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It has been a busy overnight session starting off with stronger than expected food and energy inflation in Japan even though the trend is now one of decline while non-food, non-energy and certainly wage inflation is nowhere to be found (leading to a nearly 3% drop in the Nikkei225), another SHIBOR spike in China (leading to a 1.5% drop in the SHCOMP) coupled with the announcement of a new prime lending rate (a form a Chinese LIBOR equivalent which one knows will have a happy ending), even more weaker than expected corporate earnings out of Europe (leading to red markets across Europe), together with a German IFO Business Confidence miss and drop for the first time in 6 months, as well as the latest M3 and loan creation data out of the ECB which showed that Europe remains stuck in a lending vacuum in which banks refuse to give out loans, a UK GDP print which came in line with expectations of 0.8%, where however news that Goldman tentacle Mark Carney is finally starting to flex and is preparing to unleash a loan roll out collateralized by “assets” worse than Gree Feta and oilve oil. Of course, none of the above matters: only thing that drives markets is if AMZN burned enough cash in the quarter to send its stock up by another 10%, and, naturally, if today’s Durable Goods data will be horrible enough to guarantee not only a delay of the taper through mid-2014, but potentially lend credence to the SocGen idea that the Yellen-Fed may even announce an increase in QE as recently as next week.

Market Re-Cap by RanSquawk

Markets got off to a cautious start this morning, as market participants reacted to less than impressive EU based earnings and also continued to fret over yet another up tick in money market rates in China. Financials and telecommunications sectors underperformed, with credit spreads widening and the Euribor curve steepening after the 3m Euribor rate fixed above Thursday’s level. The FTSE-100 index in the UK outperformed its peers, supported by the release of an encouraging advanced GDP report and also the fact that BoE’s Carney announced late Thursday that the central bank will offer banks money for longer periods and accept a wider range of collateral. Looking elsewhere, even though the release of the latest German IFO number failed to meet consensus estimate, market reaction was relatively muted. Going forward, market participants will get to digest the release of the latest durables goods report, as well as earnings from Procter & Gamble and UPS.

Overnight news bulletin from BBG and Ran

• China’s money-market rate completed the biggest weekly jump since a cash
  squeeze in June after the central bank refrained from injecting funds
  through open-market operations
• The PBOC wants to avoid the problems seen in June where money market rates soared, increasing concerns of defaults and may resume reverse repos if money market rates are too high, according to PBOC sources.
• UK GDP (Q3 A) Q/Q 0.8% vs. Exp. 0.8% (Prev. 0.7%) – strongest growth since Q2 2010.
• German business confidence fell for the first time in six months in
  October, with the Ifo institute’s business climate index declining to
  107.4 from 107.7 in Sept and a median estimate of 108 in a Bloomberg
  News survey
• Treasuries head for weekly gain, spurred by weaker-than-forecast September payrolls which pushed expectations for Fed taper until at least March FOMC meeting.
• U.K. GDP rose 0.8% in 3Q, in line with forecasts and the biggest increase since 2010; BOE presents new quarterly forecasts on Nov. 13 amid growing expectations officials will concede interest rates may have to increase earlier than forecast in August
• RBNZ Gov. Wheeler said NZD is “very strong,” would be prepared to intervene if opportunity arises to “make a difference and create uncertainty”
• Credit Suisse and Citigroup are among banks grappling with a round of probes into MBS sales, as the U.S. uses a 1989 law to extend scrutiny of Wall Street’s role in the credit crisis and seek additional penalties from the industry
• European leaders condemned the reported U.S. hacking of Merkel’s mobile phone and said they will seek trans-Atlantic accords on espionage practices
• Sovereign yields mixed, EU peripheral spreads tighten. Shanghai Composite fell for a fourth day, leading Asian equities lower; European stocks and U.S. equity-index futures decline. WTI crude higher; gold and copper fall

Asian Headlines

The PBOC wants to avoid the problems seen in June where money market rates soared, increasing concerns of defaults and may resume reverse repos if money market rates are too high, according to PBOC sources.

The PBOC launched a new loan prime rate benchmark lending rate system for commercial bank lending, with the aim of liberalizing interest rate reform. The PBOC also added it is to further promote interest rate liberalization.

Japanese National CPI (Sep) Y/Y 1.1% vs. Exp. 0.9% (Prev. 0.9%), Tokyo CPI (Oct) Y/Y 0.6% vs. Exp. 0.5% (Prev. 0.5%)

– National CPI Ex Food and Energy (Sep) Y/Y 0.0% vs. Exp. 0.0% (Prev. -0.1%) – first non-deflationary reading since Dec’08.

EU & UK Headlines

German IFO Business Climate (Oct) M/M 107.4 vs. Exp. 108.0 (Prev. 107.7)
German IFO Current Assessment (Oct) M/M 111.3 vs. Exp. 111.4 (Prev. 111.4)
German IFO Expectations (Oct) M/M 103.6 vs. Exp. 104.5 (Prev. 104.2)

Eurozone M3 Money Supply (Sep) Y/Y 2.1% vs. Exp. 2.4% (Prev. 2.3%)

UK GDP (Q3 A) Q/Q 0.8% vs. Exp. 0.8% (Prev. 0.7%) – strongest growth since Q2 2010.
UK GDP (Q3 A) Y/Y 1.5% vs. Exp. 1.5% (Prev. 1.3%) – highest since Q1 2011 .

Barclays month-end extension: Euro Agg +0.08y
Barclays month-end extension: Sterling Agg +0.02y

US Headlines

According to sources, top banking regulators in the US are recommending lenders strengthen underwriting standards for leveraged corp. loans as borrowing of the high-risk debt approaches levels not seen since before the fin. crisis.

Barclays month-end extension: Treasury +0.06y

Equities

Markets got off to a cautious start this morning, as market participants reacted to less than impressive EU based earnings and also continued to fret over yet another up tick in money market rates in China.

Financials and telecommunications sectors underperformed, with credit spreads widening and the Euribor curve steepening after the 3m Euribor rate fixed above Thursday’s level.

UK banks outperformed its peers this morning, as market participants welcomed decision by the BoE to offer money for longer periods, accept a wider range of collateral, including “any asset of which we are capable of assessing the risks” and lower the cost of using the bank’s facilities.

FX

Despite the cautious sentiment as evidenced in lower trading stocks, EUR/CHF edged higher and topped the psychologically important 200DMA line to the upside. Separately, USD/JPY also managed to recover off overnight lows but remains below the 200DMA line.

Commodities

East Libya has declared itself as an autonomous authority to the central government, in what is seen as a direct challenge to the federal Libyan government.

A senior White Official has said that the US are not looking to ease sanctions ‘at the front end’ following reports that Iran are set to reduce their nuclear programme.

Indian finance minister Chidambaram asked regulators to take all possible measures to prepare for the tapering of quantitative easing policies of the US Fed.

In related news, there were also reports that India is to approach sovereign wealth funds for debt investments to offset any likely impact of US Fed tapering, according to a go
vernment official.

UBS says physical gold premiums in India may continue to rise.

