Many participants seem confused. Despite the talk about the dollar by different Fed officials, dollar policy is set by the US Treasury. Secretary Lew has been clear.

First he reiterated the 20-year old mantra of a strong dollar being in US interest. Despite the polemical tactics to reduce this claim to absurdity, it does indeed have real and important significance. Proof is consider the impact of the opposite. If Lew would have said some thing to the effect that a strong dollar no longer served US interests the destabilizing impact would be immediately evident.

The strong dollar policy was initially articulated by Robert Rubin to differentiate his stance from his predecessors who included Bentsen and Baker, both who has used the dollar as a weapon to try to win concessions from Japan and Germany. Rubin’s mantra was a signal that the US would not engage in such practices, and thus far it has not.

Second, Treasury Secretary Lew urged other countries to refrain from competitive devaluations.  That is to aim policy to achieve currency depreciation to boost exports.  There reason this course is so detested is that it is zero-sum.  A policy aimed at lowering the euro, for example, can, if effectively, simply shift demand to Europe from elsewhere.  Engineering lower interest rates to stimulate an economy is not zero-sum as it can boost overall demand. 

Recall what we are talking about.  The US dollar has increased 2% year-to-date on the Federal Reserve’s broad trade-weighted measure that is adjusted for inflation.  This is too small to have even a 0.1% impact on the US economy, according to various econometric models.

Doesn’t valuation matter?  According to the OECD, most of the major currencies are still rich to fair-value ( a PPP-based model).  According to them the Swiss franc is 31% above its PPP implied level.  The Australian dollar is almost 24% over-valued.  Sterling is about 10.5% above PPP.  The Canadian dollar is rich by 9.5%. 

There are two major currencies that the OECD says are a little under-valued.  The euro, which is less than 2% below fair-value, and the yen, which is 4% below its PPP level.    This is quite minor and pales in comparison with the magnitude and duration of their overshoot.

Nevertheless, it makes good political and economic sense for US to warn other countries from seeking excessive depreciation of their currencies or beggar-thy-neighbor policies.  If combination stimulative efforts to arrest lowflation and revive the economy drives the euro lower, US officials may not object too loudly, for example.  However, the lack of structural reforms, and Germany’s large current account surplus, seems as it some in Europe are relying too heavily on currency depreciation to do the heavy lifting.

The US does not hide the fact that although China’s current account surplus has fallen, and reserve growth most recently appears to have tapered off, it still needs to move toward a market-determined exchange rate.  The yuan is at new seven-month highs today.  Many emerging market countries have massively under-valued currencies according to the OECD.  In the Treasury’s spring report on the foreign exchange market and the international economy, in addition to China, South Korea was singled out for its frequent intervention.  The OECD says it is still 25% under-valued.

The Federal Reserve does not set dollar policy in the US.  However, exchange rates are among the financial variables that could impact growth and inflation.  It is natural for the Federal Reserve to take significant changes in the foreign exchange market into account when setting policy.  However, the co-efficient of that variable in the policy making equation remains modest at best.  It is more of a potential issue than a salient headwind.  The appreciation of the dollar is hardly a surprise to Fed officials who must have anticipated some appreciation given that it is ahead of most major countries in ending its extraordinary policy initiatives.  Until a couple of months ago, the question of when, not if, it was going to happen.

The foreign exchange market could become the terrain of competition between countries.  This is what is frequently meant by a “currency war”.   Since the international political economy is characterized by the competition between states, the key issue is one of degree.  Many Japanese officials were keen to indicate that they were not the drivers of the yen’s recent decline.  ECB and French officials more explicitly have been talking the euro lower.  However, the main weight on the euro has been the divergence between US and euro zone economies and policies.     It takes two to tango in a currency war, and the US Treasury will likely use its update of its assessment of the currency market and international economy to urge others to show restraint.

via Zero Hedge http://ift.tt/1qTYsS3 Marc To Market

U.S. and UK Test Big Bank Collapse – Risk Of Bail-ins

Regulators from the U.S. and the UK are in a “war room” today to see if they can cope with any possible fall-out when the next big bank topples over, the two countries said on Friday according to Reuters.

Treasury Secretary Jack Lew and the UK’s Chancellor of the Exchequer, George Osborne, on Monday will run a joint exercise simulating how they would prop up a large bank with operations in both countries that has landed in trouble.

