The current external environment and consequence of past policies are limiting options for EM nations (most specifically Indonesia and India). Citi believes the best they can do now is to smooth the (inevitable) macro adjustment (weaker FX, higher risk premiums, slower growth) through improved policy credibility (to curb volatility and overshooting) and find offsets to portfolio flows to ease the pressure. The 4 choices of various rocks and hard places do not hold much hope for anything but further FX devaluation. As Citi's Matt King points out, what goes up (in terms of Emerging Market central bank FX reserves) risks coming back down with a thud... and in case you were wondering why India, Turkey, and Indonesia were the most-hammered...
2013 has not been kind to Hugh Hendry, whose Eclectica Absolute Macro fund has posted an unchanged performance year to date, broadly underperforming (alongside the bulk of the hedge fund community) the market. Below are his most recent macro thoughts, his holdings (few changes most notable of which is the closure of the Yen short), and his take on how Bernanke "infamously marched his troops to the top of the hill only to march them down again, one moment promising tapering, the next, unlimited accommodation."
After the banks, after the city of Detroit it will be the USA that will be going bankrupt and filing for Chapter 11 bankruptcy. If only that were possible! But unfortunately it won’t be.
Even after seven years of writing macroeconomic analysis and bearing witness to astonishing displays of financial and political stupidity by more “skeptics” than we can count, it never ceases to amaze us the amount of blind faith average Americans place in the strength of the U.S. dollar. One could explain in vast categorical detail the history of fiat currencies, the inevitable destruction caused by inflationary printing and the conundrum caused when any country decides to monetize its own debt just to stay afloat - often, to no avail. The dollar is no more invincible than any other fiat currency in history. In some ways, it is actually far weaker than any that came before. The dollar is entirely reliant on its own world reserve status in order to hold its value on the global market.
In the biggest non-news of the day, Germany's Finance Minister Wolfy Schaeuble finally admitted, officially for the first time, what everyone knows: Greece will need a third bailout. His exact words, as cited by Reuters, "There will have to be another programme in Greece," Wolfgang Schaeuble told a campaign audience in northern Germany, in comments that raised prospect of a step that could be deeply unpopular domestically just five weeks before national elections.
- Egypt, U.S. on Collision Course (WSJ), Gunmen kill 24 Egyptian police in Sinai ambush (Reuters)
- India’s efforts fail to prevent new rupee low (FT)
- More bad news for AAPL: Steve Jobs Biopic Crashes on Opening Weekend (WSJ)
- "Sustainable" - U.S. Stocks Beat BRICs by Most Ever Amid Market Flight (BBG)
- Merkel cancels election rally after hostage taking (Reuters)
- Some day, Abenomics might work... Not today though: Japan Exports Rise Most Since ’10 as Deficit Swells (BBG)
- China July Home Prices Rise as Nation Seeks Long-Term Policy (BBG)
- Spanish Bank’s Bad Loan Ratio Rises to Record in June (Reuters)
- Recovery... for some - Ferrari NART Spyder Sets $27.5 Million Auction Record (BBG)
- Bund yields hit 17-month high, rupee slumps (Reuters)
- Regulatory Headaches Worsen for J.P. Morgan (WSJ)
- Critics Decry Risks Posed by Link Between China's Banks and Bonds (WSJ)
- U.S. retailers say uneven recovery keeps consumers cautious (Reuters) - er, what recovery?
- Easy Credit Dries Up, Choking Growth in China (NYT)
- Fed's Bullard Floats Idea of Small Cuts to Bond Buying (WSJ)
- EU wants one definition of bad loans for bank tests (Reuters) - because in Europe they can't even agree what an NPL is...
- Nagasaki Bomb Maker Offers Lessons for Fukushima Cleanup (BBG)
- With Gmail Overhaul, Not All Mail Is Equal (WSJ)
- Snowden downloaded NSA secrets while working for Dell, sources say (Reuters)
- Apollo co-founder buys into New Jersey Devils (FT)
- Republicans to vote on debate boycott because of Clinton programs (Reuters)
- J.C. Penney Heads for Ninth Quarter of Plunging Sales (BBG)
Draghi is a clever man in charge of a pretend central bank (for it’s only equipped to fight inflation, not a banking-turned-sovereign-debt-and-unemployment crisis). He must guess that bond investors will soon figure out that a stateless central bank defending a stateless currency is so hamstrung politically that it carries far less firepower than, say, the Federal Reserve has over the US economy and US dollar. If his outright-monetary-transactions bluff collapses, he may well have other tricks ready to suppress yields on struggling sovereign debt and save the euro (without which there is no need for the ECB). If Draghi is out of surprises, he can be thanked for buying time for politicians to come up with durable solutions to the eurozone’s woes. Oh, that’s another flaw with Draghi’s scheme; it removed the pressure for politicians to act. So they haven’t.
