The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

Another step in the global trade war/currency crisis and U.S. dollar devaluation that we’ve been forecasting for the past decade. This Japan/China accord is the Asian trading bloc predictably coming together in the incipient global trade war.

But the incipient global equity Supercycle Bear Market will be accompanied with a rising“safe-haven” status U.S. dollar – up to DXY0 mid- to high 80s (which is why months ago we recommended taking U.S. dollar short profits in low-volatility, foreign-currency-based money market funds like ICPHX) – that will exacerbate the global trade war as each of the three global-trading blocs try to accelerate their export growth to reflate their recessionary economies. We fully expect the U.S. will become very frustrated and finally figure out to win the export growth game it will to succumb to a “last hurrah” formal devaluation ending the U.S. dollar status as the sole central bank reserve currency since WWII in some sort of Bretton Woods-like agreement under a replacement of Treasury Secretary Geithner.

See Economists React: China-Japan Currency Pact:

“China and Japan announced a wide-ranging currency accord on Christmas day that is expected to give the yuan a more prominent role in international trade. Among the measures, the two countries agreed to promote direct yuan-yen trade, rather than converting their currencies first to dollars, and also for Japan to hold yuan in its foreign-exchange reserves

-Barry Eichengreen, University of California at Berkeley:

I think the new accord is squarely in line with China’s strategy for internationalizing the yuan, which is to proceed in stages: first encourage its use in trade invoicing and settlement, then encourage its use in international investment, and lastly encourage its use as international reserves. They’ve been moving unilaterally to implement the strategy, most recently permitting offshore holders of yuan to invest in the Chinese stock market.

What’s new here is that they are working with and have the support of the Japanese government, which seems to be acknowledging implicitly that there will be a single dominant Asian currency in the future and that it won’t be the yen.

-Jeffrey Frankel, Harvard University

Before the yuan becomes a true international currency, let alone rivaling the dollar, it must become a normal currency. I would interpret the increased use of the yuan in China’s international trade as indicating movement toward becoming a normal currency.

If this new initiative with Japan were indeed to result in substantial bilateral trading between the yuan and yen directly, without intermediate use of the dollar, that would represent a big leap in international status, since almost all currencies have to go through the dollar as a vehicle currency.

Bottom line: This hastens a multi-currency world. But this is just one of 100 steps along the way.

WSJ: How would this affect the U.S. dollar and U.S. economy?

Internationalization of the yuan and a move toward a multiple currency system would by definition reduce the share of the dollar as an international currency. . . . If the yuan becomes internationalized, this will almost certainly be associated with an appreciation against the dollar. [Bob Bronson: After the global equity Supercycle Bear Market ends]

Overall, an appreciation of the yuan against the dollar would be good for the U.S. economy – especially during this current period of high U.S. unemployment, slow U.S. growth, and rock-bottom interest rates (though still nowhere near as important as U.S. congressmen think it is). Incidentally, I also think it would be good for the Chinese economy.

Of course, as with any exchange-rate change, there is always the flip side: the possibility of higher U.S. inflation and higher U.S. interest rates. [BB: Nope!]

Regarding a continuation, or acceleration, of the slow, 40-year trend [BB: It has only been 26 years since 1985] away from dollar hegemony toward a multiple currency system, it does have some negative effect, which I classify in four areas: loss of seigniorage, loss of business for U.S. banks and financial institutions, reduced convenience for U.S. businessmen (and tourists), and loss of geopolitical power and prestige. [That’s already happening, especially under Obama.]

But if these trends continue, the currency question will be more of a symptom than a cause. The cause lies in long-term fiscal unsustainability, imperial overreach and other U.S. policy mistakes, many of them attributed to the famous “partisan gridlock.” [More so due to the superior economic growth rate of the other two trading blocs since WWII, especially pan-Asia.]

