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Guest Post: Fiat Money Kills Productivity

Only a wilful and ideological Keynesian could ignore the salient detail: as soon as the USA left the gold exchange standard,  total factor productivity began to dramatically stagnate.   Coincidence? I don’t think so — a fundamental change in the nature of the money supply coincided almost exactly with a fundamental change to the shape of the nation’s economy. Is  the simultaneous outgrowth in income inequality a coincidence too? Keynesians may respond that correlation does not necessarily imply causation, and though we do not know the exact causation, there are a couple of strong possibilities that may have strangled productivity. It’s not just total factor productivity that has been lower than in the years when America was on the gold exchange standard — as a Bank of England report recently found, GDP growth has averaged lower in the pure fiat money era (2.8% vs 1.8%), and financial crises have been more frequent in the non-gold-standard years.

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Europe's "Monetary Twilight Zone" Neutron Bomb: NIRP

Just because ZIRP is so 2009 (and will be until the end of central planning as the Fed can not afford to hike rates ever again), the ECB is now contemplating something far more drastic: charging depositors for the privilege of holding money. Enter NIRP, aka Negative Interest Rate Policy.

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Where Has All The EUR Tail-Risk Gone?

Everyone and their dog is by now well aware of the stress in Europe - and implicitly the chance for a major tail-risk event occurring. Yet, as Citi's Steven Englander notes, the amount of tail risk that is actually priced in is astonishingly small. Whether it is risk-reversals (which are skewing increasingly towards EUR strength relative to the USD) or Digital options (which are essentially the market's oddsmaker for a big - 15% or more - move in the currency), it appears investors are gravitating to a view that the sovereign crisis will play out in debt markets more than in currency markets. We agree with Englander when he notes "this looks to be an extremely hopeful view of how events will play out". Given the German unwillingness (and quite possibly inability) to underwrite the rest of the euro zone, the risk of contagion and EUR weakness may be much bigger than what is now priced in.

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Europe "Welcomes" The Spanish Bailout

One just can't come up with better wording if one tried.


And a little change in the original plans:

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So Much For the 'Epic' JPM 'Whale-Trade' Unwind

Last night's release of DTCC CDS data came and went with little furor. Despite the protestations of various mainstream media reporters last week that they had been 'told' that JPM had unwound 65-75% of their IG9 disaster last week, their is nothing in the actual reported data from the CDS repository to suggest any 'epic' unwind or change in actual risk transfer occurred. We hate to say we told you so but the spike in activity was very likely associated with the CDS roll as all those Weinstein-wannabes unwound their index-arb positions (sold back their index protection and bought back their single-name protection) as opposed to face the illiquidity cliff of holding through the roll. The last few weeks have seen index net notionals drop for IG9 - which fits with the index-arbitrage unwind - but little to no change in the tranched risk (which is the more appropriate to track JPM's exposure) suggesting that JPM remains the 'diligent shareholder-friendly' holder of its tail-risk hedge just as Dimon said they would.

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Is That A NIRP In Your Pocket Or Is Gold Just Happy To See Negative Rates?

Gold and Silver are spiking once again, after experiencing quite a roller-coaster ride of rips and dips in the last week or so but this latest spike is suggesting the market's concerns at NIRP is growing. Moments ago, when noting the recent drive for NIRP at the ECB, we noted, that "once [the EUR747 billion in ECB deposits] has to pay to stay, it is certain that nearly $1 trillion in deposit cash, currently in electronic format, would flood the market." Judging by the dramatic move in gold in the last few minutes, at least the PMs appear to already be discounting just such a move.

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The Summer Of Their Discontent

This Summit is likely to be the one where the masks come off the revelers at the Ball and where the faces behind the masks are unveiled for all to see. We predict this weekend will be full of many “Oh My God” moments which will go unreported in the Press but where it dawns, with a wicked thump, that the wealthy nations of Europe are unwilling to pay for the poorer ones and that all of the make nice comments of the last thirteen years were no more than polite conversation in the European parlors. This Summit will not be the end but it may well mark Churchill’s famous postulation that it is the beginning of the end. The cries of anguish are about to be met with refusal and the realization that “No” is actually “No” will produce, I fear, the exact same reaction of a six year old unruly child who throws himself on the floor in utter frustration when he does not get what he wants. It is still now, it is quiet; but it will not be soon!

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Barclays Found To Engage In Massive Libor Manipulation, Gets Wrist-slapped By Coopted Regulators

We can finally close the case on the massive Libor manipulation issue that we first brough to the world's attention back in January 2009 when we penned: "This Makes No Sense: Libor By Bank." As of minutes ago, Barclays is the first bank to admit it has engaged in gross manipulation of the key benchmark rate that sets the cost of capital for $350 trillion in interest-rate sensitive products. As the CFTC notes, as it produly announces an epic wristslap of $200 million for Barclays Bank: "The Order finds that Barclays attempted to manipulate and made false reports concerning two global benchmark interest rates, LIBOR and Euribor, on numerous occasions and sometimes on a daily basis over a four-year period, commencing as early as 2005." Surely this massive fine will teach them to never do it again, until tomorrow at least, when the British Banker Association once again finds 3 month USD liEbor to be... unchanged. In other news, who would have thought that the fringe "conspiracy" brigade was right all along once again.

