First Impressions

Dilemmas, Dilemmas
by Doug Ashburn, John Lothian News
The “Greenspan’s dilemma revived” story from yesterday’s FT sparked some healthy discussion around the office today. From both the stories and follow-up discussion, we got a reminder that the interpretation of data, like horoscopes, depends greatly on one’s point of view.

Was the “Clinton Surplus” a great testament to fiscal discipline, or a by-product of the deregulation and leverage that would sow the seeds for the financial crises to come? Likewise, is the low-rate, quantitative easing environment of today creating the next asset bubble, or was it a temporary necessity that is already showing signs of normalization? Was that really all we needed to do – get enough new money into the financial sector in order to reflate some of the toxic assets, and shift the rest onto the balance sheet of the Federal Reserve?

If that was it, I must say, that was the closest thing to a free lunch as I have ever seen.

While I would not go so far as to say the worst is yet to come, as a student of economic history, I can say that, if we are on the front end of a long prosperity, that would be unprecedented.

If we are truly being propped up by intervention, the normalization of deficits, as with the normalization of payroll numbers, may be the spark the return of a certain economic dilemma from which we have been hiding for the last four years.

Quote of the Day

“Perhaps the most important rebalancing has been in the government. Despite all the talk of runaway Federal deficits, the medium-term deficit outlook has improved dramatically.”

Ethan Harris at Bank of America Merrill Lynch in the FT’s “Greenspan’s dilemma revived.”

Lead Stories

Financial transaction tax rises from the grave
John Dizard –
Halloween is past, and yet there are still creatures rising from their graves. Do they not know there is a time and place for this sort of thing? For example, some optimists in the money business thought the European Commission’s proposed financial transaction tax had been finally killed back in September by an adverse opinion from the European Council’s legal service.
**JK: The dreaded transaction tax for 11 EU countries. Let’s watch volume flows to London and New York then shall we?

Greenspan’s dilemma revived
Izabella Kaminska | FT Alphaville
Deficit continues to be a dirty word in the US (despite *those* findings about the holier-than-thou Clinton surpluses not being all that great), whilst the idea that the US is an unsustainable deficit spender increasingly propagates in mainstream circles. But, as Ethan Harris at Bank of America Merrill Lynch shows on Monday, nothing could be further from the truth. In reality the US deficit is contracting at a relatively speedy rate:
**JK: Also see the interesting story from last year about the US budget surplus and its impacts. “The Untold Story Of How Clinton’s Budget Destroyed The American Economy.” –
**JB: Also see why the interesting story from last year about the US budget surplus and its impacts is misleading.  “Did Bill Clinton’s Budgets Really Destroy the American Economy?” –

Skeptics See Euro Eroding European Unity
Europe’s slow emergence from its second recession in the last five years is raising new questions about whether the euro currency is doing more harm than good.

Bond Exodus at Broad Funds Hits Pimco, JPMorgan: Credit Markets
Lisa Abramowicz – Bloomberg
In a year of record withdrawals from taxable bond funds, no category has been harder hit than the biggest broad market strategies managed by firms from Pacific Investment Management Co. (PTTRX) to JPMorgan Chase & Co.

Default ‘Wave’ of $1.6 Trillion Looming for Junk, Fridson Says
Mary Childs – Bloomberg
Almost $1.6 trillion of junk bonds globally will default between 2016 and 2020, according to Martin Fridson, chief executive officer of New York-based FridsonVision LLC, a research firm specializing in speculative-grade debt.

EU Ministers Agree 2014 Budget
European Union finance ministers agreed on the 28-nation bloc’s 2014 budget in the early hours of Tuesday after tough overnight negotiations, with extra funding allocated to tackle migration and border control.
**JK: Dear Congress – It can be done.

Global Central Bank Easing
Joe Weisenthal – Business Insider
Last week, the ECB stunned markets by cutting interest rates. Now the question is being asked: Are we about to see a big, new wave of central bank easing?
**JK: Tapering by December? What are your odds?

Arbitrage a risk in Shanghai free-trade zone
Kanika Saigal – Euromoney magazine
The free-trade zone in Shanghai has been depicted as one of the biggest steps towards Chinese economic liberalization, but some analysts argue the risk of arbitrage and a lack of transparency will be difficult to overcome – while there is no consensus on whether policymakers are committed to full-scale capital-market liberalization.
**JK: Housing prices in Shanghai about to go up.

Government bond traders see difficult markets heading into 2014
Margie Lindsay –
Fund manager Stratton Street suggests a better indicator of a government bond’s worth is its net foreign liabilities. It prefers Middle East and Asian sovereigns, particularly China, to US Treasuries

Financial Innovation Is Depressing
Matt Levine – Bloomberg
DealBook has a special section today on ideas and innovation on Wall Street and let’s just say it will not inspire too many idealistic Stanford undergrads to stop work on their iPhone apps and take that financial-engineering job at Wells Fargo. It’s all pretty sad stuff.
**JK : Meant to be a bit tongue-in-cheek, it’s not funny at all, except for the footnote at the end with the hedge fund guy who is marketing using a professional surfer.

China Reins In Shadow Banking as Leaders Meet to Set Policy
China’s broadest measure of new credit fell by more than estimated in October, suggesting authorities are trying to keep shadow-finance risks in check as leaders map out a blueprint to sustain growth.

Central Banks

Dovish Fed to Damp Dollar in Surprise to Market, BNY Says
Kevin Buckland & Hiroko Komiya – Bloomberg
The dollar will reverse recent gains versus the euro and the yen in coming months as the Federal Reserve pares monetary stimulus at a slower pace than the market expects, Bank of New York Mellon Corp. said.

