Another Fed “Taper” Casualty: Kazakhstan Devalues Currency To Weakest On Record

With only $24.5 billion left in FX reserves after valiantly defending major capital outflows since the Fed’s Taper announcement, the Kazakhstan central bank has devalued the currency (Tenge) by 19% – its largest adjustment since 2009. At 185 KZT to the USD, this is the weakest the currency has ever been as the central bank cites weakness in the Russian Ruble and “speculation” against its currency as drivers of the outflows (which will be “exhausted” by this devaluation according to the bank). The new level will improve the country’s competitiveness (they are potassium heavy) but one wonders whether, unless Yellen folds whether it will help the outflows at all.

 

 

Charts: Bloomberg


    



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Obama Administration Delays Obamacare’s Employer Mandate, Again

Another day, another Obamacare
delay. Once again, the employer mandate, which in theory requires
businesses with 50 or more employees to provide qualifying health
coverage for employees, is the target.

Las summer, the administration put the requirement on hold for
an extra year. Now it’s tweaking the provision even further.
Businesses with between 50 and 99 employees will not be subject to
the employer mandate until 2016. The administration says it will
require employers participating in the delay to
certify that they aren’t cutting back on jobs strictly to fall
under the 100-employee threshold.  

The administration is also tweaking the coverage rules for
larger businesses. Employers with 100 or more employees will now
only have to provide coverage for 70 percent of their workers
through 2016. Previously, those firms had been required to give
coverage to 95 percent of their workers to meet the
requirement.

Where does the White House get the authority to tweak and delay
the rules like this? I’m not sure how much the administration
actually cares at this point, but I suspect it derives at least
partly from the—whoalookablimpbehindyougottarun!

To some extent this is just one of the many perils of attempting
to make a law as complex and controversial as Obamacare work. The
administration is attempting to please employers who don’t like the
requirement and mitigate some of the potential economic
destabilization that could come with the requirement. It’s a
political move as much as anything. But it could further undermine
the law’s already shaky policy foundations. As Obamacare’s
supporters argued before the law was passed, the employer mandate
is
one of the key mechanisms the law relies on to keep costs down and
coverage up. But the administration has now twice weakened that
mechanism. (And at this point, you have to wonder if there aren’t
more tweaks to the provision coming down the line.) 

At the same time, the administration’s pick-and-choose approach
to implementation has destabilized the law politically. 
Because the Obama administration won’t be running the show forever.
And future administrations, which might not be so sympathetic to
the law or so tied to its fortunes, are likely to take advantage of
the flexibility the Obama administration has made for itself here.
Pascal-Emmanuel
Gobry might be overstating the case a little bit when he

writes at Forbes that President Obama is “giving
conservatives all the tools they need to transform the country.”
But with legally dubious moves like this, the Obama administration
is almost certainly setting a precedent that will eventually come
back to haunt Democrats. 

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Barclays Fires 12,000; Reports Horrible Earnings, Awards Itself Bigger Bonuses

It is not easy for one bank to anger more people with one announcement than what Barclays did in the past 24 hours. In one fell swoop, the British bank infuriated shareholders after announcing dismal earnings (an adjusted Q4 profit of about 200 million pounds and a statutory profit of less than 100 million as investment banking income slumped 37% as income fell 9% to 10.7 billion due to a fall in fixed income, and it took further charges related to a cleanup of the banking industry in the wake of the 2008 financial crisis) which sent the share price sliding, it then pissed off UK workers and taxpayers after it announced it would hike investment bank bonuses by 13% despite the abovementioned profit slump, and finally it crushed 9% of its workforce, or 12,000 workers, who are set to prepare pink slips as the bank “streamlines.”

Barclays said 820 senior roles would go, and half of those were cut at the investment bank in the last two weeks. It cut 7,650 jobs last year, including 1,400 in the investment bank, as part of a restructuring unveiled a year ago by Jenkins to cut 1.7 billion pounds of annual costs. There were 139,600 Barclays employees by the end of the year.

More from Reuters:

Stepping up efforts to cut costs, Barclays said up to 9 percent of employees could go, including 7,000 in Britain, where half of the affected staff had already been notified. The cuts are not concentrated in any single business area.

 

Britain’s third-biggest bank said it paid 2.4 billion pounds ($3.9 billion) in incentive awards last year after raising bonuses at the investment bank by 13 percent despite a slump in profits from the business. The average bonus across the investment bank’s 26,200 staff was 60,100 pounds.

 

The combination of lay-offs and fatter bonuses drew indignation from Britain’s biggest labor union.

 

“The culture change the bank promised will be less than skin deep if those at the top still hoover up obscene amounts of money while workers in call centers and branches struggle by on low wages and face the persistent pressure of job insecurity,” said Ciaran Naidoo of Unite the Union.

Under fire, Barclay’s new CEO Anthony Jenkins was forced to defend the bonus hike decision, saying the bank had to recruit the best staff to compete with global rivals and continued to have “constructive” talks with investors over pay. “We need to recruit people from Singapore to San Francisco. We need the best people in the bank to drive long-term sustainable returns for our shareholders,” Jenkins told reporters on a conference call. “I understand that there will be some (people) who feel that this decision is the wrong one for Barclays. But it is the decision of the board and myself that this entirely is the right decision for the group and in the long-term interests of shareholders,” he said.

Finally, it wouldn’t be a bank if it didn’t blame someone. Sure enough, as we predicted would happen in 2009 after the backlash against HFT and vacuum tubes became instituionalized, that someone is “technology”:

Jenkins said banking was going through a “100-year transformation” as technology and cost pressures reshape the industry, and he was optimistic that Barclays was well set for a “pivotal” 2014.

Well, time to hire some algos then: we hear they are easy on the contract negotiations. Or, failing that, the bank can just appoint “a junior trader as interim head of its London spot foreign exchange desk, illustrating a thinning out of the ranks after a torrent of traders has departed or been suspended amid a global probe into alleged market manipulation.”

And just like that, the E-trade babies – with zero non-ZIRP world experience – and their collocated toys, have literally taken over the banking asylum.


    



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Frontrunning: February 11

  • Frustrated by Karzai, U.S. Shifts Afghanistan Exit Plans (WSJ)
  • Yellen Testimony Guide From Payrolls Report to Emerging Markets (BBG)
  • Gold hits three-month high, shares up ahead of Yellen (Reuters)
  • Tightfisted New Owners Put Heinz on Diet (WSJ)
  • Senator describes “gruesome” bin Laden photos (Reuters)
  • More reasons for the ongoing economic contraction: U.S. Winter Storm Seen Spreading Snow, Sleet Across South (BBG)
  • Barclays Cuts Up to 12,000 Jobs as Quarterly Profit Falls  (BBG)
  • Boeing Considering 787-Size Medium-Range Jetliners (WSJ)
  • AOL Chief Apologizes for ‘Distressed Babies’ Comment (BBG)
  • U.S. Looks to Target American With Drone (WSJ)
  • Volkswagen Car Sales Rise in January (WSJ)
  • London Underground Union Suspends Strike Tonight Following Talks  (BBG)
  • Dartmouth Applications Drop 14% After Tumultuous Year of Protests (BBG)

 

Overnight Media Digest

WSJ

* The U.S. military has revised plans to withdraw troops from Afghanistan to allow the White House to wait until President Hamid Karzai leaves office before completing a security pact and settling on a post-2014 U.S. troop presence, officials said.

* Most employers won’t face a fine next year if they fail to offer workers health insurance, the Obama administration said Monday, in the latest big delay of the health-law rollout. The Treasury Department, in regulations outlining the Affordable Care Act, said employers with 50 to 99 full-time workers won’t have to comply with the law’s requirement to provide insurance or pay a fee until 2016.

* House Republican leaders tried Monday to build support for raising the federal debt limit by linking it to a reversal of planned cuts in some military pensions, working to overcome vocal opposition from conservatives in hopes of bringing it to a vote Wednesday.

