Tag Archives: FX

Market Still Deluding Itself That It Can Escape The Inevitable Dénouement


 Until we face up to the reality of the economic landscape before us, we will be on the same path as Japan, 1987-present…

Market Still Deluding Itself That It Can Escape The Inevitable Denouement 
By Albert Edwards, Société Générale, London
 

The current situation reminds me of mid 2007. Investors then were content to stick their heads into very deep sand and ignore the fact that The Great Unwind had clearly begun. But in August and September 2007, even though the wheels were clearly falling off the global economy, the S&P still managed to rally 15%! The recent reaction to data suggests the market is in a similar deluded state of mind. Yet again, equity investors refuse to accept they are now locked in a Vulcan death grip and are about to fall unconscious.
The notion that the equity market predicts anything has always struck me as ludicrous. In the 25 years I have been following the markets it seems clear to me that the equity market reacts to events rather than pre-empting them. We know from the Japanese Ice Age and indeed from the US 1930’s experience, that in a post-bubble world the equity market merely follows the economic cycle. So to steal a march on the market, one should follow the leading indicators closely. These are variously pointing either to a hard landing or, at best, a decisive slowdown. In my view we are poised to slide back into another global recession: the data is slowing sharply but, just like Japan in its Ice Age, most still touchingly believe we are soft-landing. But before driving off a cliff to a hard (crash?) landing we might feel reassured when we pass a sign that reads Soft Landingand we can kid ourselves all is well.
I read an interesting article recently noting the equity market typically does not begin to slump until just AFTER analysts begin to cut their 12m forward EPS estimates (for the life of me I can’t remember where I read this, otherwise I would reference it). We have not quite reached this point. But with margins so high, any cyclical slowdown will crush productivity growth. Already in Q2, US productivity growth fell 1.8% – the steepest fall since Q3 2006.Hence, inevitably, unit labour costs have begun to rise QoQ. This trend will be exacerbated by recent more buoyant average hourly earnings seen in the last employment report. Whole economy profits are set for a 2007-like squeeze. And a sharp slide in analysts’ optimism confirms we are right on the cusp of falling forward earnings (see chart below).
OTBImage01
I love the delusion of the markets at this point in the cycle. It bemuses me why investors cannot see what is clear as the rather large nose on my face. Last Friday saw the equity market rally as August’s 67k rise in private payrolls and an upwardly revised July rise of 107kbeat expectations. But did I miss something? When did we switch from looking at headline payrolls to private jobs? Does the fact that government is shedding jobs not matter? Admittedly temporary census workers do mess up the data, but hey, why not look at nonfarm payroll data ex census? Why not indeed? Because the last 4 months run of data looks notably weaker on payrolls ex census basis than looking only at the private payroll data (ie Aug 60k vs 67k, July 89k vs 107k, June 50k vs 61k and May 21k vs 51k). But these data, on either definition, look dreadful compared to the 265k rise in April and 160k in March (ex census definition). If someone as pathologically lazy as me can find the relevant BLS webpage after a quick call to the BLS (link), why can’t the market? Because it is bad news, that’s why.
OTBImage02
August’s rebound in the US manufacturing ISM was an even bigger surprise. This is a truly nonsensical piece of datum as it was totally at variance with the regional ISMs that come out in the weeks before. The ISM is made up of leading, coincident and lagging indicators. The leading indicators – new orders, unfilled orders and vender deliveries – all fell and point to further severe weakness in the headline measure ahead (see chart above). It was the coincident and lagging indicators such as production, inventories and employment that drove up the headline number. Some of the regional subcomponents (eg Philadelphia Fed workweek) are SCREAMING that recession is imminent (see left hand chart below).
OTBImage03 OTBImage04
The real reason why markets reversed last week was that they got ahead of themselves. Aside from the end of 2008, government bonds were the most over-bought they had been over the last decade. And in equity-land the AAII two weeks ago recorded a historically low 20% of respondents as bullish (see chart above). These technical extremes will now be quickly worked off before the plunge in equity prices and bond yields resumes.
I am often asked by investors with a similar view of the world to my own (yes, there are some),whether the equity market will ever reach my 450 S&P target because of the likelihood that further Quantitative Easing will prevent asset prices from falling back to cheap levels.
Indeed we know that a central plank of the unhinged policies being pursued by the Fed and other central banks is to use QE to deliberately target higher asset prices. Ben Bernanke in a recent Jackson Hole speech dressed this up as a “portfolio balance channel”, but in reality we know from current and previous Fed Governors (most notably Alan Greenspan), that they view boosting equity and property prices as essential for boosting economic activity. Same old Fed with the same old ruinous policies. And by keeping equity and property prices higher, the US and UK Central Banks are still trying to cover up their contribution towards the ruination of American and British middle classes – (see GSW 21 January 2010, Theft! Were the US and UK central banks complicit in robbing the middle classes? – link).
The Fed may indeed prevent equity prices from slumping with any QE2 announcement. But this sounds a familiar refrain at this point in the cycle. For is monetary easing in the form of QE that different from interest rate cuts in its ability to boost equity prices? Indeed announced rate cuts in previous downturns often did generate decent technical rallies. But in the absence of any imminent cyclical recovery, equity prices continue to slide lower (see chart below). The key for me is whether QE2 can revive the economic cycle, not equity prices temporarily.
OTBImage05
In the absence of a cyclical recovery I cannot see how QE is any different in its ability to revive asset prices than lower rates in anything other than a temporary fashion. (Interestingly many of our clients think QE2 might give a temporary fillip to the risk assets but that the subsequent failure to produce any cyclical impact will cause an extremely violent reaction as investors lose faith in QE as a policy tool and Central Banks in general.)
If we plunge back into recession, do not place too much confidence in the Central Banks having control of events. As my colleague, Dylan Grice, said last week “let them keep pressing their buttons.” Ultimately they cannot fool all of the investors, all of the time.

