Archive - Feb 2013

The G7 issued a statement that essentially endorses stimulative policies in Japan and elsewhere, but reaffirmed its commitment to market determined exchange rates. This is a green light to buy dollars against the yen and to buy euros.

The first two months of the year have seen volatility crushed downward in this two month bullish rally in assets as new money came rushing into markets needing to get off to a positive start for the year. 

This graph shows everything we need to know about the geopolitical reality of Predator Drones (coming soon to the skies of America to hunt down fugitives?) - the American public loves drone strikes. Let’s be intellectually honest. If a country engages in a military program that carries out strikes that kill hundreds of civilians - many of whom having no connection whatever with terrorism or radicalism - that country is going to become increasingly hated. People in the countries targeted - those who may have lost friends, or family members - are going to plot revenge, and take revenge. That’s just how war works. It infuriates. It radicalises. It instils hatred.

Update: S.KOREA RAISES MILITARY READINESS LEVEL, YONHAP REPORTS,  South Korean news agency Yonhap says U.S., China informed about the North Korea nuclear test on Monday

Just because it has been off the headlines for a while, the time has come for North Korea to remind everyone it is still there, somewhere, with what appears another underground nuclear test, a few short years after that last one from May 2009.

• N. KOREA TEST ‘LIKELY’ TO BE NUCLEAR: S. KOREA DEFENSE MINISTRY
  
• S. KOREAN DEFENSE MINISTRY CONFIRMS DPRK NUCLEAR TEST
• USGS says earthquake of 4.9 scale detected in North Korea near to known nuclear test site - RTRS
• Seismic activity has been detected in North Korea. North Korea is not prone to seismic activity, it could indicate a nuclear test - RTRS
• Seismic activity detected in DPRK... believed to be "man-made" per various ROK sources - VOA
• Artificial earthquake detected in N. Korea - Yonhap
• S. Korea's presidential office checking reports of artificial quake in N. Korea - Yonhap

Of course, since this won't have any impact on the only wars that matter, the currency ones, it is unlikely that anything but more jawboning, and hard language out of both South Korea, the US and the UN, will come out of this attempt by DPRK to appear relevant.

Day after day, just after the US day-session close - just as traders settle down for some Ovaltine and light reading - someone (anyone) from Japan's political or financial elite sends a shot across the wires on the epic amount of easing that they will do to fight deflation. Explicitly focusing on the stock market, with the economy 'hopefully' coming along for the ride, is the cunning plan to inflate asset values into a self-fulfilling cycle of awesomeness for the structurally deadbeat Japanese economy. So far so good - given JPY's weakness and NKY's nominal rise. But loathed as we are to steal the jam from Abe's donut, there is a rather large fly in his inflation ointment - Brent Vigilantes^TM. Today saw the price of oil in Japan rise to its highest since September 2008. Anytime the price of oil has topped JPY10,000 per barrel, Japan's macro-economy has slumped. Just as we noted earlier, there is simply no free lunch in the competitive devaluation game - as the market's only self-regulating force remains in the price of energy.

From the 'simplicity' of a Gold Standard to the 'complexity' of our current fiat system, Santiago Capital draws a handy analogy between the over-complicated machines of 'Rube Goldberg' that represents the interactions between the various actors affecting the size and velocity of our monetary base and the 'simplest possible, but no simpler' world of Occam's Razor prone gold. In two brief presentations, Brent Johnson introduces the two systems and explains that in order to keep the shark of our economy alive, one of two things must happen: monetary velocity must be maintained or the monetary base must rise. Obviously both are inflationary. From how the system is designed to its drastic implications, simple, brief, concise, and what to do about it. Simply put "If something cannot go on forever, it will stop"... whether we decide to do it ourselves or the market does it for us, our overly-complicated system of money is going to stop... and as such - buy protection against this absolutely certain eventuality.

Just in case the Friday night insider dump bomb by Google executive chairman Eric Schmidt, in which he announced the sale of 42% of his GOOG holdings the day the stock hit its all time high, did not send a clear enough message to the market as to what side of the under-over valued spectrum corporate insiders believe we currently find ourselves in, here come six other companies with announcement of equity follow ons and secondary offerings - mostly by "selling shareholders" who happen to be some of the smartest LBO shops around - after the close on Monday alone. The scramble to sell equity while the selling is good is on.