* 400 workers at H.J. Heinz Co’s Idaho plant have become casualties in a cost-cutting campaign that is the talk of the food industry. Although Heinz had been considered one of the industry’s leanest organizations, the Brazilian lead investors, private-equity firm 3G Capital, believe they have identified plenty of fat.

* Billionaire investor Carl Icahn gave up his fight Monday to force Apple Inc to boost its share repurchase program by $50 billion.

* Nokia, whose mobile-device business will soon be bought by Microsoft, plans to introduce this month a smartphone powered by a version of Google’s Android mobile software, according to people familiar with the matter.

* KKR & Co is shuttering two funds for individual investors, a move that comes less than two years after the buyout firm launched them.

* The executive in charge of BlackBerry Ltd’s instant-messaging tool, BBM, has left the company, creating a hole in one of the smartphone company’s core offerings. Andrew Bocking, executive vice president in charge of BBM, “has made the decision to leave” the company, according to a BlackBerry spokeswoman.

* Rackspace Hosting Inc Chief Executive Lanham Napier stepped down from the Web infrastructure provider he led for nearly eight years, following a sharp slowdown last year that sank its stock.

* In a move to end misconceptions, General Motors Co said Chief Executive Mary Barra will be eligible for a $14.4 million pay package this year, a 60 percent increase over the compensation awarded to her predecessor Dan Akerson. The pay disclosure was in response to ongoing reports in both the mainstream media and on social websites accusing the Detroit auto maker of paying Barra less than Akerson.

* A leading bitcoin exchange Monday blamed a long-unresolved technical issue for its decision to abruptly halt customer withdrawals last week.

* The Commodity Futures Trading Commission is preparing to ease restrictions on swaps trading overseas, according to people familiar with the matter, a move that could shift some trading abroad as banks and other firms look for ways to circumvent tough U.S. rules.

 

FT

Billionaire activist investor Carl Icahn gave up on his proposal that Apple Inc spend $50 billion on share buybacks before the end of September after the shareholder advisory firm Institutional Shareholder Services Inc recommended that investors vote against it.

UBS said it had put two Hong Kong-based bankers on leave as the lender investigates the appointment of Chinese banker with close connections to a potential Chinese corporate client.

Billionaire entrepreneur Richard Branson’s Virgin America, is closing in on an initial public offering after the U.S. carrier recorded its first profit since it was founded 10 years ago.

British and the Netherlands have filed a lawsuit for up to 556 billion Icelandic crowns ($4.85 billion) against Iceland’s deposit insurance fund, reigniting a controversial dispute over the collapse of online lender Icesave during the financial crisis in 2008.

Chinese carmaker BYD, backed by Warren Buffett, will on Tuesday launch London’s first ever all-electric taxi fleet, pulling ahead of rivals such as Nissan in the race to meet Mayor Boris Johnson’s zero emission cabs rule by 2018.

 

NYT

* Mary Barra, chief executive of General Motors Co, will earn as much as $14.4 million in compensation during her first year on the job, the company said on Monday.

* What was once the world’s largest Bitcoin exchange, Mt. Gox, appeared near collapse on Monday, the latest symbol of the woes facing early players in the world of virtual currencies. A few days after cutting off withdrawals for customers, Mt. Gox said on Monday that its problems were a result of a more fundamental flaw in the computer program that underlies Bitcoin.

* Kohlberg Kravis Roberts is closing two mutual funds less than two years after it started them, a setback for the private equity giant as it looks to attract smaller investors.

* The court-appointed monitor in the Apple e-book price-fixing case can get back to work. A federal appellate court on Monday rejected Apple’s request to stay the monitor, Michael Bromwich, a Washington lawyer, from doing any more work pending the outcome of its challenge to a judge’s earlier order appointing the monitor in the first place.

* According to a lawsuit filed against the Justice Department on Monday, the crucial details of the $13 billion settlement deal with JPMorgan Chase were for the government’s eyes only. The lawsuit filed by Better Markets, a nonprofit group critical of Wall Street, challenged the constitutionality of the deal, a landmark settlement stemming from accusations that JPMorgan overstated the quality of mortgage securities it sold before the financial crisis.

* Goldman Sachs Group on Monday named Ashok Varadhan as co-head of the securities division, a significant promotion that has in the past paved the way to the bank’s upper echelons for other top-ranking executives.

* After six months of urging Apple Inc to pay out more money to shareholders, the billionaire Carl Icahn dropped his effort on Monday. His decision came after strong opposition from other big investors and an influential shareholder advisory firm. Still, Icahn may have prevailed in the end anyway, as Apple continued to emphasize returning money to investors.

* More people have gone to work during the past three months than at any time in decades. Those same three months have seen fewer jobs created than during any similar stretch in more than a year.

 

Canada

THE GLOBE AND MAIL

* A new strain of computer malware infecting payment card terminals in restaurant and gas station has compromised nearly 700 credit cards in Canada, a computer security firm says.

* The Conservative government is scrapping Canada’s decades-old immigrant investor program in the 2014 budget, ending a path to citizenship that has been criticized for allowing foreigners to buy their way into this country without generating sufficient long-term benefit.

Reports in the business section:

* A wide array of manufacturing groups and companies is urging the federal government to reach a free-trade agreement with South Korea, warning that Canada is being beaten by rivals in the race to do business with the fast-growing country.

NATIONAL POST

* Toyota Motor Corp has just announced it would close its manufacturing plant in Melbourne, Australia, ending more than five decades of building cars in the country. On the heels of similar decisions by Ford Motor Co and General Motors Co, it means by 2017 Australia will no longer have an automobile manufacturing industry.

* Canada’s first Green member of a provincial legislature has shaken up the British Columbia anti-pipeline sector after expressing what appeared to be tacit support for a $25 billion refinery that would be built at the western edge of the proposed Northern Gateway pipeline.

FINANCIAL POST

* Canada’s Prime Minister Stephen Harper remains relatively unperturbed about the drawn-out Keystone XL pipeline review, maintaining its approval is “inevitable.” As far as he is concerned, history and economics carry far more weight in Canada-United States relations than whoever happens to occupy the White House at a given moment.

* The Haisla First Nation is urging Ottawa to delay a decision on Enbridge Inc’s $7.9-billion Northern Gateway pipeline, warning that a hasty approval “would be illegal” in the absence of “meaningful” consultation with aboriginal groups.

 

China

SHANGHAI SECURITIES NEWS

– China will strengthen guidance for industries suffering from industrial overcapacity, encouraging outbound investment to tap offshore demand.

– The Shanghai government has set the development of the Shanghai Free Trade Zone as a top policy priority for 2014.

– The ongoing antimonopoly investigation into Qualcomm Inc will create opportunities for local companies to catch up in technology and lower purchase cost in negotiation.

CHINA DAILY

– More antitrust probes are in the pipeline, said an official with the State Council’s anti-corruption body, and regulators will add staff to handle the new investigations.

SHANGHAI DAILY

– Local airlines are warning passengers not to use third-party mobile apps to check in or get boarding passes. Air China and China Eastern both warned of apps such as those developed by VeryZhun, Lvmama and Qunar.com, saying the apps infringe on the carrier’s rights and are not supported.

– The Shanghai government will more tightly regulate the online finance sector as state media expresses concerns that high-yielding wealth management products like Alibaba’s Yu-ebao are risky.

 

Britain

The Telegraph

BANKS FACE NEW INDUSTRY BENCHMARKS

British banks will be benchmarked against one another other to track their performance, with lenders expected to publish figures ranging from the number of staff that make whistle-blowing complaints, to how many employees are in professional training.

MPS RAP SPIRALLING SELLAFIELD COSTS

The costs of decommissioning and re-processing at the Sellafield nuclear site are soaring to “astonishing” levels, with latest estimates putting the figure at more than 70 billion pounds ($114.79 billion), according to a committee of Members of Parliament.

VODAFONE BOSS ISSUES WARNING TO US RIVALS

Vittorio Colao, chief executive of Vodafone, has sounded a warning to American mobile operators eyeing the European market, telling them that they are unlikely to do a better job than the current players.

