Monetization

While the US may be rejoicing its daily stock market all time highs day after day, it may come as a surprise to many that global equity capitalization has hardly performed as impressively compared to its previous records set in mid-2007. In fact, between the last bubble peak, and mid-2013, there has been a $3.86 trillion decline in the value of equities to $53.8 trillion over this six year time period, according to data compiled by Bloomberg. Alas, in a world in which there is no longer even hope for growth without massive debt expansion, there is a cost to keeping global equities stable (and US stocks at record highs): that cost is $30 trillion, or nearly double the GDP of the United States, which is by how much global debt has risen over the same period. Specifically, total global debt has exploded by 40% in just 6 short years from  2007 to 2013, from "only" $70 trillion to over $100 trillion as of mid-2013, according to the BIS' just-released quarterly review.

According to Goldman, the median company’s EV/sales ratio is now the highest in 35 years, surpassing even the dot com bubble.

Despite our insistence that their was nothing new in the BoJ's loan ceiling hike and lack of QE extension (and Goldman's 'this is already priced in' perspective), it still took the machines that are running USDJPY almost 36 hours to figure it out. USDJPY has retraced the entire 100 pip swing and has broken back below the crucial 102.00 level this morning. Time for some more jawboning about the potential for more QE - even as Kuroda insisted last night to the Diet that the government's tax hikes occur (if for no other reason to ensure this does not escalate into the 'monetization miasma' that they fear the market would believe). Of course, as we approach the US open, we would expect the usual ramp-job to lift stocks.

Nearly two months ago, when we commented on the recent string of unprecedented failures by the ECB to sterilize its legacy bond buying operation, the SMP, we commented that "judging by the feverish pace of purchases of every peripheral bond available, is this merely just another indication how little the ECB cares about sterilization, and is just a hint at an upcoming full-blown and unsterilized bond monetization about to be launched by Mario Draghi?" Sure enough at the subsequent February 6 ECB meeting Mario Draghi hinted as much when he said that among the things the ECB was looking at was precisely the "de"sterilizing of the SMP program. However, one stumbling block was getting the Bundebsbank's tacit approval to proceed with this plan which would make the ECB's bond monetization mirror that of the Fed where bonds are purchased on an unsterilized basis. And, as expected, overnight the Bundesbank threw in the towel on sterilization, meaning that the SMP will no longer be sterilized with an announcement divulging just this likely as soon as the next ECB meeting.

Clearly boxed in by the concern that any increase in their QE program will shift sentiment from stimulus to monetization, the BoJ kept the money-printing the same but redirected focus by raising the ceiling on their bank lending facility (from JPY3.5 trillion to JPY 7 trillion). This is being presented to the public as dovish despite the balance sheet recession's debt minimization - not profit-maximization - mantra as was oh so well illustrated by the dismal GDP prints since Abenomics has been in existence. It's not like Japan needs "low-interest" rate loans... are their rates high? Of course, in order to maintain some semblance of hope and belief in this new "common knowledge", USDJPY was smashed higher (running stops over 102.50) and that leveraged Nikkei futures up over 400 points in the space of a few minutes. S&P futures are modestly higher but EM FX is drifting lower. The question on everyon's lips, of course, is - what is the BoJ's half-life?

Get long 'Depends' may be the most befitting headline for tonight's massive macro miss in Japan. For the 3rd quarter in a row, Japanese GDP missed expectations with a meager +1.0% annualized growth (versus a +2.8% expectation), and a tiny 0.3% Q/Q change vs expectations of a 0.7% increase, this is the biggest miss and slowest growth since Abe retook the economic throne after his chronic-diarrhea-prone first attempt to save the nation. No matter how hard they try to spin this, there's no silver lining as consumer and business spending missed expectations notably and the only Tokyo snow fell just last week so long after the quarter was over... and this is before a tax hike that is aimed at showing how fiscally responsible the nation and not simply an insolvent ponzi scheme alive through the good graces of the greater fools of leveraged carry trades.

In a deja vu of yesterday's 10 Year auction, which saw a slide in the Bid To Cover even as the closing yield was well through the When Issued, so today's 30 Year saw a slide in the Bid to Cover (from 2.57 to 2.27, and well below the 2.46 TTM average) even as the closing yield of 3.69% priced through the When Issued by a whopping 1 bp. However, here the comparisons ends, because while in both the 3 and 10 year auctions from earlier this week, there was a surge in the Indirects, this time around the Indirects were more or less in line, rising to 46.0% from 45.3%, if above the 39.4% TTM average, while Dealers took down 40.8%, above the 38.1% in January. Directs ended up holding 13.9%. So a mixed auction overall, as if the market expect the Fed to continue buying the long end on one hand, even as tapering means the 30 Years will be the most convex instrument should tapering indeed mean the monetization of duration ends some time in the summer.

