Archive - Feb 2013 - Story

One of the largest potential volatility events for the equity markets this year will be the Q1 US Debtapalooza.  There are three main issues that are to be debated with a crescendo coming in late February – the Long Term Budget Deal, the 2013 Budget Deal and the Debt Limit.  There will obviously be many consequential threats and theatrics associated with these events – including potential threats for government shutdowns and debt defaults – while the very real consequences could be additional US ratings downgrades.  It is important to remember that outside of the 2008 shock, the Debt Ceiling Debate and consequent US Debt Downgrade in Summer 2011 created the biggest volatility event of the past two decades. Volatility metrics show that the market is extremely complacent heading into these events.

Manias occur for many reasons, but great manias are made possible and sustained by errant government policies that may seem to have good reasons, none of them with any long-term economic value. Housing, despite high leverage, high transaction costs, and poor liquidity, was promoted as a dream investment for everyone. Massive intervention in this market by populist government policies and agencies fostering affordability exacerbated these normal defects and disastrously distorted the market. It was a "dream," in the sense of confused, wishful thinking. But to think and act this way with many trillions of dollars, most of it borrowed, was irresponsible on an historic scale.

Confused what the earlier released statement by the G-7 means? Fear not, because here comes Goldman with a post-mortem. And just in case anyone puts too much credibility into a few sentences by the world's developed nations (whose viability depends in how quickly each can devalue relative to everyone else) in which they say nothing about what every central bank in the world is actually doing, here is a history of four years of G-7 statements full of "affirmations" and support for an open market exchange policy yet resulting in the current round of global FX war, confirming just how 'effective' the group has been.

• The Man Who Killed Osama bin Laden... Is Screwed (Esquire)
• G7 fires currency warning shot, Japan sanguine (Reuters)
• North Korea Confirms It Conducted 3rd Nuclear Test (NYT)
• Italian Police Arrest Finmeccanica CEO (WSJ)
• Legacy, political calendar frame Obama's State of the Union address (Reuters)
• China joins U.S., Japan, EU in condemning North Korea nuclear test (Reuters)
• Wall Street Fading as Emerging-Market Banks Gain Share (BBG)
• Berlin Conference 2.0: Drugmakers eye Africa's middle classes as next growth market (Reuters)
• Barclays to Cut 3,700 Jobs After Full-Year Loss (BBG)
• US Treasury comment triggers fall in yen (FT)
• ECB Ready to Offset Banks’ Accelerated LTRO Payback (BBG)
• Fed's Yellen Supports Stimulus to Spur Jobs (WSJ)
• Libor Scrutiny Turns to Middlemen (WSJ)
• Samsung Girds for Life After Apple in Disruption Devotion (BBG)

With the world so obviously gripped in currency war even the hotdog guy has moved away from saying how technically undervalued AAPL stock is to opining on who is leading the global race to debase, it was only a matter of time before the G-7 confirmed the only strategy left is FX devaluation by denying it. Sure enough, a preliminary statement from the G-7 came earlier, in which the leading "developed" nations said, well, absolutely nothing:

We, the G7 Ministers and Governors, reaffirm our longstanding commitment to market determined exchange rates and to consult closely in regard to actions in foreign exchange markets. We reaffirm that our fiscal and monetary policies have been and will remain oriented towards meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates. We are agreed that excessive volatility and disorderly movements in exchange rates can have adverse implications for economic and financial stability. We will continue to consult closely on exchange markets and cooperate as appropriate.

This follows a statement by the US Treasury's Lael Branaird yesterday in which she said that she is supportive of the effort in Japan to end deflation and “reinvigorate growth”. Lastly, the SNB's Jordan also confirmed that the Swiss National Bank will continue to do everything to crush its own currency, and will the 1.20 EURCHF floor, stating that Japan is merely doing the right thing to stimulate growth (i.e., doing what "we" are doing).  In other words, let the FX wars continue and may the biggest balance sheet win, all the while everyone pretends nothing is happening.

This graph shows everything we need to know about the geopolitical reality of Predator Drones (coming soon to the skies of America to hunt down fugitives?) - the American public loves drone strikes. Let’s be intellectually honest. If a country engages in a military program that carries out strikes that kill hundreds of civilians - many of whom having no connection whatever with terrorism or radicalism - that country is going to become increasingly hated. People in the countries targeted - those who may have lost friends, or family members - are going to plot revenge, and take revenge. That’s just how war works. It infuriates. It radicalises. It instils hatred.

Update: S.KOREA RAISES MILITARY READINESS LEVEL, YONHAP REPORTS,  South Korean news agency Yonhap says U.S., China informed about the North Korea nuclear test on Monday

Just because it has been off the headlines for a while, the time has come for North Korea to remind everyone it is still there, somewhere, with what appears another underground nuclear test, a few short years after that last one from May 2009.

