FX markets featured significant volatility in the past week, though the driver of that volatility was a combination of several idiosyncratic factors, rather than a core underlying narrative. Widespread risk aversion and position unwinds dominated market trading with China PMI, weak US earnings, and BoJ un-dovishness cited among more systemic factors. Turkey and Argentina (among others) have more idiosyncratic risks (and limits approaching) but as Barclays notes, market positioning has played a major role in the moves as market volatility appears to have been the straw that broke the carry-trade's back - for now... as EM currency returns have notably decoupled from moves in US rates.
Krugman frequently accuses his opponents of being stupid and/or evil, when they present a view that he himself advanced in other circumstances. His typical readers would have no idea that Krugman once worried about bond vigilantes, or that his books lay out the standard case for why generous government unemployment benefits might contribute to structural unemployment. No, Krugman has led such typical readers to believe that anyone espousing such views is either a complete idiot - immune to theory and evidence that we’ve had since the 1930s - or is a paid shill who hates poor people.
Bottom line for financials is that 2014 is looking to be a tough year, even if the Sell Side wants to believe that growing earnings is still possible on flat revenue
The resilience that has long been one of America's remarkable traits was on display in 2013. Not only did businesses create 2 million jobs, but the struggling economy actually grew and profits and stock prices soared to near-record levels. Still, five years into the Obama presidency, the economy is grossly underperforming. Contrary to the dominant media narrative, it's not bad luck or the financial crisis to blame, but bad policies — from the $860 billion "stimulus" that didn't stimulate to the Dodd-Frank financial reform that killed lending. Last year was a challenging one for entrepreneurs and other productive Americans. No fewer than 13 new taxes were put into place. Big government now consumes one of every four dollars of our GDP and is getting bigger. Entering 2014, we face problems, including taxes and spending, that neither the White House nor Congress is addressing. In the following charts, we look at a few of the more alarming and intractable ones.
A year which showed that central planning works (for the fifth year in a row and probably can continue to "work" at least a little longer - in the USSR it surprised everyone with its longevity before it all came crashing down), is drawing to a close. This is what has happened so far on the last trading session of 2013. As market participants head in to the New Year period, volumes are particularly thin with closures being observed across Europe with only the CAC, IBEX and FTSE 100 trading out of the major European indices, with German, Switzerland, Italy and the Nordic countries are already closed. The FTSE and CAC are both trading in the green with BP leading the way for the FTSE earlier in the session after reports the Co. have asked a federal appeals court to block economic loss payments in its settlement of the Gulf of Mexico oil spill. European stocks rise, with real estate, travel & leisure leading gains. Retail shares underperform as Debenhams slumps following its IMS. A number of major markets will close early today. The euro falls against the dollar. Fixed income market are particularly quiet with the Eurex being shut. Whilst Gilts are seen down this morning following on from yesterday’s short-covering gains.
While some would argue (as they always do) that there are good reasons to be bullish going into 2014 (central bank liquidity provision being an obvious one); there are ample reasons to remain vigilant with respect to your investments. The stagnation of wage growth combined with higher costs leaves an already cash strapped consumer with few options. It is likely that we will see a push by consumers to re-leverage their household balance sheet which will be hailed by the media as a return of consumer confidence. However, one should not forget the last time a highly levered consumer ran into problems. Furthermore, there are three potential headwinds that are likely to weigh on the economy and the markets which are potentially being overlooked.
Despite the recent sharp narrowing in the U.S. federal budget deficit, the U.S. fiscal policy outlook carries financial stability risks, driven by three factors (aacording to the OFR - aka, The Treasury). First, a rapid pace of deficit reduction carries economic costs. Second, a clear resolution of the nation’s long-term fiscal challenges is still lacking. Finally, the political process for implementing sustainable fiscal adjustments has become more uncertain. While everyone is still bleating over the success' of the budget deal (despite its betrayal), the next few months have plenty of potential mines for fiscal fragility.
December 23rd, 1913 is a date which will live in infamy. That was the day when the Federal Reserve Act was pushed through Congress. Many members of Congress were absent that day, and the general public was distracted with holiday preparations. Now we have reached the 100th anniversary of the Federal Reserve, and most Americans still don't know what it actually is or how it functions. But understanding the Federal Reserve is absolutely critical, because the Fed is at the very heart of our economic problems. Since the Federal Reserve was created, there have been 18 recessions or depressions, the value of the U.S. dollar has declined by 98 percent, and the U.S. national debt has gotten more than 5000 times larger. This insidious debt-based financial system has literally made debt slaves out of all of us, and it is systematically destroying the bright future that our children and our grandchildren were supposed to have. The truth is that we do not have to have a Federal Reserve. The greatest period of economic growth in U.S. history was when we did not have a central bank. If we are ever going to turn this nation around economically, we are going to have to get rid of this debt-based financial system that is centered around the Federal Reserve. On the path that we are on now, there is no hope.
