Tag Archives: Inflation

Twas the Night Before Taper: A Wall Street Holiday Poem

After several months of silence, Mustafa Mond, whom we last heard from in April, has resurfaced. Today, Mr. Mond offers us this holiday poem:

TWAS THE NIGHT BEFORE TAPER

By Mustafa Mond

Twas the night before Taper, when all through the Street
Not a whale was stirring, not even a veep.
The earnings were prepped by accountants with care,
In hopes that bonuses would be much more than fair.

The bankers were settled all smug in their spreads,
While Fed interventions entranced all their heads.
And Barack with his selfie, and Michelle with hers too,
Readjusted their cameras to spy just on you.

When out in the markets there arose such a cry,
Barry sprang from West Wing to see what was nigh.
To the news wires he flew like a bat of hell,
Knowing hestill had the masses to quell.

Markets were speeding, out of control,
The VIX off the charts—who spiked the punch bowl?
When, what to his wondering eyes should appear,
But a great big helicopter with pallets in the rear!

With an exhausted driver, tired of dollar-yen,
And a new co-pilot, it must be St. Ben.
Faster than a flash crash his beneficiaries came,
And he whistled, and shouted, and called them by name!

“Now Blankfein! Now Dimon! Wells Fargo and Citi!
On Gorman! On Moynihan! NYSE and BONY!
To the highest of highs! ‘Til market bears have fled!
After all, in the long run, we’ll all be dead!”

The yield-hungry traders scrambled for carry,
Locking in profits before the curves vary.
And up to the market-top prices arose,
While Barack’s disapproval relentlessly grows.

And then, with the microphones set to full blast,
The media watched carefully for any contrast.
Trading floors went silent, as they are apt to do,
As Fed chairman testimony makes sense to so few.

He spoke all in jargon, acronyms and indices,
Durables and deficits and payrolls and factories.
A big pile of assets he still wants to backstop:
A mortgage, a bankruptcy, a credit default swap.

His data—how thorough! Statistics—such authority!
And his protégé, this Yellen, confirmed with a majority!
His post-Fed retirement expectantly awaits,
No doubt duly hedged for much higher interest rates.

Europe and China, oil exporters like Canada,
The Saudis and Russia, and fiefdoms like Panama,
Listened closely for signs of any new shocks,
But at least they have product–unlike tech stocks!

He was measured, cogent, lacking Greenspan’s grandiloquence,
But the reaction, as always, was irrational exuberance,
As he made quite clear that ZIRP would continue,
And Wall Street rejoiced–“to the discount window!”

Thus ended St. Ben’s last public report
As chairman of the lender of last resort:
Tapering delayed, until 2014,
When St. Ben will no doubt be far from the scene.

He sprang to his chopper, having completed his duties,
Leaving risks to be rated by S&P, Fitch and Moody’s.
And on his way out, they asked, “what of safety nets?”
He cried, “Happy Holidays! And good luck with your debts!”

MustafaMond.signature

Irrational exuberance continues plaguing Bitcoin

2013.12.IgnoranceBank of America has now initiated coverage of bitcoin and puts a fair value price target at US$1,300, which depending on your view, either validates or discredits the digital currency. Personally, I have no skin in this game, I appreciate and am fascinated by the theoretical construct, but am put off by the breathlessly brainless hype surrounding it and one doesn’t have to look far to see bitcoin’s limitations.

With that said now, the BoA report link is here, and as far as I’m concerned, the most important stuff comes in at page 6, in the section entitled, “How to assess Bitcoin’s fair value?”

I admit up front I have yet to come up with a viable answer to this question, but if I may say so, I am expert at recognizing bullshit when I see it. And BoA analysts make what even they concede are very big assumptions here, but if you know the assumptions are “big” (read: unrealistic), then why bother going on about it in the first place?