* * *

We round of the round up with the commentary by Deutsche Bank’s Jim Reid

Markets are off to a cautious start to Friday’s trading though. Every major Asia regional index is trading lower with the exception of the ASX200 (+0.25%) while S&P 500 futures are down 0.2%. Japanese equities are faring poorly (- 2.2%) despite a better (ie higher) than expected inflation reading (1.1% YoY vs 0.9% expected). Core CPI measures were flat YoY and -0.2% MoM suggesting weakening upward momentum of prices. The yen’s strength against the dollar is also weighing on sentiment there. Chinese equities (-1.1%) are again lagging the broader region and are on track for their fourth consecutive loss which is the longest losing streak in nearly three months. Negative earnings reports from a number of Chinese corporate are weighing on A-shares while banking shares are rebounding (+0.6%) following sharp losses yesterday. The seven-day repo rate continues to climb (+40bp to 4.80%), though it should be noted that rates have tended to climb into the month-end over the past few months. Our Chinese bank equities team believes that rising inflation pressure and net capital inflows in September 2013 have prompted banks to preserve more liquidity, in anticipation of a potentially tighter monetary stance by the PBOC.

As a result, money market rates have spiked up, but they believe rates should normalize unless October’s CPI data surprises on the upside. Staying in China, there is some market chatter that the government is considering wide-ranging financial market and economic reforms ahead of the Country’s third plenum meeting in November – which will be attended by the President, Premier, ministers and heads of the largest state-owned enterprises.

While the market continues to push back on Fed tapering, a Bloomberg report overnight suggested that the Fed has sent letters to some of the largest US banks asking them to avoid originating loans that can be considered as “criticised”. The description relates to any loans that can be classified as having some deficiency that may result in a loss. According the article, 42% of leveraged loans were placed in that category this year. This comes after $839bn of leveraged loans were originated this year in  the US, which is within 7% of the record $899bn set in 2007 (Bloomberg). This follows comments from Fed Governor Jeremy Stein who commented earlier this year that  some segments of the credit markets are showing signs of excessive risk taking. So it’s fair to say that there is growing interest in this issue within the Fed.

Staying on the topic of central banks, the BoE Governor Mark Carney struck a decidedly softer tone towards the banking sector yesterday in his first major policy speech on financial sector regulation. The tone could be described as conciliatory, at least compared with that of his predecessor Mervyn King who was criticised as taking a harder line stance during the financial crisis. Indeed, it’s clear to us that a Mark Carney BoE would be more aggressive in supporting the banking system in the future if the need arose than his predecessor. Amongst the ideas floated by Carney yesterday, one involved amending the Index Long Term Repo to allow banks to tap central bank liquidity with lower grade collateral, and to do so at a lower charge. Carney commented that “The range of assets we will accept in exchange will be wider, extending to raw loans and, in fact, any asset of which we are capable of assessing the risks”. The Bank will also make the terms of its discount window more generous. Mervyn King’s worry of moral hazard seems to have been kicked out the door of the BoE.

Yesterday’s US data flow was mixed and did little to directly add to the tapering debate. Initial jobless claims for the week of October 19 declined -12k to 350k after the prior week was revised up +4k to 362k. The Department of Labor indicated that the backlog of initial claims in California continued to distort the data. The preliminary Markit PMI disappointed at 51.1 (vs 52.5 expected and 52.8 previous) which followed a similarly disappointing round of Euroarea PMIs (51.5 vs 52.4 expected and 52.2 previous). The JOLTS job openings survey showed 1.7% of workers quit their jobs in August, which though low by historical standards, is at multi-year highs. The US trade balance for August was broadly unchanged MoM at -$39bn. 10yr UST yields traded as low as 2.47% at one point yesterday following the data, but promptly backed up to finish just above 2.50%.

Looking at the day ahead, much of the focus in the European timezone will be on the German October IFO report and Eurozone credit aggregates. The UK’s preliminary Q3 GDP print is due today where consensus is looking for +0.8% qoq. In the US, data releases include capital goods orders, the final UofMichigan confidence survey and wholesale inventories.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/WEKX_bpfe0k/story01.htm Tyler Durden

Nearly one year into the Japan’s grandest ever monetization experiment, the “wealth effect” engine is starting to sputter: after soaring into the triple digits due to the BOJ’s massive monetary base expansion, the USDJPY has been flatlining at best, and in reality declining, which has also dragged the Nikkei lower dropping nearly 3% overnight and is well off its all time USDJPY defined highs. But aside for the wealth effect for the richest 1%, it is not exactly fair to say that the BOJ has done nothing for the vast majority of the population. Indeed, as the overnight CPI data confirmed, food and energy inflation continues to soar “thanks” to the far weaker yen, even if inflation for non-energy and food items rose by exactly 0.0% in September. Oh, it has done something else too: that most important “inflation”, so critical to ultimately success for Abenomics – wages – is not only non-existant, in reality wages continue to decline: Japanese labor compensation has been sliding for nearly one and a half years!

Goldman breaks down last night’s inflation numbers:

The national core CPI (excluding fresh foods) was up 0.7% yoy in September. Despite slightly narrowing from +0.8% in August, the figure remained high. The breakdown continues to shows high positive contribution from energy costs, which were up 7.4% yoy (contribution: +0.64 pp), but the figure was slightly lower compared to August (+9.2% yoy; +0.78 pp).

 

Aside from energy costs, foods (excluding fresh foods) turned positive at +0.1% yoy (August: 0.0% yoy) for the first time since July 2012, while prices of clothing/footwear continued to rise steadily (September: +0.7%, August: +0.8%).

 

Cultural/recreational durables (e.g. TV), which has been a significant driver of price decline, rose 0.1% yoy in August for the first time since January 1992, and continued to rise in September, at +0.4%. The September core-core figure (excluding foods and energy) pulled out from the negative territory for the first time since December 2008, at 0.0% (August: -0.1%).

 

Reuters adds:

China’s central bank starts system for a loan prime rate, orLPR, today in order to “further promote interest rate liberalization; LPR is 5.71% today

 

…

The idea is that sustained increases in consumer prices after 15 years of deflation should lead to a cycle of growth, brisk business expenditures and higher wages. While growth has picked up this year, business investment and wages have not.

 

“The core-core CPI is a good sign, but it is a little strange to say things are doing well simply because prices are rising,” Economics Minister Akira Amari told reporters.

 

“What we need is to ensure that rising wages accompany price gains to ensure healthy economic growth.”

 

Similarly, Finance Minister Taro Aso cautioned that it would take more time to escape deflation due to uncertainties including sluggish exports and China’s economic outlook.

And therein lies the rub: the higher input costs soar – and thay have soared quite high – the less wages companies can afford to pay, and a result wages have been falling since early 2012, oblivious of what Abe wishes or demands. The only question is how much longer can ordinary Japanese citizens afford to get squeezed between soaring food and energy prices, and flat wages. Even if, one assumes, all said citizens are perfect traders and generate a few thousand pips every day fading Tom Stolper’s JPY FX recos.

* * *

Elsewhere, overnight the People’s Bank of China took another step towards interest rate liberalisation – introducing of prime lending rates (LPR) that are based on the reporting from nine commercial banks. SocGen notes that the first reading is 5.71% for 1-year lending, below the current benchmark rate of 6%, which is reasonable given that LPRs are offered to the best corporates. We expect no immediate impact from this change, but introducing LPRs means that the PBoC has pretty much given up the benchmark lending rates as policy rates. Liberalising deposit rates, however, will be a gradual process. The next moves are likely by end-2013, including initiation of CDs and implementation of the deposit insurance scheme as well as the bankruptcy lawfor financial institutions.

