Archive - Sep 23, 2012 - Story

Some wonder why we have been so convinced that no matter what happens, that the Fed will have no choice but to continue pushing the monetary easing pedal to the metal. It is actually no secret: we explained the logic for the first time back in March of this year with "Here Is Why The Fed Will Have To Do At Least Another $3.6 Trillion In Quantitative Easing." The logic, in a nutshell, is simple: everyone who looks at modern monetary practice (as opposed to theory) through the prism of a 1980s textbook is woefully unprepared for the modern capital markets reality for one simple reason: shadow banking; and when accounting for the ongoing melt of shadow banking credit intermediates, which continues to accelerate, the Fed has a Herculean task ahead of it in restoring consolidated credit growth. Shadow banking, as we have explained many times most recently here, is merely an unregulated, inflationary-buffer (as it has no matched deposits) which provides the conventional banking credit transformations such as maturity, credit and liquidity, in the process generating term liabilities. In yet other words, shadow banking creates credit money which can then flow into monetary conduits such as economic "growth" or capital markets, however without creating the threat of inflation - if anything shadow banks are the biggest systemic deflationary threat, as due to the relatively short-term nature of their duration exposure, they tend to lock up at the first sing of trouble (see Money Markets breaking the buck within hours of the Lehman failure) and lead to utter economic mayhem unless preempted. Well, preempting the collapse in the shadow banking system is precisely what the Fed's primary role has so far been, even more so than pushing the S&P to new all time highs. The problem, however, as we will show today, is that even with the Fed's balance sheet at $2.8 trillion and set to rise to $5 trillion in 2 years, it will not be enough.

It should come as no surprise - to anyone but the most whocouldanode crowd - but global trade volumes are slowing notably, and surprise surprise, Europe is leading the lag. Between the total lack of any sustainable trade advantage that the PIIGS suffer from (discussed here) and recent outlook cuts from FedEx and UPS (detailed here), it is not a shock that the following detailed charts of Import and Export volumes for China, US, Japan, and Europe are starting to drop notably. Just as we pointed out here, Europe remains the hub of around half of World Trade and as is clear, the myth of decoupling among the world's largest economies is smoke-and-mirrors as it is a lead-lag relationship that is now proven to be entirely un-decoupled as 'obviously' the import and export sides of the world's imbalanced economies show trade is falling in a hurry.

There was a time about a year ago, before the second Greek bailout was formalized and the haircut on its domestic-law private sector bonds (first 50%, ultimately 80%, soon to be 100%) was yet to be documented, when it was in Greece's interest to misrepresent its economy as being worse than it was in reality. Things got so bad that the former head of the Greek Statistics Bureau Elstat, also a former IMF employee, faced life in prison if convicted of doing precisely this. A year later, the tables have turned, now that Germany is virtually convinced that Europe can pull a Lehman and let Greece leave the Eurozone, and is merely looking for a pretext to sever all ties with the country, whose only benefit for Europe is to be a seller of islands at Blue Aegean water Special prices to assorted Goldman bankers (at least until it renationalizes them back in a few short years). So a year later we are back to a more normal data fudging dynamic, one in which Greece, whose July unemployment soared by one whole percentage point, will do everything in its power to underrepresent its soaring budget deficit. Case in point, on Friday the Finance Ministry proudly announced its budget deficit for the first eight months was "just" €12.5 billion, versus a target of €15.2 billion, leading some to wonder how it was possible that a country that has suffered terminal economic collapse, and in which the tax collectors have now joined everyone in striking and thus not collecting any tax revenue, could have a better than expected budget deficit. Turns out the answer was quite simple. According to Spiegel, Greece was lying about everything all along, and instead of a €12.5 billion deficit, the real revenue shortfall is nearly double this, or €20 billion, a number which will hardly incentivize anyone in Germany to give Greece the benefit of another delay, let along a third bailout as is now speculated.

