First Impressions

Intrinsic value and other unicorns
Jonathan Matte – John Lothian News

Once in a while, I find myself looking at a universal truth that the rest of the world holds dear, and for the life of me I just can’t sign on to it. Everybody is cooing about the unicorn in the pasture, but it sure looks like a rhinoceros to me; and when I ask people to explain it, I get blank stares or a defensive, “It is TOO a unicorn!” before the cooing begins again. And then I find myself no further along the path of understanding.

So it is with this “intrinsic value” thing. Alan Greenspan was on Bloomberg TV to talk about Bitcoin, among other things (a topic that frankly I’m pretty tired of hearing about these days), and he said this: “When we were on the gold standard, gold and silver had intrinsic value.”

I must be the only person on planet Earth that didn’t just now nod wisely, but I’m telling you, there’s no such thing as intrinsic value. Intrinsic value does not mean, “Something that people have prized highly for a long time,” nor does it mean, “A thing that governments use to back their currencies.” It means that a thing possesses its own innate, inherent worth. And that makes the term an oxymoron.

***JB: I had much the same thought as my colleague here. How does a fiat currency have “intrinsic” value? Put it this way, if there is a zombie apocalypse what value will a dollar bill have? Kindling for a fire is about all I can come up with. US currency only has value because we all agree it has value. That can be applied to anything…including bitcoins.

***DA: Well, yes and no. In a sense, a dollar can be thought of as a share in the value and productive capacity of the USA, just as a share of stock represents partial ownership of a company. The problem arises when the executives cannot be trusted to not dilute the shares.

Quote of the Day

You have to really stretch your imagination to infer what the intrinsic value of bitcoin is. I haven’t been able to do it. Maybe somebody else can. But if – you asked me is this a bubble in bitcoin. Yeah, it’s a bubble.”

Former Federal Reserve Chairman Alan Greenspan in an interview with Bloomberg Television

Lead Stories

Treasury Chief to Declare Big Gains in Financial Reform
Treasury Secretary Jacob J. Lew will assert on Thursday that the Obama administration’s vast overhaul of the financial system is close to accomplishing its goal of shielding society from the dangers posed by giant banks.

Alan Greenspan: Bitcoin is a Bubble and Gold is Weak
Joshua M Brown | The Reformed Broker
America’s foremost authority on bubbles, former Fed Chairman Alan Greenspan, weighed in on both Bitcoin and gold today in an interview for Bloomberg Television.

China bars banks from bitcoin transactions
China’s government banned financial institutions from trading in bitcoin on Thursday, in what analysts said was a restrained first step towards regulating the digital currency that has exploded in popularity in China and soared in value in recent months.

***DA: The move prompted an immediate 30 percent correction, putting it at levels not seen since…last week.

Is QE deflationary or not?
Izabella Kaminska | FT Alphaville
We first proposed the idea that QE could be (but wasn’t necessarily) deflationary a couple of years ago. It was dubbed a counter-intuitive idea by Tyler Cowen. More recently, a similar proposition has been made by Stephen Williamson — though this time using models and proper math. His view is a little different to ours because it’s less focused on the safe asset squeeze and more on the conditions that generate a preference for cash over yielding paper in the first place. Hint: you have to think the purchasing power of cash will go up regardless.

***DA: It all comes down to expectations. QE works only to the extent people think it is working.

Blackstone’s GSO Said to Price Largest Europe CLO This Year

Patricia Kuo – Bloomberg
Blackstone Group LP, the world’s biggest private-equity firm, priced the largest collateralized loan obligation in Europe this year after it increased the deal by almost 50 percent to meet investor demand.

***DA: At first I thought we had dredged up a story from 2006. Nope. It is for real – CLOs are all the rage again.

Inflation Remains Low in Most Advanced Economies
Press Release (via The Sacramento Bee)
In October, inflation as measured by the Harmonized Index of Consumer Prices (HICP) was positive in all economies compared, except for Switzerland, where prices remained stable compared to a year ago.
In October, Norway experienced the highest inflation (2.3 percent), followed by the United Kingdom (2.2 percent), Japan (1.5 percent) and Austria (1.5 percent). Inflation in Switzerland was unchanged. In the Euro Area, inflation was 0.7 percent.

Iceland’s Debt Relief Plan; Horse-riding Protester Unimpressed
MoneyBeat – WSJ
Iceland’s prime minister this week announced a radical plan to cut household debts to get the struggling economy moving, but he’s got work to do to convince critics at home and abroad that’s it’s going to work.