Morris Goldstein, Peterson Institute for International Economics [His comments are the most sophisticated of the three]

The China-Japan initiatives will obviously increase the regional use of the yuan, although much depends on their scale and timing. That said, I don’t see them as game changers in the broader issue of if and to what extent the yuan becomes a serious rival to the dollar as the dominant global currency.

To do the latter, China would need to be willing to take some fundamental policy decisions, including changing its market intervention and sterilization strategy, undertaking interest rate liberalization, building a larger corporate bond market, reducing much further restrictions on international capital flows, and putting the banking system on a more market-oriented basis — to say nothing about avoiding a crash due to excessive investment in real estate.

Each of those policy choices involves tough trade-offs and reform on the whole package is likely to be some time down the road.

So yes, we are moving to a more multiple-currency world, but it is likely to be a slow process and is not likely to accelerate until China is prepared to give up much more to obtain much wider international use of the yuan.

I don’t think the US should either encourage or discourage it; it should allow the market to choose. Besides the international role of the dollar depends much more on what we do (e.g., U.S. fiscal reform) than on these kinds of yen/yuan initiatives.

I think the international role of the dollar is a moderate plus for the U.S. but this latest initiative is not something the U.S. needs to react too; this is a long-distance race not a sprint.

–Bob Davis

A better measure of investor sentiment towards Italian debt were today’s longer term auctions where 10 yr and near 10 yr debt were sold at yields of 6.98% and 6.7% respectively. The shorter term 3 yr auction yielded 5.62% vs 7.89% last month. To compare, nominal GDP in Italy may not grow more than 3%, thus these yields Italy is paying is unsustainable for any long period of time. Monti is speaking today, stating his case for the steps his gov’t has taken and saying there is “no justification” for the high yields of Italian debt relative to Germany. Really? The euro continues to weaken mostly vs the US$ and yen. Gold is selling off again and is now down 20% from its record high but the recent action in the US$ should be viewed as euro weakness rather than US$ strength as the US$ continues to languish vs healthier economies such as Canada and Australia with both still at about parity with the US$. This pullback in gold is nothing more than a correction in a long term bull market as the fundamental backdrop of currency debasement (especially with the recent explosion higher in the size of the ECB balance sheet) has never been greater. European banks parked 437b euros with the ECB overnight vs 452b yesterday. Much was made about the amount yesterday after all the borrowing banks did for 3 yr’s but its more yr end noise than anything. With this said, the money European banks borrowed for 3 yrs from the ECB will likely go more to refinancing their Q1 maturities than anything else. Italian business confidence fell to the lowest since Dec ’09 and Germany inflation in moderated in Dec.

My eclectic early morning reads for today:

• Congress ends corn ethanol subsidy (The Detroit News) see also 30-year-old corn ethanol subsidy nixed by Washington (Autoblog)
• A Grim Forecast for Corporate Earnings (Barron’s)
• Michael Lewis: Princeton Brews Trouble for Us 1 Percenters  (SF Gate)
• Sears Holdings liquidation sale (Bronte Capital)
• Great Moments In Punditry: Art Laffer Edition (Forbes)
• R&D: Will China Outsmart the U.S.? (Sunday NYT Magazine)
• How Cash Has Corrupted Congress (Daily Beast)
• Leonardo’s Optics in Action, in Paint (WSJ)
• Fascinating discussion from former Ron Paul staffer (Rightwings News)
• Perfect for the holidays! Where The Fuck Should I Go For Drinks? (WTFSIGFD)

What TF are you reading?

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click for larger graphic

Source: (WSJ)

Canadian Medical Association Journal: Japanese Response to Fukushima Even Worse than Communist Russian Response to Chernobyl … “The Japanese Government Was Lying Through Its Teeth”

“Unconscionable” Failure Of Government … a “Culture of Coverup”

The peer-reviewed Journal of the Canadian Medical Association – a 144 year-old national association – slammed the Japanese government for lying about Fukushima:

A “culture of coverup” and inadequate cleanup efforts have combined to leave Japanese people exposed to “unconscionable” health risks nine months after last year’s meltdown of nuclear reactors at the Fukushima Dai-ichi power plant, health experts say.

