Gold

When Central Banks buy it, the price tends to go up, and when they sell it, the price tends to go back towards marginal cost of production.

Talk of Cypress being forced to sell stokes fears of Greece doing same, and of course when EU policy turns biased towards selling its doubtful any of the member banks would buy?


Full size image

thatcher & oil

Well worth a read!

>   
>   (email exchange)
>   
>   On Wed, Apr 10, 2013 at 7:02 PM, James wrote:
>   
>   Paper attached, I cleaned it up some and added a few lines on shale oil that I had intended
>   to write. Its not what I would consider a finished product, but its so old now that I dont
>   see much point in improving it. Use it as you see fit.
>   

The Institutions of the Oil Industry: A Proposal for Adjustment

comments on a line from a confidential report from Karim

Comments and ramblings:

“Strong multiplier effects from construction jobs to broader economy.”

Good report!!!

I used to call this the ‘get a job, buy a car, get a job buy a house’ accelerator. And yes, it has happened in past business cycles and been a strong driver. But going back to the last Bush up leg, turns out it was supported to a reasonably large degree by the ‘subprime fraud’ dynamic of ‘make 30k/year, buy a 300k house’ with fraudulent appraisals and fraudulent income statements. And the Clinton up leg was supported by the funding of impossible .com business plans and y2k fear driven investment, and the Reagan years by the S&L up leg that resulted in 1T in bad loans, back when that was a lot of money. Japan, on the other hand, has carefully avoided, lets say, a credit boom based on something they would have regretted in hindsight, as was the case in the US.

The point is it takes a lot of deficit spending to overcome the demand leakages, and with the govt down to less than 6% of GDP this year, yes, ‘legit’ housing can add quite a bit, but can it add more than it did in Japan, for example? And, to the point of this report, will it be enough to move the Fed?

Also, looks to me like, at the macro level, credit is driven by/limited by income (real or imagined), and the proactive deficit reduction measures like the FICA hikes and the sequesters have directly removed income, as had QE and the rate cuts in general. So yes, debt is down as a % of income, but the level of income is being suppressed (call it income repression policy?) through pro active fiscal and the low number of people working and getting paid for it.

Domestic energy production adds another interesting dimension. It means dollar income is being earned by firms operating domestically that would have been earned by overseas agents. The question here is whether that adds to incomes that gets spent domestically. That is, did the dollars go to foreigners who spent it all on fighter jets, or did they just let them sit in financial assets vs the domestic oil company? Does it spend more of its dollar earnings domestically than the foreign agent did, or just build cash, etc? And either way its dollar friendly, which also means more non oil imports, particularly with portfolio managers ‘subsidizing’ exports from Japan with their currency shifting. That should be a ‘good thing’ for us, as it means taxes can be that much lower for a given size govt, but of course the politicians don’t have enough sense to do that. It all comes back to the question of whether the deficit is too small.

As for banking and lending, anecdotally , my direct experience with regulators is that they are ‘bad’ and vindictive people, much like many IRS agents I’ve come across, and right now they are engaging in what the Fed calls ‘regulatory over reach’, particularly at the small bank level, but also at the large bank level. This makes a bank supported credit boom highly problematic. And without bank support, the non bank sector is limited as well.

Lastly, there’s a difference between deficits coming down via automatic stabilizers and via proactive deficit reduction. The automatic stabilizers bring the deficit down when non govt credit growth is ‘already’ strong enough to bring it down, while proactive deficit reduction, aka ‘austerity’ does it ‘ahead of’ non govt credit growth, which means austerity can/does keep non govt credit growth from materializing (via income/savings reduction).

Conclusion- the Fed is correct in being concerned about our domestic dynamics. And they are right about being concerned about the rest of the global economy. Europe is still going backwards, as is China where they are cutting back on the growth of debt by local govts and state banks, all of which ‘counts’ as part of the deficit spending that drove prior levels of growth. And softer resource prices hit the resource exporters who growth is leveraged to the higher prices. I wrote a while back about what happens when the longer term commodity cycle peaks, supply tends to catch up and prices tend to fall back to marginal costs of production, etc.

And the Fed has to suspect, at least, the QE isn’t going to do anything for output and employment in Japan, any more than it’s actually done for the US.

U.S. Warns Japan on Yen

So does the US have a strong dollar policy, a weak dollar policy, or an ‘unchanged’ dollar policy?

In any case, President Obama and Congress still fail to recognize that imports are real benefits and exports real costs. And that net imports mean taxes can be lower and/or spending higher to sustain full employment levels of demand.

So what would you rather have?
1. A strong dollar, rising net imports, and lower taxes, or
2. A weak dollar, falling net imports, and higher taxes?

How hard is this???

As for Japan, the BOJ hasn’t actually done anything to weaken the yen. Nor has fiscal policy, at least yet, though if the announced deficit hike goes through it could be a modestly weakening influence. The trade flows going into deficit from surplus have hurt the yen, as gas and oil replaced the nukes that were shut down, though they are in the process of relighting them. And portfolio shifting has probably weakened the yen the most, with life insurance companies, pensions, etc. reportedly adding risk to their portfolios by shifting from yen assets to dollar and euro assets. Yes, this is a ‘one time’ adjustment, but it can be sizable and take years, or it could have already run its course. I personally have no way of knowing, but no doubt ‘insiders’ are fully aware of how this will play out.

Furthermore, the US is going the other way with tax hikes and spending cuts a firming influence on the dollar, which is at least part of the yen/dollar weakness.

