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August 31, 2013

Financial Repression: A Game Every Government Loves To Play

Filed under: Currency — Tags: , , , , , , — admin @ 2:24 am

Quotable

I saw their starved lips in the gloam

With horrid warning gaped wide

And I awoke and found me here

On the cold hill’s side.

                                                            John Keats

Commentary & Analysis

Financial Repression: A game every government loves to play

I’ve been trudging through Prof. Michael Pettis’ latest book, The Great Rebalancing: Trade, Conflict, and the Perilous Road Ahead for the World Economy.  I think it’s excellent.  I’ve learned a lot.  I particularly like his coverage of financial repression.  It is a game all our governments are now playing to the detriment of their own peeps.  Shocking, I know.  J I think and understanding of financial repression may shed some light on why central banks have wondered off into monetary Wonderland, a place where our boy Ben Bernanke stars as The Mad Hatter.  

 “I’m investigating things that begin with the letter M.”

The Mad Hatter

“Financial repression is not always well understood, but in fact it can often be, and usually is, the most powerful of all the policies or conditions that generate trade imbalances and is at the heart of Chinese and Asian overall imbalances. Financial repression matters to trade even more than undervalued currencies, although, unfortunately, it rarely enters into the debate on trade imbalances.

“What is a financially repressed system, and why does it matter? In a recent article Carmen M. Reinhart, Jacob F. Kierkegaard, and M. Belen Sbrancia described a financially repressed system this way:

Financial repression occurs when governments implement policies to channel to themselves funds that in a deregulated market environment would go elsewhere. Policies include direct lending to government by captive domestic audiences (such as pension funds or domestic banks), explicit or implicit caps on interest rates, regulation of cross-border capital movements, and (generally) a tighter connection between government and banks, either explicitly through public ownership of some of the banks or through heavy ‘moral suasion.’

Financial repression is also sometimes associated with relatively high reserve requirements (or liquidity requirements), securities transaction taxes, prohibition of gold purchases, or the placement of significant amounts of government that that is nonmarketable. In the current policy discussion, financial repression issues come under the broad umbrella of ‘macro prudential regulation,’ which refers to government efforts to ensure the health of an entire financial system.

“As the passage implies, most savings in financially repressed countries, like most of the countries that followed the Asian development model, are in the form of bank deposits. The banks, furthermore, are controlled by the monetary authorities that determine the direction of credit, socialize the risk, and set interest rates. Financial repression is a way of describing a system in which the rates of return and the direction of investment of domestic savings are not determined by market conditions and individual preferences but rather are heavily controlled and directed by financial or political authorities. At the extreme the financial system is often little more than a fiscal agent of the government.”

Key points:

In short, financial repression is a direct transfer from the household sector (who is the primary source for deposits) to the net borrowers, which Prof. Pettis defines as “local and central governments, infrastructure investors, corporations and manufacturers, and real estate developers,” because the repressed deposit rates effectively lowers the cost of capital for the benefitting entities. 

[Note: There was some excitement recently over the fact China was lifting its cap on rates its banks can charge borrowers; but the most telling part may have been caps were not lifted on depositors, steeping the yield curve in favor of banks.  China over the recent past has clearly been the most aggressive of financially repressive government.  Since the credit crunch, however, Western governments have dramatically improved their game.] 

Here are some of my random thoughts on this process and its implications:

  • It’s a reverse Robin Hood when you think about it.  Those that can borrow get the subsidized goodies.  Yet our government is here to “help us” don’t you know.  It really is the big money scam and why the big players in the financial community love The Mad Hatter, i.e. Mr. Bernanke. 
  • It tends to reduce consumer income and therefore consumption.  Effectively this is another way of attempting to increase the relative size of export component, i.e. improve the trade balance and by virtue the current account. Put another way, it forces the major players to scramble for relatively scant aggregate global demand in the world. 
  • It explains why retail investors’ “stretch for yield” and are willing to buy stocks with little regard to risk. 
  • It explains why the big money guys have been so confident stocks can only go higher, and have reaped a huge bounty from their bet.  Liquidity is the mother’s milk of stock prices. 
  • It explains why the real economy, where Joe Six Pack works and lives, is so badly disconnected with the financial economy, where Joe Hedge Fund and his banking buddies work and live. 
  • It explains why big interest lobbyists are flush with cash to manipulate the so-called “Representative Republic,” with a blatancy we have witnessed in our lifetimes. 
  • It helps explain why our government is so dramatically cracking down on US citizens who have money offshore, as those Swiss bankers know all too well. 
  • It may lend credence to the idea if things do get worse, the government may begin to put restrictions on citizens buying gold.
  • It definitely explains why even the US banking system reserves have soared something like 2,145.6% percent since the credit crunch and continue to rise–incredibly.  

