But, but, but...
- ECB NOT YET DECIDED ON WHETHER TO CONTRIBUTE TO GREEK DEBT RESTRUCTURING - EURO ZONE SOURCES
The V-Fib pattern formerly known as the EURUSD not happy.
Gold Increased In Value In Both Extreme Inflationary And Deflationary Scenarios - Credit Suisse & LBS ResearchSubmitted by Tyler Durden on 02/08/2012 10:42 -0400
Mohamed El-Erian, CEO and co-chief investment officer of bond fund giant PIMCO, said investors should be underweight equities while favoring "selected commodities" such as gold and oil, given the fragile global economy and geopolitical risks. Over the long term gold will reward investors who own gold as part of a diversified portfolio. Trying to time purchases and market movements is not recommended – especially for inexperienced investors. New research from Credit Suisse and London Business School entitled ‘The Credit Suisse Global Investment Returns Yearbook 2012’ continues to be analysed by market participants. The 2012 Yearbook investigates data from 1900 to 2011 and looks at how best to protect against inflation and deflation, and how currency exposure should be steered. The chief findings are that bonds do well in deflation and benefit from currency hedging, and equities are not a perfect inflation hedge, but benefit from international diversification. The report shows that gold offers a timely inflation hedge and long term holders of gold should expect a positive correlation to inflation – gold is one of only two assets since 1900 to have positive sensitivity to inflation (of 0.26). Only inflation-linked bonds had more - 1.00, as expected. By contrast, when inflation rises 10%, bond returns have fallen an average 7.4%; Treasuries fell 6.2%, and equities lost 5.2%. Property fell by between 3.3% and 2%. Importantly, gold managed to increase its value across both extreme inflationary and deflationary scenarios. The academics from LBS analysed 2,128 individual years in 19 major countries (1900-2011), finding gold rose 12.2% in the most deflationary years - when average deflation was 26%.
The problem with printing money and promising to do so for years ahead of time is that the negative consequences of inflation only happen after a delay. As a result, it's difficult to know if a policy has gone too far until years down the road at times. Unfortunately, if confidence in the dollar is lost, the consequences cannot be easily reversed. One problem for the Fed itself is that it holds long-term securities that will lose value if rates rise. The federal government faces an even more serious problem when interest rates rise, as higher rates on its debt mean greater interest payments to service. Due to this federal-government debt burden, the Fed has an incentive to keep rates low, even if the long-term result is higher inflation. However, for now the Fed's statement suggests it sees inflation as "subdued," so it's putting those concerns aside for now.
Since the start of the year, global markets have been apparently buoyed by the understanding that Draghi's shift of the ECB to lender-of-last-and-first-resort via the LTRO has removed a significant tail on the risk spectrum with regard to Euro-banks and slowed the potential for contagious transmission of any further sovereign stress. In fact the rally started earlier on the backs of improved perceptions of US growth (decoupling), better tone in global PMIs, and potential for easing in China and the EMs but it does seem that for now the ECB's liquidity spigot rules markets as even in the face of Greek uncertainty, as George Magnus of UBS notes, 'financial markets are most likely to defer to the ECB's monetary policy largesse' as a solution. Both Magnus and his firm's banking team, however, are unequivocal in their view that the next LTRO will unlikely be the last (how many temporary exceptions are still in place around the world?) and as we noted earlier this morning, banks' managements may indeed not be so quick to gorge on the pipe of freshly collateralized loans this time (as markets will eventually reprice a bank that holds huge size carry trades at an inappropriate risk-weighting) leaving the stigma of LTRO borrowing (for carry trades, substitution for private-sector funding, or buying liquidity insurance) as a mark of differentiable concern as opposed to a rising tide lifts all boats as valuations reach extremes relative to 'broken' business models, falling deposits, and declining earnings power.
They expect a EUR300bn take up of the next LTRO, somewhat larger than the previous EUR200bn add-on - but not hugely so - as the banks face a far different picture (in terms of carry profitability) and yet-to-be-proven transmission to real-economy credit-creation that will make any efforts at a fiscal compact harder and harder to implement as its self-defeating austerity leave debtor countries out in the cold. The critical point is that unless the market believes there will be an endless number of future LTROs, covering the very forward-looking private funding markets for banks, then macro- and event-risk will reappear and volatility will flare.