Anyway, taking this piece by piece, some of the outlandish assumptions that lead to a “fair value” price of $1,300, as far as bitcoin’s value as a medium of exchange:

Given the assumption that Bitcoin will grow to account for the payment of 10% of all on-line shopping, this would suggest that US households would want to have a balance of $1bn worth of Bitcoins.

…given bitcoin’s famous finite supply cap at 21 million units, the math here isn’t quite doing it for me.

What about for the whole world? US GDP is about 20% of World GDP. If we were to assume the same degrees of penetration of e-commerce for the rest of the world and that spending by households outside the US has the same velocity, we get to $5bn worth of Bitcoins for the total desired cash/noncash balance of global on-line shopping.

…sure, but both of those assumptions are not just wrong but shockingly ignorant about how the world outside the United States operates. I don’t need to spell this one out further, do I?

In addition to its role as a mean for payment for on-line commerce, Bitcoin can be used for transfer of money (e.g. immigrant worker in the US sending remittances back home).

…the average immigrant worker in the US sending remittances back home is a) Latin American, and b) traditionally very distrustful of all financial mechanisms or intermediaries that are not cash; further, this average immigrant worker would require a level of facility with the internet that various studies simply do not bear out.

Western Union, MoneyGram, and Euronet are the three top players in the money transfer industry (with about 20% of the total market share). Let’s assume that Bitcoin becomes one of the top three players in this industry.

…actually, let’s not, for all kinds of practical reasons. See previous two rebuttals to begin with.

A thought just occurred to me: maybe this is a practical joke — like the Onion!

As far as bitcoin somehow serving as a store of value, the entire discussion here appears LSD-induced, with the following statement perhaps being the biggest whopper:

If we were to assume that Bitcoin were to eventually acquire the reputation of silver (which is an extremely ambitious assumption), this suggests that Bitcoin market capitalization for its role as a store of value could reach $5bn.

WHAT?

This is the metaphorical equivalent of saying that assuming gravity were one-tenth its current force, I could leap tall buildings in a single bound…and then going on to design a workout routine that does indeed involve me leaping tall buildings in a single bound.

Someone’s living in unreality and I’m pretty sure it’s not me. 

More evidence of a Bitcoin bubble

If this isn’t proof enough of a Bitcoin bubble, I don’t know what is:

2013 December Bitcoin

Actually you know what? I think there is better proof: THIS.

Ode to Janet Yellen: A Fed Prayer

Yellen PrayerSo Janet Yellen is officially the new Chairperson of the US Federal Reserve Board of Governors. Thanks to whatever anonymous reader just sent me this:

Dearly Beloved,

Let us pray.

Our Fed
Who art in Washington
Yellen be thy name
Thy printing come
Thy will be done by Ben as it is with Janet
And as it was before by Greenspan.
Give us this day our daily 3 billion
And increase us our debts
As we bail out our debtors
And lead us not into inflation
But deliver us from down markets
For thine is the printing, the bubble and the euphoria
Forever till taper
Amen

— Anonymous

Fed tapering, Emerging Markets, Banxico

Thanks to Brent Donnelly from Nomura for this chart showing USDMXN vs 10-year US Treasuries since “tapering” became a new market watchword:

2013.09.20.USDMXN 10 year UST

So what? Here’s so what: For anyone who ever thought Videgaray, Carstens or whoever else had any sway, when push comes to shove, dollar-peso moves almost in lockstep with Fed expectations. Put another way, whenever Bernanke & Co. decide easy money is over and raise interest rates, expect the peso to go back above 13.0+ and stay there (possibly even 14). And if Carstens or whoever replaces him is smart, they’ll keep their hands off. Draw your own conclusions about what that means for Mexican inflation, TIIE, etc.

Charts Of The Day: The Bitcoin-Argentina Connection

On increasing chatter I’ve been hearing about bitcoin, pending devaluation in Argentina and the possible use of bitcoin to circumvent capital controls in Argentina, I had to look at the data.

