EurAnalysis

At an Impasse in Davos, Europeans Plan Pilgrimage to Beijing
January 29, 2012 • 8:35AM

The news wires coming out of the annual Davos World Economic Forum not surprisingly give a picture of a stalemate over a "solution" to the European financial crisis, complete with attacks on Germany for not agreeing to the huge "wall of money" that the British, the IMF, and the U.S. insist must be provided, in order to "save" the euro zone (read, the Inter-Alpha and money center banks).

Threats about how the ongoing crisis would spread to the world were rampant. Exemplary is this statement from Donald Tsang, chief executive of Hong Kong: "I've never been as scared as now about the world. ... We do not know how deep this hole would be when the whole things implodes on us." "The euro zone is a slow-motion train wreck," said Nouriel Roubini, who forecast Greece would be leaving the euro zone "this year."
Meanwhile, EU officials are trekking off to China, hat in hand. Klaus Regling, head of the European Financial Stability Fund, visited China, Japan, and other wealthy countries last week, but failed to get any firm commitments, according to China Daily. This coming week, Angela Merkel is scheduled to visit China as well.

Meanwhile, U.S. Treasury Secretary Tim Geithner took the occasion of Davos to further bash the Chinese for not totally submitting to the (British Empire's) international markets on currency and other matters. Geithner's apparently too insane to understand that he is growling at the U.S.'s largest creditor.

Stay Tuned...

http://blogs.barrons.com/stockstowat...ogle_news_blog

http://www.marketanthropology.com/20...-normalcy.html

http://www.prudentbear.com/index.php...w?art_id=10625

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It Should Be Read...

Policy Deserving of a Rant

 

1. by Doug Noland
2. January 27, 2012

It has been labeled an intellectual exercise and ridiculed as “intelligentsia.” I’ll stick defiantly to the view that it remains one of the most important issues of our time: Are the Treasury and government-related debt markets part of a historic Credit Bubble and global financial mania?

There are reasons why Jean-Claude Trichet over the years repeatedly stated “the ECB would never pre-commit” on interest-rate policy. The Federal Reserve this week moved further to the opposite polar extreme, essentially pre-committing to near-zero rates through late-2014. The ECB has historically believed that market speculation based upon future policy expectations works to foment market excesses, imbalances and attendant fragilities. In contrast, the activist Federal Reserve believes that it has a fundamental obligation to intervene and manipulate to achieve market outcomes the committee believes will spur growth.

Unprecedented operations back in late-2008 took the Fed’s balance sheet from about $900bn to $2.2 TN. We were assured that the Fed had an “exit strategy.” I’ve always presumed “no exit,” and here we are today with Fed holdings at $2.9 TN. The economy is expanding, financial markets are strong and consumer price inflation is rather undeflationary – yet Dr. Bernanke is again signaling he is prepared for additional monetization.

The Fed has for years operated with the premise that aggressive “Keynesian” stimulus has been necessary to stabilize a system hamstrung by post-Bubble headwinds. I’ve for as many years argued that the problem was being dangerously misdiagnosed. From my perspective, it has been much more a case of ongoing misguided “inflationism” sustaining history’s greatest Credit Bubble. And history is unequivocal: inflationism has an end-game problem. Again, it is analysis easily dismissed, although I am nonetheless convinced it will go a long way in determining what kind of world we and our children have to look forward to.

While I was chronicling the emergence of the mortgage finance Bubble back in 2002, Fed Governor Bernanke was crafting the Fed’s case for novel reflationary policymaking. Mortgage Credit was already expanding at double-digit rates when Dr. Bernanke introduced his intellectual basis for the government printing press and helicopter money. The subsequent decade, replete with a historic Credit boom and bust, has seen radical monetary policy doctrine become the mainstream. But didn’t the policy experiment fail miserably?

Accommodating gross mortgage Credit excesses in the name of system reflation is one of the greatest blunders ever committed in monetary management. The Fed has not been held accountable – either in terms of a seriously flawed analytical framework or the associated policy mistakes.