Currencies The Race to the bottom


Currencies

Race to the bottom

A weak economy and an active Federal Reserve have driven the dollar down since June. Will that last?

THREE months ago, when Europe’s debt crisis had markets panicking about sovereign risk, it seemed that all roads led to the dollar. The greenback was rising against the other big global currencies, the yen, pound and euro. Its role as the world’s reserve currency seemed an inestimable advantage when investors were unsure where they could safely park their cash. Within the rich world, America’s economy looked the best of a bad bunch. The stage seemed set for a dollar rally.
How quickly things have changed. On August 11th the dollar fell to a 15-year low against the yen of ¥84.7. It perked up against the euro to $1.29, though that was still much weaker than the $1.19 it reached in early June when euro-revulsion was at its worst (see chart 1). The ground the greenback has lost in recent weeks owes to a run of weaker data about the economy, not least on jobs (see box on the next page). On August 10th the Federal Reserve conceded that the recovery would probably be slower than it had hoped. The Fed kept its main interest rate in a target range of 0-0.25% and stuck to its creed that rates would need to stay low for “an extended period”. In addition the central bank said that it would reinvest the proceeds from the maturing mortgage bonds it owns into government bonds to prevent its balance-sheet (and thus the stock of ready cash) from gradually shrinking.
This modest change in Fed policy was widely expected. It signalled concern about the economy while stopping short of panic measures. That did not stop stockmarkets from slumping the day after the Fed’s statement—perhaps because investors had hoped the central bank would go further and commit itself to a fresh round of asset purchases, or perhaps because they were unnerved by the Fed’s more cautious tone on the economy. But the Fed’s shift still seemed to confirm that it is more minded than other central banks to keep its monetary policy loose, a perception that has contributed to the dollar’s slide and helped America’s exporters. The day before the Fed’s decision, the Bank of Japan kept its monetary policy unchanged. The European Central Bank (ECB) has allowed short-term market interest rates to rise as it withdraws emergency liquidity support from the banking system.
Events in America do not determine the dollar’s fate: exchange rates have two sides. The euro has bounced back since June in part because markets are more confident that Europe has got to grips with its sovereign-debt problems. The currency’s strength also reflects a stronger economy. Figures due out after The Economist went to press were expected to show that the euro area’s GDP grew a bit faster than America’s in the second quarter, thanks largely to booming Germany. But the problem of sluggish growth in the euro zone’s periphery has not gone away. A strong euro amplifies the lack of export competitiveness in Italy, Spain, Greece and Portugal. That is one reason why many analysts think the euro is likely to weaken again.
The yen’s rally, in contrast, may have further to run. It is trading against the dollar at levels last seen in the aftermath of the peso crisis in the mid-1990s, when the yen had greater claim to being a haven from troubles elsewhere. But the yen’s renewed strength may not be quite as painful for Japan’s exporters as that implies. Years of falling prices in Japan combined with modest inflation elsewhere mean the real effective exchange rate is below its average since 1990 (see chart 2). Because Japan’s wages and prices have fallen relative to those in America and Europe, its exporters can live with a stronger nominal exchange rate.
What needs explaining, then, is not why the yen has strengthened recently but why it was so weak before. Kit Juckes of Société Générale reckons that the low yields on offer in Japan provide most of the answer. “The yen is under-owned because Japan had by far the lowest interest rates in the world,” he says. But now falling bond yields in America, as well as in most of Europe, have made Japan a less unattractive place for investors to put their money. The more that the rest of the rich world resembles Japan, the less reason there is to shun the yen. There are even stories that China has been buying Japanese bonds as part of its effort to diversify its currency reserves away from the dollar.
Such interest may not be entirely welcome in Japan. A cheap currency is especially prized now, when aggregate demand in the rich world is so scarce and exports to emerging markets seem the best hope of economic salvation. Japan’s finance minister has complained that the yen’s recent moves are “somewhat one-sided”. That kind of talk has spurred speculation that Japan’s authorities may soon intervene to contain the yen’s rise. But such action would spoil the rich world’s efforts to persuade China to let its currency appreciate. It is perhaps more likely that the Bank of Japan and the ECB will follow the Fed’s lead in extending (albeit modestly) its quantitative easing—or risk a rising exchange rate.
The battle for a cheap currency may eventually cause transatlantic (and transpacific) tension: not everyone can push down their exchange rates at once. For now, though, the dollar holds the cheap-money prize.

