GLOBAL MONETARY - Remember the 2nd Derivative

A 1994 Redux? 03-05-13 BOAML via ZH

A prevailing theme that the pundits are trying to furiously push onto hapless lemmings in hope of forcing them out of bonds and into stocks, is that the current capital market is somehow comparable to that of 1994 and that the Fed rate hike of 1994 is imminent in our day and age too. Aside from the fact that the economy, or the market, is nothing like 1994, the subliminal suggestion is that the Fed may just pull a Greenspan, and proceed to hike rates one clear day, in the process sending the long-end soaring, so please dear lemmings: rotate greatly. So if one were to ignore the fact that for the Fed to hike it would imply that the $14 trillion in global central bank support would immediately start being withdrawn, and thus sending the S&P lower by over 1000 points, how does this particular fable work? Here is how Bank of America spins it.

A small step for the Fed; a giant leap for the bond market: The economic recovery in the early 1990s was similar to today’s recovery. Growth rebounded slowly from the 1991 recession, so the Fed continued to cut rates and then went on hold with a 3% funds rate from October 1992 to January 1994. This caused a steady rally in the bond market, with monthly average 10-year yields bottoming at just 5.3% in October 1993. This was an extraordinarily low yield; coming just 10 years after yields had peaked at 13.4%.

Sure enough: a tidy little package. There is one problem: hiking rates means that the Central Banks admit their balance sheets are too big. Which means one simple thing: the $14 trillion orange bar will be "discounted" as going to zero asap. What happens next Bank of America can certainly tell us, but something tells us they won't.

GORDONTLONG.COM

"This is an Incredibly Valuable Chart

Remember your 2nd Derivative from Calculus?" - GTL

EMOTIONAL CYCLE - The Media Attention Stage of the Great Monetary Easing

"Enthusiasm", "Greed" Or "Delusion" Phase? 03-05-13 Zero Hedge

QE IV PRICED IN - The Great Monetary Easing Part III IS NOT!

Bernanke's S&P 500 Year-End Forecast: "Conviction Buy", $2000 Price Target 03-05-13 Zero Hedge

Given his reiteration last week that the Fed is here to stay - and his fellow dovish lapdogs' confirmation that we can all rest assured that our 'wealth' is being protected - we know that the Fed balance sheet will hit around $4 trillion by year-end. Given the hyper-correlation over the past three months between US equity performance and the daily pump of POMO, it appears clear that Bernanke's target for the S&P 500 by year-end is around 2000 (unless of course you think there is even a little bit of market efficiency and discounting left in the world).

Is this what the Princeton Professor is looking for?

Or did the market front-run as usual and has already priced it in?

and maybe the post 2010 valuation highs for the Dow will slow things down a little?

Charts: Bloomberg

GOLD - Signalling Great Monetary Easing - Part III Ahead

Gold And The Next Great Monetary Easing 03-05-13 Morgan Stanley via ZH

SITUATIONAL ANALYSIS

Gold's rise over the past few years has been driven by a number of factors. Aside from the unprecedented monetary easing and skepticism over the global financial system in recent years, Morgan Stanley notes that

1) A persistent increase in investment demand,

2) Acceleration in producer de-hedging,

3) A decline in net official sector sales, and

4) A persistent failure on the part of the mining companies to respond to the incentive of a steadily rising price and materially lift production; all also impacted gold's premium.

 In 2012, gold’s investment premium was driven by investors seeking a safe haven from widespread fears of

• A hard landing in China,
• Systemic risk to the European single currency posed by the possibility of a Greek default and
• Risks to US recovery posed by the impending Fiscal Cliff and Debt Ceiling.

A re-evaluation of gold’s security premium followed from the various mitigations of the numerous risks to global growth.

THE GREAT MONETARY EASING - Part III

• About to witness the third installment of the Great Monetary Easing that started to play out when the credit bubble burst five years ago and that the gold bull market will enter its strongest phase.
• This third phase is being driven by
  • central bankers’ concerns over excessive non-yen currency appreciation as Japan works to fight deflation, and
  • worries about a further significant rise in bond yields and the implications for private and public sector debt sustainability.
• In this environment, the priority of monetary policy is to avoid excessive exchange rate appreciation as the yen continues to depreciate and alleviate the debt burden of the private and public sector.

The implicit continuation of low interest rates in an emerging cyclical recovery argues quite strongly, in our view, for a potential upside surprise in central bank liquidity creation, something that in the very recent past has been positive for gold prices.

