The number one American export is U.S. dollars. It is paper currency that is backed up by absolutely nothing, but the rest of the world has been using it to trade with one another and so there is tremendous global demand for our dollars. The linchpin of this system is the petrodollar. For decades, if you have wanted to buy oil virtually anywhere in the world you have had to do so with U.S. dollars. But if one of the biggest oil exporters on the planet, such as Saudi Arabia, decided to start accepting other currencies as payment for oil, the petrodollar monopoly would disintegrate very rapidly. For years, everyone assumed that nothing like that would happen any time soon, but now Saudi officials are warning of a "major shift" in relations with the United States. In fact, the Saudis are so upset at the Obama administration that "all options" are reportedly "on the table".
Despite the 'support' of the G-20 and the self-deceiving belief that Japan is 'not' manipulating its currency; 60 US Senators appear confused. In a letter to Treasury Secretary Jack Lew and Trans-Pacific-Partnership Trade Rep Michael Froman, the Senators demand they "address one of the 21st century's most serious trade problems: foreign currency manipulation." In order to ensure any agreements meet the "high standards" that America's workers deserve, Lew and Froman are directed to include "strong and enforceable disciplines," for any currency manipulations. Cue Abe protestations at US policy...
Positive demographic cycles have been one of the key components in the strong growth trends for a number of Asian countries. As Morgan Stanley note in their most recent 'China Deleveraging' discussion, the decline in the ratio of the non-working (elderly and children) to working-age (15-64 years) population has coincided with periods of economic boom for various countries in Asia in the past 50 years. But... as Nomura's Richard Koo notes - having experienced the very same unstoppable shift in Japan - "demographics will cease to be a positive for China’s economic growth and start to have a negative impact." Fundamentally, Koo adds, this means "the nation will grow old before it grows rich." Demographics, capital accumulation and productivity are the three most important drivers of potential growth, and these three factors are intertwined to a certain extent. China has already entered its first stage of demographic challenge, with its GDP growth slowing on the back of all three contributors of growth. Given the lessons of Japan and the Asian Tigers, China is set to suffer notably from this demographic drag - and its entirely foreseeable.
As we noted just two weeks ago - before the hope-and-change-driven exuberance in Japanese equities came crashing down - "those who believe in Abenomics are suffering from amnesia," and Nomura's Richard Koo clarifies just who is responsible for the exuberance and why things are about to shift dramatically. Reasons cited for the equity selloff include Fed Chairman Ben Bernanke’s remarks about ending QE and a weaker than expected (preliminary) Chinese PMI reading, but, simply put, Koo notes, more fundamental factor was also involved: stocks had risen far above the level justified by improvements in the real economy. It was overseas investors (particularly US hedge funds) that responded to Abe's comments late last year by closing out their positions in the euro (having been unable to profit from the Euro's collapse) and redeploying those funds in Japan, where they drove the yen lower and pushed stocks higher. Koo suspects that only a handful of the overseas investors who led this shift from the euro into the yen understood there was no reason why quantitative easing should work when private demand for funds was negligible... The recent upheaval in the JGB market signals an end to the virtuous cycle that pushed stock prices steadily higher.
The spin-doctors are hard at work talking up America’s subpar economic recovery. All eyes are on households. Thanks to falling unemployment, rising home values, and record stock prices, an emerging consensus of forecasters, market participants, and policymakers has now concluded that the American consumer is finally back. Don’t believe it. In short, the American consumer’s nightmare is far from over. Spin and frothy markets aside, the healing has only just begun.
If JGB investors 'believe' as Richard Koo earlier noted, in the BoJ's new actions and Abenomics (to double the monetary base and generate inflation), then, Kyle Bass explains, a rational investor is likely to sell a portion if not all of them. The BoJ only has JPY10 trillion cushion (after the JPY60 trillion deficit) to soak up this 'rational investor paradox' selling and this is dwarfed by the holdings of JGBs in the largest Japanese banks (who are now starting to rotate away from JGBs into foreign bonds). Simply out, Bass exclaims, they are going to have make the plan even bigger... if they are to successfully contain rates. With a quadrillion JPY of JGBs out there, if a mere 5% is sold (from 'Abe'lievers) then Japan's Turbo QE is not big enough which leads to the paradoxical increase in the QQE, moar inflationary 'belief', and moar selling pressure... The BoJ has been in the market every day but 2 since April 4th trying to hold rates down (and is failing)...
The surge in Japanese long-term interest rates is likely causing some lost sleep among bond market participants and policymakers (despite their ignorance of the moves in the BoJ minutes) as Nomura's Richard Koo notes, if this trend continues (now added to by the collapse in stock prices) it could well mark the “beginning of the end” for the Japanese economy. Although the stock market has (until now) welcomed the yen’s continued slide against the dollar, Koo warns that this trend needs to be carefully monitored, as simultaneous declines in JGBs and the yen can be interpreted as a loss of faith in the Japanese government and the Bank of Japan. The biggest concerns are that the extreme volatility in Japanese stocks and bonds is occurring at a time when the BOJ was buying large quantities of government bonds. It is now clear that even large-scale BOJ purchases of JGBs cannot stop yields from rising. Simply put, Koo notes, the BoJ needs to rein itself in and state it will not stand for overshooting inflation expectations or the 'bad' rise in rates could crush both the nascent recovery and the nation's banking system.
