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Quote of the Day

“The bank I would like to run at the moment is Wells Fargo because I would love to make 400 basis points in retail banking and have a relatively easy life. Unfortunately there are lots of things I wish for that are not going to come true.”

John Cryan, co-CEO of Deutsche Bank, in the story, “Deutsche Bank press call: 10 key quotes”

Lead Stories

Deutsche Bank Reports First Full-Year Loss Since Crisis
Jenny Strasburg – WSJ
Deutsche Bank AG ‘s investment bank, typically its biggest profit engine, lost momentum and market share in key businesses in the fourth quarter, the bank said Thursday, capping a painful year at the start of a multiyear turnaround effort.
Executives at Germany’s largest bank acknowledged that employee morale has taken a beating along with financial performance. Deutsche Bank’s shares continued their slide Thursday, falling 5.4% after the company detailed quarterly and full-year losses it had already announced last week.

****SD: Also, Bloomberg’s Deutsche Bank Demoralized, Reuters’ Deutsche Bank risks its own “keep dancing” moment and the New York Times’ Deutsche Bank Confirms the Damage: A Record Loss

Brokers found not guilty of Libor fraud label trial a farce
Graham Ruddick – The Guardian
The six brokers found not guilty of helping Tom Hayes rig Libor interest rates have said their trial was a sham and they were made scapegoats, in heavy criticism of the Serious Fraud Office’s handling of the investigation.
They spoke outside Southwark crown court after Darrell Read was found not guilty of the one outstanding count against the brokers, meaning they have all been cleared.

The $29 Trillion Corporate Debt Hangover That Could Spark a Recession
Sally Bakewell – Bloomberg
There’s been endless speculation in recent weeks about whether the U.S., and the whole world for that matter, are about to sink into recession. Underpinning much of the angst is an unprecedented $29 trillion corporate bond binge that has left many companies more indebted than ever.
Whether this debt overhang proves to be a catalyst for recession or not, one thing is clear in talking to credit-market observers: It’s a problem that won’t go away any time soon.

The Brics are dead. Long live the Ticks
Steve Johnson – Financial Times
The Brics concept, based on the belief that the quartet of Brazil, Russia, India and China would power an unstoppable wave of emerging markets-led economic growth, gripped the firmament for more than a decade after it was conjured into existence by Jim O’Neill, then chief economist at Goldman Sachs, in 2001.

A Junk-Bond Run to Some Exits
Lisa Abramowicz – Bloomberg
Investors are learning what happens when they flee junk-bond mutual funds in mass. The results aren’t pretty, but they’re not broadly catastrophic, at least not yet.
Avenue Credit Strategies, for example, has plummeted 20 percent since November 2014, with its assets shrinking to less than $1 billion from almost $2 billion a year earlier. Nuveen High Income Bond Fund has lost 17 percent since last June while its assets have shrunk to about $322 million from more than $1 billion in 2014, according to data compiled by Bloomberg.

BofA’s Montag Said to Order Expense Savings in Trading Division
Hugh Son – Bloomberg
Bank of America Corp. isn’t waiting to see if trading revenue rebounds from a tough 2015.
Chief Operating Officer Thomas Montag, 59, is increasing pressure on deputies to lower expenses across his trading and investment banking world, according to people with knowledge of the initiative. While managers have latitude on how to trim the equivalent of a few percentage points off their budgets, the effort probably will lead to job cuts in March, said the people, who asked not to be identified discussing personnel matters.

China in crisis? Another credit crunch in the West is far more likely
William Littlewood – The Telegraph
Bad, yes. But getting worse? Recent movements in stock markets have been dominated by precipitous falls in China. China bears predict that the current issues will deepen, turning into troubles similar to those that caused the financial crisis of 2008-09. I do not think this will be the case. In the past 20-odd years there have been three periods of bubble-like conditions globally: the technology boom of the late 1990s, the credit binge in the mid-2000s and a bubble in commodities in the last decade. The first boom led to overbuilding of cable infrastructure and permanent loss of capital in the technology sector.

