The recent release of the final estimate of Q2 GDP, and the September's Durable Goods Report, confirmed that indeed the economy was far weaker than the headline releases, and media spin, suggested. While the media quickly glossed over the surface of the report there were very important underlying variables that tell us much about the economy ahead. The problem is that there is little historical precedent in the U.S. as to whether maintaining ultra-low interest rate policies, and inducing liquidity, during a balance sheet deleveraging cycle, actually leads to an economic recovery. This is particularly troublesome when looking at a large portion of the population rapidly heading towards retirement whom will become net drawers versus net contributors to the economic system. The important point for investors, who have a limited amount of time to plan and save for retirement, is that "hope" and "getting back to even" are not successful investment strategies.
- Madrid Protesters March Again as Spain Braces for Cuts (Bloomberg)
- Euro Can Bear Fewer Members as Czech Leader Calls Greeks Victims (Bloomberg)
- Chinese Industrial Profits Fall 6.2% in Fifth Straight Drop (Bloomberg)
- China pours $58bn into money markets (FT)
- Beijing vows more measures on Diaoyu Islands (China Daily)
- Noda vows no compromise as Japan, China dig in on islands row (Reuters)
- Politico’s Paul Ryan Satire: The Joke’s on Them (Bloomberg)
- Electoral Drama Shifts to Ohio (WSJ)
- German opposition party targets banks (FT)
- Fed action triggers fear of new currency wars (FT)
- Ex-Credit Suisse CDO Boss Serageldin Is Arrested in U.K. (Bloomberg)
- Romney ‘I Dig It’ Trust Gives Heirs Triple Benefit (Bloomberg)
After seeing its stock market tumbling to fresh 2009 lows, the PBOC decided it couldn't take it any more, and joined the Fed's QE3 and the BOJ's QE8 (RIP) in easing. Sort of. Because while the PBOC is prevented from outright easing as we have been saying for months now (even as "experts" screamed an RRR or outright rate cut is imminent every day while we warned that Chinese inflation has proven quite sticky especially in home prices and food and China's central bank will not attempt to push its stocks up as long as the situation persists, so for quite a while) it can inject liquidity on a ultra-short term basis using reverse repos (or what are called repos here in the US). And shortly after it was found that Chinese companies industrial profits fell 6.2% in August after tumbling 5.4% in July, we learned that the PBOC added a record 365 billion Yuan to the financial system in order to prevent a creeping lockup in the banking system. While this managed to push the Shanghai Composite by nearly 3% overnight, this injection will prove meaningless in even the medium-term as the liquidity is now internalized and the PBOC has no choice but to add ever more liquidity or face fresh post-2009 lows every single day. Which it won't as very soon it will seep over into the broader market. And as long as the threat of surging pork prices next year is there, and with a global bacon shortage already appearing, and food prices set to surge in a few short months on the delayed effects of the US drought, one thing is certain: China will need a rumor that someone- even Spain- is coming to its rescue.
Yes, it did feel kinda rainy already yesterday with “Purple Rain”.
Total Risk Off close today.
Bad Rain. Bad, Bad Rain...
The consensus view of China is that the country is imploding due to the collapse of the export sector. Such arguments make sense. But they may also be dead wrong.
- China To Maintain Prudent Monetary Policy (China Daily)
- Why Exit Is An Option For Germany (FT)
- China-Japan Ministers Hold 'Severe' Talks As Spat Damages Trade (Bloomberg)
- Eurozone Deal Over Bank Bailout In Doubt (FT)
- UBS Co-Workers Knew of Fake Trades, Adoboli Told Lawyer (Bloomberg)
- Banks Seek Changes To Research Settlement (FT)
- Secession Crisis Heaps Pain On Spain (FT)
- SEC: NY Firm Allowed HFT Manipulation (Bloomberg) - busted 'providing liquidity'?
- Germany To Tap Brakes ON High-Speed Trading (WSJ)
- Rajoy Outlines Fresh Overhauls (WSJ)
- BBC Apologizes To Queen Over Radical Cleric Leak (Reuters)
- British Banks Step Back From Libor Role (WSJ)
- Obama Seeks To Recast Ties With Arab World (FT)
More bailouts and QE, until Beethoven writes the 10th Symphony.
