Monetary Policy

Panic at the mere thought of rising real wages.

All you need to read.

You've just crossed over...

Because our political system is corrupted by corporate lobbyists, it leaves the people with few choices. Those who do not wish for a violent revolution are left with the one alternative of taking control of their own money. Money can be anything two parties in a transaction choose it to be. Precious metals is one good choice. Converting ones savings from Federal Reserve Notes into precious metals is not some kooky survivalist ploy. It is empowering a person to vote against the immoral monetary system. Hoarding food is not a kooky survivalist ploy, it is hedging against an immoral banker tax. We all have the moral obligation not to pay the banker tax. Refuse to deposit your funds into a money center bank. Support efforts to end the Federal Reserve System.

It is one thing for Tom Stolper to release precious tidbits about what is not going to happen in the future on a weekday - for those we are very grateful. But doing so on god's (or is that Goldman's) day is truly a first. In a note just blasted out, it would appear there is no rest for the Stolper, and according to the world's most admired FX strategist (remember: batting 0.000 is just as useful as batting 1.000), "Dollar downside forces on the rise" and that Goldman is positioned "short the USD again"... Just as Goldman was positioned long the Russell 2000 literally the minute the market topped on Thursday (no joke - check it). And to think it was only three weeks ago that the same strategist saw downside risks for the EURUSD to 1.20...

Back in the 1930's, Irving Fisher introduced a concept called the 'debt supercycle.' Simply put, it posits that when there is a buildup of too much debt within an economy, there reaches a point where there simply is no other available solution but to let it rewind. We are at that point in our economy, as are most other major economies around the world, claims John Maudlin, author of the popular Thoughts from the Frontline newsletter and the recent bestselling book Endgame: The End of the Debt Supercycle and How It Changes Everything. For the past several decades, excessive and increasing amounts of credit in the system have allowed us to live above our means as both individuals and nations. We've been able to have our cake and eat it, too. Now that the supercycle has ended and the inevitable de-leveraging cycle is staring us in the face, we will be forced to set priorities in a way that has been foreign to our society for over a generation.

Festive Friday fun:

• FITCH TAKES RATING ACTIONS ON SIX EUROZONE SOVEREIGNS
• ITALY LT IDR CUT TO A- FROM A+ BY FITCH
• SPAIN ST IDR DOWNGRADED TO F1 FROM F1+ BY FITCH
• IRELAND L-T IDR AFFIRMED BY FITCH; OUTLOOK NEGATIVE
• BELGIUM LT IDR CUT TO AA FROM AA+ BY FITCH
• SLOVENIA LT IDR CUT TO A FROM AA- BY FITCH
• CYPRUS LT IDR CUT TO BBB- FROM BBB BY FITCH, OUTLOOK NEGATIVE

And some sheer brilliance from Fitch:

• In Fitch's opinion, the eurozone crisis will only be resolved as and when there is broad economic recovery.

And just as EUR shorts were starting to sweat bullets. Naturally no downgrade of France. French Fitch won't downgrade France. In other news, Fitch's Italian office is about to be sacked by an errant roving vandal tribe (or so the local Police will claim).

Which is why we were delighted that after months of modest confusion on the topic, the Congressional Committee on Financial Services (including subcommittee chairman Ron Paul), have demanded that not only Geithner make his stance on a US-funded IMF bailout of Europe crystal clear, but that they are openly opposed to "American taxpayer dollars being used to bail out Europe...through additional contributions to the IMF." We are curious to see just how Geithner will weasel his way out of responding to this: perhaps the only logical stall tactic is to reply that he will be busy helping Mitt Romney in his tax "revisions" over the next several months.

Update: literally seconds after this article was posted, we receive news that the IMF will seek Saudi contribution to the European bailout fund. There you have it - you enjoy that implicit US protection Saudi emirs? It is about to cost you.