Qu Hongbin, chief  economist of HSBC in a Bloomberg interview, added the following: PBOC’s decision to start loan prime rate is next important step towards market-based interest rates in China. Smaller commercial banks will be able to use market-based loan prime rate, which is determined by commercial banks, as a reference for pricing of corporate loans, instead of using China’s ’managed’ lending rate, which is determined by PBOC. Loan prime rate extends tenor of market-based benchmark rates to longer maturities from existing short-term Shibor rate.

Whether or not this is merely more lip service by the PBOC to feign reform when in reality nothing has changed – as has been the case with all other recent such “initiatives” will be made clear soon. For now, the market doesn’t care about rate liberalization. The only rate it does care about is Shibor, or the various tenors of short-term repo rates, which have continued their surge: one-month Shibor rises 102 bps, most since June 25, to 6.4220%, highest since July 1. Three-month Shibor increases to 4.6910% from  4.6876% yesterday, seventh gain in a row, while the all important 1 Week Shibor rose to 4.891% from 4.60%. For now, all the hopes that the PBOC is just bluffing, have been squashed.

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

Nearly one year into the Japan’s grandest ever monetization experiment, the “wealth effect” engine is starting to sputter: after soaring into the triple digits due to the BOJ’s massive monetary base expansion, the USDJPY has been flatlining at best, and in reality declining, which has also dragged the Nikkei lower dropping nearly 3% overnight and is well off its all time USDJPY defined highs. But aside for the wealth effect for the richest 1%, it is not exactly fair to say that the BOJ has done nothing for the vast majority of the population. Indeed, as the overnight CPI data confirmed, food and energy inflation continues to soar “thanks” to the far weaker yen, even if inflation for non-energy and food items rose by exactly 0.0% in September. Oh, it has done something else too: that most important “inflation”, so critical to ultimately success for Abenomics – wages – is not only non-existant, in reality wages continue to decline: Japanese labor compensation has been sliding for nearly one and a half years!

Goldman breaks down last night’s inflation numbers:

The national core CPI (excluding fresh foods) was up 0.7% yoy in September. Despite slightly narrowing from +0.8% in August, the figure remained high. The breakdown continues to shows high positive contribution from energy costs, which were up 7.4% yoy (contribution: +0.64 pp), but the figure was slightly lower compared to August (+9.2% yoy; +0.78 pp).

 

Aside from energy costs, foods (excluding fresh foods) turned positive at +0.1% yoy (August: 0.0% yoy) for the first time since July 2012, while prices of clothing/footwear continued to rise steadily (September: +0.7%, August: +0.8%).

 

Cultural/recreational durables (e.g. TV), which has been a significant driver of price decline, rose 0.1% yoy in August for the first time since January 1992, and continued to rise in September, at +0.4%. The September core-core figure (excluding foods and energy) pulled out from the negative territory for the first time since December 2008, at 0.0% (August: -0.1%).

 

Reuters adds:

China’s central bank starts system for a loan prime rate, orLPR, today in order to “further promote interest rate liberalization; LPR is 5.71% today

 

…

The idea is that sustained increases in consumer prices after 15 years of deflation should lead to a cycle of growth, brisk business expenditures and higher wages. While growth has picked up this year, business investment and wages have not.

 

“The core-core CPI is a good sign, but it is a little strange to say things are doing well simply because prices are rising,” Economics Minister Akira Amari told reporters.

 

“What we need is to ensure that rising wages accompany price gains to ensure healthy economic growth.”

 

Similarly, Finance Minister Taro Aso cautioned that it would take more time to escape deflation due to uncertainties including sluggish exports and China’s economic outlook.

And therein lies the rub: the higher input costs soar – and thay have soared quite high – the less wages companies can afford to pay, and a result wages have been falling since early 2012, oblivious of what Abe wishes or demands. The only question is how much longer can ordinary Japanese citizens afford to get squeezed between soaring food and energy prices, and flat wages. Even if, one assumes, all said citizens are perfect traders and generate a few thousand pips every day fading Tom Stolper’s JPY FX recos.

* * *

Elsewhere, overnight the People’s Bank of China took another step towards interest rate liberalisation – introducing of prime lending rates (LPR) that are based on the reporting from nine commercial banks. SocGen notes that the first reading is 5.71% for 1-year lending, below the current benchmark rate of 6%, which is reasonable given that LPRs are offered to the best corporates. We expect no immediate impact from this change, but introducing LPRs means that the PBoC has pretty much given up the benchmark lending rates as policy rates. Liberalising deposit rates, however, will be a gradual process. The next moves are likely by end-2013, including initiation of CDs and implementation of the deposit insurance scheme as well as the bankruptcy lawfor financial institutions.

Qu Hongbin, chief  economist of HSBC in a Bloomberg interview, added the following: PBOC’s decision to start loan prime rate is next important step towards market-based interest rates in China. Smaller commercial banks will be able to use market-based loan prime rate, which is determined by commercial banks, as a reference for pricing of corporate loans, instead of using China’s ’managed’ lending rate, which is determined by PBOC. Loan prime rate extends tenor of market-based benchmark rates to longer maturities from existing short-term Shibor rate.

Whether or not this is merely more lip service by the PBOC to feign reform when in reality nothing has changed – as has been the case with all other recent such “initiatives” will be made clear soon. For now, the market doesn’t care about rate liberalization. The only rate it does care about is Shibor, or the various tenors of short-term repo rates, which have continued their surge: one-month Shibor rises 102 bps, most since June 25, to 6.4220%, highest since July 1. Three-month Shibor increases to 4.6910% from  4.6876% yesterday, seventh gain in a row, while the all important 1 Week Shibor rose to 4.891% from 4.60%. For now, all the hopes that the PBOC is just bluffing, have been squashed.

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

Every now and then, it is good to refresh knowledge of what is truly important in life. So it’s time to post “The Greatest Speech Ever” by Charlie Chaplin. Charlie Chaplin was known as the greatest silent actor ever. The most powerful excerpts from his speech, still very relevant today, in my opinion, are below:

 

“And the good earth is rich and can provide for everyone. The way of life can be free and beautiful, but we have lost the way. Greed has poisoned men’s souls, has barricaded the world with hate, has goose-stepped us into misery and bloodshed. We have developed speed, but we have shut ourselves in. Machinery that gives abundance has left us in want. Our knowledge has made us cynical. Our cleverness, hard and unkind. We think too much and feel too little. More than machinery we need humanity. More than cleverness we need kindness and gentleness. Without these qualities, life will be violent and all will be lost.“

 

“To those who can hear me, I say – do not despair. The misery that is now upon us is but the passing of greed – the bitterness of men who fear the way of human progress. The hate of men will pass, and dictators die, and the power they took from the people will return to the people. And so long as men die, liberty will never perish.”