Instead, the Bernanke Fed has become only more radical and domineering in the markets. Public confidence and trust in the Federal Reserve have suffered mightily, yet this has thus far had no impact. Importantly, the power players in political circles and the securities markets have benefited tremendously, ensuring ongoing support for the Fed’s controversial reflationary policy course. The financial mania has reached the point where the completely unreasonable is accepted as perfectly reasonable.

The housing Bubble was obvious, or at least this has become the commonly held view. As someone who chronicled the Bubble on a weekly basis for a number of years, I have a clearer view of how things went down. There was actually tremendous hostility for Bubble analysis. I was “lunatic fringe.” The analysis that the GSEs, mortgage insurers and sophisticated Wall Street debt structures were part of a historic episode of “Ponzi Finance” did not resonate. And the more conspicuous the mortgage finance Bubble became, the more elaborate the arguments against the Bubble thesis.

Chairman Greenspan became fond of arguing that housing markets were local and, hence, the notion of a national housing Bubble was misguided. I often wondered if the king of all economic data ever took a glance at the Fed’s Z.1 “flow of funds” report. The Greenspan/Bernanke Fed fashioned “white papers” and such explaining how it was impossible to recognize a Bubble until after it burst. To them, the proper and prudent policy course was to avoid the risk of intruding on prosperity and functioning markets, being ready instead to implement a “mopping up” strategy in the event such measures were ever required. It was the ridiculous bordering on negligence.

When it comes to Credit and Bubble analysis, the Fed has proven itself incompetent. After the Fed-induced steep yield curve from 1991 to early-1994 fomented a destabilizing speculative Bubble, they should have focused keenly on how their policy measures were inciting leveraging and speculation. After the 1995 Mexican bailout further emboldened speculative excess and fomented the catastrophic Bubble throughout SE Asia (and beyond), policymakers should have been fixated on the risks associated with destabilizing “hot money” flows, derivatives and a ballooning global “leveraged speculating community.” After the LTCM fiasco, the danger was conspicuous. It was also conspicuously apparent that the LTCM bailout and the Federal Reserve market backstop were instrumental in inciting the tech Bubble. And the Fed’s response to that burst Bubble was integral to the scope of the mortgage finance Bubble.

As obvious as this chain of cause and effect has been, the Fed dogmatically refuses to have any part of such analysis.

I have seen overwhelming support for the “global government finance Bubble” thesis. Fiscal and monetary policy has been out of control for going on four years now. And with parallels to the mortgage finance Bubble, the more prolonged the Bubble period the more dismissive the crowd becomes to the notion that they might be participants to a manic Bubble. That’s ok. As an analyst of speculative Bubbles, I am well aware of the nuances. Objectively, it is possible to recognize Bubble dynamics in real time. Realistically, however, it is the nature of things that this analysis will be dismissed and disparaged. As I’ve written in the past, “Bubbles tend to go to unimaginable extremes - and then double!” I am comfortable with the analysis that we are in the late stage of a historic global financial mania.

Let’s talk a little Bubble analysis. First of all, most that use the term “Bubble” are implying an imminent bursting. I subscribe to a different analytical framework. The baseline assumption, especially in today’s extraordinary global financial and policy backdrop, is that Bubbles will enjoy momentum and longevity. Anchorless global finance and incredible policy activism will tend to support ongoing (compounding) excess. My thesis further holds that the global government finance Bubble is the “granddaddy” – the crescendo Bubble that will conclude this Credit cycle. Students of previous monetary experiments and manias appreciate that authorities will commonly resort to increasingly desperate measures in order to bolster waning confidence. This week I recalled reading accounts of how John Law devalued hard money coinage that was competing with his “Mississippi Bubble” paper monetary scheme in a last chance gambit to force players to stick with his faltering Credit instruments.