Also taking part are Federal Reserve Chair Janet Yellen and Bank of England Governor Mark Carney, and the heads of a large number of other regulators, in a meeting hosted by the U.S. Federal Deposit Insurance Corporation.

“We are going to make sure that we can handle an institution that previously would have been regarded as too big to fail. We’re confident that we now have choices that did not exist in the past,” Osborne said at the International Monetary Fund’s annual meeting.

Six years after the financial crisis, politicians and regulators around the globe are keen to prove they have created rules that will allow them to let a large bank go under without spending billions in taxpayer dollars.

They have forced banks to ramp up equity and debt capital buffers to protect taxpayers against losses, and have told them to write plans that lay out how they can go through ordinary bankruptcy. The plans are so-called living wills.

Yet salvaging a bank with operations in several countries – which is the norm for most of the world’s largest banks such as Deutsche Bank, Citigroup Inc and JPMorgan – has proven to be a particularly thorny issue.

Because the failure of a big bank is such a rare event, regulators may not be used to talking to each other. There have also been suspicions that supervisors would first look to save the domestic operations of a bank, and would worry less about units abroad.

The exercise comes as regulators are about to bring to fruition further initiatives to make banking safer.

The first would force banks to have more long-term bonds that investors know can lose their value during a crisis, on top of their equity capital, to double their so-called Total Loss-Absorbing Capacity (TLAC).

A second measure, expected to be announced this weekend, will force through a change in derivative contracts, which in their current form protect investors, and complicate the winding down of a bank across borders.

Gold in U.S. Dollars (Thomson Reuters)

It is now the case that in the event of bank failure, your deposits could be confiscated.
Let’s be crystal clear: The EU, UK, the U.S., Canada, Australia and New Zealand all have plans for bail-ins in the event of banks and other large financial institutions getting into difficulty.

Are your deposits safe?

Are you prepared for Bail-Ins?

Special Report on Bail-ins Here

GOLDCORE MARKET UPDATE

Today’s AM fix was USD 1,228.00, EUR 969.14 and GBP 763.82 per ounce.
Friday’s AM fix was USD 1,222.25, EUR 964.38 and GBP 761.01 per ounce.
        
Gold and silver both remained unchanged on Friday at $1,223.70 and $17.35. Last week, gold and silver both climbed 2.7% and 3.2%, respectively.

Silver in U.S. Dollars (Thomson Reuters)

Gold jumped sharply in the early Asian trading Monday as a safe haven bid came into the market. Gold in Singapore rose as high as $1,235 an ounce prior to concentrated selling in London pushed prices lower again. At the open in London, gold climbed to $1,237.30 an ounce, near a 4 week high, prior to selling saw gold fall back to $1,225/oz. 

Last week gold bullion saw its largest weekly gain in 4 months as safe haven buying was seen due to concerns about the Eurozone and continuing ultra loose monetary policies.

Poor economic data from Europe, slow growth in China and concerns about Ebola have prompted investors to sell equities. Asian stocks stumbled to seven-month lows on today while crude oil prices were pinned near a four-year trough. Stocks in Dubai fell 6.5% on Sunday, the biggest drop in four months to bring the Dubai Financial Market General Index to its lowest level since July 20.
Gold is a proven hedging instrument and safe haven asset to riskier assets such as equities.
Last week the IMF cut its global economic forecast, and the U.S. Fed’s very dovish comments have made investors think that an interest rate hike is coming later than they expected. 
Fed officials also expressed concern over the global economy, which could further delay a rise in U.S. interest rates.

Most notably, Fed Vice Chairman Stanley Fischer said the effort to normalise radical U.S. monetary policy after years of extraordinary stimulus may be hampered by the global outlook.
A delay in raising interest rates is positive for gold, a non-interest-bearing asset, and negative for the dollar and other interest yielding assets.

Today, Japanese markets are closed and the U.S. and Canada will be partially, or fully, shut for holidays as well. 

Singapore launched physically-settled kilobar gold trading today or contracts for 25kg or 804 ounces each. Singapore has stated its intent to become an Asian gold hub with a goal of setting a regional benchmark price. The contract which expires tomorrow was priced at $39.685/gram at close of trade. The contracts trade at 830-1130 am Singapore time.

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With the auto loan subprime bubble large enough for both mainstream media, credit reporting agencies, and the Fed itself, having no choice but to notice, one question has emerged: what is the preferred car model of subprime lessors and lenders? The answer, courtesy of Experian’s “State of the Automotive Finance Market Second Quarter 2014” report, is shown below.