Too many cross currents for me to bet on one way or another. If you have to trade it go by the charts and don’t watch the news…

U.S. Warns Japan on Yen

By Thomas Catan and Ian Talley

April 12 (WSJ) — The Obama administration used new and pointed language to warn Japan not to hold down the value of its currency to gain a competitive advantage in world markets, as the new government in Tokyo pursues aggressive policies aimed at recharging growth.

In its semiannual report on global exchange rates, the U.S. Treasury on Friday also criticized China for resuming “large-scale” market interventions to hold down the value of its currency, calling it a troubling development. The U.S. stopped short of naming China a currency manipulator, avoiding a designation that could disrupt relations between the world powers.

The Chinese Embassy didn’t immediately respond to a request for comment. A Japanese government official reached early Saturday in Tokyo declined to comment directly on the Treasury report, but said, “We will continue to abide by” recent commitments by global financial policy makers to avoid intentional currency devaluation”as we have done until now.”

The Treasury report appears to be part of a broader strategy by the Obama administration in response to a sharp shift in economic policy in Japan under new Prime Minister Shinzo Abe.

Hours before the currency warning, the White House said it had accepted Mr. Abe’s request to join negotiations to create an ambitious pan-Pacific free trade zone, despite objections from the American auto industry and other domestic sectors worried about new competition from Japan. The U.S. government is welcoming economic reforms in Japan while trying to discourage Tokyo from reverting to prior tactics of trade manipulation.

The Bank of Japan kicked off the latest drop in the yen by shocking markets last week by announcing plans for a massive increase in money supply, pledging a sharp increase in purchases of government bonds and other assets. The dollar has risen nearly 7% against the yen since then, and is up 15% since Mr. Abe came into power on Dec. 26.

Policy makers in Japan sensitive to currency complaints and warnings have repeatedly insisted in recent days that the yen’s sharp fall has merely been a byproduct of its stimulus policies, not a goal.

“We have no intention to conduct monetary policy targeting the exchange rate,” Haruhiko Kuroda, the new Bank of Japan governor whose policies have helped push down the yen, said in a Tokyo speech Friday. The BOJ’s policies, he added, were aimed at pulling Japan out of its long slump and that “achieving this goal will eventually provide the global economy with favorable effects.”

Amid sluggish global growth, governments face the temptation to lower the value of their currencies to juice exports. Those pressures are aggravated as central banks in the U.S., Europe and Japan seek to spur their economies by pushing cash into the systempolicies that have the effect of weakening their currencies. Seeking higher returns, investors are putting their money into emerging markets, putting upward pressure on those countries’ currencies and making their exports more expensive abroad.

The U.S. said it would “closely monitor” Japan’s economic policies to ensure they are aimed at boosting growth, not weakening the value of the currency. The yen is now hovering near a four-year low against the dollar, in response to Mr. Abe’s policies.

“We will continue to press Japanto refrain from competitive devaluation and targeting its exchange rate for competitive purposes,” the Treasury report said.

The yen quickly strengthened following the report, pulling the dollar to as low as 98.08, its lowest level this week, in a thin Friday afternoon market. The yen later gave back some of those gains, as investors came to see the comments less as criticism than as a statement of fact.

American officials have been walking a tightrope in recent months. While worried about a deliberate currency devaluation, they have also tried to encourage Japan’s attempts to jump-start growth, after years of frustration in Washington that Tokyo wasn’t doing enough to fix its economy.

“The wording does make it clear that the U.S. Treasury is watching extremely closely” to ensure that Japan lives up to promises not to purposely weaken its currency, said Alan Ruskin, a currency strategist at Deutsche Bank in New York. But, he added, “the report does not infer that Japan is breaking any agreement.”

The Treasury report, required by Congress and closely followed by markets, highlighted the need for more exchange-rate flexibility in many Asian countries, most notably China.

The Treasury used tougher-than-usual language on China, saying Beijing’s “recent resumption of intervention on a large scale is troubling.” While it noted that China had allowed the yuan to appreciate by about 10% against the dollar since June 2010or 16% including inflationthe report said the Chinese currency remained significantly undervalued and “further appreciation” was warranted.

The Treasury in recent years under both Republican and Democratic administrations has declined to formally label China as a currency manipulator, with officials suggesting publicly and privately that such a step would hurt efforts to encourage Beijing to let the yuan rise.

Still, the question of China’s currency has become shorthand in Washington for the broader debate over the economic relationship between the two countries. It was a frequent topic on the campaign trail for both President Barack Obama and GOP challenger Mitt Romney last year, as Mr. Romney pledged that if elected, he would label China a currency manipulator.

On Friday, some U.S. manufacturers criticized the Obama administration for its reluctance to call China a currency manipulator. “The Treasury Department’s latest refusal to label China a currency manipulator once again demonstrates President Obama’s deep-seated indifference to a major, ongoing threat to American manufacturing’s competitiveness, and to the U.S. economy’s return to genuine health,” said the U.S. Business and Industry Council, an industry lobby group.

The Treasury report also took South Korea to task for seeking to keep a lid on the won as foreign investors flood the economy with cash. “Korean authorities should limit foreign-exchange intervention to the exceptional circumstances of disorderly market conditions,” and capital controls should only be used to prevent financial instability, not reduce upward pressure on the exchange rate, Treasury said.

Enterprise Bank Q1 2013 Investment Performance

A contract has been signed to sell Enterprise to First United of Boca. Closing looks like Q4 if all goes well.

Attached is the performance recap since I started managing the portfolio. Note that there were no capital charges for the swaps used as hedges, and so the calculation returns would likely differ for non banks.

Enterprise Bank Q1 2013 Investment Performance