Archive - Jan 2013 - Story

Three weeks ago it became clear that in its fight to curb consumer thirst for gold products, India, whose population is the largest single source of gold consumer demand (at least for now, soon to be replaced with China) is losing said fight, after its finance minister made it very clear that "demand for gold must be moderated" leading to a hike in import taxes to 4%. Needless to say, there is no more certain way to increase demand for a given commodity (or gun, ahem US government) than to hint that the government will make its procurement problematic. Sure enough India blamed its record current account deficit on precisely this: the soaring imports of gold as locals revert to a currency far more appreciated and respected than paper, a topic further explained when we showed the exponential surge in gold-backed loans outstanding in India. Indeed, at least in this country, there is one safe and abundant collateral product which, contrary to the US, is as good as money - gold - whose consumer demand in just India and China is shown in the chart below. Combined India and China consumer amount to some 35% of total gold demand, and 55% for just jewelry. And while we have tracked the relentless gold gross import surge into China, we have not done the same with India, because we assumed these were implied. It is precisely the importing of gold that India is once again doing its best to curb, this time by boosting import duties on gold dore bars by a 150% from 2% to 5%, a day after it once again hiked gold import taxes, this time by 50% from 4% to 6%.

After dropping for the past two years, global unemployment is on the rise again according to the International Labor Organization, a UN jobs watchdog. 2013 is expected to top 200 million unemployed for the first time with the epicenter in the advanced economies as 28 million jobs have been lost since the onset of the crisis. Critically, for the globalists, they unsurprisingly note that macro imbalances have been passed on to the labor market to a significant degree. Moreover, some 39 million 'discouraged' people have dropped out of the labor market as job prospects proved unattainable, opening a 67 million global jobs gap since 2007. However, regions that have managed to prevent a further increase in unemployment have experienced a worsening in job quality, as vulnerable employment and the number of workers living below or very near the poverty line increased. "These are people who,... have given up hope, ...and therefore they are not counted as unemployed but more as discouraged."

• "My adversary is the world of finance."
• "I don't like indecent, unearned wealth."
• "We do not believe that in this country, freedom is reserved for the lucky, or happiness for the few."
• "We cannot succeed when a shrinking few do very well and a growing many barely make it."
• "People from all backgrounds and political positions are willing to contribute for services and protection of society as a whole - but on the condition that money is being spent effectively and that everyone is paying their part."
• "We find ourselves in a difficult situation... There's a crisis, weak growth, unemployment... my duty is to ensure that by the end of my mandate (the country) is in a better state than it was at the beginning."

Just because it has been a while since the ponytailed Swiss pundit's cheerfulness graced these pages, here is a reminder that things can always be worse:

• FABER: `I'M HYPER BEARISH, SOMETIMES WANT TO JUMP OUT WINDOW'
• FABER: `PLACE FOR KEYNESIANS IS NORTH KOREA'

Dr. Gloom, Boom and Doom: consistent to the very end.

While in some places crushing your currency is a badge of honor for every formerly independent central banker (and now merely an operative of the fourth branch of government), this appears to not be the case in Iran. Because after having done what western central bankers can only dream of, and destroying the Iranian real by so much it nearly led to the onset of hyperinflation in the troubled country (and inflating away all that sovereign debt, oh wait, wrong insolvent country), the governor of the nation's central bank, Mahmoud Bahmani, was summarily dismissed. And while the move is obviously politically motivated, and the reason given is that he ordered "illegal withdrawals of money from the banking system", or a process better known in the US as POMO, it is rather stunning how gaping the double standard is vis-a-vis central bankers around the world. Fear not Mahmoud - we are certain that Ben Bernanke will have a vice chairman spot open just for you, or at least a Vice President of Market Manipulation and Leaking on the Liberty 33 trading desk, if and when you manage to escape the clutches of Iran and make your way to the Marriner Eccles building. Now where is that Argo 2 - the Sequel film crew...

• Geithner allegations beg Fed reform (Reuters)
• BOJ Adopts Abe’s 2% Target in Commitment to End Deflation (BBG)
• Bundesbank Head Cautions Japan (WSJ)
• In speech, Obama pushes activist government and takes on far right (Reuters)
• Atari’s U.S. Operations File for Chapter 11 Bankruptcy (BBG)
• Israel goes to polls, set to re-elect Netanyahu (Reuters)
• Apple May Face First Profit Drop in Decade as IPhone Slows (BBG)
• EU states get blessing for financial trading tax (Reuters)
• Indian Jeweler Becomes Billionaire as Gold Price Surges (BBG)
• Europe Stocks Fall; Deutsche Bank Drops on Bafin Request (BBG)
• Algeria vows to fight Qaeda after 38 workers killed (Reuters)
• GS Yuasa Searched After Boeing 787s Are Grounded (BBG)
• Slumping pigment demand eats into DuPont's profit (Reuters)

The two month wait is over and the most overtelegraphed central bank news since November 2012 finally hit the tape when the BOJ announced last night what everyone knew, namely that it would proceed with open-(y)ended asset purchases and a variety of economic targets, key of which was 2% inflation. However, the response so far has been one of certainly selling the pent up news, especially since as was further detailed, the BOJ will do virtually nothing for 12 months, except to increase the size of its existing QE (is the current episode QE 10 or 11?) by another €10 trillion for the Bills component. The USDJPY dropped as much as 170 pips lower than its overnight kneejerk highs hit just after the news.

