YOU DECIDE

We continue to write about what many want to overtly deny, currency wars.

Countries are no different from people. Most will not sit sidle when threatened. The present mess currently called Greece is an example irrespective of the debate. There are other examples. Just before the super rich convened their annual party in Davos reports surfaced how widely disgruntled many felt.

Confidence and respect for elected officials around the globe is sinking faster than a leaky boat. A recent report in the U.S. showed confidence in Congress at all time lows. The same holds for other institutions like MSM.

Most people now suspect research whether its about markets, unemployment or climate change. Many now realize much of it is produced to serve those who paid for it and little if anything about accuracy and truth.

People are beginning to have a much better idea of what's going on than any other time in history, thanks in part to the Internet. For the establishment crowd that a dangerous turn. Central bankers are part of that establishment.

What many fail to discern is, "Doing what it takes" is about as financially dangerous as it gets because the flip side of that is starting currency wars. Push beget push back, not pull.

Here's just one more warning about currency wars.

SOURCE: ZERO HEDGE

Merv "The Swerv" King - former governor of The Bank of England - has joined the ranks of thoseex-central-planners-who-feel-the-need-to-protect-their-legacy-by-rewriting-history-and-admitting-the-entire-thing-is-crazy. Speaking in Tokyo overnight, King said he’s concerned that financial markets believe real interest rates will remain very low for a very long time which has created "a significant disequilibrium in the world economy," adding that he does "not believe and expect a market economy to thrive on real interest rates that are close to zero." Warning that many nations realize "they have pushed monetary policy as far as it can go," King added that with the additional risk of currency wars, "markets will discover that they have been pushing asset prices to an excessively high level and there will be a major downward shock to asset prices."

As Bloomberg reports, Former Bank of England Governor Mervyn King says central banks and governments are becoming more and more strident in their determination to talk down their exchange rates.

“Many countries today can see that they have taken monetary policy as far as they can go.”

“Exchange rate policy may now become an instrument of monetary policy.”

“Since exchange rate changes are a zero sum game, there is a risk of currency war.”

King says disequilibrium in world economy is causing chronic weakness in demand

The must be addressed, says King, noting that monetary and fiscal stimulus may not be able to bring a recovery unless the disequilibrium is addressed

King also explained that he’s concerned that financial markets believe real interest rates will remain very low for a very long time.

“They may be right, they may be wrong,”

“If they are right, I think we have a significant disequilibrium in the world economy. I do not believe and expect a market economy to thrive on real interest rates that are close to zero.”: King

“If they’re wrong, then at some point markets will discover that they have been pushing asset prices to an excessively high level and there will be a major downward shock to asset prices and with debt levels fixed in nominal terms, that could cause some serious problems at some point in the future.”: King

Former central bank chief or not, King is obviously just one guy. So it's just as obvious that the in-crowd will claim the disgruntled-lone wolf defense to marginalized him or anyone else who bothers to question their tactics.

By the same token it's most likely much more dangerous to speak up now than at any other time. So we'll leave you for now while you enjoy the Super Bowl with one of our favorite sayings: 

You decide.

STRONG DOLLAR WINDS

In case you didn't know it, Procter and Gamble, the largest consumer goods firm by sales, is 178 years young.

Back to that in a bit.

Falling energy prices were touted as a big positive for consumers who were expected to get those savings out of their hot little hands in a hurry.

In fact, this was a popular MSM meme second only to last year's big Wall Street one about rising bond yields, something that never happened.

Such memes usually come gift wrapped in the typical, arrogant Wall Street "No-Brainer" packaging. Race track touts used to call them "Sure things."

Consumers and the economy in the eyes of most half-blind economists are Siamese twins attached at the pocketbook. Consumer spending numbers may get revised upwards when they hit the street next month. But the spillover effect has yet to hit industrial firms reporting 4Q earnings, the Financial Times reports.

Headwinds so far include a stronger U.S. dollar, low energy prices, slow global growth and, yes, even those much revered by many bureaucrats, economists and politicians, low interest rates. And a once popular advertising slogan, "Where's the beef?' has now become--with the so-called unemployment rate at 5.6%--where's the average hourly earnings?

