Abort, Retry, Fail?

Well, golllllly.  Who knew that a judiciously-leaked story that DB was considering buying back a few billion euros' worth of senior debt (i.e., not the Cocos that everyone's suddenly an expert in) would single-handedly turn the tide of bearish sentiment engulfing global markets yesterday?  It's hard to believe that this solution didn't occur to them earlier; they can just dig under the sofa cushions for the money, or just spend last year's retained earnings....er, never mind.  Anyhow, huzzah for John Cryan!

Regardless of the merits of either Deutsche Bank or this story, yesterday's immediately enthusiastic reaction to it was more than a little redolent of 2008 or 2011, when hopeful tape bombs would push markets from the brink for a few hours at least, sucking the foolish into a sense of complacency and giving the wise an opportunity to do some selling.   Macro Man half expected to see a red headline that a Korean bank is this close to bidding for Lehman Brothers....

While today's price action in European financials will be a tasty opening act, the main event today is of course Janet Yellen's testimony before Congress.   Given the evident deceleration in US growth, the tumult gripping global markets, and the absence of any visible inflationary pressures, she has the opportunity to inject a further degree of confidence into markets, if only temporarily, by signalling the Fed's willingness to climb down from its policy of slowly removing accommodation.   That doesn't mean that she will, or even that she should, of course; the most likely (and most sensible) approach would be to keep her options open while acknowledging that March is probably off the table.

In a very real sense, the Fed faces the same difficult choice as the ECB and BOJ, and indeed must feel the same level of frustration that two generations of computer users encountered when confronted with the MS DOS query of what do you wanna do: Abort, Retry, Fail?

Consider the options, with a little help from Wikipedia:

Abort: Terminate the current policy operation and return to a flat policy setting.    This might be an option for the Fed (sitting tight at current rates), though given rhetoric and the clear disequilibrium of current policy settings it might be a little trickier for Japan and especially Europe.

Retry:  CBs could attempt the operation again.   Retry makes sense if the policymaker can rectify the problem that has caused the current reflation to crash.   Easier said than done, obviously, but clearly on the table for all three central banks in one form or another.

Fail: Return policy status to the earlier program/routine.   The economy could then gracefully recover from the problem.  The recommended policy for the Fed if you happen to own a few hundred billion dollars' worth of bonds, and for the ECB and BOJ if you happen to own a few hundred thousand bank shares.

The more that Macro Man looks at the NIRP issue, the more convinced he becomes that it was ill-conceived with little appreciation of the negative externalities.   Unfortunately, we're all operating under the jurisdiction of the law of unintended consequences,  and the judge is a stern task-master.  At this juncture the impact upon banks should be fairly clear, but what about pension funds with liabilities discounted by long-term rates?

Consider the stylized example below of a pension fund with an obligation to pay out 5 nominal units per year for the next 30 years.  (Real-life liability calculations are much more complicated.)  For the sake of simplicity we'll assume an asset base that has a net present value of 100 units, based on current nominal asset size and a constant real return assumption.   Note that this is in some ways a flattering assumption; periods with extremely low discount rates can probably be expected to sustain a compression in real returns as well, but we'll forego that for this example.

Using 30 year euro swap rates as our discount rates, we can see how the pension fund's status changes as the discount rate declines.  At 3% swap rates, it is more than fully-funded and has a liability duration of 18.25 years; at 2%, it is 7% in deficit and has seen duration extend by a year; a 1%, it's now 24% in deficit and has its liability duration yet another year.


Again, this is a very simple example and the real world is much more complicated.   Nevertheless, the impact of policy driven low rates can be seen quite starkly, even if actual discount rates move more slowly than markets. Lest we forget, here's what long dated euro swaps have done over the past few years:

Grazie, Mario!   And how are those pension return assumptions panning out with so much of the low-risk euro-denominated asset base delivering negative nominal and real yields?   What will happen if, in extremis, a lower deposit rate combined with negative convexity drives long-dated swap rates into negative territory for an extended period?   In such a case, the NPV of future liabilities could exceed the nominal value of said liabilities!  It sounds crazy, sure....but no more crazy than negative rates would have sounded a decade ago.

At the same time, Macro Man had to laugh when he saw the headline that European regulators are probing a "suspected rigging of $1.5 trillion debt market" for government-sponsored bonds.  Let's take a step back, shall we, and examine what real manipulation looks like?

* From 2002-2013 or so, China actively maintained an artificially weak exchange rate and accrued FX reserves of $3.6 trillion.  This policy distorted market pricing at home and abroad, leading to significant misallocations of capital.   Since then, they have maintained an artificially strong exchange rate.  Commodity producers and other mercantilist countries have pursued similar policies, leading to very substantial flows into and out of asset markets.   How's that worked out?

* Many central banks, including the Fed, ECB, BOJ, and BOE have been active participants in government bond markets, driving yields to levels that they likely would not have reached otherwise.  This is turn has impacted not only pension funding as described above, but also the pricing and allocation of capital into such worthy endeavours as...oh...share buybacks and oil ventures requiring $60 crude to turn a profit.   How's that working out?

* Even latterly, in the name of macroprudential policy and financial stability, regulators have encouraged banks to raise capital and, in Europe, blessed the issuance of some $450 billion of hard-to-value Coco bonds that at least one national central bank studied and decided would...wait for it...threaten financial stability!

If Macro Man had his druthers, we would declare modern central banking (un)orthodoxy a giant Fail, decide to Abort it, and then Retry with another policy mix.  Given that the downside of going batshit-crazy in monetary terms has become increasingly evident, why not try something different and go crazy in fiscal terms?

