First Impressions

Today we say goodbye to a fallen comrade: Mt. Gox, which began as a platform for the exchange of cards for Magic: The Gathering, a fantasy trading card game. If you have not heard of it, ask either your teenage son or your tech guy.

Anyway, Mt. Gox evolved to become the largest platform for bitcoin transactions until Feb 7, when the firm suspended withdrawals due to an apparent system hack. As of this morning, the web site has gone dark (and we hear the firm’s office has gone dark as well).

The future of Mt. Gox is pretty clear – it ceases to exist. Less clear, however, is what this means for bitcoin, and for virtual currencies in general. In today’s newsletter we see stories of angry bitcoin investors who may be wishing for regulatory oversight. The infrastructure that exists in the “non-virtual” financial world are expensive, and not perfect, but at least a system is in place. Granted, crime is crime, and if the perpetrator(s) are found they will be subject to the laws of the land, but I would not hold my breath.

For more on bitcoin, check out our recent special report, featuring JLN editor Jeff Bergstrom’s primer, “So you think you know bitcoin?”
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***JB: It is worth noting that the failure of Mt. Gox is not a failure of bitcoin. It is a cautionary tale. A tale of “buyer beware” and not much else. Even in the heavily regulated world of ordinary finance there are examples of companies imploding overnight and the money people had in those accounts becoming unavailable (e.g. MF Global). In the wild and woolly west that is bitcoin these days investors take big chances that go beyond the usual risks associated with investing.

Quote of the Day

“Monetary policy action cannot be taken off the table as a response to the build-up of broad and sustained systemic risk.”

Federal Reserve Governor Daniel Tarullo in the story, “Tarullo Backs Option of Using Rates Against Price Bubbles”.

Lead Stories

China’s $12 trillion corporate debt pushes up refunding costs, drives mergers
Reuters
China’s corporate debt has hit record levels and is likely to accelerate a wave of domestic restructuring and trigger more defaults, as credit repayment problems rise.
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***DA: You want to make egg fu yung, you have to crack some eggs, right?

Bitcoin Website Mt. Gox Unavailable
WSJ.com
The website of bitcoin exchange Mt. Gox became unavailable Tuesday and trading in bitcoin at the site appeared to have stopped, signaling a new stage in troubles that have dented the image of the virtual currency.
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***DA: I guess that makes Bitstamp the new king of the hill?

EU Searches for Meaning of Derivative as Rules Take Effect
Ben Moshinsky – Bloomberg
What is a derivative? Don’t ask the European Union — you might get 28 different answers.
The EU’s top markets regulator, the European Securities and Markets Authority, asked the European Commission to clarify what a derivative is as it grapples with harmonizing trade reporting rules across the 28-nation bloc.
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Ex-Jefferies Trader’s Customers Say Lies Part of the Job
Chris Dolmetsch and John Dillon – Bloomberg
Ex-Jefferies & Co. trader Jesse Litvak’s former customers told a jury during his fraud trial in Connecticut that lies and misrepresentations are a common part of the give-and-take of bond trading.
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Annuity Sales Jump Most Since 2002 on Interest Rates Gain
Zachary Tracer – Bloomberg
Sales of annuities jumped 17 percent in the fourth quarter, the biggest gain in 11 years, as higher bond yields buoyed insurers that offer the savings products.
Insurers sold $61.9 billion of annuities, compared with $52.7 billion a year earlier, according to estimates today from industry group Limra. The increase was fueled by sales of fixed annuities, which jumped 45 percent to $25.6 billion.
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Japan’s Authorities Decline to Step In on Bitcoin
WSJ.com
Investors with funds tied up at Mt. Gox are looking for guidance from local authorities on how to get their bitcoin back, but without success, highlighting the regulatory vacuum in which the bitcoin exchange operates in Japan. Japanese financial authorities decline to take responsibility for the crypto-currency.
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***DA: Cryptocurrencies exist, arguably, for those who wish to sidestep financial authorities. Can’t have it both ways.

JPMorgan Boosts Profit Goal to $27 Billion Amid Job Cuts
Michael J. Moore and Hugh Son – Bloomberg
JPMorgan Chase & Co. (JPM) increased its target for annual net income to $27 billion and will cut 5,500 more mortgage and retail banking jobs than forecast as higher interest rates boost profits and curb demand for home loans.
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Central Banks

Mystical Powers and the Fed
David Reilly – MoneyBeat – WSJ
Monetary policy is a lot like weather forecasting. It’s cloaked in scientific method but often turns out to be more art.
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***DA: Art, as in “like watching paint dry.”

