Brazil

The global reliquification continues:

• BRAZIL CENTRAL BANK DECREASES BENCHMARK LENDING RATE TO 9.00%
• BRAZIL CEN BANK SAYS RATE CUT PART OF CONTINUED ADJUSTMENT

First India, now Brazil (even if the move was largely expected). When are Russia and China joining the fray?

Because no day can be truly complete without a brief comic interlude by everyone's favorite FX strategist...

This isn't science. 

All you need to read and some more.

• ECB Seen Favoring Bond Buying Over Bank Loans (Bloomberg)
• Italians Rally Against Monti’s Pension-Overhaul Limbo (Bloomberg)
• Spain Cracks Down on Fraud as Rajoy Says Aid Impossible (Bloomberg)
• Europe’s Capital Flight Betrays Currency’s Fragility (Bloomberg)
• China’s Less-Than-Forecast 8.1% Growth May Signal Easing (Bloomberg)
• China Banks Moving to Lower Mortgage Interest Rates (China Daily)
• Fed Officials Differ on Need to Keep Rates Low to 2014 (Bloomberg)
• North Korea Confirms Rocket Failure (Reuters)
• Yuan Lending Set to Cross New Border in Pilot Plan (China Daily)

"In the last three plus years, central banks have had little choice but to do the unsustainable in order to sustain the unsustainable until others do the sustainable to restore sustainability!" is how PIMCO's El-Erian introduces the game-theoretic catastrophe that is potentially occurring around us. In a lecture to the St.Louis Fed, the moustachioed maestro of monetary munificence states "let me say right here that the analysis will suggest that central banks can no longer – indeed, should no longer – carry the bulk of the policy burden" and "it is a recognition of the declining effectiveness of central banks’ tools in countering deleveraging forces amid impediments to growth that dominate the outlook. It is also about the growing risk of collateral damage and unintended circumstances." It appears that we have reached the legitimate point of – and the need for – much greater debate on whether the benefits of such unusual central bank activism sufficiently justify the costs and risks. This is not an issue of central banks’ desire to do good in a world facing an “unusually uncertain” outlook. Rather, it relates to questions about diminishing returns and the eroding potency of the current policy stances. The question is will investors remain "numb and sedated…. by the money sloshing around the system?" or will "the welfare of millions in the United States, if not billions of people around the world, will have suffered greatly if central banks end up in the unpleasant position of having to clean up after a parade of advanced nations that headed straight into a global recession and a disorderly debt deflation." Of course, it is a rhetorical question.

Imagine the world economy as an armada of ships passing through a narrow and dangerous strait leading to the sea of prosperity. Navigating the channel is treacherous for to err too far to one side and your ship plunges off the waterfall of deflation but too close to the other and it burns in the hellfire of inflation. The global fleet is tethered by chains of trade and investment so if one ship veers perilously off course it pulls the others with it. Our only salvation is to hoist our economic sails and harness the winds of innovation and productivity. It is said that de-leveraging is a perilous journey and beneath these dark waters are many a sunken economy of lore. Print too little money and we cascade off the waterfall like the Great Depression of the 1930s... print too much and we burn like the Weimar Republic Germany in the 1920s... fail to harness the trade winds and we sink like Japan in the 1990s. On cold nights when the moon is full you can watch these ghost ships making their journey back to hell... they appear to warn us that our resolution to avoid one fate may damn us to the other.

While most of the time, it seems, investing in Emerging (or Growth) market countries is entirely focused on just that - the growth - with little thought given to the lower probability but high impact event of a growth shock. Goldman uses a variety of economic and corporate factors to compile a Growth Vulnerability Score including excess credit growth, high levels of short-term and/or external debt, and current account deficits. Comparing growth expectations to this growth shock score indicates the BRICs are now in very different places from a valuation perspective. Brazil remains 'fair' while India looks notably 'expensive' leaving China and Russia 'cheap'. It seems, in Goldman's opinion that markets are discounting large growth risks too much for China and Russia (and not enough for India). Finally, for all the Europeans, Turkey is richest of all, with a significant growth shock potential that is notably underpriced. Goldman's China-is-cheap perspective disagrees with Nouriel Roubini's well-below-consensus view of an initially soft landing leading to a hard landing for China as 2013 approaches as he notes the pain that commodity exporters feel in 2012 is only a taste of the bleeding yet to come in 2013.

It’s important to put yourself in the minds of OECD policy makers. They are largely managing a retirement class that is moving out of the workforce and looking to draw upon its savings -- savings that are (mostly) in real estate, bonds, and equities. Given this demographic reality, growth in nominal terms is undoubtedly the new policy of the West. While a 'nominal GDP targeting' approach has been officially rejected (so far), don't believe it. Reflationary policy aimed at sustaining asset prices at high levels will continue to be the policy going forward.  While it’s unclear how long a post-credit bubble world can sustain such period of forced growth, what is perfectly clear is that oil is no longer available to fund such growth. For the seventh year since 2005, global oil production in 2011 failed to surpass 74 mbpd (million barrels per day) on an annual basis. But while the West is set to dote upon its retirement class for many years to come, the five billion people in the developing world are ready to undertake the next leg of their industrial growth. They are already using oil at the margin as their populations urbanize. But as the developing world comes on board as new users of petroleum, they still need growing resources of other energy to fund the new growth which now lies ahead of them. This unchangeable fact sets the world on an inexorable path: a competitive race for BTU.

