First Impressions

Targeting the 2%

By Jim Kharouf, John Lothian News

A scan of recent US GDP forecasts shows a sizeable gap between the Fed’s estimates and economists from the financial services sector.

This topic was taken up nicely today in Bloomberg’s piece “Time for Fed to accept that U.S. growth not what it used to be?” On one hand, the story reports that the Fed is expecting about 3 percent growth next year and 3.5 percent in 2015, largely on stronger employment numbers and other metrics. But others are not so convinced, calling for 2 percent growth next year and perhaps beyond that.

The story also points out that the Fed has consistently gotten it wrong, when its come to GDP forecasts in recent years. Heck, they called for 3.5- to 4.5 percent growth in 2012, when in fact it grew just 2 percent.

What is going on? Pretty simple actually. This is old fashioned Fed politics, even though the Fed is an apolitical branch of the government as we all know. At the end of the day, the massive QE program and the absence of a coordinated fiscal policy means that the rosy predictions simply won’t add up.

There are many other factors as well, one of which was pointed out in recent days in a New York Times post called “Three Questions on the Jobs Picture” which argues that the US is seeing a dramatic decline in its labor force.

So the issue may come down to this. The Fed can try all it wants to boost the US economy upward to 3 to 3.5 percent growth. But what happens if its directed at an economy that has a shrinking labor force? Welcome to the 2 percenters.

Quote of the Day

“Unless Washington does everything right — and that’s just not going to happen — the U.S. is a 2 percent economy now.”

Bluford Putnam, chief economist at CME Group in Bloomberg’s “Time for Fed to accept that U.S. growth not what it used to be?”

Lead Stories

ECB: Negative Interest Rates Are an Option
Steven Russolillo – MoneyBeat – WSJ
The European Central Bank says it could adopt negative interest rates or purchase assets from banks if needed to lift inflation closer to its target, rebutting concerns that the central bank is running out of tools or is unwilling to use them.
**JK:  I wear a coat when it gets below zero.

Yellen Says Economy Performing ‘Far Short’ of Potential
Joshua Zumbrun & Jeff Kearns – Bloomberg
Janet Yellen, nominated to be the next chairman of the Federal Reserve, signaled she will carry on the central bank’s unprecedented stimulus until she sees improvement in an economy that’s operating well below potential.
***JM: “I’m very disappointed. VERY disappointed,” she said, frowning at the legislators before her.  Several senators looked sheepish under her stern, grandmotherly stare, and busily pretended to take notes.  “I’ll be coming back a few months after my appointment, and by then I expect ALL of you to have cleaned this mess right up.”

Not so happy birthday: Abenomics ages, challenges remain
A year after Prime Minister Shinzo Abe took financial markets by storm with promises to revive the moribund Japanese economy, data showed growth slowed sharply and that his “Abenomics” policy mix is yet to secure a durable recovery.
***DA: Japan’s problem is one of demographics, not economic policy (well, if they keep it up at this rate they will ALSO have an economic policy dilemma), but until they solve the age-old problem of an aging population, expect the same-old same-old in Japan.

Analysis: Time for Fed to accept that U.S. growth not what it used to be?
Year after year Federal Reserve policymakers have clung to a belief that the U.S. economy will soon regain its pre-recession stride. And year after year they have been wrong. Now a growing number of economists and at least one top Fed official think Americans should lower their expectations.
***DA: But, but, but… look at the stock market! The wealth effect was supposed to be enough to carry us forward.

Treasury ownership marks wealth divide
Gillian Tett –
Who owns America’s ever-swelling pile of government debt? This is a question that has provoked considerable angst among US politicians recently; or at least it has in relation to national identity.

Pimco’s Bill Gross Bets Treasury Yields Won’t Rise Despite Fed Tapering
Min Zeng – MoneyBeat – WSJ
Bill Gross, who runs the world’s biggest bond fund, has boosted Treasury bond holdings for two straight months through October, betting that Treasury yields won’t rise even if the Federal Reserve pares back monetary stimulus.
***DA: Betting on the liquidity trap, or is he front-running Janet Yellen’s first trade?

Wall Street’s Year: Blame it on the Bonds
Christian Berthelesen – MoneyBeat – WSJ
A top research firm projects revenues at the industry’s 10 largest global investment banks will decline 5% in 2013, thanks to big drop-off in a core business – trading in debt, derivatives, currencies and commodities.

Les Misérables banking
Izabella Kaminska | FT Alphaville
Since 2008, it’s somehow become conventional wisdom in regulatory and policy circles to deem shadow banking undesirable, risky or inherently unstable. And yet, as SoberLook heroically alluded to on Wednesday, that may be a somewhat small-minded way to look at the phenomenon. Shadow banking is arguably as much an endogenous response mechanism to an under-banked area of the economy as it is a silo for risk and instability.
***DA: Do you hear the people sing, singing the songs of angry men? It’s the song of all the taxpayers who won’t bail out again!

Central Banks

As his term nears its end, Bernanke lauds Fed transparency
The more steps the Federal Reserve takes to openly explain its policy decisions to the public the more legitimate and effective the U.S. central bank will be, Fed Chairman Ben Bernanke said on Wednesday.

Yellen to defend Federal Reserve policies before Senate Banking committee
Ylan Q. Mui – The Washington Post
Janet Yellen plans to defend the Federal Reserve’s stimulus program and communication efforts Thursday during a Senate hearing on her nomination to lead the central bank, according to her prepared remarks.

