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Trickle-Down QE

Everyone’s heard of trickle down economics, but how about “trickle down QE”?

The concept is basically the same, you just have to replace the people in the equation with bonds, an abstraction which isn’t difficult for bulge bracket banks to make, as subjugating the human element to dollars and cents has been unspoken corporate policy for decades. Just as tax breaks, etc for businesses and high earners are expected to ultimately benefit middle and low income households in trickle down economics, in trickle down QE, the liquidity injected into the system via central bank purchases of sovereign and IG corporate debt is expected to ultimately benefit high yield spreads.

Of course, this is really just another way of repeating what everyone has been saying for the last half decade: central bank largesse forces investors into risk assets by driving down yields on any asset class that could be even remotely construed as “safe.” Fortunately for those of us who are bored with buying plain vanilla equities and dabbling in HY cash credit to get our yield fix, the unique character and scope of Draghi-style easing presents investors of an adventurous disposition with an opportunity to capitalize on trickle down QE via an exciting foray into synthetic credit.

Without further ado, here’s Citi to explain how a hypothetical credit strategist will visit your fictional office and use the concept of trickle down QE to convince an imaginary you to go long euro HY credit via synthetic exposure to Crossover mezz tranches (you can’t make this stuff up):

The argument which finally convinced us that high yield is an attractive long is the potential of ECB QE to “trickle down” all the way to high yield…


Imagine … some random credit strategist showed up in your office with the following pitch: “It’s not whether you like this or not, the ECB is going to force you to take more beta. High yield is a good place to do that”. First reaction? Get defensive, partly because this (well-meaning) strategist is reminding you that what you think doesn’t matter because somebody very important is going to force you to do something.


After getting through that, you probably want some more detailed advice: “How do you propose me taking that risk?” Considering the strategists’ concerns about idiosyncratic risk, the advice will go along the following lines:

You should build a diversified enough portfolio of high yield bonds because idiosyncratic risk is high and if you’re not diversified there is a chance your losses can be very big. But if you are diversified, the most likely outcome is that the idiosyncratic risk will only cause a small loss in your portfolio.

You use the complaint du-jour to placate him: “Do you realize how liquidity is like in the bond market these days? You should know better before recommending anybody to build a diversified portfolio of high yield bonds. Diversified means I need to buy many, and that’s not easy you know, especially in ‘size’.”


So traditional remedies are clearly somewhat problematic when taking high yield risk given idiosyncratic risks. What can be done to take high yield risk, minimizing exposure to idiosyncratic risks but in a way where execution is not prohibitive?

In case you’ve lost the narrative, that last passage is Citi asking itself a rhetorical question from the perspective of an imaginary client. It only gets better when our fictional protagonist reminds the make-believe credit strategist that the last time someone came around hawking an investment “opportunity” in synthetic tranches, the financial universe nearly collapsed shortly thereafter: 

By now … you’re already in defensive mode again, thinking “Here these guys go again trying to solve a problem with synthetic tranches. Don’t they remember that …?” There is plenty of resistance among many investors to use synthetic tranches on the back of not very satisfactory past experiences – we know that. But it turns out that: (i) Synthetic mezzanine tranches are a very good fit for the problem we’re trying to solve here (see below), and (ii) what caused the problems in the past wasn’t the product itself but its over-use … and that’s not the case now – and it’s not only us believing that: 70% of respondents in our recent Credit Derivatives Survey aren’t concerned about investors taking leveraged risk using derivatives. With that, let us go on with our pitch.

So there you have it. Granted, some investors had a “not very satisfactory” (i.e. the entire financial system blew up on the back of pyramided counterparty risk) experience with synthetic tranches in the past, but “it turns out” that the problem wasn’t really the complexity of the instruments, but rather their “over-use” (so, too much of a good thing?). Of course, there’s no over-use problem now (which certainly has nothing to do with investors’ collective memory of what happened last time) and ultimately, you don’t have to take Citi’s word for it, you can just ask any of the banks and hedge funds they surveyed, nearly three-quarters of which definitely aren’t concerned about you taking leveraged risk with derivatives. 

Getting to the specifics (and briefly stepping back from the sarcasm), it’s the Crossover S22 10-20% that you want, as it gives you enough subordination to dodge a few idiosyncratic default bullets and still pays a running spread above 550 bps. For those who buy the trickle down QE narrative and actually see an opportunity in HY heading into ECB asset purchases, here’s the default exposure on this:


*  *  *
Of course, these types of trades are intended for sophisticated investors and in a post-crisis world characterized by humility on Wall Street, we can be sure that these “opportunities” aren’t advertised to clients for whom they aren’t suitable.

From the introduction to the above-quoted Citi note:

Our target audience for this piece is the non-seasoned tranche investor. Don’t be afraid of reading on if you haven’t been involved in tranches before. We’ve written this piece so that you won’t get lost.

And in case you also haven't seen how all this ends, Citi previewed that as well, in "Citi Warns Of "Dancing", "Music" And "Complicated Things" For The Second Time..."

Paul Craig Roberts: The Cancer Of Financial Repression (And Why You Can't Do Anything About It)

Submitted by Gordon T.Long via Macro Analytics,

Dr. Paul Craig Roberts is extremely meticulous in examining the central problems facing America and the developed economies today. You may not like nor agree with what he says but there is little double as a former high level Treasury official, academic professor and Wall Street Journal editor, that he knows what he is talking about.


"It is going on on several fronts conducted by different people for their own agendas, though they all seem to be mutually supporting.

  1. FINANCIALIZATION OF THE ECONOMY by the Big Banks. - "What that means is that they are converting the entirety of the economic surplus to paying interest on debt. They are draining the economy of all vitality! There is nothing left for the expansion of consumer demand, business investment and old age pensions. It expropriates the economic surplus that is created beyond the maintenance of the current living standard into interest on debt."
  2. OFF-SHORING OF MIDDLE CALLS JOBS by Corporations & Wall Street - "What the Corporations and Wall Street have achieved by off-shoring manufacturing jobs and tradable professional job skills such as software engineering & information technology. What they have done by moving these offshore is to recreate the labor market conditions and wage exploitation of the late 19th century."
  3. MANIPULATION OF THE BULLION MARKETS by the Futures Market Bullion Banks - "There is no free market in the futures markets. These are markets that are manipulated."


"I think there is a lot of collusion. For example the government colluded with the banking system in financial deregulation. For example they repealed Glass-Steagall. They expressed this absurd claim that financial markets are self regulating."

"They turned the financial system into a gambling casino where the bets are covered by the tax payer and central bank."

The cancer which started in the US Financial System has spread globally. The carriers of the cancer has been the International Banks.


"Some of the Financial Repression is collusion of government serving the financial interests because Wall Street is a huge supplier of political campaign funds which you are highly dependent on to get re-elected. So you answer to the donors. You don't answer to the public interest. It doesn't give you any money."

"You answer to:

  • Wall Street,
  • The Military-Security Complex,
  • The Agri Business like Monsanto,
  • The extractive Industries (Oil, Timber, Mining)

These are the powerful interest groups that use the government to serve their interests."


