Archive - Jan 2013

Better than expected German confidence and another Spanish auction 'success' was not enough to encourage anyone in the real world to step into European risk assets en masse. It seems good is no longer good; sovereign spreads leaked wider to unchanged on the week, corporate and financial credit spreads are far from the exuberance we see in European stocks; and Swiss 2Y rates pushed back into the negative (after a few days respite in the green) as last night's Open-Yended decision by the BoJ saw little risk-on follow-through. Europe's VIX has pushed higher from the middle of yesterday. Of note, perhaps is the opening gap down (catch down to credit) in stocks today that was bid - but credit did not follow. EURUSD is going out slightly lower at 1.33.

Q:  Can a ZIRP-driven bull market in US equities exist, side-by-side, with an economic rebound and a bullish outlook on HPA?  A: "No"

Germany and Japan have a long tradition of cooperating, at least when it comes to various iterations of world war, generically in the conventional sense (and where they tend to end up on the less than winning side). Which is why it may come as a surprise to some that earlier today German politician Michael Meister launched what is now the third shot across Japan's bow in what is rapidly escalating as the most dramatic case of global currency warfare between the world's net exporters (at least legacy net exporters: thanks to Japan's recent political snafus, it has now become a net importer as it is rapidly losing the Chinese market which accounts for some 20% of its exports) which started as long ago as 2010 when it was quite clear that currency warfare is what the insolvent world can expect, before it devolves into outright protectionism, and finally regular war as Kyle Bass explained recently. To wit: “What can Japan’s competitors do?” Meister said today in a telephone interview. “Either we’re all smart and do nothing, or we follow suit and create a spiral that hurts us all.”

Two fundamental beliefs have driven economic policy around the world in recent years. The first is that the world suffers from a shortage of aggregate demand relative to supply; the second is that monetary and fiscal stimulus will close the gap. Is it possible that the diagnosis is right, but that the remedy is wrong? That would explain why we have made little headway so far in restoring growth to pre-crisis levels. And it would also indicate that we must rethink our remedies. Policymakers initially resorted to government spending and low interest rates to boost demand. As government debt has ballooned and policy interest rates have hit rock bottom, central banks have focused on increasingly innovative policy to boost demand. Yet growth continues to be painfully slow. Why? What if the problem is the assumption that all demand is created equal? Put differently, the bust that follows years of a debt-fueled boom leaves behind an economy that supplies too much of the wrong kind of good relative to the changed demand.

If we as a nation, buoyed by Obama's Inauguration preach, expect to compete once again on a global jobs stage (as we noted earlier) then perhaps taking a note from the Chinese employers' handbook will wake a few up to new realities. CTV News reports the Chinese workers are revolting as they demand "the scrapping of the ridiculously strict requirements stipulating that workers only have two minutes to go to the toilet and workers will be fined 50 yuan ($8) if they are late once and fired if they are late twice." Hundreds of Chinese factory orders angry at these policies took labor law into their own hands and held their Japanese and Chinese managers hostage for a day and a half before police broke up the strike. Shanghai Shinmei Electric noted the managers were released unharmed after 300 police officers were called to the factory. As CTV notes, strikes have become more commonplace in China, as factories operating in highly competitive markets try to get more productivity from their labor force; but workers connected by mobile phones and the Internet become more aware of their rights.

So much for the latest "recovery." While everyone continued to forget that in the New Normal markets do not reflect the underlying economy in the least, and that the all time highs in the Russell 2000 should indicate that the US economy has never been better, things in reality took a deep dive for the worse, at least according to the Empire State Fed, the Philly Fed, and now the Richmond Fed, all of which missed expectations by a huge margin, and are now deep in contraction territory. Moments ago, the Richmond Fed reported that the Manufacturing Index imploded from a 9 in November, 5 in December and missed expectations of a 5 print at -12: this was the biggest miss to expectations since September 2009.

Three weeks ago it became clear that in its fight to curb consumer thirst for gold products, India, whose population is the largest single source of gold consumer demand (at least for now, soon to be replaced with China) is losing said fight, after its finance minister made it very clear that "demand for gold must be moderated" leading to a hike in import taxes to 4%. Needless to say, there is no more certain way to increase demand for a given commodity (or gun, ahem US government) than to hint that the government will make its procurement problematic. Sure enough India blamed its record current account deficit on precisely this: the soaring imports of gold as locals revert to a currency far more appreciated and respected than paper, a topic further explained when we showed the exponential surge in gold-backed loans outstanding in India. Indeed, at least in this country, there is one safe and abundant collateral product which, contrary to the US, is as good as money - gold - whose consumer demand in just India and China is shown in the chart below. Combined India and China consumer amount to some 35% of total gold demand, and 55% for just jewelry. And while we have tracked the relentless gold gross import surge into China, we have not done the same with India, because we assumed these were implied. It is precisely the importing of gold that India is once again doing its best to curb, this time by boosting import duties on gold dore bars by a 150% from 2% to 5%, a day after it once again hiked gold import taxes, this time by 50% from 4% to 6%.

