First Impressions

We Cry for Thee, Argentina
by Doug Ashburn

The economic policy decision-making process exists, for the most part, in a theoretical world. Today’s decisions are taken from yesterday’s problems and (hopefully) adjusted for the conditions that make each situation unique. For example, central bank policy over the past few years has drawn heavily from “lessons learned” during the Great Depression and, to a lesser extent, from the two decades-old Japanese malaise.

Runaway inflation is another economic topic for which many historical parallels can be drawn, but for which no magic bullet clearly exists, as no two hyperinflations have the exact root causes, nor do they unfold in the same manner. While it is difficult to know how to navigate through such a period, it is relatively easy to know what not to do. Case in point: Argentina.

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Quote of the Day

“When your annual return shows a minus sign, clients wonder why they should pay you a fee to lose money. They have a point, although it may be somewhat shortsighted.”

Bill Gross, co-founder of Pimco in the story, “Pimco’s Gross: Bonds Can ‘Float Above Water in 2014’”

Lead Stories

Pimco’s Gross: Bonds Can ‘Float Above Water in 2014’
Min Zeng – MoneyBeat – WSJ
Bill Gross, manager of the world’s largest bond fund, argued that fixed income investments this year will shake off a brutal 2013.
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***DA: Many believed Mr. Gross could walk on water as well.

MarketAxess Research’s Alex Sedgwick: The December Effect
The “January Effect” is a well known, heavily covered phenomenon in the equity markets. Far less known is the “December Effect” in the bond market. MarketAxess Research head Alex Sedgwick of MarketAxess details this seasonal slump in bond market volumes and the challenges it poses for investors in December. In his latest blog post, he notes how investors have come to rely on e-trading to help them implement significant quarter-end adjustments to their portfolios even as trading volumes wind down in the final weeks of the year.
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***DA: Worth a read.

Banking rivalries: Risk on, risk off
Tom Braithwaite – Financial Times
Only two pure Wall Street investment banks survived the financial crisis intact. One came to be viewed as so powerful that it had become a problem for society. The other was considered lucky simply to have made it.
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***DA: The age-old question among investment bankers – do we want to make money on fees or on trading? The usual answer is “yes.”

More U.S. Economists See Half-Full Glass
NYTimes.com
Record exports and the smallest trade deficit in four years. Healthier consumer spending, including the strongest annual increase in automobile sales since 2007, spurred by a booming stock market and an improving housing sector. And a slow but steady pickup in job creation that has pushed unemployment to its lowest level since 2008.
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***DA: The real question is whether the level of water in the glass is sustainable without the Fed’s spigot.

Tempered Optimism for the Economy
LAURA D’ANDREA TYSON – NYTimes.com
The last few years have begun with rosy expectations for an acceleration of growth in the United States economy, and this year is no different. This time, however, the rosy expectations are more likely to be realized.
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***DA: Half-filled glasses, half-empty glasses and rose-colored glasses.

Morgan Stanley Warns of Crisis Amid Inflation Sign: Japan Credit
Masaki Kondo, Shigeki Nozawa and Mariko Ishikawa – Bloomberg
Morgan Stanley said inflation and overspending threaten to push Japan’s finances to the brink, amid signs government-bond investors are preparing for rising consumer prices.
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***DA: Since the Japan bubble burst in 1990, the cure for high prices has been high prices.

Covered Bond Shock Forces Denmark to Devise Plan B for Banks
Frances Schwartzkopff – Bloomberg
Denmark is mapping out a new battle plan to protect $555 billion in mortgage bonds after Europe’s bank regulator proposed rules that threaten to trigger a sell-off of the securities.
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Brazil 2013 Inflation Exceeds All Estimates and 2012 Level
David Biller – Bloomberg
Brazil’s consumer prices in 2013 exceeded every analyst estimate and accelerated from last year, boosting pressure on the central bank to extend the world’s biggest cycle of raising interest rates. Swap rates increased.
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***DA: Is Brazil jealous that I wrote a piece about Argentina’s inflation?

Greece Takes EU Helm, Still Focused on Self
Matina Stevis – WSJ.com
Greece’s turn at the helm of the European Union, a largely administrative role that rotates every six months, could find itself overshadowed by something close to home: Greece’s own bailout.
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***DA: I am sure they will be fair and impartial when dealing with administrative issues surrounding bailouts.

