The Quiet Triumph Of Oil And Gas In Obama’s Policies

testosteronepit — Sat, 18 May 2013 20:53:09 +0000

Wolf Richter www.testosteronepit.com www.amazon.com/author/wolfrichter

It was announced Friday afternoon, when no one was supposed to pay attention: after years of controversy, heated rhetoric, intense lobbying, and stiff opposition from some unlikely bedfellows, with multinational industrial and chemical companies weighing down one side of the bed, and environmentalists tossing and turning on the other, the Obama Administration decided in favor of the US oil and gas industry. With geopolitical ramifications.

The Department of Energy “conditionally authorized” Freeport LNG Expansion LP and FLNG Liquefaction LCC (Freeport) to export domestically produced liquefied natural gas to countries with which the US does not have Free Trade Agreements (PDF, 132 pages). Already allowed are exports to the 20 countries with FTAs – most of them in the Americas, but also Australia, Korea, Singapore, Israel, Jordan, Bahrain, Oman, and Morocco. But exports to the remaining 180 or so countries have to jump through some hoops.

So Freeport’s LNG Terminal on Quintana Island, Texas, is now authorized to export 1.4 billion cubic feet per day (Bcf/d) of LNG for 20 years to those non-FTA countries. Freeport joins Cheniere Energy Inc.’s Sabine Pass terminal in Cameron Parish, Louisiana, with an export capacity of 2.2 Bcf/d. Freeport’s and Cheniere’s combined capacity would amount to 5.2% of US production (estimated at 69.3 Bcf/d in 2013). Other companies are cooling their heels in line at the DOE, which would, as it said, “process the applications currently pending on a case-by-case basis.” At snail’s pace. The administrations sole concession to environmentalists.

“DOE has had the remaining applications on its desk for months and should ensure that these applications are approved without any further delay,” groused Erik Milito, of the American Petroleum Institute, a trade association representing over 500 oil and gas companies.

Hurdles remain. DOE approval is just another step. The plants will have to get a permit from the Federal Energy Regulatory Commission (FERC) and must pass an environmental review, which could be a nail-biter. And none of the plants are up and running yet.

Then there is an unknown: how will world markets react to this additional supply that competes with at least 63 LNG export terminals currently planned or under construction worldwide? US production can rise to meet that new demand, as the gas glut in recent years has demonstrated in its bloody manner. But for production to rise significantly, the price – which is still below the cost of production for most “dry” gas wells – must rise as well.

Industrial and chemical companies that use natural gas for energy or as feedstock are deeply worried. Would they end up having to pay European prices? Or catastrophically, Japanese prices? The gas industry and its pundits have feverishly assured them that LNG exports would have “only minimal impacts” on gas prices in the US. Yet, the moment DOE announced its decision Friday afternoon, natural gas spiked about 3%, before retracing some of it.

The largest potential customers for LNG are Europe and Japan – staunch allies of the US. Europe is furiously trying to break the stranglehold that Russia’s Gazprom has on its gas supplies. Norway has morphed into a large producer, but it isn’t nearly enough. With prices two to three times higher than in the US, cheaper US gas hitting these markets would wreak havoc in Russia and its political clout in Europe. It would be a game changer in the EU economy, which is bogged down in high energy prices. And it would bring the European allies closer to the US.

But it might not happen, at least not initially: because there is Japan, the world’s largest most desperate importer of LNG since the shutdown of its 50 surviving nuclear reactors following the Fukushima meltdowns. The country is doing some serious soul-searching about nuclear power, and whether or not to bring reactors back on line. Meanwhile, its utilities are getting ripped off by distant natural gas suppliers that charge over four times the current price in the US.

Freeport already inked contracts with BP for half of its capacity and with the Japanese utilities Osaka Gas and Chubu Electric for the other half. So at least half, but probably much more of its shipments would be destined for Japan, still the most lucrative market in the world. Those contracts are already being leveraged by the Japanese government in its negotiations with Gazprom on a number of deals, including Japanese participation in an undersea pipeline from Russia’s Far East – which is far only from Moscow – to its neighbor, Hokkaido, the largest island of Japan.