With the destruction of the manufacturing jobs in America through off-shoring, it has reduced the power of the unions and destroyed the Democrats independent source of campaign funds.

"You now have two parties with the same head and reporting to the same masters. There is no longer any countervailing power"

You no longer have the Democrats supporting workers against the Republicans supporting business. Both parties represent them.

"This is the reason you can't do anything about Financial Repression!"


We have been in 14 years of wars and added $6T of national debt to finance these wars "without adding five cents of investment for the country having taken place."

"We now have the Neo-Conservatives driving the conflict with Russia (which is insane), with China (which is insane). The United States doesn't have the power to try and dominate Russia / China. Especially now that the two countries have a strategic alliance"

"You have much of the world turning away from the United States because of Washington's

  • Abuse of the Dollar as the World's Reserve Currency,
  • Abuse of the dollar based payment system,
  • Imposing unilateral sanctions which are acts of war,
  • Threatening people with expulsion from the clearance mechanism and people saying we won't have any part of this,
  • The BRIICS establishing their own version of the IMF,
  • The Impact of the Spy Scandals and people saying they will build their own internet,

All of this is not only going to effect business it is going to effect American power. It is going to start shriveling!"

"If you have these crazed Neo-Conservatives demanding control of the world, faced with declining power, you don't know what they will do! It is a very, very dangerous situation. I'm surprised it has taken the world so long to realize the threat the US poses to the rest of the world."

"The US Dollar payment system is essentially a system for looting. This, Globalization and Neo-liberal economics are tools of American economic imperialism. Countries are beginning to realize this. The looting of countries by American imperialism has now reached the point where it is turning on itself - Greece for example."


This European Nation's Poverty Rate Just Hit A Record High (Spoiler Alert: Not Greece)

For the last few years - and most especially the last few months - all eyes have been focused on Greece. From record poverty rates to record suicide rates and levels of youth unemployment, post-election emboldened hopes for a phoenix-like rebirth of a nation from the flames of Eurogroup repression were seemingly dashed on Friday. However there is another nation, that begins with the letter 'G' and that is at the heart of the EU-Greece talks that is suffering seemingly silently. As Newsweek reports, poverty in Germany is at its highest since the reunification of the country in 1990, with 12.5 million residents now classified as 'poor'...


As The Joint Welfare Association reports states,

Poverty in the Federal Republic of Germany is on an all time high, the findings of the Joint Welfare Association in its current poverty report. The Association is calling on the federal government for decisive action to combat poverty, including a significant increase in the standard rate in Hartz IV reforms and the family load balancing and basic old-age security.


"Never before has the poverty in Germany so high and never was the regional turmoil as deep as today. Germany is a deeply political poverty rugged Republic, "said Ulrich Schneider, Executive Director of the Joint General Association. Poverty in Germany has risen within a year almost jumped from 15.0 percent (2012) to 15.5 percent (2013). Purely mathematical terms this represents an increase from 12.1 to 12.5 million people.





The highest risk of poverty among all households were thereafter with 43 percent single parents. Special attention should also be paid to the Association's view, the pensioners, "There is no other group in Germany that had even remotely comparable high poverty increases in recent years. We are dealing with a pro-poor political landslide, "Schneider warns the face of a rise in poverty in this group by 48 percent since 2006. Already this year, the poverty rate for pensioners will first be above the German average, predicts the Association.

As Newsweek reports, "Poverty and regional inequalities are homemade primarily the result of political decisions," criticizes Schneider.

Dr Wolfgang Strengmann-Kuhn, a speaker for the Green parliamentary group in the German Bundestag, agrees. He believes cuts in social security funding are responsible for labour market incomes in the country becoming progressively more unequal, and points the finger at German chancellor Angela Merkel.


“While other countries have introduced tax credits for low income groups, this has not been on the agenda in Germany,” he says. “The fight against poverty is not on the agenda of the present government, neither has it been on the agenda of the preceding governments under Merkel.”


He says he believes that while Germany is profiting from the low value of the euro - which he attributes to the “crisis in southern Europe” - it is purely the upper-income groups who benefit.


“The poor lag behind because they have been neglected by the Merkel government,” he says.


“What is needed in Germany is the introduction of minimum levels in the social security systems, and it is also necessary to make the social insurance system universal.”

However, a spokesperson from the German Ministry of Labour and Social Affairs refutes the claims that Germany has seen a steep rise in poverty... noting that defining poverty based on median income alone does not reflect quality of life...

“The ‘at risk of poverty’ rate shows the proportion of people with equivalent income below 60% of the median income. It is not to be equated with poverty in the sense of indigence,” she says.


“Other highly important factors such as wealth, health, education, property or other social services are not considered. In addition, the indicator is not very robust due to random fluctuations of the median income. This means that small random fluctuations of the median income may have significant changes in poverty rates.”

In other words - the 'poor' German, we suspect, is considerably better off (in almost every aspect) that the 'poor' Greek.

It appears poverty is contagious among the world's money-printing-beneficiary developed nations...

Oil's "Surprise" Collapse: It's The Demand, Stupid

Submitted by Jeffrey Snider via Alhambra Investment Partners,

Crude oil futures have been quite volatile of late, particularly in the front months where even the slightest changes in expectations of whatever factor (rig counts, CEO comments, etc.) send WTI surging or tumbling by turn. Despite that, however, the outer years on the curve have seen not just more stability but a steady downward pressure of late. I think a lot of that has to do with futures investors reconciling actual contango options with the idea that demand is far more of not just a problem, but a longer-term problem.

At the front end, rig counts have gained most attention but only as they relate to the surge in inventory. The US is overflowing with oil and production remains at a record high, but the two of those factors together don’t actually count as much in terms of price as is made out by most commentary. It is far too difficult for many to discount the entire economics professions’ complete dedication to the US “booming” economy in order to see a huge demand problem in oil prices; far easier to simply repeat the words “record supply” and leave it at that.

If you actually view the futures curve of late, the curves of recent days has crossed in the outer years. In other words, where prices have moved around at the shorter end, out at the long end the curve has shifted significantly downward regardless of short term pricing. That relates to both contango, as noted above, but also I believe growing recognition that supply is overwrought and demand is what may be impaired – perhaps more permanently than anyone thought possible only a few months ago.

In order to believe that crude prices are solely a supply problem you simultaneously have to believe that futures investors are all stupid. This is not to say that they are never wrong, but in this case it would mean that they cannot even perform basic tasks of financial discounting in order to set an orderly and clearing market price. That is the only way you can look at “record supply”, which is clearly the case, and think it has anything much to do with the collapse in oil prices (latest monthly figures through November 2014).

US domestic supply has been rising precipitously since July 2011! And it has done so in a remarkably stable fashion, nearly a straight line to match even the S&P 500 in slope. In other words, “record supply” has been a continuous facet of oil markets for almost four years now and the trend in the level of production should not surprise anyone let alone futures investors. If anyone was surprised by the level of crude oil production heading into 2015, enough to sell, sell and sell to the tune of an almost 60% price drop, they had to be utterly incompetent especially as futures prices are supposed to be the purest form of discounting future considerations. The supply part of the equation is decidedly easy and clear.

