Saturday, 19 December 2009


At the Fleetwood Mac concert this weekend!

No change to positions.

Will update next week, but not convinced by recent USD strength.

I see it as profit taking and position adjustments into year end.

The AUD and NZD will rally again in the new year. The USD and the JPY remain toast.

But stand by for when the game changes, when US interest rates actually do rise.

But still not until at least mid year at this stage.

Monday, 30 November 2009

Bank of Japan hints that there is room for fresh steps

NAGOYA, Japan, Nov 30 Reuters

head of the Bank of Japan said the bank will act decisively in the event of renewed financial market turmoil, his strongest hint yet at fresh support for the economy that analysts say could involve buying more government bonds or a return to quantitative easing. A government spokesman said quantitative easing will indeed be part of the talks when BOJ Governor Masaaki Shirakawa and Prime Minister Yukio Hatoyama meet this week, as the government leans on the central bank to act against deflation.

"We absolutely don't have any plan to prepare for exiting our easy policy," Shirakawa told business leaders in Nagoya, central Japan. "We had some developments in financial markets last week. If we experience financial market turmoil again, the BOJ will act aggressively and decisively," he said. Despite mounting pressure from the government, which is worried about the risk of another recession, the BOJ has said there is little it can do beyond keeping interest rates at the current 0.1 % to push up prices.

But analysts say the BOJ will eventually be pressed to increase its government bond buying or revert to a quantitative easing policy of flooding markets with extra cash. "It is likely the BOJ will do more. The most important measure is the BOJ's purchase of government bonds," said Simon Wong, a regional economist at Standard Chartered in Hong Kong. "The current path paves the way for the BOJ to further ease in terms of buying of JGBs, and the current inflation environment creates a perfect backdrop to expand monetary policy."
And that will mean a weaker yen as they will be doing what the USA and UK are doing...printing money!! KT

Asked whether the BOJ could increase its bond purchases, Shirakawa said the bank will take the most appropriate policy action to deal with economic and financial developments at the time. "The financial market is a living thing, so we'll always think of how best to maintain market stability," Shirakawa told a news conference. "We're in a position now to provide ample liquidity to the market." He said he recognised the pain felt by Japanese companies from the yen's surge to a 14-year high against the dollar, adding that he would closely examine how currency moves affect the economy. So print some more money! KT

He said the BOJ held a very cautious view of the economy and shared the government's view that the country was in mild deflation in the sense that price falls are likely to persist.

The government has declared Japan to be in deflation and has criticised as too optimistic the BOJ's view that annual consumer price falls will gradually ease and that another recession is unlikely. Hatoyama's government, only two months old and largely untested on fiscal policy, has adoptedthe kind of heavy-handed approach towards the BOJ that previous governments have used to influence monetary policy. But it has been vague on exactly what it wants the BOJ to do. The administration is considering including measures to deal with the recent surge in the yen in an economic stimulus package it plans to compile this week.

Data on Monday showed industrial output rose 0.5 percent in October and manufacturers forecast further rises in the following two months, easing some concern that the economy could slow to a standstill or even contract early next year. But the yen's surge last week is hurting manufacturers' profitability and could derail an export-driven recovery. Finance Minister Hirohisa Fujii left markets guessing on whether Tokyo would step into the currency market to stem further yen rises, warning on Monday that he had never said intervention was impossible.

Voter support for Hatoyama's cabinet is above 60 percent but has slipped gradually. The
nightmare scenario for the cabinet is an economic downturn ahead of an upper house election in mid-2010. A rebound in the manufacturing sector has been driving Japan's recovery since earlier this year. The economy grew 1.2 percent in July-September after a revised 0.7 percent expansion the preceding quarter.

As the economy weakens, the yen will become a real political football. QE is not far away here! KT

Sunday, 22 November 2009

Beef, lamb and dairy prices

The Press takes a look at developments in beef, lamb and dairy prices.

In the past month, the value of the New Zealand dollar has declined by 3 per cent against the British pound. However, this is still 13 per cent above its level at the same time last year, and 17 per cent above the average of the previous five years.

Meanwhile, the British CKT lamb leg price (cost, insurance and freight) is at the same level as this time last year and appears to have hit a ceiling for now. This would indicate exporters' margins have reduced in the past year, which is now being reflected in the falling schedule prices at the farm gate.

Why we sell our lamb at the UK lamb prices is stunning. NZ lamb is the best in the world, we must brand it as such, and be more expensive than other lamb...because it is the best! We still have a long way to go. We have to stop being commodity exporters and export a brand! KT

A further decline in schedules of up to 15 cents a kilogram was experienced across the country, with the larger falls occurring in the North Island. This has seen the schedule price of a 17.5kg lamb slip below $90 for the first time since March. Prime lambs at saleyards appear to have come into line with schedules, particularly in the North Island, where a medium prime lamb is fetching just under $90. In the South Island, the same lamb has an average $97 price.

United States imported bull gained a further US2c/lb this week, lifting to US142c/lb. The US6c/lb lift in price over the past two weeks has come about as the availability of imported bull remains tight. It is still early in New Zealand's new slaughter season, but bull numbers are already well down on where many market participants expected them to be.

Figures for the five weeks of the new season suggest New Zealand is already 6000 head down on its five- year average as good grass cover remains prevalent across the country.
As mentioned in earlier reports, this rise in price will be tested when an influx in slaughter numbers is seen.

US imported cow gained US1c/lb, as the US domestic market looked to firm slightly on the back of improved export figures to Asia. US imported cow finished the week at US131c/lb. The strengthening US imported market has flowed through to farm gate prices, with an average 4c/kg lift in schedule prices across the grades.

Grain fed beef is more expensive than grass fed beef. But NZ cows live on average 7-8 years longer than US cows. NZ cows are outside eating grass in the sunshine. US cows are inside, standing on concrete and eating corn. It's like battrey hens. I know which beef I would rather eat, and yet most of our beef goes into mince for burgers. It is a crime. KT


The NZX Agrifax weighted- average dairy commodity price peaked in November 2007 at US$5460 a tonne, before it fell 58 per cent over the course of 18 months to bottom out at US$2290 in June. Since then, the weighted-average dairy commodity price has recovered almost half of these losses, this week lifting to US$3990/tonne.

This highlights the volatility of the dairy commodities market. Anhydrous milkfat's rapid price gains over the past couple of weeks simmered this week, with only a 2 per cent rise from US$4800/tonne to US$4900/tonne. Casein and cheddar had minimal gains of 1 per cent to US$8200/tonne and US$3800/tonne respectively.

Underlying demand for wholemilk powder remains firm, adding a further US$100/tonne this week to reach US$3500/tonne. Skim milk powder's gain was slightly larger at US$150/tonne to US$3350/tonne. Butter firmed over the week, climbing 7 per cent from US$3450/ tonne to US$3700/tonne.

More than 50% of French milk goes into making cheese. Most of the exported NZ milk production goes into milk powder, the lowest end of the product range. We have to go up the value chain, then our produce exporters will be able to handle a stronger currency without getting killed.

When you have a brand, if the exchange rate goes up, you put the price up!
If you export a commodity, you are stuck with the overseas price.

We must change the model, or we are doomed!! KT

Saturday, 21 November 2009

On Monetary Policy

Here are two great posts from The Visible Hand in Economics:

On Monetary Policy

and on

the Brazilian experience

Both well worth the read, and providing some sense, compared to some of the silly comments
being made here and here.

The debate is good, but really some of the comments are so ill informed!

Rising for a fall?

This is a good summary of the current state of play, with opinions from both sides:
Rising for a fall?
Saturday Nov 21, 2009
By Heather Stewart and Larry Elliott, Observer

The din from the commodity pits on the Chicago exchanges is growing louder. Real estate agents in London's Kensington and Chelsea say they can't meet demand for 1 million-1.5 million ($2.2 million-$3.4 million) homes. Wall Street's high-tech Nasdaq exchange has wheeled out its confetti machine for the first time since the credit crunch.

Everywhere the story is the same. Gold: at a record high, above US$1100 ($1476) an ounce. Shares: 50 per cent up since March. Oil: back to almost US$80 a barrel. Bonds: yields on two-year gilts (British government bonds) at a record low. Average British house prices: up 11,000 this year.

Around the world, asset prices are booming. Relief that the global economy has avoided the Armageddon feared in March, combined with large dollops of virtually free money, have helped put a smile back on the faces of the speculators. Too big a smile, according to some experts, since the buoyancy of asset markets is not reflected in the real economy.

Away from the frenzied financial world, among struggling firms and cash-strapped families, signs of recovery from the worst downturn since the 1930s have been much patchier. The US returned to growth in the third quarter, thanks to Washington's cash-for-clunkers scheme to encourage car sales, and tax breaks for first-time homebuyers. But unemployment is at its highest level since 1983 and the number of Americans losing their homes is still rocketing.

