2012 was an odd year in many senses. The Fed and the ECB are both verging on $4 trillion balance sheets, the total for all of the world’s central banks is $14 trillion and these small pieces of paper float around in the breeze and are plucked at will to feed the fires of Wall Street. When all of the central banks on the planet work in concert then, without off-world bourses, there is no place else left to go and the spatial restraints of our planet are the same boundaries for the investment of money. Here then we find the explanation of 2012. It is not a dot-com bubble or a real estate bubble or a specific bubble of any type at all or any we have ever seen but the Big Lebowski, the giant squid, the mother of all Blue Whales and the days of living in some place that we have never occupied before. Those that bet with the central banks have prospered, made fortunes, become vastly richer but how long does this game go on and is there a way out that is devoid of the usual pain to be found in contractions. The bet of last year was to place your money with the bankers-at-large but will that be the correct bet of this year as the plastic is stretched so thin now that a misstep, the politics of nationalism either of the funding or the funded bursts the balloon and sends it cascading around the room in some wildly gyrating manner.
Most of the major currencies are consolidating within yesterday's trading ranges. The main feature has been comments from Japan's Minister of Economic Revival that appeared to declare victory in the government's attempt to weaken the yen. News wires quoted him saying that the yen had corrected its excessive rise and was currently in line with fundamentals. This triggered a wave of short covering yen positions, driving the down form around JPY89.60 to near JPY88.60 in initial reaction that lasted about an hour. It has been consolidating since, mostly below JPY88.90. The sharp recovery of the yen was also felt on the crosses, though a more consolidative tone that was seen in the European morning was fading and the currencies moved back toward the lows as North American traders prepared to return to their screens.
In what could be a watershed moment for the price, provenance, and future of physical gold, not to mention the "stability" of the entire monetary regime based on rock solid, undisputed "faith and credit" in paper money, German Handelsblatt reports in an exclusive that the long suffering German gold, all official 3,396 tons of it, is about to be moved. Specifically, it is about to be partially moved out of the New York Fed, where the majority, or 45% of it is currently stored, as well as the entirety of the 11% of German gold held with the Banque de France, and repatriated back home to Buba in Frankfurt, where just 31% of it is held as of this moment. And while it is one thing for a "crazy, lunatic" dictator such as Hugo Chavez to pull his gold out of the Bank of England, it is something entirely different, and far less dismissible, when the bank with the second most official gold reserves in the world proceeds to formally pull some of its gold from the bank with the most. In brief: this is a momentous development, one which may signify that the regime of mutual assured and very much telegraphed - because if the central banks don't have faith in one another, why should anyone else? - trust in central banks by other central banks is ending.
Because in a world in which markets no longer are affected by fundamentals, and reflect nothing more than what politicians (and their Wall Street lobbies) believe the "fair value" of risk assets should be, it is likely that any fat-tail events will emerge not out of the markets, but out of politics (and perhaps out of central banks, although it is a safe bet that the world's central planners will merely do much more of the same). The chart below summarizes the geopolitical hotspots of the coming 12 months, which together with everything else are no longer reflected in asset prices courtesy of the central banks completely destroying the market's discounting function.
The Chairman of China Securities Regulatory Commission (similar to the US SEC) said that China can increase by 10-fold the size of the two main channels by which foreign investors buy mainland financial assets. It can, Guo Shuqing said, increase quotas under the Qualified Foreign Institutional Investors and the Renminbi Qualified Foreign Institutional Investors. The latter would make it easier for the yuan in Hong Kong (CNH) to be used to purchase Chinese securities. This hint helped lift China shares by over 3%, their largest gain in a month. The Shanghai Composite's 3% rise brings the gain to 19% off the multi-year low near 1949 (the year of China's Revolution) in early December.
The Central Bank of Ireland continues to be queried about the status of the Irish gold reserves. It has been reluctant to release information and said that it is “not obliged” to release information due to certain “rules and regulations”. Ireland's finance minister, Michael Noonan, has also been asked about the country's gold vaulted at the Bank of England, such as whether the gold is held in allocated form with a bar list available and whether the gold is leased out into international markets. Answers are as of yet not forthcoming. The Sunday Independent, Ireland’s best selling Sunday broadsheet covered the story yesterday in an article (see news) published yesterday which is being widely shared on the internet and commented upon: Bankrupt Ireland owns six tonnes of gold, the bulk of which is held at the Bank of England, it has been revealed. The Central Bank of Ireland said the value of its gold holdings was €235m last time it checked. This represents just over 1 per cent of its total investments. A spokeswoman said the Central Bank was a party to the Washington Agreement on Gold, which recognised gold as an important element of global monetary reserves. She said the Central Bank had not entered into any lease arrangements regarding any of its gold but would not provide specific details of its storage arrangements with the Bank of England.
The underlying trends seen this year have continued, but after strong follow through in Asia, a more subdued tone has been seen in Europe. The US dollar is generally softer, except against the yen and sterling. Japanese markets were closed for holiday, but the MSCI Asia-Pacific Index rose almost 0.3%, lifted by more than a 3% rally in China on speculation that there may be a sharp increase in the cap on foreign investors' ability to invest in Chinese equities. In Europe, the Dow Jones Stoxx 600 is hp about 0.4%, led by a rise in financials. Spanish stock market is at its highest level in almost a year (Feb 2012) and Italy's market is at its best August 2011, though their bond markets are seeing some profit-taking today. With a light economic calendar in North America today, Bernanke's speech in Michigan after the markets close may be the highlight. We identify six key factors shaping the investment climate.
