Japan- Foreign countries have no right to lecture us

This confirming much of what’s been previous discussed.

The remaining question whether there already has been direct intervention, as evidenced by rising fx reserves.

Interestingly, with floating fx it’s operationally easy for Central Banks to offset each other’s intervention. For example, if the BOJ buys dollars the Fed could simply buy the yen. Each CB would have a deposit on the other’s books and the (global) economy wouldn’t know the difference.

Also interestingly, all governments currently miss the point that exports are real (real vs nominal) costs and imports are real benefits.

So the CB that weakens its currency is in fact gifting the world superior real terms of trade via lower export prices via lower domestic real wages, etc. as it reduces its own real terms of trade.

Japan Rebuke to G-20 Nations May Signal More Moves to Weaken Yen

By Eunkyung Seo and Masaki Kondo

December 31 (Bloomberg) — Japanese purchases of foreign bonds to weaken the yen may become more likely as the nation rejects trading partners’ rights to criticize its currency policies.

“Foreign countries have no right to lecture us,” Finance Minister Taro Aso told reporters at a briefing in Tokyo on Dec. 28. He said that the U.S. should have a stronger dollar and questioned whether major Group of 20 nations had stuck to pledges from 2009 to avoid competitive currency devaluations.

Japan’s new Prime Minister Shinzo Abe may accept trade friction as a cost of spurring growth and countering deflation through a looser monetary policy and weaker yen. The currency is set to complete its biggest annual decline in seven years after Abe’s Liberal Democratic Party secured a landslide victory in this month’s lower-house election. During his campaign, Abe said foreign-bond purchases were a possible monetary tool.

“The LDP wants to boost stock prices before the upper- house election in July next year, and the easiest option for them is to weaken the currency,” said Satoshi Okagawa, a senior global-markets analyst in Singapore at Sumitomo Mitsui Banking Corp., a unit of Japan’s second-biggest bank by market value. “The explicit policy to weaken the yen is likely to upset the U.S. and China.”

The yen was at 86.08 per dollar as of 7:30 a.m. in London after touching 86.64 on Dec. 28, the weakest since August 2010. It traded at 113.53 per euro.

Currency Promises

The currency has dropped more than 10 percent versus the greenback since the end of 2011, set to complete the biggest annual slump since 2005. At the same time, the yen remains about 30 percent higher than it was five years ago.

In his Dec. 28 comments, Aso, a former prime minister, said that Japan and other countries made “a promise not to resort to competitive currency devaluations” at a G-20 meeting in 2009. “How many countries have kept the promise? The U.S. should have a stronger dollar. What about the euro?” he asked. “Foreign countries have no right to lecture us” as Japan is the only major economy to keep the pledge, Aso said.

The U.S. criticized Japan for undertaking unilateral sales of the yen in August and October last year, after Group of Seven economies earlier jointly intervened to weaken the currency in the aftermath of an earthquake and tsunami.

“Rather than reacting to domestic ‘strong yen’ concerns by intervening to try to influence the exchange rate, Japan should take fundamental and thoroughgoing steps to increase the dynamism of the domestic economy,” the Treasury Department said in a report in December last year.

Shrinking Economy

The Liberal Democratic Party faces the task of reviving growth after the economy contracted for the past two quarters, meeting the textbook definition of a recession. The nation’s industrial output tumbled more than forecast in November to the lowest level since the aftermath of last year’s record quake.

At the same time, stock prices are climbing, with Toyota Motor Corp. at a more than two-year high, as a weaker yen and prospects for central-bank easing brighten the outlook for exporters. Such improvements may cause concern for some of Japan’s Asian neighbors.

“South Korea is one of the countries most vulnerable to the weak yen policy as many export items are in direct competition, such as cars and electronic goods,” said Lee Sang Jae, a Seoul-based economist at Hyundai Securities Co. “Japan will try whatever it can to stop the deflation and to weaken the yen for export growth.”

Shirakawa’s Caution

After a Dec. 28 call with U.S. Treasury Secretary Timothy F. Geithner, Aso said he had told Geithner that the yen was making some corrections from one-sided moves and Aso would keep monitoring changes in the currency.

