Bear Market


Much ado about Greece in Finnish EU elections

February 28, 2014 by · Leave a Comment 

“Soini has been a vocal opponent of any Finnish contribution to the two previous Greek bailout packages and to the European Commission’s crisis efforts. These issues are why Finland is likely to contribute to the predicted general rise of the hard right in the May EU vote.”

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Ukraine news: Russia invades Crimea to ‘protect its Black Sea naval fleet’ as tensions soar

February 28, 2014 by · Leave a Comment 

“Tension in the Crimea grew tonight as the Russian government finally confirmed it had sent soldiers into the troubled region… Moscow insisted its soldiers were on a mission to “protect Black Sea Fleet’s positions”.”

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U.S. Growth at End of 2013 Is Revised Downward (BIG-TIME!)

February 28, 2014 by · Leave a Comment 

“The Commerce Department now estimates the economy grew at an annual pace of 2.4 percent in October, November and December, down from an initial estimate of 3.2 percent. The revised figure also represents a substantial slowing from the pace of growth in the third quarter, which totaled 4.1 percent. The department is scheduled to provide one more estimate of growth during the fourth quarter on March 27.”

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Ukraine turmoil: Great unravelling of Putinocracy has just started with Crimea

February 28, 2014 by · Leave a Comment 

While I write this, Vladimir Putin is committing the biggest of strategic blunders in his history.

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The Ripple Effects of the QE Debt Binge

February 28, 2014 by · Leave a Comment 

The Daily Reckoning

Financial crises are not predictable, though the buildup of fragility is observable.

Gary Gorton, economist and author of
Misunderstanding Financial Crises: Why We Don’t See Them Coming

We have been trying to push down interest rates, particularly longer-term interest rates. Those rates do matter to the valuation of all assets… stocks, houses and land prices. And so I think it is fair to say that our monetary policy has had an effect of boosting asset prices.

And thus did Janet Yellen, newly installed head of the Federal Reserve Bank, speak with understated candor before the House of Representatives in her first Humphrey-Hawkins address. She only confirmed what she could not deny.

A thoughtful investor has to wonder what will happen when the Fed no longer wants to push down rates anymore. For symmetry, it is hard to beat the idea that everything it goosed up will then come shimmying down.

Markets are never so neat. And the specifics matter. What, exactly, has been propped up the most? And what might suffer the most upon a reversal? This morning’s letter is an effort to disentangle the effects of QE’s unwinding.

Quantitative easing, or QE, is the silly name the Fed gives its efforts in price fixing of interest rates. The Fed buys Treasury bonds and mortgage-backed securities. As it does so, its balance sheet swells. Many are the asset prices that have risen right along with it, too.

A Merrill Lynch report points out some of the asset prices that have moved in step with the Fed’s balance sheet. These include U.S biotech stocks as well as the Nasdaq (heavily weighted with many tech stocks).

Take a look at this next chart, from Merrill. Remember, a correlation of 1 means the two things move identically. The lower the number, the less the two move together. Here, you see a 0.94 correlation between the Nasdaq and the Fed’s balance sheet since easing began, versus only 0.35 before.

b
click to enlarge

You find a similar story with biotech stocks – a correlation of 0.92 since Fed easing. But QE’s effects are not limited to US stocks. It also has affected global asset prices.

And so you find emerging-market gaming stocks and Internet stocks leap to the QE song. So do property prices in Hong Kong, Indonesia, South Africa, Malaysia, Sydney and London.
QE has also set off something far more insidious…

Low US interest rates provide an incentive to borrow low-yielding US dollars and buy higher-yield foreign currencies and assets. In the next chart, you can see the surge in US dollar loans in emerging markets since QE.

c
click to enlarge

Since 2009, US dollar debt issued by emerging markets summed to $724 billion, according to official balance of payments data. But this undercounts the real amount by 44%, says Merrill: ‘If an Indian firm borrows USD debt from a foreign bank branch in Mumbai, that is counted… but if it raises a USD bond in London, it is not.‘ Correcting for that, the real number is over $1 trillion.

This reveals deeper pricing vulnerabilities in the global financial system. It shows a potential credit bubble. We have seen this movie before. As Merrill notes: ‘Emerging-market banks and corporates have gone on an international leverage binge, yet another carry trade, the third in 20 years.

The first one financed an East Asian boom that ended with the Asian Crisis in 1997. The second one was banks and investors supporting massive expansion in the so-called BRICs (Brazil, Russia, India and China). That ended in the financial crisis of 2008.

In its essentials, the latest is just a twist on an old story of a credit-driven boom. It can be hard to tease out what is a real growth story and what is simply the result of easy money. Investors get caught up in the apparent prosperity, but forget its unreliable foundations. Credit conditions eventually do turn. And the credit bubble then unwinds.

Now we have the Fed telling us it will look to raise rates by mid-2015. An easing cycle seems to be drawing to a close. Be wary of carry trade-driven asset prices is the message here. Not all emerging markets have levitated on an air cushion of QE-driven easy credit, but most have.

The above may seem bleak, but I think it is an important to warn you of the fragility in the market. No one can predict the timing of the next financial crisis. And there are ways the party may go on for longer (say, if the Fed renews its QE efforts).

Besides, not every asset price has gone up since QE. This morning, I was looking over a list of the cheapest stocks in the US market based on tangible book value. It is a striking list. There are several shippers, gold stocks, coal miners and oddball troubled issues. No QE-driven boom here. These extreme values have extreme risks. But the point is that there are still things to do.

In the meantime, thank the Fed for kicking off another asset bubble. Yellen said the Fed ‘tried to look carefully at whether or not broad classes of asset pricing suggest bubble-like activity.

The Fed hasn’t found any evidence of that yet, Yellen said. When it does, it will be too late to do anything about it.

Regards,

Chris Mayer
for The Daily Reckoning Australia

Ed Note: The Ripple Effects of the QE Debt Binge originally appeared in The Daily Reckoning USA.

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Ultra Vision Lighting Releases Enforcer Head Lamp Brochure

February 28, 2014 by · Leave a Comment 

The Dura Vision Enforcer has been designed from the bracket up, utilising ground-breaking LED technology. Engineered to exacting standards as demanded in the mining industry, the Enforcer will stand up to the toughest applications. With its robust di…

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DYWIDAG-Systems International Acquires Schaum-Chemie Mikołów

February 28, 2014 by · Leave a Comment 

DYWIDAG-Systems International (DSI) has entered into an agreement to acquire 100% of the shares of Schaum-Chemie Mikolów, Poland, and all related intellectual property and know-how for mining applications from the Schaum-Chemie Group.

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Philippi-Hagenbuch to Unveil New Product at CONEXPO 2014

February 28, 2014 by · Leave a Comment 

Philippi-Hagenbuch (PHIL) will be holding a press conference at CONEXPO on 4 – 8 March 2014 in Las Vegas, Nevada. PHIL plans to unveil a new product and launch new designs to its water tanks and rear eject bodies. In addition, Leroy Hagenbuch is intr…

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Dust Control Technology Sponsors Children’s Orphange Event

February 28, 2014 by · Leave a Comment 

A global leader in open-area dust suppression technology has sponsored a day-long event to benefit the children of Casa Hogar de Cabo San Lucas, an orphanage dedicated to providing active care and personal well-being for boys in need in Baja Californ…

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Apollo Minerals signs strategic alliance with High Power Exploration

February 27, 2014 by · Leave a Comment 

Australian iron ore developer Apollo Minerals has signed a strategic alliance with High Power Exploration (HPX) to explore iron oxide-copper-gold (IOCG) deposits in the Northern Gawler Craton in South Australia.

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