Japan's economy contracted for the third consecutive quarter in October-December, showing the country is struggling to escape from a mild recession and adding weight to the new government's push for radical policy steps to revive growth.
Gross domestic product (GDP) fell 0.1 percent in October-December from the previous quarter, compared with the median forecast of 0.1 percent expansion, according to a Reuters poll.
Economics Minister Akira Amari said while the economy was still showing some weakness, it was likely to resume moderate recovery helped by monetary easing, stimulus spending and an expected pick-up in global growth.
On an annualized basis, the economy contracted 0.4 percent, Cabinet Office data showed on Thursday. Economists had expected a 0.5 percent annualized increase.
Private consumption rose 0.4 percent from the previous quarter versus the median forecast for a 0.5 percent increase.
Capital expenditure fell 2.6 percent, more than the median estimate for a 1.8 percent decline, marking the fourth straight quarter of decline.
A $117 billion stimulus package is likely to pass parliament in coming weeks.
Those are not good numbers. Moreover, given Japan's massive debt-to-GDP ratio, there is virtually no escape for the predicament Japan is in.
If you are looking for who and what to blame, the answer is simple: Keynesian and Monetarist stimulus foolishness
The eurozone consensus was .4%. The 17-nation bloc shrank at .6% quarter-on-quarter while the broader 27-nation bloc shrank .5% quarter-on-quarter.
From the above Financial Times link:
Germany and France, the eurozone’s two biggest economies, both saw output shrink. German GDP shrank 0.6 per cent in the period while France contracted 0.3 per cent compared with the previous three months. Both were marginally worse than the consensus forecasts of 0.5 per cent and 0.2 per cent respectively.
Italy’s economy shrank 0.9 per cent, also more than expected, and its sixth consecutive fall. Both Dutch and Austrian GDP also contracted. The figure for the wider EU – all 27 member states – was a fall of 0.5 per cent.
The steep German decline reflected a sharp drop in net exports and investment in plants and machinery. Although business surveys have been much more upbeat, the weakness underscores how the recent appreciation of the euro could threaten an export-led recovery.
Insee, France’s national statistics agency, said manufacturing output fell 2.3 per cent in the fourth quarter after a 0.9 per cent rise in the third quarter.
Spotlight on Germany
The Financial Times noted "the contraction in Germany is widely expected to be shortlived." I believe otherwise.
Precisely what is supposed to carry the German economy to strong growth?
Expect ECB Jawboning
One likely consequence of this "unexpected" news is the ECB is highly likely to start jawboning about the "unwelcome strength of the euro", hoping to talk the exchange rate lower without the ECB having to take any action. When that fails to work, the ECB will cut rates.
That will not work either. How can it? The euro is a one-size fits all currency, but what needs to happen is a rebalancing within the eurozone itself.
It started overnight in Japan, where Q4 GDP posted a surprising and disappointing 3rd quarter of declines, then quickly spread to France, whose Q4 GDP declined -0.3% Q/Q missing expectations of a -0.2% drop, down from a +0.1% increase, then Germany, whose GDP also missed expectations of a -0.5% drop, declining from a +0.2% increase to a -0.6% drop, then on to Italy (-0.9% vs Exp. -0.6%, last -0.2%), Portugal (-1.8%, Exp. -1.0%, last -0.9%), Greece (down -6.0%, previously -6.7%), Hungary (-0.9%, Exp. -0.3%), Austria (-0.2%, down from 0.1%), Cyprus (-3.1%, last -2.0%), and so on.
To summarize: Eurozone GDP dropped far more than expected, or posting a -0.6% decline in Q4, worse than the -0.4% expected, which was the largest drop since Q1 2009, and down from the -0.1% posted in Q3. And since this was a second consecutive negative quarter of GDP decline for the Eurozone, the technical recession (double dip? triple dip? is anyone even counting anymore?) in Europe too is now official.
Who could have possibly foreseen this disappointing development for Europe? Maybe all those who were warning that for the frail and weak continent the last thing it needed was a surge in the currency, which is precisely what it got in Q4. Sure enough, the EURUSD has tumbled over 100 pips overnight, with more fuel added to the flames courtesy of the ECB's Constancio who added out of the blue that negative interest rates are always possible, and the ECB is technically read if needed - hardly the statement one makes if one wants to push their currency higher.
Sure enough, the EURUSD was trading at just about 1.330 at last check, and likely to test recent support levels.
And since the US futures trade in lockstep with the EURUSD, please don't adjust your monitors: that odd non-green color of the futures is not a malfunction.
Some more from Goldman on the European economic collapse in Q4:
Broad-based negative surprise in largest EMU economies. The country breakdown showed that outturns in Germany, France and Italy were all weaker than expected.
Germany: -0.6%qoq in Q4 after +0.2%qoq in Q3. The statistical office does not provide a breakdown by expenditure components (which will be released on February 22), but suggested that domestic demand was mixed: both private and public consumption increased slightly, while investment probably declined strongly. The contribution from net trade to GDP was negative, with the decline of exports outpacing the decline in imports.
France: -0.3%qoq in Q4 after +0.1%qoq in Q3. The breakdown by expenditure components was somewhat more positive than the headline GDP reading. Private consumption remained resilient, growing by 0.2%qoq, and public consumption continued to support activity (+0.4%qoq). However, investment declined at a faster pace than in Q3 (-1.0%qoq in Q4 after -0.5%qoq). Overall, the contribution of total domestic demand (excluding inventory changes) was flat in Q4, down from +0.1ppt in Q4. Net trade contributed positively to growth for the second consecutive quarter (+0.1ppt after +0.3ppt in Q3), with the contraction of imports (-0.8%qoq) outpacing the contraction of exports (-0.6%qoq). Changes to inventories shaved 0.4ppt off French GDP in Q4, dragging the aggregate figure into negative territory.
Italy: -0.9%qoq in Q4 after -0.2%% in Q3. The pace of contraction of 0.9%qoq (after -0.2%qoq in Q3) in Italy was significantly more acute than expected (Cons:-0.6%qoq, GS: -0.3%qoq). A detailed breakdown of the data will not be available until March 11. The surprisingly weak GDP data come at a sensitive time in the election campaign and could potentially damage support for the existing austerity/reform programme. The parliamentary elections will be held on February 24 and 25.