What is driving prices now is the record buildup in crude stocks, which has only recently become problematic.

Each weekly release of the US EIA estimates of crude inventory has been market-moving in January and February, to both fuel rebounds and kick off erosion in prices, because the amount of building inventory is immense.

Given the cumulative assessments here, it seems far more likely that if some variable has changed, and done so dramatically, it is not a “surprise” surge in crude supply but rather a sudden and sharp drop in demand that had reasonably matched growing supply until only more recently. The nature of futures markets being what they are, imperfect as they may be, it is even likely that investors there took financial cues in the “rising dollar” to mean that the probability of demand matching supply was falling. The heightened illiquidity into October and then December simply confirmed growing financial problems which would reflect in far lower probabilities of economic stability.

In other words, futures markets assume that supply may be a problem but only because now, all of sudden, demand, including US demand, will no longer keep up. The fact that such an imbalance created a nearly 60% collapse in price speaks to the growing probability of any economic shortfall occurring as well as the far more important and greater discounting of its severity and/or duration. It bears overstating that these kinds of price movements only occur during severe economic dislocations of a global scale.

Either all futures market participants are comically inept or demand is the variable that shifted hard. Those are the only two possibilities.

The Ultimate "Easy Money Paradox": How The ECB's Previous Actions Are Assuring The Failure Of Its Current Actions

Experiments, by their very nature, tend to have unintended consequences and on the eve of Q€, it appears as though the ECB’s previous policy decisions may have caused the central bank to unwittingly paint itself into a corner. Having pledged to purchase some €1 trillion in assets over the next 18 or so months, Mario Draghi now faces the rather perplexing logistical challenge of finding enough bonds to buy. What’s obvious from the following tables is that convincing domestic banks, insurers, and pension funds to sell is particularly important but will, for reasons outlined below, likely prove well nigh impossible.

As discussed previously, the ECB’s predicament (i.e. the reason it’s looking for sellers) is the result of a supply shortage. Fixed income net issuance across the Eurozone has only averaged around €340 billion over the last four years, meaning supply can’t possibly keep up with the ECB’s demand. In fact, at the individual country level net supply less-Q€ will be negative for Germany, France, Italy, Belgium, Netherlands, Austria, Finland, Portugal, and Greece in 2015. Put simply: someone, somewhere has to be willing to sell in order for the bank to have any hope of executing its plan

The problem, as several sources told Reuters last week, is that there simply aren’t a lot of willing sellers. Ironically, the ECB’s own policy maneuvers are ultimately responsible for creating this situation. That is, the fallout from previous forays into ultra accommodative monetary policy is now hampering the implementation of quantitative easing - call it the ultimate easy money paradox.

For instance, last September, the ECB cut its deposit facility rate to -0.2% in an effort to fight low inflation and encourage banks to put capital to work. Of course, this effectively eliminated one option for where prospective sellers might choose to park their proceeds should they decide to unload their EGBs to the ECB. That is, if I’m a bank, I’m not going to be too thrilled about the prospect of selling an interest-bearing asset only to turn right around and pay 20 bps for the right to hand the cash I just received right back to the buyer. The ultimate irony here is that, as mentioned above, the deposit facility rate cut was meant to counter disinflation, as is Q€. So what we’re witnessing is one deflation-fighting policy stymying another.

Another problem for the ECB is that sellers of EGBs expose themselves to the very real possibility that proceeds will have to be reinvested at lower rates. For some EGB holders, like insurers, this prospect simply isn’t feasible from a regulatory perspective. Here’s Morgan Stanley:

The biggest holders, Eurozone banks and insurers, will be reluctant sellers, given it will mean reinvesting at lower yields. If the ECB responds by pushing yields lower in an attempt to incentivise sellers, this could have an opposite effect, as lower yields could actually deter banks and insurers from selling.


Regular harvesting of unrealised gains, undertaken in part to meet life policyholder obligations, is expected to continue and may be a source of limited supply [but] our base case is that insurers will not seek to take advantage of the ECB bid and sell bonds in size, given their overriding priority to ensure as strong as possible matching of assets and technical liabilities. 

As for banks, selling to the ECB would likely have the effect of compressing NIM, exacerbating the negative effect QE already has on margins. Domestic banks are unlikely to volunteer for something that will squeeze them further when they’re already concerned about the effect ECB asset purchases will have on their bottom line. Just ask Deutsche Bank’s Anshu Jain who, less than 24 hours before Draghi’s January presser, had the following to say about Q€:

“ means very low interest rates and a real destruction of net interest margins, which of course will be a huge challenge. So the best parts of our businesses, the deposit taking and the flow franchise businesses will all suffer."

To drive the point home, here’s Morgan Stanley on why domestic banks won’t sell:

Eurozone banks own ~one-fifth of Eurozone debt (more in the south than north).


We suspect banks will be reluctant to sell because this would reduce NIMs and loan demand is yet to recover. The ongoing deleveraging in Europe may diminish banks’ capacity to sell bonds as deposit growth may continue to outpace loans.

Again we see existing easy money policies restricting the effectiveness of new easy money policies, or more accurately, the central bank’s previous efforts to drive down rates are thwarting its current plans to … drive down rates. This may well be the ultimate Keynesian boondoggle.

At the end of the day, it appears as though the ECB may need to turn its gaze outward:

We think Global asset managers have the ability to sell tactically, and may look to do so, given rich euro valuations vs. other sovereign markets. Global fixed income asset managers benchmarked to market-weighted indices have a large benchmark exposure to euro sovereigns (31% of their index), but generally have discretion to diverge from these benchmarks. As a result, they have the ability to tactically reduce their euro sovereign exposure if they think EGBs are likely to underperform other global government bonds. Syndication data show non-domestic investors, primarily asset managers, were significant buyers of euro sovereign paper in 2014, much of which we think was reducing previous underweight positions. However, we think they could be significant sellers to the ECB, given the richness of euro sovs cross market.

To summarize, the ECB will have to turn to foreign holders (who, as a reminder, ran the other direction during the height of the Eurozone crisis at the first mention of a periphery government bond) and, in yet another irony of ironies, the central bank may find some sellers there precisely because CB policy has created unsustainably rich valuations in € credit. 

1998 Redux: The World According To Bulls

It's different this time... "decoupled" "cleanest dirty shirt" "goldilocks" - oh wait!


h/t @RudyHavenstein


There's only one problem with that...


So buy Europe, right?




Nothing matters except central banks... for now.


Charts: Bloomberg

Prominent French Journalist Calls For France-Germany-Russia Alliance

With the Ukraine civil war - courtesy of the constant prodding of the US State Department - inching ever closer to an all out military confrontation with Russia, and further escalation in terms of western sanctions on the Kremlin, as well as even more acute countermeasures and retaliation by Russia, increasingly more in Europe are asking themselves the question, if not in those exact words, "if the US said to fuck the EU, then why should the EU allign with the US?"