Bank of Japan (8301) Governor Masaaki Shirakawa, whose five-year term ends in April, has rejected suggestions that the bank buy foreign bonds and called for respect for the BOJ’s independence. Such a policy would amount to currency intervention, which is the responsibility of the finance minister, he says.

At the same time, the Nikkei newspaper on Dec. 29 cited Shirakawa as saying that central bank and government must work together to overcome deflation. Abe is pressing for the Bank of Japan to adopt a 2 percent inflation target, compared with a current goal of 1 percent. Consumer prices excluding fresh food fell 0.1 percent in November from a year earlier, showing the central bank is struggling to fulfil even the lesser ambition.

The LDP proposed in its campaign manifesto establishing a joint BOJ, Ministry of Finance and private sector fund to buy foreign bonds. Takatoshi Ito, a former finance ministry official and a possible contender to become central-bank governor, said in a Dec. 6 interview that the BOJ “can and should buy foreign bonds,” adding that such a move is possible if the finance minister publicly declares support for it.

In a note this month, Australia and New Zealand Banking Group Ltd. said that foreign bond purchases are contrary to the legislation governing the BOJ. At the same time, it’s possible that the government may cajole the central bank into putting money into a proposed private-public vehicle for investment in foreign asssets, the lender said.

China Budget Deficit Said Set to Expand 50% to $192 Billion

Ancient Chinese secret:

China Budget Gap Said Set to Widen 50% to $192 Billion

December 27 (Bloomberg) China plans to increase the budget deficit by 50 percent to 1.2 trillion yuan ($192 billion) in 2013, including the sale of 350 billion yuan of bonds to fund local governments, a person familiar with the matter said.

The central government deficit is budgeted at 850 billion yuan, according to the person, who asked not to be identified as the deliberations are not public. The nations leaders target about 8 percent trade growth, down from this years 10 percent goal, the person said.

A bigger fiscal deficit may give Chinas new leadership under Xi Jinping more room for tax cuts and measures to boost urbanization and consumer demand. The 1.2 trillion-yuan total compares with an 800 billion-yuan target this year, which included a 550 billion-yuan central government deficit and 250 billion yuan in local government bond sales.

The year 2013 is the first year for the new Chinese leadership, and urbanization will receive a big push, said Zhang Zhiwei, chief China economist at Nomura Holdings Inc. in Hong Kong. Financial support, including an expanded fiscal deficit in the budget, is needed for that.

Apart from a trial program launched in late 2011, local governments are barred from selling bonds directly and cant run deficits. China Business News reported the 1.2 trillion yuan figure today and Economic Information Daily reported an 8 percent trade target.

China News Service reported a 10 percent growth target for industrial production in 2013.

The government usually reveals specific goals at the legislatures annual meeting in March.

China hates QE

This was my suspicion back in maybe May, 2011 when Bernanke made his strong dollar speech after China had let their T bill portfolio run off after the Fed had begun QE1.

Either China doesn’t understand QE or they are taking this position anyway, for further political purpose.

And in any case, in general they all remain blind to the fact that imports are real benefits and exports real costs.

China dismisses Brazil currency proposal at WTO, criticizes QE

By Tom Miles

Nov 26 (Reuters) — China blamed quantitative easing for damaging emerging economies and rejected Brazil’s proposal of using world trade rules to compensate for currency misalignments, during a debate at the WTO on Monday.

“We, together with many other countries, have been critics of this irresponsible and beggar-thy-neighbor policy,” China’s deputy permanent representative to the World Trade Organization, Zhu Hong, said, referring to the monetary stimulus policy often shortened to QE.

“It has a lingering negative impact on developing, emerging economies in particular,” Zhu said during a debate on currency fluctuations at the WTO in Geneva, according to a transcript provided by a Chinese official.

The meeting was called to discuss Brazil’s proposal that WTO rules should include a system for dealing with currency misalignments.

Brazil’s Ambassador Roberto Azevedo, who some trade diplomats say is a contender to replace WTO chief Pascal Lamy when he steps down next year, has gradually hardened up his demands on the issue.

