Luke Gromen discusses macroeconomic trends

Global Bond Crash as Deflation Bets Go Very Wrong

The global deflation trade is unwinding with a vengeance. Yields on 10-year Bunds blew through 1pc today, spearheading a violent repricing of credit across the world.

The scale is starting to match the 'taper tantrum' of mid-2013 when the US Federal Reserve issued its first gentle warning that quantitative easing would not last forever, and that the long-feared inflexion point was nearing in the international monetary cycle.

Paper losses over the last three months have reached $1.2 trillion. Yields have jumped by 175 basis points in Indonesia, 160 in South Africa, 150 in Turkey, 130 in Mexico, and 80 in Australia.

The epicentre is in the eurozone as the "QE" bet goes horribly wrong. Bund yields hit 1.05pc this morning before falling back in wild trading, up 100 basis points since March. French, Italian, and Spanish yields have moved in lockstep.

Read the rest here.

Former BIS Economist Warns of Dangers in QE

The economic prophet who foresaw the Lehman crisis with uncanny accuracy is even more worried about the world's financial system going into 2015.

Beggar-thy-neighbour devaluations are spreading to every region. All the major central banks are stoking asset bubbles deliberately to put off the day of reckoning. This time emerging markets have been drawn into the quagmire as well, corrupted by the leakage from quantitative easing (QE) in the West.

"We are in a world that is dangerously unanchored," said William White, the Swiss-based chairman of the OECD's Review Committee. "We're seeing true currency wars and everybody is doing it, and I have no idea where this is going to end."

Mr White is a former chief economist to the Bank for International Settlements - the bank of central banks - and currently an advisor to German Chancellor Angela Merkel.

Read the rest here.

Why Switzerland is wreaking havoc in the global currency markets

This is how a currency peg ends. This is how a currency peg ends. Yes, with a bang, actually.

The Swiss National Bank (SNB) shocked markets on Thursday by announcing that it would no longer hold the value of the Swiss franc down at 1.2 per euro, although it would lower interest rates from -0.25 to -0.75 percent. Mayhem ensued. The Swiss franc immediately shot up as much as 39 percent against the euro, before settling at "only" up 17 percent on the day. This is basically the biggest single-day move for a rich country's currency, as economist David Zervos points out, in the last 40 years. And it's sent Switzerland's stock market down 10 percent, as its suddenly more expensive currency will cripple its exporters by making their goods more expensive abroad.

Now let's back up a minute. Why was Switzerland pushing its currency down, and why has it stopped now? Well, in four words, it's the euro crisis. Back in 2011, you see, what looked like the imminent end of the euro made people want to move their money to the safety of Swiss banks. It wasn't about the secrecy, though. It was the fact that Swiss banks use Swiss francs, and those wouldn't get devalued like, say, Italian euros would if the common currency broke apart. The problem, though, was that this flood of incoming money pushed Switzerland's currency up too much, over 40 percent in just a year. The Swiss franc got so expensive that Swiss exporters, who sell 56 percent of their goods to the EU, were becoming uncompetitive, and Swiss prices were starting to fall.

And then the SNB remembered that a central bank can always push its currency down just by printing more of it. So that's what it did. Even better, it told everybody that this was what it was doing. It said it would buy as many euros with newly-printed Swiss francs as it took to keep the Swiss franc from being worth more than 1.2 per euro. That meant that, for awhile, the SNB didn't actually have to do anything, since nobody wants to bet against somebody with infinite money.

Read the rest here.

Further evidence of severe global deflationary pressure.

Signs of Deflationary Depression Increase in Europe

All key measures of eurozone inflation fell dramatically in October, stunning the markets and leaving the region dangerously close to a Japan-style deflation trap.

Consumer price inflation (CPI) plunged from 1.1pc to 0.7pc, the lowest since the financial crash in 2008-2009. “This is a massive downward surprise,” said Gizem Kara from BNP Paribas.

A string of debt-crippled states are now sliding into deflation, with Italy buckling over the late summer. The underlying rate is even lower once austerity-linked tax rises are stripped out

The shock data came as EMU-wide unemployment jumped to a record 12.2pc in September, with a further 74,000 people losing their jobs. Youth jobless rates reached 40.2pc in Italy, 57.6pc in Greece and 56.6pc in Spain.

Read the rest here.

