Tag: finance

The key event in the week ahead is the ECB meeting.  The ECB surprised many in early September by cutting
key interest rates.  We had anticipated it because although Draghi had
indicated their rate policy had been exhausted, he acknowledged there some
still scope for technical adjustments.  We
had thought it bolstered the chances of a successful TLTRO, as with a five bp
repo rate there could be little hope in lower rates later.  

 

Although many think that there can be no further interest
rate cuts, Draghi did point to the possibility of some adjustment in the rate
corridor. For example, it
is conceivable that the ECB could cut the lending rate, which is the top of the
corridor.   Still, it is unreasonable to expect a change in the rate
corridor this week.  Instead, the focus is on the “modalities”
or terms of the asset-backed purchase facility that Draghi in early September.
 

 

After the low takedown at the initial TLTRO, market
participants are anxious for details about the ABS and covered bond purchase
plans.  The idea being that the low TLTRO
borrowing points to a more aggressive asset purchase program.  The key is boosting the ECB’s balance sheet,
as Draghi indicated, back to levels in mid-2012, which is about one trillion
euros from current levels.  

 

The problem is the that the ABS market is relatively small.  The outstanding ABS at the end of
the 2013 was roughly one trillion euros.  Of this amount, only about half
is estimated to be in the market. The other half is being used for collateral
for funding at the ECB.   This is an important point about the potential
for the ABS purchase program, but also about the ECB’s experience in assessing
the risk and pricing such securities.  

 

There are four components to the ABS universe that is
relevant here.  The single biggest part by far in
the assets back by real estate mortgages.  That is roughly 60% of the ABS
market in Europe. The size of the remaining components shrink dramatically.
 Traditional ABS, backed by car loans, leases and that sort of activity,
is about 15% of the outstanding market.   Another 10% of the market are
ABS backed by loans to small businesses.  ABS backed by loans in the form
of collateralized debt obligations account for roughly the same amount.  

 

Of the existing stock of ABS securities, Netherlands
accounts for a little more than a quarter.  Italy and Spain together account for
about a third, which is evenly divided between the two.  It falls considerably
after these three.  Belgium accounts for about 8% and Germany 6%.
 Ireland is just shy of 4%, and France’s share is a tad lower, just below
3.5%.

 

There are three elements that investors want to know from
Draghi:  the size, components, and duration of the ECB’s purchase plan,
which will be conducted by an asset management firm. Reuters reported recently that the initial
plan for the ABS (and covered bond) purchase program anticipated up 500 bln
euros.  This suggests that the TLTROs
were anticipated to expand the balance sheet by another 500 bln euros).  
The risk is that the ECB does not announce the size of its program. This
preserves the most about of flexibility by not doing so.   

 

By telling the market the components of its ABS purchases,
investors can quick estimate the maximum the ECB could purchase of the existing
stock, and make judgments accordingly.   There are several other moving
parts here.  For example, it is not yet clear what Draghi meant by
“simple and transparent” ABS that the ECB would purchase.  The
ECB could also lower the rating of ABS that is is willing to accept.  This
would boost the securities available, of course, and assist the peripheral
banks more.  

 

Under QE3+, the Federal Reserve told the amount it would
buy of long-term securities, but left the duration of the program open-ended.  The ECB could turn this formulation
on its head.  It could indicate that it would make monthly ABS purchases
for the next two years.  This would encourage banks to
“manufacture” the securities the ECB will purchase, the same way they
are manufacturing the collateral the ECB was willing to accept.  

 

If the ECB limits itself to new securities only, the impact
will likely be small.  There was an estimated 240 bln euros
in ABS issued in 2013 and about 150 bln euros in H1 2014.  Much of this
may already sit with the ECB in the form of collateral.  Buying old
issuance may not offer a power incentive to increase current and future
lending, though it does help banks de-leverage.  

 

If the ECB wants a large program, it needs to provide banks
incentives to create more.  This implies a slow start.  If
the ECB wants to start quickly, it may find that its program will be small. It
may adopt other technical polici
es that will help augment the purchase program,
including collateral and credit rules.   

 

While the ECB meeting dominates
the agenda, it is, of course, not the only event of the week.  A second highlight is the US jobs
data. The market expects a large bounce back after the surprisingly weak August
non-farm payroll increase of 142k.  We
expect that the US economy loses some momentum seen in the middle two quarter
of he year.  Q2 GDP was revised to 4.6%
last week and Q3 appears to be tracking something a bit north of 3%.   Expectations will be fine tuned after this
week’s personal expenditure, construction spending, and trade balance reports. 

 

We suspect Q3 is ending on a
soft note and that payback will be seen in Q4. 
It is difficult to
envision US auto sales building on the strong 17.45 mln pace.  That said, GM, Ford and Chrysler likely
picked up market share. 

 

Weekly initial jobless claims
bottomed in mid-July, and although they have not deteriorated, the improvement
has stalled. Republicans
appear to have a strong chance to capture the Senate from the Democrats in November.
  This may freeze some private sector decision making
in anticipation of better legislative climate, including corporate tax
reform. 

 

The market may get the 215k
increase in non-farm payrolls the Bloomberg consensus shows.  However,
it may not be in quite the form it would like. 
Given historical patterns the August series is likely to be revised
higher. 

 

We do not expect this week’s
data in the US, Europe or Japan to influence the outlook for policy.  It
would be only mildly encouraging to see, for example, a tick up in the euro area
flash September CPI.  It is too early to
see expect the impact from the euro’s decline. 
The euro area PMIs will be interesting only for mapping relative
movement of the core and periphery. 

