Around the Globe 10.28.2013

Pending Home Sales Show Sharp Drop –

Pending Sales of Existing Homes Slump by Most in Three Years – Bloomberg.

Pending home sales drop 5.6 percent in September.

U.S. pending home sales fall by most in more than three years in September | Reuters.

NAR Pennding Home Index through 09.2013

The MFP is rightly attributing this fall in pending home sales to the precipitous rise in mortgage rates since May, though the NAR would have you believe that the shutdown beginning on October 1 somehow affected pending sales from September.  Houses have become dramatically more unaffordable since May from rising rates and housing prices against the backdrop of stagnant incomes.  The only way for the housing market to improve at this juncture would be from gains in consumer income, which is not in the cars.


Hilsenrath to Wall Street: You don’t know Fed.

QE Infinity? No end in sight for money printing.

In Fed and Out, Many Now Think Inflation Helps –

Fed Balance Sheet vs. SP500 Last Year

If you wish to know the Fed’s future money printing output, this is the only chart you need to understand.  The Fed buys bonds, and the sellers invest those proceeds into stocks raising prices.  When the Fed stops or even threatens to stop, the whole trade begins unraveling. While the Fed claims to be concerned with unemployment and inflation, the Fed is extremely apprehensive about the consequences of a falling stock market.    Going forward, the Fed will continue to use low inflation and poor labor market data to justify continued printing to support both the government bond and stock markets.

Analysis: Convalescent euro zone seeks to escape debt overhang | Reuters.

Currency Woes Batter Europe’s Industrial Giants –

EURUSD 10.28.2013

From Yahoo Finance

The Eurozone and the MFP is really counting on PIIGS exports continuing their rise in order to support the Eurocrisis Recovery Narrative.  Unfortunately, a rising euro will stop the export “boom” in its tracks.  The Euro will continue to rise as the Fed continues to print.  Moreover, Eurozone banks are still selling overseas assets to bolster capital ratios back home.  This process has created  background buying pressure on the euro that may even pick up as these backs clean up their balance sheets in advance of the commencement of the “banking union” in late 2014.

Not happy at work? Wait until you’re 50 or older….

This article is typical of the drivel spewing from the mouth of the MSM.  People report increasing job satisfaction after 50 because of some rather obvious selection bias.  People switch jobs several times over the course of their careers.  If your job sucks, you quit it in the hopes that the next job will be better.  This process will continue until you find a job that you enjoy.  Then, you will stay with it as long as you can.  It is not surprising that people settle into a comfort zone with their employment when they reach the last stages of their careers.  So the article’s advice to sit around and “just wait” until you’re 50 is poor advice.  It takes a lot of work to obtain satisfying work, so get to work already!


Around the Globe 10.09.2013

Nothing to do but duck and cover if US defaults: Kyle Bass.

US Sovereign Credit Default Swap

There is nowhere to run if the U.S. government defaults, but that isn’t stopping the US CDS from rising dramatically since the “crisis” began.  If the government really defaults, then the financial system will freeze, and no one will get paid on their hedges.  After a time, the government will get its act together and reopen.  The debt will come off default, and the CDS hedges won’t matter.

Obama to choose Yellen for top Fed job, markets relieved | Reuters.

Janet Yellen, a Backer of Pushing the Fed’s Policy Boundaries –


Janet Yellen will easily be confirmed by the Senate.  Summers had administration support, but he was an unfavorable candidate from the perspective of the banksters.  Yellen is a known serial printer, but Summers would have probably ceased monetary easing.  The banksters spend a lot of money on the Senate, and this lobbying paid off.

At the very least, Yellen will continue to current program, and there is an excellent chance she may even add to it.  Bernanke would have begun winding down bond purchases had the government shutdown not intervened, so this development is being viewed favorably by the banksters and permabulls.

Icelanders Run Out of Cash to Repay Foreign Debts: Nordic Credit – Bloomberg.

Iceland must run a large current account surplus in order to generate the cash necessary to pay its debts, because foreigners will not invest in the country as long as the capital controls remain in place. Removing the capital controls is a giant gamble, but it is also the only way to take a shot at getting the country back to normal.  Expect no gambling from Iceland’s leaders.  They’ll have to go hat in hand to obtain another loan from someone.