Confusion About the Financial Crisis Won’t Die
Barry Ritholtz – Bloomberg
Once more unto the breach, dear friends, once more.
Having slogged through several years of research on the many and complex causes of the financial crisis, I take it personally when people try to rewrite history and ignore what actually drove the events that led to the collapse.
That is our charge today, in response to the rather perplexing claim that the Federal Reserve caused the crisis — not because former Fed Chairman Alan Greenspan irresponsibly kept rates low for too long, but rather because the Fed raised them.
This is the proposition offered in a New York Times op-ed by David Beckworth of the Mercatus Center and Ramesh Ponnuru of the American Enterprise Institute and a Bloomberg View columnist.

Central Banks

Beijing seeks to soothe investor angst with cash and an open door while stepping up tirades on George Soros
Xie Yu – South China Morning Post
Beijing is trying every measure to calm the nerves of domestic and international investors as its seeming inability to tame falling financial markets has caused concern and sparked pressure as money is pulled out of China. The central bank plunked down its biggest cash injection in three years in a bid to fill a credit crunch left by recent capital outflows and to meet heavy funding demand before the Lunar New Year on February 8. The People’s Bank of China (PBOC) pumped a net 590 billion yuan through short-term loans, known as reverse repurchase agreements, to commercial banks by Thursday this week, the biggest since February 2013 and just after last week’s 1.5 trillion yuan injection through gross short- and medium-term lending to banks.

The Potential of a Fed Policy Error Has Risen
Lance Roberts – Newsmax
The Fed on Wednesday clearly showed they are trapped in their decision to raise rates.
Despite an ongoing deterioration in the underlying economic and financial market fabric, Yellen & Co. stayed firm in their commitment to a gradual increase in interest rates.
What is most interesting is their focus on headline employment data while ignoring their very own Labor Market Conditions Index (LMCI) which shows a clear deterioration in the employment underpinnings.

Seven Years of Monetary Quackery; Can the Fed Admit it Was Wrong Yet?
Mike Whitney – Global Research – Centre for Research on Globalization
America’s richest investors are betting trillions of dollars that the US economy will stay lousy for years to come.
Who are these wealthy investors?
Bondholders. And their views on the state of the economy are reflected in the yields on long-term US Treasuries. At present, the yields on long-term debt are very low which means that investors think the economy will continue to underperform while inflation remains in check.

****SD: As always, beware the bias of authors.

Planet Earth to Janet Yellen
Desmond Lachman – American Enterprise Institute
Coming so soon after the FOMC’s ill-advised interest rate hike last month, yesterday’s FOMC statement underlines how out of touch the Federal Reserve has become about global financial market and economic developments. Indeed, by giving no intimation that it is now ruling out a March interest rate hike, or that it is now reconsidering the interest rate hike path upon which it believes itself to be on, the Fed seems to be repeating the same mistake it made in 2008 of being overly sanguine about the US and global economic outlooks. Minutes of the 2008 FOMC meetings reveal that as late as August 2008, the Fed had no inkling about the magnitude of the sub prime crisis that was about to hit the US and global economies later that year.

****SD: See above comment.

3 Simple Changes To The Fed’s Policy Framework
Seeking Alpha
Frankly speaking I don’t feel like commenting much on the FOMC’s decision on Wednesday to keep the Fed Funds target unchanged – it was as expected, but sadly, it is very clear that the Fed has not given up the 1970s-style focus on the Phillips curve and on the US labour market rather than focusing on monetary and market indicators. That is just plain depressing.

Artificial Intelligence Sees Kuroda’s BOJ on Hold This Week
Simon Kennedy – Bloomberg
The machines are beating man at forecasting the Bank of Japan.
As analysts try to decide if the BOJ will follow the European Central Bank in pursuing even more monetary stimulus, those at Credit Suisse Group AG and Nomura Securities Co. are turning to artificial intelligence for assistance.