Most Bubble analysis focuses on valuation: “A Bubble is created when prices move beyond that which is supported by underlying fundamentals.” Again, my framework is altogether different: A Credit Bubble is about a mispricing (under-pricing) of finance. This mispricing supports the over-issuance of debt instruments. And, importantly, Credit Inflation is self-reinforcing, in that the associated increase in purchasing power bolsters the fundamental factors central to the bullish premise. Credit excess begets Credit excess. Tech stocks always looked cheap compared to earnings growth rates, and the greater the mania in tech-related equity and debt securities the greater the capacity for industry expansion to justify ever increasing industry price-to-earnings ratios and stock prices.

Throughout the mortgage finance Bubble, the expansion of mortgage debt led to inflating home prices. And the greater the number of housing transactions the greater the growth in household equity extraction and consumption. GDP and corporate profits surged, ensuring higher stock prices and heightened demand for houses and mortgage Credit. For the most part, home prices at the time didn’t look dangerously extended compared to boom-time fundamentals (i.e. surging household net worth, income growth, stock prices, GDP prospects, etc.). And the meager risk premiums on mortgage-related finance seemed to be justified by minimal Credit losses, robust housing price trends and prospects for ongoing prosperity. Home prices only go up.

The bottom line was, however, that multi-Trillions of finance were mispriced based on faulty market perceptions. In the end, faith that Washington (the Fed, Treasury, Congress, Fannie, Freddie, Ginnie, the FHLB, FHA, etc.) would never tolerate a housing bust proved instrumental in the market’s mispricing of the debt underlying the historic Bubble.

Government intervention, market misperceptions, mis-priced finance, self-reinforcing over-issuance and seductively inflated fundamentals are Credit Bubble hallmarks.

At this point, only a lunatic would take issue with the market premise that the Fed and global central bankers would never tolerate a problem in the Treasury or agency debt market. In a replay of mortgage finance Bubble dynamics – with only greater ramifications and inevitable consequences - the perception of ongoing government market intervention is allowing the self-reinforcing issuance of Trillions of debt at the most meager of risk premiums. Systemic risk rises exponentially, as the price of government finance is pushed to the floor.

It has reached the point where the Fed (along with fellow global central banks) has completely abrogated the market pricing mechanism - and with it the capacity for the self-regulation of debt issuance through higher borrowing costs. Why on earth would we expect Washington politicians to take deficit reduction seriously? And, to be sure, the massive expansion of newly created purchasing power is bolstering fundamentals, including consumption, economic output, corporate profits, stock prices, and household net worth. Strong markets, in particular, underpin the view that future growth will provide a backdrop conducive to Washington getting its fiscal house in order. There are many facets to the Bubble.

The Fed committed yet another major error this week. The worsening European crisis last year created a major artificial bid to perceived “safe haven” Treasury (and related) securities. This amounted to a major loosening of financial conditions for the commanding sector of U.S. Credit expansion. The Fed should have recognized how this dynamic had created heightened Bubble risk throughout our government debt markets (Treasury, agency, MBS, muni, etc.). Instead, the Fed has administered gas to the fire – along with pronouncing that it’s content to stand gas can in hand for some years to come. The Bernanke Fed has created a backdrop further supportive of speculative leveraging – and global risk market speculation more generally. Worse yet, our central bank is determined to punish savers into submission.

Responding to the Fed announcement, Treasury, agency debt and fixed income prices rose; U.S. stock prices rose; gold, energy and commodities prices rose; and emerging debt, equity and currency prices rose. The dollar was one of the few losers. Forgive me for believing the Fed secretly fears a stronger dollar. And forgive me further for contemplating a scenario where the Fed’s incessant market circumventions backfire.

Let’s contemplate LTRO 1&2-induced bullish market sentiment meeting disappointment at the hand of faltering European economic performance – and European debt markets finding themselves, there we go again, re-pricing risk higher. At some point, might global investors perhaps find a highly governed U.S. Credit market more appealing than dealing with the whims of ungovernable debt markets in Europe and elsewhere? And forgive me one last time for thinking that the invincible hand of the Federal Reserve – along with unfathomable global central bank liquidity creation – further bolsters boom and bust dynamics and heightens the risk of further rounds of global de-leveraging and de-risking. If it looks like a Bubble, smells like a Bubble…

Kno's Comments: This man is as mainstream as there is. My vote goes to him. We are in unchartered waters abd the Flood is on it's way and this time Noah is nowhere to be found.

