Talks Break Down, Or Maybe Not
A brief update on the EU's bizarre mercantilistic plan to increase tarrifs on solar panels from China. As previously noted, it is not only shooting itself in the foot in order to protect a tiny minority of producers to the detriment of the far larger contingent of consumers, but is risking a trade war with China to boot.
China's trade association has let it be known that the talks with the EU's 'trade experts' have broken down, something the EU denies:
“The European Commission rejected Chinese trade association statements that talks to resolve a dispute over allegations of dumping of solar panels had broken down, while Chinese comments highlighted risks the dispute could escalate.
EU regulators agreed to impose solar panel duties earlier this month following a investigation launched by a complaint from German manufacturer SolarWorld.
The dispute has the potential to impact 21 billion euros ($27.1 billion) worth of imported Chinese solar panels, cells and wafers from manufacturers such as Trina Solar, Yingli Green Energy and Suntech Power Holdings.
A Chinese industry association authorized to represent Chinese solar companies told reporters in Beijing on Wednesday that it had made an offer during a visit to Brussels but was rebuffed by the European Commission.
"These claims are simply wrong and misleading for one simple reason – no formal negotiations are yet ongoing between the EU and China in the solar panel anti-dumping case," EU trade spokesman John Clancy said in a statement on Thursday.
We Can Inflate Too …
Perhaps it is a coincidence that we get these news so shortly after James Bullard forwarded his ideas as to how the ECB could most effectively join the global inflatathon. In any case, ECB board member Peter Praet – hitherto regarded as a 'hawk' – let it be known that the ECB too has a 'toolkit' at its disposal that can be 'expanded' to inflate the euro area back to economic Nirvana. What a surprise!
“The European Central Bank could expand its monetary policy toolkit if needed to respond to threats to price stability, and must ensure the euro zone economy does not enter a downward spiral, ECB Executive Board member Peter Praet said on Wednesday.
"We have an objective: price stability," Praet, who is in charge of the economics portfolio on the ECB's six-member executive board, told a conference in Washington.
"If that objective is at risk, we have the possibility … to expand the range of (monetary policy) instruments if we think it's necessary for that objective," he said.”
On the Road to Ruin
Reuters has published an extremely interesting article on Shinzo Abe, the father of so-called 'Abenomics'. His economic policy is in essence little more than a warmed-up hoary inflationism, the quack cure that governments have employed throughout history in attempts to 'fix' their economies. It always 'feels good' in the beginning, as asset prices rise and numerous economic activities are set into motion that would never be considered absent the inflationary policy. What happens in the end is best summarized in the conclusion to a speech Fritz Machlup once delivered on the consumption of capital in Austria during the interwar period:
“Austria was successful in pushing through policies which are popular all over the world. Austria has most impressive records in five lines: she increased public expenditures, she increased wages, she increased social benefits, she increased bank credits, she increased consumption. After all these achievements, she was on the verge of ruin.”
The main difference is perhaps that Japan is on the verge of ruin already, at least its government is. On the other hand, Japan also still has a lot of wealth that can be consumed and destroyed by Abe's policies. The de facto insolvency of the government is not an obstacle to additional wealth destruction, quite the contrary in fact.
Japan's current economic policy also has strong mercantilist overtones, as the devaluation of the currency is held to help its export sector. That this is to the detriment of everyone else in Japanese society as a rule remains unmentioned in the press, as it remains unmentioned that the export sector can at best hope to increase its profits temporarily, namely until prices and wages in Japan have adjusted to the devaluation. On the whole, Japan will end up poorer than it was prior to devaluation – and that is without considering the growing potential for a crisis that utterly destroys its currency and makes its outstanding stock of debt worthless.
The Misguided Urge to Close Loopholes
As 'Der Spiegel' reports, there are efforts underway in the EU to close the tax loopholes used by multinational corporations to quite legally avoid taxes. Allegedly it is a 'tough battle' as a few member states are not very happy about these plans. Recently Apple's CEO was forced to defend his company's use of such loopholes in front of a very hostile Congress. Everybody seems agreed that tax loopholes are somehow bad. But are they really?
