Archive - Sep 2010 - Story

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 24/09/10

The half-life of central bank interventions is getting shorter and shorter. After Shirakawa decided to show the Fed who is boss, only to be met with the biggest beatdown the dollar has experienced since March, tonight the BOJ decided to show Bernanke how it's done. Too bad the idiots at the BOJ have learned nothing from the SNB's Hildebrand, who was last seen cowering in a fetal positions, underneath his desk. After surging by 100 pips post the second intervention in a row, the "wolfpack" is back, and the yen has retraced more than half it losses in under 2 hours. This pathetic attempt to weaken its currency has just cost the BOJ another few trillions yen, while the end result is the same: a Japan whose export economy is about to be crushed, and a central bank president who will now be forced to join the ranks of the unemployed within a month.

Things are getting wierder and wiered: China has confirmed it has detained 4 Japanese officials due to "violation of a Chinese law relating to protection of military facilities." Xinhua reports: "The state security authorities in Shijiazhuang, capital of Hebei, have taken measures against the four people according to law after receiving a report about their illegal activities." It is unclear if the four suggested recommending nuking the 3 Gorges dam for risk of cracks and terminal collapse during the next massive earthquake. Next up: Chinese defense forces amassing in Manchuria. In other news President Obama believes he can tell Hu Jintao what to do...

Alaska is one of the most prospective and yet most underexplored areas in the world. There are good reasons for the neglect, most notably the long, cold winters and the lack of infrastructure. Whether the latter is a result of, or a cause of, there being few people in the state is an open question. One clear result, however, is a rather small economy: Alaska’s 2009 GDP was US$47.3 billion, comparable to that of the Dominican Republic or Bulgaria. The state is ranked 44th by GDP among its U.S. peers. In terms of metals, Alaska produces gold, silver, copper, lead, and zinc. Being well endowed with natural resources, Alaska’s mining history dates back to the early 1800s, when Russian explorers prospected the region, looking for placer gold. But not until after Russia sold Alaska to the United States did exploration activities start to develop rapidly, both on placer and hard rock deposits.

A month ago we discussed a recent paper by the IMF's Carlo Cottarelli titled "Default in Today's Advanced Economies: Unnecessary, Undesirable, and Unlikely"which we noted had "conclusion that are at best questionable, and at worst, completely worthless." Today, Citi's Willem Buiter does a much more eloquent job if dissecting the paper yet at the end of the day, reaches precisely the same conclusion: "A recent IMF study argues that sovereign default in today’s advanced economies (AEs) is “unnecessary, undesirable and unlikely”. We do not agree with this unqualified blanket assertion...the study represents the triumph of dogma over evidence and logic." And since sovereign default will be the primary topic for years and years to come, as more and more countries go tits up, here are Buiter's key disagreements with the IMF.

In the week ended September 13, M2 rose to a fresh all time record, just above $8.7 trillion, representing the 10th consecutive increase in the broadest monetary aggregate tracked by the Federal Reserve, during which time $115 billion in new liquidity has been injected in the US economy. Additionally, since the 2010 M2 lows recorded oddly enough on April 19, around the time when the S&P peaked for 2010, there has been $235 billion of money injected into M2. Yet a peculiar observation arises when one looks at the components of the M2 - the bulk of the individual pieces of M2 (and M1 by definition) declined: there were W/W drops in Demand Deposits, Other Checkable Deposits, Savings Deposits at Thrifts, and especially Small Denomination Time Deposits, offset only by Savings Deposits at Commercial Banks. Now that is rather troubling, because the former list represents products used by the "less than wealthiest" to park their money. It appears that in the prior week (and throughout 2010), what's left of the middle class continues to actively withdraw its saved up money, but the net effect was offset by increased deposits into Commercial Bank savings deposits: traditionally capital storage reserved for the richer (due to the relative immobility of the capital: the vast majority of Americans for whom money does not grow on trees, prefer to have instant access to their deposits). This makes us wonder: is the trend seen in the stock market being replicated in the bank deposit realm? Are the lower and middle classes actively withdrawing money from banks, even as the wealthiest 1% continues to deposit? No wonder then that Huffington's campaign to punish the TBTF's by extracting their deposits is not working.

