As if China was not suffering enough from a slumping economy, the South China Morning Post now reports that the H7N9 'bird flu' virus that has infected 131 people (and killed 36) so far can be transmitted not only by close contact but by airborne exposure. Domestic reports suggest the virus appears to be brought under control largely through restrictions at bird markets but the team at the University of Hong Kong has also found that pigs can be infected (cue 'when pigs can fly' pun). The findings suggest that there may be many more cases that have been detected or reported since "people may be transmitting the virus before they know they've even got it."
We are approaching a critical point (again) in the “battle royal” between the forces of inflation and deflation. Deflationary forces are threatening to overwhelm the reflationary push-back of the world’s central banks - although this is not reflected in most equity markets (especially the US). Open-ended QE was only announced by the Fed last Autumn, but the impact on (market-based) inflation expectations plateaued within months and has started turning down. A decision to taper QE would obviously be negative for equities in the absence of a sufficiently strong offsetting improvement in economic fundamentals – which is difficult to envisage right now.
It seems the correlation to USDJPY has started to disintegrate and what is more worrisome for the BoJ is the linkage between JGBs and the Nikkei 225. Equities in Japan are about to open to a modest bounce around 1.5% but JGB prices are down around 0.50 (half the limit-down price moves). So, the problem for the BoJ is - do you let JGBs flop to maintain your equity market's appearance of normality? Or are Japanese stocks about to be as implicitly repressed as the bond market? It would appear TPTB are doping their best to ramp the JPY to keep this bounce alive (USDJPY opening just shy of 102.50).
*AMARI SAYS 'ABENOMICS' IS PROGRESSING STEADILY (this is progress?)
*AMARI SAYS BOJ IS COMMUNICATING CLOSELY WITH MARKETS (we suspect the market is communicating back even more)
"Central bankers dream of getting back to "normal" – normal interest rates, a normal balance sheet, and so on. But that point isn't going to come any time soon. They are stuck on a money printing treadmill, and there appears no way off.
The foundation of the Soviet model of trade and investment was centralization under the guise of "universal public ownership". The entire goal of communism in general was not to give more social and political power to the people, but to extinguish alternative options and focus power into the hands of a select few. The process used to reach this end result can vary, but the goal always remains the same. In most cases, such centralization begins with economic hegemony, and it is in our fiscal structure that we have the means to see the future. Sovietization in our financial life will inevitably lead to sovietization in our political life. Does the U.S. economy’s path resemble the Soviet template exactly? No. And we're sure the very suggestion will make the average unaware free market evangelical froth at the mouth. However, as we show, the parallels in our fundamentals are disturbing; the reality is that true free markets in America died a long time ago.
The IRS' Lois Lerner may not be the most proficient when it comes to hiding years of alleged conservative group persecution, or subsequently pleading the fifth and avoiding self-incrimination in what she dubs is a perfectly legal misunderstanding even as she makes on the record statements defending her innocence, but when it comes to being put on "involuntary" paid leave, she shows private sector efficiency and results. According to Bloomberg, "Lerner is being replaced on an acting basis, the IRS said today. Lerner has been placed on paid administrative leave, said a Democratic aide who was informed of the decision. The move wasn’t voluntary, the aide said." So whereas taxes paid by conservatives were being used to fund her witchhunt of other conservatives, going forward the government worker, who oddly enough is being replaced "despite having done nothing wrong", will be paid to do nothing. Sound like a hole in one mission accomplished for this administration.
In an age of economic policy activism, including widespread quantitative easing and associated purchases of bonds and other assets, Amphora's John Butler reminds us that it is perhaps easy to forget that foreign exchange intervention has always been and remains an important economic policy tool. Recently, for example, Japan, Switzerland and New Zealand have openly intervened to weaken their currencies and several other countries have expressed a desire for some degree of currency weakness. In this report, Butler summarizes the goals and methods of foreign exchange intervention and places today’s policies in their historical context; but moreover he discusses the evidence of where covert intervention - quite common historically - might possibly be taking place: perhaps where you would least expect it... And if the currency wars continue to escalate as they have of late, it seems reasonable to expect that covert interventions will grow in size, scope and frequency.
As the chart below shows, since officially leaving the gold standard in 1971, annual GDP growth has outpaced the growth of federal debt on just 11 occasions, and of these half were during the dot com boom of the late 1990s. Obviously this chart would look far worse if instead of just federal debt - which is merely a portion of total we used total credit market debt (which is some three time greater). But for illustrative purposes, merely Federal debt will suffice, because the parabolic "endphase" divergence between the two indexed lines - one showing GDP growth, the other debt growth - says more about the final outcome of this tragic Keynesian experiment than 1000 meandering, meaningless, trolling essays written by Nobel-prize winning economists ever could.