 

The UK’s three PMIs are unlikely
to alter the view of a BOE rate hike in Q1 15. 
The readings may be consistent with a moderation of activity, but they
are expected remain at elevated levels. 

 

Japan’s Tankan survey is
expected to show that corporate Japan is a bit less optimistic on balance.  The
sales tax increase is have a greater and longer impact than the government had
expected, and recently the government has downgraded its assessment.  It is little wonder that businesses do also
downgrade their assessment.  We suggest
the focus of the policy response will be on a supplemental budget rather than
the expanding the BOJ’s asset purchase program. 
We anticipate the the yen’s recent sharp decline will boost inflation in
the coming period. 

 

 

 

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

Three weeks ago, in “A Quick Reminder Of The Only Thing That Matters, In One Chart” we did just that, showing the ever greater amount of global liquidity injected by the central banks, thanks to which they have so far successfully masked the accelerating economic collapse of the world, as shown by cratering “benign” inflation expectations to levels not seen since Lehman: hardly a confirmation of economic stability and growth:

… we and quoted none other than JPM that “the current episode of excess liquidity, which began in May 2012, appears to have been the most extreme ever in terms of its magnitude and the ECB actions have the potential to make it even more extreme.”

We left it off with the “one chart that should put everything in perspective, and explain why the world has reached a plateau of permanent addiction to monetary liquidity injections, and why nothing else matters.”

 

So, with everyone fearing imminent Fed tightening, what does this chart look like in the coming years? For the answer of what the “only chart that matters” projected until 2016 looks like, we go to Barclays, where we find that absolutely nothing is about to change to the slope of the infinitely fungible, globally interconnected, liquidity excess.  In fact, as Barclays puts it best, “central bank balance sheet growth will be broadly unchanged in the next 12-15 months.” So much about all those fears of a global rate hike cycle…

In fact, the only difference is that if and when the Fed’s QE ends and the US balance sheets declines modestly as a % of GDP, both Europe and Japan will take its place at the forefront of the global monetary firehose.

Of course, the assumption here is that once the Fed ends QE in 1 month, and concerns that a US rate hike is imminent, the market won’t crash and thus force the Fed to promptly return to what it does best, CTRL-P. In fact, the €64K question is whether the hand off from the Fed to the ECB and BOJ will be smooth enough to avoid a stock market crash between now and the end of 2016. Everything else is semantics.

via Zero Hedge http://ift.tt/1t8FA36 Tyler Durden

Three weeks ago, in “A Quick Reminder Of The Only Thing That Matters, In One Chart” we did just that, showing the ever greater amount of global liquidity injected by the central banks, thanks to which they have so far successfully masked the accelerating economic collapse of the world, as shown by cratering “benign” inflation expectations to levels not seen since Lehman: hardly a confirmation of economic stability and growth:

… we and quoted none other than JPM that “the current episode of excess liquidity, which began in May 2012, appears to have been the most extreme ever in terms of its magnitude and the ECB actions have the potential to make it even more extreme.”

We left it off with the “one chart that should put everything in perspective, and explain why the world has reached a plateau of permanent addiction to monetary liquidity injections, and why nothing else matters.”

 

So, with everyone fearing imminent Fed tightening, what does this chart look like in the coming years? For the answer of what the “only chart that matters” projected until 2016 looks like, we go to Barclays, where we find that absolutely nothing is about to change to the slope of the infinitely fungible, globally interconnected, liquidity excess.  In fact, as Barclays puts it best, “central bank balance sheet growth will be broadly unchanged in the next 12-15 months.” So much about all those fears of a global rate hike cycle…

In fact, the only difference is that if and when the Fed’s QE ends and the US balance sheets declines modestly as a % of GDP, both Europe and Japan will take its place at the forefront of the global monetary firehose.

Of course, the assumption here is that once the Fed ends QE in 1 month, and concerns that a US rate hike is imminent, the market won’t crash and thus force the Fed to promptly return to what it does best, CTRL-P. In fact, the €64K question is whether the hand off from the Fed to the ECB and BOJ will be smooth enough to avoid a stock market crash between now and the end of 2016. Everything else is semantics.

via Zero Hedge http://ift.tt/1t8FA36 Tyler Durden

We have yet to read Owen Jones’ “The Establishment… And how they get away with it“, although Russell Brand’s take of the author has certainly piqued our interest: ”Owen Jones may have the face of a baby and the voice of George Formby but he is our generation’s Orwell and we must cherish him.” We do know, however, that the young author and Guardian columnist is one of those who are not afraid to think critically while accepting there is far more than meets the eye, and certainly than the controlled media would like revealed. To wit, from the book’s official blurb:

Behind our democracy lurks a powerful but unaccountable network of people who wield massive power and reap huge profits in the process. In exposing this shadowy and complex system that dominates our lives, Owen Jones sets out on a journey into the heart of our Establishment, from the lobbies of Westminster to the newsrooms, boardrooms and trading rooms of Fleet Street and the City. Exposing the revolving doors that link these worlds, and the vested interests that bind them together, Jones shows how, in claiming to work on our behalf, the people at the top are doing precisely the opposite. In fact, they represent the biggest threat to our democracy today – and it is time they were challenged.

The following infographic from the book, showing “how the media controls Britain” reveals the schism between popular British sentiment about key social issues courtesy of media influences and reality, indicating that the “establishment” is more than happy to sow discord within the working/middle classes using its traditional “objective” distribution channels, while it remains aloof, collecting the rent its record capital provides.

