Keep your eyes on the prize. The important part of the G20 statement had nothing to do with currency wars.
Because “there’s no difference in the taste”
The European Commission formally endorsed the financial transaction tax agreed to by eleven of the 27 members. The tax will be set at 0.1% for stocks and bonds and 0.01% for derivatives. The tax will go into effect at the start of 2014, by which time the participating countries will give it formal approval.
There seems to be two purposes of the tax. The first is to raise revenue. The EC projects the tax will raise 30-35 bln euros annually where ever and whenever an instrument from eleven is traded. This would seem to block the ability to avoid the tax by moving transactions out of the eleven countries. It reinforces the "residence principle". This essentially means that if some one is a resident of the eleven countries, or acting on behalf of a resident, the transaction will be taxed anywhere it takes place. The other purpose is to deter the high frequency trading, which some officials see as largely unnecessary and potentially destabilizing.
Europe Q4 GDP declines 0.6%, and economy contracts 0.9%. No one should be surprised at the latest disappointing European GDP numbers, but they hide important trends – Germany’s Q4 0.6% GDP drop was worse than expected, although the expectations remain for growth later this year. For the rest of Europe the numbers were generally worse than expected – and no one credible is talking about significant growth prospects. (Sure, the Euro Elites are telling us they see growth tomorrow.. but tomorrow is always tomorrow..) My current interest in Spain was pricked by Blackrock CEO Larry Fink’s comments to ABC following a visit to Madrid. He reckons “Spain will be a star economy if reforms continue.” Spain last ran a balanced budget in Q1 2008 when growth was 2%. Now the economy is shrinking 1.7% on an annualised basis.” That’s a massive amount of catch up to be achieved. We are looking at another 3-4 years of economic misery just to get the Spanish economy back into the EU’s 3% deficit/GDP groove. Then we’re looking at on-going relative poverty for Spanish workers within Europe. At some point... something has to give...
One of the recurring memes of the now nearly 4 years old "bull market" (assuming the recession ended in June 2009 as the NBER has opined), is that corporate profits are soaring, and that despite recent weakness in Q4 earnings (profiled most recently here), have now surpassed 2007 highs on an "actual" basis. For purely optical, sell-side research purposes that is fine: after all one has to sell the myth that the US private sector has never been healthier which is why it has to immediately respond to demands that it not only repatriate the $1+ trillion in cash held overseas, but to hand it over to shareholders post-haste (see recent "sideshow" between David Einhorn and Apple). However, a problem emerges when trying to back this number into the inverse: or how much money the US government is receiving as a result of taxes levied on these supposedly record profits. The problem is that while back in the summer 2007, or when the last secular peak in corporate profitability hit, corporate taxes peaked at well over $30 billion per month based, the most recent such number shows corporate taxes barely scraping $20 billion per month!
China has been a very active purchaser of gold for its reserves in the last few years, as we extensively covered here and here, but another nation has taken over the 'biggest buyer' role (for the same reasons as China). Central banks around the world have printed money to escape the global financial crisis, and as Bloomberg reports, IMF data shows Russia added 570 metric tons in the past decade. Putin's fears that "the U.S. is endangering the global economy by abusing its dollar monopoly," are clearly being taken seriously as the world's largest oil producer turns black gold into hard assets. A lawmaker in Putin's party noted, "the more gold a country has, the more sovereignty it will have if there’s a cataclysm with the dollar, the euro, the pound or any other reserve currency." It appears Russia-China is now the 'hard-money' axis and perhaps, to some extent, it is the relative price of oil that defines their demand for the barbarous relic.
Citi's Willem Buiter sums it all up: "...the improvement in sentiment appears to have long overshot its fundamental basis and was driven in part by unrealistic policy and growth expectations, an abundance of liquidity and an increasingly frantic search for yield. The key word in the recovery globally, and in particular in Europe, growth is fragile. To us the key word about the post summer 2012 Euro Area (EA) asset boom is that most of it is a bubble, and one which will burst at a time of its own choosing, even though we concede that ample liquidity can often keep bubbles afloat for a long time." His conclusion is self-evident, "markets materially underestimate these risks," as the EA sovereign debt and banking crisis is far from over. If anything, recent developments, notably policy complacency bred by market complacency, combined with higher political risks in a number of EA countries highlight the risks of sovereign debt restructuring and bank debt restructuring in the EA down the line.
Two examples today of the strange way things work here in the Netherlands regarding conflicts of interest. Of course we know that things are getting increasingly blurry whereever you are between government, regulators and corporations. I'll be interested to hear what you think about the whole issue.
The first example is for a business that tests LED lamps and publishes the results on the internet. The people that run the tests both work full time at Philips. Maybe not on the lamps themselves.