But environmental groups in the US, already fuming at their erstwhile messiah, are getting madder with every fossil-fuel deal the Administration approves. The controversial Keystone Pipeline, which Native American opponents have equated to “environmental genocide,” is waiting in the wings. The Administration simply doesn’t want to get run over by the momentum of the oil and gas industry, and the thousands of high-wage jobs it has created. And it wants to lick its geopolitical chops.

The status of the US dollar as the world reserve currency gives the US tremendous advantages. Among them: it allows the Fed to export inflation, while the Federal Government can run a huge deficit with impunity. But now an angry Russia has had enough! Read.... Russia’s Plan For The BRICS To Dismantle The Dollar System

Class of 2013: The Most Indebted Ever

Tyler Durden — Sat, 18 May 2013 20:32:57 +0000

70% of graduates had at least some debt according to the latest poll from Fidelity Investments but as the Wall Street Journal reports the average student-loan debt for a borrower who received a bachelor's degree in 2013 is $30,000 - an all-time record. With $986 billion of outstanding student loan debt (up 50% from Q1 2009) and unemployment rates running at or near all-time highs for the 16-24 year old cohort in this nation, it is little surprise that delinquencies are surging. The unemployment rate among graduates is 7.1% (which is considerably worse than it looks given that many are stuck in low-paid jobs) but it is those who don't complete college that face the greatest burden - the median annual income of a non-completer was $25,000 (compared to $33,900 for a degree holder), less than the average student loan debt. As the WSJ notes though, the 2013 class is unlikely to hold the 'most indebted class ever' title for long as 2014 enrollments and tuition costs look set to continue the 20 year trend...

Chart: Wall Street Journal

"Boldly They Rode And Well", Or Why Japan Is Not America

Tyler Durden — Sat, 18 May 2013 19:30:09 +0000

Submitted by Daniel Cloud

Boldly They Rode And Well

I believe that Shinzo Abe has made a very serious strategic miscalculation. I used to be confused in much the same way he now seems to be, but I was cured of my confusion by thinking about Chinese inflation.

For a long time, I was puzzled by the fact that America’s endless multi-stage QE program seemed to have no effect on measured inflation, on the CPI and the PPI. But then I realized that by only looking at the United States and their three hundred million-plus people, I was missing the big picture, missing the most important part of its aggregate impact on the Earth’s seven billion inhabitants.

QE may never have much of an effect on the inflation rate in the fifty states of the United States of America, because it is workers in the developing world, and in particular, in China, who are the marginal hires in our still-globalizing, still-offshoring world economy. There is no distinct American economy, now, there is no Chinese economy, there is only the world economy, and the Fed makes policy for large parts of it. China has the kinds of structural rigidities in its labor, goods, information, and asset markets that make inflationary psychology very probable. It already had an ongoing and stubborn problem with inflation before QE started, so the required psychology already existed. And, perhaps most importantly, much of the money the Fed is printing doesn’t actually end up in the United States. It ends up being added to the reserves, and therefore the domestic money supply, of countries like China, who want to keep their currencies pegged, or quasi-pegged, to the dollar.

Why? Simply letting their currency appreciate would do to the Chinese what it did to Japan in the late ‘80’s. But to keep the yuan from appreciating against the dollar as a result of the increased supply of dollars from QE, the government of China must buy all the dollars anyone shows up with, at the pegged exchange rate. To pay for them, China must issue yuan, and pay them out to the holders of those dollars. That makes the supply of yuan in circulation increase by the same amount – as the dollars are added to the country’s reserves, the domestic money supply has a matching increase. The authorities can try to “sterilize” this hot money, by selling treasury bills, but experience has shown that the flows are simply too large and long term for this to be very effective.

