Yellen to defend Fed's ultra-easy monetary policy Reuters
“I believe that supporting the recovery today is the surest path to returning to a more normal approach to monetary policy”

Yellen: U.S. Economy Performing Far Short of Potential BL

Testimony

Treasury 10-Year Yield Holds Decline as Yellen Damps Taper Bets BL

ECB - Hints at QE for EU

ECB's Praet: All Options on Table 11-13-13 WSJ

Central Bank Could Adopt Negative Deposit Rate, Asset Purchases If Needed

The European Central Bank could

1. Adopt negative interest rates or
2. Purchase assets from banks if needed

.. to lift inflation closer to its target, a top ECB official said, rebutting concerns that the central bank is running out of tools or is unwilling to use them.

"If our mandate is at risk we are going to take all the measures that we think we should take to fulfill that mandate. That's a very clear signal," ECB executive board member Peter Praet said in an interview Tuesday with The Wall Street Journal.

Annual inflation in the euro zone slowed to 0.7% in October, far below the central bank's target of just below 2% over the medium term.

Mr. Praet didn't rule out what some analysts see as the strongest, and most controversial, option: purchases of assets from banks to reduce borrowing costs in the private sector. "The balance-sheet capacity of the central bank can also be used," said Mr. Praet, whose views carry added weight as he also heads the ECB's powerful economics division. "This includes outright purchases that any central bank can do."

Additional stimulus from the ECB isn't needed right now, Mr. Praet signaled, noting that inflation risks for the euro zone as a whole are balanced after last week's unexpected ECB interest-rate cut. On Thursday the central bank reduced its key lending rate to 0.25%, a record low. The move came days after the October inflation report fanned fears that the euro zone may slip into a period of excessively low inflation or, in some places, persistent declines in consumer prices, known as deflation.

This cripples economic activity by holding wages and profits down and hampering efforts by the private sector and governments to reduce debt. Some of the countries hit hardest by the euro zone's debt crisis, including Ireland, Greece, Cyprus and Spain, have inflation rates of zero or lower. The ECB could do more if necessary, Mr. Praet said.

OPTIONS

DEPOSIT FACILITY: "On standard measures, interest rates, we still have room and that would also include the deposit facility," he said. The central bank's deposit rate has been set at zero for several months. Making it negative would effectively levy a fee on commercial banks that park funds at the ECB. That would be aimed at spurring bank lending to the private sector, which would boost growth and inflation. However, a negative deposit rate would also weigh on bank profits.

LTRO: Another option is to make more cash available to financial institutions, as it has in the past with cheap, long-term loans, known as LTROs, Mr. Praet said.

QE: The ECB has so far resisted large-scale asset purchases as a means to boost growth. The Federal Reserve and Bank of Japan have used this tool, known as quantitative easing, aggressively to spur lending and keep inflation from falling too low, buying large swaths of government and private debt.

The ECB purchased safe bank and government bonds at the height of the global financial crisis and Europe's sovereign-debt crisis, but in small amounts compared with other major central banks. Such bond purchases are deeply unpopular in Germany, where long-standing fears of inflation inspire doubts about easy-money policies. Jens Weidmann, who heads the German central bank as well as serving on the ECB's Governing Council, opposed the ECB's decision last year to create a program to buy government bonds. Nevertheless, the program, which hasn't even been used, has been widely credited with helping calm the bloc's debt crisis. The ECB's charter forbids it from financing governments, and Mr. Praet said the bank must respect such legal constraints. However the rules "do not exclude that you intervene in the markets outright," he said. Mr. Weidmann was also in the minority of ECB officials who opposed last week's rate reduction, preferring to wait for more information on the inflation outlook. This has led to some concern that if the ECB can't unanimously agree on a cut to its key lending rate, reaching consensus on more outside-the-box monetary policies will prove tricky. "For some decisions it's easier than others" to gain consensus, Mr. Praet said. "One thing is clear: the Governing Council has been able to decide. That's really the message."

The need for more aggressive stimulus is increasingly being debated by economists and investors. Economists at BNP Paribas argue the ECB should buy €50 billion ($67 billion) per month of government bonds of euro-zone countries and start doing so "the sooner the better." Still the French bank places the odds of that happening at under 50-50, "probably by a wide margin," in part because of likely resistance from the ECB's conservative wing. Mr. Praet rejected fears, particularly in Germany, that low ECB interest rates harm savers by reducing the interest rate they earn on deposits. Low interest rates tend to favor borrowers over savers. "Creditors and debtors always have an interest in a stable anchor, which is price stability in the medium term," Mr. Praet said. "The action to reduce uncertainty is good for the climate for savers."

CURRENCY WARS - US$ & Euro Debasement Talk Foster Currency Wars

Is a Currency War Just Around the Corner? BL Video
Is a Currency War coming? It may already be here G&M

Russian lawmaker wants to outlaw U.S. dollar, calls it a Ponzi scheme WT
“If the U.S. national debt continues to grow, the collapse of the dollar system will take place in 2017”

Japanese Shares Advance as Yen Weakens on Aso Comments BL
Taro Aso said the nation must retain the option to intervene in currency markets

Why I Sell the Dollar: From Dollar Strength to Dollar Weakness 11-12-13 Axel Merk

Q3 of 2013 marked a peak and reversal of direction for the dollar. The notable strength in the dollar during Q2 turned into an equally prominent weakness in Q3 compared to a basket of foreign currencies. All of the G10 currencies strengthened against the dollar during Q3, while the price of gold rose more than 7%. See attached chart for the performance of the U.S. Dollar Index for the year through 10/31/2013.

ifferently put, other factors such as prevailing monetary policy may have a much stronger impact on currency moves. Alas, while the European recovery is painfully slow, it relies more on structural reforms and less on accommodative monetary policy. Specifically, the euro has benefitted from a shrinking European Central Bank (ECB) balance sheet from early Long Term Refinancing Operations (LTRO) repayments as well as subsiding fears about negative deposit rates hinted at by the ECB earlier in the year. While the ECB just recently and unexpectedly cut its policy rate over disinflation concerns, in our assessment, the ECB has less flexibility than other central banks, particularly the Fed, in implementing policies that would weaken the currency.