IRISH EX-TYCOON DEFENDS ANGLO-IRISH STAKE

Ireland’s one-time richest man on Monday defended his decision to keep gambling on the success of the now defunct Anglo Irish Bank despite plunging share prices.

The Guardian

MENTAL HEALTH ISSUES ‘COST UK 70 BLN STG A YEAR’, CLAIMS THINKTANK

Mental health issues are costing Britain 70 billion pounds a year, the west’s leading economic thinktank said on Monday, as it urged the government to help those with depression, stress and anxiety into work.

The Times

NEWSPAPER ‘LEAK’ FEARS FORCE WARY BARCLAYS TO PUBLISH PROFITS EARLY

Barclays rushed out its profits numbers a day ahead of schedule yesterday amid fears that price-sensitive information had been leaked.

BRITAIN SENDS IN LAWYERS TO REGAIN 3 BLN STG FROM ICELAND

The British and Dutch authorities are suing Iceland’s tiny depositor lifeboat fund for a sum equal to two thirds of the island nation’s GDP.

GERTLER LOAN POSES MORE QUESTIONS FOR GLENCORE

Glencore Xstrata is under pressure to explain its links to a controversial businessman after details of an new offshore loan emerged.

The Independent

GATWICK POSTS MONTHLY RISE IN PASSENGER NUMBERS AS BRITONS HEAD EAST

Gatwick handled 6.6 percent more passengers in January compared to a year earlier as Brits headed east to escape the wet weather.

NPOWER EMPLOYS MEDITATION GURUS TO HELP STAFF RELAX AFTER VAST JOB CUTS

RWE Npower employs seven ‘meditation gurus’ to help staff deal with stress after the energy firm announced it would axe 1,400 jobs as part of a major business overhaul.

 

 

Fly On The Wall 7:00 AM Market Snapshot

ECONOMIC REPORTS

NFIB small business optimism index for January at 7:30–consensus 93.8
Wholesale trade inventories for December at 10:00–consensus 0.6%

ANALYST RESEARCH

Upgrades

Buckeye Partners (BPL) upgraded to Buy from Neutral at Citigroup
Burlington Stores (BURL) upgraded to Overweight from Equal Weight at Morgan Stanley
CenturyLink (CTL) upgraded to Outperform from Neutral at Macquarie
Finisar (FNSR) upgraded to Buy from Hold at Jefferies
L’Oreal (LRLCY) upgraded to Buy from Neutral at UBS
ONEOK Partners (OKS) upgraded to Buy from Neutral at Citigroup
Primerica (PRI) upgraded to Outperform from Market Perform at Keefe Bruyette
Ralph Lauren (RL) upgraded to Overweight from Neutral at Atlantic Equities
Reliance Steel (RS) upgraded to Buy from Neutral at BofA/Merrill
Steel Dynamics (STLD) upgraded to Buy from Neutral at BofA/Merrill
Tetra Technologies (TTI) upgraded to Outperform from Market Perform at Raymond James

Downgrades

Advanced Photonix (API) downgraded to Neutral from Buy at B. Riley
Aircastle (AYR) downgraded to Underweight from Equal Weight at Morgan Stanley
Alcatel-Lucent (ALU) downgraded to Equal Weight from Overweight at Morgan Stanley
Annie’s (BNNY) downgraded to Neutral from Outperform at Credit Suisse
Apache (APA) downgraded to Neutral from Outperform at Credit Suisse
Atlas Air (AAWW) downgraded to Underweight from Equal Weight at Morgan Stanley
BG Group (BRGYY) downgraded to Equal Weight from Overweight at Morgan Stanley
Carbonite (CARB) downgraded to Perform from Outperform at Oppenheimer
Carnival (CCL) downgraded to Underperform from Hold at Jefferies
Grainger (GWW) downgraded to Sell from Neutral at Goldman
Infoblox (BLOX) downgraded to Hold from Buy at Needham
Insperity (NSP) downgraded to Neutral from Buy at Roth Capital
Post Properties (PPS) downgraded to Market Perform from Outperform at Raymond James
Qualys (QLYS) downgraded to Sector Perform from Outperform at Pacific Crest
Sohu.com (SOHU) downgraded to Underweight from Equal Weight at Morgan Stanley
TRI Pointe Homes (TPH) downgraded to Market Perform from Outperform at JMP Securities
U.S. Steel (X) downgraded to Sell from Neutral at Citigroup

Initiations

AT&T (T) initiated with a Buy at Drexel Hamilton
Ashford Hospitality Prime (AHP) initiated with a Buy at SunTrust
Cypress Energy (CELP) initiated with an Outperform at Raymond James
Hilton Worldwide (HLT) initiated with a Positive at Susquehanna
OncoMed (OMED) initiated with a Buy at Mizuho
RSP Permian (RSPP) initiated with an Overweight at Barclays
The Inventure Group (SNAK) initiated with an Outperform at Wedbush
Verastem (VSTM) initiated with a Buy at Mizuho
Xilinx (XLNX) initiated with a Buy at MKM Partners

HOT STOCKS

Nestle (NSRGY), L’Oréal (LRLCY) boards unanimously approved sale of 48.5M shares
comScore (SCOR), Google (GOOG) partner to offer comScore vCE
Blount (BLT) said may report material weakness in Form 10-K, to consolidate North American lawn, garden blade ops
Rackspace (RAX) CEO Lanham Napier to retire, Chairman Graham Weston named CEO
ConAgra (CAG) said Ardent Mills transaction will be delayed, citing regulatory review
Cubic (CUB): FY12, FY13 financial statements cannot be relied upon, to be restated

EARNINGS

Companies that beat consensus earnings expectations last night and today include:
Huntsman (HUN), Proto Labs (PRLB), Dr. Reddy’s Labs (RDY), Regal-Beloit (RBC), Owens & Minor (OMI), Markel (MKL), Flotek (FTK), Primerica (PRI), Waste Connections (WCN), Pioneer Natural (PXD), Danaos (DAC), CAI International (CAP)

Companies that missed consensus earnings expectations include:
Genesee & Wyoming (GWR), NGL Energy Partners (NGL), Masco (MAS), Forward Air (FWRD), Molina Healthcare (MOH), KapStone (KS), Wausau Paper (WPP)

Companies that matched consensus earnings expectations include:
Capstone Turbine (CPST), M/A-COM (MTSI), Immunomedics (IMMU), Rackspace (RAX), Qualys (QLYS)

NEWSPAPERS/WEBSITES

Goldman’s (GS) Blankfein: Emerging markets stronger than in past, Bloomberg reports
Court denies Apple’s (AAPL) request to sideline e-book monitor, NY Times reports
Barclays (BCS) to cut up to 12,000 jobs this year, BBC News reports
Boeing (BA) faces production issues for 787 Dreamliner, Reuters reports
Whitney Tilson takes stake in magicJack (CALL), Bloomberg reports
Sony’s (SNE) PlayStation Vita to see North American release in spring, Engadget reports
Vodafone (VOD) CEO eyes strategic deals with $30B to $40B to spend, Reuters reports
KKR (KKR) closing two funds for individuals investors, WSJ reports

SYNDICATE

Aastrom (ASTM) files to sell 1.75M shares of common stock for holders
Atmos Energy (ATO) files to sell 8M shares of common stock
Canadian Solar (CSIQ) files to sell 2.6M shares; $100M convertible senior notes
Highwoods Properties (HIW) files to sell 3.62M shares for holders
Ironwood (IRWD) files to sell $150M in common stock
MacroGenics (MGNX) files to sell 2.5M shares for holders
MagneGas (MNGA) files to sell 5.6M shares for holders
Mattson (MTSN) 12.245M share Secondary priced at $2.45
Navios Maritime Partners (NMM) files to sell 5.5M common units for limited partners
Nephrogenex (NRX) 3.1M share IPO priced at $12.00
PTC Therapeutics (PTCT) files to sell $75M in common stock
Puma Biotechnology (PBYI) 980K share Secondary priced at $122.50
StealthGas (GASS) 3.4M share Secondary priced at $9.71
StoneMor Partners (STON) files to sell 1.8M common units for limited partners


    



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Jacob Sullum on the Consequences of Reclassifying Marijuana

“When Obama took office,” notes Dan Riffle of the
Marijuana Policy Project, “he said that decisions in his
administration would be guided by science, not by politics and
ideology. It’s very clear that marijuana’s continued classification
as a Schedule I drug violates that mandate.” Jacob Sullum considers
what might happen if the Obama administration moved marijuana to a
less restrictive legal category.

