New Zealand

Tryingto make sense of the price action in the foreign exchange market.  The dollar was heavier than we anticipated and there is no compelling sign of a turnaround, but the key is the FOMC meeting.  

In the brief but tempestuous fight between Abe and the "deflation monster", the latter is now victoriously romping through an irradiated Tokyo, if last night's epic (ongoing) collapse in the Nikkei is any indication: down 6.4%, crushing anyone who listened to Goldman's "buy Nikkei" recommendation which has now been stopped out at a major loss in three days, and now well in bear-market territory, it would appear that a neurotic Mrs. Watanabe is finally with done with daytrading the Pennikkeistock market, and demands Shirakawa's deflationary, triumphal return to finally clam the market. Only this time the Japan's selling tsunami is finally starting to spill, if not to the US just yet (it will) then certainly to Asia, where the Shanghai Composite which was down 2.7%, and is once again well down for the year, and virtually all other Asian stock markets. Except for Pakistan - the Karachi Stock Exchange is an island of stability in the Asian sea of red.

A macro overview.

Here is my weekly outlook for the major foreign currencies.  Yes they are not backed by silver or gold, it is still the largest of the major captial markets at an estimated turn-over of some $4 trillion a day.  Yes, officials may try to guide the market directly and indirectly, but success is often elusive.   

It’s always a bit amusing to meet an investor making money in the markets right now who actually thinks it’s because he’s smarter than everyone else. Everyone knows the Fed’s quantitative easing program calls for them to buy $85 billion worth of bonds and mortgage backed securities each and every month. And the connection to market performance is clear. But, as is clear with USDJPY, Nikkei, and European sovereigns, the end of this exuberance is beginning to happen. All of this indicates that the leveraged investing herd seems to be squaring positions, going to cash, and paying back some of the USD-denominated debt they’ve borrowed. So far it’s all been an orderly move lower. And herein lies the trouble. Few investors are spooked right now because there is so much calm in the markets. But that calm can quickly turn into anxiety, which can quicly turn into all-out panic. It’s taken years (since 2008) to print so much money. This means that a market panic will unwind years’ worth of liquidity in a matter of weeks. It’s a financial tsunami that no investor should underestimate.

House prices - with respect to both levels and changes - differ widely across OECD countries. As a simple measure of relative rich or cheapness, the OECD calculates if the price-to-rent ratio (a measure of the profitability of owning a house) and the price-to-income ratio (a measure of affordability) are above their long-term averages, house prices are said to be overvalued, and vice-versa. There are clearly some nations that are extremely over-valued and others that are cheap but as SocGen's Albert Edwards notes, it is the UK that stands out as authorities have gone out of their way to prop up house prices - still extremely over-valued (20-30%) - despite being at the epicenter of the global credit bust. Summing up the central bankers anthem, Edwards exclaims: "what makes me genuinely really angry is that burdening our children with more debt to buy ridiculously expensive houses is seen as a solution to the problem of excessively expensive housing." It's not different this time.

In an age of economic policy activism, including widespread quantitative easing and associated purchases of bonds and other assets, Amphora's John Butler reminds us that it is perhaps easy to forget that foreign exchange intervention has always been and remains an important economic policy tool. Recently, for example, Japan, Switzerland and New Zealand have openly intervened to weaken their currencies and several other countries have expressed a desire for some degree of currency weakness. In this report, Butler summarizes the goals and methods of foreign exchange intervention and places today’s policies in their historical context; but moreover he discusses the evidence of where covert intervention - quite common historically - might possibly be taking place: perhaps where you would least expect it... And if the currency wars continue to escalate as they have of late, it seems reasonable to expect that covert interventions will grow in size, scope and frequency.

The idea that a weak yen is positive for countries outside Japan is gaining traction. This is preposterous and we'll see why as currency wars soon accelerate.

The Bernanke Chicago speech became little more than a side show Friday. He did say the Fed was keeping a watchful eye on yield risk-taking given ZIRP. He’s a little late to that observation methinks.

