Archive - Dec 29, 2012

Only from Banzai7 News...

The politicization of central banking continues unabated. The resurrection of Shinzo Abe and Japan’s Liberal Democratic Party – pillars of the political system that has left the Japanese economy mired in two lost decades and counting – is just the latest case in point. He argued that a timid BOJ should learn from its more aggressive counterparts, the US Federal Reserve and the European Central Bank. But will it work? Unfortunately, it appears that Japan has forgotten many of its own lessons – especially the BOJ’s disappointing experience with zero interest rates and QE in the early 2000’s. Not only is QE’s ability to jumpstart crisis-torn, balance-sheet-constrained economies limited; it also runs the important risk of blurring the distinction between monetary and fiscal policy. Massive liquidity injections carried out by the world’s major central banks – the Fed, the ECB, and the BOJ – are neither achieving traction in their respective real economies, nor facilitating balance-sheet repair and structural change. That leaves a huge sum of excess liquidity sloshing around in global asset markets. Where it goes, the next crisis is inevitably doomed to follow.

Surprise! As we all wait on tenterhooks for tomorrow's messianic 'Meet the Press' appearance, The Hill reports that a Senate aid with knowledge of the talks said late Saturday afternoon there is "no major progress." The rare weekend negotiations continue with the sticking point still taxes - which will come as no surprise to any who read/listened to Ron Paul's clear analysis of the idiocy taking place - but differences on other issues, including spending cuts, linger. Reid has scheduled a Democratic caucus meeting for Sunday afternoon to give his colleagues a chance to weigh in on a potential deal. McConnell has said he would do the same. "I believe such a proposal could pass both houses with bipartisan majorities – as long as these leaders allow it to come to a vote," Obama said in his weekly address. "If they still want to vote no, and let this tax hike hit the middle class, that’s their prerogative – but they should let everyone vote. That’s the way this is supposed to work." If the Senate passes the legislation, it would then force the House to take up the bill on the eve of the looming deadline - leaving the 'blame' at the foot of Boehner's Republicans should they not support it. The games continue... but in the meantime, consider what the debate would have looked like (literally) if Elizabeth Hasleth was still in the Senate.

We have a Crisis of Trust in America and it has become so pervasive that it is paralyzing America's natural inclination towards risk taking and innovation. This Crisis in Trust is a direct result of Monetary Malpractice and the Moral Malady which it has inflicted on America. Trust fosters certainty and a sense of security. Uncertainty is the death knell for business investment and finance. Today's plummeting capital investment in America means slower growth and an even tougher job market lay ahead. So where does a Crisis of Trust stem from and why do we suddenly have one?

California home prices experienced a big surge in 2012. This might fly in the face of stagnant household incomes but the incredible push for lower interest rates and reliance on low down payment FHA insured loans has brought many people off the fence. In Southern California home sales are up by 14 percent over the last year and the median price is now up by 16 percent. The median price is largely being pushed by the mix of home sales. Distressed properties are making up a smaller pool of sales. With low inventory, you have regular home buyers competing also with house flippers, big Wall Street buyers, and foreign money with limited supply on the market. The result has been to push home prices much higher making it more difficult for middle class families to afford a home. As we approach the end of 2012, let us look at the data for Southern California.

Even if the US economy really takes off in 2013, don`t look for oil and gasoline demand to overtake supply in the equation.

A broken safety net is no safety net at all.  

When it comes to US austerity, a very sensitive topic as framed best by the "spending cuts" portion in the Fiscal Cliff debate, the ideas range from the surreal to the outright idiotic: as an example in the most recent Obama proposal spending would be "reduced" in the form of $290 billion in interest savings - not an actual spending reduction, but a hope and a prayer that because rates are lower, the government will "save" money with rates continuing to be lower (something which immediately causes a #Ref! explosion for anyone not using government math), $130 billion in savings that would come from once again rejiggering the definition of 'inflation', as well as "savings" from not funding extra defense spending because the US is not engaged in a pro forma war. Like we said: surreal and idiotic, or in other words, no actual real cuts to spending. Yet even as the nation is gripped by the melodrama of fake spending cuts offset by the threat to tax millionaires more (all of whom will merely find more creative and effective ways to hide their wealth and income offshore), spending increases are all too real, such as last night's order by Obama's just issued an executive order to end the pay freeze for federal employees, which is the equivalent of a wage increase. A truly deserved rise in wages for a job well done by the most dysfunctional Congress America has ever seen.

