PIMCO founder and co chief investment officer Bill Gross gives no credence to the trillion dollar platinum coin scheme. "We feel that such an action would not only jeopardise the U.S. Fed and Treasury standing with Congress but with creditor nations internationally - particularly the Russians and Chinese." It appears to be a bit of a stunt by and may be a convenient distraction away from the substantive issue of how the U.S. manages to address its massive budget deficits, national debt and unfunded liabilities of between $50 trillion and $100 trillion. It may also be designed to create the false impression that there are easy solutions to the intractable US debt crisis - thereby lulling investors and savers into a false sense of security ... again. Gross said that subject to the debt ceiling, the Fed is buying everything that Treasury can issue. He warns that we have this "conglomeration of monetary and fiscal policy" as not just the US is doing this but Japan and the Eurozone is doing this also. Gross has recently criticised the Fed's 'government financing scheme.' He has in recent months been warning of the medium term risk of inflation due to money creation and recently warned of 'inflationary dragons.'
After out sized moves in the foreign exchange market yesterday, a consolidative tone has emerged with a few exceptions. The big winner yesterday was the euro and with a narrow range of about a third of a cent today, the market seems as if it is catching its breath before assaulting important resistance near $1.33, which capped it in mid-December and at the very start of the new year. Sterling recovered from a test on $1.60 at mid-week, but lagged behind the euro. The pullback today is also more pronounced after the disappointing industrial output figures. Industrial production rose 0.3%, half the recovery the consensus expected after the 0.9% decline in October. The key disappointment was in manufacturing, which contracted 0.3% compared with consensus expectations for a 0.5% gain, following the 1.4% slide in October. The increases concerns that the UK economy slipped back into contraction following expansion in Q3. Support is now seen near $1.6080.
It is not often that early sentiment is defined by developments out of Asia but this is precisely what has happened overnight. The Alcoa "hope rally", which saw the company close red on the day of its earnings, but which sent the markets higher on the CEO's announcement that things in China may be improving, seem to be ending following last night's news out of China which saw December CPI jump to 2.5%, substantially more than expected, following a spike in food costs in part from the coldest weather in 28 years, implying any good news may have already been priced in. This renewed fears that speculation of PBOC easing was largely unjustified (it is) leading to the biggest drop in the Shanghai Composite in 2013, pushing it lower by 1.78%. The offset came out of Japan, where the government approved a JPY10.3 trillion ($116 billion) fiscal stimulus package. This together with expectations of a BOJ 2% inflation rate targeting, are the reasons why the Dollar Yen soared to a fresh multi-year high of over 89.30, which has since regained some of the move. At this point virtually all the Japanese hope has been bought, and the actual BOJ announcement coming later this month will launch the "sell the news" mean reversion.
When people talk about "cash in the bank", or "money on the sidelines", the conventional wisdom reverts to an image of inert capital, used by banks to fund loans (as has been the case under fractional reserve banking since time immemorial) sitting in a bank vault or numbered account either physically or electronically, and collecting interest, well, collecting interest in the Old Normal (not the New ZIRPy one, where instead of discussing why it is not collecting interest the progressive intelligentsia would rather debate such trolling idiocies as trillion dollar coins, quadrillion euro Swiss cheeses, and quintillion yen tuna). There is one problem, however, with this conventional wisdom: it is dead wrong. Tracking deposit flow data is so critical, as it provides hints of major inflection points, such as when there is a massive build up of deposits via reserves (either real, from saving clients, or synthetic, via the reserve pathway) which can then be used as investments in the market. And of all major inflection points, perhaps none is more critical than the just released data from today's H.6 statement, which showed that in the trailing 4 week period ended December 31, a record $220 billion was put into savings accounts (obviously a blatant misnomer in a time when there is no interest available on any savings). This is the biggest 4-week total amount injected into US savings accounts ever, greater than in the aftermath of Lehman, greater than during the first debt ceiling crisis, greater than any other time in US history.
- Obama Picking Lew for Treasury Fuels Fight on Budget (BBG)
- Deutsche Bank Bank Made Huge Bet, and Profit, on Libor (WSJ)
- Spain Beats Maximum Target in First 2013 Debt Sale (BBG) - In other news, the social security fund is now running on negative?
