The US currency is shrinking as a percentage of world currency today according to the International Monetary Fund. It’s still in pole position for the moment, but business transactions are showing that companies around the world are today ready and willing to make the move to do business in other currencies.
The following chart represents the all-time record-low household confidence of a European nation (which, in the last month, fell at the second fastest rate in 20 years). This nation's equity market is near pre-crisis highs having rallied over 37% in the last 11 months. This nation's bond market risk is near post-crisis lows with its spread having halved in the last year. Name this Nation whose households have never been more depressed, economically speaking...
Update: rumor of Price Keeping Operation in Japan. If correct, this means that the BOJ's $70 billion per month injection is no longer sufficient, that the BOJ's credibility is being actively questioned - by far the biggest stigma for any central bank anywhere - and pass-through financial entities have to artificially prop up the market by buying ETFs in order to preserve the galloping rate of increase or else face a collapse such as that seen in the past several days.
The "catalysts" in the new normal have become so hilarious that losing money in the centrally-planned market can be simply viewed as the price of admission to witness the most entertaining circus spectacle in capital "markets" history. Behold: the 8pm open of Japanese trading. Apparently, somehow, the fact that a market has reopened is not only news, but is massively sell the Yen news, at least by Mrs. Watanabe, and since every US algo is correlated to the USDJPY, this means a surge in the E-mini. But perhaps what those sneaky algos are discounting is that tomorrow is a Tuesday. And as every dart chasing monkey with an E-trade terminal knows: nobody ever loses money on Tuesdays betting on the Stalingrad & Propaganda 500 index any more.
Western central banks have got themselves horribly wrong-footed as a result of not adjusting their anti-gold policies to allow for the realities of Asian gold demand. Though their dealings are shrouded in secrecy, there is compelling evidence that much – if not most – of Western central bank gold has been quietly sold over the last three decades. More recently members of the Shanghai Cooperation Organisation, a common security and trading bloc led by Russia and China, and future members (India, Iran, Afghanistan, Mongolia, Belarus and Sri Lanka), with their citizens numbering over 3 billion people, have together cornered the global market for physical supply, without even taking account of demand from the rest of South East Asia’s gold-hungry population. The result is that gold markets are now failing to clear. The ability of the Western central banks to supress gold prices appears to be ending.
Just when you thought the R&R debate was finished, it seems Paul Krugman's latest "spectacularly uncivil behavior" pushed Reinhart and Rogoff too far. In what can only be described as the most eruditely worded of "fuck you"s, the pair go on the offensive at Krugman's ongoing tete-a-tete. "You have attacked us in very personal terms, virtually non-stop... Your characterization of our work and of our policy impact is selective and shallow. It is deeply misleading about where we stand on the issues. And we would respectfully submit, your logic and evidence on the policy substance is not nearly as compelling as you imply... That you disagree with our interpretation of the results is your prerogative. Your thoroughly ignoring the subsequent literature... is troubling. Perhaps, acknowledging the updated literature on drawbacks to high debt-would inconveniently undermine your attempt to make us a scapegoat for austerity."
A week later and everyone is a bit more nervous, with the speculation that US sovereign debt purchases by the Federal Reserve will wind down and with the Bank of Japan completely cornered. In anticipation to the debate on the Fed’s bond purchase tapering, on April 28th (see here) we wrote why the Federal Reserve cannot exit Quantitative Easing: Any tightening must be preceded by a change in policy that addresses fiscal deficits. It has absolutely nothing to do with unemployment or activity levels. Furthermore, it will require international coordination. This is also not possible. In light of this, we are now beginning to see research that incorporates the problem of future higher inflation to the valuation of different asset classes. Why is this relevant? The gap between current valuations in the capital markets (both debt and credit) and the weak activity data releases could mistakenly be interpreted as a reflection of the collective expectation of an imminent recovery. The question therefore is: Can inflation bring a recovery? Can inflation positively affect valuations? The answer, as explained below, is that the inflationary policies carried out globally today, if successful will have a considerably negative impact on economic growth.