In Europe, the big economies of Germany and France returned to growth six months ago but consumer spending remains painfully weak. In Britain, the latest official figures show the economy still contracting in the autumn after six successive quarters of negative figures. Mervyn King, Bank of England Governor, warned last week that Britain has "only just started on the road to recovery".

As share prices rocket, the question is: are policymakers trying to solve the problems caused by one of the biggest bubbles in history by pumping up another speculative frenzy?

This was what happened after dotcom shares collapsed in 2000, when former Federal Reserve Chairman Alan Greenspan slashed US interest rates to 1 per cent and left them there for three years, setting off the biggest housing boom in US history. And this time, central banks and finance ministries have added tax cuts, spending increases and "quantitative easing" - the creation of electronic money - and so created an even headier brew.

Ravi Batra, US economist and author of Greenspan's Fraud, says: "We are repeating the mistakes of Greenspan but on a much bigger scale. There is going to be another big pop in the new year."

He is not the only Cassandra. Nouriel Roubini, one of the few economists to see the crisis coming, warned this month that the US had replaced Japan as the centre of the global "carry trade" (whereby investors borrow money cheaply in a currency with low interest rates and buy risky assets that offer a return higher than the interest due on the loan).

With the US Federal Reserve pledging to keep interest rates only just above zero for "an extended period", Roubini says dollars, instead of yen, are now being used in "the mother of all carry trades", forcing up the price of all kinds of other assets.

Central bankers past and present sought last week to allay fears that, just like last time, it would all end in tears. Frederic Mishkin, a former Federal Reserve board member, said there were two sorts of bubbles: "credit boom" bubbles and "irrational exuberance" bubbles. Credit boom bubbles - like the one that burst in 2007 - were far more dangerous than irrational exuberance bubbles, such as the wild buying of technology shares, he argued, because they created a toxic feedback loop. A rise in the price of an asset such as housing allows consumers to borrow, but they then invest the money in buying a bigger home, driving prices up ever further - and so it goes on.

When prices plummet, hapless homeowners not only have a property worth a fraction of what they thought, they're also sitting on a mountain of debt. Mishkin sees the dotcom boom as less catastrophic because it didn't involve this vicious circle, and he regards the current rise in asset prices as being of this harmless, irrational kind.

Mervyn King agrees with this analysis. During a sepulchral press conference to launch the Bank of England's quarterly inflation report, the governor made it clear that he was losing no sleep over the rise in asset prices. The bank believes some increase in such prices - bonds and shares, in particular - is good for the economy because it lowers the cost of financing for companies and makes them more recession-proof. It is one of the channels by which the Bank believes the 200 billion it is injecting through quantitative easing will feed through to the rest of Britain.

King's message was clear: after a near-6 per cent drop in output since early 2008, it is premature to be drawing comparisons with the Dutch tulip mania of the 1630s, Isaac Newton losing his shirt in the South Sea Bubble of 1720, the boom-busts in US railway shares in the 19th century, or any of the periodic speculative stock market frenzies of the 20th century.

King said: "It's very important that we don't end up in a world in which everyone describes every increase in asset prices as a bubble, and every fall in asset prices as the bursting of a bubble." He made it clear he was not worried because there had not been the "rapid extension of credit" seen in the early 2000s - indeed, we are gripped by a credit shortage.

GERARD LYONS, chief economist at Standard Chartered, says he sees no sign yet that prices in the US or Britain have risen out of control: "It should not be a surprise that in the early stages of a recovery, property prices and equity prices rise, particularly if they have taken a big hit."

He is concerned, however, about China, where a return to strong growth has been achieved with a massive government stimulus programme, which has led to a jump in bank lending - potentially making it a damaging credit boom.

"Where asset prices have risen sharply alongside rampant lending and credit growth, there is more reason to think it's a bubble, and China fits into that category," he says, though he adds Beijing is well aware of the risk and is now clamping down on lending.

Even the severest critics of Mishkin's and King's laid-back approach to the current buying spree accept that some recovery in asset prices - of perhaps 20 per cent - has been justified. After the collapse of Lehman Brothers in September 2008, financial markets continued to fall sharply throughout the northern winter as global output contracted and credit dried up. By March, investors had fully priced in the possibility that the world economy could be heading for a new Great Depression, so even the first tentative pieces of good economic news sparked a relief rally.

But markets tend to have only two moods: deep gloom and wild euphoria.

Having prepared for the return of soup kitchens in the spring, they are now betting on a strong and rapid return to business as usual - a so-called "V-shaped recovery". And that's what worries analysts, who are not comforted by the age-old cry that "it's different this time".

"It sounds too good to be true and it is," says Robert Barrie of Credit Suisse. "It's time to take asset prices and credit more seriously. They can have long-run effects that are big and problematic. They took a long time to show themselves last time and could do so again."

Concerns about a new speculative bubble fall into three categories. The first is that the recent track record of central banks does not engender much optimism that they will be able to distinguish between a credit bubble and an irrational exuberance bubble, or indeed spot either sort developing.

The fed, for example, denied that the US housing market was a bubble right up until the global financial system was paralysed by the sub-prime meltdown in 2007, and the Bank of England flatly rejected arguments that central banks ought to "lean against the wind" and prevent prices in markets such as housing getting out of kilter.

Moreover, as London market analyst Andrew Smithers noted last week, even the popping of the irrational exuberance dotcom bubble, dismissed by Mishkin as relatively harmless, had baleful long-term consequences, since it led to the cuts in interest rates and taxes in the US that fed the housing bubble.

A second concern is that the fundamentals of the global economy remain weak, and when investors catch up with that grim reality, there will be another brutal crash. "The speculative economy that caused the problems in the first place has again reared its head," says Graham Turner of GFC Economics. "But the real economy continues to flounder; 2010 will be a very big year because the global economy is not fixed."

Danny Gabay, of Fathom Consulting, says the reaction of markets this month to the statement of G20 finance ministers in St Andrews, Scotland was indicative of the over-optimistic mood. "The communique said that conditions were far too weak to consider removing the economic stimulus, yet stock markets rallied by 2 per cent. Ministers were saying things are so fragile they daren't take their foot off the pedal."

Finally, there is the worry that the underlying reason bubbles keep recurring is that the modern global economy can only run on cheap money and debt, which fuel regular and powerful speculative cycles.

Batra says that in the US there has been a profound mismatch between the increased supply of goods from improved productivity and the squeeze on real wages dating back to Ronald Reagan's presidency. "Greenspan resorted to debt creation and budget deficits to bring demand and supply into balance," he says.

Turner says bubbles reflect how global capitalism now works, with firms moving operations offshore to cut wage costs, leaving demand in the world's major economies so weak that it can only be kept going by spoon-feeding consumers with cheap credit.

Even some who believe that we are back in a bubble say central bankers have little choice, such is the scale of the downturn. "My view is that we have to go on with quantitative easing for as long as we possibly can," says Crispin Odey, a London hedge fund manager.

So what happens next? Policymakers hope the rise in asset prices is a catalyst for stronger growth next year, with consumers feeling richer as house and share prices rise and so spending more. Businesses will respond to stronger consumer demand and easier financing by boosting investment and creating new jobs.

But at some point, governments and central banks will have to withdraw their emergency support by pushing up interest rates, selling the bonds they bought through quantitative easing and cutting public spending. Only then will it become clear whether central bankers are cleverly "smoothing" the most painful adjustment in the world economy since World War II, as King argues - or unleashing yet another bout of irrational exuberance.

Exuberance breaking out all over:

Shares: Heading for a fall?
Gut-wrenching declines in world share prices became a relentless routine at the height of the financial crisis, with Wall Street's Dow Jones index dropping by almost 400 points in a single day in the weeks after Lehman Brothers collapsed.

The Dow peaked at more than 14,000 in October 2007. By early this year, when traders were seriously beginning to factor in the possibility that recession in all the world's major economies would give way to a 21st-century Great Depression, it had more than halved.

Yet most of the world's indices have roared back from their lows; and some countries, including France and Germany, bounced out of the downturn more quickly than many expected.

In New Zealand, the NZX50 index fell by 44 per cent from its peak in 2007. But from its low point in March, the market has climbed by 30 per cent.

The Dow is now back above 10,000; the FTSE100 index of stocks on the London exchange has gained 50 per cent since it bottomed out in March and is back above 5300; emerging economies' stock markets have roared ahead.

Analysts are divided about whether this is a sustainable resurgence - or a dangerous bubble.

Oil: Recovering lost ground
During the relatively innocent pre-Lehman days of mid-2008, central banks fretted about inflation as oil prices surged to their record of US$147 ($197) a barrel.

Prices had already been on the slide before the financial crisis reached a peak of intensity in September and October last year, but then crashed to a low of just US$38 a barrel between Christmas and the new year as the global economy went into reverse.

Since then, prices of crude have been steadily rising as China has stockpiled commodities and traders have anticipated renewed demand throughout the world.