Ludwig von Mises reportedly once remarked that 'tax loopholes allow capitalism to breathe'. In a speech he delivered in 1951 at a conference in White Sulphur Springs, West Virginia, he remarked that so-called 'loopholes' are actually simply the law. One should not even call them 'loopholes'.
“What is a loophole? If the law does not punish a definite action or does not tax a definite thing, this is not a loophole. It is simply the law. . . . The income-tax exemptions in our income tax are not loopholes. The gentleman who complained about loopholes in our income tax . . . implicitly starts from the assumption that all income over fifteen or twenty thousand dollars ought to be confiscated and calls therefore a loophole the fact that his ideal is not yet attained. Let us be grateful for the fact that there are still such things as those the honorable gentleman calls loopholes. Thanks to these loopholes this country is still a free country.”
Bad News Finally Have an Effect
Even though the market moves in the US were fairly large and volatile, the action became a great deal more pronounced when Japan started trading. At first there was such a heavy sell-off in JGBs that the market was (once again) briefly halted. The Nikkei did its usual thing and tried to move higher.
Then the HSBC 'Flash' PMI for China was released (details here – pdf) and showed that manufacturing in China has slipped back into contraction, to a 7 month low of 49.6.
This is what the China PMI chart with the latest flash estimate added looks like (keep in mind that HSBC only measures private sector activity, its PMI data therefore differ from the official data which include the state-owned sector).
China flash PMI – a decline to 46.9 in May, a 7 month low – click to enlarge.
That was not what traders in the Japanese stock market wanted to hear apparently. The Nikkei, which is always more volatile than the US market, produced a huge 1,125 point intraday swing, a move of roughly 8% on the day.
The Nikkei, hourly. Now that's volatility – click to enlarge.
Read the rest of this entry »
To Taper or Not to Taper
Ben Bernanke's testimony in combination with the release of the Fed minutes – although neither contained anything we didn't already know and haven't already heard ad nauseam for months on end – were used as an excuse to sell US stocks for a change (not only stocks, but hitherto stocks have been completely impervious to this stuff, so this is noteworthy).
That left the DJIA and the SPX with somewhat ominous looking daily candles, as the indexes had at first surged to new highs after Bernanke's prepared remarks were released (he mentioned that to withdraw stimulus 'too early' was risky in his view).
SPX daily – Wednesday's daily candle looks slightly ominous – click to enlarge.
DJIA 5 minute chart, 2 days. A new high after Bernanke's prepared remarks were released, followed by a 270 point swoon – click to enlarge.
Dereliction of Duty
Once upon a time, during the reign of King Greenspan, sub-prime was the rule of the land. Someone asked his majesty what happened to the risks of these mortgages, to which the maestro replied, "the banks are very sophisticated and they know how to spread the risk around so there is no need to worry" (not an exact quote but that was his message).
Now we know the risk never went away, it was just hidden by despicable rating agencies and passed onto lazy investors who never did their own due diligence. Aside from a few hedge funds who catapulted to rock star status by betting against the loans, the country and the world paid a very dear price for Greenspan's dereliction of duty as the regulator.
There are three major changes since Greenspan's days: 1) the demise of private label mortgage backed securities (same as the dominance of agency MBS), 2) the rise of all cash transactions mainly from investors and 3) Federal Reserve intervention via its QE operations.
What happened to mortgage risk today? More importantly, pertaining to the real estate market, are we are building a solid foundation or are we looking forward to another disaster?
Fed's Monetary Pumping 'Just Right'
After a few public appearances of the two or three remaining 'hawks' among the regional Fed presidents – among them Charles Plosser, who once again noted he favors a 'tapering' of the money printing policy (Plosser made the almost unpardonable comment that he thinks 'central banks do not create wealth') – it was the doves' turn.
Charles Evans of the Chicago Fed was at his most hawkish in many months, by noting that the Fed's current pace of money printing is 'just right'. How does he know it is 'just right'? Well, as a monetary bureaucrat he has special insights we mere mortals as a rule don't have. The 'incoming data' prove his case. He even sees the future: in what might be called this year's version of the famous 'green shoots', he expects the US economy to attain 'escape velocity' in 2014. Will it leave the planet?