One person doing just that is prominent and controversial French writer and political journalist Eric Zemmour, who on Friday said that France and Germany, following the historical tradition, should work on forming an alliance with Russia.

"NATO is doing its utmost to present Russia as an enemy of the West and thereby justify its existence," Zemmour wrote in Le Figaro Magazine. "Fortunately, France and Germany in due time blocked Ukraine’s accession to NATO, and that’s a positive fact," the journalist said.

"Now when they finally coordinated their positions on establishing relations with Moscow, they should not stop halfway and should move towards forming a tripartite alliance with Russia," he said, recalling numerous efforts in the past by "kings, emperors and presidents" of the three countries to set up such an alliance.

As further cited by Tass, such a bloc "will be the only chance for Europe to get rid of the United States protectorate and become, in the words of General de Gaulle, a ‘Free Europe’."

"An alliance with Russia is absolutely necessary to fight against Islamists in Syria, Libya, Iraq, Mali, Central African Republic, Nigeria, Pakistan and Afghanistan, where these extremists are trying not only to erase all the traces of a Western and Christian presence, but to pave the way for carrying the war into the European territory," Zemmour added.

Sounds crazy? Maybe, but then again just 2 years ago anyone suggesting that a Grexit is inevitable, was branded as a conspiracy theory sociopath and prepped for burning at the Brussels stake. Now, it is all but a done deal. 

So when looking at the future of Europe, will it be this:


or this:

If The Troika Says "Nein" Tomorrow, Here's What The "New Drachma" Will Look Like

While Greek officials remain 'confident' of their ability to deliver a reform package that the Troika-esque "institutions" will accept tomorrow (notably a bank holiday in Greece), it appears the Germans are not so sure. Hans Michelbach, a finance expert of the Christian Social Union, told the Handelsblatt newspaper it is "inconceivable that the German parliament can make a final decision on the bridge program for Greece before the end of February." Having already seemed to capitulate on the promises made to the electorate, and now beginning to crack down on tax evasion, we wonder how long it will be before the dreaded 'Drachmatization' occurs (by dictat or revolution).

After the cabinet council on Saturday Yanis Varoufakis told reporters...

“I am almost certain our list with the reforms will be approved by the institutions, they won’t say no. If institutions say No on Monday, there will be a eurogroup meeting on Tuesday. I hope they say Yes.”

The Greek proposals are thought as structural reforms to be legislated and implemented for the time of the “Bridge-Program”, but the "institutions" do not seem as confident...

The German parliament is unlikely to approve extending Greece's bailout before it expires at the end of the month, a senior lawmaker of Germany's ruling coalition said Sunday, according to Bloomberg...

Hans Michelbach, a finance expert of the Christian Social Union, told the Handelsblatt newspaper it is "inconceivable that the German parliament can make a final decision on the bridge program for Greece before the end of February."


The CSU is the Bavarian sister party of Chancellor Angela Merkel's Christian Democrats. The finance ministers of Greece and the other eurozone countries agreed on Friday to an extension of the bailout program for the highly indebted country, which has to be approved by the parliaments of some of the supporting countries, including Germany.


The Greek overhaul proposals must be examined thoroughly by the governments and the parliaments, and that process won't be concluded by Feb. 28, Mr. Michelbach said.

If there is a "nein" tomorrow then Tsipras has stated that he will call for an emergency Eurogroup meeting on Tuesday.

Meanwhile, as The BBC reports, as if the capitulation on promises were not enough to stir the angst-ridden heart of the Greek population, the Greek government will crack down on tax evasion and streamline its civil service in its bid to secure a bailout extension, minister of state Nikos Pappas says...

The government is working on a package of reforms that it must submit to international creditors on Monday.


If the reforms are approved, Greece will be granted a vital four-month extension on its debt repayments.


Mr Pappas said the reforms being proposed would take the Greek economy "out of sedation".


"We are compiling a list of measures to make the Greek civil service more effective and to combat tax evasion," he told Greece's Mega Channel.


He added that talks this week would be "a daily battle... every centimetre of ground must be won with effort".

*  *  *
And so, while the world appears to believe a deal is done... it remains very much in limbo at the mercy of the Germans. And in case anyone was wondering, The Greeks have already drawn up the "New Drachma" notes... just in case...

As News247 reported in 2013, the 6 banknotes (designed by Paul Vatikioti) of 50, 100, 200, 500, 1000 and 10,000 drachmas have pictures of Cornelius Castoriadis, Odysseus Elytis, Yiannis Moralis, Georgios Papanikolaou, Melina Mercouri and Maria Callas...

*  *  *

Good luck tomorrow Yanis...

Department Of Homeland Security Issues Warning After "Mall Of America" Terror Threat

First it was ruthless snow (in the winter), then we got a port blockade (caused by well-paid US workers demanding even more), and now, unveiling the last pillar of the holy trifecta of economic disappointment scapegoats, earlier today the secretary of the Department of Homeland Security, aka the "De(r)partment of Fear", Jeh Johnson said that in a video the Al Qaeda-linked terrorist group al Shabaab called for attacks on US shopping malls, specifically citing the Minnesota mall, and that the agency is taking this threat against the Mall of America “very seriously” and that people should be “particularly careful” when visiting the mall in Minnesota. It was unclear just how being "careful" would protect one from ad hoc explosive detonations and other mass murder event, but that's a bridge the Department of Fear will cross when it gets to it.

As cited by Politico, "What we’re telling the public in general is you’ve got to be vigilant,” Johnson said on CNN’s “State of the Union.” “We’ve just revamped our ‘If You See, Say Something’ campaign at the Super Bowl … Americans should still feel that they are free to associate, they are free to go to public gatherings. But it’s critical that we have public awareness and public participation in our efforts.”

In other words, don't be too scared. Just scared "enough."

“Anytime a terrorist organization calls for an attack on a specific place, we’ve got to take that seriously,” he explained, “So, through our intelligence bulletins, through working with state and local law enforcement, through working with the FBI, we take this kind of thing very seriously.”

What he really means is that the Q1 retail season - following the disaster that was the 2014 Holiday spending season as confirmed by the worst clip of retail sales data since Lehman - is an absolute disaster, and since one has to "explain" why plunging gas prices are not doing anything to boost consumer spending contrary to months of propaganda bombardment, spending that is so very critical 70% of the US economy that 7 years after Lehman still refuses to return to normal, it is time to whip out the "terrorism threat." Because who in their right minds would go shopping when some Nairboi terrorist group threatens to blow up the mecca of US spending, right?

In a statement, the Minnesota mall said, “Mall of America is aware of the threatening video that was released, which included mention and images of the mall. We take any potential threat seriously and respond appropriately. We have implemented extra security precautions, some maybe noticeable to guests and others won’t.”

Johnson said that kind of enhanced security is typical of “the environment we’re in, frankly.”

Just what environment is that?

The threat reflects “reflects the new phase we’ve evolved to in the global terrorist threat in that you have groups such as al Shabaab and ISIL publicly calling for independent actors in their homelands to carry out attacks,” he said.


