11-05-10
1-
SOVEREIGN DEBT & CREDIT CRISIS |
ITALY
Berlusconi Partying With Minors Raises Risk of Italian Bonds: Euro
Credit BL
Fears of Berlusconi's resignation appear to be the main
factor driving CDS spreads up to 182 basis points, and the
yield premium on 10-year bonds to 152 basis points over
German bonds.
The latest sex scandal involves a 17-year-old belly
dancer whom Berlusconi allegedly paid to get out of prison
-- and somehow this story also involves various
prostitutes, planes filled with marijuana, and offensive
comments. None of this, however, represents anything new
or surprising for Berlusconi, whose wife divorced him last
year for partying with another 17-year-old girl.
So we wonder if investors are just looking for an
excuse to get out of Italy,
while Ireland, Portugal and Greece are suddenly hitting
the fan once again.
Italy accounts for more than a third of the 71 billion
euros ($100 billion) of bonds EU governments will sell in
November, HSBC Holdings Plc estimates. With the EU’s
biggest debt at almost 120 percent of gross domestic
product last year and the euro zone’s third-largest
economy, Italy’s financing needs dwarf the other
peripheral nations. Next year Italy will sell more than
225 billion euros of bonds, more than Spain, Portugal,
Greece and Ireland combined, ING estimates
|
UK
Double Dip Lurks Behind London's New Skyscrapers
Gilbert
IRELAND
Ireland is running out of time
Pritchard
The spreads over German Bunds are mimicking the action
seen in Greece in the final hours before the dam broke. Ireland has been desperately unlucky.
The bond crisis is snowballing out of control before
the country has had enough time to let its medical,
pharma, IT, and financial services industries (don’t
laugh, some of it is doing well) come to the rescue.
Yields on 10-year Irish bonds surged this morning to a
post-EMU high of 7.41pc.
Yes, Ireland is fully-funded until April – and has
another €12bn in pension reserves that could be tapped in
extremis – but that is less reassuring than it looks. The
spreads over German Bunds are mimicking the action seen in
Greece in the final hours before the dam broke.
|
Irish Bond Surge Continues, Yield Now at 7.6% On The
10-Year BI
Ireland's sovereign debt is continuing to come under
stress today. The yield on the country's 10-year sovereign
debt has risen to 7.6% this morning.
The combination of things hammering Ireland right now
is as follows:
- - Worried over the country's budget, the sincerity
of cuts, and its ability to grow tax revenue
- - Concerns over the banking sector bailout, which
is seeing its costs continue to rise
- - And the European Union's new plan for crises, in
which investors in bonds will take a hit
As a result, CDS is also spiking,
now up to 512 bps.
But check out the movements on the 10-year yield, this
a 6 month chart, now trading at 7.6%:
|
Dublin increases Budget spending cuts
FT
JAPAN
Shirakawa Says Asset Fund Shows BOJ's Resolve to Support
Economic Recovery BL
If you thought Bernanke's buying of U.S. government
bonds was hardcore monetary stimulus, then check out
Japanese central bank governor Masaaki Shirakawa.
Today's he's provided further detail on Japanese
central bank plans to buy not just government bonds, but
lower-rated corporate bonds, ETFs, and even Japanese real
estate investment trusts (REITs).
The program “suggests that we
stand ready to counter downside risks for the economy and
that can provide relief to financial markets and have a
positive effect on corporate sentiment,” Shirakawa said at
an economic forum in Tokyo today. “We need to continue to
take appropriate policy action.”
..
The bank will buy 3.5 trillion
yen in government debt, 1 trillion yen in corporate debt,
450 billion yen in exchange- traded funds and 50 billion
yen in J-REITs. It plans to buy lower-rated corporate debt
than its purchases in 2009, a step to make it easier for
companies to borrow funds.
Japan's buying program is only $62 billion at this
stage, but it can A) become larger if Japan's central bank
deems it necessary and B) will act on markets much smaller
than the U.S. government bond market. What Bernanke is
doing is experimental for the U.S., but Japan remains
clearly on the experimental frontier when it comes to
monetary stimulus. Though we're not sure it's something to
be proud of.
