HOT RISING CURRENCY

The late Hall of Fame baseball pitcher Leroy "Satchel" Paige advised: "Don't look back 'cause something might be gaining on you."

Though some might say this is panicky talk, if you're the U.S. government you might want to give old Satchel's advice a closer look.

Azerbaijan's a country most Americans would likely have a difficult time finding on the map. A former member of the Soviet Union, the oil rich country is an important wedge between Russia and Iran. Baku is the capitol city.

The country recently announced its sovereign wealth fund plans to invest $1.8 billion in the Chinese renmimbi this year. According to the FT, it is the "largest investment in the Chinese currency to be made public --and a further indication of its rapid move towards reserve currency status."

The CEO of the $37 billion State Oil Fund reported to the FT the fund was seeking permission to access the renminbi assets and start investing in the currency before the end of the year. As the renminbi grows in international important it was the seventh most used currency for international payment in April, an amount that doubled in a littler over one year.

The Azerbaijan fund is not alone in buying renmimbi. Some reports suggest central banks and other wealth funds are starting to buy the Chinese currency but only a few have publicly confirmed these purchases. The Reserve Bank of Australia, Chile and Nigeria's central bank hold renmimbi in their reserves along with Japan and Malaysia.

As noted those are the ones publicly known. The recent big energy deal between Russia and China and the fact there's talk about the BRICs finding an alternative currency to settle accounts if access to the dollar changes should also trouble U.S. officials.

In foreign policy the US is a victim of the damned-if-you-do-and-damned-if-you-don't concept. But that hardly excuses the fact that it is also a country that continues to suffer from pitiful leadership hardly unique to the current feeble, pathetic administration. It breeches generations.

It's not our intent to name names because if we did one of the names that would have to be tossed into the ring is the name of the people themselves. They have and continue to tolerate it. They do so, apparently bereft, that it's their future economic welfare and freedom at stake here.

AROUND THE WEB

Not Your Father's Ponzi Scheme
http://www.acting-man.com

Deaf Ears
http://www.minyanville.com/business-news/politics-and-regulation/articles/Moscow-and-Kiev-A-Dialogue-Of/6/10/2014/id/55250

Dropping The Bubble
http://www.testosteronepit.com/home/2014/6/10/feds-bullard-the-bubble-was-developing-under-our-noses.html

Fed Needs To Start Hiking Rates
http://www.marketwatch.com/story/fed-needs-to-start-raising-rates-top-forecaster-says-2014-06-10

Another Central Bank Adds Liquidity
http://www.reuters.com/article/2014/06/10/peru-centralbank-idUSL2N0OR2KL20140610

Buy High, Sell Low
http://www.nytimes.com/2014/06/07/your-money/fear-of-equities-drives-more-investors-to-cash.html?_r=0

BP Gets First Drone
http://www.latimes.com/business/aerospace/la-fi-faa-bp-drone-20140609-story.html

CRAZINESS ABOUNDS

 
There's an old saying, look and you'll find what you're looking for. Perhaps nowhere is that more true than in medicine. But then again maybe climate change is another sure-fire area.

Perhaps an exception to the rule today is in the financial markets. If you look for craziness you won't have to look very far or hard. There's more than enough to go around.

"Some Spanish government bond yields dipped below U.S. Treasury bonds, adding another twist to the year of surprises for the world's bond markets," the WSJ recently reported. Now we think technically the U.S. isn't in such great shape. Probably a more apropos description would be something like: An undeclared bankrupt country looking for a proper time and place to come out of the closet.

The U.S. for now still enjoys the international currency of trade, an advantage no other country has. But don't blink too long or you might miss it if there are not some serious and severe structural changes that have a lot more to do with bankrupt leadership than income inequalities or the trumped up caterwauling about the wealthy.

Now Spain, that's another can of beans. Unemployment there, generously noted, is between 20-25 percent, one section of the country wants to secede (Come to think of it, the same thing 
is going in the US!), and much more. But we'll spare you the rest and just direct you to this site.

