Archive - 2013

Think the Fed (with its balance sheet amounting to over 20% of US GDP), or the ECB (at 30% of GDP) is bad? Then take a look at the balance sheet of the Swiss National Bank, whose assets now amount to some 75% of Swiss GDP and which has now "literally bet the bank" in the words of the WSJ not once, not twice, but three times in a bid to keep the Swiss Franc - that default flight to safety haven - low, and engaging in what is semi-stealth currency warfare by buying other sovereigns' currencies for over two years now, although he hardly expect the US Treasury to even consider it for inclusion on its list of currency manipulators - after all, "everyone is doing it".

New Prime Minister Shinzo Abe’s pledge to spur inflation to 2 percent at the end of the yen’s appreciation means Japanese pension funds now have to hedge against rising prices and a currency decline after two decades of stagnation. Japanese pension funds are set to diversify some of their massive holdings, worth nearly $3.4 trillion into gold bullion. Corporate pension funds in Japan will diversify 72 trillion yen in assets after domestic stocks produced little return in the past two decades, according to Daiwa Institute of Research. “Bullion’s role as an inflation hedge, long ignored by Japanese fund operators, has come under the spotlight thanks to Abe’s economic policy,” Toshima, who now works as an adviser to pension-fund operators, said in an interview today in Tokyo. “Gold may be a standard asset-class in the portfolio of Japanese pension funds as Abe’s target is realized.”

• A Bold Dissenter at the Fed, Hoping His Doubts Are Wrong (NYT)
• China and Japan step up drone race as tension builds over disputed islands (Guardian)
• How Mario Draghi is reshaping Europe's central bank (Reuters)
• Merkel Economy Shows Neglect as Sick Man Concern Returns (BBG)
• US oil imports to fall to 25-year low (FT)
• China Loan Share at Record Low Shows Financing Risks (BBG)
• Dimon Says Some JPMorgan Execs ‘Acted Like Children’ on Loss (BBG) - children that reveleased who 'excess reserves' are truly used
• Fed injects new sell-off risk into Treasuries (FT) - really? So the Fed will stop monetizing the US deficit some time soon?
• Obama aide presses Republicans to accept more tax revenues (Reuters)
• Ex-SAC analyst named 20 alleged insider traders (FT)
• BOJ easing bets help dollar regain ground vs yen (Reuters)
• Goldman Sachs Said to Be Part of Fed-Led Foreclosure Settlement (BBG)
• Venezuela postpones inauguration for cancer-stricken Chavez (Reuters)

With Alcoa kicking off the earnings season with numbers there were in line and slightly better on the outlook (as usual), attention will largely shift to micro data and disappointing cash flows over the next two weeks, even as the countdown clock to the debt ceiling "drop dead" D-Day begins ticking with as little as 35 days left until debt ceiling extension measures are exhausted and creeping government shutdowns commence. There was little in terms of macro data from the US, even as a major datapoint out of Germany, November Industrial Production, missed expectations of a 1% rise, pushing higher by just 0.2% M/M (up from a -2.0% revised October print), once again proving that "hopes" (as shown by various confidence readings yesterday) of a boost to the European economy are wildly premature. This disappointing print comes a day ahead of the ECB conference tomorrow, when the governing council may or may not cut rates, although it is very much unlikely it will proceed with the former at a time when at least the narrative is one of improvement - pursuing even more easing will promptly dash "hopes" of a self-sustaining trough (forget improvement) for yet another quarter. Putting the German number in context, Greek Industrial Output slid 2.9% in November, down from a revised 5% rise, refuting in turn that this particular economy is anywhere near a trough.

If the large TBTF banks are really being forced  out of the mortgage business, then just how will we achieve these revenue growth rates?  How indeed.

In the wake of the Sandy Hook Elementary School shooting, the usual cadre of politicians, pundits and commentators are hitting the airwaves and condemning believers of the “guns don’t kill” rationale. This exercise in demonization is being followed with pleas to strip Americans of their guns and place a ban on vaguely-defined “assault” weapons. What’s been lacking in the flurry of proposals that inevitably followed a catastrophe like Sandy Hook has been a deeper look at the kind of environment impressionable minds are coming of age in. Far too often, politically-minded observers fall back on reactionary emotion for the solution to problems without actually engaging in critical thinking as to the root of what they are trying to solve. What must be considered is why some individuals are so drawn to violence, what effect has the increased prescription rate of antidepressants had, and why casualties in war have become so dehumanized. There is an uncomfortable but common denominator in all these factors. I would hope anti-gun zealots notice it before they ramp up their War on Firearms.