Bitcoin, for those who aren’t aware, is a virtual currency that exists solely online (I have one previous discussion of it here). I’m not going to put up any links on its origins here because you can honestly just google it and find more than enough info, but the Wikipedia page gives a decent unbiased explanation.

And the operative word in that previous sentence is “unbiased”. Because there’s a rising political element to bitcoin that I really don’t want to get into, but to sum it up, there is a palpable libertarian bent to its propagation if you can sift through all the hype and speculation, good and bad, about its use.

Personally, I think it’s an interesting experiment and am wholly agnostic about its success or legitimacy, but love seeing regulators squirm at the implications of it. To borrow from former US Defense Secretary Donald Rumsfeld, the “unknown unknowns” here are nothing less than staggering.

Actually, here is an interesting profile of bitcoin’s user base for those of you already familiar with it.

And for those of you ready for the advanced class, this is a handy diagram:

2013.03.27.How a bitcoin transaction works

Anyway, on to the data.

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Plain English: Some Thoughts On Bernanke’s LSE Speech

2013.03.26.Bernanke Plain English-helicopter benBernanke gave a speech at the London School of Economics yesterday which is grabbing a lot of attention. Those who have heard or read some of his other non-Fed public lectures over the past few years will recognize that he spent about half of it reviewing some of his favorite historical lessons, mostly sourced from his pre-Fed academic work. But there were some new statements to add to this mix. My interpretation of some of the key themes:

  • The current financial crisis is in fact a classic panic: a systemwide run of “hot money” away from assets whose values suddenly became uncertain.
  • That said, there were some different bells and whistles this time, notably the introduction of new financial instruments, more varied actors beyond just banks and (in my opinion) most vitally, a scale and complexity altogether new.
  • Currency war, which Bernanke chooses to refer to as, “competitive depreciation of exchange rates”, is similarly not new.
  • The accommodative monetary policies central banks around the world have been implementing (read: zero interest rate policy) to support growth do not constitute competitive devaluations, currency wars or whatever term you prefer. The primary reason for this is that domestic demand counts for a lot more than exchange rate meddling and in any event when competitive economies both devalue their currencies, whatever effects result from these devaluations effectively cancel each other out.

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Translation of the Bank of Mexico’s Monetary Policy Announcement on Friday

2013.03.11.Banxico Agustin CarstensAs you may or may not have heard, the Bank of Mexico cut its benchmark interest rate on Friday by 50 points to 4 percent. This is kind of a big deal for reasons I’ll get into in a separate comment. But for the time being I just wanted the full text of the statement in English for easy referencing and nobody else seems to be carrying this, so I just did the translation. More to come shortly.

Here’s the original link in Spanish from Banxico’s website.

Here’s the translation (bold emphasis mine):

March 8, 2013

Monetary Policy Announcement

The Bank of Mexico has decided to reduce the interbank interest rate by 50 points to 4.0 percent.

The global economy continues showing signs of weakness. In the United States growth in 2013 is expected to be lower than in 2012 and important downside risks are prevalent. In particular, the recovery of economic activity and employment, supported in large part by monetary policy, is being affected by necessary fiscal consolidation.

In the Eurozone, economic activity continues without showing signs of recovery. Furthermore, regarding economic recovery, uncertainty continues about the effect necessary fiscal adjustments will have, the health of the European financial system and the possibility of major political instability, particularly among the peripheral economies.

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Chart Of The Day: Emerging Markets Currency Wars Landscape

This is interesting:

2013.03.06.Swan FX Diagram

2013.03.06.Swan FX Table

And here’s an explanation of what we’re looking at:

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A Perfect Example Of Why Diplomats Should Never Be Trusted On The Economy

2013.02.26.Mexico gdp forecast calculationYes, that’s right: NEVER. War, yes. Economy, no.

