Swiss National Bank
From the first headline to the last, the following brief month-by-month summary of the year shows just how far markets and global happenings have come...
A little followed development is revealing about the emerging financial architecture and the role of the dollar. A dispassionate discussion.
See why the Fed is unlikely to taper in December, but Q1 14 is much more likely. Read a preview of the highlights from the week ahead.
Fingers of Instability
US Fed's exit plan poses a critical dilemma and underscores important contradictions. The calendar says Europe should be talking about exits too--as aid packages for Spanish banks, and Ireland and Portugal are to wind down in the coming year--yet more rather than less assistance may be neeed.
This is our first out of four series where we look at all the various bail-out schemes concocted by Eurocrats.
Today we look at how the ECB has evolved since 2007. In the next three posts we will look at the Target2 system, various fiscal transfer mechanisms and last, but not least the emergence of a full banking union.
- Lew warns Congress to strike debt ceiling deal (FT)
- Central-Bank Moves Blur the View (WSJ)
- Brazil, Indonesia launch measures to shore up their currencies (FT)
- More mainstream media reminded about Fukushima - Radioactive ground water under Fukushima nears sea (AP)
- Fukushima inspectors 'careless', Japan agency says, as nuclear crisis grows (Reuters)
- New York Banker Arrested on Rape Charges in East Hampton (NYT)
- This time they mean business, for real: CFTC Moves to Rein In High-Speed Traders (WSJ)
- Britain operates secret monitoring station in Middle East (Reuters)
- Moody’s considers downgrading top US banks (FT)
- China's Bo calls wife mad after she testifies against him (Reuters)
- JPMorgan Sub-New Normal Growth Seen Vexing Next Fed Chief (BBG)
- SEC calls for cooling-off period for more staff (Reuters)
While the market's eyes were fixed on the near record slide in Japanese Industrial Production (even as its ears glazed over the latest commentary rerun from Aso) which did however lead to a 1.53% jump in the PenNikkeiStock market on hope of more stimulus to get floundering Abenomics back on track, the most important news from the overnight session is that the PBOC's love affair with its own tapering may have come and gone after the central bank came, looked at the surge in 7 day market repo rates, and unwilling to risk another mid-June episode where SHIBOR exploded to the mid-25% range, for the first first time since February injected RMB17 billion through a 7-day reverse repo. The PBOC also announced it would cut the RRR in the earthquake-hit Lushan area. And with that the illusion of a firm and resolute PBOC is shattered, however it did result in a tiny 0.7% bounce in the SHCOMP.
- Turmoil Exposes Global Risks (WSJ)
- China Money Rates Retreat After PBOC Said to Inject Cash (BBG)
- Fed Seen by Economists Trimming QE in September, 2014 End (BBG)
- Booz Allen, the World's Most Profitable Spy Organization (BBG)
- Abe’s Arrows of Growth Dulled by Japan’s Three Principles (BBG)
- China steps back from severe cash crunch (FT)
- Smog at Hazardous as Singapore, Jakarta Spar Over Fires (BBG)
- U.S. Weighs Doubling Leverage Standard for Biggest Banks (BBG)
The global capital markets are seeing large moves in response not only to the Federal Reserve, though clearly that is a key impetus, but also to developments elsewhere. Here is a dispassionate review.
Overview of these week's key developments
"QE detractors... see something quite different. They see QE as not responding to the collapse in the money multiplier but to some extent causing it. In this account QE – and the flatter yield curves that have resulted from it – has itself broken the monetary transmission mechanism, resulting in central banks pushing ever more liquidity on a limper and limper string. In this view, it is not inflation that’s at risk from QE, but rather, the health of the financial system. In this view, instead of central banks waiting for the money multiplier to rebound to old normal levels before QE is tapered or ended, central banks must taper or end QE first to induce the money multiplier and bank lending to increase."
Last month we laid out the reasons why France was On The Brink Of A Secondary Depression - in short, due to a deadly collision of French politics with Frankensteinian monetary union. Unfortunately, subsequent data confirms the bleak trajectory. Even Francois Hollande is beginning to wake up to just how destructive and anti-business the French agenda is. France will enter a recession at a time when spending and debt levels are quite high and Hollande’s recent attempts to assist entrepreneurs are too little, too late. France has been slower to cut taxes than other EU members and a secondary depression will push the French budget deficit to new dangerous heights as the government's 'forecast' of the primary balance is farcical. Even if borrowing costs remain low, debt ratios will still explode. Knowing this, why then are French rates so low? The usual explanations (purchases by the Swiss National Bank and Mrs. Watanabe buying) have some merit, but other factors may also be at play. In any case, in a bond market, one should look at two things: the return ON capital and the return OF capital. The return ON capital is pitiful and the return OF capital is far from certain. Sell the financials in Europe - and in France especially. Really, the euro is on its last legs. France is in play.
Stanley Fischer, who cost his central bank a lot of money with his ill-timed bet to invest billions of the Bank of Israel's foreign currency reserves on names such as Apple last year, has demonstrated that Einstein's definition of insanity is alive and well when it comes to central-planners, has just decided to double down on stocks. Alas, this is not a joke. Bloomberg reports that "The Bank of Israel plans to almost double equity holdings by the end of the year after falling bond yields prompted the central bank to invest in European shares for the first time. The bank will increase its stock holdings to as much as 6 percent of foreign-exchange reserves, or about $4.5 billion, from 3 percent at the end of 2012, according to Yossi Saadon, a Bank of Israel spokesman. Investments in shares rose to about 4.5 percent of assets in the first four months of 2013 as the institution made a “small allocation” to European equities in addition to its U.S. funds, he said." Well, if the BOI's investment in AAPL was the beginning of the end for that company, one can start shorting Europe - an academic Keynesian just called the top.
When tin-foil-hat wearing digital dickweed blogs first suggested that Central Banks were actively buying stocks, the mainstream media scoffed at the idiocy and un-independence of such an idea. However, it is clear the central banks themselves are now not only actively buying stocks but are activley encouraging it and propagandizing their efforts to lever this last policy tool left in the toolbox. As Bloomberg reports, 23% of central bankers surveyed said the bank owns shares and plans to buy more. From the Bank of Japan to the Bank of Israel and with the SNB and the Czech National Bank now at over 10% allocation of reserves to stocks, is it any wonder there is an inexorable bid under the 'free' markets. Rick Santelli is rightly concerned that, "there is a danger that everyone is loaded in the same direction," asking what happens if all the Central Bank pump-priming does not work, given these equity valuations, "who gets caught holding the bag? What chairs are left when the music stops?"