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Futures Sneak Above 1800 Overnight But Yellen Can Spoil The Party

A sneaky overnight levitation pushed the Spoos above 1800 thanks to a modest USDJPY run (as we had forecast) despite, or maybe due to, the lack of any newsflow, although today’s first official Humphrey Hawkins conference by the new Fed chairman, Janet Yellen, before the House and followed by the first post-mortem to her testimony where several prominent hawks will speak and comprising of John B. Taylor, Mark A. Calabria, Abby M. McCloskey, and Donald Kohn, could promptly put an end to this modest euphoria. Also, keep in mind both today, and Thursday, when Yellens’ testimoeny before the Senate takes place, are POMO-free days. So things may get exciting quick, especially since as Goldman’s Jan Hatzius opined overnight, the third tapering – down to $55 billion per month – is on deck.

In market terms, positive sentiment that was evident overnight in Asia, which was buoyed by positive broker recommendation by JPM on Chinese banks and consequently saw Shanghai Comp. settle with gains of around 0.8%, carried over into the EU session, with stocks bid since the get-go. So much so that this also saw the S&P future trade above the key 1800 level for the first time since mid-Jan. Basic materials led the move higher in Europe, following trade update by Glencore and also Kazakhmys, with shares surging around 20% after Kazakhstan’s central bank devalued its currency by the most since 2009. In terms of other notable equity movers, L’Oreal pared initial gains of over 2% supported by reports that the company is to repurchase EUR 6.5bln worth of shares from Nestle and gradually edged into negative territory following somewhat downbeat comments by the CEO on the outlook.

Turning to the day ahead, there is little on the European calendar aside from the earnings report from Barclays (although Barclay’s bottom-line numbers were prereleased to the market yesterday). Stateside, JOLTs job openings, wholesale inventories and MBA mortgage applications are the main data releases of note. As we mentioned above, the prepared remarks from Yellen’s testimony will be released at 8:30am US EST, with her formal testimony to follow 90 minutes later. Immediately following Yellen, the House Financial Services Committee will hear reactions to the Chairlady’s comments from Stanford University professor John Taylor, the Cato Institute’s Mark Calabria, the American Enterprise Institute’s Abby McCloskey and former Fed Vice Chair Don Kohn. Kohn, who was Fed vice chair before Yellen took the job in 2010, has been supportive of QE but the other three panelists are far more sceptical (Reuters). Nevertheless, the spotlight will remain squarely on Yellen today.

Overnight headline summary from Bloomberg and RanSquawk

  • EU stocks traded higher, with basic materials outperforming following trade update by Glencore and also Kazakhmys, with shares surging around 20% after Kazakhstan’s central bank devalued its currency.
  • The second half of the session will see Fed’s Yellen deliver her testimony on monetary policy to the House as well as the release of the latest API inventories and the US Treasury will kick off its planned issuance.
  • Chinese stocks were buoyed by positive broker recommendation by JPMorgan on Chinese banks, with analysts recommending buying Chinese banks.
  • Treasuries decline as Yellen prepares to appear before House committee at 10:00am and week’s auctions begin with $30b 3Y notes, yield 0.69% in WI after drawing 0.799% in Dec.
  • Yellen probably will indicate she plans continue trimming QE by $10b/meeting and back further away from FOMC’s 6.5% unemployment rate target
  • Employers with fewer than 100 workers won’t have to provide health insurance until 2016 under Obamacare, as the administration said it would again delay a key requirement of the health law
  • Barclays Plc will eliminate as many as 12,000 jobs this year after fourth-quarter profit tumbled, with about 7,000 of the cuts to be in the U.K.
  • Opponents of the EU, the euro and immigration claimed fresh momentum in the campaign for EU-wide elections after Switzerland voted to impose quotas on foreigners
  • The EU is pushing for “fair” elections in Ukraine to break a political stalemate between the government and protesters manning street barricades for almost three months
  • Kazakhstan’s central bank devalued its currency by the most since 2009 as Russia’s ruble weakens and reduced bond buying by the Fed sparks capital outflows from emerging markets
  • Sovereign yields mostly higher. EU peripheral spreads tighten. Asian, European stocks, U.S. stock-index futures rose. WTI crude, copper, gold gain

Asian Headlines

Japanese markets remained closed for National Foundation Day, while the rest of the Asia-Pacific equity markets rallied overnight, with the Shanghai Composite up 1.0% and the Hang Seng Index up 1.8% as of 0620GMT. Shanghai Comp. was buoyed by Financials after JPMorgan recommended buying Chinese banks and the CBRC ordered some smaller banks to set aside more funds to avoid a cash shortfall.

EU & UK Headlines

German Finance Minister Schaeuble says markets no longer doubt ECB and governments will do all that in necessary to defend EUR and said OMT has contributed to return of confidence in EUR but it is not the only or primary factor.

The book for the Portuguese syndication closed with orders in excess of EUR 4.5bln for the 10yr 2024 bond, with strong demand indicated.

ECB allots EUR 93.3bln in 7-day op to 111 bidders and EUR EUR 6.5bln in 1-month op to 30 bidders.

French public audit office says there is ‘real risk’ that the French public deficit overshot government target of 4.1% of GDP in 2013.

The Italian economy ministry have said they see no need for a publicly funded bad bank. (RTRS) This follows reports that a bad bank could be installed in the country to alleviate Italian bank’s nonperforming loans ahead of the ECB’s Asset Quality Review. However, Italian PM Letta was said to have been concerned this would prompt a sovereign downgrade for Italy.

UK BRC Sales Like-For-Like (Jan) Y/Y 3.9% vs. Exp. 0.8% (Prev. 0.4%); fastest annual growth since 2011. (BBG)

The BRC said with a record number of people in work and the continued recovery in the housing market, furniture and non-food items have performed very strongly.

US Headlines

Little in terms of US specific news flow, with focus firmly on the upcoming testimony by Fed’s Yellen.

German DAX index outperformed its peers, with car markers leading the move higher after analysts at Goldman Sachs said that pricing outlook for Western European car sales is improving, raising BMW to buy rating. At the same time, UK retail names posted decent gains this morning after the BRC said that LfL sales for the month of Jan posted its fastest annual growth since 2011.

FX

In spite of a weaker USD, USD/JPY traded higher, supported by the general risk on sentiment following positive close by major Asian equity indices. Analysts at Nomura forecast USD/JPY at 109.00 in 12-months, also noting that the key driving force for stronger USD is the Fed starts tapering next year and the BoJ increases their asset-purchase program. At the same time, AUD/USD trended higher and rose to its highest level since mid-Jan on the back of higher metal prices and also weaker USD.

Commodities

According to analysts at UBS, gold close above USD 1,293 to send price towards USD 1,338.

According to analysts at Commerzbank, OPEC may adjust output to keep prices up and expect that Saudi Arabia will scale back its oil production so as to prevent any price fall, meaning that the oil price is likely to remain within its recent trading band. (DJN)

China may import 35mln mt of crude from Iran in 2014. Furthermore, China may import total of 310mln – 420mln mt yr of crude in 2015-2020, Yue Laiqun, according to researcher at Land and Resources Ministry. (CNPC)

* * *

DB’s Jim Reid concludes the overnight event recap

The House Financial Services Committee is the forum for today’s eagerly awaited debut testimony from Chairlady Yellen. Perhaps some of the recovery in markets in the last few days is based on expectations that she’ll be fairly dovish. Such a view is justifiable based on her past but this testimony is traditionally one reflecting the view of the Fed overall. As such she’ll probably keep fairly close to the recent FOMC script. It’s too early for the recent weaker data to influence the Fed’s tapering plans (especially given weather uncertainties) and she’ll no doubt remain confident that the US recovery is building and broadening. Any updates on forward guidance now that the 6.5% unemployment rate is within 0.1% of being breached will be a key focal point. Also how she interprets the current low inflation may contribute to how dovish the testimony is seen. The Q&A will wrap up the event and it’ll be interesting if the 2014 EM wobbles become a talking point or not. The full text of Yellen’s prepared remarks will be made available at 8:30am USEST (90 minutes before she officially appears before the House Financial Services Committee). The question and answer session after might be where we get the real headlines.

