Spoos - S&P 500 futures
QE - Quantitative Easing
ECB - European Central Bank
BoJ - Bank of Japan
G20 - Group of 20 nations finance ministers and central bankers
MRO - Main Refinancing Rate of the European Central Bank, their one week rate
USDJPY - US Dollar/Japanese Yen exchange rate
EM not DM - Emerging Market not Developed Market
From: DAVID ZERVOS (JEFFERIES LLC)
Sent: Thursday, April 25, 2013 10:59 AM
To: John Broussard
Subject: Yes it was GOOD news
So the verdict is in. Gold is settling down 8 to 10 percent from its pre-crash levels and the world feels mighty fine. Spoos are a few ticks from record highs and the Nikkei is moeteimasu!! So much for the endless stream of comments suggesting that because of a Gold crash all leverage will be purged from the system. Yes gold collapsed. And since 2010, Gold has consistently traded above spoos, sometimes by hundreds of points. But this is a crash back to reality - a cathartic move that is importantly NOT a sign of global deflationary Armageddon. Its a sign that a bunch of misguided hyperinflation focused investors were carted out. FINALLY!
In fact, most of the old spoo haters from 2009-2011 stopped out of their 600 forecasts and turned towards 10,000 gold forecasts. Deflationists turned hyerinflatioists in an instant. These people are simply not happy unless something is blowing up!! And of course the only thing thus far that has truly blown up is their pnl.
Let's review reality quickly. The base case is that QE will work. QE will drive risk taking and investment in real economic activity. It will raise depressed animal spirits. It will also reflate assets that were driven to depressed levels and deflate the real value of our debt overhang. It will repair distressed levered balance sheets. Of course there will be some fallout. Those who choose fooloishly to own low yielding debt instruments will be financially repressed into poverty. And on the other side, those who invest in real/productive equity capital will be reflated into prosperity. Its a simple formula!!
And just to make sure everyone is fully aware of where our major central banks are headed - last week the G20 gave the BoJ the green to go loco; Bullard, Lacker and Kotcherlakota opened the door for "reverse tapering"; and the German uber hawk Weidmann opened up a possible MRO cut. The central bank reflationary accelerator is pressed to the floor in developed markets! And while we always have to watch the Europeans in case they try to start spreading Cyphilis again, the best news of the last few weeks is actually the German economic slowdown. A weak Germany will force the ECB to move in the right direction. So we can thank Kuroda for not only starting to finally fix Japan, but also for competitively devaluing against the German export machine and forcing them to capitulate on foolishly tight monetary policy.
I'll sign off for now as I'm jammed on the road and writing between meetings (apologies for any typos). But I will leave today with a preview of what I'm writing about next. The developed market central banks will solve many of their own problems through expansionary monetary policy. And there will surely be some long term inflationary consequences - nothing too frightening, but UK style 5 handles may haunt us for a while down the road in a few years. But the cause for concern in these policies does not rest in developed markets. When the Japanese took USDJPY from 80 in 1995 to 140 in 1998 they left a trail of destruction in emerging markets. The next worry is in EM not DM! Be careful. Good luck trading.