(Billions of $’s in banking reserves: Aug ’09 $97.3 billion – Jul ’13 $2,185.0 billion or agrowth of 2,145.6%)

  • It may explain why the emerging market problems may be “their” problems, as the result is likely more developed world investor money returning to the collective coffers of our illustrious governments via those conduits we call banks and Treasury paper.  

I could continue on with this, and I am sure you can add a few of your own, but you do get the point I hope.  Financial repression allows for greater government control over the system is the bottom line.  This is not to suggest all implications of financial repression are negative.  There are times when imbalances are so great government must do all it can to right the system, lest the entire credit system evaporate; some believe that’s the justification for the severe financial repression now being applied in the United States. 

Maybe or maybe not, only the Mad Hatter knows for sure. 

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Daily Forex Fundamentals – August 30, 2013

Filed under: Currency Charts — Tags: , , , , — admin @ 1:28 am

What’s on the Economic Horizon

German retail sales to disappoint?
Canadian monthly GDP to show 0.4% contraction
U.S. PCE core price index due today

U.S. Dollar (USD)

Back-to-back, baby! For the second day in a row, the Greenback showed the markets who’s king of pips as EUR/USD, GBP/USD, and USD/CHF all showed dollar strength. What the heck brought this on?! Read more…

Euro (EUR)

Make that two in a row! EUR/USD chalked up consecutive losing days, as the pair dipped to a low of 1.3218 yesterday. EUR/JPY, on the other hand, was stuck in consolidation above the 130.00 handle. Read more…

British Pound (GBP)

Make that three in a row! Once again, GBP/USD closed lower on the day, as it finished at 1.5508, 22 pips below its opening price. Now that it is approaching a key support line though, will we see the bulls come charging back? Read more…

Japanese Yen (JPY)

SPLAT! Except against the euro, the yen fell against its higher-yielding counterparts as appetite for risk improved. USD/JPY, GBP/JPY, and AUD/JPY showed gains while EUR/JPY ended the day in the red due to weak euro zone reports. Read more…

Canadian Dollar (CAD)

Ooh, that’s gotta burn! The Loonie was no match to U.S. dollar strength in yesterday’s trading, as USD/CAD surged to a high of 1.0537. Will the Canadian dollar have a chance to recover today? Read more…

Australian Dollar (AUD)

The comdolls had another difficult day yesterday. AUD/USD finished the day 8 pips lower than its open price after climbing to an intraday high at .8980. Did the easing of Syrian tensions even help the Aussie? Read more…

New Zealand Dollar (NZD)

Another day of choppy trading for NZD/USD, as it was simply all over the place. By the end of the New York session, NZD/USD was trading at .7774, just 17 pips lower for the day. Read more…

Swiss Franc (CHF)

Ka-chow! The franc got blindsided in yesterday as the dollar staged a massive rally, leaving USD/CHF to finish at .9309, up a solid 89 pips from its opening price. Read more…

Bonnie and Clyde, peanut butter and jelly, Justin Bieber and his hair. Some things just go well together.

In forex trading, you get better odds at securing pips when your fundamental analysis is complemented by technical analysis.

Head on to Big Pippin’s Daily Chart Art for some pip-locking technical setups!

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August 30, 2013

Daily Forex Fundamentals – August 29, 2013

Filed under: Currency Charts — Tags: , , , , — admin @ 1:29 am

What’s on the Economic Horizon

German unemployment data to boost the EUR?
Inflation and unemployment data on tap from Japan

U.S. Dollar (USD)

Who’s your daddy? Despite the bad U.S. housing figures, the Greenback still managed to show the foreign exchange market who’s boss by reigning supreme over other big currencies. The U.S. dollar index that tracks the performance of the Greenback versus major currencies like the euro and the yen climbed to 81.90 from 81.61. Read more…

Euro (EUR)

Retreat, boys, retreat! 1.3400 was still a no-go for EUR/USD in yesterday’s trading. There was only enough demand for the pair to test the level but resistance held. By the end of the New York session, the pair was down 50 pips from its opening price at 1.3341. Read more…

British Pound (GBP)

I’m seeing red! The pound’s bleeding didn’t stop yesterday, as GBP/USD sank to a low of 1.5429 while GBP/JPY tumbled to the 151.00 area. Will it be able to recover today or will the selloff continue? Read more…

Japanese Yen (JPY)