Nine Event Risks for the week ahead:  identified, discussed and assessed.

The gap between the rich and poor continues to grow. The wealthiest 1% held 8% of the economic pie in 1975 but now hold over 20%. Most of the literature on income inequalities is written by professors from the sociology departments of universities. They have identified factors such as technology, the reduced role of labor unions, the decline in the real value of the minimum wage, and, everyone’s favorite scapegoat, the growing importance of China. Those factors may have played a role, but there are really two overriding factors that are the real cause of income differentials. One is desirable and justified while the other is the exact opposite.

Things in the country whose central bank assets have climbed to ¥229 trillion, or 48 percent of the nation’s nominal gross domestic product, are about to get very interesting: on one hand, it will have no choice but to slow down monetization under its existing QE program. On the other, pernicious inflation is spreading doubts the BOJ will be able to boost QE in the near-future. What is a country stuck in a vortex between deflation and runaway inflation to do? "It may be too late to prevent long-term rates doing something crazy” should the BOJ hold off on tapering before inflation reaches the target, said Richard Koo, the chief economist in Tokyo at Nomura.

The last time we pointed out an ECB bond sterilization failure as part of its legacy SNP program was on December 30 of last year (the third in a row), when a liquidity glut led to the biggest sterilization shortfall, one amounting to €39 billion, when only 89 banks submit bids to absorb paper in exchange for a paltry tip. Moments ago, the ECB reported that in just the third such sterilization auction of the new year there was once again a failure to absorb all the €177.5 billion in outstanding toxic peripheral bonds, when an impressive 126 bidders showed up and yet were only able to generate only €152.1 billion in bids, leaving a €25 billion shortfall.

What could be worse than a falling cost for things that the increasingly cash-strapped consumer desires? We are not entirely sure but Christine Lagarde is deathly afraid of it...

• *LAGARDE SAYS RISING RISK OF DEFLATION MUST BE FOUGHT DECISIVELY
• *LAGARDE URGES OFFICIALS TO `FORTIFY THE FEEBLE GLOBAL RECOVERY' *LAGARDE SAYS U.S. MUST AVOID EARLY WITHDRAWAL OF FED SUPPORT
• *LAGARDE: JAPAN'S INITIAL BOOST FROM `ABENOMICS' WEAKENING A BIT
• *LAGARDE SAYS EURO-AREA MONETARY POLICY `COULD STILL DO MORE'

In other words, 5 years of debt monetization on an unprecedented scale were not enough! Get back to work Mr Draghi, Mrs Yellen, and Mr Kuroda.

Is the U.S. consumer tapped out?  If so, how in the world will the U.S. economy possibly improve in 2014?  Most Americans know that the U.S. economy is heavily dependent on consumer spending.  If average Americans are not out there spending money, the economy tends not to do very well.  Unfortunately, retail sales during the holiday season appear to be quite disappointing and the middle class continues to deeply struggle.  And for a whole bunch of reasons things are likely going to be even tougher in 2014.  Families are going to have less money in their pockets to spend thanks to much higher health insurance premiums under Obamacare, a wide variety of tax increases, higher interest rates on debt, and cuts in government welfare programs.  The short-lived bubble of false prosperity that we have been enjoying for the last couple of years is rapidly coming to an end, and 2014 certainly promises to be a very "interesting year".

"The powers of financial capitalism had (a) far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent meetings and conferences. The apex of the systems was to be the Bank for International Settlements in Basel, Switzerland; a private bank owned and controlled by the world's central banks which were themselves private corporations. Each central bank... sought to dominate its government by its ability to control Treasury loans, to manipulate foreign exchanges, to influence the level of economic activity in the country, and to influence cooperative politicians by subsequent economic rewards in the business world." - Carroll Quigley, member of the Council on Foreign Relations

... we learned what the difference between $85 billion and $75 billion is in the grand scheme of things. Or, in case we haven’t, here is a chart showing just how “vast” the impact of today’s announcement will be on the Fed’s balance sheet at December 31, 2014 when instead of printing well over $5 trillion at its old monetization pace, the Fed’s balance sheet will be only $4.9 trillion.