Two of the major problems in the world at the moment are government balance sheets that require some measure of austerity and the lack of inflation.   Japan has faced similar issues for nearly two decades, and Macro Man is mindful of a suggestion he raised a dozen years ago, well before the advent of this blog.

The US, Eurozone,  UK, and Japan all have 2% inflation targets that they're nowhere close to meeting.   Why not implement a periodic VAT increase of 0.5% per quarter, ad infinitum- in other words, legislate quasi-2% inflation?  The usual VAT issue of simply pulling consumption forward would be resolved because the tax would continue to rise rather than  being a one-shot deal, and would presumably inform inflation expectations as well.   Crucially, the revenue would then be spent back into the real economy to achieve some sort of positive growth impact- upgrading infrastructure in the US, public services in the UK and parts of Europe, etc.  The policy probably wouldn't work in Japan, given the long-term failure of infrastructure projects there, but they're kind of screwed anyway by demographics so why not give it the old college try?

To be sure, there are problems with such a policy, most notably the implementation issues of high-frequency tax rate changes.  Moreover, legislated inflation is not "real" inflation, and would not necessarily impact wages and incomes, particularly at the beginning.   This would lead to a loss of real purchasing power, which would apparently negate any impact of fiscal impulse from the government.  Then again, consumers are enjoying a historically positive "personal terms of trade" shock via commodity and manufactured goods deflation, so if there were ever a time to try such a policy now would be it.

At the end of the day, how bad could it be, particularly if central banks allowed consumers, pensions, etc to actually a generate a positive return on their savings instead of confiscating it through ZIRP and NIRP?  At the very least, you could say that this type of policy would avoid an officially-sponsored sanction to buy crappy assets at dubious prices, which has been a central plank of modern monetary policy since the crisis (and well before, in places like the US.)

And hey- if it didn't work after a few years, you could just abort it, retry it in a slightly different form, or declare all modern policies a failure and just add a zero to everyone's bank balance....

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Nico G
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February 10, 2016 at 8:24 AM ×

Achleitner is going to have to tap his Goldman network very soon

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Anonymous
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February 10, 2016 at 8:28 AM ×

We both reach the same conclusion. Central banks are actually part of the problem not the solution when it comes to managing economic cycles. It's not yet really occurred to them that trickle down policy doesn't work when what you really need to push top line growth is ...wait for it....more purchasing power from the bottom gushing UP. The answer to this is not monetary policy which favours capital asset impacts before it ever manifests has real increases to incomes. The answer has you quite rightly point out is in the realm of fiscal policy. Brings us back to the old adage that a carpenter always sees the solution to a problem in terms of 'nails'. Central banks ..do we need to say it?
Whatever fiscal policy enacts though , for it to work in the face of a global problem of oversupply also needs to be coordinated on a global levels with the top economies of the world responsible for the bulk of global trade all singing from the same hymn sheet otherwise all you do is open up the latest in along series of currency devaluation arb opp's.
We have a global problem and what is reprehensible is that we have no global resolution. What we do have is each central bank trying to steal a march on all of the others. NIRP the latest idiocy that is doomed to failure for consequences that are not 'unforeseen' I would have thought to anyone who stopped to think about it.
Economics has a science is a joke.

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Anonymous
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February 10, 2016 at 8:31 AM ×

By the way in your example of vat policy I would suggest there would be no 'loss of purchasing power'. What happens is the purchasing power is redistributed from the consumer to the government and back to the consumer eventually. I think the question might be is this the optimum solution relative to the other solutions available.

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Nico G
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February 10, 2016 at 9:18 AM ×

economics is not a science they have to stop with this insanity. Economics is like philosophy - folks trying to observe and make sense of things - they create 'schools of thought'. That is about it

and before you even granted a Nobel prize for economics you had to grant one for (lifetime achievement in) politics i.e. public service now THAT would really really help mankind.

meanwhile island reversal in the making on globex - pourvu que ca tienne

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Anonymous
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February 10, 2016 at 9:29 AM ×

https://s3.amazonaws.com/kuma_image/attached_images/2860/0b61f4583f5849523169681f85f9c3357a5e749a/large.png

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northshore
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February 10, 2016 at 9:39 AM ×

Is there evidence of VAT increases net increasing consumer inflation through demand, rather than reduced demand leading to less supply (i.e. balanced against larger impact on producer output, profit, employment, and consumer disposable income), let alone earnings? I don't think there is in the UK.

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Anonymous
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February 10, 2016 at 10:02 AM ×

I do not see that VAT ratchet as passing any voter tests, ie. electoral suicide, so that's not happening.

An option that would pass voter tests would be a systematic DE-ratcheting of taxes, "paid for" by a parallel and synchronised cancellation of governments' debt by their respective central banks, providing fiscal headroom for the tax cuts.

Let the debt cancellation and tax cuts continue for as long as necessary until morale, and govt debt/GDP ratios, improve.

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Anonymous
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February 10, 2016 at 10:51 AM ×

Looks like the BoJ whisperer is stirring things up on twitter.

Rumours talking of ECB getting ready to add Bank stocks to its asset purchases.

Neg rates on themselves? They suffer losses on bail ins? The lunacy that people are stretching to get a market rally going.

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Anonymous
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February 10, 2016 at 10:55 AM ×

Interesting that no-one has mentioned the most obvious (and best) solution to this economic/financial mess, namely: abandon CB nonsense and let all these bubbles explode. After asset markets have crashed and re-priced, there will be huge short-term pain and also huge long-term gain.

Of course we will need to blame someone - again, we can choose central bankers. They can all go to prison. We can get on and let free markets sort out the rest - they are the best tool for the job.