 

And while the middle class around the world fights for scraps, and has seen its real wages over the past three decades largely unchanged, the “establishment”, wrapped in a comfortable cocoon spun by the captured media, benefits:

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

We have yet to read Owen Jones’ “The Establishment… And how they get away with it“, although Russell Brand’s take of the author has certainly piqued our interest: ”Owen Jones may have the face of a baby and the voice of George Formby but he is our generation’s Orwell and we must cherish him.” We do know, however, that the young author and Guardian columnist is one of those who are not afraid to think critically while accepting there is far more than meets the eye, and certainly than the controlled media would like revealed. To wit, from the book’s official blurb:

Behind our democracy lurks a powerful but unaccountable network of people who wield massive power and reap huge profits in the process. In exposing this shadowy and complex system that dominates our lives, Owen Jones sets out on a journey into the heart of our Establishment, from the lobbies of Westminster to the newsrooms, boardrooms and trading rooms of Fleet Street and the City. Exposing the revolving doors that link these worlds, and the vested interests that bind them together, Jones shows how, in claiming to work on our behalf, the people at the top are doing precisely the opposite. In fact, they represent the biggest threat to our democracy today – and it is time they were challenged.

The following infographic from the book, showing “how the media controls Britain” reveals the schism between popular British sentiment about key social issues courtesy of media influences and reality, indicating that the “establishment” is more than happy to sow discord within the working/middle classes using its traditional “objective” distribution channels, while it remains aloof, collecting the rent its record capital provides.

 

And while the middle class around the world fights for scraps, and has seen its real wages over the past three decades largely unchanged, the “establishment”, wrapped in a comfortable cocoon spun by the captured media, benefits:

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

For several days we had heard a persistent rumor, that one of the most famous members of the New York Fed’s Markets Group, also known as the Plunge Protection Team, Kevin Henry was moving to the HFT capital of the world, Chicago. We refused to believe it because, let’s face it, when the trading desk on the 9th floor of Liberty 33 needs to get its hands dirty in stocks, it simply delegates said task using just a little more than arms length negotiation, with the world’s most levered HFT hedge fund: Ken Griffin’s Citadel. Why change the status quo.

And then, it turned out to be true because as the Chicago Fed announced just a few short days ago:

The Markets Group at the Federal Reserve Bank of New York manages the size and composition of the Federal Reserve System’s balance sheet consistent with the directives and the authorization of the Federal Open Market Committee (FOMC), supports debt issuance and debt management on behalf of the U.S. Treasury, provides foreign exchange services to the U.S. Treasury and provides account services to foreign central banks, international agencies and U.S. government agencies.

 

Markets Group is establishing a presence at the Federal Reserve Bank of Chicago and has openings for both experienced professionals and recent graduates.

So instead of interacting with the HFT momentum ignition algos using the microwave line of sight towers from NY all the way to Chicago, the NY Fed has decided it needs to be present on location in the windy city to buy up every ES contract and reverse the selling momentum when the day of reckoning finally hits.

But what does that mean for Citadel? Well, considering Ken Griffin has more pressing issues on his mind, we can understand why Bill Dudley is suddenly concerned the NY Fed’s orders may get less than optimal “best practice” execution, and thus the need to finally get the Fed’s hands wet. After all, by now everyone knows the Fed is directly and indirectly manipulating and intervening in markets on a daily basis, so why not.

As to just what specific skills the NY Fed is seeking as it builds out its HFT practice on the ground in Chicago, here are the two indicated positions with which the expansion is set to start:

Markets Group – Policy & Markets Analysis Associate – Cross Market Monitoring

 

Primary Location: IL-Chicago
Full-time / Part-time:  Full-time
Employee Status:  Regular
Overtime Status:  Exempt
Job Type:  Recent Graduate
Travel:  Yes, 5 % of the Time
Shift:  Day Job
Job Sensitivity Not Evaluated

Job Title: Policy & Markets Analysis Associate – Cross Market Monitoring
Group:  Markets Group
Location: Chicago, IL
Start Date: Summer 2015
 
The Markets Group at the Federal Reserve Bank of New York consists of multiple business areas that fulfill a range of responsibilities, from planning and executing open market operations, monitoring and analyzing financial market developments, to managing foreign customer accounts.

 

Through its analytical and operational areas, the Markets Group:

• Manages the size and composition of the Federal Reserve System’s balance sheet consistent with the directives and the authorization of the Federal Open Market Committee (FOMC);
• Monitors and analyzes financial market developments for key stakeholders and policymakers within the Federal Reserve System;
• Monitors and analyzes developments related to financial stability;
• Supports debt issuance and debt management on behalf of the U.S. Treasury;
• Provides foreign exchange services to the U.S. Treasury; and
• Provides account services to foreign central banks, international agencies, and U.S. government agencies.

RESPONSIBILITIES:

• Monitors, analyzes and reports to policy makers on global financial market developments:
  • Tracks intra-day and longer-term global asset price movements;
  • Interfaces with market participants to obtain context for asset price movements;
  • Analyzes findings and identifies themes relevant to the monetary policy process;
  • Prepares detailed written analysis and presents oral briefings on market developments to officials in the Federal Reserve, the Treasury, and other institutions;
  • Relates developments in financial markets to issues pertaining to financial stability; and
  • Assumes responsibility over time as a Markets Group specialist for a specific aspect of financial markets.
• Plans and executes transactions in foreign exchange or fixed income markets on behalf of the U.S. monetary authorities, foreign central banks, and other customers
• Participates in projects within the Markets Group related to increasing the effectiveness and efficiency of transactional business areas
• Performs related duties as required

REQUIREMENTS:

