Target2 net amounts by central bank in Eurozone: ominous rises; threat for more LTRO

Target2 explosion is threat for more 3 year LTRO by ECB

Target2 is the system in the Eurozone where the central banks net their liabilities resulting from the banking system needs.
The strong countries have big surpluses while the central banks of the PIIGS have huge deficits.
The last half year these positions were exploding, the surplus countries get enormous positive Target2 amounts that the weak central banks in exploding amounts owe to the core.

This is a reason why the Dutch central bank (DNB) is worried about 3 year deposits and some people of DNB (or formerly DNB) say the ECB is taking too much risk.

The strong core: Germany, the Netherlands, Luxembourg and Finland. Especially the amount of Luxembourg is extreme versus its GDP.
The weak countries: all the other, including Austria and France.
The deficits are exploding for Italy, Spain, Belgium and improving for Ireland and stabilising in Portugal.

(source: http://www.querschuesse.de/target2-salden/)

Bespoke: after a fast 15% rise of equity markets a further rise is a bit more likely than normal

The blog Bespoke had the table above what happened when the S&P500 had risen more than 15% in the three previous months.
One could expect like the bears that time is rife for a decent correction, mean reversion to lower prices. That was not what the data mining exercise of Bespoke showed (results from the past are no guarantee for the future as every impoverished speculator of the last years now well enough knows).

In the following three months after a 15%+ event the market rose on average not the normal 1.76% but 3.2%. On average in normal times the S&P rose in 62% of the times, but after 15% + explosion that was even more: 77%. Momentum was often a winner.

SP500 in 2012 like 2011 or 1988

History repeats itself, but never exactly. Most of the time when remarkable similarities are seen suddenly another pattern originates. But still the similarities between 2012 until now and 2011 or the recovery after the crash of 1987 are big. Since November 2011 we see a repetition of 2010 and 1987.
The ISM could go down over some months and that could cause continuing similarities with 2011. QE3 could turn 2012 into a better year than 2011. Also the US housing market is now less weak, credit growth is better, employment growth is better. The expectations for profit growth are lower and can be more easily be better than implied. Against these good odds are new possible disasters in Europe and Iran or maybe something new.

eurocoin indicator points to 0% growth in eurozone

The eurocoin indicator (source:http://eurocoin.cepr.org) improved in fberuary, just like in January, but is still marginally negative. That points to a growth of 0% in the first quarter in the Eurozone. The good news is that November/ December seems to have been the low point in growth.
The higher oil price could cause negative growth in the second and third quarter, but that shouldn’t be very negative numbers.

Credit growth US has almost left the credit crunch phase

At long last credit growth is accelerating in the US to an almost decent level. Infinite liquidity of FED didn’t get traction until now: the FED was seen pushing at a string to seduce banks to give credit. But the chart of Bianco shows that credit growth is now at a post credit crisis high. It is still too low for normal times (and so we are still in the grey area of the credit crunch).
Striking is further that the recovery on the equity markets so strongly correlated with stronger and weaker credit growth.

The growth of M2 has become quite high and when the velocity of Money remains somewhat constant that should be a sign for faster nominal GDP growth. The volatility as measured by the VIX is low and that is creating a good climate for investments: investments in software & equipment, structures and even residential investment will be leading economic growth up.

Euro crisis: less swap lines FED necessary because money market funds US are buying Europe again

The chart of Bianco shows that US money market funds after a big sell down again want to buy European bank deposits. That selling caused a weak Euro and the FED had to rescue the Euro with huge swap lines.
The addiction to higher yields bring the US money market funds back to Europe. They try again because they think that the three year deposits of the ECB will make the european banks to pay back those deposits before the ECB takes the liquidity back.
That renewed interest is one of the reasons (next to better macro news like a wonderful IFO) why the last weeks the Euro is strong again, even while Greece is a nightmare, the numbers of Spain have a bigger question mark than the Chinese numbers and Portugal is not fenced off well enough from Greece.
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Paul Mortimer –Lee Inflation will go up, more than the FED wants

Paul Mortimer- Lee (BNP Paribas) was in a more optimistic mood than in the previous occasions I saw him, but he remained more negative on the growth in Europe and especially on inflation.
Why is the core inflation rising while the output gap is so high. Inflation is supposed to go through the floor in that situation?
PML thinks the central banks see inflation too much as a real phenomenon, caused by the real economy and too little as a monetary phenomenon. Since Greenspan and Bernanke agreed that there is no more good relation between money growth and inflation they watch only the real economy for inflation dangers (I also cannot find good relations between Money growth and inflation, even not after some data mining). They have forgotten about Friedman (inflation is always and everywhere a monetary phenomenon). It is very difficult to show in a chart the relation between money growth and inflation.
Paul Mortimer- Lee invented the chart above and surprise, surprise there seems to be a relation between liquidity and inflation. That would be very bad news for inflation. Inflation will go up because the liquidity in the OECD will rise further as even a child can see.
Not only liquidity but also higher commodity prices will cause higher inflation. The year on year influences are now maximally favourable and from April-May it will go in the other direction: higher commodity prices will push inflation (CPI) up again, especially when things in Iran get out of hand. Also food inflation is dangerous (but that doesn’t seem to be a big problem in 2012).

So the coming years inflation will disappoint because of the seas of liquidity that have inundated the markets already and because of higher commodity prices thanks to high growth in China, India, the US etc. Moreover inflation can rise when the English disease of continuing hikes of the VAT spreads over the world to get more fiscal prudence . For the time being inflation will not be high, but when the FED continues to print more and more money as they promise almost every day inflation will pass the pain threshold levels before the end of 2014 and then it will rain FED hikes (but this year they will defend 0% like lions) .

