Japan

It's not as if this couldn't have been seen coming. For those that believe this event, and all of the other events of the recent past, and the Pan-European Sovereign Debt Crisis, and the China bubble, and... Well I think you can taste the flavor of this post. Contagion is in the air. It's hard to determine precisely the where and the when, but I don't think the question is "if"...

Further confirming that America deserves each of its elected officials, in this case a Treasury Secretary whose intellect is increasingly put into question with every single utterance out of his mouth, was Tim Geithner's statement from Davos earlier that inflation on a global level is "not high on the list of concerns" although probably while looking at pictures of tear gas being fired at protesters in Tunisia, Algeria, Yemen, Morocco and now Egypt he added "emerging markets across the world are certainly 'feeling some pressure'." If by pressure he means revolutions, then he is certainly spot on. As for Egypt's soon to be deposed leaders, Timmy has four words of advice: please kill the dollar. "Geithner told the World Economic Forum that emerging markets could manage their inflation problems better if they loosened their currencies' links to the dollar, a measure that economists say would lead in most cases to an appreciation against the greenback." And there you have it: America continues keeping the world hostage courtesy of the dollar's reserve status, able to export inflation at will knowing that the US consumer is irreplaceable, and the only recommendation we have to the world is to continue devaluing the dollar (yes, a weaker dollar means stronger opposing non-dilutable currencies), an act for which we are sure the US middle class thanks him.

• Baltic Dry Index falls 4.1% to 1137 points
• Moody's Says Time Running Out for U.S. as S&P Cuts Japan (Bloomberg)
• Governments Stockpile Food Staples (FT)
• Consumer spending seen helping quarterly growth (Reuters)
• Internet in Egypt offline (BGPMon)
• IMF's Zhu Warns Global Imbalances May Worsen on Chinese Exports (Bloomberg)
• Chinese Firms Set Sights on U.S. Investments (WSJ)
• Ratings Agency Cites Political Chaos (WSJ)
• ECB’s Tumpel-Gugerell Says Governments Must Do More for Euro (Bloomberg)
• Sarkozy Tells G20 ‘Dare to Dream.’ (FT)
• BofA may pay higher share of bonus in cash: report (Reuters)
• Facebook Overvalued at $50 Billion in Global Poll of Investors (Bloomberg)

Markets mostly positive this AM ahead of significant 4Q10 economic releases. GDP is widely believed to be very expansionary, but considering the disappointing numbers yesterday, a more muted number would not be a surprise. Jobless claims printed on a (sadly) more normal run rate yesterday and the Fed’s dovish stance revealed in Wednesday’s release seems to be well founded if one chooses to ignore commodity price inflation. Moody’s commentary on US ratings, states that the timeframe for review is shortening as the balance sheet expands.

Despite new claims for unemployment putting up the largest weekly increase since September 2005...

It is apparent to me that the factors that underlie the causes of our boom-bust cycle still exist. Nothing has changed on the policy front that would do anything to revive the economy. If we could spend our way to prosperity, then countries like Zimbabwe would be rich.

If nothing else disturbs you while you buy your NFLX today – that last one should. Rich folks in an industrialized nation trying to go to the theater in their limo and being attacked by an angry mob.

"I see more inflation and more currency turmoil as we go forward. There are huge debt imbalances in the world. U.S. is the largest debtor nation in the world and all the assets are in Asia. The largest creditors in the world are China, Korea, Japan, Taiwan, Hong Kong, Singapore – this is where the assets are and the debts are in the West. Those imbalances have to be resolved. They frequently lead to more currency turmoil. We’ll see more inflation, we’ll see more governments fall. We just saw Tunisia fall – more are coming because the world is going to continue to have these problems, and especially inflation that is going to cause more social unrest."

Expect dire reactions by financial markets when the US debt/GDP ratio soon tops 100%. With the current spending trajectory and the new tax compromise, total debt will reach $23 trillion by 2020, or some 160% of today’s GDP, 1.6 times the WWII peak. China and Japan might even demand a retreat from our $150 billion a year commitments in Iraq and Afghanistan to protect their bond holdings. Who were the real big spenders?

Futures mixed in the early going as yesterday's Fed left little doubt that QE2 will remain firmly in place. With no dissenters to the policy and the only nod to inflation a note that "commodity prices have risen" the Fed seems entrenched in their game of chicken between commodity price inflation and labor market inflation.

From S&P: "The downgrade reflects our appraisal that Japan's government debt ratios--already among the highest for rated sovereigns--will continue to rise further than we envisaged before the global economic recession hit the country and will peak only in the mid-2020s. Specifically, we expect general government fiscal deficits to fall only modestly from an estimated 9.1% of GDP in fiscal 2010 (ending March 31, 2011) to 8.0% in fiscal 2013. In the medium term, we do not forecast the government achieving a primary balance before 2020 unless a significant fiscal consolidation program is implemented beforehand."

The world today is riddled with unique economic, political, and demographic risks. Finding attractively priced assets that will perform well in spite of these challenges is excruciatingly difficult. For investors, though, one segment of the market – the highest-quality stocks – still offers attractive risk-adjusted returns.

Nic Lenoir throws down the gauntlet and takes on Goldman Sachs directly following their recent upgrade of the EURUSD target to 1.40: "Not that many layups or exciting trades in the G10 out there with equities in a slow melt up and the long end in Fixed Income stuck in a range for the last month. If you missed out on the sell-off in metals or did not have the UK GDP data ahead of the market don't despair just yet, we have a very interesting set-up to sell EURUSD here...We stand below the 61.8% of the sell-off since the November highs, the hourly divergence is staggering also. I strongly favor shorts here. Less convinced traders traders can wait for the break of the trend support which comes around 1.3640. Given the recent advance I think we should see a retracement back to at least 1.34 even if we are to utlimately advance further. I am bearish EUR as I don't believe this currency has a place in this world anymore, but even raging bulls should be cautious here."

• Mandatory Prison in Securities Frauds Sought by New York's District Attorney Cyrus Vance (Bloomberg)
• Financial Meltdown Was ‘Avoidable,’ Inquiry Concludes (NYT)
• Default worry sees US muni bond sales dry up (FT)
• Greece Default With Ireland Breaks Euro by 2016 in Global Poll (Bloomberg)
• Lehman Brothers amends bankruptcy plan (Reuters)
• Davos Moguls Adjust to Fast, Slow, Reverse: Mohamed El-Erian (Bloomberg)
• Bernanke Gets 66% Approval From Investors Disliking QE2....all of whom can afford a Bloomberg terminal (Bloomberg)
• Fed warns banks to be weary of expensive CDS: Impact of High-Cost Credit Protection Transactions on the Assessment of Capital Adequacy (Fed)
• China Is No White Knight in Euro's Debt Crisis (Bloomberg)