 

And particularly relevant, is the following, as it applies to nearly all world leaders today and it should serve to awaken us to the knowledge that divided we will fall to the brutal immorality of today’s banking/government/military complex, but united, we have the power to change our futures for the better:

 

“You the people have the power, the power to create machines, the power to create happiness. You the people have the power to make life free and beautiful, to make this life a wonderful adventure. Then in the name of democracy let’s use that power – let us all unite. Let us fight for a new world, a decent world that will give men a chance to work, that will give you the future and old age and security. By the promise of these things, brutes have risen to power, but they lie. They do not fulfill their promise, they never will. “

 

 

 

Here is more about Charlie Chaplin, courtesy of Wikipedia:

 

Chaplin arrived in Los Angeles, home of the Keystone studio, in early December 1913. The 1940s saw Chaplin face a series of controversies, both in his work and his personal life, which changed his fortunes and severely affected his popularity in America. The first of these was a new boldness in expressing his political beliefs. Deeply disturbed by the surge of militaristic nationalism in 1930s world politics, Chaplin found that he could not keep these issues out of his work: “How could I throw myself into feminine whimsy or think of romance or the problems of love when madness was being stirred up by a hideous grotesque, Adolf Hitler?”

He chose to make The Great Dictator – a “satirical attack on fascism” and his “most overtly political film”. There were strong parallels between Chaplin and the German dictator, having been born four days apart and raised in similar circumstances. It was widely noted that Hitler wore the same toothbrush moustache as the Tramp, and it was this physical resemblance that formed the basis of Chaplin’s story. Chaplin spent two years developing the script and began filming in September 1939. He had submitted to using spoken dialogue, partly out of acceptance that he had no other choice but also because he recognised it as a better method for delivering a political message. Making a comedy about Hitler was seen as highly controversial, but Chaplin’s financial independence allowed him to take the risk. “I was determined to go ahead,” he later wrote, “for Hitler must be laughed at.”

Chaplin replaced the Tramp (while wearing similar attire) with “A Jewish Barber”, a reference to the Nazi party’s belief that the star was a Jew. In a dual performance he also plays the dictator “Adenoid Hynkel”, a parody of Hitler which Maland sees as revealing the “megalomania, narcissism, compulsion to dominate, and disregard for human life” of the German dictator.

The Great Dictator spent a year in production, and was released in October 1940. There was a vast amount of publicity around the film, with a critic for the New York Times calling it “the most eagerly awaited picture of the year”, and it was one of the biggest money-makers of the era. The response from critics was less enthusiastic. Although most agreed that it was a brave and worthy film, many considered the ending inappropriate. Chaplin concluded the film with a six-minute speech in which he looked straight at the camera and professed his personal beliefs. The monologue drew significant debate for its overt preaching and continues to attract attention to this day. Maland has identified it as triggering Chaplin’s decline in popularity, and writes, “Henceforth, no movie fan would ever be able to separate the dimension of politics from the star image of Charles Spencer Chaplin.” The Great Dictator received five Academy Award nominations, including Best Picture, Best Original Screenplay and Best Actor.

 

Chaplin decided to hold the world premiere of his film Limelight in London, since it was the setting of the film. As he left Los Angeles, Chaplin expressed a premonition that he would not be returning. At New York, he boarded the RMS Queen Elizabeth with his family on 18 September 1952. The next day, Attorney General James P. McGranery revoked Chaplin’s re-entry permit and stated that he would have to submit to an interview concerning his political views and moral behaviour in order to re-enter the US. US Congressman John E. Rankin of Mississippi told the House in June 1947:

 

“[Chaplin] has refused to become an American citizen. His very life in Hollywood is detrimental to the moral fabric of America. [If he is deported] … his loathsome pictures can be kept from before the eyes of the American youth. He should be deported and gotten rid of at once.”

 

What is remarkable about the above is that Chaplin’s speech about fascism in The Great Dictator nearly 75 years ago is as relevant today, if not more relevant, as it was back then. In addition, as Chaplin was demonized for telling the truth back then, administrations worldwide today, like the Obama administration, are relentlessly demonizing and persecuting truth tellers as well after deceitfully pledging to protect them. It is for these reasons, in an Orwellian age when telling the truth is a revolutionary act, that we must spread “The Greatest Speech Ever” far and wide.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/weRjeTEKTd4/story01.htm smartknowledgeu

Submitted by Michael Krieger of Liberty Blitzkrieg blog,

Over the weekend a close friend sent me the following image, which was found spray-painted somewhere in Brooklyn:

The words above reflect a state of mind and disposition that has been expressed by philosophers and revolutionaries for thousands of years. It is not a novel or new concept, but it is a concept that seems to have been forgotten across much of these United States. The population has largely been domesticated and this is the primary reason why there has been such little pushback to the global oligarchs looting the landscape. A pathetically large percentage of the population would rather not think, they’d prefer to be told what to believe. They would rather not have any risk in their lives, they’d prefer to have shiny gadgets handed to them. They would rather not explore the wonderful expansive world around them, they’d rather sit on the couch and watch television.

Planet earth is a truly incredible place. Majestic mountains, glistening and seemingly endless blue seas, powerful dense forests. Its beauty is too profound for me to accurately put into words. At the same time, there are terrible tsunamis, horrific hurricanes, devastating floods and many more natural disasters that pose a constant deadly threat.

I moved to Colorado in December 2010 for many reasons, but one of the most appealing things was to get away from the big city. As a kid who had grown up in Manhattan and spent 90% of my life in that environment, I felt a deep longing to move closer to nature and vast open spaces. When weather permits I like to go on a lengthy hike at least once or twice a week. On essentially all of these hikes there are both bears and mountain lions active, amongst a host of other creatures. I mention the first two because of their ability to do severe bodily harm to me at any moment should they choose to. Being aware of such dangerous animals creates a sense of fear but also thrill. Do I carry a gun on my hikes? No, I don’t. Do I wish the Colorado state government to go into the woods and hunt down all the bears and mountain lions so that I can be 100% sure of my safety from them? Of course not. I understand this part of the world is wild and potentially dangerous, and that’s a large part of what I love about it.

Two typical signs at Boulder trailheads:

The same could be said for the world at large and society itself. Beyond the obvious reality that we are all going to die anyway, there is the point that no matter how hard you try to avoid harm or hard times, those things can come to your doorstep any time they choose. At the end of the day, it really isn’t up to you. What is up to you is how you spend each day. The things you think about, the stuff you create, the people you love. All of those things can only reach their highest potential in a free society.

Now I’m someone who certainly believes in laws and such laws applying to everyone equally. I think the entirity of the Bill of Rights of the Constitution are absolutely essential. I also believe in the saying: “No Victim, No Crime.” Taking it a step further, I do no have a problem with societies and communities actively taking measures to protect themselves from both outside and inside threats as long as such measures are consistent with a free people. However, such protective measures cannot and should not be seen in a vacuum.

For example, after all we have witnessed in the past few years, is there any reason whatsoever that a rational human being would trust the U.S. government and intelligence agencies on anything? No, there isn’t. So then why would you trust them to protect you? Why would you trust them to use the Big Brother surveillance grid for your best interests, rather than as a totalitarian tool to squash dissent?