“The U.S. Federal Reserve has the appropriate level of monetary accommodation in place, allowing the economy to reach "escape velocity" next year, a top Fed official said on Monday.
"We continue to face powerful headwinds in the fiscal situation and the global economy," Chicago Federal Reserve Bank President Charles Evans told the CFA Society Chicago. But "the U.S. economy seems to be performing pretty well right now," he added, with the labor market improving, consumer spending up and housing stronger.
By 2014, GDP growth should be somewhere between 3 percent and 4 percent, allowing the recovery to be self-sustaining, he said.”
The Eater of Children
The EU's monetary and economic affairs commissar Olli Rehn is concerned that his reputation as the enforcer of austerity gives the wrong impression about the true nature of Olli, deep down. As the NYT reports, he wants to 'peel off' the label that has been stuck on him. One very big concern of his is to avoid the impression that he is somehow not a Keynesian.
“The European Union's top economic policy maker and scourge of debt-fueled budget deficits, is fed up with austerity. Or at least with being tarred by a term that "is clearly used to label somebody as an unworthy person who is almost eating children."
With more than 26 million Europeans out of work and the economies of the 27-nation bloc shrinking over all for six quarters in a row, Mr. Rehn, the commissioner for economic and monetary affairs, has become a lightning rod in recent months for swelling anger across Europe against the harsh belt-tightening policies generally known as austerity.
But in an interview, Mr. Rehn, 51, described himself as a "doctrinaire agnostic in terms of economic policy" who has read and found much of value in the writings of the British economist John Maynard Keynes, whose name is synonymous with the idea of economic stimulus in times of crisis.”
The Out of Touch Eurocracy
Not a day passes without the citizens of the EU witnessing new absurdities being imposed by the apparatus of compulsion and coercion in Brussels. The decrees emanating from the EU's center of power of course have to be read by the cold light familiar from morgues these days, as the bureaucrats in their wisdom have felt it necessary to ban the incandescent light bulb in the wake of heavy lobbying by industry. The pretext was that they needed to 'save the planet' and who can be against saving the planet?
Following on the heels of the solar panel duties madness that risks a trade war with China, the EU's commissars have now decided that the producers of olive oil require their protection – this time under the pretext of safeguarding the interests of consumers. Consumers will of course end up paying through the nose for this nonsense.
According to a recent Reuters report, the “EU finds time to tell restaurants how to serve olive oil”:
The 'Fair Share'
Whenever a politician appeals to either his fellow citizens' patriotism or employs the term 'fair' (as in 'fare share' or 'fair trade', to name two examples), he is about to embark on a policy that is deeply injurious to same citizens. The term 'fair' specifically means that the rapacious paws of the State are about to be thrust deep into their wallets on some pretext. Usually it is either to 'protect' favored interest groups that can afford to send their lobbyists to the centers of political power, or it is a simple tax grab due to the perennial problem that treasuries are weighed down by the deficits of the past and need new sources of income to buy the next round of votes.
What is not going to happen after citizens have coughed up the share deemed to be 'fair' is that they will enjoy an improvement in the services they never asked for in the first place. The funds just disappear in the maws of Leviathan never to be seen again. This policy of 'fairness' can be implemented up to a point; there is a threshold beyond which the economic damage it inflicts becomes so large that the government's revenue actually shrinks instead of increasing. These negative repercussions are then held to require even more interventions and so a vicious circle ensues. The eventual long term outcome is either that the system gives up the ghost in some shape or form (often by means of a destruction of the underlying currency system) or that the governments concerned decide to embark on war.
CFNAI and Rail Traffic Growth Both Decline
Even while Bloomberg reports that there is now widespread conviction (as a result of rising stock prices no doubt) that the US economy is about to achieve 'escape velocity' – whatever that is supposed to mean – economic data continue to disappoint with unwavering regularity.
One of the fund managers interviewed by Bloomberg even went as far as asserting that 'anyone who isn't long real estate is a moron' (Bloomberg's pushing of establishment approved memes couldn't possibly be more blunt than it has recently been). However, as Ramsey always points out in these pages, it is Wall Street money that is pushing house prices up – there is very little organic demand from owner users.
