Archive - Feb 2014

For once, the vast majority of economists was correct, with 62 of 66 predicting accurately what the ECB would do today: nothing. At least so far - moments ago Mario Draghi's central bank just announced no cuts across all three major rates.

• Draghi as ECB Master of Suspense Keeps Investors on Edge (BBG)
• Abe lays out detailed plan for expanding defense powers (Nikkei)
• Inflation Fuels Crises in Two Latin Nations (WSJ)
• Obama walks into crossfire of Asian tensions (FT)
• Harvard Makes Professor Disclose More After Blinkx Slides (BBG)
• Hedge Funds Rework Currency Positions in Market Drop (BBG)
• Canada, U.S. Strike Tax-Information Sharing Deal (WSJ)
• Indonesia calls for greater clarity from Fed on tapering (FT)
• Sony to cut 5,000 jobs, split off PC, TV operations (Reuters)

Over 92%, or 62 of 66 economists surveyed by Bloomberg, expect no surprises from the ECB in half an hour. Whether that guarantees a "surprise" we leave it up to readers, but here courtesy of ABN Amro's head of macro research Nick Kounis, are the four possible decisions scenarios that Mario Draghi can reveal to the world today.

Today the lingering problems of the "emerging" world and concerns about the Fed's tapering take a back seat to what the European Central Bank may do, which ranges from nothing, to a rate cut (which sends deposit rates negative), to outright, unsterilized QE - we will find out shortly: with 61 out of the 66 economists polled by Bloomberg looking for no rate changes from the ECB today it virtually assures a surprise . However, despite - or perhaps in spite of - various disappointing news overnight, most notably German factory orders which missed -0.5% on expectations of a +0.2% print, down from 2.4%, the USDJPY has been supported which as everyone knows by now, is all that matters, even if it was unable to push the Nikkei 225 higher for the second day in a row and the Japanese correction persists.

If gold dips below $1,200 per ounce for a “sustained” period, serious production cutbacks are likely. Declining scrap or recycled gold supply, which fell to a five-year low in 2013, exacerbates a “tight supply picture”, said Artigas.

While we are sure it is a very sad coincidence, on the day when Argentina decrees limits on the FX positions banks can hold and the Argentine Central Bank's reserves accounting is questioned publically, a massive fire - killing 9 people - has destroyed a warehouse archiving banking system documents. As The Washington Post reports, the fire at the Iron Mountain warehouse (which purportedly had multiple protections against fire, including advanced systems that can detect and quench flames without damaging important documents) took hours to control and the sprawling building appeared to be ruined. The cause of the fire wasn’t immediately clear - though we suggest smelling Fernandez' hands...

"The market is way overdue for a 20 to 30% drop," Marc Faber warns, "but that is not what worries him." Sarcastically reflecting on the typical talking-head that appears on financial media, Faber adds you won't "hear this view from someone who is fully invested," as he "hopes the market drops 40% so stocks will become - from a value point of view - attractive." The outspoken Faber channels Jim Grant as he exclaims, "the experience with quantitative easing is a complete failure. It has lifted asset prices and created asset inflation, but it hasn't lifted the standard of living of most people in the U.S. nor worldwide."

Many have sought to draw comparisons between Asia today and Europe in the run-up to WWI. Most notably, in a widely covered speech at the World Economic Forum in Davos last month, Japanese Prime Minister Shinzo Abe compared his country’s current bilateral relationship with China to that of England and Germany before WWI. Specifically, Abe used the example of London and Berlin before WWI to warn that China and Japan’s extensive economic ties do not necessarily preclude them from going to war. Now it appears that some in Asia believe the current regional environment is more similar to Europe just before WWII. However, there appears to be some disagreement over which country in Asia most resembles Nazi Germany.

The US minimum wage has been a common news topic lately - increasing its sound and fury since President Obama's State of the Union proclamation of a rise in federal employee minimum wages to $10.10 (from $7.25). While obviously a contentious political issue, one question keeps coming up - will this help? As BofAML notes in a recent report, a simple back-of-the-envelope calculation suggests that the rise in wages from a minimum wage increase would amount to fractions of a percentage point on macroenomic data. There simply are not enough people working at (or below, since some jobs are exempted) the minimum wage to have a noticeable impact on the total wage bill and in the end, there are just too few people, earning far too little, at the minimum wage to meaningful affect aggregate macroeconomic statistics. So why is he doing it?

It would seem, in the case of momo-chasing levered fast-money flows, that Propertius was correct - "fickleness has always befriended the beautiful..." and Japanese stocks are no longer the once beautiful trend that Abe had promised them to be. A tapering of the US flow; a ripple across the bow of emerging markets; and suddenly Kyle Bass' sarcastically-named "macro tourists" are running for exits as Shakespeare himself once wrote, "was ever feather so lightly blown to and fro as this multitude." Historical quotations aside, the last time flow swung so violently negative, the Nikkei ended up losing 55% in the next 18 months. We love the smell of nay-sayers in the morning...

Triffin’s Dilemma is that the country that issues the world’s reserve currency will have to choose between:

1 ) running a trade deficit in perpetuity - risking of a loss of confidence in its currency and solvency while the rest of the world enjoys an adequate supply of USDs.

or

2) running a trade surplus and enjoying an appreciation in the value of the dollar while the rest of the world suffers from a lack of liquidity and collateral.

Either way, there are negative implications for world growth. In the first example – in which the US runs a trade deficit in perpetuity – the US continues to add to its debt and risks undermining its ability to pay off that debt. In the second example – in which the US runs a trade surplus – emerging market currencies are put under pressure by the USD potentially leading to capital outflows, a higher cost of debt, and global financial instability.

To the algo that bought TWTR at $71.92 2 hours ago, and 34% higher - 01000110 01010101 01000011 01001011 01011001 01001111 01010101 00100001

If you repeat a lie often enough, and if you only speak with confidence and in a calm, cool collected voice, the people will believed you - propaganda 101. Also, if you repeat enough times that the US economy - that $17 trillion juggernaut 0 which as recently as December was fabled to have entered the escape velocity phase and thus was safe from the adverse side effects of the Fed's taper, has hit a brick wall because of snow in the winter, then maybe the people will believe that too. Of course, there are the facts, and as always happens, the facts are diametrically opposed to the propaganda.

So much for the infinite growth story?

Tai-Pan tells the story of Western, and especially British, traders at the time of the Opium Wars with China.

"Great God, I warned Robb not to put all the money in one bank. Na with all the speculating that was going on in England, na when a bank could issue paper in any amount that it liked."

The world is not that different today. The threats and warning signs are there for everyone to see even today.