The Fix of China’s Fix

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

It wouldn’t be “reform” if it wasn’t seemingly contradictory and confusing. It is increasingly apparent that investors and observers look at everything in binary terms; something either isn’t or it is. In China, the entire premise of what they are doing takes more than one form, as it can look to be conflicting in the sense that the PBOC both “tightens” and “loosens” at the same time. That is the nature of trying to wean off monetarism’s asset bubble byproducts of great inefficiency.

Yesterday, the PBOC raised its yuan reference “fix” to 6.1318, a significant difference to offshore trading rates that have seen the currency depreciate as much as the first wave of “reform” in early 2014. It was an effort aimed at liquidity financing speculation, assuming that the net effect is to cause “outflows.”

I wondered earlier in the week if the PBOC had finally met its limitation, and the answer appears to be a qualified more of the same. In what is like a liquidity twist, the “tightening” aspect of raising the official currency reference is then undone, somewhat, as there is no precision here, by the nearly simultaneous reaction of reducing the RRR by 50 bps. However, the PBOC made further liquidity steps aimed at particular institutions, like the Ag Bank, those already deemed “good” and “necessary” by the PSL conduits last year.

Another “Reflation Proponent” to Join BoJ Board

Submitted by Pater Tenebrarum  –  The Acting Man Blog

No More Dancing Naked in the Streets …

When the BoJ’s board last voted in favor of enlarging its “QQE” (qualitative and quantitative easing) program even further, from already enormous amounts to nothing short of gigantic amounts, the board’s vote was 5:4 in favor, with outgoing board member Ryuzo Miyao considered to have cast the “swing vote”.

As Chris Woods of CLSA remarked at the time, in a society like Japan’s with its strong focus on consensus, “they might as well have been dancing naked in the streets”. Indeed, something like this has never happened before, although some resistance to Kuroda’s plans already reared its head previously. At most though there would be one or two members voting against further inflationary measures, but never nearly half of the board.

As Reuters reports, this problem is about to be dealt with this year. The newest nominee to the BoJ’s board is Yutaka Harada, reportedly a “committed reflation supporter”. That should actually read “inflation supporter”, because “reflation” is really just a euphemism for “inflation”. While he replaces another inflationist, the government will soon have the oipportunity to tilt the balance on the board more permanently toward loose monetary policy with the next appointment, as one of those who voted against further easing will leave the board in June. At this point one can probably be fairly certain that no suspected “hawk” stands a chance of being nominated by Shinzo Abe’s government anytime soon.

ECB Pulls The Trigger: Blocks Funding To Greece – Full Statement

Submitted by Tyler Durden  –  ZeroHedge

Just what the market had hoped would not happen…

• *ECB SAYS IT LIFTS WAIVER ON GREEK GOVERNMENT DEBT AS COLLATERAL
• *ECB SAYS IT CAN’T ASSUME SUCCESSFUL CONCLUSION OF GREECE REVIEW

What this means simply is that since Greek banks are now unable to pledge Greek bonds as collateral and fund themselves, and liquidity is about to evaporate, the ECB has just given a green light for Greek bank runs… and all the worst parts of the bible (or merely a negotiating move to let Greece see just what kind of chaos this will create).

And now finally, after many years of investing in ECB repo collateral, pardon Greek debt, Greek banks finally will ask what the “fundamental” value of all that Greek government debt they bought really is. Judging by the Greek ETF’s reaction, the answer is lower.

The only question now is whether the Greek Central Bank, which the ECB said is now sufficient to meet bank liquidity needs, is allowed to print Euros. If not, the Greek experiment at trying to stick it to Europe is about to crash and burn spectacularly.

Have A Little Faith In Blotto

Submitted by Raúl Ilargi Meijer  –  The Automatic Earth

DPC Jai alai hall, Havana, Cuba 1904

What, Greece again? Sorry!! But I see a lot of things flash by that make me want to say something. Today it’s the alleged 180 that Syriza made on debt reduction, before that it was their alleged kow-towing to Brussels on Russia sanctions, and tomorrow it’ll be something else again. It’s all media formatted bite-size and pre-chewed chunks, but the Greece-Troika stand-off is anything but.