'Larry Summers for Fed Chair' proponents are working hard to reverse his generally poor reputation and seem to have gained some ground. They’ve tempted even Fed skeptics with reports that Summers doesn’t believe much in quantitative easing. But his supporters are also making claims that don’t stand up to the facts. Call us old-fashioned, but we think we should be wary of power-hungry egotists whose personal philosophy is to obscure the truth.
Despite an overnight surge in the Chinese markets, with the Shanghai Composite closing up 2.4% following reports that China will not only continue with its "liquidity tightening" operation by, paradoxically, cutting RRR for smaller banks, but launch a stimulus for several Chinese provinces and city governments "on the quiet" in the form of jumbo-sized bank loans, and GDP news in Japan that were so bad they were almost good (although not bad enough to close the Nikkei in the green) US futures continue to take on water following the second worst week of 2013 as the market now appears resigned to a Taper announcement in just over 5 weeks (as we have claimed since May). News in Europe continues to be bipolar, with the big picture confirming that only dark skies lie ahead following yesterday's news that a new Greek bailout is just around the corner, or rather just after the Merkel reelection (even though Kotthaus perpetuated the lies and said a second cut in Greek debt is not on the agenda - although maybe he is not lying: maybe only Greek deposits will be cut this time), offset by on the margin improvements in the economic headlines, even as credit creation remains not only non-existent but as the FT reports (one year after Zero Hedge), some €3.2 trillion in financial deleveraging is still on deck meaning an unprecedented contraction in all credit-driven aggregates (one of which of course is GDP).
No one can predict accurately at what point slower growth will start producing political turmoil on a scale that’s unprecedented in the China that Deng made, what the magic number is, or even whether there’s an iron connection between economic and political crises. Yet the increase in capital flight from China and soaring applications for American and European residential visas by well-heeled Chinese suggest that the elite is hedging its bets. Some may be overstating things, but the rebalancing camp is too sanguine.This much is certain: China’s leaders are in uncharted waters, and because of the diminishing utility of the established formula for rapid growth their maps may be of questionable value.
With all of the problems afflicting the world economy nowadays, inflation seems to be the least of our worries. In addressing the post-2008 economic malaise, which stems from over-indebtedness, policymakers are correct to focus on the threat of debt deflation, which can lead to depression. But dismissing inflation as “yesterday’s problem” could undermine central banks’ efforts to address today’s most pressing issues – and, ultimately, facilitate inflation’s resurgence. Understanding how the Great Inflation from the late 1960’s to the early 1980’s was tamed offers important lessons for addressing far-reaching economic problems, however different ours may be, and provides insight into the dangers that may lie ahead.
Since Detroit’s Chapter 9 filing in late July, it has slipped off the front-pages to some extent. The Chapter 9 process is underway and Barclays provides a deep-dive look at the various liabilities involved in the bankruptcy. From the pension obligation certificates (POC), which they believe could be subject to the most volatility over the course of the bankruptcy process and will likely recover no more than 30 cents on the dollar, Barclays' muni team expands on the various aspects of the eligibility process, historical precedents (such as Stockton, CA), and the tough decisions that investors face in deciding between short-term goal of certainty of payment or a long-term goal of maximizing returns. The judge has set a mid-March 2014 deadline for the city to file its plan of adjustment.
Back in May 2011, together with forecasting Japan's most epic case of quantitative easing ever unleashed, we presented the absurd, if inevitable, thought experiment of a country that would soon cross into the twilight zone of total sovereign debt numbers that no longer even fit on a simple pocket calculator. The country of course is Japan, and the debt number is one quadrillion. As of last night, the absurd has become real as Japan has officially announced its total government debt rose by 1.7% to ¥1,008,600,000,000,000.00.