Asian markets have recovered from a soft start overnight with gains across the Hang Seng (+1.8%) and KOSPI (+0.6%). While Japanese markets are closed for National Foundation Day, in the FX space USDJPY (-0.05%) is testing the 102 level. Following yesterday’s record Japanese trade deficit (for December), the Nikkei ran a story suggesting that excessive optimism over the benefits of a weaker yen have raised the threat of twin deficits in Japan. The article suggested that Japan is unable to reverse a trade deficit, even with a weaker yen, because industry is increasingly moving overseas and some market participants have lost confidence in the effect of the J-curve (initial trade deficits followed by significant trade surpluses). However DB’s FX strategist James Malcolm believes that markets are being insufficiently patient and that the impetus from the USDJPY should only be kicking in around now and should be very powerful in the months to come.

Elsewhere in Asia, there are further negative headlines out of China’s banking sector suggesting that the banking regulator has ordered some smaller banks to set aside higher reserves to strengthen liquidity (HK Wenweipo). This isn’t hurting Chinese bank equities which are up around 2-3% today, and are leading gains on the HSCEI (+2.5%). Perhaps anticipating a dovish Yellen today, gold is up 0.8% and is poised to close higher for its 8th time in the last ten Yesterday the S&P500 (+0.16%) extended its positive run to three days and we are gradually climbing back towards the mid January levels before we had the EMinspired sell off of late Jan/early Feb. There was little to speak about in terms of economic data which probably explained the narrow trading ranges that we saw in both the S&P500 (8pts) and Dow Jones (68pts), both which were the smallest ranges that we’ve seen for the last few weeks. We saw similarly narrow ranges in treasuries (10yr yields -1.6bp) and credit (CDX IG +0.125bp) so it appears that most are in wait-and-see mode ahead of Yellen. There was more action in emerging markets where we saw Brazil (+5bp), Mexico (+4bp) and Turkey (+10bp) CDS underperform.

For those looking for more clues on the weather’s impact on January activity, McDonald’s gave a sales update which seemed to suggest that its US revenues were indeed affected by the winter storms. The fast food chain reported that global comparable sales grew 1.2% Y/Y in the month of January – however sales in the United States were 3.3% lower. The company said that “severe winter weather” had dragged on US sales but we should also note that the company flagged other “broadbased challenges” behind the company’s US results which have disappointed in recent months. Nonetheless it adds to other anecdotal indicators, including January auto sales, suggesting that inclement weather had impacted on the level of economic activity.

Yesterday we highlighted the more cautious tone amongst some, including the FT’s Wolfgang Munchau, to the German Constitutional Court’s deliberation on the OMT programme. Our German economists published an updated view which provides a more cautious view on the GCC’s decision saying that the Court did not refer the case to the ECJ but instead sent a list of specific questions regarding the legality of OMT to the ECJ. The GCC will put on hold its inquiry on OMT until it gets the legal opinion from the ECJ. But in the end, it will be the German Court that gives the final ruling on the complaints – only taking into account the legal opinion of the ECJ. In its declaration the GCC states that it regards the OMT decision as exceeding the competences that were given to the ECB through the European Treaties. It considers OMT as not being covered by the mandate of the ECB on monetary policy (Art. 119 and 127 TFEU) and in violation with the prohibition of monetary financing of the budget (Art. 123 TFEU). Given the strong demand for periphery debt at the moment this story isn’t likely to be much of a driver for now but it’s important to follow as it could influence the ECB’s policy making in the months and years ahead.

Back in the US, the debt ceiling continues to be a slow-burning issue but it’s likely this will start to generate more noise the closer we get to Treasury Secretary’s Jack Lew’s February 27th deadline for when the so-called “extraordinary measures” are exhausted. House Republicans are still plotting out a strategy to raise the debt ceiling, with conservative lawmakers looking to extract at least a few concessions for an increase, but a large contingent fearing the impact of another financial showdown in a midterm election year. Bloomberg highlighted that there isn’t too much time for political leaders to come to agreement as Congress plans to be out of session the week of Feb. 17 and will return to Washington the week of Feb. 24. One-month T-Bill rates dropped 4bp yesterday to a yield of 0.06% so few concerns at the moment.

Turning to the day ahead, there is little on the European calendar aside from the earnings report from Barclays (although Barclay’s bottom-line numbers were prereleased to the market yesterday). Stateside, JOLTs job openings, wholesale inventories and MBA mortgage applications are the main data releases of note. As we mentioned above, the prepared remarks from Yellen’s testimony will be released at 8:30am US EST, with her formal testimony to follow 90 minutes later. Immediately following Yellen, the House Financial Services Committee will hear reactions to the Chairlady’s comments from Stanford University professor John Taylor, the Cato Institute’s Mark Calabria, the American Enterprise Institute’s Abby McCloskey and former Fed Vice Chair Don Kohn. Kohn, who was Fed vice chair before Yellen took the job in 2010, has been supportive of QE but the other three panelists are far more sceptical (Reuters). Nevertheless, the spotlight will remain squarely on Yellen today.


    



via Zero Hedge http://ift.tt/1elSoLB Tyler Durden

Brickbat: Testing Her Patience

As her 11-year-old
son Ethan lay in a coma dying, the Florida Education Department was
forcing Andrea Rediske to prove that he wasn’t able to take the
Florida Comprehensive Assessment Test. During his last month in
hospice his homebound teacher came everyday, which the family
appreciated, and was required to document
the progress he was making on his sixth-grade curriculum,
which left them upset and baffled.

from Hit & Run http://ift.tt/1eMSz91
via IFTTT

Six Questions for Federal Reserve "Chair" Janet Yellen

“My logic is undeniable”

V.I.K.I

“I Robot”

http://ift.tt/1bHnuxv

The Federal Reserve Board “Chair” is appearing before Congress on Tuesday to go through the usual charade of questions and answers regarding US monetary policy.  Janet Yellen has politely let the Committee know that she is neither Chairman nor Chairwoman, this even though the statute clearly says that she is the “Chairman of the Board of Governors of the Federal Reserve.” Below follows some questions that members of Congress ought to ask Yellen, along with the answers she might make were Chair Yellen sufficiently honest and informed to respond directly.   Special thanks to Rep. Mick Muvaney (R-SC), one of the few honest men in Washington.

1)  The Debt Ceiling

Background:  We in Congress have heard that the Fed has had meetings regarding a possible breach in the debt limit.  Specifically, we think that people at the Fed may have been discussing, among other things, that the Fed would still accept Treasuries as collateral at the discount window, regardless of the status of the debt ceiling.  There also may have been discussions with Treasury about a prioritization of payments.  We haven’t confirmed this (despite asking for confirmation in writing).  

Q: In the interest of trying to calm markets in advance of the impending debt ceiling discussion, could you please confirm whether such discussions have occurred and what the Fed is prepared to do in the event that the US debt ceiling is breached?

A: The Fed’s primary concern has always been maintaining the ability of the Treasury to operate in the debt markets.  More that encouraging full employment or price stability, the Fed has always made the maintenance of orderly markets for Treasury debt among its top priorities.  For example, preserving the number of domestic primary dealers was the rationale behind the merger of Bank of America and Countrywide, Bear, Stearns & Co. with JPMorgan and the acquisition of Washington Mutual with JPMorgan.  In each case, these efforts failed, but preserving the stability and operational capabilities of the primary dealers has always been the Fed’s first, unspoken priority.  As a result, should Congress fail to give the Treasury legal authority to borrow even more money, the Fed is prepared to bend the rules to the breaking point and beyond to maintain orderly markets and public confidence.