First, here is the FICO score sort of new car leases by the 10 most popular leased models:

And, alternatively, the same however not for leases but for loans.

 

So what size Toyota loan or CR-V lease does a 666 or 726 FICO score, respectively, get you? The answer is shown below:

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

The stock market is in a perilous state.

 

Ever since 2008, anytime stocks began to collapse sharply, “someone” stepped in and put a floor under the market.

 

In 2010, the S&P 500 staged a death cross, where its 50-DMA broke below its 126-DMA (the half year moving average). Stocks were in a perilous state with the 2008 Crash still in everyone’s short-term memory.

 

 

The Fed stepped in, hinting at, then all but promising, and then finally launching QE 2 in July, August, and then November, respectively.

 

This set off a rally in stocks that lasted until the EU Crisis erupted in full force in 2011. Once again stocks staged a death cross. And once again, the Fed stepped in with promises of action followed by the announcement of Operation Twist in September 2011. Stocks took off and we were back to the races.

 

 

Which brings us to 2012. Europe was really going down in flames. Greece, then Portugal, and even Spain were lining up for bailouts. And the bailouts were getting larger by the month with Spain requesting €100 billion in June 2012.

 

ECB President Mario Draghi promised to do “whatever it takes” to hold the EU together. But the carnage was spilling over even into US markets. So Bernanke’s Fed promised yet another QE program, though this new program would be “open-ended” in June.

 

Sure enough, Bernanke unveiled QE 3 in September 2012. He then upped the ante, unveiling QE 4 in November 2012.

 

 

Stocks took off again, launching one of the sharpest, strongest rallies in history:

 

 

Which brings us to today. Stocks once again are in trouble, having taken out their 50-DMA, and the 126-DMA. We’re likely just a few weeks away from another “death cross”… and the Fed is fully committed to ending QE at the end of the month.

 

 

Moreover, the ECB is having trouble engaging in QE because Germany is not overly fond of the idea. China just announced that it will not engage in a large scale stimulus program in the near future. And the Bank of Japan has admitted it will likely not announce another massive QE program anytime too soon.

 

So who will save stocks this time?

 

If you’ve yet to take action to prepare for the second round of the financial crisis, we offer a FREE investment report Financial Crisis "Round Two" Survival Guide that outlines easy, simple to follow strategies you can use to not only protect your portfolio from a market downturn, but actually produce profits.

 

You can pick up a FREE copy at:

 

http://ift.tt/1rPiWR3

 

 

Best Regards

 

Graham Summers

 

via Zero Hedge http://ift.tt/1sHtZME Phoenix Capital Research

It completely came out of the blue. On Friday September 26th Bill Gross, founder and director at PIMCO, resigned from his position and moved to Janus Capital. Rumor has it that the most influential bond specialist on this planet was about to be fired and Gross did have a reputation of making strong statements, which is something that not all employees appreciated. Mohamed El Arian already left PIMCO earlier this year, also because of Gross according to insiders, and the letters from dissatisfied co-workers were apparently getting out of control in recent months.

But what is more relevant to investors is the fact that PIMCO’s Total Return fund had almost reached 300 billion dollars at a certain point under the leadership of Bill Gross. For decades the fund outperformed the market year in, year out. This created a bit of complacency with private bankers and such; recommending this fund was never a big risk to your career. When things would not end up as expected you could always say that PIMCO was going through a temporary rough period, and that everything was going to be fine in the end. Gross was untouchable.

In recent years the fund did not perform as well as it did in the past, unfortunately, and Gross lost a lot of his shine. The fund started showing up in the bottom 25% of its peer group, especially since Gross misplaced a bet against United States Treasuries in 2011. The fund lost more than a tenth of its value in September with around 20 billion dollars net being withdrawn. On the day of Gross’ resignation the fund suffered its biggest outflow in its existence, although PIMCO did not release the exact figures.

Source: Business Insider

While the competition was recovering from a miserable 2013 and slowly picking up gains this year, the PIMCO fund kept underperforming. Investors were getting anxious as a consequence and withdrew about 80 billion dollars in the 17 months leading up to Gross’ exit. Investment research firms, like the influential Morningstar, also voiced their opinions as analysts dropped the fund’s rating from ‘Gold’ to ‘Bronze’, because of the uncertainty around the new management team. Fortunately for Gross, the bond market in which the fund invests is one of the most liquid in the world, with 700 billion dollars’ worth of assets changing hands daily on average. The fund, consequently, never really ran into liquidity problems.

