Today (like pretty much every other day), it will be all about the Fed and the start of its 2-day FOMC meeting, whose outcome will be influenced by today's 8:30 am CPI report as inflation (Exp. 0.1%) according to many is the only thing stopping the Fed from tapering in light of better than expected recent economic data as well as a clearer fiscal outlook. Or at least that's what the watercooler talk is. The hardliners now agree that since the Fed openly ignored the bond market liquidity considerations in September, that it will plough on through December with no announcement, and potentially continue into 2014 with zero chances of tapering especially now that we approach the end of the business cycle and the Fed should be adding accommodation not removing it. To that end, the consensus still is in favour of January or March for the first taper so markets are not fully set up for a move; conversely a dovish statement would probably result in yet another pre-Christmas, year end market surge, which in the lower market liquidity days of December is likely what the Fed is going for, instead of a volatile, zero liquidity sell off, despite Thursday's double POMO.
Everywhere you look these days, central planning just can't stop reaping failure after failure. First it was Japan's Q3 GDP rising just 1.1%, well below the 1.9% in the previous quarter and the 1.6% expected, while the Japanese current account posted its first decline since of €128 billion (on expectations of a JPY149 billion increase) since January. What's worse, according to Asahi, Abe's approval rating tumbled to 46% in the current week, down from the low 60s as soon as early 2013, while a former BOJ member and current head of Japan rates and currency research, Tohru Sasaki, said that the high flying days of the USDJPY (and plunging of the JPY respectively) is over, and the USDJPY is likely to slide back to 100 because the BOJ would not be able to expand monetary easing by enough to repeat this year's "success." He definitely uses that last word rather loosely.
- Apple, China Mobile Sign Deal to Offer iPhone (WSJ)
- Japan approves $182 billion economic package, doubts remain (Reuters)
- Volcker Rule Won't Allow Banks to Use 'Portfolio Hedging' (WSJ)
- He went, he saw, he achieved nothing: Biden's Trip to Beijing Leaves China Air-Zone Rift Open (WSJ)
- Britain announces sharp upward revision to growth forecasts (Reuters)
- U.S. Airlines to Mortgage-Backed Debt Top List of Best ’14 Bets (BBG)
- Thaksin's homecoming hopes dashed as Thai crisis reignites (Reuters)
- Age of Austerity Nearing End May Boost Global Economy (BBG) - or it may expose that it was just corruption and incompetence at fault all along
- China aims to establish network of high-level FTAs (China Daily)
A great many long refuted Keynesian shibboleths keep being resurrected in Krugman's fantasy-land, where economic laws are magically suspended, virtue becomes vice and bubbles and the expropriation of savers the best ways to grow the economy. According to Paul Krugman, saving is evil and savers should therefore be forcibly deprived of positive interest returns. This echoes the 'euthanasia of the rentier' demanded by Keynes, who is the most prominent source of the erroneous underconsumption theory Krugman is propagating. Similar to John Law and scores of inflationists since then, he believes that economic growth is driven by 'spending' and consumption. This is putting the cart before the horse. We don't deny that inflation and deficit spending can create a temporary illusory sense of prosperity by diverting scarce resources from wealth-generating toward wealth-consuming activities. It should however be obvious that this can only lead to severe long term economic problems. Finally it should be pointed out that the idea that economic laws are somehow 'different' in periods of economic contraction is a cop-out mainly designed to prevent people from asking an obvious question: if deficit spending and inflation are so great, why not always pursue them?
Nobel Winner Dares To Go There: "No Reason To Fear Deflation... Greece May Benefit From Gold Standard"Submitted by Tyler Durden on 11/16/2013 12:45 -0500
"Historically, there is no reason to fear deflation," Nobel Laureate Thomas Sargent explains to Germany's Wiwo.de, "we all benefit from lower prices." Crucially, he continues, "countries with declining prices, such as Greece, must improve the competitiveness they have lost in recent years," requiring falling wages and rising productivity (and falling unit labor costs) which will lead to companies cutting prices, "this is not a dangerous deflation, but part of the necessary correction so that these countries are internationally competitive again." That central banks pursue an inflation rate of around 2%, Sargent blasts, is because they consider it their job to "make bad debt good debt," adding that inflation is "a major redistribution machine - reducing the real debt burden for the benefit of creditors and devaluing the assets of the creditors." A return to a gold standard,he concludes, to prevent governments and central banks from limitless money-printing "would not be foolish."
One of the biggest lies in finance is this perpetual deception that inflation is good. Ben Bernanke, the current high priest of US monetary policy, recently remarked that it’s “important to prevent US inflation from falling too low.” Well of course, we wouldn’t want that, would we? Just imagine the chaos and devastation that would ensue if the cost of living actually remained… you know… the same. One shudders at the mere thought of price stability.
A dispassionate overview of the investment climate and what to expect this week.
Attention this week was focused on Europe's overall (disappointing) 0.7% inflation print - which sent Draghi back to drawing board - despite the world of sell-side strategists exclaiming that Europe has turned the corner and now is the time to load the boat. However, quietly out of sight for the mainstream, Greece just printed its worst deflation data on record. Consumer prices fell 2.0% on an annual basis as a combination of deep recession, wage cuts, and substantial spare capacity squeeze prices lower. Additionally, we already showed the dismal demise of the macro picture across the European union - heading in a very different direction that the stock markets.. but now, bottom-up, earnings are collapsing too... so remind us again why Europe is a "strong buy?"