2)  Remittances to Treasury

Background:  As you know, this is something Mulvaney and other members of Congress have been working on for several months.   One possible line of questioning here would be to ask her how the Fed intends to deal with the interest payments that are being made on the $2.7 trillion in bank reserves on the books at the end of January.

Q: Madam Chair, just to follow up on the point about the debt ceiling, has the Fed had any discussion about either funding or forbearing with respect to the payments on the trillions of dollars-worth of Treasury debt and agency securities now held by the Federal Reserve System?   Have you had any discussions with either the Treasury or the White House about providing Fed resources to prevent a default in the event that the debt ceiling is breached?

A: Of course we would never publicly admit to making such assurances to the Treasury, but in fact we have in place contingency plans to advance interest payments to member banks with reserves on deposit with the Fed in the event that the Treasury and/or the agencies cannot make scheduled interest payments on their debt.  While such operations are probably not legal, the fact remains that the Fed places confidence above all other considerations and we will do whatever is necessary to keep the confidence game rolling.  

3)  The Volcker Rule

Background:  Rep Mulvaney asked the following question of Fed Vice Chairman Daniel Tarullo.  Mulvaney: “ What if the SEC says that a broker-dealer’s  particular trade is OK under Volcker, but the Fed later says it isn’t, how would you deal with that conflict?”  Tarullo:  “If it’s a broker-dealer, and the SEC is OK with what practice the broker dealer (is) pursuing, then — then we (the Fed) don’t have — none of the rest of us (the OCC, the Fed, etc.) has the authority under the Volcker Rule and the statute to say, “no, that’s incorrect.”

Q: Are the broker dealer subsidiaries of a bank holding company covered by the Volcker Rule?

A: Probably not.  The whole point of the Volcker Rule, at least as the Fed sees it, is to prevent the TBTF banks from holding the world hostage as was the case with the rescue of AIG.  So long as the bank is not engaged in principal activities, the Fed is happy to look the other way as those activities are conducted by the broker dealer.  The key issue is that the broker-dealer may not become a nominee of the bank and the bank may not extend any guarantees for the dealer’s activities.  We must be able to flush the broker-dealer in a bankruptcy in the event that bank management screws up, but protect the insured depository.  Whether or not the Fed has the guts and institutional courage to pursue such a course given the answer to Question 1 is another matter.

4. A Housing Recovery

Background:  Madam Chair, it is pretty clear from the data published by CoreLogic and a number of analysts that the recovery of the housing market is over.  More, between one quarter and one third of all home owners in states like FL, NV, OH, IL and CT are under water or have insufficient equity in their homes to sell.  Loan applications are running about 50% below 2012 levels and further deterioration in home lending volumes ins predicted by most credible analysts.  Finally, about 40% of all home purchases in December were for cash.

Q: Given the above, how can you and the other members of the Federal Open Market Committee pretend that quantitative easing or “QE” is actually helping the housing market?  How would you compare the situation in states like Florida and Nevada today with the real estate debacle of the late 1920s and early 1930s?

A: Well, to be perfectly honest, QE is about preventing worldwide global deflation or at least slowing the deflation process.  The impact of QE on the housing sector has largely been thwarted by the 2010 Dodd-Frank law and the implementation of the Basel III capital regime, so you are correct to ask the question.  We on the FOMC really don’t have a good answer to the housing mess.  The sad fact is that Americans do not have sufficient income or credit capacity to lift home price anywhere cl
ose to the levels seen prior to 2007.  But in truth, if you were looking carefully at the housing data, US home prices started to slow or even decline in late 2004 and 2005.  This is why depositories such as WaMu and Countrywide also started to shrink in terms of total assets and loan sales into the agency market, but we at the Fed could not tell the truth about this for fear of damaging confidence.  Remember, our job at the Fed is not to deal with reality or hard data, but rather to pander to ignorant politicians in Washington and keep the American people comfortably numb as to the screwing they are taking in terms of inflation and falling living standards.  Home prices, sad to say, usually reflect inflation and thus rise much faster than weak consumer income.

5. Unwinding QE?  Really?

Background:  Some members of Congress have questioned  whether the Fed will face losses on its huge bond portfolio in the event that interest rates rise.  Since rates have in fact risen significantly since the trough in Treasury yields in 2012, the supposition is that the Fed already faces large losses on its portfolio – at least in an economic sense.  Now the Fed does not “mark to market” like a private bank, but if it did sell paper it would in theory take a loss and thus reduce its remittances to the Treasury.  Two years ago, Rep Mulvaney pressed Chairman Ben Bernanke on that issue of bond sales and losses to the Fed.  He said that the FOMC could still REPO the bonds to soak up excess liquidity.  But since then, a number of market observers have opined that using the REPO market very well might not work on as large a scale as could be necessary to drain liquidity.

Q: Madam Chair Yellen, can you confirm whether the FOMC intends to sell any of the trillions of dollars-worth of Treasury paper and mortgage securities that have been acquired over the past several years?  

A: Well of course we are not going to sell any paper.  The 300% increase in System assets and the money supply has come at a time when the velocity of money has been falling rapidly, so selling securities and taking liquidity out of the markets would be national suicide.  The whole point of this exercise is confidence, don’t forget, so selling debt and draining liquidity is a big “no no.”  There is also the question of just who would buy the paper.  The Wall Street dealer community is in no way ready to deploy sufficient capital to offload even 10% of the Fed’s holdings.  The System position represents huge amount of duration that the private sector cannot possibly support, especially in the wake of the implementation of the Volcker Rule.  So you can assume that the Fed is going to retain its portfolio and simply allow the assets to run off over time.  Just imagine what would happen to the Dow, the NASDAQ and “confidence” if the Fed even thought about selling significant amounts of debt.  Such silly talk.  

6. What’s the Frequency Janet?

Background:  For the past several decades, the Federal Reserve has been following a policy of low interest rates that goes against most classical economic warnings about the role of interest rates in a free market system.  The nineteenth-century economist Walter Bagehot maintained that in order to prevent bank panics a central bank should provide liquidity to the market at a very high rate of interest.  In a December 2013 interview in Zero Hedge, David Kotok of Cumberland Advisors noted that Antoine Martin of the Federal Reserve Bank of New York, in his important 2005 paper “Reconciling Bagehot with the Fed’s Response to September 11,” argued that Bagehot had in mind a commodity money regime in which the amount of reserves available was limited. Thus, keeping rates high was a way to draw liquidity, that is gold, back into the markets. Bagehot also understood that low interest rates fuel bad asset allocation decisions – what we call “moral hazard.” In the age of fiat money, however, economists have taken the opposite view, namely that an unlimited supply of reserves obviates the need to attract money back into the financial markets.

Q:  Madam Chair Yellen, can you describe for the Committee just why you think that low interest rates are good for the US economy and how you believe that depriving savers and investors of positive returns on their assets is somehow beneficial to society?

A: Well, as a first principle you must realize that the model of political economy within the Fed and the FOMC today is no longer a classical liberal model as prevailed in the days of Bagehot.  We are not even following what you might describe as a neo-Keynesian or Progressive model that we saw in the 1930s.  No, today at the Fed we are following a purely socialist and authoritarian allocation model that ignores market forces and instead seeks to prevent asset deflation at all costs.  Going back to my first response, the whole point of this exercise is to preserve the ability of the US Treasury to borrow new cash in the markets.  If we have to annihilate savers and investors to achieve this objective, so be it, but the implicit if not explicit policy of the FOMC today is to subsidize debtors via a forced wealth transfer from savers.  Some call this “financial repression,” but remember we at the Fed are all about saving the world from catastrophe today – even if our policy choices make the problems facing us tomorrow or next week even more horrific.  If we were to really allow interest rates to rise, the market for Treasury debt would seize up and the financial markets would implode.  We cannot allow that because Congress is incapable of dealing with the nation’s fiscal problems.  We at the Fed are the platonic guardians of the global financial system.  And our logic is undeniable…. 


