Wall Street Journal

As I noted in an article published Thursday morning, the government bought three quarters of a percentage point worth of growth in the third quarter leading several hapless commentators to opine on national television that the U.S. economy was not only on solid footing but was in fact experiencing "above trend" growth. Of course if you're the mainstream financial media what is good for the Q3 goose is not necessarily good for the Q4 gander and so when fourth quarter GDP printed in contraction territory Wednesday, viewers were encouraged (much to the chagrin of a predictably irate Rick Santelli) to discount "volatile" government consumption expenditures and focus only on the components that made a positive contribution.

• Risky Student Debt Is Starting to Sour (WSJ)
• Political scandal in Spain as PP secret accounts revealed (El Pais)
• New York Times claims Chinese hackers hijacked its systems (NYT)
• Spain's Rajoy, ruling party deny secret payment scheme (Reuters)
• Iran crude oil exports rise to highest since EU sanctions (Reuters)
• BlackBerry 10’s Debut Fizzles as U.S. Buyers Left Waiting (BBG)
• Costs drag Deutsche Bank to €2.2bn loss  (FT)
• And the gaming of RWA continues - Deutsche Bank Beats Capital Goal as Jain Shrugs Off Loss (BBG)
• More fun out of London - Barclays, RBS May Pay Billions Over Improper Derivatives Sales (BBG)
• Hagel to face grilling by Senate panel on Mideast, budget (Reuters)

• Boeing misses Q4 top line ($22.3 bn, Exp. $22.33 bn) beats EPS ($1.28, Exp. $1.18), guides lower: 2013 revenue $82-85 bn, Exp. 87.9 bn
• Hilsenrath discovers DV01: Fed Risks Losses From Bonds  (WSJ)
• Airlines had 787 battery issues before groundings (Reuters)
• Monte Paschi ignored warnings over risk, documents show (Reuters) as did Mario Draghi
• China averts local government defaults (FT)
• Economy Probably Slowed as U.S. Spending Gain Drained Stockpiles (Bloomberg)
• Bono Is No Match for Retail Slump Hitting Dublin’s Fifth Avenue (BBG)
• Catalonia requests €9bn from rescue fund (FT)
• US plans more skilled migrant visas (FT)
• Japan PM shrugs off global criticism over latest stimulus steps (Reuters)
• CIA nominee had detailed knowledge of "enhanced interrogation techniques" (Reuters)
• Cleanliness Meets Godliness as Russia Reeled Into Cyprus (BBG)
• Deutsche Bank Seen Missing Goldman-Led Gains on Cost Rise (BBG)

• U.S. Wants Criminal Charges for RBS (WSJ)
• Bernanke Seen Buying $1.14 Trillion in Assets in 2014 (BBG)
• Irish banks at mercy of international paymasters (Reuters)
• Do badly, and we will let you do even worse: Rehn Signals EU May Ease Spain Budget Goal in Austerity Retreat (BBG)
• Too Soon to Celebrate for Europe's Banks (WSJ)
• Army says political strife taking Egypt to brink (Reuters)
• Media Firms Probed on Data Release (WSJ) - No Criminal Charges Seen
• Japan’s Government Proposes First Spending Cut in 7 Years (BBG)
• Nazi Goebbels’ Step-Grandchildren Are Hidden Billionaires (BBG)
• Goldman seeks to reduce China exposure (FT)
• More than 70% of Chinese airports generate losses (People's Daily)

Russia, Kazakhstan and Turkey expanded their gold holdings in December, seeking to diversify their foreign reserves and protect from currency devaluation risk. Russian gold holdings climbed 2.1% to 957.8 metric tons or 30.793 million ounces, according to data on the International Monetary Fund’s website. The increase in December takes the increase in Russian gold reserves in 2012 to 8.5%.  The Russian central bank has said that they will continue buying gold. The pace of the purchases may vary, First Deputy Chairman Alexei Ulyukayev told reporters this month.  He denied that there is a 10% target for gold’s share in the reserves according to Bloomberg