I know this has been a very Mexico-heavy week, but there’s been a lot of activity here and I’m angling for some other things coming next week, so stay tuned! In the meantime, chalk up another gushing go-go-pro-Mexico story, this one from the Globe and Mail of Toronto, in which Canadian Foreign Affairs Minister John Baird unleashes this whopper:

“Mexico, in our lifetime, is going to be a top-10 world economy, and potentially in our lifetime, a top-five world economy.”

This is more than just irrational exuberance. I’m tempted to call it a lie, but then that would imply that there is an absolute truth, that Baird knows that absolute truth, and is willfully concealing it while vocally professing the opposite to be true. And I can’t prove that. But what I can prove is that this statement is nothing less than Bullshit.

Consider the 15 largest economies as measured by nominal GDP in 2012, according to the IMF (figures in US$ billions):

1. United States: 15,653.366
2. China: 8,250.241
3. Japan: 5,984.390
4. Germany: 3,366.651
5. France: 2,580.423
6. UK: 2,433.779
7. Brazil: 2,425.052
8. Italy: 1,980.448
9. Russia: 1,953.555
10. India: 1,946.765
11. Canada: 1,770.084
12. Australia: 1,542.055
13. Spain: 1,340.266
14. Mexico: 1,162.891
15. South Korea: 1,151.271

Now here’s how the Economist Intelligence Unit is forecasting Mexico’s real GDP growth out to 2030:

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Making A Case For Buying Chile and Selling Mexico

2013.02.27.The Case for Buying Chile and Selling MexicoWhat I’m about to put here has gone through many evolutions. The latest came out in the form of a Seeking Alpha article which I just had published the other day under the headline, “A Preliminary Case For Chile Over Mexico.”

For a couple of weeks now I’ve been looking at the merits of either buying the Chile ETF (ticker: ECH), shorting the Mexico ETF (ticker: EWW) or both. And by the way things have been looking recently, not only do my instincts look about right, but I may have even missed the boat. For those who have been watching the elections in Italy, the fallout for the euro has been pretty hard, on the order of 300 bps in Monday alone. So what does this have to do with Latin America? Well, a lot, actually. I initially wrote about this back in June last year for Seeking Alpha here, and apparently my thesis still holds.

The storyline as I see it is pretty simple.

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Central Banking Today: Game Theory Now More Than Ever

Take a look at this recent column from PIMCO’s Mohamed El-Erian and try to tell me otherwise:

With many other policy makers essentially missing in action, central banks find themselves in leadership roles not out of choice but necessity. Given imperfect tools, their involvement entails, to use the US Federal Reserve chairman Ben Bernanke’s phrase, “benefits, costs and risks”. They believe that macroeconomic benefits will outweigh the collateral damage; and they hope that they will buy sufficient time for others to respond properly and for economies to heal endogenously.

The dilemma of modern central banking was captured well last week by incoming BoE governor Mark Carney in his testimony to the UK House of Commons Treasury committee. While recognising the risks of further QE, the current Bank of Canada chief argued that central banks should act to avoid sluggish growth raising the natural unemployment rate via hysteresis.

The fundamental problem is that central banks are pursuing too many objectives with too few instruments. That is why outcomes consistently fall short of their expectations; and also why talk of exit is repeatedly shelved.

Absent better support from other policy makers, central banks will be dragged deeper into policy experimentation. Meanwhile, with incentive structures failing to align properly, perverse reactions are clear – from persistent (and, in Europe’s case, increasing) policy complacency elsewhere to distorted market functioning leading to potentially harmful resource allocations.

Then there is the biggest issue of all: the effects of unconventional monetary measures are likely to become volatile and highly binary if a growing number of central banks around the world feel they have no choice but to join the current western policy stance.

A larger global shift to expansionary monetary policy would enhance the probability of triggering “wealth effects” and “animal spirits”: the two channels through which policy-bolstered asset prices translate into better economic fundamentals. With that, the greater the likelihood of a pivot from “supported growth” to “genuine growth”.