Spain: -0.7%qoq in Q4 after -0.4%qoq in Q3 (already published on January 29). The outturn was also slightly weaker than Consensus and our expectations for -0.6%qoq. The preliminary data release provides no breakdown in terms of output by sector or by expenditure component (to be published on February 28). A weak quarter was, however, expected on the basis of the consumer spending response to September's VAT rise.
Smaller economies - including core countries - in negative territory. Q4 GDP in Portugal was particularly weak: it contracted sharply by 1.8%qoq after -0.9%qoq. Finnish GDP contracted 0.5% in Q4, after -0.3% in Q3, while both Dutch and Austrian outputs were down 0.2%qoq.
Some comments on the EURUSD response, and other currency pairs, after the ugly economic data via Bloomberg:
EUR/USD correcting, with outside risk to 1.3260 area, ING’s Chris Turner and Tom Levinson say after GDP data; 1.3430/60 should be the sell area
Widening European sovereign CDS spreads may also prove mild EUR negative; watch for interest in short EUR cross trades again with short EUR/NZD increasingly popular
Signs of independent weakness in EUR may weigh on EUR/JPY, USD/JPY; break of 93.00 in USD/JPY risks losses to 92.00/92.20 area
Fundamental case for weaker JPY remains, though pace of weakening may “slow substantially” vs recent months
Cites likely candidate for new BOJ governor comments that inflation targets wouldn’t be attainable without JPY correction; USD/JPY in the 90-100 range would mark return to equilibrium
May see additional easing linked to April 3-4 BOJ meeting with possible new dovish majority on board
Looks for G-20 to affirm that countries’ current policies don’t represent exchange-rate manipulation
Market underestimating negative impact of BoE monetary policy on medium-term GBP outlook, note to clients says
EUR/GBP PPP adjusted for CPI 0.81 vs 0.75 a few years ago, wedge between unit labor costs in U.K. and euro zone increasing at even faster pace; with costs in euro zone collapsing on debt crisis, EUR/GBP PPP likely to rise “even faster” in coming years
Gilt market/GBP correlations recently have been turning
Targets another 5% move in trade-weighted index, looks for EUR/GBP to reach low 0.90s, GBP/USD to eventually drop to low 1.40s by year end
5- Sovereign Debt Crisis
PRICE CONTROLS - Currency Wars Lead to Price Controls Which Leads to CONTROLS
In typical 'crazy-talk' ways, Venezuela is 'pledging' that its currency devaluation will not increase inflation in the country and, as The FT reports, has warned it will crack down on businesses that raise prices. Hot on the heels of Argentina's ignoration of inflation and recent price controls (and advertising bans), it would appear Venezuela is next as grey market dollars are changing hands for 22 Bolivars - massively lower than the official (just devalued) 6.3 Bolivars per USD rate. An 'equilibrium' rate is believed to be around 9 Bolivars but with Chavez still MIA and Maduro running the show, the 'nymphomania' for dollars - as Venezuela's finance minister called it - continues as businesses are simply unable to find tenable USD to use for imports. Contagion is also spreading as Colombia's FinMin Cardenas fears goods being smuggled across the border - creating inflation there too.
Venezuela’s government warned that it would crack down on businesses that raise prices as it pledged that a devaluation of its currency would not increase inflation.
The black market price for dollars in the country has risen to a record high, at more than 22 bolivars. That compares to the new official exchange rate of 6.3 bolivars per dollar, with the old 4.3 rate eliminated last Friday. Economists said that at 6.3 bolivars to the dollar, Venezuela’s currency remains overvalued, with the “equilibrium” price believed to be about 9 bolivars.
Finance minister Jorge Giordani spoke of “nymphomania” for dollars in Venezuela this week. But businesses criticised his failure to announce alternative sources of foreign currency for importers after a central bank-run system known as the Sitme was scrapped last Friday. Businesses had been able to obtain dollars for 5.3 bolivars through the Sitme.
Fears are growing that businesses will find it increasingly hard to obtain dollars to import goods, possibly forcing them to resort to the more expensive black market for foreign currency, with about a third of consumption in Venezuela supplied by imports.
Mauricio Cárdenas, the finance minister in neighbouring Colombia, expressed concern that the devaluation could lead to an increase in goods being smuggled across the border. A rise in inflation in Venezuela and other distortions caused by price controls could create an incentive for some goods to be sold illegally in Colombia.
Mr Chávez cracked down on businesses after the government’s previous devaluation in January 2010, expropriating supermarkets deemed to be raising prices excessively. There are signs that Mr Maduro will be no less severe
SECURITY-SURVEILLANCE COMPLEX - Stealth and Unconstitutional
It’s getting impossible to keep track of all the new spy tools being rolled out by the police state in the name of “fighting terrorism”, aka spying on innocent American citizens unconstitutionally. I thought that I had my hands full the other day with ARGUS: The World’s Highest Resolution Video Surveillance Platform, but this “Stingray” system is already being deployed illegally in cities throughout the United States. As the EFF states: “The Stingray is the digital equivalent of the pre-revolutionary British soldier.”From the EFF:
The device, which acts as a fake cell phone tower, essentially allows the government to electronically search large areas for a particular cell phone’s signal—sucking down data on potentially thousands of innocent people along the way. At the same time, law enforcement has attempted use them while avoiding many of the traditional limitations set forth in the Constitution, like individualized warrants. This is why we called the tool “an unconstitutional, all-you-can-eat data buffet.”
Recently, LA Weekly reported the Los Angeles Police Department (LAPD) got a Department of Homeland Security (DHS) grant in 2006 to buy a stingray. The original grant request said it would be used for “regional terrorism investigations.” Instead LAPD has been using it for just about any investigation imaginable.
Of course, we’ve seen this pattern over and over and over. The government uses “terrorism” as a catalyst to gain some powerful new surveillance tool or ability, and then turns around and uses it on ordinary citizens, severely infringing on their civil liberties in the process.