I find it incredibly bizarre that so many people who will claim in polls to distrust the government, will at the same time support the police state grid being built around them. Why? Fear. Fear of terrorists. A fear that has been nurtured and encouraged by the very government frantically trying to have every human being on the planet on watch 24/7. While in my mind the trade-off between “safety and freedom” should always err toward freedom, there are times when it must even more aggressively bend in that direction. I believe that to be the case today since we have a government and elite power structure of oligarchs that has proven itself to be beyond corrupt and beyond morality.

These folks do not care about the country, or the Constitution, the poor and middle class or civil society. Their actions have proved without a shadow of a doubt that they care about nothing but themselves and furthering their wealth and power. They are not constructing the largest surveillance society in human history to protect you, they are doing it to protect them. From you. The sooner we all recognize this, the better.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/s5L6NRf8qwY/story01.htm Tyler Durden

Inflation, meh! Growth, bleh! Unemployment, whatever! The terrifying news is that it seems, despite the ongoing ‘surge’ to new all-time highs in stocks, they are losing the confidence of the “rich”. With everything hinging on the ‘wealth effect’ of moar QE and a levitating US stock market, the fact that Bloomberg’s Comfort Index for the most affluent earners just collapsed (and stayed at) seven-month lows – in the face a rip-your-face-off rally in stocks – suggests even the wealthy know when the music is beginning to end…

In the short-term, the “belief” of the wealthy is fading…

 

and the overall economic index is diverging badly…

 

The bottom-line is that if even the wealthy ain’t buying it, then just who is this farce for?

 

Source: Bloomberg and @Not_Jim_Cramer

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/dh_szuZp71g/story01.htm Tyler Durden

Last week, Peter Schiff began his epic take-down of the myth of Janet Yellen’s forecasting ability. As proof of her wisdom supporters had pointed to speeches she delivered in 2005 and 2006 in which she supposedly issued clear warnings about the dangers then building in the frothy real estate markets.  Without any attempt at reasonable fact checking, these claims have been parroted by the media.. and that is what Schiff so diligently destroyed. However, Schiff notes in this follow-up, there is a key statement she makes (in justifying the ‘fundamentals’ behind the housing bubble) that relates to credit and speculative leverage that is crucial to understand the way she sees the world and thus – what to expect from her Fed.

 

 

2005 San Francisco Speech excerpt (used by many to justify the fact that she may have identified the bubble)…

 

 

So fundamentals showed it was a ‘bubble’ but she justifies it on the basis of the fact that HELOCs created more liquidity in home value – thus creating yet more speculative leverage (right in front of her face…)

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/A8k59f-kQPs/story01.htm Tyler Durden

Submitted by Michael Snyder of The Economic Collapse blog,

The number one American export is U.S. dollars.  It is paper currency that is backed up by absolutely nothing, but the rest of the world has been using it to trade with one another and so there is tremendous global demand for our dollars.  The linchpin of this system is the petrodollar.  For decades, if you have wanted to buy oil virtually anywhere in the world you have had to do so with U.S. dollars.  But if one of the biggest oil exporters on the planet, such as Saudi Arabia, decided to start accepting other currencies as payment for oil, the petrodollar monopoly would disintegrate very rapidly.  For years, everyone assumed that nothing like that would happen any time soon, but now Saudi officials are warning of a "major shift" in relations with the United States.  In fact, the Saudis are so upset at the Obama administration that "all options" are reportedly "on the table".  If it gets to the point where the Saudis decide to make a major move away from the petrodollar monopoly, it will be absolutely catastrophic for the U.S. economy.

The biggest reason why having good relations with Saudi Arabia is so important to the United States is because the petrodollar monopoly will not work without them.  For decades, Washington D.C. has gone to extraordinary lengths to keep the Saudis happy.  But now the Saudis are becoming increasingly frustrated that the U.S. military is not being used to fight their wars for them.  The following is from a recent Daily Mail report…

Upset at President Barack Obama's policies on Iran and Syria, members of Saudi Arabia's ruling family are threatening a rift with the United States that could take the alliance between Washington and the kingdom to its lowest point in years.

 

Saudi Arabia's intelligence chief is vowing that the kingdom will make a 'major shift' in relations with the United States to protest perceived American inaction over Syria's civil war as well as recent U.S. overtures to Iran, a source close to Saudi policy said on Tuesday.

 

Prince Bandar bin Sultan told European diplomats that the United States had failed to act effectively against Syrian President Bashar al-Assad and the Israeli-Palestinian conflict, was growing closer to Tehran, and had failed to back Saudi support for Bahrain when it crushed an anti-government revolt in 2011, the source said.

Saudi Arabia desperately wants the U.S. military to intervene in the Syrian civil war on the side of the "rebels".  This has not happened yet, and the Saudis are very upset about that.

Of course the Saudis could always go and fight their own war, but that is not the way that the Saudis do things.

So since the Saudis are not getting their way, they are threatening to punish the U.S. for their inaction.  According to Reuters, the Saudis are saying that "all options are on the table now"…

Saudi Arabia, the world's biggest oil exporter, ploughs much of its earnings back into U.S. assets. Most of the Saudi central bank's net foreign assets of $690 billion are thought to be denominated in dollars, much of them in U.S. Treasury bonds.

 

"All options are on the table now, and for sure there will be some impact," the Saudi source said.

Sadly, most Americans have absolutely no idea how important all of this is.  If the Saudis break the petrodollar monopoly, it would severely damage the U.S. economy.  For those that do not fully understand the importance of the petrodollar, the following is a good summary of how the petrodollar works from an article by Christopher Doran…

In a nutshell, any country that wants to purchase oil from an oil producing country has to do so in U.S. dollars. This is a long standing agreement within all oil exporting nations, aka OPEC, the Organization of Petroleum Exporting Countries. The UK for example, cannot simply buy oil from Saudi Arabia by exchanging British pounds. Instead, the UK must exchange its pounds for U.S. dollars. The major exception at present is, of course, Iran.

 

This means that every country in the world that imports oil—which is the vast majority of the world's nations—has to have immense quantities of dollars in reserve.

 

These dollars of course are not hidden under the proverbial national mattress. They are invested. And because they are U.S. dollars, they are invested in U.S. Treasury bills and other interest bearing securities that can be easily converted to purchase dollar-priced commodities like oil. This is what has allowed the U.S. to run up trillions of dollars of debt: the rest of the world simply buys up that debt in the form of U.S. interest bearing securities.

This arrangement works out very well for the United States because we can wildly print money and run up gigantic amounts of debt and the rest of the world gobbles it all up.

In 2012, the United States ran a trade deficit of about $540,000,000,000 with the rest of the planet.  In other words, about half a trillion more dollars left the country than came into the country.  These dollars represent the number one "product" that the U.S. exports.  We make dollars and exchange them for the things that we need.  Major exporting countries (such as Saudi Arabia) take many of those dollars and "invest" them in our debt at ultra-low interest rates.  It is this system that makes our massively inflated standard of living possible.

When this system ends, the era of cheap imports and super low interest rates will be over and the "adjustment" to our standard of living will be excruciatingly painful.

And without a doubt, the day is rapidly approaching when the petrodollar monopoly will end.

Today, Russia is the number one exporter of oil in the world.

China is now the number one importer of oil in the world, and at this point they are actually importing more oil from Saudi Arabia than the United States is.

