Fed's securities purchases blunt the impact of convexity hedgeing

Cuándo empezó?

La posible transición o ajuste de cateras globales en caso de estarse dando se consolidó y reafirmó el día 29 de Mayo cuando la tasa del bono de 10 años de los Estados Unidos igualó en rendimientos a la tasa de dividendos de la canasta de acciones S&P 500. 

Consideren el siguiente comentario LINK :

The dividend yield-Treasury yield relationship is one traders have been eyeing as the bond selloff gathered steam in May and rising stock prices lowered the dividend yield. With market participants focused on a “hunt for yield” as major central banks competed to pump more money into their financial systems, the erosion of the stock market’s yield advantage has been a hot topic. The question is whether the erosion of the dividend yield premium will halt the stock rally and draw investors back into Treasurys just as talk of a Great Rotation started to regain momentum.}

Esta transición de acciones a bonos será gradual y podría tomar mucho tiempo aún. Recordemos que el ajuste se inició con los comentarios de diversos miembros de la Fed que están discutiendo la vías de salida de los QE y ya prácticamente se descuenta que para septiembre o finales del año, ya se habrá ajustado la velocidad de compra de bonos. 

Las bolsas en Estados Unidos desde que se iniciaron los QE han sido impulsados por el dinero inyectado por la Fed, ahora que se habla de retraer la compra de bonos se han ajustado y el rendimiento de los bonos han subido. Este proceso llegará un a un equilibrio cuando el rendimiento ofrecido por los bonos incentiven a los bancos retirar dinero de las reservas que pagan prácticamente cero y lo inviertan en bonos. 

No es una mala apuesta si consideras que si bien la economía de Estados Unidos no se ha recuperado del todo, todavía presentará ajustes en la tasa de crecimiento e inclusive de manera importante pero no a niveles recesivos. Por otro lado, si la Fed se equivoca y toma una medida equivocada o apresurada, lo más probable será que retome la mismas medidas ya aplicadas hasta ahorita en cuyo caso el precio de los bonos serán los beneficiados. 

For the perspective: The State Of Macro In 17 Simple Charts

Its interesting this set of Charts delivered by ZeroHedge

The State Of Macro In 17 Simple Charts:
With the US macro surprise index having hit 10-month lows - and now among the dirtiest of dirty shirts of world economic regions (thanks to the over-optimistic expectations) - we thought it useful to reflect somewhat stoically on the reality of the macro-economic environment that we are told day after day is doing so well in the US...



As Barclays notes,

Several indicators point to a slowdown in economic growth in Q2. For example, the manufacturing ISM fell to 49.0 in May, the lowest since the end of the recession in 2009. In addition, despite a solid increase in payrolls (of 175k), the three-month-moving average fell to 155k in May from 208k in April. Growth in aggregate hours worked also eased.

We view these developments as consistent with our forecast for GDP growth to be notably weaker in Q2 than Q1, reflecting an end to a mini-inventory cycle (which saw a large drag on GDP growth from stock accumulation in Q4 but a sizable boost in Q1) and a slower pace of consumer spending growth (as fiscal tightening at the start of the year curtails demand).

The Economic "Recovery"?


The Consumption "Recovery"?


The Jobs "Recovery"?


The Housing "Recovery"?


Do you see the government-credit-sponsored segment of the economy? (hint GREEN!)

Charts: Bloomberg and Barclays

The New Normal America: A Country Where Eating And Drinking Is The New Manufacturing

Salida de QE

Recientemente hemos visto varios papers que confirman que las medidas de estímulo monetario extrema implementado por la Fed, el ECB y el Banco Central de Japón no generan inflación durante su aplicación pero esto no es así durante el periodo de salida de dichas medidas.

Es importante tomar en cuenta que la salida de los QE mundiales tomará varios años,proceso durante el cual se podría generar diversas crisis por el desequilibrio creado.

Mohamed El-Erian: Putting It All Together

Mohamed El-Erian: Putting It All Together:
The world is awash in contradiction with stocks rising to new highs as interest rates reflect a slowing economy. It is an upside down world according to PIMCO's Mohamed El-Erian. As Lance Roberts annotates, the moustaced maestro explains individuals are both excited and anxious. They are excited by the rally in the markets as they see their portfolios increase in values but at the same timed overwhelmingly concerned about the economic future. It is a world with an enormous contrast between the markets and the real economy. That is the world we are navigating and it is incredibly unusual. This is why it is an unloved rally. His discussion at the recent Strategic Investment Conference is about a simple framework to reconcile these issues. The long term view matters greatly - but the short term matters also.

Via Lance Roberts of Street Talk Live blog,

In Part IV of the series of reports from the 10^th annual Strategic Investment Conference, presented by Altegis Investments and John Mauldin, Mohamed El-Erian ties together the views of the previous presenters. You can read the previous presentations by clicking the links below.

Part I: Niall Ferguson – The Great Degeneration

Part II: Jeff Gundlach – Why Own Bonds At All

Part III: A. Gary Shilling – Six Realities In An Age Of Deleveraging

Mohamed El-Erian, Ph.D. is the CEO and Co-CIO for Pimco, the global investment company with over $2 Trillion in assets under management. Here are his views:

I want to try and build on what you have heard so far.   I want to focus, in particular, on two statements that have been made so far at this conference.

1. The need to put the pieces together
2. To make sure we give ourselves a chance to win.

So, how do we put the pieces together to give us the best chance to win? I will try and give you an answer.

If you knew nothing of the markets, and just showed up at this conference, you would be very confused. The world is awash in contradiction with stocks rising to new highs as interest rates reflect a slowing economy. It is an upside down world.

Individuals are both excited and anxious. They are excited by the rally in the markets as they see their portfolios increase in values but at the same timed overwhelmingly concerned about the economic future. It is a world with an enormous contrast between the markets and the real economy. That is the world we are navigating and it is incredibly unusual. This is why it is an unloved rally.

Therefore, I want to provide a simple framework to reconcile these issues. The long term view matters greatly - but the short term matters also.

First, acknowledge that we are here, in terms of current policy, for a good reason. Most countries are shifting from a growth model based on leverage and credit creation to trying to find a new growth model based on new realities. Emerging markets are shifting from exports to internal growth. Developed economies are shifting to a lower growth economic cycle due to ongoing deleveraging.

These shifts require assistance from the Central Banks. However, this assistance leads to disconnects.

"The question, however, is what the “hand off” from assisted support to organic growth will look like and when will it come?"

"The hand off is the 'destination.' The 'journey' is getting there. Investors must invest for both the journey AND the destination. Investing for only one part will lead to unhappiness during the journey or pain at the destination."

At Pimco this reality is what we call the “stable disequilibrium.”  The world will not reset in cyclical manner and a “new normal” has arrived.

The look of the “new normal” is that the West will be stuck in a low growth and high unemployment cycle for quite some time to come. Conversely, the emerging world will continue to bounce back and begin to close the gap between wealth and incomes.

There are three speeds to the “new normal.”

• Slow: Europe and Japan that will live continue to live through lost decades.
• Medium: Countries like the US are healing - but not fast enough to get obtain “escape velocity.”
• Fast: Emerging countries with strong balance sheets and favorable business economies.