What a massive rally! The lower-yielding Japanese yen took advantage of risk aversion in the markets, pushing USD/JPY down to the 97.00 handle and EUR/JPY below the 130.00 mark. Can the yen hold on to its gains today? Read more…

Canadian Dollar (CAD)

Still no win for the Loonie on Wednesday. USD/CAD finished the day higher at 1.0484 after starting the day at 1.0474. Will today be different? Read more…

Australian Dollar (AUD)

The pain’s not over yet. After yesterday’s brief reprieve, the Aussie is back in the loser’s den, giving up a lot of ground to the dollar. AUD/USD started the day at .8990, fell to an intraday low at .8902, and then closed the day with a 49-pip lose at .8941. Read more…

New Zealand Dollar (NZD)

What a turnaround! Just when it seemed like NZD/USD was down in the dumps as it dipped a few pips below the .7750 minor psychological support, the pair bounced right back up to close above .7800. What was that all about? Read more…

Swiss Franc (CHF)

Yesterday wasn’t a good day to be a franc bull as the Swiss currency lost ground to both the dollar and the euro. USD/CHF found support at the .9180 area and jumped to a high of .9234 while EUR/CHF made an upside break from consolidation to close above 1.2300. Read more…

Bonnie and Clyde, peanut butter and jelly, Justin Bieber and his hair. Some things just go well together.

In forex trading, you get better odds at securing pips when your fundamental analysis is complemented by technical analysis.

Head on to Big Pippin’s Daily Chart Art for some pip-locking technical setups!

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August 29, 2013

Nine Reasons Why The US$ Multi-Year Bull Market Is [Likely] Still Intact

Filed under: Currency — Tags: , , , , , , , — admin @ 2:24 am

Quotable

Time, the avenger! unto thee I lift
My hands, and eyes, and heart, and crave of thee a gift.

Lord Byron

Commentary & Analysis

Nine reasons why the US$ multi-year bull market is[likely]still intact

About four years ago we shared with our clients these nine reasons to support our belief the dollar had entered a multi-year bull market back in March 2008. It may be the third dollar bull market cycle since the major currencies began to float against one another after President Nixon shut the gold window.   

Let’s review the original reasons with updated comments [in brackets]: 

  1. Credit Crunch Sea Change

    US Savings going up; debt sentiment changed

    [Though US households have done a lot of deleveraging since the credit crunch, I do not expect a rebound in consumption to prior levels anytime soon.  I believe the tendency to save more and spend less is a secular change in habits and is ultimately a net positive for the US economy.]

  2. Risk Bid Trigger Again…initially

    Greece and Dubai

    [Though wrong on Dubai, the idea Greece would be a trigger for haven flow to the US dollar was    correct.  Of course now we have Greece rescue #3 in the works; I am sure this one will do the trick.  Is the euro single currency regime still a potential source of global systemic risk?  I believe it is for reasons already shared despite the apparent stabilization across the Eurozone.]

  3. Growth – Not as bad as expected; it’s all relative

    Non-farm payroll and Mr. US Consumer

    [Despite the tepid US growth we have witnessed during this so-called recovery, it has been more robust than growth in Europe, UK, or Japan.   Thus, the US is leading on relative growth.  The point about “Mr. US Consumer” goes to the idea that in a world still struggling for demand, those countries with a larger consumption base will likely take less of the brunt to their domestic economies from global rebalancing compared to those countries which are more export dependent.  This theme continues to play out.]

  4. Carry trade idea history

    Fed hikes before BOJ and before ECB

    [This still makes sense.  And going forward I believe the yield differential will rise in favor of the US dollar, as the Fed moves first.]

  5. US Assets are very cheap

    Foreign Direct Investment Flow  (currency cycles play that role)

    [This goes to the idea that the dollar looked very cheap and made US assets cheap to the rest of the world accordingly.  I expected this reality would be the catalyst for a rebound in foreign direct investment (FDI) flow back into the US.  This is a key fundamental theme; FDI is often a major driver of a currency’s longer term trend.  I believe we are seeing this trend in FDI accelerate on the back of cheap energy for manufacturing companies in the US and re-shoring of manufacturing from China.]

  6. Sentiment – Newsletter writers are in apoplectic territory

    Everyone hates it and one-way bet

    [At the time we initially shared our reasons for a long-term bull market, the newsletter writers of the world, the guys that actually don’t need to trade for a living (guilty to a degree, but I do trade real money and eat my own cooking, so to speak), were apoplectic about the dollar disappearing as a reserve currency.  Many still believe this. And someday it may come to pass.  But in an environment where global cooperation on key issues financial is scant at best, we are a long way from fashioning together a substitute for the US dollar, even though Mr. Triffin was right all along about the imbalances that would be created if the dollar was to replace gold at the center of the global monetary system.   Anyway, with universal sentiment in the dollar so bad back then, it only made sense that Mr. Market would do what it does best–fool as many players as it can at any one time.]