“We’re in a new phase in that these groups are relying more and more on independent actors to become inspired, drawn to the cause … carrying out small scale attacks on their own, through their effective use of the Internet,” Johnson added. “So, that’s why it’s critical that we work in the communities where these groups might be able to recruit, to help develop the counter-narrative, to build trust with law enforcement, with Homeland Security, with state and local law enforcement.”

And... the punchline: "The new threat is all the more reason why Congress should fully fund the Department of Homeland Security, he said."

Ah yes, the only solution to the biggest government ever is to make it... even bigger. Because all those threats posted on YouTube clips: why somebody has to protect America's innocent, spending spree warriors.

Finally, jsut to make sure it wasn't only the US superstate that gets even bigger, the "threat" also involved Canada and the UK: according to the BBC, "the group urged followers to carry out attacks on shopping centres in the US, Canada and the UK."

Because it there is no crisis that should go to waste, the next best thing is to make one up. And speaking of global crisis, it is about time the NSA and CIA jointly put together yet another masterpiece YouTube false flag video implication Syria's as Assad in some horrific crime, thereby unleashing the final step of "Project ISIS" - the full takeover of Syria, and with it the proportional Russian response.

The "Liquidity Glut" Springs Eternal: Global Central Bank Easing Quadruples In 2015

Thanks to global disinflationary pressures driven by the savings glut, an oil glut, and universally high (peak) debt levels (crushing the transmission mechanisms of textbook economists), central planners have gone full ease-tard in 2015. From a 'balanced' 10 easing, 9 tightening bias (~1:1) in December, Morgan Stanley illustrates in the following chart there are now 16 central banks easing and only 4 with a tightening bias (4:1) as it appears the one-trick pony brigade are trying moar of what didn't work the first, second, and last times in an effort to prove this time is different...


Source: Morgan Stanley

With so many central planners piling up in the lower left corner... and global growth expectations crashing... when oh when does the world wake up to smoke and mirrors they have been witnessing and, as Marc Faber recently warned, lose faith in central bank omnipotence?

Hedge Funds Underperform The S&P For The 7th Year In A Row: Here Are Their Top Holdings

Maybe one day investors, or at least the 1%-ers, will finally grasp that in a centrally-planned world in which the central banks themselves assure that there is "no risk", there is also no point in paying billionaire hedge fund managers 2 and 20 to "hedge" away risk, since there simply is none left (at least until central bankers lose control, at which point it will be too late to hedge assets as the fiat system itself will implode).

In fact, the only strategy that does seem to work in this "NIRP normal" is to buy the stocks most shorted by the hedge funds community as sooner or later they soar on yet another inevitable short squeeze, as we first suggested back in 2012.

However, since most people are too lazy to do any work (this includes hedge funds themselves), and would rather piggy back on other people's work (such as the rating agencies back in 2005-2007) that day is still far away.

So for the time being, this is how, through February 20, the US hedge fund universe of the "smartest money" around is doing. According to Goldman, "the average hedge fund has returned 1% YTD after lagging the S&P 500 by 11 pp in 2014 (3% vs. 14%). Our VIP basket of the most popular long positions (Bloomberg: GSTHHVIP) has gained 0.2% YTD despite the strong performance of Apple, which remains the most popular hedge fund stock and continues to rise in size and popularity. Funds entered 2015 with record net long exposure of 57% and overweight positions in the Energy sector."

The key notables from the above excerpt: after trailing the S&P for 6 years in a row, the 7th is so far not proving to be the charm.


The "hedge fund hotel" underperformance is taking place despite hedge fund long exposure rising to 57%, an all time high, as shorting is no longer either an art nor a science, but merely long forgotten:


Perhaps even more troubling is that in their confusion how to generate alpha, all hedge fund managers do is participate in "hedge fund idea dinners" which has resulted in a surge in concentration to a level not seen since Lehman of the most prominent hedge fund positions. According to Goldman: "Hedge fund returns are highly dependent on the performance of a few key stocks. The typical hedge fund has an average of 65% of its long-equity assets invested in its 10 largest positions compared with 32% for the typical large-cap mutual fund, 22% for the average small-cap mutual fund, 17% for the S&P 500 and just 3% for the Russell 2000 Index."

In other words it is no longer a "hedge" fund: it is a "scrambling to come up with any original ideas here" fund.


And with near record high concentration of ideas and near record low creativity, which stock do most hedge funds love above all? What else, but AAPL. More Goldman:

Apple reigns undisputed as the most popular hedge fund stock. Nearly one in five of the 688 fundamentally-driven hedge funds in our sample own Apple; 12% hold it as a top 10 position. AAPL is the top stock in our VIP list of most popular hedge fund long positions (Bloomberg: GSTHHVIP) for the second straight quarter and has ranked among the top five VIPs for more than six years. Although interest in the stock is resurgent, at its peak popularity in 2012 nearly 33% of funds held Apple and 20% held it as a top position.


Its size and popularity means Apple will be a key driver of hedge fund returns as well as broad US equity performance and earnings growth. Apple constitutes 4% of S&P 500 market cap and 5% of consensus 2015 EPS. Given its 17% YTD return, the stock has contributed 61 bp of the S&P 500 2.3% YTD return, or 27% of the total.

And since the bulk of the AAPL upside is purely a result of financial engineering and bets that the company will issue more debt and use the proceeds to buyback stock, it is somewhat ironic that the future of equity hedge funds compensation is in the hands of debt investors, whose generosity when it comes to the next round of AAPL bond issuance, and the next, and the one after, is what will ultimately determine not just the average return of hedge funds in 2015, but of the S&P500 itself.

Which brings us to the question on everybody's mind:

what are the most widely held stocks by "hedge" funds? Here is the answer:


But why bother with the longs? After all since 2012 it has been the most shorted names that have outperformed the hedge fund hotel, as has been duly noted before.  To be sure, Goldman's "Very Important Short" basket has outperformed not only the "Long VIP" Basket, but the S&P500 itself!


As such it continues to be far more useful, not to mention profitable, to focus not on what hedge funds are most long, but going long the most shorted names for yet another year.

Here is the full list:

China's "Barely Noticed By The West" Pivot To Everywhere

Authored by Pepe Escobar, originally posted at,

The world’s leading economy is on a roll as it enters a new year in the Chinese zodiac. Welcome to the Year of the Sheep. Or Goat. Or Ram. Or, technically, the Green Wooden Sheep (or Goat).

Even the best Chinese linguists can’t agree on how to translate it into English. Who cares?

The hyper-connected average Chinese – juggling among his five smart devices (smartphones, tablets, e-readers) – is bravely advancing a real commercial revolution. In China (and the rest of Asia) online transactions are now worth twice the combined value of transactions in the US and Europe.

As for the Middle Kingdom as a whole, it has ventured much further than the initial proposition of producing cheap goods and selling them to the rest of the planet, virtually dictating the global supply chain.

Now Made in China is going global. No less than 87 Chinese enterprises are among the Fortune Global 500 – their global business booming as they take stakes in an array of overseas assets.