News that every G7 country bar Britain is growing again has helped to underpin confidence in rising energy prices and oil briefly clambered back above the US$80 mark this month. Some broking firms believe that prices are now on course to surge back through US$100 a barrel, although this would have a dampening effect on the global recovery.

Bonds: Key indicators of success
Rising prices for government bonds should come as no surprise, because they are a key indicator of the success of the aggressive policy response to the crisis by central banks.

Under "quantitative easing" - the creation of electronic money - the central bank purchases bonds from the commercial banks. The reduced supply of bonds pushes up their price and reduces yields, which move in the opposite direction to the price.

Long-term interest rates - which affect both what companies pay for their borrowing and what households pay for fixed-rate mortgages - have been driven down as a result of this policy.

In the US, the government has not just bought government bonds but corporate debt as well, to help reopen frozen credit markets and enable firms to borrow more cheaply. In Britain, the policy has been more beneficial for large corporations than small- and medium-sized companies, which are dependent on bank loans.

Gold: Safe as houses
Gold is the ultimate "safe haven" commodity in times of trouble - the Bank of England has a gold ingot that was damaged, but not destroyed, by a World War II bomb. Gold has surged in price by almost 50 per cent since January, as investors fled riskier assets.

This week the cost of a troy ounce of the precious metal hit another record, above U$1140, and TV advertisements have appeared on both sides of the Atlantic urging consumers to dust-off long forgotten jewellery and sell it for cash.

Gold has partly benefited from the waning power of the US dollar, as the two tend to move in opposite directions. The most potent symbol of the glittering metal's rising appeal came this month, when the Indian central bank bought 200 tonnes of gold from the International Monetary Fund, replacing rapidly depreciating dollar assets.

However, analysts warn that there have been unsustainable bubbles in the gold market before: the price rocketed to a peak of US$850 an ounce in early 1980, before rapidly losing more than half its value.

Housing: Don't believe the hype
Gazumping is back in London's top postcodes, mortgage approvals are on the rise and the long-predicted housing crash turned out to be a short, sharp shock, instead of the early 90s' long slog.

House prices fell 20 per cent between 2007 and this year as confidence collapsed, and it became near-impossible to secure a mortgage. But in the northern spring prices began to bounce back, and have risen for the last six months.

They are now down 13.1 per cent from the peak - though the bounce has been concentrated in London. Rock-bottom interest rates helped prevent the rash of repossessions and forced sales of other crashes, helping to prevent prices from falling off a cliff. But with fewer homes changing hands than in the boom years, some believe the crash is far from over.

Even estate agents, usually the most optimistic observers, warn that a shortage of properties for sale could be distorting the market.

In New Zealand, Quotable Value's house price index fell 10 per cent from late 2007 to early this year, but climbed by about 2 per cent in the three months to June, and according to Real Estate Institute figures, prices have kept climbing since.

Friday, 20 November 2009

Capital controls not the answer

ADRIAN CHANG 20 November 2009
The Independent
New Zealand's volatile currency woes won't be resolved by capital controls, according to a visiting central banker from a country with a history of fiddling with the dials.

Alexandre Pundek Rocha, senior adviser to the board of the Central Bank of Brazil, who was visiting New Zealand this week to promote greater business ties with Brazil, told The Independent capital controls in his region have a long history of failure.

His comments come during a period of exceptional currency volatility in New Zealand, with the kiwi increasing by about 52 per cent since March. Trade groups, economists and commentators complain unchecked capital inflows from the carry trade have hijacked the dollar.

The arguments are familiar to Pundek, who saw similar things happen in Brazil during the 1990s. He concedes countries like Brazil and New Zealand tend to attract speculative capital and have a comparative disadvantage with China, which pegs its currency at an undervalued rate.

Brazil abandoned its peg against the US dollar in January 1999 after speculative attacks on the Brazilian real caused its peg to fail. The central bank then turned to inflation targeting, much like the system in New Zealand, but has maintained much wider powers to interfere on foreign capital markets than our own Reserve Bank.

For example, it can unilaterally set a tax rate of between zero to 25 per cent on foreign capital entering the country to invest in fixed-interest bonds or shares. It exercised this power on October 20, instituting a 2 per cent tax on new money entering the country to invest in these asset classes.

Our own Reserve Bank governor, Alan Bollard, has had to restrict himself to rare and secretive forays into the currency markets and largely fruitless attempts at jawboning the dollar down.

Has Brazil's capital tax worked? It's difficult to tell, says Pundek. Capital flows have been exactly the same before and after the tax, but that doesn't mean it has failed. "You never can tell, because the flows today [without the tax] could have been even higher than they are today."

But his personal view is that imposing capital controls does nothing to address the underlying issues. He recalls in 1999 Brazil had an 8 per cent tax on incoming capital but that failed to stop a flood of speculative capital pouring into the country and driving up its currency, the real. "You delay the process, but you can never stop the process." Exactly

Senior Brazilian trade representative Mario Marconini from the Federation of Industries of Sao Paulo, says there's a growing realisation from Brazilian businesses that trying to control the exchange rate is fruitless. Yup

The long-term answer can only come from concerted international action to apply pressure on China to allow more flexibility in its exchange rate, Pundek says.

By removing China's artificially low exchange rate, the massive trade imbalances created by that rate can be corrected.

China remains the problem - KT

Wednesday, 11 November 2009

Economics focus: The lessons of 1937 | The Economist

The lessons of 1937 Jun 18th 2009
From The Economist

In a guest article, Christina Romer says policymakers must learn from the errors that prolonged the Depression

Christina Romer is the chairwoman of Barack Obama's Council of Economic Advisers and a scholar of the Depression

At a recent congressional hearing I cautiously noted some “glimmers of hope” that the economy could stabilise and perhaps start to rebound later in the year. I was asked if this meant that we should cancel much of the remaining spending in the $787 billion American Recovery and Reinvestment Act. I responded that the expected recovery was both months away and predicated on Recovery Act spending ramping up greatly.

Only later did it hit me that I should have told the story of 1937. The recovery from the Depression is often described as slow because America did not return to full employment until after the outbreak of the second world war. But the truth is the recovery in the four years after Franklin Roosevelt took office in 1933 was incredibly rapid. Annual real GDP growth averaged over 9%. Unemployment fell from 25% to 14%.

The second world war aside, the United States has never experienced such sustained, rapid growth. However, that growth was halted by a second severe downturn in 1937-38, when unemployment surged again to 19%. The fundamental cause of this second recession was an unfortunate, and largely inadvertent, switch to contractionary fiscal and monetary policy. One source of the growth in 1936 was that Congress had overridden Mr Roosevelt’s veto and passed a large bonus for veterans of the first world war.

In 1937, this fiscal stimulus disappeared. In addition, social-security taxes were collected for the first time. These factors reduced the deficit by roughly 2.5% of GDP, exerting significant contractionary pressure. Also important was an accidental switch to contractionary monetary policy.

In 1936 the Federal Reserve began to worry about its “exit strategy”. After several years of relatively loose monetary policy, American banks were holding large quantities of reserves in excess of their legislated requirements. Monetary policymakers feared these excess reserves would make it difficult to tighten if inflation developed or if “speculative excess” began again on Wall Street.

In July 1936 the Fed’s board of governors stated that existing excess reserves could “create an injurious credit expansion” and that it had “decided to lock up” those excess reserves “as a measure of prevention”. The Fed then doubled reserve requirements in a series of steps. Unfortunately it turned out that banks, still nervous after the financial panics of the early 1930s, wanted to hold excess reserves as a cushion.

When that excess was legislated away, they scrambled to replace it by reducing lending. According to a classic study of the Depression by Milton Friedman and Anna Schwartz, the resulting monetary contraction was a central cause of the 1937-38 recession. The 1937 episode provides a cautionary tale.

The urge to declare victory and get back to normal policy after an economic crisis is strong. That urge needs to be resisted until the economy is again approaching full employment. Financial crises, in particular, tend to leave scars that make financial institutions, households and firms behave differently. If the government withdraws support too early, a return to economic decline or even panic could follow.

In this regard, not only should we not prematurely stop Recovery Act spending, we need to plan carefully for its expiration. According to the Congressional Budget Office, the Recovery Act will provide nearly $400 billion of stimulus in the 2010 fiscal year, but just over $130 billion in 2011. This implies a fiscal contraction of about 2% of GDP. If all goes well, private demand will have increased enough by then to fill the gap. If that is not the case, broad policy support may need to be sustained somewhat longer.

Perhaps a more fundamental lesson is that policymakers should find constructive ways to respond to the natural pressure to cut back on stimulus. For example, the Federal Reserve’s balance-sheet has more than doubled during the crisis, drawing considerable attention.

Monetary policymakers have made it clear that they believe continued monetary ease is appropriate. Moreover, the Fed’s credit programmes are to some degree self-eliminating: as demand for its special credit facilities shrinks, so will its balance-sheet. But now may also be a sensible time to grant the Fed additional tools to help its balance-sheet contract once the economy has recovered.

