Then you see a big sell off only to be followed by a big green bar at the close.  What is telling though is the price action right after the close.  ES futures now down four handles.

Friday has tended to be the largest days of demonstration in Egypt after prayer so tomorrow should be a very big day from a geopolitical standpoint.  Asia should be pricing in these Egyptian developments tonight.  

Bonds did not catch much of a bid today and the thirty year auction was relatively weak.

What Was That?

The EU Plays Hard Ball. Good Luck!

Ireland is in need of a bailout but so are the German and French banks most exposed to a default. Trichet comes out today and tries to play hardball by declaring the deal has been worked out Ireland, now you must execute. Oh they may execute alright. They may execute the deal but in the definition that would cause serious problems. From the Irish Times, Trichet comments are below:

EUROPEAN CENTRAL Bank (ECB) chief Jean-Claude Trichet has reiterated his opposition to any debt restructuring by Ireland, saying the terms of the EU-IMF bailout plan for the State have been approved by “the entire world”.

In Brussels yesterday, Mr Trichet said the Irish rescue plan and that of Greece did “not comprehend” the notion of bondholders being compelled to take a “haircut” on their investments.

Ireland entered an €85 billion EU-IMF programme last November and Greece was bailed out to the tune of €110 billion last May.

“We have plans. The plans have to be executed, have to be implemented in the best fashion possible as has been the case the world over and it is very, very important in my opinion not to confuse things,” he said.



This is going to get really interesting. Ireland may in fact have more power and the EU knows that. Why else would the EU have offered to extended Irish and Greek maturity dates to now 30 years? Careful how you approach Ireland Jean-Claude.

The EU Plays Hard Ball. Good Luck!

Let The Haircuts Begin!

The Danish government today seized Amagerbanken, the country's eighth largest bank per Bloomberg. Under new regulation, senior bond holders and depositors above the insured limit will take a 41% haircut. It is about time! Just like Tunisia led the first of many revolutions against oppression, perhaps Amagerbanken will lead to many senior bondholders assuming risk for a change.

Elections in Ireland are coming and Fine Gael will be able to site this example for similar actions in Ireland. But if the politicians can't force the issue, the markets will certainly try. Here's the latest from the Irish Independent and don't forget that December saw a 100% increase in bank deposit runs.

REPOSSESSION orders granted by the courts have risen almost six-fold since the peak of the property boom. Figures released by the Courts Service show that the number of orders granted by the High Court and Circuit Courts for the repossession of lands and premises were at their highest last year, a figure that is set to rise as lenders increase their interest rates.

Let The Haircuts Begin!

Staying Focused

While the equity kids play near the hot stove, don't lose site of the big picture from a macro standpoint.  September 2008 was the start of a painful period for many.  Fortunes were lost in the blink of an eye.  Sunday nights unfortunately involved some CNBC special on learning about CDS, FX lines, Fed Liquidity Programs, etc.  Many vowed they would never use leverage again, they would not get caught in such a frothy market.  They would sell at the first sign of trouble.

This was in the backdrop of the Fed saying that subprime was contained, Kudlow talking about Goldilocks, fund managers saying now was the time to buy.  Now fast forward about 30 months and we find that margin debt is back to pre LEH levels.  Obama in his state of the union says all is well because the stock market is up.  There will be no second leg in housing.  The bond market selling off is not a signal of problems.  I can go on.  Honestly though, I'm tired of watching the kids play, knowing sooner or later their hand is going to get burned again.

I find myself listening to less and less trader chats during the day.  There is just so much noise out there.  A majority truly believe this market will just keep going up and any correction will be minor.

The reality is a vast majority of people in this market are long, have been long, have made a lot of money or recouped a lot of losses, yet they have no appreciation of their surroundings.  For the past twenty three months now, anyone long has been right. Anyone calling into question the validity of asset prices has been wrong, or shall I say early.  The longer this rally goes on, the harder it is to stay focused on the bigger picture. I keep an open mind in my research and am not hung up on a deteriorating macro theme in 2011.  If I find data that contradicts my views, I will change my investing thesis.  Until then, I find the following macro trends to be vary scary indeed:


Sovereign debt:  It's not going away even though the media doesn't talk about it.  The reality is there is an ongoing bank run in Ireland and elections in Ireland that could easily derail the current bailout.  That would then turn the problem to German and French banks along with many other creditors.  Yields in Portugal are at the 7% threshold, Spain is at 5% and no going down.  CDS rates are rising.

Global Unrest:  Egypt may or may not achieve their goal of unseating Mubarak but to think it ends in Egypt I think is a grave misunderstanding.  People have been oppressed for years and now they are being starved through higher food prices.  Yemen is beginning to protest, Saudi Arabia even had a small protest.  I am convinced yet another unintended consequence of QE was a foreign policy nightmare for the US.

Residential and Commercial RE:  Anyone thinking assets prices have bottomed is kidding themselves.  The second leg down has started and more than likely will overcorrect just like equity markets overcorrect, because human emotions are involved.

Jobs:  The data is plain horrid.  People are suffering.  People are trying to provide for a family on part-time income.  People have blown through their savings.  20% of income is in the form of transfer payments from the government.  There is no health here.  Sunny weather in January won't bring back the 160,000 jobs alone each month needed just to match population growth.