The yen has weakened slightly since Bernanke's
announcement, so it seems as though Japan is indeed
winning the race to destroy currency credibility.
|
|
time (et) |
report |
period |
Actual |
Consensus forecast |
previous |
FRIDAY, Nov. 5 |
8:30 am |
Nonfarm payrolls |
Oct. |
151,000 |
70,000 |
-41,000 |
8:30 am |
Unemployment rate |
Oct. |
9.6% |
9.7% |
9.6% |
8:30 am |
Average hourly earnings |
Oct. |
0.2% |
0.2% |
0.1% |
12:30 pm |
Pending home sales |
Sept. |
-1.8% |
N/A |
4.4% |
3 pm |
Consumer credit |
Sept. |
$2.1bln |
N/A |
-$3.3 bln |
U.S. Added 151,000 Jobs in October, Unemployment Held at 9.6%
BL
BLS
Jobs Expand by 151,000, Unemployment Steady at 9.6%
Mish
Ø
151,000 jobs added
Ø
5,000 construction jobs added
Ø
7,000 manufacturing jobs were lost
Ø
154,000 service providing jobs were
added
Ø
27,900 retail trade jobs were added
Ø
46,000 professional and business
services jobs were added
Ø
53,000 education and health
services jobs were added
Ø
5,000 leisure and hospitality jobs
were lost
Ø
8,000 government jobs were lost
TRIM TABS
“The economy clearly improved
in October,” said Madeline Schnapp, Director of
Macroeconomic Research at TrimTabs. “Unfortunately, the
gains probably aren’t sustainable.”
Multiple indicators suggest the
labor market perked up last month. Real-time tax data
shows wage and salary growth accelerated, TrimTabs’
proprietary measure of online job postings jumped 5.6%,
and initial unemployment claims fell to the lowest level
since August 2008.
In a research note, TrimTabs
argues that the economy will remain stuck in slow-growth
mode. October’s employment increase likely owes to
temporary factors such as inventory building. Also, a
cheaper dollar boosted exports, and record low mortgage
rates spurred refinancing activity.
“Economic growth is likely
to stay sluggish because the private sector isn’t able to
pick up the slack from waning government stimulus,”
Schnapp noted. “State and local government budget crises
and the weak housing market will be significant drags on
growth for a long time.”
The official unemployment rate
is 9.6%. However, if you start counting all the people
that want a job but gave up, all the people with part-time
jobs that want a full-time job, all the people who dropped
off the unemployment rolls because their unemployment
benefits ran out, etc., you get a closer picture of what
the unemployment rate is. That number is in the last row
labeled U-6.
It reflects how unemployment feels to
the average Joe on the street. While the "official"
unemployment rate has held steady, at an unacceptable
9.6%, U-6 is much higher at 17.0%
Looking
ahead, there is no driver for jobs. Moreover, states are
in forced cutback mode on account of shrinking revenues
and unfunded pension obligations. Shrinking government
jobs and benefits at the state and local level is a much
needed adjustment. Those cutbacks will weigh on employment
and consumer spending for quite some time.
Expect
to see structurally high unemployment for years to come.
Keep in mind that huge cuts in public sector jobs and
benefits at the city, county, and state level are on the
way. These are badly needed adjustments. However,
economists will not see it that way, nor will the
politicians.
Recap and Reflections
This is the first respectable jobs report in years. The
reports earlier this year were padded by part-time census
hiring. This report was all private hiring, a very good
thing.
However, it is important to put this into
perspective. It takes approximately 125,000 jobs a month
just to hold the rate steady. Here we have +151,000 and a
falling participation rate with the unemployment number
flat. This apparent anomaly can be explained by the fact
that unemployment numbers are derived from the household
survey while the reported jobs number comes from the
establishment survey.
The key point to remember is
even if we were to see +150,000 jobs a month for the next
year, it would not put a dent in the unemployment rate. In
fact, if the participation rate rose, it could even go up.
Moreover, it is highly unlikely jobs rise by +150,000
jobs a month, on average, for a whole year.
This
month's rise in jobs was fueled by retail hiring. Retail
hiring is not sustainable. Nor is the rise in
manufacturing. We might see a few more months of this (or
not), but this is highly unlikely to be the start of
something big or sustainable.
