The gold market has always been partial to “carry trades”. But in the post 2008 world the nature of the carry-trade has changed.
In collateral terms, whereas gold mostly traded on “special” terms before 2008 — because you had to pay to borrow it — meaning it was privy to more of a “stock lending” profile, post 2008 it went fully into “collateral” mode. Read more
We thought the following from TD Securities’ Richard Gilhooly on Tuesday was a rather insightful way of looking at the whole BoJ effect (our emphasis):
While it remains a contentious point and as yet unproven, Japan’s devaluation and soaring Nikkei vs slumping DAX or Bovespa has all the hallmarks of a competitive devaluation. While competing factions debate the Monetary expansion/QQE, versus beggar-thy-neighbour interpretation, one positive aspect of the Japanese Yen collapse and fear of exported deflation has been collapsing commodity prices with weak growth in export countries (China, Germany, S Korea) and a stronger USD helping a supply story (crude inventories at 22yr highs) and weak demand send commodities into a bear market.
Thursday’s 5-year US Treasury TIPS auction was something of a noteworthy one, according to Kit Juckes at Societe Generale. Click to enlarge…
Well, some of them at least. One of the big determinants of whether ‘Abenomics’ manages to pull Japan from its deflationary spiral is through wage growth. Inflation can’t really kick off or arguably even begin without rising wages. One can argue about how important wage growth is, or where it fits in causality-wise — and we’ll come to that later. But it is — or will be — an important signal as to whether this three-pronged approach of the new-ish Japanese government is working.
And actually, it might be catching on. Read more
“Whatever we can”, you say? Encouraging words from BoJ governor nominee Kuroda over the weekend (even if comparisons with Mr Draghi are overblown). If Cullen Roche is correct, what happens in Japan over the next year or many could change the future of economic policy. So it’s worth spending a bit more time on what Kuroda’s “can” might actually be.
We’ve argued already that much of the low-hanging fruit of expectations and verbal intervention has already been plucked. Read more
Dario Perkins at Lombard Street Research has a great little note out on Tuesday arguing why it’s absolutely wrong to assume the current bond sell-off is in any shape or form a repeat of 1994.
As he notes (our emphasis): Read more
Abenomics: it’s as divisive as it is fun to say.
We should start this round with Adam Posen, who used to sit on the Bank of England’s Monetary Policy Committee and penned an Abenomics op-ed in the FT on Wednesday. Read more
The following chart, we propose, has the potential to inspire a whole new way of looking at the gold and Treasury market:
The Bank of Japan’s unprecedented joint statement with the Japanese government after the central bank’s October meeting raised eyebrows around the world. The BoJ was already widely seen as having come under increased political pressure in recent months as the country’s economy had slowed; so what did the joint statement mean?
The statement contained a couple of key declarations: “The Bank strongly expects the Government to vigorously promote measures for strengthening Japan’s growth potential”, and “The Government strongly expects the Bank to continue powerful easing as outlined in section 2 until deflation is overcome.” Read more
We introduced our Rubiks QE analogy on Tuesday. This post is a continuation, in which we apply the analogy to the crisis so far.
Before we go on we should point out that the Rubik’s is a simplification, as are the concepts of “tomorrow money” and “today money”. There are and will always be areas that call for further explanation, but which we haven’t covered in this post. If they’ve been left out, it’s mostly due to post-length constraints. It’s not because we are wilfully ignoring them. Read more
Last week FT Alphaville drew attention to the fact that HSBC had joined the cohorts of the “don’t call QE money-printing” brigade. We thought this was great progress for the mainstream analyst community.
Moreover, we thought their explanation was really good. Read more
“Mad. Mad. Mad. Bernanke’s gone totally MAD, I tell you!”
“What’s he thinking with QEternity? It’s so inflationary. AGHH!” Read more
For all the talk of heightened inflation expectations on the back of QE3, Morgan Stanley analysts remain unconvinced.
The truth, according to them, is that central bank action is having less than its desired effect. In fact, inflation expectations have remained well behaved if not subdued. Read more
US 10-year Tips breakeven rates are surging, and talk of a revival in inflation expectations is, understandably, doing the rounds.
But we’re not entirely convinced that it is that simple. Read more
Earlier this week Paul Krugman went out of his way to point out that if China stopped buying US bonds, it wouldn’t be the end of the world.
