Capital Markets

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A discussion of what investors who are being displaced by BOJ purchases are going to do. It may not be as simple as rushing to buy foreign assets that people are anticipating.

I see Japan as a global aggressor, the country doesn't give a damn about where the chips fall outside of its borders.

It is hard to make sense of the markets these days. For instance, gold showed no support while the geopolitical situation in Asia deteriorated, Japan embarked in the mother of all monetization programs, and a member nation of what is supposed to be a monetary union was imposed controls on the movement of capital. Or take the case of the Euro, which jumped from $1.2750 to $1.2950 on the day of one of the most confusing and embarrassing press conferences the president of its central bank ever gave. However, in a faraway land, where there is no shadow banking, leverage or even capital markets, economic fundamentals still hold, which can help us, inhabitants of the developed world, visualize a dynamics lost in the shelves of our collective memory. The land we are referring to is Argentina, but not Argentina of 2001. Today, we want to write about Argentina of 2013, and no, we will not discuss their legal battles with Mr. Singer.

With every modestly positive datapoint being desperately clung to, now that even Goldman's Hatzius has once more thrown in the economic towel after proclaiming an economic renaissance in late 2012 just like he did in late 2010 only to issue a mea culpa a few months later (and just as we predicted - post coming up shortly), the key prerogative is to ignore the elephant in the room. That, of course, is that the JPY 1 quadrillion bond market had to be halted for the second day in a row as the Japanese capital markets are fast becoming a very big and sad joke. The resulting flight to safety from Japanese investors, who sense that their own bond market is on the verge of breaking down completely, has managed to send French and Belgian bonds to record lows, the Spanish 2 Year to sub 2%, the German 6 month bill negative in the primary market, the US 10/30 year constantly bid and so on. The immediate result is that the bond-equity disconnect continues to diverge until one day we may get negative 10 Year rates coupled with an all time high stock market. Gotta love the fake New Normal market, in which the Japanese penny stock market was up another 2.8% to well over 13,000 even as the Shanghai Composite plumbs ever redder territory for 2013 on fears the birdflu contagion will hurt the already struggling economy even more.

A big picture look at the drivers of the global capital markets.

Portugal's court ruling and Italy's caretaker government decisions briefly discussed.

Why has the Euro-zone fallen back into recession, and why can't it shake of its seemingly never-ending crisis? Is there light at the end of the tunnel - or is that an approaching train? A walk through the Euro-zone with charts of macro-economic data reveals the crisis is far from over. Instead, most trends are pointing towards further deterioration - facts as opposed to the hope and anecdote that we are bombarded with on a daily basis. While perusing these charts, consider EU President Barroso's comments just today that, "the worst of the crisis is over." You decide.

Mounds of cold, hard, indisputable evidence not found ANYWHERE else! Damn, you thought Cyprus was newsworthy? Ireland already Troika'd & they're bigger than Cyprus. Depositor recap of banks looks inevitable if this research is right!

What is the meaning of the markets hitting new all-time highs.  The general consensus of the analysts and economists is that the rise in capital markets, given weak current economic data and a resurgence of the Eurozone crisis, is clearly a sign of economic strength; and, combined with rising corporate profitability, makes stocks the only investment worth having. There is, however, a more pragmatic perspective. Suppressed wage growth, layoffs, cost-cutting, productivity increases, accounting gimmickry and stock buybacks have been the primary factors in surging profitability.  However, these actions are finite in nature and inevitably it will come down to topline revenue growth.  However, since consumer incomes have been cannibalized by suppressed wages and interest rates - there is nowhere left to generate further sales gains from in excess of population growth. The reality is that all the stimulus and financial support available from the Fed, and the government, can't put a broken financial transmission system back together again.  Eventually, the current disconnect between the economy and the markets will merge.  Our bet is that such a convergence is not likely to be a pleasant one.

I disagree with the “addiction” metaphor because it implies that the markets/ addict could potentially become healthy if the dealer stopped dishing out the drugs. This ties in with Bernanke’s claims that everything is under control and that he can remove the excess liquidity anytime he wants to.

When it comes to popular finance myths, cash hoarding by corporates may be one of the most perpetuated. It's not that the data is wrong; US companies are holding more cash on their balance sheets than at any time in the past, as a report by Moody's this week notes. What's misguided is the narrative, in Citi's view, in particular among equity investors. What they most take issue with is the implication that corporates have lots of cash to return to shareholders. Indeed, there's plenty of data to the contrary that challenges the prevailing notion that corporates are the picture of good health.

A review of the implications of the new deal struck on Cyprus. We think three of the worst pitfalls have ultimately been avoided--small depositors protected, orthodox seniority of claims respected, and extensive capital controls averted. The political will to preserve EMU has once again triumphed over ideological purity. We review the economic calendar for the week ahead.

Up until just a week or so ago, the euro, the market seems to be telling us, has been saved, and peripheral Europe is widely seen as being out of the woods. Thanks to the ECB - who are willing to pump as much liquidity into the markets as it needs - it seems rising debt levels, greater political fragmentation, and a worsening economy somehow don't really matter and it is impolitic to sound pessimistic. But is peripheral Europe really suffering primarily from a liquidity crisis? It would help me feel a lot better if I could find even one case in history of a sovereign solvency crisis in which the authorities didn’t assure us for years that we were facing not a solvency crisis, but merely a short-term problem with liquidity. A sovereign solvency crisis always begins with many years of assurances from policymakers in both the creditor and the debtor nations that the problem can be resolved with time, confidence, and a just few more debt rollovers. The key point is that bankers are not stupid. They just could not formally acknowledge reality until they had built up sufficient capital through many years of high earnings – thanks in no small part to the help provided by the Fed in the form of distorted yield curves and free money – to recognize the losses without becoming insolvent.

An overview of the technical condition of the major currencies. See why we anticipate a heavier US dollar in the week ahead.

It may be that a larger correction is in order given that some important global powers are struggling. Money printing by itself isn’t cure-all for what ails us.

Friday not much is happening beyond Cyprus tensions—how fun! 

Let’s see what happens.