This is an important jobs report. Not because it matters in the least whether the US economy added 170,000 new jobs or 185,000 new jobs. Not because it matters a whit whether the unemployment rate goes up or down 1/10th of 1 percent. No, the importance of this jobs report rests in two related linguistic games. Here's how to translate the lingo.... and then how to trade it.
The taper program distances the bankers from responsibility for crisis in our financial framework, at least in the eyes of the general public. If a market calamity takes place while stimulus measures are still at full speed, this makes the banks look rather guilty, or at least incompetent. People would begin to question the validity of central bank methods, and they might even question the validity of the central bank’s existence. The Fed is creating space between itself and the economy because they know that a trigger event is coming. They want to ensure that they are not blamed and that stimulus itself is not seen as ineffective, or seen as the cause. We all know that the claims of recovery are utter nonsense. The taper is not in response to an improving economic environment. Rather, the taper is a signal for the next stage of collapse. The real reason stocks and other indicators are stumbling is because the effectiveness of stimulus manipulation has a shelf life, and that shelf life is over for the Federal Reserve.
Moments ago, the Senate Banking Committee started a hearing on the topic of "Financial Stability And Data Security." We assume the topic discussed will be financial stability, the highly diluted final version of the Volcker Rule, Dodd Drank, the London Whale, and other things legislators have no understanding of. As such it will be a complete waste of time, and the only thing that can possibly force anyone to fix the broken system is the next systemic crash, one which the central banks, already all in with their bailout efforts, will be unable to resolve.
Triffin’s Dilemma is that the country that issues the world’s reserve currency will have to choose between:
1 ) running a trade deficit in perpetuity - risking of a loss of confidence in its currency and solvency while the rest of the world enjoys an adequate supply of USDs.
2) running a trade surplus and enjoying an appreciation in the value of the dollar while the rest of the world suffers from a lack of liquidity and collateral.
Either way, there are negative implications for world growth. In the first example – in which the US runs a trade deficit in perpetuity – the US continues to add to its debt and risks undermining its ability to pay off that debt. In the second example – in which the US runs a trade surplus – emerging market currencies are put under pressure by the USD potentially leading to capital outflows, a higher cost of debt, and global financial instability.
Asia outperformed emerging market peers in Europe and Latin America during the recent selloff, which coincided with a drop in China’s PMI below 50. As Bloomberg's Tamara Hendereson notes, that was partly due to 'smoothing' by Asian central banks to temper volatility and partly because of the region’s reputation for strong growth and ample current-account cushions. Still, she warns, emerging market investors may in time focus more on Asia’s vulnerabilities, including higher valuations, lower real yields and greater sensitivity to Fed tapering and China’s rebalancing.
We’ve all done it, haven’t we? Chucked something in the wash and turned it on too high, only to see it pop out at the end of the cycle and it ends up the size of your hamster. Well, Obama has been doing the same. Except this time it’s not your winter woollies that he’s shrinking, it’s the greenback.
People Powered Privacy Savior ... Or Honey Trap Pushed By the Central Banks and TBTF?
The biggest fear the market currently has is not the ongoing crisis in the Emerging Markets, not the suddenly slowing economy, not even China's credit bubble popping: it is that Bernanke's successor may have suddenly reverted to the "Old Normal" - a regime in which the Fed is not there to provide the training wheels should the S&P suffer a 5%, 10% or 20% (or more) drop. Whether such fears are warranted will be tested as soon as there is indeed a bear market plunge in stocks - the first in nearly three years (incidentally the topic of the Fed's lack of vacalty was covered in a recent Reuters article). So, assuming that indeed the most dramatic change in market dynamics in the past five years has taken place, how does one trade this new world which is so unfamiliar to so many of today's "younger" (and forgotten by many of the older) traders? And, more importantly, how does one look for the signs of a bottom: an Old Normal bottom that is. Courtesy of Convergex' Nicholas Colas, here is a reminder of what to look forward to, for those who are so inclined, to time the next market inflection point.
Because the ultimate outcome of this monetary cycle hinges on how, when, or if the Fed can unwind its unwieldy balance sheet, without further damage to the economy; most likely continuing stagnation or a return to stagflation, or less likely, but possible hyper-inflation or even a deflationary depression, the Bernanke legacy will ultimately depend on a Bernanke-Yellen legacy. But what should be the main lesson of a Greenspan-Bernanke legacy? Clearly, if there was no pre-crisis credit boom, there would have been no large financial crisis and thus no need for Bernanke or other human to have done better during and after. While Austrian analysis has often been criticized, incorrectly, for not having policy recommendations on what to do during the crisis and recovery, it should be noted that if Austrian recommendations for eliminating central banks and allowing banking freedom had been followed, no such devastating crisis would have occurred and no heroic policy response would have been necessary in the resulting free and prosperous commonwealth.
"Many will remember Ben Bernanke for classic central bank stabilizing actions taken during the fall 2008 panic, including emergency loans to banks and swap lines to foreign central banks. But historians might also consider actions the Fed took before and after that panic...
Many argue that QE has not reduced unemployment, but has diminished the Fed’s independence and credibility, offsetting the effects of adopting a numerical inflation target. Now, only a year after the latest round of QE began, the Fed is struggling with how to unwind it, just as many had warned."
We find it truly extraordinary that anyone is surprised the financial system is under duress again.
How many times in the last few days have we been told that Turkey - or Ukraine or Venezuela or Argentina - are too small to matter? How many comparisons of Emerging Market GDP to world GDP to instill confidence that a little crisis there can't possible mean problems here. Putting aside this entirely disingenuous perspective, historical examples such as LTCM, and ignoring the massive leverage in the system, there is a simple reason why Emerging Markets matter. As Reuters reports, European banks have loaned in excess of $3 trillion to emerging markets, more than four times US lenders - especially when average NPLs for historical EM shocks is over 40%.
In this part, we look at the question: Is gold a currency? Professor Tom Fischer answers, “Yes, gold is a currency with the symbol XAU”.
In the years since the Financial Crisis, major Central Banks have been engaged in incredible easing programs that included the injection of massive amounts of liquidity into the financial system. That liquidity, Citi notes, had to go somewhere, and in a search for yield, much of it went indiscriminately into Local Markets. So far, the exodus of money from Local Markets has been “tame” compared to previous EM crises and it has also been selective since countries with weaker economies and foreign reserves have been the ones taking the largest hits. However, as Citi warns, our bias is that this is just the beginning.
Confirming the floating rumor from last week that yet another Wall Streeter from a bailed out company is going to set US economic policy, moments ago the Treasury announced that indeed the Citigroup economist Nathan Sheets - the bank's global head of international economics - will start working next week as a counsellor to U.S. Treasury Secretary Jack Lew. This is the same Sheets, who ten days ago wrote that "our empirical work presents evidence that over the next few years, 10-year U.S. Treasury yields are likely to move toward 5 percent (slightly above our projections for nominal GDP growth) and to stabilize near that level. Our work suggests that Japanese rates may be on a sharply rising trajectory as well, if policymakers there get traction in taming the deflationary demons that have plagued the economy." We already know why the Treasury likes him so much.