"Michael Hasenstab is all about the big trade," is the 'masters-of-the-universe'-esque introduction by Bloomberg for Franklin Templeton's "famous" bond fund manager. “His success speaks for itself, but he does take bets,” notes one financial planner but it appears Hasenstab has BTFD one time too many - after loading up on more than $7 billion of Ukraine's bonds (equal to almost half of all Ukraine’s foreign bonds) he has seen them almost cut in half to around $4 billion. And it appears clients are seeing the bond guru's BTFD-iness for what it is - extreme risk with OPM - as investors last year pulled a record $14 billion from the U.S. and European versions of the Templeton Global Bond Fund.
After loading up on more than $7 billion of the country’s bonds, Hasenstab has seen the value of the securities collapse as the conflict with pro-Russian rebels deepened an economic recession, depleted foreign reserves and prompted government calls for a debt restructuring. His investment, equal to almost half of all Ukraine’s foreign bonds, is now valued at just $4 billion, based on fund holdings from the end of the third and fourth quarters.
As the losses mount, returns on Hasenstab’s two biggest funds -- standouts in the industry that have outperformed 99 percent of peers over the past decade -- have slipped, helping fuel client redemptions. Investors last year pulled a record $14 billion from the U.S. and European versions of the Templeton Global Bond Fund.
“Franklin Templeton’s Global Bond group often takes a contrarian approach to investing,” Coleman said in an e-mailed response to questions. “It has the research capabilities, size and long-term perspective to buy and hold investments that are out of favor.”
The Ukraine trade started to unravel in the second half of last year as the government’s finances deteriorated.
It seems Hasenstab is nothing more than a well-paid knife-catcher?
He’s also made big investments in debt from South Korea, Hungary and Poland, Bloomberg data show. Hungary’s dollar bonds have returned an average 54 percent over the past three years, helping Hasenstab’s Global Bond Fund return an average 10.1 percent annually over the past decade.
The fund’s return, though, slipped to 1.99 percent last year, a figure that put Hasenstab behind 53 percent of his peers. The Ukrainian bonds were responsible for more of that slump in returns than those from any other country, according to data compiled by Bloomberg.
“The fund’s management team is nothing short of brilliant,” Gilbert Armour, a financial adviser in San Diego who owns the fund for clients, wrote in an e-mail. “I wouldn’t let a short-term dip in performance deter one from sticking with a long-term winner.”
But now - as holder of more than half of Ukraine's foreign debt, Hasenstab now finds himself in the position of having to decide how much, if anything, he’s willing to give up in restructuring negotiations.
The government has hired Lazard to advise it in talks with bondholders, Reuters reported Wednesday, citing people familiar with the situation.
Restructuring talks will likely have the support of the IMF, according to Lutz Roehmeyer, a fund manager who oversees $1.1 billion in emerging-market debt at Landesbank Berlin Investment GmbH. If IMF officials are showing a willingness to extend the terms of their financing to Ukraine, they will be looking for bondholders to make concessions too, he said.
“Nobody wants to fund Ukraine alone,” Roehmeyer, whose holdings include Ukrainian debt, said in a Jan. 22 telephone interview. “Not the U.S., not the EU and not the IMF. It’s a piecemeal approach, and of course creditors will have to contribute. If the IMF prolongs its loans, it will demand the same from bondholders.”
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We have a simple question - what were the 'fundamentals' that Hasenstab was seeing to BTFD in this?
“It’s a country that despite some of the short-term fiscal issues has very little indebtedness,” Hasenstab, 41, said in the April 5 piece. “So from a bondholder investor standpoint, it made a lot of sense. Then the crisis came, and what encouraged us was the response of crisis management.”
Two months later, Hasenstab was quoted in a Morningstar Inc. interview as saying that Franklin Templeton had made “a good amount of money” as Ukrainian bonds rallied. The selloff would start a few weeks later.
The math at this point isn’t encouraging: Ukraine has to make $14 billion of foreign bond payments over the next three years, an amount that’s almost double the $7.5 billion of international reserves it has left, according to data compiled by Bloomberg.
And the economy is in tatters. Government officials are predicting a 4.3 percent contraction this year following a 7.5 percent drop last year. The military conflict with separatists, which has claimed more than 5,000 lives since it began in April, has snarled business in much of the east of the country.
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Or is it yet another falling knife to catch - if it drops - oh well it's OPM... if it soars - hero bond manager knows all... Incentives anyone?
Via ConvergEx's Nick Colas,
Hillary Clinton isn’t a lock for the 2016 Elections: Google searches for US Senator Elizabeth Warren surpassed the former US Secretary of State just last month with a ratio of 6 to 5. Interest in bowling (+85% since October) is growing faster than Facebook (-4%) and Youtube (-2%), and there is a lot more interest in smoking marijuana than tobacco (58 vs. 19 on average). Those are just three of the surprising findings from our latest survey of social engagement using Google Trends. Our analysis of over 150 discrete search terms from investing and leisure pursuits to politics and life changing events shows the disruptive shifts in Americans’ interests and attentions currently underway.
Note from Nick: Here at Convergex, we are always on the lookout for the next big thing. Those shifts are, after all, the critical drivers of everything from asset prices to social trends to market structure. Jessica’s been poring over the data from Google Trends for +150 search terms – something she does every quarter – and has the latest and greatest from this analysis. Read on for the details.
Scientists have identified which areas of the brain light up when stimulated under different conditions, but how does the brain enable us to focus our attention on one thing amid other distractions? This is known as object-based attention—when we can block out superfluous senses and zero in on an object, like a face amongst a crowd. Dr. Daniel Baldauf and Dr. Robert Desimone of the McGovern Institute at MIT conducted an experiment—published in Science—that provides useful color on the mechanisms of how we pay attention. Here are the details:
Twelve participants were asked to view a stream of sequential images including houses and faces, and were told to focus on the former and latter objects irrespective of each other at different times. A house was shown every half second and a face appeared every two-thirds of a second. By using magnetoencephalography (MEG), the researchers were able to connect brain activity with different frequency patterns. They then matched these results with functional magnetic resonance imaging (fMRI), which allowed them to identify the exact areas in the brain responsible for object-based attention.
Activity rose in the parahippocampal place area (PPA) of the brain when participants paid attention to the houses, and increased in the fusiform face area (FFA) when participants concentrated on the faces. Additionally, when participants focused on the houses and disregarded the faces, neurons in the PPA fired in harmony and neurons in the FFA fired out of synch; the reverse occurred when participants paid attention to the faces.
The researchers also found that it takes 20 milliseconds for neurons to send information to the PPA or FFA from the inferior frontal junction, which usually experiences activity first. Thus, the inferior frontal junction may direct the synchronized neurons during object-based attention. This helps tune out the noise so that other areas of the brain can grasp pertinent information more easily.
We are bombarded with new information every day, and over time, we learn how to sift through this endless material. There are only so many hours in a day, so we have to allocate our attention judiciously. Therefore, we track attention by delving into Big Data—using Google Trends—since it bears valuable insight into the ebbs and flows of interests and behaviors. We divided topics of social engagement into six buckets: financial assets, human capital, non-traditional assets, leisure, major life changes, and politics. Please read on for our top ten takeaways for the U.S. during the period October 2014 through today:
1) Hillary Clinton is not a shoe-in for the 2016 Democratic presidential nomination—Elizabeth Warren tracks close behind. At least in terms of garnering attention on the web: Ms. Warren received more Google searches than the former US Secretary of State just last month with a ratio of 6 to 5; the ratio now stands at 6 to 4 tilted in the other direction, or out of favor for the current Senator of Massachusetts. No matter which woman wins, throw Jeb Bush into the mix and the general election could actually get interesting.
Speaker of the House John Boehner (+533%) rose to the top of our political bucket list amid his reelection for House speaker and the State of the Union Address this month. Exclude the newly reelected speaker, and interest in politics (Federal, state and local government, key issues, and politicians, for example) waned from October through January, down 7%. This category grew by 36% from July 2014-October 2014 leading up to the mid-term elections last November, and experienced negative growth thereafter.
2) “Stock market” gives “Kickstarter” the boot: the crowdfunding platform first achieved the same number of Google searches as “stock market” in July 2012 and surpassed it last summer from June through August. Stock market reclaimed its prominence over Kickstarter this past September, however, currently at a ratio of 26 to 19. The pivot in September—around the time volatility started to pick up— that lasted through the year largely contributed to “stock market” (+16%) garnering more search interest than “kickstarter” (-18%) in 2014.