The Real Interest Rate Risk: Annual US Debt Creation Now Amounts To 25% Of GDP Compared To 8.7% Pre-CrisisSubmitted by Tyler Durden on 01/13/2013 18:32 -0400
By now most are aware of the various metrics exposing the unsustainability of US debt (which at 103% of GDP, it is well above the Reinhart-Rogoff "viability" threshold of 80%; and where a return to just 5% in blended interest means total debt/GDP would double in under a decade all else equal simply thanks to the "magic" of compounding), although there is one that captures perhaps best of all the sad predicament the US self-funding state (where debt is used to fund nearly half of total US spending) finds itself in. It comes from Zhang Monan, researcher at the China Macroeconomic Research Platform: "The US government is now trying to repay old debt by borrowing more; in 2010, average annual debt creation (including debt refinance) moved above $4 trillion, or almost one-quarter of GDP, compared to the pre-crisis average of 8.7% of GDP."
That China openly manipulates its economic data, especially around key political phase shifts, such as one communist regime taking over for another, is no secret. That China is also the marginal economic power (creating trillions in new loans and deposits each year) in a stagflating world, and as such must be represented by the media as growing at key inflection points (such as Q4 when Europe officially entered a double dip recession, and the US will report its first sub 1% GDP in years) as mysteriously reporting growth even without open monetary stimulus (something we have said the PBOC will not engage in due to fears of importing US, European and now Japanese inflation) is critical for preserving hope and faith in the future of the stock market, is also very well known. Which is why recent market optimism driven by "hope" from Alcoa that China is recovering and will avoid yet another hard landing, and Chinese reports of a surge in Exports last week, are very much suspect. But no longer is it just the blogosphere that is openly taking Chinese data to task - as Bloomberg reports, even the major banks: Goldman, UBS and ANZ - are now openly questioning the validity and credibility of the goalseek function resulting from C:\China\central_planning\economic_model.xls.
If the Republicans want to shut down the government, they have a much better issue to do it over than the Debt Limit.
The absence of meaningful negative market responses to debt ceiling dramas, Japanese inflation targeting, trillion dollar coins, and other odd and dubious politically-oriented market meddling seems to be sending reflexive signals back to capitals: all clear, continue self-destructing. The markets seem not to care, knowing that central banks have their back. Money creation can suspend nominal economic contraction and ensure rising financial markets until something, (anything!), might stir the public’s imagination again and animal spirits. But while money can suspend animation, it is not and cannot replace real economic functioning. In fact, ongoing money creation is locking-in negative real economic growth and real returns in most financial assets. We think the best strategy for discretionary investors is to stay focused on the growing monetary mountain across the valley, and to not look down. This piece seeks to place the current investment environment in economic, political and social perspective.
The investment world is convinced that China is about to engage in another massive round of stimulus. After all, this is what China did in 2008 when its economy slowed, so surely this is what they’ll do now that the economy is slowing again.
PIMCO founder and co chief investment officer Bill Gross gives no credence to the trillion dollar platinum coin scheme. "We feel that such an action would not only jeopardise the U.S. Fed and Treasury standing with Congress but with creditor nations internationally - particularly the Russians and Chinese." It appears to be a bit of a stunt by and may be a convenient distraction away from the substantive issue of how the U.S. manages to address its massive budget deficits, national debt and unfunded liabilities of between $50 trillion and $100 trillion. It may also be designed to create the false impression that there are easy solutions to the intractable US debt crisis - thereby lulling investors and savers into a false sense of security ... again. Gross said that subject to the debt ceiling, the Fed is buying everything that Treasury can issue. He warns that we have this "conglomeration of monetary and fiscal policy" as not just the US is doing this but Japan and the Eurozone is doing this also. Gross has recently criticised the Fed's 'government financing scheme.' He has in recent months been warning of the medium term risk of inflation due to money creation and recently warned of 'inflationary dragons.'
It is not often that early sentiment is defined by developments out of Asia but this is precisely what has happened overnight. The Alcoa "hope rally", which saw the company close red on the day of its earnings, but which sent the markets higher on the CEO's announcement that things in China may be improving, seem to be ending following last night's news out of China which saw December CPI jump to 2.5%, substantially more than expected, following a spike in food costs in part from the coldest weather in 28 years, implying any good news may have already been priced in. This renewed fears that speculation of PBOC easing was largely unjustified (it is) leading to the biggest drop in the Shanghai Composite in 2013, pushing it lower by 1.78%. The offset came out of Japan, where the government approved a JPY10.3 trillion ($116 billion) fiscal stimulus package. This together with expectations of a BOJ 2% inflation rate targeting, are the reasons why the Dollar Yen soared to a fresh multi-year high of over 89.30, which has since regained some of the move. At this point virtually all the Japanese hope has been bought, and the actual BOJ announcement coming later this month will launch the "sell the news" mean reversion.
It is hard to find a policymaker who hasn’t actively tried to talk his currency down. The few who don’t talk, act as if they were intent on driving their currency lower. Citi's Steven Englander argues below that the ‘currency wars’ impact is collective monetary/liquidity easing. Collective easing is not neutral for currencies, the USD and JPY tend to fall when risk appetite grows while other currencies appreciate. Moreover, despite the rhetoric on intervention, we think that direct or indirect intervention is credible only in countries where domestic asset prices are undervalued and CPI/asset price inflation are not issues. In other countries, intervention can boost domestic asset prices and borrowing and create more medium-term economic and asset price risk than conventional currency overvaluation would. So the MoF/BoJ may be credible in their intervention, but countries whose economies and asset markets are performing more favorably have much more to lose from losing control of asset markets. So JPY and, eventually CHF, are likely to fall, but if the RBA or BoC were to engage in active intervention they may find themselves quickly facing unfavorable domestic asset market dynamics.