In the past, food and alcoholic beverage makers got in trouble for attempting to cover the impact of inflation (such as the 12% Y/Y increase in Fed employee salaries) by diluting the content, or simply serving less, of their products while keeping the price constant: the same thing as rising prices, but optically more palatable to less than sophisticated consumers. That was the past. A new breed of industrious, high profit margin-seeking alcohol vendors have decided to skip this protocol entirely and instead of serving booze, have opted to replace the product outright. As AP reports, at numerous New Jersey bars, including 13 TGI Fridays restaurants, owners were accused of substituting cheap booze while charging premium prices. The profitability at all costs situation was so bad that at one bar, a mixture that included rubbing alcohol and caramel coloring was sold as scotch. In another, premium liquor bottles were refilled with water — and apparently not even clean water at that.
While many would argue that youth unemployment (the real scariest chart here), in fact we suspect it is the following two charts that are really keeping Mario Draghi up at night. The lip service paid by the French and the Germans to growth strategies and youth unemployment pale in relation to the desperation of the European collateralizer-of-last-resort to de-fragment his transmission channels and unleash his own QE to the starving banking systems of Spain and Italy. As BNP notes, recent data on Italian and Spanish banks’ bad and non-performing loans (NPLs) have reignited the debate on the health of the banking sector in the eurozone’s peripheral economies and its implications for the bloc’s credit supply and, ultimately, economic growth. But what is worse is that interest rates on new loans for a company in Italy or Spain are almost double those in Germany and France. It is against this backdrop that Draghi expressed plans to revive the ABS market - but implementation will prove significantly more challenging than market hopers believe (as is clear in credit markets) and direct purchases will probably face vetoes by a number of influential members of the board. To add further salt to these fresh wounds, the FT reports that Spanish banks will need to set aside more than EUR10 billion more reserves to cover the rolling over of EUR 200 billion of 'extend-and-pretend' loans.
...understand the national threat that is our fragmented and perverted equity market microstructure that is driven by such esoteric order-types such a Post No Preference Blind Limit Order created through the buddy system of exchange/order volume producer.
UPDATE 1: Japanese stocks turned negative (NKY -600pts from highs, -1.5% on day; and TOPIX down over 4% from highs); Japanese banks -11% from yesterday highs; S&P futures down 10 points from after-hours highs...
UPDATE 2: *KURODA WANTS TO AVOID INCREASING VOLATILITY IN BOND MARKET (yeah thanks... as useful as saying "we all want to avoid syphilis")
UPDATE 3: Nikkei 225 Drops below 14,000 - TOPIX down 11% from highs
For the second day in a row, and in spite of comments from Abe and Kuroda on communicating with the market (as Kuroda says BoJ Monetary easing sufficient), Japanese capital markets are out of control.
Chaos Theory turns 50 years old this year, celebrating half a century of flapping butterfly wings in Brazil creating tornadoes in Texas. That most famous example is especially appropriate, since it was a meteorologist named Edward Lorenz who first outlined why seemingly consistent and knowable systems can still go wildly wrong. As it turns out, as ConvergEx's Nick Colas reminds us, small errors in measurement or observation at the start of a time series can significantly change how things look at the end. In the current low volatility, one-variable central bank driven global equity markets, Chaos Theory may seem a quaint relic of past crises. However, its central lesson – that complex interrelated systems create unexpected outcomes from seemingly benign inputs – is still relevant. Students of economics like to think of their discipline as scientific, just like physics or other hard sciences. They would do well to embrace the intellectual honesty neatly encapsulated by the central lessons of Chaos Theory. The problem is that current market price action - that slow steady grind higher - indicates marginal buyers don’t fret very much about the future. No matter how little we really know about it.
If you develop your beliefs about gold and silver by sourcing mainstream media news, everything you believe about gold and silver will always be wrong.
In August of 2011, Argentina’s government slowly began to implement a series of actions destined to curtail the right of citizens to access US dollars (foreign exchange in general). The goal was and is to force savings into pesos, as pesos are after the taxable asset in a country that cannot access capital markets and fully monetizes its deficits. From that moment onward physical US dollars started to trade at a premium. First-hand experience on the ground in Patagonia confirm the irreversible damage caused by interventionist policies: Widespread poverty, abandoned infrastructure, scarcity of consumer goods, unseen unemployment and criminality, and the madness of hedging against inflation with the purchase of new cars. The streets of any forgotten small town in Patagonia are filled with brand new 4×4 vehicles that would be the envy of many in North America. We can now see that the sustainability of the manipulation in a segmented/broken foreign exchange market causes a negative carry, which would create a quasi-fiscal deficit in Argentina (i.e. the deficit of the Banco Central), fully opening the gates to hyperinflation.