New Zealand

Nuclear News Roundup

News may come, and news may go, but the fiscal policy implementation vehicle known as the market, and now controlled by the Political Reserve don't care. For those who do, here is what has happened in the past few hours and what is on deck for the remainder of the week.

Two signs that fear and instability have reached critical mass are capital flight and capital controls. Capital flight is people and enterprises moving their capital (cash and liquid assets) to an overseas "safe haven" to avoid devaluation of the currency or confiscation of their capital/assets. (Devaluation can be seen as one method of confiscation; high taxes are another.) Capital controls are the Central State's way of stemming the flood of cash leaving the country. Why do they want to stop money leaving? If we think of each Central State as a neofeudal fiefdom, we understand the motivation: citizens are in effect serfs who serve the State and its financial nobility. If the serfs move their capital out of the fiefdom, it is no longer available as collateral for the banks and a source of revenue for the State. Once capital has drained away, borrowing and lending shrink, cutting off the revenue source of the banks (financial nobility). Since financial activity also declines as cash is withdrawn from the system, the State's "skim"--transaction fees, sales taxes, VAT taxes, income taxes, wealth taxes, etc.--also declines. Both the State and its financial nobility are at increasing risk of decline and eventual implosion as capital flees the fiefdom. The Central State imposes capital controls as a means of Elite self-preservation.

Where does the AUD.USD go from here?

XAU/EUR Exchange Rate Daily - (Bloomberg)

Gold at €1,355/oz, just 2.5% from the record high of €1,390/oz, is a sign of a continuing lack of trust in the euro and in Draghi’s stewardship at the ECB.

The usual suspect, the all-powerful French nuclear industry?

Governments Indefinitely Detaining Citizens In Psychiatric Wards Without Due Process of Law

Even the strong falter. As the dynamics within this global economy become more severe, the strengthening local economies find it more difficult to remain on course. The situation in Australia is that the country’s currency appears to be overvalued which impedes their ability to compete in the global market place.

The week ahead brings a batch of Q2 GDP prints, which will provide guidance on the strength of activity in that quarter, as well as a bunch of business survey data which will offer insights into the strength of momentum at the start of Q3. Starting with the GDP data, the main attraction is likely to be the print from the US. Goldman expects a below trend print of 1.1%qoq, vs the consensus at 1.5%qoq. The Q2 print from the UK is expected to be negative. While only a few Q2 prints have been published so far, only China has recorded a recovery on Q1. The consensus expects soft prints for the business surveys out this week. The Euroland flash PMIs are expected to be unchanged, leaving them at levels consistent with a continued contraction in activity. The German IFO is expected to fall slightly, as is the Swiss KoF. There are no consensus expectations for the China flash PMI, however if it does not pick up from current levels around 48, questions over the extent/effectiveness of stimulus in China will remain.

Strength is fading. Parity is visible. Reform is the only option. European markets are tumbling and the euro has slipped to record lows against several major currencies. The market is in reaction mode responding Spain and Greece in the headlines.

Via Goldman, here are the key economic events to look forward to in the coming relatively quiet week. And out of DB, we get a list of the key PIIGS bond auctions and bailout events in the immediate and near-term future.

A generation of market participants has grown up knowing only the era of central bankers and the 'Great Moderation' of (most of) the last two decades elevated their status significantly. While central bankers are generally very well aware of the limits of their own power, financial markets seem inclined to overstress the direct scope of monetary policy in the real world.

If markets fall, investors need only to run to central bankers, and Ben Bernanke and his ilk will put on a sticking plaster and offer a liquidity lollipop to the investment community for being such brave little soldiers in the face of adversity

Monetary policy impacts the real economy because it is transmitted to the real economy through the money transmission mechanism. This has become particularly important in the current environment, where, as UBS' Paul Donovan notes, some aspects of that transmission mechanism have become damaged in some economies. Simplifying the monetary transmission mechanism into four very broad categories: the cost of capital; the willingness to lend; the willingness to save; and the foreign exchange rate; UBS finds strains in each that negate some or all of a central bank's stimulus efforts. In the current climate, it may well be that the state of the monetary transmission mechanism is even more important than monetary policy decisions themselves. Some monetary policy makers may be at the limits of their influence.

What few media pundits seem to grasp is that when our trade deficits transfer hundreds of billions of dollars to other nations, those dollars have to end up in dollar-denominated assets like bonds, stocks or real estate. Many people have missed the difference between dollars used to settle accounts and dollars held as a result of trade deficits. Many of those emotionally wedded to the belief that the U.S. dollar is doomed gleefully grabbed onto the news that China and Japan will swap currencies directly (yen and yuan) rather than intermediate the trade with U.S. dollars. This was mistakenly seen as a nail in the coffin of the USD. If I am in Japan and I have yuan due to trade with China, and I want to exchange those yuan for yen, I only need USD for about 10 seconds to intermediate the exchange. Cutting out the USD simply cut the exchange costs and lowered the daily trading volume of the USD. This reduction in the transactions needed to exchange yuan for yen did nothing to change the dollars held by China or Japan as a result of their trade surpluses with the U.S. This also didn't lower the amount of assets or credit (debt) denominated in USD. In other words, the effect on the value of the dollar is trivial. No matter how many exchanges the USD sitting in overseas accounts are pushed through, they still end up in dollar-denominated assets somewhere.

With so much economic doom and gloom out there, it’s easy to forget that there are actually some bright spots in the world. I’ve spent the last few days in one of them– Georgia. Perhaps most famous for being continually stomped on by Russia, this place has suffered severe hardship practically since independence from the Soviet Union in the early 1990s. In 2005, Georgia was shut out of the Russian market, it’s largest trading partner. It happened again in 2006. Then, of course, you may remember the Russian military invading Georgia (do you see the theme here?) in August 2008 in support of the breakaway republic of Abkhazia in northwest Georgia. Russian forces rolled across the border, occupied several key areas in the country, and bombed the hell out of Tbilisi just for good measure. The damage is still visible to this day. Yet despite so many challenges, Georgia has finally turned the corner and become one seriously exciting economy with some seriously compelling opportunities.

There are simply no words to describe this.