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Adamantic
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February 10, 2016 at 10:59 AM ×

All this for one Trichet-style rate rise.

In general though the CBs did what they could when they could. I

VAT raise is interesting, but might make things more complex. What if it takes too long to work and the poor get stiffed again?

EU, UK, US should just invest more in infrastructure by charging investors to lend to them

I know what I would do with a negative interest rate..

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Polemic
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February 10, 2016 at 11:16 AM ×

Agree with MM that increasing VAT doesn't produce the right type of inflation. Cutting tax and funding the difference through issuing at negative rates probably a better bet.

Still can't see inflation getting going until debt is cancelled and monetised. Or just print money and I m not talking about QE. That has stopped working when you issue zero yield cash in return for zero yield bonds. Just go wild and print the stuff and tell eveyone you are going to issue x bazzillion a year to the gov to spend on infrastructure. That should highten inflation expectations increase labour demand and draw in commodity demand.

Corbynomics may actually work.

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Booger
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February 10, 2016 at 11:35 AM ×


My mind goes back to Kuroda a week ago when he did a backflip over a beer with Mr. Aghi about NIRP at Davos and then strangely quoted Peter Pan:
"Only if you believe it will all your heart, can you really learn to fly"

Yeah, ok, pass the bong, Mr. Kuroda San. One suspects some "verbal intervention" soon and perhaps even some direct intervention. I think the time to go long Yen will be when the BOJ has spent some more bullets on NIRP (-1%) and blown a wad on direct FX intervention.

EUR.USD: actually getting to good value to short in view of Mr. Aghi being pressured to act next month.

Yellen testimony today: what can she do but talk up the economy and keep the door open to a rate increase in March whilst actually reassuring the market that is not really on the cards.

All in all, I like the odds of going long dollar into the Yellen testimony. EUR.USD, USD.JPY, AUD.USD, USD.CNH all look to be at good levels to be long dollar again. On the latter, looks like the PBOC sold some USD from about an hour ago.

On inflation ratcheting, to do that one need only empower the unions, which was done in the wake of the great depression.

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abee crombie
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February 10, 2016 at 11:49 AM ×

Haha. Nice one on the Korean Banks buying db... I thought we would see a ban on short sales and cds trading. Maybe soon.

I have no doubt CB can create inflation. The more markets punish central banking policies the faster it's going to come. They will bring back helicopter ben.

Maybe japan just ends up buying the whole topix, puts negative 5% rates on deposits. Surely they will get what they desire. The nuclear option.

To me the real problem is the FX regime. Price swings are too destabilizing, markets overshoot and this whole notion of usd reserves is nuts. Why does China need the usd ? They produce everything and run the world's biggest trade surplus.

Anyways back to real life, yellen is backed into a corner. I can really see a crash if she disappoints,

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Nico G
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February 10, 2016 at 11:49 AM ×

anon 1055

"no-one has mentioned the most obvious (and best) solution to this economic/financial mess, namely: abandon CB nonsense and let all these bubbles explod"

last month i wrote that markets had to correct and find a bottom WITHOUT an help from any CB. The sine qua non condition for a sustainable purge in leverage, hearsay, herding and other fuckery

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Booger
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February 10, 2016 at 12:14 PM ×

QE should tend to inflate asset prices most of the time. Except when there is a real crisis in which case things may fall far more than they would have without QE. Prices I suspect find the same bottom with or without QE, but with QE they spend more time floating in the stratosphere.

And since a systemic crisis happens every 8 years or so, I suspect the next one will be about as bad as 2009 or 2001. The Fed have a history of being systematic bubble blowers.

The next crisis will be ugly, but hardly the end of the world, but the Fed will come to the rescue again as it will seem like the world is ending, and who knows what crazy QE or NIRP we will have by then. Like they say, the path to hell is paved with good intentions.

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Anonymous
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February 10, 2016 at 12:19 PM ×

I agree with Kocherlakota on 1 point: negative interest rates signal the failure of appropriate fiscal policy. Especially in the Eurozone, with its monetary dominance regime, fiscal policy has been way too tight for years. Now that the ECB is doing QE (which they should have been doing much earlier), fiscal policy can be relaxed without fear of diverging interest rates on sovereign debt. But unfortunately the institutional setup does not really allow for it (Maastricht treaty), which imho is insane.

And there should be plenty to invest in with decent future societal benefit (energy transition/renewables, infrastructure, etc). So I really hope that before we go through the looking glass of further and further negative rates, good old fiscal policy will be given a try...

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Bruce in Tennessee
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February 10, 2016 at 12:23 PM ×

"The US, Eurozone, UK, and Japan all have 2% inflation targets that they're nowhere close to meeting. Why not implement a periodic VAT increase of 0.5% per quarter, ad infinitum- in other words, legislate quasi-2% inflation?"

...Hmmmmm. I smell a man, who in writing his article, didn't think one of the points through. I'm pretty sure I smell the wrong conclusion. This idea smells like napalm in the morning..

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Anonymous
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February 10, 2016 at 12:23 PM ×

@ Anon at 10:55 AM

Precisely.

"Abort, Retry, Fail?"

None of the above. Need to do a "Restart"

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Anon 1055
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February 10, 2016 at 12:25 PM ×

Nico G - Apologies, you did indeed point this out.

To everyone promoting "print away all the debt", "monetize everything" (Polemic?) - I hope you don't really think this is in anyway even vaguely sensible??? This is the path of Zimbabwe etc. Monetizing debt is defaulting on debt in all but name... you punish savings, investment, business, jobs and the real economy. It is the path to absolute ruin. The outcome is total economic collapse, starvation and maybe war. I cannot believe intelligent people are even vaguely countenancing such a thing... please tell me I have misunderstood your remarks...

