Category: zerohedge

In the upcoming week, the key event is the US FOMC, though we and the consensus do not expect any key decisions to be taken. Though a strengthening of forward guidance is still possible, virtually nobody expects anything of import to be announced until the Dec meeting. In the upcoming week we also have five more central bank meetings in addition to the FOMC: Japan, New Zealand, India, Hungary and Israel. In Hungary we, in line with consensus, expect a 20bps cut to 3.40% in the policy rate. In India consensus expects a 25bps hike in the repo rate to 7.75%.

On the data front, US IP, retail sales and pending home sales are worth a look, but the key release will be the ISM survey at the end of the week, together with manufacturing PMIs around the world. US consumer confidence is worth a look, given the potential impact from the recent fiscal tensions.

A few other selected data releases are worth some attention. For example the latest Turkish trade numbers are relevant in the context of large external deficits in that country. Japanese wage data are interesting given the BoJ attempt to change inflation expectations. Finally, the Korean trade data will be the first hard data released globally for the month of October.

Monday, Oct 28

• Israel MPC: GS and consensus have policy rate unchanged. The housing boom continues to be a constraint on further monetary easing and a rate cut will arguable only have a limited impact on the exchange rate at this point.
• Australia RBA Governor speaks
• US IP (Sep): Consensus +0.4%, previous +0.4%
• US Pending Home Sales (Sep): Consensus -0.2%, previous -1.6%
• Japan Retail Sales (Sep): Cconsensus +1.8%yoy, previous +1.1%yoy
• Japan Household Spending (Sep): Consensus +0.5%yoy, previous -1.6%yoy
• Japan Unemployment Rate (Sep): Consensus 4.0%, previous 4.1%
• South Korea CA Balance (Sep): previous $+6.8bn
• Also interesting: Italy Business Confidence (Oct), Ukraine CA Balance (Q3)

Tuesday, Oct 29

• India MPC: consensus expects a hike of 25bps in repo and reverse repo rates to 7.75% and 6.75% respectively and has cash reserve ratio unchanged at 4.00%.
• Hungary MPC: Consensus expect a cut of 20bps to 3.40% in the policy rate
• US Consumer Confidence (Oct): Consensus 75.0, previous 79.7
• US PPI (Sep): Consensus +0.2%, previous +0.3%
• US Retail Sales (Sep): Consensus +0.1%, previous +0.2%
• US S&P Case Shiller Home Price Index (Aug): consensus +0.5%, previous +0.6%
• Japan IP (Sep): Consensus +1.8%mom, previous -0.9%mom
• Germany GFK Consumer Survey (Nov): previous +7.1
• France Consumer Confidence (Oct): previous 85
• South Korea IP (Sep): Previous +3.3%yoy
• Also interesting: UK Consumer Credit (Sep) and Mortgage Approvals (Sep)

Wednesday, Oct 30

• US FOMC: GS and consensus expect no change in monetary policy tools
• New Zealand MPC: Consensus have policy rate unchanged at 2.50%.
• US ADP Employment Change (Oct): consensus 160K, previous 166K
• US CPI (Sep): Consensus +0.2%, previous +0.1%
• Euro Area Consumer Confidence (Oct, final): consensus -14.5, previous -14.5 (flash)
• Germany Harmonized CPI (Oct, flash): previous +1.6%yoy
• Germany Unemployment Change (Oct): consensus flat, previous +25K
• Brazil IGP-M Inflation (Oct): GS +5.40%yoy, consensus +5.32%yoy, previous +4.40%yoy
• Also interesting: Ukraine GDP (Q3, prelim.), Spain GDP (Q3) and CPI (Oct, flash)

Thursday, Oct 31

• Japan MPC: GS and consensus expects no change in monetary policy stance. We also expect a small upward revision to growth in the published bi-annual outlook report
• Japan Total Cash Wages (Sep). GS -0.6%yoy, consensus -0.3%yoy, previous -0.9%yoy
• US Initial Jobless Claims: consensus 340K, previous 350K
• US Chicago PMI (Oct): GS 55.0, consensus 55.0, previous 55.7
• Euro Area Harmonized CPI (Oct, flash): GS +1.1%yoy, consensus +1.1%yoy, previous +1.1%yoy
• UK GFK Consumer Confidence (Oct): consensus -8, previous -10
• South Africa Trade Balance (Sep): consensus ZAR-16.0bn, previous ZAR-19.1bn
• Turkey Trade Balance (Sep): consensus $-7.30bn, previous $-7.02bn
• Thailand CA Balance (Sep): previous $+1.3bn
• Taiwan GDP Advance (Q3): consensus +2.5%yoy, previous +2.5%yoy
• South Korea CPI (Oct): Consensus +1.0%yoy, previous +0.8%yoy
• Also interesting: Australia Building Approvals (Sep) and Private Sector Credit (Sep), France Consumer Spending (Sep), Hungary Trade Balance (Aug, final), Switzerland FX Reserves (Q3)