We wanted to come back to some of his points, because well, we think they are pretty good. Read more
By now, everyone is familiar with the mantra that QE is [arghh!] money-printing and that a major unintended consequence could be a chronic and uncontrollable inflation. (One could call this the goldbug, Austrian, Republican case).
Less well known, perhaps, is the theory that QE could be just as unexpectedly deflationary — because long-term micro yields come to threaten a number of financial sectors outright, as well as general expectations of risk-free returns which lead to capital destructive feedback loops. Read more
FT contributing blogger Gavyn Davies recently wrote about the impact of what he called a disaster risk premia on bond yields — something the FT’s Gillian Tett has also followed up on here.
In both cases, the authors suggest that bond yields have disconnected from credit derivative valuations — not because the derivatives are incorrectly priced, but because bonds now feature an embedded risk premium. Goodbye risk-free. Read more
Okay. It’s true. We’ve become slightly obsessed with negative yields at FT Alphaville. Especially with regards to what they signify for the financial industry.
Though, for a long time we’ve felt very much alone with this obsession. Weirdly enough, nobody else has seemed too bothered about it. (Note, we even had to go to the ECB directly to ask Draghi what he thought about it.) Read more
Low yields in the context of epic supply may baffle some people, but not UBS’s Chris Lupoli.
Lupoli, part of Global Macro Team, seems, if anything, to subscribe to our negative carry shift theory — the idea that a more permanent curve transformation may be under way. Read more
Presenting an economic journey in felt, looking at whether the system’s ails have more to do with an abundance of goods than a shortage of credit because of the system’s technological advances and efficiencies. Move ahead to slide 20 for a snapshot of where we *think* we are today.
1) The water source. Read more
Just when you thought no more could be written about collateral, shadow banking and repo, Manmohan Singh and Peter Stella come together to bring us a new paper on the core essence of money and collateral.
The story so far: the world has been plagued by a shortage of safe collateral and an over-dependence on shadow-bank funding, all of which has led to a breakdown in repo markets and secured funding, which is having more of an effect on financial markets than many first anticipated. Read more
Ah, the elusive liquidity trap. Does it exist? Is it here? And what does it mean for monetary policy?
Those are critical questions which are not currently being addressed by policymakers, according to a new paper by Paul McCulley and Zoltan Pozsar, presented at the Banque of France on March 26. In fact, many policymakers, they say, are still under the mistaken belief that no such thing as a liquidity trap exists. Read more
This’ll be a controversial argument about the Bank of England’s buying of UK government debt, we know… but it comes from Philip Rush of Nomura:
Aggressive quantitative easing brings [gilt] market capacity constraints into play. A renewed intensification of the sovereign debt crisis could cause this should one of QE’s reverse auctions fail. Tweaking maturity buckets or adding linkers could cure the constraints… Read more
The share edition that is…
Mohammed El-Erian has penned a few thoughts about Germany’s negative yielding bubill auction and indentifies — quite rightly — that there are major risks associated with this precedent.
Ultimately, as FT Alphaville has also argued, a negative yielding regime of this sort could bring about exactly the sort of voluntary capital destruction conditions that turned the 1930s crisis into a depression. Read more
In Shakespeare’s Merchant of Venice, an embittered money-lender, Shylock, famously forfeits interest on a loan he makes to merchant Antonio for a right to claim a pound of his flesh if the loan is defaulted upon.
Antonio agrees to the terms since he is confident that a valuable cargo will arrive long before the loan needs to be repaid. Read more
The Swiss National Bank said it would maintain its 1.20 floor on the franc per euro on Thursday, knocking back speculation it would move to weaken the currency further, Reuters reports. The central bank added that it would be prepared to take further action at any time if risks to the economy mount. In its growth forecasts for next year and the central bank predicted only slightly falling prices – leaving analysts divided over whether a rise in the franc cap was likely early in 2012. According to Bloomberg, Swiss central bank President Philipp Hildebrand said he was ready to act if deflation risks emerged. The central bank also maintained its benchmark interest rate at zero. The SNB has defended the limit for three months without a breach after pledging to buy “unlimited” quantities of foreign currency, notes Bloomberg. Read more
Crystal-ball charts via Mark Cliffe of ING (click to enlarge):
Is QE money printing, or not? That is the question.
Is it hyperinfaltionary, or not? That is another question. Read more