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Adrem
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February 10, 2016 at 12:37 PM ×

I am surprised anyone should give any credence to what central bankers say (BIS excspted) leave alone what they do. Of course, their activities have effects that must be noted by participants but the over-arching principle of whether it is getting us anywhere other than on a downward slope is studiously ignored.
The ball is really in the court of the politicians who really would rather it wasn't because what is a stake is their power and they really fear that what fiscal and other actions they might take will see them lose it. Witness Trump and Sanders and rising extremist, right and left, in Europe, aided and abetted by a wave of refugees whose basic religion is one of submission to Allah and totally at variance with Western civilisation. Why else would the Patriach of Greek Orthodoxy be meeting the Pope for the first time since the schism of 1054.
Bit remote from DBs CoCo bonds I know but when tectonic plates shift anything can happen. And probably anythng will.

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Macro Man
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February 10, 2016 at 12:42 PM ×

Adreem, I hate to be "that guy", but the pope is meeting the patriarch of the Russian Orthodox church, and there have been previous meetings between pope and patriarch before, notably in 1964 between the pope and the Patriarch of Constantinople (ie the 'pope' of the Orthodox church)

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Bruce in Tennessee
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February 10, 2016 at 12:45 PM ×

All right...if you want nutty ideas...I think the probable solution to this debt crisis is to stop QE and ZIRP and let rates find a normal equilibrium. How's that for nutty?

When credit is extended, a rate other than ZIRP is the stinger that means it gets properly allocated. The Fed, by going to ZIRP, negated this natural checks and balances system, and allowed money to be spent unproductively. You know the examples. Ghost cities in China, oil that depended, like housing in 2006, on never going under 60 dollars a barrel, subprime car sales to people who are impulsive, megamines, and so forth. Now banks are concerned, and probably rightly so, that they will be unprofitable....this never ends. I am not saying Volckerize rates, just let them find their natural level. This manipulation has produced a tangled, complex mess that certainly seems to me to be harder to extricate our globe from than the problem we had at Time=0. We are now globally depending on what? A policy that seems to have been a bust and has been given nearly the time of the entire Great Depression.

Surely we can do better than this.

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Bruce in Tennessee
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February 10, 2016 at 12:58 PM ×

http://blogs.wsj.com/moneybeat/2016/02/09/surging-credit-risk-for-banks-is-becoming-a-major-issue-in-european-markets/

"Some of the latest analysts to weigh in on the subject come from Bank of America Merrill Lynch. In a research note out on Monday titled “the tide has turned,” analysts Ioannis Angelakis, Barnaby Martin and Souheir Asba argue that risk is becoming more systematic.

The authors go on: “Risks are not contained any more within the EM/oil related names. Global growth outlook fears and risks of quantitative failure have led to weakness into cyclical names. Add also the recent sell-off in financials and you have the perfect recipe for a market sell-off that looks and feels systemic."

...In one sense it is as though we have abandoned our business book, and taken all our business to the government. And you know what can happen when you lose the government contract. Banks have seen the NIRP train pulling out of the station, and are alarmed. But there is only one contract out there at this time....of course in this instance there was no choice....

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Anonymous
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February 10, 2016 at 12:59 PM ×

Politicians, and by extension the central bankers whom they appoint, are not in the business of embracing vote-losing "huge short term pain", so good luck waiting for that one as an intentional policy choice.

Conversely, I don't recall anyone here writing "print away all the debt" either.

Debt jubilees were once "a thing", and if you've got a fiat currency, you may as well use it to your advantage to achieve a similar outcome while mitigating the pain.

Create central bank reserves to allow increasing quantities of government debt to be parked in a dusty cellar, coupons returned to sender, with the key to the cellar one day eventually lost, such that that portion of govt debt can be reclassified as "old sh!t no longer relevant". Meanwhile, fiscal headroom is created, enabling lower-than-otherwise taxes and higher-than-otherwise spending, directed for example at projects with lengthy investment horizons that don't otherwise get funded because of the short term timescales driving reelection. Repeat as necessary, for as long as it takes the patient to respond sufficiently that the extra fiscal headroom becomes no longer required.

The challenge is calibrating the voodoo so that the populists don't go Brewster crazy "printing away all the debt", precipitating currency crises. No one is suggesting it's easy choice or one without danger, but it's a choice the politicians have open to them, and to every last one of them it'll look a great deal more attractive (and vote winning) than presiding over a "great purge" or "reckoning".

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Macro Man
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February 10, 2016 at 1:05 PM ×

Actually, it's easier than that: governments issue zero coupon perpetuals and use the proceeds (from selling to QE CBs) to retire a significant chunk of the stock of coupon debt.

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Anon 1055
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February 10, 2016 at 1:22 PM ×

anon 12:59
Actually Polemic did write "print away all the debt" as follows: "Still can't see inflation getting going until debt is cancelled and monetized. Or just print money and I m not talking about QE."
As for letting markets crash not being palatable, they're gonna crash worse if we carry on like this. Do you want big pain or enormous pain? That's your only choice. Understand this... there are NO good choices.

Regarding just "parking away all debt" - it's nonsense, it's just slowly inflating away debt, rather than quickly inflating it away. Problem is, one person's debt/liabilities are another person's credit/assets. No this is not a good choice, because guess what will happen? As you slowly monetize the current debt, idiots (i.e. those in debt) will run up even bigger debt piles ad infinitum.

