Mohamed El-Erian made one of his regular media appearances today (in addition to his almost daily Op-Ed, released earlier) appearing on Bloomberg Surveillance with Tom Keene and talking the developments in the Maghreb. While the full highlights are presented below, there are two items of note. El-Erian once again hits on what we believe will be the keyword of 2011: stagflation. To wit: "we have to appreciate that in the west, what is happening in Egypt and North Africa results in stagflation in the short term. So higher inflation and lower growth because of higher oil prices that take away purchasing power and transfer wealth somewhere else; because of higher geopolitical risk, which tends to diminish animal spirit and therefore impact investment; and let's not forget that the Middle East is a market, particularly for European exports. So from an economic perspective, it is important for the west to understand that these are stagflationary winds that have been added to the global economy." It is important, but not necessary: as long as the manipulated, liquidity glutted market continues to misrepresent the true state of the economy, nobody will care until it is too late. And speaking of "too late", validating our sarcastic observations over the past several weeks that the dollar is no longer the "flight to safety" currency (that would be the PM complex, and the swiss franc if anything), is the Pimco CIO's suddenly very dour outlook on the weakening US Dollar: "It is a warning shot to America that we cannot simply assume flight to quality, flight to safety. That people are starting to worry about the fiscal situation in the U.S., worrying about the level of debt and what they're hearing about states and municipalities. I would take this as a warning shot that we cannot assume that we will maintain the standing of the reserve currency as we have in the past." That's a given - the question however remains, which fiat currency, if any, is willing and ready to step in and replace the USD? With all eyes continuing to be look at the CNY, how long before China finally takes the plunge to find out just who is the real reserve currency in the world?
The last time the oil price lost touch with gravity, which it threatens to again with the price of Brent crude now well north of $100 a barrel, it helped tip the world economy into the deepest recession since the 1930s. Is history about to repeat itself?
And just in case the stock market needed a little more risk off impetus...
Libya is in the same predicament, as is Sudan, Algeria, Nigeria, Angola... What happens when people are starving while they see their leaders living lives of luxury? They get pissed! They demand CHANGE.
World Bank's Robert Zoellick, who has recently been on a truth-telling roll, suggesting a return to the gold standard, and also highlighting that surging food prices have suddenly pushed 44 million to extreme hunger around the world raising the likelihood for many more revolutions, penned an oped in yesterday's FT, sharing his vision for a "monetary regime for a multipolar world" in which, not surprisingly he warned that the current monetary system is perilous, and that China's Yuan should be added to the SDR, as well as other currencies "over time." This is yet another dig at the dollar's status as a reserve currency, yet without China taking proactive steps to indicate its interest at becoming the new de facto world currency, the status quo may be stuck with the greenback. Essentially, China is waiting until the right moment emerges, a time when it has stockpiled enough resources, when it can, unilaterally, or in collaboration with Russia and potentially a post-EUR Europe, make an announcement that the Yuan is the new reserve currency, backed by a basket of commodities. This is precisely the step-change that Zoellick is trying to avoid: "A framework to manage a monetary system in transition may be less headline-grabbing than sudden regime change, but it is a lot more realistic. Modernising the management of international monetary affairs could prove an important contribution to future growth. The time of powerful kings is long gone. But today’s leaders still have the chance to stamp their mark on the monetary framework of tomorrow." Unfortunately, the possibility of a gradual transition in which the US willingly cedes ever increasingly more of its reserve status is unthinkable: after all the bulk of the Fed's disastrous policy is dictated that no matter what the Chair does, the world has no choice but to continue using dollars. Which will work until it doesn't (and with total US debt at almost 100% of GDP, the "doesn't" part is approaching.
The capitalist answer to this vast financial overshoot is simple: interest rates will rise once the unlimited free money stops flowing. Once interest rates rise, then the debt--which has now doubled or tripled in the frenzied flow of free money-- quickly becomes burdensome in the extreme. In other words, the status quo is now addicted to unlimited flows of free money. If the flow continues, then inflation will destabilize it; if it's cut off, then rising interest payments will destabilize it. That's why it's easy to predict a financial collapse in the next few years. But there are still enough resources around to restabilize things after the impending financial liquidation; societies and economies have a way of finding a new equilibrium, a process described in The Onset of Catabolic Collapse
A Very Critical Bank Of America On The Fed's Third Mandate, And Why BofA Is Not Bullish But "Bubblish"Submitted by Tyler Durden on 02/16/2011 23:13 -0400
Ever since the advent of QE2, few if any, sellside analysts employed by Too Big To Fail banks have dared to voice a negative opinion of the Chairman's third mandate, that of raising stock prices (for obvious reasons: nobody will bite the hand that feeds them trillion in taxpayer bailout money). Which is why we continue to believe the BofA credit strategist Jeffrey Rosenberg is one of the few men standing who dares to call it how it is. In his latest piece, Rosenberg lays out what is the most harshly (yet diplomatically) worded criticism of QE we have read to date. "In our view, the longer term problem with such a strategy is that in delaying the adjustment to the root causes of the credit crisis, namely excessive leverage in the economy and financial markets, the essential vulnerabilities from that excessive leverage remain. What triggers their realization again is the inflationary shock leading to an interest rate shock that undermines the cheap cost of that debt that currently enables its maintenance." As for the implicit assumption that savings and wealth are inversely correlated, Rosenberg points out the glaringly obvious: "Inflation erodes the value of those savings and decreases their standard of living." The only option left: "Lowering the value of savings creates a powerful incentive to take on investment risk to maintain the real purchasing power of those savings." And while everyone getting aboard the investment ship at the same time is a horrible idea when it happens in one country, it is a guaranteed disaster waiting to happen when it occurs at the global level. Which is precisely what has happened: "Today, we see that same pattern again at play. But this time, it’s not limited to just the US Fed policy. Globally, central banks are pursuing coincident easy money policies. And even in Emerging Markets where the inflation fears stand most acute, the policy rate increases are just keeping up with inflation increases. The result: global negative or zero real policy rates." The entire global "economy", which really means stock market, is now one timebomb, just waiting for the first central banker error-induced 'crack' to appear in the windshield, following which the destruction will be unprecedented.