Monetary policy: BOJ policy meeting: what to watch
Tatsuya Goto – Nikkei Asian Review
Ahead of the Bank of Japan’s monetary policy update following its two-day meeting through Friday, market players will have their eyes on the clock. The rule of thumb is that the longer a meeting continues, the greater the likelihood of additional easing.

Have Central Banks Got Anything Left in the Toolbox? (VIDEO)
Deutsche Bank International Economist Torsten Slok discusses central banks monetary policies.


Colombia’s Discount Currency Exchanges Are Funneling Drug Money
Matthew Bristow – Bloomberg
They are in high-end malls, at the international airport, even on the steps of the nation’s central bank. Most display stamped customs documents, making them appear not only benign but official.
Yet hundreds of cut-rate dollar changers across Colombia form part of the scaffolding of the country’s thriving illegal drug and gold trade, some with links to Marxist guerrillas, according to current and former officials. Cocaine traffickers and illegal miners use some of the currency dealers to convert ill-gained dollars into pesos. Customers benefit from a 10-percent discount on the rate banks and investors use.

The Return of the Currency Crash
Carmen Reinhart – Project Syndicate
Currency-market volatility has been around for decades, if not centuries. Wide gyrations in exchange rates became a staple of international financial markets after the Bretton Woods system broke down in the early 1970s, and mega-depreciations were commonplace later in the decade and through much of the 1980s, when inflation raged across much of the world. Even through much of the 1990s and early 2000s, 10-20% of countries worldwide experienced a large currency depreciation or crash in any given year.

Emerging markets: Big trouble from brittle China
Sid Verma – Euromoney Magazine
The January fall in emerging market currencies, the exodus of foreign capital and a global bear market in equities all point to a new financial crisis. How China reacts to this threat holds the key for emerging markets.

Currency Markets Tell Kuroda He Can’t Turn Back the Clock on Yen
Netty Idayu Ismail – Bloomberg
Currency traders are writing off Haruhiko Kuroda’s ability to weaken the yen the way he did in 2014, when he expanded his record monetary stimulus program.
While the Bank of Japan governor won’t step up bond purchases at this week’s gathering, he’ll have to act later in the year to get to his inflation target, according to economists surveyed in recent days by Bloomberg. A stronger currency may stymie his efforts.

The Hong Kong dollar peg is feeling the strain
Joyce Ho – Nikkei Asian Review
The week of Jan. 18 stirred up some bad memories in Hong Kong. The Hong Kong dollar’s spot rate against its U.S. counterpart tumbled, Hong Kong dollar forwards sank below the level permitted by the linked exchange rate system, and interbank loan rates spiked to their highest level since 2008.

****SD: From the South China Morning Post, Hong Kong’s dollar peg safe from attacks by speculators seeking ro undermine link to US dollar

The U.S. Dollar Is Strong and Is Going to Stay Strong: Learn to Live With It
John Mason – TheStreet
The value of the dollar is going to be strong for at least the near term, and it’s time American leaders, economic and political, accept that fact.

Most Latin American Currencies Undervalued On Cyclical Fundamentals: BofA
Teresa Rivas – Barron’s
Bank of America Merrill Lynch’s Claudio Irigoyen and his team take a look at Latin American currencies Thursday, and write that most are undervalued on cyclical fundamentals.

Indexes & Index Products

Bill Ackman Runs an Anti-Index Fund
Matt Levine – Bloomberg
If you run a hedge fund that loses 20 percent in a year, you have an obligation to be interesting in your annual investor letter, and Bill Ackman’s Pershing Square letter for 2015 is quite interesting. Though the how-did-we-lose-all-that-money stuff — which you might expect would be the bulk of the letter — is a bit perfunctory. It’s basically: We bought stocks that we thought were good, and the market disagreed, but we still think they’re good, so the market must be wrong. In a subtle touch, the letter ends with a paragraph about the importance of humility. Honestly, though, if you invest in a hedge fund you have to expect something along these lines; you’re not paying Bill Ackman because you believe in the unfailing wisdom of an efficient market.