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Headline Durable Goods Beats, Core Ex-Transports And Capital Goods Shipments Miss

There is a little for everyone in the latest BWB (Baffle with BS) data point - durable goods. The headline number printed at +1.1%, on expectations of a 0.5% rise, up from a downwardly revised -0.2% (from 0.2%). So a beat even as the baseline was cut. However, when stripping out the extremely volatile transports number, the result was very different and at +0.4%, it was a miss of expectations of 0.7%, although still up from the April -0.6%. Finally, actual Capital Goods shipments excluding non-defense rose 1.6% on expectations of a 1.9% increase. In other words: a beat when including volatile fluff, a miss on the core. The inventory/shipments ratio slipped to 1.63, lowest reading since Dec. 2011; may “imply weaker times ahead,” says Bloomberg economist Rich Yamarone. Is this good enough for the Fed to push on with the NEW QE: it is unclear. Which is why next Friday's NFP will once again be watched by everyo8ne and be the latest "most important payrolls number ever." 

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Daily US Opening News And Market Re-Cap: June 27

European equities are seen modestly higher at the midpoint of the European session, with the utilities and financials sectors leading the way higher. As such, the Bund is seen lower by around 40 ticks at the North American crossover. The closely-watched Spanish 10-yr government bond yield is seen lower on the day, trading at 6.85% last, as such, the spread between the peripheral 10-yr yields and their German counterpart has been seen tighter throughout the European morning. Issuance of 6-month bills from the Italian treasury passed by smoothly, selling EUR 9bln with a higher yield, but not an increase comparable with yesterday’s auction from the Spanish treasury. The decent selling from Italy today may pave the way for tomorrow’s issuance of 5- and 10-year bonds, which will be closely watched across the asset classes. Data of note has come from Germany, with the state CPIs coming in slightly higher than the previous readings, proving supportive for the expectation of national CPI to come in flat at 0.0% over the last month.

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Overnight Sentiment: Directionless

In a market in which horrible data leads to upward stock spikes, what can one expect but a directionless market for now: after all today's biggest pending disappointment, the durable goods orders due out in an hour, has not hit the tape yet sending stocks soaring. Newsflow out of Europe is more of the same, summarized by the following BBG headline: 'MERKEL SAYS EURO BONDS ARE THE ‘WRONG WAY." We for one can't wait for the algos to read into this as more bullish than Eurobonds only over her dead body. Perhaps that explains why despite the constant barrage of abysmal economic data, capped by today's epic collapse in MBS mortgage applications plunging 7.1% or the most since March despite record low mortgage yields, futures are once again green. In summary: the usual Bizarro market which has by now driven out virtually everyone.

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Italy Pays More For 6 Month Debt Than America Pays For 30 Year, As LTRO Claims Its First Bank Insolvency

Today Italy had a rather critical Bill auction in which it sold €9 billion in debt due six months from today. Obviously, since the maturity is well inside of the LTRO, the auction itself was rather meaningless from a risk standpoint. Still, the good news is that Italy managed to place the entire maximum amount targeted. The bad news: it cost Italy more to raise 6 months of debt, or 2.957%, than it costs the US to borrow for 30 years (2.70%). Not only that but the average yield 2.957% was the highest since December when the Italian 10 Year was north of 7%, and nearly 50% higher compared to the 2.104% at auction on May 29, or less than a month ago. The Bid/Cover of 1.62 was unchanged compared to the 1.61 at the May 29 auction. From Reuters: "Today's bill sale points to the sovereign getting this supply away but at yield levels sufficiently elevated to leave a niggling doubt at least as to the medium-term sustainability of the country's public finances," said Richard McGuire, a rate strategist at Rabobank. On Tuesday, Spain paid 3.24 percent to sell six-month bills. Madrid is seen at risk of having to ask for more aid after formally requesting a European rescue for its banks this week. But doubts are also growing on Italy's ability to keep funding its 1.95 trillion euro debt, which makes it the world's fourth-largest sovereign debtor. Domestic appetite has so far allowed the Treasury to complete 56 percent of its 445-billion-euro annual funding plan."

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Frontrunning: June 27

  • France to Lift Minimum Wage in Bid to Rev Up Economy (WSJ)... weeks after it cut the retirement age
  • Merkel Urged to Back Euro Crisis Measures (FT)
  • Monti lashes out at Germany ahead of summit (FT)
  • Italy Official Seeks Culture Shift in New Law (WSJ)
  • Migrant workers and locals clash in China town (BBC)
  • Romney Would Get Tough on China (Reuters)
  • Bank downgrades trigger billions in collateral calls (IFRE)
  • Gold Drops as US Data, China Speculation Temper Europe (Bloomberg)
Tyler Durden's picture

Ray Dalio: Don't Assume That Germany Will Bail Europe Out; Consider The "Fat Tail" A Significant Possibility

Lately, more and more professional investment "advisors" and newsletter recommendations boil down to just one catalyst: wait for either Germany, the ECB or the Fed to step in, as usual, and bail the world out, because, well, they have to, and any additional thought is rendered moot as fundamental analysis is meaningless under central planning (plus it is actually more work than just repeating the same stuff over and over while charging $29.95/month for it). Of course, when these same snakeoil salesmen are asked the simple question: what if said bailout does not happen, or if it happens late (for the purposes of this exercise let's assume one is not a central bank that can print its own money, have an infinite balance sheet, and can afford to be wrong almost into perpetuity), they give a blank stare, start mumbling something and walk away, especially if one mentions Lehman brothers and the simple detail that, oh, it failed. Which is why if Ray Dalio, head of the world's largest hedge fund, is correct, it may time to summarily fire and stop subscribing to each and every broken record Oracle whose template is "X will bailout Y" for the simple reason that it is wrong.

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RANsquawk EU Market Re-Cap - 27th June 2012

Do NOT follow this link or you will be banned from the site!