Friday, Nov 1

• US Fed Speakers: Bullard (FOMC voter), Kocherlakota (non-voter), Lacker
• US ISM Survey (Oct): Consensus 55.0, previous 56.2
• US Motor Vehicles Sales (Oct)
• China PMI (Oct): Previous 51.5yoy
• UK Manufacturing PMI (Oct): consensus 56.4, previous 56.7
• Brazil Trade Balance (Oct): Consensus $+1.35bn mom, previous $+2.15bn mom
• Sweden Manufacturing PMI (Oct): consensus 54.5, previous 56.0
• Czech Republic Manufacturing PMI
• Switzerland Manufacturing PMI (Oct)
• Indonesia Trade Balance (Sep): consensus $-48mn yoy, previous $+132mn yoy
• Thailand CPI (Oct): GS +1.4%yoy, consensus +1.5%yoy, previous +1.4%yoy
• Also interesting: Mexico Workers Remittances (Sep), Peru CPI (Oct), South Korea Trade Balance (Oct), Russia Manufacturing PMI (Oct)

And from SocGen, a summary of the key investor issues:

NO FED TAPER … BUT BETTER DATA

We expect to see no change from the 28-29 October FOMC. Better data, however, will be a reminder to markets that Fed taper is delayed, not cancelled. We look for a 0.7% mom gain in September industrial production and while the headline retail sales number is likely to clock in at a fairly moderate 0.2% mom, ex-autos we look for 0.9%. We put the odds of a December tapering announcement at 5%, January at 30% and March at 60%.

BOJ HOPING FED WILL TAPER SOONER…

The BoJ presents new growth and inflation forecasts at this week’s meeting and our expectation is that there will be little change. Recent yen appreciation, however, presents a challenge to the BoJ. The BoJ is already purchasing around 70% of JGB issuance and the concern is that this is close to the limit of what is feasible. No doubt, the BoJ is hoping that the Fed will taper sooner rather than later, allowing the yen to resume a depreciation path. At that time, the BoJ could hope that even a small increase in its asset purchases (most likely to be ETFs) could have a greater impact. This week, however, we expect the BoJ to remain on hold and  keep its powder dry.

…RBI THAT IT WON’T!

The delay of Fed tapering has allowed the INR to stage an appreciation of 10% against the US dollar from recent lows. This is helpful to the RBI, facing a near stagflation situation of runaway inflation and slowing growth. We expect the RBI to take this window of opportunity and hike rate 25bp on Tuesday (and perhaps even 50bp). Our expectation that the Fed will taper in Q1 means that any respite for the INR is likely to prove short-lived. Moreover, weak domestic data will mark an additional headwind. Ultimately, it is up to the government to implement desperately needed supply side reforms. The hope is that after the spring 2014 general election, the next government will indeed deliver.

CHINA POLICY TIGHTENING CREEPING BACK

< p>We expect the official manufacturing PMI to decline to 50.8 from 51.1 in September. Interestingly, policy appears to be shifting back to risk management; the PBoC has withdrawn liquidity for two weeks and big cities are tightening restrictions on the property market again.

ECB LENDING SURVEY TO SHOW SLOW REPAIR

The ECB’s quarterly bank lending survey (Wednesday) is set to confirm an only very gradual improvement of the financial fragmentation still plaguing the periphery. As we detailed last week in our new Focus Banking Union report, we see significant potential wins from banking union. Last week, the ECB presented the comprehensive assessment that will pave the way for the Single Supervisory Mechanism (SSM) to come into effect in November 2014. An effective European Banking Union requires that the Single Resolution Mechanism (SRM) also be in place. The hope is to have this in place before the current legislative period ends as the European Parliament heads to elections in May 2014

Source: Goldman, SocGen

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/YvEDhINA0Rs/story01.htm Tyler Durden

Just as it is easy being a weatherman in San Diego (“the weather will be… nice. Back to you“), so the same inductive analysis can be applied to another week of stocks in Bernanke’s centrally planned market: “stocks will be… up.” Sure enough, as we enter October’s last week where the key events will be the conclusion of the S&P earnings season and the October FOMC announcement (not much prop bets on a surprise tapering announcement this time), overnight futures have experienced the latest off the gates, JPY momentum ignition driven melt up.

