Shareholders Join Bankers, Economists, Financial Experts, Regulators and the American People In Calling for a Break Up of the Giant Banks
Typically the public enters the market after a large run up, in time to buy at the top. Not there yet.
Conventional thinking and reporting has it that Japan is conducting a larger version of the same monetary experiment they’ve been running for about 15 years. The implication here is that we can safely analyze what Japan is up to through the same monetary lens, as always, but with a slightly wider aperture. In truth, what Japan is running is as much a massive social experiment as it is a monetary experiment. It has such enormous implications to everyone, but especially the Japanese people, that we should all be paying very close attention. The early results, with a manic pulse in the Nikkei coincident with arrhythmic gyrations in the Japanese government bond market, suggest that something has been shaken loose in Japan.
Despite the mainstream analysts' calls for a "great rotation" by investors from bonds to stocks - the reality has been quite the opposite. While the 10-year treasury rate rose from the recessionary lows signaling some economic recovery in 2009; the decline in rates coincided with the evident peak in economic growth for the current cycle that begin in earnest in 2012 - "With rates plunging in recent weeks the indictment from the bond market concurs with the longer term data that the economy remains at risk." Despite the calls for the end of the "bond bubble" the current decline in interest rates are suggesting that the real risk is to the economy. The aggressive monetary intervention programs by the Federal Reserve, along with the ECB and BOJ, continue to support the financial markets but are gaining little traction within the real economy. Of course, this is likely why the current quantitative easing program is "open-ended" because the Fed has finally realized that there is no escape. The next economic crisis is coming - the only questions are "when" and "what causes it?" The problem is that next time - monetary policy might not save investors.
With all three major non-Fed central banks on the tape today, all economic data will be merely "noise" as the market digests what the central-planners' intentions are. The BOJ came and went, and following its substantial balance sheet expansion announcement, which many called "shocking and awing" the USDJPY has pushed higher by 2.5 big figures, although not reaching the 96 levels seen prior to Kuroda's actual announcement. In fact, from this point on there is likely downside as Japan's biggest export competitor, South Korea, has no choice but to join the race to debase which in turn will be JPY-positive. The Bank of England is next, which as expected did nothing moments ago, and will keep doing nothing until Carney joins officially this summer. In some 45 minutes, the ECB headlines will hit the tape where Draghi may bur more likely may not lower deposit rates, and instead will focus on recent deterioration in the economy. None of this will be surprising, and the EUR continues to trade sufficiently weak in line with sub-200DMA levels seen in the past few weeks. What we look forward to the most will be Draghi once again discussing the legal term-sheet details of the ECB's OMT program. His answer will be amusing as there still is no answer, and the OMT is for all intents and purposes the biggest straw man ever conceived by a central bank.
After months of posturing, promising, prevaricating, and proclaiming; the time is rapidly upon us where the central planner of the world will have to actually make actions rather than words. As SocGen notes, Central Bank decisions at the BoJ, ECB and BoE will take centre stage tonight/tomorrow but it is the BoJ announcement that is most highly anticipated after the epic jawboning. SocGen’s Sebastien Galy: "Only the truly brave can feel confident trading into the BoJ event"; adds, "It is not completely clear what economic consensus is expecting in terms of BoJ decision apart from broad outlines." Given positioning, the risk of disappointment and short JPY covering cannot be underestimated should Kuroda underdeliver.
Overview of implications and consequences of Cyprus 2.0.
China’s Government knows it's on thin ice and so is doing three things to try to mollify the Chinese population:
- Launching a very public campaign to crack down on corruption (to mollify the populace).
- Taking steps to tame inflation (slowing financial speculation and importing massive quantities of commodities to attempt to control prices).
- Curbing its stimulus efforts.
It seems more likely to Morgan Stanley's Gerard Minack that central bankers may win the battle: sustaining recovery in developed economies with extraordinarily loose monetary policy. For a while this would go hand-in-hand with better equity performance. The battle is against a crisis caused by too loose monetary policy, elevated debt and mis-priced risk. Ironically, he notes, central bankers may overcome these problems by running even looser monetary policy, encouraging a new round of levering up, and fresh mis-pricing of risk. However, winning the battle isn't winning the war. If central bankers do win this round, the next downturn could be, in Minack's view, an omnishambles. In short, it seems more likely that central bankers may add another leg to the credit super-cycle. The key question for investors in this scenario is when (and how) this cycle may end, and Minack's hunch is that this cycle is already closer to 2006 than 2003.
