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Aside from the totally asinine and impossible strategy of attempting to borrow the global economy out of a debt crisis, we currently face a staggering array of risks unprecedented in modern history. Fortunately, the Idiocracy is fat and happy, comforted by the abiding assumption that printing money is the secret to effortless wealth…
Volatility will rise toward its long-term average and that means an increase in risk premiums, said Philip Moffitt, head of fixed income in Sydney for Asia and the Pacific at Goldman Sachs Asset Management, which had $991 billion of assets under supervision worldwide as of September. The risks for different emerging economies will become more idiosyncratic and Mexico presents a buying opportunity following the rout, he said.
Markets from Turkey to South Africa and Argentina were roiled during the past month as investors sold off emerging-economy currencies, stocks and bonds, prompting emergency measures from governments and central banks. The bout of risk aversion follows the Fed’s decision to scale back asset purchases and China’s pledge to rein in leverage and give market forces a more decisive role in allocating resources.
“The selloff in emerging markets has much more to do with China than with Fed tapering,” Moffitt said yesterday in an interview in Sydney. “China’s such a big source of global demand, in particular for other emerging markets, uncertainty’s going to stay high and risk premiums should be expanding.”
The worst isn’t over for emerging markets, Mark Mobius, who oversees more than $50 billion in developing nations as an executive chairman at Templeton Emerging Markets Group, said in an interview. Prices can decline further or take time to stabilize, he said.
China’s policy makers have attempted to rein in the unprecedented credit boom they unleashed in 2008-2009 amid the global financial crisis. Money market rates in China have surged, the cost of insuring against credit default by banks has increased and payment difficulties are emerging in the country’s $6 trillion shadow-banking industry.
“They’re looking to create a market that prices credit risk, rather than having prices imposed,” Moffitt said. “In the absence of a strong mechanism for pricing credit risk, there’s likely to be a lot of uncertainty and volatility.”
The world’s second-largest economy is predicted to expand by 7.4 percent this year, the slowest pace since 1990, according to the median estimate in a Bloomberg News survey.
The slowdown in China comes as the U.S. economy is showing signs of a pickup, allowing the Fed to trim its monthly bond purchases to $65 billion from $85 billion. U.S. growth is expected to accelerate to 2.8 percent in 2014 from 1.9 percent last year, according to a another Bloomberg poll.
Moffitt said investing in Mexico would be his top trade at the moment because the country’s fundamental outlook is strong even though it has been affected by the global selloff.
“There’s been outflow from emerging-market assets and when you get that kind of flow people sell what they can sell, often high-quality assets,” he said. “It will benefit from the strong U.S. growth we’re expecting and there’s the prospect for rate cuts, so Mexico stands out to us on both value and fundamentals.”
“Fed Has Fingers & Thumbs On The Scales Of Finance,” Grant Tells Santelli And It “Will End Badly” | Zero Hedge
In a mere 140 seconds, Jim Grant explains to an almost stunned into silence Rich Santelli how we all “live in a valuation hall of mirrors” as the Fed manipulates everything. Thanks to it’s “fingers and thumbs on the scales of finance,” Grant continues, the Fed “insists on saving us from ‘everyday low prices'” – what they call deflation – and by doing so it manufactures “redundant credit” which “does mischief” in and out of markets. Grant, ominously concludes, “there is no suspense as to how [this will] end… [it will] end badly.”
Must watch… (especially for EM asset managers)…
Consensus that the Fed would extend its $10bn taper from December with a further $10 bn taper today (reducing the monthly flow to a ‘mere’ $65 billion per month – $30bn MBS, $35bn TSY) was spot on. We suspect the view, despite the clear interconnectedness of markets (and flows), of the FOMC is that “it’s not our problem, mate” when it comes to EM turmoil.
- *FED TAPERS BOND BUYING TO $65 BLN MONTHLY PACE FROM $75 BLN
- *FED SAYS LABOR MARKET `MIXED,’ `SHOWED FURTHER IMPROVEMENT’
Of course, “communication” was heavy with forward guidance on lower for longer stressed. We’ll see if the market buys the dichotomy of hawkish real tapering and dovish promises…remember “tapering is not tightening.”
Pre-FOMC: S&P Futs 1775, Gold $1267, 10Y 2.71%, 2Y 35.5bps, USDJPY 102, EM FX 85.67, WTI $97.35, IG 72bps, HY $106.35
Perhaps this chart from Saxo Capital Markets ( @saxomarkets ) sums up the world best for now…
Full redline below…
The Conference Board of Canada is calling the decline in the Canadian dollar the economic story of the year so far, predicting further declines as the Canadian economy underperforms.
The loonie began the day stronger on Thursday, rising to 91.48 US in early trading, up from its close of 91.37 US yesterday. It closed up 0.16 of a cent to 91.53 cents US.