Although the Japanese government has declared the plant virtually stable, some experts are calling for evacuation of people from a wider area, which they say is contaminated with radioactive fallout.

They’re also calling for the Japanese government to reinstate internationally-approved radiation exposure limits for members of the public and are slagging government officials for “extreme lack of transparent, timely and comprehensive communication.”

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The government may soon allow some of the more than 100 000 evacuees from the area around the plant to return to their homes.

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The plant is still badly damaged and leaking radiation, says Tilman Ruff, chair of the Medical Association for Prevention of Nuclear War, who visited the Fukushima prefecture in August. “There are major issues of contamination on the site. Aftershocks have been continuing and are expected to continue for many months, and some of those are quite large, potentially causing further damage to structures that are already unstable and weakened. And we know that there’s about 120 000 tons of highly contaminated water in the base of the plant, and there’s been significant and ongoing leakage into the ocean.”

The full extent of contamination across the country is even less clear, says Ira Hefland, a member of the board of directors for Physicians for Social Responsibility. “We still don’t know exactly what radiation doses people were exposed to [in the immediate aftermath of the disaster] or what ongoing doses people are being exposed to. Most of the information we’re getting at this point is a series of contradictory statements where the government assures the people that everything’s okay and private citizens doing their own radiation monitoring come up with higher readings than the government says they should be finding.”

Japanese officials in Tokyo have documented elevated levels of cesium — a radioactive material with a half-life of 30 years that can cause leukemia and other cancers — more than 200 kilometres away from the plant, equal to the levels in the 20 kilometre exclusion zone, says Robert Gould, another member of the board of directors for Physicians for Social Responsibility.

International authorities have urged Japan to expand the exclusion zone around the plant to 80 kilometres but the government has instead opted to “define the problem out of existence” by raising the permissible level of radiation exposure for members of the public to 20 millisieverts per year, considerably higher than the international standard of one millisievert per year, Gould adds.

This “arbitrary increase” in the maximum permissible dose of radiation is an “unconscionable” failure of government, contends Ruff. “Subject a class of 30 children to 20 millisieverts of radiation for five years and you’re talking an increased risk of cancer to the order of about 1 in 30, which is completely unacceptable. I’m not aware of any other government in recent decades that’s been willing to accept such a high level of radiation-related risk for its population.”

Following the 1986 nuclear disaster at the Chernobyl nuclear power plant in the Ukraine, “clear targets were set so that anybody anticipated to receive more than five millisieverts in a year were evacuated, no question,” Ruff explains. In areas with levels between one and five millisieverts, measures were taken to mitigate the risk of ingesting radioactive materials, including bans on local food consumption, and residents were offered the option of relocating. Exposures below one millisievert were still considered worth monitoring.

In comparison, the Japanese government has implemented a campaign to encourage the public to buy produce from the Fukushima area, Ruff added. “That response [in Chernobyl] 25 years ago in that much less technically sophisticated, much less open or democratic context, was, from a public health point of view, much more responsible than what’s being done in modern Japan this year.”

Were Japan to impose similar strictures, officials would have to evacuate some 1800 square kilometres and impose restrictions on food produced in another 11 100 square kilometres, according to estimates of the contamination presented by Dr. Kozo Tatara for the Japan Public Health Association at the American Public Health Association’s 139th annual meeting and exposition in November in Washington, District of Columbia.

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The Japanese government is essentially contending that the higher dose is “not dangerous,” explains Hefland. “However, since the accident, it’s become clear the Japanese government was lying through its teeth, doing everything it possible could to minimize public concern, even when that meant denying the public information needed to make informed decisions, and probably still is.”