Attack Iran? Obama c.s. will do everything to prevent that before the elections

Strategas explained it again (see chart): confidence plummets when the gasoline prices rise. When the oil prices rise further the gasoline price will go up and the confidence down, the macro economists will lower obediently to the oil sheiks the economic growth .
By the way, oil prices will have to rise materially will it be of more importance for the approval rating of the president than job growth.
It is clear that the oil prices will rise when Iran will be attacked or when Iran will lay mines in the street of Hormuz. 1 million barrels oil per day could mean oil prices +26% was calculated (a little bit too much I think, but with supply disruptions the rise of the oil prices will be material).

Obama really knows this and is exercising with all of the US government tremendous pressure on Israel not to attack Iran in an election year. According ot Stratfor Israel needs some help from the US to bomb and clear the Iran nuclear facilities enough back to the stone age. This help they will not get this year. Only the game theory of the trembling hands (people have wrong information and do not rational things and panic) could lead to attacks (and unfortunately this is not unlikely, see how against all odds Saddam Hussein continued to believe Iraq would not be attacked by the US).

All time highs for total return indices: FT all shares UK yes, SP almost

We are used to watch only the price indexes of equities without the dividend income.
When you watch the total return indexes you get (of course) a more positive impression. You see then that the relentless proceeding crash of 2000-2003 thanks to the dividends was entirely overcome in 2007 in most countries. In 2012 a lot of total return indexes are near all time highs or setting all time highs. The UK all share total return has set a new high and the S&P500 is only about 3% away from the all time high.
Several European indexes have done worse, for example the Dutch AEX that did (just) not set an alltime high in 2007 and now is still quite far away of the levels of 2007.

Pancake Purchasing Power Parity

Several people asked me to blog about the pancake chart of The Economist. They seem to think I like pancakes a lot. Maybe I have to lose some weight in this time of fasting.

The Economist tried a variation on its Big Mac purchasing power parity index. This time it was calculated what it should cost to bake 130 pancakes (no way I will eat so many of it) according to the recipe of Delia Smith, the renowned English writer of cookery books. She advices to take 1,100 grams of flour, 20 eggs, 2 litre of milk and 500 grams of butter.
Now suddenly Japan is the most expensive country in the world (as most people already thought) and not Brazil according to the Big Mac index. Switzerland is of course also an expensive paradise. The Netherlands seem outlandishly cheap, but I think they are baking the pancakes with the cheapest of the cheapest of the margarines (it is not necessary to bake pancakes with real butter).
The Netherlands as a cheap paradise is the true relevation of the pancake purchasing parity thanks to the cheap butter. In the Netherlands several people reacted they wanted to export butter to Japan. The Netherlands are in a recession but their spirit of commerce is not gone.

Steel production: disappointing in China, surprising in the US

The last months the world steel production was going down, but is recovering a bit in January. That recovery was not made in China, there the steel production is still going onto the wrong path (maybe the lunar new year is distorting things). The recovery was mainly made in the USA. Steel production is bad in Asia (China Japan,Korea) and core Europe (Germany, France) but growing in Brazil, Russia, surprisingly also in Italy and as mentioned the US.

Greek tragedy continues: March 27 voluntary default

At long last a new agreement has been reached where Greece will be able not pay its debt and gets a fresh € 130B when they behave prodigiously (so lots of new debts where IMF.ECB and ESM will be senior to other bond investors, trashing their hopes to get anything when Greece defaults). The private sector writes down 53% immediately, the interest rates go down and the maturities up resulting in losses of 75%. Even the ECB pays a bit, but unbelievable little thanks to Super Mario.
The agreed haircuts will apply on the redemptions of March 20 and with a delay of seven days you will get the voluntary default on March 27.
The official default will be later. First 95% of the private sector must agree and the hedge funds have too much fun on battling this kind of agreement to agree soon, so 95% should be elusive. When you don’t get that 95% everything can happen again. Delay, more or less haircuts, still CDS triggered, an official default.

Meanwhile the elections in Greece will complicate things. The extreme parties will win and they will not agree with the current agreements and renegotiate things, while support for the euro in Greece is going down fast (still a majority wants the euro).

The scrooges from the north will continue to do difficult about new tranches for Greece when new scenarios point to a base scenario of government debt/ GDP of 140%+ instead of 120.5% in 2020.

The market can be relieved again for some time: we kicked the can down the road. But Greece will remain the naughty boy.

It is not necessary to exaggerate the importance of Greece: O"Neil of Goldman Sachs tells China creates every quarter a total extra economy as big of Greece. The world is not so dependent of Greece for economic growth [but rebranding of Greece into Hellas will do no harm]

(pictures before photoshop: Agence France- Press / Getty images;Lagarde and Papademos; and picture from Economist with Venizoulos, Papademos (together a resistance pose like the Dutch parody war hero’s the brothers Temmes that pointed the Germans in the wrong direction), Schäuble and the finance minister of France)

Money growth China way too low: GDP growth < 8%

The Money growth numbers of China were way below expectations. Previous month most people thought that the growth of M1 and M2 had bottomed out and were recovering. That is a disappointment: the growth of M2 fell back again and the M1 growth shrivelled up to a low not seen in many years. This should lead to economic growth of below 8% according to several forecasters in Q1 in China.
No wonder that the Peoples Bank of China became nicer for the banks with a lowering of 0.5% of the reserve ratio requirements (20,5% instead of 21% for the big banks). Credit growth is too low now and China has announced they see credit growth as an important leading indicator. So money growth has to be pepped up and confidence is high they will succeed in this.