After the financial crisis, we saw a shift in attention towards entrepreneurial ventures and away from traditional means of investing (i.e. search for “stock market”). Searches related to traditional financial assets (stocks, bonds, and mutual funds, for example) fell by 45% from October 2008 to June 2014, while searches related to investing in human capital (schooling, learning languages, getting involved in startups, for example) climbed 33%. This trend started to reverse in our last report as our financial assets bucket rose 12% from July 2014 through October 2014, while our human capital bucket lagged with a gain of 1%. This report found a slowdown in this trend, despite continued volatility, as searches related to investing in traditional assets was flat from October through January, and searches related to investing in yourself continued to grow steadily, up 2%.
3) The Google search term “Currency investing” surged 154% since October, as the dollar continues to strengthen against the euro and yen, and as the Swiss National Bank unexpectedly abandoned the Swiss franc’s peg to the Euro. This was the largest gainer in our “Investing in non-traditional assets” category (“Hedge funds”, “House flipping”, and “Venture Capital”, for example), which rose 7% since October, more than the traditional assets and human capital buckets. Everything from Hedge fund (+52%), retirement fund (+23%), and gold coin (+7%) to buy land (+18%), house flipping (+23%), and buy art (+8%) grew positively.
4) Interest in “Youtube” and “Facebook” dissipated since October, as people opted for… bowling? Searches for “bowling alley” grew by 85% from October through January, while searches for the video-sharing and social media sites dropped by 2% and 4% respectively. More prosaic leisure activities also gained a greater share of attention: Movie showings (+38%), museum (+17%), casino (+13%), and mall (+7%).
Searches related to leisure activities (TV, Casinos, and NASCAR, for example) rebounded from our last report, up 12% since October. The category fell by 13% from July 2014 to October 2014. The reason for this may be cyclical as the prior period captured the transition back to school from summer, and the latter included the holiday season when people carve out more time for fun with family and friends.
5) Searches for marijuana rose just 4% in 2014, even as recreational marijuana stores opened for the first time in Colorado and Washington. Not to mention the successful legalization efforts in Alaska, Oregon, and Washington, D.C. Nonetheless, interest in cigarettes on the web pales in comparison to marijuana: the average number of hits is 19 to 58 respectively. As the legality of medical and retail marijuana continues to unfold, this represents a huge addressable market for tobacco companies. On a positive note, searches for “how to quit smoking” rose by 10% over the last decade. This is a positive development and one that falls under the territory of our “Life change” bucket.
Interest in major life changes (examples from our list include searches for “Nursing homes”, “retirement” and “having a baby) advanced by 12% since October after falling by 14% from July 2014 through October 2014. Some inputs may relate to New Year’s resolutions: “weight loss” tops the list with a gain of 34%, similar to the rise of 25% for “gym membership” in our leisure category. Others are seasonal, such as “Funeral home” (+27%) which is the second highest on our list, as older people are more prone to dangerous bouts of pneumonia during the winter.
6) Netflix streams past TV: interest in the online streaming service grew 24% since October compared to +14% for TV. The latter means of video entertainment still has the upper hand in terms of the amount of attention overall, but it fell by 11% from its peak in January 2009 over the past six years. During that same period, Netflix gained 214% in popularity.
The success of original series created by Netflix significantly expanded its outreach. For example, “House of Cards” received 22 Primetime Emmy Award Nominations and 3 nominations at the Golden Globes; likewise, “Orange is the New Black” received 12 Emmy nominations and 3 Golden Globes nominations. In fact, “Orange is the New Black” drew more attention during the month in which it premiered in June than “American Horror Story”—one of network television’s most popular shows—during October when it premiered, with a ratio of 100 to 89 respectively.
7) Wealthfront closes in on stockbrokers: there are more searches for the online financial advisor than “stockbroker” with a ratio of 75 to 51 respectively. Since January 2013, interest in “Wealthfront” rose by 525% compared to 33% for “stockbroker” and negative 4% for “financial advisor”. “Stockbroker” may have neared the top of our list of financial asset related searches, climbing 65% since October, but online financial advisors are gaining share of attention.
“CVX” (+72%), or the symbol for Chevron, grew the most on our list in this category—most likely due to the rapid drop in oil prices. Comparatively, XOM gained 43% over the same period. Stocks in general fared better than bonds on the attention generation front: buy a stock (-1%), small cap stock (+10%), large cap stock (0%) versus buy a bond (-41%), corporate bond (-36%), and high yield bond (-25%).
8) People are more interested in driving an Uber car than a taxi: the ratio of searches for “Drive for Uber” and “Drive a taxi” is 95 to 32. Drivers have opted for Uber over traditional taxis since April 2014 and haven’t looked back. The app-based taxi service now serves as model for other startup hopefuls trying to become “the Uber of X”.
The financial crisis helped spur the startup craze as billions in capital was allocated towards companies in their early stages as opposed to post-IPO through stocks or bonds. “Tech startup” dipped 5% since October 2014, but is up 326% since October 2008. Similarly, “Startup jobs” gained 22% since this past October and 300% since October 2008. Other entrepreneurial ventures also garnered interest over the past few months: open a store (+17%), start a business (+10%), and business loan (+8%).
9) What can defeat both Putin and Isis: Ebola. Each input generated more attention than the others during their peaks, but none like Ebola. During the annexation of Crimea in March 2014, the ratio of searches for “Putin”, “Isis” and “Ebola” was 3:1:1. Peak interest for Isis in September 2014 coincided with a ratio of 22 (Isis): 1 (Putin): 10 (Ebola). Both pale in comparison to peak interest in Ebola (October 2014): 100 (Ebola) vs. 9 (Isis) vs. 1 (Putin). Unsurprisingly, Isis (5) is currently in the lead as compared to Putin (1) and Ebola (3).
Geopolitics (+10% since October 2014) and war (+11%) remain high on our list of political searches, as the U.S. navigates tensions between Russia and Ukraine, and fights a war with Isis. By comparison, interest in other key issues fell by the wayside after the mid-term elections: education reform (-38%), income inequality (-29%), gun control (-27%), global warming (-23%), and universal health care (-21%).
10) Trade the US dollar for some Bitcoin? Searches for “Bitcoin” exceeded those for “US Dollar” in December 2014 with a ratio of 24 to 21, compared to 24 to 23 now in favor of the US dollar. Searches for “Bitcoin” may have grown by 300% over the past two years, but the average number of searches is only 7 compared to 17 for “US Dollar”. So what accounts for its rapid growth in interest, compared to the US Dollar which is relatively flat over time?
The first licensed U.S. exchange for Bitcoin launched this week. This development comes on the heels of the closing of Japan-based exchange Mt. Gox last February, or when the second largest peak in searches for the anti-fiat currency occurred. The first and third largest peaks developed in December 2013 and April 2013 when the currency crashed. Bursts of interest in Bitcoin seem to coincide with times of panic, or when its viability comes into question.
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How low can US Shale go?
For the longest time, analyst consensus was that 2015 S&P500 EPS would rise a comfortable 8-10% compared to 2014. However, in recent weeks, as a result of the collapse in energy company earnings - whose prices as previously discussed are due for a 40% plunge to implied historical PE multiples - as well as almost all other company earnings as a result of the soaring FX, projected EPS have tumbled at the fastest rate since Lehman. In fact, with forward 12 month EPS now below 124, or roughly where they were back in April of 2014, the S&P is now about 100 points higher compared to where it was last time earnings were projected to be this level. Only back then forward EPS were rising. Now they are falling dramatically, and are likely to see even bigger drops in the coming months. Then again, there is nothing a little central bank multiple expansion can't fix.
What's worse, however, is that while consensus still expects 2015 EPS to see a modest increase Y/Y, Q1 of 2015 has already been written off, with what at the beginning of the year was projected to be a 4% Y/Y EPS increase, and on September 30 2014 stood at 10%, has now plunged to a nearly 2% decline.
Looking at the current quarter (Q1 2015), what are analyst expectations for earnings growth? Is the current streak of eight consecutive quarters of earnings growth expected to continue?
The answer is no. This week marked a change in the aggregate expectations of analysts from year-over-year growth in earnings for Q1 2015 to now a year-over-year decline in earnings. However, expectations for earnings growth for Q1 2015 have been falling not only over the past few weeks, but also over the past few months. On September 30, the estimated earnings growth rate for Q1 2015 was 9.9%. By December 31, the estimated growth rate had declined to 4.2%. Today, it stands at -1.6%.