I still expect to see
the unemployment rate back up above 10% in this cycle.
While today's report may not be as good as it gets, it
certainly is close to as good as it gets on a sustainable
basis.
Expect to see the unemployment rate
stubbornly high for a decade.
|
|
BNP Grows to Biggest Bank as France Says Size Doesn't Matter
BL
The world’s biggest bank isn’t in the U.S., where regulators
banned lenders from proprietary trading, nor in Switzerland, which
is doubling capital requirements.
BNP Paribas SA is in France, which is doing neither.
BNP Paribas’s assets rose 34 percent in the three years through
June, reaching 2.24 trillion euros ($3.2 trillion), equal to the
size of
Bank of America Corp., the largest U.S. bank, and
Morgan Stanley combined. The Paris-based company may also have
one of the lowest capital ratios among major European banks under
new Basel rules, Morgan Stanley analysts estimated.
|
The Basel Committee on Banking Supervision, which sets capital
standards for banks worldwide, softened planned capital and
liquidity requirements in September and gave lenders about a
decade to comply. France and Germany led efforts to weaken
regulations proposed by the committee in 2009, concerned that
their banks and economies wouldn’t be able to bear the burden of
tougher rules until a recovery takes hold, according to bankers,
regulators and lobbyists involved in the talks.
“The French government clearly desires to defend and promote
French banks’ capacity to expand abroad,” said
Nicolas Veron, a senior economist at Brussels-based economics
research organization Bruegel. The fact that French banks did
better in the last crisis “doesn’t mean that France has no
systemic-risk problems. You must think about scenarios of future
risks.”
France has four banks with more than $1 trillion in assets, as
many as the U.S., whose economy is five times the size. In the
euro region’s four largest nations, Spain’s
Banco Santander SA is the only bank aside from BNP Paribas
with assets that exceed its home country’s gross domestic product.
BNP Paribas’s exposure to Portugal, Ireland, Greece and Spain
amounts to 15.4 percent of the bank’s tier 1 capital,
Hoffmann-Becking said. That’s higher than 14.4 percent at Societe
Generale, 9.5 percent at Credit Agricole, or 4.7 percent at
Deutsche Bank AG of Frankfurt, and increases to 75.6 percent if
Italy and Belgium become affected, he said.
|
4- STATE
& LOCAL GOVERNMENT |
5-
CENTRAL & EASTERN EUROPE |
STIGLITZ- We Have To Throw Bankers In Jail Or The Economy Won't
Recover BI
As economists such as William Black and James Galbraith have
repeatedly said, we cannot solve the economic crisis unless we
throw the criminals who committed fraud in jail.
And Nobel prize winning economist George Akerlof has
demonstrated that failure to punish white collar criminals –
and instead bailing them out- creates incentives for more economic
crimes and further destruction of the economy in the future. See
this,
this and
this.
Nobel prize winning economist Joseph Stiglitz just agreed. As
Stiglitz
told Yahoo’s Daily Finance on October 20th:
This is a really important point to understand from
the point of view of our society. The legal system is supposed
to be the codification of our norms and beliefs, things that
we need to make our system work. If the legal system is seen
as exploitative, then confidence in our whole system starts
eroding. And that’s really the problem that’s going on.
|
Bank of America Edges Closer to Tipping Point
BL
Judging by its shrinking stock price, though, investors are
acting as if Bank of America is near a tipping point. Its market
capitalization stands at $115.6 billion, or 54 percent of book
value. That’s the second-lowest price-to-book ratio among the 24
companies in the
KBW Bank Index, and well below the 76 percent ratio the
company was at in October 2008 when it landed its first round of
TARP dough. Put another way, the market is saying there’s a $96.8
billion hole in Bank of America’s balance sheet.
|
The problem for anyone trying to analyze Bank of America’s $2.3
trillion balance sheet is that it’s largely impenetrable. Some
portions, though, are so delusional that they invite laughter.
Consider, for instance, the way the company continues to account
for its acquisition of Countrywide Financial, the disastrous
subprime lender at the center of the housing bust, which it bought
for $4.2 billion in July 2008.
