Friday, January 25, 2013

Don't short the euro

I've been preaching so for years:



Thursday, January 24, 2013

The way of Japan

Japan's Chain Of Events: Stagnation -> Monetization -> Devaluation -> Stabilization -> Retaliation -> Hyperinflation

Tyler Durden's picture

As the world's equity markets prepare to rally on the back of yet more central bank printing as Japan's Shinzo Abe takes the helm with a 2% inflation target, to be announced momentarily, and a central bank entirely in his pocket, The Telegraph's Ambrose Evans-Pritchard suggests a rather concerning analog for the last time a Japanese minister attempted to salvage his deflation/depression strewn nation: the 1930s 'brilliant rescue' by Korekiyo Takahashi, who removed Japan from the Gold Standard, ran huge 'Keynesian' budget deficits intentionally, and compelled the Bank of Japan to monetize his debt until the economy was back on its feet managed to devalue the JPY by 60% (40% on a trade-weighted basis).
Initially this led to exports rising dramatically and brief optical stability, but the repercussion is the unintended consequence (retaliation) that the world missed then and is missing now. Though the economy appeared to stabilize, the responses of other major exporting nations, implicitly losing in the game of world trade, caused Japan's policies to backfire, slowed growth and left a nation needing to chase its currency still lower - eventually leading to hyperinflation in Japan... and Takahashi's assassination.
And with no Martians to export to, why should we expect any difference this time? and how much easier (and quicker) are trade flows altered in the current world?
Premier Shinzo Abe has vowed an all-out assault on deflation, going for broke on multiple fronts with fiscal, monetary, and exchange stimulus.
What happened last time the a Japanese minister tried to desperately devalue his nation to growth?
This is a near copy of the remarkable experiment in the early 1930s under Korekiyo Takahasi, described by Ben Bernanke as the man who "brilliantly rescued" his country from the Great Depression. Takahasi was the first of his era to tear up rule book completely. He took Japan off gold in December 1931. He ran "Keynesian" budget deficits deliberately, launching a New Deal blitz before Franklin Roosevelt took office. He compelled the Bank of Japan to monetize debt until the economy was back on its feet. The bonds were later sold to banks to drain liquidity. He devalued the yen by 60pc against the dollar, and 40pc on a trade-weighted basis. Japan's textile, machinery, and chemical exports swept Asia, ultimately causing the British Empire and India to retaliate with Imperial Preference and all that was to follow -- and there lies the rub, you might say. Takahasi was assassinated by army officers in 1936 when he tried to tighten by cutting military costs. Policy degenerated. Japan later lurched into hyperinflation. 
but the initial stability and growth could have unintended consequences as:
Needless to say, printing money has its perils too. The risk is that Japan could escape gentle but stable deflation -- the Devil it knows -- only to see a panic flight from bonds that overwhelms the Bank of Japan. As Governor Masaaki Shirakawa told the Diet through gritted teeth, "long-term yields could rise, and that would be a problem for public finances."
Japan's unilateral move may also be perceived badly by the rest of the G-20...
Mr Abe's frustration is understandable. Japan is cursed with a safen-haven currency that strengthens in times of trouble when least wanted, the cross that  creditor states must bear. Japan did uphold the G20 deal in March 2009 to refrain from "competitive devaluations", when others did not. But should Japan now buy foreign bonds on a mass scale to suppress the yen, there will be trouble. Tokyo will be blamed as the aggressor in the outbreak of currency wars. Others will retaliate.
And just as we have warned (and Kyle Bass has painstakingly described):
"Banks hold JGBs worth 900pc of their Tier 1 capital. Their portfolios would be decimated if long rates punched above 2pc. Japan might then face a banking disaster as well. These are the hard choices that Mr Abe has to make. "
And as Evans-Pritchard concludes correctly:
Huge issues are at play here. The world's trade system is fragile. The wasting disease behind the Long Slump is a record high savings rate of 24pc of global GDP, and too little demand to go around. Everybody wants a weaker a currency. They can't all have it.

Japan's great experiment cuts both ways for the rest of us: the reflation blitz helps lift the global economy out of the doldrums: but yen manipulation snatches market share, incites protectionism, and takes us into the brave new world of "actively managed exchange rates", as Sir Mervyn King put it last month.
To summarize:
  • Stagnation
  • Monetization
  • Devaluation
  • Stabilization
  • Retaliation
  • Hyperinflation
  • Source

Sunday, January 13, 2013

Krugman in May 2012

Paul Krugman:
"Some of us have been talking it over, and here’s what we think the end game looks like:
1. Greek euro exit, very possibly next month.
2. Huge withdrawals from Spanish and Italian banks, as depositors try to move their money to Germany.
3a. Maybe, just possibly, de facto controls, with banks forbidden to transfer deposits out of country and limits on cash withdrawals.
3b. Alternatively, or maybe in tandem, huge draws on ECB credit to keep the banks from collapsing.
4a. Germany has a choice. Accept huge indirect public claims on Italy and Spain, plus a drastic revision of strategy — basically, to give Spain in particular any hope you need both guarantees on its debt to hold borrowing costs down and a higher eurozone inflation target to make relative price adjustment possible; or:
4b. End of the euro.
And we’re talking about months, not years, for this to play out."
Current euro-dollar exchange rate: 1.336 and on the move up.

Tuesday, January 8, 2013

Rating agencies

Can Open Source Ratings Break the Ratings Agency Oligopoly?