Since this means the money supply in China is constantly increasing at what would otherwise be an undesirably rapid rate, the result, as readers of Zero Hedge already know, is a persistent problem with inflation. Inflation is a form of taxation; by printing money, the State funds itself by taking a little bit of wealth away from each holder of the currency. (Or in the case of the dollar, of all the various currencies pegged to it…)

In 2012, according to a recent post on ZH, citing the WSJ, nominal private sector wages in China were up 17.1 percent. This means wages are compounding at a rate much, much higher than GDP growth, and the process shows no signs of stopping. That endless increase feeds through into product prices – not the prices of exported products, since it’s necessary to stay competitive in dollar terms, but the prices of ones sold into the domestic market. The same effect is echoed all through the developing world, in any country that wants to participate in dollar-based world trade, and feels it has to keep its currency in a stable relationship with the dollar to do so without undue disruption. That increase in the cost of the goods and services available to them makes the middle class, and the many people who are still poor in those countries, worse off than they otherwise would have been. (It was rising food prices, tied to Chinese demand, that were the straw that finally broke the camels’ back in Egypt and Syria.) On the other hand, the American policy that ultimately causes it helps the Fed’s main constituency, developed-country banks, and helps developed-country governments keep spending, and allows developed-country political actors to maintain their patronage networks.

QE works, politically, because it is mostly a tax on consumers in the developing world. It keeps the banking system in Europe, and therefore the rest of the world, from collapsing, for the time being, it maintains the existing set of political arrangements, and the costs fall mainly on people who will never have a chance to vote in an OECD election. Ben Bernanke’s great triumph, as an ideologue, is to have come up with a Rawlsian, distributive justice argument in favor of what really amounts to taxing the poor to protect the assets of the rich. (To add insult to injury, in a country like China, where nobody ever gets to vote on anything, it’s taxation without any hint or whisper of representation. Egypt showed us what that can lead to, though as Americans we shouldn’t need reminding.) Given the actual goal, which is to maintain the status quo in world affairs as long as possible, it isn’t clear what other policy could have been chosen, but the justification offered in public is, of necessity, somewhat ironic.

The risk to world markets, at the moment, comes from the fact that the people who run the Fed and Treasury may actually be sincere in offering that justification, that the irony may be unintended. Their somewhat myopic focus on the developed world – which is, after all, where all the relevant political constituencies live – means that they may not actually understand that robbing the poor to pay the rich is what they’ve been doing. All they know, perhaps, is that the policy didn’t cause anyone who mattered to them any pain – so it seems possible that they have perceived it as actually costless, as a free lunch. It’s easy to be incurious about how migrant workers in Wuhan are doing, when the Chinese press can’t really cover their situation, and you never meet or talk to such people yourself. (Somehow they don’t get invited to G7 meetings…)

Certainly, the Japanese don’t seem to have been let in on the joke. We’ve been doing QE for years. It hasn’t had any of the predicted catastrophic effects. We kept obnoxiously pointing this out to everyone, and voicing our exasperation at their failure to emulate us. Eventually the political pressure for adopting such an apparently costless, and riskless, and kind-hearted policy became irresistible, and there was a coup at the Bank of Japan.

The mistake Abe is making, though, is to think the same trick that worked for the US will work for them. The problem, as Shirakawa no doubt realizes, is that the two country’s situations are not at all analogous, because the yen isn’t really a reserve currency in the same way the dollar is. There is no population of natural sovereign buyers who will be forced to print their own currency to mop up excess yen, as there is for the dollar. No sovereign is going to want to dramatically increase the allocations of their country’s reserves to the yen, not when it’s in the middle of being deliberately devalued, or really ever. Russia and China and Saudi Arabia don’t need any more yen, they have plenty. Oil isn’t priced in yen. Japan isn’t the world’s largest economy, or even its second largest. World trade isn’t conducted in yen. The emerging economies will just let it collapse. There is no natural sovereign sink for yen to drain into, as there is for the dollar, no group of buyers of last resort with bottomless pockets and no choice but to buy.

But that means nobody else is going to want to hold yen either. Why own a currency when the issuer publicly plans to make it worth less, and to raise the inflation rate well above the current long-bond yield at the same time? That isn’t a store of value; it’s a live grenade. People in the private sector, wishing to survive, will fling the grenade away. There is nothing to stop them, no natural buyer the other side, because the only player who could possibly defend the yen – the BoJ – is publicly committed, in a politically irrevocable way, to the opposite path. Because of the relative success of QE in the United States, policy-makers will be complacent about the risks.