US Dollar Index and other thoughts. Plenty of charts to look at...

http://www.goldscents.blogspot.com/2...en-dollar.html

view on euro...eu summit outcome mus be watch very closely

Good Mirror Image. I am observing it since last week. I benefited from it last week. But as usual I am master of panic and lost my profit. I am de-leveraging myself for few days. See how you can use it.

Euro pares some gains ahead of weekend as Greece and private sectors are still struggling to conclude a plan for the debt swap arrangement. IIF Chief Dallara said there was "some progress" after a two-hour meeting with Greek Prime Minister Papademos yesterday and work will continue today. Focus of yesterday and today was on legal and technical issues and the officials are aiming at completing the deal soon. It's believed that the major obstacle, the coupon, rate is "parked" for the moment and the group will finish details of the overall package first

hahaha I'm not saying it's tripe. But when it looks like a duck and quacks like a duck....

You bring up a very valid question. I don't know the answer, but as long as I am guessing, I'd say that they buy Drachmas

Seriously though, this is the reason why past interventions have faded almost as fast as they were brought on. In order for an intervention to work, other CBs have to cooperate. As far as I know, neither the US or the EZ want their stinkin Yens. So in effect, the BOJ are on their own. It will be interesting to see how it all plays out.

Forer effect writing or maybe more like cognitive bias.
If you find that article believable, be careful with your trading.

Let's combine lyrics of Ozzy Osbourne, Moon phases and Masonic Numerology - we get Forex Occultic Analysis...

I know it sounds like you're tooting your own horn but I have to say I agree 100%

ZeroHedge always make excellent commentaries however they are also extremely biased. Just remember to take everything you read with a grain of salt when it comes to their stuff. Ignore their opinions and just extract the facts.

http://www.actionforex.com/action-in...0120130158383/

Snippet:

Daily Report: Risk Retreats ahead of EU Summit

Risk appetite retreats mildly as the week starts in response to Fitch's downgrade of some Eurozone countries and as traders await the first EU summit in 2012 in Brussels. EU leaders are expected to sign off the permanent bailout fund, the European Stability Mechanism or ESM, today. The EUR 500b permanent will become operational in July, a year ahead of originally planned, replacing the temporary European Financial Stability Facility or EFSF. European leaders are also expected to discuss and possibly agree on the terms of the so called fiscal compact, which would tightening budget rules. The principles of the fiscal compact were agreed back in December but UK refused to participate. The current unused funds from EUR's 2007-2013 budget, at around EUR 20b, would also be redirected to revive the job markets.

There were news headlines stating that an agreement between Greece and its private sector bondholders (PSI) was close to resolution. It's reported that bondholders agreed to a deal that includes a coupon considerably lower than 4%. It's expected that an agreement will be finalized by this week. Meanwhile, the ECB reiterated that it won't be participating in Greek bond haircuts as "PSI stands for private sector involvement, ECB is not private'. On the other hand, the Financial Times reported that Germany suggested that a budget commissioner should be appointed to manage key budget decisions in Greece. The appointee will be responsible for "all major blocks of expenditure' and would have the power to "veto decisions not in line with the budgetary targets set by the Troika'. The reported indicated that the proposal might be set as a condition for a further EUR 130B bailout for Greece.3

Last Friday, Fitch lowered the sovereign credit ratings of Italy, Spain, Belgium, Slovenia and Cyprus. Italy's credit rating was reduced by two notches to A- from A+ while that of Spain was lowered to A from AA-. Ireland's rating of BBB-plus was affirmed. According to the rating agency, the "rating actions balance the marked deterioration in the economic outlook with both the substantive policy initiatives at the national level to address macro-financial and fiscal imbalances, and the initial success of the ECB's three-year Long-Term Refinancing Operation in easing near-term sovereign and bank funding pressures'.

