New Asian Union Means The Fall Of The Dollar.

One of the most frustrating issues to haunt the halls of alternative economic analysis is the threat of misrepresentative terminology.  For instance, when the U.S. government decided to back the private Federal Reserve in lowering the interest rates on lending windows to European banks last month, they did not call this a bailout, even though that’s exactly what it was.  They did not call it quantitative easing, or fiat printing, or a hyperinflationary landmine; rarely does bureaucracy ever apply honest terminology to their subversive activities.  False terminology is the bane of every objective analyst, because in order for them to educate and awaken those who are unaware of the truth, they must first battle through the daunting muck of the general public’s horrifically improper perceptions and vocabulary.  

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Dollar Still King Of Reserve Currencies - IMF COFER Data.

--Dollar stays on top with 61.7% of total allocated reserves
--Euro holdings edge lower as debt crisis bites
--Active Q3 reflects Japan, Switzerland currency moves 
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The Endgame: Japan Makes Another Move.

                                   www.testosteronepit.com

                                                               

It’s a doozie. On December 24, the cabinet approved a draft budget for fiscal 2012 whose headline numbers were horrid enough: ¥90.3 trillion ($1.173 trillion) in outlays, ¥42.3 trillion in tax revenues, and a deficit of ¥48 trillion. 49% of the outlays are to be covered by issuing bonds, a record even for Japan. But it gets worse. Accounting shenanigans gloss over the fiasco by removing two items from the general budget: the reconstruction budget of ¥3.8 trillion and pension payments of ¥2.6 trillion. When they’re included, the deficit jumps to ¥54.4 trillion.

Fiscal 2012 Draft Budget	trillion
General budget	¥  90.3
Reconstruction budget, left out of general budget	¥    3.8
Pension payments left out of general budget	¥    2.6
Total budget	¥  96.7
Estimated tax revenue	¥  42.3
Deficit to be funded by borrowing	¥ -54.4
Percent of budget to be funded by borrowing	56.2%

The Japanese government will have to borrow 56.2% of every yen it spends in 2012. But it gets even worse! Japan regularly passes “supplementary budgets” during the year—four of them in 2011, the last one on December 1 for ¥2 trillion. So there may be a few in 2012 as well, which could push borrowing requirements toward a dizzying 60% of outlays.

Despite the near-zero interest rate policy the Bank of Japan has been pursuing for years, interest expense on the debt—at 230% of GDP by far the highest in the developed world—will eat up ¥21.9 trillion in 2012, a stunning 51.8% of tax revenues! If yields on 10-year JGBs were to rise from 1% to 2%.... Better not think that way. Keeping yields near zero is simply a matter of survival.

Funding these deficits and rolling over the gargantuan debt has been made possible by the institutional setup and cohesive psychology of Japan Inc.: 95% of JGBs are held within Japan. Individuals directly or indirectly hold over 50%. Government-owned or controlled institutions hold over 40%. Among them: the Government Pension Investment Fund, the government-owned Post Bank, financial institutions the government can lean on, and the BoJ. Foreigners hold 5% for decorative purposes.

But two of the strengths of the Japanese economy that have supported the absurd deficit levels—a high savings rate and a large trade surplus—have collapsed. The savings rate is in the low single digits, and the trade surplus has turned into a ¥2.2 trillion ($29 billion) trade deficit in 2011 through November.

2011 Trade Balance in billion ¥

In November, imports grew 11.4% over a year ago, in part due to liquefied natural gas imports—up 21%. Since the Fukushima disaster, utilities have shut down reactor after reactor for scheduled maintenance but have not restarted them. Of the 54 reactors, only six are operating (one was shut down December 26, three more will be shut down in January). To make up for the shortage, utilities have revved up natural gas plants—though reductions in power consumption have also been implemented.

Exports dropped 4.5% from a year ago. Exports to China, Japan’s largest export market, declined 7.7% while imports grew 6.6%. Japan used to have a trade surplus with China. No more. The pace of offshoring is picking up, particularly in the auto and tech industries. While a weaker yen could slow down that trend, it would also drive up the cost of imports, including fossil fuels and raw materials—posing additional strains on the struggling economy.

The strategy for keeping it all glued together for a few more years? An increase in the unpopular consumption tax from the current 5% to 10%. Prime Minister Yoshihiko Noda proposed it in November. The opposition howled. Noda’s approval rating has dropped from 63% to 44.6% in the four months he has been in office (for the whole debacle of weak governments and revolving-door prime ministers, read.... Japan Inc. Plays By Its Own Rules). In pushing the consumption tax, he might run into a buzz saw. And if it passes, it will constrain consumption even further.

