Snowden Market Insights: The Unbearable Lightness of Money

December 14, 2012

This Insight looks to discuss: FED reflation The fiscal cliff and gravity Keeping watch over bubbles In days of old, money had a certain gravitas. It was heavy. In French, money is argent, meaning silver. In German, the word for money is Geld, which is related to gold. Today, money has an ethereal quality. The Federal Reserve announced on Wednesday, as expected, that they would expand their quantitative easing program (money printing), buying $45 billion a month of longer dated US Treasury securities. This program complements the $40 billion a month of mortgage backed securities which the FED is currently buying. Thats $85 billion a month, money created from thin air. Equities rose on the news then gave back gains. Treasury bonds sold off heartily with the 10 year yield rising back above 1.7%. The FED will now consider withdrawing monetary accommodation if the unemployment rate hits 6.5%. Linking an explicit employment level to monetary policy is new. A 2% inflation target remains in place but an additional 0.5% will be tolerated. 10 year TIPS break evens are trading at 2.5% now. We have discussed the FEDs willingness to accept a higher rate of inflation before. Now its official. The FED has been reflating since the financial crisis. The debt crisis was a collective recognition that the ethereal quality of money could not support the weight of debt. Debt still maintains a certain gravitas. It is finite, measurable, and in context of the developed economies of the world, considerable. By almost all accounts it is unsustainable. The FEDs response to the crisis has been to extend the limitless force of money creation into the policy mix. Like cream rising to the top, more liquidity is supposed to lift the economy from its doldrums. What we have actually seen are asset prices rising over the last four years. The global economy is muddling along, skirting crises along the way. We are now staring over the fiscal cliff. While there has been a fair amount of drama by both political parties, the simple fact of the matter is that this event is heavy. If no accord is struck, the sequestration process will go into effect, including automatic budget cuts and higher taxes. We would expect that both markets and the economy would sink. The question remains to what degree. If a deal is struck between Republicans and Democrats before years end, the markets may continue their ascent but the enormous mismatch between government revenues and expenditures remains. The limits of borrowing are closing in. The FED is buying up large swathes of US debt markets but that is still not sufficient. Cuts must be made on a grand scale and politicians are loath to implement unpopular measures. Any cut is unpopular somewhere in the electorate.

About Snowden
Snowden is a global, independent financial services firm. We provide wealth and corporate advisory services to high net worth individuals, families, institutions, and governments. In the end, each of our clients is trying to get from Point A to Point B Snowden provides the pathway from point to point.

Article Written By

Patrick Grattan
Investment Advisor & Portfolio Manager, Snowden Capital Advisors Patrick provides advisory and investment management services to Snowden's wealth advisory clients. He joined Snowden from Merrill Lynch where he was an International Financial Advisor and Portfolio Manager in the PIA Program, working with HNW and UHNW clients. Patrick started at Merrill Lynch in 1998 in the International Advisory Group, which oversaw over $2 billion in client assets. Prior to his career in finance, Patrick served as an Adjunct Professor of Philosophy at the College of Charleston, having completed his PhD in Comparative Literature at Binghamton University and a DEA in Philosophy at the University of Paris VIII, Saint Denis. He received his BA from Hobart College in 1983. Patrick speaks French and Spanish and has a working knowledge of Russian. He holds Series 7, 63, and 66 licenses. Patrick and his wife have one child and reside in Montrose, New York.