GORDONTLONG.COM

In these circumstances, we believe that gold has demonstrated considerable technical strength, offers good value at current prices both as an entry level to the trading range between US$1,540/oz and US$1,800/oz and as an option on any remaining upside surprise above this range that might result from the third part of the Great Monetary Easing.

JAPAN - Yen Devaluation

Guide To Trading USDJPY 03-03-13 Zero Hedge

Having trouble deciding whether to join the herd? Unsure if Abe and Kuroda can unilaterally take on the world's central banks? Worried that surging inflation in energy and food costs in Japan will force the BoJ's inflationary resolve to crack? The following flow-chart from HSBC provides an at-a-glance decision-tree for whether JPY weakens to over 120 or strengthens back to 80...

Click to Enlarge

(h/t @JEliasof)

JAPAN - New Bank of Japan Policy - 2% Inflation in 2 Years

BOJ nominee Kuroda sets out aggressive policy ideas 03-04-13 Reuters

Haruhiko Kuroda - BOJ Nominee

NO MONEY INCREASE LIMITS

The Japan government's nominee to be the next central bank governor outlined more forceful policy prescriptions on Monday to finally defeat deflation, saying he

"would not set any limits on the amount of cash the Bank of Japan pumps into the economy"

INFLATION OF 2% IN 2 YEARS

Underlining expectations he would be an aggressive governor, Haruhiko Kuroda told lawmakers the BOJ's current policies were not powerful enough to boost inflation to 2 percent, a target he said the central bank should strive to achieve in two years.

Kuroda suggested the most natural way to ramp up the central bank's stimulus for the economy would be through

1. Huge purchases of longer-dated government bonds.
2. The BOJ should also consider kicking off its open-ended asset purchases early, rather than waiting until the scheduled start date of 2014.

"It would be natural for the BOJ to buy longer-dated government bonds in huge amounts," Kuroda said in a confirmation hearing in the lower house of parliament. "But the central bank also needs to scrutinize market developments at the time, as well as the potential drawbacks."

Prime Minister Shinzo Abe nominated Kuroda, president of the Asian Development Bank, to be the new governor in a push for bolder central bank efforts to end nearly two decades of debilitating deflation and revive the fortunes of an economy stuck in its fourth recession since 2000. His nomination is expected to be approved by parliament because opposition parties, whose support would be needed in the upper house, have indicated they would back him.

The prospect of BOJ buying longer-dated bonds prompted a market rally, led by the longer end. Yields on 20-year bonds dropped to a seven-month low of 1.550 percent. Yields on 5-year debt hit a record low of 0.110 percent.

Japan's former top currency diplomat, Kuroda, 68, would replace incumbent Masaaki Shirakawa, 63, who is due to leave office on March 19 along with his two deputy governors.

PRIOR POLICY

Under Shirakawa, the BOJ has agreed to

1. buy assets or make loans totaling 101 trillion yen by the end of this year, part of which includes buying government bonds with a maturity of up to three years.
2. It said in January it would switch to open-ended asset buying from 2014 to achieve the 2 percent inflation target.

ABE'S RESULTS

Abe's demands for bolder action has already

1. pushed the yen to a three-year low and
2. the stock market to a four-year high as investors anticipated much looser policies.
3. Sentiment in the government bond market reached a seven month high, a Thomson Reuters poll showed on Monday.

"Market expectations are high and it will be hard for the BOJ to do something to surpass such expectations," said Koichi Haji, chief economist at NLI Research Institute.

"You cannot deny the possibility that the central bank will ease before the scheduled first monetary policy meeting in early April to provide surprise."

If Kuroda's nomination is approved, his first regularly scheduled policy review would be on April 3-4.

Abe has also nominated academic Kikuo Iwata, who supports unconventional monetary policy, and BOJ official Hiroshi Nakaso, who has hands-on knowledge of the central bank's inner workings, as deputy governors.

Kuroda said that like other central banks, the BOJ should also focus on reducing long-term rates and risk premiums with the aim of increasing consumption and investment. The BOJ should not focus solely on the amount of money circulating through the economy, he said. "Simply expanding monetary base won't be too effective," he told lawmakers.

He acknowledged international concerns over Japan's monetary policy and worries a sliding yen could spark competitive currency devaluations.