- "Icahn is also believed to have taken a long position in Herbalife" (NYPost) - HLF +5% premarket
- Lew-for-Geithner Switch Closes Era of Tight Fed-Treasury Ties (BBG)
- Turkey Beating Norway as Biggest Regional Oil Driller (BBG)
- Greek State Firms are Facing Closure (WSJ)
- Draghi Spared as Confidence Swing Quells Rate-Cut Talk (BBG)
- China’s Yuan Loans Trail Estimates (BBG)
- SEC enforcement chief steps down (WSJ)
- CFPB releases new mortgage rules in bid to reduce risky lending (WaPo)
- Japan Bond Investors Expect Extra Sales From February (BBG)
Moments ago, MSNBC showed a clip in which "gun tzar" VP Joe Biden made it clear that "the President is going to act" on the issue of gun control, and that "executive orders and executive action can be taken." Of course "can" does not mean "will" as the fallout from an executive order bypassing Congress would be rather dramatic, especially on a topic so near and dear to at least half of America, and the response, to put it mildly, would make the Piers Morgan vs Alex Jones screaming match seems like a tranquil discussion between two dignified stoics. If "can" however, does become "will", America may have far bigger issues over the next two months than the debt ceiling, kicking the sequester down another several months, or even the quadrillion yen tuna.
One of the most glaring omissions in mainstream financial-media stock market commentary is the connection between the U.S. dollar's relative value and corporate earnings. 50%-60%+ of global corporate earnings and profits are non-U.S., i.e. booked overseas in a currency other than the U.S. dollar (USD). As the dollar weakened, global corporate profits skyrocketed as earnings in euros, yen, etc. rose when stated in dollars. In other words, overseas profits expand as if by magic when stated in dollars. This explains why the Fed has been so keen to trash the dollar: it magically increases corporate profits and thus drives stocks higher. As the dollar strengthens, overseas profits will decline when stated in dollars. If we combine the FX drag of a rising USD with the cyclical top in corporate earnings described in What If Corporate Earnings Have Topped Out?, we discern a potential double-whammy on earnings and thus stock market valuations.
New Prime Minister Shinzo Abe’s pledge to spur inflation to 2 percent at the end of the yen’s appreciation means Japanese pension funds now have to hedge against rising prices and a currency decline after two decades of stagnation. Japanese pension funds are set to diversify some of their massive holdings, worth nearly $3.4 trillion into gold bullion. Corporate pension funds in Japan will diversify 72 trillion yen in assets after domestic stocks produced little return in the past two decades, according to Daiwa Institute of Research. “Bullion’s role as an inflation hedge, long ignored by Japanese fund operators, has come under the spotlight thanks to Abe’s economic policy,” Toshima, who now works as an adviser to pension-fund operators, said in an interview today in Tokyo. “Gold may be a standard asset-class in the portfolio of Japanese pension funds as Abe’s target is realized.”
- A Bold Dissenter at the Fed, Hoping His Doubts Are Wrong (NYT)
- China and Japan step up drone race as tension builds over disputed islands (Guardian)
- How Mario Draghi is reshaping Europe's central bank (Reuters)
- Merkel Economy Shows Neglect as Sick Man Concern Returns (BBG)
- US oil imports to fall to 25-year low (FT)
- China Loan Share at Record Low Shows Financing Risks (BBG)
- Dimon Says Some JPMorgan Execs ‘Acted Like Children’ on Loss (BBG) - children that reveleased who 'excess reserves' are truly used
- Fed injects new sell-off risk into Treasuries (FT) - really? So the Fed will stop monetizing the US deficit some time soon?