Following on from our earlier discussion of how a Chinese hard landing would evolve, SocGen now examines how a Chinese hard landing would impact the global economy. They see the contagion in several ways: mechanically (since China is part of the global economy) and through trade, financial and market channels. Mechanically, a slump in Chinese GDP growth to just 3% would cut our global GDP growth forecast by 0.6pp. Add to that the channels of transmission to the global economy, and our expectation is that a Chinese hard landing would result in 1.5pp being slashed from global GDP growth in the first year.

Oaktree Capital's Howard Marks begins his latest missive with a few hard truths. Anyone who has read his memos of the last 23 years will see he returns often to a few topics. This is due to the frequency with which themes tend to recur in the investment world. Humans, he notes, often fail to learn. They forget the lessons of history, repeat patterns of behavior and make the same mistakes. As a result, certain themes arise over and over. Mark Twain had it right: “History doesn’t repeat itself, but it does rhyme.” The details of the events may vary greatly from occurrence to occurrence, but the themes giving rise to the events tend not to change. Most or all of these themes have to do with behavior that’s observed in the markets over and over. The good news is that today’s investors are painfully aware of the many uncertainties. The bad news is that, regardless, they’re being forced by the low interest rates to bear substantial risk at returns that have been bid down. Their scramble for return has brought elements of pre-crisis behavior very much back to life. In 2004, I stated the following conclusion: “There are times for aggressiveness. I think this is a time for caution.” Here as 2013 begins, I have only one word to add: ditto.

As Japan’s Liberal Democratic Party national defense task force announced on Jan. 8 that it would increase the nation’s defense budget by more than 100 billion yen ($1.15 billion), three of five scenarios explored by the defense ministry recently involve the Self-Defense Forces squaring off against the People’s Liberation Army (PLA). While the scenarios remain in the realm of speculation, Japan’s inclusion of a Taiwan contingency again underscores the importance Tokyo places on Taiwan remaining de-facto independent. Certainly, China’s assertiveness in 2012 in both the East China and the South China Sea has done little to reassure Tokyo that it could live comfortably with a CCP-controlled Taiwan so close to its waters and territory.

When job hunting in one's field turns tough, college graduates may return to school for another degree (even in economics). But for some Americans, multiple degrees won't guarantee a job in their field (or even at the Fed) - or even keep them above the poverty level... Over the past few years, more and more highly educated people have turned to food stamps and other forms of welfare for help...

A year ago, out of nowhere, the grotesque suggestion to "resolve" the US debt ceiling with a platinum dollar coin came, and like a bad dream, mercifully disappeared even as the debt ceiling negotiations dragged until the last minute, without this idea being remotely considered for implementation, for one simple reason: it is sheer political, monetary and financial lunacy. And yet there are those, supposedly intelligent people, who one year later, continue dragging this ridiculous farce, as a cheap parlor trick which is nothing but a transparent attempt for media trolling and exposure, which only distracts from America's unsustainable spending problem and does nothing to address the real crisis the US welfare state finds itself in. And while numerous respected people have taken the time to explain the stupidity of the trillion dollar coin, few have done so as an integral part of the statist mainstream for one simple reason - it might provide a loophole opportunity, however tiny, to perpetuate the broken American model even for a day or two, if "everyone is in on it." Luckily, that is no longer the case and as even Ethan Harris from Bank of America (a firm that would be significantly impaired if America was forced to suddenly live within its means), the whole idea is nothing more than "the latest bad idea" straight "from the land of fiscal make believe." We can only hope that this finally puts this whole farce to bed.

… Or Communism, BP during the Gulf Oil Spill, Nixon During Watergate or King George During the American Revolution

In Europe the political leaders are now not only proclaiming that the “worst” is over but that in fact the crisis as a whole is over. To say this is political grandstanding would be understatement of the year so far: EU unemployment just hit a new record of 11.8%. Also, both Greece and Spain have issued reports revealing that their banks are massively undercapitalized and in fact have negative values.

The Chinese economy has been enjoying a cyclical rebound since the beginning of Q4 2012. SocGen's central scenario is that this recovery will last until early Q2 2013 and then gradually lose momentum. In the medium term, they still anticipate a bumpy path of secular deceleration, leading to an average growth rate of 6-7% over the next five to seven years, down from 10% per annum over the last three decades. This piece focuses on what is probably the most popular “what-if” question about the Chinese economy – what if China hard lands (with real GDP growth rate plummets to below 6%)? As China undergoes demographic ageing and growth of the working-age population slows, this minimum stable growth level will decline further. However, if progress in rebalancing and structural reform remains slow, the probability of a hard landing will rise over the medium term. In the tail risk scenario set out below, 2013 will see several quarters with just 3% growth and full year growth would stand at just 4.2%, but what are th triggers, how would it evolve, how would the government respond, and how bad could things get?