Some have suggested that the Fed be authorised to issue debt, as many other central banks do. This would enhance its ability to withdraw excess cash from the financial system. Granting such additional tools now could provide confidence that the Fed will be able to respond to inflationary pressures, without it having to create that confidence by actually tightening prematurely. Fiscal health check Now is also the time to think about our long-run fiscal situation.

Despite the large budget deficit President Obama inherited, dealing with the current crisis required increasing the deficit substantially. To switch to austerity in the immediate future would surely set back recovery and risk a 1937-like recession-within-a-recession. But many are legitimately concerned about the longer-term budget situation. That is why the president has laid out a plan to shrink the deficit he inherited by half and has repeatedly emphasised the need to reduce the long-term deficit and put the debt-to-GDP ratio on a declining trajectory.

In this regard, health-care reform presents a golden opportunity. The fundamental source of long-run deficits is rising health-care expenditures. By coupling the expansion of coverage with reforms that significantly slow the growth of health-care costs, we can dramatically improve the long-run fiscal situation without tightening prematurely. As someone who has written somewhat critically of the short-sightedness of policymakers in the late 1930s, I feel new humility.

I can see that the pressures they were under were probably enormous. Policymakers today need to learn from their experiences and respond to the same pressures constructively, without derailing the recovery before it has even begun.

This is an excellent article, still relevant as to why US interest rates are not going up anytime soon. KT

Monday, 9 November 2009

No Change

Have not altered positions at all at this stage.
Still happy with all positions.

Saturday, 24 October 2009

Position Update - Finally!

Here are the trades I am active in:

Long AUD 3,735,990.04 short JPY at 82.79 average.

Current rate: 84.88
Current: Finally!! A Gain by 209 points.

By buying AUD I have converted this trade from a crappy USD/JPY deal to a AUD/JPY deal. See post here. Target is 85.00 enroute to 105.00.

I remain comfortable with carry trades.

Extra background:
Sold USD3m and bought AUD at 0.8030, thus making the USD/JPY trade long AUD3,735,990.04 short JPY at 82.79.

Long NZD 3m short JPY at average of 57.23.

Current rate: 69.42
Current: Gain 1,219 points.

I remain comfortable with carry trades with the NZD/JPY up over 56.5% this year!
Happy with the current exposure.


Current rate: 1.5000

Overall I see the USD weakening considerably due to quantitative easing pressures. Recent data, especially in housing and unemployment indicates there is no pressure to change monetary policy, and easy conditions in the US will be the norm for a considerable time yet to come.

Cashed out: Way too soon!
Long EUR1m (1.4465) short USD at 1.4550, for a gain of USD8,500.00, NZD12,142.86 (not counting carry interest).

Long AUD2m short USD at 0.8670.

Current rate: 0.9222
Current: Gain 552 points.

I took profits (see below) at 0.8610, but then reinstated again, as it is clear that the AUD/USD has a long way to go yet. Target is now 1.0000.

Cashed out:
Long AUD2m (0.7312) short USD at 0.8610, for a gain of AUD301,509.87, NZD369,950.76 (not counting carry interest).

Long NZD2m short USD at .7160.

Current rate: 0.7542
Current : Gain 382 points.

I took profits (see below) at 0.7010, but then reinstated again, as it is clear that the NZD/USD has a long way to go yet. Target is now the highs of 0.8216.

Cashed out:
Long NZD2m (0.6241) short USD at 0.7010, for a gain of NZD219,400.86 (not counting carry interest).

Unrealised gains NZD886k (AUD/JPY +112k, NZD/JPY +527k, AUD/USD +146k, NZD/USD +101K).

Previous realised balance: NZD1,742,865.90

Plus EUR/USD realised gains of NZD12,142.86
Plus AUD/USD realised gains of NZD369,950.76
Plus NZD/USD realised gains of NZD219,400.86

Total gains banked since August 2007:


English relaxed over high dollar

Published today in the press:

New Zealand's high dollar is a vote of confidence in the country's economy, and there is no silver bullet to bring it down for exporters, Finance Minister Bill English says.

The kiwi dollar was trading against the US yesterday at around 76c.

"The dollar is one way the market is telling us Australia and New Zealand have performing economies, because relatively speaking we are," Mr English told Canterbury business leaders yesterday.

Taking a five-year average, the New Zealand dollar was the highest it had been since the 1960s so concerns about the dollar did have some historical basis, Mr English said. "What can we do about this? In many respects not much. We've just got to make sure we've got the story clear."

Mr English said the dollar was high compared with the US and the British pound, but was not high relative to the Australian dollar and Australia was still New Zealand's biggest export market.

"One of the reasons that we are high against the UK and the US is because frankly they are in a bit of a mess."

New Zealand's economy had not shrunk by as much as Britain, US and Europe.
Another driver of the high dollar was low interest rates in other countries, Mr English said.

Interest rates in the US, Japan and the UK were either zero or low, so when investors were offered a triple A-rated New Zealand Government bond at 5.5 percent interest, it was attractive to them compared with the alternative.

New Zealand was now attracting interest from people who were wanting to diversify away from US dollars to buy New Zealand debt or the New Zealand dollar, he said.

Those things were out of the Government's control. "If there was a silver bullet to do with the dollar then we would fire it, but there is not one." The high New Zealand dollar was one of the reasons the export sector had shrunk in the last decade, he said.

New Zealand's economy had an imbalance between the tradeable and non-tradeable sectors. In the last five years the tradeable sector had shrunk by 10 percent and the non-tradeable sector had grown by 15 percent. The biggest driver of that growth was government spending. Growth in the future would not come from a fast-growing government or fast-growing credit, it had to come from the tradeable sector.

"It's (the tradeable sector) up on blocks and someone has taken the wheels."

Mr English also said countries all around the world were going to increase taxes but one country that would not was Australia, which was competing directly for New Zealand's companies and its people.

"We can not afford to raise taxes if they do not," he said.

Excellent article!

I will post later on today as to why, but we need more of this thinking!!

Thursday, 15 October 2009

Apologies for lack of updates!

But it's been bloody busy!!

Tuesday, 29 September 2009

Why Europe Recovers Before the US

Here is a great article on why I like the Euro:

Jerry Bowyer CNBC 24 Sep 2009

“I will not let anyone tell me that we must spend more money." - German Chancellor Angela Merkel, March 29th, 2009

America works even when it's tried in Western Europe, and the old world fails even when it's tried in North America.

This past spring, United Kingdom Prime Minister Gordon Brown and United States President Barack Obama attempted to launch a "global new deal." They attempted to persuade other developed countries, especially in the European Union, to embark on a coordinated program of very high stimulus spending.

Angela Merkel led the opposition, issuing a resounding 'nein'. French President Nicholas Sarkozy added his 'non' to the chorus shortly thereafter. The rest is history. The Obama administration enacted a stupendously large spending program; the United Kingdom followed suit. The European Union resisted the clarion call of international Keynesianism and left the recovery largely to the private sector.

And then, something fascinating happened: They recovered, and we did not. Some of these numbers are a little close to the line and clearly other factors were involved too: The US has had the largest stimulus so far, Britain after that, Germany slightly less than Britain and France much less.

So far,the GDP data shown below indicates that the second quarter (that is, roughly the spring season) growth numbers showed expansion in the two countries that most conspicuously failed to used Keynesian tools. The data also shows that the two countries which most stubbornly hewed to the Keynesian line continued to contract.

Famed French economist Guy Sorman recently told me, "We invented the word 'entrepreneur', exported it to you, and then forgot it. Now, you are sending it back to us."

He's right. At precisely the moment when the United States is shifting toward discarded European solutions such as nationalization, inflation, and fiscal manipulation, a number of European countries are liberalizing their markets.

Angela Merkel has been described by many observers as the German version of Margaret Thatcher. The entrepreneurial Sarkozy ran on a platform of creating a France that "wakes up early."

Not all of this is a matter of electoral shift. The European Union has some structural factors which have helped it resist bad policies. For example, the Union itself imposes certain spending and debt limits on member countries. These limits emboldened European politicians who resisted Anglo-American policy bullying.

Furthermore, the European experience with hyperinflation earlier in the twentieth century persuaded them to focus their central bank exclusively on matters of price stability. The United States, on the other hand, has given our own central bank a "dual mandate" for inflation control to be balanced by low unemployment. In other words, the fiscal phrenology of the Philips curve was hard-wired into the very structure of the Fed.

It's not over yet; there are promising signs that perhaps last year's electoral swing to the left was a summer/fall fling rather than a serious relationship. Time will tell.

But for now, we see played out across the Atlantic a dictum uttered by Someone who was neither a European nor an American: The last shall be first, and the first shall be last.

And it has resulted in debt that the children of the children being born today will be paying off.

It also means the USD must weaken against the Euro in the long term.

It is now just a matter of time - KT.