    



via Zero Hedge http://ift.tt/1m01WGn rcwhalen

Six Questions for Federal Reserve “Chair” Janet Yellen

“My logic is undeniable”

V.I.K.I

“I Robot”

http://ift.tt/1bHnuxv

The Federal Reserve Board “Chair” is appearing before Congress on Tuesday to go through the usual charade of questions and answers regarding US monetary policy.  Janet Yellen has politely let the Committee know that she is neither Chairman nor Chairwoman, this even though the statute clearly says that she is the “Chairman of the Board of Governors of the Federal Reserve.” Below follows some questions that members of Congress ought to ask Yellen, along with the answers she might make were Chair Yellen sufficiently honest and informed to respond directly.   Special thanks to Rep. Mick Muvaney (R-SC), one of the few honest men in Washington.

1)  The Debt Ceiling

Background:  We in Congress have heard that the Fed has had meetings regarding a possible breach in the debt limit.  Specifically, we think that people at the Fed may have been discussing, among other things, that the Fed would still accept Treasuries as collateral at the discount window, regardless of the status of the debt ceiling.  There also may have been discussions with Treasury about a prioritization of payments.  We haven’t confirmed this (despite asking for confirmation in writing).  

Q: In the interest of trying to calm markets in advance of the impending debt ceiling discussion, could you please confirm whether such discussions have occurred and what the Fed is prepared to do in the event that the US debt ceiling is breached?

A: The Fed’s primary concern has always been maintaining the ability of the Treasury to operate in the debt markets.  More that encouraging full employment or price stability, the Fed has always made the maintenance of orderly markets for Treasury debt among its top priorities.  For example, preserving the number of domestic primary dealers was the rationale behind the merger of Bank of America and Countrywide, Bear, Stearns & Co. with JPMorgan and the acquisition of Washington Mutual with JPMorgan.  In each case, these efforts failed, but preserving the stability and operational capabilities of the primary dealers has always been the Fed’s first, unspoken priority.  As a result, should Congress fail to give the Treasury legal authority to borrow even more money, the Fed is prepared to bend the rules to the breaking point and beyond to maintain orderly markets and public confidence.

2)  Remittances to Treasury

Background:  As you know, this is something Mulvaney and other members of Congress have been working on for several months.   One possible line of questioning here would be to ask her how the Fed intends to deal with the interest payments that are being made on the $2.7 trillion in bank reserves on the books at the end of January.

Q: Madam Chair, just to follow up on the point about the debt ceiling, has the Fed had any discussion about either funding or forbearing with respect to the payments on the trillions of dollars-worth of Treasury debt and agency securities now held by the Federal Reserve System?   Have you had any discussions with either the Treasury or the White House about providing Fed resources to prevent a default in the event that the debt ceiling is breached?

A: Of course we would never publicly admit to making such assurances to the Treasury, but in fact we have in place contingency plans to advance interest payments to member banks with reserves on deposit with the Fed in the event that the Treasury and/or the agencies cannot make scheduled interest payments on their debt.  While such operations are probably not legal, the fact remains that the Fed places confidence above all other considerations and we will do whatever is necessary to keep the confidence game rolling.  

3)  The Volcker Rule

Background:  Rep Mulvaney asked the following question of Fed Vice Chairman Daniel Tarullo.  Mulvaney: “ What if the SEC says that a broker-dealer’s  particular trade is OK under Volcker, but the Fed later says it isn’t, how would you deal with that conflict?”  Tarullo:  “If it’s a broker-dealer, and the SEC is OK with what practice the broker dealer (is) pursuing, then — then we (the Fed) don’t have — none of the rest of us (the OCC, the Fed, etc.) has the authority under the Volcker Rule and the statute to say, “no, that’s incorrect.”

Q: Are the broker dealer subsidiaries of a bank holding company covered by the Volcker Rule?

A: Probably not.  The whole point of the Volcker Rule, at least as the Fed sees it, is to prevent the TBTF banks from holding the world hostage as was the case with the rescue of AIG.  So long as the bank is not engaged in principal activities, the Fed is happy to look the other way as those activities are conducted by the broker dealer.  The key issue is that the broker-dealer may not become a nominee of the bank and the bank may not extend any guarantees for the dealer’s activities.  We must be able to flush the broker-dealer in a bankruptcy in the event that bank management screws up, but protect the insured depository.  Whether or not the Fed has the guts and institutional courage to pursue such a course given the answer to Question 1 is another matter.

4. A Housing Recovery

Background:  Madam Chair, it is pretty clear from the data published by CoreLogic and a number of analysts that the recovery of the housing market is over.  More, between one quarter and one third of all home owners in states like FL, NV, OH, IL and CT are under water or have insufficient equity in their homes to sell.  Loan applications are running about 50% below 2012 levels and further deterioration in home lending volumes ins predicted by most credible analysts.  Finally, about 40% of all home purchases in December were for cash.

Q: Given the above, how can you and the other members of the Federal Open Market Committee pretend that quantitative easing or “QE” is actually helping the housing market?  How would you compare the situation in states like Florida and Nevada today with the real estate debacle of the late 1920s and early 1930s?

A: Well, to be perfectly honest, QE is about preventing worldwide global deflation or at least slowing the deflation process.  The impact of QE on the housing sector has largely been thwarted by the 2010 Dodd-Frank law and the implementation of the Basel III capital regime, so you are correct to ask the question.  We on the FOMC really don’t have a good answer to the housing mess.  The sad fact is that Americans do not have sufficient income or credit capacity to lift home price anywhere close to the levels seen prior to 2007.  But in truth, if you were looking carefully at the housing data, US home prices started to slow or even decline in late 2004 and 2005.  This is why depositories such as WaMu and Countrywide also started to shrink in terms of total assets and loan sales into the agency market, but we at the Fed could not tell the truth about this for fear of damaging confidence.  Remember, our job at the Fed is not to deal with reality or hard data, but rather to pander to ignorant politicians in Washington and keep the American people comfortably numb as to the screwing they are taking in terms of inflation and falling living standards.  Home prices, sad to say, usually reflect inflation and thus rise much faster than weak consumer income.

5. Unwinding QE?  Really?

Background:  Some members of Congress have questioned  whether the Fed will face losses on its huge bond portfolio in the event that interest rates rise.  Since rates have in fact risen significantly since the trough in Treasury yields in 2012, the supposition is that the Fed already faces large losses on its portfolio – at least in an economic sense.  Now the Fed does not “mark to market” like a private bank, but if it did sell paper it would in theory take a loss and thus reduce its remittances to the Treasury.  Two years ago, Rep Mulvaney pressed Chairman Ben Bernanke on that issue of bond sales and losses to the Fed.  He said that the FOMC could still REPO the bonds to soak up excess liquidity.  But since then, a number of market observers have opined that using the REPO market very well might not work on as large a scale as could be necessary to drain liquidity.

Q: Madam Chair Yellen, can you confirm whether the FOMC intends to sell any of the trillions of dollars-worth of Treasury paper and mortgage securities that have been acquired over the past several years?  

A: Well of course we are not going to sell any paper.  The 300% increase in System assets and the money supply has come at a time when the velocity of money has been falling rapidly, so selling securities and taking liquidity out of the markets would be national suicide.  The whole point of this exercise is confidence, don’t forget, so selling debt and draining liquidity is a big “no no.”  There is also the question of just who would buy the paper.  The Wall Street dealer community is in no way ready to deploy sufficient capital to offload even 10% of the Fed’s holdings.  The System position represents huge amount of duration that the private sector cannot possibly support, especially in the wake of the implementation of the Volcker Rule.  So you can assume that the Fed is going to retain its portfolio and simply allow the assets to run off over time.  Just imagine what would happen to the Dow, the NASDAQ and “confidence” if the Fed even thought about selling significant amounts of debt.  Such silly talk.  