Transatlantic trade? That’s the past. The wave of the future is Trans-Pacific trade as Asia boasts 15 of the world’s top twenty container ports (with China in pride of place with Shanghai, Hong Kong, Shenzhen, Guangzhou).

Sorry, Britannia, but it’s Asia – and particularly China – who now rule the waves. What a graphic contrast with the past 500 years since the first European trading ships arrived in eastern shores in the early 16th century.

Then there’s the spectacular rise of inland China. These provinces have a huge population of at least 720 million people and a GDP worth at least $3.6 trillion. As Ben Simpferdorfer detailed in his delightful The Rise of the New East (Palgrave MacMillan), “over 200 major Chinese cities with populations greater than 750,000 lay some 150 miles inland from the coast. In effect, we are observing the rise of the world’s largest landlocked economy, and that will change the way China looks at the world. From Guangzhou’s factories to Shanghai’s bankers, all are starting to look inward, not outward.”

This new way China looks at the world – and at itself - certainly has not registered in the way the world, especially the West, looks at China. In the West, the spin is always about China’s economy slowing down and bubbles about to burst. The real story is how China will develop and modernize its mid-and-large sized cities with populations larger than 750,000. China concentrating on itself is now as important as China spreading its tentacles across the world.

This is what’s at the heart of Beijing’s breathless “urbanization drive.”

During the 1990s, the imperative was massive investment in manufacturing. During the 2000s, the buzzword was massive investments in infrastructure - and a property boom. Now China is tweaking its model – from large-scale economic restructuring to absolutely necessary improvement of political governance.

Meet our new best friends

Geopolitically, China has also tweaked its model, but the West, especially the US, has barely noticed it.

Essentially, the Beijing leadership finally got fed up with trying to manage a possible reset of the China-US strategic relationship, and be treated as an equal. Exceptionalists don’t do equality. So Beijing came up with its own response to the Obama administration’s political/military “pivot to Asia” – originally announced, and that’s quite significant, at the Pentagon.

Thus, in late November 2014, during the Central Foreign Affairs Work Conference in Beijing, President Xi Jinping made an earth-shattering announcement; from now on China would stop treating the US – and the EU – as its main strategic priority. The new focus is on the fellow BRICS group of emerging powers, especially Russia; Asian neighbors; and top nations of the Global South, referred to as “major developing powers” (kuoda fazhanzhong de guojia).

This is not as much a Chinese pivot to Asia as a Chinese pivot to selected nations in the Global South. And based on a “new type of international relations centered on ‘win-win’ cooperation” – not the bully-or-bomb exceptionalist approach.

Key advisors of this policy should include Professor Yan Xuetong, Dean of the Institute of Modern International Relations at Tsinghua University, and very close to the Chinese Communist Party (CCP) intelligentsia.

China’s new foreign policy and strategic configuration is all the more evident in the courting of Asian neighbors, invited to embark on China’s extremely ambitious twin strategy and the greatest trade/commerce story of the young 21st century: the Silk Road Economic Belt and the 21st Century Maritime Silk Road, in short “Belt and Road initiative,” as it’s known in China, now officially launched with the first $40 billion attributed to a Silk Road Fund.

The enormity of the challenge is on a par with Beijing’s ambition: a pan-Eurasia trade/commerce utopia weaved by high-speed rail, fiber optic networks, ports and pipelines, and connecting East Asia, Central Asia, Russia, the Middle East and Europe.

Of course there will be myriad problems. As in the Chinese commercial push clashing with foreign interests; China having to learn on the go how to manage different cultural sensibilities; and how to coordinate a sort of global trade campaign capable of creating myriad of political and economic effects. The Chinese are already worried about finding the right terminology - so the Chinese dream, internally and globally, won't be lost in translation.

Plenty to be excited about then as the Year of the Sheep (or Goat) starts. What’s certain is that the Chinese caravan, much in contrast with the dogs of war - and austerity – pivoting across the West, has already pivoted towards “win-win” pan-Eurasia integration.

*  *  *

Pepe Escobar’s latest book is Empire of Chaos.

For The First Time Since Lehman, Full Year S&P 500 Revenues Are Projected To Decline

A lot can change in less than two months apparently: it was just on December 31, 2014 when deep in the crude-oil rout the sell-side community was still predicting solid EPS growth of 8.20%. Just 7 weeks later, on February 20, consensus opinion as summarized by Factset, now anticipates EPS to collapse by two-thirds, as S&P 500 earnings (non-GAAP) are now expected to rise by just a fraction, a tiny 2.80%, in all of 2015 (and decline on a non-GAAP basis, but for now nobody cares about actual numbers for the time being).


And while the chart above gets undeserved credit from extensive "one-time" and various other non-GAAP adjustments, not to mention projections for even more margin expansion, i.e., mass layoffs which will continue to be masked by the BLS in seasonal-adjustments until one day the massive retroactive BLS revisions confirm that there was actually no job growth in 2015 and probably in 2014, it is the revenue growth that has finally turned a historic corner, because while on the last day of 2014 there was still some hope that S&P500 sales will still grow even if at a very muted pace, as of Friday - for the first time since Lehman - full year revenue growth is now projected to turn negative!


As noted above, this is the first negative revenue inversion since Lehman:


It gets worse: while we showed yesterday that the median EV/EBITDA multiple of the S&P500, having just crossed 11.0x is the highest in history, now Factset observes that even on a simple P/E basis, the market is more overbought than during the entire housing bubble period of 2005-2007, and at 17.1x, forward PEs are the highest since 2004.

From Factset:

The forward 12-month P/E ratio for the S&P 500 now stands at 17.1, based on yesterday’s closing price


(2097.45) and forward 12-month EPS estimate ($122.72). Given the high values driving the “P” in the P/E ratio, how does this 17.1 P/E ratio compare to historical averages? What is driving the increase in the P/E ratio? The current forward 12-month P/E ratio of 17.1 is now well above the three most recent historical averages: 5-year (13.6), 10-year (14.1), and 15-year (16.0).


In fact, this week marked the first time the forward 12-month P/E has been equal to (or above) 17.1 since December 31, 2004. On that date, the closing price of the S&P 500 was 1211.92 and the forward 12-month EPS estimate was $70.79.


Back on December 31, the forward 12-month P/E ratio was 16.2. Since this date, the price of the S&P 500 has increased by 1.9% (to 2097.45 from 2058.90), while the forward 12-month EPS estimate has decreased by 3.3% (to $122.72 from $126.90). Thus, both the increase in the “P” and the drop in the “E” have driven the increase in the P/E ratio to 17.1 today from 16.2 at the start of the first quarter.


It is interesting to note that despite the decline in the forward 12-month EPS  estimate for the S&P 500 over the past few weeks, analysts are still projecting record-level EPS for the S&P 500 in the 2nd half of 2015 (please see page 25 for more details on EPS estimates). If not, the forward 12-month P/E ratio would be even higher than 17.1.

Once we approach the second half of the year, and there is no revenue projection, expect full-year EPS forecasts to crumble, pushing the P/E multiple as high as 20x, both on a GAAP and non-GAAP basis at which point drinks are on David Tepper.