The other other John Taylor (not the FX trader, nor the guitar player, but the "Taylor Rule" discoverer, which is at the base of all Fed monetary decisions), spoke on Bloomberg TV, and his message was certainly a far less optimistic one than that conveyed by the man charged with putting his rule into practice. "We could get into a situation like Greece, quite frankly. People have to realize it is a precarious situation. The debt is going to explode if we don't make some changes." What changes does Taylor recommend? Why the same that Bill Gross warned about yesterday - that ZIRP4EVA means a liquidity trap pure and simple, and the Fed needs to start rising rates: "the Fed has bought so much of the debt that people don't know how they're going to undo that. They pledged to have interest rates at zero until 2014, but people are saying how can they possibly do that when the economy picks up. This uncertainty had lead people to sit on all this cash. I think if the Fed gets back to the policy that worked pretty well in the '80s and '90s, we would be in much better shape." Ah yes, but the one thing, and only one thing that matters, and that is not mentioned at all, is what happens to the stock market when the Fed officially sets off on a tightening path. Actually make that question even simpler - will the drop in the S&P will be 30%, 40%, or any other greater mulitple of 10% thereof, considering that as we noted previously, the Fed and the other two central banks alone have injected over $2 trillion in just over a year. And about $10 trillion in the past 5. Calculate what the removal of this liquifity would do to stocks...
When all else fails, pretend it's all good. Like what Australia did, following the just released announcement by the RBA that it is keeping the cash rate unchanged at 4.25% on expectations of a 25 bps rate cut. Which begs the question: is China re-exporting the lagging US inflation it imported over 2011? So it appears to Glenn Stevens, who just said that "Commodity prices declined for some months to be noticeably off their peaks, but over the past couple of months have risen somewhat and remain at quite high levels." Or maybe they are not pretending and inflation is still alive and very much real? It also means that Chinese inflation continues to be far higher than what is represented, but we probably will just take the PBoC's word for that. Or not, and wonder: did the RBA just catch the PBOC lying about its subdued inflation? And if that is the case, does anyone really wonder why that very elusive RRR-cut is coming with the same certainty as the Greek creditor deal? Either way, the AUDJPY spikes by 80 pips on the news, however briefly, and if the traditional linkage between the AUDJPY and the market is preserved, it should have a favorable impact on risk as it means at least one hotbed of inflation remains. On the other hand, it also means that Chinese easing is a long way off... and in a market defined solely by hopes for central bank intervention this is not good. And amusingly, just as we write this, Bloomberg release a note that the PBOC is draining funds: "China’s money market rates rose after PBOC resumed fund drain via a repo operation, showing it remained cautious toward policy easing." Translation: "Hopes for a near-term RRR cut could be dashed, Credit Agricole CIB strategist Frances Cheung writes in note to clients." Oops. Furthermore, the PBOC did 26 billion yuan in repos, meaning it is set to conduct a net liquidity withdrawal for this week according to Credit Agricole. Withrawing liquidity when the market expects RRR cuts? Fughetaboutit. (and reread the Grice piece on why only idiots define inflation by the CPI or the PCE).
It has only been a week since we discussed the San Francisco Fed's research group admitted that water was wet Fed policy will be unable to impact unemployment since the cyclical changes are more structural leading to jobless recoveries as fat is removed from the system. The powerless Fed now has another well-researched problem. As Daniel Wilson of the FRBSF sheepishly admits (having spent several thousands in taxpayer cash to fund the latest Fed 'white paper') with regard to the impact of fiscal stimulus: It is an inconvenient reality that this literature provides an enormous range of multiplier estimates, ranging from –1 to +3. Critically he notes that the benefits of fiscal stimulus vary with the business cycle and are strongest during recessions. So, given that the US is decoupling and that we are not in a recession, we assume the multiplier effect of the Fed's much-desired fiscal stimulus requests will be at the lower end of the range - either negative or inconsequential?
In other words, for the Fed to get its desired fiscal stimulus from the government they had better engineer, using only the monetary policies up their sleeves, a recession.
At least he knows where the bathroom is.
Not only is the large bank-GSE cartel preventing millions of Americans from refinancing, but these same cartel players are also thwarting Fed monetary policy and hurting all our economic prospects.