This is the reality of the world that we live in today.   If this three speed theory is correct then there are three questions that must be answered:

1. Can it persist and for how long?
2. Will it add up?
3. What do you do about it?

Yes, it can persist but not forever.

The timing, which is tricky, differs on where you look. For example, in Europe, Cyprus tells you much about the entire European structure. The Troika is no longer operating in an efficient manner. The creditors are also tired of supporting the Eurozone as they see no end to the checks they are writing.  

Likewise, the debtors are tired from adjustment fatigue. The problem is that the majority of Eurozone countries not only lack growth but, much more importantly, they lack a growth model.

The financial markets don’t care because there is the ECB.   Whatever happens - the ECB, as Mario Draghi promised last June, is willing and able to support them. However, the ECB only supports the journey – not the destination. The Eurozone is nearing the end of its journey and they will soon be forced to make tough choices.   They will be forced to either opt for a stronger, and smaller, Eurozone which will begin to grow again, or, fragmentation which will end miserably.

In the U.S. - the Fed is fully engaged in artificial support to give the system time to heal. There is no question that the economy is healing. Corporations, banks, and housing are all healing. If this continues it will allow for a handoff from supported growth to real growth.   If the structural problems don’t improve then we will slip back into a slow growth economy.

Emerging markets will either continue surge or slip back to moderate growth.

So, the reality is that when you live in an interdependent world your competitors are your friends. In an independent world your competitors can bring you down. The world, today, is unlike what we have ever seen before. Unfortunately, global policy coordination is really non-existent.

Historically, when the core has been weak there has been someone to step in to support it. After WWII the U.S. stepped in to support Europe. Today, with the entire world weak – there is no one large enough to support the core.

When it comes to investing the majority of recommendations to investors is not based on fundamentals but rather stocks are cheaper than something else. This is potentially very dangerous.

What Should Investors Be Doing

Ride the central bank wave. The more intervention done by one Central Bank forces other countries to do more. The Fed forced Japan into its policy shift. Japan has now forced the ECB to move further.

The Central Banks have little choice other than to continue on their current trajectory. They cannot get to their objective unless they make you feel better by boosting confidence.

However, it is also important to understand that all waves eventually break.   The question is whether you crash or “walk off” the surf board. This wave will crash. When it does it will depend on how you are positioned that will determine whether you suffer or not.

Secondly, there are other waves out there.   There are too few people looking for other waves where central banks cannot reach. In these areas there is genuine growth potential. These include selected currencies, bonds and other types of assets.

Third, understand that past models are broken. The world today is far different that it has been historically and therefore new models must be built.

Fourth, you cannot disconnect the markets from the fundamentals forever.   There is a limit and when the reversion of markets to the fundamentals occur the devastation to capital will likely be severe.

Fifth, do not give up liquidity cheaply. In the world today it is very binary.   It will either end well, or very badly, with no middle ground. Optionality and liquidity is the key to surviving and profiting from a binary world.

Finally, realize that risk mitigation is going to have to evolve.   Cost effective tail hedging is going to be critically important. This is a choice that all investors must make: Do you leave some capital on the table as markets rise or suffer large capital losses later. The choice is critical.

Conclusion

Why is it that the Pimco’s of this world are not disciplining a system that is becoming more and more artificial? Why do we allow the manipulation?

In a classroom you can discipline a single a person. However, if the whole class misbehaves it is an entirely different issue.   Currently the whole class is misbehaving and that is a very different paradigm than what we have seen in the past which has led to unprecedented, unproven and untried interventions that are likely to have far reaching outcomes.

Investors that are overly invested in stocks will eventually pay a very high price for taking on excessive risk. We are approaching the end of the journey for this experiment and it will either result in a return to organic growth or economic disaster. The problem is that we really don't know which it will be. What we do know is that eventually, regardless of the outcome of these monetary experiments, the disconnect between the fundamentals and the markets will revert which will prove painful for unhedged investors.

Roubini : The Fed is creating the same problems that led to the financial crisis in 2008

Roubini : The Fed is creating the same problems that led to the financial crisis in 2008: Nouriel Roubini : The Fed is creating the same problems...



[[ This is a content summary only. Visit my website : www.nourielroubini.blogspot.com for full story! ]]

The FOMC Statement - A Brief Comment

The FOMC Statement - A Brief Comment: By Pater Tenebrarum:
Xeroxed

It is rare to see such few changes from one FOMC statement to the next. Market participants and linguistics-parsing trading algos alike must have been slightly mystified. We have often commented half in jest in recent years that the FOMC members could just as well skip the meeting and make copies of the previous statement and distribute those, but it has never been more true than this time around.

As always, it all sounds very reasonable and 'scientific' on the surface, but we will continue to confidently maintain that they are as clueless as ever and have no idea what their policies will produce. This is not a comment on the intentions, intelligence, education levels or otherwise general competence of the committee members. Many of them may well have our best interests at heart, even though we obviously disagree with the economic theories they base their decisions on. It

Complete Story »

Emerging Markets: What has Changed

Emerging Markets: What has Changed: This is what has changed in the EM space, in our view: 1) Thailand:  Officials are stepping up action and rhetoric against THB appreciation 2) India: We are becoming more optimistic that the INR will finally start to recover 3) Mexico: Banxico is sounding dovish again, but caution is needed in interpreting comments 4) Indonesia: [...]

ECB Eases as Downturn in Europe Spreads

ECB Eases as Downturn in Europe Spreads: President Mario Draghi said that the bank may be able to ease its monetary policy still further even after cutting its benchmark lending rate to a new low of 0.5%.

QE Has Been and Will Continue to Be a Complete Failure

QE Has Been and Will Continue to Be a Complete Failure:

The Fed is now blaming Congress for the failures of its QE policies.

This is to be expected, given that no one in the power elite ever accepts responsibility for their own failures. Congressional members blames each other (depending on which party they’re in), the Fed blames Congress, the White House blames the GOP, and on and on.

Behind this façade of bickering is the total and complete failure of the Fed’s policies to generate economic growth OR jobs. Regarding #1, the US has not had a single year of 3% GDP growth since Bernanke became Fed Chairman. End of story.

As for QE… there is not one single example in history in which QE has successfully created jobs. The UK has engaged in QE equal to over 20% of its GDP and hasn’t seen a real recovery in employment. Similarly, Japan has employed QE equal to nearly 25% of its GDP and GDP growth continues to slow while unemployment stays elevated.

As for the US, the Fed has spent roughly $2 trillion in the last year via QE. During that time a little over, 500,000 jobs were created… So the Fed is spending roughly half a MILLION dollars to create each job.

There’s a word for this… it’s pathetic. Actually “insane” would be a better choice. This is what happens when you put Central Planners who have little if any real world experience, in charge of an economy. You spend millions of dollars to create low paying jobs.

And the Fed’s argument is to do this until unemployment falls.

The fact that the Fed continues to engage in QE despite its clear failure to create jobs indicates the Fed literally is either totally clueless OR is engaging in QE for other reasons.

My view… it’s a bit of both. The Fed is largely comprised of academics like Bernanke who have little if any experience in banking (interesting that he’s in charge of the Central bank since he NEVER worked in a bank in his life) or the private sector.