Let's get it all out there. America's dirty laundry that is. Our family secrets. The skeletons in the closet. The goal is to create a list of the many and numerous ways in which our country is deluding itself into believing we are the greatest, smartest, most innovative, freedom loving country that ever was. Don't get me wrong, I'm not some unpatriotic ne'er do well. I love what the Founding Fathers of our country set out to accomplish, faults and all. I love it so much, I was willing to put my life on the line for this country by serving in a US Marine Corps special forces unit for 8 years (your move armchair patriot). But we have drifted so far from the original concepts, I believe our current central planning apparatus more closely resembles the USSR than what most people think is the USA. So I'm going to kick this list off but in no way do I intend this to be exhaustive.

Oh where to begin. The weakness in the markets started late last night when Australia posted a surprising second consecutive deficit of $480MM on expectations of a $1.1 billion surplus (with the previous deficit revised even higher). This is obviously quite troubling because as we pointed out 3 weeks ago when recounting the biggest Chinese trade deficit since 1989 we asked readers to "observe the following sequence of very recent headlines: "Japan trade deficit hits record", "Australia Records First Trade Deficit in 11 Months on 8% Plunge in Exports", "Brazil Posts First Monthly Trade Deficit in 12 Months " then of course this: "[US] Trade deficit hits 3-year record imbalance", and finally, as of late last night, we get the following stunning headline: "China Has Biggest Trade Shortfall Since 1989 on Europe Turmoil." So who is exporting? Nobody knows, but everyone knows why the Aussie dollar plunged on the headline. The shock sent reverberations across Asian markets, which then spilled over into Europe. Things in Europe went from bad to worse, after Germany reported its February factory orders rose a modest 0.3% on expectations of a solid 1.5% rebound from the -1.8% drop in January. But the straw on the camel's back was Spain trying to raise €3.5 billion in bonds outside of the LTRO's maturity, where the results confirmed that it will be a long, hard summer for the Iberian country, which not only raised far less, or €2.6 billion, but the internals were quite atrocious, blowing up the entire Spanish bond curve, and sending Spanish CDS to the widest in over half a year.

Six centuries ago, when London and Paris were irrelevant, plague-infested backwaters, and New York City wasn’t even on the map, the greatest city in the world was Nanjing– the capital of the Great Ming. At the time, Nanjing was not only the most populous city on the planet, it was also the pinnacle of civilization. Art, science, technology, and commerce flourished in the Ming Dynasty’s liberalized economy, which constituted a full 31% of global GDP at the time. (By comparison, the US economy is roughly 25% of global GDP today…) Taxes were low, the currency was strong, and overseas trade thrived. For a time, Nanjing truly was the center of the world. Over the next several hundred years, the tide shifted. The Ming Dynasty fell, and power was transferred further west to the Ottoman Empire, and eventually to Europe which had finally emerged from the Dark Ages as the most advanced civilization on Earth... This phenomenon has lasted for several hundred years now… but as history has shown repeatedly, power centers frequently shift. The world is now witnessing yet another transition of power, this time from west to east, as the US-led western hierarchy suffocates within its own debt-laden Keynesian fiat bubble.

On Thursday morning, President Hu Jintao of China, President Dmitry Medvedev of Russia , President Dilma Rousseff of Brazil, President Jacob Zuma of South Africa and Prime Minister Manmohan Singh of India shook hands at the start of the one day meeting in New Delhi. Top of the agenda was the creation of the grouping's first institution, a so-called "BRICS Bank" that would fund development projects and infrastructure in developing nations. Less noticed and commented upon is the aspirations of the BRIC nations to become less dependent on the global reserve currency, the dollar and to position their own currencies as internationally traded currencies. The leaders of BRIC nations and other emerging market nations have adopted the idea of conducting trade between the five nations in their own currencies. Two agreements, signed among the development banks of Brazil, Russia, India, China and South Africa, say that local currency loans will be made available for trade between these countries. The five fast growing nations participating in local currency trade will allow participants to diversify their foreign exchange reserves, hedging against the growing risk of a euro or dollar crisis. The BRICS want to have easy convertibility of currency to make it easier to use the real, ruble, rupee, renminbi and rand amongst themselves without having to always use the US dollar. Higher intra-Brics trade, conducted in their own currencies would shield their economies from economic dislocations in the west. Left unsaid so far is the possibility that one of the BRICs or the BRICs in unison might peg the value of their respective currencies to the ultimate store of value and money - gold.

The week ahead will offer significant inputs to our views. ISM and payrolls will likely set the market tone for the next few weeks. Despite the softer signals from regional surveys, Goldman expects the ISM to improve at the margin relative to last month’s print. In contrast, it expects payrolls to grow by 175k, down from last month’s 227k jobs gain. FOMC minutes will likely show that Fed officials had a discussion on further easing but are unlikely to offer strong hints about the likelihood and possible timing of a third round of Quantitative Easing.

All you need to read and more.