Transaction Tax

Thanks to the scapegoating of the Cahuzac affair, Europe can now move from its war against finance (Hollande declaring that finance was his enemy, the financial transaction tax, capping of bonuses, etc) to an outright war against tax havens (letting Cyprus sink, arm-twisting Luxembourg into abandoning its banking-secret policy, etc). Leaving aside the EU’s increasing penchant for forcing members to adopt policies that blatantly go against national interests (like the Tobin tax in the UK), yesterday’s announcement by Luxembourg of an “open-book” policy raises the question of whether the EU is cutting off its nose to spite its face. If tax havens have existed and thrived for so long, they must have some sort of economic justification. The reality for most tax havens is that their economies are far too small to absorb the excess savings that pour into their countries. Their banks thus end up being large buyers of assets outside of the country. In this position of weakness, going out all guns blazing after rich people and their wealth strikes us as sheer madness...

In all of the tortuous moments that have taken place with the European Union the one thing that has become apparent is a radical change of mindset. In the beginning there was a kind of democratic viewpoint. All nations had a voice and while some were louder than others; all were heard. This is no longer the case. There is but one mindset now and it is decidedly German. It is not that this is good or bad or even someplace in between. That is not the real issue. The Germans will do what is necessary to accomplish their goals. There is nothing inherently bad or evil about this but it is taking its toll on many nations in Europe. It is the occupation of Poland in a very real sense just accomplished without tanks or bloodshed as money is used instead of armaments to dominate and control a nation. Politically you may "Hiss" or you may "Applaud" but there are consequences here for investors that must be understood. First and foremost is that they will not stop.

The European Commission formally endorsed the financial transaction tax agreed to by eleven of the 27 members. The tax will be set at 0.1% for stocks and bonds and 0.01% for derivatives. The tax will go into effect at the start of 2014, by which time the participating countries will give it formal approval.

There seems to be two purposes of the tax. The first is to raise revenue. The EC projects the tax will raise 30-35 bln euros annually where ever and whenever an instrument from eleven is traded. This would seem to block the ability to avoid the tax by moving transactions out of the eleven countries. It reinforces the "residence principle". This essentially means that if some one is a resident of the eleven countries, or acting on behalf of a resident, the transaction will be taxed anywhere it takes place. The other purpose is to deter the high frequency trading, which some officials see as largely unnecessary and potentially destabilizing.

In what has been a quiet start to week dominated by the G-20 meeting whose only purpose is to put Japan and its upstart currency destruction in its place, many are expecting a formal G-7 statement on currencies and what is and isn't allowed in currency warfare according to the "New Normal" non-Geneva convention. Because while there may not have been much overnight news, both the EURUSD and USDJPY just waited for Europe to open, to surge right out of the gates, and while the former has been somewhat subdued in the aftermath of the ECB's surprising entry into currency wars last week, it was the latter that was helped by statements from Haruhiko Kuroda (not to be confused with a Yankee's pitcher) who many believe will be the next head of the BOJ, who said that additional BOJ easing can be justified for 2013. He didn't add if that would happen only if he is elected. Expect much more volatility in various FX pairs as the topic of global thermonuclear currency war dominates the airwaves in the coming days.

With China offline celebrating its New Year, and potentially mobilizing forces in (not so) secret, and not much on the global event docket, the upcoming G20 Finance Ministers meeting in Moscow at the end of the week will be the key event for FX markets, which these days define every other aspect of risk. It should surprise nobody the last couple of weeks have seen increased attention on exchange rates and the frequent use of the “currency war” label by policymakers in many countries. No news announcements are expected at the BoJ meeting on Thursday, following the formal announcement of a 2% inflation target and an open-ended asset purchase program. On the data side, US retail sales on Wednesday will provide an important signal about the strength of the US consumer following the largest tax increase in decades. Although January auto and same store sales data was reasonably solid, new taxes will soon begin to weigh on spending. Also on Wednesday, Japan Q4 GDP will be released. On Thursday, Q4 GDP for France, Germany, Italy and the Euro area will be released. While Q4 contraction is assured, the key question mark is whether German can rebound in Q1 and avoid a full blown recession as opposed to a "brief, technical" one, as the New Normal economic term goes.

The market gets smoked for 1/4 Trillion in a single name, and we're trading at the highs. Go figure.

There are 16 days left before we all shoot over the falls and are plunged into the freezing water. The markets are pretending it will never happen and that some magical incantation will be found to set everything right in the moments before we take the dive. The lethargy is noticeable and the apathy is like someone has thrown the wet towel of complacency over everyone’s shoulders. The crowd meanders. In the best case scenario, according to most people, some agreement will be reached. This best case scenario however includes an assumption that I do not believe will be correct which is that something formulated by common sense will be the result and it is just there that I hold little hope - I am more frightened of what our political leaders might concoct than what we face at the cliff. Obama claims a mandate. Who gave him this mandate one may reasonable ask; the 47.5 million people on food stamps, the people living on the tax benefits of those that work, the people who game the system so that they never have to find a job and enjoy a life paid for by those that are gainfully employed? That is one heck of a mandate isn’t it and yet that is the basis of his claim. I am slowly coming to the opinion that the best that can be hoped for is that we do plunge off the cliff. Maybe that will wake up some of the intoxicated with themselves people we now find living in Washington. It also might have a further benefit of waking up the citizens of the country who seem to be traipsing around like nothing is amiss.