Bank of England might be open for business, but it’s heading for a fall
Euromoney magazine
Bank of England governor Mark Carney is correct that the City of London should be open to global finance. But he dismisses moral hazard and market distortions – the inevitable consequence of easy money and a reflationary UK housing policy – at his peril.

Indonesia takes markets by surprise with rate rise
Ben Bland in Jakarta –
Indonesia’s central bank surprised investors on Tuesday by hiking interest rates to the highest level since 2009 to shore up the rupiah, tackle inflation and bring the current account deficit under control.


Forex probe: how to fix the fix
Eva Szalay – Euromoney magazine
As the investigation into the alleged manipulation of FX widens, the jury is out on whether the practice is tantamount to front-running clients or simply a case of hedging. Suggested reforms to the benchmark include handing it over to a public body, or banks’ abandoning fixing-related orders altogether and treating the flow as normal business, while others think regulators’ efforts would be better spent reforming the fix in options contracts.

The Rush to Coin Virtual Money With Real Value
If cash is king, virtual cash may be the crown prince in waiting. Programmers around the world have been churning out new digital currencies that try to improve on the concept of bitcoin, the hot but controversial virtual money that has swept the Internet.

Czech koruna among the most vulnerable to a dollar rebound
Peter Garnham – Euromoney magazine
Authorities in the Czech Republic might be pleased to learn that the koruna is one of the emerging market (EM) currencies most vulnerable to a dollar rebound.

Poles and Hungarians count cost of Swiss franc mortgages
Jan Cienski in Warsaw and Kester Eddy in Budapest –
Tomasz Sadlik is among hundreds of thousands of Poles and Hungarians who thought it was a good idea to take out a mortgage denominated in Swiss francs, but are now in trouble as their home currencies plummeted during the financial crisis.

Emerging Market Currencies May Not See Repeat of Summer Selloff
Prabha Natarajan and Erin McCarthy – MoneyBeat – WSJ
Friday’s strong U.S. jobs data has revived forecasts for the Federal Reserve to cut its bond purchases as soon as December, a prospect that should cause jitters for investors in emerging markets. But some say they’re not worried.

ISE Announces Highest Daily FX Options Volume, Year-to-Date
The International Securities Exchange (ISE) today announced that 5,328 Foreign Exchange (FX) Options contracts were traded on Friday, November 8, 2013, the highest FX Options volume, year-to-date.

EBS Direct moves to full commercial launch
EBS, ICAP’s market-leading electronic FX business, announces that EBS Direct has launched its commercial service. Following a period of beta testing the service is now fully operational and available to all customers. Both liquidity providers and consumers contributed invaluable feedback during the beta programme and traded in a live environment during this testing phase.

Graphic: Where Credit Is Due
DealBook – NY Times
Starting from a simple loan, credit markets have featured many innovations as well as costly crises. Track the history of debt from 400 B.C. to today.

Indexes and Index Products

SGX Introduces New Asian Index Futures
Singapore Exchange (SGX) is pleased to introduce three new Asian Index Futures to provide investors wider access to almost all of Asia’s key capital and growth markets.  The new contracts, namely the SGX-PSE MSCI Philippines Index Futures, SGX MSCI Thailand Index Futures and SGX MSCI India Index Futures, complement SGX’s extensive suite of equity derivatives offerings.

It’s a good job the only word that rhymes with passive is massive
Dan McCrum | FT Alphaville    
Although huge, all conquering, dollar-scooping behemoths of asset management would also seem to work. Towers Watson and Pensions & Investments have counted up money manager dollars world-wide, once again, and when it comes to size, passive investment products are (almost) the only game in town.

One Answer to the Index Fund: Build a Better Index
PAUL A. SAMUELSON made a startling and significant case for index funds in 1974. In a deliberately provocative essay, Mr. Samuelson, who had already won the Nobel in economic science and written the most influential economics textbook in history, said most professional investment managers should “drop dead.” At the very least, he said, they should “go out of business.”

Smart-beta stock ETFs focus on fundamentals
Holding stocks in a passive index fund as a core portfolio holding has generally been a rock-solid idea. You can own nearly the entire market at a low cost and not get snagged in market timing errors. Yet most index funds are capitalization-weighted, meaning they hold the most popular stocks by market value.


Why aren’t gold traders more scared?
Mark Hulbert – MarketWatch
Consider: Gold has fallen nearly $70 so far this month, and $140 since late August — including another $3 in Monday’s trading. And, yet, in response, the average gold trader is not nearly as upset as he was on the occasion of prior price drops of similar magnitude.

Gold Is No Safe Haven, No New Investment Class, No Substitute For Paper Money
Robert Lenzner – Forbes
The best damned trade, long-short in all of 2013, was going long the stock market, and selling gold short in the belief it would lose value.

The gold producer wild card
Izabella Kaminska | FT Alphaville
BNP Paribas thinks gold is getting closer to the precipice. How quickly it’s likely to be pushed over will be determined by the rate at which producers accelerate their hedging activity.

Why is Russia Selling Gold?
Alexander Fleiss – Wall Street & Technology
The world’s largest buyer of precious metals was also on the wrong side of the natural gas trade, while its economy, not well diversified, has continued to stall throughout 2013.

Hedge Funds Cut Bullish Gold Bets on Fed Stimulus Outlook
Debarati Roy – Bloomberg
Hedge funds cut bullish gold bets, adding the most short contracts in four weeks, as U.S. economic growth fuels speculation the Federal Reserve will trim stimulus. Holdings across commodities dropped the most since April.


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