The mistake Abe is making is to generalize from the experience of the central bank of the world’s primary reserve currency to his own very different situation. Japan can’t tax its allies to support its insolvent State by printing money, because (aside from the US, which is also broke) it has no allies. Any liquidity it squirts at them will simply splash off. What will really happen is, therefore, exactly what you would expect to happen to a country with a convertible currency and a very large national debt which credibly announces that it plans to abruptly double its money supply – there will be a scramble to get out, and the yen will decline, or Japanese bond yields will rise, until one or the other reaches a level that offers some prospect of a positive return. Though of course, there will be overshooting.

That means a much, much lower yen, and/or much higher JGB yields, which would of course be instantly fatal. So, as George Soros has already warned, what we may actually get (unless Abe flinches, and reverses course, which is hard for him to do now he’s actually pulled his sword out, yelled “Banzai!”, and started the cavalry charge) is an uncontrolled devaluation of the yen, to some level that would seem wildly unrealistic to us now, with incalculable risks for the stability of world markets. And it’s all based on a mistake, an incorrect analogy with America’s situation. “Boldly they rode and well, into the jaws of Death, into the mouth of Hell…” The nobility of failure may, I suppose, be some consolation, for Abe, personally, at least.

The only really unusual thing about this particular case is the fact that the uncontrolled devaluation has been publicly announced, in advance, in a way that’s extremely credible. That makes it an unprecedented experiment – which could easily turn out to be the recipe for an unprecedented disaster.

Saturday Humor: The Fed Is Hiring

Tyler Durden — Sat, 18 May 2013 17:34:24 +0000

Now that the Federal Reserve has hired every single pennystock trader and momentum-chasing algo in the world (or at least is enjoying Citadel's helping hand in regards to the latter) it is time for the Fed's human resources department to branch out and fill those really important gaping holes.

Great job opportunity! Penetration Tester: rfer.us/FRS5ERsd.

— Federal Reserve Jobs (@FedReserveJobs) May 18, 2013

h/t @shark_wahlberg

Italy's New Government Approval Rating Plummets From 43% To 34% In Three Weeks, Protests Return

Tyler Durden — Sat, 18 May 2013 17:20:16 +0000

It was less than a month ago that the new Italian government of the pseudo-technocrat Letta, of Bilderberg 2012 and Aspen Institute fame, was voted in by a majority of the PD and the PDL parties (the latter agreeing so Berlusconi would get an extension of his much needed political immunity from assorted prison sentences). It may not last too long. As Reuters reports, it took just 20 days for Letta's approval rating to plunge by 25%, dropping from 43% at the start of the month to 34%, according to an SWG institute poll. It would appear the Italian people (unlike their Japanese peers who at least according to government-controlled media data could not be happier with PM Abe, supposedly because of the bubblelicious 50% rise in the Nikkei225 year to date, even though under 20% are actually invested in the stock market making one wonder just how credible polling, and all other data in Japan actually is) don't have Mrs. Watanabe's childish fascination wth soaring stock bubbles, sexy bonds, mini skirts and 2% inflation bras, and instead demand real economic results. Which also means the protests are once again back.

Thousands of people protested in Rome on Saturday against austerity policies and high unemployment, urging new Prime Minister Enrico Letta to focus on creating jobs to help pull the country out of recession.

"We hope that this government will finally start listening to us because we are losing our patience," said Enzo Bernardis, who joined the sea of protesters waving red flags and calling for more workers' rights and better contracts.

Less than a month in power, Letta is trying to hold together an uneasy coalition between his center-left Democratic party and the center-right People of Freedom, led by former prime minister Silvio Berlusconi.

Confidence in the government, cobbled together after inconclusive elections, is already falling, with one poll on Friday by the SWG institute showing its approval rating had dropped to 34 percent from 43 percent at the start of the month.

"We can't wait anymore" and "We need money to live" were among slogans on banners held up by the crowds.

Letta promised to make jobs his top priority when he came to power in April after two months of political deadlock. But several protesters complained he was not sticking to his vow, focusing instead on a property tax reform outlined this week.

The people's chief demand: end that perpetual scapegoat for everything that is wrong in Europe, "austerity" (the same austerity that was never actually implemented but since it distracted from politicians' gross incompetence, it was a handy propaganda tool). The problem, as all those who are even remotely familiar with finance know is that in a Keynesian world, it is all about credit creation - the same credit creation which can no longer take place in Europe for the various reason explained before.