Stingrays are particularly odious given they give police dangerous “general warrant” powers, which the founding fathers specifically drafted the Fourth Amendment to prevent. In pre-revolutionary America, British soldiers used “general warrants” as authority to go house-to-house in a particular neighborhood, looking for whatever they please, without specifying an individual or place to be searched.
The Stingray is the digital equivalent of the pre-revolutionary British soldier.
On March 28th, the judge overseeing the Rigmaiden case, which we wrote about previously, will hold a hearing on whether evidence obtained using a stringray should be suppressed. It will be one of the first times a judge will rules on the constitutionality of these devices in federal court.
It will be interesting to see what happens in late March. I will be watching.
Those who traded credit in the frothy days of 2007 will recall that virtually every piece of new paper, including LBO debt, would come to market with the skimpiest of creditor protections, i.e., "covenant lite" which to many was an indication that money was literally being thrown without any discrimination in the last epic chase for yield, just as many were preparing for the imminent market backlash. Which they got shortly thereafter. Judging by the amount of covenant lite loans issued in 2012 as a percentage of total and compiled by Brandywine Management, which just surpassed the credit bubble frenzy of 2007 at more than 30% of total issuance, the bubble in credit is now well and truly back - a job well done Federal Reserve, just 5 years after the last credit bubble.
And that's just for loans.
A quick look at high yield bond space shows exactly the same, with Moody's reporting that the covenant quality of North American high-yield bonds continued to slide in January, and has hit a new low in the month of January.
Moody's Investors Service says in its second monthly report on its recently launched Covenant Quality Index (CQI). The index shows that covenant quality began to erode last July, at the same time that high-yield bond issuance started to climb.
"Our three-month rolling average CQI deteriorated to 3.89 in January from 3.79 in December," says Alexander Dill, Head of Covenant Research at Moody's and author of "Bond Covenant Quality Resumes Slide." "The single-month score for January was 4.08, a marked deterioration from 3.55 in December and the previous low of 4.06 in November."
The CQI uses a five-point scale, with 1.0 representing the strongest covenant protections and 5.0, the weakest. It peaked at 3.40 last July.
But investors are not being compensated for accepting weaker covenants, Dill says. "While investors are taking on more covenant risk, average spreads to benchmark yields have tightened, fueled by strong demand and a record volume of issuance." Indeed, the average benchmark spread of bonds in Moody's High-Yield Covenant issued since October is close to the level seen in the first half of 2011, though the CQI shows much weaker covenants.
Last month's decline can be explained largely by an increase in high-yield-lite issuance. High-yield lite covenant packages, which lack a restricted payments and/or a debt-incurrence covenant, accounted for 34.6% of issuance in January, compared with 3.2% in December. Continuing a recent trend to convert to high-yield lite from full high-yield covenant packages, Netflix, Lear and Crown Americas all issued bonds with high-yield lite packages last month.
January also saw a higher percentage of bonds rated Ba, which generally have high-yield-lite covenant packages or full covenant packages with low covenant quality. These accounted for 58% of issuance in January, compared with the average of 27% since Moody's began tracking the CQI in January 2011.
Luckily, just like in 2007, there is no risk at all of overheating: after all the Fed has a tremendous track record of intercepting bubbles in the credit, housing, and "stocks with an N/M PE multiple" asset classes. Surely they will deal with this one promptly and resolutely.
Intermediate Market Peaks Often Identified by Junk Bonds and European Equities
We have seen several intermediate market peaks over the last few years and most of them have been associated with negative divergence with junk bond funds and European equities that warned of a coming top.
The 2010 mid-year top and bottom are a great example of this where leading into the April/May top both the iShares High Yield Bond Fund (HYG) and the Euro Stoxx 50 Index failed to make a higher high above the January peak leading to a negative divergence prior to the market correction. As the market correction commenced the Stoxx 50 bottomed in early May while HYG bottomed in the middle of May while the S&P 500 didn’t bottom until July as both produced a bullish divergence suggesting a bottom was forming.
During the multi-month topping process in 2011, the Stoxx 50 Index gave ample warning of a coming top as it peaked in February and made a series of lower highs while HYG followed the S&P 500 more or less and didn’t provide a clear warning leading into the peak, though it did accelerate lower from May to July than the S&P 500 did. Not only was the Stoxx the better early warning indicator for the 2011 top but also the bottom as it troughed in the middle of September while both the S&P 500 and HYG didn’t bottom until two months later in November.
The HYG bond fund acted as a better early warning indicator in 2012 than it did in 2011 as both HYG and the Stoxx 50 Index showed negative divergences at each intermediate top during the year. The first significant top of 2012 came when the S&P 500 peaked near 1420 in early April, though the HYG fund peaked well before it in late February while the Stoxx 50 peaked a few weeks earlier in March. We witnessed another top in October and HYG showed the most negative divergence with the S&P 500 while the Stoxx 50 more or less traded in step with the S&P 500.
Between the two indicators, at least one of them has shown significant negative divergence with the &P 500 near intermediate tops and as seen below in the shaded red box in the far right of the chart, both are currently selling off while the S&P 500 is hitting new highs suggesting a near-term pullback may be just around the corner.
Given how strong the market’s internals are (please see Wednesday’s article) I would expect any pullback to be shallow in nature and likely see the S&P 500 pullback to the breakout point near its September 2012 highs near 1465-1475 for roughly a 3-5% pullback. After working off an overbought condition and bullish sentiment, the markets could hit new highs and continue their advance until we see more significant internal erosion in the market’s health.
This week's record outflows from high-yield bond ETFs could be a warning sign for investors in risk assets
Flows into equity funds totaled $6.6 billion in the first week of February. January's historic inflows averaged $13.5 billion a week, but this isn't really a strong signal that flows into mutual funds and ETFs investing in stocks are slowing down.
However, there are two other observations from this week's flow data that could be concerning for investors in risk assets.
This week, U.S. Treasury funds recorded their first inflows – $0.5 billion – after 10 straight weeks of outflows, totaling about $6 billion.
This week's gains in the Treasury fund space obviously don't make up for the $6 billion that have flowed out of those funds in recent weeks, but the fact that they didn't suffer outflows this week is evident of a risk reversal nonetheless, says BofA strategist Michael Hartnett.