Iceland Current Account to GDP

Puerto Rico Yields Above Venezuela’s in Worst Rout: Muni Credit – Bloomberg.

U.S. Treasury Said to Have No Puerto Rico Assistance Plan – Bloomberg.

MUB 10.09.2013

The Puerto Rican debt crisis is similar in form to the Eurocrisis. Ultralow rates have induced Puerto Rico to issue too much debt rather than cutting back on expenses. Furthermore, the dollar is too strong a currency for Puerto Rico, which renders the commonwealth noncompetitive on world markets.   You can say the same thing about Greece, Italy, Spain, Cyprus or even France.  There is no way to bail out a state or territory if it gets into trouble, which is similar to the relationship between the Eurozone countries and the ECB.  Saving Puerto Rico would require an act of Congress, and that does not seem likely at the present juncture.

Slovenia Buys Time With Rigged Bond Sale

Slovenia Buys More Time With Strong Bond Sale.

Slovenia Buys Time to Dodge Bailout With Debt Sale Win – Bloomberg.

Slovenia Aims to Issue T-Bills, Retire Debt –

Slovenia 10 Year Bond Yield 04.18.2013

The first two headlines are from mainstream media outlets Bloomberg and CNBC.  Note how each organization hypes the Slovenian debt sale describing it as “strong” and a “win.”  Both articles neglect to inform the reader the reason for these fantastic results.

The two state owned banks were coerced to participating in what amounts to an extension of the €885mm debt issue maturing in June.  The banks purchased the T-bills from the government who in turn purchased portions of the June issue from the banks.  The net result of the transaction is that Slovenia is rolling over the debt to its captive banks so that it does not have to use bond markets.  The terms are attractive for the banks in that they are being taken out at 99.525% of par, which is a significant premium to the market price.

At this juncture, it is doubtful that a Slovenian bond issue would price near the 4.15% rate the banks are receiving for the T-bills.  In typical Eurozone fashion, Slovenia’s GDP is decreasing, and its government debt is rising.  Meanwhile, non performing loans continue to rise.  They’re currently at 20% and will probably move higher as the effects of a property bubble work its way through the system.

The estimated cost for cleaning up the banking sector is €3-4bn, but this is figure is suspect due to its source, the Slovenian government.  Based on the bad loan percentage, the cost to recapitalize the banks is around €6bn and still rising.  Just this amount would increase Slovenia’s debt to GDP ratio from 50% to 75%.  Large yearly budget deficits will also add to the final number.

In this environment, it will be difficult for Slovenia to sell its bonds to anyone other than its state owned banks.  As such, the country will require some sort of Eurozone assistance to continue financing itself.  Slovenia is not bad off the other peripheral countries, so merely activating the OMT program as opposed to a full-scale bailout may be the answer here.



Misconceptions Regarding Bank of Japan Policy



Bank of Japan Joins Fed, ECB in Record Stimulus – Bloomberg.

Bank of Japan follows the Fed, on steroids | Gavyn Davies.

A day after the BoJ dropped its QE bomb, a number of misconceptions about its plan are floating around the financial media.  Today, I’d like to do my part to dispel some of these, and then knock off early to enjoy Central Park.

I found many of these misconceptions in the FT article linked above, so you may wish to read it first.  Without further ado:

The package of quantitative easing announced today by the new regime at the Bank of Japan is one of the largest monetary injections ever announced by the central bank of a major developed economy. (My bold and italics— JMD) This statement is essentially correct except for one word.  Perhaps I am being a bit of a stickler, but I prefer direct language.  The BoJ is not “injecting money”  or “firing a big bazooka.” No matter the metaphor the financial press is using to describe this action, it is money printing.  Central banksters must cloak their action under the language of medicine or war, but it is unbecoming for a journalist to do so.  Inform the public not only by disseminating information but by doing so with clarity.

[The new policy] represents a deliberate change in philosophy, and a complete abandonment of everything that the Bank of Japan has said about monetary policy in the past two decades.  Even before the days of William Randolph Hearst, journalists have known that hype sells newspapers.  Calling this new policy a change or even new is at best hype and at worst disingenuous.  The BoJ has maintained a zero interest rate policy since the late 90’s and has been purchasing JGBs since the early aughts:

Japanese Benchmark Interest Rate

All that has changed here is the scale of the BoJ’s actions.  The philosophy has remained the same.  With a fervor usually reserved for religion, the BoJ and their fellow central banksters believe that they have the ability to create viable, self-sustaining economic growth via the printing press despite the fact that this has never been the result of these expansionary policies.