Italy's bond auction today will be a test on market sentiments after Fitch's downgrade. Italy plans to sell as much as EUR 6b of 5 and 10 year bonds with securities due in April 2016 and March 2012. In addition, Belgium will sell EUR EUR 1.8b of 105-day bills and EUR 1.2b of 168-day debt tomorrow. Germany will sell EUR 5b of 10 year bonds on Wednesday. France will auction October EUR 8.3b of bills today and October 2018, October 2020, and April 2022 debt on Thursday. Spain will sell as much as EUR 4b of July 2015, October 2016 and January 2017 bonds on Thursday.

Now Davos meeting is over, what is the conclusion?

I went through the material (http://www.weforum.org/) and issues of meeting, but couldn't find anything that matters to anything.

Lots of speeches, but no actual decisions. Only thing popping out of headlines is Mr. Roubini's prediction of doom and disaster. What was this meeting worth - absolutely nothing.

http://www.dailyfx.com/forex/technic...al_EURUSD.html

Snippet:

EUR/USD: The market has finally managed to find some bids and although the broader underlying trend remains intensely bearish, the risks from here are for additional corrective gains back towards the 100-Day SMA in the 1.3400 area before the next lower top carves out. Some falling trend-line resistance has already been broken on the daily chart and the 10-Day SMA has now crossed back above the 20-Day SMA to provide added confirmation for short-term bullish structural shift. Setbacks should now be well supported ahead of 1.2900, while only a daily close back under this figure would negate short-term bull bias.

--- Written by Joel Kruger, Technical Currency Strategist

http://www.ekathimerini.com/4dcgi/_w...01/2012_424937

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The euro came off six-week highs against the dollar on Monday, as investors took profits made on its strongest weekly rally in more than a quarter and awaited a debt deal between Greece and its private creditors.
Further tension concerning Greece after suggestions that the country should give up control of its budget policy to European institutions sparked an angry reaction from Greece's Finance Minister Evangelos Venizelos, also weighed on the sentiment, traders said.

The single currency dropped 0.3 percent to $1.3178 zeroing in on immediate support formed by the bottom of the Ichimoku cloud on the daily charts at $1.3165. It rallied almost 3 percent last week as speculators covered short positions.

"The recent gains in the euro were mostly on the lack of bad news from Europe and a broad softening in the dollar, not because it has become an attractive investment overnight,» said Koji Fukaya, chief currency analyst at Credit Suisse in Tokyo.

"That's why any further gains in the currency will likely be choppy and limited to buying back. For now, all eyes are on Monday's summit and Greek talks,» he said.

The Greek debt swap deal, which would cut the long-term value of privately held bonds by just over 70 per cent, is thought to be largely in place, raising hopes that the country at the heart of the euro zone debt crisis would avoid a messy default.

But it is unlikely to be forged in time for Monday's summit, where euro zone leaders will gather to discuss budget rules for governments and ways to stimulate growth in Europe.

Venizelos said on Sunday Greece was perfectly capable of making good on its promises. «Anyone who puts a nation before the dilemma of 'economic assistance or national dignity' ignores some key historical lessons,» he said in a statement.

Venizelos was also heard rejecting the idea of external fiscal oversight, saying it would undermine Greece’s “national identity and dignity”.

If that pathetic excuse for a country had even a shadow of "identity" or "dignity", they would have done the things necessary a long time ago to get out the situation they put THEMSELVES into. Greece has no dignity whatever and the only identity they have has been filched from another age.

I hope Germany sticks it to 'em with this fiscal oversight thing - what a refreshing change of perspective that would be for the whole EU.

But IMO: sovereigns and insiders have been trading (especially through the EUR/USD) this insanity for the last few years and they DON'T WANT the insanity to end. They're just making too much money.

Now that's something for the journals