The Austrian central bank keeps most of its 280 metric tons of gold reserves in the United Kingdom, Vice Governor Wolfgang Duchatczek was quoted as saying in the finance committee of the country’s parliament today, according to Bloomberg. Answering lawmakers’ questions, Duchatczek said 80%, or 224.4 metric tons of the metal was stored in the U.K., 17% or 48.7 metric tons in Austria and 3% in Switzerland, according to a summary of a closed-door committee meeting provided by the parliament. The reserve has been unchanged since 2007, Duchatczek was quoted as saying. The central bank has earned 300 million euros ($385 million) over the last ten years by lending the gold, he said.

Economists, market analysts, journalists and investors alike are all talking about it quite openly, generally in a calm and reserved tone that suggests that -  to borrow a phrase from Bill Gross – it represents the 'new normal'. Something that simply needs to be acknowledged and analyzed in the same way we e.g. analyze the supply/demand balance of the copper market. It is the new buzzword du jour: 'Financial Repression'. The term certainly sounds ominous, but it is always mentioned in an off-hand manner that seems to say: 'yes, it is bad, but what can you do? We've got to live with it.' But what does it actually mean? The simplest, most encompassing explanation is this: it describes various insidious and underhanded methods by which the State intends to rob its citizens of their wealth and income over the coming  years (and perhaps even decades) above and beyond the already onerous burden of taxation and regulatory costs that is crushing them at present. One cannot possibly "print one's way to prosperity". The exact opposite is in fact true: the policy diminishes the economy's ability to generate true wealth. If anything, “we” are printing ourselves into the poorhouse.

While the attached interview between the Casey Report and HFT expert Garrett from CalibratedConfidence will not reveal much unknown new to those who have been following the high frequency trading topic ever since ZH made it a mainstream issue in April of 2009, it will serve as a great foundation for all those new to the topic who are looking for an honest, unbiased introduction to what is otherwise a nebulous and complicated matter. We urge everyone who is even remotely interested in market structure, broken markets and the future of trading to read the observations presented below.

Just when you thought the debt issue had reached its peak, the United Nations has come knocking on the door with their hand out.

As details from Thursday's European Memorandum of Understanding, which has all the binding power of a 'highly confident letter' issued by a third tier investment bank, continue to be non-existent, the questions, and conditions, are accumulating fast. While the ESM passed with a solid majority in both the lower and upper houses of German parliament yesterday, its fate is now in the hands of the German constitutional court which as reported previously has requested extra time to study the bailout plan, before it gives the all clear for a presidential signature. Sound familiar? And barely did the ESM pass the ratification vote, before lawsuits alleging its unconstitutionality start pouring in. But probably more importantly, Focus magazine reported overnight that the first clear condition from Germany will be the enactment of a Financial transaction tax for all countries where the ESM would be operational in order to minimize the burden on German taxpayers. In other words, banks would effectively pool their profits, in order to fund the bailout of other banks (or their own). In retrospect, it does not sound like a bad idea. It may even pass the recently conceived "fairness doctrine" of the Great June Socialist Revolution. Most importantly, however, it appears that events over the past week may have been merely a gambit for something that Schauble and Weidmann have already hinted at: a popular referendum that decides the fate of Europe once and for all, washing Merkel's hands and letting the people decide if they want the European experiment to continue or not.

Months ago, I forecast that Germany will walk before it goes “all in” on the EU to prop up everyone else. I believe that day is fast approaching. Unless Angela Merkel wants to commit political suicide, she will be forced to protect Germany’s domestic issues. Whether this comes as a result of Germany pre-emptively leaving the Euro or doing so after one of the PIIGS has already left remains to be seen. But in the end, Germany WILL WALK IF IT HAS TO.

Just read.

Gradually, the key open items from yesterday's Spanish bailout are getting some closure. First, we learned that Ireland, as speculated, will demand a comparable retroactive bailout renegotiation, an act which also puts the Greek elections a week from today in play. Then, we got definitive confirmation that the Spanish loan, coming at ~3% or half Spanish GGBs, is a priming loan, subordinating existing creditors. Finally, we learn that the ESM - the bailout mechanism at the heart of all current and future European bailout plans, and which still has not been ratified by Germany, is in danger of being scuttled by none other than the German opposition. The reason? According to a Reuters report, "A [Spiegel] report that German Chancellor Angela Merkel is not serious about implementing a European financial transaction tax threatens to undermine an initial deal struck last week with the opposition over the EU's planned fiscal pact... The Social Democrats (SPD) and Greens are insisting on a plan for a transaction tax and measures to boost growth."