The overnight economic data dump started in China, where both exports and imports rose more than expected, at 14.7% and 16.8% respectively, on expectations of a 9.2% and 13% rise. The result was a trade surplus of $18.16 billion versus expectations of $16.15 billion. The only problem with the data is that as always, but especially in the past few months, it continued to be completely made up as SocGen analysts, and others, pointed out. The good data continued into the European trading session, where moments ago German Industrial Production rose 1.2% despite expectations of a -0.1% drop, up from 0.6% and the best print since March 2012. The followed yesterday's better than expected factory orders data, which also came at the best level since October. Whether this data too was made up, remains unknown, but it is clear that Germany will do everything it can to telegraph its economic contraction is not accelerating. It also means that any concerns of an imminent ECB rate cut, or a negative deposit rate, are likely overblown for the time being, as reflected in the kneejerk jump in the EURUSD higher.
In the beginning there were a handful of core nations equal in partnership and full of the excitement of a new venture. Much of the esprit was a desire to band together and compete against the United States for economic dominance and world power. Now we find the EU headquarters no longer staffed by equals but a useful front for Berlin which resides in another country. This point is critically important to understand. Yes, sure, the Germans will smile and nod and give way on agricultural supplements and on fishing rights and trivial matters but when it gets down to it and the decision is important; Berlin will have its way. The fact that the equity markets have done fabulously and that the interest rates for European sovereign debt have done remarkably well all rest on one thing and one thing only; the creation of money and a massive amount of it. Europe, and the rest of the world for that matter, has been transformed by the printing of money. The dislocation between economies and markets is huge and the glue is the twenty-four seven machinations of the printing presses. Politicians in Europe and America have taken a back seat to the heads of the world's central banks. Lastly, as I stare out at the horizon, you should understand the German viewpoint of the State. You win by being in control and control must always be exercised and never relinquished.
Surprising German Factory Orders Bounce Offset ECB Jawboning Euro Lower; Australia Cuts Rate To Record LowSubmitted by Tyler Durden on 05/07/2013 05:57 -0500
The euro continues to not get the memo. After days and days of attempted jawboning by Draghi and his marry FX trading men, doing all they can to push the euro down, cutting interest rates and even threatening to use the nuclear option and push the deposit rate into the red, someone continues to buy EURs (coughjapancough) or, worse, generate major short squeezes such as during today's event deficient trading session, when after France reported a miss in both its manufacturing and industrial production numbers (-1.0% and -0.9%, on expectations of -0.5% and -0.3%, from priors of 0.8% and 0.7%) did absolutely nothing for the EUR pairs, it was up to Germany to put an end to the party, and announce March factory orders which beat expectations of a -0.5% solidly, and remained unchanged at 2.2%, the same as in February. And since the current regime is one in which Germany is happy and beggaring its neighbors's exports (France) with a stronger EUR, Merkel will be delighted with the outcome while all other European exporters will once again come back to Draghi and demand more jawboning, which they will certainly get. Expect more headlines out of the ECB cautioning that the EUR is still too high.
Given the global central banker's determination to stop prices falling, worries that the outlook is deflationary are unlikely to be realised. In the main this is the view of neoclassical economists, Keynesians and monetarists, who generally foresee a 1930s-style slump unless the economy is stimulated out of it. So successful was the Fed leading other central banks to save the world in 2009 that the precedent is established: if things take a turn for the worse or a systemically important financial institution looks like failing, Superman Ben and his cohort of central bankers will save us all again. Call it kryptonite, or failing animal spirits if you like. It is closer to the truth to understand we are witnessing the early stages of erosion of confidence in government and ultimately its paper money. Ordinary people are finally beginning to suspect this, signalled by the world-wide rush into precious metals last month.
An overview of this week's drivers.
The clear message from the doctors this week is that they plan to keep administering the pills, in larger quantities if necessary, until the donkey turns into a butterfly. Citi's Matt King reminds us though that they failed to mention the associated risk that the donkey dies of the side effects first (apart, that is, from Dr Osborne, who urged the other doctors to ignore any such possibility entirely). For investors, King notes the immediate implication is that the central banks would like the party in any and all risk assets to carry on. This raises the spectre of a rally back to 2007 valuations, made all the more dizzying this time by the lack of any accompanying justification in the state of the economy. And yet we have played this game before, and it does not end well. Ideally at some point the central banks realize that the donkey is just a donkey, realize that their sole focus on their inflationary (& employment) mandate is blinding them to the risks of asset price inflation. To paraphrase a certain former CEO, when the central bank music is playing, investors are compelled to get up and join the party. Yet we know how that one ends...
With equity valuations no longer levitating but in a different, 4th dimension altogether, and credit spreads compressing dramatically (and unreasonably)... It is in situations like these, when the crash comes, that the proverbial run for liquidity forces central banks to coordinate liquidity injections. However, something tells me that this time, the trick won’t work. Over almost a century, we have witnessed the slow and progressive destruction of the best global mechanism available to cooperate in the creation and allocation of resources. This process began with the loss of the ability to address flow imbalances (i.e. savings, trade). After the World Wars, it became clear that we had also lost the ability to address stock imbalances, and by 1971 we ensured that any price flexibility left to reset the system in the face of an adjustment would be wiped out too. From this moment, adjustments can only make way through a growing series of global systemic risk events with increasingly relevant consequences. Swaps, as a tool, will no longer be able to face the upcoming challenges. When this fact finally sets in, governments will be forced to resort directly to basic asset confiscation.