Nomura's Richard Koo destroys the backbone of the modern central bankers only tool in the tool-box in his latest paper. "As more and more people began to realize that increases in monetary base via QE during balance sheet recessions do not mean equivalent increases in money supply, the hype over QEs in the FX market is likely to calm down ...The only way quantitative easing can have a positive impact on economic activity is if the authorities’ purchase of assets from the private sector boosts asset prices, making people feel wealthier and thereby encouraging them to consume more. This is the wealth effect, often referred to by the Fed chairman Bernanke as the portfolio rebalancing effect, but even he has acknowledged that it has a very limitmed impact... In a sense, quantitative easing is meant to benefit the wealthy. After all, it can contribute to GDP only by making those with assets feel wealthier and encouraging them to consume more."
The existing (and ongoing) massive expansion of base money into the banking systems of the US, England, and Japan is without precedent. As Nomura's Richard Koo notes, at 16x statutory reserves, the liquidity 'should' have led to unprecedented inflation rates of 1,600% in the US, 970% in the UK, and 480% in Japan. However, it has not, yet. In short, Koo explains, businesses and households in these economies have stopped borrowing money even though interest rates have fallen to zero. There is little physical or mechanical reason for the BOJ’s easing program to work. But the program could also have a psychological impact - and Japanese media is on an 'inflation' full-court press currently. The risk here is that not only borrowers but also lenders will start to believe the lies. No financial institutions anticipating inflation could ever lend money at current interest rates. No actual damage will be done as long as the easing program remains ineffective. But once it starts to affect psychology, the BOJ needs to quickly reverse the policy and bring the monetary base back to 'normal'. If the policy reversal is delayed, the Japanese economy (and inflation) could spiral out of control.
While the G-20 and the G-7 haggle among each other, all (with perhaps the exception of France) desperate to make it seem that Japan's recent currency manipulation is not really manipulation, and that the plunge in the Yen was an indirect, "unexpected" consequence of BOJ monetary policy (when in reality as Richard Koo explained it is merely a ploy to avoid the spotlight falling on each and every other G-7/20 member, all of which are engaged in the same type of currency wars which eventually will all morph into trade wars), Europe's energy powerhouse Norway quietly entered into the war. From Bloomberg: "Norges Bank is ready to cut interest rates further to counter krone gains that interfere with the inflation target, Governor Oeystein Olsen said. “If it gets too strong over time, leading to inflation that’s too low, we will act,” Olsen said yesterday in an interview at his office in Oslo.
Curious why nobody at the G-7 or G-20 had the gall to outright accuse Japan of currency manipulation? Simple: because everyone else in the G-7 and G-20 has been doing precisely what Japan only recently started doing a few months ago. As such, it would be outright "glass house" hypocrisy if there was a formal Japanese condemnation by the group of overlevered nations, which moments ago released its draft communique not naming the island nation outright as was widely expected. Of course, that the G-20 did not accuse Japan of engaging in what everyone clearly knows is currency war, does not mean that everyone else is not doing this. To the contrary: they are, and the lack of a stern rebuke of Japan simply means the currency wars will now intensify, devolving into the same protectionism and trade wars as the first Great Depression was so familiar with, which to borrow a parallel from history again, will end with the kind of war that ultimately ended the first Great Depression.
Obama's Back In: Does He Succumb To Popular (Ignorant?) Opinion Like The Europeans Or Make The Tough ChoicesSubmitted by Reggie Middleton on 11/08/2012 12:04 -0500
Starving a skinny man doesn't make him healthy, but then again neither does shoving 30lbs of food down his throat. When will TPTB start using their heads? As long as policy mistakes are made, contrarian profits can be made as well.
- Obama and Romney Deadlocked, Polls Show (WSJ)
- NYC Commuter Week Faces Uncharted Ground as Storm Brews (Bloomberg)
- New York region struggles to move on a week after Sandy (Reuters)
- Europe's Bank Reviews Collateral (WSJ)
- Less circuses to pay for the bread? Time Warner Cable misses on falling demand (Reuters)
- Spanish unemployment total jumps by 128,242 as recession continues to take its toll on economy (Independent)
- Goldman Sachs Partner List Drops 31 Since February, Filing Shows (Bloomberg)
- China's mission impossible - a date for Hu's military handover (Reuters)
- German-Iranian trade booming (Jerusalem Post)
- Russia supplying arms to Syria under old contracts: Lavrov (Reuters)
- Russia endorses Egyptian-led regional group on Syria (Reuters)
- Election Winner Must Win Over Wall Street (Bloomberg)
- On Google, a Political Mystery That's All Numbers (WSJ)
- Richard Koo: explain to Americans why $22 trillion in debt in 4 years is good for them.. or something (FT)
Sometimes you just have to laugh; or else committing harakiri comes dangerously close to mind. Japan's increasingly terrifying fiscal situation combined with a central bank that is rapidly becoming the laughing stock of the world (though all the other central banks are merely mimicking its actions) is becoming so self-referential (with its almost total domestic ownership of government debt), so short-termist (with its dramatically high short-term funding requirements constantly rolling), and demographically challenged (with its elderly almost entirely reliant upon government transfer payments) that it is hard to comprehend how much longer this farce can carry on. We have previously discussed Japan's WTF charts, but the following collection from Deutsche Bank's Torsten Slok must be seen to be believed. For now - the problem in a nutshell is government-debt per working-age person in Japan will be $140,000 in 2016 - almost triple the rest of the G7.
Without justice for investors, pension funds and banks defrauded to the tune of hundreds of billions of dollars, there can be no investor confidence to support private finance.