Most of the expected decline in the estimated earnings growth rate for the S&P 500 for Q1 2015 is due to reductions in earnings estimates for companies in the Energy sector. On September 30, the estimated earnings growth rate for the Energy sector for Q1 2015 was 3.3%. By December 31, the estimated growth rate fell to -28.9%. Today, it stands at -53.8%.
Needless to say, absent a surge in oil back to the $80s, it is only going to get worse.
So how do we get back to $80 oil? Simple - once a majority of US shale companies file for bankruptcy just as Saudi Arabia demands, leading to a recession in Texas and numerous other states, and freefall, literal and metaphorical, for countless energy junk bond investors - then, and only then, will Saudi Arabia halt the crude gusher to a trickle, sending oil soaring and letting the good times, if only for oil exporters, roll again.
Which of the two superpowers has the greater military provisions?
US or Russia?
The historical relationship between the United States and Russia can hardly be described as rosey. The two countries are inextricably linked due to the Cold War era, with the world’s two modern superpowers having enjoyed an extremely suspicious relationship with one another for decades during the 20th century.
This suspicion led to the infamous Cuban Missile Crisis. What is perhaps not so infamous about this particularly tense situation is that the world was nearly blown to smithereens. It was only due to decisions taken on board a Russian nuclear submarine by Vasili Alexandrovich Arkhipov that full-scale of nuclear war was averted. This was acknowledged in 2002 by former Defense Secretary Robert McNamara, who stated that the world has been much closer to nuclear war than is often realized.
Such history is rather chilling, particularly when one considers that the diplomatic relationship between the two nations has diminished recently. With tensions in the Ukraine, and some underlying economic and political reasons for the United States and Russia to be in military opposition, there is once again the tension between the two countries.
In March, 2014, Forbes gave seven reasons why the United States will never go to war with Russia. One would certainly hope that this is the case, but it is still interesting and informative to compare the relative military might of the world’s most powerful nations.
The United States has more than double the population of Russia, and so it is not hugely surprisingly that it has a significant edge in available manpower. The United States has over 145 million people who could theoretically serve in the armed forces, whereas Russia has under 70 million by comparison. Of course, the notion of a draft would be hugely controversial in either nation, and this figure only really is relevant in theory.
Active Military Personnel
Of more relevance is the current levels of active military personnel in the two nations. The US certainly has a much larger armed forces to draw upon than Russia, with nearly 1.5 million military personnel of various denominations currently active in the United States. Russia actually has a higher level of military personnel per capita, but the total number of 766,000 is significantly less than the United States.
Movies such as Top Gun have created a collective imdge in our mind which suggests that the United States is associated with military might in the air. And this is certainly reflected in figures related to military aircraft. Of course, many of the world’s largest defense contractors operate out of the United States, and companies such as Lockheed Martin Corporation ensure that the US is pretty spectacularly endowed with military aircraft.
According to recent figures, the United States has over 13,500 military aircraft ready to be deployed at any given time. The Russian air force is paltry by comparison, with the Eastern European nation not even in possession of 4,000 active military aircraft.
The aerial supremacy of the United States is also underlined with regard to helicopters. Again, military history intrinsically associates this vehicle with the United States, as helicopters are indelibly linked with critical conflicts for the US in the 20th century such as Vietnam and Korea.
It comes as no surprise then that the United States has a huge amount of active military helicopters; just over 6,000 in total. This is clearly not an area which has been prioritied by Russia, with the former Eastern Bloc nation having less than 1,000 active military helicopters by comparison.
When one pictures Soviet tanks rolling into Afghanistan, for example, the tank strength of the former Eastern Bloc Russia would be presumed to be significant. And this impression garnered from history would not turn out to be inaccurate.
Russia currently has 15,500 active tanks available for military service, and this is significantly more than the United States. The US tank provision is not as overshadowed as the Russian military is in some departments, but nonetheless the United States currently has around 8,325 tanks as part of its military capabilities. In terms of ground battles, Russia would appear to have the edge.
As mentioned previously, it was a Russian nuclear submarine which almost prompted complete disaster during the Cuban Missile Srisis. But both the United States and Russia are associated with underwater technology, and as such there is no significant difference between the two in this department. The United States has slightly more deployable submarines, 72 as opposed to 63, but one cannot say that there is a significant difference in military strength in this department.
Given that President Obama famously signed off a $1 trillion defense budget, and the notion of the military-industrial complex was coined by a 1961 speech by Dwight Eisenhower, it wouldn’t come as a huge surprised if US defense spending was significantly higher than Russia. And, of course, this turns out to be the case, with admitted defense spending in the United States currently equal to around $612 million. This dwarfs any nation on the planet, and Russia is no exception, with the Eastern European powerhouse spending $76 million annually on its defense.
Both countries have been reducing their stockpiles of nuclear weapons under various disarmament and non-proliferation treaties. But the bulk of nuclear weapons which remain in the two nations is a constant reminder of the potential stakes involved. This is one department in which Russia has the edge over the United States, with the Eastern European nation currently boasting around 8,000 active nuclear warheads. This is reckoned to be nearly 1,000 more than the United States.
In an estimation published in 2012, graphic designer Maximilian Bode stated that the estimated tonnage of nuclear warheads in the world today would easily be enough to obliterate the entire human population. Given that the United States and Russia is responsible for 75 percent of these nuclear weapons, we must hope that diplomatic relations between the two nations thaw somewhat in the near future.
Over the past few weeks one could not escape the headline of the latest proposal to give away two years of community college. Everywhere it was debated by pundits whether it was a “good thing,” or a “bad idea”. “Who would, in the end, pay?” “Who would be eligible?” “Who wouldn’t? So on, and so forth. (for as we all know when you receive something for “free” there’s always a catch)
One of the details that was missed early on that finally made its way into the discourse was that “free” actually meant it was going to be paid for via the rescinding of the 529-Plan. A plan used primarily by the middle class as a way to help pay the onerous ever rising costs of college. A college by the way – of choice. i.e., A school they deem as being more noteworthy (or resume enhancing) than the typical community college.
Of course once this detail became apparent there was an outpouring of outrage. So much so that the idea was pulled and shelved nearly as fast as it came on the scene. This doesn’t happen that often. Rarely does a “give-away” initiative that’s designed to have all the right target buttons to be pushed leave the political arena before it’s been thoroughly fear mongered, class envied, and argued to death in the public square.
With at least 6 months if not more to go before any real political campaigns start in earnest for the next cycle, one would think this was just what a political debate vacuum would want. It had all the ingredients adored by political parties to throw barbs from podiums at the other side. (no matter the side) It is a perfect debate vehicle even if there’s no chance of it ever going thru. Because we all know; it really doesn’t matter at the time if an idea has a chance in passing. Rather, it’s more important the argument can be used to bludgeon your opponent. For that’s a far better use for results. Yet, this one was like a flash in the pan idea. Before the debate even started it was squelched and withdrawn. Why?
Many will say it didn’t have a snowball’s chance in you know where once some of the details became apparent. Sure, I can agree to that. However, what if the real reason had nothing to do with funding college: and had everything to do with setting a precedent? A precedent as to soften the masses up on the idea of trading or exchanging a tax deferred program (as in your 529 tax deferred nest egg) for a shiny new government backed program. All for “free.”
So you’re think “Yeah, yeah, yeah, what else is new.” And again I would agree with that . But here’s the issue that one must consider. What struck me was the fact in just how fast this proposal went away. Then it began to dawn on me. This has “trial ballooning 101″ written all over it. We’ve seen it so many times before regardless of party. So may times in fact we’ve drawn oblivious to it.
So, what is the real idea behind this probable balloon? Why even bring this into the public debate at all; especially now? It’s not like they need private institutions to bank roll higher learning any longer. That was basically done away with just a few years ago when the administration took over the entire student loan program. They now currently control it.
Tweaks, changes, special financing and more could all be done with basically “strokes of the pen.” There just has to be something here more than what typically meets the eye. Then it hit me: Replace 529 with 401K – and change college to retirement. Same premise, just the severity of outcomes changed. Which is why I believe it was a trial balloon idea to see the reaction to the underlying argument that was first and foremost the reasons to bring it forward.
If one remembers back in the early days of the financial crisis when it seemed all heck was breaking loose the then House Speaker was appearing on nearly every financial media channel touting the idea that maybe “The government should institute a program where people could turn over their 401K plans for a secured government bond.”