It was the deep of illiquid night when the momentum ignition trading algos struck. Out of the blue, a liftathon in all JPY crosses without any accompanying news sent the all important ES leading EURJPY surging by 50 pips, which in turn sent both the Nikkei up over 1% in minutes, and led to an E-Mini futures melt up of just about 8 points just when everyone was going to sleep. All of this happened completely independent of the actual data, which was chiefly European retail sales which missed (-0.6%, Exp. 0.4%, prior revised lower to 0.5%), Eurozone Service PMI which dropped (from 52.2 to 51.6) but beat expectations of 50.9 (notably the Spanish Service PMI of 49.6, up from 49.0 saw its employment index drop from 46.5 to 45.3, the lowest print since June), and finally, German Factory Orders which surged from last month's -0.3% to +3.3% in September. And while all this impacted the EUR modestly stronger, it had little if any residual effect on the ES. The bigger question is whether these slightly stronger than expected data point will offset the ECB's expected dovishness when Mario takes to the mic tomorrow).
After a blistering October for stocks, drunk on yet another month of record liquidity by the cental planners, November's first overnight trading session has been quiet so far, with the highlight being the release of both official and HSBC China PMI data. The official manufacturing PMI rose to 51.4 in October from 51.1 in September. It managed to beat expectations of 51.2 and was also the highest reading in 18 months - since April 2012. October’s PMIs are historically lower than those for September, so the MoM uptick is considered a bit more impressive. The uptrend in October was also confirmed by the final HSBC manufacturing PMI which printed at 50.9 which is higher than the preliminary reading of 50.7 and September’s reading of 50.9. The Chinese data has helped put a floor on Asian equities overnight and S&P 500 futures are nudging higher (+0.15%). The key laggard are Japanese equities where the TOPIX (-1.1%) is weaker pressured by a number of industrials, ahead of a three day weekend. Electronics-maker Sony is down 12% after surprising the market with a profit downgrade with this impacting sentiment in Japanese equities.
If the "success" of Abenomics is measured by the soaring prices of food and energy, if little other inflation, by the exploding monetary base and by a wealth effect, pardon, stock market which has flatlined in the past 3 months, then it has so far done passable job of being considered good policy. If, however, one actually looks at the general improvement in living conditions measured most directly by that key metric -wages - then Abenomics has been the worst thing to hit Japan since the Fukushima tsunami, and an unmitigated disaster. As the Japan labor ministry reported overnight, the nation's salaries extended the longest slide since 2010, as regular wages excluding overtime and bonuses fell 0.3 percent in September from a year earlier, marking a 16th straight month of decline. That this is happening even as Prime Minister Shinzo Abe "urges companies to raise workers’ wages as part of his bid to reflate the world’s third-largest economy" is merely the latest slap in the face of central-planners everywhere who believe that flipping an economy and deeply engrained behaviors can happen on a dime.
Many have asked us to expand on how the rapid expansion of money supply leads to an effect the opposite of that intended: a fall in economic activity. This effect starts early in the recovery phase of the credit cycle, and is particularly marked today because of the aggressive rate of monetary inflation. The following are the events that lead to this inevitable outcome. And while many central bankers could profit by reading and understanding this article, the truth is they are not appointed to face up to the reality that monetary inflation is economically destructive, and that escalating currency expansion taken to its logical conclusion means the currency itself will eventually become worthless.
Japan Drowns In Food, Energy Inflation; China's Liquidity Tinkering Continues As Does SHIBOR Blow OutSubmitted by Tyler Durden on 10/25/2013 05:03 -0500
Nearly one year into the Japan's grandest ever monetization experiment, the "wealth effect" engine is starting to sputter: after soaring into the triple digits due to the BOJ's massive monetary base expansion, the USDJPY has been flatlining at best, and in reality declining, which has also dragged the Nikkei lower dropping nearly 3% overnight and is well off its all time USDJPY defined highs. But aside for the wealth effect for the richest 1%, it is not exactly fair to say that the BOJ has done nothing for the vast majority of the population. Indeed, as the overnight CPI data confirmed, food and energy inflation continues to soar "thanks" to the far weaker yen, even if inflation for non-energy and food items rose by exactly 0.0% in September. Oh, it has done something else too: that most important "inflation", so critical to ultimately success for Abenomics - wages - is not only non-existant, in reality wages continue to decline: Japanese labor compensation has been sliding for nearly one and a half years!
It is rare that investors are given a road map. It is rarer still that the vast majority of those who get it are unable to understand the clear signs and directions it contains. When this happens the few who can actually read the map find themselves in an enviable position. Such is currently the case with gold and gold-related investments.
For the greater part of human history, leaders who were in a position to exercise power were accountable for their actions. The problem we are faced with today is that our political and (frequently) business leaders are not being held responsible for their actions. Thomas Sowell sums it up well: "It is hard to imagine a more stupid or more dangerous way of making decisions than by putting those decisions in the hands of people who pay no price for being wrong." Fortunately, there is an institution that exercises control over the academics at the Fed; it is called the 'real' market economy... and it has badly humbled the professors at the Fed.