- Pretty much as expected from George W. Bush: Edward Snowden ‘damaged’ security (Politico)
- Gotta love the Keynesian-Monetarist religion: True 'Bullievers' Are Still Sweet on Japan (WSJ)
- Canadian Takes Reins at Bank of England (WSJ)
- Egypt streets quiet, political standoff goes on (Reuters)
- Private Banks Leave Switzerland as End of Secrecy Hurts (BBG)
- How Next Debt-Ceiling Fight Could Play Out (WSJ)
- Easy Money Is Still Central (WSJ)
- Lew Says China Needs Market Policies and Stop Spying (BBG) - China replies with the same
- Ireland Preparing Plan to Tap Euro-Area Rescue Fund, Noonan Says (BBG)
- Poll shows strong shift to Australian PM Rudd, new ministry named (Reuters)
A busy week, with a bevy of significant data releases, starting with the already reported PMIs out of China and Europe (as well as unemployment and inflation numbers from the Old World), the US Manufacturing and Services PMI, another Bill Dudley speech on Tuesday, US factory orders, statements by the ECB and BOE, where Goldman's new head Mark Carney will preside over his first meeting, and much more in a holiday shortened US week.
Japan’s attack in the Currency War was SUPPOSED to make it more competitive in international trade
This piece is timely as markets spit up the punch from Bernanke's bowl
While all eyes and ears will conveniently and expectedly be on the Fed announcement and press conference in a few hours, the real action continues to take place in China, where the liquidity crunch is becoming unbearable for the local banks (and will only get worse the longer Bernanke and Kuroda keep their hot money policies). The CNY benchmark money-market one-week repo rate was 138bp higher overnight to a 2 year high of 8.15%. The 7 day Interest-Rate swap rose for a record 13th day in a row jumping +10 bps to 4.08%, the highest since September 2011. China sold 10 Year bonds at a 3.50% yield, above the 3.47% expected, and at a bid to cover of 1.43 which was the lowest since August 2012. Moody’s commented that local government financing vehicles (LGFVs) pose significant risks to Chinese banks. LGFVs accounted for 14% of loan portfolios at end-2012 according to Moody’s.
It can’t be emphasized enough (I’ve emphasized it here, here and here) that there’s a close link between the Fed’s narrowing focus and the core, theoretical models that economists developed in the decades after World War II. These model builders naïvely ignored boom-bust cycles in credit and asset markets, just as the Fed disastrously eliminated the relevance of these cycles from its policy framework. Or, more precisely, policymakers reversed Martin’s maxim, spiking the punch bowl when credit and asset markets weaken but dismissing the case for action when the 'party gets going'. In order to explain, we thought it might be interesting to create one of those island economy stories to demonstrate a problem with the Fed’s policy framework - how the Fed’s inflation target can cause policymakers to do the exact opposite of what they should be doing.
Overview of these week's key developments
Japan goes to bed with another absolutely ridiculously volatile session in the books following a 5%, or 637 point move higher in the PenNIKKEIstock Market closing at over 13514, which if taking the futures action going heading to Sunday night into account was nearly 1000 points. With volatility like this who needs a central bank with price stability as its primary mandate. The driver, as usual, was the USDJPY, which moved several hundred pips on delayed reaction from Friday's NFP data as well as on a variety of upward historical revisions to Japanece economic data, but not the trade deficit, which came at the third highest and which continues to elude Abenomics. Fear not: one day soon consumers will just say no to Samsung TVs and buy Sony, or so the thinking goes. erhaps the most interesting news out of Asia was the spreading of FX vol tremors to a new participant India, which is the latest entrant into the currency wars, even if involuntarily, where the Rupee plunged to 58, the lowest ever against the dollar.
Succinctly summarizing the positive and negative news, data, and market events of the week...
If we see the economy as a system, we understand why removing or suppressing feedback inevitably leads to financial crashes. The essential feature of stable, robust systems (for example, healthy ecosystems) is their wealth of feedback loops and the low-intensity background volatility that complex feedback generates. The essential feature of unstable, crash-prone systems is monoculture, an artificial structure imposed by a central authority that eliminates or suppresses feedback in service of a simplistic goal--for example, increasing the yield on a single crop, or pushing everyone with cash into risk assets. Resistance seems futile, but the very act of suppressing feedback dooms the system to collapse.
Following April's surprising drop in crude imports which led to a multi-year low in the March trade balance (revised to -$37.1 billion), the just released April data showed an 8.5% jump in the deficit to $40.3 billion, if modestly better than the expected $41.1 billion. This was driven by a $2.2 billion increase in exports to $185.2 billion offset by a more than double sequential jump in imports by $5.4 billion, to $222.3 billion. More than all of the change was driven by a $3.2 billion increase in the goods deficit, offset by a $0.1 billion surplus in services.The Census Bureau also revised the entire historical data series, the result of which was a drop in the March deficit from $38.8 billion to $37.1 billion. In April 233,215K barrels of oil were imported, well above the 215,734K in March, and the highest since January. Furthermore, since the Q1 cumulative trade deficit has been revised from $126.9 billion to $123.7 billion, expect higher Q1 GDP revisions, offset by even more tapering of Q2 GDP tracking forecasts. And since the data is hardly as horrible as yesterday's ISM, we don't think it will be enough on its own to guarantee the 21 out of 21 Tuesday track record, so we eagerly look forward to today's POMO as the catalyst that seals the deal.
All traders walking in today, have just one question in their minds: "will today be lucky 21?" or the 21st consecutive Tuesday in which the Dow Jones has closed green.
All else is irrelevant.
The Bank of Japan has embarked on one of the most inflationary policies ever undertaken. Pledging to inject $1.4 trillion dollars into the economy over the next two years, the policy is aimed at generating price inflation of 2% and further depreciating the Yen. The idea is to fight “deflation” and increase exports. Mises’ key insight was in looking at the long-term effects of such a policy, and in the process he examined the logic behind the short-term results as well. The ineffectiveness of the policy in the long run is apparent when one understands how prices – both domestic and foreign – interact to determine exchange rates. Exports will be promoted in the short run, though the effect will be cancelled in the long run once prices adjust. If the policy is ineffective in the long run, Mises demonstrated that the short-run gains are illusory. The same monetary policy aimed at depreciating the currency to promote international trade will reap domestic chaos.
Joseph Eugene Stiglitz was awarded the Nobel Prize in Economic Sciences in 2001. We have constructed the world in which we live on recognition and awards. But, they are just for giving. They are not for anything else. We take no heed of what the ones that have been recognized might have to say or declare. They can go blue in their face, we have delusions of grandeur. Who gave them the prize anyhow?
Abenomics is riddled with inconsistencies. He wants the world's biggest bond market to sit still while he tells them they are going to lose money year-after-year (if his inflation goals are met). He wants to spark a renaissance by lowering the JPY and creating inflation but he doesn't want real wages to drop. Of course, the CNBC anchor's ironic perspective that the 80% domestic bond holdings of JGBs will 'patriotically sit back and take the loss' is in jest but it suggests something has to give in the nation so troubled. In fact, as Diapason's Sean Corrigan notes, that is not what has been happening, "every time the BoJ is in, the institutional investors are very happy to dump their holdings to them." On the bright side, another CNBC apparatchik offers, this institutional selling will lead to buying other more productive assets to which Corrigan slams "great, so we have yet another mispriced set of capital in the world, that'll help won't it!" The discussion, summarized perfectly in this brief clip, extends from the rate rise implications on bank capital to the effect on the deficit, and from the circular failure of the competitive devaluation argument.