I remember at the time listening slack-jawed not only for the implications of such an idea. Rather, it was the brevity along with just how fast this idea came to light. It wasn’t as if there was a large vibrant ongoing debate. This seemed to come out-of-the-blue as a neatly packaged idea ready for anyone else (politically or via the populace at large) to jump on board and help push, or run with it. However, it too went away seemingly just as fast and was shelved.
I believe “shelved” is a very instructive word. For it implies: Ready to go when or if needed – again. These types of ideas don’t seem to be spontaneously derived, or a serendipitous bubbling out of the political ether. No, usually they are constructed far in advance then shelved waiting for the “right time” to either impose – or float for the future.
Many have written and spoke on the subject that the government in one form or another wants to get access (whether to tax or confiscate) the large pool of money that sits currently beyond their reach within the 401K structure. And nothing burns a hole in a politicians pocket faster than knowing there’s a great big ole pile of money somewhere within the financial system.
The only problem? Currently they can’t get access to it. (Regardless of party affiliation) But one should not think the political class doesn’t lay awake sleepless thinking about ways to garner access to it – just as often as one does the same for the opposite effect.
I believe it would be prudent for anyone to consider with what is currently going on within the financial markets globally, as well as the possible contagion concerns that may raise their ugly heads: trial balloons for the sole purpose of setting precedents for the explicit reasons which have to do with giving up tax sheltering vehicles in turn for “free” government backed or supplied ____________(fill in the blank) should not be lost on those watching these horizons for clues.
Remember, it wasn’t all that long ago people awoke to the change that their “cash” in a money market account no longer needed to be worth what their balance stated. It can now float via market forces along with being gated if necessary. The response? (Insert crickets here)
Currently if it were proposed forthright one could (or should) access “free” (i.e. wont be subject to negative interest rates) government back bonds; and all you needed to do to access this “great benefit” was to turn over your 401K plan? The alarm bells and uproar that would ensue would be fierce one would believe. Yet, the idea of negative interest rates just a few years ago was also considered “unimaginable.” Now? It’s becoming commonplace.
I feel the only way to re-engage in that conversation without a knee-jerk rebuttal of out right refusal would be if you first laid the premise and groundwork of another, yet smaller scale of the same idea gaining (or allowing) the acceptance of such a proposal first. i.e., The tax protected 529-Plan for a government supplied “freebie.”
Move that idea into the public. Find acceptance. (even if it’s small at first) Then: you can move the ladder quickly and propose the same idea or premise, only this time – it’s the 401K for a government bond. Or as I said earlier, ” _______________(fill in the blank.)”
No one knows whether this is the true except for those who float these type of ideas. Yet, one must take heed as to look out at the current financial landscape with all the possible contagion risks rearing their ugly heads within both the Euro Zone and more; and not be on high alert to the possibility things could once again: get very ugly – very fast.
With Greece leading the way to a possible EU breakdown along with hundreds of thousands now filling the public square in Spain to possibly do the same. The Federal Reserve along with most other politicians have to be a little more than concerned that things aren’t quite playing out as the “text books” stated they should.
With Ukraine, Germany, and France all expressing their concern this morning about "conflict escalation" between pro-Russian separatists and the Ukraine military, the so-called "truce" appears to be hanging by a thread of semanticism (despite OSCE's please for respect of the cease-fire and the demarcation line). Today's triple whammy of 'escalation' appears more focused on the non-Russian side as first, France begins sending tanks into Poland; second, Ukraine shifts its tanks to the front-line; and third - and potentially most inflammatory for Putin - NATO has confirmed plans to create permanent command centers in Eastern Europe. Putin has not responded yet but reports of 'nuclear bombers' flying above the English Channel "with transponders turned off," suggests the sabre rattling continues.
Ukrainian civilians are being evacuated:
The OSCE is calling for the truce to stand...
Everyone is "concerned"
Leaders call for immediate “cease-fire” to fighting in east Ukraine after speaking on the phone today, AFP says, citing the French president’s staff.
So the following takes place:
France is pledging tanks and armored vehicles to bolster NATO forces in Poland, where leaders are increasingly uneasy about Russia.
In a joint statement Friday after a meeting between French President Francois Hollande and Polish Prime Minister Eva Kopacz, the two governments also called for a cease-fire in eastern Ukraine, where fighting has intensified between pro-Russia separatists and government troops.
NATO has no permanent presence in Eastern Europe but since last April members have been cycling forces and military equipment through the region in response to Russia's actions in Ukraine.
The French military equipment is expected to remain in Poland for two months.
2) Ukraine begins moving its tanks to the front-line in Eastern Ukraine
NATO said Friday it will deploy small units in six eastern European nations to help coordinate a spearhead force set up in response to Russia's actions in Ukraine.
NATO Secretary General Jens Stoltenberg said the units in Estonia, Latvia, Lithuania, Poland, Bulgaria and Romania will be the first of their kind there.
Defense ministers from the 28-nation military alliance will discuss the full force, which can react quickly to any hotspots in Europe, when they meet on Feb. 5.
Stoltenberg said countries responsible for providing the several thousand troops should be known next week.
The forward units will comprise a few dozen troops only. They will plan and organize military exercises, and provide command and control for any reinforcements the force might require.
"They're going to plan, they're going to organize exercises, to provide ... some key command elements for reinforcements," Stoltenberg said.
* * *
Russia has been very quiet today as all of this has occurred but we suspect the last move - NATO bases so close to Russia's border - will warrant some response very rapidly... or perhaps Putin already pre-empted it...
The U.K.’s Royal Air Force scrambled fighter jets on Thursday after a pair of nuclear-capable Russian bombers flew across a busy civilian air traffic corridor above the English Channel. The bombers had their transponders turned off, British officials said, making them invisible to many air traffic control systems. The incident disrupted multiple flights – and ended with the U.K. government demanding the Russian ambassador appear at the Foreign Office to explain the actions.
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This is not going to end well.
Despite Angela Merkel's insistence on numerous occasions this past week that there will be "no debt renegotiations," it appears a schism at the core of Europe is opening. As France24 reports, following a meeting between France's finance minister Michel Sapin and Greece's finance minister Yanis Varoufakis, the press conference had a considerably more amicable tone that Friday's Dijsselbloem dissing. "France is more than prepared to support Greece," Sapin said adding that Greece’s efforts to renegotiate were "legitimate." Sapin urged a "new contract between Greece and its partners."
France’s Socialist government offered support Sunday for Greece’s efforts to renegotiate debt for its huge bailout plan, amid renewed fears about Europe’s economic stability.
The backing was a victory for Greek Finance Minister Yanis Varoufakis, holding talks with European officials to push for new conditions on debt from creditors who rescued Greece’s economy to save the shared euro currency. Worries have mounted that Greece’s new far left government might not pay back its debts.
Varoufakis is also visiting London and Rome – and said Sunday that he would visit Berlin. The German government has been particularly angry at the new Greek government’s position and bluntly rejected suggestions that Greece should be forgiven part of its rescue loans.
Varoufakis insisted that Greece wants to pay the money back, but said he wants new terms and new negotiating partners, arguing that “it’s not worth” discussing with the so-called “troika” of creditors who set the strict terms for Greece’s rescue.
France’s Socialist leadership, whose president has campaigned against austerity, presented itself Sunday as a possible mediator between Greece and creditors.
French Finance Minister Michel Sapin insisted his country wouldn’t support canceling the debt, but offered support for a new timeframe or terms.
“France is more than prepared to support Greece,” Sapin said after meeting Varoufakis, saying Greece’s efforts to renegotiate were “legitimate.” Sapin urged a “new contract between Greece and its partners.”
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Perhaps Merkel should remember her nation's own history?
Marina Prentoulis, a senior lecturer at the University of East Anglia and Syriza’s London spokesman, said that Europe’s austerity drive had left an entire generation in Greece with “no future”.
"We are not going to enforce the austerity programmes, what we call the memoranda, it created a huge humanitarian crisis, she said. People have been working all their lives and their pensions have been slashed to 40pc," she told the BBC's Andrew Marr Show.
"We have huge unemployment – 27pc. And 60pc for young people. This means that they have created a generation that has effectively no future. They have destroyed any employment rights. So this has to stop. This programme Syriza has pledged is not going to be enforced any more."
