The Institute of International Finance (IIF) has released data that shows that the credit crunch in China is hitting harder than was thought at first and is secondly at the worst level since the global financial crisis landed on everyone’s plate.
Hopes that Kuroda would say something substantial, material and beneficial to the "three arrow" wealth effect (about Japan's sales tax) last night were promptly dashed when the BOJ head came, spoke, and went, with the USDJPY sliding to a new monthly low, which in turn saw the Nikkei tumble another nearly 500 points. China didn't help either, where the Shanghai Composite also closed below 2000 wiping out a few weeks of gains on artificial hopes that the PBOC would step in with a bailout package, as attention turned to the reported announcement that an update of local government debt could double the size of China's non-performing loans, and what's worse, that the PBOC was ok with that. Asian negativity was offset by the European open, where fundamentals are irrelevant (especially on the one year anniversary of Draghi FX Advisors LLC "whatever it takes to buy the EURUSD" speech) and renewed M&A sentiment buoyed algos to generate enough buying momentum to send more momentum algos buying and so on. As for the US, futures are indicating weakness for the third day in a row but hardly anyone is fooled following two consecutive days of green closes on melt ups "from the lows": expect another rerun of the now traditional Friday ramp, where a 150 DJIA loss was wiped out during the day for a pre-programmed just green closing print.
While many draw comparisons to 1994's Fed actions, rate rises, and the subsequent economic and equity market performance, UBS' commodity team examines the five main drivers of that mid-90s disinflationary boom and how (or if) they are applicable in the US' current new normal. Their findings "this may be a 1994 redux, but it ain't no 1995 replay," as they note, in fact, it's a bear market waiting to happen. Every one of these processes is deflationary, not disinflationary. And they are self reinforcing. And deflation, in direct contrast to disinflation, is very bad for asset prices (with a serious equity and credit bear-market). So just as we have noted previously any taper will likely eventually lead to an 'un-taper' reflation effort (which will see gold once again strengthen) along with the exposure of the fallacy that the Fed really has become.
Dis-passionate discussion of next week's events and data, placed within a somewhat larger context.
We take a new look at Japan from the 1980s to today in order to decipher what “Abenomics” might do to this fragile nation. We argue that moving Japan from its current stable, but unsustainable equilibrium, through activist monetary policy risk a run on the sovereign. We present part I and part II here today. We hope you enjoy it.
Given more than his normal 30-second soundbite on mainstream media, Marc Faber is able to discuss in considerably more detail his views on the massive growth in global financialization (when compared to real economies) noting that "one day, this financial bubble will have to adjust on the downside." This will occur via either an inflationary burst or a collapse of the system. Simply put, "it's gonna end one day," either through war or financial collapse, "it will be very painful." The Gloom, Boom, and Doom Report editor notes current asset valuations are driven by excess credit creation, printing money, and distorted market signals, and the unintended consequences of the effect on investor psychology are perfectly mis-timed. Faber concludes with a discussion of the inflationary impact of US monetary policy and where it is seen (and not seen) and the global social unrest implications of middle class discontent.
... Well, not today's Ben Bernanke of course - a far more honest version of the current Fed Chairman, one speaking before the New York Chapter of the National Association for Business Economics, on October 15, 2002.
"I worry about the effects on the long-run stability and efficiency of our financial system if the Fed attempts to substitute its judgments for those of the market."
So do we Ben.
For the second consecutive day futures have drifted lower following a drubbing in the Nikkei which was down nearly 3% to just above 14K (time to start talking about the failure of Abenomics again despite National CPI posting the first positive print of 0.2% in forever and rising at the fastest pace in 5 years) and the Shanghai Composite which dropped to just above 2000 once again, after PBOC governor Zhou saying that China has big economic downward pressure and further reiterated prudent monetary policy will be pursued. This is despite Hilsenrath's latest puff piece which pushed the market into the green in yesterday's last hour of trading and despite initial optimism which saw stocks open higher following forecast-beating EU earnings gradually easing and heading into the North American open stocks are now little changed. It may be up to the WSJ mouhtpiece to provide today's 3pm catalyst to BTFATH, or else it will be up to the circular and HFT-early released UMichigan confidence index to surge/plunge in order to push stocks on any red flashing news is good news.
"I worry about the effects on the long-run stability and efficiency of our financial system if the Fed attempts to substitute its judgments for those of the market. Such a regime would only increase the unhealthy tendency of investors to pay more attention to rumors about policymakers' attitudes than to the economic fundamentals that by rights should determine the allocation of capital." - Ben Bernanke, October 15, 2002
"QE in my view is less efficacious for the real economy than most people suppose," may just be the sentence that ends Larry Summers' run at becoming the next 'most powerful person in the world'. As the FT reports, the chubby ex-chief economist for Obama made these, and other, somewhat hawkish comments (entirely unacceptable for a Federal Reserve chairman) at a conference in Santa Monica in April.
The Fed publicly claims it wants to help the economy and Main Street. However, as we are now discovering, the Fed is more than willing to sacrifice the good of the people in order to prop up a few insolvent big banks.
As the President prepares to address Congress (and the nation) with his next new new 'better bargain' deal to secure the economic future for the US, we thought it appropriate to dust off the economic scorecard for how things are going under his old new deal. Obviously, the President of the United States is not really solely responsible for where we are economically. The condemnation, or praise, must be applied equally to all branches of government responsible for the fiscal and monetary policy decisions made. The problems that exist today were not due to just the last few years of excess but rather come as a result of more than 30 years of fiscal irresponsibility that spans both Republican and Democratic Administrations alike. However, since President Obama has taken the position of responsibility for "clearing away the rubble and getting us back to where we were", we can review the economic data to see whether, or not, this is indeed the case.
The words of central bankers have for a very long time been poured over by those believing their utterances to have mystic qualities, but we now live in an era where their fallibility is coming into question. The Governor of the San Francisco Fed has written a paper debunking the effectiveness of quantitative easing where monetary policy is "uncertain", a state of affairs that has been with us since QE was started and reinforced by Bernanke's two recent press conferences. To taper or not to taper; will he or won't he? Your guess is as good as mine. “No pain no gain”, is what my fitness trainer tells me with irritating relish and frequency, but you know what? He's right! So what should our central banks and politicians be doing? Debt is the problem so deleveraging has to be the answer.
Federal Reserve Chairman Bernanke's term expires January 31, 2014. While his continuation as Fed chair cannot be ruled out, he has given no public indications that he plans to seek another term and most market participants - as well as many members of Congress in last week's Humphrey-Hawkins hearings - seem to believe he will retire from public service early next year. As Goldman notes, the announcement of the next Chair of the Federal Reserve seems most likely to come in October, though nominations for Fed Chair have been announced as early as five months before the current term expires and as late as less than a month before expiration. There does not appear to be much risk to the Senate's ultimate confirmation of whomever the President chooses, though the Fed nominations have become more politically controversial over the last few years, which is likely to lengthen the confirmation process. Following previous confirmations, financial market volatility has typically increased slightly, though whether this occurs following the upcoming transition will of course depend on who is nominated.
Surplus capital used to be the understood as the primary challenge, but this fell out of favor. This essay seeks to return it to the center of the narrative.