Jim Rickards: We are in a depression, and its not over

The whole video is interesting but the relevant part starts at around 12 minutes.

HT: Reub from the Permanent Portfolio Forum.

Japan’s New Optimism Has a Name: Abenomics

TOKYO — After years of grinding malaise, Japan suddenly has some of its bling back.

A humbled Sony — once a titan of Japan Inc. — recently sprang back into the black for the first year in five years, courtesy of a plunging yen. Honda, another corporate icon, triumphantly announced a return to Formula One racing, rejoining an exclusive club of high-performance carmakers after having slinked away when cash ran low.

Even some of Japan’s wary consumers are beginning to indulge. At the plush Takashimaya department store in Tokyo’s financial district, a clerk reported that $20,000 watches had become hot sellers. And a cut-rate sushi chain, which flourished in difficult times, just started a line of upscale restaurants for customers newly able to afford “petite extravagances.”

The reason for the exuberance? Early — and some say deceptive — signs that new Prime Minister Shinzo Abe’s economic shock therapy, called Abenomics, might just be working.

His plan, one of the world’s most audacious experiments in economic policy in recent memory, combines a flood of cheap cash (doubling the money supply in two years), traditional fiscal stimulus and deregulation of Japan’s notoriously ingrown corporate culture. The hope is that this will yank Japan from a debilitating deflationary spiral of lower prices and diminished expectations, stirring what Keynes called the “animal spirits” of investors and consumers.

Read the rest here.

Japan Launches Massive Money Printing

TOKYO — In its first policy steps under its new governor, Haruhiko Kuroda, the Bank of Japan announced Thursday it would seek to double the amount of money in circulation over two years, initiating a bold bid to end years of falling prices and dispelling market fears that Mr. Kuroda might fail to follow up his recent tough talk with concrete action.

The central bank said it would aggressively buy longer-term bonds and double its holdings of government bonds in two years, in effect doubling the money in circulation in the process. The bank will aim for a robust 2 percent rate of inflation “at the earliest possible time,” it said.

“This is monetary easing in an entirely new dimension,” Mr. Kuroda said following the bank’s decision.

Read the rest here.

Evidence of Global Deflation Mounts In Asia

China is on the cusp of a deflationary vortex.

This was signalled late last year by the sharpest contraction in the (real) M1 money supply since modern records began. The hard data is now confirming the warnings.

Consumer prices have been falling for the last three months, producer prices have been falling for four months. This is not a food cost story. It is systemic.

"While an economy-wide generalized deflation is yet to be seen, the deflationary spiral looks to have started in some industrial sectors, attesting to considerable stress with the economy. Persistent deflation can be poisonous," said Xianfang Ren from IHS Global Insight in Beijing.

Indeed it can be poisonous, and China already has the twin-afflictions of the deflation malaise: a fast aging nation, and a surfeit of factories and industrial plant.

Meanwhile, Japanese machine tool orders fell 14.8pc in May, the biggest drop since 2001 – when Japan’s deflation began in earnest. The post-Fukushima reconstruction boom has run its course. Asia is turning stone cold.

Read the rest here.
HT: T-19

Sharp contraction in money supply may signal deflationary crisis

Growth of the world money supply has dropped to the lowest level since the financial crisis of 2008-2009, heralding a severe economic slowdown later this year unless authorites rapidly take action.

The latest data show that the real M1 money supply – cash and overnight deposits – for China, the eurozone, Britain and the US has been contracting since the early Spring. Any further falls risk a full-blown global recession.

Clear signs of trouble are emerging in the US, until now the last bastion of strength. The New York Institute of Supply Management said its ISM business index – a proxy for business demand – flashed a "screeching halt" in May, crashing to 49.9 from 61.2 in April, where anything below 50 denotes contraction. Unemployment is rising again after grim jobs data for April and May, indicating that the economy may have fallen below stall speed.

Read the rest here.

Are we in a deflationary crisis/depression?.

The Fed is clearly battling deflationary forces.

1. Contracting credit
2. Falling home prices
3. Secular bear market for stocks
4. Unfavorable demographics
5. Falling bond yields

All of those things add up to deflation.

One of the comments from this excellent discussion thread over at the Permanent Portfolio Forum.

Gold is the final refuge against universal currency debasement

States accounting for two-thirds of the global economy are either holding down their exchange rates by direct intervention or steering currencies lower in an attempt to shift problems on to somebody else, each with their own plausible justification. Nothing like this has been seen since the 1930s.