The Canadian currency fell 6.6 per cent in 2013, after trading at par with the greenback in February, and is down more than three per cent since the beginning of the year.
‘Markets are betting that the Canadian economy will continue to underperform’– Glen Hodgson, Conference Board
The Conference Board, an economic and policy think tank, said the falling dollar is a sign of lack of confidence in Canadian growth prospects.
“Arguably more important than the value of the loonie is the signal it sends about the Canadian economy. Markets are betting that the Canadian economy will continue to underperform,” chief economist Glen Hodgson said in a report released today.
“This assessment is consistent with our own forecast, which calls for U.S. gross domestic product to grow by 3.1 per cent in 2014, much better than Canadian growth of 2.3 per cent,” he continued.
Hodgson is not the only economist predicting Canada’s GDP growth will underperform the U.S. Towers Watson’s annual survey of Canada’s top economists and analysts found most believe Canada will lag the U.S. in both economic activity and job creation over the next few years.
Too many plant closures
“With a lower Canadian dollar, there is hope that manufacturing businesses, and certainly the export sector of the economy, can contribute to reducing the unemployment rate in the next few years,” said Janet Rabovsky, Towers Watson director of investment consulting.
“That being said, recent announcements about industrial plant closures in Ontario would indicate that the cycle has not yet turned.”
Hodgson agreed that it is not clear if Canadian exporters will be able to fully capitalize on a weaker dollar because of the loss of capacity in the manufacturing sector since 2008.
There have been deep slashes in export-dependent industries — such as autos and parts — and a shift of much U.S. production to the southern states, so Canadian suppliers may not benefit as quickly as in the past from the U.S. recovery, he said.
He also points to the hit consumers may take from higher prices.
TD chief economist Craig Alexander said the U.S. Fed’s “decision to taper asset purchases has greased the skids under an already depreciating loonie.”
Traders rush back to U.S. dollar
The Fed decided in December to taper its U.S. bond-buying program to $75 billion US a month and as good economic news out of the U.S. continues to roll in, it is expected to continue tapering.
But that has encouraged traders to buy the U.S. dollar, leading to a rush away from the Canadian dollar.
“However, the fundamentals are not Canadian-dollar positive either, and the loonie likely has further to fall,” Alexander said in a research note.
BMO chief economist Doug Porter predicts a falling dollar will actually help boost Canadian GDP in the long-term – as much as 1.5 percentage points over the next two years if the loonie falls to 90 cents or lower.
“There are definitely losers, such as consumers, travellers, utilities, broadcasters, sports teams. But there are also lots of winners. The beleaguered manufacturing and domestic tourism sectors will find the biggest relief from the weaker currency. Even some retailers will be breathing a tad easier, as the loud siren call of cross-border shopping fades for consumers with each tick down in the currency,” he said.
“The Fed’s policies have actually led to a lot of problems around the world,” Marc Faber begins his discussion with Bloomberg TV’s Trish Regan, especially “people in the lower income groups [who] spend say 30% of their income on energy, transportation, and so forth, electricity and gasoline.” The Gloom, Boom & Doom Report author goes on to discuss everything from how the Fed is creating a two-class system around the world, the inexorable growth of governments, buying votes, Bitcoin, interest rates, wealth taxes, and overall market valuations. “We are in a gigantic financial asset bubble,” Faber explains, “everybody’s bullish,” but he sees a slowing global economy (as do we e.g. Baltic Dry Index); “[The bubble] could burst any day. I think we are very stretched.” Faber is on fire…
Take 10 minutes and listen…
Prepare yourself… “In China, if I say what I am saying about the USA, they would not let me in the country”
Faber on the Fed and how far the ‘rubber band can be stretched’:
“We have to distinguish between the financial economy, the financial sector, and the economy of the well-to-do people that benefit from rising asset prices, from rising prices of wines, and paintings and art, and bonds, and equities, and high-end properties in the Hamptons and West 15 here in New York and so forth — and the average person, the typical household, the so-called ‘median household’, or the working class people. And the Fed’s policies have actually led to a lot of problems around the world in the sense that they’re not only responsible, but partly responsible that energy prices are where they are, they’re up from $10 or $12 in 1999 to now around $100 a barrel. Food prices are up and a lot of other prices are up. So on your income, energy prices have very little impact because you at Bloomberg – you, young man – you make so much money. But for the poor people, it has an impact.Some people in the lower income groups, they spend say 30% of their income on energy, transportation, and so forth, electricity and gasoline.”