Wage growth for all the talk about economic strength in the U.S. has disappointed so far. And that brings us back to Procter and Gamble, the 178-year-old largest consumer goods company by sales and its recent announcement that it's been hit by the "most significant fiscal year currency impact" in its history. 

Those are pretty big words covering a pretty long time.

It's another way of saying earnings are taking a hit. To date much of the price in p/e ratios, it's no secret, has been supported by share buybacks and raised dividends. Some of those dividends paid for with borrowed money. 

So p/e ratios become a concern. Who wants to pay more for less?

Rising interest rates could pose a threat to the wind beneath the wings of those rising dividends without support from rising earnings irrespective of what the Fed does.

SECOND WARNING

 

This is the second warning we've seen in a week about the possibility of oil hitting $200 a barrel in the near future if  searching for new supply dries up owing to a lack of  investment as most majors roll back their E&P spending and cut jobs.

See our earlier post, The Frack Thickens.

Brent crude prices steadied above $48 a barrel today, recovering from earlier losses as the dollar weakened against the euro. Prices were also supported after OPEC's Secretary-General, Abdullah al-Badri, commented yesterday that prices may have bottomed and warned of a risk of a future jump to $200 a barrel if investment in new supplies was too low. Brent is 0.7% higher at $48.49/bbl, while WTI is up 0.6% at $45.40.

Certainly, this could be smoke and mirrors owing to the pain lower energy prices seem to be causing the industry. But just today the newest  bond king, CEO of Doubleline Capital, Jeffery Gundlach, stated oil would not reach $90 a barrel this year, a view somewhat at odds with one oil magnate T. Boone Pickens had suggested earlier. 

Gundlach admitted he knew less about oil markets than Pickens but noted he knew a lot about markets and had put lots of his own money where his view was. So this ought to make for some interesting theater as 2015 rolls on.

In fairness to Gundlach he did mention that geopolitical risk were still there. As an aside, here's one of our favorite recent Gundlach quotes:  “People often repeat things people tell them without thinking,“ he said. “There are phrases in [markets] that make absolutely no sense, kind of like talk from central bankers.”

ECONOMIC OLD MAID

The skeptics--especially those who worship at the alter of central banks--will claim currency wars are more myth than truth.

Someone apparently forgot to tell the Chinese. The Wall Street Journal reported today, "China Nudges Yuan to 7-Month Low," pushed lower by China's central bank to boost growth.

The People's Bank of China set the morning reference rate--which typically sets the daily direction--weaker, with traders in Asia then pushing the yuan down to 6.2537 to the dollar, the closest it's ever been to the weak side of its 2% daily trading band.

A weaker currency should help ease two concerns confronting the world's second biggest economy: weakening exports and softening inflation.                                        

Chinese is reported;y growing at it slowest in almost 25 years, not something that a country with a billion potentially restless people favors. With falling inflation numbers, the fear about deflation spreads and like a room full of measles apparently doesn't discriminate.

The drop on the yuan engineered by the People's is the latest response to persistent global economic weakness that is a legacy of the global financial crisis.

Many central banks have resorted to letting their currencies fall against their trading partners. In the short term, weakening a currency helps exporters by making their goods more competitive in foreign markets.

This is an economic replica of a once popular card game some played growing up called Old Maid. The object was not to get stuck holding the Old Maid card at the end of the game. With Japan already at the table--not to mention other central banks--and the ECB now pulling up a chair, the picture should be getting clearer.

With the U.S. economy being held up as the big recipient of all the Fed's QE and the big dollar rally, one should by now have a decent idea about who the Old Maid is.
  
The skeptics tell whoppers. 

AMERICA EUROPEAN STYLE

From time to time we select pieces we see from the web we think our readers will find interesting. Here's one we like from
http://www.dailyspeculations.com/wordpress/.

It's unlikely that many have heard of the Ten Thousand Commandments. It's the title of an annual report which measures Congressional legislative progress and then contrasts its record with that of the "rules and regs" initiated by a host of federal agencies in the same period.

