First Impressions

Anthony Belchambers

Finding Our Differences: FOA’s Anthony Belchambers Says Regulation Has Long Way to Go
JohnLothianNews.com
European regulatory changes continue to move forward, but there are significant differences between the US and EU, and also between the European states themselves. The Futures & Options Association’s Anthony Belchambers spoke with John Lothian News about where Europe stands in the rulemaking process and the challenges that still remain. Belchambers said that the issue of extraterritoriality continues to concern EU regulators and market participants.

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Quote of the Day

The problem [during the crisis] was not any lack of smarts, but rather that people were paid based on their return on equity without appropriate adjustment for risk. In that context, the clever thing to do is to borrow as much as possible, particularly if you think that downside insurance will be available in some form from the government.

Simon Johnson, former IMF chief economist and current MIT professor, in the NY Times commentary “The Rich Country Trap.”

Lead Stories

The Rich Country Trap
SIMON JOHNSON – NYTimes.com
Until about 10 years ago, it was fashionable among policy makers to suppose that relatively rich countries had grown or evolved beyond the stage where they would be vulnerable to debilitating financial crises. The reasoning was that financial markets had become sophisticated, in part because big companies knew how to diversify their risks. And with a large continent-wide real (i.e., nonfinancial) economy, what could possibly go wrong on a scale that would be large enough to shake the American or the European financial system?
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***DA: Shaken, but not stirred. The S&P 500 made new highs 50 times last year.

***JB: And the Titanic is unsinkable and the power plant at Chernobyl is safe and New Orleans is at no risk from storm surges and so on. You’d think we’d have learned something by now. If nothing else remember Murphy’s Law.

The Economy’s Secret Success in 2013
Daniel Gross – The Daily Beast
The financial failures of the Great Recession—bank busts, foreclosures, and bankruptcies—shrank dramatically this year. And the success will feed on itself.
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***DA: The U.S. economy grew about by about 4 percent, or 700 billion. The Fed expanded its balance sheet by about a trillion. If this is success, I would hate to see what failure looks like..

Monetary Policy in Japan: Finally on Track
PHILLIP SWAGEL – NYTimes.com
Japan’s central bank, the Bank of Japan, is finally taking the action long suggested by outside economists as a remedy for two decades of stagnation: a prolonged period of substantial monetary expansion to end deflation and reverse the drag on business and consumer spending induced by deeply embedded deflationary expectations.
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***DA: Rapid yen depreciation has led to double digit increases in food and energy prices. Combine that with zero interest rates and the oldest population in the developed world, and you have a crisis in the making. The elderly recently overtook teenagers as the biggest group of shoplifters in Japan.

Despite Possible Volcker Reprieve, Some Banks Move Ahead On CDO Sales
Andrew R. Johnson – MoneyBeat – WSJ
Some banks aren’t waiting for the dust to settle on a hotly contested provision of the Volcker rule before selling assets.
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***DA: The regulators promised to rule on a TruPS exemption by January 17th. For more, visit the Volcker page in MarketsReformWiki.

Five things that signal the end of the banking crisis
Financial News
More than half a decade from the collapse of Lehman Brothers and the most serious period of the credit crunch, the aftershocks are still being felt. But they are getting weaker, and signs over the past 12 months suggest the world’s financial industry is beginning to get over its most profound crisis in several generations.
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***DA: Well, since “normalized interest rates” and “Fed reduces balance sheet” are not on the list, I will reserve judgment as to whether the crisis is over.

Funds shrug off default risk in dash for emerging company bonds
Reuters
When Brazilian oil firm OGX tried to tap bond markets for $2 billion in 2011, investors were ready to hand it $5.5 billion. Two years on, OGX is in default and the debt trades at less than 10 cents of its original face value. The spectre of such defaults spreading across emerging markets has not yet dimmed investor enthusiasm for the corporate debt sector, which saw record-high bond sales of $330 billion-plus in 2013 and more than 150 first-time borrowers.
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***DA: Like selfies and twerking, shrugging off risk was trendy in 2013.

Morning MoneyBeat: A Year About Nothing
Paul Vigna – MoneyBeat – WSJ
Last year, in case you didn’t notice, wasn’t exactly the most normal year in the market.
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***DA: Amen to that.

Central Banks

Glasnost must be embraced by central bankers
Julian Callow – FT.com
With the intensification of the financial crisis in 2008, central banks cut rates sharply and rapidly ran into the zero interest rate bound, necessitating a recourse to non-conventional measures. These took three forms: large-scale asset purchases (quantitative easing), exceptional liquidity provision and forward guidance on policy rates.
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ECB modestly successful in tempering eurozone rates divergence
Ralph Atkins in London – FT.com
European Central Bank action has had only modest success in easing big differences in interest rates paid by businesses across the eurozone, which remain near peaks seen at the height of the region’s debt crisis.
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Currencies

How and why Bitcoin will plummet in price
Tyler Cowen – Marginal Revolution
My post from yesterday was perhaps not specific enough, so let me outline one possible scenario in which the value of Bitcoin (and other cryptocurrencies) would fall apart. For purposes of argument, let’s say that a year from now Bitcoin is priced at $500. Then you want some Bitcoin, let’s say to buy some drugs. And you find someone willing to sell you Bitcoin for about $500.
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Euro Supporter Credit Suisse Joins Bears: Currencies
Lukanyo Mnyanda – Bloomberg
Credit Suisse Group AG went against the consensus in June and correctly called the euro’s rally. Now, the bull has turned into a bear, with the firm predicting the common currency’s biggest annual drop in almost a decade.
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Indexes & Index Products

S&P 500 Index Has Its Best Year Since 1997
Ken Sweet – AP Markets (via ABC News)
The stock market closed out a record year with more all-time highs on Tuesday, giving U.S. indexes their biggest annual gains in almost two decades.
The Standard & Poor’s 500 index notched its best year since 1997; The Dow Jones industrial average rose the most since 1995.
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Gold

Gold Falls 28% In 2013, Ends 12-Year Bull Run
Tatyana Shumsky – WSJ.com
Gold prices fell Tuesday, locking in the largest annual decline since 1981 and ending a 12-year bull run.
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Gold Rebounds in Asia
Arpan Mukherjee – WSJ.com
Bargain-hunting sent gold prices to the highest level in more than two weeks in holiday-thinned Asian trading on Thursday.
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Why gold bugs should brace for an ‘awful’ 2014
Ansuya Harjani – CNBC
Gold had a tumultuous run in 2013 but don’t expect any respite in the new year, said UBS, which anticipates double-digit percentage losses over the next 12 months.
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***JB: As you can see from the story below there seems to be disagreement on this point. Who is right? If I knew that I would not be writing this newsletter.

From worst to first: Why gold is about to stage an epic comeback
Matt Nesto – Yahoo Finance
In sports, everybody loves an underdog. Nothing thrills the soul like a dramatic, against-all-odds comeback. On Wall Street, however, things are completely different as we’ve all been taught to cut losses and let our winners run.
But at least one investment pro is bucking that advice and is currently taking a long, hard look at gold (GLD), now that it’s 30% cheaper than it was at this time last year.
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