So why should Russia, China and virtually everyone else continue to be forced to use U.S. dollars to trade oil?

That is a very good question.

In fact, China has been making a whole lot of noise recently about the fact that it is time to start becoming less dependent on the U.S. dollar.  The following comes from a recent CNBC article authored by Michael Pento…

Our addictions to debt and cheap money have finally caused our major international creditors to call for an end to dollar hegemony and to push for a "de-Americanized" world.

 

China, the largest U.S. creditor with $1.28 trillion in Treasury bonds, recently put out a commentary through the state-run Xinhua news agency stating that, "Such alarming days when the destinies of others are in the hands of a hypocritical nation have to be terminated."

For much more on all of this, please see my previous article entitled "9 Signs That China Is Making A Move Against The U.S. Dollar".

But you very rarely hear anything about this on the evening news, and most Americans do not understand these things at all.  The fact that the U.S. produces the de facto reserve currency of the planet is an absolutely massive advantage for us.  According to John Mauldin, this advantage allows us to consume far more wealth than we actually produce…

What that means in practical terms is that the United States can purchase more with its currency than it produces and sells. In theory those accounts should balance.

 

But the world's reserve currency, for all intent and purposes, becomes a product. The world needs dollars in order to conduct its trade. Today, if someone in Peru wants to buy something from Thailand, they first convert their local currency into US dollars and then purchase the product with those dollars. Those dollars eventually wind up at the Central Bank of Thailand, which includes them in its reserve balance. When someone in Thailand wants to purchase an imported product, their bank accesses those dollars, which may go anywhere in the world that will take the US dollar, which is to say pretty much anywhere.

And as Mauldin went on to explain in that same article, a significant amount of the money that we ship out to the rest of the globe ends up getting reinvested in U.S. government debt…

That privilege allows US citizens to purchase goods and services at prices somewhat lower than those people in the rest of the world must pay. We can produce electronic fiat dollars, and the rest of the world accepts them because they need them to in order to trade with each other. And they do so because they trust the dollar more than they do any other currency that is readily available. You can take those dollars and come to the United States and purchase all manner of goods, including real estate and stocks. Just this week a Chinese company spent $600 million to buy a building in New York City. Such transactions happen all the time.

 

And there is one other item those dollars are used to pay for: US Treasury bonds. We buy oil and all manner of goods with our electronic dollars, and those dollars typically end up on the reserve balance sheets of other central banks, which buy our government bonds. It's hard to quantify the exact amount, but these transactions significantly lower the cost of borrowing for the US government. On a $16 trillion debt, every basis point (1/10 of 1%) means a saving of $16 billion annually. So 5 basis points would be $80 billion a year. There are credible estimates that the savings are well in excess of $100 billion a year. Thus, as the debt grows, the savings also grow! That also means the total debt compounds at a lower rate.

Unfortunately, this system only works if the rest of the planet has faith in it, and right now the United States is systematically destroying the faith that the rest of the world has in our financial system.

One way that this is being done is by our reckless accumulation of debt.  The U.S. national debt is now 37 times larger than it was 40 years ago, and we are on pace to accumulate more new debt under the 8 years of the Obama administration than we did under all of the other presidents in U.S. history combined.  The rest of the world is watching this and they are beginning to wonder if we are going to be able to pay them back the money that we owe them.

Quantitative easing is another factor that is severely damaging worldwide faith in the U.S. financial system.  The rest of the globe is watching as the Federal Reserve wildly prints up money and monetizes our debt.  They are beginning to wonder why they should continue to loan us gobs of money at super low interest rates when we are beginning to resemble the Weimar Republic.

The long-term damage that we are doing to the "U.S. brand" far, far outweighs any short-term benefits of quantitative easing.

And as Richard Koo has brilliantly demonstrated, quantitative easing is going to cause long-term interest rates to eventually rise much higher than they normally should have.

What all of this means is that the U.S. government and the Federal Reserve are systematically destroying the financial system that has enabled us to enjoy such a high standard of living for the past several decades.

Yes, the U.S. economy is not doing well at the moment, but we haven't seen anything yet.  When the monopoly of the petrodollar is broken, it is going to be absolutely devastating.

And as I wrote about the other day, when the next great economic crisis strikes it is going to pull back the curtain and reveal the rot and decay that have been eating away at the social fabric of America for a very long time.

Just check out what happened in Detroit recently.  The new police chief was almost carjacked while he was sitting in a clearly marked police vehicle…

Just four months on the job, Detroit’s new police chief got an early taste of the city’s hardscrabble streets.

 

While in his patrol car at an intersection on Jefferson two weeks ago, Police Chief James Craig was nearly carjacked, police spokeswoman Kelly Miner confirmed today.

Craig said he was in a marked police car with mounted lights when a man quickly tried to approach the side of his car. Craig, who became police chief in June, retold the story Monday during a program designed to crack down on carjackings.

Isn't that crazy?

These days, the criminals are not even afraid to go after the police while they are sitting in their own vehicles.

And this is just the beginning.  Things are going to get much, much worse than this.

So let us hope that this period of relative stability that we are enjoying right now will last for as long as possible.

The times ahead are going to be ex
tremely challenging, and I hope that you are getting ready for them.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/8TrgTA0CccI/story01.htm Tyler Durden

At first glance, when the CIO of Fortress Investment Group says:

“Put a little money in Bitcoin…Come back in a few years and it’s going to be worth a lot.”

One might think, the firm that manages $54.6 billion is advocating the end of the USD as we know it… Or is this more muppetry at work?

Via Bloomberg:

“Put a little money in Bitcoin,” Novogratz, principal and co-chief investment officer of macro funds at Fortress, said at a conference held today in New York by UBS AG’s chief investment office. “Come back in a few years and it’s going to be worth a lot.”

 

Novogratz said he sees Bitcoin growing as a payment system, especially in developing nations. Novogratz said he has put his own money in the virtual currency, without specifying how much. He has not invested in Bitcoin on behalf of Fortress, which managed $54.6 billion as of June 30.

 

“I have a nice little Bitcoin position,” Novogratz said. “Enough that I’m smiling that it doubled.”

 

However, color us a little skeptical at his advice…

Given that Bitcoin may ultimately make firms like Fortress – that rely on fiat specie – redundant, then doesn’t the endorsement of Bitcoin by one of the world’s largest Private Equity firms reek of the ultimate failure of BTC as a monetary construct, and seem much more to be merely an attempt by the firm to herd even more momentum chasers into a trade (ostensibly one for Novogratz P.A.) that will be then unwound with Bitcoins ultimately converted into the same dollar they are supposed to replace?

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/T09YFmOuXj8/story01.htm Tyler Durden

"We see upside surprise risks on gold and silver in the years ahead," is how UBS commodity strategy team begins a deep dive into a multi-factor valuation perspective of the precious metals. The key to their expectation, intriguingly, that new regulation will put substantial pressure on banks to deleverage – raising the onus on the Fed to reflate much harder in 2014 than markets are pricing in. In this view UBS commodity team is also more cautious on US macro…

 

Via UBS,

In testimony in front of the Senate banking committee in July, Ben Bernanke made an unusual comment; 'nobody really understands gold prices and I don’t pretend to understand them either'. That's a surprising admission, because, as head of the central bank that controls the word's reserve currency, we think Bernanke should understand gold. Because gold, in our view, is a critical barometer of the state of global credit.

