First Impressions

Dan Hubsher

Flex Time: Object Trading’s Dan Hubscher on Shedding Operational Complexity
From a flurry of new regulations and rapid changes in market structure to constant updates from exchanges, simple, flexible infrastructure has never been more important in the trading world. John Lothian News spoke with Dan Hubscher of Object Trading on the topic of shedding operational complexity and what they found from their most recent research.

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Quote of the Day

“There has been a shift of a significant amount of debt” into the public sector during the crisis. “Despite some improvement on the debt front, there is still a lot of deleveraging to go. The process is still ongoing and will continue for many years.”

Nicholas Gartside, chief investment officer for fixed-income at J.P. Morgan Asset Management in the story, “Bond Tab for Biggest Economies Seen at $7.43 Trillion in ’14”.

Lead Stories

China’s Cabinet Drafts Shadow-Banking Plan
China’s cabinet has drafted a new framework for beefing up regulation of shadow-banking activities, in a sign that the Chinese leadership is seeking to slow the growth of debt and bolster the country’s economic stability.
***DA: So-called soft landings are awfully hard to implement successfully. Just sayin’.

Bond Tab for Biggest Economies Seen at $7.43 Trillion in ’14
Anchalee Worrachate – Bloomberg
The world’s biggest economies will need to refinance $7.43 trillion of sovereign debt in 2014 as bond yields begin to climb from record lows, threatening to raise borrowing costs while nations struggle to bring down elevated budget deficits.
***DA: Those so-called higher bond yields will be their own worst enemy.

Calmest Markets in 12 Years as Fed Boosts Confidence: Options
Nikolaj Gammeltoft and Liz Capo McCormick – Bloomberg
Markets for stocks, currencies, bonds and commodities are the calmest in at least 12 years amid investor confidence that central bank stimulus is spurring economic growth.
Expectations for price swings have fallen to the lowest on record for 29 assets, including U.S. equities, interest rates, the euro and oil, based on data since 2002 compiled by New York-based hedge fund Lake Hill Capital Management LLC. The implied volatility, a gauge of options prices, for the markets reached an average of 15.3 on Nov. 22, compared with an all-time high of 44.2 in 2008, data on two-month exchange-traded contracts show.
***DA: Technically, option prices are a gauge of volatility, not the other way ‘round.

Still unclear exactly how QE eases conditions: Fed’s Dudley
Extensive research into massive asset-purchase programs has not yet clarified whether such policies ease financial conditions primarily as a signal to investors or more directly through private portfolios, an influential U.S. central banker said on Saturday.
***DA: I have been asking that same question.

Long-Term Thinking: 1800-2013
Morgan Housel | Motley Fool
Long-Term Thinking lived an illustrious life since the start of the Industrial Revolution, when for the first time, people could think about more than their next meal. But poor incentives and the rise of 24/7 media chipped away at his health. The final blow came Monday, when a trader on CNBC warned that a 10% market pullback — which has occurred on average every 11 months over the last century — could be “devastating” for investors.
***DA: I need to look up the definition of “devastating.” A 10 percent pullback after a 30 percent rise does not seem like such a bad deal.

Arthur Laffer Interview
Rob Wile – Business Insider
Arthur Laffer is a legend in Washington, having been the leading voice on President Ronald Reagan’s hawkish Economic Policy Advisory Board. His “Laffer Curve,” which argued that there are diminishing returns after a certain point of taxation, was taken as gospel.
***DA: It is gospel. We are simply just arguing about the location of that certain point.

Study Suggests Recovery in U.S. Is Relatively Vital
Academic heavyweights have been debating whether the current United States economy is so sluggish because of too much government stimulus or not enough, or because slower growth had become the norm even before the recession. But maybe these arguments share a faulty premise.
***DA: The only solution is time. Everything else is posturing.

Era of renminbi dawns as China’s influence grows
Patrick Zweifel –
“The Chinese currency, the renminbi, is not terribly well known at the moment, but over my lifetime it’s going to become almost as familiar as the US dollar.” So said George Osborne during a recent visit to Shanghai.
***DA: Maybe, but there will be a long and bumpy ride in order to get from point A to point B.

Fresh Signs of a Cooling Economy in China
Reuters (via The New York Times)
Growth in China’s services industries slowed in December, separate surveys have found, echoing a slowdown in manufacturing and confirming views that the economy lost steam at the end of last year.

Central Banks

Central Banks Split on Stimulus in 2014 as Fed Tapers
Simon Kennedy – Bloomberg
The united stimulus front of central banks is starting to splinter as 2014 dawns.
The Federal Reserve — soon to be led by Janet Yellen, who is poised for confirmation by the Senate today — begins pulling back on its quantitative easing amid stronger U.S. growth, and the Bank of England is trying to cool its housing market. The European Central Bank and Bank of Japan lean toward more monetary action to fight weak inflation. The ECB and BOE both hold policy meetings this week.

