For the right answer, we look to the past....
"I estimate the US fiscal gap at US$200 tn, 17 times the reported US$12 tn in official debt in the hands of the public.... Our country is broke. It’s not broke in 50 years or 30 years or 10 years. It’s broke today. Six decades of take as you go has led us to a precipice. That’s why almost the entire economics profession is talking as one at www.theinformact.org. Economists from all political persuasions are collectively sending our government a warning about what is, effectively, a nuclear economic bomb. I’ve been around economics for a long time. I’ve never seen such a strong response to a proposed Congressional bill. This is the profession sending a statement to the President and Congress that’s not unlike the warning physicists sent via Einstein to Roosevelt about the bomb." Larry Kotlikoff
Japanese finances are in a shambles and very soon investors are going to run screaming from the Yen and JGB markets.
In spite of the prime-dealers seeming agreement that SepTaper is most likely; judging by the plethora of talking-heads and research pieces hitting in the last few days, the idea that a Taper was a good thing (Tepper) and in fact indicates 'health' appears to be on the back-burner as almost every sell-side shop is out with a discussion of just how potentially bad things are macro-economically and that a taper should be off the table. Below is BofAML's Ethan Harris' seven reasons to delay the taper following today's "punch in the stomach for the economic recovery story" (and our 4 reasons why they can't or won't).
One of the most published academics on gold in the world is Dr Brian Lucey of Trinity College Dublin (TCD) and he and another academic who has frequently covered the gold market, Dr Constantin Gurdgiev have just this week had an excellent research paper on gold published.
They have researched the gold market, along with Dr Cetin Ciner of the University of North Carolina and their paper, ‘Hedges and safe havens: An examination of stocks, bonds, gold, oil and exchange rates’ finds that gold is a hedge against US dollar and British pound risk due to “its monetary asset role.”
- So no great rotation into EM? Capital Flows Back to U.S. as Markets Slump Across Asia (BBG)
- Muslim Brotherhood leader arrested in Egypt (Reuters)
- Allies Thwart America in Egypt: Israel, Saudis and U.A.E. Support Military Moves (WSJ)
- Dear Bloomberg: when you buy the loans of a distressed retailer, you are not betting on a rebound, you are betting on being the fulcrum security in a bankruptcy: Kyle Bass Said to Bet on J.C. Penney Comeback With Loan Purchase (BBG)
- Bubbles Bloom Anew in Desert as Buyers Wager on Las Vegas (BBG)
- Britain rejects Spanish request for Gibraltar talks (Reuters)
- U.K. Mortgage Lending Rises to Highest Since Lehman Collapse (BBG)
- Pension Funds Dispute Math in Detroit Bankruptcy (WSJ)
- Christie Says Gayness Inborn as He Signs Therapy Measure (BBG)
The Fed’s Confession: We Can Avoid A Crash At The End Of QE If Everybody Believes That Everybody Believes In A Mirage....Submitted by testosteronepit on 08/14/2013 12:33 -0400
With impeccable timing.
With revenues fading, profit margins collapsing, and only financial institutions' entire lack of transparency providing any lift in EPS, the 'great rotation' continues to provide enough cognitive dissonance to sink a boat for the asset-gatherers. The trouble, as we showed previously, is this 'rotation' is dominated by US retail investors (more specifically non-US domiciled and non-retail investors are rotating away from US equities). The US retail investor has shifted in a great-rotationary manner by the greatest amount since Feb 2000 - just as the last great bubble burst. US equities are the 3rd most over-crowded speculative long asset in the world after Crude Oil and the Brazilian Real. It seems the Fed is getting just what it wants but, just as Kyle Bass warned, "investors should be really careful doing what the central bankers want them to do."
Quantitative easing is nothing but "competitive devaluation," Kyle Bass begins this brief but wide-ranging interview; and while no central bank can explicitly expose the 'beggar thy neighbor' policy, they are well aware (and 'banking on') the fact that secondary or tertiary effects will lead to devaluing their currency. The bottom line, Bass warns, is "when the globe is at 360% credit market debt-to-GDP, there is no real way out." Furthermore, the winds of austerity have already blown (simply put no nation engaged in austerity prospectively - for the nation's betterment - they were forced by the bond markets) and with central bankers now dominant - the Krugman-esque mentality of "let's just keep going," is very much in the driver's seat since politicians now see "no consequence for fiscal profligacy." The average investor, Bass adds, "is at the mercy of the central bank puppeteers," as the Fed's policies are forcing mom-and-pop to "put their money in the wrong place at the wrong time." There will be consequences for that... there is only one way this will end... "and investors should be really careful doing what the central bankers want them to do."