If you still believe that the BoJ is doing something new over those pesky facts above, then believe the author of the article:

The doubling in the Japanese monetary base over a period of 21 months is in itself remarkable. Taken together with the extension of the duration of bonds purchased from less than 3 years to an average of 7 years, the injection becomes of historic proportions.

It is the same policy, just implemented on a grander scale, and it is still not an injection but money printing.

Mr Kuroda is trying to pull off a difficult trick, which is “to drastically change the expectations of markets and economic entities”, and to do so in a very particular way.  Changing expectations means replacing a deflationary system with an inflationary one.  If this gambit is successful, the real trick will be simultaneously maintaining low interest rates in the face of the declining value of the yen.  An increase in yields for JGBs will bankrupt Japan overnight.  At 2%, all government tax revenue must be used to make interest payments on outstanding debt.  Every other line item must be financed via the debt markets.  I do not believe that the markets can absorb the drastic, resultant supply increase in JGBs.

This is not helicopter money, because the rise in JGB holdings (although large enough to finance more than the entire budget deficit in the next two years) is intended to be reversed in the long run.  While currency is not being dropped on Tokyo like propaganda pamphlets during WWII, there is painless no exit from money printing on such a large basis.  The Fed will allow its bond holdings to mature over the next thirty years or so, because it simply owns too many to safely sell back to the market.  The parenthetical reveals the true nature of this policy— debt monetization.  The only way to stop monetizing public debt is via default.  See Weimar Germany for the seminal example.

Although inherently risky, it has a reasonable chance of success, via its impact on financial markets, and on inflation expectations. Those are the places to look for early indicators of whether this unprecedented monetary “big bang” is succeeding, or going badly off course.  It was bad enough to bring the honorable professions of medicine and war into the financial realm, but now the author invokes the language of astrophysics.  This policy is not a big bang but money printing, and it has no chance of success.  It has been used unsuccessfully for almost 20 years.  With each new round of money printing more is done, and less is accomplished.  If this policy fails spectacularly precipitating the Japanese Debt Crisis, the first sign will be interest rates and the canary in the coal mine will be the swaps market.

An early indication to where we are heading is revealed in the chart inserted at the beginning of this post.  Note the ridiculous spike in yield for 10 year JGBs.  Was this a fat finger or the finger of the smart money leaving the market?

This is not helicopter money, because the rise in JGB holdings (although large enough to finance more than the entire budget deficit in the next two years) is intended to be reversed in the long run.


Bank of Japan Accelerates Money Printing



BOJ to pump $1.4 trillion into economy in unprecedented stimulus | Reuters.

BOJ Throws In Kitchen Sink in War With Deflation.

BOJ Doubles Bond Purchases in First Kuroda Easing Salvo – Bloomberg.

BOJ Launches Bold Plan to End Deflation –

The Bank of Japan is embarking on a final effort to stoke its economy by turning up the Yen printing press to 11.  After all, Japan must keep up the race to debase with its trading partners.

Virtually all the world’s central banks are Keynesian, which is more akin to religious rather than economic doctrine.  Religion is based on faith.  If one follows the religion and does not receive the desired effect, the problem cannot possibly be the divine doctrine meaning it is not being followed in the proper fashion.  If praying is not working, then it is because one is not praying enough.

So it is with the Keynesian cult.  Money printing is always the answer.  If this is not working, it is because money is not being printed on a grand enough scale.

As such, the Bank of Japan is taking the following steps to promote a 2% inflation rate in its economy:

  1. Switching the target from the overnight call rate to the monetary base
  2. Doubling bond purchases from ¥3.8tr to ¥7.5tr
  3. Purchasing all durations of debt rather than just the shorter-dated issues
  4. Increasing ETF purchases by ¥1tr per year and REITs by ¥30bn
  5. Removing the limit on debt holdings to outstanding currency

This is not a new plan, merely a souped-up version of previous episodes of money printing.  The new head of the BoJ, Haruhiko Kuroda, believes that this round of money printing will finally be the one to revive Japan’s moribund economy after nearly two decades of stagnation. The goal of the plan is to create a wealth effect for Japanese consumers that will induce them to increase their spending.