However, relative pricing channels, including currency relationship, would be crippled if too many central banks were to opt for the same policy. Harmful beggar-thy-neighbour effects would amplify damage from artificial surges in asset prices that encourage irresponsible risk taking, fuel “bad inflation” and worsen the risk of disorderly economic and financial deleveraging.

Street Markets 101: Che Misterio Navigates Argentina’s Black Market for Dollars

2012.10.18.Che MisterioI am humbled, honored, grateful and excited to once again present Che Misterio in Argentina, who continues endangering his life for the purpose of shining a light on one of the blindest of economic blind spots in the world today: Argentina’s black market in foreign exchange. Che previously enlightened us in this space on the topics of Big Mac inflation and street level economics. The following was first published on Seeking Alpha under my name in a version suited to that publication’s editorial format, entitled, “How to Navigate Argentina’s Black Market in Foreign Exchange”. Below is the original as submitted by Che Misterio.

Ladies and gentlemen, Che Misterio:

Where Next for Argentina?

By Che Misterio

It is no secret that Argentina is now a two-tiered society. There are those with hard currency for whom the standard of living is quite cheap, and who are therefore immune to chronic inflation as their dollars and euros appreciate even quicker than prices. And then there are those without hard currency, and they live a precarious existence, to say the least: they cannot save their pesos, and even if they could it would be pointless as inflation rages on despite government insistence to the contrary; flagging confidence in the national currency and ever tighter regulations on foreign exchange means the only way to acquire a meaningful amount of hard currency is to pay an expensive premium on the black market.

I am grateful to belong in the first tier. I exchanged some euros recently on the black market, despite the terms being rather nebulous. For those unfamiliar with the street level workings of Argentina’s informal economy, this does not involve some suspicious character in dark sunglasses manning a backstreet stall flanked by security guards with black ear pieces protecting the stash. This was in an otherwise regulated bureau de change on a busy street, staffed by a man of average height, weight, complexion—what those in show business refer to as “the everyman look.”

The opening conversation went something like this:

“Hi, I’d like to change euros please”
“Where are you from?”
“Here.”
“We don’t change euros.”
“But Roberto changes euros, no?”
“Please wait here.”

“Roberto” was the code word a friend of mine had given me for signaling to this bureau de change that I wanted to transact at the black market rate. The man turned his back to me and knocked on the tinted glass of the door behind him. The door made a slight clicking sound as the magnetic lock loosened and the door opened. The man disappeared through the doorway and the door closed and locked, leaving me alone to wait. Two minutes later, the door re-opened, and he beckoned me to enter.

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Chart of the Day: What the Big Mac says about Eurozone prices

Borrowed Bruegel (source link here):

“…the Big Mac tells us that Italy is the most expensive place in the euro area. A Big Mac costs €3.85, while it costs only €3.6 in France and 3.64 in Germany. Or to put it in percentages, in July 2011, Italy was overvalued by 2.9% while in January 2013, it was overvalued by 5.7% relative to Germany. Of course, you may just as well say that Germany was undervalued… but then, the adjustment in Germany seems to go in the right direction but not in Italy in these last one and a half years.”

2013.02.11.Big Mac Euro 1

2013.02.11.Big Mac Euro 2

Chart of the Day: The top 10 stock exchanges of 2012

This is actually going to be a few charts, because the first chart as you can see looks ridiculous:

Top 10 Frontier Market stock exchanges v DJIA

It should go without saying that there’s something very wrong with this picture, and indeed Miguel Octavio sums it up better than anyone I know here, but the long and short of it is that runaway inflation and an ass-headed capital controls regime has wildly overstated the “returns” in Venezuela. So let’s get rid of Venezuela and look at how the rest of these stack up against the Dow Jones Industrial Average. Here’s what we get:

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Chart of the day: Fastest growing and shrinking economies of 2013

From the Economist Intelligence Unit:

2013.01.08.EIU fastest growing and shrinking economies

Forecasting for the Masses: The Macro Outlook, as told to Mom and Pop

How do you know an investment trend has officially peaked? There’s the old legend about how John D. Rockfeller knew it was time to get out of the stock market when his shoeshine boy started giving him tips. More recently, I know a lot of people of the opinion that when you see an investment trend story in the New York Times, it’s time to close the position. Even more recently, Fast Company Magazine ran some stories about how Brazil is the “hot new” destination for American startup geeks…cue another curtain call.