• Master’s degree in Business Administration, Economics, or Public Policy and a minimum of one year relevant work experience in an analytical capacity related to global financial markets
• We will consider recent graduates/current students and those with up to 5 years of relevant work experience
• Demonstrated analytical skills, including knowledge of financial instruments and financial market structure, macroeconomic theory and monetary policy
• Proven ability to provide concise, articulate and insightful economic analysis in written and verbal form.
• Ability to analyze complex market issues, make sound decisions and respond under pressure
• Ability to work productively in a high-performance team atmosphere and as an independent analyst
• Must adhere to area specific financial disclosure requirements

… and a European-focused plunge protector:

Policy & Market Associate – Chicago-237531

 

Primary Location: IL-Chicago
Full-time / Part-time: Full-time
Employee Status: Regular
Overtime Status: Exempt
Job Type: Experienced
Travel: Yes, 10 % of the Time
Shift Day: Job

 

The Markets Group at the Federal Reserve Bank of New York is responsible for the implementation of monetary and foreign exchange policy, providing payments and custody services to foreign central banks, and auctioning and issuing Treasury debt as the fiscal agent for the U.S. Treasury.  As part of these duties, the Market Operations Monitoring and Analysis Function (MOMA) within the Markets Group executes transactions in the open market and conducts detailed analysis of financial market developments in support of the monetary policy decision-making process.

 

The International Market (IM) Directorate within MOMA is responsible for providing in-depth analysis of global financial mar
ket developments and international policy matters that contributes directly to the broader analytical work conducted by the Markets Group specifically and the Federal Reserve System more broadly. The Directorate also has many operational responsibilities, including executing U.S. foreign exchange policy and foreign exchange customer transactions, managing the U.S. foreign exchange reserves, and managing foreign exchange swap lines with foreign central banks.

 

The IM Directorate is currently seeking a Policy and Markets Associate to produce high quality analysis on global policy and financial market developments that contributes directly to the broader analytical work conducted by the Markets Group specifically and Federal Reserve System more broadly.  This position will focus specifically on the euro area, but may include some coverage for other regions.  Applicants should be familiar with matters relating to international economic policy frameworks and global financial markets analysis, and should be able to develop and convey their views in a concise manner, both verbally and in writing, to senior policy makers throughout the Federal Reserve System and U.S. Treasury.  The candidate will also be expected to participate in the myriad of operations under the Directorate’s purview.

 

Responsibilities

• Prepare analysis of global financial market developments with a focus on the euro area.
• Convey and develop views to senior policy makers on such topics through daily and/or weekly written and/or oral briefings.
• Collaborate with other Groups within the Federal Reserve Bank as well as other Federal Reserve Banks within the system as well as the U.S. Treasury in related areas.
• Collaborate with other central banks on relevant policy initiatives, information exchange on financial markets, domestic policy developments and reserve management.
• Remain current on relevant economic and finance literature and financial markets and developments pertaining to monetary and foreign exchange policy frameworks and approaches.
• Develop contacts within the global financial community, including with investment banks, central banks and other policy institutions such as the U.S. Treasury and IMF.
• Learn and conduct the broad range of the Directorate’s operations, including related to foreign reserves management, foreign exchange transaction and foreign exchange swaps.

Requirements

• Post-graduate degree in economics, finance or a related field.
• Minimum of 3 years’ experience analyzing financial market developments and/or international policy issues.
• Strong written and oral communication skills that will enable the candidate to convey their views to senior policy makers in a clear, concise and consistent manner.
• Strong interpersonal skills to interact and collaborate effectively with peers, subordinates, senior management and external parties.
• Operational experience not required, but candidate should have strong attention to detail.
• Ability to represent effectively the business area and the Bank, as appropriate, on issues related to global financial markets.

Finally, and we assume this was done in very good humor, the Fed is also hiring a Risk Management Specialist.

#Hiring– Risk Management Specialist – C: http://t.co/68I1jRIgjR.

— Federal Reserve Jobs (@FedReserveJobs) September 26, 2014

About time?

via Zero Hedge http://ift.tt/YwnYGs Tyler Durden

When a member of the black community was shot by a local Ferguson cop on August 9, under circumstances still undetermined, it led to several weeks of angry rioting by the largely impoverished population of this St. Louis suburb, not to mention broad popular outcry against the tactics employed by the Ferguson PD and wholesale punditry taking over primetime TV for hours on end. Fast forward several weeks when last night, Reuters reports, a police officer from the “strife-hit Missouri city of Ferguson was shot and authorities are still searching for the shooter, law enforcement officials said.”

According to Lt. Louis County Police Chief Jon Belmar the shooting did not seem connected to protests occurring elsewhere in Ferguson. “I wouldn’t have any reason to believe right now that it was linked in any way, shape, manner or form with the protests,” he said. Still a question now arises: will this latest mirror image violence in Ferguson merely stoke the already latent hostilities between all members of society? Then again, the situation is not an exact mirror image as the police officer was not killed, but “merely” shot in the arm by an unknown assailant.

The details of what happened from Reuters:

The officer was chasing the suspect outside the Ferguson Community Center on Saturday night when the person turned and shot him in the arm, St. Louis County Police Sergeant Brian Schellman said.

 

The officer, who was treated at a local hospital, returned fire but apparently did not hit the suspect, Schellman said. The shooter disappeared into a nearby wooded area, eluding arrest.

 

Police said earlier that there were two suspects, but detectives later determined there was only one, Schellman said.

 

Several hours later, an off-duty St. Louis City police officer was shot at and suffered a minor arm injury from broken glass while driving on a nearby freeway in a personal car, police said.

 

It was not immediately clear if the two shootings were related.