The most powerful driver behind the euro may be that it is attracting risk-friendly capital, yet did not participate in the rally of recent years that pushed other so-called risk-friendly assets (such as U.S. stocks to name just one) to the stratosphere. This may sound technical, but consider that many that sold emerging market local debt securities are now buying fixed income instruments issued by peripheral (weaker) Eurozone countries. The previous generation of investors that mistakenly thought peripheral Eurozone securities were safe have fled; the new generation is willing and able to take on the risks associated with the securities. We are not suggesting that those securities are suddenly safe, but the risk of “contagion” is dramatically reduced as risk-friendly investors allow risk to be priced locally; in contrast, when an institution deemed too big to fail has significant exposure to risky assets, the fear of contagion can cripple the entire region. As proof, look at Cyprus: during the peak of the crisis, Spain had a Treasury auction where the country paid the lowest yield since the early 1990s. The market is letting us know that a crisis in the Eurozone is not the same as a crisis in the euro.

In summary, we believe the euro can be strong, while the European economy is still relatively weak.

Dollar, Out of the Frying Pan, Into the Fire

The situation in the U.S. is almost the opposite: the true problems (read entitlement spending and government debt) have not been addressed, rather, the economic recovery is dependent on accommodative monetary policy by the Federal Reserve (Fed), taking the country out of the frying pan, and into the fire. Asset bubbles may be forming, but no real reform has been undertaken. Notable is that the dollar is almost flat for the year on the popular U.S. Dollar Index, retracing almost all of its earlier gains.

In the mean time, market expectations continue to shift towards a longer time frame for QE. It is the lack of willingness to slow the pace of extreme accommodation that might become of increasing concern to the market.

There are two main elements to accommodative policy by the Fed, one is the QE program; the other is the Fed Funds rate, the short-term interest rate that the Fed controls, and the forward guidance that they provide on that rate. In our view, the Fed Funds rate is the more important piece of the puzzle for currency markets, and the decision not to taper is indicative of how cautious the Fed may be in raising rates and how much they will err on the side of keeping policy extremely loose.

Given this, while the dollar may experience short-term strength from time to time, as is being evidenced this month, our medium to long-term outlook on the dollar remains bearish. Next February’s change of guard at the Fed should support our case, with Janet Yellen as the über-Dove at the helm.

Yen: Headwinds Aloft

The yen weakened significantly through the late spring. Since May the yen has been in a trading range consolidating around 98. Despite the dollar strength witnessed for the first part of the year, the yen was not able to meaningfully rally. This is a bad sign for the yen, which will face a myriad of fundamental headwinds over the medium to long term. As a result, we remain bearish on the yen and would not count out a sharp sell off back to the weakest levels seen earlier in the year.

Golden Opportunities?

Gold fell substantially during Q2, then rallied 7.65% through Q3 coming off of what appeared to be depressed levels under $1,200 per ounce in late June. In our assessment, long term fundamentals for gold remain largely intact. In addition, Gold’s low correlation with other asset classes as well as with other currencies makes it a valuable diversifier. An actively managed currency basket including gold may provide improved risk-return benefits to a portfolio, as it may be able to benefit from gold’s upside potential, yet manage its volatility due to gold’s low correlation with other currencies.

Asian Currencies, Best of the EM

After several months of relative calm, volatility is likely to resurface in EM currencies, and the market will refocus on individual currencies’ fundamentals. One lesson investors may have learned this year is that currencies of EM countries with fragile external positions are exposed to high liquidity risk when investors rush for the exit. In contrast, most Asian countries, with the notable exception of Indonesia and India, have current account surpluses and modest to large foreign reserves, making the respective currencies more resilient to potential capital outflows. Moreover, the majority of Asian currencies have historically exhibited lower volatility and less exposure to liquidity risk, adding to the factors indicating that Asian currencies may provide investors better risk-adjusted returns compared to other EM currencies.

Renminbi on Long, Slow Race

Without much fanfare, the Chinese currency has hit a 20-year high against the dollar. We believe Chinese policymakers may continue to allow the currency to appreciate to help mitigate domestic inflationary pressure. Over the long term, we believe the currency may outperform, partly driven by China’s transition to a higher value added and more consumption-oriented growth model. For the renminbi, this is a marathon, not a sprint, which the Chinese tortoise may ultimately win over the American hare.

Why Invest in Currencies?

To those that say the U.S. has the cleanest of the dirty shirts, we would like to point out that it hasn’t helped the greenback, as evidenced by the euro outperforming the dollar both so far this year, as well as last year. Yes, we have a mess in the Eurozone that won’t be resolved anytime soon. But we also have a mess in the U.S., Japan, and many other places around the globe. Most of these problems are neither new, nor are they going to go away. We may not be able to convince policy makers to pursue sound policies, but we can allocate our money in a way that potentially mitigates some of the risk and provides profit opportunity from what may lie ahead.

More specifically, with policymakers staying engaged, asset prices appear to no longer reflect fundamentals, but instead reflect the next perceived move of government policymakers. As such, we believe the currency markets may be a great way to express one’s view of what we call the “mania of policymakers,” as currency movements may provide a more direct reflection of what policy makers are up to.

We continue to see numerous opportunities within the currency asset class, and believe that currencies may provide valuable portfolio diversification benefits and upside potential.