After getting WTO members to agree to examine the available literature on the subject last year,Brazil circulated a proposal on November 5, explaining that WTO rules contained language about dealing with currency-related trade distortions but no adequate instruments to act directly.

“The WTO seems to be systemically ill-equipped to cope with the challenges posed by the macro and microeconomic effects of exchange rates on trade,” Brazil said in its proposal, a copy of which was obtained by Reuters.

“Members may wish, against this background, to consider the need for exchange-rate trade remedies and to start some analytical work to that effect.”

The proposal did not mention quantitative easing and explicitly called for analysis “from a systemic perspective” rather than from any one country’s experience.

But it was accompanied by a graph showing the estimated misalignment of Brazil’s own currency, the real, with an over-valuation of nearly 40 percent in 2011.

Brazil has previously called quantitative easing, a form of monetary stimulus, “selfish” and blamed it for stealing exports from emerging markets.

But China’s Zhu said the issue was one for the International Monetary Fund, not the WTO.

“Currency issue in nature is a monetary policy issue. The right path to resolve this issue is by enhancing the responsibility of and promoting coordination among the international reserve currency issuers,” Zhu said.

BAD PRECEDENT

Brazil’s push for the WTO to take up the currency proposal has rolled onward despite struggling to gain vocal support, partly because it is unclear if such an idea would be workable in practice.

Donald Kohn, a former vice chairman of the Federal Reserve and a member of the Bank of England’s Financial Policy Committee, said that although he was not familiar with the proposal, such ideas did not make sense from an economic point of view in general.

“Emerging market economies should adapt, and they should change regulation to allow their exchange rates to be more flexible where that’s appropriate,” he told Reuters after giving a speech in Geneva earlier this month.

“But I think it’s not going to work and I think it’s unproductive to ask the industrial economies to do things that are not in their self-interest, within the rules of the game. Secondly, if what they’re talking about is tightening up on trade and restricting trade, that’s a very bad precedent.”

Clinton says budget deal critical to U.S. global role, security

In case you thought Hillary had a clue:

Clinton says budget deal critical to U.S. global role, security

By David Brunnstrom

November 17 (Reuters) — U.S. Secretary of State Hillary Clinton said on Saturday that reaching a deal to resolve America’s budget crisis is critical to its global leadership and national security and would bolster efforts to project U.S. economic power around the world.

Speaking in Singapore during a tour of Asia and Australia, Clinton said that when she was in Asia last year during the height of debate about the U.S. debt ceiling, leaders from across the region asked her if the U.S. Congress would actually allow the United States to default on its debt.

“Let’s be clear,” she said. “The full faith and credit of the United States should never be in question.”

However, Clinton, who spoke at Singapore Management University, said that with Washington gearing up for another round of budget negotiations, she was “again hearing concerns about the global implications of America’s economic choices”.

She said that despite all the differences between the U.S. political parties, “we are united in our commitment to protect American leadership and bolster our national security”.

“Reaching a meaningful budget deal is a critical to both,” she said. “It would shore up our ability to project economic power around the globe, strengthen our position in the competition of ideas shaping the global marketplace, and remind all nations that we remain a steady and dependable partner.

“For us, this is a moment to once again prove the resilience of our economic system and reaffirm America’s leadership in the world,” Clinton said, stressing that U.S. leadership depended on its economic strength.

“Global leadership is not a birthright for the United States or any nation. It must be constantly tended and earned anew.”

U.S. President Barack Obama and his Republican rivals are in talks aimed at avoiding what has been dubbed a “fiscal cliff” at the year-end, which experts say could push the U.S. economy back into recession.

If Congress cannot agree to less extreme steps, from Jan. 2, about $600 billion worth of tax increases and spending reductions, including $109 billion in cuts to domestic and defense programs, will begin to kick in.

Both sides are eager to reassure the public that Washington will not see a repeat of the white-knuckle budget standoff that spooked consumers and investors last year, and Republican and Democratic congressional leaders emerged from a meeting with Obama on Friday pledging to find common ground to avert the fiscal cliff.

“HISTORY BEING WRITTEN”

Clinton said responding to threats would remain central to U.S. foreign policy, but could not be Washington’s only foreign policy.