There was not much in terms of newsflow: in China SHIBOR rates continued to creep up, albeit more slowly, with the O/N and 1 Week rates barely changed, however the 2 Week Shibor got the bulk of the upward brunt rising 53.4 bps as concerns about when the PBOC will proceed with another reverse repo liquidity injection mount. The lack of enthusiasm was evident in the SHCOMP which was up 0.04% following last week’s drubbing even if the Baltic Dry, which has now entered a bear market, indicates more liquidity driven pain may be in stock. Elsewhere in Japan, on the one year anniversary of Abenomics, where the only “improvements” are the plunging Yen and purchasing power, soaring energy and food input costs, and of course, a rising Nikkei225 offset by stagnant and declining wages,  the Nikkei rose on the follow through of Friday’s US meltup and was up 2.19% nearly offsetting all of Friday’s 2.75% losses.

Not much news out of Europe either, where the only notable development was Italian business confidence which rose to 97.3 on expectations of a 96.0 print, a two year high. At the same time the 1Y1Y Eonia jumped to as much as 39.14 bps from 37.5 bps as the ECB’s excess liquidity continued to drop and touched its lower level since December 2011. At this point – and with the EURUSD at an export-busting 2 years high as well – it will soon be incumbent on Draghi to start jawboning for more liquidity and a lower Euro as happened early in the  year.

On the US docket, we have the NAR’s pre-adjustment pending home sales data, as well as September’s delayed Industrial production. On the micro side, about a quarter of the S&P 500’s market cap are due to report this week including a number of heavy weights such as Exxon Mobil, Berkshire Hathaway, Chevron, General Motors and ConocoPhillips, with Apple set to print after the close today.

Market Recap from Bloomberg and RanSquawk

• Treasuries steady before week’s auctions begin with $32b 2Y notes today, FOMC two-day policy meeting begins tomorrow; 10Y yields have held near 2.50% level after last week’s weak payrolls data pushed Fed taper expectations to at least March 2014.
• 2Y notes to be sold today yield 0.325% in WI trading; drew 0.348% in September. June’s stopout of 0.43%, which came amid expectations for  imminent taper announcement, was highest since May 2011
• The Bank of Japan will continue to buy bonds until it achieves its 2% inflation target as the country’s monetary and fiscal policies are at a critical point for ending deflation, Deputy Governor Iwata said yesterday
• Japan’s Abe warned he wouldn’t permit China to use force to resolve territorial spats, as the renewed presence of Chinese aircraft near disputed islands led its neighbor to dispatch fighter jets
• China’s yuan traded within 0.1% of its 20-year high on speculation the PBOC is allowing the currency to strengthen to curb inflation
• Britain risks repeating the debt-fueled binge that led to the credit crisis as the government relies on a hair-of-the- dog remedy for the economy, said former Financial Services Authority Chairman Adair Turner
• The troubled roll-out of the Obama administration’s health- care overhaul faced mounting problems when a key computer service failed yesterday, two days after the government said its insurance exchange website would take another month to function smoothly
• Sovereign yields mostly higher, EU peripheral spreads tighten. Nikkei +2.2%, leading Asian equities higher; European stocks mostly higher, U.S. equity-index futures rise. WTI crude, gold and copper gain

Deutsche Bank’s Jim Reid concludes the overnight round up:

We’re set for a deluge of another kind this week as data blows in from all corners as we enter the last few days of the month and play catch-up from the US shutdown. Payrolls won’t come out on the first of the month though (which it usually would this Friday) and has been delayed a week. Outside of the data, we also have a Fed meeting that should be relatively uneventful but there’s always scope for the nuance of the statement to change. Indeed, the statement will be all there is this month in the absence of a post-meeting press conference from Bernanke.

Asian equities have started the week on the front foot. The strong close to US trading on Friday, where the S&P500 forged another record high, is helping sentiment this morning. The Nikkei (+1.8%) is erasing most of it’s losses from last Friday when it closed down 2.75%. We’re also seeing firmer sentiment across the Hang Seng (+0.5%) and KOSPI (+0.4%). Elsewhere Chinese interbank rates continue to climb, rising to 5.03% today or an increase of 40bp, but still remain well below the spike seen in June. Chinese A-shares are underperforming again this morning (-0.6%). On a longer time scale, Chinese A-shares are one of the only major Asian equity markets, together with India, which are still trading in negative territory on a YTD basis.
Continuing with China, as we mentioned on Friday, there has been increasing chatter of wide-spread financial and economic reforms being explored in advance of next month’s 3rd plenary meeting of the Chinese government, and this was repeated by both government officials and domestic media over the weekend. In the FX market, both USDJPY and AUDUSD are higher to start the week, the former helped by BoJ deputy governor Iwata who reiterated the central bank’s commitment to achieve its inflation targets. As we go to print, US 10yr yields are a touch higher (+1bp) at 2.52% reflecting the stronger risk sentiment to start the week.