Did The Federal Reserve Prevent Another Recession This Year?
Jeff Spross – Think Progress
Without quantitative easing, the unconventional monetary policy that the Federal Reserve has been deploying to boost growth, the combined hit of tax increases from the fiscal cliff deal and spending cuts from sequestration would have driven the American economy back into negative growth, according to an analysis by Political Calculations.

BOE’s Fisher Says Pound Level Inconsistent With Trade Gap Size
Eshe Nelson – Bloomberg
Bank of England Markets Director Paul Fisher said the U.K.’s trade deficit is inconsistent with a stronger pound exchange rate.

Bank Indonesia Acts, and Janet Yellen Moves Markets
Jake Maxwell Watts – MoneyBeat – WSJ
Bank Indonesia officials would have good reason to feel a bit unappreciated by investors, who this week appear more enthralled with their counterparts in Washington, particularly Janet Yellen.

Europe’s Morning MoneyBeat: Yellen’s Remarks Please the Crowds
David Cottle – MoneyBeat – WSJ
Global markets are able to occasionally get interested in other issues, but their real obsession is what, precisely, the Federal Reserve will look like once Janet Yellen takes the reins at the central bank.

BOE’s Carney Finally Says ‘Rates Could Rise Sooner’
David Cottle – MoneyBeat – WSJ
The Bank of England acknowledged the much better economic performance of the United Kingdom since its last Inflation Report in August, and seemed to flag up a greater chance that rates could now rise sooner than it thought back then.


Woman With German Wise Men Weder di Mauro Wins Euro Bet
Catherine Bosley & Jana Randow – Bloomberg
Beatrice Weder di Mauro, who made her name by being an expert on debt, can’t collect on one of her own: Nouriel Roubini owes her a bottle of Champagne for a 2012 bet they made about whether Greece would leave the euro. It didn’t, and she won.

Korean securities firms to provide alternative to banks in domestic OTC forex trades
Garima Chitkara –
The Korean Ministry of Finance’s move to allow securities firms to trade currencies among themselves will see that sector provide a challenge to the banks in the domestic over-the-counter foreign exchange derivatives market.

Bitcoin Couple Travels the World Using Virtual Cash
World-Wide Odyssey Spanned Three Continents and Proved One Can Live on Bitcoin Alone
***JM: This is super different from using electronic and online payments with an ordinary currency, because… well, because this is BITCOIN, ok?  And that’s really different.

Bitcoin Price Hits a New Record
Robin Sidel And Saabira Chaudhuri-
The price of a bitcoin vaulted to a record Wednesday, fueled by growing views that the virtual currency can have a credible future as an alternative to traditional methods of payment.
***JM: Folks keep talking about this like “adoption” is the critical factor for success.  It’s not.  The critical factor for success is “regulation”, as in, “If big nations decide that this is a currency, and trading and using Bitcoin is a regulatable foreign exchange transaction, they will squash it like a bug.”  Once that’s established, one can concentrate on who’s still using it, where, and what the market looks like.

Raghuram Rajan defends rupee as concerns resurface
James Crabtree –
Indian central bank governor Raghuram Rajan has dismissed worries about a return to market “turmoil” and rapid falls in the country’s fragile currency, while pledging to inject Rs80bn ($1.3bn) to ease liquidity pressures in Asia’s third-largest economy.

Indexes and Index Products

VIX Shows No Fear Into Year-End
Kaitlyn Kiernan – MoneyBeat – WSJ
Bullish investors are taking the market’s so-called fear gauge back toward multiyear lows. With investors believing that the coast is clear for stocks through the end of the year, the Chicago Board Options Exchange’s Volatility Index has fallen 36% since an early October spike amid the political wrangling in Washington over the debt ceiling.

Four major stock indexes hit new highs
Robert McCurtain – Futures Magazine

Index breakouts lead to eye-popping projections
L.A. Little – MarketWatch
With breakouts in the S&P 500 and the Dow Jones Industrial Average, and with pending breakouts now in the Nasdaq Composite and the NDX 100, the Russell 2000 is the laggard in a year where it has been the leader for the most part. The divergences that force care still remain until the Nasdaq, NDX and Russell break out, although the former two are within spitting distance now.

FTSE plots China fixed-income push
Michelle Price
The FTSE brand may be synonymous with the UK stock market, but the index provider is steadily diversifying into the international fixed-income market.

RBI mulling pros & cons of Indian bonds joining global indices
The Economic Times
Finance Ministry today said the Reserve Bank is looking into the feasibility of joining global indices for bonds with a view to attract foreign funds.


Gold demand falls to four-year low
Jack Farchy –
Global gold demand fell to a four-year low in the third quarter amid widespread investor disillusionment with the precious metal, according to data published on Thursday.

WGC: China Already Tops Record For Full-Year Gold Demand
Kitco News (via Forbes)
Gold demand in China remained robust in the third quarter, with the country already topping its previous full-year record for gold buying, the World Gold Council reported Thursday.

Gold Seen Flowing East as Refiners Recasting Bars for Asia
Glenys Sim – Bloomberg
Gold demand in China, India and the Middle East surged in the 12 months to September while European sales contracted, underscoring a shift in the global bullion market from west to east, according to the World Gold Council.

Investors Flock to Silver Coins
Arpan Mukherjee – MoneyBeat – WSJ
Silver coins are gaining favor among investors and sales could rise to a record high in 2013, thanks to a sharp fall in the precious metal’s price.
***JM: Glad to see that there are alternatives for when one gets tired of accumulating a lot of gold coins for an elusive Armageddon…

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