The data on high-yield debt flows offer much more striking evidence of a risk reversal, as the chart below shows (via Zero Hedge).
This week, high-yield ETFs recorded their largest weekly outflows ever.
Zero interest rate policy has depressed yields in safer bonds, like investment grade and government debt, causing investors searching for interest income to move further out on the risk spectrum – arriving at the high-yield bond market.
As such, high-yield is one of the first places you would expect to see a breakdown in a risk rally, and that appears to have happened pretty swiftly this week.
Credit strategist Peter Tchir recently wrote an excellent, inside look at high-yield ETFs specifically, and why self-enforcing feedback loops in those funds pose so much risk in the event of a selloff (Bond ETFs Are A Massive Accident Waiting To Happen).
It will be very interesting to keep an eye on the data in the next few weeks to see whether or not the move out of high-yield reverses, and whether the negative sentiment infects the equity space.
The Wall Street consensus is that Treasury yields are headed higher in 2013. That's big news because it could mark the end of a three-decade bull market in bonds.
Strategists expect those higher yields – driven by an upturn in economic growth – to cause bond investors, who after three decades aren't used to seeing negative returns, to reallocate toward equities. Hence, a "Great Rotation."
The prospect of higher yields has the government bond market on edge, but it's also sparked some intense analysis of what could happen to corporate debt markets if rates rise. The rumblings from a few firms in notes to clients are that not everyone is going to come out a winner.
BofA credit strategist Hans Mikkelsen describes how it could unfold in what he describes as the "biggest risk" to the market in a note to clients:
In our view, a disorderly rotation out of bonds – characterized by higher interest rates and wider credit spreads – is the biggest risk for investment grade corporate bond investors this year. The key problem is that, with the rise of bond funds and ETFs, individual investors now have a means to trade illiquid corporate bonds in a much more liquid manner.
When interest rates rise and NAVs decline, we are concerned that redemptions will lead to a situation where too many illiquid underlying corporate bonds come out of funds – especially as dealers have little capacity to act as buffer in the new regulatory environment.
Forced selling – and no one to take the other side of the trade.
"But we have never seen a disorderly rotation," writes Mikkelsen. So, how that sort of scenario would pan out is uncertain.
We have seen two big moves out of bonds spurred by rising interest rates, in 1994 and in 1999, but the picture is radically different now, thanks to the rise of mutual funds in the corporate bond market.
Federal Reserve Flow of Funds, BofA Merrill Lynch Global Research
Mutual funds and ETFs, whose investors are typically going to head for the exits if they observe negative returns, have accounted for a big portion of the buying in recent years as investors across the spectrum have searched for yield. Thus, a decent share of the market is exposed to forced selling by these funds.
In comparing today's set-up to 1994 and 1999, Mikkelsen writes:
However, what is different this time is that, following continued declining interest rates and quantitative easing, bond fund assets under management have expanded significantly.
Moreover, the share of corporate bonds in mutual fund fixed income assets has increased to 42% from 24% in 1994 and 31% in 1999. Hence, mutual funds and ETFs now own 19% of the corporate bond market (high grade and high yield), up sharply from 9% and 10% in 1994 and 1999, respectively.
Thus, if we were to experience outflows from bond funds of the magnitude seen in 1994 and 1999, the impact on corporate bonds this time would be much more severe.
On top of the illiquid nature of the instruments being used to trade corporate bonds and the growing share of the market held by those instruments, there may be another massive, secular headwind for credit markets to contend with if things really pan out for the American economy.
So, here is what the "Great Rotation" looks like from the credit perspective, according to Mikkelsen:
Moreover, following the extended declines in interest rates, and associated outsized fixed income total returns, households now hold more than 13% of their financial assets in fixed income – at the upper end of the historical range and sharply above the low of 8% we saw more than 30-years ago in the early 1980s before interest rates began their secular decline.
This higher fixed income allocation to us is a direct result of the extended environment of declining interest rates – when interest rates start increasing, we look for households to reduce allocations to fixed income. This, despite the underlying bond friendly demographics.
Of course households’ percentage allocation to fixed income automatically declines when stock prices increase – but there is reason to suspect that households will play a more active role in rebalancing out of bonds, into stocks as interest rates increase.
Combine the "Great Rotation" with a corporate bond market uniquely vulnerable to rising interest rates and credit markets may have a tough go of it this year or next.
Mikkelsen thinks 10-year Treasury yields would have to keep rising past 2.5 percent and on toward 3 percent in 2013 in order for a sell-off in credit like the one described above to occur.
"Timing is obviously also important," he writes, "as the disorderly scenario requires a fairly rapid, as opposed to slow and drawn out, increase in rates."
Citi strategist Stephen Antczak, on the other hand, writes that if 10-year yields rise "anywhere near what our economists expect (again, 2.5% by year end)," that total returns in bond funds could be negative, which would create a forced selling situation
Central Banks have repressed the sovereign bond markets of the world's currency printers to extreme. This relative pricing makes stocks look extremely cheap on an equity risk premium basis (thank you Ben); however, everyone knows this and, as we have discussed many times, margin balances and net long positions are as high as they have ever been. A zealous belief in the power of the central bank has compressed the market's risk perception to near-zero - but at the same time, returns have been crushed as even junk bond yields are at record lows. In other words - there is no risk any more, and no conventional return. Or rather, the only "return" is in the wholesale herding of cattle into the "safety" of the equity beta butcher house.
Equity risk premium (relative to repressed bonds) make stocks look 'attractive'...
But everyone knows that...
leaving No Risk...
and no conventional return either...
This won't end well...
3- Bond Bubble
EU BANKING CRISIS
CURRENCY WARS -UK Kings Response - Applying ever more monetary stimulus is like 'Running up a Hill'.
What Mr Abe is trying to do in Japan by targeting a slightly higher rate of inflation, flooding the system with stimulus, and thereby prompting weakness in the currency, is entirely legitimate and long overdue.
In any case, in today’s world, with its interconnected supply chains, devaluation is pretty much a zero sum game, as we are discovering to our cost here in Britain. Notionally, it helps exporters, but by raising the cost of imports, it adds to input inflation, which, in turn, damages living standards, crimping domestic demand and ultimately hitting the cost competitiveness of exporters.