6. What’s the Frequency Janet?

Background:  For the past several decades, the Federal Reserve has been following a policy of low interest rates that goes against most classical economic warnings about the role of interest rates in a free market system.  The nineteenth-century economist Walter Bagehot maintained that in order to prevent bank panics a central bank should provide liquidity to the market at a very high rate of interest.  In a December 2013 interview in Zero Hedge, David Kotok of Cumberland Advisors noted that Antoine Martin of the Federal Reserve Bank of New York, in his important 2005 paper “Reconciling Bagehot with the Fed’s Response to September 11,” argued that Bagehot had in mind a commodity money regime in which the amount of reserves available was limited. Thus, keeping rates high was a way to draw liquidity, that is gold, back into the markets. Bagehot also understood that low interest rates fuel bad asset allocation decisions – what we call “moral hazard.” In the age of fiat money, however, economists have taken the opposite view, namely that an unlimited supply of reserves obviates the need to attract money back into the financial markets.

Q:  Madam Chair Yellen, can you describe for the Committee just why you think that low interest rates are good for the US economy and how you believe that depriving savers and investors of positive returns on their assets is somehow beneficial to society?

A: Well, as a first principle you must realize that the model of political economy within the Fed and the FOMC today is no longer a classical liberal model as prevailed in the days of Bagehot.  We are not even following what you might describe as a neo-Keynesian or Progressive model that we saw in the 1930s.  No, today at the Fed we are following a purely socialist and authoritarian allocation model that ignores market forces and instead seeks to prevent asset deflation at all costs.  Going back to my first response, the whole point of this exercise is to preserve the ability of the US Treasury to borrow new cash in the markets.  If we have to annihilate savers and investors to achieve this objective, so be it, but the implicit if not explicit policy of the FOMC today is to subsidize debtors via a forced wealth transfer from savers.  Some call this “financial repression,” but remember we at the Fed are all about saving the world from catastrophe today – even if our policy choices make the problems facing us tomorrow or next week even more horrific.  If we were to really allow interest rates to rise, the market for Treasury debt would seize up and the financial markets would implode.  We cannot allow that because Congress is incapable of dealing with the nation’s fiscal problems.  We at the Fed are the platonic guardians of the global financial system.  And our logic is undeniable…. 


    



via Zero Hedge http://ift.tt/1m01WGn rcwhalen

Goldman's 5 Key Questions For Janet Yellen

Fed Chair Janet Yellen will deliver her inaugural monetary policy testimony on February 11 and 13. Her prepared remarks will be released at 8:30amET and the testimony will begin at 10amET. Goldman, unlike the market of the last 3 days, believes that Ms. Yellen is likely to “stick to the script” in her first public remarks since taking over from Bernanke but they look for additional color on the following issues: (1) the recent patch of softer data; (2) the Fed’s thinking on EM weakness; (3) the hurdle for stopping the taper; (4) the amount of slack in the labor market; and (5) the future of forward guidance.

 

 

Via Goldman Sachs,

1. How much does Ms. Yellen worry about the softer data?

The US economic data have disappointed since the start of the year. Following last week’s weaker-than-expected employment and ISM manufacturing reports, our US-MAP surprise index has fallen further into negative territory and our current activity indicator (CAI) has slowed from an average of 3.1% in October/November to 2.3% in December/January. But, given a number of special factors, we think this is a pothole after a much stronger-than-expected 2013H2, not the beginning of yet another swoon. More broadly, our confidence in the fundamental drivers of stronger US growth remains high and we continue to expect growth of about 3% this year. We will take note of the degree to which Ms. Yellen views the recent patch of softer data as transitory. A new set of formal economic projections is not due until the March FOMC meeting, and we expect Ms. Yellen’s message to remain broadly consistent with the committee’s December forecast of 3% growth in 2014.

2. How are Fed officials thinking about the EM weakness?

The recent turbulence in emerging economies and markets raises two questions for Fed officials. The first is whether the turmoil is related to the Fed’s tapering. As our EM Markets team has noted, we think that the EM difficulties reflect a need for significant adjustments in a range of countries in an environment of higher global real interest rates and lower commodity prices. While rising US rates–and therefore to some extent Fed policy–were a catalyst, the fundamental source of pressure lies in the domestic and external imbalances within EMs that need correction. The second question is the extent to which the EM turmoil might spill over into the United States. Given the limited exposure of the United States to the EM world, we are not too worried about adverse spillovers. Emerging economies as a group only account for a relatively small share of US exports, banking claims, and corporate profits, and the numbers decline further if we focus on the most troubled EM countries. We would expect Ms. Yellen to take a similar view but will look out for any color on these issues.

3. What is the hurdle for stopping the taper?

We believe that the hurdle for a pause in the tapering process is still fairly high. While the Committee has taken pains to note that the path of asset purchases is “not on a preset course,” a substantial change in the outlook would likely be required for the Fed to either pause or accelerate the gradual pace of tapering started in December. We think this relatively high bar has not been met. This is partly because of our interpretation of the recent dataflow discussed above and partly because, at this point, Fed officials appear to have little confidence that they can use small moves in the QE pace to fine-tune their monetary impulse. After the events of last summer, they are probably particularly reluctant to signal an increase in the pace of tapering, now that the program is on a natural course toward expiration well before the point at which the FOMC expects to hike the funds rate. The hurdle for interrupting the tapering process in response to weaker growth or lower inflation might be a bit lower, but we believe that the surprise would still need to be more meaningful than what we have seen in recent weeks. We would expect Ms. Yellen to deliver a similar message.

4. How much slack does the economy have?

One of the key questions for the US economy is how much slack remains in the labor market. The size of the employment gap appears particularly uncertain at present because it is unclear to what extent the unemployment rate is representative of the amount of slack in the labor market. On the one hand, the unemployment rate might overstate the amount of slack in the labor market because the short-term unemployment rate has already fallen significantly. On the other hand, the unemployment rate might understate the employment gap because the weakness in labor force participation is partly cyclical. While the uncertainty is significant, we see the evidence as more consistent with the latter view. Fed commentary on this issue suggests that there is a range of opinions on the committee. Former Chairman Bernanke was generally non-committal, highlighting the importance of both cyclical and structural factors (such as demographics). We would expect Ms. Yellen to indicate that a significant amount of slack remains despite the drop in the headline unemployment rate, and that more and broader labor market improvement is needed before the FOMC will consider an increase in short-term interest rates.

5. What will happen to forward guidance?

Finally, we will take particular note of any remarks regarding potential changes to the forward guidance. The most immediate question is how Fed officials think about guidance for the first rate hike now that the unemployment rate is very close to its threshold. A cosmetic adjustment to the guidance appears needed once the unemployment rate drops below 6.5%. But we would expect Fed officials to rely mainly on qualitative guidance in the near term given the apparent lack of support in the December meeting minutes for more forceful enhancements, such as reducing the unemployment threshold to 6.0%.

The other important question is whether the committee will provide additional guidance for the pace of policy normalization once the first rate hike occurs. The FOMC statement currently states that “when the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.” Ms. Yellen said in March 2013 that the committee’s current forward guidance is “not complete” because it “has not specified exactly how it intends to vary the federal funds rate after liftoff from the effective lower bound.” Ms. Yellen concluded in April 2013 that “as the time of the first increase in the federal funds rate moves closer… it will be increasingly important for the Committee to clearly communicate about how the federal funds rate target will be adjusted.”

We argued last week that an attractive approach to providing additional forward guidance in the present circumstances might be to stress the role of nominal wage growth for Fed policy. The uncertainty around the extent of labor market slack makes agreement on quantitative guidance difficult to attain. But we showed that Fed officials can, in principle, mitigate this problem by responding less to the poorly measured employment gap and more to nominal wage growth. This is true even if Fed offi
cials care greatly about employment; the reason is that wage inflation acts as a cross check for (imprecisely measured) labor market slack. While such a policy is not perfect—as the link between wages and slack, too, is subject to uncertainty—the scope for error is lowered significantly. Ms. Yellen may therefore well indicate that wage inflation is one of the key markers for broad labor market improvement and, therefore, the committee’s thinking about the funds rate path.


    



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