Meanwhile, a crowd of about 100 people gathered near the scene of the night’s first shooting, with a group breaking off to protest at Ferguson police headquarters, according to Kareem Jackson, 27, a musician who goes by the stage name Tef Poe and is a member of the activist group HandsUp United.

“People are peaceful as a duck, just literally standing on the side of the street watching,” he said in a phone interview from the site where protesters had gathered.

To be sure, if the shooting is found to have been in retaliation for the death of Michael Brown, one can be certain the duck will hardly be peaceful. Although, for the time being, when it comes to global riotwatch, all eyes remain glued to Hong Kong, where the Ferguson baton has so far been quite sucessfully passed on.

via Zero Hedge http://ift.tt/1t87I6v Tyler Durden

Submitted by Erico Tavares of Sinclair & Co.

The Eurozone’s Unresolved Situation

Can market forces prevail in the Eurozone?

With another round of central bank intervention coming four plus years after the start of the Eurozone debt crisis, this is a question worth considering, at a time when the Southern Eurozone members – Italy, Spain, Greece and Portugal, which collectively account for over 30% of the GDP of the early adopters of the Euro as a whole – continue to struggle.

This is a complex topic for sure, but a simple economic indicator can be used to help frame the situation.

The Real Effective Exchange Rate, or “REER”, is a weighted average of a country’s currency relative to an index or basket of other major currencies adjusted for the effects of inflation. A country with higher inflation will seek to devalue its currency to maintain competitiveness in relation to its trading partners (the reverse also applies of course, but these days nobody seems to want a strong currency). The REER therefore provides a gauge of that country’s competitiveness in foreign markets.

Under a fixed foreign exchange regime, policy options are much more limited. A Eurozone member can become much less competitive relative to another member with a lower inflation rate. Stated differently, its REER will increase in that situation. This dynamic provides an insight as to how the Southern European countries got into trouble in the first place, and some of the challenges associated with its resolution.

Historical Context Leading Up to the 2008 Financial Crisis

The oil shocks of the 1970s had very damaging effects in the southern contingent of the Eurozone, with inflation rates skyrocketing. Devaluations were therefore a necessity to regain competitiveness, although these also provided an inflationary feedback loop. In contrast Germany, and to a lesser degree France, more or less kept inflation under control during this turbulent period.

Figure 1: Historical CPI Inflation in Selected Eurozone Countries, 1965-2001

Source: www.inflation.eu.

It is important to understand this context, as these economies evolved out of a system that systematically used currency devaluation as a policy tool for many years.

In the 1980s, Portugal, Greece and Spain formally joined the European Community, having just transitioned to a democratic system in the prior decade. A program to promote economic convergence with the European “core” was then implemented. This included the establishment of trading bands with other European currencies in order to avoid wild swings and competitive devaluations between trading partners, as well as facilitate greater economic integration going forward.

As currency fluctuations narrowed, inflation at home would have to come down, otherwise the REER would increase as a reflection of higher prices for their goods and services abroad. Figure 2 shows this process of “convergence” in the Southern European countries from 1995 up until the last business cycle peak in 2007.

Figure 2: REER Yearly Index in Selected Eurozone Countries (1995 = 100), 1995-2007

Source: Eurostat.

(a) Based on the current 18 countries of the Eurozone.

Portugal’s “currency” (speaking figuratively) had appreciated in real terms by almost 15% over that period. Spain, Greece and Italy were not far behind. At the same time, the REER of their core Eurozone partners went in the other direction, declining by almost 10%, and thus gradually eroding the cost advantage and competitive edge of Southern Europe.

As shown in Figure 3, this loss of competitiveness had a very negative effect on the trade balance (goods and services exported minus imported) down south, with generally expanding deficits recorded over the period.

Figure 3: Trade Balance as % of GDP, 1995-2007

Source: Eurostat.

(a) Remaining founding members of the Euro combined.

Not even Italy, with its dynamic exporting sector in the northern part of the country, was able to buck the trend. On the other hand, the core countries as a whole were able to increase their trade balance throughout the period.

Figure 4 depicts the situation in absolute terms in 2007. Out of 188 countries in the world, our Southern European friends made the top 10 list ranked by current account deficits. Spain made it all the way to #2; Greece, at #6, had net imports of almost $4,000 per person, the highest by far in the ranking.

Figure 4: Top 10 Countries Ranked by Current Account Deficit in 2007 (US$ bn.)

Source: CIA World Factbook.

It should also be noted that China emerged as a trading powerhouse over this period. By 2007 it already boasted the world’s largest current account surplus. Southern Europe’s industries like textiles and light manufacturing, which historically had contributed significantly to their economies, were particularly vulnerable to Chinese imports. This was much less so in the core countries, which stood to gain disproportionately more from trading with Asia. So the composition of the export sector is also an important consideration.

If we rank the Southern European countries in accordance with their trade deficit as % of GDP in 2007, we get the same domino sequence of economies tumbling down during the 2010-11 Eurozone debt crisis: first Greece, then Portugal, followed by Spain, and narrowly missing Italy with the same virulence (Ireland is not shown here, but the crisis there was rooted in a different economic model).

For all the talk about government finances, turns out that trade deficits actually matter – even inside a fixed currency regime like the Euro. Years of heavy borrowing by the private and public sectors led to inflation in the form of relatively higher price levels and burgeoning trade deficits, further undermining the competitiveness of the economy at a time when the international markets were opening up.

At some point those imports become unsustainable and foreign lenders that provide the credit close the tap. And that’s precisely what followed.