  7. Correlation – it has changed

    No new low with gold blow off and stock high

    [Gold and the US dollar had been tightly correlated during the era of free credit.  It made sense.  But, when gold blew off to a new high, the dollar finally didn’t make a new low, i.e. its longer term correlation changed (ditto for the oil-US dollar correlation that broke down in 2008).  This indicated to me that problems in the world were no longeronly a dollar problem.  It was a piece of the puzzle to support our bullish dollar view.]

  8. Technical

    Broke its weekly down trend & extremely oversold

    [Speaks for itself I think.  We have seen a nasty retracement from the original move that started in March 2008.  But we saw the same thing during the ten-year bull market in the dollar from 1992-2002, i.e. a rally then a very deep retracement, then an explosion upward that started in late 1995 and ran till 2002].

  9. Euro craters as a currency

    Rush to dollar-the world reserve currency punctuated

    [The euro has depreciated sharply over the last four years.  But, I have to say the euro has not “cratered.”  The euro remains supported and its sharp rallies at times have surprised me.  That said, even if a “cratering” does not occur, it seems the dollar wins against the euro on economic growth and interest yield differential over time. ]

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Daily Forex Fundamentals – August 28, 2013

Filed under: Currency Charts — Tags: , , , , — admin @ 1:28 am

What’s on the Economic Horizon

U.S. Pending Home Sales Expected to Rise 0.2%
BOE Governor Mark Carney to Speak in Nottingham Today

U.S. Dollar (USD)

When traders are risk averse, the dollar rules! Higher-yielding currencies continued to slide down against the safe-haven Greenback, with EUR/USD dipping to a low of 1.3325 and GBP/USD falling below the 1.5500 mark. Read more…

Euro (EUR)

What a rollercoaster ride it was for EUR/USD yesterday! Although the pair dropped to an intraday low at 1.3322, it managed to pare its losses and stage a quick rally in the U.S. session to end the day with a decent 20-pip gain. Read more…

British Pound (GBP)

The pound didn’t escape the bloodbath that we witnessed all over the high-yielding currencies yesterday as the lack of U.S. reports made it easy for the bears to drag the pound lower against the Greenback, the yen, and even the euro. What gives?! Read more…

Japanese Yen (JPY)

What a massive rally! The lower-yielding Japanese yen took advantage of risk aversion in the markets, pushing USD/JPY down to the 97.00 handle and EUR/JPY below the 130.00 mark. Can the yen hold on to its gains today? Read more…

Canadian Dollar (CAD)

he Canadian dollar showed that it isn’t a pushover yesterday as it rallied strongly versus the U.S. dollar. The USD/CAD pair closed the day at 1.0474, 30 pips lower from where it opened during the Asian trading session. Read more…

Australian Dollar (AUD)

The Aussie got wiped out in yesterday’s trading, as AUD/USD tumbled below the .9000 major psychological support while AUD/JPY crashed below .8700. What’s up with that?! Read more…

New Zealand Dollar (NZD)

Ka-blam! The Kiwi bulls’ hopes were crushed to the ground when NZD/USD failed to follow up on its gains and ended another day in the red. The pair closed 53 pips lower than its open price after hitting an intraday low of .7765. Read more…

Swiss Franc (CHF)

The low-yielding currencies were kings of pips yesterday and the franc was no exception. USD/CHF, GBP/CHF, and EUR/CHF all showed losses despite the lack of reports from Switzerland. Read more…

Bonnie and Clyde, peanut butter and jelly, Justin Bieber and his hair. Some things just go well together.

In forex trading, you get better odds at securing pips when your fundamental analysis is complemented by technical analysis.

Head on to Big Pippin’s Daily Chart Art for some pip-locking technical setups!

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August 28, 2013

Stream of Consciousness and Self-Reinforcing Funds Flows

Filed under: Currency — Tags: , , , , — admin @ 2:27 am

Quotable

In trouble to be troubled
Is to have your trouble doubled.

