Archive - Jan 2013 - Story

As the world's equity markets prepare to rally on the back of yet more central bank printing as Japan's Shinzo Abe takes the helm with a 2% inflation target and a central bank entirely in his pocket, The Telegraph's Ambrose Evans-Pritchard suggests a rather concerning analog for the last time a Japanese prime-minister attempted to salvage his deflation/depression strewn nation. The 1930s 'brilliant rescue' by Korekiyo Takahashi, who removed Japan from the Gold Standard, ran huge 'Keynesian' budget deficits intentionally, and compelled the Bank of Japan to monetize his debt until the economy was back on its feet managed to devalue the JPY by 60% (40% on a trade-weighted basis). Initially this led to exports rising dramatically and brief optical stability, but the repercussion is the unintended consequence (retaliation) that the world missed then and is missing now. Though the economy appeared to stabilize, the responses of other major exporting nations, implicitly losing in the game of world trade, caused Japan's policies to backfire, slowed growth and left a nation needing to chase its currency still lower - eventually leading to hyperinflation in Japan (and Takahashi's assassination). With no Martians to export to, why should we expect any difference this time? and how much easier (and quicker) are trade flows altered in the current world?

It is only three weeks into 2013, and already some clear winners (Dan Loeb, PTJ, Pine River, Owl Creek, Landsdowne, Solus) and losers (Ackman, T1 or is that T0?) are emerging.

With the BoJ and the Japanese government set to announce the now much-anticipated (and oft-repeated rumor) 2% inflation target in a joint (yet, rest reassured completely independent) statement, we have seen JPY swing from a 0.4% weakening to a 0.6% strengthening (sell the news?) and back to middle of the day's range by the time Europe closed. Cable (GBPUSD) has quite a day, dropping almost 100 pips top to bottom before bouncing back a little. This is 5 month lows for GBP as the triple-dip response of Mark Carney's new deal starts to get discounted. The USD ended practically unchanged despite all this as European sovereigns leaked wider, CHF strengthened modestly (2Y Swiss positive) and US equity futures did a small stop-run helped by the JPY crosses. It seems the zero-sum game in global FX competitive devaluation, as Steve Englander notes, has a long way to go, for if the UK and Japan, among others, are determined to crowd in growth by boosting exports, their currencies will have to fall a lot more than is now priced in.

We have long argued that when it comes to the deplorable and insolvent state of modern "developed" societies, the fault lies as much at the bottom, as at the top: the bottom, in this case, being the economic establishment in both academia and 'practice' that peddles a voodoo pseudoscience as a legitimate explanation for the unpredictable happenings in irrational world, meant to give people an illusory sense of control, and which works until it doesn't and fails spectacularly, at which point "the top", or the central banks conceived to smooth reality when it does not conform to economist models (and to facilitate wealth transfer from the poor to the rich of course), have to step in and fill gaping holes some $20+ trillion wide - see: 2008/2009 (all the while, the transfer of wealth from the middle class to the wealthy, by way of that invisible tax known as inflation continues). And while it has proven easy for the shamans of this voodoo class to fool the general population time and again (use big words, speak loudly and with confidence, mock any opposing voices as not having a Ph.D. or a Nobel prize in economics... "act as if") in their infallibility and superiority or that they have even the faintest clue what it is they are talking about, the reverse has also turned out to be true. And as the case of one Mr. Baptista da Silva from Portugal has shown, there is nothing easier than for an economist to con other economists. Or, rather, one fraud to con a whole lot of other frauds.

The recent landslide victory of the Liberal Democratic Party (LDP) on a platform that promised positive change for the long-struggling Japanese economy has thrust a somewhat forgotten Japan back into the headlines. Indeed, as Goldman notes, asset markets have already responded aggressively to the prospective changes with Japanese equity markets climbing to multi-year highs and the Yen declining to multi-year lows against the US dollar and the EUR. But, as Kyle Bass has recently explained, very real questions remain about the ability of the LDP and new Prime Minister (PM) Shinzo Abe to deliver on promises and break the damaging cycle of low growth and deflation that has become well-entrenched in the Japanese economy over the last five-plus years. These doubts are reinforced by concerns about the health of the domestic banking sector and of Japan Inc. in general. "Abe-nomics 'appears' positive, but for how long?" Goldman asks and Hamada's recent concerns over 'going too far' are very real - though in general Goldman's positive 'take' is a useful counter-point to Bass' somewhat more realistic apocalyptic endgame thesis.

Focusing on econometric data to make sense of our economic ills blinds us to deeper dynamics, for example, the Grand Tradeoff of risk and financial security. If risk is avoided, suppressed and unrewarded, the economy will stagnate and the costs of the promised financial security will crush it. If you want a high-innovation, high-growth economy, you must reward risk and accept constant disorder and failure - the very antithesis of guaranteed financial security. The very promise of permanent security dooms the economy to stagnation as complicity, gaming the system, avoidance of risk and passivity are incentivized.