Just because mistakes are made all the time.

This morning, in an understated way (of course) ahead of the G-20 group-hug at the end the week, Economic and fiscal policy minister Akira Amari stated "It will be important to show our mettle and see the Nikkei reach the 13,000 mark by the end of the fiscal year (March 31)." This level for the Nikkei implies a USDJPY level of 104.75 (or a further 12% devaluations for here). However, there is a strong correlation between the USD-JPY exchange rate and the S&P 500-to-Nikkei 225 relationship. Based on that 104.75 target (and the toungue-in-cheek belief that this will help Japan's competitiveness - which means someone else has to suffer), the ratio of the SPX to NKY would be 8.7x. So while the Nikkei would see a 17% surge (in nominal value), the S&P 500 would lose 3-4% from here. 

Economic freedom involves more than just the freedom to buy and sell products and services. It allows us to be free in our interactions with other people. Economic freedom enables us to travel, to say what we want to say, to do what we want to do. This is how Prof. Antony Davies describes the 'positives' of the somewhat commonsensical benefits of economic freedom. In this brief clip, he shows how economic freedom is associated, in the data, with a number of positive indicators of a healthy country. For the first 3:30 of this fascinating discussion, the professor clarifies how great it all is... then just when you're feeling wonderfully smug, he shows the facts for the USA, as we discussed here and here, things are trending away from economic freedom for Americans.

From the management of a global currency war to the 1998 Committee to Save The World, QBAMCO provides an all encompassing escape into the reality our current - and future - monetary (and inflationary) world. While Brodsky and Quaintance do not expect a breakdown in global monetary oversight, they do expect fiat currency debasement to continue to mask the driver of real economic malaise and contraction - global bank deleveraging; and they do expect this process to lead to a popular loss of confidence in today’s major currencies as savings instruments – perhaps beginning in the global capital markets in 2013. What will eventually (or soon) occur will be the rare occasion when return-on-savings trounces return-on-investment, implying precious metals will outperform the great majority of financial assets (except for shares in precious metals miners and natural resource producers).

With Abe talking his down explicitly, Weidmann talking his up explicitly, Draghi's subtle talk-down, Hollande's outright plea, and the developing world in full 'war' mode, Citi's Steven Englander sets out some brief 'rules of engagement' for the G-20 nations as competitive devaluation escalates.

“Charming” is, I believe, the word most often used to describe Uruguay. People tend to make a lot of parallels to the United States in the 1950s – a much slower pace of life, less government intrusion, and family focused. There is an important thing to understand about Uruguay– it is heavily dependent on Argentina. Over the years, Argentines began using this country as a sort of bank account. They stashed US dollars in Uruguayan banks and bought up all the high quality agricultural and beach property they could as a means to hold assets outside of their home country. Argentines have wisely learned through experience not to trust their government. Fool me once, shame on you. Fool me twice, shame on me. One of the chief consequences is inflation.

Today was simply dreadful. S&P 500 futures saw their narrowest day-session range in six months and lowest day-session volume of the year. No matter what was tried today - vol compression, EURJPY (carry) ramps, Oil stop-run - equities did not respond with any algo-driven exuberance. Stocks ended the day practically unchanged even as AAPL did its best to hold them up - filling its post-earnings gap and fading. Five things dominated the day: Gold and Silver were slammed lower early on; ECB's Weidmann slammed EUR higher early on; Oil prices surged above $97 (WTI); and then France's Moscivici spoke and retraced all the EUR's gains; and then a 3pmET rampathon in JPY. For the bulls, this is healthy stabilization; For the bears, this is a day where normal risk drivers had no impact and stocks never followed through on new highs. Credit remains pensive as renewed rises in oil prices will crimp margins (and the consumer's pocket) but none of that matters as JPY crosses remain in play.

Why has the Fed paid some $6 billion in interest to foreign banks, in the process subsidizing and keeping insolvent European and other foreign banks, in business and explicitly to the detriment of countless US-based banks who have to compete with Fed-funded foreign banks and who have to fire countless workers courtesy of this Fed subsidy to foreign workers? And, perhaps more importantly, why will the Fed pay about $5 billion or much more in interest to foreign banks each year starting in 2014?