It is a mystery why investors keep pumping money into bonds in the current environment of extremely low interest rates but, nevertheless, tens of billions of dollars flow into these kinds of funds. Investment funds and ETFs in the bond segment that are listed pulled in no less than 116 billion dollars of fresh cash this year up to and including the month of August. It would be a lie to say that all the money is going into the stock market, which is a lot smaller and less liquid regardless.

It is only a hypothesis of course, but maybe after 43 years of Bill Gross on the bond markets we will see the end of the secular bull market in government bunds. During that whole period interest rates have been constantly decreasing and Gross outpaced the market during all those years with tremendous returns. Despite all the statements about the superior returns of stocks in the (very) long term, bonds have been leading the market for the last 4 decades (!). Below you can see a chart of the 10-year Treasury yield, which has been on the decline since 1982.

Source: Yahoo! Finance

Investing in bonds has certainly become a lot harder than in the ‘80s. Back in the day you could assume that you were certainly going to be paid back, but now bond ratings have come into play much more and that takes a lot more work from an analysis perspective. Managing a bond fund has become much more complicated as a consequence. It used to be the case that you could buy long-term bonds and keep them until maturity. There was no doubt that you would make a profit if you had to sell before that date, since interest rates were decreasing anyway. Today, fund managers have to work with derivatives to make a difference.

For example, try getting a decent return with a 0.92% yield on German bonds over 10 years. These types of yields do not reflect the economic reality at all, moreover, and not many market watchers realize how hard it is for insurers and other parties to meet those long term obligations and get some sort of a return. The central banks are pushing everyone to take risks, even the ones who do not want to take them. Warren Buffett recently stated in an interview on CNBC on the 2^nd of October that he does not really understand global interest rates, but that he does not have to understand them. If Buffett already does not understand…

Is Gross preparing for the worst? Has he noticed that after 40 years of superior bond returns, his ‘Bond King’ empire is over with? He does not have to do it for the money: his 200 million dollar yearly salary plus bonuses will cover everything. Although the man tweeted on his 70^th birthday that he was ready to add another 40 years, we doubt that the end of his career will play out on the bond markets.

Bill Gross’ departure is a game changer for the bond markets. Those who still expect decent returns for bonds are probably expecting deflation to hit. That is not what we, at Sprout Money, believe is going to happen. We expect for the cash that has been created over the last few years to find its way to the markets at one point or another. Most likely the money will not flow to the ‘old’ bull market, but to a new candidate that is yet to be selected. There are many options: stocks, gold, commodities, real estate… all alternatives the government cannot print more of. Position yourself in real assets and avoid the ‘confiscation certificates’, which is what bonds are at the current rates.

** Check out our latest Gold Report!

Sprout Money offers a fresh look at investing. We analyze long lasting cycles, coupled with a collection of strategic investments and concrete tips for different types of assets. The methods and strategies from Sprout Money are transformed into the Gold & Silver Report and the Technology Report.

Follow us on Twitter @SproutMoney

via Zero Hedge http://ift.tt/1wtmtnA Sprout Money

But, but, but… it’s a social media platform…

 

GRPO enters official bear market (down 20%)…

And so does TSLA…

Did Tesla’s “D” stand for Down…?

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

Do not panic. Ebola is not very contagious at all. That remains the mantra from health and political officials in America.. and as far as the nurse who was treating now-dead Dallas Ebola patient Thomas Eric Duncan, it was user error, according to CDC Director Frieden. As Reuters reports, some healthcare experts are bristling at the assertion by a top U.S. health official that a “protocol breach” caused the Dallas nurse to be infected with Ebola while caring for a dying patient, saying the case instead shows how far the nation’s hospitals are from adequately training staff to deal with the deadly virus, “you don’t scapegoat and blame when you have a disease outbreak… We have a system failure. That is what we have to correct.”

 

 

As Reuters reports,

Some healthcare experts are bristling at the assertion by a top U.S. health official that a “protocol breach” caused a Dallas nurse to be infected with Ebola while caring for a dying patient, saying the case instead shows how far the nation’s hospitals are from adequately training staff to deal with the deadly virus.