I have a ton and a half of respect for David Stockman, who earlier this week wrote: ‘Greek Finance Minister Yanis Varoufakis has the weight of history on his shoulders’, but I’m sorry, I can’t agree with that, Dave. Yanis, who I only know through the occasional recent email exchange, if he has any weight on his shoulders, it’s that of the Greek people. And it’s the weight of their future, not their history.

Stockman also hints that Greece should leave the euro, and perhaps that is true, I would certainly tend to agree, but that doesn’t mean, even if Syriza agrees too, that today is the day they should go public with it. A Grexit may even be their endgame, but focusing on it now could well backfire. After all, a Grexit could come in many different shapes.

I have confidence that Varoufakis and his people have thought this through, and thoroughly, and that they have a – longer term – strategy that not many people will be able to comprehend. A quality all good strategies have. And the other side has no such strategy: they have never entertained the idea that they could lose, so why strategize? Goliath never figured he needed one either.

Still Stuck On Step 1

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

Every once in a while, you get the sense that the officialdom is starting to come around to the legion of finance as it actually exists rather than the one printed inside the dusty textbooks still crowded within the halls of academia. The “rising dollar” of the past six months has left its mark of bewilderment, as so many economists are rushing to see it as they want to not as it actually makes sense with the world around us. A “strong dollar” is assumed to be testament to the successes of monetarism, especially when the US is breeding GDP where others cannot seem to gain any traction whatsoever.

If the US is the cleanest dirty shirt, then the Fed did something very right, and the “dollar” supposedly recognizes that. So it was interesting to see in Barron’s, of all places, a roundtable discussion about the subject that actually alluded to the “dollar” rather than the dollar.

The dollar was strong against every major currency in the world last year. That hasn’t happened in at least 25 years.
Mainstream economists are telling us that the dollar is strong because of growth differentials among countries, and an impending interest-rate hike in the U.S. They don’t understand the true reasons for the strong dollar.

So far so good.

The Federal Reserve, under Alan Greenspan and Ben Bernanke, pursued a monetary policy that kept interest rates too low. It weakened the U.S. currency, which became a funding currency around the world. Corporations issued dollar-denominated debt. According to the Bank of International Settlements, there is $9 trillion of dollar-denominated debt outstanding in the private sector around the world. That is the short position.

So close. That is most decidedly not the “short position.” The global “dollar” short, a synthetic short, comes about not because there was tremendous growth in dollar-denominated assets but that financial entities borrowed “dollars” in which to “buy” it all. What they borrowed were currency liabilities that don’t really exist anywhere except on a bank ledger somewhere, and it so often isn’t very clear exactly where. The problem of such an arrangement is that the system is therefore very susceptible, asymmetrically, to periods where funding, rolling over the synthetic short, becomes less easy and cheap.

The Great PE Multiple Expansion Of 2011-2014: Why The Market Must Eventually Crater

Submitted by David Stockman – The Contra Corner Blog

The earnings season is all over except for the shouting, but the outcome doesn’t remotely validate Wall Street happy time narrative. Reported Q4 earnings for the S&P 500 companies (with about two-thirds reporting) stand at $25.02 per share compared to $26.48 in the year ago quarter. That’s right. So far Q4 profits are down 5% but shrinking corporate profits is something that you most definitely have not heard about on bubble vision.

That’s because the talking heads invariably reference “adjusted” or “ex-items” earnings, which, almost by definition, exclude charges for every imaginable business mistake and bonehead executive action—-such as soured M&A deals and “restructuring” expense—- that could possibly cause earnings to go down. For the four-year period 2007-2010, as I outlined in the Great Deformation, the ex-items profit figure hawked by the Wall Street analysts was a cool one-half trillion dollars or 30% higher than the GAAP profits reported to the SEC on penalty of jail time.

But that’s just the tip of the iceberg. The real truth coming out of this earnings season is that we have had a tremendous inflation of PE multiples during the last three years in anticipation, apparently, of the US economy hitting escape velocity and the overall global economy continuing to power onwards and upwards. As is evident from the financial news and “incoming” data, however, that presumption is not remotely correct.