CREDIT GROWTH - It Will End Badly

It Will End Badly... We're In A Worse Position Than 2008" 11-11-13 Marc Faber CNBC

On the inevitable endgame:

"It will end badly and the question is whether we will have:

• a minor economic crisis and then huge money printing or
• get into an inflationary spiral first,

On China's explosive credit growth:

"Look at China, its credit as a percent of the economy has increased by 50 percent in the last 4-1/2 years. This is the fastest credit growth you can imagine in the whole of Asia,"

On the hidden inflation impacts around the world:

"Why are so many product prices in Singapore and Hong Kong more expensive than in the U.S.? It's because when you have asset inflation and high property prices, shops have to pay higher rents, so they charge more for their products. So asset inflation can flow into consumer inflation,"

VALUATIONS - Excessive on A Historical Basis

Be Prepared For Stocks To Crash 40%-55% 11-09-13 Henry Bloget, Business Insider

The stock market continues to set new highs, which is exciting and fun for those of us who own stocks.

I own stocks, so I'm certainly enjoying it.

I hope stocks continue to charge higher, but I can't find much data to suggest that they will. I only have a vague hope that the Fed will continue to pump air into the balloon and corporations will continue to find ways to cut more costs and grow their already record-high earnings.

Meanwhile, every valid valuation measure I look at suggests that stocks are at least 40% overvalued and, therefore, are likely to produce lousy returns over the next 10 years.

Which valuation measures suggest the stock market is very overvalued?

These, among others:

• Cyclically adjusted price-earnings ratio (current P/E is 25X vs. 15X average)
• Market cap to revenue (current ratio of 1.6 vs. 1.0 average)
• Market cap to GDP (double the pre-1990s norm)

How lousy do these measures suggest stock returns will be over the next decade?

About 2.5% per year for the S&P 500 — a far cry from the double-digit returns of the past 5 years and the ~10% long-term average.

If stocks just park here for a decade and return 2.5% a year through dividends, that wouldn't be particularly traumatic. But stocks rarely "park." They usually boom and bust. So the farther we get away from average valuations, the more the potential for a bust increases.

So the higher we go, the less surprised I will be to see the stock market crash. 

How big a crash could we get?

According to the aforementioned valuation measures, and the work of fund manager John Hussman of the Hussman Funds, 40%-55%.

A 50% crash would take the S&P 500 below 900 and the DOW below 8,000.

Is that going to happen?

No one knows.

And, just as importantly, no one knows when. (Valuation is unfortunately not helpful in predicting short- or intermediate-term market moves.)

But a careful study of history suggests that a crash is increasingly likely and that long-term stock returns from this level are likely to be crappy.

I've explained in detail here why I think the odds of a crash are increasing. And I've also explained why, despite this, I'm not selling my stocks. (In short, because I am a long-term investor, I am mentally prepared for a crash, and I am planning to ride out any crash, the same way I did with the 2008-2009 crash. And also because there isn't anything else compelling to invest in.).

Here's a chart from Mr. Hussman that lists many of the reasons why he (and I) are bracing for a crash. And, below that chart is an excerpt from Mr. Hussman's latest note, in which he explains the valuation concern in more detail.

And here's the excerpt:

Stock Valuations – an unrecognized bubble

Recently, as part of his book promotion tour, Alan Greenspan has hit the media circuit. His remarks include the assertion that stocks are still attractively valued, based on his estimate of the “equity risk premium.” See Investment, Speculation, Valuation, and Tinker Bell for a full discussion of the Fed Model, “equity risk premium” calculations, and a variety of far more reliable valuation methods that are tightly associated with subsequent S&P 500 total returns.

The simple fact is that on metrics that have been reliable throughout history, and even over the past decade, stock market valuations are obscene. Importantly, these same valuation metrics were quite optimistic about prospective market returns at the 2009 low.

As a side-note, one should not confuse the message with the messenger here. It’s no secret that my insistence on stress-testing our return/risk estimation methods against Depression-era data resulted in missed returns in the interim (2009-early 2010), but none of that reflects our valuation metrics, which indicated prospective 10-year S&P 500 total returns in excess of 10% annually at the time. The real concern in 2009 was that even after similar valuations were observed during the Depression, the stock market still went on to lose two-thirds of its value. So I’m quite open to criticism about my insistence on stress-testing (which I still believe was a fiduciary obligation given the events at the time). But one should be careful in concluding that this removes the ominous implications of present valuations.

On the basis of a wide variety of historically reliable fundamentals, we currently estimate 10-year S&P 500 nominal total returns of just 2.5% annually. Notably, the Shiller P/E (S&P 500 divided by the 10-year average of inflation-adjusted earnings) is now at 25. Prior to the late-1990’s bubble, the only time the Shiller P/E was higher was during three weeks in 1929 that accompanied the extreme peak of the market before stocks crashed. Meanwhile, the price/revenue ratio of the S&P 500 is presently 1.6 – a level that is double its pre-bubble norm, and even further above levels historically associated with bear market lows.

Shiller P/E

We observe similar extremes in other reliable measures that aren’t dominated by cyclical movements in profit margins. The apparently “reasonable” market valuations based on margin-sensitive fundamentals (e.g. forward operating earnings) implicitly assume that all of history can now be ignored: profit margins will no longer be highly cyclical; margins will no longer vary as the mirror image of deficits in combined household and government savings (see Taking Distortion at Face Value); and they will instead permanently remain more than 70% above their historical norm.

Aside from the fact that we can fully explain the present surplus of corporate profits as the mirror image of deficits in the household and government sectors, the other reason to focus on normalized earnings, cyclically-adjusted earnings, revenues, and other “smooth” fundamentals is simple: they are strikingly accurate guides across history. Another such measure is the ratio of stock market capitalization to nominal GDP, based on Federal Reserve Z.1 Flow of Funds data. Again, the present multiple is about double the historical pre-bubble norm.