Chavez Crackdown on Brokerage `Thieves’ Leaves Traders Jobless


Chavez Crackdown on Brokerage `Thieves’ Leaves Traders Jobless

Chavez crackdown leaves traders jobless
Venezuelan President Hugo Chavez. Photographer: Chris Ratcliffe/Bloomberg
Trader Jofmar Heredia was thrown out of work when Venezuelan President Hugo Chavez shut the unregulated currency market in May and seized about 40 brokerages, accusing them of setting artificial rates, capital flight and money laundering.
Heredia, 31, said she’s worried she may never find a job at a bank again because of Chavez’s crackdown.
“I’m unemployed and leaving my resume in banks but no one is calling,” said Heredia, who worked at Proinversion Sociedad de Corretaje CA in Caracas. “A lot of my friends in brokerages taken over by the government have been let go.”
The brokerage business is in danger of becoming obsolete in this socialist nation, said Noris Aguirre, a director at the clearing firm Caja Venezolana de Valores. Since November, Venezuela’s securities regulator has taken control of about 35 percent of the 112 trading firms and closed four after they were blamed for the 27 percent drop in the bolivar through May 18. That may leave up to 2,500 without jobs even as Chavez says his biggest economic priority is preserving employment.
Chavez, a 55-year-old former paratrooper who’s been in power for 11 years, says the country doesn’t need such companies and accuses them of exploiting loopholes to become rich. The government banned investment instruments known as mutuos in February — which are akin to repurchase agreements, or repos — and prohibited brokers from trading in a new currency market established last month. Securities firms use repos to borrow money to finance positions in bonds and other securities.
Chavez Takes Control
In a speech on May 23 to supporters, Chavez said his country should eliminate brokerages.
“We’re going to respond strongly against these thieves that are trying to wash their hands now,” Chavez said. “There’s no economic reason for the weakening of the bolivar. It’s a huge fraud against the republic.”
The government took control of the country’s largest brokerage, Econoinvest Casa de Bolsa, after raiding it on May 24, arresting four directors and ordering it to cease operations for a week pending an investigation. Of the 420 workers at the company, 126 have resigned, according to the nation’s regulator. The directors are being held at the national intelligence service in Caracas awaiting final charges against them for illegally trading foreign currency and association with delinquency.
Authorities are investigating “irregularities” at Econoinvest and are trying to guarantee the investments of its 44,000 clients, the Finance Ministry said today in a statement.
No Opportunities
Rene Buroz, the lawyer for the directors, declined to comment, as did an Econoinvest public relations official, who asked not to be identified in accordance with company policy.
The government took control of Finalca Casa de Bolsa today for failing to prove the origin of funds and putting its clients’ investments at risk after a raid on June 2, according to a resolution published in the Official Gazette.
Nelson Venero, a 32 year-old accountant, lost his job at the end of May after working for five years in the brokerage industry. After securing a job at AVC Valores Sociedad de Corretaje and a pay raise with a dollar bonus in October, he said he was fired after the government seized the company in May.
