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"BEST OF THE WEEK " |
Posting Date |
Labels & Tags | TIPPING POINT or 2013 THESIS THEME |
HOTTEST TIPPING POINTS |
Theme Groupings |
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We post throughout the day as we do our Investment Research for: LONGWave - UnderTheLens - Macro Analytics |
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COMPLACENCY VXV / VIX Ratio Sending A Clear Signal |
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FAILURES - Market, Policy and Institutional The Capital-Flow Conundrum 11-08-13 Eswar Prasad Brookings In recent months, emerging economies have experienced capital-flow whiplash. Indications that the US Federal Reserve might “taper” its quantitative easing (QE) drove investors to reduce their exposure to emerging markets, sharply weakening their currencies and causing their equity prices to tumble. Now that the taper has been postponed, capital is flowing back in some cases. But, with little influence, much less control, over what comes next, emerging economies are still struggling to figure out how to protect themselves from the impact of a Fed policy reversal. When the Fed initially hinted at its intention to taper QE, policymakers in some emerging economies cried foul, but were dismissed by advanced-economy officials as chronic complainers. After all, they initially rejected the very policies that they are now fighting to preserve. But emerging-market policymakers’ criticisms do not reflect an inconsistent stance; in both cases, the crux of their complaint has been volatility. They have already attempted to erect defenses against the potentially destabilizing effects of advanced-country monetary policy by
But this approach fails to address the underlying issue – and misdiagnosing the problem could have far-reaching consequences, not only leading to ineffective solutions, but also possibly causing severe distortions for specific economies and the global financial system as a whole. In order to design effective remedies, it is useful to distinguish among three types of failures that impede financial-market functioning. The three types of failures that impede financial-market functioning. MARKET FAILURES First, there are market failures, which occur when, for example,
POLICY FAILURES Second, there are policy failures, which occur when
INSTITUTIONAL FAILURE The third – and currently most problematic – failure is one of national or international institutions. MONETARY DEPENDENCY Using monetary policy to compensate for deficiencies in other policy areas constitutes an institutional breakdown: monetary policymakers are not necessarily getting it wrong, but they are constrained by the configuration of other policies. Domestic monetary policy has become the first and last line of defense against growth slowdowns and financial panics, enabling policymakers to avoid pursuing other important, but far more difficult measures. Using monetary policy to compensate for deficiencies in other policy areas constitutes an institutional breakdown: monetary policymakers are not necessarily getting it wrong, but they are constrained by the configuration of other policies. GLOBAL GOVERANCE FRAMEWORK The inadequacy of the current framework for global governance compounds the problem. The grim reality is that, with financial markets becoming increasingly interconnected, monetary-policy measures taken by any of the major economies have international spillover effects. An effective governance mechanism or reliable institution is needed to help emerging markets cope with these effects. The lack of effective global economic governance has important implications for capital flows. Emerging-market policymakers believe that they lack recourse to safety nets that would cushion the impact of volatile flows. Their efforts to “self-insure,” by, say, building up their foreign-exchange reserves, perpetuate global economic imbalances. So how can policymakers address these failures? There has been some progress at the international level on regulatory reforms aimed at addressing market failures, though such efforts have been limited by strident resistance from financial institutions. Solutions for policy failures are not difficult to discern.
Moreover, the functioning of emerging-economy financial markets should be improved, with policies aimed at
While the right policies cannot eliminate risk, they can ameliorate the cost-benefit tradeoff from capital flows. Fixing institutional failures is the most important – and the most difficult – step. Successful reform requires, first and foremost, finding the right mix of domestic policies. In the advanced economies, in particular,
In many of the troubled emerging economies, however, monetary policy has shouldered the burden of
This balancing act is difficult to maintain, leaving these economies vulnerable when the external environment turns unfavorable. In India, for example, increasing productivity and long-term growth require fiscal discipline and a raft of financial- and labor-market reforms. But the central bank is being asked to do all the heavy lifting. In other emerging markets, too, the main challenge is to ensure that all macroeconomic and structural policies advance common goals. At the same time, the governance structure of multilateral institutions like the International Monetary Fund must be reformed, in order to bolster their legitimacy in emerging markets. Otherwise, these institutions will remain ineffective in confronting collective problems related to macroeconomic-policy spillovers, and in providing insurance against crises. Policymakers in advanced and emerging countries alike should Focus on the underlying failures that destabilize their economies and impede growth, rather than trying to treat the symptoms by manipulating monetary policy or capital controls. Unless they are supported by strong institutional structures at all levels, such measures will prove futile in managing capital flows.
