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Bernanke Exit Signaled by Obama Means Tapering, Feldstein Says

Bernanke Exit Signaled by Obama Means Tapering, Feldstein Says - Here is the opening for this informative article from Bloomberg today:

President Barack Obama clearly signaled this week that Federal Reserve chairman Ben S. Bernanke will be leaving the central bank when his term ends in January and that looming departure means Bernanke will want to begin tapering asset purchases this year, said Harvard University economics professor Martin Feldstein.

The Fed has been making $85 billion in monthly bond purchases in an effort to spur job growth and galvanize faster U.S. economic expansion. The policy making Federal Open Market Committee is meeting today in Washington, with four more FOMC meetings scheduled before the end of the year.

"One of the implications of the fact that Ben is now very, very likely to be leaving at the beginning of the year is that he's going to want to get the so-called exit strategy under way," Feldstein said on CNBC television today. "He's going to want to start the tapering before he leaves so that he can say, 'I did all these good things, and I put us on an exit path.'"

Obama said Bernanke has "already stayed a lot longer than he wanted or he was supposed to" in an interview with Charlie Rose that was broadcast June 17 on PBS.

"The president more or less said the other day, on television, 'Your time is up, Mr. Bernanke,'" Feldstein said. "I didn't think that was a very nice gesture on the president's part."

My view - Ben Bernanke was appointed Chairman of the US Federal Reserve because he was the academic expert who said he could prevent a destructive deflation, such as Japan experienced and which so many people feared. He succeeded in avoiding deflation with an exceptionally accommodative monetary policy, as we know, and this has cushioned downside risk for the US economy somewhat.

We also hear that Mr Bernanke will most likely be handing over leadership of the Fed to a successor appointed by President Obama, possibly before the expiry of his second term on 31 January 2014. It had been assumed that Fed Vice Chairman Janet Yellen would succeed Mr Bernanke, but President Obama has yet to confirm this.

There has been speculation about President Obama's terse comments regarding Mr Bernanke in his recent interview with Charlie Rose of CNBC. I will not add to the conjecture but weaning the economy off $85bn a month without disruption will be more challenging than providing the stimulus which has been a powerful tailwind for the stock market.

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Corn Gains as May Rain Reduced Crop Potential, Wheat, Soy Rise -
Here is part of a brief report, originally from Bloomberg today, questioning previous forecasts for bumper crops:

June 19 (Bloomberg) -- Corn rose for a third day in Chicago on speculation that rain and cool temperatures during April and May reduced U.S. planted acreage and cut yield potential. Wheat and soybeans also gained.

Rainfall from March to May in Iowa, Minnesota, Wisconsin and Michigan was the most in 119 years of weather data, the National Oceanic and Atmospheric Administration said in a report. Corn planting on May 26 was 86 percent completed, which may have encouraged farmers to idle land for crop insurance payments or switch to soybeans that can be planted later, according to Greg Grow at Archer Financial Services Inc.

"The focus is on the uncertainty about the number of acres that did not get planted, and the potential yield losses from fields seeded after the middle of May," Grow, the director of agribusiness at Archer Financial in Chicago, said in a telephone interview.

The USDA estimated June 12 that the U.S. corn harvest will rise 30 percent to a record 14.005 billion bushels this year as farmers plant the most acres since 1936 and yields recover from last year's drought. The government will update planted acreage estimates on June 28.

Corn supplies before the harvest are projected at 769 million bushels, the smallest since 1996, after the worst drought in more than 70 years reduced production to the lowest in six years, the USDA said last week

"We have a very tight supply situation ahead of the harvest, and we may not be able to see that type of crop USDA is currently forecasting without ideal-weather conditions the next three months," Grow said.

My view - We had some record plantings in the US but so much can go wrong during a crop season. Weather conditions in particular have become more turbulent.

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Bernanke Says Fed on Course to End Asset Buying in 2014 -
These items on Ben Bernanke and the Fed today are much more important than anything else that I have seen, in terms of their implications, so I make no apology for featuring another one from Bloomberg. Here is the opening:

Federal Reserve Chairman Ben S. Bernanke said the central bank may start reducing bond purchases later this year and end them in mid-2014 if the economy continues to improve as the central bank forecasts.