Goodwill Purchase
Here’s how Bank of America
allocated the purchase price for that deal. First, it
determined that the fair value of the liabilities at Countrywide
exceeded the mortgage lender’s assets by $200 million. Then it
recorded $4.4 billion of goodwill, a ledger entry representing the
difference between Countrywide’s net asset value and the purchase
price.
That’s right. Countrywide’s goodwill supposedly was worth more
than Countrywide itself. In other words, Bank of America paid $4.2
billion for the company, even though it thought the value there
was less than zero.
Since completing that acquisition, Bank of America has dropped
the Countrywide brand. The company’s
home-loan division has reported $13.5 billion of pretax
losses. Yet Bank of America still hasn’t written off any of its
Countrywide goodwill.
Dubrowski, the company spokesman, declined to comment when I
asked him why not. In its latest
quarterly report with the SEC, Bank of America said it had
determined the asset wasn’t impaired. It might as well be telling
the public not to believe any of the numbers on its financial
statements.
|
US midterms muddy waters for derivatives
FT
8-
COMMERCIAL REAL ESTATE |
9-RESIDENTIAL REAL ESTATE - PHASE II |
10- EXPIRATION FINANCIAL CRISIS PROGRAM
|
11- PENSION & ENTITLEMENTS CRISIS
|
13- GOVERNMENT BACKSTOP INSURANCE |
14- CORPORATE BANKRUPTCIES |
19- PUBLIC POLICY MISCUES |
The Strange Death of Fiscal Policy Krugman
GOP Leader McConnell Already Threatening To Make The US Default TPM
Now that Dems have lost one house in Congress, and seen their
majority diminished in the other, Republicans have much more
leverage, and are already threatening to use it.
Their chief goal, they say, is repealing Obama and Pelosi's
signature accomplishment: health care reform. Acknowledging that
they could undercut that achievement, Pelosi said such an outcome
would be "most unfortunate," but that she doesn't think a full
repeal is in the cards.
In an interview with Fox News this evening, Senate Minority
Leader Mitch McConnell said Congress would not vote to
increase the nation's debt ceiling -- legislation that must
pass to avoid a global economic panic -- without "strings."
Those strings could be attached to anything, including health care
legislation.
|
OTHER TIPPING POINT CATEGORIES NOT LISTED ABOVE
24-RETAIL SALES
26-GLOBAL OUTPUT GAP
31-FOOD PRICE PRESSURES
32-US STOCK
MARKET VALUATIONS
CENTRAL BANKING MONETARY POLICIES, ACTIONS & ACTIVITIES
------------
U.S. Quantitative Easing is Fracturing the Global Economy
Hudson
What the Fed did and why: supporting the recovery and sustaining
price stability Bernanke
China central bank adviser calls QE2 'huge risk' Reuters
Germany Concerned About US Stimulus Moves Reuters
Emerging market policymakers vow to combat Fed's QE2
Reuters
The frosty reaction from emerging economies makes any
substantive deal on global imbalances and currencies at
next week's Group of 20 meeting that Seoul is hosting even
less likely. |
Fed's $600bn gamble risks throwing away America's biggest asset
Warner
Fed Gets Aggressive After Months of Holding Back Leonhardt
Bernanke christens QE2: Fed "on a very dangerous path": Axel Merk
TTicker
Moment of Surrender: Musings on the Election and Fed Policy
Sonders The Fed's balance sheet could look "very
ugly, very fast”
Fed Ignored Foreclosed Homes in Asset Choices Baum
Empowered GOP may have fun kicking Bernanke around Hutchinson
Bernanke Faces Greater Scrutiny After Republican Election Gains
BL
Milton Friedman vs. the Fed Meltzer
The Nobel laureate would never have endorsed
increasing inflation to stimulate the economy. |
The Fed's $600 Billion Statement, Translated Into Plain English
NPR
Sailing QE2 around Charybdis Salmon
Goldman: QE2 Will Continue Into 2012, Will Be Over $2 Trillion,
Models Do Not See Rate Hike Until 2015 ZH
Goldman: "In practice, QE2 is likely to
continue well beyond June 2011—at least well into 2012—if
our forecasts for unemployment and inflation are close to
the mark. We believe that purchases could ultimately
cumulate to around $2 trillion...Under our longer-term
projections it is easy to come up with models that show no
tightening until 2015 or later." In other news,
the economy will not recover for the next five years, but
under the Centrally Planned Feudal State of Bernanke, the
economy is irrelevant. Incidentally, Zero Hedge now
believes a $5 trillion QE3 program will be announced by
July 2011, when gold is trading at $10,000, the entire
Treasury curve is at zero, and stock prices are
meaningless courtesy of a DXY sub 50, and every commodity
opening limit up daily.