Questions or Comments? Please direct them to

Snowden Market Insights www.snowdenadvisors.com th 660 Madison Ave., 14 Floor New York, New York 10065 lmorris@snowdenllc.com

A temporary fix will still be drawn into the debt ceiling limit in March. With that in mind, a temporary solution may be a sell the news event. In that case, expect a shallow pullback of up to 5% for investors to regroup and reassess into the new year. Should no deal be struck, we would expect markets to sell off anywhere from 7 to 15%. Its all psychology and momentum at that point, along with the unpredictable reaction of computers selling shares faster than other computers. The cliff may prove to be an apt metaphor. Following the FEDs calculations, reflation offsets deflation. While US markets outperformed on a global basis through much of the year, the cliff debate has seen US performance surpassed by both European and Asian indices. New leadership in China, coinciding with lows on the Shanghai index may portend greater follow through in both China and emerging markets. The Chinese government approved some $156 billion worth of infrastructure projects in September. Among other things, this includes the build out of twice the current subway capacity of the United States. These projects may simply lead to misallocation of capital but for now, it increases employment and material inputs. While Europe is clearly entering into recession, markets there have bottomed and have been outperforming. The Greek crisis and other looming crises like Spanish banks and unemployment have taken a back burner to the concerted and seemingly coordinated actions of Central Banks. Beyond the FEDs Q Eternity, The Reserve Bank of Australia has recently eased, the Bank of England is leaning towards more accommodation and the European Central Bank (ECB) has plans in place to support failing banks and sovereigns. Japan has announced two stimulus plans in about a months time. The Yen has weakened and Japanese stocks are rising, historically a bullish signal for global trade. Global swap lines, which are liquidity provisions between major Central Banks, have just been extended for another year.

Liquidity remains flush globally, which has overshadowed the fundamentals of a slowing / muddling economic recovery. It is the lightness of money at play. This has been positive for asset prices but has still been of dubious benefit for jobs and the economy. The clear and present danger of money printing is inflation. In the US the largest component of inflation is found in wages, but we are still far removed from labor pressures. In fact, wages continue to erode. This tames inflation but places stress on the social fabric. A continual danger is the loss of signal between markets and the economy, since liquidity trumps fundamentals and markets rise on momentum. The ethereal lightness of money is unbearable because it is unsustainable. While certain pundits applaud Central Bank actions, we have maintained a skeptical view in the face of impending bubbles. But as the old Wall Street saw goes, "the trend is your friend." The FED has engineered an asset recovery, plain and simple. They are not done yet. The two leading sectors this year have been Financials and Consumer Discretionary. Typically these are early cycle plays and their strength should portend a growing economy. While banks are earning profits, much of this is in the mortgage business which floats upon the FEDs largesse. Balance sheets also remain opaque. Consumer Discretionary success is, to a large degree, built upon housing stocks which have surged on potential, while actual housing growth remains tepid. Consumption is also enabled by government deficits, but while profits are up, a record number of people are now on food stamps! Were reviewing our outlook for the new year. Gold, which remains range bound, is still a diversifier and a hedge against currency debasement. Bonds are tactical plays at this point given expected bouts of volatility (where a bond can earn a total return during deflationary fears). Emerging markets peripheral to the BRICs have broken out and hold promise. A bad result from the cliff could be a global downer, but Central Banks are pulling out the stops. We are floating above the fray. One must keep their wits, because the implacable force of gravity is the final arbiter of bodies in motion, no matter how seductive those bubbles may be!

This report discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. It is for informational purposes only and does not constitute, and is not to be construed as, an offer or solicitation to buy or sell any securities or related financial instruments. Opinions expressed in this report reflect current opinions of Snowden Capital Advisors, LLC ("Snowden") as of the date appearing in this material only. This report is based on information obtained from sources believed to be reliable, but no independent verification has been made and Snowden does not guarantee its accuracy or completeness. A reference to a particular investment or security by Snowden is not a recommendation to buy, sell, or hold such investment or security, nor is it considered to be investment advice. Snowden, its employees, officers or affiliates, in some instances, have long or short positions or holdings in the securities or other related investments of companies mentioned herein. Snowden does not make any representations in this material regarding the suitability of any security for a particular investor or the tax exempt nature or taxability of payments made in respect to any security. Past performance is not a guarantee of future results. Investors are urged to consult with their financial advisors before buying or selling any securities. The information in this report may not be current and Snowden has no obligation to provide any updates or changes.