Many clients have asked us whether gold is an inflation hedge. The chart below suggests not.

But we believe that gold is in fact an inflation hedge – but the inflation it is hedging is not inflation as most people commonly understand it.

Friedrich Hayek said that inflation is not a change in the consumer price index, it is an increase in money and credit. To this he added near money – any asset that could be quickly and easily swapped for traditional money or credit. (For ease of writing – I'll refer to money, near money and credit combined as 'credit'). For Hayek, neutral inflation was when credit expanded in line with the productive potential of the economy.

Whether Hayek's inflation leads to traditional CPI inflation depends on the nature of the economy. If it is sclerotic – bound up by unions, capital controls and excessive state spending as it was in the 1970s – then you get CPI inflation. In a globalised world characterised by industrial overcapacity in China, a large global under-utilised workforce, and exceptionally low rates, the impact is asset price inflation.

Hayek had a lot to say about an environment where 'inflation' or credit expanded too fast and asset prices rose. He argued that it accelerated growth, because there was a large incentive for companies that service or build assets (from estate agents and investment banks, to property developers) to expand, to build, and to transact more asset sales.

Hayek's problem; this causes a major misallocation of capital – because the returns from servicing and building assets are available only when credit is expanding.

When credit stops accelerating (not even declining) asset prices start to fall.

Returns in these areas decline precipitously, and value is destroyed. When credit grows in line with the productive potential of the economy, a very different incentive structure emerges. Assets as a group tend to rise in line with incomes. So the incentive is to boost income and wealth through building businesses that create sustainable returns above the cost of capital.

So how does gold fit into this? In commodity strategy, we see gold as a barometer of global credit inflation. The best way to understand this is to highlight the Bretton Woods II system of global capital flows that drove gold through a 12 year bull market up to 2011.

We highlighted this mechanism in the note 'Reverse Bretton Woods' (3 September 2013) and depicted in Figure 3 below. It starts in the central oval with the Fed running easy money, and with the commercial banks expanding their balance sheets. In the 2000s and under QE1 and QE2, a key feature of this was the use of repo and the purchase of credit with CDS insurance. This balance sheet expansion neatly avoided raising risk weighted capital ratios – which allowed the banks to progress towards their Basle III targets. (More on the regulator backlash later).

This immediately suggests the first two things to track to measure the expansion of global money and credit – measure the change in the size of the Fed's balance sheet and the change in banks domestic lending. Those two neatly add up to M2 – notes and coins in circulation and deposits with commercial banks.

But that misses out 'near money' – assets that can be swapped for cash and used to buy more assets.

The Treasury borrowing advisory committee have estimated this – at US$43trn at the start of the year. But the data is very slow coming out. One way to proxy developments is to follow the amount of liquid assets that the US banks hold that can be used for collateral in repo transactions. That's shown in the chart below.

That's not perfect, as it doesn't take account of rehypothecation – the reuse of capital (which is like the velocity of money in the repo market). We are not aware how we track this in a timely manner – but any suggestions, please get in touch. What we do know is that new regulations – notably central clearing rules, are sharply reducing the reuse of collateral for repo and other trades.

But then there is the global aspect – the right side oval in figure 3 shows that when capital flows into emerging markets, central banks print their own currency to buy the incoming dollars. This sets off a chain reaction of credit growth – first deposits rise, then banks lend to consumers and corporates. That raises growth and inflation, lowering real rates and inducing more savings into the system (from consumers who need to save more to build a nest egg) and more demand for loans from corporates, and consumers who want to gear up speculate on property or fixed capital formation. Which causes even more credit expansion.

So the initial capital flows into the rest of the world are multiplied up first by the emerging market central banks, and then by the commercial banks, and by the incentives that a combination of strong liquidity growth, rising inflation and sticky nominal rates then induce.

Again, the data on this is slow and partial (as a chunk of emerging market lending occurs off balance sheet). So, out of expediency we take the change in foreign central bank treasury holdings held at the Fed, as a timely proxy, and we multiply it up five times – as a proxy of the impact of the fractional and shadow banking multiplier in emerging markets.

This gives us four metrics.

Of these – we believe that a necessary condition for gold to rally is the expectation that 1) capital will flow into emerging markets, 2) the combination of the fed's balance sheet and the banks marketable securities holdings rises.

The banks' vanilla lending at home in the US has little positive impact, and probably a negative impact on gold prices. Why? Because it doesn't deliver capital lows overseas, and it induces expectations of tightening monetary policy from the Fed.

So we have created a weighted indicator made up of foreign central bank treasury holdings with the Fed, Fed balance sheet expansion and the US banks liquid security
holdings.

It is potentially more revealing to show the change in liquidity vs the gold price.

In commodity strategy, our view is that US combined central bank and commercial bank asset purchases are the key driver of yield compression – which makes gold a relatively more attractive asset to hold – and the global reach for yield, that induces flows into emerging markets. Those flows then start a very bullish gold dynamic;

• The falling dollar raises dollar denominated gold prices. Rising FX reserves induce central banks to buy gold to maintain the gold ratio in reserves.
• The liquidity boost in emerging markets raises income among consumers who tend to invest in gold. Rising commodity prices and commodity currencies raise dollar based gold costs, and reduce revenues in local currency terms – constraining supply.

But when the Fed started QE3 last October, the improving growth outlook and rising stock market had gold anticipating the threat of tapering (first mentioned by the Fed three months later on Jan 4th), anticipating capital outflows from emerging markets (which began in Jan/February and which accelerated in May). And anticipating commercial bank liquid asset sales – which also began in May. All considered negative for gold.

So while Bernanke may not understand gold, it would appear that gold certainly understands Bernanke.

Perhaps the most significant aspect of the tapering debate was that the Fed became increasingly hawkish on tapering in 1H13, despite the fact that growth was modest and inflation subdued. Our interpretation of this was that the Fed started to become highly concerned about credit market overheating.

Governer Jeremy Stein raised the issue in the December 2012 meeting, and his speech in February 2013 outlined research that showed not just tight spreads, but outsized low quality credit issuance – the classic signals of an overheated credit market, with the clear rider that this could lead to a bust. Soon after Stein presented his results, the tone from Bernanke et al became much more hawkish on QE.

The most revealing aspect of the market reaction to Bernanke in 2013 is that it was the diametric opposite to the market reaction to Greenspan in 2004, even though their communication appeared identical. Back in February 2004, Greenspan stated that, if growth continued along the lines the Fed anticipated, then it would start to remove accommodation gradually. Greenspan then started raising rates by 25bps a meeting from June. Capital flowed into emerging markets, banks bought liquid assets, and the Bretton woods 2 system of flows kicked in so powerfully that treasury yields actually fell while rates rose. Something Greenspan dubbed 'a conundrum'.

Then Bernanke repeated the same communication procedure in 2013, announcing in June that, providing growth met the Fed's expectations, it would, in due course, gradually remove accommodation. The market response; capital flowed out of emerging markets, banks sold their liquid assets, treasury yields blew out 100 points and mortgage yields blew out more.