Corporate Margins:  They are simply being squeezed by higher input costs.  Any costs that can be passed along will simply cause the consumer to be squeezed.  The economy is slowly being choked to death again in the face of zero real demand by consumers beyond the necessities of life.


I remain largely in cash with a few small hedge credit call spreads on financials.  It is my decision to miss out on any upside and I am fine with that.  

Staying Focused

Another QE Head Wind

The US equity market may be experiencing low volatility but beyond that HFT driven "market" volatility is rising fast. There are a lot of moving parts right now, each of which on their own could cause a severe shock to an extremely fragile global economy.  It is important to stay focused on what is out there and the risks they present.  Maintaining a false sense of security regarding the future of QE is ignoring the real investment risks that are present today.  One does not know when nor which event will be the tipping point so patience is needed.  It's important though to stay focused and educated so when events surface as investors we are ready to react.


I want to focus on global food prices, primarily the recent price action in rice.  Below is an excerpt from a  2009 USAID Study 


"Approximately 1 billion people—or one sixth of the world’s population—subsist on less than $1 per day. Of this population, 162 million survive on less than $0.50 per day. At the household level, increasing food prices have the greatest effect on poor and food-insecure populations, who spend 50 to 60 percent or more of their income on food, according to the International Food Policy Research Institute (IFPRI). Overall, increased food prices particularly affect developing countries, and the poorest people within those countries, where populations spend a larger proportional share of income on basic food commodities."

Even within the US, food prices affect one in seven Americans.  That is because 15% of the US population does not have the income to pay for the most basic necessity of life and that is food. Rice is one of the largest staples of the global diet and its recent price action is signaling yet another threat.  

This heat map of rice consumption per capita shows Asia as the most at risk to rising rice prices

Rice prices in 2010 relative to the 2007-08 highs are relatively low but as the chart shows, price can accelerate very quickly. 

The chart below shows just how fast prices have begun to move since 2009.  In fact the prior resistance level has already been taken out and a massive melt up is not only possible but also probable.  We are in a yield chasing environment right now.  Those who missed the move up in sugar and cotton, etc will pile in to the rice trade and accelerate this move.  

"It's really very simple Governor, when people are hungry they die..."  Bob Geldoff

Another QE Head Wind

The Future Of QE

One thing that is certain is some day QE will end.  Either because the economy is truly self-sustaining or because someone forces the Fed's hand, possibly even the Fed.   Too many people use the blanket excuse "the Fed will just print money."  The reality is, 90% of those who say that don't even understand what it means.

It is truly amazing how the Fed has conditioned all of us.  If you are bullish, you are leveraged and unhedged.  You believe in the power of the Bernanke put. If you are bearish you have been beaten up pretty badly and are now simply managing risk and limiting any exposure to the short side.

Something will occur that is unforeseen that will stop QE and in a timeline different than what the majority think.  I say that for the simple reason that the majority is always wrong.  There will be some event that no one factored in.  With QE the Fed expected a weak dollar and lower yields.  Lower yields is what they sold as the benefit of QE but the opposite has happened.  The Fed did get their weak USD but its impact has reached far beyond exports.

US manufacturing data has been solid the past few months as was the trade portion of the Q4 GDP report.  Beyond the headlines though something that has stood out are rising prices.  The Fed knows of these price increases and their negative impact on the consumer.  They can't come out and say that though.  They are in the business of conditioning us to believe all is well.  I think the Fed made a huge miscalculation with their QE policy.

They underestimated the impact that QE would have on input costs.  Costs are rising so fast right now that margins are being squeezed.  For manufacturers of discretionary items, passing along these prices are next to impossible so costs will have to be reduced including lower payrolls (notice today's reported productivity gains at the expense of labor). Non-discretionary items will see prices passed along to the extent it is possible. Name brands though are losing market share to the generic brand sitting on the same shelf, so pricing power is limited.  Games will be played by selling smaller size products for the same price to hide inflation, but it's there and the consumer will be taxed.

The piece the Fed truly underestimated and what I suspect is the event that possibly forces the Fed's hand are global food riots.  What started as peaceful demonstrations have truly grown both in size and method.  Just two nights ago I watched protestors in Egypt picking up the trash to maintain the integrity of their community.  Tonight, the media is banned and molotov cocktails, rocks and gun fire litter the street.  Yemen saw 20,000 protestors come out tonight, Saudi Arabia had a small protest, Algeria, Tunisia had a successful protest, the list goes on.  Watch for this movement to grow faster than anyone ever expected.  I don't know of anyone who had this on their 2011 prediction list.

When QE2 was announced in August of 2010, it was a monetary policy to "inflate" the economy.  One of its many unintended consequences is the foreign policy nightmare is has created.  Global security is now at risk.  As the 2008 financial crisis taught us, many bad decisions are made during a crisis.  Watch for things to unfold and the poor decision making to continue.

The Future Of QE

Let Us Not Forget Our Friends In The EU

Portugal

Remember 7% yield is the cutoff for ECB / IMF aid.  What's that a 7% yield I see?

Spain

Not 7% but not coming down and stuck at 5%.

Ireland

The bank run continues and doubled the rate in December versus November.

UK

Was that a negative GDP print on expectations of growth?  Yes it was.

Let Us Not Forget Our Friends In The EU