• N. KOREA TEST ‘LIKELY’ TO BE NUCLEAR: S. KOREA DEFENSE MINISTRY
  
• S. KOREAN DEFENSE MINISTRY CONFIRMS DPRK NUCLEAR TEST
• USGS says earthquake of 4.9 scale detected in North Korea near to known nuclear test site - RTRS
• Seismic activity has been detected in North Korea. North Korea is not prone to seismic activity, it could indicate a nuclear test - RTRS
• Seismic activity detected in DPRK... believed to be "man-made" per various ROK sources - VOA
• Artificial earthquake detected in N. Korea - Yonhap
• S. Korea's presidential office checking reports of artificial quake in N. Korea - Yonhap

Of course, since this won't have any impact on the only wars that matter, the currency ones, it is unlikely that anything but more jawboning, and hard language out of both South Korea, the US and the UN, will come out of this attempt by DPRK to appear relevant.

Day after day, just after the US day-session close - just as traders settle down for some Ovaltine and light reading - someone (anyone) from Japan's political or financial elite sends a shot across the wires on the epic amount of easing that they will do to fight deflation. Explicitly focusing on the stock market, with the economy 'hopefully' coming along for the ride, is the cunning plan to inflate asset values into a self-fulfilling cycle of awesomeness for the structurally deadbeat Japanese economy. So far so good - given JPY's weakness and NKY's nominal rise. But loathed as we are to steal the jam from Abe's donut, there is a rather large fly in his inflation ointment - Brent Vigilantes^TM. Today saw the price of oil in Japan rise to its highest since September 2008. Anytime the price of oil has topped JPY10,000 per barrel, Japan's macro-economy has slumped. Just as we noted earlier, there is simply no free lunch in the competitive devaluation game - as the market's only self-regulating force remains in the price of energy.

From the 'simplicity' of a Gold Standard to the 'complexity' of our current fiat system, Santiago Capital draws a handy analogy between the over-complicated machines of 'Rube Goldberg' that represents the interactions between the various actors affecting the size and velocity of our monetary base and the 'simplest possible, but no simpler' world of Occam's Razor prone gold. In two brief presentations, Brent Johnson introduces the two systems and explains that in order to keep the shark of our economy alive, one of two things must happen: monetary velocity must be maintained or the monetary base must rise. Obviously both are inflationary. From how the system is designed to its drastic implications, simple, brief, concise, and what to do about it. Simply put "If something cannot go on forever, it will stop"... whether we decide to do it ourselves or the market does it for us, our overly-complicated system of money is going to stop... and as such - buy protection against this absolutely certain eventuality.

Just in case the Friday night insider dump bomb by Google executive chairman Eric Schmidt, in which he announced the sale of 42% of his GOOG holdings the day the stock hit its all time high, did not send a clear enough message to the market as to what side of the under-over valued spectrum corporate insiders believe we currently find ourselves in, here come six other companies with announcement of equity follow ons and secondary offerings - mostly by "selling shareholders" who happen to be some of the smartest LBO shops around - after the close on Monday alone. The scramble to sell equity while the selling is good is on.

Just because mistakes are made all the time.

This morning, in an understated way (of course) ahead of the G-20 group-hug at the end the week, Economic and fiscal policy minister Akira Amari stated "It will be important to show our mettle and see the Nikkei reach the 13,000 mark by the end of the fiscal year (March 31)." This level for the Nikkei implies a USDJPY level of 104.75 (or a further 12% devaluations for here). However, there is a strong correlation between the USD-JPY exchange rate and the S&P 500-to-Nikkei 225 relationship. Based on that 104.75 target (and the toungue-in-cheek belief that this will help Japan's competitiveness - which means someone else has to suffer), the ratio of the SPX to NKY would be 8.7x. So while the Nikkei would see a 17% surge (in nominal value), the S&P 500 would lose 3-4% from here. 

Economic freedom involves more than just the freedom to buy and sell products and services. It allows us to be free in our interactions with other people. Economic freedom enables us to travel, to say what we want to say, to do what we want to do. This is how Prof. Antony Davies describes the 'positives' of the somewhat commonsensical benefits of economic freedom. In this brief clip, he shows how economic freedom is associated, in the data, with a number of positive indicators of a healthy country. For the first 3:30 of this fascinating discussion, the professor clarifies how great it all is... then just when you're feeling wonderfully smug, he shows the facts for the USA, as we discussed here and here, things are trending away from economic freedom for Americans.

From the management of a global currency war to the 1998 Committee to Save The World, QBAMCO provides an all encompassing escape into the reality our current - and future - monetary (and inflationary) world. While Brodsky and Quaintance do not expect a breakdown in global monetary oversight, they do expect fiat currency debasement to continue to mask the driver of real economic malaise and contraction - global bank deleveraging; and they do expect this process to lead to a popular loss of confidence in today’s major currencies as savings instruments – perhaps beginning in the global capital markets in 2013. What will eventually (or soon) occur will be the rare occasion when return-on-savings trounces return-on-investment, implying precious metals will outperform the great majority of financial assets (except for shares in precious metals miners and natural resource producers).