Goldman's prior observations which concluded that a $4
trillion QE is needed now, not in 2011, now,
and not $2 trillion as CNBC keeps saying, can be
found here.
Jan Hatzius' observations below presented without
commentary. Watching this country implode in slow-motion
courtesy of a few openly insane economists is
self-explanatory.
From Goldman's Jan Hatzius
QE2: Slightly Slower Pace, But Long Time
Frame (Hatzius)
- Today’s statement by the Federal Open Market
Committee (FOMC) shows a slightly slower-than-expected
pace for the second round of quantitative easing
(QE2), with purchases of “only” $75 billion per
month. However, the committee made up for this
potential disappointment by signaling a
longer-than-expected time period of purchases,
cumulating to $600 billion through June 2011.
- In practice, QE2 is likely to continue well beyond
June 2011—at least well into 2012—if our forecasts for
unemployment and inflation are close to the mark.
We believe that purchases could ultimately
cumulate to around $2 trillion. Moreover, it
is likely to take even longer—perhaps several
years—before the FOMC starts to increase short-term
interest rates, although the outcome as always will
depend on the performance of the economy.
We see two main takeaways from today’s FOMC
statement:
1. Large-scale asset
purchases (LSAPs) are on a slightly slower-than-expected
schedule, but will likely grow significantly over time.
In a widely anticipated move to provide more support
to economic growth, the FOMC announced that it would
purchase $600bn in Treasury securities by June 2011. This
is over and above the amount that will be purchased as
part of the program to reinvest repayments of principal on
agency and MBS, which the committee expects to total
$250bn-$300bn over the same period. Thus, overall
purchases will be in the $850bn-$900bn range between now
and mid-2011. Previously planned purchases for
reinvestment will take place as scheduled on Nov 4 and 8,
after which the two programs will be combined with the
anticipated publication of a new purchase schedule on Nov
10 at 2pm.
While the headline figure for the new
program is a bit higher than the $500bn that we and many
others had expected, the time period is also longer (eight
months instead of six), implying a monthly purchase rate
of $75bn. We and others had thought that this figure would
be about $100bn. If we focus on a measure such as
the expected stock of Fed asset holdings at a 6-12 month
horizon—consistent with our research showing that it is
mainly stocks rather than flows of Fed purchases that
matter for bond yields—these two surprises probably
roughly cancel out.
We believe that the program
will grow significantly beyond the initial $600 billion.
Today’s statement says that the committee will "regularly
review the pace of its securities purchases and the
overall size of the asset-purchase program in light of
incoming information and will adjust the program as needed
to best foster maximum employment and price stability." If
our forecasts of a 10% unemployment rate and a further
decline in core inflation to around 0.5% by late 2011
prove correct, we believe the committee will continue
buying assets well beyond June 2011. At a minimum,
we expect purchases into 2012 and still believe that they
could ultimately cumulate to around $2 trillion.
(See “QE2: How Much Is Needed?” US Economics Analyst,
10/42, October 22, 2010.)
2. The statement
is consistent with our expectation that rates will stay
near zero for a very long time, possibly several years.
One implication of the slightly longer time frame for
QE2 is that, at the margin, the likelihood rate of hikes
anytime soon has receded further. If Fed officials
are committed to buying assets through June 2011, it is
very hard to see how they would turn around a few months
thereafter and start hiking the funds rate, barring a
massive surprise in the economic data. This is
likely to warrant some additional adjustments in the
expectations of many economic forecasters. Although
the OIS curve has already removed any rate hike
expectations from the 2011 outlook, the median economic
forecast in the October Blue Chip Economic Indicators
survey still has the first rate hike in the third quarter
of 2011. This is likely to change in coming months.
How long will rates stay near zero? Of course,
the answer depends on the economic outlook, but at least
under our longer-term projections it is easy to come up
with models that show no tightening until 2015 or later.