All the complaint about currency wars is therefore basically just a lot of political hot air. If countries are to be allowed to stimulate growth – and after more than two decades of going nowhere, it seems entirely reasonable that Japan should at least be allowed to try – they are bound to take monetary action that will have consequences for the currency.
Politicians who complain about it are doing the equivalent of what business losers do when they are out-traded by rivals – they go running off to the regulator screaming unfair competition. Why look to the mote in your own eye when there is always Johnny Foreigner to blame?
If we accept that countries are indeed trying to gain competitive advantage through devaluation, then of course Britain is one of the worst offenders. At Wednesday’s Inflation Report press conference, Sir Mervyn King, Governor of the Bank of England, aired some apparently shocking numbers.
Since the financial crisis began, not only had interest rates been reduced to close to zero, but
The Bank of England’s balance sheet had been expanded by a factor of five.
Expressed as a share of GDP, the increase has been greater than that of the US, greater than that of the European Central Bank, and greater than that of Japan.
This is way beyond being an unprecedented degree of stimulus. These are completely uncharted waters we are in, and even Sir Mervyn seems to be getting worried by them.
Trouble is, he said, that applying ever more monetary stimulus is like “running up a hill”.
In terms of growth, it seems to be increasingly less effective, but it’s turbo-charging asset prices, raising serious questions about how the country is going to cope with the eventual normalisation of interest rates.
We seem to have become addicted to quantitative easing; to withdraw it would only prompt the cold turkey of a bond and stock market crash.
It is perhaps with this in mind that Sir Mervyn seemed to be warning the Government on Wednesday that
there is little more that monetary policy can do to support growth.
Sir Mervyn promised that the Bank would continue “looking through” elevated rates of inflation, which in any case are now largely the result of deliberate government policies, but if George Osborne wants more, then he’s going to have to await the arrival of Mark Carney. But he may be disappointed on that front, too.
Thankfully, Carney has already ruled out the “helicopter drop”, an idea raised in a wide-ranging speech last week by one of his rivals for the job, Lord Turner. Monetising the deficit in the way Lord Turner suggested, or simply distributing the spoils of QE to the population at large by way of hand-outs, needn’t necessarily lead to hyper-inflation, and it is certainly quite hard to imagine that the Government could be any worse than the banks in applying the freshly minted money. But if you think QE is addictive, then this would be the same drug to the power of 10.
No government given the freedom to spend what it likes would know when to stop. You don’t have to cite the calamity of Weimar to see the damage this can do. Large parts of Europe in the 1970s serve as warning enough. There are limits to what monetary stimulus can achieve, Sir Mervyn said yesterday. Quite so.
When a sovereign nation accumulates too much debt, far more than its economic growth can sustain, there are only two ways out: inflating the debt away, or defaulting. The global central banks have bet not only the house but the entire $700 trillion derivative house of cards that they can generate the former in order to preserve the equity tranche (controlled by the same entities that also control the central banks) above the insurmountable global debt load, and certainly there are more than enough historic examples of instances where a nation literally destroyed its currency by hyperinflation in order to eliminate the debt overhang. Because when it comes to getting the Goldilocks outcome of just enough inflation to slowly grind the debt away, the track record of the world's central planners is simply woeful.
The flipside to the great reflation operation is that while Bernanke and company try year after year to bring enough base money into the system to generate the "virtuous" inflationary cycle, they are increasingly hitting against the statutory limit, which in this case is the amount of debt in the system that keeps on rising year after year, until one day the central banks will have run out of time. This is the moment when global debt - both at the individual sovereign level and consolidated - is so vast, default is the only option. In other words, one can only attempt to reflate so many times before the time runs out.
As the chart below shows, in some 200 years of history, when expressed as a ratio of total sovereign debt to tax revenues, the empirical data as compiled by Reinhart and Rogoff ranges from 2x to 16x. This is shown by the blue bars in the chart below.
So where are we in this cycle as the debt clock counts down?
As the red bars show, we are in a very uncomfortable place, with Japan now at the highest such ratio in history, well above the highest recorded which always ended up in default, while the US, whose such ratio is over 600%, is above the long-term average of circa 520% in default triggering public debt/revenue. The problem is that every current and subsequent attempt to reflate merely pushes both of these higher, until one day the marginal growth creation of every dollar in new debt becomes negative.
How much higher can consolidated global debt go before global GDP is not only no longer growing, but every incremental dollar in debt has a negative impact on GDP, as was the case for the US in the fourth quarter? Keep an eye on global economic growth: if and when the world enters outright recession: the most feared outcome by all central bankers who realize they are out of weapons and their only recourse is much more of the same, that may be cue to quietly leave town.
As is the case for today’s central bankers, Von Havenstein was faced with horrible fiscal problems; as is the case with today’s central bankers, the distinction between fiscal and monetary policy had blurred; as is the case for today’s central bankers, the political difficulty of deflating was daunting; and, as is the case for today’s QE-enthralled central bankers, apparently respectable economic theory reassured him that he was doing the right thing.
One might think that the big difference is that today we have a greater expertise. Surely we understand what happens when deficits are financed with printed money, and that it is only backward and corrupt states that don’t know any better, like Bolivia and Zimbabwe? But just a few years ago didn’t we think that it was only backward and corrupt states that suffered banking crises too?
And anyway, how could Von Havenstein not have known that the continued and escalating printing of money to fund government deficits would cause inflation? The United States experience of unrestrained money printing during the Civil War has been well documented, as had the hyperinflation of revolutionary France in the late 18th century. Isn’t it possible that, like today, he was overconfident in his ability to control his creation and in the economic theory which told him such control was possible? Certainly, in an article in the New York Times on the eve of the First World War, again from Liaquat Ahamed’s book, there seems to have been evidence of the general optimism that there would be no “unlimited issue of paper money and its steady depreciation … since monetary science is better understood at the present time than in those days.”