On whether the Fed is creating a two-class system:
“Correct, largely. The problem is then that you have people like Bill de Blasio, they come in and say: ‘you know what’s the problem? All these rich guys. Because of these rich people, you are poor. They take advantage of you. So, let’s go and tax them.’ The IMF has come out with a paper in Europe that essentially the well-to-do people should pay a 10% wealth task — a one-time wealth tax. I can assure you, a one-time wealth tax, 10%, will become an every-year’s tax eventually.”
On how to help the people on the lower end of the economic spectrum:
“This is the point I’d like to make. All of these professors and academics at the Fed who never really worked in the private sector a single day in their lives, and write papers nobody reads and nobody’s is interested in. Why would they want not write about how you structure an economic system that lifts the standard of living of most people? You can’t lift everybody.”
“We had that in the 19th century in the U.S. because we had very small government at the time. The entire government — local, state federal — was less than 20% of the economy. Now it is close to 50% of the economy.”
On whether the government is spending too much money:
“The larger the government becomes, the less economic growth you have and the more crony capitalism and corruptions you have. Because big corporations — and especially the money printers, they’re the most powerful people in the world, they control the governments. The U.S. Treasury, the Federal Reserve, and the government is one and the same. The Fed, they finance the Treasury, so the government can go to war in Iraq and Afghanistan. Then they finance transfer payments to essentially buy votes so you can get elected.”
“I prefer physical gold and silver, platinum to bitcoin. Bitcoin can have a lot of competition. Gold, silver, platinum — they have no competition. How do you value a bitcoin? I can value gold to some extent and compare say gold to the quantity of money that is floating around the world, to the wealth increase, and to the monetary base increase, to the credit increase, and so forth and so on, and to the production costs. So I have an idea of where gold should be. I’m not sure because prices overshoot. How do you value Netflix? Is it overpriced or underpriced? Is Tesla overpriced, underpriced?”
On interest rates:
“But one thing I wanted to show you and talk about because you said that lower interest rates help people. Well, if money trending helps everybody, then why does not everybody in the whole world always have zero interest rates? And everybody would be rich. You keep on printing money and you don’t need to work here, you don’t need to put on makeup. I could stay in bed the whole day and go drinking in the evenings. So, let’s just print money and be all happy. It doesn’t add up. One thing about the figures you showed: first of all, you live in New York. Do you really think that your cost-of-living increase is a 1.2% per annum? You really believe that? It doesn’t feel like more, it feels like five times more, or even ten times more.”
“Number two, by keeping interest rates at zero percent on the Fed fund rate — i want to emphasize that this is now going on in March of 2014 for five years. It is not something new. For five years this has happened. You penalize the income earners, the savers who save, your parents, why should your parents be forced to speculate in stocks and in real estate and everything under the sun?“
On his view of overvalued stocks, including Facebook:
“I think it is to a large extent a fad. People they go on Facebook – what they do is they put pictures on and the only people that watch these pictures are themselves. They all want to be stars. It is a very distractive kind of occupation. I can’t imagine that this would have a lot of value. I would rather own – I don’t own it because I think it is very highly priced – I would rather own a company like Alibaba or Amazon or Google, than Facebook, personally. This is my view. Other people have different views. That’s what makes the market. Some people are buying it and some people are selling it.”
On overall market valuation concerns:
“I think we are in a gigantic financial asset bubble. But it is interesting that that despite of all the money printing, bond yields didn’t go down. They bottomed out on July 25, 2012 at 1.43% on the 10-years. We went to over 3.0%. We’re now at 2.85% or something thereabout. But we’re up substantially. Now, this hasn’t had an impact on stocks yet. In fact, it pushed money into the stock market out of the bond market. But if the 10-years goes to say 3.5% to 4.0%, then the 30-year goes to close to 5.0%, the mortgage rates go to 6.0%. That will hit the economy very hard.”
“[The bubble] could burst before. It could burst any day. I think we are very stretched. Sentiment figures are very, very bullish. Everybody’s bullish. The reality is they’re very bullish because they think the economy will accelerate on the upside. But my view is very different. The global economy is slowing down, because the global economy’s largely emerging economies nowadays, and there’s no growth in exports in emerging economies, there’s no growth, in the local economies. So, I feel that the valuations are high, the corporate profits have been boosted largely because of the falling interest rates.”
Financial markets have become increasingly obviously highly dependent on central bank policies. In a follow-up to Incrementum’s previous chartbook, Stoerferle and Valek unveil the following 50 slide pack of 25 incredible charts to crucially enable prudent investors to grasp the consequences of the interplay between monetary inflation and deflation. They introduce the term “monetary tectonics’ to describe the ‘tug of war’ raging between parabolically rising monetary base M0 driven by extreme easy monetary policy and shrinking monetary aggregate M2 and M3 due to credit deleveraging. Critically, Incrementum explains how this applies to gold buying decisions as they introduce their “inflation signal” indicator.
