Capital Markets

US jobs data is important, but other forces are at work that seem more powerful.

India should monetise their huge gold stockpiles of over 20,000 metric tonnes according to the World Gold Council (WGC) as reported by Bloomberg this morning.

“In the long term gold could be monetized as a financial asset," Aram Shishmanian, the CEO of the WGC said in India overnight.

The World Gold Council has approached the Reserve Bank of India (RBI) to work with it so that bullion could be used as a financial asset, rather than just a physical asset. 

It is clear that Western capital markets no longer generally regard gold as money. It has been relegated to the status of a risk asset, useful collateral, or simply a commodity with a history of being used as money. This is a mistake.

Now that the BOJ's "interventionalism" in the capital markets is increasingly losing steam, as the soaring realized volatility in equity and bond markets squarely puts into question its credibility and its ability to enforce its core mandate (which, according to the Bank of Japan Act "states that the Bank's monetary policy should be aimed at achieving price stability, thereby contributing to the sound development of the national economy) Japan is left with one wildcard: the Government Pension Investment Fund (GPIF), which as of December 31 held some ¥111.9 trillion in assets, of which ¥67.3 trillion, or 60.1% in Japanese Government Bonds. Perhaps more importantly, the GPIF also held "just" ¥14.5 trillion in domestic stocks, or 12.9% of total, far less than the minimum allocation to bonds (current floor of 59%).  It is this massive potential buying dry powder that has led to numerous hints in the press (first in Bloomberg in February, then in Reuters last week, and then in the Japanese Nikkei this morning all of which have been intended to serve as a - brief - risk-on catalyst) that a capital reallocation in the GPIF is imminent to allow for much more domestic equity buying, now that the threat of the BOJ's open-ended QE is barely sufficient to avoid a bear market crash in the Nikkei in under two weeks.

There are some problems, however.

Here is what is shaping the global capital markets.

There is something very wrong with this Bloomberg article screengrab.

Some of my first memories of television are of a series called The Rocky and Bullwinkle Show, which was a witty combination of animated cartoons about the exploits of the title characters, Rocket "Rocky" J. Squirrel and Bullwinkle J. Moose and their nemeses, two Pottsylvanian nogoodniks spies, Boris Badenov and Natasha Fatale. The show was filled with current event commentary, political and social satire. The show was also filled with commentary on economic and market conditions that resonated with the parents watching the show while the kids focused on the cartoons. Each show ended with the narrator describing the current cliffhanger with a pair of related titles, usually with a bad pun intended. So let's adapt some of my favorite Rocky and Bullwinkle episode titles to modern day; we might see that there are some political and economic challenges that are timeless, as it appears we have been doing the same thing over and over for decades and expecting different results.

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.