So when Wall Street calls a great multiple expansion party that doesn’t pan out—–what happens next doesn’t require a labored explanation. The untoward course of market action in the year after 1999 and 2007, respectively, speaks for itself. But the point here is that the eventual market correction this time could be a doozy. The magnitude of PE multiple expansion triggered when the Fed and other central banks went all in with ZIRP and QE has been enormous, and it has also gone largely unremarked upon.

Greece and the EU – Nothing But Political Theater?

Submitted by Pater Tenebrarum  –  The Acting Man Blog

Varoufakis’ Tour of Europe

Greece’s new finance minister Yanis Varoufakis has toured Europe, trying to drum up support for – actually, we’re not quite sure what for exactly, as the precise nature of the Greek government’s demands is currently in flux (this is a parallel to Syriza’s ever-changing pre-election statements). Essentially, he seems to be gauging what they can get away with.

Not surprisingly, France’s political leadership has announced its support for a “debt deal” in principle(whatever that means), as the spendthrift French government is so to speak an ideological partner-in-crime of Syriza. However, the French government stopped short of supporting a partial write-down of Greece’s debt (Michel Sapin: “No we will not annul, we can discuss, we can delay, we can reduce its weight, but not annul”). Similar noises have issued from Berlin and Madrid.

The Shifting Script

Submitted by JC Collins  –  philosophyofmetrics

With the first month of 2015 in the books, the year, thus far, has met the expectations of the volatility which has been previously discussed amongst us here on the site.  So many readers and contributors have written and shared links to massive amounts of material that it leaves very little for me to write myself.

Which is something of a good thing lately as my work has completely consumed me.  The last few weeks have been full of travel and meetings and strategy sessions on how best to deal with the changing labor and materials markets surrounding Canadian energy production.

It’s somewhat exciting as the company which employees me is likely to see some growth in this downturn and potentially some major moves into new and developing markets around the world. The downside is that many around me are beginning to feel the crushing force of massive deflation.

This deflation has been held back since 2008 by all governments and central banks around the world.

When it comes to philosophyofmetrics.com and the analysis we have been building here for the last 13 months, it fills me with an odd sense of achievement that so many of the macroeconomic scripts and methodologies presented here are in fact manifesting as expected and discussed.

Is 105 the New 120? – A Crazy Thought On What Happens Next

Submitted by Bruce Krasting  –  The Bruce Krasting Blog

The Euro CHF has crossed well over the 1.05 level and looks fairly solid to me. This is a huge bounce from the chaotic levels reached on 1/15 when the SNB floated (low of ~.85). The cross is now 20% off the bottom, and only 15% from where the craziness started.

Step back and look at the post chaos trading and you might conclude that the “market” is trying to reprice the EURCHF to some reasonable level. And that conclusion would be completely wrong. The market is not repricing the CHF – THE SNB IS INTERVENING – What you have as a price today is just a dirty float managed by the SNB.  There is no price discovery  – the FX market is being led by the nose.

I’ve been looking at this picture and trying to figure how this will play out. I see three possible scenarios:

1) For the immediate future (a couple of months maybe?) the SNB will prevail and the trading range for the EURCHF is 1.05 on the bottom and possibly as high as 1.10. The actual rate is up to the SNB. The markets might try to goose the cross up for a bit (the carry trade using short CHF as the “wheel” is compelling).

2) At some point this year the market calls the SNB’s bluff. We get back down to 1.05 and the SNB is forced into defensive intervention (trying to hold a line in the sand). This, of course, can’t work for long. The SNB has shown it’s hand, the market understands that the SNB is weak and will back off if forced to. This outcome takes us to below par fairly quickly.

3) Something unbelievable happens. Something that is not on anyone’s radar today. Because this outcome is unanticipated it has significant knock-on consequences to global markets. The result is a significant turn around in the Swiss/EU inflation picture. Actual monthly inflation numbers and (more importantly) inflation expectations rise quickly. A huge turn around in the global bond markets follow – lights start turning off all over the place. Gold comes back as a safe haven.