Will oil become even more expensive versus gold or will China prevent this

The chart shows the rise of the oil price (Brent) versus gold in periods of six months. When you see the fluctuations nobody will be surprised when the oil price rises another 10% versus gold. When the oil price starts to rise versus gold you normally see quite a big run.

But lots of people think the commodity world turns around China and especially from the Money growth of China. That should mean that the oil price has now risen enough, given the poor growth prospects of China while Europe is in a recession and the US drinks less of gasoline. So the oil price should fall.

The price momentum shows the market is thinking now that the situation in Iran is no longer controllable or because what Iran is doing or because of what Israel will do.

Copper price too low versus ISM

The copper price ordinarily follows the ISM, the most important barometer for manufacturing in the US, with servile obedience. This time the copper price almost doesn’t move on the resurrection of the ISM. That is odd. Maybe it is like 2003-2004 when at long last the copper rpice followed the ISM higher.
It also could very well be that the ISM is not following the ISM because growth in China is too much slowing, especially in construction.
Another cause could be the big decline of the copper inventories in warehouses. China is already importing not enough copper for some time.
Still it is strange that the copper price is not following the world macro fundamentals in the west.
Dr. Copper normally warns for the health of the world economy. So it is dangerous to neglect the trailing copper prices: the recovery in the US is making progress, but without a further rise of the copper price you should not become very optimistic about the world macro fundamentals (but at the moment there is not yet reason to become more pessimistic).

summary of financial economic news of last week

The pattern of the last weeks is starting to get familiar: The economic news was satisfying. There was unrest about Greece and again an agreement seems nearby. The resistance of the people is growing in and outside Greece. Even the finance minister of Luxembourg is now saying that Greece has to accept everything and to has to take its poison because Europe can stand a default of Greece very well. So he got his portion of blame because things are not that sure.
In the US the initial claims for unemployment declined prosperously to below 350,000 and that points to maybe even 4% growth in Q1.
The retail sales grew ncely +0.5% even with the strange fall of vehicle sales (while light vehicle sales were up a lot). The saving rate is OK again and doesn’t need to go up further. The NFIB survey for small and mid size companies was a bit higher. The forerunners of the ISM Phillyfed and Empire State survey were more in the plus than thought (=ISM will rise this month). The best news was the jump in the BAHMI that indicates how optimistic the home builders are. Already for quite some time less houses are started than new homes are sold, so the builders are getting rid fast of their inventories and are becoming less pessimistic.
The inflation declined as well CPI as PPI. After April a further rise of rents will stop the decline of the CPI and when Iran gets out of control oil price will add to inflation. The use of energy is at the moment extremely low in the US because of the hot winter and less gasoline sold. All OPEC members produce more than their quota so including lower growth in China the oil price should not go up ex Iran.
China promised to help Europe again and started special vehicles for investing abroad (yuan 50B last week). The Peoples Bank of China lowered the reserve requirement ratio with 0.5% (to 20.5% for large banks). GDP growth is too low now.

In Germany the sentiment indicator for the economy ZEW was good, pointing to positive growth in Q1.
In the UK the inflation declined a lot and the consumer confidence grew strongly.
The interest rate differentials of the euro periphery/ France with Germany didn’t move much despite good placements of government bonds.

In Japan the GDP growth in Q4 was negative, but the Tertiary Industry Index was up considerably (this service industry indicator points to better growth in Q1). The most important news was the Bank of Japan implementing new QE of 10T yen and BoJ has now an inflation target of 1% (0% is too low, deflation is bad).
In India the inflation surprised enough to the downside for the central bank to get in the easing mode. They did a QE of 10B rupeeh for buying of government bonds. In Indonesia the interest rates were lowered (again) by 1%.

Linsanity: the rescue of the American dream

He is a lin-sation, he unleashes a lin-demonium, girls sent him last week va-lin-tines. Words are in shortage how to tell how magnificent he is and so a new lin-language has originated, with corruption of words by pasting lin in it.
All that sensation is caused by Jeremy Lin, who is since a few weeks playing better than almost anyone ever before for the Knicks in the NBA, basketball.
Before that time he was the loser, that was transferred like a cast-off from one club to another. But a few weks ago the Knicks had so many injured players they had to give him a place in the team.
The prejudices prevented anyone giving a dime for what he could do for the team. He is too small (just 1.90 meter, not enough for a basketball player at the highest levels), a Chinese American from Taiwan. And the Chinese tiger mothers don’t want that their children spoil their time with sport. Americans from Chinese descent never performed in sports. So he had to go to Harvard. He is not black, too clever and worst of all: he is very religious. And that religiosity learns to be humble instead of trashing your adversaries and it prevents all your testosterone to transform in a winners mentality.
So all in all a very unlikely sport hero, that won unbelievable amounts of points for his club. The share price of the Knicks went up by 10% last week because of lin-sanity.

That extraordinary, unlikely fact that Jeremy Lin is a fantastic basketball player has created an unbelievable enthusiasm: linsanity is already a registered trademark. Almost never somebody became so instantly a celebrity, even Susan Boyle bites into the dust in this respect.
There is even a global linpact: American basketball is getting popular in China.

By the way, Lin was already discovered as an above average player in the Harvard team. He was contracted in 2011-2012 for $ 762,000 and that is a salary you don’t get when you don’t know where the basket is, as suggested in the press was the case only a few weeks ago.