“It’s now clear they knew within a day or so there had been a meltdown at the plant, yet they didn’t disclose that for weeks, and only with great prodding from the outside,” Hefland adds. “And at the same moment he was assuring people there was no public health disaster, the Prime Minister now concedes that he thought Tokyo would have to be evacuated but was doing nothing to bring that about.”

Ruff similarly charges that the government has mismanaged the file and provided the public with misinformation. As an example, he cites early reports that stable iodine had been distributed to children and had worked effectively, when, “in fact, iodine wasn’t given to anyone.”

Public distrust is at a level that communities have taken cleanup and monitoring efforts into their own hands as the government response to the crisis has been “woefully inadequate” and officials have been slow to respond to public reports of radioactive hotspots, Gould says. “That’s led to the cleanup of some affected areas, but there are also reports of people scattering contaminated soil willy-nilly in forests and areas surrounding those towns.”

“In some places, you can see mounds of contaminated soil that have just been aggregated under blue tarps,” he adds.

Many other health and nuclear experts agree. See this and this.

Of course, in this culture of coverup permeating Japan and the rest of the world, Tepco is hiding information from the Japanese government, the Japanese government is trying to hide the truth from foreign government agencies such as the NRC, and other countries – like the U.S. – are hiding the truth from their own people.

Source:
How To Decide If You Or Your Business Should Use Twitter
by Social Mouths

Cory Doctorow:

The last 20 years of Internet policy have been dominated by the copyright war, but the war turns out only to have been a skirmish. The coming century will be dominated by war against the general purpose computer, and the stakes are the freedom, fortune and privacy of the entire human race.

The problem is twofold: first, there is no known general-purpose computer that can execute all the programs we can think of except the naughty ones; second, general-purpose computers have replaced every other device in our world. There are no airplanes, only computers that fly. There are no cars, only computers we sit in. There are no hearing aids, only computers we put in our ears. There are no 3D printers, only computers that drive peripherals. There are no radios, only computers with fast ADCs and DACs and phased-array antennas. Consequently anything you do to “secure” anything with a computer in it ends up undermining the capabilities and security of every other corner of modern human society.

Someone asked me a great question the other day: What is the best software or website sites to track your portfolio?

I had to answer “I don’t know.” There are lots of good pro options — in the office, we use Bloomberg ($1600 per month) and Morningstar ($500 per month).

But what are the decent free or reasonable consumer grade sites to track your investments? I have played with Marketwatch, Yahoo finance, Wiki Invest — but since I have everything on TD (our analytics are elsewhere), I never really got a feel for the strengths and weaknesses of each of these.

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So, let’s consider this an open thread — what are your favorite portfolio management tools?

My afternoon reads:

• 2011: The Year in Financial Blogging (The Reformed Broker) see also Bloggers as Marginal revolutionaries (Economist)
• Whistleblower documents illuminate case against BNY Mellon (Reuters)
• How wealth of members of Congress has TRIPLED in 25 years – while average U.S. family has suffered a DROP in their worth (Daily Mail) see also America’s inequality need not determine the future of Britain (FT.com)
• No, There’s No Life At Mers (Stop Foreclosure Fraud)
• The Great Economic Divide Makes Everyone Poorer (Fiscal Times) see also No One Is Above the Law (Economix)
• 7 Downloads to Kick-Start Your Tablet Adventure (WSJ)
• Insights on the writing of Steve Jobs (Fortune)
• Twitter more popular than Facebook in 2011 (ZDNet)
• How SOPA 2.0 Sneaks In A Really Dangerous Private Ability To Kill Any Website (Tech Dirt)
• Solitude and Leadership (The American Scholar)

What are you reading?

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Winners & Losers for Customer Service in Holiday Season 2011

Source: ForeSee

Source: Emerging Markets, ETFs and Dividend Stocks Rule in 2012

Last week, we ran this series of Sentiment charts.

Today, I want to share with you a few interesting economic cycle charts:

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