Around the Globe 11.04.2013

Janet Yellen’s mission impossible—Commentary.

Could QE spur deflation, not inflation?.

There are two reasons why the Fed will keep printing. 1st:

Fed Balance Sheet vs. SP500 10.2013


US 10yr through 11.04.2013

The creation of the 401(k) years ago politicized the stock market.  The government’s policy of herding Americans into purchasing equities to fund their retirements has created an expectation that the government must do something about falling markets, so it does.  Additionally, the government must be able to finance itself.  A rise in treasury rates would result in higher deficits down the road; hence, the Fed must keep rates low and the only method currently at its disposal is the printing press, so print it does.

Ultimately, all of this printing is slowly destroying the economy, because QE is ultimately both inflationary raising assets prices and deflationary suppressing income growth.  Japan started its own money printing program in the late 90’s, and you can see for yourself how incomes are performing:

Japanese Incomes

Like the Fed, ECB expected to keep on pumping.

ECB may soon join the flight of the doves | Reuters.

Debt crisis has left Germany vulnerable –

USDEUR Exchange Rate vs Fed to ECB Balance Sheet Ratio

The MFP and its assorted shills, hangers on and supplicants believe that the ECB will begin printing in earnest to match pace with the Fed, and it just might but not for the reasons it endlessly touts: unemployment, lower inflation and economic contraction and stagnation in the periphery.  Rather, the only thing you need to know is the USDEUR exchange rate.  When it rises to a level that threatens Germany’s export machine, then there will be an ECB rate cut and not one second before.

The chart above illustrates the relationship between the dollar/euro exchange rate and the Fed/ECB balance sheet ratio.  As you can see, the rate has diverged from its long-term relationship, but these divergences are only temporary.  The euro will continue it general, upward trend for the near future.  Once the euro crosses the $1.45 line, the ECB will consider a rate cut because this is the rate that curtails Germany exports.

China reform checklist: How to tell that this time it’s for real? | Reuters.

China 7 Day Repurchase Rate 11.04.2013


Chinese leaders enjoy discussing economic reforms almost as much as the mainstream financial press hyping said reforms.  Chinese leadership has linked economic growth with political stability.  In light of this fact, this is all you need to know about Chinese economic reforms: if the reforms have any negative consequences, they will quickly be rolled back.  The PBOC has been attempting to liberalize the financial system by stepping away and letting the banks fund each other rather than relying on central bank liqudity.  Unfortunately, whenever it begins backing out of the overnight lending market, interest rates spike, so it rushes right back in.

This is exactly how government reforms will proceed.  The government will attempt to reform the economy.  Once adverse consequences erupt, (i.e. higher unemployment, the wrong guy’s factory being shuttered) the government will reverse course in short order.  After conditions settle down, it will make another feeble attempt to reform and change its mind once the consequences return.  Rinse and repeat.

High unemployment? Blame high home ownership, study says – NBC

Unemployment versus Home Ownership


This is an interesting study.  High rates of home ownership lead to higher structural unemployment.  This study’s conclusion makes sense, and it survives a careful reading.  Renters are more mobile than homeowners, and this affects the unemployment rates.  In the chart excerpted from Dr. Oswald’s study, we can see two examples that tend to prove the rule.  Of course, there are other reasons why Greece has a drastically higher unemployment rate than Germany, which is why the country is so far above the trend line.  BTW, Greece’s neighbor on the chart is Spain.


Around the Globe 08.19.2013

Europe Bonds May Offer More Value –

Spanish Italian German Bonds 08.19.2013

The Eurocrisis has reached a new, dangerous stage:

“With no immediate threat of inflation and slow economic growth in Europe, investors don’t need to be as worried about a big surge in yields,” he (John Sajdak) says.

Investment advisors have seemingly short memories.  Last summer, the Eurozone was on the verge of collapse due to a periphery recession caused by an ill-fitting currency union.  Today, the recession continues, but this is interpreted as bullish for PIIGS bonds in the quote above.

Default risk and breakup risk still exist for peripheral bonds despite the article’s failure to mention them.  Moreover, Spanish and Italian bonds have converged with German bunds so a further rally based on shrinking spreads is unlikely.  Before you buy those PIIGS bonds, ask your broker how much he owns.

Spanish banks’ bad loan ratio rises to record in June | Reuters.

Spanish NPLs 06.2013

Spanish NPL’s continue their inexorable march upward.  As long as Spain’s property market deteriorates, NPL ratios will rise.  The rate recently topped 11.6% in June, and this number underestimates the true number of NPLs.  Moving some of the bad loans into SAREB excludes them from the final ratio.  According to this article,

Spain’s ‘Real’ Non-Performing Loans (NPL) Approach 17%: Exane

bad loans are actually about 17% of total outstanding.  This figure represents 25% of Spanish GDP.


Indian rupee falls to record low; bond yields hit five-year high | Reuters.