****SD: Also, Seeking Alpha’s Dear Hedge Funds: Index Funds Didn’t Eat Your Returns

New Study On Weekly, Monthly S&P 500 PutWrite Indexes Released
Press Release
The Chicago Board Options Exchange (CBOE) today announced the release of a new study that examines both the monthly CBOE S&P 500 PutWrite Index (PUTSM Index) and the CBOE S&P 500 One-Week PutWrite Index (WPUTSM Index), comparing their performances with that of traditional benchmark stock and bond indexes. This is the first comprehensive study that examines the performance of a benchmark strategy index that incorporates WeeklysSM options.
Written by Oleg Bondarenko, professor of finance at the University of Illinois at Chicago, and sponsored by CBOE, the study — “An Analysis of Index Option Writing with Monthly and Weekly Rollover”– analyzes the performance of the two PutWrite Indexes through the end of 2015.

****SD: Copies of the full study for viewing and downloading can be found on the CBOE’s website.

Performance of Smart Beta Strategies Across Market and Economic Cycles
Priscilla Luk – Indexology: S&P Dow Jones Indices
Historically, factor-based strategies have generated significant risk-adjusted returns in the long run, but they can also exhibit a high amount of cyclicality in the short run. Based on our studies of factor performance under different financial regimes—the market cycle, the business cycle, and the investor sentiment regime—we found that factor strategies historically have been most responsive to market cycle analysis, while business cycle and investor sentiment analysis have served as good complements to market cycle analysis (see Exhibit 1).

Year of the Monkey means mischief is afoot … for Hong Kong’s stock market
Jessie Lau – South China Morning Post
It’s the year of the monkey and that means mischief – even for Hong Kong’s stock market index.
The city’s benchmark Hang Seng Index is set to fluctuate as we enter a “fire monkey” year and will see a decent recovery to hit a peak in April, according to brokerage firm CLSA’s 22nd annual tongue-in-cheek feng shui index forecast.


The gold market just lost its best measure of Chinese demand
Myra P. Saefong – MarketWatch
The Shanghai Gold Exchange has stopped publishing its weekly gold withdrawal figures, forcing the market to lose its “best measure of Chinese wholesale demand,” according to Koos Jansen, precious-metals analyst and blogger for Singapore-based bullion dealer BullionStar.

How Gold & Lumber Can Tell You What’s Next for Equities: Market Technician
Equities have had their worst start in history in 2016 as gold prices have rallied, and one market technician says he saw it coming.
According to Charlie Bilello, research director for Pension Partners, the correlation between gold and lumber prices are indicative of volatility in equity markets, particularly in the U.S.

Investors chase gold bonds in falling stock market
Rajendra Jadhav – Reuters
The second tranche of India’s sovereign gold bond received a better response than the first, a government official said, as a price discount and its safe haven appeal amid a slide in equities attracted investors.
The world’s second biggest gold consumer plans to sell 150 billion rupees in bonds linked to the metal in the financial year ending March 31, to wean investors off buying physical gold and stem the outflow of foreign exchange spent on gold imports.


Market Crashes, Stock Scandals: Lessons From the U.S. Frontier
Jason Zweig – WSJ
The government massively overinvested in transportation and land development. The banking system was inefficient and corrupt. State governments gorged on debt, then defaulted on it with aplomb. The stock market was crooked, rife with cronyism and insider trading. Stocks shot up and down like yo-yos.

Deutsche Bank press call: 10 key quotes
Laura Noonan – Financial Times
Deutsche Bank’s management team have spent more than two hours talking journalists through the bank’s EUR7bn full-year loss. Here are 10key quotes from co-CEOs John Cryan and Jurgen Fitschen.

Susan Athey: Why do technology companies hire economists, and what is their contribution? What kinds of problems do they work on?
This is a great time for economists in tech companies—the most interesting firms in Silicon Valley are hiring chief economists as well as economic teams at a very rapid clip. Every week I am contacted to help fill a position, or I hear about a new hire by firms like AirBnb, Netflix, Pandora, Uber, etc. Each tech company, and each chief economist, is different, but there are several main categories.

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