Investors fear Fed rate-driven Treasury market shakeout
Michael Mackenzie in New York – FT.com
The intentions of central bankers are by no means set in stone, and that tenuous reality looms as a major source of tension between the Federal Reserve and bond traders in the coming months.
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Federal Reserve faces prospect of bond market showdown over rates
Michael Mackenzie in New York – FT.com
Bond traders are bringing forward their expectations of when the Federal Reserve will start to tighten policy, leading to a jump in short-term US borrowing costs. Recent economic data have pointed to a gathering American recovery, and could result in a showdown between policy makers and the Treasury market.
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Treasuries Close to Cheapest Level Versus Peers Since ’07
Lukanyo Mnyanda and Wes Goodman – Bloomberg
Treasuries were near the cheapest versus international peers in seven years before a jobs report that may signal whether the recovery is strong enough for the Federal Reserve to accelerate its tapering of stimulus.
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LGFV credit risk and the rate wall of China
David Keohane | FT Alphaville
Have a chart from BofAML who, like many others, see financial conditions in China remaining tight as the PBoC tries to delever the economy and an inelastic, potentially spirally, demand for credit dominates. Basically, it shows one of the problems that occurs when interest rates are jacked-up. As we’ve written before, there’s probably a reason Chinese companies have been rushing to issue in dollars.
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Greenspan, the Keynesian
Izabella Kaminska | FT Alphaville
Justin Fox at the Harvard Business Review has collated some interesting extracts from a conversation he had with Alan Greenspan late last year. What’s striking, as Fox himself notes, is that Greenspan (generally pigeon-holed as a free-market loving Ayn Randian type) is getting pretty Keynesian nowadays.
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Central Banks

Janet Yellen: The Sixteen Trillion Dollar Woman
TIME
In her first and only interview as Fed chief, the economist says why she thinks the housing market is back on track, companies will invest, and more new jobs are on the way this year. She now has the world’s largest economy in her hands
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Bernanke gives upbeat assessment of economy to U.S. senators
Reuters
Federal Reserve Chairman Ben Bernanke on Thursday offered an optimistic view on the U.S. economy’s prospects to Democratic senators, but warned that “tough decisions” were ahead on dealing with long-term budget deficits and healthcare costs, according to lawmakers present.
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Some banks easing lending ahead of stress tests: ECB’s Honohan
Reuters
Some euro zone banks are restricting lending to boost their performance in financial stress tests this year, a member of the European Central Bank’s (ECB) governing council said on Friday.
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Currencies

Did China’s Yuan Hit a Record High?
MoneyBeat – WSJ
China’s currency traders were left confused Friday after watching the tightly controlled yuan jump to a fresh record against the dollar before the price disappeared within an hour from their terminals.
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Draghi’s words can’t keep euro down for long
James Mackintosh – FT.com
Mario Draghi, president of the European Central Bank, showed his worth again Thursday: about E30bn a word judging by the immediate 0.6 per cent drop in the euro against the dollar.
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Yen Seen Rallying 15% Threatens Abe’s Successes: Market Reversal
Mariko Ishikawa and Hiroko Komiya – Bloomberg
Mitsubishi UFJ Morgan Stanley Securities Co. and Westpac Banking Corp. are breaking from the pack to bet the yen will rally in 2014, which could threaten Japan’s efforts to reflate the economy.
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Overstock.com to Accept Bitcoin
WSJ.com
Overstock.com said it would now accept bitcoin, a virtual currency that has exploded in popularity since its introduction four years ago, at the company’s online shopping site.
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Currency Relief for Norwegian Tourism?
Norway has been on a roll. But for businesses like the Swiss-style Hotel Union located in its picturesque western coastal town of Geiranger, the nation’s good times have come with a price as a stubbornly strong currency put a dent in tourism.
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Indexes & Index Products

The Importance Of The Purchasing Managers’ Index (PMI)
Elvis Picardo – Investopedia
One of the most reliable leading indicators for assessing the state of the U.S. economy is the PMI, formerly known as the Purchasing Managers’ Index.
PMI is the headline indicator in the ISM Manufacturing “Report on Business,” an influential monthly survey of purchasing and supply executives across the United States.
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Stock indexes need Goldilocks jobs number to sustain rally
Anthony Lazzara – Futures Magazine
The S&P 500 fell 0.6% in 2014 through yesterday, after climbing 30% last year, the most since 1997. Yesterday, minutes from the Fed’s latest meeting fueled concern that stimulus cuts may be accelerated. “A few” officials mentioned the need for a “more deterministic path.”
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Miscellaneous

License to Kill: The Complexity of Circuit Breakers
Marina Daras – Waters Technology
Much has been written about the August 1, 2012, Knight Capital debacle, the May 6, 2010, Flash Crash and the many other technical glitches that have disrupted the markets significantly over the past few years. But the amount of media attention devoted to such incidents doesn’t mean that the problems have been satisfactorily resolved.
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