Basically, #3 is a Black Swan event. Something that is so remote, that it’s probably not worth considering. But if it were to happen it becomes a game changer.

“Buy Gold” and Short Federal Reserve, Says Marc Faber

Submitted by Mark O’Byrne  –  GoldCore

Faber: “Only one way to short central banks and that is to buy gold”.

Marc Faber warned at the weekend that 2015 may be the year that investors will lose confidence in central banks and that investors will “suddenly realise what a scam that central banking is”.

He is long gold and recently bought more gold and investors should buy gold and short sectors such as biotech and social media.

Faber on WSJ via Barrons

In an interview with Jack Otter, editor Of Barrons.com, Dr. Faber again reiterated his desire to short central banks. While that is technically impossible, the editor of the excellent Gloom, Doom and Boom newsletter indicated that it can be done by proxy through the buying of gold and silver bullion.

In a Barron’s video interview published by the Wall Street Journal, ‘Dr. Doom’ said,

I think that my bet is that if i could short central banks i would short central banks in 2015 because I think that investors will suddenly realise what a scam central banking is and then they will lose confidence. And there is only one way to short central banks and that is to buy gold.

In January he said at a Societe Generale presentation that he expected to price of gold to go “up substantially – say 30%” in 2015. Dr. Faber has an impressive track record of accurately predicting medium term patterns within the overall long-term trend.

Negative Bond Yields and Gold

Submitted by Pater Tenebrarum  –  The Acting Man Blog

Soaring Prices of Government Debt

As the WSJ reports on government debt yields in Europe:

“As much as €1.5 trillion ($1.7 trillion) of euro area debt maturing in more than a year now pays a negative yield, according to J.P. Morgan. That compares to none whatsoever a year ago.

German government bonds offer negative yields on maturities up to six years, according to Tradeweb, along with those in Denmark. For five years, the Netherlands, Austria, Sweden and Finland are in the club. For four years, add France and Belgium. In Switzerland, bonds out to a whopping 13 years in length have negative yields.”

Approximately €220 billion in bank reserves are subject to negative deposit rates as well (this is actually less than it once used to be, as banks have moved excess reserves from the deposit facility to the current account facility at the ECB, which at least yields zero instead of the 20 basis point penalty rate applied to the deposit facility).

Photo via moneyweek.com

The Daily Debt Rattle

Submitted by Raúl Ilargi Meijer  –  The Automatic Earth

• ECB Is NOT Stimulating The Economy, Its a Bank Bailout (Martin Armstrong)
• If Size Matters, the ECB Is Still Falling Short (Bloomberg)
• Greek Debt Will Make ECB QE Problematic (MarketWatch)
• Tsipras Proves Bullish Surprise as Bonds to ETFs Reveal No Panic (Bloomberg)
• Greek Bonds Rally With Italian Peers as Tsipras Said to Retreat (Bloomberg)
• Greek Stocks Surge 10% On ‘Creative’ Debt Plan (CNBC)
• Greece Plays Colonel Blotto With Europe (Bloomberg)
• Varoufakis Wants OECD, Not Troika Inspectors (Kathimerini)
• Greeck Rock-Star Finance Minister Varoufakis Defies ECB’s Drachma Threats (AEP)
• Greek Finance Minister Looks Like A Normal Person – How Refreshing (Guardian)
• Merkel Expects Greek Funding Talks to Drag On for Months (Bloomberg)
• Greek Retreat on Writedown May Move Fight to Spending (Bloomberg)
• Why Greece Must Repudiate Its ‘Banker Bailout’ Debts, Exit The Euro (Stockman)
• Greece May Be ‘Weeks’ Away From Running Out Of Money (MarketWatch)
• European Central Bank Resists Latest Greek Bailout Plan (FT)
• It’s Not Just Greece And Spain That Need Debt Restructuring (Guardian)
• Gallup CEO: The Big Lie: 5.6% Unemployment (Zero Hedge)
• Cash-Starved Oil Producers Trade Treasured Pipelines for Money (Bloomberg)
• Apocalypse Now and Forever (jim Kunstler)

Continue Reading: Debt Rattle February 4 2015 – TheAutomaticEarth.com