Indeed, even the pro-Wall Street crowd at the Fed (Dudley and Evans) don’t see how their policies are crushing the banking sector. Citigroup plans to lay off 11,000. JP Morgan is laying off 14,000. Morgan Stanley is laying off 1,600.

And yet the Evans and Dudley keep asking for more QE!

Buckle up… this won’t end well.

For more investment insights and market commentary visit us at www.gainspainscapital.com

Best Regards

Graham Summers

Bordering on a Boom: Mexico Manufacturing Builds a Future

Ed Skelton, a business economist at the Federal Reserve Bank of Dallas, discusses the growth of the manufacturing sector in Mexico, factors behind its expansion, and what its resurgence implies for the global economy.https://docs.google.com/viewer?url=https%3A%2F%2Fwww.frbatlanta.org%2Fdocuments%2Fpubs%2Feconsouth%2F13q1_mexico_manufacturing.pdf

...As measured by the vast variety and sophistication of exported products, Mexico’s economy is the most complex economy in Latin America and the 20th most complex in the world, according to Harvard University’s Atlas of Economic Prosperity. (The Atlas defi nes “complex” as the amount of productive knowledge a country contains.) This complexity is one reason Mexico’s per capita GDP is projected to be the world’s 10th fastest growing between 2009 and 2020.
...Overall, according to the Economist, the combined effects of currency movements relative to the U.S. dollar, rising wages in Asia, and increasing logistics costs have made Mexico the cheapest place in the world to manufacture goods for export to the United States—cheaper than China, India, and Vietnam.
...The HSBC projects that in just six years the United States will be more dependent on imports from Mexico than from any other country. What’s important to note, though, is that 40 percent of our imports from Mexico represent goods that originated in the United States and were sent to Mexico for manufacturing. In fact, 13 percent of all our manufacturing exports go to Mexico.

The Cyprus bail-out

A better deal, but still painful

Mar 25th 2013, 4:34 by Charlemagne | BRUSSELS

http://www.economist.com/blogs/charlemagne/2013/03/cyprus-bail-out

ECB: Hora de hacer lo propio

Un dato que llama la atención es la caída de la venta de autos nuevos en Alemania en 10% respecto a febrero del año pasado dando muestras que el sector automotriz está un lejos de la recuperación e incrementa la posibilidad de una mayor desaceleración europea. A casi siete meses del famoso discurso de Draghi (Presidente del Banco Central Europeo) el 26 de julio de 2012  que estaba listo para hacer lo necesario para salvar el euro parece que tendrá que hacer aún más para seguir salvando el euro.

Recordemos que ese discurso fue precursor en gran medida de los alivios de tensión en diversos mercados de bonos en España, Italia y Francia; pero esto fue sólo una breve temporada de alivio donde los bancos que pidieron prestado en los LTROS I y II empezaron a pagar en febrero de este año. Al final no fue mas que patear el balón un poco y ahora parece que es hora de que Draghi vuelva a hacer lo suyo, hasta que decir que harán lo necesario ya no sea suficiente.

Inflación? No es algo para todos.

De la misma manera que Draghi el año pasado Haruhiko Kuroda, el aún por confirmarse próximo gobernador del Banco Central de Japón, afirma que hará todo lo necesario para acabar con la deflación que ha vivido ese país durante 15 años. Actualmente, están convencidos que la solución a sus problemas es generar inflación, pero en una población con alto grado de retirados o próximos por retirarse no creo que  sea bien recibido estas políticas, será interesante ver si estas medidas en verdad lograr generar inflación o una caída abrupta en la demanda que pueda recrudecer la espiral deflacionaria.

Aunque creo que en algunas economías el efecto de generar inflación puede ser constructivo como en el caso de sociedades con población relativamente joven, en el caso de Japón me parece que la reacción puede ser todo lo contrario a lo esperado.

De los objetivos de inflación en Japón

Los precios al consumidor en Japón continúan cayendo 0.2% en enero comparado con el mismo mes del año pasado.  La intención del gobierno es tener un objetivo de 2% en dos años para reactiva su economía, en la actualidad los consumidores por la experencia adquirida a lo largo de décadas de bajos precios y con tendencia a bajar prefieren postergar temporalmente sus compra con la esperanza de que los precios bajarán en el futuro próximo, lo que vuelva a generar otra caída de precios de manera cíclica, ese es el efecto devastador de la deflación.

Recordemos que en el caso de Estados Unidos, uno de los argumentos más repetidos después de la crisis bancaria era evitar a cualquier costo caer en una burbuja deflacionaria, de ahí que la Fed haya determinado que la mejor manera de evitar esto fuera imprimir dólares, abaratarlo y con esto provocar una continua actividad del dinero entre los cosumidores. La apuesta era recuperara la actividad económica a través de la inyección de dinero, así la Fed inyectó hasta 2 Trillones de dólares pero entonces ¿Por qué ha tardado tanto en recuperarse la economía de ese país? La respuesta se encuentra en el alto grado de despidos que hubo a causa de la crisis financiera que provocó un pánico entre la sociedad y como resultado retracción del consumo ante la incertidumbre de conservar o tener trabajo en el futuro; otra causa es la reducción del efecto multiplicador del dinero que es básicamente la generación de riqueza a través del consumo que provoca un incremento en la producción de bienes y servicios como resultado a un incremento en la demanda que a su vez incrementa el empleo que pone dinero en las manos de más personas que volverán a consumir. Nos quedamos con esas dos para el propósito de este post pero la idea principal es que la crisis fue tan profunda que dislocó los canales de distribución de riqueza y hasta el momento la recuperación más importante se ha dado en sectores sensibles al dinero barato, las viviendas.

Regresando a Japón, su intención al tener una inflación es provocar consumo en el presente cuando las personas perciban que los precios van a subir y de esta manera no postergar sus compras. Para lograr esto no es suficiente que exista como tal una inflación, debe ser sostenidad y las personas deben creer que será permanente o por lo menos continuo de ahí la importancia de reafirmarlo y mostrarse firmes en sus políticas de compra de bonos y de inyección de dinero en el mercado. 

 

Dos corrientes en China

El dato adelantado de PMI de HSBC muestra una desaceleración importante de la manufactura en China pero lo curioso es que el Banco Central de China ha empezó a retirar liquidez del mercado en congruencia con los comentarios de señales de calentamiento en la economía como el sector viviendero, nicho recientemente abierto a inversión extranjera pero con restricciones. Es interesante observar las dos corrientes que está viviendo China por un lado un sector manufacturero en desaceleración y por otro sectores con crecimientos de burbuja, hechos que se dan quizá por la transición a una economía más abierta a inversiones extranjeras.

¿Cómo manejar una economía propensa a los crecimientos desmedidos en diversos sectores y a su vez sensible al aún parco crecimiento global?

Haruhiko -Kuroda nominado como head del BoJ

Finalmente se ha formalizado la nominación del aún por retificarse Haruhiko Kuroda como gobernador del Banco Central de Japón quien se espera continúe con las medidas depreciatorias del Yen y en busca de un objetivo de inflación en ese país. Esto es importante pues con esto esperan reactivar su economía que durante décadas ha estado entrando y saliendo de un crecimiento parco a recesión. Así mismo, Japón ha sido durante los últimos meses un promotor de la guerra de monedas haciendo declaraciones en todos los niveles de gobierno con el objetivo de devaluar más cada vez su moneda.