This is the third day in a row that an attempt to mount an overnight ramp out of the US has fizzled, with first the Nikkei closing down for the second day in a row and snapping a week-long rally, and then the Shanghai Composite following suit with its 5th consecutive drop in a row as the rumblings out of the PBOC on the inflation front get louder and louder, following PBOC governor Zhou's statement that inflation expectations must be stabilized and that great importance must be attached to inflation. Stirring the pot further was SAFE chief Yi Gang who joined the Chinese chorus warning against a currency war, by saying the G20 should avoid competitive currency devaluations. Obviously China is on the edge, and only the US stock market is completely oblivious that the marginal economy may soon force itself to enter outright contraction to offset the G-7 exported hot money keeping China's real estate beyond bubbly. Finally, SocGen released a note last night title "A strong case for easing Korean monetary policy" which confirms that it is only a brief matter of time before the Asian currency war goes thermonuclear. Moving to Europe, it should surprise nobody that the only key data point, Eurozone Industrial Production for January missed badly, printing at -0.4% on expectations of a -0.1% contraction, down from a 0.9% revised print in December as the European recession shows no signs of abating. So while the rest of the world did bad or worse than expected for the third day in a row, it will be up to the POMO and seasonally adjusted retail sales data in the US to offset the ongoing global contraction, and to send the perfectly manipulated Dow Jones to yet another all time high, in direct refutation of logic and every previous market reality ever.
Yo Liz: Subsidies for the zombie banks total more than $3 annually for every dollar in income reported by the industry...
Just like yesterday, it will be up to the US session to provide the perfectly expected, VIXterminating, volumeless ramp as the rest of the world just did not have it in i to take the S&P to all time highs in overnight trading. To summarize: currency talkfare out of Asia, hope springs eternal out of Europe despite the usual spate of ugly numbers, PIIGS bond auctions backstopped by the ECB and always "that much better" than the expected, a UK economy that is just imploding to provide an alibi for more open-ended QE and a crushed pound, and with the US due to make everything better by sending the SP to its all time high (just 9 points away) on the one week anniversary of the record high DJIA, as the NY Fed clobbers the VIX to a 10 handle or lower on even more ugly, unadjusted economic data.
- One in four Germans would back anti-euro party (Reuters)
- EU Chiefs Seeking to Stave Off Euro Crisis Turn to Cyprus (BBG)
- Ryan Says His Budget Would Slow Annual Spending Growth to 3.4% (BBG)
- Goldman leads decline as Wall Street commodity revenues plummet (Reuters)
- South Korea and US begin military drills (FT) and North Korea cuts off hotline with South Korea (Reuters)
- Karzai Inflames U.S. Tensions (WSJ)
- Algorithms Get a Human Hand in Steering Web (NYT)
- Meeting Is Set to Choose Pope (WSJ)
- More U.S. Profits Parked Abroad, Saving on Taxes (WSJ)
- Banks rush to redraft pay deals (FT)
- Fugitive Fund Manager Stuffed Underwear With Cash, Fled (BBG)
- Post-Newtown Gun Limits Agenda Narrows in U.S. Congress (BBG)
- China Hints at Shift in One-Child Policy (WSJ)
Thirty cities at the center of the nation’s most populous metropolitan areas faced more than $192 billion in unpaid commitments for pensions and other retiree benefits, primarily health care, as of fiscal 2009. Pew notes that these cities had 74 percent of the money needed to fully fund their pension plans but only 7.4 percent of what was necessary to cover their retiree health care liabilities. Cities typically count on investment earnings from their pension funds to cover two-thirds of benefits. During the Great Recession, though, returns were lower than expected, and unfunded pension liabilities grew in nearly all of the cities. Even cities with well-funded systems struggled to keep up their yearly contributions as local tax revenue plummeted during the recession, and while pension assets have largely returned to pre-recession levels, they still must make up for years of lost growth, as liabilities continue to rise. So pressure for reforms is not expected to lessen. New York and Philadelphia may have the largest unfunded liability per household, but it is Chicago and Pittsburgh that have the lowest funding levels for pensions and the lowest retiree health care funding levels - while Washington D.C. tops the list in both. Benefits down, taxes up.
There was once a rough and logical correlation between the level of government borrowing, and the rate of interest on government debt. If the government borrowed more money, the cost of borrowing rose and the private market’s appetite for government debt fell. But that correlation totally broke down around the year 2000. In 2008 we hit the Minsky moment, and today we are in the deleveraging phase. The spread between government borrowing costs and government borrowing levels remains huge. And the long, slow grind back to a sustainable debt-to-GDP ratio is slow and depressionary. Japan hit their Minsky moment in the 1990s, and today still remain trapped in the deleveraging phase. The question that remains unknown is how the distortions will resolve. In the long run, the data is clear. The Greenspan-Bernanke era Federal Reserve wilfully built up bubbles and distortions, which grew out of control, and sucked the economy into a black hole. At the very best, this has led to a Japanese-style depression.