There is some fear because of the decline of the fortunes of the middleclass that no one still believed in the American Dream, it seemed to be deleveraged into a new normal where you accept that you never will fulfill your dreams, even when you work very hard. Linsanity proves the American Dream is still alive and kicking.

Initial claims in US in line with 4% growth in Q1

The initial claims for unemployment are declining prosperously in the US in the past weeks. When that should be your only guide for growth, you should believe that growth in Q1 will be something like 4%.
The initial claims De initial claims are still quite a lot higher than in 2004-2006, so it can go lower. But the initial claims are starting to point at a growth of the employment of more than 200,000 and that is surprisingly high (=nearly impossible) given the economic growth in the past year.
The decline of the initial claims is an important leading indicator (however only leading for 1-2 months) and maybe the most important indicator for the belief that macro fundamentals are improving in the US.

Number of bulls in line with rise of S&P and fundamentals

More and more people are worried that there are so many bulls nowadays. Sentiment indicators are now often in euphoria.
The chart with the high percentage of bullish advisers in the US gots the most attention in the press.
That precentage of bulls is quite normal given the rise of the S&P500 and the decline of the initial claims for unemployment.
And that is what sentiment indicators do: they indicate how good the times have been given the rise of the stock market and the economic news. That there are so many bulls is not a worry when the fundamentals continue to improve.
There is not much hidden forecasting power in the sentiment indicators when you correct them for improving fundamentals. Rising equity prices and themes.

Bianco: 5 year Treasuries: the bulls are weared out, exhausted

Bianco, normally a semi permanent bull on US Treasuries. Was yesterday unusually negative in his commitments of traders analysis of what futures traders were doing with 5 year Treasuries.
The strong hands, the hedgers are already for some time quite bearish positioned, but that was neutralised by buying of the speculators, large and small. Now the large speculators seem at long last to have bought enough and last week they started to sell (and they have a lot to sell).
It just has lasted too long in the eyes of speculators that you can earn money with their positions, so they try now something else.
So according to this analysis there ought to come a rise of the 5 year yields in the US.
This is a plausible story, but of course not a guarantee..

Republicans destroy their possibilities to beat Obama by switching to theocrat instead of immediately bowing to the unavoidable choice of Romney, but

What should have been a victory procession through the pre-election states with lots of press and ever growing esteem for the winner is starting to become a disaster for the republicans. The usual transformation of the republican candidate from conservative to moderate is now reversed: Romney, but first has to move now a lot more in the conservative direction, becoming a man with slippery principles and less and less attractive for independent voters.

The republicans prove to be a strange combination of extreme groups. There is the big group of admirers of the Tea Party that want a policy like the government of Greece is performing now: huge cuts in government spending without extra taxing the rich. A part of the Tea Party feels happy with Ron Paul, he has all kind of interesting plans like abolishing the Fed (at least they have to be audited in a normal way) and decimating defence spending abroad and he doesn’t want to do anything at the plans of Iran.
The last things make Paul unelectable. Another extreme group are the born again Christians that want a theocrat as president. Santorum is their candidate, since they have seen that Gingrich is too much of a wild animal and that Santorum can quite effectively attack Romney, but. Cafferty of CNN, see his blog (caffertyfile), cannot understand what the republicans see in a wacko like Santorum and why Romney,but has not yet exposed this well enough. Santorum lost as incumbent senator of Pennsylvania his re-election with 18 points, after continuing to live in Virginia and having for free some education of his children in Virginia with money from Pennsylvania. Especially his feudal points of view about women are shocking. Why should women work when they are married, anti-conception is dangerous for women, it makes them inferior etc. Homosexuality is worse than incest, liberals are the reason for the problems of the catholic.
The female voters are not idiots, they almost didn’t vote for Santorum. Still Santorum could win because men didn’t want to vote on Romney,but (men voted twice as often then women on Santorum). Gingrich hast Romney,but with success exposed as a Massachusetts Moderate (and he should have wanted to add mor(m)on to it), being a weakling in conservative values.
The real man doesn’t vote on Romney,but and women already voted with a big majority on Obama (he also has a problem with male voters). That is why Santorum at the moment is doing better than Romney, but in the polls against Obama. This probably will not last long because of his ridiculous views about women and when the voters know this well enough, they flare him off like they did with Gingrich, Paul, Cain, Bachmann, Perry. Gingrich hopes now he will be the real come back kid again between all these political weaklings of the republicans.

You have now the curious situation that Obama with his approval rate of clearly below 50% can easily win of any republican according to the betting agencies (see charts of Bianco). The battle for the presidency seems to go between Romney, but against Obama, but.

The Revenge of the Pessimists Is Coming

The pessimists of this cruel world of deleveraging are in despair when they have to stomach the big rises of the equity markets in the past months, while it is so obvious that the Maya’s are right that the world will end soon.
That retarded belief that the three year deposits of the ECB will solve all the problems of Europe has to be brought back to real proportions. Tons of liquidity are not leading to a gram of better solvability
The probability that Greece will have to say goodbye to the Euro zone is growing hand over hand. In Germany, the Netherlands and Finland the call is becoming louder and louder that the Greek no longer should delay their bankruptcy, the delay makes things even worse. Finland will start getting collateral from the four biggest Greek banks as is agreed. In Greece they will first start to do nothing for a while after the elections also by lack of something that will resemble like a government. The debt/GDP ratio is rising merciless mainly because of the collapse of the GDP: that is already 17.2% lower than the top.