La ratificación de Harihiko es muy probable que se de pronto pues cuenta con el apoyo de ambos partidos dominantes en Japón, de esta manera de inmediato se espera incremente la compra de bonos de largo plazo mientras actualmente el banco central se encuentra comprando bonos de hasta tres años.

China’s February HSBC Flash PMI Eases a Little

China’s February HSBC Flash PMI Eases a Little:
Growth in China’s giant manufacturing sector in February pulled back from two-year highs despite racking up a fourth consecutive month of expansion, a private survey showed on Monday, as foreign demand remained unsteady.
The HSBC flash purchasing managers’ index (PMI) for February slipped to 50.4, the lowest in four months and down from January’s final reading of 52.3, which had been the best showing since January 2011.
The flash PMI is the earliest indicator of China’s economic health in any month and should not alter expectations that the world’s No. 2 economy is enjoying a gentle recovery, a welcome development for the country’s new leaders who take office in March.
CNBC

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Banxico's Rate Cut is hotter than ever...

Banxico's dovish tone was helped by the fact that inflation, which had crept up for most of 2012, surprised on the downside at the end of the year, finishing below the bank’s 4 per cent ceiling.  Core inflation in December hit an all-time low of 2.9 per cent drive by the stabilisation in raw materials prices combined with a stronger Peso and lower telecommunications rates. The Central Bank also acknowledged that growth in Mexico was also slowing after an impressive three years, with the heady growth rates seen in the country’s export sector calming somewhat. December IGAE printed a 1.42% below market expectations and prior data. Yet almost 80 per cent of total exports still go the US and exports represent more than 30 per cent of the Mexican GDP any lower data coming from US would be driving Mex Local Markets. Several Market Dealers are expecting a one off 50bp rate cut in the next meeting (March 8).

Japan’s Economic Minister Wants Nikkei to Surge 17% to 13,000 by March; Contender for Bank of Japan Supports Additional Easing

Japan’s Economic Minister Wants Nikkei to Surge 17% to 13,000 by March; Contender for Bank of Japan Supports Additional Easing: Currency wars again took another leap forward this week as Japan’s Economic Minister Wants Nikkei to Surge 17% to 13,000 by March.

Economic and fiscal policy minister Akira Amari said Saturday the government will step up economic recovery efforts so that the benchmark Nikkei index jumps an additional 17 percent to 13,000 points by the end of March.



“It will be important to show our mettle and see the Nikkei reach the 13,000 mark by the end of the fiscal year (March 31),” Amari said in a speech.



“We want to continue taking (new) steps to help stock prices rise” further, Amari stressed, referring to the core policies of the Liberal Democratic Party administration — the promotion of bold monetary easing, fiscal spending and greater private sector investment.



The key index started rallying from around 8,600 points in mid-November when then-Prime Minister Yoshihiko Noda decided to hold a general election Dec. 16 that saw his ruling Democratic Party of Japan trounced by the LDP. Share prices have risen largely in response to the yen’s depreciation against other major currencies on expectations for aggressive monetary easing measures by the Bank of Japan since the LDP’s return to power.

Contender for Bank of Japan Supports Additional Easing



In addition to stock market cheerleading and targets from Japan's economy minister, Yen Weakens as Candidate for Bank of Japan Promotes Easing.

Japanese stock futures rose and the yen weakened after Haruhiko Kuroda, a potential contender for Bank of Japan chief, said additional monetary easing can be justified this year.



“If we do see a BOJ Governor of Kuroda’s calibre, the dollar-yen could well punch through 95 and would head to 100 very quickly,” said Evan Lucas, Melbourne-based market strategist at IG Markets Ltd., a provider of trading services. “It would also signal to Japanese consumers and investors alike that the government is finally taking action.”

For the record, I have been in on a long Japanese equities, short the Yen play for quite some time.



Yet, I do not pretend to know whether or not the Nikkei will soar another 17% by March. However, I do know that it is economically foolish for politicians to hijack currencies and stock markets. Thus, my positioning is certainly not an endorsement of Japanese policy.



At some point, and perhaps we have crossed the point already, currency wars can and will get out of control. If and when that happens, the Yen will spiral downward out of control, with energy prices (in Yen) skyrocketing. Moreover, Japanese exports may not necessarily rise as everyone believes.



Sentiment is a powerful thing. Convincing everyone in Japan that a huge outburst of inflation is on the way, is not the brightest thing to do, to say the least. As I have stated many times, Japan better be careful or it may get (and then some in spades) more of what it seeks.



Mike "Mish" Shedlock

http://globaleconomicanalysis.blogspot.com

Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.
Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Inflationary pressure in Brazil is building

Inflationary pressure in Brazil is building:
By Sober Look
Brazilian central bank’s highly accommodative policy in the past year and the recent weakness in the Brazilian real has helped boost growth.

But with economic growth stabilizing, the nation is beginning to face inflationary pressures (as predicted). Ultra dovish central bank policies, whether in Brazil or elsewhere, usually come at a price.

Reuters: - Brazil’s inflation accelerated to the fastest rate in nearly eight years in January, raising bets of an interest rate hike this year that could complicate the government’s drive to reignite a near-stagnant economy.
The Brazilian currency, the real , also jumped on the news, hitting a 9-month high against the dollar after central bank president Alexandre Tombini said he was worried about inflation.

Brazil’s inflationary pressures are becoming broad-based instead of simply focused on a particular sector of the economy.

GS: – What is of particular concern is that the acceleration of inflation in Brazil was broad-based, i.e., it was not driven by narrow-based shocks to just a few items. In fact, the Brazil IGI shows that items with a combined weight of about 60% in the CPI have annualized seasonally adjusted inflation now running above the 6.5% inflation target upper limit.

In response, the central bank is expected to begin raising rates aggressively – with futures already pointing to 100bp increase in the near future, – dampening the nascent economic recovery.
More About: Brazil, currencies, current account, Economy, inflation, monetary policy

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Is China Mobilizing For A War With Japan?

Is China Mobilizing For A War With Japan?:
We don't know if it merely a coincidence that a story has emerged discussing a Chinese mobilization in response to the ongoing territorial feud with Japan over the Diaoyu/Senkaku islands (and the proximal massive gas field) the very week that China celebrates its new year (and days after news that a Chinese warship was very close to firing on a Japanese destroyer). We don't know how much of the story is based in reality, and how much may be propaganda or furthering someone's agenda. What we do know is that the source of the story: offshore-based, Falun Gong-affiliated NTDTV has historically been a credible source of information that the China communist party desperately tries to censor, such as breaking the news of the SARS epidemic in 2003 some three weeks before China publicly admitted it. Its motto is "to bring truthful and uncensored information into and out of China." If that is indeed the case, and its story of major troop movements and mobilization of various types of military vehicles and artillery into the Fujian and Zhejian provinces, bordering the East China Sea and closest to the Diaoyu islands, is accurate, then hostilities between China and Japan may be about to take a major turn for the worse.
Fujian and Zhejian provinces highlighted below:

The clip that NTDTV released late yesterday covering the news is presented below.
As for the accompanying commentary, we recreate it below in its entirety so nothing is lost in translation (original source).