With all eyes fixed on GDP and unemployment data this week (and all their revised and propagandized unreality) for more hints at if (not when) the Fed will Taper; the dismal reality that few seem willing to admit is that it is when (not if) and that the announcement of a "Taper" has nothing to do with the economy. There are three key factors driving this decision: Bernanke's bubble-blowing and bond-market-breaking legacy, the political 'clean slate' his successor needs, and, most importantly, the fear that QE will be discovered for what it is - monetization. As BoJ's Kuroda admitted last night "if QE is seen as financing debt, this could lead to rise in yields." With deficits falling, the Fed's real actions will be exposed (unless QE is tapered) and as Kyle Bass has explained before, it was out of the hands of the BOJ (or The Fed) and entirely up to market psychology.
‘Vote For Gold’
"You have to choose, as a voter, between trusting to the natural stability of gold and the natural stability and intelligence of the members of the government. And with due respect to these gentlemen, I advise you, as long as the capitalist system lasts, to vote for gold."
When it comes to changing the "measurement" rules in the middle of the game, nobody does it quite like Japan: in the aftermath of the Fukushima nuclear explosion, when radiation was soaring (and still is with Tritium levels just hitting a record high but who cares - Goldman partners have to earn record bonuses on the back of the irradiated island) Japan's solution was simple: double the maximum safe irradiation dosage. Done and done. Now, it is time to do the same to that other just as pesky, if somewhat less lethal indicator: inflation. Reuters reports that the Japanese government plans to adopt a different measure of inflation to the central bank's.
"China’s direct contribution to global growth is enormous, but perhaps equally as important is its role in generating growth in developed and emerging economies. A slowdown, whether significant or extreme, in the Chinese economy heralds very bad news for asset prices around the world. A growth crisis centered in Asia will further exacerbate the instability and volatility in Japan and have a devastating impact on second derivative marketplaces such as Australia, Brazil and developing markets in South East Asia. The combination of rich valuations and further threats to growth has led us to dramatically reduce risk in the portfolio and actively position ourselves to withstand the uncertainty and instability ahead"
It is easy to get the impression that the naysayers are wrong on Europe. After all the predictions of Armageddon, ten-year government bond yields for Spain and Italy fell to the 4% level, France which is retreating into old-fashioned socialism was able to borrow at about 2%, and one of the best performing bond investments has been until recently – wait for it – Greek government bonds! Admittedly, bond yields have risen from those lows, but so have they everywhere. It is clear when one stands back from all the usual euro-rhetoric that as a threat to the global financial system it is a case of panic over. Well, no. Europe has not recapitalized its banking system the way the US has (at great taxpayer expense, of course). Therefore, it is much more vulnerable. Where European governments and regulators have failed to make their banks more secure it is because they tied their strategy to growth arising from an economic recovery that has failed to materialize. The reality is that the Eurozone GDP levels are only being supported at the moment by the consumption of savings; in orther words, the consumption of personal wealth. Wealth that is not infinite; and held by those not likely to tolerate footing the bill for much longer.
Earlier we noted the rather peculiarly truthful (lack of optimistically-biased bullshit) annual report from the BIS as reading ZeroHedge-sermon-like. There is a smorgasbord of data, charts, and quotes strewn throughout the 204-page melodrama but one caught our eye. Reflecting on the fact that governments in several major economies currently benefit from historically low funding costs, and yet at the same time, rising debt levels have increased their exposure to higher interest rates, the BIS projects the dismal reality that any rise in interest rates without an equal increase in the output growth rate will further undermine fiscal sustainability. Although predicting when and how a correction in long-term rates will unfold is difficult, it is possible to examine the potential impact on the sustainability of public finances and how any normalization of rates (or Abe's success in creating 2% 'inflation' in Japan) leads the nation's debt-to-GDP ratio to explode to a surely-Krugman-mind-blowing 600% debt-to-GDP.