"If the incoming data are broadly consistent with this forecast, the committee currently anticipates that it would be appropriate to moderate the pace of purchases later this year," Bernanke said today in a press conference in Washington. "If the subsequent data remain broadly aligned with our current expectations for the economy, we will continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around mid-year."

Bernanke spoke after the Federal Open Market Committee said today it would maintain the $85 billion pace of monthly asset purchases and that it sees the "downside risks to the outlook for the economy and the labor market as having diminished since the fall." The FOMC (TREFQE2) repeated that it's prepared to increase or reduce the pace of purchases depending on the outlook for the job market and inflation.

Bernanke is expanding the Fed's balance sheet toward $4 trillion as he seeks to reduce a jobless rate that stands at 7.6 percent after four years of economic growth. Concern that the Fed is closer to reducing the pace of asset purchases, also known as quantitative easing, pushed 10-year Treasury yields to the highest since March 2012.

Stocks extended losses after his remarks. The Standard & Poor's 500 Index declined 1.3 percent at 3:57 p.m. in New York. The yield on the 10-year Treasury note rose to 2.34 percent from 2.19 percent late yesterday.

My view - Approximately a month ago, some people, presumably including bond investors, were naively talking about 'interest rates staying low for ever'. Now the message that we have not only seen the best of the big QE tailwind, but that it will also end, is sinking in.

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I will review price charts for precious metals tomorrow -
However these have been mentioned in tonight's Audio.

Additional commentary by Eoin Treacy

Email of the day (1) on correlation:

Regarding the Permanent Portfolio, would you beleive the Kiwi Dollar runs most of the time at 80% to 90% correlation to it? Especially since the lows of 2009 the overlay is remarkable. Buying or selling t he Kiwi Dollar makes a simple permanent portfolio even simpler!

My comment Thank you for highlighting this interesting correlation which alludes to the Permanent Portfolio mentioned in Tim Price's piece posted by David on Monday. I replicated the correlation for the Permanent Portfolio Fund to the Australian and New Zealand Dollars using Bloomberg. As you point out the correlation between the Permanent Portfolio Fund and the Australian Dollar and New Zealand Dollar are 0.76 and 0.73 respectively since April 2009.

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Email of the day (2) on France:

How can Europe ever recover while the following conditions pertain? Even though the following is from the Austrian School the argument looks good to me.

My comment Thank you for this interesting article highlighting the issues with France's financial position and its ability to service its debt. France has long had a love affair with socialism and as a result has public services that are the envy of consumers everywhere. However, paying for such largesse is an increasingly difficult challenge. One of the main problems for the administration is that they have failed to effectively communicate the dire situation of the public finances to the public. Considering the fact that the public sector accounts for considerably more than 50% of the economy, rationalisation will have electoral implications if it is not handled correctly.

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Asian and commodity related government bond yields
The impact of Japan's quantitative easing has been felt far and wide with the performance of JGB's standing out for special mention. 10-year yields have doubled since the advent of Japan's extraordinary monetary policy, breaking a lengthy progression of lower rally highs in the process. A sustained move below 0.75% would now be required to question medium-term potential for further yield expansion.

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Email of the day (3)
on Singapore Dollar hedged Japan ETFs:

I trust you are doing fine. Could you advise any SGD hedged JAPAN equities ETFs please (ETF by preference, otherwise fund if ETF are not available) and add MMK LN to the Chart Library. Many thanks

My comment Thank you for this question which subscribers may be able to assist with. I conducted a search of the internet and Bloomberg but have not found a Singapore Dollar hedged Japan ETF. This section continues in the Subscriber's Area.

Email of the day (4)
on an addition to the Chart Library:

Can you put up the chart for Escher (ticker - ESCH.LN) please? Many thanks


My comment Thank you for this suggestion which has been added to the Chart Library. 

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