Capitalization to Nominal GDP

While the valuation of the S&P 500 Index itself was higher in 2000, it’snotable that the overvaluation of the S&P 500 was skewed in 2000 by extreme overvaluation in very large-capitalization stocks, while smaller capitalization stocks were much more reasonably valued. In contrast, we have never in history observed the median stock as overvalued as we observe presently. Indeed, the median price/revenue ratio of stocks in the S&P 500 now exceeds the 2000 peak. Likewise, as Damien Cleusix has observed, if we examine valuations by quartiles (25% of stocks in each bin), the average price/revenue ratio of the two middle quartiles also exceeds the 2000 extreme.

For the sake of completeness, I should also note that virtually every “overvalued, overbought, overbullish” syndrome we define is on red alert. I hesitate a bit on this point, because in contrast to nearly a century of market history where these syndromes were reliably associated with deep losses, the emergence of these syndromes since late-2011 has repeatedly been followed by yet further speculation (see the chart in The Road to Easy Street). My impression remains that this is not a permanent change in market dynamics, but simply reflects an anvil that has not yet dropped. So these syndromes have admittedly done us no favors in the more recent period. Still, it remains our job, and our discipline, to view market action within its full historical context.

Among the many largely equivalent ways to define an overvalued, overbought, overbullish syndrome, the blue bars on the following chart present one of the many we observe at present:

• Shiller P/E anywhere above 18 (overvalued),
• S&P 500 at a 5-year high and at least 8% over its 40-week smoothing (overbought), with
• bullish sentiment greater than 50% and
• bearish sentiment less than 20% based on Investors Intelligence figures (overbullish).

Notice that we did not observe this particular variant in 2000 because bearish sentiment never fell below 20% in that year. Also, while sentiment data was not available in 1929, we can impute sentiment reasonably on the basis of past price movements. Using imputed sentiment, we can also include 1929 in the set of instances here.

Notice that we’ve observed three instances this year – in May, in August, and today. Given the lack of follow-through from recent syndromes, we have to at least allow for the possibility of a further blowoff, as the seduction of quantitative easing has encouraged investors to ignore these conditions. On the economy, the best we can say is that while some widely-followed Fed surveys and Purchasing Managers indices  have improved modestly in recent months, the most recent rolling correlation between these measures and actual economic outcomes (employment growth, industrial production) has become even more negative at the same time (see When Economic Data is Worse than Useless). Again, my impression is that this is not a permanent change in economic dynamics, but a temporary effect of distortions from quantitative easing, but it does force us take a more agnostic view of the economy than we might otherwise have.

In any event, I continue to believe that it is plausible to expect the S&P 500 to lose 40-55% of its value over the completion of the present cycle, and suspect that whatever further gains the market enjoys from this point will be surrendered in the first few complacent weeks following the market’s peak. That’s how it works. If all of this seems like hyperbole, please recall my similar concern at the 2007 peak (see Fair Value – 40% Off), and the negative 10-year return projections – even on best-case assumptions – that we correctly estimated for the S&P 500 in 2000. These numbers relate to the striking gap between present valuation levels and normal historical precedent, not to personal opinion.

None of our own challenges in this decidedly unfinished half-cycle relate to our consistent ability to correctly assess long-term investment prospects. We may yet see some amount of further short-term speculation, but already for the median stock, the long-term investment outlook has never been worse.

You can read the whole thing here

PRODUCTIVITY PARADOX - Robotics, Intelligent Dispensing, Showrooming etc Doesn't Bode Well For Part Time Labor

Over the past year, unionized restaurant workers across numerous fast-food chains but mostly at McDonalds, expressed their dissatisfaction with compensation levels by striking at increasingly more frequent intervals - a sentiment that has been facilitated by the president himself and his ever more frequent appeals for a raise in the minimum wage. Unfortunately, as we have pointed out previously, in the context of corporations that have given up on growing the top line (as virtually all free cash goes into stock buybacks and dividends and none into growth capex), and in pursuit of a rising bottom line, employee wages are the one variable cost that corporations will touch last of all. But what's worse, these same unionized employees have zero negotiating leverage.

Perhaps nowhere is this more visible than in the recent strategy of smoothie retailer Jamba Juice, which in order to battle a 4% drop in Q3 same store sales has decided to radically transform its entire retailing strategy by getting rid of labor, cheap, part-time or otherwise, altogether. Presenting the biggest threat to minimum-wage restaurant workers everywhere: the JambaGo self-serve machine that just made the vast majority of Jamba's employees obsolete. Coming soon to a fast-food retailer near you.

Why did Jamba just make its retail sales force obsolete? Part of the problem is heightened competition: McDonald’s has entered the smoothie market, and others like Dairy Queen and Panera spent the summer promoting their rival drinks. Which means even less top-line growth potential. It also means that in order to push more of the top line straight to earnings, and bypass variable costs, a problem that will be faced by increasingly more corporations, Jamba's corner office had no choice but to unleash JambaGo.

Bloomberg reports:

The smoothie chain is hoping to see improvement from something it calls “JambaGo,” a self-serve machine that can be installed in cafeterias, schools, and convenience stores. Jamba Juice makes money by selling the prepackaged, pre-blended smoothie ingredients to JambaGo vendors, like a soda maker selling syrup to the owner of a soda fountain. The advantages: Jamba doesn’t need to build a store and the labor costs are much lower compared with hiring staff to concoct made-to-order drinks.

The company expects this model to help expand its brand more quickly and cheaply. Last quarter, however, revenue from the JambaGo program amounted to just about $400,000. But having recently landed a deal with Target (TGT) to put JambaGo machines in 1,000 Target Cafés, the company will soon have installed more than 1,800 machines (up from only 404 at the start of 2013). By contrast, there are currently about 850 Jamba Juice stores.

