No one wants to mention that the Fed Chairman has changed the rules of the game in the middle of the game but there you are; a backsliding Federal Reserve Bank whose statements are only crafted for the moment and future moments may be brief; we just don’t know. Apparently we have transitioned to a “whatever is convenient” policy at the Fed and we all should bear that in mind when assessing probable actions. When money talks, nobody pays any attention to the grammar. The Treasury issues, the Fed prints money and buys, the cost of financing for the country is incredibly low and the yields for investors are paltry. In the risk markets there will now be a demand as instigated by the Fed, that overwhelms the supply of new issuance. Between the coupons paid and the maturities for 2013 the figure is about $1 trillion in excess demand more than estimated forthcoming supply. Given the 36% loss in wealth that took place in America during the 2008/2009 period the odds of an asset allocation shift out of bonds and into equities is de minimis in my opinion and so the “Great Compression” will continue.
With gold and silver down this morning - following a mysterious vertical plunge last night (once again) - we thought ConvergEx's Nick Colas' timely discussion of gold was worthwhile. As he notes, Gold is the ultimate personality test for investors. Some hate it, excoriating its adherents for their lack of faith in human ingenuity – gold has been valuable since before humans could write. And some swear by the yellow metal, in the belief that it is the last vestige of rationality in a world of financial assets manipulated by central banks and opaque trading venues. What gets lost in the wash is that gold is a commodity and can be analyzed as such. On that basis, here is the 'Top 10' list of real-world fundamentals for gold.
We are sorry to interupt regularly scheduled Banzai7 Holiday Programming with this consummate farce...
Gold fell nearly 1% in illiquid markets in Asia overnight. Some traders may have decided to take profits on the short term long the FOMC announcement trade. Gold bullion prices had already ran up to $1,723 in the 2 weeks prior to the policy statement. Overnight, as prices fell below the 100-day moving average at $1,705, stop-loss selling was triggered which pushed prices lower quickly. Yesterday, the Federal Reserve took the bold, some would say reckless step, of linking its monetary policy to unemployment, creating concerns that the U.S. dollar will be debased even more in the coming months. The US Federal Reserve will keep interest rates at close to zero until unemployment falls below 6.5%. This is a historic and very radical change to monetary policy. It is the first time a large central bank has ever tied its interest rate policy directly to one facet of the economy – unemployment.
- Bernanke Wields New Tools to Reduce Unemployment Rate (BBG)
- Home Seizures Rise as Banks Adjust to Foreclosure Flow (BBG)
- EU Backs Release Of Greek Aid (WSJ)
- Democrats Confident They Have 'Cliff' Leverage (WSJ)
- Americans Back Obama Tax-Rate Increase Tied to Entitlement Cuts (BBG)
- Goldman flexes tentacles: Treasury open to Carney radicalism (FT)
- Launch Fuels Asia Security Concerns (WSJ)
- BOJ’s Unlimited Loan Program Seen Open to Use by Hedge Funds (BBG) - there are Japanese hedge funds?
- Abe Set to Face Manufacturing Gloom as Japan Contracts (BBG)
- US and UN condemn N Korea rocket launch (Guardian)
- Eurozone agrees common bank supervisor (FT)
- Berlusconi Adds to Italy Turmoil by Signaling He’d Step Aside (BBG)
Regardless of the reasons, Ben’s got a major problem on his hands. That problem is the fact that Treasuries are on the verge of breaking their upward sloping trendline. If Treasuries begin to collapse at a time when the Fed is buying up over 70% of debt issuance, then the Great Treasury Bubble is finally about the burst:
A funny thing happened today. For the first time, the equity and bond market closed red (and VIX green) on a Federal Reserve QE-announcement day. Gold outperformed stocks and Treasuries underperformed everything... From the FOMC announcement, Gold and Silver closed green but stocks, bonds, oil, financials, and apple all lost ground (as did the USD very modestly)...
Turkey’s trade balance may turn on whether President Barack Obama vetoes more stringent sanctions against Iran after the U.S. Senate passed a measure targeting loopholes in gold exports to the Islamic Republic. Turkey’s gold trade with neighbouring Iran has helped shrink its trade deficit over the past year according to Bloomberg. Incredibly, precious metals accounted for about half of the almost $21 billion decline. That’s calmed investor concern over its current-account gap, and helped persuade Fitch Ratings to give Turkey its first investment-grade rating since 1994. The U.S. Senate voted 94-0 on Nov. 30 to approve new sanctions against Iran, closing gaps from previous measures, including trade in precious metals. Obama, who opposes the move on the grounds it may undercut existing efforts to rein in the nation’s nuclear ambitions, signed an executive order in July restricting gold payments to Iranian state institutions. Turkey exported $11.9 billion of gold in the first 10 months of the year, according to the Ankara-based statistics agency’s website. A very large 85% of the shipments went to Iran and the United Arab Emirates. Iran is buying the gold with payments Turkey makes for natural gas it purchases in liras, Turkish Deputy Prime Minister Ali Babacan told a parliamentary committee in Ankara on Nov. 23.