In our view in commodity strategy, that is a clear expression of the fact that the global liquidity dynamic of the 2000s, and under QE1 & QE2 is now set to run in reverse.

It is worth noting that Fig 12 shows that foreign treasury holdings have bounced since the Fed announced a delay to its tapering programme in September. EM currencies & equities have also jumped. We expect these trends to reverse as bank deleveraging takes hold, and as bullish positioning in broader risk assets unwinds. Asset price developments indicate that the pool of available liquidity has narrowed dramatically. The majority of major asset classes are well off their tops. None are confirming the near high in the S&P.

Within the US market, banks have started to underperform.

And a narrowing group of stocks is driving the market – led by a group of growth/concept companies on largely triple digit multiples – Tesla, Netflix, Netsuite, 3D systems corp etc.. We have created a basket of these names in the chart below. We are using this index as an indicator for when a decline in liquidity reduces investors’ appetites for highly valued issues.

We've highlighted that regulation will now likely drive a new wave of deleveraging by the banks.

What we're worried about is the interaction of several simultaneous strands of legislation – all acting to reduce liquidity – on the amount of money or near money available to buy assets. And the ease with which financial players can trade those assets.

Before we go into the details, one of the main questions we get asked is why would the regulators continue with a process that seems to cause market dislocation?

In our view it is because they believe in the morality of their actions – that banks that are too big to fail should shed assets or raise equity to the point where it's much harder for them to fail, to prevent a repeat of the financial crisis and the heavy burden on taxpayers that ensued. Fed Governor Jeremy Stein’s speech last week (‘Lean or clean?), and Governor Tarullo’s speech from May (Evaluating Progress in Regulatory Reforms to Promote Financial Stability) highlight that desire.

That, in our view in commodity strategy, is a laudable aim. The difficulty, as the old joke has it, is that to get there, you don't want to start from here.

Second, to many regulators, the banks have raised their exposure levels, and raised counterparty risk in the system, in order to raise net interest margin and equity value. So while the systemic banks reduced risk weighted assets by a third from the financial crisis, total leverage has risen 10%. This is precisely the opposite of what the regulators intended when they negotiated the Basle III capital requirements with the banks. The regulators apparently believe that the banks acted in bad faith. The regulators are now fighting back. The clearest comments on this were from Thomas Hoenig, deputy Chairman of FDIC, the US regulator.

Third, the regulators believe that the fact that the markets have rallied for five years gives them scope to act without causing too much damage.

And finally, regulators don't follow an Austrian view of the world. They may not perceive the degree to which credit markets have become overheated. And they are unlikely to recognise that the credit boom of the past five years has induced a massive misallocation of capital globally, and has created the potential for Hayek's 'recessionary symptoms' to show up as liquidity is drained from the system.

So what are the key regulatory actions?

• Central clearing house trading to replace OTC – the key issue is that this raises collateral requirements, making the trades more expensive, and it makes it impossible to rehypothecate the collateral – which reduces system liquidity. The Treasury Borrowing Advisory Committee estimated that there was around us$4.5trn of rehypothecated in the US assets at the start of 2013.
• U
  S requirements for foreign owned banks to hold separate ring-fenced collateral to their parents. Oliver Wyman, the consultants, estimate that this will force foreign owned banks to reduce repo by US$300bn in the US.
• Leverage ratios which do not allow the netting of repo, or credit against CDS – proposed at a minimum of 3% by the BIS, the US Comptroller of the currency has proposed 5-6%. European and UK regulators yet to decide
• Capital requirements behind trading – including market risk capital changes, stressed value at risk, and incremental risk charges. Stephane Deo, UBS head of asset allocation, believes that these will reduce liquidity and raise volatility across several asset classes
• Multiple additional measures under Dodd-Frank, etc

The problems with the regulation are fourfold.

1. First, they make it much more expensive for banks to hold assets and carry out repo, or buy credit with a CDs insurance wrapper
2. They tie up collateral, reducing the velocity of collateral.
3. They make it less attractive for banks to originate credit, and to offer securities inventory holding/trade facilitation.
4. They reduce liquidity and raise volatility across multiple asset classes.

And the problem with repo is that it is highly pro-cyclical. Rising values for high quality collateral used in repo reduce the amount of collateral you need to post to secure funding, and allow you to buy more assets. It can also reduce the haircuts for some lower quality collateral.

And a point Jeremy Stein highlighted in his speech on 'credit overheating' was that the more the cost of capital falls as a result of banks expanding their repo operations, the more financial institutions are induced to reach for yield – further accelerating the Bretton Woods II liquidity cycle.

But falling collateral values do the opposite. They reduce the capacity of firms to carry out repo and use the funds for credit transactions and for funding credit warehousing etc. and it reduces the tendency of financial companies to reach for yield. All this, in our view in commodity strategy, causes Bretton Woods II to go in reverse.

A key observation of the Bretton Woods II process of capital flows is that the risk free rate – the yield on 10-year treasuries – is no longer risk free. It is subject to a pro-cyclical and speculative expansion of leverage on the upside. The implication is that, when risk aversion rises, the normal safe haven bid for treasuries may be offset by selling from domestic commercial banks and foreign central banks. So yields may rise, or not fall as much as would be typical. This removes a natural stabilisation mechanism in markets. The higher cost of capital (than usual) may make the impact of risk aversion on markets and macro more severe than we are used to.

And just as the Bretton Woods process was highly reflationary and bullish for all assets, reverse Bretton Woods is considered bearish for everything, except gold and silver. And that's because of the capital misallocation generated during the credit inflation will unwind, destroying value and precipitating what Hayek called 'recessionary symptoms'. Hayek said all it took to start the unwind was a deceleration in credit expansion. Our description of the impact of QE on growth is shown in the following two charts

A rising cost of capital and shrinking liquidity, for any given rate of growth, does not only de-rate asset prices. It hurts growth in all the asset related businesses from financial services through to construction. And then it hurts growth via the reduced supply and higher cost of credit – which included from 2009-13 consumer spending (via mortgage refinancing, or cheap and plentiful car loans), or small companies (via tighter high yield spreads).

So far, this set up appears very similar to 1937. Back then the US was into a fourth year of recovery from the depression. The Roosevelt administration scaled back deficit spending and the Fed raised reserve requirements (not thought of as a problem at the time, due to bank’s excess reserves) and started sterilising gold inflows. Manufacturing declined 37% & the Dow halved. The difference, though, is that this time the Fed is likely to move earlier.

In our view in commodity strategy, as the private sector takes away leverage and reduces liquid asset holdings, the Fed will be forced into providing the heavy lifting to keep total asset purchases up. On that basis, the Fed will be doing much more QE in 2014 than the market anticipates.

And with gold and silver acting as a barometer of whether the Fed will be reflationary or deflating the global economy in 6-12 months time, we anticipate hem to rally as soon as the deflationary process becomes visible in a breakdown in the S&P or a breakdown in US macro surprises.

And in particular, with Yellen now all but certain to take Chair, the market will immediately assume that the Fed will reflate in response to any deterioration in broader markets or macro conditions. Something that we believe would be much more debatable had Summers taken the post.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/4n4TCFcg3P8/story01.htm Tyler Durden