In what is likely the biggest sabre being rattled this week in the war-of-words that is occurring in the Pacific, China announced today the launch of its first aircraft carrier. China bought the 300-meter Soviet-built vessel in 1998 from Ukraine and had it refitted to become an important step in "raising the overall fighting capacity" of its naval forces. Rear Admiral Yang Yi noted that "it is natural that China should have its own aircraft carrier," arguing that all major world powers already own similar vessels. Of course, the coincidental timing is no surprise as Reuters notes "China will never tolerate any bilateral actions by Japan that harm Chinese territorial sovereignty," Vice Foreign Minister Zhang Zhijun told his Japanese counterpart on Tuesday as the two met in a bid to ease tensions. "Japan must banish illusions, undertake searching reflection and use concrete actions to amend its errors, returning to the consensus and understandings reached between our two countries' leaders."
The Japanese have a peculiarly virulent strain of right-wing militarism that continues to influence domestic politics. In this worldview, reverence for the Imperial household is mixed with an aggrieved sense that Japan's expansion in World War II was justified (though few would say this publicly). As a result, any official Japanese attempt to apologize for the horrendous destruction, murder, enslavement and torture inflicted by Japanese forces in World War II sparks outrage in one sector of the domestic political order. Deep within this mindset is the view that the only thing wrong with World War II was that Japan lost. Even more galling to those who suffered so mightily, Japan has refused to publicly acknowledge (though they claim they have) and compensate the "comfort women," young women who were forced into prostitution to serve Japan's armed forces in the Asian/Pacific theater of World War II. This official dance between apology and refusal satisfies no one, and the general sense outside Japan is that the Japanese acceptance of guilt is grudging public relations rather than sincere. Combine an obsession with "face" and a plethora of deep-seated resentments, and you get the tinder for territorial disputes. What appears to be lost on the Chinese is the consequence of their saber-rattling and bluster: they appear to have obliterated 20 years of careful diplomacy aimed at convincing their neighbors of China's peaceful intentions.
Liquidity, Fund Flows and Technicals matter now. Fundamentals, Dow Theory and the real economy, not so much.
Another fairly uninspiring day.
In absence of hard data, subject to rumours and sentiment, as well as sudden “squeezes” or “sell-offs”, albeit in very tight ranges.
Mood maybe less rainy then yesterday, but, call me a bear, it doesn’t feel very convincing out there.
Health Tip for Paper Money Users
Investors remain convinced, it would seem, that the fiscal cliff will not happen because our great-and-good politicians in Washington know full-well that the economic repercussions will be too great. Even though Ben's foot is to the floor, he has stated that monetary policy will be unable to offset the negative economic impact of the tax hikes and spending cuts. The prospect of agreement among a deeply polarized politik and just as Goldman expects, we worry that the S&P 500 will fall sharply following the election once investors finally recognize the serious possibility that the 'fiscal-cliff-problem' will not be solved in a smooth manner. In order to clarify that thinking, Bloomberg Brief has provided 12 charts on the timelines, impact, uncertainty, and possibilities surrounding this most obvious of risk events.
- China carrier a show of force as Japan tension festers (Reuters)
- Draghi Rally Lets Skeptics Dump Spain for Bunds (Bloomberg)
- China’s Central Bank Injects Record Funds to Ease Cash Crunch (Bloomberg)
- Obama warns Iran on nuclear bid, containment 'no option' (Reuters)
- When Would Bernanke’s Successor Raise Rates? (WSJ) that's easy - never
- Italy's Monti Downplays Sovereignty Risk (WSJ)
- Portugal swaps pay cuts for tax rises (FT)
- Madrid faces regional funding backlash (FT)
- Berlin Seeks to Push Back New Euro-Crisis Aid Requests (WSJ)
- Race Focuses on Foreign Policy (WSJ)
- China Speeds Up Approvals of Foreigners’ Stock Investment (Bloomberg)
These days every pundit and his barber are suddenly central banking gurus and monetary transmission mechanism experts, but while some of them may have an educated guess as to the reality of the matters at hand, none can envisage that which the Fed is able to. What is almost never considered by most wanna-bees is that no one in the world has access to as many economic and financial data sets, metrics, and indicators, and the synthesis thereof, as the United States Federal Reserve. Ben may make mistakes, but he is no fool. When he acts, he either sees present reason to do so, or he is bracing for a future shock. It is just a matter of time before markets lose complete faith in the recklessness of central planning Ponzi artists.