Following the riots at Apple's FoxConn Chengdu plant in June, engadget is reporting that FoxConn's Taiyuan plant - the scene of earlier strikes over salary disputes back in March - has suffered damage as workers riot. Police are on site to control the crowd and while the motive is not clear, it is apparently unrelated to the recent anti-Japan protests. It appears - based on the clip and photos below - that much damage has been done in the process.

The weekly summary of all charts of note, which again belong neither here nor there, yet which all have a story to tell.

We have discussed the CRIC cycle a number of times - especially with regards Europe - but it seems the never-ending story of Crisis-Response-Improvement-Complacency has struck once again as Morgan Stanley notes when complacency becomes pervasive, it usually gives way to a renewed crisis. Complacent financial markets appear to be looking through the fact that the global economy remains stuck in a 'twilight zone' between expansion and recession. Dismissing weak PMIs in China and EU, markets have feasted in QEternity and OMT and this has, as expected, affected European policy-makers (e.g. ongoing disagreements over the details of the much-anticipated negative-feedback-loop-breaking banking union; and Spain/Italy's 'belief' they can avoid an ESM 'austerity' program). This feels eerily like the March/April period when post-LTRO improvements induced euphoria in traders and governments/ECB to relax prematurely and as Brevan Howard explains below - every major developed economy is facing significant downside risks - no matter how enthusiastic markets appear to be.

A few days ago, our report on the discovery of a single 10 oz Tungsten-filled gold bar in Manhattan's jewelry district promptly went viral, as it meant that a tungsten-based, gold-counterfeiting operation, previously isolated solely to the UK and Europe, had crossed the Atlantic. The good news was that the counterfeiting case was isolated to just one 10 oz bar. This morning, the NYPost reports that as had been expected, in the aftermath of the realization that the sanctity of the gold inventory on 47th Street just off Fifth Avenue has been polluted, and dealers promptly check the purity of their gold, at least ten more fake 10-ounce "gold bars" filled with Tungsten has been discovered.

If yesterday it was the Middle East's turn to escalate, today it is the Far East, aka Pacific Rim, where China and Japan both remind the world nothing has been fixed in the diplomatic snafu between the two countries over a barren rock in the East China Sea. First, it was China, which on the front page of the biggest daily Xinhua, over the weekend, demanded that Japan immediately stop infringing upon its "territorial sovereignty. To wit: "China asked Japan to immediately stop all acts that harm China's territorial sovereignty, Foreign Ministry spokesman Hong Lei said late Saturday, after some Japanese landed on the Diaoyu Islands. Hong said the Japanese landed on the Diaoyu Islands Friday evening with the excuse of preventing Taiwanese activists from landing on the islets. "It is a severe infringement upon China's territorial sovereignty, and the Chinese government has lodged solemn representations and strong protests to the Japanese side," Hong said in a statement." Other headlines make it quite clear that it is in China's interest to stir populist anger at Japan instead of seeking an amicable resolution. What, however, was the most important article in today's Pacific Rim press is this one which has nothing to do with Japan, and everything to do with China's expanding zone of influence: "China's top security official on Saturday made a surprise visit to Afghanistan, the first time in 46 years that a Chinese leader set his foot on the soil of this landlocked Asian country."

Large, centrally-directed systems are inherently fragile. Think of the human body; a spontaneous, unexpected blow to the head can kill an otherwise healthy creature; all the healthy cells and tissue in the legs, arms, torso and so forth killed through dependency on the brain’s functionality. Interdependent systems are only ever as strong as their weakest critical link, and very often a critical link can fail through nothing more than bad luck. Yet the human body does not exist in isolation. Humans as a species are a decentralised network. Each individual may be in himself or herself a fragile, interdependent system, but the wider network of humanity is a robust independent system. One group of humans may die in an avalanche or drown at sea, but their death does not affect the survival of the wider population. The human genome has survived plagues, volcanoes, hurricanes, asteroid impacts and so on through its decentralisation.