"There's evidence that currencies tend to fall for countries that ease monetary policy on a large scale ... But the BOJ's policy is not targeting currencies,"

"The important thing is to ensure price stability and achieve the 2 percent price stability goal, although it could affect currencies in that process." Kuroda said currency levels should be determined by markets, but intervention was possible if markets greatly deviate from fundamentals.

It would be difficult for the BOJ to buy huge amounts of foreign currency bonds on its own, Kuroda said. The nominations must be approved by both houses of parliament to take effect. Abe's ruling camp controls the lower house but lacks a majority in the upper house, so needs the support of opposition parties to confirm the nomination.

TOTAL FINANCIALIZATION - Versus Enterprise Value

Total Debt + Equity = USA Bubble #1 03-03-13 McKinsey via ZH

Most of the time, when economists or Wall Streeters present a continuum of who's worst (or best) in the world, they show just a part of the whole: whether it is total sovereign (public) bonds, total corporate bonds, securitized or non-securitized bank loans, or in some cases, equities, as a percentage of the host nation's economic output, or GDP. The reality is that all these are merely a part of the greater whole, and showing one independent of the others tells at best a small part of the story. For the full picture one always needs to show how all these add up combined to get what in corporate finance is known as "enterprise value", and what in economics McKinsey has dubbed "financial depth" or the value of the world's financial assets relative to GDP. It is here that it is clearest and most visible just how extensive the "bubblification" of the US capital markets - both debt and equity - has been, even despite the relative drop in consolidated "financial depth" in the past five years.

In short: think US is the biggest financial bubble in the world? You are right.

And for those who say there is still a long way to go before the global bubble - the consolidated global bubble, including equity and debt, is reflated back to 2007 levels, guess again - we are now at a new all time high of "financial depth."

Finally, while everyone is bombarded every single day with news that the global stock market is back to "all time highs", what virtually nobody knows is that when expressed as a percentage of global GDP, which in turn is driven entirely by new debt creation mostly by central banks, global equities as a % of global GDP are now 40% lower than their previous high achieved back in 2007!

Those who are familiar with the simplest concept in all of finance - Enterprise Value - will understand why in an environment of imploding free cash flow such as the current one, this is bad to quite bad.

GLOBALIZATION CYCLES - Crisis and Conflict Prone

The Two Eras Of Financial Globalization: A Flashing Red Warning 03-04-13 Zero Hedge

The rise of cross-border investing in recent decades is not the first time the world has seen a significant burst of financial globalization. Indeed, the Second Industrial Revolution coincided with a new era of capital mobility that extended roughly from 1860 to 1915. Foreign investment assets rose to 55 percent of GDP in the major European economies.

This wave of financial globalization reflected European investment in colonies and former colonies. As the British Empire reached its peak, Great Britain alone accounted for half of the foreign assets of the period. These investments helped fund the industrialization and urbanization that transformed recipient nations such as Canada, Australia, and Argentina.

But the ending of the first age of financial globalization provides a cautionary tale. Two world wars and a global depression not only brought this period of integration to a halt but also ushered in six decades of tightly restricted capital flows and pegged foreign exchange rates. Foreign investment assets as a share of GDP in the major economies did not regain their earlier peak until 1990. Today it is unclear whether financial globalization will rebound or whether we will enter a similar period of more insular national financial markets.

WARNINGS - List of Worries Grows

12 Things That Just Happened That Show The Next Wave Of The Economic Collapse Is Almost Here 03-04-13 Michael Snyder of The Economic Collapse blog, via ZH

Are we running out of time?  For the last several years, we have been living in a false bubble of hope that has been fueled by massive amounts of debt and bailout money.  This illusion of economic stability has convinced most people that the great economic crisis of 2008 was just an "aberration" and that now things are back to normal.  Unfortunately, that is not the case at all.  The truth is that the financial crash of 2008 was just the first wave of our economic troubles.  We have not even come close to recovering from that wave, and the next wave of the economic collapse is rapidly approaching.  Our economy is like a giant sand castle that has been built on a foundation of debt and toilet paper currency.  As each wave of the crisis hits us, the solutions that our leaders will present to us will involve even more debt and even more money printing.  And each time, those "solutions" will only make our problems even worse.  Right now, events are unfolding in Europe and in the United States that are pushing us toward the next major crisis moment.  I sincerely hope that we have some more time before the next crisis overwhelms us, but as you will see, time is rapidly running out.

The following are 12 things that just happened that show the next wave of the economic collapse is almost here...

