International Monetary Fund

As the saying goes, ‘desperate times call for desperate measures.’ The phrase is bandied about so frequently, it’s generally accepted truth. But I have to tell you that I fundamentally disagree with the premise. Desperate times, in fact, call for a complete reset in the way people think. Desperate times call for the most intelligent, effective, least destructive measures. But these sayings aren’t as catchy. This old adage has become a crutch – a way for policymakers to rationalize the idiotic measures they’ve put in place...

Following last night's surprise event, which was China's HSBC PMI dropping into contraction territory for the first time since July, which in turn sent Asian market into a tailspin, the most relevant underreported news was a speech by International Monetary Fund Deputy Managing Director Naoyuki Shinohara who said that "As long as steady progress is being made toward the 2% target, we do not see a need for additional monetary accommodation in Japan." He added that while exit from unconventional monetary policy "is still very likely some way off for the euro area and Japan, I believe that the moment to start planning is now." This warning - an echo of prcisely what we said yesterday - promptly roiled the Yen, sending it far higher and sending the EMini futures sliding by over 10 tick in no time: a drop from which they have not recovered yet.

What are you afraid of, exactly? ConvergEx's Nick Colas notes we all have our phobias and fears, some logical and anchored in reality and others irrational but still powerful; but for the capital markets currently it seems there is no fear. The CBOE VIX Index started the year at 14.2 and has fallen to a close of 12.9 today. That move, Colas adds, has dragged the IVs of everything from U.S. large cap energy stocks to gold to corporate bonds lower in its wake.  Even expectations for Emerging Markets equity volatility are in retreat as we start 2014. But, when near term historical or implied volatility becomes this complacent, it seems appropriate to spend a little more time pondering what might go wrong.  Markets, after all, have the entire “What should go right” side of the trade well understood and reflected in current prices. In that spirit, here is the "Top 10" list of what might take us off the rails of complacency in 2014.

• Winter Storm Expected to Make Northeast Commutes Harder  (BBG)
•  Invasion of Spanish Builders Angers France Struggling to Compete  (BBG)
• Toronto mayor, caught ranting on video, admits drinking a 'little bit" (Reuters)
• IBM's Hardware Woes Accelerate in Fourth Quarter (WSJ)
• Sharp Divisions Come to Fore as Peace Talks on Syria Begin (NYT)
• Afghanistan cracks down on advertising in favor of U.S. troops (Reuters)
• Microsoft CEO Search Rattles Boards From Ford to Ericsson (BBG)
• Banks Sit Out Riskier Deals (WSJ)
• Netflix Seen Reporting U.S. Web Users Reach 33.1 Million (BBG)

• Hilsenrath: Next Cut in Fed Bond Buys Looms - Reduction to $65 Billion Could Be Announced on Jan. 29 (WSJ)
• China Workforce Slide Robs Xi of Growth Engine (BBG)
• Obama pulls the race card: Obama Says Race May Blunt Poll Standing in Interview (BBG)
• Chinese firm's IPO deal switches banks as chairman's daughter moves from JPMorgan to UBS (SCMP)
• China and Russia may hold joint naval drill in the Mediterranean (RT)
• Iran invite to Syria talks withdrawn after boycott threat (Reuters)
• Seven Chinese IPOs Halt Trading After 44 Percent Share  (BBG)
• U.S. military says readying plans for Olympic security assistance (Reuters)
• Thank you Bernanke: Investors Most Upbeat in 5 Years With Record 59% Bullish in Poll (BBG)
• From His Refuge in the Poconos, Reclusive Imam Fethullah Gulen Roils Turkey (WSJ)

But fear not, dear poor people of the world, for Lloyd Blankfein, Mark J. Carney, Mario Draghi, Haruhiko Kuroda, Christine Lagarde, Jacob Lew, Shimon Peres, Larry Fink, David Cameron, Shinzo Abe, Marissa Meyer, and many others are there fighting for you. Fighting all the way...

The IMF has reported that its resident respresentative in Afghanistan - 60-year-old Wabel Abdallah - is among the 15 people killed in a coordinated assault at a Kabul restaurant by the Taliban. The upscale taverna is well-known to be frequented by foreigners and ex-pats. As Reuters reports, Abdallah had been leading the IMF's office in the Afgan capital since 2008 and IMF Managing Director Christine Lagarde said "this is tragic news, and we at the fund are all devastated."

• NSA phone data control may come to end (AP)
• China to rescue France: Peugeot Said to Weigh $1.4 Billion From Dongfeng, France (BBG)
• China to rescue Davos: Davos Teaches China to Ski as New Rich Lured to Slopes (BBG)
• Hollande’s Tryst and the End of Marriage (BBG)
• Iran has $100 billion abroad, can draw $4.2 billion (Reuters)
• Target Hackers Wrote Partly in Russian, Displayed High Skill, Report Finds (WSJ)
• Nintendo Sees Loss on Dismal Wii U Sales (WSJ)
• Goldman's low-cost Utah bet buoys its bottom-line (Reuters)
• Royal Dutch Shell Issues Profit Warnin: Oil Major Hit by Higher Exploration Costs and Lower Oil and Gas Volumes (WSJ)
• EU Weighs Ban on Proprietary Trading at Some Banks From 2018 (BBG) - so no holding of breaths?
• Sacramento Kings to Accept Bitcoin (WSJ)