After the 2008 Financial Crisis

Figure 5 shows how Southern Europe started to devalue in real terms as financial conditions deteriorated from 2008 onwards. The decline in REER is particularly pronounced in Greece, Spain and Portugal, spurred on by deep austerity measures and a big curtailment of credit to the private sector.

Figure 5: REER Yearly Index in Selected Eurozone Countries (1995 = 100), 2007-2013

Source: Eurostat.

(a) Based on the current 18 countries of the Eurozone.

And once again we see the trade deficits responding in tandem, as shown in Figure 6.

Figure 6: Trade Balance as % of GDP, 2007-2013

Source: Eurostat.

(a) Remaining founding members of the Euro combined.

The decline in trade deficits as % of GDP has been very substantial, after the large chronic deficits of “happier times” [Note: GDP accounting changed in all of these countries over this period to include things like illegal drugs and prostitution, which in some cases added 3% to the final calculation. Hmmm…]

Services Inflation

Under a fixed exchange rates regime, REER changes are fundamentally driven by differen
ces in the inflation rate. We can break this down by: (i) goods inflation, which broadly reflects price changes in items that are easily traded across borders; and (ii) services inflation, for those which are not.

With open borders goods inflation should be fairly aligned across member states. As such, the key driver behind overall changes in competitiveness must be services inflation. This is shown in Figure 7 below.

Figure 7: Services Inflation by Eurozone Area, 1999-2014

Source: Eurostat, Clemente de Lucia (BNP Paribas).

Note: “Periphery” includes Greece, Spain, Portugal, Italy and Ireland; “Core” includes the Netherlands, Austria, Luxemburg, Belgium, Finland, Germany and France.

Going back to 1999, services inflation in the periphery was consistently higher than in the core up until 2009. This is very much in line with the relative performance of the REER over this period, as outlined previously.

However, with fixed exchange rates and open borders, what is driving this significant services inflation differential?

Figure 8: Relative GDP Performance vs Service Inflation Differential, 1998-2013

Source: Eurostat, Clemente de Lucia (BNP Paribas).

(a) Includes only the Eurozone founding members plus Greece.

(b) Difference between “Periphery” and “Core” services inflation rates in percentage points.

Figure 8 shows that faster GDP growth in the periphery was accompanied by relatively higher services inflation. With the onset of the Eurozone debt crisis in 2009, the trend reversed and the periphery started to grow much slower, as shown in the shaded area. Services inflation responded accordingly. This makes economic sense of course: under similar conditions, countries growing faster should experience higher price growth in non-tradable items.

Therefore, the lack of economic vitality in Southern Europe is adding significant deflationary pressure.

The Eurozone’s Unresolved Situation

Can the Southern European economies restructure their economies with the aid of a declining REER, that is, their goods and services becoming relatively cheaper abroad, and reverse the trend that has led to a steady accumulation of massive trade deficits over a decade and a half?

Recent experience suggests that this could be possible. However, sustaining that decline in the real value of the “currency” going forward will be very difficult for the following reasons:

• Deflation improves competitiveness outright by reducing the cost base of the country (e.g. lower salaries). But this is very problematic for Southern European economies, as the already stratospheric debt levels continue to rise as the income needed to repay them goes down in nominal terms. Which is why the European Central Bank is so concerned with deflation.
• The core Eurozone partners could conceivably endure relatively higher inflation to reduce their relative competitiveness, but this is also problematic: (i) as we have seen, this differential is largely driven by economic performance, meaning that Southern Europe could be failing to achieve the escape velocity needed to bring down debt ratios; (ii) the inflation rate differential needed to make a difference down south would likely to be too high for the core countries; and (iii) core countries compete against many other countries.
• Greece has already seen a massive correction in its REER, which is now below the level in 1995. And yet the trade deficit remains stubbornly high compared to its closer peers. It is unclear by how much more prices would need to adjust to correct this. Sanctions against Russia, a major export market for them, could not have come at a worse time.
• Politically, devaluation is not on the table. In any event, foreign debts resulting from a generational accumulation of trade deficits would explode in value overnight.

The inability of these countries to rebalance their foreign terms of trade highlights a major flaw of the Eurozone construct, which is largely based on conventional international economics thinking.

All the talk about free movement of labor, price adjustments and so forth breaks down once we realize the adverse implications that the required adjustments will have on debt ratios. It looks like we have hit one major economic SNAFU.

Figure 9: Eurozone Government Debt as % of GDP, 2013

Source: Eurostat.

(a) Remaining founding members of the Euro combined.

Figure 9 reminds us of how extreme the debt situation has become in Southern Europe, in this case just by looking at the public sector. In 2013, all the countries added together had a Government Debt as % of GDP ratio of 121.5%, much higher than their core Eurozone partners and more than double Maastricht Treaty levels. The ratio increased by a staggering 40 percentage points in just five years.

At these dizzying heights market forces just can’t be allowed to play out; and the debt situation in the southern Eurozone complex remains unresolved. Debt is the one thing that has steadily grown over the last four years in these countries.

Sure, we can all live in a world where central banks continue to keep interest rates at absurdly low levels (again, the market is not allowed to function) and paper over any sovereign blow-ups. However, the system becomes increasingly unstable. Moreover, the economic fundamentals continue to deteriorate as those countries struggle to regain competitiveness under a massive debt burden. And it is tackling that burden with non-conventional measures that eventually needs to be considered, but that’s a story for another time [Hint: that process starts with an “R”].

But OK, these are very pleasant countries to live in, with friendly people, great food and beautiful weather. For sure this can attract foreign companies and eventually develop such a productive economy that will mitigate any pricing disadvantages and help pay off the debts right?

