First Impressions

How to (Cherry) Pick Investment Ideas
Doug Ashburn – John Lothian News

I love today’s quote of the day and the article in which it is contained, because, on the surface, it appears to be a compelling reason to forge ahead and purchase emerging market assets despite a possible taper. He compares today’s environment to that of 2004, when emerging markets surged amid tightening of the Fed Funds Rate. He deduces that Fed tapering will have the same effect as the market will realize there was nothing to fear and it will be off to the races.

Yeah, but…

First, rate hikes and tapering are apples and oranges. Actually, since current Fed policy is uncharted territory, the two are really apples and some kind of fruit from another planet that we have never seen before. To draw comparisons from this environment to any in recent history, or ever for that matter, is just plain silly.

Secondly, the article goes on to discuss the “higher returns” in Brazil in July 2012 – ten year rates hovering at 10 percent versus 1.38 percent in the U.S. What the article fails to mention, however, is that the Brazilian real lost about 65 percent of its value from mid 2011 to the end of 2012.

The article ends with a reminder that emerging markets significantly outperformed the S&P 500 in 2004, leading the casual reader to the conclusion that emerging markets are ready to explode.

It sounds like a compelling story until one digs a little deeper.

Quote of the Day

“The moment tapering actually starts, everyone is going to say ‘OK, this is out of the way, let’s go and dance’. In 2004 when Fed Funds started climbing, emerging markets never looked back.”

Julian Jacobson of Fabien Pictet & Partners Ltd. in London in story, “Greenspan Lesson Signals Emerging Market Gains: Chart of the Day”

Lead Stories

Greenspan Lesson Signals Emerging Market Gains: Chart of the Day
Maria Levitov – Bloomberg
The CHART OF THE DAY shows that when then-Fed Chairman Alan Greenspan began raising rates in June 2004, the last such cycle in the U.S., the MSCI Emerging Markets Index of equities and JPMorgan Chase & Co.’s emerging-markets bond index had already begun to climb, and were still rising when the Fed rate reached 3.25 percent a year later. Emerging-market stocks and bonds declined in April and May of 2004, anticipating the increase in the Fed Funds Target Rate from a then-record 1 percent.

Guest post: The helicopter can drop money, gather bonds or just fly away
Stephanie Kelton, Scott Fullwiler | FT Alphaville
Paul Krugman pointed out out in a recent post that whether a government finances itself through bond purchases, which are later bought by the Fed, or whether it prints money directly, makes no difference. The two are in effect the same. Some, however, still question this idea because they wrongly believe the Fed and the Treasury to be two separate entities. While this may be the case on paper, in reality they represent more of a married couple with a joint account than two separate entities.

***DA: It is a one-two punch designed to pull forward tomorrow’s earnings to fund today’s consumption. It packs a wallop in the short term, but remains quite dangerous long-term.

Forget the Fed, prepare for Tokyo ‘taper’
Gillian Tett –
If (or when) America’s central bank finally embarks on its taper, how will this affect markets? Or the central bank itself? That is a question investors and analysts are frantically debating now, as the next US Federal Reserve decision looms.

Macro Horizons: Stocks, Dollar are Finally Responding to Fed Taper Prospects
Michael J. Casey, Alen Mattich and Michael Arnold – MoneyBeat – WSJ
Finally, markets are starting to price in the reality that economic data are bringing the Federal Reserve closer and closer to starting to unwind its extraordinary monetary stimulus program–perhaps as early as next week. Stocks are at five-week lows and the dollar hit a new five-year high against the yen. Yet while the greenback is rallying against most of its counterparts, there is one exception: the euro.

***DA: Remember when Bundesbank president Helmut Schlesinger said about the euro in 1992, “I have nothing against it apart from its name. I think it should be called the Deutsche Mark.” Clearly that is what is happening here.

Young Stanley Fischer and the Keynesian Counterrevolution
Stanley Fischer, who may join Janet L. Yellen atop the Fed, is now a respected elder among monetary economists, but he began his career as an insurgent.

***DA: For my take on Fischer, see my commentary from yesterday.

Your RBI regime change
David Keohane | FT Alphaville
And on silent feet they… moved towards price stability with CPI inflation as the new nominal anchor. The RBI’s report on how to revise and strengthen its monetary policy framework to make it more “transparent and predictable” may play a very large role in the regime change underway at the Reserve Bank of India.

***DA: Maintaining transparency and predictability is harder than it looks, especially during a crisis of confidence. We saw little transparency in 2008-09.

Fidelity Beclowns Itself
Joshua M Brown | The Reformed Broker
Fidelity Investments, fresh from the embarrassment of having missed the entirety of the ETF movement’s formative years, is determined not to allow that to happen again. And so they’re going to be very innovative going forward, no matter what kind of idiotic risks for their customers it engenders.

***DA: OMG! Click the link to see Fidelity’s “innovation.”

Central Banks

The Federal Reserve’s balance sheet will hit a mind-boggling $4 trillion any day now
Matt Phillips – Quartz
The Federal Reserve’s balance sheet is on its way to becoming one of the biggest numbers in economics.
Sure it’s not Japan’s ¥1 quadrillion government debt. Or the US economy’s $16 trillion-plus economy. (Or come to think of it, the US’s $16 trillion-plus debt.)
But still, the amount of financial assets the US central bank is holding in the wake of quantitative easing and other stimulus measures of the past five years is a very big number: Unless something truly bizarre happens, it will hit $4 trillion very soon.