Union leaders said he needed to shift away from the austerity agenda pursued by former Prime Minister Mario Monti, who introduced a range of spending cuts, tax hikes and pension reform to shore up strained public finances.

"We need to start over with more investment. If we don't restart with public and private investments, there will no new jobs," said Maurizio Landini, secretary-general of the left-wing metalworkers union Fiom.

Italy is stuck in its longest recession since quarterly records began in 1970, and jobless rates are close to record highs, with youth unemployment at around 38 percent.

Other protesters were pessimistic that Letta's fragile government would be able to take effective action.

Of course to get "investments", one needs funding, and the problem is that virtually all sovereign bond issuance - for now driven by the BOJ's monetization-facilitated carry trade impulse - is going to indirectly prop up the local insolvent banking system, not to fund public spending. That too will become clear in due course, but for now there is hope.

However, even the hope is running out, leading to the people's, accurate, conclusion:

"This government will last a very short time," said demonstrator Marco Silvani. What we need is a new leftist party that fights for the rights of the people," he said.

Or, in other words, the same left party "solution" that France got and that has managed to crush the local economy to a double-dip recession in just one year.

Auditing The IRS: "Is There Any Limit To The Scope Where You Folks Can Go?"

Tyler Durden — Sat, 18 May 2013 16:15:25 +0000

While it does have all the impromptu genuineness of a made for C-Span soap opera, the following exchange between Rep. Mile Kelly (PA) and the IRS' commissioner Miller was the highlight of yesterday's grilling of the IRS by the House Ways and Means committee, because rehearsed or not, it does capture the prevalent sentiment the US public harbors not only toward its tax collectors, but the government in general.

"The IRS can do almost anything they want to anybody they want any time they want. This is very chilling for the American people.... This is a Pandora's box that has been opened. The American people should be outraged and they are. This has nothing to do with political parties - this has to do with highly targeted groups. This reconfirms everything that the American public believes. This is a huge blow to the faith and trust the American people have in their government. Is there any limit to the scope of where you folks can go? Is there there any question that you should have asked: how much money do you have in your wallet, who do you get emails from, whose sign do you put up in your front yard: this ia tax question? The fact that you all can do just about anything you want to anybody: you can put anybody out of business any time you want.... I think the American people have seen what's going on right now in the their government. This is absolutely an overreach and this is an outrage for all Americans."

And while contemplating these questions, let's make government even bigger, and also why has that pesky Second amendment not been overturned yet?

Spot The Odd Continent Out: Total Bank Assets As % Of GDP

Tyler Durden — Sat, 18 May 2013 15:07:21 +0000

There is a reason why in Europe, no matter how much some want to deny it, the Cyprus deposit confiscation "resolution" has become the norm. Quite simply, as BofA summarizes, "Europe's economy struggles with too many banks, too much debt and too little growth. A long history of empire, trade, war and commerce means a long history of banking. The world’s first state-guaranteed bank was the Bank of Venice, founded in 1157, and the world’s oldest bank today is also Italian, Monte Paschi di Siena (founded 1472). In many European countries, bank assets dwarf the size of the local economy and are far in excess of other regions in the world. This is similarly reflected in the local stock exchanges: even now financials account for 42% of the Spanish stock market and 31% of the Italian stock market versus ust 16% in the US."

Visually, this translates as the following dramatic chart, which shows why Europe no longer has a choice in kicking the can, and what we have said from the very beginning, a Mellonesque asset liquidation of bad "assets" is the only option:

It is in Europe that the biggest debt burden lies, and it is Europe that is desperate for the biggest inflation impulse to purge away the debt in the absence of liquidation, or a spike in asset quality. However, as we showed yesterday with Europe's €500 billion NPL timebomb, the asset quality of Europe's banking sector is imploding at an unprecedented pace, and is correlated most tightly to the surging unemployment in the periphery, which intuitively makes much sense: without jobs, consumers can't pay off their debt.

NPLs:

... compared to unemployment:

This means that the only resolution to a massively overlevered banking sector, where inflation just refuses to arrive and assist in the bad-asset "cleansing", is the start of liability impairment, which will allow the long overdue process of balance sheet restructuring, instead of merely can kicking, to commence. Whether this implies deposit confiscation, well that matters in which country one is, and how many NPLs have been accumulated.