Angela Merkel, the German Chancellor, has ruled-out cancelling more of Greece's national debt, which has climbed to more than 175pc of gross domestic product (GDP). However, Ms Prentoulis said Germany should "remember it’s own history".
"In 1953 a big part of the German debt was written off and then the repayments were associated with growth. This is what Syriza is asking for Greece as well," she said.
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European Dis-Union once again!!!
For 30+ years, Western countries have been papering over the decline in living standards by issuing debt. In its simplest rendering, sovereign nations spent more than they could collect in taxes, so they issued debt (borrowed money) to fund their various welfare schemes.
This was usually sold as a “temporary” issue. But as politicians have shown us time and again, overspending is never a temporary issue. This is compounded by the fact that the political process largely consists of promising various social spending programs/ entitlements to incentivize voters.
In the US today, a whopping 47% of American households receive some kind of Government benefit. This type of social spending is not temporary… this is endemic.
The US is not alone… Most major Western nations are completely bankrupt due to excessive social spending. And ALL of this spending has been fueled by bonds.
This is why Central Banks have done everything they can to stop any and all defaults from occurring in the sovereign bonds space. Indeed, when you consider the bond bubble everything Central Banks have done begins to make sense.
1. Central banks cut interest rates to make these gargantuan debts more serviceable.
2. Central banks want/target inflation because it makes the debts more serviceable and puts off the inevitable debt restructuring.
3. Central banks are terrified of debt deflation (Fed Chair Janet Yellen herself admitted that oil’s recent deflation was economically positive) because it would burst the bond bubble and bankrupt sovereign nations.
So how will all of this play out?
The first real sign of trouble has already emerged. That sign pertains to the US Dollar.
Globally, the world is awash in borrowed money… most of it in US Dollars. The US Dollar carry trade is north of $9 trillion… literally than the economies of Germany and Japan COMBINED.
When you BORROW in US Dollars you are effectively SHORTING the US Dollar. So when the US Dollar rallies… you have to cover your SHORT or you blow up.
And the US Dollar has been rallying… HARD. Indeed, the move that began in July is already on par in scope with that which occurred during the 2008 meltdown:
This first wave imploded the price of Oil, numerous other commodities, and several emerging markets equities, most notably in Russia and Brazil.
However, the US markets are not immune to the move.
Indeed, as ZH noted earlier this week, 87% of companies have guided below consensus expectations for next quarter. The stronger US Dollar is hurting profits… which are the single biggest driver of stock prices.
What happened the last time that stocks were strongly disconnected from reality… and the US Dollar began to rally hard?
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Despite the uncertainties ahead of the Greek general election, the European Central Bank (ECB) went ahead and announced quantitative easing (QE) of €60bn per month from March to at least September 2016.
What makes this interesting is the mounting evidence that QE does not bring about economic recovery. Even Jaime Caruana, General Manager of the Bank for International Settlements and who is the central bankers' central banker, has publicly expressed deep reservations about QE. However, the ECB ploughs on regardless.
The Keynesians at the ECB are unclear in their thinking. They are unable to answer Caruana's points, dismissing non-Keynesian economic theory as "religion", and they sweep aside the empirical evidence of Keynesian policy failures. Instead they are panicking at the spectre of too little price inflation, the continuing fall in Eurozone bank lending and now falling commodity prices. To them, it is a situation that can only be resolved by monetary stimulation of aggregate demand applied through increased government deficit spending.
This is behind the supposed solution of the ECB's QE, most of which will involve national central banks in the euro-system propping up their own national governments' finances.
The increased socialisation of the weaker Eurozone economies, especially those of France, Greece, Italy, Spain and Portugal, will inevitably lead to unnecessary economic destruction. QE always transfers wealth from savers to financial speculators and other early receivers of the new money. Somehow, the impoverishment of the working and saving masses for the benefit of the central bankers' chosen few is meant to be good for the economy.
Commercial banks will be corralled into risk-free financing of their governments instead of lending to private enterprise. This is inevitable so long as the Single Supervisory Mechanism (the pan-European banking regulator) with a missionary zeal is discouraging banks from lending to anyone other than governments and government agencies. So the only benefit to employment will come from make-work programmes. Otherwise unemployment will inevitably increase as the states' shares of GDP grow at the expense of their private sectors as the money and bank credit shifts from the former to the latter: this is the unequivocal lesson of history.
It may be that by passing government financing to the national central banks, the newly-elected Greek government can be bought off. It will be hard for this rebelling government to turn down free money, however angry it may be about austerity. But this is surely not justification for a Eurozone-wide monetary policy. While the Greek government might find it easier to appease its voters, courtesy of easy money through the Bank of Greece, hard-money Germans will be horrified. It may be tempting to think that the ECB's QE relieves Germany from much of the peripheral Eurozone's financing and that Germans are therefore less likely to oppose the ECB's QE. Not so, because the ECB is merely the visible head of a wider euro-system, which includes the national central banks, through which there are other potential liabilities.
The principal hidden cost to Germany is through the intra-central bank settlement system, TARGET2, which should only show minor imbalances. This was generally true before the banking crisis, but since then substantial amounts have been owed by the weaker southern nations, notably Italy, to the stronger northern countries. Today, the whole of the TARGET2 system is being carried on German and Luxembourg shoulders as creditors for all the rest. Germany's Bundesbank is owed €461bn, a figure that is likely to increase as the debtors' negative balances continue to accumulate.
The currency effect
The immediate consequence of the ECB's QE has been to weaken the euro against the US dollar, and importantly, it has forced the Swiss franc off its peg. The sudden 20% revaluation of the Swiss franc has generated significant losses for financial institutions which were short of the franc and long of the euro, which happens to have been the most important carry-trade in Europe, with many mortgages in Central and Eastern Europe denominated in Swiss francs as well. The Greek election has produced a further problem with a developing depositor run on her banks. Doubtless both the carry-trade and Greek bank problems can be resolved or covered up, but problems such as these are likely to further undermine international confidence in the euro, particularly against the US dollar, forcing the US's Fed to defer yet again the day when it permits interest rates to rise.
This was the background to the Fed's Open Market Committee (FOMC) meeting this week, and the resulting press release can only be described as a holding operation. Statements such as "the Committee judges that it can be patient in beginning to normalise the stance of monetary policy" are indicative of fence-sitting or lack of commitment either way. It is however clear that despite the official line, the US economy is far from "expanding at a solid pace" (FOMC's words) and external events are not helping either. For proof of that you need look no further than the slow-down of America's overseas manufacturing and production facility: China.
The consequences for gold
Until now, central banks have restricted monetary policy to domestic economic management; this is now evolving into the more dangerous stage of internationalisation through competitive devaluations. We now have two major currencies, the yen and the euro, whose central banks are set to weaken them further against the US dollar. Sterling, being tied through trade with the euro, should by default weaken as well. To these we can add most of the lesser currencies, which have already fallen against the dollar and may continue to do so. The Fed's 2% inflation target will become more remote as a consequence, and this is bound to defer the end of zero interest rate policy. So from all points of view competitive devaluations should be good for gold prices.
This is so far the case, with gold starting to rise against all major currencies, including the US dollar, with the price above 200-day and 50-day moving averages in bullish formation. To date from its lows gold has risen by up to 13% against the USD, 18% against the pound, 30% against the euro, and 32% against the yen. The rise against weaker emerging market currencies is correspondingly greater, fully justifying Asian caution about their government currencies as stores of value.
We know that Asian demand for bullion has absorbed all mine production, scrap and net selling of investment gold from advanced economies for at least the last two years. Indeed, the bear market in gold has been a process of redistribution from weak western into stronger eastern hands. So if there is a revival in physical demand from the public in these advanced economies it is hard to see how it can be satisfied at anything like current prices, with physical bullion now in firm hands.
The gold price is an early warning of future monetary and currency troubles, and it is now becoming apparent how they may transpire. The ECB move to give easy money to profligate Eurozone politicians is likely to have important ramifications well beyond Europe, and together with parallel actions by the Bank of Japan, can now be expected to increase demand for physical gold in the advanced economies once more.
Five days ago, when previewing an event that could be the Holy Grail for FX traders in 2015, we wrote:
In the epic alpha vacuum left in the absence of the worst, pardon, best FX "analyst" of all time, Goldman's legendary Tom Stolper, whose perpetual fading helped us and countless readers generate some 10,000+ pips in profits in the years when he was actively crucifying muppets on Goldman's payroll, most were confused how to make profits with absolutely no risk in the FX sapce. And ever since when rading alongside major central banks led to career-ending outcomes as recently as 2 weeks ago, it seemed that the entire FX space was merely populated by algos and other robots who would merely frontrun each other's cluelessness in perpetuity.