Today is the big day. Investors are on the edges of their seats, waiting to find out what the Fed will do. Taper? No taper? Or maybe it will taper on the tapering off? Investors don't seem worried... Most of the reports we read tell us the economy is improving. Unemployment is going down. Meanwhile, manufacturing levels are rising. Compared to Europe, the US is a powerhouse of growth and innovation, they say. Compared to emerging markets, it is a paragon of stability and confidence. But wait... What if all these things were delusions... statistical folderol... or outright lies? What if the true measures of the economy were feeble and disappointing? What if the US economy was only barely stumbling and staggering along? As Rick Santelli so uncomfortably asked, "What is Bernanke afraid of?"
While the good times are about to end for the Japanese Bond Market (as shown in yesterday in Counting Down To Japan's D-Day In Two Charts), the reality is that anyone who bet on an surge in Japanese bond yields in the past few years has been carted out feet first. Which is also why shorting the Japanese bond market has been widely known as the "Widowmaker" trade in the investing community. However, according to Charles Gave, another "Widowmaker" has emerged in the past year: "It looks like the euro is competing to grab title for itself. Many traders have been shorting the currency, with poor results so far."
- Wall Street Exhales as Volcker Rule Seen Sparing Market-Making (Bloomberg)
- GM to End Manufacturing Down Under, Citing Costs (WSJ)
- U.S. budget deal could usher in new era of cooperation (Reuters)
- Ukraine Police Back Off After Failing to Stop Protest (WSJ)
- First Walmart, now Costco misses (AP)
- Dan Fuss Joins Bill Gross Shunning Long-Term Debt Before Taper (BBG)
- China New Yuan Loans Higher Than Expected (WSJ)
- China bitcoin arbitrage ends as traders work around capital controls (Reuters)
- Blackstone’s Hilton Joins Ranks of Biggest Deal Paydays (BBG)
Contrary to some expectations, the budget deal has done absolutely nothing to push global markets or US futures higher which was to be expected: markets are no longer driven by fundamentals but by such things as carry pairs which signal monetary policies. Sure enough, as a result of the strength in the Yen, overnight markets have reacted with a mixture of cautiousness and optimism. On the cautious side, Asian equities are down across the board which can at least be partially attributed to nervousness at the prospect of a December Fed taper. If Congress passes the budget over the next few days, the probability of a taper next week increase at the margin, given that we have lower fiscal uncertainty (and higher spending) over the next two years. Losses in equities are being led by the Nikkei (-0.7%) and the Hang Seng (-1.3%). Asian credit shows no sign of taper nervousness this morning with the Asia IG index 4bp tighter and high beta EM names such as Indonesia trading firmer (5yr CDS -10bp). 10yr UST yields are unchanged at 2.80% and the US dollar is slightly stronger against the major crosses. The Hang Seng China Enterprises index is down 2.3% ahead of the results of China’s central economic work conference which is expected to end tomorrow and may set a number of economic targets for 2014.
There has been quite a bit of discussion lately over the rapid reduction in the government's budget deficit as it relates to economic growth going forward. There are 3 issues that will likely impede further progress on the deficit reduction in the months ahead; 1) lower rates of tax revenue, 2) weaker economic growth and 3) greater levels of spending. The good news for stock market bulls is that deepening budget deficits increase the amount of bonds that the Treasury will need to issue to cover the shortfall in spending. This will give the Federal Reserve more room to continue their current monetary interventions which have inflated asset prices sharply over the last year. Creating financial instability to gain economic stability has been an elusive dream of the Federal Reserve since the turn of the century; yet someday it is hoped that they may just be able to "catch their own tail."
The United States’ reputation for sound economic policymaking took a beating in 2013. Some of this was warranted; some of it was not. And now a related distorted narrative – one that in 2014 could needlessly undermine policies that are key to improving America’s economic recovery – is gaining traction... to the danger of "government failure."
On December 5 2013, George Osborne will deliver the Autumn Statement, providing an update on the state of the UK economy. In the address, the Chancellor of the Exchequer will detail the coalition’s plans to reduce the budget deficit and extend the UK economic recovery into 2014. Saxo Capital Markets latest infographic outlines the changes in the economy since the coalition government formed in 2010. In 2010, the Chancellor projected that the coalition would slash the structural budget deficit to zero by 2016. Three years on, net public debt has risen as a consequence of the government’s measures to reduce the deficit. While there is some hope in the figures - and we are sure they will be projected in nothing but glowing glorious ways, Brits are drawing down savings at record rates to cover soaring costs of living and the UK's debt-load is surging. What happens if/when Carney lifts his foot even a little?