The point is Spanish 10-year bonds are now yielding less than U.S.10-year bonds and no one apparently thinks that crazy.
http://globaleconomicanalysis.blogspot.com/

POLICY ERRORS

Looking over the current landscape one sees headlines like this from the Financial Times: "US stocks soar as US's 'fear gauge' hits semi-year lows."

Stock prices are up, inflation, so they tell us, down and volatility AWOL. When things get too far over the line, as they sometimes do, there's usually a correction or regression to the mean of sorts. The absence of fear, at least in markets, is almost always joined at the hip with the absence of common sense.    

We recall in our many travels strolling into a noted chest surgeon's office some years ago to interview him and noticing a sign on the wall behind his desk: "There is nothing more uncertain or dangerous than a state of absolute certainty."

That pretty much sums up investor attitude about this market. The Fed apparently has convinced investors they won't be jacking up interest rates until sometime in 2015. And even then they'll raise them orderly.

Now what we don't hear--and this is our take on it--is any contingency for policy error. Most seem to take for granted the bureaucrats at the Fed will get it just right. The truth is they may already be behind the curve. Such things are usually only discerned in retrospect.

The Fed in the past has missed numerous recessions either going in or coming out. Truth be told, they usually miss them on both ends. In fact, the old joke about economists is they've correctly called nine of the last two recessions.

Note also that central bank bureaucrats every time they cut rates they claim they averted disaster. What they're really doing is causing it.

Now we don't want to trouble you with too much history especially since other than revisionists not too many today are interested.  Harry Truman, the U.S.'s 33rd president, once noted, "The only thing new today is the history you failed to learn yesterday."

So just to bolster your confidence in government and bureaucrats, we'll close with three things here in America they run well: Amtrak, the Post Office and the VA Medical Centers.

What the chart below shows is the Fed missed on three of these four recessions, odds not much better than one would get in Vegas.

WARNING SIGNS?

Earnings no longer in tandem with stock prices in the EU.

This article by Wolf Richter appeared 6-8-14 on David Stockman's Contra Corner.

Here's a couple of paragraphs from the post.

For years, EPS of the Stoxx companies and the index itself have been rising and falling roughly in parallel. The chart, based on data from FactSet, picks up in 2005. The index was tracking earnings perfectly on the way up. On the way down during the financial crisis, EPS lagged, given that companies report quarterly and the index crashed by the second. Then EPS recovered – OK, in Europe, financial engineering is just as normal as in the US – while the index lagged behind as the debt crisis was raging. But when the index took off, an ugly thing happened:

Since July 2011, earnings have been falling!

And that, despite quarter after quarter of Wall-Street forecasts of dizzying earnings growth for future quarters that then get whittled down to nothing!

As of May 30, according to data provided by FactSet, the Stoxx 600 had EPS of 23.67. That’s down 0.7% from a year ago, and down 11.2% from July 2011. These miraculous European companies that make up this gravity-defying index and that have been trumpeted by Wall Street with such conviction are making less now than they did three years ago during the depth of the Eurozone debt crisis!

GOBBLEDY MEETS GOOK

                           








 
You got to give it to central bankers and their loads of economists. They like to take a language and screw it up as badly as they can, almost as badly as governments around the globe like to screw taxpayers.

We'd include a host of others who enjoy torturing the language, but space doesn't permit. Yet most of you sociologists, psychologists and business school grads know whom we're talking about. So for now we'll start with this cute phrase that came out of a recent Financial Times article about the ECB and their new found love for financial charity.

One for the money, two for the show, three to get ready and here we go: "monetary transmission mechanism." In case you haven't guessed it, it's broken. Wow! Sounds like a Bad Day At Blackrock and we're not talking about the investment funds.

So what is the monetary transmission mechanism that's so busted? It's banks refusal to lend money or make loans irrespective of how low central bankers lower the interest rates it charges bankers. Now that brings up an interesting point. You first roll out the regulators to financially pistol whip the banks for doing all the things they should not have done in the first place and now you want them to make loans and take risk just because money is cheap.

