The main story for the next two days will be Japanese Prime Minister Abe’s visit to the U.S. to meet with President Trump. Abe is coming to mend relations after Trump officially ended the Trans Pacific Partnership (TPP) agreement before Congress could even debate the trade treaty. The Japanese prime minister had expended a great deal of political capital in Japan to get various parties to accept a massive Pacific-based trade agreement. In an effort to forestall any discussion of Japan as a currency manipulator, the Japanese are offering all sorts of investment ideas in the context of getting Trump the negotiator to soften his stance on tariffs for Japanese goods, or sourced material from Asia for assembly in the U.S. Japan is a paramount promoter of the global supply chain paradigm.
Posts Tagged ‘Greece’
One of the most important indicators for financial markets is yield curves. They are predictive as they have historically shown coming economic turmoil, or, more importantly, the end of a business cycle. The severity of any recession depends on the amount of debt that has preceded the onset of an economic slowdown. I will remind readers that before the 2007-08 financial crisis, the U.S. 2/10 curve actually INVERTED to NEGATIVE SIX BASIS POINTS. Some financial pundits like to cynically advise consumers that the STOCK markets have predicted 10 of the last 5 recessions, but that is not so with yield curves. The difficulty with the signalling mechanism of yield curves is predicting the time for even during the GREAT RECESSION equity markets continued to rally even as the curve flattened.
While attempting to enjoy Pittsburgh (and hopefully a Cubs game), the markets buzzing about the U.S. Treasury’s report about the “Trade facilitation and trade Enforcement Act of 2015.” In a Bloomberg News article published late Friday afternoon, “U.S. Places China, Japan, Germany on New FX Monitoring List,” it seems that the Treasury and Jack Lew are raising the threat of retaliation against nations that meet the Congressional crafted criterion of currency manipulation. These include: 1. Significant bilateral trade surplus with U.S.; 2. Material current-account surplus; and 3. Engaged in persistent one-sided FX intervention. The issue of “one-sided intervention” is defined as only weakening a currency by conducting repetitive net purchases of FX amounting to more than 2% of its GDP.”
It was a very big weekend for information leaks that many in the world of policy making did not wish to have spread across the globe. The noted economist Arthur Okun posited that there was a trade-off between equality and inefficiency when it came to providing a social safety net for those suffering from the capriciousness of a capitalist system. In an effort to minimize the economic dislocations of a market economy, the redistribution of wealth through transfers was compared to a leaky bucket in which not all the money would make it to the intended recipients. Okun also posited that in an effort for some amelioration of the pain of economic dislocation taxes on the most successful actors would result in an effort to avoid any wealth confiscation through progressive taxation: “High tax rates are followed by attempts of ingenious men to beat them as surely as snow is followed by little boys on sleds.” (Library of Economics and Liberty)
Open question to Goldman Sachs: ARE YOU ARROGANT OR DEAF? There’s a story in tomorrow’s Financial Times there is a story titled, “Goldman Sachs Makes Large Donation to Pro-EU Campaign.” It is being reported that Goldman has made a large six-figure donation to Britain Stronger in Europe. Whoever thought this up needs their head examined. There is nothing in the world more TOXIC than the big investment banks. In a potentially existential issue for British democracy, the idea of a large U.S. investment bank playing in the U.K. referendum will stir the anti-EU forces to push harder for a NO vote. The anti-euro camp has many strong, legitimate former officials working hard to push England further from the restrictions of an overzealous group of Brussels eurocrats.
(Will the Collapse In Energy Prices Grease a Cut In Rates Or the Introduction of QE?)
Just some tidying up and refocus on things besides China, Iran and the debt of ingratitude to the fracking revolution. Tomorrow at 9:00 a.m. CST the Bank of Canada announces its overnight interest rate. The bank rate in Canada is currently 0.5% and consensus is calling for a rate cut of 25 basis points to 0.25%. Other market participants are suggesting that BOC Governor Poloz will announce a large-scale asset purchase program (better known as QE). I doubt the BOC will change policy at this time even as the Canadian economy suffers from the severe drop in fossil fuel prices and other commodities.