“We live in an amazing world. Everybody has big budget deficits and big easy money but somehow the world as a whole cannot fully employ itself,” said former Fed chair Paul Volcker in Chris Whalen’s new book Inflated: How Money and Debt Built the American Dream.

“It is a serious question. We are no longer talking about a single country having a big depression but the entire world.”

The US and Britain are debasing coinage to alleviate the pain of debt-busts, and to revive their export industries: China is debasing to off-load its manufacturing overcapacity on to the rest of the world, though it has a trade surplus with the US of $20bn (£12.6bn) a month.

Premier Wen Jiabao confesses that China’s ability to maintain social order depends on a suppressed currency. A 20pc revaluation would be unbearable. “I can’t imagine how many Chinese factories will go bankrupt, how many Chinese workers will lose their jobs,” he said.

Read the rest here.

Federal Reserve hints (strongly) at more money printing

WASHINGTON — Federal Reserve officials signaled for the first time on Tuesday that they are worried that the slow-moving recovery could be undermined by very low rates of inflation and hinted that they might resume buying vast amounts of government debt.

While the central bank’s Federal Open Market Committee did not take any new steps on interest rates, it communicated in unmistakable terms its concerns about the fragility of the economic recovery and the threat to stable prices.

It said inflation levels were “somewhat below those the committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability.” And it said it was “prepared to provide additional accommodation if needed” to support the recovery and get inflation back to normal.

The Fed will continue to use money from its holdings of mortgage-related bonds to buy long-term Treasury debt, the tactic it announced on Aug. 10. That strategy was intended to prevent a slight tightening of monetary policy that would have occurred as the bonds held by the Fed were paid off and money was taken out of the economy.

Read the rest here.

Following the announcement the stock market is trading mixed and near flat. The bond market is rallying across the curve with Treasury yields dropping. Precious metals are up on renewed fears of inflation and currency debasement. Gold is currently trading at 1288.20 oz. (up $8.70), a new nominal record high. Silver is up more than 1.20% and is trading at a multi-year high of $21.00 oz.

Fearing an economic slowdown and deflation the FED will print (more) money

WASHINGTON — Acknowledging that the recovery has slowed, the Federal Reserve on Tuesday announced that it would use the proceeds from its huge mortgage-bond portfolio to buy long-term Treasury securities.

By buying government debt, the Fed is taking an unmistakable step to maintain the large amount of money that it pumped into the economy, starting in 2007, to prop up the financial and housing markets.

The Fed bought $1.25 trillion in mortgage-backed securities, and another $200 billion in debts owed by government-sponsored enterprises, primarily Fannie Mae and Freddie Mac, and completed the purchases in March. The Fed had planned to allow the size of that portfolio to shrink gradually over time as the debts matured or were prepaid. Instead, the Fed will reinvest the principal payments in longer-term Treasury securities.

The central bank said it would continue to roll over its holdings of other Treasury securities as they mature.

In its announcement, the Fed also left unchanged its benchmark short-term interest rate — the federal funds rate, the rate at which banks borrow from each other overnight — at zero to 0.25 percent, the level it has been at since December 2008.

In a new qualification to its previous statements, the committee said it still expected a “gradual return” to normal economic conditions, “although the pace of economic recovery is likely to be more modest in the near term than had been anticipated.”

On Wall Street, shares regained some lost ground after the announcement.

Read the rest here.

The dangers of deflation

Hundreds of thousands of people are being laid off. The nation’s leading banks and carmakers need bailouts. The stock market has had an ugly 2008.

Well, here’s something else to worry about: deflation. This week, the government announced that prices fell in November for the second month in a row.

It might seem hard to understand what the problem is with falling prices. If all they mean is that we can buy our Christmas presents for less this month than we could have a month ago, maybe we can get the decked out Mac after all. What’s there to worry about?

A lot. If prices persist in their decline, they could be devastating to the economy — not primarily because of their impact on consumers’ spending habits but because of their impact on consumers’ ability to service their debts.

Think of it this way: Say you earn $50,000 a year, and have a $200,000 mortgage. If there is heavy deflation, prices and salaries fall. Your salary might go down to $40,000, but your mortgage would remain the same. Suddenly, making those mortgage payments has gotten a lot tougher.

Read the rest here.