The most recent report reveals that Congress managed to enact 72 pieces of legislation. Federal agencies, chief among them the Departments of the Treasury, Commerce, Interior, Health and Human Services, Transportation, and the Environmental Protection Agency pumped through 3,659 new rules. The annual "rules and regs" price tag? $1,863 trillion - to put that amount in perspective, the Feds annual "take" from individual taxpayers was $1.234 trillion.

In addition to the enacted rules and regs, there are an additional 2,500 "proposed" regs awaiting a final go-ahead. There are also over 24,000 "public notices" regarding many of our daily concerns. Among these are issues of health care, education, energy production, finance, land and resource management, etc.

It's imperative to understand that agency rules and regs are legally binding decisions which are written and implemented by groups of nameless, faceless, and unelected individuals — many of whom, like members of Congress, have agendas of their own, but unlike members of Congress, are unanswerable to the American public.

ECONOMIC DUELING

 

Back in the day dueling was often the solution of choice to solve a problem or difference.

Weapons varied from pistols to swords to whatever. Today dueling still exists, but the weapons have changed. Today's weapons of choice are QE and beggar thy neighbor.

A host of central banks recently picked up the trend, Canada, Denmark among others, with the 800 pound gorilla, Japan, sending out a shock wave of jitters with their own form of "Whatever it takes."

To cover its tracks Japan's central bank counterpart to Super Mario, a relaxed Haruhiko Kuroda, taking a theme from a popular song not too long ago, urged the world, don't worry, be happy.

The money-printing crowd will no doubt deny this for obvious reasons. They want what they want, a good old fashioned exterior house painting, in many circles known as a feel good factor notwithstanding that the interior is as usually rotting away. We call it monetary curb appeal.

We have written before and we will mostly do so again that the worst nightmare of politicians and bureaucrats is the Internet. With most of MSM in their hip pockets, it's a medium that's prevented these denizens of the world capitols and Davos from wreaking more unquestioned havoc on the masses.

The only creditability that Super Mario and his fellow dolts at the ECB will bring in the end is the current growing mistrust of these folks is warranted by 10 to the 10th power. 

When it fails to improve things these power-seekers will do just that, call for more independence, a receipt for further enslaving the masses and a clear shot at rolling back one of the major benefits of the Internet.

The journalistic meme waiting in the wings is what Financial Times columnist Martin Wolf floated last week when he wrote that if the ECB QE plan fails it won't be because it's independent but because "it's not independent enough."

EU inflation in December was positive, though it might not have been anywhere near what these bureaucrats wanted to cover up their perfidia. But the problem isn't one of printing more money. Europe is a cesspool of over-regulation, a chastised banking system and a cauldron spineless politicians.

In the end, the Super Duper Mario's legerdemain will be discovered just for what it is, economic sleight of  hand.

Meanwhile, expect the dueling to continue.And plan your investments accordingly.

EITHER WAY THE TRUTH GETS FRACKED

The possibility of more fracking woes seems to be spreading faster than a big oil spill. Low energy prices along with deflation worries are only a couple of many facing the industry.

Hydraulic fracturing in shale for oil and gas should be put on hold in the U.K. because of risks to public health and the environment, a panel of lawmakers said.
A moratorium on fracking is needed to prevent the U.K. from missing its carbon targets and allow time to stiffen regulations for the industry, Parliament’s cross-party Environmental Audit Committee said in a report Monday.

It called for measures including a ban on venting methane, public disclosure of chemicals used for hydraulic fracturing, and a regulatory regime to be written specifically governing fracking.
“Fracking cannot be compatible with our long-term commitments to cut climate-changing emissions unless full-scale carbon-capture-and-storage technology is rolled out rapidly,” Committee Chairwoman Joan Walley, a member of the opposition Labour Party, said in a statement. “There are also huge uncertainties around the impact that fracking could have on water supplies, air quality and public health.”

The Conservative-led government has promoted fracking by Cuadrilla Resources Ltd., IGas Energy Plc and other companies by cutting taxes and opening up swathes of the countryside to bidding for drilling licenses. 