This week’s unusually heavy US data docket starts with September industrial production and pending home sales later today. This will be followed tomorrow by September retail sales, PPI and the conference board’s consumer confidence index for October. While we won’t be getting payrolls this week, the ADP employment report on Wednesday will provide an important indicator of hiring activity. The September CPI report and FOMC’s  post-meeting policy statement are also scheduled for Wednesday. Delving deep into the latter half of the week, initial jobless claims and the Chicago PMI for October will be the  main focus on Thursday. The latter may show the extent of slowdown in manufacturing activity as a result of the government shutdown, as may the ISM manufacturing report for October which is due on Friday. Fed officials will exit blackout the day after the FOMC meeting when Bullard, Kocherlakota and Lacker are due to speak at various forums. On the micro side, about a quarter of the S&P 500’s market cap are due to report this week including a number of heavy weights such as Apple, Exxon Mobil, Berkshire Hathaway, Chevron, General Motors and ConocoPhillips. More than US$90bn of 2s/5s/7s treasury supply is scheduled across the week.

Something to also look out for this week is the re-opening of congressional budget talks in the US via the convening of the bipartisan House-Senate budget committee on Wednesday. The committee is due to report back to Congress by December 13th on a budget resolution. Democrats are seeking  to boost spen
ding higher than the $967 billion sequestration level that goes into effect early in 2014. Senate Majority Leader Harry Reid and other top Democratic leaders refuse to trade sequestration cuts, for cuts to other spending programs, such as Medicare or Medicaid — unless Republicans agree to raise revenue.

In Europe, we have a lighter data schedule this week. French consumer confidence and retail sales are due out tomorrow, followed up by Spanish Q3 GDP (where a gain is expected by the market in Q3 after 9 consecutive falls) and German unemployment on Wednesday. Eurozone unemployment and inflation data are due on Thursday. In Germany, Merkel’s CDU bloc will continue talks with the Social Democrats with the aim of forming a coalition government. The bond market will also see new supply in the form of Italian 10yr linkers (today) and new 5/10yrs (Wednesday) throughout the week. About one-fifth of the Stoxx600 will report earnings this week including a number of the large financial institutions such as UBS, Barclays and RBS. We may hear more about the potential for a split of RBS between a good bank and a bad bank which have been widely discussed by the financial media during recent weeks. Staying in the UK, a speech from the BoE’s Mark Carney is scheduled for Thursday.

In Asia, China’s official manufacturing PMI reading is the major data release (Fri) together with the final HSBC manufacturing PMI the same day. Consensus is expecting the official PMI to increase by 0.1pt to 51.2. In Japan, the BoJ’s monetary policy meeting is scheduled for Thursday. Data releases include employment, retail sales (Tues) and industrial production (Wed). So a fairly busy week.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/ry5nZQsafeI/story01.htm Tyler Durden

“…There’s only one thing left to do now, gentlemen… Let’s find a way to blame Bush.”

 

 

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/Ivvdtq98udo/story01.htm Tyler Durden

The Obama administration, which has a spotless track record in taking credit for everything that goes right (all of which is thanks to Bernanke’s flooding the world with record liquidity as when the No Free Lunch bill comes due, it will be some other president’s clean up), has an even more impeccable history of deflecting responsibility for all that goes wrong.

Most recently, it was the horrific rollout of Obamacare which as we observed earlier in the week, was all “someone else’s fault” but certainly not the government’s. Now, as the Snowden whistleblowing scandal has found its third (or fourth) wind courtesy of a furious international response following revelations that Obama was listening in to Merkel and at least 34 other world leaders’, it is time for perhaps the most stunning revelation of all: you see, Obama is shocked, shocked to learn that cell phone spying – of virtually everyone on the planet – is going on in here.

From the WSJ:

The White House cut off some monitoring programs after learning of them, including the one tracking Ms. Merkel and some other world leaders, a senior U.S. official said. Other programs have been slated for termination but haven’t been phased out completely yet, officials said. 

 

The account suggests President Barack Obama went nearly five years without knowing his own spies were bugging the phones of world leaders. Officials said the NSA has so many eavesdropping operations under way that it wouldn’t have been practical to brief him on all of them.

