A dispassionate discussion of the impact of the sequester and implications for investors. I look also look at how the dollar has performed since QE3+ was announced and it is not what many might have expected.
In many Western industrialized nations, debt has overwhelmed or is about to overwhelm the economy's debt-servicing capacity. In the run-up to a debt crisis, bad debt tends to move to the next higher level and may ultimately accumulate in the central bank's balance sheet, provided the economy has its own currency. Many observers assume that, once bad debt is purchased by the central bank, the debt crisis is solved for good; that central banks have unlimited wealth at their disposal, or can print unlimited wealth into existence.
However, central banks can only create liquidity, not wealth. If printing money were equivalent to creating wealth, then mankind would not have to get up early on Monday morning. Only a solvent central bank can halt hyperinflation. The longer governments run large deficits, the longer central banks continue to monetize them, and the longer their balance sheets grow, the higher the potential for enormous losses and thus hyperinflation.
Necessary preconditions for hyperinflation are a quasi-bankrupt government whose debt is monetized by a central bank with insufficient assets. One way or another, owning physical gold is the safest and most effective way of insuring against hyperinflation.
Instead of looking at the daily bar charts for the major currencies that we provide every week, given the large moves, we thought it might be helpful to look at the longer term charts. It is one thing for pundits and other observers to argue that QE drives currencies down, it quite another to operationalize and use that as a decision-making rule for investing or trading the foreign currencies. The way people make money in the markets is not being right more often, but disciplined risk management. Technicals allow one to quantify risk and admit where one can be wrong.
- Office Depot Agrees to Buy Officemax for $13.50/Shr in Stock
- Bulgarian Government Resigns Amid Protests (WSJ)
- Rome will burn, regardless of Italian election result (Reuters)
- Abe Says No Need for Foreign Bond Buys Under New BOJ Chief (BBG)
- Rhetoric Turns Harsh as Budget Cuts Loom (WSJ)
- Muddy Waters Secret China Weapon Is on SEC Website (BBG)
- Business Loans Flood the Market (WSJ)
- Staples May Be Winner in Office Depot-OfficeMax Merger (BBG)
- Fortescue Won't Pay Dividend, Profit Falls (WSJ)
- Key Euribor rate on hold after rate cut talk tempered (Reuters)
- FBI Probes Trading in Heinz Options (WSJ)
- Spain Said to Impose Yield Ceiling on Bond Sales by Regions (BBG)
- BOK’s Kim Signals No Rate Cut Needed Now as Outlook Improves (BBG)
With the end of Asia's lunar new year celebration and the return of the US and Canadian markets after yesterday's holiday, there is full liquidity in the global capital markets for the first time in over a week. The currencies are mixed, with the yen, sterling and the Australian dollar posting modest gains, while the euro, Swiss franc and Canadian dollar have heavier tones.
The Chinese yuan has weakened for the second day after returning from the extended holiday and is near 2-month lows. After reversing lower yesterday, the Shanghai Composite led the regional bourses lower with a 1.9% decline. The Composite is approaching its 20-day moving average (~2365) which it has not traded below since early December. European equity markets are higher and the Dow Jones Stoxx 600 is up a little more than 0.5% led by consumer goods and basic materials. Of the main industrial sectors, only telecom is lower. European bond markets, core as well as periphery are lower.
Broadly speaking, we identify five factors that will shape foreign exchange rates in coming days.
An overivew of the price action in the foreign exchange market and what it might mean in the week ahead.
As debate about currency wars heats up, there's been little talk about which currencies will prove safe havens. We think the Singapore dollar tops the list.
Here is a review of the technical condition of the major currencies. In my professional experience, I know few purist fundamental traders in the foreign exchange market. Even for those, like myself, who study the macro economic and political fundamentals, technical analysis allows us to quantify the risk. Those who make money in the markets, do not do so because they are right more often, but rather they are disciplined risk managers. Technical analysis provides a way to manage the risk by helping to identify where we are wrong. It is offered here not as a substitute for fundamental analysis, but as a complement.
Yesterday we presented a simplistic analysis of why for Japan "This Time Won't Be Different", a preliminary observation so far validated by the just announced Japanese December current account deficit which was not only nearly double the expected 144.2 billion yen, printing at some 264.1 billion yen, but was only the first back-to-back monthly current account deficit since 1985. But perhaps we are wrong and this time Abe will succeed where he, and so many others, have failed before. And, as is now widely understood, perhaps Japan will succeed in finally launching the necessary and sufficient currency war that would be part and parcel of Japans great reflation, as even various G-8 members have recently acknowledged. The question is will it, and when? One attempt at an answer comes from the fine folks at Bienville Capital who have compiled the definitive pros and cons presentation on what Japan must do, and how it will play out, at least if all goes according to plan.
Six months after the Barclays epic wristslap in which there were none - zero - criminal charges against Libor manipulators, it is time to trot out the same old theatrical song and dance again, this time focusing on bailed out RBS, which the CFTC just fined a whopping sum of $325 million, modestly less than the $16 billion profit the bank made in 2007, followed by the epic subsequent collapse which saw $104 billion in bailouts to keep the bank afloat courtesy of Biritsh taxpayers. In other words: manipulate the world's most sensitive credit-related metric, and you will see either 5% of your peak profits deducted, or we will force you to get even more bailouts.
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.
JPMorgan Sees Gold At $1,800 By Mid 2013 As South Africa “In Crisis” And “Escalating Instability” In Middle EastSubmitted by GoldCore on 02/01/2013 11:29 -0400
Gold fell $11.70 or 0.7% in New York yesterday and closed at $1,664.80/oz. Silver slipped to a low of $31.09 and finished with a loss of 1.66%.
An overview of the fundamental determinants of the foreign exchange market in the week ahead. I look beyond the official rhetoric at what is pushing the yen lower. I also discuss the tightening of European monetary condition. In addition, there is a brief discussion of the key US events this week: the FOMC, Q4 GDP estimate, and US jobs report.
Here is a weekly over view of the currency market from a technical perspective. The divergence between the performance of the dollar against the euro-bloc, with the exception of sterling, and the other major currencies is noteworthy. In the analysis, I suggest a few opportnities for near-term contrarians. I fully appreciate that some readers eschew technical analysis and regulate it to the same space as numerology and witchcraft. Yet, even still, it is useful to recall Keynes' view that the markets are like a beauty contest and the trick is not to pick who one thinks is the most beautiful, but to pick who others will think most beautiful. Moreover, technicals allow one to quantify how much one is willing to lose in a way that fundamental macro-economic analysis doesn't. It is a tool then for risk management.
An overview of the key factors and events that are shaping the investment climate in the week ahead. It looks at some emerging market developments as well. These are the main talking points and considerations that ought to be on your radar screen as investors or pundits.