The fact is we do understand the economics of inflation. Despite what economists everywhere say about being in ‘uncharted territory’ with QE, we know that if you keep monetizing deficits eventually you get inflation, and we know that once you’re on that path it can be extremely difficult to get off it. But we knew that then. Despite what economists everywhere say about being in "uncharted territory" with QE, we know that if you keep monetizing deficits eventually you get inflation, and we know that once you're on that path it can be extremely difficult to get off it. But we knew that then. The real problem is that inflation is an inherently political variable and that concern over debt sustainability and unfunded welfare obligations leaves us more dependent on politicians than we have been in many decades. Frank Graham concluded his 1930 study of the Weimar hyperinflation with the following observation, which I think is as ominous as it is apt today:
"The mills of international finance grind slowly but their capacity is great. It is also flexible. The one condition is that the hoppers be not unduly loaded in the effort to get the whole grist from a single grinding. So much for the economics of the question. What politics has in store is, however, an inscrutable mystery. It can only be said that such financial difficulties as may occur will almost certainly arise from political rather than from economic sources."
5- Sovereign Debt Crisis
STEALTH INFLATION - More than Just the Government Hiding Reality - A Grand Illusion
More Stealth Inflation As Maker’s Mark Slashes Alcohol Content 02-11-13 Michael Krieger of Liberty Blitzkrieg blog, via ZH
They just ain’t making Maker’s like they used to. According to the company, an apparent bourbon shortage has besieged the company leaving it no choice but to cut the alcohol content of their booze from 45% to 42%.
I’m sorry, but this excuse reeks of marketing spin. What manufacturer decides to dilute their product when they face high demand, rather than just raise the price by 3% and keep the quality intact? In a world
It will not be a great shock to ZH readers, but the sad truth (no matter what one is told by the plethora of talking heads and commission takers) is that neither EPS upgrades or EPS outlooks are in any way correlated to equity market performance. Instead, the central bank balance sheet size and forward inflation expectations are the key factors. As Credit Suisse notes, in fact over the past few years, EPS upgrades and outlooks are negatively correlated with stocks!
Even as current inflation (CPI) is supposedly fading, forward inflation expectations have risen and supported equity P/E valuations.
and until recently, central bank balance sheets remain supportive of stocks...
However, in the last few weeks, as stocks have surged ahead, a few things have changed with the world's central banks seeing the lowest growth in their balance sheets since the crisis began...
and in the last few weeks, forward inflation expectations have dropped notably - after peaking at post-crisis peaks once again...
So, it's not at all about the fundamentals; it's about the central banks and inflation - and in the short-term, they are losing some willpower - as the ECB is loathed to expand its balance sheet (which is the current drag) and implicitly weaken its currency (as we discussed earlier).
The White House has released the full economic blueprint that President Barack Obama will lay out in his State Of The Union speech Tuesday night.
The blueprint includes 17 proposals for public investment in manufacturing, education, clean energy, and infrastructure, which Obama argues will result in economic growth and strengthen the middle class.
Those proposals include:
Bringing good manufacturing jobs back to America, by:
Investing $1 billion investment in 15 Manufacturing Innovation Institutes, public-private partnerships between federal agencies, private businesses, universities, and community colleges that will help develop manufacturing technologies and capabilities. Obama is creating three of these by executive order.
Ending tax breaks for companies that outsource jobs overseas, and implementing an "offshoring tax" that would set a minimum tax on overseas earnings.
Expanding Department of Commerce's efforts to promote investment.
Increasing energy security though clean energy investments, by:
Additional executive action to promote clean energy in federal agencies
Make the renewable energy Production Tax Credit permanent and refundable.
Establish an Energy Security Trust, funded by revenue from oil and gas development on federal lands, which would support clean-energy research.
Creating an Energy Efficiency Race to the Top program for states
A $50 billion investment in infrastructure, that would include:
A "Fix It First" program to focus on urgent infrastructure repairs
A Partnership to Rebuild America, aimed at increasing private investment in business infrastructure
Rebuilding the housing sector by allowing homeowners to refinance at today's rates and investing $15 billion in Project Rebuild to help communities recover from the foreclosure crisis
Launch talks on a comprehensive trade agreement with the European Union
Invest in science and technology
Invest in early childhood education by supporting state efforts to provide pre-school access to low-and-moderate income children.
Investing in education, by:
Creating a Master Teacher Corps of STEM educators
Redesigning high schools, rewarding schools that develop new partnerships with colleges and employers, and reforming federal investment in career education
Support the $8 billion Community College to Career Fund
Holding colleges accountable for cost, value, and quality with a new College Scorecard
Ensuring veterans benefits, education, and job opportunitie
Raising the minimum wage to $9 an hour
Growing the middle class by partnering businesses with 20 hard-hit communities with Promise Zones, support summer low-income youth employment, removing financial deterrents for marriage, and supporting fatherhood
From the 'simplicity' of a Gold Standard to the 'complexity' of our current fiat system, Santiago Capital draws a handy analogy between the over-complicated machines of 'Rube Goldberg' that represents the interactions between the various actors affecting the size and velocity of our monetary base and the 'simplest possible, but no simpler' world of 'Occam's Razor'-prone gold. In two brief presentations, Brent Johnson introduces the two systems and explains that in order to keep the shark of our economy alive, one of two things must happen:
monetary velocity must be maintained or the
monetary base must rise.
Obviously both are inflationary. From how the system is designed to its drastic implications, simple, brief, concise, and what to do about it.
Presentation 1: How The System Is Designed... Introducing Occam's Gold Standard and Goldberg's Fiat system, and the enormity of our credit-based fiat system's liabilities... and how new money enters the system.
Presentation 2: The Reality And Its Implications... What happened after the dot-com bust til now... the Fed plugging the hole... the monetary base has only contracted 8 times YoY in the last 93 years with the last significant contraction occurring 60 years ago... the Fed will not let it fall (or the shark is dead)... from the ramifications of false CPI to the ignorance of facts in the CBO projections, from "it just doesn't happen" to the marginal utility of new debt, there is only one way out for the Fed (and they need to keep it quiet from the masses)...
Simply put (by Stein) "If something cannot go on forever, it will stop"... whether we decide to do it ourselves or the market does it for us, our over complicated system of money is going to stop...
and as such - buy protection against this absolutely certain eventuality.