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Bruce in Tennessee
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February 10, 2016 at 1:35 PM ×

http://news.yahoo.com/u-supreme-court-blocks-obama-carbon-emissions-plan-232809840--finance.html

WASHINGTON (Reuters) - The U.S. Supreme Court on Tuesday delivered a major blow to President Barack Obama by blocking federal regulations to curb carbon dioxide emissions from power plants, the centerpiece of his administration's strategy to combat climate change.

...Perhaps coal companies can climb out of their coffin today?

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Macro Man
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February 10, 2016 at 1:41 PM ×

Ummm...no she didn't. The speech played a fairly straight bat and was pretty much as expected IMHO- acknowledge headwinds and low inflation but say you still expect to move policy.

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Polemic
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February 10, 2016 at 1:42 PM ×

Yes I did say it. But I didn't say monetise all of it. I don't buy the notion that it's Zimbabwe or nothing.

As per MM comment re zero perpetuals issued.. Cash is effectively a zero coupon perpetual so we are just talking semantics.

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washedup
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February 10, 2016 at 1:54 PM ×

I think Yellen just declared 'hey guys, I spotted goldilocks in the woods picking daisies the bear from the revenant was sniffing around nearby' - which the market, in its current mood, and exemplified by the WSJ headline, will interpret as 'guys, the bear from the revenant is about to maul goldilocks to shreds and I am truly powerless to stop it'.

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Macro Man
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February 10, 2016 at 2:07 PM ×

Ah, the press. The Reuters story was entitled "Fed's Yellen cites global risks but says U.S. should motor through". Who'd have guessed it was about the same speech?

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Anonymous
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February 10, 2016 at 2:14 PM ×

Westmoreland Coal Co....ask is almost a buck higher (6.33) than it sold for most of the day yesterday...apparently many have the same thought...

BinT

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Anonymous
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February 10, 2016 at 2:40 PM ×

FWIW I thought this post was brilliant right up to the solution offered of a tax to solve the non-problem of deflation. Think of how the gumint would grow with the stimulus of such a tax and how the non-gumint world would shrink over time. And why wouldn't the tax itself grow as the gumint makes up more and more problems for it to solve (like climate change LOL).

Could it be that the stuff is actually starting to hit the fan?

Rossmorguy

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abee crombie
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February 10, 2016 at 2:57 PM ×

TBS, I read Gross's outlook. I dont really agree that NIRP is the problem, but anyways, the market clearly does agree with his and your point of view, most specifically in Japan. (Gross makes some poor analysis on the problems in Brazil).

Financial markets are unstable. We had a crash in 1987 without any recession and all the doom and gloomers were calling for a return to the great depression bc of the outstanding debt levels at the time were high. The Fed was created in fact to stop all the boom/bust cycles that characterized the US economy in the late 1800's early 1900s

Feels like we could be heading for the same thing.

In an ideal world, should we have QE or CB manipulated interest rates, of course not. Should prices clear without any interference. Of course. I just dont think we live in that ideal world. Politicians and CB wont stand by like they did in the 1930's

The problem with ZIRP, NIRP, QE etc is that you encourage zombie companies to stay afloat, you produce excess supply and you push ppl into risky assets. The problem now, IMO, is more about Global growth and the markets fear that suddenly there is no more growth left so we are going to have a huge debt deflation.

Once ppl are done selling their non UST/JGB/Bund assets, what are they going to do with their money?

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MrBeach
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February 10, 2016 at 3:25 PM ×

There is no politically viable solution to 35 years of global capital misallocation.

None.

The tsunami scene in the movie Interstellar was one of my favorites: https://www.youtube.com/watch?v=v7OVqXm7_Pk

I agree with Abee above - we have so much excess supply underpinned by banks, savings, pensions, etc. that we have to find a way out, lest we repeat 2008-2009 again.

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Anonymous
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February 10, 2016 at 4:19 PM ×

Saw this on twitter: "Rising hostility toward Yellen is clear"

Very true. The tide is turning against central banks. As Nico here clearly pointed out, markets are starting to fade central bank monetary policy. Soon they will outright reject it. Politicians sensing this are starting to point the finger of blame at central banks. I think this spirals further... these guys (and gals) are going to jail...

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Anonymous
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February 10, 2016 at 4:29 PM ×

"these guys (and gals) are going to jail..."

In your dreams. Besides which I think most are misguided by models that don't describe the economic reality that well ,but they are well intentioned which is hardly a criminal offence in my book.

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Macro Man
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February 10, 2016 at 4:31 PM ×

Never ascribe to malice what can be explained by incompetence.

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abee crombie
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February 10, 2016 at 4:37 PM ×

MrBeach, so much excess supply is a result of Fiat money, and the current FX regime, IMO. Every country beside the US feels the need to have massive FX reserves bc of what happens when you dont. This encourages overproduction, the results of which is savings and invested in USTs.

The big deal now is that in prior cycles, when US tightened policy it was accompanied with higher global growth expectations, so the shock of lower liquidity/higher rates, whatever you want to call it, was minimized by the growth expectation. (That is why the USD usually fell after the first rate hike). Now we have the reverse, an OK US economy, that probably needs higher rates but the rest world growth is still crap and cannot absorb them and is throwing a hissy fit.

GBPJPY has been a reliable risk indicator. Its about to fall off a cliff

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thegreyman
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February 10, 2016 at 4:40 PM ×

Kevin McPartland March1, 2011
"Apparently I called the CoCo thing back in 2011, although I don't really want to be right in this case"

http://kevinonthestreet.com/how-to-create-a-new-bank-capital-crisis/

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thegreyman
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February 10, 2016 at 4:46 PM ×

"DB will have government backing" ex-MS CEO John Mack

I remember when SEC investigator Gary J. Aguirre attempted to subpoena Mack for leaking inside information. Aquirre was immediately fired by the SEC.

