Our world, our life, has been built on debt and propaganda for many years. They have kept us from noticing how poorly we are doing. But now a third element has entered the foundation of our societies, and it’s set to eat away at everything that has – barely – kept the entire edifice from crumbling apart. Deflation.
Hiding in econometric obscurity, in an area of research so boring no economist would dare tread, did the government knowingly encourage the adoption of a dubious economic theory that would likely bias inflation downward? If so, it was a good bet.
Three important factors which should support gold above $1,100/oz are Chinese demand, central bank demand including from Russia and of course the Swiss Gold Referendum. We remain bearish in the short term but very bullish for 2015 and in the coming years.
The key event overnight was the release of European Q3 GDP data, which saw Germany averting a recession by the narrowest of margins when following a -0.2% drop in Q2 economic growth, Germany grew by the smallest amount possible in Q3, or 0.1%, in line with expectations, thus averting two consecutive quarters of decline, the technical definition of a recession. The French economy likewise posted a modest increase in Q3, although one wonders how aggressively the data had to be fudged for a country whose PMIs all indicate a -1% or greater contraction. Italy however was less creative with its use of "hookers and blow", and continued its recession with a 3rd negative print, contracting at -0.1% as expected, while Portugal also missed third quarter growth estimates.
The relentless regurgitation of the only two rumors that have moved markets this week, namely the Japanese sales tax delay and the "surprise" cabinet snap elections, was once again all over the newswires last night in yet another iteration, and as a result the headline scanning algos took the Nikkei another 1.1% higher to nearly 17,400 which means at this rate the Nikkei will surpass the Dow Jones by the end of the week helped by further reports that Japan will reveal more stimulus measures on November 19, although with US equity futures rising another 7 points overnight and now just shy of 2050 which happens to be Goldman's revised year-end target, the US will hardly complain. And speaking of stimulus, the reason European equities are drifting higher following the latest ECB professional forecast release which saw the panel slash their GDP and inflation forecasts for the entire period from 2014 to 2016. In other words bad news most certainly continues to be good news for stocks, which in the US are about to hit another record high (with the bulk of the upside action once again concentrated between 11:00 and 11:30am).
With the USDJPY repeatedly hitting 116.00 as a result of the same pair of headlines hitting either Reuters, the Nikkei or Sankei every 6 or so hours for the past 3 days, namely that Japan will delay its sales tax hike by almost two years, and that Abe is preparing early elections, perhaps the algos realized they were pricing in the same event about 4 times in one day, and unable to break the 7-year-high resistance level, slid dropping nearly 100 pips to just over 115 at least check, which may well be today's "tractor" level, which in turn has also dragged down both European stocks and US futures. But the thing that made the vacuum tubes really spark is that at a press conference yesterday in Beijing, Abe was quoted as saying that he "has never made any reference to the dissolution of parliament", this came after the chief cabinet secretary Suga saying that the decision on whether or not to go to the polls would be Abe’s only.
Overall, CPI’s are used to index payments on over $10 trillion in liabilities. Any underestimation of CPI benefits the federal government at the expense of the taxpayer and amounts to a backdoor default on its financial obligations. Please understand this could be deliberate or the result of dubious econometric methods. Using a bad model is like using a random number generator as a compass. To get an idea of the sums of money involved, for every 1% of CPI underestimation the federal government saves $8.4 billion on social security payments alone. The lack of transparency regarding quality adjustments (and their perceived complexity) provides a perfect smoke-screen for covert debt management through CPI under-reporting.
On one hand, global growth is slowing down. And on the other, the cost of living is rising. That’s a bad combination, but we’ll make it. While you’re waiting for QE4 to see how it all goes down, remember to hold on to your assets… if you have any.
Following Friday's sticksave, where the usual 3:30 pm ramp brigade pushed futures just barely green into the close despite a miss in the payrolls report which the spin brigade did everything in its power to make it seem that the hiring a few hundred thousand young female waitresses was bullish for the economy, overnight we have seen a listless session, dominated by more USD-profit taking as increasingly more wonder if the relentless surge higher in the Greenback is massively overdone, especially considering that stocks are screaming "worldwide recession" excluding the US, if only for now, because as Goldman explained soaring USD means plunging Oil, means tumbling E&P capex, means lower GDP, means less growth, means lower corporate profits, and so on. That said, we expect the now trivial Virtu JPY momentum-ignition algos to activate shortly, pushing the USDJPY and its derivative, the S&P500, higher in the coming minutes, and certainly before the US market opens in under 3 hours.
Non-bombastic overview of the forces influencing the capital markets in the week ahead.
European shares fall, reversing earlier gains, with the banks and tech sectors underperforming and basic resources, oil & gas outperforming. Companies including ArcelorMittal, Allianz, Swiss Re, Richemont released results. The Spanish and Italian markets are the worst-performing larger bourses, the U.K. the best. The euro is stronger against the dollar. Japanese 10yr bond yields rise; German yields increase. Furthermore, the pullback in the USD-index from overnight highs has also provided the commodity complex with some upside and thus has seen basic materials and energy name outperform to the benefit of the FTSE 100. Elsewhere, Allianz’s (+4.9%) impressive pre-market report has helped halt the move to the downside for the DAX which trades with modest gains of 0.3%. Fixed income markets continue to hold fire (albeit in marginal negative territory) with volumes exceedingly thin ahead of key risk events. And with that, all eyes move to today's Nonfarm payroll expected to print at 235K, after last month's 248K. Something to keep in mind: the average seasonal adjustment to the October data is almost exactly 1 million, so yet again the fate of the US and global economy, will be determined by an Arima X 13 "fudge factor."
Confused how your cost of living increase is always orders of magnitude above the "inflation" reported by the BLS' Consumer Price Index? Then prepare for your daily dose of Keynesian epiphany, with this step by step guide from the BLS of how to use the Hedonic Quality Adjustment to turn a 400% price increase into a 7.1% decline.
At 12:50pm Tokyo time, Nikkei 225 Index was sitting pretty, up 0.5% for the day. Then came the tumble. Over the next 22 minutes, Nikkei Index lost 1.8% to touch intraday low of 16,725.45. USD/JPY followed suit, but with a lag, based on data compiled by Bloomberg; currency slid from 115.38 to 114.46 during that period, marking 0.8% drop. Japanese banks sold down Nikkei to take some money off the table, given its 8% advance since Oct. 31 when BOJ announced its latest easing, which in turn caused USD/JPY to retreat, according to a Tokyo-based FX sales trader. Nikkei 225 closed down 0.9%, reversing earlier gain of as much as 0.6%
Economic data from China have generally been on the weak side of late, but not catastrophically so. And yet, apart from growing weakness in aggregated data, we also see more and more anecdotal evidence that the economy is deteriorating.
In the previous 125 years of the Global economy, no two events overshadow the system fragility of the financial system as the economic woes of the 1920’s and 1930’s and the crisis of 2008.