                                    Daniel Defoe

Commentary & Analysis

Stream of consciousness and self-reinforcing funds flows…

As you know from reading our daily missives, guesses, and attempts at independent thought, we are big believers in feedback loops, which tend to create self-reinforcing cycles over all time frames(the fractal nature of markets, as it were). To paraphrase Jesse Livermore, the big money is made in the big swing (self-reinforcing long-term trend) and the little money is made in the small swing (self-reinforcing move over the short-term). And as you also know I am also an "equilibrium" denier. Why? Well it is because in actively traded asset markets the raw material of the elusive "equilibrium" is fundamentals. But in the real world fundamental conditions are often as ephemeral as technical conditions. What is left? I think George Soros (the brilliant global macro trader, not the loony political hack version) nailed it when he postulated actively traded asset markets are no more than boom-bust cycles at the core.

These booms and busts are created by real people, like you and me, and those chosen few elite who get a sneak peek at the order flow (this group we can call "the house," which includes for example exchange members, investment bank players, US Congress, Plunge Protection Team, etc.). The sneek-peekers aren’t alwaysright, but it does skew the game in their favor at the margin. We can gnash our teeth about this, and I have, but in the end it is what it is.

When we add up all the rationales for a trade or investment (differentiated by time frame in this usage) the bottom line is real money is the mother’s milk of asset price movement. Of course there are literally millions of reasons real people decide to move real money. But remember God and price action is on the side of those with the biggest guns, no matter the reason (s). So, as small traders, our goal should first be to make sure we are playing this game in the right ball park. If we show up in Philly for a game at Fenway we aren’t likely to do too well. And if the Florida Marlins show up anywhere, it really doesn’t matter…uhhhggg, a story for another day.

So, thinking in terms of feedback loops and self-reinforcing processes to help get us in the right ball park is one reason I created the esoteric looking emerging markets funds flow diagram (below)for myself, and clients. I tried to include the key moving parts as I saw them, thinking about how they interact in a feedback loop with funds flow. I think if you spend time with this, it could be fruitful. If it looks like hieroglyphicsto you, I understand. So let me summarize the key points:

  1. Funds flow emanates from the center and moves out to the periphery when the environment is good. But when the environment turns band, the funds from the periphery flow back to the center (all time frames).
  2. Global demand (growth) is a major determinate of whetherfunds flow outward to the periphery (relatively strong demand) or back to the center(relatively weak demand).
  3. The developed world deep capital marketsrelative to the capital markets in the emerging/developing world markets is why this happens.
  4. Funds flowing in a clockwise direction mean this cycle is self-reinforcing and positive; when counterclockwise it means this cycle is self-reinforcing and negative.

Emerging markets have been hit pretty hard lately. The catalyst, as believed, is the view central banks (Fed tapering leading the way) will start withdrawing liquidity from the world. That in itself shouldn’t lead to a battering of emerging markets unless there is an expectation that global demand won’t rebound strong enough to lead real people to push money out to the periphery in order to capitalize on markets that tend to grow faster than the industrialized world. But, if global growth is suspect and central banks reduce liquidity at the margin, this funds flow diagram suggest a counterclockwise flow over some unknown intermediate-term time frame.

Step right up and place your bets.

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Daily Forex Fundamentals – August 27, 2013

Filed under: Currency Charts — Tags: , , , , — admin @ 1:30 am

What’s on the Economic Horizon

German IFO business climate index to rise to 107.1
U.S. consumer confidence expected to decline

U.S. Dollar (USD)

Up, up, and…nope! Just when the dollar was gaining momentum for a positive day, weak U.S. reports popped up and rained on its parade. How did that happen? Read more…

Euro (EUR)

What a snoozer! The euro’s price action on the charts was the complete opposite of ‘N Sync’s spectacular comeback performance at the VMAs. EUR/USD ended the day 12 pips lower at 1.3373 after trading within a 50-pip range. Meanwhile, EUR/JPY was down 18 pips at 131.62 by the New York session close. Read more…

British Pound (GBP)

Another slow day for Cable! The pair never traded more than 50 pips away from its opening price of 1.5570. After a spiking up slightly at the start of the New York session, price eventually settled at 1.5577. Read more…

Japanese Yen (JPY)

Wham, bam, thank you risk aversion! Thanks to the investors’ flight out of the emerging market currencies yesterday, demand for the low-yielding yen received a boost, enough for the yen to show small gains against the euro, pound, and the Aussie. Read more…

Canadian Dollar (CAD)

Thanks to the disappointing durable goods orders from the U.S., the Loonie was able to prevent the Greenback from making significant gains yesterday. After it opened the day at 1.0498 and hit a session high at 1.0535, USD/CAD fell to close the U.S. trading session at 1.0504. Read more…

Australian Dollar (AUD)

The Aussie landed firmly in the bears’ lair yesterday despite the lack of reports from Australia. AUD/USD lost 22 pips while GBP/AUD and EUR/AUD jumped by at least 50 pips. What’s up with that?! Read more…

New Zealand Dollar (NZD)

Will you look at that — there’s life left in the Kiwi after all! The comdoll was one of yesterday’s best performers as NZD/USD climbed 43 pips to break its 5-day slide. Read more…

Swiss Franc (CHF)

USD/CHF was off to a slow start to the week as the pair hardly budged from its opening price. After trading as high as .9248, it eventually chilled out and came to rest at .9223, locking in a 10-pip gain on the day. Read more…

Bonnie and Clyde, peanut butter and jelly, Justin Bieber and his hair. Some things just go well together.