In Iran the situation deteriorates by the day. Iran is training Al Qaida according to agreements of 2009 so they can attack a bit more in a professional way, even while the attack in Thailand was somewhat clunsy (losing your legs because the bomb fell back in the own car instead on Israeli diplomats) (Sky News' intelligence sources have said Iran has been supplying al Qaeda with training in the use of advanced
explosives, "some funding and a safe haven" as part of a deal first worked out in 2009 which
has now led to "operational capacity". http://bit.ly/zc50iN).

The markt is way to positive about the solvability of European banks, they need tons of new capital to be only a shred believable as a solvent institution. Tighter regulation, Basel 3 is making life difficult for banks and new governments even ask for more provisions so new disappointments are in the making. Spain called for new provisions of its banks and also in other countries that is popular, especially when you don’t know the value of real estate that in wild dreams was enough as collateral for financing of speculators.

In the Eurozone the recession is staring to become really onerous in Southern Europe and Estland and now Belgium and especially the Netherlands are doing very poorly. This is triggering more austerity and creating a very long recession.

In China the equity market has been one of the worst in the world in the past year and that is what you deserve when real estate speculation is rampant, capex is bigger than consumption, you are too much dependent on exports to e.g. Europe, credit growth is being killed, you allow speculators paradises like Wenzhou and ghost towns in Outer Mongolia.
The problem is that the Chinese stock market is such an excellent forecaster of the US market, see the chart of The Reformed Broker. So, the pessimists must have somewhat more patience and everything will be great for them, when we are somewhat unlucky...

Apple $ 500: is this the end or remains the trend your friend?The pundits are warning it has to be over with the euphoria about Apple, now its share p

The pundits are warning it has to be over with the euphoria about Apple, now its share price has crossed $500.

Apple speaks to the imagination. Suppose thtat the Dow Jones commission ad chosen to add Apple to the Dow and not Cisco, then the Dow should have been now at an all time high (because the Dow weights with the share price the weight of Apple should be tremendous) See chart of Bespoke.

Apple belongsnow two the select number of equities that has had the highest market capitalisation in the US. When you are at long last a mega cap, then most of the times you become an underperformer. The table of Bianco shows the battlefield of several mega cpas and companies that had the honour to have the highest market capitalisation in the US. General Motors even went bankrupt.

Bespoke had also a table what the price of Apple could be when you apply the same PE as the S&P or technology etc. In that case often another considerable rise of the price of Apple could be possible.

Yesterdays good news bolsters markets today

Yesterday the stock markets couldn’t get their mojo, maybe because the were digesting the downgrades of several European sovereigns by Moody’s. Or maybe it was the statistic about the abysmal amount of miles driven in the US on the roads (=growth of industrial production should disappoint; this can indeed be the case because the utilities will produce less because of the very mild winter in the US).
But lots and lots of good news should have led to positive markets. Maybe that is why today the markets, discovering the good news of yesterday again, were in a much rosier mood.

In Japan the Bank of Japan surprised with an extra QE of 10 trillion yen and an inflation target of 1% (not in a few years, as was previously the explanation, but in the pretty short term = more QE than the Y 10T of yesterday will be allowed). The Nikkei yesterday turned into the green immediately after the BoJ news. The yen became weaker and politicians were very glad (just in time, they were already debating when to fire Shirikawa).
Central bankers in the world dream of different things. The FED wants 0% interest rates until 2014+, low inflation and lower unemployment rates, in Japan they are dreaming about a higher inflation rate of 1.7% in 2020.

In Indonesia the thought about inflation are completely different: there is 5% seen as wonderful with a range of + or – 1%. The central bank has been pretty good in keeping the inflation in that range and is getting respect for this (in Germany they should throw central bankers that want 5% inflation into prison). In January the inflation was only 3.7% so drastic action was needed. Yesterday the interst rate was lowered with 1%, so they are now 2% lower than at January 18 (level now 3.75%). This makes the rupiah weak, but true despair is not necessary: the economic growth of Indonesia was 6.5% entirely caused by domestic growth so this will automatically do its salutary work to get higher inflation and interest rates over some time.

In India the rise of the wholesale prices was lower than expected: 6.55% while 6.7% was expected (the previous number was 7.5%). This is seen as low enough for the Reserve Bank of India to go in the easing mode (a threshold of 7% was seen). Today the RBI told they do a bit QE: they wanted to buy for 100B rupiah government bonds on Friday.

In Germany the ZEW surprised for the second month in a row spectacularly to the upside. It is positive again, so the recession mood has to be trashed.

In the US the retail sales grew with a pretty strong 0.4% (nominal), while total vehicle sales were -1.1% despite the clearly higher (light vehicles) car sales in January.

In China they thought it was time to leak that inflation after the disappointing rise of 4.1% to 4.5% will plummet below 4% in the coming month. China repeated its New Year resolutions to help Europe via the IMF/ESM, but the markets must be patient. The new dear leader Xi Jiping visited the US and was received with all the regards you can think of, so everybody was glad in China and the US.

Schäuble loses confidence in Greek government (especially after the election)

Not only in the Netherlands (an opinion poll in newspaper De Telegraaf showed 92% did not support new bail outs for Greece) but also in Germany the support for helping Greece is dwindling.
Athens burned Sunday because of approving of new austerity by the current government under pressure of core Europe.
But the New Democrats, after the elections probably the biggest party (31% in the polls), told almost immediately after the vote that the results of Sunday had to be renegotiated by the new government after April.
Those elections will not produce a majority for the friends of European forced austerity. The labour party PASOK that has now a majority in parliament will get about 8% of the votes if they are lucky. Some parties already have indicated they don’t want to rule and they will become big because they oppose more austerity measures (and that is what a lot of people want).

