Allow me, readers, to journey down the rabbit hole. I believe a major theme in 2011 is that many of the high correlative trades are going to break apart and fundamentals will prevail over mere mathematical permutations (hence NOTES FROM UNDERGROUND WHERE 2+2=5 is also a beautiful thing). One of the areas of decoupling will be in the area of DEVELOPING MARKETS where all nations are not equal. Russia is one of those nations that I believe will outperform, as the rising middle class will continue to push for more development that is not just natural-resource based. Now I am not naïve and certainly understand the pernicious nature of Putin and his kleptogarchs and the failure of the rule of law. One of Yra’s laws is the MONEY IS FASCIST, by which I mean that money in search of a high return will tolerate autocratic rule. History certainly bears this out, especially when we are in a greed cycle rather than fear.
Archive for the ‘G-20’ Category
Today saw an unwinding of some of the more frothy positions that have been built up since the FOMC announcement on SEPTEMBER 21. All asset classes, from stocks to commodities, have been rallying as the FED promised that it would do what it could to insure against the onset of a deflationary spiral. Many news outlets reported that the silver markets broke hard after CME GROUP raised margins on SILVER positions. The talking heads compared this to the Hunt brothers in 1980, which is COMPLETE UNADULTERATED RUBBISH. The margin increase was relatively small and nowhere near the type of actions taken in 1980 when some nearby silver contracts had a margin of 100 percent of the value of the contract. Also, margin rates are relatively low on a value of contract basis and as we also know much of the investment in silver is taking place in the ETF market where the future exchanges have zero influence.
Notes From Underground: Obama pushes for huge export growth while Geithner favors a strong dollar mantra–somebody is singing from the wrong sheetNovember 7, 2010
Friday’s U.S. unemployment data showed that job growth was better than estimated. This is insignificant as long as the FED has signed on to a continued dose of quantitative easing. In the eyes of the FED and its dual mandate, the 9.6 percent unemployment rate is a problem. As the economy improves, the unemployment rate will be sticky to the high side as more people re-enter the job market. If the FED solely focuses on the rate, there is no question that the FED will remain aggressive in pumping up the volume of liquidity. The U.S. action is not being positively viewed and the Germans are voicing the loudest criticism. In an interview widely broadcast throughout the world, German Finance Minister Wolfgang Schauble called the U.S. policy “clueless.”
In Saturday’s New York Times, President Obama had an op-ed in which he cited the United States’s need to double exports by 2015. At the same time, Secretary Geithner maintained the mantra of a strong DOLLAR policy. What needs to be addressed is that if U.S. exports are to become more competitive to boost sales, either the DOLLAR must depreciate or wages must decrease on a relative global basis. The easiest path from a political perspective is for the DOLLAR to depreciate and Geithner better get with the program. Geithner’s constant repetition of his strong DOLLAR MANTRA is being ridiculed as it flies in the face of the road that the FED has walked down. Again, we criticize all of Washington for its inability to coordinate policy as the different policy makers seem to all be singing from a different song sheet.
While U.S. data was better, the German factory orders were much weaker than expected. Analysts were mixed as to why factory orders fell so dramatically. Some blamed the incipient austerity in the PIIGS while some Germans pointed to the recent strength in the EURO as the main culprit. During the weekend, the Greeks went to the election booth and the regional elections were mixed, but the Socialists appeared to poll strong enough to prevent the sitting government to have to call new national elections. Another important concern in the Euro arena is the Portuguese debt situation.
Last week the 10-year Portuguese/BUND spread went out to record highs. However, on Friday the Chinese leaders were in Lisbon and made noises about their desire to buy Portuguese debt. If this proves out then the BUND/PORTUGUESE spread should narrow. If not then we will know the Chinese statement is mere noise and we can look forward to greater stress in the European sovereign debt markets.
If favorable news cannot remove the recent stress in the European sovereigns it will be time to worry about the PIIGS again. This week brings the G-20 meeting and we advise all to pay attention to what evolves from the conclave of world leaders. Let the posturing begin.
The RBNZ–KIWI CENTRAL BANK–announced they were holding rates at 3 percent and awaiting further news on the global economy before they would move again. Also, South Korea said it was considering more capital controls to halt the appreciation of the WON. The South Koreans offered up several possibilities for exchange controls but it appears they will follow upon the heels of the Brazilians. In two weeks the G-20 leaders will meet in Seoul and yet we have the hosts promoting the use of currency controls. Several G-20 members have thrown down the gauntlet in an effort to prevent the U.S. from embarking on depreciation of the DOLLAR by stealth.