“This limits operations so much for brokerages that I don’t see any opportunities for them,” Aguirre of Caja Venezolana de Valores, which helps manage bonds and equities owned by brokerage houses, said in an interview. “They’re allowed to buy and sell company shares, but all of the companies that traded on the stock market have now been nationalized.”
Nationalizations
Chavez nationalized Cia Anonima Nacional Telefonos de Venezuela, the phone company known as Cantv, in 2007 to boost the state’s hold on the economy. The government has also taken over assets from Exxon Mobil Corp., ConocoPhillips, Ternium SA and Mexican cement maker Cemex SAB, which listed on the Caracas Stock Exchange.
The brokerage industry boomed between 2005 and 2010, growing 42 percent to more than 100 institutions, according to the securities regulator. Traders were hired to perform bond swaps as a means of obtaining dollars for companies that failed to receive government authorization to buy at the official exchange rate.
The bond trading set an implicit unregulated rate. That rate plunged to 8.2 per dollar on May 11, seven days before Chavez shut down that market.
‘Destined’
The central bank re-opened the market on June 9, setting the maximum rate and limiting the amount of dollars for purchase. The average rate is now about 5.3 bolivars per dollar. In addition, there are two official exchange rates of 2.6 bolivars per dollar and 4.3 per dollar for imports.
“This was destined to happen,” said Roberto Gonzalez, 39, a former partner at a Caracas-based brokerage who left the firm last year. He declined to identify the company.
Tomas Sanchez, president of the securities regulator known as CNV, said the number of brokerages will likely be cut to less than 20 and that most of the unemployed traders may be able to live off savings since they earned commissions in dollars.
“We know some workers will be affected by this situation but they enjoyed exorbitant benefits and have savings,” Sanchez said in an interview in Caracas on June 9. “Maybe the secretaries and couriers can be incorporated into the public banking system.”
‘Blackmail’
Heredia said that she wasn’t paid in dollars and received a commission of about 10 percent of the value of bolivar transactions.
Raul Maestres, a consultant at Korn/Ferry International, an executive search firm, said their offices in Caracas have been inundated with resumes.
“It’s not the best moment to find work,” Maestres said.
Venezuela’s unemployment rate rose to 8.1 percent in May, from 7.7 percent a year earlier, as the economy slid into the first recession in seven years. Gross domestic product shrank 3.3 percent last year and will likely contract 2.5 percent this year, according to the median forecast in a Bloomberg survey.
Brokers are “not going to blackmail us with the idea that this is going to hurt employment,” Ricardo Sanguino, the president of the congressional finance committee, said in an interview. “Many of them acted outside the law and created more problems than benefits.”
Venero, the unemployed accountant, said that he feels powerless to find work and that he may take a broker course in Panama, where Venezuelan banks have opened branches.
“I don’t think I’ll find work in the capital markets because they’ve been very hard hit,” he said in a phone interview. “A lot of friends are out of work.”
To contact the reporters on this story: Corina Rodriguez Pons in Caracas atcrpons@bloomberg.netDaniel Cancel in Caracas at dcancel@bloomberg.net.