In forex trading, you get better odds at securing pips when your fundamental analysis is complemented by technical analysis.

Head on to Big Pippin’s Daily Chart Art for some pip-locking technical setups!

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August 27, 2013

Schiff. Rosenberg. Looking for Inflation from a Deflationary World …

Filed under: Currency — Tags: , , , , , , — admin @ 2:25 am

I think Peter Schiff is very good at explaining how political economy should operate. But it seems his market and economic forecasts, in anything but the very long term, tend to be similar one-way bets.  Maybe I notice this because often times my bets are opposite his.  (I mention him because he’s calling a spectacular buying opportunity in gold, again.)

David Rosenberg is also very good on political economy. He seems to me more pragmatic than Peter Schiff in that he seems more open to change his market calls as evidence mounts.

[Note:  Both Peter and David have made some great calls, and I respect their work.  This is not intended to be a bash session.]

Mr. Schiff remains on the inflation train, thinking that Fed policy must eventually generate an unmanageable increase in prices; while Mr. Rosenberg has held on to his outlook that deflation is the order of the day under current policy. David has been more correct than Peter since the credit crunch, but now he’s changing his tune … Thus, it is an important shift of a powerful voice away from the deflation camp [a camp I frequent].

Mr. Rosenberg believes we may soon begin to see some inflation. He doesn’t expect much, but he notes the potential for inflation to exceed the 2% threshold the Fed likes to posit.

Why?

The crux of his change of heart seems to rest on the deleveraging of US households. The fact that they may have finished working off their debt suggests consumption can regain a pace to generate rising prices. Rosenberg’s words now:

“My sense is that once this consumer deleveraging cycle is over, and there are signs that it is coming to an end if it hasn’t ended already, you’re going to see the velocity of money start to rise, against the backdrop of double-digit growth of the monetary base, and that is going to lead to inflation down the road.”

Here is a chart from the BIS showing debt growth as a percentage of GDP in a range of countries. Notice what I circled: it shows that US household debt as a percentage of GDP has shrunk in the five-year period in question.

That is unquestionably a good thing. But is it sufficient to counter other deflationary forces?

Sure, there is plenty of data you can grab to suggest the US economy has finally stabilized and could resume a steady pace of growth. But I feel like we’ve said that at least once a year for the last, I don’t know, three or four years, maybe?

The chart above shows overall global debt, when measured relative to economic growth, actually increased (and by $33 trillion, no less). I may be reading this wrong, but I would say that means many countries are actually worse off when it comes to their flexibility in managing debt and growth.

So if you want to consider the Fed’s much-talked-about tapering, you have to wonder what it will mean for interest rates. And if it means interest rates will continue to climb, you have to wonder what that will mean for countries still struggling with too much debt and dysfunctional credit markets. And you have to wonder what type of contagion that might have on the US. And you have to wonder if the Fed actually can taper any meaningful amount of its purchases without rattling sentiment.

All said I can understand Mr. Rosenberg’s change of heart. He sees the writing on the wall – we’re stuck with a status quo of QE that will in most cases generate further fuel for financial markets. And, as Mr. Rosenberg believes, I suspect any increase in prices will look more like stagflation than inflation.

In the medium-term, Mr. Rosenberg’s decision may begin to look prescient. Rising interest rates may be taken as a sign the market has overcome the central banks’ low interest rate policy. US economic data may continue to improve. The labor market may even continue to show the faintest signs of improvement.

But how long can the US maintain stability if the rest of the world has dropped anchor and the US labor market still faces substantial hurdles?

I do expect the US will continue to outperform. But that’s all relative. It doesn’t necessitate rising prices. And it perhaps overlooks the battle the Fed will continue to fight in trying to keep the rest of the world from weighing down the US.

A major correction, particularly in US equities, could be materializing now (finally). But ultimately, the outlook for the global economy suggests business as usual. In such an environment, stock markets probably remain buoyed and other asset prices will ebb and flow on fluctuating economic expectations.

Unless the Fed surprises everyone, I’ll be looking for a market downturn soon … and then a buying opportunity.