AUD and NZD trades

I re-established my long NZD and AUD trades yesterday.

Bought AUD2m sold USD at 0.8670.
Bought NZD2m sold USD at 0.7160.

Target 0.9000 and 0.7500.

Review at .8000 and 0.6800

A weaker greenback?

I totally agree with this article from Reuters. The USD will continue to weaken in a big way!

Neal Kimberley (Reuters 28 September)
Twenty-four years ago, major nations called for depreciation of the dollar to rebalance the global economy.

Now, as another effort at rebalancing looms, the dollar will again bear the brunt - though officials will try to ensure its fall is less dramatic this time.

That's the implication of President Barack Obama's announcement this week that he will push world leaders for a new global "framework" in which the United States would cut its huge trade and budget deficits.

Agreeing on this framework would be politically difficult, since it would require policy changes by many countries - China, for example, would probably have to rein in its explosive export-led growth.

But as the euro's climb to a new one-year high versus the dollar this morning shows, markets are starting to think the rebalancing process may start as soon as this week's Pittsburgh summit of leaders from the Group of 20 nations.

The Plaza Accord of 1985 called for "orderly appreciation of the main non-dollar currencies against the dollar"; it was followed by central banks' coordinated intervention to ensure that happened.

This time, with the world shakily emerging from a financial crisis, policymakers are likely to try to manage the dollar's drop in a more low-key fashion.

They are unlikely to issue an explicit call for the dollar to fall. In fact, the U.S. Treasury may continue proclaiming its "strong dollar policy" in an attempt to keep the markets calm.

No one in the G20 wants to risk a freefall of the dollar that could disrupt global trade as it recovers from recession. And in contrast to the 1980s, developing nations such as China are now challenging the dollar's long-term role as the world's top reserve currency.

The dollar's premier status helps the United States to obtain foreign capital and in order to keep that access, Washington is likely to encourage central banks around the world to continue holding dollars. This would require slow depreciation of the currency rather than a panicky slide.

So unless policymakers completely lose control of the forex markets - which cannot entirely be ruled out - the dollar's slide is likely to be slower and smaller than it was after the Plaza Accord, when the currency sank about 50 percent versus the yen between Sept. 22, 1985 and the end of 1987.

The overall direction of the dollar does not look in doubt, however. Top presidential adviser Lawrence Summers has said he wants a U.S. economy that is "more export-oriented and less consumption-oriented".

A lower dollar is a logical tool to achieve that goal, and letting the currency weaken would probably be faster and easier than most other big policy steps to reshape the U.S. economy, such as tax changes and health reform.

The International Monetary Fund, which is advising G20 nations on economy policy, is hinting heavily at the need for currency realignment.

In a report released this week, it said "current policies and the assumed constellation of exchange rates may not be sufficient for the needed rebalancing of demand."

It added that policy reforms by the world's big economies to restore growth "would be more effective if accompanied by a real effective renminbi appreciation, offset by euro and dollar depreciation".

An international understanding on dollar depreciation may well not be reached in Pittsburgh. A French official said last Friday that Pittsburgh would merely set the stage for future talks on foreign exchange rates.

"At this stage there will not be currency discussions, but the framework that we hope to put in a way of discussing later the question of exchange rates," said the official, who declined to be named.

But giving China and other developing countries more power in the IMF and the World Bank could be part of an informal quid pro quo in which China quietly undertook to resume appreciating the yuan against the dollar.

The rise of the euro as high as $1.4821, breaking the December 2008 peak of $1.4719, is a technical signal that the market thinks the dollar is increasingly vulnerable.

For many traders, the break suggests a good chance of a rise to at least the psychologically important level of $1.50 in coming weeks or months. Yup

The European Central Bank might seek to limit speculation against the dollar by expressing concern about such a move. But the market does not appear to worry that the ECB could actually intervene to support the dollar.

When the European Union's Economic and Monetary Affairs Commissioner Joaquin Almunia said last week that excessive appreciation of the euro could hurt Europe's economy, the euro fell back only marginally and briefly.

The market knows that even at levels just above $1.5000, the euro would remain well below its all-time high against the dollar of $1.6038, hit in July 2008.

And any rise of the euro against the dollar in the current circumstances would probably be seen by policymakers as the result of general dollar weakness, not excessive euro strength. When euro/dollar reached its July 2008 peak, euro/yen hit a similar high; now, euro/yen is a full 35 yen lower.

The Japanese may also be willing to see their currency strengthen. Before new Finance Minister Hirohisa Fujii took office this month, he said a strong yen was generally good as it boosted the purchasing power of Japanese. He is keeping his head down now!

Fujii subsequently backed away from that comment, but speculation will remain that after sweeping to power last month, the Democratic Party of Japan may try to shift the country away from its reliance on exports and its opposition to yen strength.

In the context of a G20 drive to rebalance the global economy, this could easily cause the market to think the yen should be trading stronger than 90 to the dollar.
Do not be long USD's, as it will not be pretty in the long term!

Sunday, 20 September 2009

US dollar carry trade starting to look shaky

For those USD bulls out there?

Gertrude Chavez-Dreyfuss and Wanfeng Zhou
NEW YORK, Sept 17 (Reuters)

A risky strategy using the US dollar to finance bets in higher-yielding currencies such as the Australian dollar could unwind quickly if this year's rally in global stocks fades.

Record low US interest rates, a commitment by the Federal Reserve to refrain from tightening monetary policy for a long period of time, along with improving global economic prospects have prompted investors to sell the US dollar in carry trades the last few weeks.

Carry trades involve transactions in which investors borrow in a low interest currency and use the funds to invest in higher-yielding assets in other countries. These strategies thrive in an environment of low volatility and economic expansion.

A nearly 70 percent surge in the broader MSCI world stock index from its low in March this year has also enhanced the carry trade's appeal. The Australian dollar , on the other hand, a carry trade beneficiary which moves in tandem with stocks, has risen 23 percent versus the greenback.

But dollar carry trades could have a shorter lifespan than most people think. A sustained pullback in stocks could dim the carry trade's attraction." Everybody's piling into equities and selling the dollar in carry trades and the main driver is not recovering earnings, it's the fact that prices keep going up," said Andrew Wilkinson, senior market analyst at Interactive Brokers in Greenwich, Connecticut.

Not too long ago, the yen and Swiss franc, with their near-zero interest rates, were the preferred funding currencies in carry trades. But a couple of weeks ago, the cost of benchmark three-month interbank dollar funds fell below those of the yen and Swiss franc. "It wouldn't surprise me that in the middle of one or two earnings cycles, people would reevaluate global prospects for growth," Wilkinson said. "So it makes me wonder how fast you can short the dollar without running the risk of a fast snapback in your face."

In many regions, less bleak economic data has morphed into upbeat reports and it seems the rebound in stocks and the dollar's sell-off has taken on a self-reinforcing quality despite persistent worries about rough times in credit and a weak lending trend by banks.

Analysts also say the interest-rate environment is too uncertain for a dollar-carry trade to survive for too long, and they believe the yen carry trade will re-emerge because of Japan's wide output gap. The output gap refers to the difference between an economy's current output and its maximum potential output. A wider gap reflects declining wages and lower inflation, and it impedes a central bank's ability to raise interest rates.

Japan's rates were low for years, which made such trades easier, but analysts do not foresee such a repeat in the U.S. "Japan has a much larger output gap than the U.S.," said Paresh Upadhyaya, portfolio manager, at Putnam Investments in Boston. "I don't believe U.S. rates will remain low for a long enough period of time for the dollar to cement its status on a multi-year basis as a funding currency."

Analysts give U.S. dollar carry trades a shelf life of six months to one year -- nowhere near the yen's lifespan of almost a decade as a carry trade vehicle. Samarjit Shankar, managing director of global FX strategy at BNY Mellon in Boston, said much uncertainty remains about the outlook for the rate-tightening cycle once the global recovery takes hold."

Interest rates will be changing quite a bit going forward. It's a much more fluid situation in terms of the attraction of lower rate currency for funding the carry trade."

Technical indicators are also starting to suggest that dollar selling is getting overextended.In the options market, traders say over a three-month horizon, euro puts, or bets the euro will fall, are getting more expensive than calls, referring to options which reflect expectations the currency will rise. This shows that as the euro rises, more and more investors are buying downside protection in case it falls.

Meanwhile, according to Barclays Capital's implied probability distribution data, which is useful in pricing call and put options, the market has also attached a high probability that the dollar will rally against the yen. Barclays fair value estimates predicted a decline of 0.3 percent in the latest week, but the actual fall in spot was 2.6 percent, making the greenback 6.2 percent undervalued. That's the largest undervaluation in the last 12 months.

These numbers suggest a turn higher in dollar/yen is imminent as positioning has become overstretched.This was also evident in Barclays' implied distribution data. The probability of dollar/yen trading above 94.57 yen was about 25 percent in the latest week compared with a 22.8 percent chance the pair will move below 86.4 yen.

