Japan

A strong yen strikes again. 

A brief and comprehensive summary of the main events in the past week, both good and bad.

Remember that one keyword that oddly enough never made it's way into the president's largely recycled SOTU address - "Solyndra"? It is about to make a double or nothing repeat appearance, now that Ener1, another company that was backed by Obama, this time a electric car battery-maker, has filed for bankruptcy. Net result: taxpayers lose $118.5 million. The irony is that while Solyndra may have been missing from the SOTU, Ener1 made an indirect appearance: "In three years, our partnership with the private sector has already positioned America to be the world’s leading manufacturer of high-tech batteries." Uh, no. Actually, the correct phrasing is: "...positioned America to be the world's leading manufacturer of insolvent, bloated subsidized entities that are proof central planning at any level does not work but we can keep doing the same idiocy over and over hoping the final result will actually be different eventually." We can't wait to find out just which of Obama's handlers was may have been responsible for this latest gross capital misallocation. In the meantime, the 1,700 jobs "created" with the fake creation of Ener1, have just been lost. Yet nothing, nothing, compares to the irony from the statement issued by the CEO when the company proudly received taxpayer funding on its merry way to insolvency: " "These government incentives will provide a powerful stimulus to a vital industry and help ensure that the batteries eventually powering millions of cars around the world carry the stamp 'Made in the USA'." Brilliant - and no, they are laughing with us, not at us.

For breathtakingly stupid political ideas and catastrophic “solutions” to America’s biggest problems, it’s hard to beat the New York Times op-ed page.  There, joined by such jihadists of the Left as Frank Rich and Maureen Dowd, resides the peerlessly wrong-headed economist Paul Krugman, whose Nobel Prize was as well-deserved as the one Yasser Arafat received for helping to bring Peace to the world. Until yesterday, we might have thought Krugman had cornered the market for the absolute worst ideas on how to revive the economy.

Looks like the earlier analysis that the US is slowly morphing into a second Japan just got even more confirmation. According to the Census Bureau (not NAR data, which we will hence ignore completely due to its consistent bias, error and overall worthlessness) December New Home Sales declined from 321K to a seasonally adjusted annualized rate of 307K in December, on expectations of a rise to 321K from last month's revised 315K. On a non-seasonally adjusted basis the US sold a whopping 21K homes, the lowest since January 2011, and on par with the lowest on record. What is more troubling is that according to Bloomberg, the 2011 number of 302K sales is the lowest on record. Of these 21K, 5K were not even started. So much for that housing recovery. And also confirming that there is not even a glimmer of hope for the US housing market is that the Median Price for new homes just dropped from $215,700 to $210,300, which is the lowest median price since October 2010. The chart below of pricing trends indicates all that is needed to know which way the housing market is going.

All you need to read.

Yesterday the Japanese Finance Ministry made a whopper of an announcement: in the year ending March 2013, total Japanese debt will surpass one quadrillion yen, or ¥1,086,000,000,000,000. This is roughly in line with the Zero Hedge expectations that by this March total Japanese debt would surpass one quadrillion yen. In USD terms, at today's exchange rate, this is precisely $14 trillion. And while smaller than America's $15.4 trillion (net of all post debt ceiling breach auctions), which was $14 trillion about a year ago, the GDP backing this notional amount of debt, which just so happens is greater than the GDP of the entire Euro area, is a modest ¥481 trillion, so by the end of the next fiscal year, Japan will have a Debt to GDP ratio of 225%. And that's not counting all the household and financial debt. So prepare to add quadrillion to the vernacular. At this exponential rate of increase quintillion will appear some time in 2015 and so on. Yet the scariest conclusion is that as Bloomberg economist Joseph Brusuelas points out, America is not only next, it already is Japan. Actually scratch that, America is worse than Japan, which at least generated a real housing bubble in the years just preceding the onset of its multi-decade credit crunch, something not even America could do in comparable terms. More importantly, "the debt-to-GDP ratio of the U.S. recently surpassed 100 percent, and it did so in the four years after the onset of the recession, compared with the six years it took the Japanese debt-to-GDP ratio to do so." The Japanese may be better than America in most things, but when it comes to destroying its economy, the US has no equal. Brusuelas' conclusion: "If below trend growth is the most probable scenario in the U.S., the most likely alternative is that the U.S. economy is headed for a lost decade… or two." So... go all in?