The German minister of finance Schäuble no longer wants to kick the can down the road because Greece will turn in an uncontrollable political ruin after the elections. Now asking from the current government to support current measures after the elections is naive because the will have no votes or are persuaded by the force of the dark side to forgo more austerity.
So it will become very difficult for Greece to remain in the Euro zone because they can no longer force more austerity. The patience of Germany and the Greek people is exhausted.
Schäuble thinks the banks are now much better prepared than two years ago and can take the losses of a Greek default. Europe has bought enough time and this was (maybe for the banks) a success, including the help of the ECB the banking system outside Greece can survive well. Day X (of Greek default) has lost a lot of horror Roessler told at German TV.

Roubini and Barrons as contrary indicators

Nomura had the chart above about how well the timing of two very renowned pessimists Roubini and Rosenberg have been in the last years. They were excellent contrary indicators.
Bianco warned with the front cover of Barrons last year where Epstein (the writer of Dow 15,000) did forecast an oil price of $150. Unfortunately the oil price first had to go down to $80.

Fed contaminated by Valentine fever

Via blogs (Justin Wolfers and http://economix.blogs.nytimes.com/2012/02/10/fedvalentines) and twitter a kind of Valentine excitement has aroused: how can you practise the Valentine thought Fed-style.

The FED is for one day not dovish, but turtledovish.
The FED is clearly to try to pick up new admirers with the biggest punch bowl ever, for an extended period. Even while the see activity growing, there has to come much more stimulus.
The dual mandate to please as well as the inflation fearing as the unemployment avoiding a new technique will be implemented: the turtledove strategy to give everything the loved ones want to have (even while they still see exceptional low levels of activity in the coming years, what can be damaging for the Valentine thought).

The last months I thought often that the FED had a secret love affair with inflation and now it seems confirmed (even while it seems to be a sadomasochistic relation).

Examples how the Valentine fever has inspired several Fed banks and others (source blog Deus Ex Macchiato):
@justinwolfers: You’re my long-run target; my nominal anchor.
@SFFedReserve: I’m going to extraordinary measures to increase your stimulus
@AtlantaFed: I long for you as the economy longs for its long-run maximum potential
@PhiladelphiaFed: Her deviations are never standard, her probabilities never mean.
@PhiladelphiaFed: My initial projections never forecast someone like you would be in my next quarter.
@alanbeattie: I’d like to borrow you overnight and then hold you to maturity
@planetmoney: But, soft! What light through yonder discount window breaks? It is the East, and Ben is the sun.
@sffedreserve: My love is elastic, my commitment too big to fail

Summary financial economic news of the past week

There was not much economic news. In the US the initial claims for unemployment were much better than expected, mortgage applications rose, the consumer confidence dipped a bit after the big rises, consumer credit disappointed, the trade deficit was worse than expected (but according to the deteriorating trend). In the VS agreement was reached about help for mortgage holders that are under water (a drop on the plate of $ 700B of mortgages with negative equity at the current house prices.
In Europe the industrial production growth numbers disappointed in Germany and France, but new orders improved in Germany. In Italy the industrial production rose (and JP Morgan revised growth up for 2012 to only -1.7%).
In Japan the numbers were better than expected (leading indicators, trade deficit, consumer confidence, credit growth). But today’s -.06% GDP growth over Q4 disappointed.
In China the inflation rose from 4,1% to 4,5%, more than expected.

Romney lost surprisingly in three states from Santorum and is now saying he will be much more of a conservative in the future, he is born again as a conservative.

The problems for Greece accumulate, but the markets almost don’t care for the time being. It last long before agreements are made and this caused a bit higher ineterst rates in Southern Europe.
The equity markets showed small declines, because of worries about Greece and Chinese inflation. Also all those publications that Israel has to strike Iran this spring didn’t help either.
The underlying trends are still quite good: macro indicators are improving, much less recession fear in the US and the belief is growing that QE3 will arrive even while the economy is improving, as Bernanke told to the senate last week again.
The optimism can get dented because optimism is quite high (even Roubini is a bull) and some brokers are communicating mildly warning sounds about overoptimism for the growth in the US (high gasoline prices, Greece and inflation now central banks print money like never before.

Barrons (Siegel/Epstein): Dow 15,000

Gene Epstein had this week the honour to write the cover story of Barrons. As usual he had something bullish to tell: Enter the bull; Dow 15,000.


For this forecast he leans on Siegel (writer of Stocks for the Long Run). He has, as is so often the case vexed the numbers of the S&P500 since 1871. After cycles of five year with disappointing returns you normally get good returns. That is now the case. Epstein/Siegel see with 2/3 probability the Dow rising above 15,000 in the coming two years and with 50% probability above 17,000.

Siegel thinks that will be possible even when you get almost no profit growth. The big sorrows (the Euro crisis and the American fears for a recession) will gradually diminish. Siegel thinks 10-15% rise of the S&P as too pessimistic, he goes for 20%+.

These forecasts are not at all very optimistic (when the consensus is right at 15,000 the PE will only be 12.8), but lots of people will use the cover of the Barrons and say that you have to go short based on the contrarian cover theory (when something is at the front page of an important journal the trend is at its highest point and will go in the other direction; so now the Barrons is overoptimistic and that has to be punished by the markets).

Dow 15,000 is a quite modest target. We have had bestsellers with Dow 36,000 and 100,000 at the cover. Because since then the Dow has plummeted nowadays everybody is too much of a coward to impress with a Dow at e.g. 25,000 or 50,000 in 2018 even while that is possible. For 25,000 you don’t need much, only about the current profit margins, continuing implementation of innovations and nice growth in the Emerging Markets.