Monday, 14 September 2009

Have booked profits on some trades today.

Have taken profit as follows:

AUD/USD Long AUD2m short USD at 0.7312.
Closed at 0.8610

Gain of 1298 points.

NZD/USD Long NZD2m shortUSD at .6241.
Closed at 0.7010

Gain of 769 points.

EUR/USD Long EUR1m short USD at 1.4465
Closed at 1.4550.

Gain of 85 points.

Still have AUD/JPY and NZD/JPY carry trades.

Will update on gains to date etc tomorrow if I get time.

Thursday, 10 September 2009

EUR/USD position

Added a new position.

Bought 1m EUR at 1.4465 sold USD.

Did this yesterday on the break higher. Was doubtful whether it would go on , so have a stop on it at 1.4450.

We will see how weak this USD really is.

Sunday, 16 August 2009

No change to positions

Left all current positions in place, as the correction lower I was looking for remains elusive, with more and more evidence pointing to stronger AUD and NZD against both the USD and the YEN.

So, steady as she goes!

Monday, 10 August 2009

Here are the trades I am active in:

Long AUD 3,735,990.04 short JPY at 82.79 average.

Current rate: 81.65
Current: Loss by 114 points.

By buying AUD I have converted this trade from a crappy USD/JPY deal to a AUD/JPY deal. See post here. Target is 85.00 enroute to 105.00.
I remain comfortable with carry trades.

Extra background:Sold USD3m and bought AUD at 0.8030, thus making the USD/JPY trade long AUD3,735,990.04 short JPY at 82.79.

Long NZD 3m short JPY at average of 57.23.

Current rate: 65.50
Current: Gain 827 points.

I remain comfortable with carry trades with the NZD/JPY up over 44% this year! Happy with the current exposure.

Current rate: 1.4185
Overall I see the USD weakening considerably due to quantitative easing pressures. But would not be surprised to see the USD strengthen over next few weeks.

Long AUD2m short USD at 0.7312.

Current rate: 0.8370
Current: Gain 1058 points.

These rallies have probably done enough for the minute, so will be taking profits at some stage this week.

Long NZD2m short

USD at .6241.

Current rate: 0.6715
Current : Gain 474 points.

These rallies have probably done enough for the minute, so will be taking profits at some stage this week.

Unrealised gains NZD770k (AUD/JPY –65k, NZD/JPY +379k, AUD/USD +315k, NZD/USD +141K).

Previous balance: NZD1,742,865.90
No changes realised.
Total gains banked since August 2007:


Saturday, 11 July 2009

Fascinating article from Professor Willem Buiter

July 3, 2009 11:07am

Quantitative easing - expanding base money in circulation (mainly bank reserves with the central bank by purchasing government securities) - isn’t working in the US, the UK or Japan. Credit easing - outright purchases of private securities by the central bank, which can either be monetised or sterilised - is achieving little in the US or the UK, although it has not been pushed too hard yet. Enhanced credit support in the Euro Area - providing collateralised loans on demand at maturities up to a year at the official policy rate - is not working either. These policies are not improving the ability and willingness of banks to lend to the non-financial sectors. They have had little positive impact on the corporate bond market. It is not surprising why this should be so, once we reflect on the actions and the conditions under which they are taking place.

In a nutshell: quantitative easing (QE), credit easing (CE), and enhanced credit support (ECS) are useful when the problem facing the economy is funding illiquidity or market illiquidity. It is useless when the binding constraint is the threat of insolvency. Today, liquidity is ample, even excessive. Capital is scarce. Capital is scarce first and foremost in the banking sector. A panoply of central bank and government financial interventions and support measures have ensured, at least for the time being, the survival of most of the remaining crossborder banks. It has not done enough to get them lending again on any scale to the household and non-financial enterprise sector.

Sure, as the economy weakens, the demand for credit is racing the supply of credit down, but there can be no doubt that many firms and households are credit-constrained, and cannot find external finance either from the banks or from the capital markets. Only the larger enterprises, and those with a good credit track record have access to the capital markets. Small and medium-sized firms and new firms without a credit track record cannot go the the markets. So with zombie banks and highly selective access to the corporate bond markets, we are set for a slow and anaemic recovery.

This is made worse by the poor state of household finances in many western countries. With property prices down and banks tightening credit conditions, households have suddenly woken up to the true horror of their highly indebted state. Fear and caution have taken over from optimism and an instinctive belief in the sustainability of a consumption plan financed through Ponzi finance made possible through house prices rising at a proportional rate in excess of the interest rate on housing debt. This rediscovery of prudence by households has lead to a form of Ricardian equivalence that makes tax cuts ineffective and limits the multiplier from public spending increases. Many highly indebted households have reduced their consumption to a (generally socially defined) ’subsistence’ level. Any additional income is saved or used to pay down debt.

Quantitative easing The central bank buying longer maturity government securities will help when the underlying problem is too high a value of risk-free long-term interest rates. That, however, is not the problem. If anything, long-term risk-free rates continue to be surprisingly and damagingly low. So outright purchases of government securities by the central bank do nothing to alleviate liquidity pressures on banks, let alone the banks’ capital shortage. They are no more than a sop to the ministry of finance and its deficit financing preoccupations. At best, such monetisation of the public debt will, if it not expected to be reversed, have a ‘fiscal’ effect - helicopter money. But if households are saving their windfalls, even this will fail to boost the economy.

Credit easing
The central bank purchasing private securities outright will help if there are liquidity problems in the markets for these securities, making for excessive spreads over corresponding maturity risk-free rates. Apart from that, such outright purchases help only if the central bank pays over the odds for the securities and thus helps recapitalise the banks. No doubt the massive past liquidity injections by the central banks of Japan, the US, the Euro Area, the UK and elsewhere in Europe have taken the liquidity spreads out of the corporate bond yields. Corporate borrowing through issuance in the markets is running at a high level, even in the Euro Area. Much of this substitutes for bank finance that is no longer available. If the authorities believe that the spreads of corporates over Treasuries are still in excess of what is warranted by differences in default risk, they should by all means buy more corporate debt. If they believe, as I do, that these spreads are likely to be a fair reflection of credit risk differentials, then even credit easing is a waste of time.

Enhanced credit support
Enhanced credit support to the banks, along the lines of the ECB/Eurosystem making a humongous volume of collateralised loans to the banks likewise only works if the Euro Area banking system suffers from a shortage of liquidity or if the ECB/Eurosystem offer too generous terms for these loans. Euro area banks take the ECB’s liquidity and re-deposit most of it with the ECB rather than using it to engage in new lending. Euro Area banks are among the most zombified by their capital inadequacy and excessive leverage.

Throughout the north-Atlantic region, the problem is not that the banks are illiquid. They are short of capital. Many of them would be insolvent but for the anticipation of further government support, on top of the massive support already given to the sector. In addition, while the fiscal authorities are prompting banks to raise more capital and have injected public capital in the wonkiest banks and while central banks are injecting liquidity in the economy on a scale never seen before, regulators and supervisors are often forcing banks to act procyclically, by building up their liquid assets now and by aggressively deleveraging now. Surely, if ever St. Augustin’s prayer - Lord give me chastity, but not yet - was appropriate, it is now for banks.

That banks are drowning in liquidity is apparent from the divergent behaviour of the stock of bank reserves with the central bank. which is increasing fast, and the broad money stock held outside the financial sector (for these purposes, the non-bank financial sector is just the off-balance sheet segment of the banking sector and should be consolidated with it). As pointed out by Ben Broadbent of Goldman Sachs (where I am an advisor - all views and opinions expressed are strictly and emphatically my own and not those of any organisation I am associated with etc.), the increase in M4 outside the financial sector in the UK has recently been much smaller than the growth of commercial bank reserves with the bank of England. Similar patterns exist in the US and in the Euro Area.

Pushing on a string is difficult. Pushing a zombie on a string is even harder. Pushing a zombie bank on a string is impossible. Unless the balance sheets of the banks are strengthened sufficiently, through massive further injections of capital, the removal of toxic assets and much lower leverage, unconventional monetary policy will not work. The banking system in the north-Atlantic region is not facing a liquidity shortage - it has got liquidity coming out of its ears. It is facing a capital shortage. Much of it still totters on the edge of insolvency. Recapitalising banks slowly through large spreads on low business volumes and through quasi-fiscal subsidies extended by the central banks in their financial support operations will take years - years of impaired intermediation and abysmally restricted external finance for households and non-financial corporations.

Recapitalising the banks and paying off private household debt through high unanticipated inflation would be possible, but undesirable. I propose a combination of mandatory recapitalisation of the banks and a debt Jubilee for the household sector to remove the two key obstacles to an economic revival. The mandatory recapitalisation would be first through new equity issuance in the market, then though mandatory debt-to-equity conversion and similar haircuts for unsecured bank creditors, and last through increased government equity stakes. All these capital injections should take the form of tangible common equity. Anything else would be cosmetic.