• CAT beats ex-Chinese fraud: $1.91, Exp. $1.70; Warns 2013 could be a "tough year"; sees 2013 EPS in $7.00-$9.00 range, Exp. $8.54, sees Q1 sales well below Q1, 2012
• Yi Warns on Currency Wars as Yuan Close to ‘Equilibrium’ (BBG)
• Monte Paschi seeks new investor as scandal deepens (Reuters)
• Assault Weapons Ban Lacks Democratic Votes to Pass Senate (BBG)
• Toyota Again World's Largest Auto Maker (WSJ)
• Curious why all those Geneva Libor manipulators moved to Singapore? Bank probes find manipulation in Singapore's offshore FX market  (Reuters)
• Japan eased safety standards ahead of Boeing 787 rollout (Reuters) - so like Fukushima?
• Goldman is about to be un charge: Osborne cools on changing inflation target (Telegraph)
• Abe Predicts Bump in Revenue as Japan Emerges From Recession (BBG) - actually, "hopes" is the correct verb here
• Toxic Smog in Beijing Fueling Auto Sales for GM, VW (BBG)
• Fed waits for job market to perk up (Reuters) ... any minute now that S&P to BLS trickle down will hit, promise
• BofA shifts derivatives to UK (FT)

How many European Union officials does it take to change a light bulb?
 
None. There is nothing wrong with the light bulb; its condition is improving every day. Any reports of its lack of incandescence are an illusional spin from the American media. Illuminating European rooms is hard work. That light bulb has served honorably, and any commentary not approved by the EU undermines the lighting effort. From the 'obvious 'encouragement' given to Europe's banks to pay back exceptionally cheap LTRO loans early to the world's addiction for freshly printed money and propaganda.The world seems devoid of politicians that sensibly lead though they have been quite adept at spending past what can be afforded. The worlds’ central banks have been left to pick up the bills.

• Fed Pushes Into ‘Uncharted Territory’ With Record Assets (BBG)
• Next up in the currency wars: Korea - Samsung Drops on $2.8 Billion Won Profit-Cut Prediction (BBG)
• China Warns ‘Hot Money’ Inflows Possible on Easing From Abroad (Bloomberg)
• BOJ Shirakawa affirms easy policy pledge but warns of costs (Reuters)
• Merkel Takes a Swipe at Japan Over Yen (WSJ)
• Wages in way of Abe’s war on deflation (FT)
• Italian PM under fire over bank crisis (FT)
• Senior officials urge calm over islands dispute (China Daily)
• Spain tries to peel back business rules (FT)
• Rifts Over Cyprus Bailout Feed Broader Fears (WSJ)
• Soros Says the Euro Is Here to Stay as Currency War Looms (BBG)

Reconciling Opposites ...

• When the cash runs out: Nokia to Omit Dividend for First Time in 143 Years (BBG)
• Passing Debt Bill, GOP Pledges End to Deficits (WSJ)
• Japan logs record trade gap in 2012 as exports struggle (Reuters)
• so naturally... Yen at 100 Per Dollar Endorsed by Japan Government’s Nishimura (BBG)
• Japan rejects currency war fears (FT)
• In Amenas attack brings global jihad home to Algeria (Reuters)
• Investors grow cagey as Italy election nears (Reuters)
• Mafia Victim’s Son Holds Key to Bersani Winning Key Region (BBG)
• Bernanke Seen Pressing On With Stimulus Amid Debate on QE (BBG)
• U.S. to lift ban on women in front-line combat jobs (Reuters)
• Red flags revealed in filings of firm linked to Caterpillar fraud (Reuters)
• Apple Sales Gain Slowest Since ’09 as Competition Climbs (BBG)
• Spanish Jobless Rate Hits Record After Rajoy’s First Year (BBG)
• North Korea Threatens Nuclear Test to Derail U.S. Policies (BBG)