Fun on ice on the canals of Amsterdam: Breitner’s view

Breitner painted in 1895 on the steps of my house the landscape corner Keizersgracht/Reguliersgracht in Amsterdam. It is auctioned in 2007 from the legacy of Anton Philips (son of the founding father of Philips lamps) for € 760.250, a record for a painting of Breitner (it is also more than the value of my house).
As you can see I have a very expensive view at two canals.

From the same spot I have taken a picture of the fun on the ice in front of my door. It was the first time this century you could skate on the canals of Amsterdam. At the Prinsengracht it was way busier, but also in front of my house the koek-and-zopie (= cook and soup, the Dutch thick peas soup (snert)) stand made a little fortune.
So you get a Breughel/ Jan Steen – like tableau vivant in modern times. It is with with several cars, lots of bikes on the bridge and lots of people making pictures with their smartphones (and there were people skating of course). Still the picture is like what you can expect from Anton Pieck in Amsterdam.

Listen to the vegetarians: Indian equities are cheap

Last year you had an explosion of the onion prices in India and that was a real problem for the Indians that are vegetarians and use onions in every dish. This undermined the consumer confidence. For some strange reasons it looks like the price of Indian equities moves around the trend of the onion prices. This equities-to-onions price did signal well the moments when you had to buy and sell Indian equities. At the end of 2011 you got a buy signal. In 2008 equities were a lot more overvalued against onions, so the bear market of 2008 was bigger than the bear market of 2011.
Maybe it is disappointing that Indian equities (even while one of the best markets in the world in the past decade) did not do better than onion prices. Warren Buffett will disagree that it wil be as bad as gold, because you don’t get dividends.
All in all when onions are too cheap to use and people will cry more using onions, you should not be a contrarian investor: be a crier also.
Of course correlation is not causation, the story behind the onions is not very believable for non vegetarians, but still it was quite a nice indicator.

Buffett: bonds dangerous for your financial health, gold overvalued

It is time for the yearly happening of Warren Buffett speaking to the shareholders of Berkshire Hathaway. The Fortune had already a preview with several of Buffets wise words.

Like all investors that talk about investing in the long run he definitely thinks it is not good to invest in bonds (Bianco reacted on that: Buffett forgets that the buyers of bonds are not investors but forced buyers like the FED, the central banks of China and Japan. So bonds are not an investment but still can give good returns). Buffett thinks the yields have become too low because of manipulation of central banks and so you don’t get a fair compensation for inflation and inflation risks. Bonds should be sold with a warning just like cigarettes: it will damage your financial health.

Also gold was bashed by Buffett. All the gold in the world fits in a cube of 68 feet and has a value of about $ 10 trillion. For that money you can buy all the crop land in the US and 16 Exxons and you still will have $ 1 trillion left for doing nice things. That is all producing income what is not the case with gold [comment: the difference can be quite small because gold normally is not taxed and income is].
At the moment the gold mines make now every year $160 billion new gold and that is c. 1.5% new inventory have to be bought by new fearfuls. Take care when they diminish in numbers.
[My comment: that 1,5% is more than the growth of the world population and less than the growth of the middle class in the coming decade(s), so for the time being the demand for gold could be high enough, certainly when the Asian central banks want in earnest a decent percentage of their reserves be invested in gold].
Buffett says that the only buyers are now investors thinking the price will rise further, this means in a Minsky cycle that gold is in the bubble phase. According to Buffettt that can last for some more time, but then the gold price will decline (and a lot).

Buffett advices to buy equities, they are much safer for the long run than gold or bonds at zero % yield. As has been often the case in the past 50+ years Buffett could be right.


The chart of Data Stream shows the total return of an investment in equities (S&P500) versus gold and at the right hand the total return of government bonds (10 year US Treasuries) indexed at 100 in 1980.
You see huge runs up and down. Initially gold was the bad investment, but this century Gold lets equities and bonds bite in the dust. It deserved a prominent place in an investment portfolio. When the central banks continue to print money at a huge scale than the gold price has to go up further especially versus bonds.

Macro surprises positive in the US and Northern Europe, negative in Pacific and Southern Europe

The chart of ASR (Absolute Strategy Research) shows we are probably a bit too pessimistic about the growth in the Eurozone outside the war zone of the PIGS. The IFO in Germany told a completely different story than we hear every day, namely that it is crisis and that will be the case the rest of the year (at least). Also Scandinavia surprises positively (again) and in the UK the current affairs are not more depressing than initially thought. It is to hope that will also apply for France and the Netherlands. In the Netherlands the real estate market is too bad to let consumer confidence improve meaningfully while income growth is dreadful. It is too difficult to compensate this with better exports. In Germany things are rosier: the housing market is clearly recovering, the confidence is still high, the unions will get a nice rise of the wages and the lower euro will help exports. This is not yet visible in better growth of the industrial production and retail sales but you can hope on improvement coming. So it is not that strange that the DAX is doing so well in the last weeks.

In the US it looked like the surprise indices had topped, but unexpectedly they came back at the old tops. The surprises refuse to vanish, we seem to need more patience (a few months?) before economists have drowned their black poison with excessive QE abuse.

In the Pacific the surprises disappoint. That is amazing, because we hear every day that things are going so well and that growth will not be that vulnerable for low growth in the West because they are selling more and more toe ach other in Asia. The growth in china seems to disappoint a bit more than previously thought. We have had the warnings: declining house prices, overspeculation in Wenzhou but especially clearly lower demand from steel and electricity than thought. The growth of China can drop to 7.5%, also because infrastructure spending is slowing and investments in real estate ought to soften also.

