Bernanke Non Event; Financial Repression; Taleb’s Wisdom

March 14, 2012

  • “Pain plus reflection equals progress.” Ray Dalio
  • Taleb believes in an America that is resilient. “You don’t achieve that through bailouts,” he said. “You need the economy to stay vital. You need a rate of failure. What is fragile should break early.” He also questions the competency and relationships of Obama’s cabal. CNBC Video

Central Banks: The Fed will lose $200 billion for each 1% rise in interest rates and we’re to believe they will stop inflation or a bubble when they need inflation to push their garbage MBS positions into the money. Bernanke’s commitment to printing and low rates is absolutely no surprise. Meanwhile, 73% are worried about US debt held by foreign countries, according to Gallup. Fear not, the Fed is monetizing the debt, stuffing government paper into the banks, where they earn temporarily “risk free” profits. This will generate a new set of concerns; even now, people are openly advocating central banks cancel debt Weimar style economist mag.

  • The Fed’s keyboard 
  • Chart: i. devaluation (US) ii. competitive devaluation (Japan Euro, + $EEM soon) iii. protectionism, tariffs, then defaults
  • Inside the Head of Mario Draghi HS
  •  ”inflation and financial repression — are only viable for domestic-currency debts (the euro area is a special hybrid case)” Carmen Reinhart on Financial Repression: Bloomberg
  • Target2 liabilities push amount owed to Bundesbank to $656 billion, up almost 65% y/y; German angst builds
  • Bernanke unfavorable rating hits record 31%, vs 27%…42% have no opinion
  • 73% worried about US debt held by foreign countries – Gallup. Fear not, the Fed is monetizing, generating a new set of concerns #inflation
  • Skepticism mounts over central bank exit plans, open talk of ‘cancellation’ Weimar style economist mag


  • Moral Hazard of printing: French Socialist Pres candidate Hollande says Spain and Italy have expressed reservations about the pace of austerity measures – Citi
  • Hedge funds want way to short Australia’s housing, get new index, but Steve Keen warns on counterparty risk
  • #Japan is losing competitiveness; i.e.’ ford fusion supplanting accord, sony dominance waning East Asia Forum
  • US: Barclays is concerned about large cap stock and dividend strategy outperformance versus small caps; sees margin compression in industrials.

Emerging Markets

  • Russia warms up to Asia East Asia Forum
  • #India: recent election losses suggest fiscal consolidation and policy reform unlikely – JPM
  • Probability of a devaluation in $EGPT has increased substantially as reserves fall to 2 year low – $JPM
  • Islamic World’s Quiet Revolution. They’re having fewer children. The Aleph Blog

China: Michael Pettis says China will not have a financial crisis, with the bad debts being resolved through higher inflation and financial repression. In short, the people will suffer. He sees a long period of escalating government debt and growth to average 3% this decade, with the caveat that it will take two or three years before this number falls within the consensus.

  • Stimulus: ‘Markets have been consistently wrong about expectations of easing in Asia, expecting slow pace to continue’
  • Reform: Chinese leadership politics delay major reforms - SeattlePI 
  • “China’s basic economic system in which public ownership is dominant is unshakable. This is written into the supreme law, the constitution.”  AP
  • ‘China’s politicians with capital will spend it on positioning themselves rather disruptive change and making enemies’ @prchovanec
  • JPM model shows commodities are currently priced for a little over 7% growth in China, Australia 8%, New Zealand 8.5%.
  • Following debate, 89% says US does capitalism better than China.”
  • Scott Lincicome: The Potential Downside of Chinese “Re-balancing”: US Inflation
  • The Chinese government will absorb the debt rather than privatization, but as debt rises it will be harder to raise rates to cut inflation
  • Iron ore shipping rates drop to lowest in a decade on weakening China demand


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