• Pivotfarm
    08/03/2015 - 15:25
    The quest for perfection is man’s unattainable goal. Man can never be perfect if we are to believe the English philosopher Thomas Hobbes. Man is man’s wolf and all of that.

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Will Kuroda Do A Bernanke?

The performance of the JPY (strengthening) and Nikkei (falling notably) over the last few days suggests a market that is expecting to be disappointed by tonight's BoJ Governor Kuroda's speech. However, as Citi's Steve Englander notes, given the recent Bernanke-Carey-Draghi actions, we suspect there will be some temptation for Kuroda to speak out whether ex cathedra as BoJ Governor or with his personal view Bernanke style so as to get the NKY-JPY train back on track.



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"The Taper Is Coming" - What Wall Street Thinks

Back in May, when we coined the term "Taper Tantrum" before the infamous Hilsenrath article was released bringing with it famine, pestilence and a full rerun of the 1994 blow out in rates, and when the prevailing consensus was that Bernanke wouldn't touch the rate of monthly monetization until December or even 2014, we forecast that as a result of a the declining US deficit (primarily due to a brief spike in GSE remittances to the Treasury until the closed loop of lower monetization ends any myth of a "housing recovery" and pushes US deficits much wider again) Bernanke will have no choice but to taper QE by $20 billion (or else risk destabilizing an already illiquid TSY market even more) with the announcement due at the September FOMC meeting. Just to avoid any confusion, we also showed just what such a September tapering would look like in the grand context of QE. But when, and by how, much does Wall Street see the end of tapering, and what is the sell-side consensus? The list below summarizes the current view by bank.



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Europe Passes The Inflection Point (Or Why LTRO3 Is Inevitable)

One year on from the "whatever it takes" speech and all appearances suggest Draghi's all-in move with the imaginary OMT 'worked. European sovereign spreads have compressed dramatically, European stock indices are near their highs, European financials are doing great. Of course, record unemployment rates, record loan delinquencies, record drops in house prices, and record deposit outflows can all be ignored because no matter what, Draghi will do "whatever it takes." Except, as JPMorgan notes, the excess cash in the Euro area banking system continues to decline reaching EUR230bn, closer to the so-called inflection point at which money market rates, i.e. EONIA and repo rates, are responding more pronouncedly to changes in the excess cash. Bank funding is becoming increasingly volatile since the 2nd LTRO repayment and the trend shows no sign of abating. We suggest Mrs. Merkel will be on the phone telling Mr. Draghi to "get back to work," - at least until September 23rd anyway.



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80% Of US Adults Are Near Poverty, Rely On Welfare, Or Are Unemployed

Despite consumer confidence at a six-year high, the latest AP survey of the real America shows a stunning four out of five U.S. adults struggle with joblessness, are near poverty, or rely on welfare for at least parts of their lives amid signs of deteriorating economic security and an elusive American dream. Hardship is particularly on the rise among whites, based on several measures. Pessimism among whites about their families' economic futures has climbed to the highest point since at least 1987.



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Alasdair Macleod: Europe is a Hot Mess

It's almost August, the month everyone in Europe takes off on holiday to forget their troubles. This year may be different, though, as not only can many not afford a vacation, but Europe's troubles loom so large that forgetting them won't be easy... a quick spin through many of the countries there reveals much instability.



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China To Kick Bad Debt Hornets Nest

China is preparing to admit that the level of problem Local Government Financing Vehicle debt is double the 10.7 trillion yuan first reported just two years ago, something many suspected but few dared to voice in the open. But not only that: since the likely level of Non-Performing Loans (i.e., bad debt) within the LGFV universe has long been suspected to be in 30% range, a doubling of the official figure will also mean a doubling of the bad debt notional up to a stunning and nosebleeding-inducing $1 trillion, or roughly 15% of China's goal-seeked GDP! We wish the local banks the best of luck as they scramble to find the hundreds of billions in capital to fill what is about to emerge as the biggest non-Lehman solvency hole in financial history (without the benefit of a Federal Reserve bailout that is).



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The Full Layout Of Modern Shadow Banking

Following up on yesterday's essay comparing Walter Bagehot to a modern-day shadow banker, we have received numerous requests for more information on this fundamentally critical  financial topic. So without further ado, we present a full and unabridged map of the modern shadow banking system.



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Guest Post: Egypt After Morsi

With the bloodiest weekend since the ouster of Mubarak, it seems the supposed coup-less people's revolution appears to be edging ever closer to civil war. Egypt lies at the heart of the Arab revolution, even if the original spark occurred in Tunisia. But Egypt – with its strategic location, stable borders, large population, and ancient history – has been the principal power of the Arab world for centuries, defining the movement of history there like no other. This implies that the overthrow of Egypt’s democratically elected president, Mohamed Morsi, will have much broader repercussions. Europe's bloody revolutions of the 19th century changed the status quo forever and while the Arab world might not be so deeply affected, the near future there will certainly be neither peaceful nor stable.