Yves here. One of the causes of the financial that should have been relatively easy to fix was the over-reliance on ratings agencies. They wield considerable power, suffer from poor incentives, in particular, that they can do terrible work yet are at no risk of being fired thanks to their oligopoly position, and are seldom exposed to liability (they have bizarrely been able to argue that their research is journalistic opinion, which gives them a First Amendment exemption). But they are not big enough moneybags to be influential donors, nor are they critical to the financial infrastructure.
Yet they’ve managed to stymie meaningful reforms. Scarecrow and Jane Hamsher detailed how Standard & Poors started threatening to downgrade US debt just as provisions in Dodd Frank that would have made them liable for their opinions, just like other experts, were moving towards a vote. And, mirabile dictu, they managed to get that provision stripped from the bill.
Note that the EU is in the process of imposing rules that would make the ratings agencies liable for “mistakes in case of negligence or intent.” This presumably would apply only on ratings of issuers based in the Eurozone; if a European investor relied on ratings to invest in a US security, these rules would not apply. Some commentators are skeptical of other provisions, namely, ones to curb sovereign debt ratings and restrict ownership of ratings agencies.
At the same time, even though ratings of structured products have proven to be sorely wanting, investors still prefer having a bad metric to no metric, particularly since that allows them to shift blame if Something Bad Happens (“everyone else in the industry uses them, we would have lost business if we tried something different”).

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Finding treasures in European junk

Bennett Goodman, who got his start almost 30 years ago helping Michael Milken use junk bonds to fund companies others thought too risky, says he is now the biggest investor in high-yield corporate loans in Europe as local banks back away.
Comment: There's still a lot to be found.

Japan to buy euro debt

Japan to Buy European Debt With Currency Reserves to Weaken Yen
By Mayumi Otsuma - Jan 8, 2013 10:17 AM GMT-0200.
Japan plans to use its foreign- exchange reserves to buy bonds issued by the European Stability Mechanism and euro-area sovereigns, as the nation seeks to weaken its currency, Finance Minister Taro Aso said.
Comment: The great realignment is on its way.

Monday, January 7, 2013

End Keynesianism now!

Guest Post: The Dangerous Blindspots of Clueless Keynesians
Submitted by Tyler Durden on 01/02/2013 10:28 -0500
Ben Bernanke Central Banks default ETC Fail Federal Reserve Free Money Gross Domestic Product Guest Post Krugman Moral Hazard Paul Krugman Quantitative Easing Reality Sovereign Debt Transparency
Via Charles Hugh-Smith of OfTwoMinds blog,
The Keynesian model is a Cargo Cult, mired in a distant, romanticized past where Central Planning, intervention and manipulation were solutions rather than the root of the economy's fatal disease.
If we want to trace today's policy failures back to the source, we find ourselves at Richard Nixon's famous statement that "We are all Keynesians now." The fundamental Keynesian project is that the Central State and Central Bank should manage market forces whenever the market turns down.
In other words, the market only "works" when everything is expanding: credit, profits, GDP and employment. Once any of those turn down, the State and Central Bank "should" intervene to force the market back into "growth."The Keynesian has two basic tools: the State can borrow and spend money (fiscal stimulus) and the Central Bank can create money and "inject" it into the economy (monetary stimulus): quantitative easing, lowering interest rates, extending unlimited credit to broker/dealer investment banks and financial institutions, etc.
The sharper the downturn, the greater the State/Central Bank intervention. This accounts for the martial analogies of State/CB responses: "bazookas," "nuclear option," etc., as the market is overwhelmed with ever greater fiscal/monetary firepower.
After basically voiding the market's ability to price risk and assets, the Keynesians believe the market will naturally resume pricing risk and assets at "acceptable to Central Planning" levels once fiscal and monetary stimulus is dialed back.
The entire Keynesian Project has numerous blindspots. When reality inconveniently fails to meet Keynesian expectations, reality is ignored or massaged to suit the Keynesian Cargo Cult's belief system.

Wednesday, January 2, 2013

The truth about the fiscal cliff

1913 - the beginning of the great fall

Beware of Years that End in 13

Before this one, the last year that ended in “13” turned out to be one of the unluckiest in American political history. Now comes word from astronomers that a recently discovered comet is heading our way in 2013, predicted by some to blaze ten times brighter than a full moon. If you’re afflicted with triskaidekaphobia (fear of the number 13), or if you believe the old myth that a comet is a bad omen, you’re already looking forward to 2014.
I’m not superstitious, but I earnestly hope 2013 doesn’t bring us anything as calamitous as 1913 did. It was a disastrous year that we’re still paying a hefty, annual price for a full century later.
The presidential election of 1912 featured three main contenders: Woodrow Wilson, the Democrat; William Howard Taft, the Republican incumbent; and former president Theodore Roosevelt, the candidate of the Progressive (or “Bull Moose”) Party. Teddy remains an overrated politician, but he was a colorful and commanding figure whose daughter Alice summed him up well: “My father always wanted to be the baby at every christening, the bride at every wedding, and the corpse at every funeral.” His vanity and animosity for Taft handed the election of 1912 to Wilson, arguably the worst president of the 44 who have held the office. His first of two dreadful terms commenced in March 1913.
Wilson’s racism and philandering are now legendary among serious historians. As president of Princeton University, he barred blacks from the campus. As President of the United States, he ordered the segregation of all departments within the executive branch and appointed ardent segregationists to high positions. He covered up his adulterous affairs while posturing as a man of personal integrity. He led us into a major war he had promised to avoid, then campaigned for a peace treaty that all but guaranteed the next great conflict. He locked up political dissidents right and left as he trampled on the Constitution’s guarantees of speech, assembly, and press freedoms. His wartime economic controls were hideously stupid and counterproductive.
1913 would rank as an unlucky year if all that had happened was Wilson’s ascendancy to the presidency. Three things he helped give us that year, however, make it unforgettable in the most pejorative sense: the income tax, the direct election of U.S. senators, and the Federal Reserve System.

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