 

They added that the president was briefed on and approved of broader intelligence-collection “priorities,” but that those below him make decisions about specific intelligence targets.

 

The senior U.S. official said that the current practice has been for these types of surveillance decisions to be made at the agency level. “These decisions are made at NSA,” the official said. “The president doesn’t sign off on this stuff.” That protocol now is under review, the official added.

 

NSA spokeswoman Vanee Vines said NSA based its operations on priorities set across the U.S. government. “The agency’s activities stem from the National Intelligence Priorities Framework, which guides prioritization for the operation, planning and programming of U.S. intelligence analysis and collection,” she said.

 

The administration didn’t end all operations involving world leaders following this summer’s revelations because some of the programs are producing intelligence of use to the U.S.

Time to throw the low-cost alternative:  where besides every single bank in the past 5 years have we seen this model? But more importantly, as so many were predicting, five years of zero knowledge means… it was all Bush’s fault again!

Which after seeing the following snapshots from 2006, makes some sense.

It makes just as perfect sense that supposedly mid-level janitors decide which leaders of the free and not so free world they will decide to eavesdrop on without even informally informing the president.

It makes even greater sense that a government which is desperately strapped for money, can spend billions on wiretaps in Spain, where El Mundo reports, the NSA monitored 60.5 million Spanish phone calls between December 2012 and January 2013.

Because when in doubt, spend taxpayer money when not even the president has any idea why the entire world is suddenly quite angry with him and America. And then panic when the government shutdown results in the furlough of thousands of spies otherwise busy eavesdropping on Frau Merkel.

But going back to the original point: with just under 3 years to go in his term, an economy that is foundering and which not all the moneyprinting in history can offset the inevitable, a budget deficit that depsite recent dips is still the largest until 2008, does Obama actually have any idea what the US Government is spending money on, or is his daily teleprompted address the only thing that Obama actually has a hand in.

As for the punchline: remember when Obama said he would have disclosed all the Snowden revelations anyway? That is now in the running for funniest phrase of the year.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/4W417Q9EdWA/story01.htm Tyler Durden

The Obama administration, which has a spotless track record in taking credit for everything that goes right (all of which is thanks to Bernanke’s flooding the world with record liquidity as when the No Free Lunch bill comes due, it will be some other president’s clean up), has an even more impeccable history of deflecting responsibility for all that goes wrong.

Most recently, it was the horrific rollout of Obamacare which as we observed earlier in the week, was all “someone else’s fault” but certainly not the government’s. Now, as the Snowden whistleblowing scandal has found its third (or fourth) wind courtesy of a furious international response following revelations that Obama was listening in to Merkel and at least 34 other world leaders’, it is time for perhaps the most stunning revelation of all: you see, Obama is shocked, shocked to learn that cell phone spying – of virtually everyone on the planet – is going on in here.

From the WSJ:

The White House cut off some monitoring programs after learning of them, including the one tracking Ms. Merkel and some other world leaders, a senior U.S. official said. Other programs have been slated for termination but haven’t been phased out completely yet, officials said. 

 

The account suggests President Barack Obama went nearly five years without knowing his own spies were bugging the phones of world leaders. Officials said the NSA has so many eavesdropping operations under way that it wouldn’t have been practical to brief him on all of them.

 

They added that the president was briefed on and approved of broader intelligence-collection “priorities,” but that those below him make decisions about specific intelligence targets.

 

The senior U.S. official said that the current practice has been for these types of surveillance decisions to be made at the agency level. “These decisions are made at NSA,” the official said. “The president doesn’t sign off on this stuff.” That protocol now is under review, the official added.

 

NSA spokeswoman Vanee Vines said NSA based its operations on priorities set across the U.S. government. “The agency’s activities stem from the National Intelligence Priorities Framework, which guides prioritization for the operation, planning and programming of U.S. intelligence analysis and collection,” she said.

 

The administration didn’t end all operations involving world leaders following this summer’s revelations because some of the programs are producing intelligence of use to the U.S.

Time to throw the low-cost alternative:  where besides every single bank in the past 5 years have we seen this model? But more importantly, as so many were predicting, five years of zero knowledge means… it was all Bush’s fault again!

Which after seeing the following snapshots from 2006, makes some sense.

It makes just as perfect sense that supposedly mid-level janitors decide which leaders of the free and not so free world they will decide to eavesdrop on without even informally informing the president.