In the past when banks were given the prospect of cheap money, they did what any sane banker would do, they bought government bonds to make guaranteed money on the spread. After all, lending to families and small businesses can be a risky business especially when you relax the the lending standards like the U.S. government did with its an affordable home for everyone program that led to the subprime explosion.

But that's a topic for another time, one that will never show up in the lives of the bureaucrats and politicos responsible. Meanwhile, we'll just entertain ourselves with some redundancies like feeling tones and aggregate demand. 

And please don't get us started on economic redundancy, a term you and I know we most likely wouldn't capisce even if it were written on the stall door in a public restroom as diversification.

DANGEROUS BUREAUCRATS

Former French Finance Minister and now Managing Director of the International Monetary Fund, Christine Lagarde, admits she got it wrong.

In a recent interview with the BBC Legarde, a bureaucrat's bureaucrat, admitted, sort of, that those geniuses at the IMF underestimated the UK's austerity program and it's future impact on Britain's economy, according to Bloomberg.

A year after the IMF’s chief economist, Oliver Blanchard, said U.K. budget cutting risked “playing with fire,” the Washington-based lender said in April the U.K. economy will grow 2.9 percent this year, the fastest pace among the Group of Seven nations.

Legarde, politician that she is, skirted the issue when asked if she had apologized to the UK's Chancellor of the Exchequer George Osborne, replying: " Do I have to go on my knees?"  

Just remember the IMF is one big bureaucratic morass that likes to go around telling others what they should and shouldn't do. That meets the definition of a Brussels or a Washington bureaucrat in our lexicon. It also qualifies as being quite dangerous.

A DESERVING LOOK

One hates to keep beating on economists but they're such a deserving bunch.

Mexico's Central Bank, in a surprise move Friday, cut interest rates 50 basis points to 3.0 percent, citing economic weakness. Recall that Mexico was on the list of many who picked the U.S.'s southern neighbor to do well in 2014. Such has yet to materialize.

But two news organizations, Bloomberg and Reuters, reported that--you guessed it--not a single economist, zero, saw it coming. The cut sent Mexico's benchmark interest rate lower after Latin America's second largest economy behind Brazil barely grew in Q1.

This wasn't the first time the MCB surprised with an interest rate change. It happened a couple times before, all the more reason some might say for economists to be less flatfooted.

Some are suggesting the U.S.'s frigid winter and higher Mexican taxes contributed to the slow growth. Earlier the government ramped up taxes on snacks and surgery drinks in an anti-obesity move. Maybe there's a lesson here for ex-New York mayor Bloomberg and the new guy, Blasio.

The MCB also noted further rate cuts were not expected given that U.S. rates will most likely soon rise. That sounds more like wishful thinking on the administration's part given Mexico's heavy dependence on exports to the U.S.

Instead of waiting on the world to change as the words in a recent popular song go, it looks more like the world is waiting on U.S. interest rates to go up so they can export their way to recovery. Much of Mexico's  economy is based on the two Bs--buying and building. And so far both have been lackluster.

Mexican bond yields tumbled while equities hit their highest level in nearly six months as the news circulated through the market. The peso also fell briefly. In January annual inflation floated above four percent, the MCB's benchmark but recently has been falling. One of the central bank's concerns, according to Reuters, is declining domestic demand.

Mexico's situation, in some ways, is the opposite of the EU, slow growth with a inflation rate that is still too high. Meanwhile, the Mexican government in May reduced its growth forecast to between 2.3 percent and 3.3 percent after the U. S. economy faltered in Q1. And some expect another downgrade to the economic growth forecast sooner rather than later.

The U.S. is Mexico's biggest trading partner. Consumer confidence in Mexico in January hit its lowest level in four years. According to one report, Mexican President Pena Nieto's approval ratings fell to 49% from 54% since he took office, lower than his two predecessors at this stage of their administrations.