In the most anticipated (and likely most strawman/leaked) policy actions, the BoJ and the Japanese government (still independent entities theoretically) have unveiled the new monetary policy to complement the $116bn fiscal stimulus plan to boost growth:

• *BOJ TO ADOPT 2% INFLATION TARGET
• *BOJ WILL INTRODUCE OPEN-ENDED PURCHASING FROM JAN 2014
• *BOJ TO BUY 2T YEN OF JGBS MONTHLY FROM JAN 2014
• *BOJ TO BUY ABOUT 10T YEN OF T-BILLS MONTHLY FROM JAN 2014

With epic amounts of JPY shorts and NKY longs, JPY was notably bid versus the USD (from Friday's close) going in, 30Y JGBs bid relative to 10s, and the NKY and TOPIX were leaking lower. Now is the time to see just how effective this efficient market is at pricing in the stabilization-to-retaliation phase of the current actions. Though of course, there is no intent to cough-'weaken'-cough the JPY:

• *AMARI TO SAY AT DAVOS NO POLITICAL INTENTION TO MANIPULATE YEN

So, as expected, the BoJ joins the Fed and ECB on the unlimited "open-yended"^(TM) printfest bandwagon. So far JPY is not totally impressed.

Everyone knows that Japan, whose population is now at the oldest average age it has ever been in its history, sold more adult than baby diapers for the first time in 2012, and is "older" than any nation in the world, has a "demographic problem." What few may know, however, is that it also has a secret plan to fix said "demographic problem" - a solution that would make Hitler, Goebbels and Stalin proud. Earlier today, Taro Aso, 72 years young, and the deputy PM of the man set to unleash Abenomics on Japan (for the second time, only this time it will be different), suggested that the elderly in Japan should just "hurry up and die" because "You cannot sleep well when you think it's all paid by the government."

Now obviously, anyone with any common sense would react to this story with immediate shock and disbelief.  The 5 year old child merely discussed "shooting bubbles" with a bubble gun she didn't even have with her, and she is immediately suspended?  How does this compute?  Have school districts gone completely insane?  Actually, I believe they are quite aware and cognizant of what they are doing... This is not just a "zero tolerance policy" on the part of school officials.  This is a concerted and directed effort to frighten children away from the whole of American gun culture using negative reinforcement.  Like Pavlov's Dog, which was taught to salivate at the sound of a bell, America's youngest generation is being taught to cringe at the mention of firearms.

As Japan and China increase naval and air activity around the disputed Senkaku/Diaoyu islands in the East China Sea, the United States is steadily increasing its active involvement to reassure Tokyo and send a warning to Beijing. But Beijing may seek an opportunity to challenge U.S. primacy in what China considers its territorial waters. In this succinst summary, Stratfor analyzes the current state of affairs, the potential for escalation, and how the US' presence in the Pacific will play tactically and strategically into the evolving crisis over the Islands.

The economy cannot recover without a complete cleansing of the excesses that have built up over the last half century plus. It is not a unique idea. It is a foundational belief of Austrian economics and an integral part of Austrian Business Cycle theory. Ludwig von Mises provided this fundamental observation: "Credit expansion can bring about a temporary boom. But such a fictitious prosperity must end in a general depression of trade, a slump." There has likely never been a boom so great (and so fictitious) as the one that this country experienced for the last several decades. Its origins began with the hubris of government economists in the decade of the 1960s who believed that the economy could be managed like a piece of machinery. This incorrect belief is still fundamental to Keynesian economists, despite the impressive string of failures it has produced. Markets are now trying to right these wrongs. Government is desperately trying to prevent the curative process.

As we have been warning for over half a year, and as conventional wisdom has finally caught on, the economy most impacted in Europe by the recent surge in the EUR exchange rate (not because of an improvement in the economy but due to wholesale engineering of asset prices by central banks) is the one that has so far been able to keep it all together - Germany, the same country where Angela Merkel last night suffered an embarrassing last minute loss which may be a harbinger of things to come should Germany slide deeper into recession. This, as also noted repeatedly before, is part of the grand paradox in Europe: unlike every other central bank in the world, the ECB's interventions achieve only one thing: to push the EUR higher, in the process stabilizing secondary market indicators (bond prices, the DAX, swap spreads) but destabilizing EUR-denominated exports. And while the adverse impact on core exporting countries from ECB intervention is by know understood by everyone (and this is ignoring the impact of potential inflation as a result of fund flows to the few safe regions in Europe), few appreciate just how big the EUR impact on the periphery is as well. The chart below from the Spanish economy ministry showing the recent stunning divergence of Spanish exports, should explain why a low EUR is good for not only Germany, but certainly the PIIGS, in this case Spain. And vice versa.

While much has been made of the seemingly paradoxical stability of railroad traffic as the broad economy stagnates (and turns down - as we discussed yesterday), it appears the little train that could for the last four years has finally decided it can't anymore. Of course, there is an obvious cyclicality to the pattern but still the unprecedented plunge in rail traffic this week must be somewhat concerning.