Meanwhile the market... well, just don't show this chart to the stock-trading desk on the 9th floor of Liberty 33.

India Cuts Its Gold Import Tax – A Smart Move

In a surprise move, the Trade Ministry in India has introduced a proposal which would see the import duty on gold being reduced by 80% from 10% to just 2% . This is the same tax rate which was used until a few years ago when the Indian government decided to gradually increase the import tax to fill the government’s treasury again. This resulted in the total import of gold to drop by approximately 50%, so the big question will be whether or not the reduced tariff will incentivize the purchase of more gold again.

The trade ministry thinks the reduction of the import tariff will boost the jewelry sector in the country as the jewellers would be incentivized to purchase more gold for finer end-products. The goal seems to be to make India one of the world’s centers for gold jewelry. Another advantage would be the fact the government would spend less efforts fighting the illegal smuggling of gold and this manpower could be deployed in sectors/situations with a higher priority.

Obviously the main question we would ask ourselves is ‘Will this have an effective impact on the gold imports in India? And if so, can we quantify the impact?’. According to research from the French commodity-focused company Natixis, India imported just over 500 tonnes of gold in 2014 which was a sharp decline compared to the 716 tonnes in 2013. This reduction was mainly caused by the ever-increasing import duties as well as the weak Indian Rupee (which was actually good for the company main export sectors). As you can see on the next chart, the value of the Indian Rupee decreased quite fast.

Chart: USD/INR exchange rate

Even though there surely will be an uptick in the ‘official’ gold demand, it’s too early to estimate the true impact of this lower import tariff. However, the official import numbers will very likely show a stellar performance in 2015 should the proposal become law. As of this moment roughly 200 tonnes of gold were illegally imported into India last year, of which a large part is coming in through neighboring country Bangladesh where smuggling stories are being published quite often.

The reduced tariff will incentivize buyers to prefer the ‘legal’ import route as a 2% tax is negligible and not enough to warrant taking the risk of smuggling gold into the country. So whilst the legal import numbers will show a nice increase in the amount of imported gold, it’s too early to be optimistic as we expect it will simply reflect a shift from the illegal gold import numbers to the legal import numbers whilst the total effective demand will remain stable. However, there will be a spillover effect on the retail demand in India as people will now be able to buy 8% more gold for the same investment. So even though we aren’t expecting huge shifts on the jewelry-level, the demand from retail buyers will very likely increase. Not in a 1 on 1 ratio, but more like a 2:1 ratio and the retail demand could pick up by as much as 5%.

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Greek Infighting Begins After Historic Syriza Member Slams Agreement, Apologizes For "Contributing To Illusion" Of Change

As the divergence between Syriza's leadership perspective on debt talks - "success...won the battle" - and the Greek voters - "It looks to me that nothing has changed" - grows ever wider, and on the heels of apparent near mutiny last week, there is growing division in the ranks of the newly elected party. Syriza MEP Manolis Glezos penned a stunning rebuke of the party's apparent U-turn and asks his electorate for forgiveness... "there can be no compromise between oppressor and oppressed... Pity, and pity again... I apologize to the Greek people because I have contributed to this illusion... before it is too late, let us react!" 

In an article uploaded on the website of his Movement for Active Citizens, Keep Talking Greece notes Manolis Glezos - the historic member of the Greek left (best known for his participation in the World War II resistance) - expresses his deep disappointment about the way Syriza handles with the negotiations and calls for party members to decide if they accept this situation.

Via Manolis Glezos' Movement for Active Citizens website (via Google Translate):

“Renaming the Troika into Institutions, the Memorandum of Understanding into   Agreement and the lenders into partners, you do not change the previous situations as in the case renaming meat into fish.


Of course, you cannot change the vote of the Greek people at the elections of January 25, 2015.


The people voted in favor of what SYRIZA promised: to remove the austerity which is not the only strategy of the oligarchic Germany and the other EU countries, but also the strategy of the Greek oligarchy.


To remove the Memoranda and the Troika, abolish all laws of austerity.


The next day after the elections, we abolish per law the Troika and its consequences.


Now a month has passed and the promises have not turned into practice.


Pity. and pity, again.


On my part, I APOLOGIZE to the Greek people because I have contributed to this illusion.”

He then goes on to call for action...

Before it is too late, let us react.


Syriza members, friends and supporters at all levels of organizations should decide in extraordinary meetings whether they accept this situation.


Some argue that to reach an agreement, you have to retreat. First: there can be no compromise between oppressor and oppressed. Between the slave and the occupier is the only solution is Freedom.


But even if we accept this absurdity, the concessions already made by the previous pro-austerity governments in terms of unemployment, austerity, poverty, suicides have gone beyond the limits.

As KeepTalkingGreece reports, to Glezos’ sharp criticism, Syriza reacted rather cool and with respect to the senior veteran.

Government sources commented that “most probably Glezos is not well informed about the tough negotiations.”


However, the article triggered a vivid exchange of ‘verbal attacks’ on internet with opposition parties supporters  -mainly pro-austerity – to mock Syriza ‘that even Glezos admitted you named the meat fish”.

Somewhere the leaders of the last Greek party that promises "change", the neo-fascist Golden Dawn, are grinning.

Commercial Traders Are The Most Long 30Y Treasuries In A Year

Via Gavekal Capital blog,

Over the last five years the signal given by investor positioning in options and futures contracts on the 30-year treasury bond has proven prescient. Each time commercial traders have moved to a long position in the long bond rates have been near a peak. Over the last few weeks the commercials have shifted their positioning dramatically, moving from one of the largest short positions to a net long position for the first time in almost a year.



If history is a guide then we may be near an intermediate term peak in rates.

After Spike In Earthquake Activity , New Fukushima Leak Sees 70x Increase In Radiation

It has been a disturbing week for Japan, not due to any recent economic calamity resulting from Abenomics, but because for the first time since the catastrophic 2011 earthquake, the nation has been rocked with a series of ever stronger tremors, with two 6.0+ stronger quakes recorded in just the past 2 days:

The quakes come at an awkward time, just a few short months before Japan's government aims to restart its first nuclear reactor by around June, following the Fukushima devastation.

While it is unclear if it is directly related to the recent surge in tectonic activity, overnight another radioactive water leak in the sea was detected at the crippled Fukushima nuclear plant, the facility’s operator TEPCO announced. Contamination levels in the gutter reportedly spiked up 70 times over regular readings.

The levels of contamination were between 50 and 70 times higher than Fukushima’s already elevated radioactive status, and were detected at about 10 am local time (1.00 am GMT), AFP reported. After the discovery, the gutter was blocked to prevent leaks to the Pacific Ocean.

As RT adds, throughout Sunday, contamination levels fell, but still measured 10 to 20 times more than prior to the leak. "We are currently monitoring the sensors at the gutter and seeing the trend," a company spokesman said.

He did not specify the cause of the leak.

Tepco being Tepco, it decided to be extra generous with the lives and safety of any citizens around the blast site, and in yet another attempt to avoid panic, reported the latest batch of radioactive propaganda:

No contaminated water leakage has been confirmed at Fukushima Daiichi NPS; however,radioactive data has temporary risen at the drainage.