"Central Bankers and policymakers can’t stop themselves from interfering." To be fair on them (unusual in his case), SocGen's Albert Edwards admits the pressure to do something in the face of “bad” economic news is overwhelming. The general public or more inconveniently, the electorate, clamor for action from policymakers to counter any economic pain. Any ‘Austrian School’-type suggestion that it is best to let the cycle play out is derided as heartless and defeatist. Something can and must always be done. Whether intervention makes things worse in the medium to long run is an inconvenience that can be ignored until later. We feel Edwards pain as he "sheds tears of despair as [he] was reminded of the blundering incompetence of our overconfident policymakers, whose interventions, despite their best intentions, seem to bring about financial crises with increasing rather than decreasing regularity."
GLOBAL PUBIC POLICY
TECHNICALS & MARKET ANALYTICS
BANK DEPOSITS - Will Soon See Competition Against Prop Desks for Excess Bank Deposits
As the credit markets froze during the height of the financial crisis, companies who relied on the short-term debt markets to finance their day-to-day operations quickly learned the importance of having liquidity on their books in the form of cash. Even the healthiest companies found themselves struggling to pay their employees due to the credit crunch.
However, the financial markets have improved significantly since the crisis.
Bank of America Merrill Lynch's Michael Hartnett just published this chart showing investors' evolving attitudes toward corporate cash.
And it tells us everything.
As you can see from the dotted line, during the financial crisis, investors wanted companies to use their cash flows to slash debt and build up their cash positions.
After the crisis, we were left with a global economy in critical condition with limited growth prospects. As you can see from black line trending up, investors wanted their shareholder value returned in the form of dividends and buybacks.
But in more recent months, you can see a burst of optimism manifesting in the blue line, which represents the desire for more capital expenditures. In other words, investors want companies to take some risk and invest in growth.
This is a very clear shift in investors attitudes toward cash deployment.
REAL WEALTH - Unencumbered DCF -- Free Cash Flow is KING!
While stocks suggest all is well, and anecdotal macro data (seasonally slandered by fiscal cliff drag-forwards and 'weather') might offer hope that green shoots are back; one glance at the following chart of US, Europe, and Asia (ex-Japan) EBITDA tells a very different story. With cashflow clearly barely budging, is it any wonder that companies are creating conservative balance sheets? It sure feels like a recessionary environment...
Selling snake oil and issuing unbacked paper currency are not so different. They're both wildly successful ploys for the guys pulling the strings. And they're both complete scams that depend solely on the confidence of a willing, ignorant public.
But once the confidence begins to erode, the fraud unravels very, very quickly, and the perpetrators resort to desperate measures in order to keep the party going.
In the case of fiat currency, governments in terminal decline resort to a very limited, highly predictable playbook in which they try to control... everything...
imposing capital controls,
border controls, and
sometimes even people controls.
These tactics have been used since the ancient Sumerians. This time is not different.
Today, Argentina presents the most clear-cut example. Here the 'mafiocracy' unites organized crime, big business, and politicians to plunder wealth from Argentine citizens. Just since 2010, President Cristina Fernandez has--
* Nationalized private pensions, plundering the retirement savings of her people.
* Increased tax rates across the board-- income, VAT, import duties, etc. as well as imposed a new wealth tax.
* Inflated Argentina's money supply, printing currency with wanton abandon; M2 money supply has increased 215% in the past three years.
* Driven the value and purchasing power of the currency down by 50%. Street-level inflation is now 30%+ per year.
* Made a mockery of official statistics, comically understating the level of Argentine inflation and unemployment. She even began punishing economists for publishing private estimates of inflation that didn't jive with the government figures.
* Taken over control of one industry after another, most notably the nationalization of Spanish oil firm YPF's Argentine assets.
* Imposed export controls of agriculture products from beef to grains, forcing growers to sell at artificially lower domestic prices.
* Imposed capital controls, reducing her citizens' capability to dump their poorly performing currency and hold gold, dollars, euros, or anything else.
* Imposed a two month 'price freeze' on items in the supermarket, and encouraged retail consumers to rat out any grocer that doesn't abide by the government order.
* Imposed controls over the media, most recently ordered an advertising ban in Argentine newspapers (weakening their financial position).
Cristina's policies here are leading to shortages in everything from food to fuel to electricity. Hardly a month goes by without major strikes and disruptions to public services. The purchasing power of their currency is diminishing rapidly. And most people are completely trapped.
Of course, there were a handful of people who saw the writing on the wall. They learned the important lesson never to trust their government. They moved their savings to stable foreign banks. They purchased property abroad. They bought gold and silver, and stored it overseas. They were prepared when the plundering began.
The developed West is rapidly heading down this path. Europe is beginning to impose capital controls, and the IMF has sanctioned them. The US is rapidly printing its currency into oblivion, and confidence is eroding quickly. Russia just purchased an historic amount of gold, choosing real assets over more US dollar reserves.
It would be foolish to think the same things can't happen in the West. And even if it never happens, would you be any worse off for taking some of these basic steps?
STATISM - It Takes A Compliant Society
Mail & Guardian - "Without saying so explicitly,
the government claims the authority to kill American terrorism suspects in secret."
Seldom do moral questions come into the discussions of eliminating enemies of the state.
The military has transformed warfare into a deadly computer game with drone weapons. Media programs like Weaponology or Future Weapons on the Military Channel provide detailed examples of the lethalness of autonomous technology. The use of drones as the preferred method of carnage is well established. Seldom do moral questions come into the discussions of eliminating enemies of the state. The rules of engagement vested in international law and the Geneva Convention, either ignored or rewritten for high-tech 21st Century combat, becomes the foundational tactic to maintain the killing force of the grand empire.
The video, Remote Control War, is an informative summary of the capabilities and uses of a drone air force. After viewing the range of aftermaths from GPS targeting, ponder the role of perpetual DARPA conflict. The distress from invented terrorism is used against the American public as a tool to incrementally relinquish basic rights and individual liberties. Matt K. Lewis offers up this assessment in an item published by This Week, Obama, drones, and the blissful ignorance of Americans.
"And here's the ugly truth: Obama is giving us what we want . . .