From a valuation perspective, Chinese equities do not, at first glance, look to be a likely candidate for trouble. The PE ratios are either 12 or 15 times on MSCI China, depending on whether you include financials or not, and do not scream 'bubble'. And yet, China has been a source of worry for GMO over the past three years and continues to be one. China scares them because it looks like a bubble economy. Understanding these kinds of bubbles is important because they represent a situation in which standard valuation methodologies may fail. Just as financial stocks gave a false signal of cheapness before the GFC because the credit bubble pushed their earnings well above sustainable levels and masked the risks they were taking, so some valuation models may fail in the face of the credit, real estate, and general fixed asset investment boom in China, since it has gone on long enough to warp the models' estimation of what "normal" is. Of course, every credit bubble involves a widening divergence between perception and reality. China's case is not fundamentally different. In GMO's extensive discussion below, they have documented rapid credit growth against the background of a nationwide property bubble, the worst of Asian crony lending practices, and the appearance of a voracious and unstable shadow banking system. "Bad" credit booms generally end in banking crises and are followed by periods of lackluster economic growth. China appears to be heading in this direction.

• Doubt Greets Bank of Japan's Easing Shift (WSJ)
• Japan hits back at currency critics (FT)
• Japan upgrades economic view for first time in eight months (Australian) - only to lower them in a few months again
• GOP critics get opportunity to grill Secretary Clinton on Benghazi (Hill)
• Global economy set for ‘slow recovery’ (FT)
• Obama to back short debt limit extension (FT)
• Unfinished Luxury Tower Is Stark Reminder of Las Vegas’s Economic Reversal (NYT)
• Draghi Says ‘Darkest Clouds’ Over Europe Have Subsided (BBG)
• High-Speed Dustup Hits a Clubby Corner (WSJ)
• U.S. Budget Discord Is Top Threat to Global Economy in Poll (BBG)
• Sir Mervyn King says abandoning inflation target would be 'irresponsible' (Telegraph)
• Spain Says It May Cover 13% of 2013 Funding in January (BBG)

As reported previously, not only are there currently US boots on the ground in the latest geopolitical "anti Al-Qaeda" snafu in Mali, but it turns out a US presence had been secretly in place for many months prior to the recent escalation in French-led hostilities against the western African nation. And while this would likely have opened up numerous media inquiries under any other administration, so far these has been zero interest as to just why the US is "assisting" the French in this latest military deployment of military forces outside of the US: after all, one of the biggest complaints about US spending is that so much of it goes for military purposes (ignoring that all the tax revenues can't even cover just the monthly entitlement spending of the nation). Perhaps one reason is that, at least to date, the general consensus was that since the French operation in Mali is spearheaded and organized by the French, it is also funded by them. As it turns out that is not the case. As Reuters reports, "The U.S. military has flown five C-17 cargo sorties into the Malian capital to help bring a French mechanized infantry unit into the fight against al Qaeda-affiliated militants in the north of the country, Pentagon officials said on Tuesday." But surely the French are paying for these sorties which are there only to help the French, right? Wrong. "Little said the United States had decided not to seek compensation or reimbursement from France for the flights." Luckily, the US is in such a healthy financial position it can afford to not only open one more front in the war against "Al Qaeda", but will sign for the French tab too. With Joe Sixpack's money of course.

• Geithner allegations beg Fed reform (Reuters)
• BOJ Adopts Abe’s 2% Target in Commitment to End Deflation (BBG)
• Bundesbank Head Cautions Japan (WSJ)
• In speech, Obama pushes activist government and takes on far right (Reuters)
• Atari’s U.S. Operations File for Chapter 11 Bankruptcy (BBG)
• Israel goes to polls, set to re-elect Netanyahu (Reuters)
• Apple May Face First Profit Drop in Decade as IPhone Slows (BBG)
• EU states get blessing for financial trading tax (Reuters)
• Indian Jeweler Becomes Billionaire as Gold Price Surges (BBG)
• Europe Stocks Fall; Deutsche Bank Drops on Bafin Request (BBG)
• Algeria vows to fight Qaeda after 38 workers killed (Reuters)
• GS Yuasa Searched After Boeing 787s Are Grounded (BBG)
• Slumping pigment demand eats into DuPont's profit (Reuters)

Over the course of the last two weeks, I attempted to explain to the general investing public how, thanks to the virtual impossibility of distinguising between 'legitimate' market making and 'illegitimate' prop trading, some of America's systemically important financial institutions are able to trade for their own accounts with the fungible cash so generously bestowed upon them by an unwitting multitude of depositors and an enabling Fed.