— TEPCO (@TEPCO_English) February 22, 2015

There was one problem what that euphemism:

What @TEPCO_English tweets on #Fukushima-1 did not say is sensors detected levels 50 to 70x > already-high radioactive level there. #nuclear

— Steve Herman (@W7VOA) February 22, 2015

The euphemisms continue: "It has proved difficult for TEPCO to deal with plant decommissioning. Postponed deadlines and alarming incidents occur regularly at the facility. Earlier this week, the UN nuclear watchdog (IAEA) said Japan had made significant progress, but there is still a radioactive threat, and a “very complex” scenario at Fukushima."

So while Tepco not only has no idea how to proceed with the toxic cleanup at the Fukushima site 4 years after the explosion having scrapped its idiotic "ice sarcophagus" idea a year ago, and continues to scramble to push the illusion that it is on top of the situation - one which any earthquake threatens to unravel with devastating results - Japan is already preparing for its next epic catastrophe, when it proceeds to launch even more nuclear power plants in the coming months. Then again, once Japan suffers the next and final Fukushima-type event and the endgame for doomed nation arrives, at least the government can "blame nature" for finally destroying the country, deflecting attention from years and decades of failed economic policies.

Three Questions to be Answered this Week

The Greek issue has been sufficiently resolved for now that investors' focus will shift elsewhere in the week ahead.   The answers to three questions will dominate the market's attention.  


  * How strong are the deflationary forces?

  * Are the cyclical recoveries still intact?

  * What is the outlook for Fed policy? 


The January inflation readings from the US, EMU and Japan will be released in the coming days.  The euro area preliminary data has already been reported.  This week's report is expected to confirm the -0.6% year-over-year headline rate and a 0.6% core rate.   


Germany and Spain will offer preliminary February readings.  Both are not expected to deviate much from the January pace of -0.5% and -1.5% respectively.  The monetary response, the ECB's accelerated asset purchase plan, which will include sovereign bonds, will be launched next month.  


Even if the ECB's bond buying program can be successfully implemented, for which there is increasing skepticism, it is not clear that it will boost inflation.  The BOJ's balance sheet is expanding by 1.4% a month.  In the H1 15 it will expand by more than the ECB's over 18-month initial projection.  Yet, it is not clear that Japan has slayed its deflation demon.   When allowances are made for the retail sales tax increase last April, Japanese CPI is barely positive.  Neither the nation's January report nor Tokyo's February report is expected to change much from the previous readings.  


Headline US CPI is expected to slip into negative territory (-0.1%) on a year-over-year basis, with a 0.6% decline in January alone.  Such a report will likely spur speculation that the Fed cannot raise interest rates with a negative headline inflation.  However, the key for policy makers is not headline inflation.  They accept that the dramatic decline in energy prices dampens inflation, but its impact on prices is transitory.  By this time next year, the bulk of the impact will be dropped by the base effect.  The core rate, which in the US excludes food and energy, is more stable and is expected to be unchanged from the 1.6% paces seen in December.  


The cyclical recoveries in the euro area and Japan continued into the early part of this year.  Perhaps encouraged by strong December exports (17% year-over-year), Japan's industrial production is forecast to have risen by 3% in January.  Output rose 0.8% last December and 1.0% in November.


New data from the euro area is thin next week.  Outside of the inflation reports, the other two reports that will confirm the cyclical recovery.  First, Germany's IFO business survey is expected to rise for the fourth consecutive month.  Second, money supply growth (M3) has begun strengthening, and this is expected to have continued.  The same can be said for bank lending.


Apart from the housing market, which has continued to disappoint, the main new information from the US will be durable goods orders.  The January orders are expected to have increased for the first time since last October.  A modest 1.6% increase is expected after last December's 3.4% drop.  


New from the world's second largest economy may not be as favorable.   The February PMI readings will be reported this week.  The risk is on the downside.  The economy is in a transition and growth has slowed.  This should not be exaggerated.  Chinese officials appear to believe that within reason, this slowing is acceptable and "natural" given the labor force dynamics. It also allows a catching of the collective breathe and reducing some excesses as it continues its quest for "the China dream" (doubling GDP and GDP per capita between 2010 and 2020).


From a global point of view, even assuming 6 3/4% growth this year, China will contribute about $660 bln to the world economy.  This still outstrips the US.  Making a generous assumption of 3% growth this year, the US economy will contribute around $520 bln to the world economy. 


Some link the likely downward revision in Q4 US GDP to below 2.0% from 2.6% and the fact that Q1 15 growth is looking soft (2.3-2.5%) to the dovish January FOMC minutes.  We suspect this is a mistake and expect Fed Chair Yellen to correct this impression in her testimony before Congress.  


What resonates with the Fed is not GDP, which as we all know is a flawed measure, but the fact that personal consumption rose 4.3% in Q4, the strongest in more than a decade.  Moreover, for those concerned about debt-financed consumption, revolving credit has barely grown. What will resonate with the Fed is that in the last three months the US created over a million jobs for the first time in nearly 20 years.  


The leadership at the Federal Reserve had led many to expect a mid-year lift off.  However, doubts have grown, and this has corresponded with a consolidative phase for the dollar.  After the FOMC minutes, the December Fed funds futures contract implied an average effective rate of less than 50 bp.  Although the market corrected this view a little before the weekend, we expect Yellen make it clear the Fed's patience is not limitless.   A hike, not today or tomorrow, but four months from now is still reasonable.  


The way the Fed communicated its tapering decision was effective and appears to be deployed again. Tell the market what you are thinking about doing.  Offer some time frame.  Give investors plenty of time to adjust.  The timing is data driven, but it is not completely unpredictable. Finally, execute.   


The Fed rightfully did not let the economic contraction in Q1 14 distract it from its tapering strategy, despite the appeal of many.   It understands that the recent slowing follows a well-above trend six month growth (April-September) that is partly being corrected now.  Even the expected downward revision to Q4 GDP is not all negative, as the downward revision in inventories suggests tat some of those excess being absorbed.  


The Fed's leadership has been preparing the market gradually for a change in US monetary policy. The emergency settings that were so necessary in the darkest days are no longer needed.  To be sure, the economy is not firing on all cylinders, but no one is really talking about a dramatic increase in interest rates.   


Look for Yellen to be patient with US Congress as she explains why the Fed's patience with emergency-level rates may be drawing to a close, and that this is a constructive sign.  It is also through this lens that Yellen will likely address questions about the dollar.  The exchange value of the dollar is one of the factors taken into account in assessing the monetary conditions.  


It is true that all else being equal a rise of the dollar on a broad-traded weighted basis adjusted for inflation will dampen growth.  However, all things are not equal, and the strength of the dollar has been offset by the decline in interest rates and oil.  The dollar's strength is a reflection of the relative performance of the US economy.  Of course, part of the dollar's rise has been fueled by expectations of a Fed hike.  Such anticipation will not be an important hurdle to the decision to hike rates later.