(See “No Rush for the Exit,” Global Economics Paper No.
200, June 30, 2010.) Fed officials will not commit
themselves that far out. However, it is quite
possible that senior members of the FOMC will provide
further guidance about the short-term interest rate
outlook in coming months to explain to market participants
just how distant the prospect of interest rate hikes
really is. This could take the form of a version of
our Taylor rule or policy reaction function analysis, with
a strong implication that even the current market
expectation of rate hikes in 2012 may well prove
premature.
|
This Is The Most Shocking Part Of Bernanke's Case For Quantitative
Easing BI
What's amazing about the latest bout of quantitative
easing is the total lack of pretense. By that we mean
Bernanke isn't even pretending that that QE would actually
benefit the real economy.
We noted yesterday that buy concentrating buying at the
short end of the yield curve, Bernanke was punishing
savers (pinning short-term rates to the mat) and bailing
out banks (keeping the yield curve steep).
But check out this line from his op-ed in the
Washington Post:
This approach eased financial conditions in the past
and, so far, looks to be effective again. Stock prices
rose and long-term interest rates fell when investors
began to anticipate the most recent action.
Amazing. Bernanke's evidence of success is the market
pump-up. There's not necessarily anything real behind it
(though the economy is improving, at least against
expectations), but Bernanke's just happy to see the market
rise.
Of course, he hopes the wealth effect from stocks will
spill over into real economic gain, but it still reeks of
manipulation and intentional bubble-blowing.
|
David Rosenberg On QEII, The Long-Bond Collapse, And The Next Leg
Of The Dollar Breakdown Gluskin-Sheff
There was nothing in the Fed press release yesterday
that was really surprising. In fact, the market’s initial
dramatic reaction (all over the map) was what’s most
surprising. The Fed is going to be buying $600 billion of
Treasuries (in the 5-10 year part of the curve) through
mid-2011 and another $250-300 billion via coupon
reinvestments, which they were going to do anyway.
The “number” that was key for the markets is that $600
billion figure, which is about $75 billion per month. That
is in the middle of consensus expectations of $50-100
billion. Not “shock and awe”, based on what was broadly
expected, but not “light” either considering that the
economy, at least so far, has managed to avoid
double-dipping.
For all the excitement, this
further expansion of the Fed’s balance sheet will add
between 0.25-0.5% to real GDP growth; however, this will
take the size of the Fed’s balance sheet to a
Japanese-style 20% of GDP! What the Fed is clearly
trying to do is reflate asset values in order to generate
a more positive wealth effect on personal spending and
pull the cost of debt and equity capital down in order to
re-ignite business “animal spirits” and hence corporate
investment and hiring. In a balance sheet or deleveraging
cycle, success is not always guaranteed even by the most
aggressive of monetary policies.
Through its
actions, the Fed creates excess reserves in the banking
system. But with one-third of the household sector gripped
with a sub-620 FICO score, 1-in-7 mortgage debtors are
either in arrears or in the foreclosure process, and with
an estimated 25% of homeowners “upside down” in their
mortgage (negative equity), there is at least some
non-trivial probability that, as was the case with QE1,
there will be no visible impact on the willingness to
borrow, the money multiplier or velocity, which is what we
would need to see to declare this radical policy
experiment a success.
In a nutshell, with core
price trends running below 1% and the economy past the
peak of growth for the cycle, the Fed is not far off the
mark in its deflationary concerns. The critical aggregate
here is the unemployment rate — policy is aimed at
redressing the glaring “gap” or chronic excess capacity in
the labour market.
Go back two years ago when the
Fed was on the brink of cutting the Fed funds rate to zero
and the central bank was expecting to see, by now, a 7%
unemployment rate. On the eve of QE1 in the opening months
of 2009, the Fed’s base case was an 8% jobless rate by
now. Instead, the jobless rate is sitting near 10% and
only an atypically low participation rate has prevented
the official unemployment rate from being higher than 12%.
Moreover, counting in the vast degree of “under-
employment”, the real unemployment rate is closer to 17%.