• Here comes JPM's next multibillion legal reserve: Federal Probe Targets Banks Over Bonds (WSJ)
• Mulally Bows Out of Microsoft CEO Race, Staying at Ford (BBG)
• United States sending more troops and tanks to South Korea (Reuters)
• Eurozone unemployment sticks at record high (FT)
• China-Japan 'Voldemort' attacks up ante in propaganda war (Reuters)
• Alternative Lenders Peddle Pricey Commercial Loans (WSJ)
• John McAfee: glad Intel dropping name from security software (Reuters)
• Jobless Benefits Bill Stays Alive Amid Talks on Offsets (BBG)
• Chicago Colder Than South Pole as Frigid Air Clamps Down (BBG)
• Former Miss Venezuela shot dead in attempted robbery (Reuters)

With Washington fighting over whether to stop emergency unemployment benefits in the US, the Saudi Arabian government has re-written their economic textbooks with some wonderful new logic. In an effort to encourage its citizens to seek jobs in private companies (as opposed to the majority in government jobs - which the IMF sees as unsustainable), the Saudis are introducing compulsory unemployment insurance for all citizens with jobs. As Reuters reports, "It may not be the most cost effective solution in the near term but if it helps normalise the labour market it is a price worth paying." With unemployment at 12%, and only 30-40% labor force participation, the costs could be significant.

• Heavy snowstorm hammers northeastern U.S. (Reuters)
• Coins Remain a Bright Spot for Gold (WSJ)
• Gross’s Mistake on Fed Taper Echoes Across Pimco Funds (BBG)
• China December services PMI falls to four-month low (Reuters)
• General Mills Starts Making Some Cheerios Without GMOs (WSJ)
• U.S. considers flammability risk of Bakken crude after accidents (Reuters)
• China Mobile’s Costly iPhone Deal with Apple (WSJ)
• Hezbollah Upgrades Missile Threat to Israel (WSJ)
• UK House Prices Cap Best Year Since 2006 as Mortgages Surge (BBG)
• China tells police to be loyal to party amid graft crackdown (Reuters)

We leave it to everyone's supreme amusement to enjoy the Maestro's full non-mea culpa essay, but we will highlight Greenspan's two most amusing incosistencies contained in the span of a few hundred words. On one hand the former Chairman admits that "The financial crisis [...] represented an existential crisis for economic forecasting. The conventional method of predicting macroeconomic developments -- econometric modeling, the roots of which lie in the work of John Maynard Keynes -- had failed when it was needed most, much to the chagrin of economists." On the other, his solution is to do... more of the same: "if economists better integrate animal spirits into our models, we can improve our forecasting accuracy. Economic models should, when possible, measure and forecast systematic human behavior and the tendencies of corporate culture.... Forecasters may never approach the fantasy success of the Oracle of Delphi or Nostradamus, but we can surely improve on the discouraging performance of the past." So, Greenspan's solution to the failure of linear models is to... model animal spirits, or said otherwise human irrationality. Brilliant.

• China cash injection fails to calm lenders (AFP)
• European Union Stripped of AAA Credit Rating at S&P (BBG)
• Last-Minute Health-Site Enrollment Proves a Hard Sell (WSJ)
• Bernanke’s Recession-Fighting Weapon Developed by 1900s Banker (BBG)
• Asia Stocks Are Little Changed Amid China Funding Concern (BBG)
• Regulators' Guidance on Volcker Rule Gives Banks Little Relief on Debt Sales (WSJ)
• On one hand: Man Who Said No to Soros Builds BlueCrest Into Empire (BBG); on the other: Michael Platt's BlueCrest Capital Poised for Rough Close to 2013 (WSJ)
• BOJ Keeps Record Easing as Fed Taper Helps Weaken Yen (BBG)
• Bank of England becomes more cautious on economic predictions (FT)
• Gold Climbs From Lowest Close Since 2010 as Goldman Sees Losses (BBG)

"If secular stagnation concerns are relevant to our current economic situation, there are obviously profound policy implications... Some have suggested that a belief in secular stagnation implies the desirability of bubbles to support demand. This idea confuses prediction with recommendation. It is, of course, better to support demand by supporting productive investment or highly valued consumption than by artificially inflating bubbles. On the other hand, it is only rational to recognize that low interest rates raise asset values and drive investors to take greater risks, making bubbles more likely. So the risk of financial instability provides yet another reason why preempting structural stagnation is so profoundly important."

As a general rule, extreme economic decline is almost always followed by extreme international conflict. Sometimes, these disasters can be attributed to the human survival imperative and the desire to accumulate resources during crisis. But most often, war amid fiscal distress is usually a means for the political and financial elite to distract the masses away from their empty wallets and empty stomachs. War galvanizes societies, usually under false pretenses. We're not talking about superficial “police actions” or absurd crusades to “spread democracy” to Third World enclaves that don’t want it. No, we're talking about REAL war: war that threatens the fabric of a culture, war that tumbles violently across people’s doorsteps. The reality of near-total annihilation is what oligarchs use to avoid blame for economic distress while molding nations and populations. Because of the very predictable correlation between financial catastrophe and military conflagration, it makes quite a bit of sense for Americans today to be concerned.