 

…

 

It was not immediately clear whether the Texas hospital prepared its staff with simulation drills before admitting Duncan, but a recent survey of nurses nationwide suggests few have been briefed on Ebola preparations. Officials at the hospital did not respond to requests for comment.

 

Some experts also question the CDC’s assertion that any U.S. hospital should be prepared to treat an Ebola patient as the outbreak ravaging West Africa begins to spread globally. Given the level of training required to do the job safely, U.S. health authorities should consider designating a hospital in each region as the go-to facility for Ebola, they said.

 

“You don’t scapegoat and blame when you have a disease outbreak,” said Bonnie Castillo, a registered nurse and a disaster relief expert at National Nurses United, which serves as both a union and a professional association for U.S. nurses. “We have a system failure. That is what we have to correct.”

 

…

 

In many cases, hospitals “post something on a bulletin board referring workers and nurses to the CDC guidelines. That is not how you drill and practice and become expert,” she said.

 

CDC spokesman Tom Skinner said the agency is still investigating the case of the Dallas nurse, but stressed that “meticulous adherence to protocols” is critical in handling Ebola. “One slight slip can result in someone becoming infected.”

 

…

 

“Doctors and nurses get lost in patient care. They do things that put themselves at risk because their lens is patient-driven,” Kaufman said. In Dallas, “I suspect no one was watching to make sure the people who were taking care of the patients were taking care of themselves,” he said.

 

…

 

“Towards of end of the illness, the virus is trying to live and thrive. It’s trying to get out of the person’s body. It’s producing massive amounts of fluid,” he said.

 

…

 

“Every hospital can then prevent the spread of Ebola, but not every hospital in the U.S. can admit a patient in the hospital for long-term care,” he said.

*  *  *
So – let’s get this straight – Ebola is a deadly disease but is not easily spread (so don’t panic) but if you are a healthcare worker a slight slip and you are done…

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

With the cash bond market closed today, we get our cues from an admittedly thin Treasury futures market. Prices are up across the board with 10Y yield down 3bps at 2.25%, 30Y back under 3%, and 5Y down 4bps at 1.49%. The rates market, once again is leading stocks lower – not getting as exuberant as stocks out of the gate… The Russell 2000 is at one-year lows (Oct 9th 2013 to be exact)

Bond futures implied rates…

 

as bonds drag stocks lower back to reality…

 

Russell 2000 dropped to one-year lows intraday…

 

Charts: Bloomberg

via Zero Hedge http://ift.tt/1s9JCuH Tyler Durden

With no bond-market-police to corral the machines, it is not entirely surprising that – on the heels of AUDJPY – US equity futures have levitated this morning to provide a comfortably green open (as the world held its breath for a black monday – particularly inappropriate on Columbus Day). However, there’s a long way to go in the day and liquidity is – in a word (or two) – non-existent (lowest in at least 18 months). That means intraday volatility will be extreme to say the least…

 

Liquidity is at its lowest in at least 18 months

 

And sure enough…the highs…

 

which was instantly whiplashed to the lows

 

But NASDAQ is back in the red (for now)

 

And then there is the Trannies…

 

Source: Nanex LLC @nanexllc

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

Another day, another attempt by the Saudis to topple Putin and kick the Kremlin where it hurts: the oily bottom line. And, as a result, another 2% drop in the price of West Texas Intermediate and various other crude grades around the globe.

But is the selling finally overdone, as some suggest happened to the S&P (as an alternative view to the PPT stepping in, the same PPT even Bloomberg is happy to bring up in casual conversation)? Well, according to the 1-year z-score of large speculator net position as % total open interest, is the lowest it has been since late 2011, early 2012, when the Fed was forced to bail out the world and Europe was crashing (as usual) into a deflationary vortex.

Also of note, per last week’s COT report, large speculators decreased WTI crude oil longs to $26.1bn from $27.0bn notional.

But perhaps the clearest indication that not even the Saudi’s can keep pushing the price of oil much further here is that from a purely technical standpoint, oil is so hated, that the daily RSI has reached oversold only for the 3rd time in six years!

So will someone (perhaps the Kremlin’s various preferred Swiss energy trading companies out of Zug) finally make a move and try to trap the crude bears in the coming days? If so, the move could be violent if and when the short squeeze finally begins.

via Zero Hedge http://ift.tt/1sHb2tJ Tyler Durden