Financial markets operate on a number of implied assumptions about growth, policy direction and other factors. Experience tells us that these assumptions often turn out to be erroneous. A modern economy is an incredibly complex entity that involves millions of transactions every day. The notion that this vast and largely self-governing system can be controlled through tools such as government spending and/or an increase in the quantity of money is - to say the least - bizarre. A flood is rarely a cure-all solution to a drought; it just creates new problems for an already suffering population. From 2002 to 2007, we witnessed a massive attempt by central banks to manipulate interest rates and currency exchange rates. The consequences of this action came due in 2008-2009. Criminal psychologists have long known that villains frequently return to the scene of their crime—in the case of western policymakers, they seem to be looking to finish off a caper that went badly wrong at the first attempt. The end result for the broader community is unlikely to be pretty.
For 727 editions, and nearly 30 years, Bill Buckler, the "captain" of the free market-praising Privateer newsletter provided a welcome escape from a world overrun with "free-lunch" economists, "for-hire" politicians, "crony-capitalist" oligarchs, "heroin-addict" bankers, "the-solution-to-record-debt-is-more-record-debt" Keynesians, and all those other subclasses of that species which Einstein, or whoever, described so aptly in saying that they all expect a different, and happy, outcome when applying the same flawed methods over and over. And for 30 years, Buckler's steadfast determination and adherence to his arguments, beliefs, reasoning and ironclad logic brought him countless followers, all of whom are now able to see past the bread and circus facade of a world every day on the edge of political and social collapse. Sadly, all good things come to an end, and so does The Privateer. We are delighted to celebrate its illustrious memory by presenting to our readers the final, must read, issue of the newsletter which encapsulates the philosophy and ideology of its author - a man much respected and admired in the free market circles - and thirty years of objective, unbiased market and economic commentary, best of all.
The world is awash in contradiction with stocks rising to new highs as interest rates reflect a slowing economy. It is an upside down world according to PIMCO's Mohamed El-Erian. As Lance Roberts annotates, the moustaced maestro explains individuals are both excited and anxious. They are excited by the rally in the markets as they see their portfolios increase in values but at the same timed overwhelmingly concerned about the economic future. It is a world with an enormous contrast between the markets and the real economy. That is the world we are navigating and it is incredibly unusual. This is why it is an unloved rally. His discussion at the recent Strategic Investment Conference is about a simple framework to reconcile these issues. The long term view matters greatly - but the short term matters also.
You know the market is frothy when the greatest concern among professional money managers is "Asset Bubbles." As interest rates rose in the early part of this year, the 'great rotation' - with outflows out of bonds and in to stocks - was heralded by many as ammo for the next leg higher in stocks; now over a quarter of investors - a share that rose 100% since BofAML's previous (March) survey - believe 'the great rotation' will never happen (only another 73% to get to reality). Instead, there are increasing concerns about inflows leading to bubbles – mainly in high yield, where investors appear uncomfortable with flows-driven spread tightening without fundamental improvement and higher interest rates (and implicitly the linkage between equity valuations and credit bodes ill for the latter, as opposed to supportive). In fact, asset bubbles now rank as the number one concern on investors’ minds, while a slow recovery moved up into second spot. So despite the best efforts of the 'marketing' arms of the big sell-side shops (so-called 'strategists'), the professional buy-side is not 'adding' at these highs, but becoming increasingly skeptical.
While Harvard historian Niall Ferguson's off-the-cuff remarks during the Q&A were in his words "as stupid as they were insensitive", the core message of his presentation was clear: the party of the last 20 years is now over and the longer we fail to address the real issues the bigger the hangover will be in the future. The central question Ferguson asks is whether our institutions, corporations and governments, are degenerating. As Lance Roberts of Street Talk Live notes Ferguson believes that without addressing the structural problems that plague the economy from production to employment – stimulus will fail. The reality is that the 'punch bowl' won't fix employment growth, economic growth or the rule of law.
For those following Bitcoin, this interview with Gavin Andresen, the 46-year-old lead software developer for the Bitcoin project in today’s Wall Street Journal should be of interest. The chief scientist for the digital currency talks about its appeal - and pitfalls - in a world of fiat money. Politicians and their appointees are entirely cut out of Bitcoin’s monetary loop, Andresen explains, adding that "Bitcoin or a similar technology could threaten the power of not just central banks, but banks, period." It is perhaps the coder's parting words that are most insightful, "I tell people it’s still an experiment and only invest time or money you could afford to lose. If only investors could as easily follow that advice with fiat currencies."
The world's central banks have printed unimaginable amounts of money in recent years - "these guys are really more powerful than the government." Neil Macdonald explores what this means for the global economy and for your financial well-being - "can you imagine if the American public knew there was this 'club' that met secretly in Switzerland and made decisions that dramatically affected their lives, but we're not going to tell you about it because it's too complicated." This brief documentary should open a few eyes to the reality behind the world's most powerful (and real) cabal.
The pricing of 'safe' assets reflects the ongoing uncertainty in a world that is in the grip of the lunacy of policymakers who have seemingly lost all sense of perspective and are engaged in a huge gamble. This essential fundamental backdrop has not changed for the better lately, but for the worse. What this once again demonstrates is that intervention by central banks is creating incentives for many institutional investors to take inordinate risks in the name of preserving the purchasing power of the savings that have been entrusted to them. The problem is that the gains of today are absolutely certain to become the losses of tomorrow for investors taking the bait, as the echo bubble created by loose monetary policy is fated to turn into a major bust once the boom has played out. When the tide is going out, a great many naked swimmers will be revealed.