And another problem: the reason why core inflation is gone from Europe is that not only is the hot central bank money not targeting European assets (except for new Japanese Yen chasing after peripheral bonds for as long as there is a carry trade arb, which at this rate won't last long), but because credit creation in the private sector is dead: as the chart below shows, even credit growth in Germany is now negative:

So what is the only option for a continent in which there are simply too many encumbered assets (recall that unlike the US the bulk of credit in Europe is secured - perhaps the starkest difference between the two credit systems) and in which the private sector credit creation pipeline is clogged: simple - the ECB has to join the Fed and the BOJ in monetizing assets, and creating "credit growth" de novo. Alas, as the past three years have shown, when it comes to outright monetization in Europe, not only does it have to be sterilized to appease the (correctly) inflation-weary Germans (i.e., the SMP; the terms of its replacement, the OMT, still technically don't exist), but most likely has to come in the form of a structured debt vehicle or an extended loan, like the ESM or the LTRO.

In fact, none other than former ECB member Lorenzo Bini Smaghi told Goldman's Allison Nathan in a recent interview that QE by the ECB - an outcome most expect once the impact of BOJ QE fizzles - is unlikely. The reason why:

Lorenzo Bini Smaghi: QE in Europe would likely entail the ECB purchasing a representative basket of Euro area government bonds. And so they would probably have to buy large quantities of German and French bonds, rather than the bonds of countries that could use more support; the impact on spreads would not necessarily be in the right direction. So from a technical point of view, the case for QE in Europe is less clear cut.

Needless to say, his outlook on Europe is less than optimistic:

Lorenzo Bini Smaghi: In 15 years I'm a bit more confident because I think the adjustments will have been made. Europe will become more competitive and stronger. So I am a long-term optimist. But I am also a short-term pessimist; the near-term adjustment is maybe a bit too tough and too front-loaded so the next five years are going to be very difficult.

And to think all of this could have been avoided if the Mellon advice of liquidating bad assets, which have accumulated in massive proportions in Europe (and in the shadow banking system in the US, but that is the topic of a different post), had been heeded, as we suggested, from the very beginning. To quote Andrew Mellon:

The government must keep its hands off and let the slump liquidate itself. Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. When the people get an inflation brainstorm, the only way to get it out of their blood is to let it collapse. A panic is not altogether a bad thing. It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.

Of course, the time for liquidation will come sooner or later, only this time the pain and suffering that will accompany it will be order of magnitude greater than had the system been purged in the dark days following the Lehman collapse.

Why Japan Is Bad For The World

Asia Confidential — Sat, 18 May 2013 15:00:00 +0000

Japan continues to be the world's biggest financial story. The consensus seems to be that the country's extraordinary economic measures are good for both itself and the world. I've detailed previously how Japan's efforts are likely to have terrible domestic economic consequences, whether they succeed or not. Today, I'm going to explore the latter idea: that Yen depreciation will benefit other countries as they'll depreciate their own currencies, which will make their economies more competitive too. This idea, put forward by some serious financial commentators, is laughable as it ignores both history and any sense of simple logic. The implications are worth exploring though as competitive currency devaluations have already begun and are likely accelerate from here.

Better figures, but...

First, let's provide some context by looking at recent events in Japan. Over the past week, Japan released GDP figures for the first quarter of 2013 which showed growth of 0.9% from the previous quarter, versus expectations of a 0.7% rise. Annualised, GDP grew 3.5%, the fastest in a year, and topped a 1% rise in the fourth quarter of last year.

Ironically, Japan 3.5% annualised growth in the first quarter crushed most other developed countries, including the U.S., where there's supposed to be meaningful recovery going on (it recorded 2.5% growth).

Looking under the hood at Japan's figure though, the result wasn't that impressive. That's because the GDP figure is a real figure, rather than a nominal one. Adjusted for a larger than expected GDP deflator (a measure of domestic prices) of -1.2%, nominal GDP grew 0.4% from the previous quarter, less than analyst expectations of 0.5%.