Based on a goal of $2,000 in annual revenue per JambaGo, the rough math for 1,800 machines is $3.6 million—a decent boost for a company that took in $228.8 million in revenue last year. Another 1,000 are planned for 2014, which would bring in another $2 million in annual revenue.

Here's what happens next: Jamba will do what every other company does to demonstrate that its radical strategy is successful - fudge the numbers and beat EPS for several quarters. This will happen even if JambaGo is ultimately yet another loss leader. However, its peers will watch closely and soon decide to roll out their own version of just this: a self-contained dispenser of a la carte prepared fast-food food, either liquid or solid, and in the process let go tens of thousands of their own minimum-wage employees, also known to shareholders as "costs."

What happens after that should be clear to everyone: more unemployment, lower wages for the remaining employees, worse worker morale, but even higher profits to holders of capital. And so on. Because in a world in which technology makes the unqualified worker utterely irrelevant, this is what is known as "progress."

LIQUIDITY - Signs of Stress

There's A Liquidity Crunch Developing 11-10-13 Alasdair Macleod of GoldMoney.com via ZH

This week an article in Euromoney points out that liquidity in bond markets is drying up.

1. CAPITAL RATIOS: The blame is laid at the door of regulations designed to increase banks' capital relative to their balance sheets.
2. REPO GEARING: Furthermore, the article informs us, new regulations restricting the gearing on repo transactions are likely to make things worse, not only reducing bond market liquidity further, but also affecting credit markets. The reason this will be so is that in a repurchase agreement a bank supplies credit to non-banks for the period of the repo.

• POLICY 'ARB' RISK: One could take another equally valid point of view: the reason for deteriorating liquidity in bond markets is due in part to yields being unnaturally low. If you price bonds too highly, which amounts to the same thing, few investors want to buy them without the unconditional support of the central bank as a ready buyer. This, after all, is why just the hint of tapering recently was enough to derail the markets. So here again we come up against the same choice: if the Fed insists on mispricing the market with its interventions and zero interest rate policy it must fully support the market with both QE and also twist applied to the yield curve to maintain market liquidity.

For the investment analysts and commentators that still expect tapering this must come as something of a surprise. The underlying point they have missed is that

Once a central bank embarks on a policy of printing money as a cure-all, it is impossible to stop, or even to just taper without risking a liquidity crisis.

Increasingly illiquid markets are now telling us that QE should be increased.

ECB RATE DECISION

The point was rammed home this week by the ECB's decision to lower interest rates. The move was sold to the financial press as designed to stimulate inflation and reduce the risk of deflation. However, central to the deflation argument is the need to stimulate liquidity in the secondary markets, which according to the Euromoney article "are now close to breakdown".

At least the ECB rate cut should defuse tapering expectations in US markets, making it easier for the Fed to back down from its failed experiment. The Fed now needs to plant the suggestion that QE will have to be increased, or a similar mechanism designed to boost liquidity introduced.

This will not be difficult in the prevailing economic conditions. Even though GDP remains a positive figure, concerns over deflation abound and are preoccupying more and more analysts. These are concerns which analysts can readily accept as an immediate and greater risk than inflation.

VENEZUELA - Crackup Boom Continues With the "To Be Expected" Outcome

Venezuela Dispatches Army To Enforce Appliance "Fair Price" Ceiling After Looting Ensues 11-12-13 Zero Hedge

Over the weekend, in "Venezuela Government "Occupies" Electronics Retail Chain, Enforces "Fair" Prices", we reported that unpopular president Nicolas Maduro ordered the "occupation" of a chain of electronic goods stores in a crackdown on what the socialist government views as price-gouging hobbling the country's economy. Various managers of the five-store, 500-employee Daka chain - the local equivalent of Best Buy - have been arrested, and the company would be forced to sell products at "fair prices." Since then things have escalated rapidly. Because as we queried, and many wondered, the first question that arose is

• How would Maduro assure that prices were indeed kept at their "fair values" and
• How would the cool, calm and orderly social order be preserved when suddenly everyone scrambles to buy all those flatscreens (which may have certain operational problems once the socialist paradise is hit with daily electric brown and blackouts very soon) they have been dreaming of for years. Now we know: with the help of the army.

NBC reports that in his "fight" against the economic "war" that he says the political opposition, in collusion with the United States, is waging against Venezuela, President Nicolas Maduro ordered the military occupation of a chain of electronics stores over the weekend, forcing the company to charge "fair" prices. This is happening hours after Maduro also promised that he will lower prices of mobile phones: will battalion regimens be tasked with making sure iPhone 5S are sold at a net profit for Apple?

But back to serious matters such as how brilliant socialist decrees result in immediate looting:

Pictures shared on social media as well as local newspaper reports said that one store in the country's central city of Valencia faced looting. Some critics suggested that the entire operation was a form of looting organized by the government, just in time for municipal elections in December.

"This is for the good of the nation," Maduro said on state television. "Leave nothing on the shelves, nothing in the warehouses … Let nothing remain in stock!"

Pay attention: this is coming to every "developed" banana republic near you.

Head of the High Commission for the People's Defence of the Economy Hebert Garcia Plaza attempted to explain the government's decision to take over Daka on state television on Friday, accusing the chain of unfair markups.

From a Daka store in Caracas, the government minister tweeted a picture of a washer/dryer that "cost 39,000 VEF on November 1 and today costs 59,000 VEF, a nearly 100 percent rise in a week."

And while observed from the outside what is going on in Venezuela is a hoot, it hardly is to those stuck in the socialist paradise:

Local economist Jose Guerra, a former Central Bank official, was critical of not just the events at Daka but the bigger picture. "Food today, hunger tomorrow," he wrote on Twitter.

