On the heels of Shinzo Abe's seeming hyprocrisy in Davos, commenting that "if peace and stability were shaken in Asia, the knock-on effect for the entire world would be enormous," while he raises military budget, antagonizes China, and inflames the militaristic fervor in his own nation with war-crime shrine visits, the Chinese have struck back specifically at Abe's comparison of China and Japan's present tensions to Germany and Britain's in 1914... Foreign Minister Wang Yi - writing from the Chinese Embassy in the US, warned:
- *CHINA'S WANG CALLS ABE'S STATEMENT ON WW1 'ANACHRONISTIC'
- *CHINA HAPPY TO REVIEW WORLD HISTORY WITH ABE: WANG YI
- *CHINA WANTS ABE TO RETHINK OWN COMMENTS, ACTIONS: WANG YI
China faces a very significant test of its reform policy pursuit rhetoric. With China's Bank regulator set to issue an alert on coal-industry loans - "as a result of outout cuts, they don't have much cash flow and thus they can't repay loans and debt," the massive growth in wealth products such as the CEG#1 (which offered a 10% yield for a 3 year term) based on these loans leaves the Chinese with a moral hazard dilemma - bailout or no bailout. ICBC has made it clear it wil not bailout investors since reputational damage would be "well manageable," and former-PBOC adviser Li Daokui adds that "a controlled default is much better than no default," noting critically that trust defaults "will teach future investors a very important lesson." Belief that contagion can be "contained" brings back memories of 2008 in the US but a total (or even partial) bailout will merely increase the leverage and risk-taking problem and signal government talk of policy reform is not real.
In a week that has been marked by astonishing mainstream media headlines, BFI Capital’s CEO Frank Suess happened to give an outstanding interview about the outlook for global currencies, gold and manipulation in the markets. These developments are significant and could mark a tipping point. Up until now, the currency and precious metals manipulation has been a topic associated with conspiracy theorists in the corners of the blogosphere. The interesting fact is that this news breaks out exactly at the time when most people are being trapped into the “economic recovery” news. With the markets hanging at the lips of the central bankers, it is fair to say that “the central banks are the markets.” Frank Suess points out that, for several decades now, central banks around the world, with the US Federal Reserve in the lead, haven’t allowed business and credit cycles to happen anymore. In fact, they have been fighting consistently every sign of recession with more money, resulting in a race to the bottom of world currencies. The effect of this on world currencies is that they are shuffling each other down in a see-saw pattern...
As we previously noted, the 85 richest people in the world have about as much wealth as the poorest 50% of the entire global population does. In other words, 85 extremely wealthy individuals have about as much wealth as the poorest 3,500,000,000 do. There is certainly nothing wrong with making money. In fact, the founders of the United States intended for this nation to be a place where free markets thrived and where everyone could pursue their dreams. Unfortunately, this country (along with the rest of the world) has moved very much in the opposite direction. Today, we have a debt-based global financial system which is dominated by gigantic predator corporations and big banks. Working together with national governments, these corporations and banks have constructed a system in which the percentage of all global wealth that is being funneled to the very top of the pyramid steadily grows over time. The Founding Fathers were very correct to be very suspicious of large concentrations of power. In the early days of the United States, the federal government was very small and the size and scope of corporations was greatly limited. Our nation thrived and a huge middle class blossomed. Sadly, over the past several decades the pendulum has completely swung in the other direction.
The bubble of private debt that we have seen inflate in China since the Lehman crisis is unlike anything that the world has ever seen. Never before has so much private debt been accumulated in such a short period of time. All of this debt has helped fuel tremendous economic growth in China, but now a whole bunch of Chinese companies are realizing that they have gotten in way, way over their heads. In fact, it is being projected that Chinese companies will pay out the equivalent of approximately a trillion dollars in interest payments this year alone. That is more than twice the amount that the U.S. government will pay in interest in 2014. So will a default event in China on January 31st be the next "Lehman Brothers moment" or will it be something else? In the end, it doesn't really matter. The truth is that what has been going on in the global financial system is completely and totally unsustainable, and it is inevitable that it is all going to come horribly crashing down at some point during the next few years. It is just a matter of time.
Monsignor Nunzio Scarano - dubbed "Monsignor 500" after his favorite bank-note - who is already on trial for allegedly plotting to smuggle 20 million euros from Switzerland to Italy, was arrested Tuesday in a separate case for allegedly using his Vatican accounts to launder a further 7 million euros. As AP reports, police said they seized 6.5 million euros in real estate and bank accounts Tuesday, including Scarano's luxurious Salerno apartment, filled with gilt-framed oil paintings, ceramic vases and other fancy antiques. A local priest was also placed under house arrest and a notary public was suspended for alleged involvement in the money-laundering plot. Police said in all, 52 people were under investigation. Have no fear though, for his lawyer, "has good faith that the money came from legitimate donations."
Said Dr. El-Erian: “I have been extremely honored and fortunate to work alongside Bill Gross, who is one of the very best investors in the world. His talents are truly exceptional, as is his dedication. I have also been amazingly privileged to work with the most talented group of professionals in the investment management industry. Their commitment and tireless work on behalf of our clients have been a consistent inspiration for me since I first joined PIMCO back in 1999. I wish them continued great success.”