Subsequent regulation of the banking sector (broadly defined to include all highly-leveraged entities with serious maturity and/or liquidity mismatch on their balance sheets) will then be necessary to prevent a recurrence of the disaster we are now struggling through.

In preparation for the Jubilee, I am going long in ram’s horns. In good Torah/Biblical tradition, we should have one of these every 49 or 50 years.

We skipped a few. Let’s have a big one now.

KT - Don't agree about the Jubilee at all though, see the other comments on his blog!!!

Friday, 10 July 2009

Yen Intervention looming?

Reuters 09Jul09 06:49:31
By Vivianne Rodrigues and Nick Olivari

NEW YORK (Reuters) - Japan could be one step closer to intervening in the foreign exchange market for the first time in five years as a soaring yen further jeopardizes the country's chances of pulling out of recession.

Growing unease about the global economy has prompted investors to rush out of trades that bet against the yen while favoring higher-yielding but often riskier currencies.

The move accelerated on Wednesday and spurred talk of intervention or at least jaw-boning of the exchange rate by Japanese officials, after investors bought back yen, pushing it to multi-month highs against both the dollar and euro.

If the yen strengthens to trade below 90 to the dollar, "it is more a question of 'when' than 'if'," said Michael Woolfolk, senior currency strategist at The Bank of New York Mellon, in New York. "At this stage, the pace of the move rather than the absolute, is their main concern. They want to see stability, they have mentioned it many times before."

Japanese officials have said repeatedly the country is not considering intervention in currency markets. However, given the country's reliance on exports, they may be more motivated.

Investors are also mindful that the Group of Seven industrial powers in October issued a rare inter-meeting statement singling out yen volatility, giving Japanese authorities the green light to stem its surge at that time.

The yen also jumped against the Australian and the New Zealand dollars as it quickly broke through key levels around 93.40 to the U.S. dollar to touch its highest since February.

The yen moved more than 3 percent against both the dollar and euro Wednesday in its biggest one-day moves since March and November, respectively.

Japan has a long history of trying to stem yen strength by intervening to buy dollars, but it has stayed out of the market since a 35 trillion yen ($377 billion) campaign over 15 months ended in March 2004. The Ministry of Finance has gradually moved away from heavy intervention because that last campaign had mixed results.

A summit of the Group of Eight major economies in Italy starting on Wednesday was silent on currencies but the sharp moves are unlikely to go unnoticed, analysts said.

"As the yen starts getting close to the 90 mark, we are going to see Japan stepping up the rhetoric at least," said Vassili Serebriakov, currency strategist at Wells Fargo Bank in New York. "It's inevitable."

Central banks have become more active in currency markets in recent months to prevent price volatility from threatening a nascent economic recovery.

The Swiss National Bank surprised the market in March by buying euros and U.S. dollars and selling the franc. It was the first time that the SNB had intervened since 1995.

The SNB denied they intervened to weaken the currency -- instead acting to stop it from rising. Swiss monetary authorities have sold the franc several times after the March announcement, with more aggressive forays in the last days of June, traders said. As a result, the Swiss franc has fallen about 4 percent versus the euro since March.

The Japanese currency has also strengthened in the past as investors unwound carry trades, trading around 88 to the dollar late last year as the global economic crisis intensified.

Momentum is now building again to hold yen as risk aversion rises. "As risk aversion goes up, the yen is regaining some of the safe-haven characteristics it has lost," said Serebriakov. "Carry trade positions now are not as large as they were pre-crisis, but the yen will keep benefiting. And let's see what happens if we get to the 90 mark.

That's probably the line in the sand."

Monday, 6 July 2009

Quantitative easing debate

This is an excellent explanation of the current debate around quantitative easing issues:

Morgan Stanley - Global QE, Global Inflation
July 03, 2009

By Joachim Fels & Manoj Pradhan, London

lation complacency:
With headline inflation gauges in negative territory in many countries and the global economy only just emerging from the ‘Great Recession', it may seem absurd or at least premature to worry about inflation risks.

Indeed, most investors appear to be undaunted by inflation, a view that is also reflected in market-implied 10-year inflation expectations for the US and the euro area of less than 2%, which would be lower than actual inflation over the past decade. In our view, however, markets are too sanguine about longer-term inflation risks. It appears more likely to us that in the coming decade inflation will significantly exceed the levels seen over the past decade.

Three reasons to expect higher inflation:

Our inflation view is based on three pillars, which we discuss in turn:

• We think that most observers vastly overestimate both the size of the ‘output gap' and the importance of this gap for determining inflation. Our earlier research has shown that global factors, rather than national output gaps, are the main determinant of inflation these days.

• The ‘secular' global forces that helped to push inflation lower or keep it low over the past couple of decades - productivity, deregulation and globalisation - will likely be less prevalent in the years ahead.

• Quantitative easing (QE) is in full swing globally, and we think that central banks will be slow to exit from it collectively, especially if economic growth remains subdued. The longer super-easy global monetary conditions remain in place, the more likely it becomes that inflation expectations and actual inflation will start to rise significantly.

Output gap approach problematic: The most frequently voiced argument for low inflation in the foreseeable future is that the Great Recession has created a huge gap between actual and potential output and thus much spare capacity that will take years to be absorbed.

However, we are inclined to discount the output gap argument for two reasons:

• First, any real-time estimates of the output gap are highly uncertain due to data revisions and because estimates of potential output evolve as more data become available. For example, as work conducted by Athanasios Orphanides during his time at the Fed has shown, monetary policymakers' misperceptions about the size of the output gap were a major factor in the inflationary surge in the 1970s. For a long time during and after the mid-1970s recession, the Fed believed the output gap to be larger than it actually was. The reason for this was that it overestimated potential output, which later turned out to be much lower than initially thought.

In fact, there is reason to believe that the credit and economic crises of the past year have led to a downshift not only in actual output but also in potential output. With the end of the consumer and housing boom in the US, the UK and other countries, resources and excess labour need to be shifted into other sectors, which will take time and could keep structural unemployment high. Also, the cost of capital is likely to stay higher than in the bubble years, and the plunge in capex will contribute to lower potential growth, too, in our view.

Our more sceptical view on potential output and thus the size of the output gap is supported by our natural interest rate model, which also generates an estimate of potential output. Tellingly, our model produces an output gap for the US that is much smaller than the ‘official' one generated by the Congressional Budget Office (CBO). Similar results have been reported in a recent study by San Francisco Fed economists Justin Weidner and John Williams ("How Big Is the Output Gap?" FRBSF Economic Letter, June 12, 2009).

• The second reason why we are inclined to discount the ‘output gap' argument is that in our previous research we found that output gaps only have a weak influence on inflation. Rather, global inflation has become the dominant driving force for domestic inflation rates. If our estimates are anything to go by, an output gap of 1% pushes inflation down by barely 15bp in the US (see Inflation Goes Global, July 16, 2007).

Global factors less disinflationary:
So how about the global factors determining inflation? In the last one or two decades, central banks were helped in keeping inflation low by a confluence of three factors: globalisation, deregulation and faster technological progress.

However, the tailwinds for central banks from each of these factors have turned into headwinds:

• Globalisation is likely to proceed less rapidly in the next several years due to the creeping protectionism that has been reinforced by governments' reactions to the Great Recession. Increased support for national industries is likely to slow restructuring and reduce import competition.

• Deregulation has been largely achieved in most sectors. Now, consolidation in deregulated sectors and government-induced re-regulation in some areas are reducing competition, and thus potentially adding to inflation pressures.

• The big boost to productivity from the IT boom of the 1990s is behind us, and trend productivity growth in the technology leader, the US, has probably slowed significantly. Lower productivity growth that is not accompanied by slower wage increases implies rising unit labour cost pressures.

But monetary policy matters most:
The most important factor for the global inflation outlook, however, is the current and future stance of monetary policy. Central banks have responded to the crisis with an unprecedented amount of monetary stimulus, and we fear that the accommodation will be kept in place for too long.

QE is alive and kicking...
The sharp increase in US 10-year yields and mortgage rates, with 10-year yields reaching 4% in mid-June, led many investors to question the effectiveness of the QE programme. While a continued increase in yields would certainly create headwinds for economic recovery, it is important to keep in mind that keeping yields low was only one aspect of the programme. As important, if not more so, is the increase in money supply and excess liquidity. On this measure, the Fed has continued to run a successful campaign, as have a host of other countries that have implicitly or explicitly turned to QE.