- Obama aide presses Republicans to accept more tax revenues (Reuters)
- Ex-SAC analyst named 20 alleged insider traders (FT)
- BOJ easing bets help dollar regain ground vs yen (Reuters)
- Goldman Sachs Said to Be Part of Fed-Led Foreclosure Settlement (BBG)
- Venezuela postpones inauguration for cancer-stricken Chavez (Reuters)
With Alcoa kicking off the earnings season with numbers there were in line and slightly better on the outlook (as usual), attention will largely shift to micro data and disappointing cash flows over the next two weeks, even as the countdown clock to the debt ceiling "drop dead" D-Day begins ticking with as little as 35 days left until debt ceiling extension measures are exhausted and creeping government shutdowns commence. There was little in terms of macro data from the US, even as a major datapoint out of Germany, November Industrial Production, missed expectations of a 1% rise, pushing higher by just 0.2% M/M (up from a -2.0% revised October print), once again proving that "hopes" (as shown by various confidence readings yesterday) of a boost to the European economy are wildly premature. This disappointing print comes a day ahead of the ECB conference tomorrow, when the governing council may or may not cut rates, although it is very much unlikely it will proceed with the former at a time when at least the narrative is one of improvement - pursuing even more easing will promptly dash "hopes" of a self-sustaining trough (forget improvement) for yet another quarter. Putting the German number in context, Greek Industrial Output slid 2.9% in November, down from a revised 5% rise, refuting in turn that this particular economy is anywhere near a trough.
As Japan’s Liberal Democratic Party national defense task force announced on Jan. 8 that it would increase the nation’s defense budget by more than 100 billion yen ($1.15 billion), three of five scenarios explored by the defense ministry recently involve the Self-Defense Forces squaring off against the People’s Liberation Army (PLA). While the scenarios remain in the realm of speculation, Japan’s inclusion of a Taiwan contingency again underscores the importance Tokyo places on Taiwan remaining de-facto independent. Certainly, China’s assertiveness in 2012 in both the East China and the South China Sea has done little to reassure Tokyo that it could live comfortably with a CCP-controlled Taiwan so close to its waters and territory.
Perhaps it is time for the punditry and the chatterbox media to start considering what happens not when the much anticipated rotation out of bonds and into stocks, which has not happened for 4 years now, and won't, at least not until the government bond bubble finally pops which will only happen when the central banks finally lose control, but what happens if even a tiny amount of the global pension capital allocated to bonds and/or equities, is rotated into gold.
“Pension money invested in bullion is ‘peanuts’ at the moment,” Toshima said. “If 1 percent of their total assets shift to the metal, the gold market would explode.”
Could not have said it better ourselves.
Reuters report that Asia's physical market has picked up so far this year, with buyers tempted by last week's big drop in prices -- when prices retreated to as low as 1,626 per ounce -- and on demand ahead of the Lunar New Year, traders said. The trading volume on the Shanghai Gold Exchange's 99.99 gold physical contract shot through the roof on Monday, hitting a record of 19,504.8 kilograms, after double-counting transactions in both directions. "Physical demand is very strong," said a Beijing-based trader. "It's a combination of the attraction of lower prices as well as pre-holiday demand." But such appetite could waver if prices recover towards $1,700, he added.
- London Quantitative Hedge Funds Report Second Year of Losses (BBG)
- Berlusconi Forms Alliance in Comeback Bid (WSJ)
- Japan to Buy ESM Bonds Using FX Reserves to Help Weaken Yen (BBG)
- Japan Mulling BOJ Accord Linked to Employment, Mainichi Says (BBG)
- Samsung Expects Record Operating Profit (WSJ)
- Boeing 787 Dreamliner Fire Probed, Blaze Adds to Setbacks (BBG)
- BOJ's Shirai: Open to Firmer Inflation Target (WSJ)
- HSBC N.J. Client Admits Conspiracy in Offshore Tax Case (BBG)
- Lampert to Assume CEO Role at Sears (WSJ)
- Abe prepares fresh stimulus measures (FT)
- U.S. Set for Biggest State-Local Jobs Boost Since 2007 (BBG)
- Pakistan Seen Needing IMF Bailout as Rupee Drops Before Vote (BBG)
Just when we thought America would be alone in crossing into the montary twilight zone where so many Keynesian lunatics have gone before, and where trillion dollar platinum coins fall from the sky right onto the heads of all those who have not even the faintest understanding of money creation, here comes Japan:
ASO: JAPAN TO BUY ESM BONDS
ASO SAYS JAPAN TO BUY ESM BONDS USING FOREIGN EXCHANGE RESERVES
ASO: ESM PURCHASES WILL HELP TO STABILIZE YEN
For those who have forgotten, the E in ESM stands for European (the S for Stability), not Japanese (Stability). Otherwise it would be, er... well, JSM. Keynesian at that. But yes - Japan will now proceed to "stabilize" itself by monetizing European debt. Because its own JPY 1 quadrillion in debt was not enough.