The New Foreign Exchange Market at the Venezuelan Central Bank


Subject: The New Foreign Exchange Market at the Venezuelan Central Bank
Source: The Devil’s Excrement
Author: moctavio

According to the Venezuelan Central Bank, the new parallel market in which dollar bonds will be traded within a price band at that bank, will begin operating next week. In tune with the revolution, the system will be implement by that evil/capitalist/gringo company called Bloomberg. I doubt the new system will be in place before the end of next week, it is not only the platform that matters, but also the regulations which go from how to order at your bank, to how the band system will exactly work. Since brokers are banned from this, the banks have to train personnel, print forms and learn how to run the system. I think it will be at least another week before this is implemented and trading begins.

Which means that three weeks would have gone by without any access to foreign currency other than Cadivi, the foreign exchange control office. Since Cadivi is quite stingy, that means inventories are being drawn down fast and there will be accumulated demand in the parallel system when it opens. How much? Well, if the old, and now banned, swap system used to trade 80-100 million $ a day that means there will be 1.2 billion to 1.5 billion dollars ready to buy, not a small amount.

Thus, the question is who will supply this money to the buyers. Minister Giordani has said the Government will not do it, that the money will have to come from the US$ 40 billion in Pdvsa and Venezuela bonds that the Government has issued. Except that not only are these bonds largely in the hands of foreigners that want or need no Bolivars, but they are all trading below their face value, roughly at 65% of their face or nominal value on average, so what’s out there is less than US$ 26 billion in actual, real dollars, which is what matters to this fx market.

Chavez has threatened to force local banks to sell their bonds for Bolivars, Analysts estimate this is somewhere between 10 and 17 billion dollars, with the Government saying it is US$ 11 billion, but these numbers are guesstimates based on calculations of the limit on dollars that banks can hold, as established by the Government.

A much simpler and precise estimate is to look at how much banks had in Venezuela and PDVSA bonds as of Dec. 31st. last year, a number that should not have changed much since then. That tabulation gives a much lower number of at most US$ 5 billion in nominal or face value, which corresponds to a cash dollar value of only US$ 3.4 billion give or take one hundred million for each.

That is not much. In fact, that is barely the needs of the parallel market for five to six weeks, of which three have already gone by. Which means that even if the Government forces banks to sell their bonds for Bolivars it is barely a scratch on the surface and in two months, this new market will need a new source of funds or a different structure.

Which implies that problems will continue for the foreseeable future and the Government will, once again, have to improvise a “new, new” system before September.

Not pretty at all.

     

Read more…

CNBC.com Article: Euro Edges Up, but Still Vulnerable


CNBC.com Article: Euro Edges Up, but Still Vulnerable

The euro inched up on Monday, recouping small losses incurred after a cut to Spain’s debt rating, but the currency remained on the back foot as the downgrade highlighted ongoing structural weaknesses in the euro zone.

Full Story:
http://www.cnbc.com/id/37429761

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At current prices, $10 million in gold … are 31.4 bars


…That fits into a suitcase. Granted, it’s too heavy to carry…

At current prices, $10 million in gold are 12,574 troy ounces.

If you have 400 oz bars, it takes 31.4 bars.

1 400 oz bar is 200mm x 80mm x 45mm

If you arrange the bars like six packs and stack 5 on top of one another, you can arrange 40 bars in the following space

200mm * 3 = 600 mm = 22. 62 inches length
80mm * 2 = 160 mm = 6.3 inches width
45mm * 5 = 225 mm = 8.9 inches height

( source for the dimensions of bars: http://www.taxfreegold.co.uk/goldbardimensions.html )

That fits into a suitcase. Granted, it’s too heavy to carry as these are 0.391 tonnes or 862 pounds.

While it makes gold less portable than diamonds, a car can easily carry such a load. Gold’s uniformity may be more important than a diamond that needs to rely on certificates.

If you can afford it, you may want to carry a stack of both – and don’t forget some gold coins as you are unlikely to get any change if fiat money is no longer accepted.

Best wishes,

Axel

Axel Merk
Manager of the Merk Hard Currency Fund, http://www.merkfund.com/
(650)323 4341