NTDTV February 8, 2013 News - the continental network transmission, Fujian and Zhejiang troops for several days active. Plus before the news that Chinese warships radar has repeatedly aimed at the Japanese ships and planes, therefore, the media have speculated that China may "prepare for war" Diaoyu Islands .

According to friends broke the news: February 3, Nan'an, Fujian Highway 308, artillery units practical exercise for several days.

February 3 to 6, Fujian, Xiamen, Zhangzhou, Huzhou, a large troop movements, nearly 100 vehicles of various types of military vehicles, armored vehicles, artillery filled the entire road, endless, Xiamen and even the scene of a traffic jam 10 kilometers.

In addition, on February 3 in Shiyan, Hubei, a large number of tanks, wheeled military base from Shiyan room counties is delivered to the coastal areas. Many local residents of the tense situation of some concern.

Prior to this allegation, January 15 and 30, the Chinese navy guided missile frigate, twice the fire control radar lock frigates and ship-borne helicopters of the Japanese Maritime Self-Defense Force, is also considered to enter a combat state.

According to mainland media quoted the "People's Daily" front-page article claiming that China will not change in point of view on the issue of the Diaoyu Islands , and have to prepare to win the war.

The international media alleged that China has purchased from Russia 239 engine, used in the manufacture of the H-6K. Combat covering the Diaoyu Islands, in this model, the engine can also be used to manufacture transported -20 transport aircraft purchased.

If the engine assembled, will greatly enhance China's military power.

Integrated these signs and reports, people have come to a startling conclusion: Day might want to go to war.

According to military experts, the Sino-Japanese war in the Diaoyu Islands, Fujian and Zhejiang provinces, is the most important logistical base. If the war to expand, at any time, will spread to the provinces of Fujian, Zhejiang.

France, Germany both right in euro disagreement

France, Germany both right in euro disagreement:

French President Franois Hollande said this week the common currency is overvalued and argues that its valuation can’t be allowed to hang “on the mood of the markets.” Germany responded by announcing that the euro isn’t overpriced.

They are both right. From Berlin’s vantage point, the euro is, if anything, cheap. At its current level, Germany’s export industries are doing very nicely. For France, it is anything but.

Calculations by analysts at Morgan Stanley, published this week, put the fair value of the euro for Germany, if it were standing alone, at $1.53. For France, it is $1.23. The euro is significantly undervalued for the German economy and overvalued for the French.

France’s dilemma is described in a November report on competitiveness to the French government by Louis Gallois, the former chief executive officer of EADS EADSY -0.99% . Bottom line: Unlike their counterparts across the Rhine, French industrial companies have ended up in the wrong segment of global product markets.

French industry finds itself “caught in the middle,” Gallois said.

German industry is protected by being positioned at the premium end of most of its markets, where there is less price sensitivity, and by the country’s success over the past decade in reducing costs.

From the other side, French exporters are being assailed by lower-cost competitors.

French companies have, over the past decade, cut profit margins in a bid to stay in the game, but they’ve lost ground in the productivity stakes.

“French industry has not succeeded, with some exceptions (luxury goods, aeronautics, nuclear, pharmaceuticals, and some food products), to move upmarket,” Gallois concluded.

It isn’t only for France that the rising euro is painful. For other economies in Europe, particularly those on the struggling fringes, euro strength threatens to negate their efforts to make their economies more competitive.

“All the potential effort that these countries are doing painfully for internal devaluation — by cutting wages, keeping them below productivity growth and so on — can be undone by the strength of the euro,” economist Nouriel Roubini said last month in Davos.

The euro’s strength has followed what appears to be the receding threat of a euro-zone breakup, thanks to pledges from the European Central Bank to stop speculative runs on the region’s banks and governments. With aggressive easing by the central banks of the U.S., U.K. and Japan, the euro is left as the least ugly dog.

If you assume the worst is over, the bond markets of Spain and Italy offer a nice interest-rate pickup for investors over the alternatives. Morgan Stanley analysts say Japanese investors “have been leading the way in returning to European markets.” If the euro isn’t at the point of breakup, therefore, it seems to be condemned to be one of the world’s strongest currencies.

Kit Juckes, head of foreign-exchange research at Societe Generale, has said the euro has been supported by rising interest rates in the euro area — since ECB President Mario Draghi’s Jan. 10 news conference, two-year euro interest rates have risen by 0.25 point — and by the move into surplus of the bloc’s balance of payments.

Roubini said that if the ECB is worried about the euro’s strength undoing the good work of governments, it should act by following other major central banks in aggressive “quantitative easing” — purchasing assets to pump money into the euro-zone economy.

Draghi did throw the ugly dog a bone late this week. He pointed out that the exchange rate remained near its long-term average and made a statement of the obvious: that the level of the euro could affect both euro-zone inflation and growth. “The exchange rate is not a policy target, but it is important for growth and price stability,” he said. “We certainly want to see whether the appreciation is sustained.”

This possible hint that he will tackle euro appreciation if it goes too far was enough to push the euro lower. But whether he will follow these words with action remains to be seen.

Juckes pointed out that the average value of the euro over the past five years has been $1.37, and it is hard to see why Draghi should sound the alarm at this point.

France, Germany both right in euro disagreement

France, Germany both right in euro disagreement:

French President Franois Hollande said this week the common currency is overvalued and argues that its valuation can’t be allowed to hang “on the mood of the markets.” Germany responded by announcing that the euro isn’t overpriced.

They are both right. From Berlin’s vantage point, the euro is, if anything, cheap. At its current level, Germany’s export industries are doing very nicely. For France, it is anything but.

Calculations by analysts at Morgan Stanley, published this week, put the fair value of the euro for Germany, if it were standing alone, at $1.53. For France, it is $1.23. The euro is significantly undervalued for the German economy and overvalued for the French.

France’s dilemma is described in a November report on competitiveness to the French government by Louis Gallois, the former chief executive officer of EADS EADSY -0.99% . Bottom line: Unlike their counterparts across the Rhine, French industrial companies have ended up in the wrong segment of global product markets.

French industry finds itself “caught in the middle,” Gallois said.

German industry is protected by being positioned at the premium end of most of its markets, where there is less price sensitivity, and by the country’s success over the past decade in reducing costs.

From the other side, French exporters are being assailed by lower-cost competitors.

French companies have, over the past decade, cut profit margins in a bid to stay in the game, but they’ve lost ground in the productivity stakes.

“French industry has not succeeded, with some exceptions (luxury goods, aeronautics, nuclear, pharmaceuticals, and some food products), to move upmarket,” Gallois concluded.

It isn’t only for France that the rising euro is painful. For other economies in Europe, particularly those on the struggling fringes, euro strength threatens to negate their efforts to make their economies more competitive.

“All the potential effort that these countries are doing painfully for internal devaluation — by cutting wages, keeping them below productivity growth and so on — can be undone by the strength of the euro,” economist Nouriel Roubini said last month in Davos.

The euro’s strength has followed what appears to be the receding threat of a euro-zone breakup, thanks to pledges from the European Central Bank to stop speculative runs on the region’s banks and governments. With aggressive easing by the central banks of the U.S., U.K. and Japan, the euro is left as the least ugly dog.