Venezuela's opposition leader, Henrique Capriles, has long blamed the government for the state of the country's economy. On Saturday, he tweeted: "Everything Maduro does leads to further destruction of the economy."

"Today it's Daka. Tomorrow it'll be the banks where you save your money," tweeted Maria G. Colmenares, a professor at a local university.

Oscar Diaz resorted to sarcasm to make his point: "Daka had flour, sugar, milk and other basics. The shortage is over! Ah sorry, they sell [appliances]! Oops."

At this point there is little left to comment on either Venezuela, or the rest of the world that has adopted the same "fairness doctrine" principle. Best to just sit back and consume the trans-fat free popcorn.

OUR "TAPER CAPER" REPORT - Proof Comes Out

Here's What The "Hint" Of A Fed Taper Did To Global Growth Hope 11-12-13 Zero Hedge

Whether or not one believes the Fed will taper (then almost instantly un-taper based on the market's reaction) or not in the coming months, Bernanke's "tease" in the early summer this year should give most pause for thought as to just how dependent 'everything' is on the Fed's money printing. As the following chart from Bloomberg's Michael McDonough shows, things changed when big Ben dropped the hint that the punchbowl will not be here forever. There is one region, however, that for now has improved its outlook for 2014 GDP growth since the taper-tease...

The largest decline occurred in Latin America, where the 2014 GDP growth consensus diminished to 3.21 percent from 3.99 percent on Jan. 1. and EMEA (the most dependent on abundant, cheap foreign capital to fuel their economic growth). Western Europe, which experienced the largest improvement, is forecasted to grow 1.39 percent in 2014, compared to 1.33 percent at the start of the year. Global growth is anticipated to total 2.85 percent in 2014.

The U.S. 2014 growth forecast has fallen modestly to 2.6 percent from 2.8 percent at the start of the year.

Though  U.S. GDP growth is forecasted to accelerate to 3.0 percent quarter-on-quarter SAAR by the fourth quarter of next year.

Hope - it's always just around the corner...

Charts: Bloomberg

FED POLICY - QE Proves to be the "Sham" We All Knew it was!

Andrew Huszar: Confessions of a Quantitative Easer 11-11-13 WSJ

We went on a bond-buying spree that was supposed to help Main Street. Instead, it was a feast for Wall Street.

I can only say: I'm sorry, America. As a former Federal Reserve official, I was responsible for executing the centerpiece program of the Fed's first plunge into the bond-buying experiment known as quantitative easing. The central bank continues to spin QE as a tool for helping Main Street. But I've come to recognize the program for what it really is: the greatest backdoor Wall Street bailout of all time.

Five years ago this month, on Black Friday, the Fed launched an unprecedented shopping spree. By that point in the financial crisis, Congress had already passed legislation, the Troubled Asset Relief Program, to halt the U.S. banking system's free fall. Beyond Wall Street, though, the economic pain was still soaring. In the last three months of 2008 alone, almost two million Americans would lose their jobs.

The Fed said it wanted to help—through a new program of massive bond purchases. There were secondary goals, but Chairman Ben Bernanke made clear that the Fed's central motivation was to "affect credit conditions for households and businesses": to drive down the cost of credit so that more Americans hurting from the tanking economy could use it to weather the downturn. For this reason, he originally called the initiative "credit easing."

My part of the story began a few months later. Having been at the Fed for seven years, until early 2008, I was working on Wall Street in spring 2009 when I got an unexpected phone call. Would I come back to work on the Fed's trading floor? The job: managing what was at the heart of QE's bond-buying spree—a wild attempt to buy $1.25 trillion in mortgage bonds in 12 months. Incredibly, the Fed was calling to ask if I wanted to quarterback the largest economic stimulus in U.S. history.

This was a dream job, but I hesitated. And it wasn't just nervousness about taking on such responsibility. I had left the Fed out of frustration, having witnessed the institution deferring more and more to Wall Street. Independence is at the heart of any central bank's credibility, and I had come to believe that the Fed's independence was eroding. Senior Fed officials, though, were publicly acknowledging mistakes and several of those officials emphasized to me how committed they were to a major Wall Street revamp. I could also see that they desperately needed reinforcements. I took a leap of faith.

In its almost 100-year history, the Fed had never bought one mortgage bond. Now my program was buying so many each day through active, unscripted trading that we constantly risked driving bond prices too high and crashing global confidence in key financial markets. We were working feverishly to preserve the impression that the Fed knew what it was doing.

It wasn't long before my old doubts resurfaced. Despite the Fed's rhetoric, my program wasn't helping to make credit any more accessible for the average American. The banks were only issuing fewer and fewer loans. More insidiously, whatever credit they were extending wasn't getting much cheaper. QE may have been driving down the wholesale cost for banks to make loans, but Wall Street was pocketing most of the extra cash.

From the trenches, several other Fed managers also began voicing the concern that QE wasn't working as planned. Our warnings fell on deaf ears. In the past, Fed leaders—even if they ultimately erred—would have worried obsessively about the costs versus the benefits of any major initiative. Now the only obsession seemed to be with the newest survey of financial-market expectations or the latest in-person feedback from Wall Street's leading bankers and hedge-fund managers. Sorry, U.S. taxpayer.

Trading for the first round of QE ended on March 31, 2010. The final results confirmed that, while there had been only trivial relief for Main Street, the U.S. central bank's bond purchases had been an absolute coup for Wall Street. The banks hadn't just benefited from the lower cost of making loans. They'd also enjoyed huge capital gains on the rising values of their securities holdings and fat commissions from brokering most of the Fed's QE transactions. Wall Street had experienced its most profitable year ever in 2009, and 2010 was starting off in much the same way.