The ongoing series of disappointing economic data was joined yesterday by yet another decline in the Chicago Fed's National Activity Index (CFNAI), which fell from -0.23 in March to -0.53 in April. Any readings below zero indicate economic contraction. According to the Chicago Fed's web site:
“Economic Activity Slower in April (pdf)
The Chicago Fed National Activity Index (CFNAI) was –0.53 in April, down from –0.23 in March.”
The CFNAI is a weighted average of 85 existing monthly indicators of national economic activity. It is constructed to have an average value of zero and a standard deviation of one. Since economic activity tends toward trend growth rate over time, a positive index reading corresponds to growth above trend and a negative index reading corresponds to growth below trend.
The 85 economic indicators that are included in the CFNAI are drawn from four broad categories of data: production and income; employment, unemployment, and hours; personal consumption and housing; and sales, orders, and inventories. Each of these data series measures some aspect of overall macroeconomic activity. The derived index provides a single, summary measure of a factor common to these national economic data.”
The Dollar is Going Up
Let’s take a look at a few graphs of the dollar, from Feb 1, 2013 through Friday May 17, 2013. Yes, I said graphs of the dollar. I’ve priced the dollar in gold first (of course), then silver, the euro, and even the yen. The pattern is obvious. The dollar is going up.
I did not show copper, lumber, or wheat though they show the same trend. These commodities are not money, of course – click to enlarge.
JGBs Weaken Again
Overnight the JGB market once again weakened slightly, to 141.875 points. To be sure, this wasn't a very big move, but the fact is that JGBs continue to consolidate below the lateral support line provided by the interim highs made in the 2010-1012 period. Moreover, an uptrend line that has been in force for several years has been violated.
There is an even more important lateral support zone visible on the weekly chart at the 140 to 141 level. Since this support zone is not very far away from current prices, it is certainly conceivable that it might break fairly soon. If so, we believe the selling will probably intensify. As we remarked to a friend in a recent e-mail exchange:
“For more than two decades anyone trying to short the JGB market got burned. It has become an entrenched truism that the JGB market cannot decline because only Japanese domestic investors hold the bonds. Kyle Bass believes Japanese government bonds will eventually plunge because of Japan's high public debt, but it seems actually more likely that it could do so because Kuroda loses control of the effects of his policies. Japan's public debt is huge, but the government also holds valuable assets one must deduct from the gross figure (the result is still a very large number, both in absolute and relative terms, but it is only about half of the reported gross figure). The problem is a different one: banks, insurers, pension funds, all hold JGBs because they think it is impossible for inflation to flare up. Once just one of the bigger investors gets scared and concludes that this may no longer be true, there will be a snowball effect.”
Gold – Dead Cat Bounce or More?
Monday was an interesting day in the gold and silver markets. When the GLOBEX opened for trading in Asia overnight, there was a quick plunge in silver amounting to almost 10%, while gold got whacked for approximately an additional $25, essentially retesting its April crash low in the process. As the COMEX open approached, the earlier losses were slowly taken back. This was then followed by a pretty vigorous and sizable rally, with gold almost touching the $1400 level at one point (up nearly $65 from its intraday low).
Yesterday's move in gold did look like an impulse wave (a 5 wave move up). If this is indeed the case, then the market may be in the beginning stages of a bigger rebound. In the second chart below we have penciled in a new support level that was created by yesterday's action. We believe this level probably needs to hold on any near term pullbacks. If it doesn't, then the rally was probably nothing but a dead cat bounce.
Gold tests its April low (roughly) overnight on GLOBEX and then proceeds to rally in what looks like a 5 wave impulse move at a quick glance – click to enlarge.
Here is a close-up of the move, with a new short term support level drawn in that was created by the action on Friday and Monday (it served as resistance on two occasions) - click to enlarge.
The HUI-gold ratio managed to bounce a bit as well on Monday. This must continue if the move represents a genuine reversal. Any failure of the HUI-gold ratio to expand further would constitute evidence that the bearish phase is not yet over – click to enlarge.
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