Quotable
Today, Norges Bank (NB), which along with the Bank of Israel (BoI) and the Reserve Bank of Australia (RBA) had started the global rate hike cycle late last year, kept its policy rate steady. Likewise, on Tuesday the RBA refrained from hiking its policy rate for a fourth time, which came as a surprise to markets. These are not isolated incidents, in our view. All the central banks who either had embarked on removing policy accommodation in 2009, such as the BoI, the RBA and NB, or were expected to begin raising rates early in 1Q10, such as the Reserve Bank of India (RBI) and the Bank of Korea (BoK), have refrained from hiking policy rates in their meetings so far this year. Korea's strong recovery and extremely low policy rates, and India's economic bounce and the risk of inflation made the central banks of these two economies front-runners for hiking policy rates in early 2010. Yet none of these 'front-riders' have made any fresh attempts to break away from the pack this year. Why? We believe that the decision to raise policy rates has to balance concerns about the domestic economy against policy constraints of a global nature. Headwinds from tightening ahead of the major central banks have made it difficult for the policy action to gain traction. Early-hiking central banks have had to deal with currency appreciation and asset markets that have stubbornly stayed buoyant in line with their counterparts in the major economies.

                Manoj Pradhan, February 5

FX Trading - Their words, not mine.

How about a cornucopia of third party commentary today ... to get the juices flowing?

From Reuters on helping out Greece ...

A potential EU support package for Greece would probably spark a near-term euro relief rally but is unlikely to alter the medium-term downward trend, says Lee Hardman, currency economist at BTMU. A support package won't solve the crux of the problem which is that Greece and other peripheral economies have become uncompetitive, he says. Aggressive fiscal tightening in these countries will also dampen overall eurozone growth and inflation acting to slow the pace of ECB monetary policy normalization.

Also from Reuters, on UK trade deficit ...

Britain's goods trade deficit with the rest of the world unexpectedly widens to 7.278 billion pounds in December, its biggest in 11 months, after imports from non-EU countries shot up at their fastest rate since March 2005.

And one more time from Reuters ...

Spanish labour unions and business groups have agreed to a series of wage increases over the next three years, a starting point for labour reforms aimed at making the jobs market more competitive, they said on Tuesday.

Spain's largest union CCOO confirmed an agreement was made that will see wages rise by a maximum of 1 percent this year, 1-2 percent in 2011 and between 1.5 and 2.5 percent in 2012. Spanish wages are mostly linked to inflation, which was 1.1 percent in January.

Analysts have warned that Spain must make wage cuts, flatly rejected by unions, to help Spain out of a deep recession.

From the McKinsey Quarterly ...

While the historical record is helpful, several elements of today's environment suggest that deleveraging may start later and take longer. First, aging populations in much of the world are causing labor force participation rates to fall, which will make it more difficult than usual to jump-start and sustain GDP growth. Another complication is that the financial crisis of 2008 was global in scale, affecting the world's biggest economies-not just one or a few, as in most previous crises. Therefore, it would be very difficult for all of today's affected countries to boost net exports simultaneously, as many did in the past to support GDP expansion when credit growth was slowing and households were saving more.

Add to that problem the prospect of sharply increasing government debt relative to GDP in several major economies. According to Global Insight, US government debt will grow to 105 percent of GDP by 2012, from 60 percent in 2008; UK government debt to 91 percent, from 52 percent; and Spanish government debt to 74 percent, from 47 percent. This development could more than offset any deleveraging by the private sector. One implication is that Spain, the United Kingdom, and the United States might postpone deleveraging until after the crisis passes and growth in government debt has been reined in. It's also likely that debt-to-GDP ratios will decline more slowly and over a longer period than the historical average, creating severe headwinds on economic growth, though we do not forecast GDP.

And this chart, also from McKinsey ...

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This from Bloomberg regarding blind pools looking to invest in commercial real estate ...

Sales of commercial mortgage-backed securities, or CMBS, fell to $12.2 billion in 2009 from a record $237 billion in 2007, removing a major source of financing for building owners, according to JPMorgan Chase & Co. in New York, the second- largest U.S. bank. Delinquencies for loans packaged into CMBS rose to a record 6.5 percent in January from 1.5 percent a year earlier, Trepp LLC, a New York-based research firm, said Feb. 1.

Only 14 percent of an estimated $150 billion in distressed U.S. commercial real estate has been taken back by lenders, according to Jessica Ruderman, director of research services at New York-based Real Capital.

There's an overhang of real estate that no one is quite sure what will happen with, Edelstein said. The market is starting to recognize the complexities of owning troubled real estate.

I suppose what I'm getting at with all this is a sample of items that don't exactly bode well for the pace of recovery in major economies like the US, UK and Eurozone. The markets may have warned us last week and the week before that we built too lofty of expectations for this whole world growth recovery thing. Then again, the markets may instead be telling us right now to buy, buy, buy!

From Bloomberg ...

Morgan Stanley's Jonathan Garner predicts the MSCI Emerging Markets Index will surge 34 percent by the end of 2010 as corporate profits jump 40 percent. Sakthi Siva of Credit Suisse says declines in the 22-country gauge may be limited to 5.3 percent. Goldman's Thomas Deng recommends investors buy in China, where he forecasts the CSI 300 Index will gain 36 percent in the next 10 months.

A tasty morsel? A chance to buy with both hands? Back up the truck?

I'd have to agree about the longer-term growth prospects for emerging markets, especially Asia. But in the shorter-term those prospects can be trumped by growing risk.

I know, I know - we continue to harp on risk appetite capital flows. But the fact is: risk appetite still matters. And deleveraging still matters. And a world with little inflation still makes a difference.

I think the market has realized it better keep its eyes on the road, because that one-way-street market recovery has merged into oncoming traffic.

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John Ross Crooks III
Black Swan Capital LLC
www.blackswantrading.com

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