You'd think the Fed would have finally stopped to question the wisdom of QE. Think again. Only a few months later—after a 14% drop in the U.S. stock market and renewed weakening in the banking sector—the Fed announced a new round of bond buying: QE2. Germany's finance minister, Wolfgang Schäuble, immediately called the decision "clueless."

That was when I realized the Fed had lost any remaining ability to think independently from Wall Street. Demoralized, I returned to the private sector.

Where are we today? The Fed keeps buying roughly $85 billion in bonds a month, chronically delaying so much as a minor QE taper. Over five years, its bond purchases have come to more than $4 trillion. Amazingly, in a supposedly free-market nation, QE has become the largest financial-markets intervention by any government in world history.

And the impact? Even by the Fed's sunniest calculations, aggressive QE over five years has generated only a few percentage points of U.S. growth. By contrast, experts outside the Fed, such as Mohammed El Erian at the Pimco investment firm, suggest that the Fed may have created and spent over $4 trillion for a total return of as little as 0.25% of GDP (i.e., a mere $40 billion bump in U.S. economic output). Both of those estimates indicate that QE isn't really working.

Unless you're Wall Street. Having racked up hundreds of billions of dollars in opaque Fed subsidies, U.S. banks have seen their collective stock price triple since March 2009. The biggest ones have only become more of a cartel: 0.2% of them now control more than 70% of the U.S. bank assets.

As for the rest of America, good luck. Because QE was relentlessly pumping money into the financial markets during the past five years, it killed the urgency for Washington to confront a real crisis: that of a structurally unsound U.S. economy. Yes, those financial markets have rallied spectacularly, breathing much-needed life back into 401(k)s, but for how long? Experts like Larry Fink at the BlackRock investment firm are suggesting that conditions are again "bubble-like." Meanwhile, the country remains overly dependent on Wall Street to drive economic growth.

Even when acknowledging QE's shortcomings, Chairman Bernanke argues that some action by the Fed is better than none (a position that his likely successor, Fed Vice Chairwoman Janet Yellen, also embraces). The implication is that the Fed is dutifully compensating for the rest of Washington's dysfunction. But the Fed is at the center of that dysfunction. Case in point: It has allowed QE to become Wall Street's new "too big to fail" policy.

Mr. Huszar, a senior fellow at Rutgers Business School, is a former Morgan Stanley managing director. In 2009-10, he managed the Federal Reserve's $1.25 trillion agency mortgage-backed security purchase program.

CURRENCIES - EURUSD Cross

Excerpted from: Citi Expects "A Significant Fall In EURUSD" As Currency Wars Escalate 11-08-13 CITI via ZH

Following the surprize ECB rate cut, this leaves the EU with only two major tools for further stimulative activity:

Renewed ECB bond buying (They can no longer rely on an LTRO transmission mechanism inducing financial institutions to buy European sovereign bonds especially as they have shown the propensity for haircuts when things go wrong)…this would likely then transmit into...

A sharp external devaluation of the EURO. Given the poor economic dynamics in Europe, the collapsing inflation, global feedback loop concerns regarding tapering, some concerns about the ability of China (A major export market for Europe and Germany in particular) to maintain the prior pace of economic growth etc. there should be no concern in Europe about this. The authorities have to stop viewing a weaker EURO as part of the problem (financial crisis) and more as part of the solution (External devaluation is stimulative to the MCI (monetary conditions index) and supports export led growth). Even Germany should embrace this given the sluggishness of the EURO area economies and sharply lower and falling inflation. When we look at the longer term EURUSD chart it is very supportive of this outcome in a fashion very similar to the 1995-2000 period.

EURUSD monthly chart: A very compelling historical perspective

We continue to expect a significant fall in EURUSD over the next 2+ years as we saw in 1998. We believe Europe needs and should embrace this dynamic given the ongoing danger of a deep recessionary/depressionary/deflationary environment as a consequence of fiscal austerity and the sharp internal devaluation dynamics already seen.

Within this we believe Europe should (and ultimately will) embrace the stimulative effects of such a move in conjunction with further traditional (refinancing rate) easing (Albeit at these levels the move is more psychological than anything) and non-traditional (bond buying).

On top of this the position of both the relative economic and monetary policy dynamics leaves the US further down the road and closer to a potential turn than Europe (Despite those dynamics still being weak by historical recovery standards)

MARGIN DEBT - Problem Combination of Low Mutual Fund Cash Levels

Chart Spotlight - Alan M Newman 11-05-13

PROFIT MARGINS - Margin Growth Running out of Runway

Here's Why Rising Interest Rates Won't Crush Corporate Profit Margins 11-10-13 Business Insider

First, American companies have deleveraged their balance sheets after getting burned by the recent credit crisis.

"[A]lthough we could see interest raters rise from current depressed levels, we would still expect them to remain well below history," said Bank of America Merrill Lynch's Dan Suzuki earlier this year. "We also do not see any rush for corporations to meaningfully re-lever their balance sheets for the foreseeable future."

Second, American companies have locked in lower interest rates. 

"The impact of higher rates should be muted, as companies have termed out their debt," said RBC Capital Markets' Jonathan Golub

PATTERNS - The Stock Market Is Not The Economy Anywhere In The World

The Stock Market Is Not The Economy Anywhere In The World 11-06-13 Business Insider

The stock market and the economy are not the same thing.

They may be related, but their growth rates differ because they are based on and driven by very different things.

"It is not unreasonable for an investor to associate rapid economic growth with strong stock market returns," write Vanguard's Joseph Davis, Roger Aliaga-Diaz, Charles Thomas, and Ravi Tolani. "And anyone who regularly follows the financial markets probably has the sense that economic data releases can drive market performance."

In a report titled "The Outlook For Emerging Market Stocks In A Lower-Growth World," the authors examined long-run equity market returns and real GDP growth for 46 countries and found the correlation to be very weak and inconsistent.