USDINR 08.19.2013

India is seemingly caught between the proverbial rock and a hard place.  The RBI can either let the rupee bleed eventually resulting in a financial crisis, or it can raise interest rates to staunch the currency probably causing a deep recession.  In the former case, the financial crisis will surely cause a recession anyway, so I would choose to raise rates.  Paul Volcker’s Fed faced a similar choice in the early 80’s.  A deep recession choked off inflation and caused a deep recession, which was followed by an eight year expansion.

Asian Emerging Markets Look Increasingly Fragile –

U.S. Stocks Beat BRICs by Most Ever Amid Market Flight – Bloomberg.

Stock Index Comparison 08.2013

The mainstream media is treating the emerging market swoon as a recent event, but these markets (as represented by EEM above) began diverging from the US last summer.  Draghi’s pledge was successful in arresting the capital flight from the periphery.  It seems that this money was redirected from emerging markets to Europe.  Note that the European Stoxx 50 index tracks the SPX nicely in the chart above while the emerging markets have found their own path down.

China’s Central Bank Chief Confident on Outlook –

China 7 Day Repurchase Rate 08.19.2013

The PBOC’s head is confident joining a long list of confident central bank heads.  It’s their job to exude confidence, so we’ll let them.  In the meantime, we’ll examine the numbers.  Chinese liquidity has yet to return to pre-crisis levels with the overnight repo rate stuck at 4%.  Additionally, Chinese government bonds rates have been rising:

Chinese T-Bill Index

Money is slowly leaving the Chinese financial system.  Unlike India’s RBI, the PBOC seems to be on top of the situation providing enough liquidity to maintain the health of the Chinese financial system.  Only time will tell if its efforts will continue to be successful.

Around the Globe 06.25.2013

Orders for U.S. Durable Goods Rose More Than Forecast – Bloomberg.

U.S. Stocks Rebound From Nine-Week Low on Economic Data – Bloomberg.

Consumer confidence highest in over five years in June | Reuters.

US Durable Goods 06.2013

There was a bumper crop of positive economic news today led by the rise in durable goods orders.  Is this good news or bad? While rising factory activity shows a strengthening economy, this dynamic could portend the Fed reducing its bond purchases despite all the protestations to the contrary in the media yesterday.

The consumer confidence numbers are even trickier to analyze.  Today’s rise in the Conference Board suggests improving sentiment, but the University of Michigan numbers released last week show the opposite.  Let’s call this data “mixed” for now and move on.

Cyprus says not seeking re-work of debt bailout, but tweaks | Reuters.

Cyprus Debt to GDP

After the panic subsided, Cypriots realized that the country will suffocate underneath a crushing burden of debt.  Now, they do not wish to rework the bailout but merely tweak it.  What is the difference between reworking and tweaking? It’s a matter of semantics.  Presumably, German voters will not be as angry at donating more money towards tweaks.  No matter, after German elections, the Cyprus bailout will be reworked, as the chart above leaves no other choices.

Population in crisis-hit Spain down 114,000 – Yahoo! Finance.

Population of Spain 06.2013

The inflection point in Spain’s population growth is 2008, the start of the country’s economic woes.  Robust economic growth led to more immigration and less emigration, but this trend is over.  Population growth is one factor that fuels GDP, so this is one more reason while Spain will find itself mired in depression for the foreseeable future.

PBOC Says It Will Ensure Stability of China Money Market – Bloomberg.

PBOC Addresses Cash Crunch –

China’s central bank seeks to allay fears of credit crunch | Reuters.

china-7-day-repo 06.25.2013

The PBOC has abandoned its laissez-faire posturing from the last few weeks and now pledges to support stability in the money markets.  The bank has ceased withdrawing cash from the system via bill sales, and this action combined with a little, good old-fashioned jawboning has succeeded in bringing rates down since last week.  Stability has been achieved in the short-term, but a creaking shadow banking system ensures that the long-term will be a wild ride in the Middle Kingdom.

New Homes Sales Hit Third Straight Month of Gains.

US Home Prices Jump in April, Setting New Record.

New-Home Sales Rise 2.1% in May; Case-Shiller Index Jumps –

New home sales near five-year high, prices rise | Reuters.

Case Shiller 06.2013

When digesting the housing reports issued by the mainstream media, it is best to heed the advice of Chuck and Flav: Don’t believe the hype.  The recent rise in housing price brings them to 2004 levels.  When you remember that there has been inflation since then, you realize that prices still have not recovered.  Of course, they are better than they were, and this is good news if you own a home but bad news if you wish to buy.  While the recent rise in mortgage rates spells the end to the housing recovery meme, remember that the mainstream media’s narratives die hard.

Cash Is Tight: 6 More US Muni Bond Sales Postponed.

Bonds Steady, Taking Cue From Overnight Stabilization.

Exit From the Bond Market Is Turning Into a Stampede.