If the Bank of Japan succeeds, it will initiate the Japanese debt crisis.  The benchmark JGB pays less than a half a point a year in interest. With a deflation rate of 2%, this is a good return.  Under a 2% inflation rate, JGB yields will have to rise to compensate the lender for use of his capital accordingly.  Japan cannot afford to pay a higher interest rate on its debt.

This is the problem.  An interest rate of 2% on JGBs effectively doubles the interest costs for the government, and it cannot afford this.  Japan will become insolvent, and it will happen quickly.

Japan is too big to fail.  As such, there will be a coordinated central bank rescue that may succeed in kicking the can down the road a little further.  Remember this when placing those bets against the ¥, the Nikkei 225 and JGBs.




Japan is Not Europe

Japan’s Abe Could Join Reformers’ Pantheon – Bloomberg.

Japan’s Choice: Shrink the Welfare State or Collapse – Forbes.

Japan wishes it had debt problems like the PIIGS. Its problems are much worse. In fact, Japan is in worse fiscal shape than any country in the world. While currently rated AA- by S&P, its fundamentals resemble countries deep into junk territory. Comparing Japan to the world’s B- and CCC+ rated countries is a revealing exercise:

Japan vs. Junk Debt to GDP

Japan’s Debt to GDP ratio is the clear champion a third larger than the runner-up, Greece. The ratio is also expanding rapidly thanks to Japan’s large budget deficits. Due to rising interest and social security costs, Japan is on track to surpass its 2012 performance for the next decade:

Japan vs. Junk 2012 Budget Balance

Surprisingly, none of those countries in the chart rank among the top ten budget deficits for 2012. Those ranked ahead of #12 Japan in order: Afghanistan, Eritrea, Sao Tome and Principe, Guineau, Ireland, Namibia, Cape Verde, Tanzania, Maldives, Burundi and Botswana. Each of these countries is either war-torn like Afghanistan, a small island nation like the Maldives, an African basket case like Tanzania, or Ireland.

Don’t worry too much about them. At least they’re growing, unlike Japan now in its 5th recession in the last two decades:

Japan vs. Junk GDP Growth 2012

Japan is tied for 5th place with Portugal for the largest economic contraction in 2012 behind Libya, Yemen, Greece and the Ivory Coast. Greece is the only one of those countries not to have experienced a revolution in the last two years, but that could change at any minute given the ongoing economic depression and corrupt political class.

The Japanese situation is set to worsen over the coming days, months or years.

Its interest cost in 2012 was ¥9,855bn and rising steadily as it issues more and more bonds. It is projected to rise ¥1tr per year assuming that interest costs remain stable. They won’t, because foreigners will demand higher interest rates to account for increased Japanese risks.

In the past, Japan was able to rely on domestic investors to purchase most of its new debt issuance, so foreigners only hold 7% of the total Japanese debt. However, an aging country means less saving, so foreigners now account for 30 – 50% of new bond purchases. The country is becoming more vulnerable to the vagaries of the world financial markets at the worst possible time.

Japan’s large trade surpluses also assisted in financing budget deficits, but these have become deficits over the past few years because of a strong yen and outsourcing:

Japanese Trade Balance

Japan is slowly losing the advantages that enabled it to run such large budget deficits in an attempt to kick start economic growth since the Japanese Bubble burst in the early 90’s. This comes amidst a demographic storm. The Japanese possess the highest life expectancy in the world. At the same time, they do not have babies. While social security costs will rise ¥800bn per year over the next decade, the ratio of tax paying workers to benefit receiving retirees will continue falling:

Workers per retiree

The ratio is the lowest in the developed world and set to fall to only two workers per retiree by 2020.

All of these factors taken together point to the inescapable conclusion that Japan must default on its debt. When countries get into trouble, the status quo reinforces them for a time, and they will putter along like nothing has happened until all at once something does.

Japan has reached the point of no return. It has no chance of growing its economy enough to pay these debts. That fact will not stop it from trying, and it will deploy the usual monetary gimmicks to forestall the inevitable. Eventually, it will either have to pay higher interest rates to attract investors or print enough money to finance itself leading to inflation. Either of these events will precipitate the Japanese Debt Crisis.