If you assume the worst is over, the bond markets of Spain and Italy offer a nice interest-rate pickup for investors over the alternatives. Morgan Stanley analysts say Japanese investors “have been leading the way in returning to European markets.” If the euro isn’t at the point of breakup, therefore, it seems to be condemned to be one of the world’s strongest currencies.

Kit Juckes, head of foreign-exchange research at Societe Generale, has said the euro has been supported by rising interest rates in the euro area — since ECB President Mario Draghi’s Jan. 10 news conference, two-year euro interest rates have risen by 0.25 point — and by the move into surplus of the bloc’s balance of payments.

Roubini said that if the ECB is worried about the euro’s strength undoing the good work of governments, it should act by following other major central banks in aggressive “quantitative easing” — purchasing assets to pump money into the euro-zone economy.

Draghi did throw the ugly dog a bone late this week. He pointed out that the exchange rate remained near its long-term average and made a statement of the obvious: that the level of the euro could affect both euro-zone inflation and growth. “The exchange rate is not a policy target, but it is important for growth and price stability,” he said. “We certainly want to see whether the appreciation is sustained.”

This possible hint that he will tackle euro appreciation if it goes too far was enough to push the euro lower. But whether he will follow these words with action remains to be seen.

Juckes pointed out that the average value of the euro over the past five years has been $1.37, and it is hard to see why Draghi should sound the alarm at this point.

A stock factor based on option volatility smirk

A stock factor based on option volatility smirk: A reader pointed out an interesting paper that suggests using option volatility smirk as a factor to rank stocks. Volatility smirk is the difference between the implied volatilities of the OTM put option and the ATM call option. (Of course, there are numerous OTM and ATM put and call options. You can refer to the original paper for a precise definition.) The idea is that informed traders (i.e. those traders who have a superior ability in predicting the next earnings numbers for the stock) will predominately buy OTM puts when they think the future earnings reports will be bad, thus driving up the price of those puts and their corresponding implied volatilities relative to the more liquid ATM calls. If we use this volatility smirk as a factor to rank stocks, we can form a long portfolio consisting of stocks in the bottom quintile, and a short portfolio with stocks in the top quintile. If we update this long-short portfolio weekly with the latest volatility smirk numbers, it is reported that we will enjoy an annualized excess return of 9.2%.

As a standalone factor, this 9.2% return may not seem terribly exciting, especially since transaction costs have not been accounted for. However, the beauty of factor models is that you can combine an arbitrary number of factors, and though each factor may be weak, the combined model could be highly predictive. A search of the keyword "factor" on my blog will reveal that I have talked about many different factors applicable to different asset classes in the past. For stocks in particular, there is a short term factor as simple as the previous 1-day return that worked wonders. Joel Greenblatt's famous "Little Book that Beats the Market" used 2 factors to rank stocks (return-on-capital and earnings yield) and generated an APR of 30.8%.

The question, however, is how we should combine all these different factors. Some factor model aficionados will no doubt propose a linear regression fit, with future return as the dependent variable and all these factors as independent variables. However, my experience with this method has been unrelentingly poor: I have witnessed millions of dollars lost by various banks and funds using this method. In fact, I think the only sensible way to combine them is to simply add them together with equal weights. That is, if you have 10 factors, simply form 10 long-short portfolios each based on one factor, and combine these portfolios with equal capital. As Daniel Kahneman said, "Formulas that assign equal weights to all the predictors are often superior, because they are not affected by accidents of sampling".

Currency wars can be quite effective

Currency wars can be quite effective:

Many in the mass media continue to be confused about the concept of currency wars and any tangible effects such policies may have. Here is an example of how real the impact can be. Below is a chart of the JPY/KRW currency cross - the number of South Korean won per one Japanese yen.

JPY/KRW

As Japan went on its devaluation campaign via monetary easing (see discussion), it's export sector quickly obtained a competitive advantage over its Korean rivals. The markets immediately rewarded Japanese firms with significant outperformance over their Korean counterparts. The two markets, which generally traded in tandem (except for a brief period last spring), have now diverged dramatically.

KOSPI (blue) vs. NIKKEI225 (red)

The impact of yen's depreciation on Japan's industries was swift and potent, creating anxiety among South Korean businesses while encouraging Japan to keep driving the yen lower.

Bangkok Post: - A surging won and waning yen are eroding the bottom lines of South Korea's export powerhouses who are feeling the pinch after years of gobbling up global market share from their Japanese rivals.

A bank employee counts out South Korean won banknotes at the Korea Exchange Bank in Seoul. A surging won and waning yen are eroding the bottom lines of South Korea's export powerhouses who are feeling the pinch after years of gobbling up global market share from their Japanese rivals.

The South Korean currency has soared 27 percent against the yen since the beginning of 2012, as anticipation of monetary easing promised by Japan's new leader Shinzo Abe weakened the yen across the board.

And the won gained 8.6 percent against the US dollar over the same period, touching a 17-month high of 1,054.49 on January 15. In contrast, the yen slumped this week to its weakest level against the greenback.

The trend is being watched anxiously in business circles in South Korea, where overseas sales account for nearly half of the country's export-reliant economy.

In the past decade South Korea has made sizeable inroads into Japan's export market where the two countries compete head-to-head in the electronics, auto, shipping and steel product sectors.

While only 20 percent of their top 50 export products overlapped in 2000, the figure now stands at more than 50 percent, according to data from the state-run Korea Trade-Investment Promotion Agency. "The impact of the weak yen will have a limited impact on IT industries like smartphones where South Korea has a wide lead," said Shin Hyon-Soo of the Korea Institute for Industrial Economics and Trade.

At some point South Korea as well as other nations in the region will "retaliate" by attempting to weaken their own currencies, launching the next chapter in the currency wars.

SoberLook.com

From our sponsor:

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Currency wars can be quite effective

Currency wars can be quite effective:

Many in the mass media continue to be confused about the concept of currency wars and any tangible effects such policies may have. Here is an example of how real the impact can be. Below is a chart of the JPY/KRW currency cross - the number of South Korean won per one Japanese yen.

JPY/KRW

As Japan went on its devaluation campaign via monetary easing (see discussion), it's export sector quickly obtained a competitive advantage over its Korean rivals. The markets immediately rewarded Japanese firms with significant outperformance over their Korean counterparts. The two markets, which generally traded in tandem (except for a brief period last spring), have now diverged dramatically.

KOSPI (blue) vs. NIKKEI225 (red)

The impact of yen's depreciation on Japan's industries was swift and potent, creating anxiety among South Korean businesses while encouraging Japan to keep driving the yen lower.

Bangkok Post: - A surging won and waning yen are eroding the bottom lines of South Korea's export powerhouses who are feeling the pinch after years of gobbling up global market share from their Japanese rivals.

A bank employee counts out South Korean won banknotes at the Korea Exchange Bank in Seoul. A surging won and waning yen are eroding the bottom lines of South Korea's export powerhouses who are feeling the pinch after years of gobbling up global market share from their Japanese rivals.

The South Korean currency has soared 27 percent against the yen since the beginning of 2012, as anticipation of monetary easing promised by Japan's new leader Shinzo Abe weakened the yen across the board.

And the won gained 8.6 percent against the US dollar over the same period, touching a 17-month high of 1,054.49 on January 15. In contrast, the yen slumped this week to its weakest level against the greenback.