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Chicago Next? Windy City Cash Balance Plummets To Only $33 Million As Debt Triples

While everyone's attention is focused on the Detroit bankruptcy, and just what assets the city will sell in lieu of raising a DIP loan, perhaps it is time to refocus attention to the city 300 miles west: Chicago. According to the Chicago Sun Times, Obama's former right hand man, Rahm Emanuel, closed the books on 2012 with $33.4 million in unallocated cash on hand — down from $167 million the year before — while adding to the mountain of debt piled on Chicago taxpayers, citing year-end audits. In addition to a liquidity problem, Chicago may also be quite insolvent as the city's total long-term debt soared to nearly $29 billion. That’s $10,780 for every one of the city’s nearly 2.69 million residents. More than a decade ago, the debt load was $9.6 billion or $3,338 per resident. Of course, in a world in which debt is "wealth", this is great news... at least until debt becomes "bankruptcy."



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Is This The Recovery Obama (And Jack Lew) Is Talking About?

Obama: "...the economy is far stronger now than it was four and a half years ago"

...as long as one ignores the reality of the following chart...



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"Bagehot Was A Shadow Banker" - A Monetary System That Is Only As Good As Its First Broken Promise

"At all times, ultimate collateral and ultimate money remain crucial reference points in modern financial markets, but the actual instruments are important only in times of crisis when promises to pay are cashed rather than offset with other promises to pay.... Our world is organized as a network of promises to buy in the event that someone else doesn’t buy. The key reason is that in today’s world so many promised payments lie in the distant future, or in another currency. As a consequence, mere guarantee of eventual par payment at maturity doesn’t do much good. On any given day, only a very small fraction of outstanding primary debt is coming due, and in a crisis the need for current cash can easily exceed it. In such a circumstance, the only way to get cash is to sell an asset, or to use the asset as collateral for borrowing."



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Gold And The Endgame: Inflationary Deflation

Excessive monetary stimulus and low interest rates create financial bubbles. This is the biggest debt bubble in history. It is a potent deflationary force and central banks are forced into deploying increasingly aggressive (offsetting) inflationary forces. The avoidance of a typical deflationary resolution to this economic long (Kondratieff) wave is pushing the existing monetary system beyond the point of no return. The purchasing power of the developed world’s currencies will have to bear the brunt of the “adjustment”. Preparations for this by the BRICS nations, led by China, are advancing rapidly. The end game is an inflationary/currency crisis, dislocation across credit and derivative markets, and the transition to a new monetary system. A new “basket” currency is likely to replace the dollar as the world’s reserve currency. The “Inflationary Deflation” paradox refers to the coming rise in the price of almost everything in conventional money and simultaneous fall in terms of gold.



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"Economics Cannot Trump Mathematics"

It is nearly impossible to convince people that an economic ending is likely, perhaps inevitable. It is beyond anything they have seen or can imagine. We attribute that to a normalcy bias, an inherent weakness of experiential learners. For many, accepting something that has not occurred during their time on the planet is not possible. The laws of economics and mathematics may shape history but they are not controlled by history. The form of cataclysm and its timing is indeterminable. Political decisions continue to shape both. The madmen who are responsible for the coming disaster continue to behave as if they can manage to avoid it. Violating Einstein’s definition of insanity, they continue to apply the same poison that caused the problem. These fools believe they can manage complexities they do not understand. We are bigger fools for providing them the authority to indulge their hubris and wreak such damage. The political class in America, either via misguided economic policies or a deliberate attempt to hide the true condition of the country, has put us here. They will continue to employ whatever policies they believe will keep things going for a while longer. The tragic ending has been cast. Economics cannot trump mathematics.



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Why China's Leaders Know There's A Storm Ahead

Positive demographic cycles have been one of the key components in the strong growth trends for a number of Asian countries. As Morgan Stanley note in their most recent 'China Deleveraging' discussion, the decline in the ratio of the non-working (elderly and children) to working-age (15-64 years) population has coincided with periods of economic boom for various countries in Asia in the past 50 years. But... as Nomura's Richard Koo notes - having experienced the very same unstoppable shift in Japan - "demographics will cease to be a positive for China’s economic growth and start to have a negative impact." Fundamentally, Koo adds, this means "the nation will grow old before it grows rich." Demographics, capital accumulation and productivity are the three most important drivers of potential growth, and these three factors are intertwined to a certain extent. China has already entered its first stage of demographic challenge, with its GDP growth slowing on the back of all three contributors of growth. Given the lessons of Japan and the Asian Tigers, China is set to suffer notably from this demographic drag - and its entirely foreseeable.

 



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Liquidity Update: Record High Deposits, Fed Reserves And Foreign Bank Cash; Fed Owns 31% Of Treasury Market

Bored with the constant daily speculation about who may be the Fed's next head (short answer: whoever Goldman says), and more interested with the actual liquidity dynamics that the next Chairman (or Bernanke, as his departure is far from certain) will have to deal with? Here is the latest.



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