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11-18-13 | GMTP A12 | 9 - Global Governance Failure |
LEADERSHIP - 'Value Transformer' Politicians are avoiding politics OR the voters are rejecting The Three Types Of Politicians 11-13-13 OfTwoMinds Charles Hugh Smith Solving profoundly structural problems by establishing a new foundation of values that most can embrace positively is the hallmark of leadership. CARETAKERS maintain the status quo, a task that boils down to throwing a fiscal bone to every politically powerful constituency and doing so in a manner that does not create career-threatening blowback. Either those with these leadership skills are avoiding politics or the voters are rejecting them in favor of caretakers who are incapable of challenging political powerful constituencies or finding common ground for desperately needed systemic reforms.
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11-18-13 | GMTP A12 | 9 - Global Governance Failure |
COMPLACENCY - VXV / VIX Ratio Sending A Clear Signal BofAML Warns "Don't Get Complacent" 11-17-13 BoAML In the near term, BofAML's Macneil Curry warns "we are growing a bit cautious/nervous, as US equity volatility is flashing a warning sign of market complacency that has often preceded a correction or a pause in trend." This 'red flag' is asterisk'd appropriately in the new normal with "to be clear, the balance of evidence is still very much US equity positive, but the near term downside risks have increased." Via BofAML's MacNeil Curry, We are bullish stocks, with the S&P500 targeting 1844 into year end [ZH: which sounds awfully close to an extraplotaed protjection of where the Fed's balance sheet implies year-end target]. However, in the near term, equity volatility warns of complacency and the potential for a correction lower. Specifically, the VXV/VIX ratio (VXV is the BBG ticker for 3m SP500 Volatility) has reached levels that have often led to a market pause/correction. While such a pullback would ultimately be corrective, Be Alert! |
11-18-13 | STUDY LIQUIDITY |
ANALYTICS |
CURRENCIES - Near Term $ Weakness on Euro & Sterling Strength & Yen Cross Weakness Dollar Remains Fragile 11-16-13 Marc To Market via ZH US$ WEAKNESS The US dollar looks vulnerable to additional losses. Generally speaking, the technical outlook for the greenback has soured and, in fact, warn of some risk accelerated losses in the period ahead. Nor can participants count on the economic calendar to stem the dollar's rout. The US has a slate of economic reports next week as the government catches up with the delay from the shutdown, but nothing to put the tapering back into December. EURO STRENGTH At the same time, while there is some expectation the ECB may do something more in a few weeks, following up on the recent repo rate cut, it is still far too early to expect the ECB to adopt what we have dubbed as "nuclear options", such as
Since it just
The euro's resilience in the face of the repo rate cut is demonstrated by its 1% rise on a trade-weighted basis, which is the key metric of its potential economic impact. EONIA is essentially unchanged (about half of a basis point lower) since the rate cut (which is one should have expected, as EONIA trades closer to the zero deposit rate than the repo rate). The euro has recorded higher lows for six consecutive sessions It tested the $1.35 in the second half of last week, but did not manage to close about it. This corresponds to a retracement objective of the nearly 5.5 cent decline beginning Oct 25. Assuming this level is convincingly breached, we see scope for the euro to rise 1% next week toward $1.3630. A move below $1.34 would weaken the outlook, but it probably requires a close below the 100-day moving average, which held on this basis, despite some intra-day penetration recently. It is near $1.3365 now. STERLING STRENGTH Sterling made new highs for the month ahead of the weekend and now seems poised to re-challenge what appeared to have been a double top made in Oct near $1.6260. Sterling had gone through the neckline (~$1.5890) early in the week, though not on a closing basis and the quickly rebounded, thanks to a favorable employment report and more optimistic BOE. Its resilience was reflected in the speed at which the market shrugged off the weak retail sales report (-0.7% rather than flat as the consensus expected). USDJPY The dollar did rise to two month highs against the yen and finished the last week with two consecutive closes (of the North American session) above the JPY100 for the first time in four months. Contrary to the general assertion, it cannot be simply attributed to Fed tapering ideas. The yen's 1.1% loss against the dollar occurred as the US premium over Japan (10-year interest rate differential) actually fell roughly 9 bp last week, slipping lower in three consecutive sessions before the weekend. The key test for the dollar is awaiting closer to the JPY100.60, the September high, which is just below the high from the second half of July set near JPY100.85. A