NY Fed: FX swaps with foreign central banks total $28 million in latest week
The Federal Reserve provided $28 million of liquidity to foreign central banks in the latest week via its swap lines for foreign central banks, the New York Fed said on Thursday.

BoJ vows to stick with easy money policy
Jonathan Soble, Martin Wolf and David Pilling in Tokyo –
The Bank of Japan will keep its highly expansionary monetary policy in place until inflation hits and stabilises at its 2 per cent target, the central bank’s governor said on Thursday, adding it would take more easing measures if price rises flagged.

***DA: Easy money policy? Are they hiring Joe Pesci and the late Rodney Dangerfield?

Without The Filibuster, The Federal Reserve Will Never See Reform
Jens F. Laurson and George Pieler – Forbes
Astute commentators have noted: The Senate’s rejection of the filibuster for judicial and executive branch nominations throws a monkey wrench into conservative plans to link the nomination of Janet Yellen as Chair of the Federal Reserve with plans to reform that institution. In particular, Sen. Rand Paul’s threat to hold up Yellen’s approval in order to win a vote (at least) on his Audit-the-Fed bill is a show that closed out of town.


Brevan Howard Brings in New Blood for Currencies
Chiara Albanese – MoneyBeat – WSJ
Hedge fund Brevan Howard Capital Management has hired a senior currencies specialist, just months after shutting down a foreign-exchange-focused fund that had suffered big investor redemptions.

Analysis: Asia FX carry trade returns but hostage to volatility
The currency carry trade is making a slow comeback in Asia although, unlike its popular pre-crisis version, punters are more selective in their investment targets for fear that market volatility could leave them with losses.

Saxo Bank’s institutional push gathers pace
Tim Cave – Financial News
Saxo Bank, one of the largest operators of retail FX trading venues, has signed up more than 15 UK-based hedge funds to its platform over the past month as it makes headway on a strategy to attract more institutional clients.

Fidelity Beclowns Itself
Joshua M Brown | The Reformed Broker
Fidelity Investments, fresh from the embarrassment of having missed the entirety of the ETF movement’s formative years, is determined not to allow that to happen again. And so they’re going to be very innovative going forward, no matter what kind of idiotic risks for their customers it engenders.

***JM: Even though Bitcoin is off the table (now), I sure hope Fidelity lets me continue to “save for retirement” by investing in that 2022 trip to Mars! Now that’s innovation!

Why Invest In Bitcoin When You Could Invest In Another Currency
Tim Worstall – Forbes
I’m always a little worried when the Financial Times echoes something that I am already thinking. It means that either I might have, inadvertently, had a good idea or that I am having the sort of ideas that are supported by the Financial Times. Either way, a surprising finding. But they are indeed stating something I agree with today. That even if one buys into the ideas of the digital currency brigade why would you invest in Bitcoin, which is looking a bit toppy, rather than one of the other digital currencies?

European Union Warns on Bitcoin
The European Union on Friday added to a string of recent warnings about the safety of using and investing in Bitcoin, the virtual currency that is not issued by any government.

Dollar Renews Five-Year High Versus Yen
The dollar hit its highest level against the yen in over five years, as investors bet recently firm U.S. data will pave the way for the U.S. Federal Reserve to start dialing down its bond-buying program as early as this month.

Is the Euro the New Yen?
Alen Mattich – MoneyBeat – WSJ
It’s a currency equivalent of Bruce Willis in the Die Hard movies. Whatever bad news gets thrown at the euro, it keeps bouncing back, stronger than ever.

Indexes & Index Products

Push for non-transparent active ETFs gains steam
Exchange-traded funds have traditionally been touted for their transparency, with their portfolio holdings disclosed daily. But the push for a new breed of ETFs that can hide their specific holdings for months at a time is gaining momentum.

New BuyWrite ETF Based on CBOE BXN Index Launched Today
Matt Moran – CBOE Options Hub
Today trading began in the Recon Capital NASDAQ 100 Covered Call ETF (QYLD). The new QYLD ETF seeks to provide investment results that will closely correspond, before fees and expenses, generally to the price and yield performance of the CBOE NASDAQ-100® BuyWrite Index (BXN).

Euronext seeks ETF trading boost
Chris Flood –
Euronext, owner of the Amsterdam, Brussels, Lisbon and Paris stock exchanges, has launched a new incentive scheme to increase activity levels for exchange traded funds.

SEC’s Amy Starr: we are scrutinising ETNs
Yakob Peterseil –
ETNs pose many of the same disclosure risks as structured notes and may be the subject of future guidance, suggested the SEC’s top structured products regulator and author of last year’s letter to US banks


Gold price probe extended to Deutsche Bank
Alice Ross in Frankfurt –
Germany’s financial regulator has demanded documents from Deutsche Bank as part of an investigation into potential manipulation of gold and silver prices.

Gold tumbles on Fed taper speculation
Xan Rice –
Gold prices tumbled 2 per cent on Thursday after positive US economic data and a stronger dollar increased expectations that the US Federal Reserve could start to withdraw its monetary stimulus next week.

It’s Been A Bloodbath For Silver And Gold
Cullen Roche – Business Insider
This WSJ article about precious metals hedge funds highlights a very dangerous idea that became all too popular in recent years – the myth that unproductive assets should be a major component of any portfolio. This became a very popular idea among big hedge fund names in recent years as gold’s rally led many to believe that they could better protect their portfolios by establishing substantial stakes in gold and other precious metals.

***JB: Hyperbole much?

Swiss to Reform Gold Market to Aid Transparency
AP (via ABC News)
The Swiss government has approved a change in how data on gold trade is compiled in an effort to reduce abuses in the precious metals’ market.

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