So I was going through my inbox over the weekend when I noticed an email from my mortgage lender, Wells Fargo, with this subject line: “2013 Economic and Market Outlook for Ulysses De La Torre”.

Maybe this is a new thing, but nobody else I know receives this sort of thing from any commercial or mortgage banker of theirs. Very well then. Is everybody ready for this?

Ladies, Gentlemen, Buyers, Sellers, presenting Wells Fargo Advisors’ Investment Strategy Committee:

2012.12.17.WF Macro outlook 2

2012.12.17.WF Macro outlook 3

Because I really have no room for diplomatic euphemisms, let’s get right to the point: Fixed Income is where it’s at here. Continue reading

Desperate Bullishness on Mexican bonds

Barron’s for whatever it’s worth, has this video on the case for investing in Mexico.

At this point, these arguments aren’t necessarily wrong, but they’re both tired and incomplete to the point that one has to wonder how long it will take before the smart money decides to take the party somewhere else. Video first, then dissection:

“The peso has been stable for several years.”

Really? Looking at the past five years, seems like the Euro has been  more stable against the dollar than the peso has:

Source: Oanda

“If you buy a five-year government bond in Mexico, you get a yield of just over 5%, compared with the US a yield of less than 1%. But what turns a good yield into a great yield is that in Mexico, those five year bonds pay well more than local inflation. Rate of inflation in Mexico is 4.4% and falling. In the US the five-year treasury bonds pay one-third of the rate of US inflation.”

This is apparently what passes for “great” yield today.

“Mexico has its inflation under control.”

HA!

“I think you have a better change of getting a positive yield after the rate of inflation in these Mexican government bonds than you do in these US Treasuries. That’s not to say you should dump all your treasuries and go into Mexican government bonds.”

That’s the second-most important quote in the entire interview.

“The institutions in Mexico are not nearly as mature and stable as they are in the US and that creates greater risk, no doubt about it. But one of the things you care about when you buy bonds is you care about what’s likely to happen to the credit rating.”

…and that would be the most important quote.

“If the new Mexican president makes the right kind of changes, they might be due for an upgrade soon.”

And that, my friends, continues to be the nut. “Will I make money there?” is a very different question from “Is it stable there?” Keep those two questions separated and there’ll be happy endings for everybody.

Rapid Growth Markets: Behold THE FUTURE

I’ve just spent way too much time playing with Ernst & Young’s interactive spider graph thingy that allows you to compare their 25 “rapid-growth” markets across a range of macroeconomic indicators. According to E&Y, these 25 countries possess the most promising “long-term potential to generate strong business opportunities.”

So since a picture is worth a thousand words, here’s how all 25 of these economies will change from 2011 to 2016 from the meta-macro view, compared against each other:

Okay! Is everybody ready to go out and make some money?
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Cristina Fernández Kirchner, Money Manager Extraordinaire

Argentina’s La Nación had a rather thorough vetting of the Kirchner family assets profile yesterday. Pictures always speak loudest so let’s start with a visual. Here’s a nice chart showing the growth of CFK’s net worth (translated and interpolated by Inca Kola):

Kirchner’s current net worth, estimated here at 89 million pesos, is either US$18.7 million at the official rate or US$14 million at the black market rate. While the Kirchner government has a vested interest in keeping the exchange rate artificially strong to project the illusion of sovereign fitness, this also gives Kirchner herself the appearance of having a higher net worth in USD terms than is realistic.

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