So there's a politician from Groenlinks who had a few good one liners for PM Mark Rutte on the radio here Saturday in rain drenched Netherlands. He said Rutte insulted his own "Ministercrew" by offering big bucks to Gerard van Olphen to run now state owned SNS Reaal. Rutte says the market must continue to determine salaries(?). Rutte is from VVD which is not an STD but a political party standing slightly to the right of the jellyfish known as Dutch politics.
Deutsche Bank co-CEO: “In this uncertain world, I cannot exclude anything."
Here is an oveview of the forces that are driving the foreign exchange market and price targets for the euro and yen. We identify the ECB meeting as a potential challenge to the existing price trends, but expect it to see the tightening of financial conditions in the euro area as partially a reflection of positive forces, especially that banks have reduced, on the margins, the reliance on ECB for funding. Draghi will likely attempt to calm the market down with words not a rate cut. Also we see the "currency wars" as being exaggerated, not just because the foreign exchange market has alsways been an arena of nation-state competition, but that it is primarily in the realm of rhetoric among the G7 countries. Few, including Germany, who have expressed concern about what Japan is doing, have objected to the Swiss currency cap. There is not a bleeding over into a trade war. The push back against the Japan (among the G7) appears to have slakcened a bit. Officials prefer Japan not provide price targets for bilateral exchange rates (like dollar-yen), but if stimulative monetary and fiscal policy weakens the yen, that is ok.
Earlier today we got one hint that not all is well in the European banking system, as far less than the expected €200 billion was tendered back to the ECB in the second LTRO repayment operation, when just 27 banks paid back some €3.5 billion. Another, perhaps far bigger one, comes courtesy of AAA-rated Netherlands, which just experienced its first bank failure since 2008 following the nationalization of SNS Reall NV, as the previously announced bad loan writedown finally claimed the bank. As a reminder, half a month ago we got news that "SNS Reaal NV (SR), a Dutch bank and insurer struggling to wind down a money-losing real estate lending unit, fell the most in more than two months after a report said it may have to post a 1.8 billion-euro ($2.4 billion) writedown on property-finance loans." Today we got the inevitable conclusion: nationalization, one which will cost taxpayers about $5 billion to avoid contagion to what many see as Europe's "strongest" banking system.
On the surface, it may seem innocuous for Germany to move some pallets of gold closer to home. But most economists can't see the bigger implications and frequently miss the forest for the trees. What your friendly government economist doesn't reveal and the mainstream journalist doesn't report (or doesn't understand) is that in the event of a US bankruptcy, euro implosion, or similar financial catastrophe, access to gold would almost certainly be limited. If other countries follow Germany's path or the mistrust between central bankers grows, the next logical step would be to clamp down on gold exports. It would be the beginning of the kind of stringent capital controls Doug Casey and a few others have warned about for years. Think about it: is it really so far-fetched to think politicians wouldn't somehow restrict the movement of gold if their currencies and/or economies were failing? Remember, India keeps tinkering with ideas like this already.
Following yet another quiet overnight session, futures have surprised many walking into work today as the traditional overnight levitation is strangely missing. The reason for that may be the lack of the traditional for 2013 lift in various funding currency pairs, with both the USDJPY and the EURUSD lower. While there was no major macro news, the former may have been dragged lower by various comments from the German BDI industry federation chief who said he is worried about the devaluation race stemming from Japan's central bank policy echoing Merkel's comparable sentiment and revealing that the EURUSD may have topped out, while the latter was pushed lower following today's 7 day ECB MRO, which saw some €124.1 billion allotted at a 0.75% yield. This was largely in line with expectations, with Barclays seeing some €135.4 billion maturing, while BNP had expected modestly more, or some €150 billion. The MRO is the first such operation, with tomorrow's 3 month refinancing operation likely to give a better glimpse of the bank's post-LTRO repayment funding needs. Whether it is this, or the market finally demanding some action out of central banks which, except for the Fed, have been in constant promise mode, or just a random walk, is unknown, but for now the carry funded nominal devaluation of risk may have topped out.
In yet another victory for not bowing to the great-and-good of modern orthodoxy, Iceland has won a court ruling that enables it to repay billions of Euros (in failed bank deposits to the UK and Holland) on its own terms. Icesave collapsed in 2008 and left thousands of depositors, who had chased higher yielding deposits, with losses. The Dutch and British governments demanded prompt payment; Iceland denied, preferring (rationally) to repay what they could from the then-bankrupt entity. As RTE notes, Icelanders in referenda twice voted against repayment schemes drawn up by their government to satisfy the British and Dutch claims, leaving the estate of Landsbanki to pay back the funds, which it has steadily done, instead of the taxpayers of Iceland being force per se to fund this shortfall. The implication being: Bank deposit insurance schemes in the European Economic Area are NOT backed by government liability, neither explicitly nor implicitly - which could well reignite concerns of the much-hoped-for Europe-wide deposit-guarantees.