The one asset that has responded miserably to the Fed
announcement is the long bond — it is getting clobbered,
in part because the Fed bond buying is in the mid-part of
the curve. Looking at the huge spread between 30-year
bonds and the 5-year note, if inflation does not rear its
ugly head, the best risk-reward is now really at the long
end, which is universally despised and may be one reason
to like it even more!
The U.S. dollar is on the verge of breaking down — the
recent countertrend rally in the DXY may well be snuffed
out quickly. The 50, 100, and 200-day moving averages in
gold are all in major uptrends despite the corrective
phase from overbought levels.
It’s difficult to see
how equities can rally on this Fed move alone or the
election results for that matter seeing as a GOP victory
in the House and QE2 had both been widely discounted in
recent months. There have been no surprises here over the
past 24 hours. Just confirmations on what had already been
priced in.
Meanwhile, risk assets from equities, to credit, to
emerging markets have, in recent months, become correlated
with a weaker U.S. dollar in an unprecedented fashion. A
weaker dollar, in turn, fits in very well with Ben
Bernanke’s reflationary strategy by cheapening exports and
buying jobs from abroad, not to mention adding extra
impetus to foreign-currency translated corporate earnings.
The question is whether the dollar’s descent becomes
destabilizing or what the responses to this overt weak
dollar policy will be in other parts of the world.
Currency wars tend to lead to trade wars and trade wars do
not tend to end very well (gold being an exception).
In the interim, the risk the market faces in the near-term is economic
disappointment from three possible sources that could inflict some pain on the
consumer:
1. The five million 99ers who are about to lose their jobless
benefits (can even a lame duck Congress be that heartless?); 2. The looming
tax hikes on January 1 if a GOP-White House deal isn’t brokered, and; 3. The
bite into discretionary spending from the spike in food and energy prices — at
exactly the most important shopping time of the year. Look out for a big bite
out of GDP from what will likely prove to be at least a sharp upward move in the
price deflator (have a look at Food Sellers Grit Teeth, Raise Prices on page B1
of today’s WSJ as well as Apparel Makers To Lift Prices on page B2).
The
equity market loves the liquidity boost but as I said, it is priced in. There
are twice as many bulls as there are bears in the sentiment surveys and the
stock market is trading near the top end of the 2010 range. Moreover, the two
“critical” events that got Mr. Market all excited in the last two months are now
yesterday’s news. The recent Barron’s Big Money Poll smacked of the complacency
we saw in the fall of 2007 when nobody seemed to see a recession looming. Today,
4 in 5 surveyed in the Barron’s poll are dismissive of double-dip risks, perhaps
prematurely. The mistake here may be in confusing derailment with delay.
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GENERAL INTEREST
FLASH CRASH - HFT - DARK POOLS
MARKET WARNINGS
Did QE Cause Equities to Move Higher in Japan? Pragmatic
Capitalist
There appears to be some confusion over the
response of equity markets to quantitative easing. Of
course, the Fed is hoping that they can ignite a “wealth effect”
by driving stocks higher. But as we saw in Japan this failed
to materialize. In fact, anyone buying in front of the QE
announcement in Japan ultimately got crushed in the ensuing few
months and years. When the BOJ initially announced the
program in March 2001 the equity market rallied ~16%.
But the euphoria over the program didn’t last
long. In fact, within 6 weeks of the announcement the Nikkei
began to crater almost 30% over the course of several months.
In the ensuing two years the Japanese stock market fell a
staggering 43%! It wasn’t until the global economic recovery
in 2003 that Japanese equities finally bottomed and went on a
tear. Ultimately, the BOJ ended the program in March 2006
and deemed it a failure.
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Bill Fleckenstein: America's 20-Year Binge Of Speculating, Borrowing And
Printing Is About To End King World
Although Bill Fleckenstein is afraid to quit the
Bernanke-fueled stock market, he says quantitative easing marks a
long-term inflection point. "If you debase the
paper enough, no one's going to hold it and the markets are going
to have to turn against the easing. The markets are going
to have to finally become vigilantes and say we're not going to
buy when you ease, now we're selling," he said on
King World News.
"That's the funding crisis, the final leg to this pass
we've been on for twenty years. First Greenspan printed
too much money and we tried to speculate our way to prosperity,
then in the housing boom we tried to borrow our way to prosperity
and now we're trying to print our way to prosperity. This will end
like those others did in disaster, but we can't take the printing
press away from ourselves anymore then if the Greeks had a
printing press they would have taken that away from themselves.