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thegreyman
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February 10, 2016 at 4:49 PM ×

Yellen: Legal authority for negative rates??? How the hell should I know (nor even care(

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Leftback
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February 10, 2016 at 4:56 PM ×

UsdJpy is literally hanging over a cliff here at 114. Below this level lies only a large air pocket..
We are getting more than a little nervous about the next move in FX.

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Leftback
admin
February 10, 2016 at 5:09 PM ×

Lots and lots of stories circulating about a new Plaza accord to lower the DX, just like this:

Is It Time for a Coordinated Response?

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Anonymous
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February 10, 2016 at 5:16 PM ×

I can see usdjpy falling to 109 or lower.

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abee crombie
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February 10, 2016 at 5:17 PM ×

Its all about the Yen-gamins!

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Bruce in Tennessee
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February 10, 2016 at 5:19 PM ×

http://news.yahoo.com/yellen-says-we-justjust-plain-screwed-the-pooch-232809840--finance.html

WASHINGTON (Reuters) - Federal reserve chairwoman Janet Yellen, in testimony on capitol hill, admitted to congress Wednesday that,"We just plain screwed the pooch."
Asked to elaborate, Yellen mentioned that policies put in place by former federal reserve chairmen Alan Greenspan and Ben Bernanke "just don't work worth a damn."

When asked by an incredulous member of congress why she would say such a thing, Yellen replied,"Oh, I don't know. I just felt like coming clean for a change. Makes me feel like a young girl all over again!" The hearing is now in emergency recess...

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Anonymous
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February 10, 2016 at 5:24 PM ×

Bruce you bastard I actually cut and paste that URL into my browser hahahahhaha

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Bruce in Tennessee
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February 10, 2016 at 5:26 PM ×

:)

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Anonymous
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February 10, 2016 at 5:47 PM ×

The solution on inflating away the debt is injecting equity. Consider the following:
- Every citizen opens an account to a commercial bank.
- the commercial bank provides the citizens with a perpetual (or 999 years) loan at 0% interest and credits their account with cash. The bank can do that because it's been advised by the central bank of the next step:
- The central buys all these loans from the commercial banks at face value. This is a fiform of QE, except it's really effective at creating inflation (it's an actual helicopter drop, not an asset swap). The program will have a certain duration and size (for example lasting for 2 years, giving each citizen €2k per year)
- inflation kicks in, and inflation expectations even more so
- the central bank can now raise rates and use both rates and this program to control inflation and growth.
Much more effective than asset price manipulation and hope relying on wealth effect. Much better than monetizing government debt to spend on roads and bridges to nowhere (if these are really needed, they will be built anyway). Much more progressive as the poor will benefit more, and at the same time market friendly as the handout will not go to privileged asset holders (for example house owners) or potentially corrupt governments.

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Bruce in Tennessee
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February 10, 2016 at 5:48 PM ×

http://finance.yahoo.com/news/feds-yellen-cites-global-risks-133256204.html

Yellen: Fed not likely to reverse course on rates despite risks

...This however, is the real McCoy...Lefty, This is that "Are you sure Janet is going to do what you think she's going to do" moment....

...Mr. Market begging a small group of people to just give us the good stuff one more time...

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Anonymous
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February 10, 2016 at 6:09 PM ×

we can shuffle paper claims all we want, go beboppin' and scattin' till the cows come home, and CBs can zig when expectations are XYZ and zag when expectations are EFG....

unfortunately, productivity doesn't come out of thin air and TANSTAAFL.


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hipper
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February 10, 2016 at 6:14 PM ×

I suppose the issuing of perpetual zero coupon bonds to governments, which are then hidden in CB basements never again to be seen is completely possible in pursuit for inflation, but what might actually happen is you get a completely new game with a new set of rules after that.

Why is "growth" so important to governments and economists? Although might be other things too I'd say the single most important thing is because growth is needed to take care of future debt obligations through rising tax revenues. But as we know now that plan is failing miserably since more units of debt are needed to create the same amount of growth. That's what monetary actions have been all about to this point. They could've just rescued the banks in 2008 through surgical, pinpointed operations but instead they made it into a continuous dosage of crack.

If you remove the need to take care of future obligations, you remove the need for growth, along with most of the stuff associated with it, like technological advancement. And control from corporations will shift towards governments (or whoever can back their claims/demands) since corporation functions/purposes, lacking a growth driven economy become more irrelevant. I think that would go a long way towards something like communism and the key issue then becomes who gets to control supply chains and means of production. Usually the one who has the (military) force to back their claim. They also get to tell the rest which currency they should use and probably it's one which they control. I can see where Mr. Rotschild was going with that infamous quote.

Ultimately that's where this is probably heading through a bunch of turbulence along the way. We're still in the phase where governments are restrained from unrestricted investment but they'll figure it out at some point. The ironic thing when that occurs is that growth then becomes irrelevant replaced by a new set of priorities. Or then again they might just reset everything and start over with the same system, although the creditors wouldn't like that at all.

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Leftback
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February 10, 2016 at 7:27 PM ×

Janet will have had one eye on Usdjpy tho morning. If she backs down on rate hikes this morning, then Usdjpy falls off a cliff and it's Goodnight Irene down to 109-110 with all of the attendant carry unwind and carnage in Spoos.

She will climb down at some point.... perhaps within 2-3 weeks, possibly as a part of more co-ordinated CB interventions, and the result of that will probably be a rally in emerging markets, commodities and precious metals. Right now we are going to probably see a technical relief rally in USD. Usdjpy is at a critical juncture. Up to 118-120, or down to 109-110. You know what that means for Spoos.