We are happy to report that the P&L drought may have finally ended, and we have none other than the man many have suggested could be next in line for the title of honorary "Tom Stolper" of the FX realm: BofA's technical strategist MacNeill Curry. Moments ago, Curry came out with a trade reco which is, not surprisingly, just in line with what the vast consensus, and not to mention the Bank of Japan, thinks: long USDJPY, aka the trade that is directly proportional to multiple expansion for the entire US stock market, and number of bankrupt Japanese corporations.
BofA's reco in question:
Buy $/¥ at market (now 117.80), risk 117.25, target 119.78, potentially120.36
For the past week, $/¥ has been caught in a 118.72/117.32 contracting range / Triangle formation. Now, that range is about to complete for a push towards 119.78/120.36. Perhaps most compelling is the risk to the trade. Price should not trade below the Jan-25 low at 117.27. Below here invalidates the bullish setup and results in a larger, choppier range than anticipated. Bigger Picture, we remain BULLISH. The long term uptrend remains incomplete for a push towards 124.16/124.59. Above the Dec-23 high at 120.83 says the long term bull trend has resumed.
[W]ill USDJPY tumble promptly back down to 117.25 at which point Curry will be Stolpered out, and we can crown the next market-moving "Stolper" whose every reco will be the source of much mirth and joy in the new and improved "bandits" and "cartel" chat room, or will the forces of momentum-chasing vacuum tubes win, and the quest for the next Stolper continue unsuccessfully? We hope to have an answer in the next 2-3 days.
Ironically, it was less than 24 hours after the reco that the USDJPY plunged as low as 117.26 (!) last Wednesday, and yet MacNeill's reco was saved literally by one pip from being stopped out.... if only for another three trading days.
Moments ago, in the illiquid Sunday night pre-market, BofA's "Stolper" was just stolpered stopped out as the USDJPY just tumbled well below 117 on fresh concerns about a Grexit and the biggest Chinese manufacturing slowdown in 2 years, dropping to the lowest level since the SNB announcement in just 3 trading days after Curry's initial recommendation, which incidentally is a record short period of time for a "Stolpering", even for the original Tom Stolper.
Which is especially ironic considering just hours ago he reiterated his conviction:
Bullish $/¥, but the Jan-28 low is key
The setup in $/¥ is very similar to that of the S&P500, albeit on a much shorter time horizon. We look for a bullish resolution to the 8d contracting range (shown in blue) for a push towards 119.78/120.36. A break of the Jan-28 low would invalidate this outlook, opening a deeper decline to 115.99/115.56 before renewed basing.
So here's to you, MacNeil Curry: keep those "recos" coming because in the absence of illegal chatrooms and muppet slayers it was getting a little difficult to make riskless profits day in and out.
Day after day in modern macro-economics, investors are bombarded with 'odd' seasonal adjustments that spuriously lift (in the case of growth-related variables) or reduce (in the case of inflation-related variables) data to ensure a constant flow of "we must keep offering free/cheap money" narrative-confirming news.
However, as The Telegraph reports, it appears this "seasonal adjustment" smoke-screen has reached the just as bifurcated opinioned world of global warming trends and Climate-Gate...
Although it has been emerging for seven years or more, one of the most extraordinary scandals of our time has never hit the headlines. Yet another little example of it lately caught my eye when, in the wake of those excited claims that 2014 was “the hottest year on record”, I saw the headline on a climate blog: “Massive tampering with temperatures in South America”. The evidence on Notalotofpeopleknowthat, uncovered by Paul Homewood, was indeed striking.
Puzzled by those “2014 hottest ever” claims, which were led by the most quoted of all the five official global temperature records – Nasa’s Goddard Institute for Space Studies (Giss) – Homewood examined a place in the world where Giss was showing temperatures to have risen faster than almost anywhere else: a large chunk of South America stretching from Brazil to Paraguay.
Noting that weather stations there were thin on the ground, he decided to focus on three rural stations covering a huge area of Paraguay. Giss showed it as having recorded, between 1950 and 2014, a particularly steep temperature rise of more than 1.5C: twice the accepted global increase for the whole of the 20th century.
But when Homewood was then able to check Giss’s figures against the original data from which they were derived, he found that they had been altered. Far from the new graph showing any rise, it showed temperatures in fact having declined over those 65 years by a full degree. When he did the same for the other two stations, he found the same. In each case, the original data showed not a rise but a decline.
Homewood had in fact uncovered yet another example of the thousands of pieces of evidence coming to light in recent years that show that something very odd has been going on with the temperature data relied on by the world's scientists. And in particular by the UN’s Intergovernmental Panel on Climate Change (IPCC), which has driven the greatest and most costly scare in history: the belief that the world is in the grip of an unprecedented warming.
How have we come to be told that global temperatures have suddenly taken a great leap upwards to their highest level in 1,000 years? In fact, it has been no greater than their upward leaps between 1860 and 1880, and 1910 and 1940, as part of that gradual natural warming since the world emerged from its centuries-long “Little Ice Age” around 200 years ago.
This belief has rested entirely on five official data records. Three of these are based on measurements taken on the Earth’s surface, versions of which are then compiled by Giss, by the US National Oceanic and Atmospheric Administration (NOAA) and by the University of East Anglia’s Climatic Research Unit working with the Hadley Centre for Climate Prediction, part of the UK Met Office. The other two records are derived from measurements made by satellites, and then compiled by Remote Sensing Systems (RSS) in California and the University of Alabama, Huntsville (UAH).
To fill in the huge gaps, those compiling the records have resorted to computerised “infilling” or “homogenising”, whereby the higher temperatures recorded by the remaining stations are projected out to vast surrounding areas (Giss allows single stations to give a reading covering 1.6 million square miles). This alone contributed to the sharp temperature rise shown in the years after 1990.
But still more worrying has been the evidence that even this data has then been subjected to continual “adjustments”, invariably in only one direction. Earlier temperatures are adjusted downwards, more recent temperatures upwards, thus giving the impression that they have risen much more sharply than was shown by the original data.
In reality, the implications of such distortions of the data go much further than just representing one of the most bizarre aberrations in the history of science. The fact that our politicians have fallen for all this scary chicanery has given Britain the most suicidally crazy energy policy (useless windmills and all) of any country in the world.
* * *
Seaonally-adjusted seasons? Sure, why not!
While much has been said about last week's third in two weeks rate cut by the Danish Central Bank, one which brought the deposit rate to -0.50%, having previously cut it to -0.35% and -0.2% in the aftermath of the ECB Q€ and the SNB's abandoning of the Franc ceiling - the latest move of desperation to preserve the peg of the DKK to the plunging Euro and one which as reported previously has led to such strange financial abominations as negative interest rate mortgages - few noticed an even more important announcement by the Denmarks Nationalbank. On Friday the Danish central bank said it would halt all government bond issuance "until further notice"!
Suspension of government bond issuance
Upon the recommendation of Danmarks Nationalbank, the Ministry of Finance has decided to suspend the issuance of domestic and foreign bonds until further notice.
The large surplus on the government finances in 2014 implies that the sale of government bonds has been greater than the funding requirement. Given the foreign currency situation, it is no longer appropriate to reduce the issuance of government bonds over several years. The balance on the central government's account at Danmarks Nationalbank is more than sufficient to cover the financing requirement in 2015.
Danmarks Nationalbank has purchased foreign exchange in the market and reduced the monetary-policy interest rates. This has resulted in a widening of the negative spread between money market rates in Denmark and the euro area. The interest rate spreads for government bonds, however, have remained positive in the longer maturity segments.
Danmarks Nationalbank expects that stopping the issuance of government bonds will contribute to reducing the interest-rate spreads in the longer maturity segments and thereby limit the inflow of foreign exchange.
What Denmark just did, in addition to going further into NIRP, is to try and halt the appreciation of its currency by preventing more inflows not only on the short end but across the Treasury curve, and by halting supply of government bonds - the government had been due to issue 75 billion Danish crowns ($11 billion) worth of domestic debt to cover its 2015 financing needs - it hopes to not only lower long-end rates further, but to further weaken the Danish Krone, whose recent strength as a result of offshore inflows is the chief reason why many are increasingly saying the DEK peg to the EUR is in jeopardy.