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Daily Forex Fundamentals – August 26, 2013

Filed under: Currency Charts — Tags: , , , , — admin @ 1:27 am

What’s on the Economic Horizon

Durable Goods Orders Report on Deck
German IFO Business Climate Survey Expected to Rise to 107.1
New Zealand Trade Balance Misses Forecast

U.S. Dollar (USD)

Due to the abysmal results of the new home sales report, the U.S. dollar was let go in favor of other currencies. The U.S. dollar index that measures the performance of the currency versus the other majors tripped to 81.82 from 81.95. Read more…

Euro (EUR)

Thanks to the contrasting data between the euro zone and the U.S., EUR/USD was able to rally last Friday. The pair began the day at 1.3356, soared above 1.3400, before ending the day with a respectable 29-pip gain at 1.3385. Read more…

British Pound (GBP)

The pound traded up, down, and all around against the dollar. GBP/USD reached a high of 1.5639 and traded as low as 1.5538, but it eventually settled at 1.5582. Read more…

Japanese Yen (JPY)

We didn’t see much movement on USD/JPY last week. The pair tested and found resistance at the 99.00 handle, but it eventually rested at 98.67, down 3 pips on the day. Read more…

Canadian Dollar (CAD)

The USD/CAD pair was unable to pick a clear direction last Friday as it traded in an almost perfect reverse “U” pattern. The pair gained significantly during the Asian and morning European trading sessions but completely reversed its move during the U.S. session. USD/CAD began the day at 1.0517, climbed as high as 1.0565, and then fell back to 1.0502. Read more…

Australian Dollar (AUD)

If you are a range trader, then you would’ve loved AUD/USD’s price action last Friday. The pair simply moved within an 80-pip horizontal channel the entire day, finding a bottom at .8970 and a top at .9050. It began the Asian session at .9011 and closed the day only 19 pips higher at .9030. Read more…

New Zealand Dollar (NZD)

Will the bleeding ever end?! NZD/USD registered its fifth straight decline as the pair slid another 16 pips to finish at .7816. Read more…

Swiss Franc (CHF)

After losing ground to the dollar for two days in a row, the Swissy finally did enough to register a win. USD/CHF traded 27 pips lower, finishing at .9209, just above a major support level. Read more…

Bonnie and Clyde, peanut butter and jelly, Justin Bieber and his hair. Some things just go well together.

In forex trading, you get better odds at securing pips when your fundamental analysis is complemented by technical analysis.

Head on to Big Pippin’s Daily Chart Art for some pip-locking technical setups!

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August 24, 2013

Collision Course: China and Japan…Starring the Eurozone, with US in a Cameo

Filed under: Currency — Tags: , , , , , — admin @ 2:24 am

Quotable

"There are two trains running in East Asia, each fueled by hollow rhetoric and propelled by dangerous, self-deluding myths. Each of these locomotives heeds only its own signal, and the danger grows by the season that, if there is no coordination, a huge wreck might one day ensue.

"The two trains are, of course, China and Japan. The former, long decrepit, its wheels rusted by decades of Communist mismanagement of the economy, has lately worked up a huge head of steam. China surprised the world by announcing it had "discovered" previously unaccounted-for economic production equivalent to the output of entire countries, say, Austria, for example. Whoops: "Off the tracks! We’re coming through!"

"The other country, Japan, a longtime economic superstar, had been in the doldrums for over a decade, a victim of high costs, excessive regulation and a slow-to-adapt mentality in a fast-changing world. Japan is enjoying something of a revival, at least in a near-term economic sense, and today, the country’s conservative leadership is feeling its oats, evidently in no mood to play second fiddle to an accelerating China.

"Competition exists between these two countries on many levels, as do animosities both recent and old."

                                          Howard French

Commentary & Analysis

Collision course: China and Japan…Starring the Eurozone, with US in a cameo

Countries have interests. Most have allies. All have enemies(real, perceived, and of the manufactured variety). In times of economic turmoil enemies appear more menacing. The normal jockeying for position by a country during the good times, may often be perceived as a threat (or opportunity to manufacture a threat) by another during the bad times. It seems China and Japan, because of the inordinate impact of global rebalancing on current account surplus countries, may be locked into this game of "perceived or real" threat for some time. Interestingly, the key global economic policy choice being made inside the Eurozone could grease the slides along a collision course forChina and Japan. The impact of such a collision would likely lead to an end of the euro currency regime as we know it, but the potential impact on the global economy would be even worse.