***DA: Such is the nature of debt-forgiveness plans. They are much more attractive to the recipients than to those who must fund it.

Who’s Lending in the Fed Funds Market?
Gara Afonso, Alex Entz, and Eric LeSueur – Federal Reserve of New York
The fed funds market is important to the framework and implementation of U.S. monetary policy. The Federal Open Market Committee sets a target level or range for the fed funds rate and directs the Trading Desk of the New York Fed to create “conditions in reserve markets” that will encourage fed funds to trade at the target level. In this post, we use various publicly available data sources to estimate the size and composition of fed funds lending activity.

***DA: More importantly, who is lending below the fed funds rate?

Central Banks

New forecasts may put policy pressure on ECB
New projections from the European Central Bank on Thursday will probably point to euro zone inflation remaining below target into 2015, raising pressure on the bank to take fresh action to stimulate the economy next year.

ECB Cuts Inflation Forecast as Draghi Pledges Low Rates
Jeff Black – Bloomberg
European Central Bank President Mario Draghi re-affirmed that interest rates will stay low for the foreseeable future, after officials cut their inflation forecast for next year.

Bundesbank: so about those current account issues…
FT Alphaville

New platform for OTC forex and interest rate derivatives from Dec 30
Business Standard
The Reserve Bank of India (RBI) said on Wednesday that market participants will have to report trades for Over-The-Counter (OTC) foreign exchange and interest rate derivatives to a new platform developed by Clearing Corporation of India Limited (CCIL) from December 30.


Fresh FX Figures Add Up to a Year to Forget
Clare Connaghan – MoneyBeat – WSJ
Poor fund performance, drab trading volumes and a global rash of investigations into possible efforts at market manipulation. It’s been a year that foreign-exchange market participants might be keen to forget.

China’s free trade zone plans herald quicker FX reforms
China plans to roll out financial sector reforms in the Shanghai special economic zone in the next three months and most will be implemented in a year, suggesting authorities are accelerating the pace of dismantling capital account controls.

In Reversal, Yen Poised to Finish as Weakest Currency
Ira Iosebashvili – MoneyBeat – WSJ
If there was an award for the most bipolar currency, the yen would be a shoo-in.

Preventing Currency Manipulation
The Obama administration is keen to agree on a “Trans-Pacific Partnership” that will increase market access in the United States in return for reducing trade barriers in other participating countries, all bordering on the Pacific Ocean. The partnership is also intended to write new rules for a wide range of international trade and investment transactions.

***DA: Good luck with that.

NOK Hits a Fresh Low
Chiara Albanese – MoneyBeat – WSJ
It may be central banks day in the euro zone and the U.K., but the Norwegians aren’t missing out on the action.

No Limit to Negative Rates as Rohde Defends Danish Euro Peg
Peter Levring – Bloomberg
A year and a half after Denmark’s central bank cut its deposit rate below zero, Governor Lars Rohde says there’s no limit to the policy measures he’s ready to deploy to defend the krone’s peg to the euro.

Indexes & Index Products

Macquarie index aims to be lead indicator of food inflation
Macquarie Commodities Research has created a new global agricultural commodity index designed to indicate the future level of food inflation, it said on Wednesday.

Q&A with Russell Investments’ Pascal Duval: ‘we have aggressive plans for 2014’
Joe McGrath
Having recently embarked on a hiring spree, Russell Investments’ chief executive officer for Europe, the Middle East and Africa, Pascal Duval, tells Financial News about further expansion plans and ideas to bring new products to market.

Russell Investments launches Russell Focused Global Equity Pool (and Russell Focused Global Equity Class) for conservative investors
Press Release (via CNW)
Russell Investments Canada Limited has launched the Russell Focused Global Equity Pool (and Russell Focused Global Equity Class), expanding its range of high-conviction, concentrated solutions with a selection of global stocks emphasizing defensive and value-oriented names. Russell’s focused fund lineup includes the Russell Focused Canadian Equity Pool launched last year, and the Russell Focused US Equity Pool launched in 2011.


Chairman of Barrick Gold Plans to Step Down
Barrick Gold, facing criticism from some shareholders for a series of missteps in a tough market, said on Wednesday that its 86-year-old chairman and founder would leave the board in the spring, along with two other directors.

All that Glitters Is Not Gold: Inside the New Bubble
Wendy Smith – The Daily Beast
The latest wild commodity is none other than one of the oldest: gold. A new book by journalist Matthew Hart takes readers on a wild ride from South African gold mines to the trading desks where gold fortunes area made and broken.

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