And stated even simpler, paraphrasing Jan Storup Nielsen of Nordea, what Denmark has done is "back-door QE", because as some forget, there are two ways to push the price of an asset higher (thus pushing its yield lower in the case of a bond): increase demand, which is what conventional QE does when central banks buy bonds, or reduce supply. Which is what Denmark just did by completely cutting off all Treasury issuance "until further notice".
"We had not expected this," said Jes Asmussen, Chief Economist at Handelsbanken. "Everything that happens now is surprising. We had expected the central bank to start to use other instruments if the pressure on the crown continued, but we did not consider it would be this exactly."
But why, when with every passing day it is becoming clearer that the facade of central bank omnipotence is falling away, and central banks will, out of sheer desperation, do anything to delay the moments which as at least the SNB has admitted, is now inevitable?
Some more from Reuters:
While unexpected and unconventional, the Danish move underscores a commitment to its decades-long fixed currency policy and is aimed at weakening the crown to keep it within a tight range to the euro.
Pressure had been building on the crown since the Swiss National Bank abandoned its cap on Jan. 15, letting the franc surge against the euro, and the European Central Bank adopted a bond-buying scheme that helped weaken the euro more broadly.
"They have been successful with pushing the short rates down but not the longer rates and that has been the catalyst for continued inflow into the Danish asset market," Kamal Sharma, G10 FX Strategy Director at Bank of America Merrill Lynch, told Reuters.
"They are obviously looking at the full extent of the policy tool kit."
They sure are, and the central bank "now hopes that removing the option of buying new Danish government bonds will reduce demand for the crown while pushing investors towards existing longer-dated bonds, which would lower borrowing costs more broadly."
That's great, there is only one problem: what was until recently a "central bank put" has now become a "global speculator call" option. Why? Because the as the SNB just showed, there are very specific and defined limits to what banks with non-reserve currencies can do to defend their monetary policy. As a result, the Danmarks Nationalbank can thank its Swiss peers for not only crushing any hopes it may have of defending its currency peg, but essentially assuring that it will suffer massive losses on any and all strategies it implements to avoid a fate similar to that of the Swiss.
Which means one thing: in the aftermath of the EURCHF devastation, where virtually unilimited stops were triggered under 1.20 sending the pair some 30% lower in milliseconds as HFTs and other traders were carried out feet first, increasingly more speculators are betting that the "Trade of 2015" could be doing precisely the opposite of what the Danish central bank is hoping will happen: i.e., shorting the EURDKK (or going long the DKKEUR) in hopes that when the Danish peg finally does break, it too will result in long Swiss France-type profits.
Of course, those who bet against the Danish Central Bank also get the benefit of being hedged against further European risk implosion, because should the Greek situation deteriorate even more resulting in inflows into safe-haven currencies such as the CHF and DKK (now that Draghi will do everything in his power to crush the Euro), then the cost of defending the Danish peg will become insurmountable and Denmark will, like Switzerland, have no choice but to give all those who are now on the other side of the trade the profit that will make many speculators' year in the blink of an eye.
They say "don't fight the Fed", and in this case - at least until Janet Yellen capitulates on the Fed's stubborn insistence of pushing the USD every higher - this means explicitly to keep fighting the Danish Central Bank until its peg finally breaks.
Just as AAPL stock hits record highs and single-handedly rescues Q4 earnings from the doldrums, it appears President Obama is bringing his own brand of 'middle-class-economics' Robin-Hood-iness to crush the 'wealth generating' machine that has served America's 1% so well for so long. As AP reports, The White House plans a six-year half a trillion dollar public works program financed with a one-time mandatory tax on profits that U.S. companies have amassed overseas. Under current law, profits only face federal taxes if they are returned, or repatriated, to the US; but Obama's new deal would set a tax on accumulated foreign profits at 14% and due immediately as part of a broader administration plan to overhaul corporate taxes. Of course, with Republicans 'in charge', it is unlikely to pass as Paul Ryan blasted, "the president is trying exploit envy economics again," adding, "top-down redistribution doesn't work."
President Barack Obama's budget will propose an ambitious six-year, $478 billion public works program of highway, bridge and transit upgrades, half of it financed with a one-time mandatory tax on profits that U.S. companies have amassed overseas, White House officials said.
The proposal, one of the main components of the $4 trillion spending plan for the 2016 budget year that Obama will send to Congress on Monday, attempts to tap into bipartisan support for spending on badly needed infrastructure repairs and construction.
The tax on accumulated foreign profits would be set at 14 percent and due immediately. Under current law, those profits only face federal taxes if they are returned, or repatriated, to the U.S. where they face a top rate of 35 percent. Many companies avoid U.S. taxes on those earnings by simply leaving them overseas.
The foreign earnings tax would be part of a broader administration plan to overhaul corporate taxes by ending certain tax breaks and lowering rates, a challenging task that Obama and Republican congressional leaders insist they are poised to tackle this year.
Under Obama's plan, the top corporate tax rate for company profits earned in the U.S. would drop to 28 percent. While past foreign profits would be taxed immediately at the 14 percent rate, going forward new foreign profits would be taxed immediately at 19 percent, with companies getting a credit for foreign taxes paid.
"What I think the president is trying to do here is to, again, exploit envy economics," Republican Rep. Paul Ryan of Wisconsin, the new chairman of the tax writing Ways and Means Committee. "This top-down redistribution doesn't work."
This time, the budget will call for the one-time 14 percent mandatory tax on the up to $2 trillion in estimated U.S. corporate earnings that have accumulated overseas. That would generate about $238 billion, by White House calculations. The remaining $240 billion would come from the federal Highway Trust Fund, which is financed with a gasoline tax.
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So tax foreign cash and tax cheap gas...
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Perhaps most ironically - CNBC will now know what the "money on the sidelines" is waiting for... to pay taxes!!
We’ll cover day trading ideas, bond markets and macro events on ...
With the European Central Bank in QE mode, stocks should be catching a bid. Instead, they seem to be following commodities – down. But who knows? The situation is so crazy that only a disabled person could understand it.
Why do we say that?
Because a report released last week told us that one out of every three people on Social Security’s disability program is a mental defective. In Washington, DC, the rate of nuttiness among the disabled is even higher – 42%. No surprise there.
And just to show we’re not making this up, here’s the report from CNSNews.com:
“One in three, or 35.2%, of people getting federal disability insurance benefits have been diagnosed with a mental disorder, according to the latest data from the Social Security Administration (SSA).
Washington, DC, the seat of the federal government, ranked in the top-10 list of states where disabled beneficiaries were diagnosed with mental problems.
In 2013, the latest data from SSA show there were 10,228,364 disabled beneficiaries, up 139,625 from 2012 when there were 10,088,739 disabled beneficiaries.
Disabled beneficiaries have increased 49.7% from a decade ago in 2003 when there were 6,830,714 beneficiaries; and the number is up 14.3% from the 8,945,376 beneficiaries in 2009, the year President Obama took office.”
Who better to understand what is going on in the financial world than a crazy person? Fortunately, America’s zombies are going crazy in ever-greater numbers.
Young person preparing to understand the markets
Look, central banks are using money they don’t have to buy “assets” – usually government IOUs (bonds) – from banks and other financial institutions such as pension funds. In other words, liabilities of governments, at whose whistle the central banks wag their tails.
They also happen to be liabilities that governments have no intention of honoring. That is why central banks are buying them: to suppress yields (and therefore governments’ debt service costs) and to drive up inflation (thereby reducing the value of the outstanding debt). Are you following, dear reader?
European governments – as well as those in North America and Japan – are finding it increasingly difficult to keep up with their promises – especially their promises to zombies… oops… we mean old people. All over the developed world, health care and pension programs are underfunded… or completely unfunded. Economies are slowing. Citizens are aging.
Zombie populations (people who live at others’ expense – some disabled … some crazy … and some very clever people) are multiplying. And if government-debt-to-GDP tests were administered like highway Breathalyzers, they’d be way over the limit.Negative Yields
You see, it’s the private sector that ultimately pays the bills. In France, for example, the private sector is only about 40% of the economy. The rest is government.
But the shrinking French private sector has to carry the weight of government spending… as well as government debt that is more than twice its size (90% of GDP). But here’s the really crazy thing: France’s government debt trades at the highest prices in history… so high the yields are negative after you factor in inflation.
The French 10-year sovereign bond yields all of 0.5%. Over the last five years, consumer price inflation has averaged between 1.5% and 2%. Conclusion: Either inflation is going a lot lower, and will stay there for years, or investors are going to lose money.