This is just getting better and better:

• FOMC: 2012 GROWTH AT 2.2%-2.7% VS 2.5%-2.9% IN NOV. FORECAST
• ELEVEN OF 17 FED OFFICIALS SEE MAIN RATE ABOVE 0.25% IN 2014
• SIX OF 17 FED OFFICIALS SEE NO RATE INCREASE BEFORE 2015
• FOMC DOESN'T SET SPECIFIC LONG-RUN GOAL FOR EMPLOYMENT LEVEL

Japan is now seriously blushing. As for the reality of the Fed's forecasts, they are absolutely worthless, so no point in even spending one minute on them.

Even American military and intelligence chiefs admit this ...

The fear of 'turning-Greek', which is now apparently worse than 'turning-Japanese', is the anchoring bias that seems to be driving more and more countries to dramatically adjust their fiscal affairs. However, Nomura's Richard Koo (whose blood pressure was already elevated last week at the ignorance of many nations to his balance sheet recession diagnosis and treatment protocol) points out in a note this week that Greece's problems stem from fiscal profligacy, a lack of domestic savings, and dishonest reporting by the government (it does kind of ring a bell). His point being that the rest of the eurozone - not to mention Japan, US, and the UK - are suffering balance sheet recessions (unlike Greece), which occur when the collapse of an asset price bubble drives sharp increases in private savings. His problem is that traditional economists are not taught of a situation in which private sector deleveraging (which we discussed last week also) leaves fiscal stimulus as the only way to stabilize an economy and in the currrent environment of deficits being watched and denigrated by any and all politician, market participant, and talking head, Koo's borrow-and-spend 'all deficits are good deficits' medicine is hard to swallow. Koo believes that the post-Lehman world was saved by fiscal stimulus, that Greece is different, and that the anti-Koo austerity actions have 'thrown a large wrench into the works of many world economies' and while the UK is coming around to the notion that austerity is not working, he worries on recent actions in the US and Japan at a time of excess private saving. It seems to us that his argument boils down to - given the system's fragility - an Austrian solution to the broken Keynesian problem is unworkable (without depression), and he hopes that the growing doubts (recessions popping up left, right, and center) about an overriding focus on fiscal consolidation will bring people back to Keynesian (Kooian) fold. He concludes with a worrying reflection on his countrymen in the MoF that seem to have learnt none of his lessons as they look to raise the consumption tax and Japan's rising sun sets.

The advance reading of Q4 UK GDP released today came in at -0.2%, slightly below expectations, however many market participants had feared a worse outcome for the indicator, allowing the GBP to pare the losses made in the lead-up to the GDP announcement. The Bank of England minutes released today have shown that the MPC unanimously agreed to keep the UK rate at 0.5%, and maintain the volume of the APF, however they also revealed that some MPC members saw the need for further QE in the future. Despite higher than expected German IFO Business Climate data this morning, European indices are trading in negative territory, with technology and financial stocks suffering the highest losses. This has seen asset reallocations into safe havens, which has seen Bunds outperform for the morning.

Just Smile ... It Will Protect You from All Radiation!

The biggest market-moving event so far this year is undeniably the positive (so far) aftershock from Germany's capitulation on monetary expansion and as Michael Cembalest of JPMorgan goes on to note that the ECB, directly and indirectly, is giving its governments and its banks the money that the rest of the world has been taking away. Between the ECB's LTRO largesse and its 'crisis management' initiatives (for example: collateral standards, watered down Basel III, lower bank reserve requirements), it seems clear that the resignation of the German contingency (Stark and Weber) from the ECB last year was a signal of the laying-down-of-arms by the Germans relative to the Periphery (perhaps for fear of the 'powerful backlash' that Monti among other has warned about). While the JPMorgan CIO understands the market's positive reaction (as Armageddon risk is reduced/delayed) he remains a skeptic broadly given the structural reforms and any expectations of growth among most euro-zone economies this year. He reminds investors that it should not be lost on anyone that first prize in the Central Bank balance sheet expansion race is not necessarily one you want to win and we wonder just how aware the German press and public are that this is happening under their watchful (if not frustrated) gaze.

The latest IMF Global Financial Stability Report is out and it is not pretty. The IMF now sees:

• 2012 world growth outlook cut to 3.3% from 4.0%, 2013 growth revised lower to 3.9% from 4.5%
• 2012 US growth of 1.8%, 2013 at 2.2%
• 2012 UK growth of 0.6%, down from 1.6%
• 2012 China growth of 8.2%, down from 9.0%
• Eurozone to enter "mild" recession, whatever that is, with -0.5% economic growth, to grow again in 2013 by 0.8%. Unclear just how with all the deleveraging...

IMF also adds that without action, the debt crisis may force a 4% Euro-area contraction, in line with what the World Bank, controlled by a former Goldmanite, said. Lastly, the IMF says that Europe needs a larger firewall and bank deleveraging limits. Well there is always that €X trillion February 29 LTRO.

All you need to read.