Maintaining U.S. strength would require following through on a policy of intensified engagement with the Asia-Pacific region and elevating the role of economics in foreign relations.

Clinton said the visit of Obama to Asia from Sunday – within days of his Nov. 6 reelection – showed the importance of the region in U.S. eyes. Obama will visit Thailand, Cambodia to attend an East Asian summit, and Myanmar.

“Why is the American president spending all this time in Asia so soon after winning reelection?” Clinton asked. “Because so much of the history of the 21st century is being written here.”

Clinton said the United States was making progress in talks with countries on both sides of the Pacific towards finalizing a Trans-Pacific Partnership trade pact, which would lower barriers and raise regulatory standards in a region accounting for 40 percent of world trade.

“We will continue to work with Japan and we are offering to assist with capacity building so that every country in ASEAN can eventually join,” she said, referring to the 10-member Association of Southeast Asian Nations.

Clinton said the United States would welcome the interest of any country willing to meet the standards of the TPP – including China, where some view the pact with suspicion and as a U.S. attempt to contain China’s rapid growth, something U.S. officials deny.

The United States, Australia, New Zealand, Chile, Peru, Singapore, Vietnam, Malaysia and Brunei agreed this year to let Mexico and Canada into the negotiations, which could reach a conclusion next year. Japan’s prime minister said this month he wants to enshrine backing for the pact in his party’s election platform.

Clinton said that with the U.S. government working to bring down trade barriers and create a level playing field for U.S. firms, it was also up to them to raise their game abroad.

“Too many are sitting on the sidelines,” she said. “I hear it over and over when I travel: ‘Where are the American businesses?’ At a time when America’s domestic growth depends more than ever on our ability to compete internationally, this has to change.”

more on the cliff

Stocks down again yesterday but interestingly bond yields up a tad, dollar down a tad, oil and metals up, and even long BMA ratios holding steady, etc.

The cliff isn’t nearly as large and threatening as the debt ceiling cliff would have been in 2011 if that thing hadn’t been extended, and we’d gone cold turkey into an immediate and forced balanced budget. But that event is the stock market’s ‘recent memory’ of stock market reaction functions.

And this time GDP is being supported by a private sector credit expansion/housing expansion, with private debt service ratios substantially lower due to cumulative federal deficits adding to nominal ‘savings’. And the federal deficit remains well above 5% of GDP, which historically has been more than enough to reverse a recession.

And then there’s the election factor. Post election I’m hearing (anecdotally) distraught Romney supporters thoroughly convinced the President is a ‘socialist’ bent on destroying capitalism, taxing the rich ‘job creators’ and giving it to what Romney called ‘the 47%’ dependent class, etc. etc. etc. Merits of this ‘belief’ aside, it looks to me it’s driving portfolios to shift out of equities. However, if not supported by an actual decline in earnings, which is how I see it, it’s all a case of ‘pushing on a spring’.

Yes, the euro zone is a problem, with Q3 GDP just reported at -.1%. But that’s an ‘improvement’ from q2’s -.2% as larger deficits are acting counter cyclically to cushion the austerity driven decline. And Rehn was just quoted on Spain favoring not adding to austerity measures, perhaps indicating a move to ‘let it be’ for a while, which will allow GDP to stabilize at modestly positive levels.

And China is no longer going backwards, so that negative has been reversed as well.

Back to the cliff, in fact letting tax rates go up for high income earners should have little effect on GDP, as the marginally propensity to spend for that segment is reasonably low. (of course that means there’s no point in taxing that income in the first place, but that’s another story). Nor does it mean investment or employment will suffer since investment is driven by sales prospects. And with higher tax rates, and business expense tax deductible, the after tax cost of investment goes down with higher tax rates. For example, in the 70’s, when my tax rate was around 70%, I clearly recall making very high risk investments figuring it was better than giving 70% to the govt. Point is, taxing income and savings that isn’t going to be spent is about social engineering, and not ‘funding the deficit’ or altering aggregate demand, and is intellectually honestly framed as such. So point here is, I score the effect of raising the highest tax rates at 0 regarding aggregate demand.