The move may make the Fed's next Open Market Committee June 16-17 meeting all the more important since it may signal an earlier than expected rise in the first hike in rates. The Fed's federal funds target has been stuck at the 0-0.25 level since late 2008.

WHY CAN'T WE ALL JUST GET ALONG

If you've been following the European Union after last week's election you're aware about the economic doldrums and how much hope is riding on the the Dragester, ECB President Magic man Mario Draghi..

For now Magic Mario is being given the benefit of the negative interest rate doubt. But if things go haywire, as they sometimes do, he'll mostly be known in history as Mario the Faker.

But there's more than the threat of deflation facing the EU. Right after the election who would become the next president of European Commission grabbed the headlines. And it's still there. Jean-Claude Juncker, the so-called tried and true candidate they came up with has caused a divide that could get much wider.

In a recent speech in Germany Prince Andrew, we don't know if he does stand up comedy on the side, boasted: "In the modern era , relations between Britain and Germany have never been closer." 

That might be news to Bristish Prime Minster David Cameron and Germany's Chancellor Angel Merkel.

The fight over who will become the next Commission president has reached Berlin. And that means that an issue that was already one of the most complicated that Merkel has ever faced has become even more so. The number of contradictory interests is unusually large. She wants to keep Britain in the European Union, she doesn't want to antagonize the SPD, she doesn't want to anger people within her own party and she doesn't want to be seen as the one who ignored the election result and prevented election victor Jean-Claude Juncker from taking what many see as his rightful position as Commission president. Economists call such a situation "lose-lose." Novelist Joseph Heller called it a "catch-22." For Merkel, it is a serious political problem. 

 http://www.spiegel.de/international/europe/merkel-likely-to-seek-eu-compromise-with-london-a-973962.html 

THE BEAR STORY

Bullish sentiment is rising and volatility is falling.

According to Barron's, Investors Intelligence's bullish sentiment recently clocked in a 62.2%, the second highest on record. That passes the 60.8% way back in August 1987 when Greenspan came on board to run the Fed not too long before he made his fateful trip in October to Dallas for a speech. To be fair, interest rates had been rising pretty much all that summer.

The records, 62.9%, happened in 2004, only one and a half years into that bull market.

There's an old hippie joke about a hippie standing at the corner of Broad and Wall Streets snapping his finger for several hours when someone finally approached him and asks what he's doing.

"Chasing elephants away," the hippie proudly says.

"Aw, that's ridiculous," the man replies. "There's not an elephant within thousands of miles of here."

"Works don't it," the hippie says, smiling back.

Meanwhile, back at the ranch, bearish sentiment currently hovers around 17%.  All the bear stew needs now is few dashes of higher interest rates.


                                                     
 
                                           CRAVING REVENUE
                                               

It's just not yield-hungry investors who are becoming less risk adverse. Not in the least if one can believe a recent piece in the WSJ.

Credit unions are now employing some tactics to ramp up income last seen in the last housing boom. Navy Federal Credit Union, the largest credit union in the U.S."with more than $58 billion in assets, began allowing it members in January to borrow up to 100% of the value of their home using a home-equity loan," the Journal reported.

And zero down mortgages are once again are on the rise. So far this year Navy Federal noted it had originated nearly $400 million of "mortgages for home buyers with no down payment...up 31% from the same period a year ago."

And Navy Federal is not alone. The nation's third largest credit union, Pentagon Federal, just raised the amount of equity homeowners can borrow against from 85% to 90% of a home's value. Other credit unions around the country have started pushing such plans on radio and television to pay off credit card debt or buy a new car or take a vacation, according to the Journal.

At still other credit unions the minimum required for down payments is dropping from 5% to 3% on homes up to the $400,000 level. Among many others one of the concerns such loosening of underwriting requirements worry some observers especially in what could turn out to be not just a rising interest rate cycle but one that goes up faster and farther than expected.

Many of these new loans are longer-term assets that could prove troublesome if interest rates jump significantly. And in this case given the lows we're coming off it won't take much to define significantly. Credit unions at the end of Q1 this year held about $1.0898 trillion in assets.