We still think fading the plunge in yields will be a good trade here, either late this week or next.

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Macro Man
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February 10, 2016 at 7:41 PM ×

LB, if you think Yellen or the Fed gives a monkey's about a 5-6% drop in USD/JPY after specifically citing $ strength as a headwind, you need to seriously reexamine your assumptions about their reaction function.

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Anonymous
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February 10, 2016 at 7:52 PM ×

Disagree MM... They might not care right now, but I see USDJPY as basically the "do you believe in central banks" financial instrument of the moment. If it breaks lower there will be all sorts of disruptions across financial markets that will have a far greater tightening impact on financial conditions than the relief from a slightly weaker dollar

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Macro Man
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February 10, 2016 at 8:08 PM ×

That may be your reasoning, and it might be my reasoning, but there is no way in hell that it's their reasoning, which is my point. As an aside, if $JPY is such an arbiter of equities, why are they up today with USDJPY taking it up the ying yang? Listen, I understand the linkage between USDJPY and risk assets, probably better than most because I've modelled it for the last 15 years. But it is just wrong to think that the Fed will down tools because USD/JPY is going down. As I wrote the other week, USDJPY shat itself 2 weeks after the 1st fed hike of 1994 and didn;t stop til well after they were done. Fed didn't exactly stop, despite bond market carnage that nflicted some real damage. Yes, this is a different environment with a different fed leader, but it is an all too common mistake to assume that everyone (including policymakers)thinks like you do, i.e. projection bias.

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abee crombie
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February 10, 2016 at 8:10 PM ×

For those Zolan Pozsar fans.

https://doc.research-and-analytics.csfb.com/docView?language=ENG&format=PDF&document_id=806977650&source_id=em&serialid=49zz%2b7Ifwr5OosPcuVWVgNMzbl1%2bNRROw0oXkEE4ZME%3d

The $100 billion in non-operating deposits that have flown out of banks since
the December rate hike are big enough to force some big banks to rebalance
between Level 2 and Level 1 assets in their HQLA portfolio in order to remain
compliant with the letter and spirit of the liquidity coverage ratio. The maximum
some banks can lose is $30 billion before their Level 2 limits are breached –
and $100 billion in outflows since December mean that this scenario is now live.

It is one thing if these rebalancing flows are driven by the gradual outflow of
non-operating deposits – the resulting trades may occur gradually, over time.
But it’s a completely different matter if they are forced by the Fed on compliance
grounds and at banks where deposit outflows have not triggered them yet.

Since the December rate hike large U.S. banks have sold $10 billion in agency
MBS and bought $13 billion in Treasuries. Whether these rebalancing flows
have been triggered by the outflow on non-operating deposits or regulatory
push to make U.S. G-SIBs comply with global HQLA portfolio composition
benchmarks we do not know. But if it is the latter, flows out of MBS and into
Treasuries could be substantial: $100 billion at best and $175 billion at worse
with obvious implications for the mortgage basis, bank NIMs and mortgage
REITs.

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Anonymous
admin
February 10, 2016 at 8:49 PM ×

I'm not trying to guess how the fed see it right now, I probably agree with you they think its possibly stimulative for usdjpy to be doing this, my contention is that usdjpy lower is a harbinger of tighter financial conditions, not looser ones, regardless of what the fed think right now. 2008 being the prime example, usdjpy gapping lower from a first order perspective may have been seen as stimulative to the US by the fed, but it told a whole different story of what was going on behind the scenes... I think usdjpy tells us the same thing again... Dissolution of faith in central banks is going to cause tighter finanacial conditions and USDJPY is the ultimate barometer of that loss of faith

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Leftback
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February 10, 2016 at 8:59 PM ×

The technical picture in Usdjpy is looking a little ominous.

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Leftback
admin
February 10, 2016 at 9:01 PM ×

Interesting discussion re: Usdjpy. I disagree with MM here but actually hope he is correct for a number of reasons.

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Bruce in Tennessee
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February 10, 2016 at 9:02 PM ×

Lefty,

This last hour is the boys have all seen her talk, got together, and said,"Damn. She's not gonna cave.".....

...Don't out-cogitate the cogitators...

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washedup
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February 10, 2016 at 9:07 PM ×

usdjpy is a tough one - its definitely risk off on a day to day market basis, so I would guess if it gets to 109-110 we will be saying hello to 1750-70 in spoos - however, it relieves pressure on China tremendously without really hurting Japan, in that its exporters have largely immunized themselves from currency appreciation in the last two decades for obvious reasons.
Either way there is zero chance yellen would explicitly take this into consideration - I think they are, however attuned to the losses in consumer and business confidence if spoos keep slitting their wrists for the next few weeks.
Ugly reversal in spoos today - doesn't bode well at all.

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Bruce in Tennessee
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February 10, 2016 at 9:23 PM ×

10 year about to be in the 1.6's!! To me, this is the most surprising thing about the 2016 market...and to me it looks like the NIRP-lite the Japanese instituted was the straw that broke the camel's trend line...yet Yellen says she plans to stay the course. I am not sure there is enough popcorn....

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washedup
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February 10, 2016 at 9:29 PM ×

BinT u back in ur shorts? I know ud pulled the plug a couple weeks ago looking for a better entry (or something like that!)

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DownWithTheBeanCounters
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February 10, 2016 at 9:32 PM ×

If someone has a moment would you please summarize why JPY|USD strength is an augur of doom? Much obliged.

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Macro Man
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February 10, 2016 at 9:35 PM ×

Historically it's positively correlated with stocks, and erm....that's it.