It makes even greater sense that a government which is desperately strapped for money, can spend billions on wiretaps in Spain, where El Mundo reports, the NSA monitored 60.5 million Spanish phone calls between December 2012 and January 2013.

Because when in doubt, spend taxpayer money when not even the president has any idea why the entire world is suddenly quite angry with him and America. And then panic when the government shutdown results in the furlough of thousands of spies otherwise busy eavesdropping on Frau Merkel.

But going back to the original point: with just under 3 years to go in his term, an economy that is foundering and which not all the moneyprinting in history can offset the inevitable, a budget deficit that depsite recent dips is still the largest until 2008, does Obama actually have any idea what the US Government is spending money on, or is his daily teleprompted address the only thing that Obama actually has a hand in.

As for the punchline: remember when Obama said he would have disclosed all the Snowden revelations anyway? That is now in the running for funniest phrase of the year.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/4W417Q9EdWA/story01.htm Tyler Durden

Submitted by Steen Jakobsen, CIO Saxo Bank (via Trading Floor.com),

I’ve been starting my speeches for some time now by saying: “I am the most optimistic I have been in almost thirty years in the market—if only because things can’t get any worse.”

Is that true, and more importantly, how do we get a fundamental change away from this extend-and-pretend which prevails not only in Europe but also the world?

History tells us that we only get real changes as a result of war, famine, social riots or collapsing stock markets. None of these is an issue for most of the world—at least not yet—but on the other hand we have never had less growth, worse demographics, or higher unemployment since WWII. This is a true paradox that somehow needs to be resolved, and quickly if we are to avoid wasting an entire generation of European youth.

---

^{The West's central banks' policies are akin to Soviet-style central planning. Photo: Eugene Ivanov}

---

Policymakers try to pretend we have achieved significant progress and stability as the result of their actions, but from a fundamental point of view that’s a mere illusion. Italian banks today own more government debt than before the banking crisis, leaving them systematically more exposed to their own government, not less. The spread on government bonds between Germany and Club Med is down below historic averages, but the price has been a total suspension of the “price discovery” of money.

The price discovery of money is the cruel capitalistic part of any system. An economics  textbook would call it the modus operandi by which capital is allocated where it can find the highest marginal utility. In practice, this should mean that the market dictates the price of money beyond one year—while at durations of less than one year, the central banks determine the price of money. The beauty of the system is that money is allocated in an auction where the highest bidder for “money” or “credit” gets filled on the price he or she deems to match his expected price of money.

Contrast the market-driven model with the present “success story” of relatively low sovereign spreads in Europe, which are driven by the European Central Bank president Mario Draghi’s promise to do "whatever it takes" to keep the euro out of trouble. He has threatened to activate the European Financial Stability Facility and the European Stability Mechamism plus the full arsenal of policy tools to ensure stability.

By doing so, he has effectively suspended price discovery for sovereign debt and for money, as the ECB and local central banks will provide infinite liquidity to local banks and hence indirectly to their government in any market conditions. This one-sided offer from the ECB and the market means there is no power to discipline the government with higher rates or to allocate credit more generally. We have simply disconnected the market and the price of money.

This comes after Draghi’s longer-term refinancing operation, a cheap funding for banks with little or no collateral, or the closest thing to quantitative easing you can have without calling it quantitative easing.

This is a problem because corporations that need to finance long-term projects, like building a power station over six to eight years, need a price for the credit they require throughout the building period. Right now they have an almost flat yield curve from zero to 30 years, which would be fine if it were realistic. But the problem is that one day in the “distant future” when the market normalises, interest rates should revert to their normal price, which is roughly inflation plus a risk premium.

In the case of an industrial company, an appropriate loan rate calculation could be something like: inflation plus Libor plus a risk spread, which might work out to about seven percent. Compare this with the rates available for highly creditworthy companies. Recently, Nestle  was able to issue a four-year corporate bond at 0.75 percent—the lowest ever. Yes, it’s nice for Nestle but remember the situation is created by the central banks presence in the market, not just due to the financial strength of Nestle.

A move from less than one percent to seven percent would administer an ugly shock to companies.  We have created a negative vicious circle in which not only investors, but also companies are depending on low interest rates forever. They have priced their future earnings and costs on government support prices rather than on realistic market prices.

The worst thing about the situation, however, is that the reason a blue chip company like Nestle can borrow at less than one percent in the capital market is the lack of alternatives for banks and investors. Less creditworthy small and medium enterprises (SMEs) which make up as much as 80 percent of many countries’ economies are not allowed to borrow. They are deemed too risky to lend to at the current “market rates” even though they hold the key to improving the employment and productivity picture.