- Here come the low margin products: Apple Tests Designs for TV (WSJ)
- Obama and Republicans Trade Offers to Avert Fiscal Crisis (BBG)
- Carney broaches dumping inflation target (FT)
- Bernanke Critics Can’t Fight Bonds Showing No Inflation (BBG)
- Corporate Taxes on Table in Cliff Talks (WSJ)
- US business chiefs back tax rise (FT)
- Greece Confident Bond Buyback Needed for Aid Succeeded (BBG)
- New Faith in Europe's Banks (WSJ)
- European Bank Sees Little Room for Rate Cuts (WSJ)
- North Korea Claims Success in Rocket Launch (WSJ)
The US dollar and yen remain soft. The news stream has encouraged the so-called risk-on trade. The Greek debt buyback appears to have gone well enough that it will get dollop of aid. Spain reportedly received 40 bln euros of bank aid. There seems to be a potential compromise banking supervision in Europe. On top of that, of course, the market expects the Federal Reserve to announce an expansion of its quantitative easing later today and keep the door open to further steps if necessary.
The dollar made new eight month highs against the yen, just shy of the JPY83 level. These dollar gains ahead of the FOMC meeting underscores one of our interpretative points that the old drivers of dollar-yen, like interest rate differentials and general risk appetite, have broken down, trumped by Mr Abe and his aggressive monetary and fiscal rhetoric.
All the extraordinary measures deployed since 2008 to jumpstart the U.S. economy are one-offs: either they cannot be repeated or they have lost their effectiveness. As a result, we now have an extraordinarily fragile one-off economy that is dependent on "emergency" measures that cannot be withdrawn even as their utility in the real economy dwindles by the day. These two dynamics--declining effectiveness and unrepeatability--have created a uniquely fragile economy. Once you become dependent on extraordinary fiscal and monetary stimulus, withdrawing the stimulus will trigger a recessionary cascade. But continuing the stimulus cannot duplicate its initial effectiveness, as malinvestment and unintended consequences degrade the initial boost.
- Fed Seen Pumping Up Assets to $4 Trillion in New Buying (BBG)
- China New Loans Trail Forecasts in Sign of Slower Growth (BBG)
- U.S. "fiscal cliff" talks picking up pace (Reuters)
- Insider-Trading Probe Widens (WSJ)
- U.K.'s Top Banker Sees Currency Risk (Hilsenrath)
- Three Arrested in Libor Probe (WSJ)
- Nine hurt as gunmen fire at Cairo protesters (Reuters)
- Egyptian President Gives Army Police Powers Ahead of Vote (BBG)
- Pax Americana ‘winding down’, says US report (FT)
- Japan Polls Show LDP, Ally Set for Big Majority (DJ)
- HSBC to pay record $1.9 billion U.S. fine in money laundering case (Reuters)
The man who singlehandedly fought the administration over the idea of converting Fannie and Freddie into the latest taxpayer-funded handout machine, FHFA head Ed DeMarco, and refused to write down Fannie and Freddie home loans in yet another Geithner-conceived debt forgiveness scheme, whose cost like any other non-free lunch will simply end being footed again by yet more taxpayers (what little is left of them), appears to have lost the war, and with the second coming of Obama appears set to be replaced as head of the FHFA. The WSJ reports that "The White House has begun preparations to nominate a new director to lead the agency that oversees Fannie Mae and Freddie Mac as soon as early next year, according to people familiar with the discussions. This would pave the way for President Barack Obama to fill what has become one of the most important economic policy positions in Washington." And so the impetus for as many as possible to default on their mortgage in a wholesale scramble to obtain debt forgiveness, will soon take the nation by storm, while the contingent liability will be transferred to those who still believe that taking out debt should be a prudent activity and one that takes into account future cash flows. In other words, the solvent middle class - those who were prudent stupid enough to save when they should have simply be doing what the government does and spend like a drunken sailor, preferably on credit, will soon be punished once more. And like it. Because according to the new broke normal "it's only fair."
- Central Banks Ponder Going Beyond Inflation Mandates (BBG)
- Bloomberg Weighs Making Bid for The Financial Times (NYT)
- Hedge Funds Fall Out of Love with Equities (FT)
- Obama and Boehner resume US fiscal cliff talks (FT)
- Italy Front-Runner Vows Steady Hand (WSJ)
- Spanish Bailout Caution Grows as Business Lobbies Back Rajoy (BBG)
- Japan sinks into fresh recession (Reuters)
- China economic recovery intact, but weak exports drag (Reuters)
- Greece extends buyback offer to reach target (Reuters) ... but on Friday they promised it was done
- Basel Liquidity Rule May Be Watered Down Amid Crisis (BBG) ... just before they are scrapped
- Irish, Greek Workers Seen Suffering Most in 2013 Amid EU Slump (BBG)