Nothing is what it seems in the gold market...
Markets have started the week on the back foot, despite a brief rally following a better-than-expected Q4 GDP print in China. Indeed, Asian equities recorded a small pop following the GDP report, but the gains were shortlived as the general negativity on China’s growth trajectory continues to weigh on Asian markets. In terms of the data itself, China’s Q4 GDP (7.7% YoY) was slightly ahead of expectations of 7.6% but it was slower than Q3’s 7.8%. DB’s China economist Jun Ma maintains his view that economic growth will likely accelerate in 2014 on stronger external demand and the benefits from deregulation. The slight slowdown was also evident in China’s December industrial production (9.7% YoY vs 10% previous), fixed asset investment (19.6% YoY vs 19.9% previous) and retail sales (13.6% vs 13.7% previous) data which were all released overnight. Gains in Chinese growth assets were quickly pared and as we type the Shanghai Composite (-0.8%), HSCEI (-1.1%) and AUDUSD (-0.1%) are all trading weaker on the day. On a more positive note, the stocks of mining companies BHP (+0.29%) and Rio Tinto (+0.26%) are trading flat to slightly firmer and LME copper is up 0.1%. Across the region, equities are generally trading lower paced by the Nikkei (-0.5%) and the Hang Seng (-0.7%). Staying in China, the 7 day repo rate is another 50bp higher to a three month high of 9.0% with many investors continuing to focus on the Chinese shadow banking system following the looming restructuring of a $500m trust product that was sold to ICBC’s customers.
A common argument that has been made to explain the precipitous decline of the price of precious metals in 2013 (in spite of the significat demand for the physical bullion) is of investors’ disenchantment with gold and silver, which had been piling up in exchange traded products as a way for investors to gain exposure to the metals. However if redemptions are a symptom of investors' disenchantment with precious metals as an investment, shouldn't silver have suffered the same dramatic redemptions fate as gold? Indeed it should have, but we think the reason silver ETFs were not raided like gold was that Central Banks do not have a silver supply problem, they have a gold problem...
SHLD is making the cut for one of my top 3 picks of 2014.
Despite telling us just yesterday that it would not take sides in the tensions in South Sudan...
*U.S. NOT TAKING SIDES IN S SUDAN: PSAKI
the US government is on the verge of deciding to... take sides. As Reuters reports, the United States is weighing targeted sanctions against South Sudan due to its leaders' failure to take steps to end a crisis that has brought the world's youngest nation to the brink of civil war. Africa, as we have discussed at length, remains the only region on earth with incremental debt capacity (and therefore growth in a Keynesian world) and so it is no surprise the US wants to get involved in yet another conflict.
Risks surrounding the looming release of the latest jobs report by the BLS later on in the session failed to weigh on sentiment and heading into the North American open, stocks in Europe are seen higher across the board. The SMI index in Switzerland outperformed its peers since the get-go, with Swatch Group trading up over 3% after the company said that it expects good results for 2013 at operating profit and net income level. At the same time, in spite of stocks trading in the green, Bunds remained better bid, with peripheral bond yield spreads wider as market participants booked profits following the aggressive tightening observed earlier in the week amid solid Spanish bond auctions, as well as syndications by Ireland and Portugal. Fake Chinese trade data failed to boost Chinese stocks, which dropped anoter 0.7% and is just 13 points above 2000 as Shanghai remains one of the world's worst performing markets since the financial crisis. The yoyoing Nikkei was largely unchanged. All eyes today will be fixed on the headline streamer at 8:30 when the latest nonfarm payrolls report is released.
If one listens to Goldman's chief economist Jan Hatzius these days, it is all roses for the global economy in 2014... much like it was for Goldman at the end of 2010, a case of optimism which went stupendously wrong. Goldman's Dominic Wilson admits as much in a brand new note in which he says, "Our economic and market views for 2014 are quite upbeat." However, unlike the blind faith Goldman had in a recovery that was promptly dashed, this time it is hedging, and as a result has just released the following not titled "Where we worry: Risks to our outlook", where Wilson notes: "After significant equity gains in 2013 and with more of a consensus that US growth will improve, it is important to think about the risks to that view. There are two main ways in which our market outlook could be wrong. The first is that our economic forecasts could be wrong. The second is that our economic forecasts could be right but our view of the market implications of those forecasts could be wrong. We highlight five key risks on each front here." In short: these are the ten things that keep Goldman up at night: the following five economic risks, and five market view risks.
One of the biggest mistakes we can make, Saxo Bank's CEO warns, is to assume that rationality will prevail, that just through superior economic performance, freedom will capture enough peoples' hearts in a democracy to win the day. In the last of his three-part series (part 1 and part 2), Lars Seier Christensen focuses on the broader relevance of Ayn Rand in society today, noting that she remains among the few that recognised with crystal clarity, that we will not win the battle through just proving that freedom and capitalism works. This, he warns, creates a major problem for those of us that like to argue rationally, rather than emotionally.