GoldSilverWorlds.com has done a great job of summarizing the key aspects (and the full chartbook is below)…
The authors introduce the term “monetary tectonics” as a metaphor for this war. Similar to tectonic plates under a volcano, monetary inflation and deflation is currently working against each other:
- Monetary inflation is the result of a parabolically rising monetary base M0 driven by the central bank monetary easing policy.
- Monetary deflation is the result of shrinking monetary aggregates M2 and M3 because of credit deleveraging.
The following chart clearly shows that 2013 was a pivot year in which the monetary base M0 grew exponentially while net M2 (expressed on the chart line as M2 minus M0) declined significantly.
The chartbook shows several trend which confirm the deflationary monetary pressure:
- Total credit market debt as a % of US GDP has been shrinking since 2007 (“debt deleveraging”).
- US bank credit of all commercial banks is stagnating (close to negative growth), similar to the period 2007/2008. See first chart below.
- Money supply growth in the US and the Eurozone is trending lower. See second chart below.
- Personal consumption expenditures are exhibiting disinflation .
- The gold/silver-Ratio is declining. Gold tends to outperform silver during disinflationary and/or deflationary periods.
- The gold to Treasury ratio is declining. See third chart below.
- The Continuous Commodity Index (CCI) has been in a steep decline since the fall of 2011.
On the other hand, inflationary pressure is present through the following trends:
- An explosion of the monetary base M0. See first chart below.
- US households show signs of stopped deleveraging. See second chart below.
- The currency in circulation keeps on expanding.
- Commercial banks have piled up an enormous amount of excess reserves which, in case of a rate hike by central planners, could flood the market through lending in the fractional banking system. See thrid chart below.
How is gold impacted in this inflation vs deflation war? The key conclusion of the research is that, due to the fractional reserve banking system and the dynamics of the ‘monetary tectonics’, inflationary and deflationary phases will alternate in the foreseeable future. Gold, being a monetary asset in the view of Austrian economics, tends to rise in inflationary periods and decline during times of disinflation.
The key take-away for investors is to position themselves accordingly and consider price declines as buying opportunities for the coming inflationary period. How comes one can be so sure that inflation is coming? Consider that the government must avoid deflation; it is a horror scenario for the following reasons:
- Price deflation results in a real increase in the value of debt and a nominal decline in asset values. Debt can no longer be serviced.
- Price deflation would lead to massive tax revenue declines for the government due to a declining taxable base.
- Deflation would have fatal consequences for large parts of the banking system.
- Central banks also have the mandate to ensure ‘financial market stability‘
Interesting to know, Stoeferle and Valk developed the “Incrementum Inflation Signal,” an indicator of how much monetary inflation reaches the real economy based on market and monetary indicators. According to the signal, investors should take positions according to the the rising, neutral or falling inflation trends.
The loonie continued its long slide Wednesday, hitting a fresh four-year low against the U.S. dollar.
The Canadian dollar was trading at 92.58 cents after falling more than a cent Tuesday to its lowest close since late 2009.
The slide followed a spate of bad news about Canada’s economy. The Ivey Purchasing Managers Index, a measure of economic activity, came in much lower than expected for last month, at 46.3, compared to 53.7 the month before. A reading below 50 suggests economic contraction.
Canada’s trade deficit numbers also spooked the markets, with Statistics Canada reporting Tuesday that the country’s overall trade deficit with the world grew to $940 million in November as imports rose to $40.7 billion, while exports were unchanged at $39.8 billion.
The deficit came as the results for October were also revised to show a deficit of $908 million compared with an initial report of a surplus of $75 million for the month.
Meanwhile, U.S. economic data has been positive, further pressuring the loonie downwards.
Payroll firm ADP reported the U.S. private sector created 238,000 jobs during December. That data came two days before the release of the U.S. government’s employment report for last month. Economists expect it will show the economy created about 195,000 jobs in total.
International traders are certainly bearish on the Canadian dollar. The Globe and Mail reports the amount of money being placed in bets against the loonie is nearing extremes, with about US$5.5 billion currently invested against it.
Investment bank Goldman Sachs forecast late last year the Canadian dollar could hit 88 cents U.S. in 2014.
Meanwhile, Bank of Canada governor Stephen Poloz doesn’t appear in any hurry to raise the Bank of Canada’s trend-setting rate. In an interview on CBC on Tuesday, he denied he was under international pressure to raise rates.
Federal Finance Minister Jim Flaherty suggested in a recent interview that there would be such pressure as a result of Fed tapering.
Poloz did say that Fed tapering will inevitably put pressure on Canadian bond yields, likely leading to an increase in long-term fixed mortgage rates even if the Bank of Canada does not increase its benchmark rate.
— With files from The Canadian Press