break of this would bring into view the early July high near JPY101.55, which is the high posted since the decline from the year's high set in May (~JPY03.75) to the early June low (just below JPY94). Support has been established around JPY99 and it may require a break of that to signal a high is in place. YEN WEAKNESS Yen weakness is more pronounced on the crosses than against the dollar. Indeed, the yen's weakness appears to be, at least in part, not a dollar story. It has fallen nearly 2% on a trade-weighted basis so far this month. Sterling is trading a multi-year highs against the yen and euro is testing the year's high. The New Zealand dollar is testing the JPY84 level that held in both Sept and Oct. The Canadian dollar is at two-month highs against the yen. With the third arrow of Abenomics still apparently a work in progress, any appearance of relying on currency depreciation may face criticism by the US and Europe. Chinese official silence on the issue is noteworthy. Perhaps, its refrains from criticizing so as not to encourage criticism of its exchange rate policy, though that doesn't stop the PBOC from time to time of being critical of the US (market determined) exchange rate stance. US$ INDEX Turning to the dollar-bloc, from a technical perspective the US dollar is set to fall further. The head and shoulders topping pattern we discussed last week proved for naught. Even though the $0.8200 neckline was violated on Nov 12, there was no follow through selling and the Kiwi rebounded smartly (almost 2%) to vie with the euro as the strongest of the major currencies on the week. It seems that the rule here, and in sterling, is play the range until convincingly violated. If applied to the yen, it would seem to warn against playing the break out. AUSTRALIAN DOLLAR IN A RANGE BOUND BASING PROCESS The Australian dollar was largely range bound for most of last week, but this is increasingly looking like a base, rather than a pause before the next leg lower. The key may be the downtrend line drawn off the Oct 23 high near $0.9760 and Nov 6 high near $0.9545. It comes in near $0.9400 on Monday, though falls toward $0.9325 by the end of the week. Technically, a move above $0.9400 could spur another 1.0-1.5 cent advance. CANADIAN DOLLAR WEAKENESS The move above CAD1.05 on Nov14 appeared to have exhausted the USD bulls. A break now of CAD1.0430 (where a retracement objective and 20 day moving average lay) would confirm a near-term greenback high), and ideally CAD1.04, would suggest a move toward at least the lower end of the 5-month trading range (~CAD1.0250-CAD1.03). MEXICAN PESO The Mexican peso's 1.75% rise last week edged out the South African rand as the strongest of the emerging market currencies. The US dollar's decline brought it within a spitting distance of the uptrend line drawn off the Sept and mid- and late-Oct lows. It comes in near MXN12.91 on Monday. A break may signal another 1% decline in the dollar. Observations from the speculative positioning in the CME currency futures:
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11-18-13 | CURRENCIES DRIVER$ |
ANALYTICS |
MOST CRITICAL TIPPING POINT ARTICLES THIS WEEK - November 17th - November 23rd |
RISK REVERSAL | 1 | ||
JAPAN - DEBT DEFLATION | 2 | ||
BOND BUBBLE | 3 | ||
EU BANKING CRISIS |
4 |
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SOVEREIGN DEBT CRISIS [Euope Crisis Tracker] | 5 | ||
CHINA BUBBLE | 6 | ||
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MACRO News Items of Importance - This Week | |||
GLOBAL MACRO REPORTS & ANALYSIS |
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US ECONOMIC REPORTS & ANALYSIS |
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CENTRAL BANKING MONETARY POLICIES, ACTIONS & ACTIVITIES | |||
Market Analytics | |||
TECHNICALS & MARKET ANALYTICS |
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COMMODITY CORNER - HARD ASSETS | PORTFOLIO | ||
COMMODITY CORNER - AGRI-COMPLEX | PORTFOLIO | ||
SECURITY-SURVEILANCE COMPLEX | PORTFOLIO | ||
THESIS Themes | |||
2013 - STATISM |
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2012 - FINANCIAL REPRESSION |
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2011 - BEGGAR-THY-NEIGHBOR -- CURRENCY WARS |
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2010 - EXTEND & PRETEND |
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THEMES | |||
NATURE OF WORK -PRODUCTIVITY PARADOX | |||
GLOBAL FINANCIAL IMBALANCE - FRAGILITY & INSTABILITY | |||
CENTRAL PLANINNG -SHIFTING ECONOMIC POWER | |||
SECURITY-SURVEILLANCE COMPLEX -STATISM | |||
STANDARD OF LIVING -GLOBAL RE-ALIGNMENT | |||
CORPORATOCRACY -CRONY CAPITALSIM | |||
CORRUPTION & MALFEASANCE -MORAL DECAY - DESPERATION, SHORTAGES.. |
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SOCIAL UNREST -INEQUALITY & BROKEN SOCIAL CONTRACT | |||
CATALYSTS -FEAR & GREED | |||
GENERAL INTEREST |
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Tipping Points Life Cycle - Explained
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