As we have been expecting, the literature coming out of the investment banks analyzing the "Japan case", and specifically how it pertains to the US and the rest of the world, is coming hot and heavy. Yet the attached report by Soc Gen Klaus Baader and team could well be the definitive analysis on the topic. While we do not necessarily agree with the paper's finding, which is simply that "Japan is not the endgame", the multivariate analysis conducted is second to none. And another key topic analyzed by the Soc Gen economists is whether EM growth can offset the deleveraging in the mature economies: a topic near and dear to Jim "BRIC|N-11 Decoupling" O'Neill. Here the conclusion is more palatable: "We see the Chinese economy following Japan, but more of Japan in the 1950s and 1960s. Chinese policy makers also see this repeat pattern, but are taking steps to avoid the preconditions of a bubble economy that afflicted Japan in the 1980s." The paper's conclusion is presented with just the right dose of optimism and pragmatism (it does after all come from a sell side team): "Managing capital inflows is the next challenge. FX adjustments, fiscal and monetary tightening, domestic prudential regulation, and capital controls are the tools available to manage these inflows. These have significant investment implications. Further, slippages could exacerbate global imbalances and slow growth and other needed reforms."

Insofar as money is concerned, governments and central banks should be kept as far away from one another as a pedophile from Dakota Fanning. If ever the twain should meet, very bad things would happen. However, now, in the good ol’ U.S. of A., monetization is taking place—and it is happening right before our eyes, even though no one is realizing it. This monetization is invisible to sophisticated analyses, but obvious to anyone looking at the situation. It's what I call stealth monetization. —Gonzalo Lira.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 23/09/10

Once again, courtesy of Damien Cleusix, here is the second Q4 update in his must read series on Global Tactical Asset Allocation - Equities (the other updates in this series are coming soon). "We would underweight emerging markets (and are now advising to exit the long position in our preferred market since the end of 2008, Indonesia), Europe and small caps.We would overweight Japan (but hedge the currency risk) and the US. Buy high quality stocks (and hedge the market risk when we recommend it). Value and growth are likely to behave badly in a downturn so value managers won't offer the decorrelated returns they offered during the 2000-2003 decline. Buy value when value dispersion is high not low as it is now."

White House Press Secretary Robert Gibbs made a rather startling statement in a press briefing on September 21st. He acknowledged that the economy is bad and he further stated under questioning that the recovery would take several years.

Today I just want to focus on one thing and one thing only, making sure I pin the top on the S&P 500 rally started in late August as I strongly believe the next wave will take us sub 1,000 in the S&P future. - Nic Lenoir

Apparently it has to do with conservative listeners willing to diversify into "precious metals": "Currently, the most popular talk radio shows in the United States are hosted by conservative commentators such as Messr. Beck, Levin and Thompson, and Ms. Ingraham. The demographics of these radio programs strongly favor those who are inclined to diversify their portfolios with precious metals. (This is best exemplified by the number of competitors who advertise among these same marketing channels.) The radio hosts themselves share an interest in owning precious metals, an important consideration when deciding where to advertise."

This one needs no commentary. The only corporate embarrassment episode that is more ironic is the BSOD during the Windows 98 introduction. And one wonders why the telepresence company's shares are down 11% in the past three months...

Guess the old man is not going to fill Larry Summers sweaty shoes:

• Volcker: "So Difficult" To Dig Out Of Recession
• Volcker: Will Take "Long Time" To Repair Economy
• Volcker: "Underlying" market problem is "too big to fail" issue

and FTW:

• Volcker: Mortgage market is "absolutely broken"