As you know, this story started where all current day economic stories start, with the great credit crunch of 2007-08 [actually the seedssown beforehand, such as the belief "free credit’ was really free,started it all, but Ithink you understand all that by now.] The credit crunch was the catalyst leading to our currentera, or quagmire, of global rebalancing. Think of it as a global "market clearing" mechanism that slowly and inexorably plows forth. It’s pernicious and seemingly impervious to the whims of government or central bank "stimulus" efforts, [which prefer the old order to market clearing] as we have witnessed.

"Six years into this regime and the opposite of those stated objectives has been achieved: global debt has become more unsustainable, global GDP growth is declining and global unemployment is at record- high levels.

"This is a global policy failure that the monetary authorities of the major economies beganrecognizing earlier this year, when a debate arose at senior central bank level. The debate was triggered by the fact that in the aftermath of the 2008 crisis, the already excessive total (government, corporate and household) global debt increased further to become even more excessive: from $175 trillion to$223 trillion. It also became more unsustainable, from 285% of global GDP to 313% of global GDP."

                                          LetoResearch

In a world of global rebalancing aggregate global demand is relatively scarce. It isthe natural order, because those countries with big current account surpluses are, well, rebalancing and shrinking those deficits. This is why Professor Michael Pettis refers to the following chart as "the scariest graph in the world," in his latest missive on China:

The chart below shows the Euro Area (EA) surplus or deficit as a percentage of GDP; the forecast calls for the surplus to grow into 2014…

According to Prof. Pettis:

"The graph makesit pretty clearthat the surge in European surpluses, which was largely matched before the crisis by the surge in deficitsin peripheral Europe, is expected to be maintained even as surpluses in China and Japan, the other leading surplus nations, have dropped dramatically, butsince these northern European surpluses can no longer be counterbalanced by deficits within peripheral Europe given how indebted and troubled are their European trade partners, the hope issimply to force them abroad. In a world with weak demand and deteriorating trade relationships, in other words, the northern Europeans have decided that ratherthan boost domestic demand they will resolve their domestic problems by absorbing far more than theirshare of global demand [through exporting], to the tune of 2-3% of Europe’s GDP.

"This is absurd. If they succeed it will only be temporarily and at the expense of their alreadysuffering trade partners, and as a consequence it will just be a question of time before global trade relationships get even nastier than they have been. Of course if trade relationships deteriorate enough, and so force the imbalances back onto Europe, the result will be a surge in German unemployment with no corresponding relief in unemployment in the periphery."

Thus, if global rebalancing continues to dominate the landscape, the unintended policy impact from Germany would likely finally drive a large nail into the euro currency regime coffin.

It is also interesting to think about the consequences of Japan’s three arrow policies, specifically as it relates to China. It seems logical that if Japan’s efforts to weaken its currency continuesto succeed, a cheap Japan leads to both hot money flow and foreign direct investment flow out of China. With the growing political tensions between Japan and China triggering rising animosity and violence against Japanese companies operating inside China, said companies may be quick to move back home if the relative costs become more in-line. So, maybe Japan’s success is to China’s detriment in this rebalancing process. Thus, yet another negative self-feeding feedback loop in the making.

We could go on till the cows come home asking "what if" questions and paint various scenarios for the future and choice our bias accordingly. That said, I have attempted to think of just a few "what if’s" that would increase the probability of a China-Japan collision.

– What if China’s political leaders are not in full control of the military?

– What if the Chinese real estate market finally breaks?

– What if Prime Minister Abe is able to change the constitution and allow for an aggressive military build up in Japan?

– What if Germany refuses to increase domestic demand in order to alleviate global (and perhiphery) trade pressure?

– What if the US follows up its provocative sounding "Asian pivot" with a tightening of Chinese economic breathing room through trade sanctions?

One would think most of this stuff can be avoided. After all, if I am asking these questionsit’s likely the "best and brightest" have already built White Papers around them. But keep in mind, this stuff is linked to the hubris of politicians, not the sanity of real thinking people. Anything, as history tells us, can and will happen.

If neither China nor Japan gets some breathing room soon, the cat and mouse game of "pride versus pride" could quickly spin out of control. If so, this would most likely further exacerbate the already powerful forces of global deflation. In a world where debt levels (debt/gdp) have a spiraled to levels never witnessed before across the industrialized world as a whole, a collision between China and Japan would likely unleash a powerful self-reinforcing downside catalyst that could crush already suspect collateral values, exposing the rouse of modern central banking which implies debt doesn’t matter.

This is why despite all the analysis and machinations supporting the idea of a bond bubble in the US Treasury market, we expect bond prices to go lower in the months ahead and the US dollar to benefit from the corresponding funds flow as wrecking ball of global rebalancing swings along.

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