The Bowland basin in Lancashire alone is estimated to hold as much as 1,300 trillion cubic feet of gas, enough to meet U.K. demand for half a century.
Lawmakers will debate Monday an Infrastructure Bill that would allow fracking companies to drill deep under land without the owner’s permission.

‘Profoundly Undemocratic’

Six thousand residents of a small northern Montana town recently awoke one morning to find that their tap water smelled and tasted like hydrocarbons. 

That turned out to be a good call as a pipeline beneath the Yellowstone River has sprung a leak and contaminated their water. Officials had to truck in bottled water.

Make no mistake in the UK and other places there's a huge egotistical political war being waged with huge goodies at stake. Besides some innocent folks like you and me the real victim will turn out, as usual, to be the truth.

What's interesting about the cited article is the phrase, "Profoundly undemocratic."

We like it. It sounds a lot like what the ECB and Super Duper Mario did just last week--endanger peoples' future without their permission.

So if you want to do your part to bring back higher energy and gasoline prices at the pump, grab your cardboard sign with the witty slogan and join the protestors. We  know more than a few speculators who will thank you profusely for it once prices start back up.

http://fuelfix.com/blog/2015/01/25/u-k-lawmakers-urge-fracking-moratorium/ 

GORDIAN KNOT

Here is an interesting read on the Greek election, most of it before the election.
http://globaleconomicanalysis.blogspot.com

And here is what happened earlier Sunday.

ATHENS (Reuters) - Greek leftist leader Alexis Tsipras promised on Sunday that five years of austerity, "humiliation and suffering" imposed by international creditors were over after his Syriza party swept to victory in a snap election on Sunday.

With about 60 percent of votes counted, Syriza was set to win 149 seats in the 300 seat parliament, with 36.1 percent of the vote, around eight points ahead of the conservative New Democracy party of Prime Minister Antonis Samaras.

While a final result may not come for hours, the 40-year-old Tsipras is on course to become prime minister of the first euro zone government openly opposed to the kind of crippling austerity policies which the European Union and International Monetary Fund imposed on Greece as a condition of its bailout.

"Greece leaves behinds catastrophic austerity, it leaves behind fear and authoritarianism, it leaves behind five years of humiliation and anguish," Tsipras told thousands of cheering supporters gathered in Athens.

European leaders have said Greece must respect the terms of its 240 billion euro bailout deal, but Tsipras campaigned on a promise to renegotiate the country's huge debt, raising the possibility of a major conflict with euro zone partners.

Now the jockeying for position begins. Taking some attention from Europe this coming week is the Federal Reserve's upcoming two-day buffet Tuesday and Wednesday. Most expect no surprises coming from that quarter as flat wages and lower energy prices put fears of spreading deflation on the front burner.

If the Greeks are smart this would be the beginning of their swan song. They would just get up and go. It would be rough going for a while, but counting on Brussels bureaucrats rather than your own independence is the more dangerous course of the two in our view.

There is an inherent north-south division here older and more complex than a Gordian knot.

WHATEVER IT TAKES

When attacked, go on the attack.

It's an age-old tactic and not one lost on Keynesian apologist or editorial writers like those at the Financial Times.

In a weekend editorial, "No need for hostilities in the money currency war," one anointed genius writes, "The ECB should ignore accusations of competitive devaluation."

Much of the justification for EU QE we have read came from those citing U.S. and UK monetary policy, the assumption being they were not only successful but worth emulating. After all, it seem to work for them. Why not us and what's the holdup?

Talking that up with a litany of excuses why QE is pure and devoid of any nasty ulterior motives, especially those as nasty as competitive devaluation, he writes:

There is little to suggest that the ECB is skewing its policy easing towards weakening the exchange rate.

We wonder why. Telling the population before is akin to a bank robber announcing which bank he's going to rob before he does it.

Next the editorial plays down the cynical idea of begging thy neighbor by citing that the EU trades mostly within its own currency area. The amount they buy from, and sell to, countries outside the 19-member bloc is less than one-fifth of the eurozone economy. 