The difference between the United States and Greece is essentially
a printing press."
The trick is finding a way to short a market that keeps rising.
"Even if it is an inflection point, the machinations of the
market convince you that you're wrong even if you're right, so yes
I'm tempted [to short], and I may do something and we'll have to
see."
Hear the full interview at King World News
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G20 MEETING
China criticises US plan for G20 FT
Beijing also questions policy on quantitative easing
China has curtly dismissed
a US proposal to address global economic imbalances, setting the
stage for a potential showdown at next week’s G20 meeting in
Seoul. Cui Tiankai, a deputy foreign minister and one of
China’s lead negotiators at the
G20, said on Friday
that the US plan for limiting current account surpluses and
deficits to 4 per cent of gross domestic product harked back “to
the days of planned economies”.
“We believe a discussion about a current account target misses
the whole point,” he added, in the first official comment by a
senior Chinese official on the subject. “If you look at the global
economy, there are many issues that merit more attention – for
example, the question of quantitative easing.”
China’s opposition to the proposal, which had made some
progress at a G20 finance ministers’ meeting last month, came amid
a continuing rumble of protest from around the world at the US
Federal Reserve’s plan to pump
an extra $600bn into financial markets.
Officials from China, Germany and South Africa on Friday added
their voices to a chorus of complaint that the Fed’s return to
so-called quantitative easing would create instability and worsen
imbalances by triggering surges of capital into other currencies.
Tim Geithner, the US Treasury secretary, has proposed using
what the US refers to as current account “guidelines” to
accelerate global rebalancing, partly as a way of changing the
debate away from simply pressing China to allow faster
appreciation in the renminbi.
But on Thursday and Friday, governments focused instead on the
global impact of the Fed’s action. “With all due respect, US
policy is clueless,” Wolfgang Schäuble, German finance minister,
told reporters. “It’s not that the Americans haven’t pumped enough
liquidity into the market,” he said. “Now to say let’s pump more
into the market is not going to solve their problems.”
Pravin Gordhan, finance minister of South Africa, a key member
of the emerging market bloc, said the decision “undermines the
spirit of multilateral co-operation that G20 leaders have fought
so hard to maintain during the current crisis”, and ran counter to
the pledge made by G20 finance ministers to refrain from
uncoordinated responses.
The US Treasury declined to comment on Friday.
Experts say the mood has soured since the G20 Toronto summit in
June and worry that unless the summit can patch up differences on
trade imbalances and exchange rates, the outlook for international
economic agreement is poor.
Ousmène Mandeng of Ashmore Investment Management and a former
senior International Monetary Fund official, said: “The G20 will
also have to show [in Seoul] it can work on the issue or its very
existence will be in question.”
In recent weeks, there had been some hints that China was
favourable to the idea of current account targets.
Yi Gang, a deputy central bank governor, said China aimed to
reduce its surplus to 4 per cent of GDP in the medium-term
But Mr Cui’s comments suggest that China’s senior leaders have
decided to reject Mr Geithner’s proposal. “We believe it would not
be a good approach to single out this issue and focus all
attention on it,” he said.
Separately, the deputy foreign minister also had a stern
message for European leaders,
warning them not to attend next month’s Nobel Peace Prize
ceremony for Liu Xiaobo, an imprisoned Chinese democracy activist.
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Geithner's 4% Solution May Be `Unworkable' as APEC Gathers BL
CURRENCY WARS
Currency wars and the emerging markets VOX
Factbox: Emerging markets wary Fed policy may amplify inflows Reuters
Backlash against Fed’s $600bn easing FT
Q3 EARNINGS
MARKET &
GOLD MANIPULATION
Comex Gold Sharply Higher as Dollar Sees More Selling Pressure
Kitco
Hong Kong launches first local gold fund MW
China to buy thousands of tons of gold over next years IBTimes
China mulls strategic reserves for rare metals China Daily
AUDIO / VIDEO
QUOTE OF THE WEEK
It’s easy
being a humorist when you’ve got the whole government working for
you.
— Will
Rogers
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