They are willing to work cheaper, longer, harder and with higher risk tolerance in order to survive. So the remaining 20 percent of the economy occupied by large and publicly listed companies and banks gets 95 percent of all credit and 99 percent of all political capital. In other words, blue chips receive artificially low interest rates only because the SMEs don’t get any credit. Herein lies my continued belief in the my traditional opening statement: things must get better soon because they can hardly get any worse.

We have never been in a more dysfunctional state at the corporate, political and individual level in history. It’s time to realise that the reason capitalism won the war against communism in the 1980s was its strong market based economy—itself based on price discovery. Now the policymakers in their “wisdom” are copying everything a planned economy entails: central planning and control, no price discovery, one supplier of credit, money and the corollary effect of suppressing SMEs and even individuals.

Finally, history offers a compelling lesson: the last time the Federal Reserve engaged in a sizeable quantitative easing was in the 1940s. The low growth and falling inflation only reversed when the Federal Reserve stopped intervening due to a severe recession brought on by the policy mistakes of keeping QE in place too long.

In 2014, a bout of near or real recession in Germany and the US could kick start the price discovery mechanism again, which will help us to start healing the deep wounds left by years of policymakers compounding their errors with round after round of extend-and-pretend. Getting to the bottom is good in one sense: the only way is up.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/1IGfps1Fawg/story01.htm Tyler Durden

Submitted by Steen Jakobsen, CIO Saxo Bank (via Trading Floor.com),

I’ve been starting my speeches for some time now by saying: “I am the most optimistic I have been in almost thirty years in the market—if only because things can’t get any worse.”

Is that true, and more importantly, how do we get a fundamental change away from this extend-and-pretend which prevails not only in Europe but also the world?

History tells us that we only get real changes as a result of war, famine, social riots or collapsing stock markets. None of these is an issue for most of the world—at least not yet—but on the other hand we have never had less growth, worse demographics, or higher unemployment since WWII. This is a true paradox that somehow needs to be resolved, and quickly if we are to avoid wasting an entire generation of European youth.

---

^{The West's central banks' policies are akin to Soviet-style central planning. Photo: Eugene Ivanov}

---

Policymakers try to pretend we have achieved significant progress and stability as the result of their actions, but from a fundamental point of view that’s a mere illusion. Italian banks today own more government debt than before the banking crisis, leaving them systematically more exposed to their own government, not less. The spread on government bonds between Germany and Club Med is down below historic averages, but the price has been a total suspension of the “price discovery” of money.

The price discovery of money is the cruel capitalistic part of any system. An economics  textbook would call it the modus operandi by which capital is allocated where it can find the highest marginal utility. In practice, this should mean that the market dictates the price of money beyond one year—while at durations of less than one year, the central banks determine the price of money. The beauty of the system is that money is allocated in an auction where the highest bidder for “money” or “credit” gets filled on the price he or she deems to match his expected price of money.

Contrast the market-driven model with the present “success story” of relatively low sovereign spreads in Europe, which are driven by the European Central Bank president Mario Draghi’s promise to do "whatever it takes" to keep the euro out of trouble. He has threatened to activate the European Financial Stability Facility and the European Stability Mechamism plus the full arsenal of policy tools to ensure stability.

By doing so, he has effectively suspended price discovery for sovereign debt and for money, as the ECB and local central banks will provide infinite liquidity to local banks and hence indirectly to their government in any market conditions. This one-sided offer from the ECB and the market means there is no power to discipline the government with higher rates or to allocate credit more generally. We have simply disconnected the market and the price of money.

This comes after Draghi’s longer-term refinancing operation, a cheap funding for banks with little or no collateral, or the closest thing to quantitative easing you can have without calling it quantitative easing.

This is a problem because corporations that need to finance long-term projects, like building a power station over six to eight years, need a price for the credit they require throughout the building period. Right now they have an almost flat yield curve from zero to 30 years, which would be fine if it were realistic. But the problem is that one day in the “distant future” when the market normalises, interest rates should revert to their normal price, which is roughly inflation plus a risk premium.

In the case of an industrial company, an appropriate loan rate calculation could be something like: inflation plus Libor plus a risk spread, which might work out to about seven percent. Compare this with the rates available for highly creditworthy companies. Recently, Nestle  was able to issue a four-year corporate bond at 0.75 percent—the lowest ever. Yes, it’s nice for Nestle but remember the situation is created by the central banks presence in the market, not just due to the financial strength of Nestle.

A move from less than one percent to seven percent would administer an ugly shock to companies.  We have created a negative vicious circle in which not only investors, but also companies are depending on low interest rates forever. They have priced their future earnings and costs on government support prices rather than on realistic market prices.