"Japan's budget-making processes and its reliance on public debt have reached their limits," Finance Minister Jun Azumi told a news conference on December 24, the winning understatement of the year. And what solutions did he propose? Well, pass the consumption tax “and somehow reverse the falling birthrates."

Reverse the falling birthrates? If that ever happened—doubtful in the current social climate—it would unleash a new wave of government expenditures (schools, healthcare, etc.) for two or three decades before it would generate a boom in productive and tax-paying members of society. But keeping the system glued together for that long would require a miracle. And for a finance minister to count on a miracle seems a bit silly.

Life goes on. A convoy of 20 supercars was speeding down the Chūgoku Expressway, entered a left-hand bend at 90–100 mph, though the posted speed limit was 50 mph. The highway was wet. And the rest was very expensive....

Japan, India Agree To Set Up $15-Billion Swap Line.

-The swap line is five times the countries' previous arrangement

-It can help buttress the two economies against euro-zone debt crisis

-The swap line could help the Indian central bank support the weak rupee 

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Weekly market update.

Via trade the news


Entering the week all eyes were on the US Fed. The Chairman's historic post rate decision press conference would hopefully shed some light on what was driving the FOMC's decision to stick to its ultra accommodative policies in the face of surging commodity prices, a declining US dollar and a growing number of central banks undertaking tightening measures to combat inflation. Though Bernanke did acknowledge a recent uptick in inflation he declined to offer any color on exactly how long it could be until the tightening process might begin, ultimately signaling the all clear to investors who wanted to continue the recent trend of gobbling up risk investments. Equity and commodity markets surged, reaching new yearly and all time highs. Gold traded above $1560 for the first time ever while silver is nearing $50 for the first time since 1980. Crude finished near levels not seen since 2008 closing just shy of $114, up roughly 7% in April. The Russell 2000 and Dow Jones Transports Index reached new all time highs trading above 2007 levels. The Greenback continued to tumble, suffering from its growing perception as a funding currency. US Treasury markets remain bid up sending yields lower on the week. Mildly disappointing Q1 GDP and manufacturing data, along with price index figures broadly in line with expectations, helped offset a couple of mediocre coupon auctions. For the week, The DJIA gained 2.4%, the Nasdaq rose 1.9%, and the S&P500 added 2%.

Earnings season has swung into full gear and it has certainly been a factor in propelling indices to new 2011 highs. A wide range of companies and sectors have chimed in and for the most part corporations are meeting and or exceeding consensus expectations. Some groups are doing better than others, but in general industries are weathering higher input costs and headwinds associated with the crisis in Japan and unrest in North Africa. Going forward, corporations have indicated they expect selling price increases to offset rising operating costs, but importantly at this time they are not experiencing any offset in end demand.

A plethora of major US multi-national corporations reported strong Q1 results and provided encouraging forward looking guidance. These companies' international exposure continues to serve them well by providing growth and offsetting some of the effects of a weaker currency. Reports from Coca-Cola, Caterpillar, Boeing, 3M, Dupont, Merck and P&G drove the Dow Jones Industrial Average higher. The S&P got a significant boost from the likes of Cummins, Colgate, Dow, Apache, Goodyear Tire, Illinois Tool Works, Aetna, General Dynamics, Ford, and Northrop Grumman among others. Despite surging energy prices, the Dow Jones Transport Index touched a new all time high on Friday above 5500. Components UPS, Delta Airlines, Ryder, Norfolk Southern all reported results this week.

The NASDAQ composite underperformed other US stock indices during the latter part of the week, as some technology earnings reports were not greeted with enthusiasm. Focus on higher input and acquisition costs along with the possibility of lingering supply disruptions resulted in some profit taking. After their respective earnings reports, shares of Broadcom and Netflix traded down sharply while Amazon initially moved lower before rebounding to fresh all time highs. Microsoft slid 4% after earnings and the CFO noted they are still experiencing some issues integrating the Bing/Yahoo search deal. Microsoft management also refused to discuss sales of windows based smartphones after Reseach in Motion cut its Q1 outlook on weaker BlackBerry sales. RIMM slipped below $50 for the first time since last fall losing 14%.