After dropping for the past two years, global unemployment is on the rise again according to the International Labor Organization, a UN jobs watchdog. 2013 is expected to top 200 million unemployed for the first time with the epicenter in the advanced economies as 28 million jobs have been lost since the onset of the crisis. Critically, for the globalists, they unsurprisingly note that macro imbalances have been passed on to the labor market to a significant degree. Moreover, some 39 million 'discouraged' people have dropped out of the labor market as job prospects proved unattainable, opening a 67 million global jobs gap since 2007. However, regions that have managed to prevent a further increase in unemployment have experienced a worsening in job quality, as vulnerable employment and the number of workers living below or very near the poverty line increased. "These are people who,... have given up hope, ...and therefore they are not counted as unemployed but more as discouraged."

• "My adversary is the world of finance."
• "I don't like indecent, unearned wealth."
• "We do not believe that in this country, freedom is reserved for the lucky, or happiness for the few."
• "We cannot succeed when a shrinking few do very well and a growing many barely make it."
• "People from all backgrounds and political positions are willing to contribute for services and protection of society as a whole - but on the condition that money is being spent effectively and that everyone is paying their part."
• "We find ourselves in a difficult situation... There's a crisis, weak growth, unemployment... my duty is to ensure that by the end of my mandate (the country) is in a better state than it was at the beginning."

Just because it has been a while since the ponytailed Swiss pundit's cheerfulness graced these pages, here is a reminder that things can always be worse:

• FABER: `I'M HYPER BEARISH, SOMETIMES WANT TO JUMP OUT WINDOW'
• FABER: `PLACE FOR KEYNESIANS IS NORTH KOREA'

Dr. Gloom, Boom and Doom: consistent to the very end.

While in some places crushing your currency is a badge of honor for every formerly independent central banker (and now merely an operative of the fourth branch of government), this appears to not be the case in Iran. Because after having done what western central bankers can only dream of, and destroying the Iranian real by so much it nearly led to the onset of hyperinflation in the troubled country (and inflating away all that sovereign debt, oh wait, wrong insolvent country), the governor of the nation's central bank, Mahmoud Bahmani, was summarily dismissed. And while the move is obviously politically motivated, and the reason given is that he ordered "illegal withdrawals of money from the banking system", or a process better known in the US as POMO, it is rather stunning how gaping the double standard is vis-a-vis central bankers around the world. Fear not Mahmoud - we are certain that Ben Bernanke will have a vice chairman spot open just for you, or at least a Vice President of Market Manipulation and Leaking on the Liberty 33 trading desk, if and when you manage to escape the clutches of Iran and make your way to the Marriner Eccles building. Now where is that Argo 2 - the Sequel film crew...

• Geithner allegations beg Fed reform (Reuters)
• BOJ Adopts Abe’s 2% Target in Commitment to End Deflation (BBG)
• Bundesbank Head Cautions Japan (WSJ)
• In speech, Obama pushes activist government and takes on far right (Reuters)
• Atari’s U.S. Operations File for Chapter 11 Bankruptcy (BBG)
• Israel goes to polls, set to re-elect Netanyahu (Reuters)
• Apple May Face First Profit Drop in Decade as IPhone Slows (BBG)
• EU states get blessing for financial trading tax (Reuters)
• Indian Jeweler Becomes Billionaire as Gold Price Surges (BBG)
• Europe Stocks Fall; Deutsche Bank Drops on Bafin Request (BBG)
• Algeria vows to fight Qaeda after 38 workers killed (Reuters)
• GS Yuasa Searched After Boeing 787s Are Grounded (BBG)
• Slumping pigment demand eats into DuPont's profit (Reuters)

The two month wait is over and the most overtelegraphed central bank news since November 2012 finally hit the tape when the BOJ announced last night what everyone knew, namely that it would proceed with open-(y)ended asset purchases and a variety of economic targets, key of which was 2% inflation. However, the response so far has been one of certainly selling the pent up news, especially since as was further detailed, the BOJ will do virtually nothing for 12 months, except to increase the size of its existing QE (is the current episode QE 10 or 11?) by another €10 trillion for the Bills component. The USDJPY dropped as much as 170 pips lower than its overnight kneejerk highs hit just after the news.

There are two main drivers in the foreign exchange market today: the much anticipated BOJ meeting and the much stronger than expected German ZEW survey. Anticipation of aggressive easing by the BOJ today has kept the yen on the defensive. However, the combination of "sell the rumor and buy the fact" activity and, arguably, some disappointment, saw dollar turned back from the JPY90 level, which it has test during the three prior sessions without a convincing break and fall to near JPY88.35 before finding a bid. Similarly the euro, which had been flirting with the JPY120 area, was sold down to almost JPY117.30 before finding a solid