Risk appetite can increase a lot further but when Roubini is starting to get optimistic…

Several sentiment indicators signal an overbought equity market, but there are a lot of exceptions. One of the most important is the risk appetite index of Jonathan Wilmot of Credit Suisse (see chart via http://www.businessinsider.com/a-beautiful-chart-showing-3-decades-worth-of-panic-and-euphoria-2012-2#ixzz1lmPiHI7j). Already for decades that produces a reasonable picture how depressive investors are or how much they are in euphoria. At the moment the CS risk appetite index indicates that a big further improvement seems to be in the cards (when you have enough patience).

Since this week even Roubini provokes investors to become bullish for the short run (but after June the doom and gloom will retrun with a vengeance is his warning) many contrairy thinkers have had a heart attack. When even Roubini is bullish who is left to become bullish (and you need to convert bears to get new money in the markets)? Answer: nobody, so you have to sell.

That reminds me at January 1984. The most important Dutch guru in that time was Jacques Post of then ABN (not yet merged by AMRO or destroyed by Fortis). He had made excellent forecasts about the interest rates, that they should go to levels much higher than seen in everybody’s lifetime at the first and second oil crisis. Equities were something from the past and no longer suitable in the time of the coming social ideal state of Labour. He was a super bear and at long last after a huge bull market since August 1982 he became bullish in January 1984. In that time I just had bought my first equity call options. At that moment I had a big profit on those positions and I was persuaded by Post to become even more bullish: he had after all very good arguments that the markets should rise further. Of course the market went down almost immediately, about 15% (the phase DE in the four year cycle). In the end my calls became worthless. I had become a wiser man in investing, but I could also have been a few months of salary richer.

Equity market capitalisation by country

The US occupies a proud, uncontested first place in the table from Bespoke of equity market capitalisations. Because of the strong relative performance in 2011 the weight of the US even has risen. Still, the weight is much lower than at the end of the nineties or before 1980 when the weight was substantially more than 50%. The fall of the weight of the US is nothing compared to Japan after 1990, when it had a weight of c. 40%.
Also the UK had long ago a market cap of more than 40%. Until 1730 also the Netherlands had a high weight, but that is never well calculated (but it must have been the case in the time the VOC was the only quoted company in the world). Now the Netherlands (without Shell) has a nimble weight of only 0.5%.
Eye- catching is also that the weight of China (only B-shares) has diminished in 2011, while there were many IPO’s. Together with Hong Kong China occupies the second place.
Because of the excellent performance in the last decade of materials and energy and RIM Canada has risen a lot and given its market capitalisation it deserves a place in the G7 of developed countries.

Middle East still a powder keg: when will Israel attack!

The cartoon of KAL in The Economist explains how the situation in Syria is getting out of control. Lattakia (a small area at the coast in the northwest where Assad and his vassals come from) is shouting with joy that Russia is so nice for them, they are allowed to suppress the rest of the country, even while Russia is suggesting that a tad less of blood shedding should be better. A civil war seems to have started.

Meanwhile Israel is thinking how they can devastate the three nuclear sites of Iran. That they will start a military operation is almost unavoidable, so reports the Wall Street Journal (article: How should Israel bomb Iran). The defence of Iran is weak, of third world quality and so it must be possible for Israel to do quite some harm in Iran. VA conquest of Iran is way too difficult (even for the US), but a military operation is seen as a real opportunity. That should happen in the spring. Israel should accept that lots of the 200,000 missiles pointed at Israel will be fired and do their (also human) damage. Israel seems to be convinced they will not exist much longer after Iran has the bomb. The US has told Israel not to attack, but is setting the light at orange. The interpretation of Israel is that they have to attack soon before the US sets the light at deep red.

Iran is threatening to close the street of Hormuz, but they know that will cost them dealy in the actions the US will deliver to open the street again, even atom bombs are not completely out of the question. For Iran maybe it is worth the trouble when they can disturb the US elections, but then they have to act only in September/October. This doesn’t look like rational behaviour for Iran, you know you will suffer a lot from the US military toys. However, Woody Brock warns this could be seen as a game of trembling hands. In game theory this normally doesn’t end well: when a party think it will be attacked on false arguments things canneasily go out of hand. This seems to apply well on Iran nowadays.

Gold price growing with balance sheet of FED and ECB

The chart of Strategas shows that there is a reasonable correlation between the endless expanding of the balance sheets of the central banks and the gold price. Overliquidity ought to lead to higher gold prices. The connection between currency reserves in the world and the gold price is even stronger and longer (before 2006 the gold price didn’t move in tandem with the balance sheets of central banks).

Credit risk of government bonds diminishing; Emerging Markets better than France!

The table of Bespoke shows that in 2012 the insurance premium for almost all government bonds except Portugal is in a free fall.
The CDS premiums are still unbelievably high when you put them in historical context. 163 bp for France or 84 for Germany, that is quite a lot (where is the time that 10 bp was already considered as a rich premium?).
The world has changed, Latin America (Brazil, Mexico, Peru, Colombia and especially Chili) are now seen as more creditworthy than the most countries of the Eurozone and the same applies to Indonesia and the Philippines. Emerging Markets that only just have received the investment grade rating or even are considered as not investment grade when they don’t borrow in their own currency have now lower CDS premiums than France or Belgium (that has seen the biggest % fall of CDS premium in 2012).
The rating of the Developing Markets is still way too low compared to the underdeveloping countries in e.g. Europe.
Who should have thought in the Tequila crisis that debts of Mexico in 2012 would be judged safer than those of France?