The worst thing about the situation, however, is that the reason a blue chip company like Nestle can borrow at less than one percent in the capital market is the lack of alternatives for banks and investors. Less creditworthy small and medium enterprises (SMEs) which make up as much as 80 percent of many countries’ economies are not allowed to borrow. They are deemed too risky to lend to at the current “market rates” even though they hold the key to improving the employment and productivity picture.

They are willing to work cheaper, longer, harder and with higher risk tolerance in order to survive. So the remaining 20 percent of the economy occupied by large and publicly listed companies and banks gets 95 percent of all credit and 99 percent of all political capital. In other words, blue chips receive artificially low interest rates only because the SMEs don’t get any credit. Herein lies my continued belief in the my traditional opening statement: things must get better soon because they can hardly get any worse.

We have never been in a more dysfunctional state at the corporate, political and individual level in history. It’s time to realise that the reason capitalism won the war against communism in the 1980s was its strong market based economy—itself based on price discovery. Now the policymakers in their “wisdom” are copying everything a planned economy entails: central planning and control, no price discovery, one supplier of credit, money and the corollary effect of suppressing SMEs and even individuals.

Finally, history offers a compelling lesson: the last time the Federal Reserve engaged in a sizeable quantitative easing was in the 1940s. The low growth and falling inflation only reversed when the Federal Reserve stopped intervening due to a severe recession brought on by the policy mistakes of keeping QE in place too long.

In 2014, a bout of near or real recession in Germany and the US could kick start the price discovery mechanism again, which will help us to start healing the deep wounds left by years of policymakers compounding their errors with round after round of extend-and-pretend. Getting to the bottom is good in one sense: the only way is up.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/1IGfps1Fawg/story01.htm Tyler Durden

Losing track of all the loose ends as the NSA handed out Obamaphones to virtually every world leader? Here is the latest summary via BBG and other outlets:

• NSA boss Keith Alexander personally informed Obama in 2010 about secret operations targeting German chancellor and president didn’t demand to stop it, Bild am Sonntag reported, citing unidentified U.S. intelligence sources: Bild
• US denies Obama knew of Merkel spying: AFP
• Merkel to seek ‘no spy deal’ within EU as well as with US: Reuters
• Spying didn’t just involve Merkel’s phone from her party, the tamper-proof phone she got in summer also hacked: Bild
• Merkel Violated Rules With Use of Party Mobile Phone, Welt Says
• NSA spied on Merkel’s text messages, mobile phone calls: Bild
• NSA specialists didn’t tap Merkel’s specially secured landline
• Social Democrats demand parliamentary investigation to look into matter, SPD’s Thomas Oppermann tells Bild
• Interior Minister Hans-Peter Friedrich says tapping phones is crime and needs to be prosecuted, says trust has evaporated: Bild

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/Mvy99G8wH9M/story01.htm Tyler Durden

Losing track of all the loose ends as the NSA handed out Obamaphones to virtually every world leader? Here is the latest summary via BBG and other outlets:

• NSA boss Keith Alexander personally informed Obama in 2010 about secret operations targeting German chancellor and president didn’t demand to stop it, Bild am Sonntag reported, citing unidentified U.S. intelligence sources: Bild
• US denies Obama knew of Merkel spying: AFP
• Merkel to seek ‘no spy deal’ within EU as well as with US: Reuters
• Spying didn’t just involve Merkel’s phone from her party, the tamper-proof phone she got in summer also hacked: Bild
• Merkel Violated Rules With Use of Party Mobile Phone, Welt Says
• NSA spied on Merkel’s text messages, mobile phone calls: Bild
• NSA specialists didn’t tap Merkel’s specially secured landline
• Social Democrats demand parliamentary investigation to look into matter, SPD’s Thomas Oppermann tells Bild
• Interior Minister Hans-Peter Friedrich says tapping phones is crime and needs to be prosecuted, says trust has evaporated: Bild

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/Mvy99G8wH9M/story01.htm Tyler Durden

It seems ‘someone’ needed to run the S&P futures market back over Friday’s highs just to flush the stops one more time. Thanks to some JPY-selling that momentum was ignited and S&P futures just made new all-time-highs… because, well why not. Soon after the stops were run in stocks, JPY started to revert and so are futures. Gold, oil, and treasuries are all unch for now as is EURUSD.

 

S&P futures were up over 5 points…

 

 

Chart: Bloomberg

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/K24HtWx0uRo/story01.htm Tyler Durden