Equity and credit markets eked out small gains on the day as Treasuries limped a few bps lower in yield (with 30Y the notable underperformer) and the EUR lost some ground to the USD. ES (the e-mini S&P futures contract) saw its lowest volume of the year today at 1.35mm contracts (30% below its 50DMA) as NYSE volumes -10% from yesterday but average for the month. Another small range day in almost every market aside from commodities which saw significant divergence with Silver (best today) and Gold surging (up around 1.15% on the week) while Oil and Copper dived (down 2.6-3% or so on the week) with the former managing to scramble back above $96 into the close. ES and the broad risk proxy CONTEXT maintained their very high correlation as Oil and 2s10s30s compression dragged on ES but AUDJPY and TSYs post-Europe inching higher in yields helped ES. HYG underperformed all day (often a canary but we have killed so many canaries recently). Energy names outperformed on the day (as Brent and WTI diverged notably) but financials did well with the majors now back up to the late October (Greek PSI deal) highs. All-in-all, eerily quiet ahead of NFP but it feels like something is stirring under the covers as European exuberance didn't carry through over here (except in ZNGA and FFN!).
With the IMF cutting its global growth forecasts and signs of slowing evident in the dramatic contraction in World Trade Volume in the last few months, it is perhaps no surprise that the central banks of the world have embarked upon what Goldman Sachs calls an 'Unprecedented Alignment of Monetary Policy Across Countries'. Our earlier discussion of the European event risk vs global growth expectations dilemma along with last night's comments on the impact of tightening lending standards around the world also confirms that this policy globalization is still going strong and is likely to continue as gaming out the situation (as Goldman has done) left optimal CB strategy as one-in-all-in with no benefit to any from migrating away from the equilibrium of 'we all print together'. Perhaps gold (and silver's) move today (and for the last few months) reflects this sad reality that all your fiat money are belong to us, as nominal prices rise (but underperform PMs) in equities (and risky sovereigns and financials).
Federal Reserve Board Chairman Ben Bernanke will testify at House Budget Committee (Chairman Paul Ryan, R-WI) full committee hearing on "The State of the U.S. Economy." The highlight of today's hearing will be watching Bernanke face his nemesis runner up, Paul Ryan, who will surely grill Blackhawk Ben with questions that are far more intelligent than the press corps could come up with during the last FOMC canned remark presentation. Watch the full testimony live at C-Span after the jump.
Gold has risen to 8 week highs despite positive manufacturing data, higher factory activity in Germany, China and the US and the hope that a Greek debt restructuring solution is imminent. Demand for physical in Europe, Asia and internationally remains robust which is supporting gold. Investors will today watch the US weekly jobless claims data for the week ending January 28th. Adding to the very gold supportive interest rate backdrop, Japan's finance and economic ministers are putting pressure on the Bank of Japan to consider easing monetary policy even further. Negative yields on some bonds (such as TIPS) are very gold positive as is moves to let investors buy short term bills with negative yields. Gold is also being supported by central bank buying. Russia's gold and foreign exchange reserves rose to $504 billion in the week to Jan. 27 from $499.7 billion a week earlier.
Punxsutawney Ben, who just saw the printer's shadow, and predicts six more trillion of free money, will address the House Budget Committee later this morning. We will also get the latest BS from the BLS how thousands of mass layoffs every day result in a drop in initial claims.
It appears from the Treasury's announcements and the Treasury's Borrowing Advisory Committee (TBAC) recommendations that we will shortly see Treasury FRNs. While details remain murky (what maturities, the underlying index, reset frequency, and so on) we would be surprised if they did not after all this analysis and the potential problems they may face. Given the weight of short-dated maturing Treasury debt, if the Treasury were roll/term this debt out at the same pro-rata distribution of maturities as it has currently, then the weighted average maturity of their debt would rise significantly. While avoiding the short-term limit of zero-date issuance that many European sovereigns face is a positive clearly, the problem for the Treasury lies in the non-domestic (read Fed) demand is waning significantly for any longer-dated Treasuries (while bid-to-covers on Bills remain very high and active for foreign buyers). FRNs would implicitly provide the lender with upside coupon on a rise in rates (a potential plus for foreign demand given their angst and the low level of rates priced into the market) and would benefit the Treasury by reducing potential demand issues at the long-end (and potentially offering the Treasury upside if rates stayed low for longer). The bottom line is that the structural decline in the stock of global high-quality government bonds, coupled with an increase in demand for non-volatile liquid assets, should make U.S. government issued FRNs extremely attractive. Of course, the benefits to the Treasury from issuing FRNs also relies significantly on the Fed's monetary policy stance - savings are likely to be greater when the change in the funds rate is negative, and especially when such change is more negative than the expectations priced into forwards (and it seems reasonable to assume that the risk to short-rates is somewhat one-sided against the Treasury FRN).