While it is best to pray that NASA will find some very rich and not so intelligent life on Mars so it can bail out the world as it sinks deeper and deeper into a untenable debt hole (which somehow can be "filled" only by issuing more debt at least according to tenured economists at ivy league institutions), a strategy of planning for a realistic outcome may not be a bad idea. The question then is who in the world has some/any spare leverage capacity to incur even more debt and use the proceeds to fund a Eurozone-American-Chinese collapse. Enter the Economist's "wiggle-room index." The publication, best known for recently introducing the "shoe thrower index" (remember the Arab Spring and how Fed induced runaway inflation generated a "democratic" revolution across MENA?) has compiled a list of those developing world countries which still have capacity to provide credible global bailout capital (in fiat form of course - after all that is the only thing that the Ponzi understands) or as the Economist says, the "emerging economies that have the most monetary and fiscal firepower." So if you are on this list (ahem China, Indonesia and Saudi Arabia) - our condolences - you are about to be dragged into the epic slow-motion ongoing collapse of the developed world, kicking and screaming, with some 44 caliber persuasion if needed, but you will be there, before it all falls apart. The time to repay all favors to Uncle Sam is coming.

All you need to read.

I think Bernanke is going to get his balls squeezed.

This is just getting better and better:

• FOMC: 2012 GROWTH AT 2.2%-2.7% VS 2.5%-2.9% IN NOV. FORECAST
• ELEVEN OF 17 FED OFFICIALS SEE MAIN RATE ABOVE 0.25% IN 2014
• SIX OF 17 FED OFFICIALS SEE NO RATE INCREASE BEFORE 2015
• FOMC DOESN'T SET SPECIFIC LONG-RUN GOAL FOR EMPLOYMENT LEVEL

Japan is now seriously blushing. As for the reality of the Fed's forecasts, they are absolutely worthless, so no point in even spending one minute on them.

The fear of 'turning-Greek', which is now apparently worse than 'turning-Japanese', is the anchoring bias that seems to be driving more and more countries to dramatically adjust their fiscal affairs. However, Nomura's Richard Koo (whose blood pressure was already elevated last week at the ignorance of many nations to his balance sheet recession diagnosis and treatment protocol) points out in a note this week that Greece's problems stem from fiscal profligacy, a lack of domestic savings, and dishonest reporting by the government (it does kind of ring a bell). His point being that the rest of the eurozone - not to mention Japan, US, and the UK - are suffering balance sheet recessions (unlike Greece), which occur when the collapse of an asset price bubble drives sharp increases in private savings. His problem is that traditional economists are not taught of a situation in which private sector deleveraging (which we discussed last week also) leaves fiscal stimulus as the only way to stabilize an economy and in the currrent environment of deficits being watched and denigrated by any and all politician, market participant, and talking head, Koo's borrow-and-spend 'all deficits are good deficits' medicine is hard to swallow. Koo believes that the post-Lehman world was saved by fiscal stimulus, that Greece is different, and that the anti-Koo austerity actions have 'thrown a large wrench into the works of many world economies' and while the UK is coming around to the notion that austerity is not working, he worries on recent actions in the US and Japan at a time of excess private saving. It seems to us that his argument boils down to - given the system's fragility - an Austrian solution to the broken Keynesian problem is unworkable (without depression), and he hopes that the growing doubts (recessions popping up left, right, and center) about an overriding focus on fiscal consolidation will bring people back to Keynesian (Kooian) fold. He concludes with a worrying reflection on his countrymen in the MoF that seem to have learnt none of his lessons as they look to raise the consumption tax and Japan's rising sun sets.

This is how Goldman sees today's events, and critical FOMC announcement, public communication overhaul and press release, unfolding.

While Paulson's star was finally setting in 2011, that of mega macro fund Brevan Howard was rising, and has been rising for years by never posting a negative return since 2003. The $34.2 billion fund, now about double the size of John Paulson's, returned 12.12% in a year marked by abysmal hedge fund performance. But how did it make money? Simple - by taking advantage of the same permabullish market myopia that marked the beginning of 2011, and that has gripped the market once again. "The Fund’s large gains during the third quarter were due predominantly to pressing the thematic view that markets were ignoring clear signs of economic slowdown and were not correctly pricing the probability of central bank accommodation, particularly the reversal of the ECB rate hikes in April and July." Not to mention the €800 billion ECB liquidity accommodation that started in July and has continued since. So yes: those betting again that the market correction is overdue, will once again be proven right Why? Because "we are about to witness an unprecedented policy move. In the US, Eurozone and UK, fiscal austerity is being prescribed as the cure following the bursting of the credit bubble and to overcome the malaise following a balance-sheet recession. Unfortunately, there is no historical example of when this approach has been successful." As for looking into the future, "we continue to believe that markets remain at risk of  substantial dislocation."