The trend is being watched anxiously in business circles in South Korea, where overseas sales account for nearly half of the country's export-reliant economy.

In the past decade South Korea has made sizeable inroads into Japan's export market where the two countries compete head-to-head in the electronics, auto, shipping and steel product sectors.

While only 20 percent of their top 50 export products overlapped in 2000, the figure now stands at more than 50 percent, according to data from the state-run Korea Trade-Investment Promotion Agency. "The impact of the weak yen will have a limited impact on IT industries like smartphones where South Korea has a wide lead," said Shin Hyon-Soo of the Korea Institute for Industrial Economics and Trade.

At some point South Korea as well as other nations in the region will "retaliate" by attempting to weaken their own currencies, launching the next chapter in the currency wars.

SoberLook.com

From our sponsor:

www.SoberLook.com

By Printing Money Central Banks Have Already Begun the Next Stage of Warfare

By Printing Money Central Banks Have Already Begun the Next Stage of Warfare:


Since the Financial Crisis erupted in 2007, the US Federal Reserve has engaged in dozens of interventions/ bailouts to try and prop up the financial system. Now, I realize that everyone knows the Fed is “printing money.” However, when you look at the list of bailouts/ money pumps it’s absolutely staggering how much money the Fed has thrown around.

Here’s a recap of some of the larger Fed moves during the Crisis:

• Cutting interest rates from 5.25-0.25% (Sept ’07-today).
• The Bear Stearns deal/ taking on $30 billion in junk mortgages (Mar ’08).
• Opening various lending windows to investment banks (Mar ’08).
• Hank Paulson spends $400 billion on Fannie/ Freddie (Sept ’08).
• The Fed takes over insurance company AIG for $85 billion (Sept ’08).
• The Fed doles out $25 billion for the automakers (Sept ’08)
• The Fed kicks off the $700 billion TARP program (Oct ’08)
• The Fed buys commercial paper from non-financial firms (Oct ’08)
• The Fed offers $540 billion to backstop money market funds (Oct ’08)
• The Fed agrees to back up to $280 billion of Citigroup’s liabilities (Oct ’08).
• $40 billion more to AIG (Nov ’08)
• The Fed backstops $140 billion of Bank of America’s liabilities (Jan ’09)
• Obama’s $787 Billion Stimulus (Jan ’09)
• QE 1 buys $1.25 trillion in Treasuries and mortgage debt (March ’09)
• QE lite buys $200-300 billion of Treasuries and mortgage debt (Aug ’10)
• QE 2 buys $600 billion in Treasuries (Nov ’10)
• Operation Twist reshuffles $400 billion of the Fed’s portfolio (Oct ’11)
• QE 3 buys $40 billion of Mortgage Backed Securities monthly (Sept ‘12)
• QE 4 buys $45 billion worth of Treasuries monthly (Dec ’12)

The Fed is not the only one. Collectively, the world’s Central Banks have pumped over $10 trillion into the financial system since 2007. This money printing has resulted in a massive expansion of Central Bank balance sheets, spread inflation into the system, and done nothing to address the key solvency issues that lead up to the great crisis.

This competitive debasement has lead to increased tension between the world’s Central Banks. You will never hear their stated outright for the simple reason that the single most important responsibility of the Central Banks is to maintain confidence in the system.

However, underneath the veneer of goodwill and the occasional necessary coordinated intervention, tensions are rising between Central Banks. When the US debases the US Dollar it pushes the Euro higher. This hurts German exports which in turn angers the Bundesbank.

The Bundesbank fired a warning shot at the Fed last autumn when it announced it wanted to have its Gold reserves at the Fed audited. To be clear here: no one of major financial import has ever questioned the Fed’s trustworthiness before. However, at the time of this announcement Germany stated it had no intentions of actually moving its reserves.

Fast-forward to today and Germany has not only audited and checked its Gold reserves at the Fed but it is now moving them. In plain terms, Germany has told the world that A) it does not trust the Fed and B) it is through playing around.

This situation will likely be getting worse going forward. The fact that Germany will be removing all of its Gold reserves from France certainly doesn’t bode well for future German French relations if push ever comes to shove (it’s not as though Europe has a history of getting along well).

Look for increased tension to grow between the world’s Central Banks in the coming months and years. This tension will likely result in:

1. Economic warfare (see the recent situation in Iran)
2. Political infighting
3. Key players being sacrificed

Given that the financial system and economic “recovery” have been built on a house of cards, these political developments will have major impacts on the financial markets.

Outside of internal dissent, the power players in the global economy (the US, China, Japan, and Germany) are showing increasing signs of tension both internal (China and the US) as well as external (China vs. Japan, Germany vs. the US, the US vs. China).

These tensions will lead to economic warfare and very likely physical warfare in the coming years.

We offer several FREE Special Reports to help investors navigate this risk and others in the financial system. They include:

Preparing Your Portfolio For Obama’s Economic Nightmare

How to Protect Yourself From Inflation

And last but not least…

Bullion 101: Everything You Need to Know About Investing in Gold and Silver Bullion…

You can pick up free copies of all of the above at:

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We Will Crush You

We Will Crush You:
Two weeks ago I posted a long overdue update on the Federal Reserve’s market fuel injection activities. My previous post had been in October of 2011 and I today I would like to address the reason for keeping silent on the subject for over a year.
A few months earlier that year the Fed announced ‘Operation Twist’, a program which would be conducted throughout late 2011 and all through 2012 to further ‘help stimulate the economy’ (well, let’s not go there). The term ‘Operation Twist’ isn’t new – it was first used back in 1961 (in a reference to the Chubby Checker song) when the Fed employed a similar policy. In essence it refers  the Fed’s initiative of buying longer-term Treasuries and simultaneously selling some of the shorter-dated issues it already holds in order to bring down long-term interest rates.
Another popular term you may have heard in this context is ‘sterilization’.  In theory the practice of buying the long end and selling the short end allows the Fed to drive down interest rates without further increase of the monetary base – thus they are calling it ‘sterilized injections’.
Operation Twist has been instituted in two parts. The first ran from September 2011 through June of 2012, and involved the redeployment of $400 billion in Fed assets. The second ran from July 2012 through December 2012 and redeployed a total of $267 billion. The Fed’s reasoning for initiating the second phase of Operation Twist was response to continued sluggish growth in the U.S. economy.
Now last December the Fed stated that it would end the program and replace it with a ‘stronger version’ of its existing policy of quantitative easing – which seeks to lower long-term rates by making open-market purchases of longer-dated U.S. Treasuries and mortgage-backed securities. And that brings us back to our POMO auctions.

If you look at our POMO chart above then you can clearly see the tail end of QE1 as well as the bell curve of injections representing QE2 – all that was done via good old fashioned ’unsterilized’ injections, thus resulting in a measurable increase in the U.S. monetary base. The St.Louis Fed is kind enough to maintain a chart of just that:

As you can see the Fed went from roughly $800 Million to about $2.8 Trillion between 2008 and 2011. Since then this chart has been pushing sideways, suggesting any injections were done via Operation Twist. If you look closely however you can see a sudden and steep rise over the past few weeks, and the same is visible on my POMO chart above. Apparently there has been yet another policy change and the Fed is now back to full scale unsterilized market injections via POMO auctions. And those means more slosh in the system which in turn provides more speculative fuel for asset purchases. Thus keeping an eye on the Fed’s POMO activities has once again become relevant to our trading activities.
To dumb all of this down let me simply state that being short equities during active periods of POMO purchase activity is a losing endeavor. In January I counted 17 days of ‘coupon purchases’ (excluding one TIPS which I usually disregard) – there was not one sale. The implicit result of which was a rise of 88 handles in the S&P 500 and 1,015 handles in the Dow Jones Industrial.  Fortunately we here at Evil Speculator were prudent enough to not step in front of this speeding bus.