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thegreyman
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February 10, 2016 at 9:39 PM ×

$133+ $TLT in AH ....... i think Nikkei gets rocked tonight on yen rally /2-10yr UST curve now +99bps

$BA apparently firing managers & executives today...more good jobs gone

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Anonymous
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February 10, 2016 at 9:42 PM ×

betting on lower equities and lower interest rates...

BinT

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thegreyman
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February 10, 2016 at 9:56 PM ×

DownWithTheBeanCounters

Chart view:

Monthly: http://stockcharts.com/public/3421479/chartbook/439491921

Weekly: http://stockcharts.com/public/3421479/chartbook/444281700

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thegreyman
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February 10, 2016 at 10:00 PM ×

Apparently UST traders the only people that see where USDJPY is ..... 30yr screaming and now 2.49% ... 2-10yr curve now +98bps

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Anonymous
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February 10, 2016 at 10:09 PM ×

I am not so sure that a collapse is immninent.

Based on the after market price actions of AMZN, TSLA, CSCO, and even TWTR, prices are clearly on the rising and it is quite possible that we have a large rebound tomorrow.

I know this equity signal is contradicting what bond and FX are telling us. But if JPY could not break down tonight, then shorty of SPOOs should be careful about tomorrow. Just my 2 cents

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Anonymous
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February 10, 2016 at 10:33 PM ×

But we had the rebound this morning in Europe. That was it. Spoos needs to test 1800 Bullard low and put up or shut up.

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Nico G
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February 10, 2016 at 10:51 PM ×

lets keep it simple!!! USD just went too rich vs. pretty much every other country on the planet

FX trading is the most leveraged game on the planet - remember when EURUSD touched 1.4 and Draghi got angry. He just gave 'the signal' for it to go lower. Well he did nothing. But momentum sent it the other way to 1.03 without any change at all in world financials

6 years ago it went to 1.60 when people got scared. Those are just crowded traded with ominous liquidation (cf. SNB 2015)

now the USDJPY

USDJPY was just the most crowded long on FX planet last year, and quite easy to identify - it was a darling gimmick for the Abe cult. You heard it, Abenomics is just a cult. The correlation you see with world equities and oil-equities blablah was only begotten by massive liquidation, worldwide

like we keep on saying at radio Nico your only enemy today is financial LEVERAGE. Until they regulate that, plenty of boom and bust plenty of volatility plenty of money to make

before taking day trading as sole job for the family in 1998 i assessed the risks. The main risk is the death of volatility. After 2009 i was wary that they would regulate markets and leverage SO much, that volatility would disappear. It certainly did on Spoos for a long while but again, with so much margin play shit was meant to hit the afterburner jet

Move along and do not worry too much, the world economy didn't stop, only too many gamblers are looking for the exit on so many assets you are welcome back to big super acrobatics jet 'correlation one'.

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AL
admin
February 10, 2016 at 10:57 PM ×

Interesting to see this though:

https://www.frbatlanta.org/cqer/research/gdpnow.aspx?panel=3

It does not exactly signal an economy that is melting down and I always felt that this indicator worked pretty well in the past.

The tough spot here is where Dr. Aghi is sitting. EUR Trade Weighted is up roughly 6% from the beginning of December. This is a lot for a basket of CCYs and represent quite a substantial tightening. Add to this a collapsing banking sector and some tension coming back in peripheral spreads in Eurozone and you really have to wonder what the ECB needs to deliver in order to restore some kind of order. A marginal increase in the monthly Public Sector Purchase Programme might not be sufficient, let alone a further cut to the depo rate that, I fear, could generate unintended consequences.

I start to think that corporate bonds are on the agenda: pretty difficult to implement, but it could certainly be quite powerful.

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abee crombie
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February 10, 2016 at 11:32 PM ×

Love it Nico! I never really paid too much attention to the long term trends in FX but now I see it as THE driver of Risk in asset markets, though sometimes with a nice lag. And boy when they start moving, they just f-ing blast off. what a market to swing trade.



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Macro Man
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February 11, 2016 at 12:46 AM ×

Abee, I've mentioned this before, but I think you have the causality totally backwards. FX is a largely a derivative market at the moment, trading off of the signals elsewhere. USD/JPY is an exception, which is why I think it's laughable that the Fed gives a hoot about where it is at the moment.

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abee crombie
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February 11, 2016 at 2:56 AM ×

MM you don't think the USD strength over the past 18 months has anything to do with what is going on today ? IMO it's the main driver.

This latest yen move I agree with you more.

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Macro Man
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February 11, 2016 at 3:12 AM ×

Yes, clearly over an 18 month horizon it's been a/the major driver, but IMHO has taken a back seat to monetary policy perversion and massive asset allocation shifts over the past 2 months or so.

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Anonymous
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February 11, 2016 at 7:04 AM ×

RE Nico above "Leverage". Should be framed on every traders wall. Boats t6hat all float on the way up etc etc on the way down. Next margin charts will show we are now embarked on the long leg of deleveraging after some 7 years of going up. Every pause or BTD thought you might have should be viewed within that context regarding what you doing. Timeframe and tactics should have changed to reflect by now and if they havn't you are overthinking it.

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February 11, 2016 at 11:02 AM ×

brasil61 -> there is imo only one clearly workable solution to present economic issues - a clearing .. if CB's were smart/corrupt theyd try this approach - let every marginable non economic braindead entity fail ..sell of the parts ..let the bondholders eat the losses .. would kill EU dream, the Euro, socialism, ect ect

that would destroy to many "friends of govt" ..i know not realistic

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Anonymous
admin
February 11, 2016 at 12:29 PM ×

VAT is already 25% in Sweden. Don't see any possibility of raising it any higher and staying in power.

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