On the positive side though, private consumption and exports did trend up. Consumption rose 0.9%, as expected, and was up for a second consecutive quarter. This suggests that consumers may be buying into Abenomics (the nickname for the Japanese Prime Minister's new policies) and willing to spend more. Exports also contributed 0.4% to GDP as they benefited from a 30% decline in the Yen since November last year.

Separate figures gave contradictory signals as to whether Japanese businesses are buying into Abenomics. Machinery orders in March increased 14% from the prior month, or 2.5% from the previous year. This beat expectations for growth of 3.5% and -4.9% respectively. The machinery orders figures ran counter to earlier numbers which showed capital spending for the first quarter declined 0.7%.

All in all, the economic data show mild improvement. Whether there's a sustained future bounce is the big question. There are two things that will indicate whether Japan's policies are starting to have a real impact: rising inflation and wages. Both haven't happened yet and the latter especially is critical to policy success.

Bond yields spike

The other interesting action of the past week has been in Japan's bond markets. Japanese government bonds (JGBs) have had a spectacular sell-off over the past week. Yields on 10-year JGBs rose by half of its value at one stage. This was despite buying from the Bank of Japan (BoJ) of government bonds ranging from 1 to 10 years to the tune of 1.2 trillion yen (US$12 billion).

The economic bulls argue that rising bond yields mean the economy is starting to normalise and that the Bank of Japan (BoJ) is succeeding in its aim to spur inflation (which will drive yields higher).

The bears suggest that increasing yields are a terrible sign as they mean liquidity in bonds is drying up as the market becomes increasingly controlled by a single buyer, the BoJ.

Either way, the BoJ is now buying 70% of new government debt issuance and that is likely to increase going forward. The government can't allow bond yields to rise as this will mean interest on government debt rises too. Japan is in an unenviable position on this front as interest on government debt already consumes more than 25% of government revenue. A further sharp rise in bond yields will be a disaster.

While it's clear that the BoJ can partially control the bond and equity markets (it's buying stocks too), it has less direct control over the currency market. The yen has had an extraordinary tumble since the new government came to office in December. With more money printing to come, the yen is almost certainly heading much lower though. That's despite being clearly oversold in the very short-term.

Yen decline is good for Europe?

A conscious decision to devalue the yen may or may not work in Japan (I've argued the latter for some time). But a related question is whether that decision is good for countries outside Japan.

I have addressed this question briefly before. But I thought it was worth going into some more detail given the issue has garnered more debate over the past month.

In particular, there's been an argument gaining traction in serious economic circles that the yen's decline will be good for other countries as it will force them to print money in order to lower their own currencies and remain economically competitive. This is particularly the case for European exporters, such as Germany, which are being hurt by the rising competitiveness of Japanese exporters due to the lower yen.

U.S. economics professor, Tim Duy, makes the case:

"... this [yen depreciation] is exactly what the global economy needs right now. If Germany and by extension Europe experiences weaker growth, European policymakers will need to respond. And they are not likely to respond by buying Yen to hold its value up. They are likely to respond by stimulating their domestic economy directly via easier monetary policy and, hopefully, easier fiscal policy.

In other words, successful domestically-orientated policy in Japan will have second-round effects that will induce further policy easing [in] Europe. And a good kick in the pants in Europe is exactly what we need right now. Rather than thinking about Japan's policy as triggering "competitive devaluations", think of it as triggering "coordinating global easing."

And an assistant U.S economics professor, David Beckworth, similarly argues:

"The ECB [European Central Bank] may ease to keep the Euro from getting too expensive and in the process shore up European domestic demand. How ironic it would be if Abenomics were to accomplish in the Eurozone that intense human suffering could not: moving the ECB to forcefully act."

I cannot think of a more preposterous and dangerous idea than that being put forward by these seemingly eminent individuals. Let's put aside the idea that countries are made stronger by weakening their currencies, which history has refuted time and time again.

No, let's focus instead on drawing out their argument to its logical conclusion. If Europe abandons austerity (which it has never really pursued) and prints money to significantly weaken its currency, this would start to equalise the competitiveness of the likes of German exporters against Japanese exporters.

In other words, Japan's exporters are gaining global share at the moment vis-à-vis the Europeans due to its lower currency. These gains would reverse if Europe depreciates its own currency.