In a little under three minutes, Ron Paul explains to a somewhat nonplussed CNBC anchor just how ridiculous the charade that is occurring in D.C. actually is. This succinct spin-free clip should be required viewing for each and every asset-manager, talking-head, propagandist, and mom-and-pop who are viewing the last-minute idiocy of the 'fiscal cliff' debacle with some hope that things will be different this time. "We have passed the point of no return where we can actually get our house back in order," Paul begins, adding that "they pretend they are fighting up there, but they really aren't. They are arguing over power, spin, who looks good, who looks bad; all trying to preserve the system where they can spend what they want, take care of their friends and print money when they need it." With social safety nets available to rich and poor, there is no impetus for change and "the country loses," but Paul concludes, the markets are starting to say "there is a limit to this."

There were some readers who took offense at our "bloodbath" recap of yesterday's market action (modestly different from that provided by MarketWatch). And, all else equal, a modest 28 step drop in the E-Mini/SPX would hardly be earthshattering. However, all else was not equal, and based on peripheral facts, the reason for our qualifier is that as of last week virtually nobody was prepared for a move as violent and sharp as the one experienced in the last minutes of trading yesterday. In such a context a "mere" 1.5% drop in the futures market has a far more pronounced impact on participants than a 10% or even 5% drop would have had, had traders been positioned appropriately. They weren't. So what was the context? Let's find out.

The IMF’s Il Houng Lee, Murtaza Syed, and Liu Xueyan have published a very interesting and widely noticed study called “Is China Over-Investing and Does it Matter?” In it they argue that there is strong evidence that China is overinvesting significantly. China’s investment rate is so high, that even ignoring the tremendous evidence of misallocated investment, unless we can confidently propose that Beijing has uncovered a secret formula that allows it to identify high quality investment in a way that no other country in history has been able, there is likely to be a systematic tendency to wasted investment. The extent of Chinese overinvestment – even if we assume that it has not already caused significant fragility in the banking system and enormous hidden losses yet to be amortized – requires a very sharp contraction just to get back to a “normal” which, in the past, was anyway associated with difficult economic adjustments. It is hard to imagine how such a sharp contraction in investment will itself not lead to a sharp drop in GDP growth.

My thoughts on what is headed our way

In a crushing blow to socialism, wealth redistribution and purveyors of the "fairness doctrine" (as defined here first) everywhere, the French Constitutional Council ruled on Saturday that Hollande's brilliant idea to tax millionaires at a 75% tax rate - a move which has since seen numerous millionaires leave France and move to Belgium - is unconstitutional. Per Reuters, the Council ruled that the planned 75 percent tax on annual income above 1 million euros ($1.32 million) - a flagship measure of Hollande's election campaign - was unfair in the way it would be applied to different households. Which is ironic because just like in the US, so in France, the selective wealth redistribution campaign waged by the government against the "rich" (which have yet to be properly defined: those making over $250K? Over $400K? Over €1MM?) was based on the premise that it is only "fair" that the rich contribute more. Turns out fairness in the eye of the government beholder, was unfair. But the move begs the question: would the court have struck down the law had it been a merely 50% tax hike? And if the income cut off was, say, €500,000? The far bigger question is, and has been in this year of encroaching socialism, just what is the definition of "rich", what is the definition of "fair redistribution", and where do the two coincide. Finally, how soon until the US Supreme Court weighs in as well on any final Fiscal Cliff tax hike proposal which, like in France, will see the "rich" pay an abnormal share, and will that too be ruled unconstitutional?

The holiday week saw the dollar consolidate against most of the major currencies.  The yen was the main exception as its losses were extended under the aggressive signals coming from the new Japanese government.   

At the end of the week, the other key consideration, the US fiscal cliff made its presence felt.  The recent pattern remained intact.  News that gives the participants a sense that the cliff may be averted encourages risk taking, which means in the foreign exchange market, the sale of dollars and yen.  

News that makes participants more fearful that the political dysfunction failed to avert the cliff and send the world's largest economy into recession, generally see the dollar and yen recover.  This is what happened in very thin markets just ahead of the weekend as Obama's ling last ditch negotiating stance seemed to reflect a retreat from his earlier compromises.

“Postponed” is the official stamp across the world. This is the operative word of governmental policy. Whether Europe or America, whether capitalist or socialist government; this is the credo, the banner, the flag waving in the wind for dealing with economic problems. Throw more money at it and barrels of it, have the central banks print and defer any pain much less any tough decisions. We live in a state of postponement, defer and delay which cancels the consequences of the moment but places more severe consequences, greater pain and tougher choices but moments out into our future. Make no mistake; the world has become a more dangerous place either haunted by the specter of rampant inflation or haunted by valuations of debt and currencies that could turn the financial markets into a swirl of dislocation where a plunge into a freezing sea of disarray awaits as capital goes to gold, senior debt regardless of yields and nations deemed to be safe havens.