And that would be excellent, except for the fact that these are pretty difficult countries to do business in. According to the latest “Doing Business Survey” by the World Bank, here’s how they ranked out of 31 OECD countries: Portugal (#19), Spain (#27), Italy (#29) and Greece (#30). Add the strong likelihood of higher taxes and pension costs to pay for all the debts as they come due and you might be better off just visiting.

If more goods and services don’t start leaving these countries more and more young people will, motivated by high unemployment at home and the prospect of a better life elsewhere. At least someone is working towards a real resolution.

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

With escalating conflict in the Middle East, an unresolved conflict in the Ukraine, and various other geo-political risks on the horizon such as the contagion risk of Ebola, it would be expected that the longstanding ‘safe haven’ qualities of gold would come into play as they have done in the past.

In September 2008, during the financial crisis, the gold price rose $50 in one day, September 18, as investors sought refuge in the one asset that they perceived to be a safe-haven of high liquidity and high credit quality. This one day move in September 2008 was the largest one day move since February 1980.

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Back in late 1979 and early 1980, some of the key drivers that propelled the gold price higher were the Russian invasion of Afghanistan and the Iranian hostage crisis.

Just looking back at old newspaper gold market commentaries in 1979 and 1980 will highlight that a lot of the key drivers for the rise in the gold price at that time were geo-politically related.

Today, the world appears to be as uncertain if not more uncertain. Indeed, in 1980 there was little risk of terrorism – state sponsored or otherwise.

In the late 1970s and early 1980s, the gold futures markets did not have nearly as large an impact on the world gold price as they does now, and the gold price was primarily driven by physical demand for gold, a lot of which was Middle Eastern and Asian demand.
 

The concept of unallocated gold accounts in the London market was in its infancy and was only being discussed by the five gold fixing bullion banks as a security issue in not having to move gold shipments around London so often. The practice of having unallocated gold not fully backed by allocated gold was not encouraged at that time.
 

Fast forward to today, and the ‘flight to quality’ and ‘financial insurance’ characteristics of gold should in theory be as important now as they were in 1979-1980 given similar invasions and occupations in various countries, not least in the Middle East with ISIS, and the renewed bombing in Syria/Iraq by the US and/or a US coalition.

Coupled with these worsening geopolitical developments, global macro economic risks remain elevated, with official interest rates at historically low levels, continued central bank balance sheet expansion through quantit
ative easing programs, and continued fiat currency debasement in the US dollar, Euro and other reserve currencies.

Inflationary risks therefore remain at the forefront. But at the same time, the gold price barometer is not signalling these inflationary risks either.

 

The key driver of the gold price at the moment is perceived to be the relative strength of the US dollar, yet the US dollar is only stronger compared to the other main currencies because these currencies, such as the Euro, are weak due to their economies remaining weak and their money supplies having been debased.
 

The economic recovery in the US is tentative at best. With the current weakness in the gold price, there is a growing cacophony that the safe haven qualities of gold are no longer relevant. Indeed, some in the financial markets are saying that the current gold bull market is dead.

It would appear to us that the factors that would make gold a safe-haven asset have not gone away.

In fact these factors are strengthening, as described above. The only rational explanation appears to be that gold remains an investment safe-haven as it has always done, but that this is not yet being recognised by the price discovery process in the market.

Adding in the fact that there is a continued disconnect between, on the one hand, the global physical gold market primarily driven out of China and India, and on the other hand, the New York gold futures market and unallocated London bullion market on the other hand, then this disconnect should not be expected to persist over the medium term.

This is especially the case given the heightened geopolitical and macroeconomic risks.

With the gold price not yet signalling the geopolitical and macroeconomic alarm bells that many would have expected it to, the question of gold price manipulation remains a valid question.

Recent gold price manipulation by an investment bank for commercial reasons has been established in the case of the successful prosecution against Barclays by the FCA regulator.

For strategic reasons, central banks do not welcome a disorderly increase in the gold price because it makes their fiat currencies look vulnerable and adds to inflationary expectations.

It is therefore not unrealistic to think that some of the current gold price weakness may be related to nonpublic gold market interventions by some of the world’s central banks such as the Federal Reserve and the ECB, perhaps under the auspices of the Bank for International Settlements (BIS).

There is plenty of documentary evidence to suggest that the G10 central banks have historically discussed the gold price during their regular meetings and they also are very cautious on allowing more recent document releases through freedom of information requests.

For different reasons, the Chinese government welcomes a low gold price since it allows China to continue to accumulate gold in large quantities. Even if this accumulation of gold by China is being done for other reasons, it does act as a way of hedging China’s exposure to its vast holdings of US dollar denominated Treasuries. Time will tell if this has been China’s strategy.    

Most markets these days are being manipulated. Therefore it seems very possibly that the gold and silver markets are too. This could be one of the factors in the precious metals surprisingly poor performance in recent weeks despite significant geopolitical and indeed economic uncertainty.

The Middle East is a powder keg that seems likely to explode. The U.S. and western nations have taken a hard stance against an increasingly powerful Russia. This is effecting an already fragile Eurozone and other economies.

Brinkmanship and a failure of diplomacy has brought the world close to a serious military conflict.

Gold has protected wealth throughout history from financial crises and war. We believe it will continue to do so in the coming years

It is very likely that tensions will lead to safe haven demand for gold and higher prices. An economic war has broken out between major world powers and the historical record shows that sanctions and protectionism tend to lead to military confrontation and war.

Everybody should own some physical gold as a hedge and a safe haven asset to protect against the significant risks challenging us today which include bail-ins, currency wars, terrorism and war.

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The death of safe haven gold has been greatly exaggerated.