Americans, it turns out, don't really have the stomach for the unseemly business of taking prisoners, extracting information from prisoners, and then (maybe) going through the emotional, time consuming, and costly business of a trial.
American citizens want someone who will make the big, bad world disappear. Problems only exist if we have to confront them. Obama has made warfare more convenient for us — and less emotionally taxing."
Beware of the unseen predators over foreign lands for the blowback is the real source of the instability and a root cause of hatred for American hegemony. What you are witnessing is the imbalance between Legislature and the Presidency. The war powers responsibility of Congress, long surrendered to the imperial commander and chief of killing incorporated is a national tragedy.
"Since at least the 9/11 attacks, Congress has been less than confrontational with the White House over presidential powers to conduct war and anti-terrorism operations, to the dismay of civil libertarians. So we had President George W. Bush's warrantless domestic wiretaps retroactively green-lighted by Congress, torture only officially nixed by a change in presidents, and a big ramping-up of lethal drones being used to kill terrorism suspects under President Obama. But Obama's decision to kill at least two Americans working for al Qaeda in Yemen in 2011, and the legal justification that emerged in a leaked white paper (read below) this week, has caused a big, unusual outcry from both the Left and Right."
"This week, NBC News obtained an unclassified, shorter "white paper" that detailed some of the legal analysis about killing a citizen and was apparently derived from the classified Awlaki memorandum. The paper said the United States could target a citizen if he was a senior operational leader of Al Qaeda involved in plots against the country and if his capture was not feasible."
One might be accused of NYT bashing if you dare point out that their reporting resembles a briefing session from White House press secretary, Jay Carney. The use of warbots on home soil is a short step from spreading terminal sanctions of homeland security.
"Both the progressive American Civil Liberties Union and the libertarian Rutherford Institute cheer legislative efforts to place strict limits on unmanned aerial vehicles, or UAVs. And, prodded by privacy groups, state lawmakers nationwide-Republicans and Democrats alike-have launched an all-out offensive against the unmanned aerial vehicles.
The prospect of cheap, small, portable flying video surveillance machines threatens to eradicate existing practical limits on aerial monitoring and allow for pervasive surveillance, police fishing expeditions and abusive use of these tools in way that could eliminate the privacy Americans have traditionally enjoyed in their movements and activities," the bill's author, Sen. Robyn Driscoll, a Democrat from Billings, testified."
The ACLU presents a list of provisions that the Civil Liberties organization advocates. AlsoRead the ACLU's full report on domestic drones. "Congress has ordered the Federal Aviation Administration to change airspace rules to make it much easier for police nationwide to use domestic drones, but the law does not include badly needed privacy protections. The ACLU recommends the following safeguards:
USAGE LIMITS: Drones should be deployed by law enforcement only with a warrant, in an emergency, or when there are specific and articulable grounds to believe that the drone will collect evidence relating to a specific criminal act.
DATA RETENTION: Images should be retained only when there is reasonable suspicion that they contain evidence of a crime or are relevant to an ongoing investigation or trial.
POLICY: Usage policy on domestic drones should be decided by the public's representatives, not by police departments, and the policies should be clear, written, and open to the public.
ABUSE PREVENTION & ACCOUNTABILITY: Use of domestic drones should be subject to open audits and proper oversight to prevent misuse.
WEAPONS: Domestic drones should not be equipped with lethal or non-lethal weapons."
"In a 3-2 vote, members of the Charlottesville City Council adopted a resolution drafted by The Rutherford Institute which urges the Virginia General Assembly to prevent police agencies from utilizing drones outfitted with anti-personnel devices such as tasers and tear gas and prohibit the government from using data recorded via police spy drones in criminal prosecutions. In so doing, Charlottesville has become the first city in the country to limit the use of police spy drones, providing momentum and inspiration for other cities across the country to follow suit.
The passage of the resolution, which also places a two-year moratorium on the use of drones within city limits, coincides with a Department of Justice memo leaked to the media which outlines the Obama administration's rationale for assassinating U.S. citizens via drone strike. With at least 30,000 drones expected to occupy U.S. airspace by 2020, John W. Whitehead, president of The Rutherford Institute, has called on government officials at the local, state, and federal level to do their part to safeguard Americans against the use of drones by police. Rutherford Institute attorneys have drafted and made available to the public language that can be adopted at all levels of government in order to address concerns being raised about the threats posed by drones to citizens' privacy."
When was the last time that a civil liberty issue developed an alliance of purpose to oppose the despotism of the totalitarian murder regime?
Even so, some of the more perceptive state legislatures are waking up to the danger of domestic drone operations. Texas "Anti Drone" Laws Would be Toughest in USA, and "prohibit federal law enforcement or federal officials from flying drones over Texas to spy on random citizens. Only individuals who are suspected with reasonable cause could be the target of drone surveillance, and only with a warrant issued by a judge of an open and public court."
Politico details, "Virginia Gov. Bob McDonnell has not decided whether he will sign a bill barring state and local agencies from using drones for two years — the first legislation of its kind in the country that passed through the state’s General Assembly Tuesday with bipartisan support."
The National Defense Authorization Act is the latest unconstitutional measure that targets domestic citizens for punitive punishment. Due process, now reduced to "Due or Die" is the harbinger of the use of domestic drone capitulation. What will it take to awaken submissive citizens that the capability of foreign deployed drones easily can be weaponized for local operations?
The Obama administration has demonstrated an eagerness to trump up a bogus domestic terrorist threat that requires a surrender of our Bill of Rights. Reaper drones are a much greater peril than just a violation of privacy. A technology that is rapidly expanding and designed to militarize the police state into a killing field of reputed rebellious Americans - violates true national security.
"Making warfare more convenient and less emotionally taxing" is the direct opposite of the horror of battle. When a false flag surgical strike targets your location and your person, it will not be an episode in a computer simulation.
2012 - FINANCIAL REPRESSION
2011 - BEGGAR-THY-NEIGHBOR -- CURRENCY WARS
2010 - EXTEND & PRETEND
CORPORATOCRACY - CRONY CAPITALSIM
GLOBAL FINANCIAL IMBALANCE
STANDARD OF LIVING
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Tipping Points Life Cycle - Explained Click on image to enlarge
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