"At 4.0% per year, the average real equity market return for the countries with the three highest GDP growth rates was slightly below the 4.2% average return for the countries with the three lowest GDP growth rates, despite the considerable difference in those rates (8.0% a year versus 1.6%, on average)," they found. "It is clear that the correlation between these two variables is weak."

"These results may not quite line up with investor intuition," they write.

CURRENCY WARS - Erupting Again

"Beggar Thy Neighbor" Is Back: Goldman's Five Things To Watch As Currency Wars Return 11-11-13 Zero Hedge

"We’re seeing a new era of currency wars," Neil Mellor, a foreign-exchange strategist at Bank of New York Mellon in London. This is what Bloomberg reported today in a piece titled "Race to Bottom Resumes as Central Bankers Ease Anew." It adds: "The global currency wars are heating up again as central banks embark on a new round of easing to combat a slowdown in growth. 

• EU: The European Central Bank cut its key rate last week in a decision some investors say was intended in part to curb the euro after it soared to the strongest since 2011.
• CZECH: The same day, Czech policy makers said they were intervening in the currency market for the first time in 11 years to weaken the koruna.
• NEW ZEALND: New Zealand said it may delay rate increases to temper its dollar, and
• AUSTRALIA: Australia warned the Aussie is “uncomfortably high."

For the most part Bloomberg's account is accurate, although it has one fundamental flaw: currency wars never left, but were merely put on hiatus as the liquidity tsunami resulting from the BOJ's mega easing lifted all boats for a few months. And now that the world has habituated to nearly $200 billion in new flow every month (and much more when adding China's monthly new loan creation), the time to extract marginal gains from a world in which global trade continues to contract despite the ongoing surge in global liquidity, central banks are back to doing the one thing they can - printing more.

The moves threaten to spark a new round in what Brazil Finance Minister Guido Mantega in 2010 called a “currency war,” barely two months after the Group of 20 nations pledged to “refrain from competitive devaluation.”

“There are places in the world where economies are generally quite weak, where inflation is already low,” Alan Ruskin, global head of Group-of-10 foreign exchange in New York at Deutsche Bank AG, the world’s largest currency trader, said in a Nov. 8 phone interview. “Japan was in that mix for 20-odd years. Nobody wants to go there” and “the talk from Draghi shows they’re taking the disinflation story very seriously. The Czech Republic is the same story.”

Growth in global trade may slow to 2.5 percent in 2013, the new head of the World Trade Organization said after a Sept. 5-6 summit of G-20 nations in St. Petersburg, Russia, down from the organization’s previous estimate in April of 3.3 percent. Even so, the G-20 participants agreed to “refrain from competitive devaluation” and not “target our exchange rates for competitive purposes.”

It is indeed the bolded part that is the most disturbing one, and is why the most important revision in the IMF's quarterly update of its flawed forecasts, is always the chart showing the collapse in real global trade, which in 2013 is now forecast to be 50% lower than preliminary estimates.

So what should one watch for now that even the MSM admits the currency wars are "back"? Goldman lists the 5 key areas to watch as central banks resume beggar thy neighbor policies with never before seen vigor.

• Watch for Sudden Policy Shifts – In a regime where stability is achieved via offsetting forces, a sudden change in one of these forces will lead to potentially rapid moves. Changes often result from a major policy shift, as for example seen in Japan about a year ago. The period of Sterling weakness early in the year was another example, where a central bank suddenly increased the focus on the exchange rate. A policy shift that hurt EM deficit currencies this year, in particular, was the move towards Tapering by the Fed. Changes to one of the normally offsetting forces are quite similar to revaluation or devaluations in traditional exchange rate regimes.
• Watch Genuine Appreciation Trends – In a world where every country wants to prevent its currency from strengthening, those who actually favour a stronger currency will not face many offsetting pressures. Obviously this is conditional on stronger underlying fundamentals. In order to control the speed of appreciation, frequent smoothing operations can be necessary. This may create a scenario of relatively slow appreciation, combined with very low volatility, which in turn would imply a high Sharpe Ratio. China’s steady Renminbi appreciation remains a case in point. And in recent times the Korean Won as well.
• Watch Policy Constraints – There may also be countries that face continued appreciation pressures but operate under policy constraints that do not allow them to respond fully. In these situations policymakers may not be able to fully prevent appreciation. The constraints could appear in various forms. Would the ECB have been able to cut rates with higher inflation rates? A strict inflation mandate reduces the flexibility for policy makers to respond to currency movements, in particular when they reflect positive growth shocks. External policy pressures could be a constraint. The discussions at the G7 may have been a factor that limited Japan’s ability to weaken the JPY further and could become a constraint in case the JPY starts to strengthen again. The US Treasury report on currencies certainly hints in that direction.
• Watch Carry – If policymakers aim at anchoring the exchange rate in nominal terms and succeed, this does not automatically imply that there are no return opportunities. As long as interest rates differentials persist there will be carry opportunities. And again relatively low volatility may be a welcome feature which raises Sharpe ratios. How long will the RBA be able to sustain an interest rate differential of more than 2% to most other developed economies in such a scenario?
• Watch Quasi Currencies – Finally there is even an argument that competitive devaluations could boost precious metals. That view is based on the simplification that gold, for example, is a “homeless” currency without a central bank that tries to block its appreciation. Another way of saying the same is that many asset prices may rise in response to continued and competitive monetary easing, which is a key feature of such a non-collaborative exchange rate mechanism.

But most importantly, watch Yellen and the inflection point where the consensus that tapering may/will/should be just around the corner, makes way for the anathema, namely that $85 billion per month is nowhere near enough as the Fed doubles down on its own core prerogative for 2014: ramping inflation at all costs... even if it means a return to Yellen's favorite topic: outright monetary finance.