Federal Reserve — 2014 Outlook
Jon Hilsenrath, Pedro Nicolaci da Costa and Victoria McGrane – The Wall Street Journal
The U.S. Federal Reserve enters a year of leadership transition and debates over how to wind down some of its easy money policies as the economy strengthens in 2014.
If all goes according to policy makers’ plans, Janet Yellen will soon succeed Ben Bernanke as Fed leader and quickly face multiple challenges, including guiding Fed policy, forging consensus within a fractious policy committee and honing her public communication skills.

European Central Bank — 2014 Outlook
Brian Blackstone – The Wall Street Journal
The European Central Bank has shown it can conduct crisis management with the best of them, using a verbal commitment to buy government bonds of stressed countries to stabilize southern European debt markets and preserve the euro.
The question now is how successfully it conducts monetary policy in the face of a stagnant economy and very low inflation.

Bernanke Voices Optimism on Pace of Economic Recovery
In his final major address as Federal Reserve chairman, Ben Bernanke said Friday that the U.S. recovery should pick up steam this year as the worst effects of the housing bust wane and Washington’s fiscal tightening eases.

Fed’s Plosser at odds with policy approach favored by Yellen
The Great Recession could have done permanent damage to potential U.S. output, a top Federal Reserve official said on Saturday, taking an indirect shot at more cyclical approaches to policy-making that is favored by many economists, including the next Fed chair.


No Letup in Europe’s Currency Battles–Heard on the Street
The currency wars that Brazilian Finance Minister Guido Mantega first warned of in 2010 have never quite reached a boiling point. But currency skirmishes are certainly under way as unprecedented loose global monetary policy continues to reverberate through markets. In Europe, both the euro and the Turkish lira, and the headaches they pose for their respective central banks, are testament to that.

FX clearing a priority for 2014, vows CLS chief
Joel Clark – FX Week
Working with banks and CCPs to facilitate central clearing of OTC FX options is ‘high priority strategic initiative’ for CLS this year, says chief executive David Puth

A dolorous 2014 for the dollarless in China
David Keohane | FT Alphaville    
That’s the 10-year yield for BBB+ corporate bonds in China, courtesy of @Pawelmorski and Chinabond. Or CUCBT10 Index <Go> on Bloomberg. Meanwhile the one-year version is also worth noting… since this is how market-priced Chinese credit risk is starting to look in 2014.

Turkish Lira Sinks to Fresh Low
Tommy Stubbington –
The Turkish lira sank to a fresh record low against the dollar Monday as investors saw no sign of measures to halt the currency’s recent slide.

Wall Street Bitcoin Fans Seek to Make Real Money From Virtual
Carter Dougherty – Bloomberg
After developing a fascination with digital currencies, Jonathan Silverman left his job managing funds at Morgan Stanley in May to take a job trading the virtual stuff instead.
As director of trading at an exchange for Bitcoin, Silverman, 25, joined a bevy of Wall Street brokers, analysts hedge funds and other speculators taking a gamble on the new currency. They are drawn to Bitcoin’s soaring value — up about 50-fold the past year — as well as the novelty of pioneering a new realm of finance.

Who Needs Bitcoin? Venezuela Has Its ‘Sucre’
Satoshi Nakamoto and Hugo Chávez had at least one thing in common: Both created virtual currencies whose popularity is growing but which are also raising alarms among law-enforcement officials.

Regulating Bitcoin?
Business Standard
Recent activity suggests that Indian regulatory authorities have belatedly become aware of the potential dangers presented by virtual currencies like the Bitcoin.


Periodic Table of ETFs: What Popped and What Dropped in 2013
Stoyan Bojinov | ETF Database
For most investors, 2013 was a very good year; stocks charged steadily ahead and a few bumps in the road did very little to derail the impressive momentum. The predictors of “doom and gloom” who foresaw a big decline in equities likely ended up eating big losses, as did commodity and bond bulls. Before turning our attention firmly to 2014, we’re offering up one more visual analysis of 2013, showing what worked and what didn’t for the past year.

Leveraged ETFs Create Demand for Tax Analysis Software
Ivy Schmerken – Wall Street & Technology
The growing popularity of “leveraged ETFs” among mutual funds is causing fund administrators to look for software that can automate the tax analysis rather than rely on public audit firms.


Swiss National Bank Takes Hefty Gold Hit
Katie Martin – MoneyBeat – WSJ
The Swiss National Bank—effectively one of Europe’s premier investment houses as well as a Very Serious Central Bank–offered a reminder Monday that it’s not only wild-eyed gold bugs that have been stung by the rout in the shiny stuff.

Gold Analysts Get Most Bullish in a Year After Rout: Commodities
Nicholas Larkin – Bloomberg
Gold analysts are the most bullish in a year on speculation that investors are reducing near-record bearish bets after the biggest plunge in prices since 1981.
***JM: Because we all know that after a big drop, there’s always a big recovery.  …isn’t that how it works?

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