There is $4.6 trillion of government debt in this negative-yield category. And so along comes the central bank bidding driving yields down further! Have we ever seen anything like it? Not that we can think of. The ECB is buying assets at record prices. And to what end? To drive prices even higher!
French 2-year government bond yields have turned negative as well – click to enlarge.
Back in the US, many Diary readers have written to protest. They may be on the list of Social Security recipients. But they are not zombies, they tell us. They paid into the fund for many years (as we did). They earned the money honestly. And Social Security is just a pension plan in which they were, often unwilling, participants.
So hold the “zombie” badge for someone else! Yeah. Yeah. We turn to Google. We type: “social security unfunded liabilities.” What do we find? Here’s a report from 2013, again from CNSNews.com:
“The Social Security program faces $9.6 trillion in unfunded liabilities over the next 75 years, which is up $1 trillion from last year’s projection of $8.6 trillion, according to the latest report from Social Security’s board of trustees.
The unfunded liability is the amount that has been promised in benefits to people now alive that will not be funded by the tax revenue the system is expected to take in to pay for those benefits. (The Social Security trustees calculate the unfunded liability for a period of 75 years into the future, from 2012 to 2087.)”
How can Social Security’s honest pension fund participants expect to get almost $10 trillion more than they put in? How can governments facing that kind of obligation borrow at less than the rate of inflation? How can central banks put a $1.3 trillion bid under the priciest bond market in history?
Go figure. Maybe the fruitcakes in Washington can make sense of it.
Slightly dated numbers from a Heritage Foundation report on social security deficits to come – these figures have now worsened once again …
With all eyes on China as the great Eastern hope for putting a floor under crude oil prices, last night's dismally disappointing Manufacturing PMI print looks set to remove that last pillar of 'demand' - artificial or not. Having fallen 6 months in a row and printing 49.8, missing expectations of 50.2 (3rd of last 4 months) and down from the prior 50.1, this is the first official contractionary signal for Chinese manufacturing since September 2012. With Industrial Enterprises in China seeing profits collapse at 8% YoY along with the slowest GDP growth (7.3% of magic unicorns and credit expansion) since Q1 2009, the PMI components' broad-based weakness show significant signs of a cyclical slowdown. What is perhaps most worrisome though is that with cries for more RRR cuts or government-sponsored largesse, the banking system has, it appears, become the new focus of the nation's corruption probes as the President of China Minsheng Bank was taken away by the Communist Party’s Central Commission for Discipline Inspection.
Triple Whammy of Chinese ugliness...
And now, Chinese Manufacturing PMI prints contractionary 49.8...
As Goldman Sachs notes,
January official PMI data was weak. Most sub-components showed signs of cyclical slowdown. The most important sub-indexes (production and new orders) both clearly softened (production decreased to 51.7 from 52.2 in December, and new orders moderated to 50.2 from 50.4). The only exception was backlog of orders which inched up to 44.0 from 43.8. These signals are inconsistent with the flash reading of the HSBC manufacturing PMI which rebounded in January (its final reading is to be released tomorrow 9:45 AM).
The fall in the official PMI is consistent with our expectations that 1Q growth will likely be weak. As the official PMI is viewed as more important by the government, the likelihood of further loosening measures has increased further.
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And while the calls for rate cuts and broad-based government bailoyts will grow stronger from this - despite the governnment's insistence that they will not embark on a broad-based credit expansion program - it appears the transmission mechanism for any such release of money is coming under signficant scrutiny... (as Bloomberg reports)
China Minsheng Banking Corp. said its President Mao Xiaofeng resigned for personal reasons after Caixin magazine reported that authorities had taken him to assist with an investigation.
Mao, who was appointed president last August, didn’t have any disagreement with the board, the Beijing-based bank said in a statement to the Shanghai Stock Exchange Saturday. The board accepted Mao’s resignation and appointed Chairman Hong Qi as acting president, it said in the statement.
Minsheng has taken note of reports on Mao, whose situation has nothing to do with Minsheng’s operations, the lender said in a statement earlier today. Mao’s mobile was turned off when called by Bloomberg News today. He was taken away by the Communist Party’s Central Commission for Discipline Inspection and removed as party secretary by the banking regulator, according to Caixin.
Minsheng’s comment and the Caixin report come amid President Xi Jinping’s crackdown on graft, described by state media as the harshest since the republic’s founding in October 1949. The campaign has spanned businesses, the military, and officials such as Zhou Yongkang, a former member of the Politburo Standing Committee, and Ling Jihua, who was a top aide of retired president Hu Jintao.
Turning 43 this year, Mao is the youngest president of a listed Chinese bank, according to Caixin. The president of a Chinese lender is the equivalent of a chief executive officer at a U.S. bank.
Mao is a graduate of Harvard University, where he completed a masters degree in public administration in 2000, according to a company profile.
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On the one hand, I’ve written so much about Greece lately I fear I’m reaching overkill. On the other hand, there’s so much going on with Greece, and so fast, that I wouldn’t know here to begin. Moreover, I’m thinking and trying to figure what is what and what is actually happening so much it’s hard to stay focused for more than a short while before something else happens again and it all starts all over. And I’m thinking it must feel that way for the Syriza guys as well.
One thing I do increasingly ponder is that it gets ever harder to see the eurozone survive. In its present shape and form, that is. Damned if you do, doomed if you don’t, is an expression I’ve used before. It’s like this big experiment that a bunch of power hungry Europeans really get off on, that now all of a sudden is confronted with the democracy they all only thought existed in books of history anymore.
But if you take your blind hunger far enough to kill people, or ‘only’ condemn them to lives of misery, they will eventually try to speak up, even if not nearly soon enough. It’s like a law of physics, or like Icarus in, yes, Greek mythology: try to reach too high, and you’ll find you can’t.
What is Brussels supposed to do now? Throw Athens off a cliff? Not respect the voice of the Greek people? That doesn’t really rhyme with the ideals of the union, does it? If they want to keep the euro going, they’re going to have to give in to a probably substantial part of what Syriza is looking for. Or Greece will leave the eurozone, and bust it wide open, exposing its failures, its lack of coherence, and especially its lack of democratic and moral values.
The problem with giving in, though, is that there are large protest demonstrations in Spain and Italy too. Give anything at all to Greece, and the EU won’t be able to avoid giving it to others as well. And by then you’re talking real money.
They called it upon themselves. They got too greedy. They thought those starving Greek grannies would not be noticed enough to derail their big schemes. That claiming “much progress has been made”, as Eurogroup head Dijsselbloem did again this week, would be considered more important than the fact that an entire eurozone member nation has been thrown into despair.
That’s a big oversight no matter how you put it. The leadership can be plush and comfy in Berlin, Paris, Helsinki, but that doesn’t excuse them sporting blinders. And now they know. Or, let’s say, are beginning to know, because they still think they can ‘win this battle’, ostensibly with the aim of deepening the Greek misery even further, while continuing to proclaim that “much progress has been made”.
Not very smart. At least that much is obvious. But what else is? Greek Finance Minister Varoufakis declares in front of a camera that Greece ever paying back its full debt is akin to the Santa Claus story. Less than 24 hours later, PM Tsipras says of course Greece will pay back its debt. Varoufakis lashed out about Syriza not being consulted on EU sanctions against Russia, but shortly after their own Foreign Minister was reported to have said he reached a satisfactory compromise on the sanctions with his EU peers.
Discontent, confusion, or something worse, in the ranks? Hard to tell. What we can tell, however, is that the obvious discomfort with Dijsselbloem, Draghi, and the entire apparatus in Brussels – and Frankfurt – is a fake move. Either that or it’s only foreplay. If Yanis and Alexis want to get anywhere, they’ll need to take on Wall Street and its international, American, French, German, TBTF banks, primary dealers. And if there’s one thing those guys don’t like, it’s democracy.
Syriza is not really up against the EU or ECB, or the Troika, that’s a sideshow. They’re taking the battle to the IMF, a sort of silent partner in the Troika, and the organization that rules the world for the rich and the banks they own. And that, if they had paid a bit more attention and a bit less hubris, could have gone on the way they have, small squeeze after small squeeze, without hardly anyone noticing, until the end of – this – civilization. But no. It had to be more.
It’s going to be a bloody battle. And it hasn’t even started yet. But kudos to all Greeks for starting it. It has to be done. And I don’t see how the euro could possibly survive it.