If JGB investors 'believe' as Richard Koo earlier noted, in the BoJ's new actions and Abenomics (to double the monetary base and generate inflation), then, Kyle Bass explains, a rational investor is likely to sell a portion if not all of them. The BoJ only has JPY10 trillion cushion (after the JPY60 trillion deficit) to soak up this 'rational investor paradox' selling and this is dwarfed by the holdings of JGBs in the largest Japanese banks (who are now starting to rotate away from JGBs into foreign bonds). Simply out, Bass exclaims, they are going to have make the plan even bigger... if they are to successfully contain rates. With a quadrillion JPY of JGBs out there, if a mere 5% is sold (from 'Abe'lievers) then Japan's Turbo QE is not big enough which leads to the paradoxical increase in the QQE, moar inflationary 'belief', and moar selling pressure... The BoJ has been in the market every day but 2 since April 4th trying to hold rates down (and is failing)...
Two years ago it was only gold and silver that saw the CME's wrath on a daily, and sometimes hourly basis. Back then, however, it was due to soaring prices. Today, it is due to the bone-crushing price collapse in the Nikkei which has just seen the CME hike most Nikkei-related outright futures margins by 33%. So not only will those who resume trading Nikkei-related products in the futures market see a big loss in their P&Ls, they will also have to post some 33% more margin. We can only hope they still have some collateral and aren't margined up 100%. That would not be good for the Japanese pennystockmarket and "experiment" no matter how much good luck Jens Weidmann wishes them.
While the off-the-lows mentality of today's market performance was heralded by most as a signal that the BTFD'rs are back, we gently remind them that the Nikkei (futures) did not bounce at all... In fact S&P futures bounced to a rather eerily perfect 38.2% Fibonacci retracement of the overnight plunge and then faded into the close. All the major indices managed to get back to unchanged on the day (but the S&P 500 was the last to make it and instantly turned around once it did). Credit markets opened gap wider and did not bounce back anything like stocks. Treasuries sold off modestly from their pre-opening levels then drifted lower in yield into the close (ending down 2-3bps on the day but up 6-7bps on the week). The USD weakened most of the day and commodities gained on the day with gold and silver now up over 2% on the week. VIX fell from the open to the close but ended the day higher as we suspect hedges were lifted and exposure reduced into the bounce.
Last week when Simon Black arrived in Bangladesh, the immigration officials there were positively ecstatic to see a foreign tourist entering the country. It’s not quite the same in the Land of the Free. In fact, before they even let people in the country, they program us to be afraid and intimidated. For one thing, all the immigration officers are armed. There’s absolutely no reason for a government agent to carry a loaded pistol when all he does is stamp a passport. This is extremely uncommon in the rest of the world. Only in the Land of the Free. When you step back and look at the whole government apparatus, it’s apparent that this culture of fear and intimidation applies across the entire spectrum. A particularly fitting quote, most frequently credited to Thomas Jefferson– “Where the people fear the government, you have tyranny. Where the government fears the people you have liberty.” It’s absolutely true.
One can read "The Lethal Presidency of Barack Obama" to get a true sense of Obama's "the best defense is a relentless drone everyone offense, ignore collateral damage and take out a few Americans in the process" policy. Or one can stare at rising stawks and enjoy their Obamaphones. Obe can't have both.
The surge in Japanese long-term interest rates is likely causing some lost sleep among bond market participants and policymakers (despite their ignorance of the moves in the BoJ minutes) as Nomura's Richard Koo notes, if this trend continues (now added to by the collapse in stock prices) it could well mark the “beginning of the end” for the Japanese economy. Although the stock market has (until now) welcomed the yen’s continued slide against the dollar, Koo warns that this trend needs to be carefully monitored, as simultaneous declines in JGBs and the yen can be interpreted as a loss of faith in the Japanese government and the Bank of Japan. The biggest concerns are that the extreme volatility in Japanese stocks and bonds is occurring at a time when the BOJ was buying large quantities of government bonds. It is now clear that even large-scale BOJ purchases of JGBs cannot stop yields from rising. Simply put, Koo notes, the BoJ needs to rein itself in and state it will not stand for overshooting inflation expectations or the 'bad' rise in rates could crush both the nascent recovery and the nation's banking system.
(Milli)seconds after today's market open, utilities NextEra Energy (NEE) and American Electric Power (AEP) did what most stocks in the New Normal do when there is an unexpected event (like a 4 sigma plunge in the Nikkei): they flash crashed. What is different about AEP and NEE is that unlike most other daily stocks that implode in a matter of milliseconds, the collective market cap of the two companies was nearly $60 billion, which in turn sent the broader utilities index down over 10%. Of course, for a few milliseconds it was more like $30 billion: because that is how much in capitalization was lost in under one second, when today's flash crash du jour struck. But fear not: anyone who got stopped out under $76.19 in NEE and under $46.03 in AEP are the "lucky" ones, and the trades were marked as "Aberrant." Alas since that simply means the trades are excluded from daily high and low charts, that is hardly comforting for anyone.