Naturally, the Japanese wouldn't be happy with this at all. They would print more money to accelerate the depreciation of the yen. The Europeans would again retaliate upon losing export share. And so it would go on. Overall, any gains through currency devaluation would be short-lived.

But that's not the end of it. If you assume that other countries follow Europe in devaluing their own currencies, then the whole world would be after lower currencies. This would be of little benefit to Japan. Put simply, Japan's policies depend on other countries not following their lead.

It's not hard to see a currency fight turning more nasty. If Japan can't gain an advantage from deliberate yen depreciation, it's likely to try other means. Those other means include increased tariffs and/or trade sanctions. Once this happens, global trade would be hit and everyone would lose.

The above discussion has left aside the real reason for Japan's currency deprecation: to import inflation. A declining yen makes imports more expensive, thereby potentially inducing higher inflation. That's what Japan is targeting. I'll leave this issue for another day though.

When does retaliation begin in earnest?

This brings us to the issue of when the rest of the world will begin to react to Japan's policies in earnest. Of course, some countries have already reacted. Recently, South Korea and Australia surprised with interest rate cuts. Switzerland and New Zealand have moved directly to cap their currencies. And Thailand and the Philippines are looking to move soon. It's clear that Japan's weak yen policies are already having a large impact on other countries.

Other major exporting countries such as Germany and China are clearly worried. Both have expressed concerns about Japan's policies as their own respective currencies have strengthened considerably, particularly in yen terms.

If you're like me and expect the yen to continue to decline over the next 12 months, it won't be long before so-called currency wars start to intensify. And unlike the economic ideologues who think that everyone will win when this happens, I think the reality is likely to prove very different.

This post was originally published at Asia Confidential: http://asiaconf.com/2013/05/17/why-japan-is-bad-for-the-world/

North Korea Launches Three Missiles Into Eastern Sea

Tyler Durden — Sat, 18 May 2013 13:51:56 +0000

Five days ago, when describing the launch of the joint-US, South Korean naval military exercise in the East Sea, we said that "for all his endless posturing, North Korea's Un has done absolutely nothing. And if his inability and unwillingness to translate threats into actions continue, that will pretty much be it for North Korea's hope to even get a few loose pennies as a nuisance factor" be it from the US, Japan, South Korea, or anyone else who is listening. It seems the North Korean leader has taken the hint, and overnight escalated from merely constant jawboning into at least some variant of activity, when he fired three short-range missiles into the sea off the eastern coast of the Korean peninsula on Saturday, "once again stirring tensions that had appeared to ease in the wake of a recent series of bellicose statements directed at South Korea and the U.S."

WSJ reports that in a short briefing, South Korea's defense ministry said Saturday that North Korea had fired two guided missiles into waters off the Korean peninsula in the morning, followed by a third missile in the afternoon.

"In our judgement, the missiles are short-range guided missiles, not mid-range missiles such as the Musudan," defense ministry spokesman Kim Min-seok said. "South Korea's military is on high alert to prepare for any hostile acts from the North following the guided-missile launch today."

This means the launched missile is most likely the appropriately named Nodong:

Is there a reason to be concerned? Hardly, especially for those who have been following the seemingly endlessly escalating rhetoric out of NK, whose only purpose is to extract a nuisance value premium from anyone, just so it shuts up.

Shin Jong-dae, professor at the University of North Korean Studies, said the launches were more likely a means of drawing attention from the international community than a test launch.

"North Korea is an expert at crisis diplomacy or crisis marketing," Mr. Shin said.

Kim Yong-hyun, professor at Dongkuk University's North Korean Studies department, said the North appears to hope that launching missiles will prompt an offer of dialogue from the U.S.

Which is why ignoring the country so far has worked, however like any irrational actor whose only mode of behavior is attempting the same failed action until there is a response (like the Federal Reserve, for example), at some point North Korea, for whom the opportunity cost of actual military escalation is declining with every day it gets no appeasement from the West, may just lash out. Especially if such overt provocations as a US nuclear carrier swimming in its back yard for "naval exercises" continue.

FiNaNCiaL TeRRoRiSM AND PoLiTiCaL SeX MaP...

williambanzai7 — Sat, 18 May 2013 13:37:53 +0000