This all supports my take that the stock market has over discounted the cliff, partly for ideological reasons, partly due to the recent memory of what stocks did during the debt ceiling debacle, and partly from fear of what’s going on in the rest of the world.

So as we get through it all with modest top line and earnings growth continuing, I’m looking for valuations to quickly return to at least where they were before the election.

Romney to Take China ‘to the Mat’ on First Day in Office

I can’t even read this stuff any more.

And, worse, it ‘forces’ his opposition to take a harder stance as well.

Romney to Take China ‘to the Mat’ on First Day in Office

October 14 (Reuters) — Republican presidential candidate Mitt Romney on Saturday accused President Barack Obama of failing to “stand up to China” after the U.S. Treasury put off releasing a politically sensitive report on the currency policies of major U.S. trading partners.

“Four years after promising to take China ‘to the mat’ for its manipulative currency practices, President Obama has once again failed to live up to his word,” Romney spokeswoman Andrea Saul said in a statement released by the campaign office.

“We can’t afford another four years of President Obama’s failure to stand up to China. Mitt Romney will do it on day one of his presidency,” she said.

QE

QE in the US has again done what it’s always done- frighten investors and portfolio managers ‘out of the dollar’ and into the likes of gold and other commodities.

And because sufficient market participants believe it works to increase aggregate demand, it’s also boosted stocks and caused bonds to sell off, as markets discount a higher probability of higher growth, lower unemployment, and therefore fed rate hikes down the road.

But, of course, QE in fact does nothing for the economy apart from removing more interest income from the economy, particularly as the Fed adds relatively high yielding agency mortgages to its portfolio.

As ever, QE is a ‘crop failure’ for the dollar. It works to strengthen the dollar and weaken demand, reversing the initial knee jerk reactions described above.

But the QE myth runs deep, and in the past had taken a while for the initial responses to reverse, taking many months the first time, as fears ran as deep as headline news in China causing individuals to take action, and China itself reportedly letting its entire US T bill run off.

But with each successive QE initiative, the initial ‘sugar high’ is likely to wear off sooner. How soon this time, I can’t say.

Global austerity continues to restrict global aggregate demand, particularly in Europe where funding continues to be conditional on tight fiscal. Yes, their deficits are probably high enough for stability- if they’d leave them alone- but that’s about all.

And as the US continues towards the fiscal cliff the automatic spending cuts are already cutting corporate order books.

And oil prices are rising, and are now at the point cutting into aggregate demand in a meaningful way.

Yes, the US housing market is looking a tad better, and, if left alone, probably on a cyclical upturn. And modest top line growth, high unemployment keeping wages in check, and low discounts rates remains good for stocks, and bad for people working for a living.

Too many cross currents today for me to make any bets- maybe next week…

September FOMC Preview and fiscal cliff comments


Karim writes:
September FOMC Preview

Its hard to remember going into an FOMC meeting with as wide a range of outcomes and as wide an array of views on those outcomes from markets and economists.

In play:

  • Do nothing
  • Extend forward guidance (to what date?)
  • Cut IOER
  • Unsterilized asset purchases
    • Open-Ended, or defined amount and time period?
    • MBS and/or USTs?

My own, relatively low conviction, view is that they only extend forward guidance, to mid-2015, from the list above. I think there is a 40% probability they announce new LSAPs that would run concurrently with the end of Twist2. If they do additional LSAPs, I think there is a 40% they are open-ended in nature. If they do additional LSAPS (defined amount), I think it will be a 400bn program over 6mths made up of 75% MBS and 25% USTs. The odds of a cut in IOER would around 25% in my view.

Assuming extending forward guidance is a done deal, as hinted in the minutes, here are some of the pro’s and cons in terms of gauging the likelihood of additional asset purchases.

Pros

  • The term ‘monetary’ accommodation used in the last Minutes suggests more than just forward guidance is being considered: Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery.
  • Bernanke used the term ‘grave concern’ at Jackson Hole to describe the state of the labor market and the last payroll report looked lousy.
  • He defended the use of QE at Jackson Hole, so if the outlook remains weak, why not do more?