Though only a small perception point, it's interesting that the writer chooses a fraction rather than a percentage to make his point in a discipline--the dismal science--that lives and breathes on percentage parameters like the percent of unemployed, interest rates or 2% inflation.

Small businesses are the purported heartbeat of the EU. Given the previous ECB tactics, with interest rates already lower than a fat duck's belly, all designed to prod banks to lend more to these small businesses--something that has yet to happen on any meaningful scale--that leaves weakening the currency.

But the writer saves his most hypocritical point for last.

Governments and central bankers would do well to look at their own monetary and fiscal policies rather than complaining about others. The ECB has a perfect right to pursue QE and is wise to do so. It should not be put off by complaints from others based on faulty understanding of monetary policy and an unwarranted degree of cynicism about its motives.

Apparently, this editorialist is either ignorant or has a faulty memory or both.

But here's a reminder, sir, of Super Mario's now famous words quoted around the globe:"Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough."  

MACHIAVELLIAN CRICKET

“It will work because it’s big, because it’s strong, and because it’s open-ended.” — ECB executive board’s Benoit Coeure speaks to CNBC, post-bazooka.

If after Mario Draghi's smiling gala "credibility" performance Thursday there's any doubt that QE ECB style is a progeny of the old Greenspan-Bernanke-Yellen put option, double your dose of medicine.

Financial Times columnist and Keynesian apologist Martin Wolf wrote:"Above all the purchases will continue until the bank sees a 'sustained adjustment' in the path of inflation consistent with its aim of achieving inflation rates 'below, but but close to, 2 per cent' over the medium term."

Who gets to define "sustained adjustment," the market or a whole gaggle of bureaucrats?  The medium term apparently runs until September 2016. Sounds like a LEAP put to us. What's your view?

An editorial in the same paper, "Draghi opens Europe's monetary spigot at last," stated, "The claim that monetary policy is inert when interest rates are low is belied by the recoveries of the US and UK."

Much of any U.S. recovery has engineered a paper financial asset bubble now headed into its seventh year, not a raft of meaningful, sustainable jobs notwithstanding what governments officials claim.

And as if these central bankers didn't know that most of the money in the U.S., as it will most likely in the EU, wound up in the hands of speculators widening the already wide gap between those
much-hated haves and those not haves the MSM loves to drivel on and on about.

First you attack the banks for not running a fiscally tight ship last time around, run some bogus stress tests designed to cough up the wanted results, then start pressuring them to lower lending standards.

Here's a what-you-expect quote from Bloomberg. Block out if you can the cheering in the background.

The region’s leaders have so far started overhauling the banking system to spur lending and funnel credit to the businesses that need it, and with some success. Credit standards eased for a third straight quarter in the three months through December and demand for loans is rising.

Demand is rising for less credit-worthy loans and bureaucrats and MSM mavens get excited. Does that about cover it?

Back to Wolf. Nobody knows for sure whether this action will work. But at least it's a start.

The proverbial camel gets it's nose under the edge of the tent too. It's a start. But nobody knows for sure if he'll ever get his whole body inside, a fact most would view as quite unfavorable.

Currency devaluation has become a currency war. Look around at how many central banks are doing it. Blockades are acts of war. So too are the foolish EU and U.S. sanctions against Russia over a country that has been one of the worst governed in the history of government.

And then there's that beautiful part with all the back slapping Draghi's getting over negotiating a bigger deal than most expected, buying one trillion-plus euro's worth of investment-grade bonds. He stood strong against those stubborn fiscal probity philistines of the north.

As a concession to the pathologically prudent he brokered a deal that left the ECB only 20 percent on the hook for any unexpected defaults. You can bet messieurs Renzi and Hollande groaned loud and long and deep from their third chakra when they heard that one.

What happened to the Three Musketeers and the all for one and one for all to take the fall? That hardly sounds like Machiavellian cricket.

Draghi may be Super Mario today to many. But if this monetary recklessness crashes and burns, in a not too distant tomorrow he might be a Super Something Else.