#1 According to TrimTab's CEO Charles Biderman, corporate insider purchases of stock have hit an all-time low, and the ratio of corporate insider selling to corporate insider buying has now reached an astounding 50 to 1....

While retail is being told to buy-buy-buy, Biderman exclaims that "insiders at U.S. companies have bought the least amount of shares in any one month," and that the ratio of insider selling to buying is now 50-to-1 - a monthly record.

#2 On Friday we learned that personal income in the United States experienced its largest one month decline in 20 years...

Personal income decreased by $505.5 billion in January, or 3.6%, compared to December (on a seasonally adjusted and annualized basis). That's the most dramatic decline since January 1993, according to the Commerce Department.

#3 In a stunning move, Michigan Governor Rick Snyder says that he will appoint an emergency financial manager to take care of Detroit's financial affairs...

Snyder, 54, took a step he avoided a year ago, empowering an emergency financial manager who can sweep aside union contracts, sell municipal assets, restructure services and reorder finances. He announced the move yesterday at a public meeting in Detroit.

If this does not work, Detroit will almost certainly have to declare bankruptcy.  If that happens, it will be the largest municipal bankruptcy in U.S. history.

#4 On Friday it was announced that the unemployment rate in Italy had risen to 11.7 percent.  That was a huge jump from 11.3 percent the previous month, and Italy now has the highest unemployment rate that it has experienced in 21 years.

#5 The youth unemployment rate in Italy has risen to a new all-time record high of 38.7 percent.

#6 On Friday it was announced that the unemployment rate in the eurozone as a whole had just hit a brand new record high of 11.9 percent.

#7 On Friday it was announced that the unemployment rate in Greece has now reached 27 percent, and it is being projected that it will reach 30 percent by the end of the year.

#8 The youth unemployment rate in Greece is now an almost unbelievable 59.4 percent.

#9 On Saturday, hundreds of thousands of protesters filled the streets of Lisbon and other Portuguese cities to protest the austerity measures that are being imposed upon them.  It was reportedly the largest protest in the history of Portugal.

#10 According to Goldman Sachs, bank deposits declined all over Europe during the month of January.

#11 Over the weekend, the deputy governor of China's central bank declared that China is prepared for a "currency war"...

A top Chinese banker said Beijing is "fully prepared" for a currency war as he urged the world to abide by a consensus reached by the G20 to avert confrontation, state media reported on Saturday.

Yi Gang, deputy governor of China's central bank, issued the call after G20 finance ministers last month moved to calm fears of a looming war on the currency markets at a meeting in Moscow.

Those fears have largely been fuelled by the recent steep decline in the Japanese yen, which critics have accused Tokyo of manipulating to give its manufacturers a competitive edge in key export markets over Asian rivals.

#12 Italy is an economic basket case at this point, and the political gridlock in Italy is certainly not helping matters.  Former comedian Beppe Grillo's party could potentially tip the balance of power one way or the other in Italy, and over the weekend he made some comments that are really shaking things up over in Europe.  For one thing, he is suggesting that Italy should hold a referendum on the euro...

"I am a strong advocate of Europe. I am in favor of an online referendum on the euro," Beppe Grillo told Bild am Sonntag.

Such a vote would not be legally binding in Italy, where referendums can only be used to repeal laws or parts of laws, but would carry political weight. Grillo has said in the past that membership of the euro should be up to the Italian people.

In addition, Grillo is also suggesting that Italy's debt has gotten so large that renegotiation is the only option...

The 64-year-old comic-turned-political activist also said Italy needs to renegotiate its €2 trillion debt.

At 127 per cent of gross domestic product (GDP), it is the highest in the euro zone after Greece.

UNCERTAINTY - Fed Governor Fisher Lays It Out

Proof the Fed is Juicing the Markets 03-04-13 Fox Business - Elizabeth MacDonald

EARNINGS - Classic Hockeystick of False Expectations

2013 Earnings: Just Insert Hockeystick 02-18-13 Goldman sachs via ZH

We have discussed various incarnations of market-reality separation from underlying-reality but none had quite the unbelievability of the following chart of earnings-growth expectations currently foreseen by the consensus of linear-extrapolaters and hockey-stickers known as the sell-side. Behold - hope, defined...

2013 Consensus earnings growth is +27% YoY...!

all done with 6% YoY top-line growth (which by itself is somewhat incredible given its triple GDP growth expectations for the year)...

and at the same time it appears pretty clear that EBIT Margins have rolled over...

Meanwhile, BTFD.