Yesterday, the rumor turned out to be a joke. Today, there was no rumor, but as we warned four hours ago, it was only a matter of time. Less than four hours later, the time has come, and Jon Hilsenrath's "Fed Maps Exit from Stimulus", conveniently appearing after the close, has just been released.

The reason for yesterday's late day swoon was a humorous tweet, which subsequently became a full-blown serious rumor, that the WSJ's Hilsenrath would leak the first hint that the Fed is contemplating preannouncing the "tapering" of its $85 billion in monthly purchases. Naturally, this did not happen as we explained. And yet, judging by the market's response there is substantial concern that the Fed may do just that. To be sure, it is quite likely that in addition to just rumblings out of economists, which are always wrong and thus ignored, that one of the Fed's unofficial channels may hint at some tightening in the monthly flow (if certainly not halt, and absolutely not unwind). Which makes sense: all previous instances of non-open ended QE took place for up to 6-9 months before the Fed briefly let off the accelerator to see just how big the downward response is. The problem now, however, is that even the tiniest hint that the grossly overvalued "market", which has risen only thanks to multiple expansion for the past year, would lead to a massive overshoot not only to whatever an ex-Fed "fair value" may be, but overshoot wildly as the liquidation programs kick in across a Wall Street that is more liquidity starved today than it has been in a decade. This is precisely what Scotiabank's Guy Hasselman thinks: "Few care about “right-tail” events, but should investors decide to pare risk in reaction to a hint of ‘tapering’, the overshoot to the downside may surprise many. The combination of too many sellers, too few buyers, and dreadful (and declining) liquidity means a down-side overshoot is highly likely."

As the global economic slump continues central bankers, such as Mario Draghi, and politicians have vowed “to do whatever it takes” to get economies back on track. Such policies while having near term benefits are considered extremely risky in the longer run by many commentators as they could beckon runaway inflation or stagflation, with ruinous results.

Shinzo Abe unleashed his plan with the blessing of the Bank of Japan to begin aggressive government bond purchases. This has led to a massive growth of 60% on the Nikkei and is deflating the yen and boosting their exports.

Three days ago, in an article that looked at the convergence of 3-D printing and the 2nd Amendment, we presented "the Liberator" - the world's first fully 3-D printed firearm. The name was aptly chosen because courtesy of its creator, 25-year old UofT law student Cody Wilson, and his non-profit group Defense Distributed, its online blueprint and assembly instructions liberated "anyone to be able to download and print a gun with no serial number, in the privacy of their garage" in effect completely circumventing any gun control/distribution laws, background checks and other regulatory hurdles of an increasingly authoritarian government. In fact, we were counting the number of days before some US Federal agency would come knocking on Cody Wilson's door and involved that other key Amendment - the First, by either "disappearing him" or politely enforcing a permanent Cease and Desist of all production, including, of course, the removal of all online "liberating" blueprints. We didn't have long to wait - it took just one week.

• Physical demand up: U.S. Mint Sales of Gold Coins Jump to Highest in Three Years (BBG)
• Paper demand down: Gold ETP Holdings Cap Record Drop as $17.9 Billion Wiped Out (BBG)
• It's May 1 not April 1: Fed Seen Slowing Stimulus With QE Cut by End of This Year (BBG)
• Another great step for Abenomics: Sony leadership to forgo bonuses after broken promise on profits (FT)
• High-Speed Traders Exploit Loophole (WSJ)
• It's peanut Breaburn jelly time: How Google UK clouds its tax liabilities (Reuters)
• Frowny face day at the Mark Zandi household: Obama Said to Choose Watt to Lead Fannie Mae Regulator (BBG)
• Russia’s 20 Biggest Billionaires Keep Riches From Putin (BBG)
• China Affair With Cheap Diamonds Heats Mass Market (BBG)
• China's emotional ties to North Korea run deep in border city (Reuters)
• US companies must use cash piles for capex (FT) ... and yet they aren't. Tax anyone who doesn't spend for CapEx!
• Chinese Way of Doing Business: In Cash We Trust (NYT)