We’re All Currency Manipulators Now
By Azizonomics. The BBC reports:
The US has decided not to declare China as having manipulated its currency to gain an unfair trade advantage.
But the Treasury did say that China’s currency, the yuan, remains “significantly undervalued” and urged China to make further progress.
In its semi-annual report, it said Beijing did not meet the criteria to be called a currency manipulator, which could have sparked US trade sanctions.
Critics of China say it keeps the yuan low to keep its exports cheap.
There’s a point that no-one in the establishment will admit.
Déjà Vu All Over Again
Latest on central banks, liquidity, rates and much more, by PIMCO’s T ony Crescenzi.
- If the eurozone is to endure, it will require reduced economic differences among countries and larger common fiscal capacity.
- Emerging market central banks are likely to remain in wait-and-see mode while looking to the U.S. for clarity on the fiscal negotiations and domestic macro prints for signs of moderation in both inflation and activity.
- While central banks in advanced economies have not traditionally used explicit policies to target exchange rates, the European debt crisis may change all that.
Full read here.
Benny and the Inkjets – Central Bank Focus
Guest post by Peter Tchir.
Ben Bernanke
Today I will be attending Ben’s talk in NY. I’m curious to see him speak in person, but can’t help but think of the questions I would ask if I could.
- Do you think that low rates are hurting savers, allowing big established businesses to make money while stopping new entrants, and do you finally admit your wealth effect theory is totally wrong since the wealth isn’t well distributed and has failed to produce results?
- At one point will you admit that the ultimate exit strategy is to just forgive the debt? That for all the talk about fiscal cliff, it would still leave us with a large annual deficit and really no end in sight to a ever growing pile of debt, making debt forgiveness the logical next step since you already pay back all the coupon income?
Okay, those are the questions that I would like to ask, but if I was given a chance to ask those questions, I would probably be too nervous. They seem obnoxious, even by my standards, and as much as I’d like answers to them, here are some more likely questions I’d ask.
Negative Nominal Interest Rates?
Guest post by Azizonomics.
A number of economists and economics writers have considered the possibility of allowing the Federal Reserve to drop interest rates below zero in order to make holding onto money costlier and encouraging individuals and firms to spend, spend, spend.
Miles Kimball details one such plan:
The US Federal Reserve’s new determination to keep buying mortgage-backed securities until the economy gets better, better known as quantitative easing, is controversial. Although a few commentators don’t think the economy needs any more stimulus, many others are unnerved because the Fed is using untested tools. (For example, see Michael Snyder’s collection of “10 Shocking Quotes About What QE3 Is Going To Do To America.”) Normally the Fed simply lowers short-term interest rates (and in particular the federal funds rate at which banks lend to each other overnight) by purchasing three-month Treasury bills. But it has basically hit the floor on the federal funds rate. If the Fed could lower the federal funds rate as far as chairman Ben Bernanke and his colleagues wanted, it would be much less controversial. The monetary policy cognoscenti would be comfortable with a tool they know well, and those who don’t understand monetary policy as well would be more likely to trust that the Fed knew what it was doing. By contrast, buying large quantities of long-term government bonds or mortgage-backed securities is seen as exotic and threatening by monetary policy outsiders; and it gives monetary policy insiders the uneasy feeling that they don’t know their footing and could fall into some unexpected crevasse at any time.
Gold – Inflation hedge or something more?
With Gold showing relative strength during this week’s risk off, we would like you to remind the real reasons behind buying Gold. Courtesy SK Options.
Gold serves numerous functions as an investment. Traditional reasons for investing in gold include:
- Inflation
- Investment market declines
- Burgeoning national debt
- Currency failure
- War or other extreme events
- Social unrest
Some would argue these entire phenomenon are related. For instance investment market declines can lead to war which can be followed by inflation which can lead to currency failure – just look to Germany in the 1920s for proof of this (albeit in a mixed order of events).
Basically, gold is protection against various ugly or undesirable societal, political, economic and financial occurrences. That reasoning broadly explains gold’s rise from $650 in 2007 to approximately $1800 today. Gold has risen over the last few years on the back of uncertainty and weakness in major global economies.
But of all the reasons given to invest in gold, the most common traditionally and the one we hear most often is protection against inflation. Inflation is often a consequence of increases in the supply of money that don’t coincide with an increase in the output of goods and services – basically, higher prices as a result of excess money competing for a fixed number of goods.