Jan Hatzius is the bellwether of the sellside economist crowd. When he was bearish (2009), most were bearish, when he turned bullish (early half of 2010), everyone else followed suit. Then he turned bearish again (early August 2010) and convinced his friend and former co-worker Bill Dudley to launch QE2. Then, in December, he turned very bullish again. And now we are here. We expect Hatzius to be fake bullish for another 3 months max, at which point he will have no choice than to start telegraphing to Jon Hilsenrath that it is time for QE3. In the meantime, for those who are not too familiar with his work, here is an extended interview with Bloomberg TV, in which the GS head economist talks about Goldman's call for 18% gain in stocks this year as well as trends in jobs, inflation and other data indicators.
"I doubt he will be invited back."
Silver and particularly gold rose sharply on the release of the higher than expected UK inflation data. It showed that UK inflation quickened to 26 month highs at 4.0%. Currency debasement and higher food and energy prices are leading to an inflation surge in both developed and emerging markets. The Chinese inflation data appears to be even more misleading and manipulated than that in western economies. Many governments are attempting to manage consumers perceptions regarding the significant increase in the cost of living as fiat currencies are debased. Silver is now less than 2% from its 30 year nominal high of $31.25/oz seen at the start of the year and looks set to challenge and surpass this level in the coming days due to continued robust physical demand (both investment and industrial) and the fact that the futures market is seeing some big money go long again after the recent correction. Silver remains in backwardation with spot trading at $30.68/oz while the July 11 contract trades at $30.55/oz and the December 14 at $30.40/oz.
I’ve finally had the time to thoroughly study Bernanke’s entire Press Club speech, his appearance before Representative Paul Ryan’s House Budget Committee and bulk of the recently released 2005 FOMC minutes. The conclusion I have drawn from all this data is that the captain of our economy, Ben Bernanke, is either an economic imbecile or a financial terrorist. Through evil intent, or sheer stupidity, the outcome remains unchanged. The bottom-line: He has hijacked our economy flight and changed our destination. Bernanke is about to crash Flight 666 and all 308 million of us sitting helplessly in the passenger cabin into Zimbabwe’s airport known as Hell’s Hyperinflation Field.
On February 12, 1973, after the second Treasury announced devaluation of the dollar, George Shultz said, “there is no doubt that we have achieved a major improvement in the competitive position of American workers and American business.” Translated, a weak dollar would stoke an exporting bonanza for U.S. businesses that would need to hire new workers to help fulfill all the demand driven by the dollar’s debasement. That Shultz was soon enough revealed as tragically incorrect is a classic understatement. Needless to say, the dollar’s devaluation predictably unleashed a lost decade of inflation and economic misery for the U.S. and the world.
The market rallied on Friday as Hosni Mubarak abdicated his manipulatedly elected throne, walked out of the country like...
Zero Hedge had an opportunity recently to ask Eric Sprott a variety of questions touching on everything from investment recommendations, to policy guidelines, to a general outlook for the world economy. As Sprott has long been a rare voice of contrarian reason in a field of lemming-like uniformity, lately driven by nothing more than a pursuit of centrally planned momentum and Bernanke-induced "heatmapping", we believe the answers were vastly more interesting and illuminating than anything available for mass media consumption.
Equities soft for a second day on geopolitical concerns, which outweighed the mild positive on Jobless Claims observed yesterday. Treasuries are rallying in the early going as a result of higher oil and the rising unrest in Egypt as well as record EM outflows over the past week. We still classify the jobless data as a mild positive as it still has not passed the test of time and still is a long way from progress given that the participation rate has dropped significantly during this recession. Today will see Trade Balance reports for December (-$38.3B prior, -$40.5BE) as well as UMich Confidence for Feb (prelim, 74.2 prior, 75E).