As Poloz articulated in a speech in Ottawa at a BIS BREAKFAST SERIES January 7 (regarding monetary policy divergence): “It is very important that we understand the reasons for these policy divergences. On one level, they simply reflect actions taken by central banks tailored to their own economies. But the underlying forces acting on the global economy are powerful, slow-moving and affect various economies differently. This means that the theme of divergence – both financial and economic – is likely to remain with us for some time to come.”
The Canadian real-estate market has run hot for too long and even though Canadian banks are not of the sub-prime model lenders, Mr. Poloz will not wish to just continue to inflate property values. It would behoove the BOC Governor to wait to see what the newly elected Prime Minister Trudeau puts on offer from a fiscal stimulus perspective before racing down the monetary stimulus track that many other central banks have followed with no proven success (except for counter-factual arguments).
As the markets are settling into the holiday mood of eggnog and the decorating of Tannenbaums, Germany’s EU partners were castigating Berlin for its continued emphasis on fiscal austerity. The ECB’s chief-economist and executive board member Peter Praet was maintaining that ECB policy would be accommodative for a very long time. This was a shot fired at Bundesbank President Jens Weidmann. Make no mistake about it, Mr. Praet was speaking on behalf of President Draghi who didn’t enjoy being “bested” by Weidmann at the December 3 meeting. The German “block” had raised its concern about more QE and prevented Draghi from delivering what he had previously promised.
It’s time to take a few days and recharge the mind. But before saddling up and heading off into the SUNSET here’s a few concepts to consider. Longtime NOTES readers know that the tagline 2+2=5 is a very serious construct for thinking outside the proverbial box. The line comes from Dostoyevsky’s short story, “Notes From Underground” in which the Russian master of literature protests against the RATIONALISTS who pretend to be all-knowing, like the FED MODELS. Just because things appear to be in balance doesn’t mean they are factual, so my goal is to look beyond conventional wisdom and find relevance and profit opportunity in what may appear to be mundane. While I am away new readers to NOTES should look back in the archives to see how we dissected ordinary news to find investment possibilities. The aim is to achieve economic gain through the analysis of politics and economics for the combination of political economy is the main thrust of this BLOG. Now, tomorrow and the FED:
Never has such calm winds cause so much turbulence. The markets have been grinding up and down during the last four weeks as traders and investors weigh the consequences of the Greek resolution and the Chinese intervention into their equity markets. ONE THING IS FOR CERTAIN, THE CHINESE EQUITY MARKET IS AN OXYMORON. If a government can set the price of individual stocks or the price of bonds it is not a MARKET but a plaything for the ruling party. The Chinese Government can try to mandate rising stock prices but ultimately it will take more than a mandate but actually spending of capital to support prices, or else invoking the fear of capital punishment for all short sellers of equities (PUN INTENDED). The talking heads are concerned that the Chinese weakness is causing selling in all global equity markets. The DOW JONES did close under the 200-day moving average last Friday and continued its downward path today. The SPOOs tested the 200-day and managed to save itself by the market close.
And so it goes. As the light lifts off the European “bailout” it appears that most analysts agree that the “Agreement” was a lose-lose for the European Project. The Germans stood firm and placed unduly harsh demands upon the Greek electorate that had the temerity to openly reject the terms of debt resolution. Merkel had favored a real compromise until Alexis Tspiras deployed the nuclear option and went to referendum in an effort to better be able to negotiate with an intransigent Djisselbloehm and his ECOFIN council of Grand Inquisitors (see the Brothers Karamazov). The punishment meted out to the Greek nation is a loss for them but ultimately the real loss will be on Spain, Italy, and, of course France. The Germans have revealed that the use of Berlin’s money to support the EU is going to come at a price and it is the acceptance of an economic model for Europe that is German, its backdrop of course being sound money. Not the strong dollar mantra of the U.S. Treasury Secretary but an actual strong currency, at least until the German financial system enters a fragile state.