Because he doesn’t want to pick a fight with China again, as per my May 2011 post.

Cons

  • The Fed states that policy works through financial channels and with most borrowing rates near record lows, and equity markets near 4yr highs, those channels are working well right now. Why mess with success?


Yes, he knows it’s about rates, not quantities, and that policy has caused the term structure of rates to be where it is. However, the channel that remains elusive is how low rates are transmitted to aggregate demand, claims of creating 3 million jobs not withstanding.

  • The outlook hasn’t changed much since June when they announced Twist2, so why act now?
  • Its 2mths before the election and the Fed is only a side campaign issue now. For an institution that craves it independence, why do anything that may risk that?

Open-ended purchases would likely be tied to the forecast (i.e., ‘the Fed will buy 150bn/mth of MBS and USTs until the Committee is able to forecast meeting its mandate within its forecast horizon’). The issue is the Fed doesn’t have a common forecast (it takes an average of 17 members to produce the SEP). That common forecast is a work in progress (a Committee headed by Yellen). So an open-ended program may take place, but probably not until next year.

Odds of an IOER cut are low just because Bernanke did not mention it at all at Jackson Hole.

About three months ago I suggested the fiscal cliff was too far away for markets to care.
But now it’s a lot closer, and close enough for those to be affected directly by govt spending cuts to be acting accordingly.

But that also means that at least some of that cliff is already being discounted which means:

It won’t be as bad as expected if it happens.
If it’s avoided there will be a boost to the economy not in current forecasts.

Why is Putin stockpiling gold?

He’s probably afraid of Draghi’s policies?

Or got long gold in his personal account, has his CB run it up for him to sell?

No telling!

Why is Putin stockpiling gold?

By Brett Arends

September 5 (WSJ) — I can’t imagine it means anything cheerful that Vladimir Putin, the Russian czar, is stockpiling gold as fast as he can get his hands on it.

According to the World Gold Council, Russia has more than doubled its gold reserves in the past five years. Putin has taken advantage of the financial crisis to build the world’s fifth-biggest gold pile in a handful of years, and is buying about half a billion dollars’ worth every month.

It emerged last month that financial gurus George Soros and John Paulson had also increased their bullion exposure, but it’s Putin that’s really caught my eye.

No one else in the world plays global power politics as ruthlessly as Russia’s chilling strongman, the man who effectively stole a Super Bowl ring from Bob Kraft, the owner of the New England Patriots, when they met in Russia some years ago.

Putin’s moves may matter to your finances, because there are two ways to look at gold.

On the one hand, it’s an investment that by most modern standards seems to make no sense. It generates no cash flow and serves no practical purpose. Warren Buffett has pointed out that we dig it out of one hole in the ground only to stick it in another, and anyone watching this from Mars would be very confused.

You can forget claims that it’s “real” money. There’s no such thing. Money is just an accounting device, a way of keeping track of how much each of us produces and consumes. Gold is a shiny and somewhat tacky looking metal that is malleable, durable and heavy. A recent research paper by Duke University’s Campbell Harvey and co-author Claude Erb raised serious questions about most of the arguments in favor of gold as an investment.

But there’s another way to look at gold: As the most liquid reserve in times of turmoil, or worse.

The big story of our era is not that the Spanish government is broke, nor is it that Paul Ryan apparently feels the need to embellish his running record. It’s that the United States, which has dominated the world’s economy for several lifetimes, is in relative decline.

As was first reported here in April of last year, according to International Monetary Fund calculations, the U.S. is on track to lose its status as the world’s biggest economy—when measured in real, purchasing-power terms—to China by 2017.

We will soon be the first people in two hundred years to live in a world not dominated by either Pax Americana or Pax Britannica. This sort of changing of the guard has never been peaceful. The declines of the Spanish, French and British empires were all accompanied by conflict. The decline of British hegemony was a leading cause of the First and Second World Wars.

What will happen as the U.S. loses its pre-eminence?

Maybe this will turn out better than similar episodes in the past. Maybe the Chinese will embrace an open society and the rule of law. If you believe that, there is probably no reason to hold any gold.