The developing nations are none too happy to be the recipients of the hot money flows being fostered by the FED‘s zero interest rate policy, making it mandatory for China and the U.S. to reach some type of agreement on the YUAN in order to slow down the FED‘s backdoor effort at DOLLAR depreciation.
In another bout of political antagonism, Angela Merkel threw some water on the recent German/French agreement concerning the penalties to be invoked for violating budgetary rules of the Growth and Stability Pact. Going into the European summit, Merkel announced that Germany is going to push for a reopening of the Lisbon Treaty in order to harden budgetary rules and put some real teeth in the law.
Sarkozy felt strong that by backing Merkel down on the issue of severe punishment for excessive profligacy that Germany would be in a much more subdued mood going into the European summit. It seems that Merkel is playing to the fiscal conservatives in Germany by demanding a hardened “crisis resolution mechanism” to replace the present European Fianacial Stability Facility (EFSF). We will watch this carefully as Frau Merkel is toughening her stance for the homefront after been seen as very soft in defending German interests within Europe.
It seems to me that, today, Bill Gross removed Ben’s testicles by coming out against further quantitative easing. He openly called QE2 a Ponzi Scheme, although he renamed it a”Sammy Scheme” in honor of Uncle Sam. When the largest bond fund comes out against such action, the FED Chairman cannot be happy. Gross acknowledges that the FED has little choice but warns that going down this unmapped road can result in hellacious outcomes for bond holders.
Jeremy Grantham also weighed in with a similar note but was even more forceful in warning of the repercussions of another round of massive liquidity injection by the Bernanke Bunch. However, Grantham laid the blame heavily on the shoulders of Greenspan but takes Bernanke to task for following the same “green brick road” of monetary stimulus to maintain the illusionary power of equity gains in acting as the driver of the wealth effect. It was not a good day for the FED in its push for QE, as the FED has put a lot on the line with its constant drumbeat of the need to do everything to halt the onslaught of deflation. Hmmmm, we may have some new voices in the Tabernacle Choir.
The statements coming from G-20 central bank chiefs and finance ministers in South Korea tried to calm the markets nervousness about currency wars. Brazilian Finance Minister Guido Mantega didn’t attend as a form of mild protest to what he felt was previous inconsistencies between words and actions. The U.S. had put forth a proposal that was leaked to the media ahead of formal proceeding for some numerical target on current account surpluses and deficits. In the final communique no formal targets were established.
From June 27:
Germany added liquidity but it was all directed at the British goalie David James–nothing austere about their World Cup peformance. The news from the G-20 was as expected: Nothing short of a waste of time and the resulting communique will be the paradigm of vacuousness. The Chinese took center stage in that they spoke up for the developing nations, stating they wanted input in the discussions about global problems. We agree with the Chinese that the G-8 is an atavistic appendage of a past colonial world and is merely the delusional forum for those wishing to hold onto a past that left the arena long ago. Yes, we are sure that Russia, Brazil and the others that make up the most robust members of the emerging world want to advise the likes of Italy, Spain and France who have certainly failed to get their own economic houses in order. Read On
There has been very little news this weekend in regards to the financial markets. Reuters reported that the IMF will delay aid to Hungary as the new government is perceived as dragging its feet in installing the fiscal reforms that are needed to meet IMF demands. We don’t think this is a major event yet, as the Hungarians are trying to buy some time for domestic political reasons and the situation is not dire at this time. Also, the IMF has requested another $250 billion in additional commitments in order to boost its lending resources to $1 trillion. IMF officials want to build a larger safety net so it’s prepared to help head off future global crises.
Notes From Underground: Unemployment was softer then expected; and CFIUS must not have read the G-20 communiqueJuly 5, 2010
Friday’s unemployment number was close to consensus but the average hours worked and average hourly wages were a little on the soft side. Yes, the unemployment rate fell to 9.5 percent, but that was due to the amount of people that left the work force as the ability to find work is causing workers to leave the job search in frustration. The rate itself is not important at this point because a higher jobless rate with a more robust economy would signal that people were returning to the labor force–a good thing.
Germany added liquidity but it was all directed at the British goalie David James–nothing austere about their World Cup peformance. The news from the G-20 was as expected: Nothing short of a waste of time and the resulting communique will be the paradigm of vacuousness. The Chinese took center stage in that they spoke up for the developing nations, stating they wanted input in the discussions about global problems. We agree with the Chinese that the G-8 is an atavistic appendage of a past colonial world and is merely the delusional forum for those wishing to hold onto a past that left the arena long ago. Yes, we are sure that Russia, Brazil and the others that make up the most robust members of the emerging world want to advise the likes of Italy, Spain and France who have certainly failed to get their own economic houses in order.