Gold is a hedging instrument and a safe haven asset as seen in history and much academic research in recent years. That is not apparent in recent weeks but we believe it will be in the medium and long term.

by Ronan Manly , Edited by Mark O’Byrne

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Yesterday we reported that the biggest riot over the weekend was not in Ferguson (although things there are hardly stable after a local police officer was shot in the violent town overnight) but in Hong Kong, where students and other mostly young people are protesting the recent loss of their democratic vote powers and thus “the loss of their freedom.” Since then things have gotten from bad to worse when late last night Hong Kong declared the start of the Occupy Central disobedience campaign, leading to violent skirmishes with the police, which over the past hour have included the use of tear gas by the police as well as the first outright warning by the cops demanding that the student protesters disperse or risk being fired upon.

From WSJ:

A standoff between police and pro-democracy protesters intensified near where thousands have converged in the past days to demand free elections.

 

Around 6 p.m., police moved to clear the area, using tear gas against protesters near Hong Kong government buildings that had been blocked off. Protesters streamed away trying to wave away clouds of smoke and holding handkerchiefs against their mouths and noses. Many were running; others were raising their hands above their heads in an indication of nonviolent intent.

 

Crowds of thousands had gathered in the area through the afternoon, with protesters attempting to build barricades against police. At one point, a few police cars were surrounded by a sea of protesters. “Hong Kong police, you have been surrounded, please leave,” protesters shouted over a sound system.

 

Police showed red signs urging the activists to stop charging or force would be used. Riot police in helmet shields and face masks were at the site.

 

After the tear-gas spraying, many protesters who had dispersed regrouped in the Tamar waterfront park where a stage and rows of chairs had been erected ahead of celebrations for China’s National Day on Wednesday.

And from AP:

After spending hours holding the protesters at bay, police lobbed canisters of tear gas into the crowd on Sunday evening. The searing fumes sent protesters fleeing down the road, but many came right back to continue their demonstration.

 

Students and activists have been camped out on the streets outside the government complex all weekend. Students started the rally, but by early Sunday leaders of the broader Occupy Central civil disobedience movement said they were joining them to kick-start a long-threatened mass sit-in to demand an election for Hong Kong’s leader without Beijing’s interference.

 

Authorities launched their crackdown after the protest spiraled into an extraordinary scene of chaos as the protesters jammed a busy road and clashed with officers wielding pepper spray.

 

The protesters were trying tried to reach a mass sit-in being held outside government headquarters to demand Beijing grant genuine democratic reforms to the former British colony.

 

The demonstrations – which Beijing called “illegal” – were a rare scene of disorder in the Asian financial hub, and highlighted authorities’ inability to get a grip on the public discontent over Beijing’s tightening grip on the city. The protesters reject Beijing’s recent decision to restrict voting reforms for the first-ever elections to choose Hong Kong’s leader, promised for 2017.

 

Earlier Sunday, thousands of protesters who tried to join the sit-in breached a police cordon, spilling out onto a busy highway and causing traffic to come to a standstill.  Police officers in a buffer zone manned barricades and doused the protesters with pepper spray carried in backpacks. The demonstrators, who tried at one point to rip apart metal barricades, carried umbrellas to deflect the spray by the police, who were wearing helmets and respirators.

 

Police had told those involved in what they also call an illegal gathering to leave the scene as soon as possible, warning that otherwise they would begin to clear the area and make arrests.

 

The use of the tear gas angered the protesters, who chanted “Shame on C.Y. Leung” after it was used, referring to the city’s deeply unpopular Beijing-backed leader, Leung Chun-ying. To many, it also seemed to mark a major shift for Hong Kong, whose residents have long felt their city stood apart from mainland China thanks to its guaranteed civil liberties and separate legal and financial systems.

The following warning from the local police urging protesters to disperse or “they will fire” has attracted a lof attention:

BREAKING: HONG KONG POLICE WARNS “DISPERSE OR WE FIRE” – MING PAO LIVE PHOTO (Fire what? Bullet? HK=Tiananman 1989?) http://ift.tt/1nqeFDD

— George Chen (@george_chen) September 28, 2014

This is madness RT @hkdemonow: #HK Police is warning protestors to leave or they will FIRE! #OccupyCentral http://ift.tt/1CxpC9V

— Ying Chan (@yingworld) September 28, 2014

I have never seen the orange flag before. “Leave or we will shoot” shoot what? http://ift.tt/1CxpCqb

— Grace Tsoi (@gracehw) September 28, 2014

Orange warning sign fr police: Might shoot to disperse crowd. Instant msg: No one has been shot but police hitting ppl w baton ?????????????

— Occupy Central ???? (@OCLPHK) September 28, 2014

Here id some more commentary from the ground in Hong Kong over the past few hours:

Hong Kong police use tear gas to break up the #OccupyCentral protest http://t.co/IVELO7tQQH (Photo: AP) http://ift.tt/1vjb3V2

— WSJ Asia (@WSJAsia) September 28, 2014

Fully armed riot police carry what appear to be guns with long barrels. Hold up signs: “Warning: Tear Smoke” on television. #OccupyCentral

— SCMP News (@SCMP_News) September 28, 2014

Tear gas was being fired into crowds at close range. http://ift.tt/1nqeFUf

— Yuen Chan (@xinwenxiaojie) September 28, 2014

RT @joannachiu: Another main art
ery blocked, Queensway outside Lippo Centre. Protesters acting spontaneously without directions from leaders

— Ying Chan (@yingworld) September 28, 2014

Finally, here is a live stream from the scene of the action:

Broadcast live streaming video on Ustream

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