In case you are wondering what February holds for us – here’s the Fed’s POMO schedule for this month. And once again we’re seeing bumper to bumper POMO purchases on the roster and not one single sale. The Fed’s message to the bears: Don’t screw with us – we will frilling crush you.
Now that is not the end of the story – there is another factor we need to consider and it’s the actions of the ECB on my side of the Atlantic. Draghi has been cooking his own stew of sterilized injections by swapping a portion of the ECB’s on-balance sheet exposure for an unlimited off-balance sheet commitment via the Outright Monetary Transactions program. He’s doing this by offering one-week deposits to the banking system. Banks bid competitively for the deposits, thus permitting the ECB to withdraw from circulation an amount of money equivalent to what it had spent so far in buying them via OMTs.
So why do we worry about all this? Because when we compare the balance sheet of the Fed to that of the ECB it almost exactly tracks the gyrations of the EUR/USD. There’s a pretty good Wall Street Journal article on the topic which makes that very point. My apologies for not providing my own chart but I have had a problem extracting the proper ECB data – it’s a bit like drinking from a firehose. If you have any pertinent insights then feel free to shoot me an email – I would appreciate any pointers.

If you are an equities trader (and if you are reading this I assume you qualify) then it is important for you to embrace the fact that you are implicitly trading the EUR/USD. The chart above makes this rather clear – the moment  the Dollar rises against the Euro equities suffer – when it falls equities rally. And at the end of the day it really boils down to who is printing more at this point – and at the moment the Fed is once again expanding its balance sheet while the ECB has been reducing it. That means a (relatively) stronger Euro, a weaker Dollar, and thus a continued rise in equities.

The current P&F target on the FXE is 139.5 – and given both the Fed’s and ECB’s activities I have little doubt that we will fulfill that price objective and perhaps more. And as long as the Dollar continues we should expect to see higher prices for commodities as well as equities across the board.

Guest Post: Soaring Debt Precedes Financial Crises...

Guest Post: Soaring Debt Precedes Financial Crises...:
Submitted by John Aziz of Azizonomics blog,
Things don’t look so good for China:

Will we see a Chinese financial meltdown in 2013? Or 2014? Or 2015? With global GDP growth on a definite trend downward, with such a tepid Western recovery, and with global geopolitical tensions still high, the last thing the global economy needs is a financial crisis at the heart of the BRIC growth engine. But the data implies that that may just be what we get.
To those who believe that China is immune to such a thing, recall that America suffered the Great Depression immediately previous to becoming a global superpower. China’s economy has undergone a rapid transformation in recent years:

Such a transformation is sure to necessitate some dislocation and fallout — just as America’s transformation from an agricultural to a manufacturing economy did. America ended that process as the global superpower. It remains to be seen if the same will happen for China, but controlling the world’s largest productive industrial base certainly suggests so. The other factor, of course, that presaged America’s rise was a global war…

Gun Murders vs. Terrorism by the Numbers

Futures Movers: Oil futures slip under $94-a-barrel in Asia

Geithner Unleashed: Sends Letter To Boehner, Warns Even Brief Default Would Be "Terribly Damaging", Channels Reagan

Bernanke: Very important that Congress raises the Debt ceiling

Irrationality, trend-following, and cats

All The Gold In The World - The Definitive Infographic

Where to look for signs of recession

Ver Beyond the Rational - Laurie Santos - Zeitgeist 2012 en YouTube

Saudi Arabia Cuts Oil Production

Repost: Posible desaceleración global futura

Repost de comentario en mayo que visto en perspectiva muchos puntos se han materializado. Desde junio 20 he comentado mi expectativa de un rango de operación de los bonos de 10 años de Estados Unidos en 0.75% a 1%  link como resultado del recrudecimiento de las desaceleraciones económicas de las mayores economías que dejarán a la economía global sin un motor lo suficiente fuerte para sacarlo de la recesión. Lo anterior llevará, y eso está ocurriendo desde hace mucho, a los Bancos Centrales a una "Currency War" para debilitar lo más posible su moneda. 

Las medidas QE1, QE2, (Operation Twist, no afectó balance) y unlimited QE han debilitado el dolar y las mayores economías están haciendo lo mismo, como resultado la moneda de reserva ha perdido valor y el resto de las monedas están retrocediendo también. Por lo tanto, los inversionistas siguen incrementando sus posiciones en oro que continúa revaluándose. En el mediano largo plazo el único asset que podría no tener valor pero dar seguridad serán los bonos de 10 años americanos y ante un mercado accionario no siguiendo  a los fundamentales económicos que podrían tener un episodio de stress extremo ante el fiscal cliffs u cualquier detonante que pueda incrementar el nerviosismo. El fundamental antes podía dar un sustento, un piso pero si dicho mercado continúa dislocado a los fundamental entonces no hay un piso tal y el estress puede dominar en cualquier momento.

Ahora si el repost

Me gustaría tratar este tema con tiempo y creo que las condiciones aún no están puestas del todo para poder afirmarlo pero me parece que tendremos tiempo de sobra para discutir una posible desaceleración futura.

Lo que me hace pensar esto es:

• Estados Unidos se encuentra en un trend de crecimiento pero actualmente se encuentra en la etapa de menor crecimiento de ese ciclo pero tiene serios problemas en el corto y mediano plazo si no se hace algo pronto con el nivel de deuda que mantiene actualmente y si no se implementa una medida para seguir extendiendo los beneficios de desempleo y tambie´n es un riesgo las acciones que tome la Fed cuando vaya a empezar a retirar la liquidez que ha inyectado.
• La economía China no repunta, no crece lo suficiente y está en riesgo de que se continúe desacelerando. Lo mencionamos en diversas ocasiones y esperaba que el Banco Central Chino fuera más enérgico en meter estímulos para mantener le economía a flote pero las medidas hasta el momento ha sido poco efectivas. Mucho de la desaceleración es explicado por el mediocre comportamiento de la economía da la zona euro.
• De Europa, bueno, no podemos decir mucho salvo que su crecimiento seguirá siendo débil mientras no cambien el enfoque con el que hacen frente a su actual crisis.

De acuerdo a los puntos anteriores hay pocas esperanzas de tener un motor que estimule el crecimiento y aún cuando los países emergentes han salido muy bien posicionados de esta crisis, dudo que puedan mantener ese ritmo si no se percibe un solución pronta a la crisis de deuda en europa y de déficit en Estados Unidos.

No quiero decir aún que es un hecho pero sin duda las probabilidades han aumentado a que sí habrá una desaceleración global, ahora a observar a China que será la que determinará que tan profunda pueda ser en caso de que continúe perdiendo impulso su ecomomía. Estaremos atentos y comentando los datos que se vayan viendo.