On our count, the Fed, the ECB, the BoE, the BoJ, the Swiss National Bank, the Swedish Riksbank, the Norges Bank and the Bank of Israel all adopted some form of QE around September 2008 (see "QE2", The Global Monetary Analyst, March 4, 2009). M1, the measure of narrow money supply, has been growing strongly in most of these countries since then. M1 growth in the G4 is ticking along at 12%, driven by M1 growth of nearly 20% in the US, around 8% in the euro area, and a move into positive territory for M1 growth in Japan. Outside the G4, money supply is moving up strongly in Switzerland and Israel, with the latest M1 growth numbers showing 42%Y and 54%Y growth, respectively. The Norges Bank's QE programme has kept the monetary base at highly elevated levels and M1 growth has begun to shrug off the effects of previous tightening and is now in positive territory. Finally, the increase in the monetary base allowed by the Riksbank has pushed up M1 growth to over 6%.

While there has been no QE announcement from the Chinese monetary authorities, the efforts made to increase money supply and credit in China over the past few months have been highly successful. M1 growth has clocked in at 18.5%Y while loans are growing at 28%Y. India briefly flirted with QE-type policies (see India: Flirting with QE, April 7, 2009) by buying a sizeable chunk of government bonds since April. However, efforts to push up money supply don't seem to have been pursued vigorously since then. Both economies are expected to outperform the global economy. If anything, our economics team sees the dramatic rally in equities and property as a development that central banks will have to monitor closely (see Rise in Asset Prices: New Challenge for Asian Central Banks, June 30, 2009).

More to come:
In the major economies, there is plenty more to come. The Fed is about halfway through its US$1.75 trillion purchase programme, while the Bank of England has about 18% (£23 billion) of its programme yet to go. Meanwhile, the ECB will start purchasing €60 billion of covered bonds this month. In short, there is plenty of firepower waiting to come out of the central banks' QE muzzles. If the impact on money supply so far is anything to go by, we can expect excess liquidity to continue to grow (see "The Global Liquidity Cycle Revisited", The Global Monetary Analyst, May 27, 2009) and support economic recovery and asset markets.

....but the way out is tricky:
While talk about ‘QExit' has started, we believe that central banks will most probably not be able to withdraw monetary stimulus rapidly without putting at risk the tenuous recovery that our global team expects. On our latest forecasts, the G10 economy will shrink by 3.5% this year and grow by only 1.3% in 2010. In such a scenario, central banks are likely to unwind QE and normalise policy rates fairly simultaneously and very slowly (see "QExit", The Global Monetary Analyst, May 20, 2009), raising the risk of inflation.

Importantly, given the importance of global factors that we pointed out earlier, keeping the inflation genie bottled up will mean that it probably won't be sufficient if one or two central banks get the timing of exit right - this is a feat that a majority of central banks will have to achieve in order to keep global inflation subdued, in our view.

Saturday, 27 June 2009

Farrah Fawcett

The original Blonde Angel has died.

Rest easy Farrah

Hat Tip: Yes Minister

Sunday, 21 June 2009

Outstanding positions update

Here are the trades I am active in:

Long AUD 3,735,990.04 short JPY at 82.79 average.

Current rate: 77.60

Current: Loss by 519 points.

By buying AUD I have converted this trade from a crappy USD/JPY deal to a AUD/JPY deal. See post here. Now waiting for the AUD to react to commodity moves. Target is 85.00 enroute to 105.00.

Extra background:
Sold USD3m and bought AUD at 0.8030, thus making the USD/JPY trade long AUD3,735,990.04 short JPY at 82.79.

Long NZD 3m short JPY at average of 57.23.

Current rate: 61.82

Current: Gain 459 points.

I remain comfortable with carry trades with the NZD/JPY up over 40% this year! Happy with the current exposure.


Current rate: 1.3940

Overall I see the USD weakening considerably due to quantitative easing pressures. So if pressed I would go long euro. But see more profit in other trades at present, so will not commit the capital.

Back to square

Current rate: 1.6504

Cashed out:
Long GBP1m (1.5050) short USD at 1.5690, for a gain of USD64,000 (at 0.6150) NZD104,065.04 (not counting carry interest).

Definitely took profit too early, but I needed my limit resources elsewhere.

Long AUD2m short USD at 0.7312.

Current rate: 0.8060

Current: Gain 748 points.

With oil in demand, and commodities generally pressured higher, I remain comfortable being long AUD. Happy with the current exposure.

Long NZD2m short USD at .6241.

Current rate: 0.6422
Current : Gain 181 points.

Now that the downgrade is off the agenda, and interest rates look to have stopped falling, there is nothing holding the NZD/USD down. Target 0.6500 enroute to 0.7000. Happy with the current exposure.

Unrealised gains NZD200k (AUD/JPY –312k, NZD/JPY +223k, AUD/USD +232k, NZD/USD +56K).

Previous balance: NZD1,638,800.86
Plus GBP/USD gains of NZD104,065.04
Total gains banked since August 2007:


Saturday, 20 June 2009

My trading style, a repeat!

I get asked a lot about my trading style. To be honest I haven’t really set out to develop one specifically at all, but after 30 years trading markets, I have realised a lot of what not to do.

First I tried fundamental trading, poring over statistics, money supply, interest rates unemployment numbers etc etc. When the Berlin wall fell, every economist predicted that unifying East and West Germany would cost billions and take decades. This was bad for the Deutsche Mark, and so on the fundmentals anyway the DEM was a sell. And yet we saw a huge and prolonged rally in the DEM, purely on the exuberance of the reunification of Germany. So fundamentals clearly did not always work, and emotions sometimes do.

Then I switched to charting and did the lot. Point and Figure, Moving averages, Stochastics, Momentum, Elliot wave, Fibonacci, you name it, I tried it. Bought the books, did the studies, bought the models etc etc. Sometimes they worked, sometimes they didn’t. Sometimes the pattern was so clear after the event, and rarely did it repeat.

Then I tried money management, and stop loss orders, take profit levels, risk analysis etc etc. I followed the reasoning that it was better to run your profits and take losses quickly etc etc.

But it was when I was watching really rich people in the markets that I realised the real truth:

It’s best not to care about the trade at all.

I have seen people with bad positions. They don’t panic. They don’t get out. They just wait. If the reason for doing the trade is still valid then they just wait. If the reason is not valid then they get out, whether a profit or a loss is realised or not.

The old adage still works: Money makes money. If you don’t care about it then you are unlikely to panic and get out at the bottom or the top . You just wait.

So I started out with small positions that I could ignore, and built up from there. I realised that all the styles are only tools to help you make a decision, and that it was my own fears that I had to understand really.

My style is to decide a trade and take a position and then just wait. I decide on fundamentals, charts, gut feeling, and a mixture of all the above. But I only get out when it feels wrong, not when some specific chart or fundamental stat starts going the other way. And even then I am reluctant to quit a trade quickly. I have seen people get very rich just by waiting for the cycles to turn again, and they do eventually.

I take long-term currency positions on a whole raft of factors. It is a little bit like Lonely Traders Knotty Warhol stance, see here. But he is much more detailed and technical than me. If asked I can’t really point to why I like a trade, it is really a whole range of factors, of which sometimes none of them stack up on their own.

I take great care not to get fixed on one school of thought. If I have learnt anything, it is that once I have worked out what is driving the markets, it isn’t happening anymore because others have worked it out too, and the drivers have therefore changed as a result.

So I keep shifting what matters to me, and I don’t get too hung up on any one thing, be it technicals or levels or even fundamentals, it is really a cooking pot of ideas and out of that I get a “sense” of what to do. My view if you like. I read a great deal, Reuters, CNBC, CNN, many newspapers, magazines, blogs, websites and my “world view” is something I tend 24/7 with great passion.

It drives my trading and it also drives my advice to my private client base. I guess I can sweep a lot of articles, given that I could actually write some of them. I guess that is why I dislike many articles out there as rubbish.

But this blog was never about giving advice to anyone. It is all about making me write stuff about my views to sort out my own mind. I really don’t care if no one reads it or many do. I rarely react to other market views, but they do go into the pot and sometimes may colour the thought process.

I am not interested in what is going on right now. That is the bulk of commentaries. I am interested in what is going to happen next, which is much harder to do, with any commentaries on that non-existent. After all, if you could do that regularly, why work anywhere, and even less, why tell anyone?

My track record over many years has been a good one. But again I don’t feel the need to justify myself…I ain’t selling anything! On this blog I have traced the trading since August 2007, as it has happened, and you can follow all the posts if you want or if you care, I’m not fussed either way. I rarely make a long-term loss, although I can be and have been in the crap for some months at a time over the years. Strong capital base is key!

In the past I have traded all time frames and hate day trading, although I was a currency spot trader at a bank once, didn't like it, with my style much more comfortable with long term strategic positions taken over weeks and months. This means that fundamentals will always have a higher weighting in my thinking. I generally (but not always, see rule above) have a dim view of charts as most chartists that I have met over many years have crashed and burned eventually and gone back to working for someone somewhere or left the markets entirely.

So that means that any charts used will be dailies or weeklies, and maybe an hourly to finesse adding to a position. But my basic stance is if you have decided to take a trade, and are looking for 10 cent moves then the level on the day is really small beer.

So I always take a long, long, long term view.....

....and in between watch a lot of cute blondes!!