A series of crises, the latest being the ominous developments in the Ukraine and further evidence of disappointing growth in China, have rattled financial markets. Of course, with all major central banks at amazingly easy policy stances, the bet continues to be that the latest uncertainties will also pass. That may be true once again. But, as Abe Gulkowitz lays out in the inimitable style of his The Punch Line letter, one must recognize that many of the serious flaws uncovered in each of the predicaments will linger for years to come and that the policy remedies have at best covered up the fundamental issues without completely resolving them.
Thanks to the repression of the world's central banks, investors have exited cash and piled into "everything else," but while this is no surprise to most, Citi's Matt King warns of the possibility of an "entrance with no exit" as investors reach for yield has distorted primary and secondary markets, forced risk-averse investors into alternative asset classes, distorted markets beyond any fundamentals, and left markets incredibly illiquid. This, he concludes, sets up a problem that we are already seeing as investors are disillusioned one asset at a time...
One of the key lessons we can take away from history is that the global financial system changes… frequently. Since the end of World War II, the US dollar has been the dominant currency in the world. And even though Richard Nixon ended the dollar’s convertability to gold and unilaterally abandoned the US government’s obligations under the Bretton Woods system back in 1971, the world has still clung to the dollar for the past 43-years. But this is changing rapidly...
This past week has seen the market struggle due to continued weak economic data, rising tensions between Russia and the Ukraine and an extended bull market run. Market internals are showing some early signs of deterioration even though the longer term bullish trajectory remains intact. Therefore, this week's "Things To Ponder" wades through some broader macro investment thoughts, from the safety of your investments to how market tops are made.
A month ago we reported that according to much delayed TIC data, China had just dumped the second-largest amount of US Treasurys in history. The problem, of course, with this data is that it is stale and delayed. For a much better, and up to date, indicator of what foreigners are doing with US Treasurys in near real time, the bond watchers keep track of a far less known data series, called "Treasury Securities Held in Custody for Foreign Official and International Accounts" because it shows what foreigners are doing with their Treasury securities held, as the name suggest, in custody by the Fed. So here it goes: in the just reported latest data, for the week ended March 12, Treasurys held in custody by the Fed dropped to $2.855 trillion: a drop of $104.5 billion. This was the biggest drop of Treasurys held by the Fed on record, i.e., foreigners were really busy selling.
Inflation has weakened the yen by 6.8% in the past 12 months… and the cost of living in Japan is now at a five year high.
"Europe faces 25 years of Japan-style stagnation," warns George Soros in this brief Bloomberg TV interview, adding that without deeper integration, "it’s an incomplete association of nations and it may not survive." While claiming that the financial crisis may be over they now "face a political crisis," with the voluntary association cracking due to the creditors (Germany) being in charge. However, he hopes "Ukraine is a wake-up call to Europe, because Russia has emerged as a rival to the European Union." Putin, Soros worries, "has a very different idea of what a society should be like... he has a blind spot - he believes people can be manipulated and cannot resist." That's not the case according to Soros, who exclaims "people do believe in freedom."
"I don’t think they’ve solved anything. I think they’ve compounded the underlying problems that caused the last crisis, and so now the next crisis will be that much worse because of what the central banks did, in particular the Federal Reserve...The Fed is building an economy that is completely dependent on that cheap money. And so if you take it away, the economy implodes, but if you don’t take it away, then it’s worse." The idea is to preempt capital controls - "get out the window before it slams shut!"
The Fed and the other major central banks have been planting time bombs all over the global financial system for years, but especially since their post-crisis money printing spree incepted in the fall of 2008. Now comes a new leader to the Eccles Building who is not only bubble-blind like her two predecessors, but is also apparently bubble-mute. Janet Yellen is pleased to speak of financial bubbles as a “misalignment of asset prices,” and professes not to espy any on the horizon. Actually, the Fed’s bubble blindness stems from even worse than servility. The problem is an irredeemably flawed monetary doctrine that tracks, targets and aims to goose Keynesian GDP flows using the crude tools of central banking. Not surprisingly, therefore, our monetary central planners are always, well, surprised, when financial fire storms break-out. Even now, after more than a half-dozen collapses since the Greenspan era of Bubble Finance incepted in 1987, they don’t recognize that it is they who are carrying what amounts to monetary gas cans.
The Whole World Has Gone Into Debt
- Index of largest Chinese stocks drops to lowest since February 2009 (BBG)
- Plane-Debris Hunters Seek Suspected Aircraft Window Part (BBG)
- New-Home Building Is Shifting to Apartments (WSJ)
- Forward Guidance Risks Stoking Instability, BIS Says (BBG)
- Alleged Bitcoin Millionaire Nakamoto Gets $28,000 Donations (BBG)
- Mexico kills drug kingpin reported dead years ago (Reuters)
- Tencent to Buy 15% Stake in JD.com to Boost E-Commerce (BBG)
- Bitcoin exchange MtGox 'faced 150,000 hack attacks every second’ (Telegraph)
- Noyer Says Stronger Euro Creates Unwarranted Pressure on Economy (BBG)
- Russian Forces Gain in Ukraine as Separatist Vote Looms (BBG)
In recent months the Fed (and ECB for that matter) has taken up the mythical charm offensive of "forward guidance" as a way to assure markets that punchbowls will remain free and available for as long as it takes. At the same time, the Bank of England has been shown up (and lost credibility) over its threshold-ignorance, the Fed has also now started to hit the wall on any 'quantitative'-based forward-guidance communications policy, proposed Fed vice-Chair Stan Fischer is skeptical: "you can't expect the Fed to spell out what it's going to do... because it doesn't know;" and finally Bob Rubin slammed the Fed, saying "their forecast models don't work.. and forward guidance [has no validity] as it is impossible to know what is going to happen in 6 months." So today's BIS report on the the fallacy of forward guidance and risks to central bank reputation (and the following 4 charts) suggest faith in central banker omnipotence may be fading.
I clearly have a very hard time reconciling a U.S. stock market making new all-time-highs almost daily, especially in the face of what most economists consider to be a weak domestic economy with negligible growth prospects. Moreover, when you layover the thoroughly stalled and certainly weaker overall global economic picture, it’s even harder to rationalize. Finally, throw into the mix the gravity of threatening geopolitical tensions between the U.S. and Russia, the two nations with the largest stockpiles of tactical nuclear weapons on earth, and the market actually welcomes it. Something majorly does not add up, well, to this Idiot anyways.
Big Bubble Brutally Bursts ... Bringing Bankruptcies, Bond Busts
Today's nonfarm payroll number is set to be a virtual non-event: with consensus expecting an abysmal print, it is almost assured that the real seasonally adjusted number (and keep in mind that the average February seasonal adjustment to the actual number is 1.5 million "jobs" higher) will be a major beat to expectations, which will crash the "harsh weather" narrative but who cares. Alternatively, if the number is truly horrendous, no problem there either: just blame it on the cold February... because after all what are seasonal adjustments for? Either way, whatever the number, the algos will send stocks higher - that much is given in a blow off top bubble market in which any news is an excuse to buy more. So while everyone is focused on the NFP placeholder, the real key event that nobody is paying attention to took place in China, where overnight China’s Shanghai Chaori Solar defaulted on bond interest payments, failing to repay CNY 89.9mln (USD 14.7mln), as had been reported here extensively previously. This marked the first domestic corporate bond default in the country's history - indicating a further shift toward responsibility and focus on moral hazard in China.