If governments or central banks really can create wealth simply by creating money, why does poverty exist anywhere on earth?  Why haven’t successive rounds of quantitative easing by the US Fed solved our economic recession?  And if Fed money creation really works, and doesn’t create inflation, why haven’t Americans gotten richer as the money supply has grown? The truth is obvious to everyone.  Fiat currency is not wealth, and the creation of more fiat dollars does not mean that more rice, steel, soybeans, Ipads, or Honda Accords suddenly come into existence. The creation of new fiat currency simply strengthens a fantasy balance sheet, either by adding to cash reserves or servicing debt.  But this balance sheet wealth is an illusion, just as the notion we can continue to raise the debt limit and borrow money forever is an illusion. 

While it is not news that the GOP has proposed a temporary debt ceiling extension that would suspend the provisions of the debt ceiling target until May 19, as was reported last week, however which would demand that the Senate do something unthinkable, and something it has not done for 4 years, namely pass a budget by April 15, it is news that as The Hill reports, the vote to suspend the debt ceiling in the House will take place "as soon as Wednesday." From The Hill: "While past measures to address the debt limit have simply increased the borrowing cap, the House bill would actually suspend the debt limit for three months. Then, on May 19, the debt limit would be automatically increased from $16.4 trillion to accommodate whatever additional borrowing the Treasury had done during that time frame." As we explained last week, this is merely a plan to shift fiscal (ir)responsibility into the Democrat camp, as it is virtually impossible that America can have a budget now or ever again. After all with $1 trillion deficits as far as the eye can see, the possibility to bluster and claim one is fiscally responsible while demanding $4 trillion in debt until 2016, will hardly fool the majority of the people any more of the time. Sure enough, Pelosi's response has made it quite clear this entire plan is DOA: "the proposed three-month debt- limit increase does not relieve the uncertainty faced by small businesses, the markets and the middle class. This is a gimmick unworthy of the challenges we face.”

We thought it useful to succinctly summarize the words that have been spewed forth from The Capitol today (and in the past). There is plenty to consider; from Reagan's "freedom" and "government" to Schumer's unfortunate random use of the words: "America", "Today", "Finished", "People" and finally Obama's somewhat ironic punchline that "we have never relinquished our skepticism of central authority, nor have we succumbed to the fiction that all society’s ills can be cured through government alone. Our celebration of initiative and enterprise; our insistence on hard work and personal responsibility, are constants in our character." Maybe the invisible hand of wordclouds was right when it suggested from today's 2,078 word address that "America Must Believe."

The crowd is ready; the pundits are anxious; the country mostly watching American Idol on their DVR but in an understated moment in Washington D.C. Barack Obama is about to begin the 57th Inauguration (retail version following yesterday's 'real' version) to be followed, perhaps, by his "I have a drone..." address in remembrance of MLK Day...

Well, it's 5pm somewhere in the world but we thought the following would provide some levity to the potentially stoic teleprompter's upcoming speech...

According to “Economics 101”, quantitative easing, on the heroic scale we have witnessed thus far, should already have led to rampant if not hyper inflation. That it hasn’t is down to the continuing decline in the velocity of circulation of money. In simple terms the banks aren’t lending (compared with the amount of money available to them), but instead are punting on financial assets, which is where “inflation” is ending up and benefitting their balance sheets. Markets generally front run the economy, but if, as many folk believe, including our commentator above, that quantitative easing has been a failure from the start, then why are equity markets indicating an upturn in economic activity? At the end of the day, if the central banks continue to believe they have no other option than money printing and you can put up with the volatility, it’s all aboard the equity train. Bond yields won’t rise much either; if at all. The gold price should give some indication of whether this strategy is working or not, but that is a market that is far easier to rig than sovereign debt – the Germans seem to think so as they contemplate repatriating some of their bullion held by other central banks.

"America has carried on not simply because of the skill or vision of those in high office, but because we, the people, have remained faithful to the ideals of our forebears and true to our founding documents.... The question we ask today is not whether our government is too big or too small, but whether it works -- whether it helps families find jobs at a decent wage, care they can afford, a retirement that is dignified.  Where the answer is yes, we intend to move forward.  Where the answer is no, programs will end.  And those of us who manage the public's dollars will be held to account, to spend wisely, reform bad habits, and do our business in the light of day, because only then can we restore the vital trust between a people and their government."

For the first time this year, Brussels is awash with the opulent optimists of Europe as the finance ministers meet to decide how much of the EUR500bn ESM funds can be funneled direct to their banks and bypass the greedy governments. However, at the core is an uncomfortable reality that all is not well, one Brussels-based think-tank noted: "It’s really about signaling, the only thing that really has an impact on markets is when the word unlimited is uttered by somebody in charge, so in the end it’s not a question of how high the big number should be." The dilemma is Draghi's 'unlimited' promise, which has now been adopted by the Fed and the BoJ, has been hailed as the "breakthrough in tackling the causes of the euro-zone crises" but has instead unraveled into a combination of "complacency and political resistance" from creditor countries.