MUB 06.25.2013

Municipal bonds are down over 10% from their November peaks.  This is a story which started months ago, but the decline became steeper in once the taper tantrum set in.  Prices have stabilized today, but this is probably the start of a dead duck bounce.  Rates will bounce up and down, but they will generally trend down over the next few months.  One exception is the U.S. treasury market, which may benefit from haven flows if it gets serious.

By the way, one of the first markets to blow up in the beginning of the GFC was the muni market, particularly ARS.  Is history repeating itself?

Around the Globe 06.21.2013

China Money-Market Turmoil Poses Test for New Leaders: Economy – Bloomberg.

Charting China’s Cash Crunch – Real Time Economics – WSJ.

What’s Really Behind China’s Cash Crunch.

China central bank holds line on shadow banking as rates spike | Reuters.

China’s Cash Squeeze Eases—for Now –

China Cash Crunch 06.20.2013

The PBOC is attempting to slow the growth of credit by starving the shadow bank system of liquidity.  Chinese banks have been using loans from the PBOC and each other to speculate in financial markets, and the PBOC is not pleased with this.  In response, the PBOC ceased providing liquidity injections forcing banks to turn to the interbank market. The dearth of available overnight funds took the banks by surprise, and they bid rates up while fulfilling their liquidity requirements.

The PBOC is playing with fire.  There is a very thin line between a liquidity crunch and a full-blown market panic.  While the crunch is under control for now, this may be just a temporary respite until banks require funds prior to the end of the quarter next week.

Bullard Says New Fed QE Outlook Plan ‘Inappropriately Timed’ – Bloomberg.

Bernanke Bond Announcement Was Poorly Timed: Fed’s Bullard.

Bernanke bond announcement was poorly timed: Fed’s Bullard | Reuters.

James BullardBullard is a well-renown hawk in the circles of finance and central banking.  Indeed, he has been critical at times of the unprecedented monetary easing that has taken place since the onset of the GFC in 2008.

His resume makes him the perfect person to restate the Fed’s policy agenda in the wake of the taper tantrum of the last few days.  What Bullard said was that disinflation/deflation remains a concern and that the Fed should make it clear that they will continue easing to attain their goal of 2% inflation.  Bullard believes that monetary policy should be based on the economy and not a calendar.

No matter the reason, Bullard’s appearance throughout the financial media two days after the Wednesday debacle is meant to deliver the message that printing will continue as scheduled.

Update****Analysis: Markets Might Be Misreading Fed’s Messages – Real Time Economics – WSJ. A Hilsenrath special to save the day.  Mr. Hilsenrath is emphasizing the dovish components of the FOMC release in his piece.


Bernanke Makes Life Even More Difficult for the Euro – MoneyBeat – WSJ.

EURUSD 06.21.2013

In this article, the mainstream media has fully bought into the Eurozone recovery meme that it has created.  The article tells the story of a Eurozone slowly emerging from recession and financial turmoil only to have victory snatched away by the fickle hand of the Fed.  Must the Fed be blamed for everything? A more reasonable analysis of the evidence is that the Eurozone is still mired in a recession with no signs that growth is about to start.

PMIs still show a contracting economy, and well-performing markets were a result of cheap liquidity flooding the planet.  Take away the liquidity, and you’re left with a basket case.  Don’t blame Uncle Ben because the markets are once again revealing the cold, hard truth of a poorly designed currency union.

Mediobanca Shares Fall as Stake-Selling Unveiled – MoneyBeat – WSJ.

Mediobanca 06.21.2013

Mediobanca announced that it would be selling stakes of Italian companies to raise capital.  Of course, it was vague about needing capital, but the markets saw through the ruse and knocked the stock down almost 10% today.  If the recent swoon in Italian sovereign debt continues, it may have to raise even more capital.  This problem is shared by virtually every Italian and Spanish bank.  They are all stuffed to the rafters with dodgy sovereign debts, and as the sovereign deteriorates do their balance sheets.  It will be a long, hot summer for the Eurozone.

EU Finance Ministers Struggle With Bank Rules –

Bank assets to GDP

Another sticking point has emerged in the endless banking union talks.  The eurocrats still have not figured out a way to pay for resolution authority and depository insurance, and now it seems that each country is attempting to water down the resolution rules so that politically preferred groups do not lose their money when the banks begin failing.

If banks resolutions are treated differently throughout the eurozone, entities will move their money to the jurisdiction with the most favorable rules and the strength to finance the consequences of those rules.  In other words, there will not be a single market for banking service, hence no banking union.

Greek Coalition Partner Pulls Cabinet Ministers –

Greek party quits coalition over state TV debacle | Reuters.

Greek markets rattled by political disarray –

GGB 06.21.2013

Greece remains dysfunctional.  The Democratic Left has withdrawn from the government removing its cabinet ministers in an empty gesture.  The grand coalition of PASOK and New Democracy will continue its Euro-1st, Greece-2nd policies as these two parties are who got the country into trouble in the first place.

A game of brinkmanship is developing regarding the next bailout payment in late July.  With each member of the troika digging in its heels, the Greek government better be strong enough for tough negotiations and more concessions over the next month.