Tarullo Backs Option of Using Rates Against Price Bubbles
Craig Torres and Lorraine Woellert – Bloomberg
Federal Reserve Governor Daniel Tarullo said central bankers must preserve the option of using interest rates to lean against dangerous financial bubbles even as they strengthen supervisory tools to curtail systemic risk.
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Israel’s Central Bank Cuts Interest Rate to 0.75%
WSJ.com
The Bank of Israel said it would reduce the key interest rate for March by 25 basis points to 0.75%, its first cut since September, citing slowing inflation, sluggish local growth and global uncertainty.
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***DA Another developed country worried about deflation.

Bank of England’s McCafferty would fear further sterling rise
Reuters
Further sterling strength would be a worry and could potentially make the Bank of England delay raising interest rates, BoE policymaker Ian McCafferty said in some of the central bank’s most forceful recent comments on the pound’s rise.
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Currencies

BitBeat: Update From the Engine Room
MoneyBeat – WSJ
Bitcoin’s five-man core development team is now testing an updated 0.9 version of the digital currency’s open-source core software, complete with fixes to the annoying bug that facilitated this month’s crippling hacker attack the bitcoin network.
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***DA: “Annoying” bug? When one’s money vanishes into thin air, it is more than annoying.

“As with any new industry, there are certain bad actors…”
Joseph Cotterill | FT Alphaville
Acting as a custodian should require a high-bar, including appropriate security safeguards that are independently audited and tested on a regular basis, adequate balance sheets and reserves as commercial entities, transparent and accountable customer disclosures, and clear policies to not use customer assets for proprietary trading or for margin loans in leveraged trading.
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***DA: Enter Nicolas Cage joke here.

Bitcoin is still a useful bludgeon
Jessica Einhorn – FT.com
I am hooked on following the fortunes of Bitcoin. But it is a misanthropic interest; I am a sceptic. As the story unfolds we will see more and more evidence of the perils of investing in a currency as an abstract idea.
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***DA: As a market maker I traded off theoretical value. Unfortunately I only got paid when the value was actualized.

Chinese Yuan’s Slide Helps Fix Misaligned Global Currencies
MoneyBeat – WSJ
An important shift in global currency alignments has been occurring with the quiet decline in the value of the yuan engineered by the People’s Bank of China.
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Jury out on renminbi trading band
Sid Verma – Euromoney magazine
Shock policy-driven fall in the onshore spot rate has ignited speculation that a widening of the exchange-rate band is on the cards, while others are unsure the ‘two-way’ volatility presages a structural shift.
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The curious incident of the PBOC in the USDCNY market
Izabella Kaminska | FT Alphaville
Something’s afoot in the world of RMB. The renminbi fell on Tuesday by the most in a single day since 2012, dropping 0.35 per cent against the dollar in the onshore market by midday in Shanghai, and 0.7 per cent since Wednesday, as the FT reported.
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Renminbi slides to six-month low against the dollar
Josh Noble in Hong Kong – FT.com
The sell-off in the renminbi deepened on Tuesday, as the biggest one-day fall in the Chinese currency took it to a six-month low against the dollar.
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Clearstream Launches Market Approach For Supporting The Internationalisation Of The Renminbi Currency
Renminbi Currency Has Potential To Become Next Major International Currency – Clearstream Launches Renminbi Approach As Part Of Its Asia Strategy
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Indexes & Index Products

Accessing offshore renminbi through synthetics and ETFs
Vita Millers – Risk.net
Confronted by the slow pace of China’s liberalisation of cross-border trading, investors are shrugging off regulatory fears and using synthetic structures to meet demand for access to renminbi assets, while exchange-traded fund providers are teaming up with Asian financial institutions to help boost the funds’ liquidity.
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Cash Flies Into Bond ETFs
WSJ.com
Investors are piling into exchange-traded bond funds at the fastest clip ever, the latest sign of a bond-market revival driven by uneven economic data, emerging-market volatility and the thirst for income-generating investments.
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ETF Securities eyes London’s China A Shares market
Philip Georgiadis – Financial News
The opening of China’s domestic equity market continues to accelerate, with investors in line for another potential opportunity to invest through a London-listed exchange-traded fund.
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Gold

Physical Gold Buyers Say Fix Is Vital
Francesca Freeman – The Wall Street Journal
The London gold benchmark is vital to Grant Phillips’s business.
In workshops behind a highly secure store front in London’s jewelry district, the firm that Mr. Phillips manages, Refined Precious Metals, melts gold scrap and sells it on to refiners.
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Turkey’s gold holdings slide sharply in January – IMF
Jan Harvey and Manolo Serapio Jr – Reuters
Gold holdings at Turkey’s central bank fell by a hefty 31.171 tonnes in January, data from the International Monetary Fund showed, in a move analysts say may show commercial banks took bullion off deposit as the lira crashed.
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Don’t raise hopes on gold over China and India
Clyde Russell – Gulf News
Gold bulls have been tempted out of hiding by bullion’s strong start to the year, but the basis for optimism looks unsteady and largely hostage to what happens in China and India.
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