Consolidation continues to be a key theme for equity markets globally. Johnson & Johnson offered more than $21B for Swiss medical device maker Synthes. US utility Exelon offered nearly $8B worth of its stock for Constellation Energy. The cloud computing space continues to consolidate after Century Link offered $40/share for Savvis Communications. Barrick Gold entered into the fray by bidding for Canada's Equinox. Barrick's C$7.3B bid topped Minmentals previous offer for Equinox and forced its Board to withdraw an offer attempting to acquire Lundin Mining.

US Treasury prices pushed higher this week on the continued prospects of accommodative monetary policy and some softer US economic data. The unprecedented FOMC press conference did little to alter expectations. Despite a sharp move higher in precious metals prices and continued selling in the dollar inflation expectations have not moved all that much, though they do remain near the upper end of their recent ranges. The 10-year TIPS breakeven remains at roughly 260 basis points, still some 6 basis points below multi-year highs seen earlier this month. The final April University of Michigan confidence reading showed 5-year inflation expectations remained in line with the preliminary reading at 2.9%. The US benchmark 10-year yield declined roughly 10 basis points on the week making a new no month low below 3.3%.

Throughout week the same old themes eroded the value of the USD. The Dollar Index fell below 73 to the lowest level since 2008. US Treasury Secretary Geithner and Fed Chairman Bernanke both reiterated the standard mantra "a strong dollar is in the United States best interest", but ultimately it had no effect. The FOMC press conference only emboldened Greenback bears by indicating US monetary tightening was still at least several meetings away, and confirming initially the Fed intends to reinvest the proceeds from maturing mortgage securities after ending large scale purchases in June. Subsequently numerous central banks commented that they expected their respective home currencies to appreciate against the dollar. The Thai Fin Min confirmed what the FX markets had long suspected about the Far East economies, when he suggested his government has been both buying and selling USD in the FX markets in a two-step intervention process. The Asian Developing bank even commented there is a growing consensus among major Asian countries to draft an accord for joint appreciation of their currencies.

Choppy US data and a hotter than expected initial estimate for April Euro-zone CPI solidified the diverging views for US and European rates. European peripheral spreads also remained wider for the most part as Greek debt restructuring speculation failed to dissipate. Interestingly, higher yields in the periphery seemed to only propel the Euro higher buoying the carry traders. The EUR/USD traded above 1.4850 to retest its 16-month highs while USD/CHF again hit fresh post WWII lows below 0.8650. The GBP was softer ahead of Wednesday's release of the UK's Q1 GDP data but held above the key pivot point of 1.6430 against the USD. The GDP data met expectations and sent the GBP higher on a 'relief rally' above 1.67

JPY entered the week with a softer tone after S&P cut Japan's sovereign rating outlook to negative amid deficit concerns following the recent earthquake. Later in the week, the Bank of Japan kept its Overnight Call Rate unchanged while expanding loan collateral requirements to financial institutions in the earthquake-affected area as part of its latest ¥1T funding measure. Moreover, BOJ semiannual economic report cut its GDP assessment for the current fiscal year from 1.6% to 0.6%, pushing forward expectations for a more pronounced recovery into FY12/13. The Golden Week holiday for Japan markets should be a busy one for Tokyo lawmakers, as the Finance Ministry's ¥4T extraordinary earthquake relief budget heads to the Diet. Despite the doldrums in Japan, the overall weakness of the greenback kept JPY on a firm tone, as USD/JPY ended the week below the 82 handle.

Down Under, the Australian dollar remained the darling of the currency markets, extending its gains for much of the week to trade within 50 pips of the $1.10 level by Friday - a fresh 29-year post-flotation high. AUD received an added boost from a hotter than expected Q1 CPI print of 1.6% q/q - its highest since Q2 of 2006. The RBA is still widely expected to leave rates unchanged at its Tuesday decision, having warned about rising Q1 inflation in its prior statement. In New Zealand, the RBNZ left its key rate unchanged at 2.50% - contradicting some of the recent hawkish comments out Governor Bollard - citing continued economic disruption from the Christchurch earthquake for keeping rates low for some time. Despite further strength against the greenback, the kiwi saw its biggest decline in AUD/NZD cross in 9 weeks.

In China, PBoC strengthened the Yuan more aggressively, setting USD/CNY below 6.50 for the first time since 1993. Dealers have attributed more pronounced USD weakness to the concerted efforts by Chinese monetary authorities, who are buying fewer dollars to counter the market demand for the Yuan. Note that China will release its Manufacturing PMI around 9pmET on Saturday night, with expectations that the reading will continue its bounce from a February low. Ahead of this data it is worth pointing out copper futures dramatically underperformed other commodity markets this week finishing lower by almost 5%.

Worsening Japanese manufacturing condition .