Q Ratio Update
Guest post by Doug Short.
The Q Ratio is a popular method of estimating the fair value of the stock market developed by Nobel Laureate James Tobin. It’s a fairly simple concept, but laborious to calculate. The Q Ratio is the total price of the market divided by the replacement cost of all its companies. Fortunately, the government does the work of accumulating the data for the calculation. The numbers are supplied in the Federal Reserve Z.1 Flow of Funds Accounts of the United States, which is released quarterly.
The first chart shows Q Ratio from 1900 to the present. I’ve calculated the ratio since the latest Fed data (through 2012 Q2) based on a subjective process of extrapolating the Z.1 data itself and factoring in the monthly averages of daily closes for the Vanguard Total Market ETF (VTI).
“How to lull a banker to sleep
Guest post by Ice Cap Management.
When it comes to sleepless nights, Toimi Soini of Finland originally set the record by using the “toothpicks under the eyelids” method for 11 straight days. In hindsight, Toimi was an amateur. You wouldn’t know it, but the nice people running the Bank of Canada have gone sleepless since 2003 – that’s 3,564 days without sweet dreams. Yet, that’s nothing compared to the very private folks at the Swiss National Bank. These super-secretive bankers have surpassed over 4,660 sleepless nights – despite living in Zzzzzzurich. This, of course brings us to the World record for sleepless nights. At 5,025 nights and counting, the always polite and well dressed chaps over at the Bank of England are reigning champions. Toimi Soini was not a banker and this was his downfall. As for the Canadians, Swiss and British – yes they are all bankers, but not just any bankers. This terrific trio have the displeasure of forever being known as the bankers who sold their gold. The irony of course, is the action of the World’s central bankersthemselves is the reason why gold is destined to remain golden forsometime to come. And with gold sitting near $1700/oz, and with noend to the money printing games, the sleepless nights are destined tocontinue.
Fixed Income Overview
Guest post by Peter Tchir.
From Risk Off to Risk Neutral
Until Friday of last week, we had been in a risk off stance. We had believed that the market was too optimistic about what immediate impact QE would have and that too many had over-estimated how eager Europe was to proceed with new and bigger bailouts. Those all helped our view, but in the end, earnings turned out far worse than most were expecting. The earnings story has been a drag on the market for the first time in recent memory. Even Apple struggled. The outlooks were even gloomier than the actual results.
So why are we switching from Risk Off to Risk Neutral or even Risk On?
First, S&P 1,400 helps. We believe the range on this downside move had been 1,375 to 1,400 so there is still some room lower, but we hit levels that make sense for us to look for a reversal. Then there is Apple. For the first time in a long time, I can see some strength building for Apple. Maybe we will get more profit taking, but given their earnings, the cash on hand, and the magic of round numbers, right around $600 seems like we could see some support and new investors who missed the surge to $700, step in and take a shot. Apple is so large in the Nasdaq, the Nasdaq 100 (QQQ) that it alone can drive the indices. Even the S&P is affected directly and indirectly by Apple.
OMT – From OMG to MIA & Why It Drives Risk
Guest post by Peter Tchir.
Even A Risk on/Risk Off World Isn’t This Simple, Or Is it?
This is the S&P 500 since July. We’ve had earnings, elections, open ended QE, attacks on embassies, doubts about the viability of social media as a business, weak economic data out of China, bouts of strength with U.S. economic data, budgets, and stress tests, yet I would argue that the ECB has had the single biggest influence on the market.
While it is impossible to tell what drove the overall trend, let alone any given day, there is a strong case to be made that the ECB has played the biggest role in the “risk on” trade, and for that matter, even the recent “risk-off” trade. The moment Draghi said he was prepared to do “whatever it takes” the market rallied. The ECB press conference immediately after was a bit of a disappointment, but reading between the lines, and the odd use of “transmission” by two ECB members was a good sign that something was in the works.
OMT was announced, and while not the full and easy QE we get out of the U.S. Fed, it was fairly impressive. My initial reaction was to give it an A for Effort but C for Execution. It was the first clear sign that the ECB was looking to take new actions and was working hard to address market concerns. It would rely on the ESM to play a role and was a little short on details, but seemed good.
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