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Five Things You Need to Know: Looking Back, Fed Predicts Slower Growth; Looking Back, Bank of Japan Predicts Low Interest Rates Encourage Carry Trade; Trade Balance; Lock, Stock and Three Warnings; Anti-Consumption: The Philosophy of Absence


What you need to know (and what it means)!


Minyanville's daily Five Things You Need to Know to stay head of the pack on Wall Street:

1. Looking Back, Fed Predicts Slower Growth in the First Part of This Year

Before we get into four other things you need to know, let's quickly recap yesterday's Federal Reserve Open Market Committee statement.

  • Although yesterday's Fed statement contained no significant changes to the "ongoing housing adjustment," or to core inflation remaining "somewhat elevated," or to the "high level of resource utilization," or even to future policy adjustments being data dependent, there was one important change to the statement that, as noted in yesterday morning's Five Things, should provide plenty of obfuscation and lack of clarity for market participants going forward:
    - "Economic growth slowed in the first part of this year and the adjustment in the housing sector is ongoing. Nevertheless, the economy seems likely to expand at a moderate pace over coming quarters."
  • So the Fed acknowledges, matter-of-factly, that growth slowed in the first part of the year, yet the Fed is confident that the economy seems "likely to expand at a moderate pace over coming quarters."
  • At best that's a rather late recognition of reality; at worst, and most likely, it's simply a disingenuous and cynical attempt to appear to have some semblance of control over what is taking place.
  • How can we say possibly that?
  • What evidence possibly points to that?
  • Good questions. The evidence lies in the past four FOMC statements (including the two statements from "the first part of the year") that have referenced continuing moderate economic expansion... which proved to be accurate except for what the Fed now says was the "first part of the year" when the economy wasn't expanding moderately at all but instead, to use their word, was "slowing."
  • Here is the March 21 FOMC statement for comparison.

2. Looking Back, Bank of Japan Predicts Low Interest Rates Encourage Carry Trade

Bank of Japan Governor Toshihiko Fukui said overnight that keeping interest rates low may fan asset bubbles and encourage the yen carry trade.

  • Bank of Japan governor Toshihiko Fukui continued his campaign for gradual interest rate hikes to support growth under price stability.
  • "Low interest rates are supportive but will hurt the economy if they are maintained too long," Fukui told an economic seminar in Tokyo.
  • "If the expectation takes hold that low interest rates will continue regardless of the situation of both prices and the economy, then that could invite inefficient allocation of capital including real estate and the yen carry trade,'' Fukui said.
  • Meanwhile, the yen is at the lowest level against major currencies since the 1985 Plaza Accord when measured in real trade-weighted average, according to XFN-Asia.
  • Well, the Bank of Japan are notorious currency interventionists, right?
  • That's what we thought, except we saw this headline on Reuters yesterday:
    "US Treasury Official Says Low Japanese Yen Value a Result of Protracted Deflation, Not Intervention"
  • Apparently a senior U.S. Treasury Department official, in prepared remarks at a U.S. House of Representatives hearing yesterday, said that the low value of the Japanese yen was caused by a lengthy bout of deflation and not from manipulation.
  • Wait, let's think about this for a moment.
  • That would mean that, at least according to the U.S. Treasury's understanding of deflation, the declining value of the yen was caused by the fact its purchasing power was increasing. What? Really?
  • Look, there may be some irrational aspects to global macro finance, but one thing is for sure: deflation does not cause a country's currency to decline... not without intervention.
  • Minyanville Professor Scott Reamer and I were discussing this very thing this morning.
  • He put it very succinctly: "Look, the three weakest currencies in the world are the U.S. dollar, the yen, and the yuan. (1) We print too much and the USD is a global reserve, currency, and (2) China and Japan both intervene massively to keep their currencies artificially low. Those policies together have combined to create the credit led hyperinflation of assets we have seen."
  • It's actually easy to understand when seen that way.
  • Those policies, and the market's embracing of them (via the yen carry trade, among other things) is what leads to asset hyperinflation (homes, stocks, CDOs, etc).
  • If those policies end because officials don't want them anymore (BOJ, PBOC changing policy, for example, or due to protectionist issues), or if market participants carry those policies too far (see Number Four below), then you get instability and a reversal of those policies regardless of what the governments want.
  • "And that's when you get the opposite of what drove the speculation in the first place - the end game," Scott notes. "A deflationary credit contraction."

3. Trade Balance and Import Prices

The U.S. trade deficit widened more than forecast in March, the largest increase in more than four years according to the Commerce Department.

  • The trade deficit rose 10.4% to $63.9 billion, the Commerce Department said.
  • The trade shortfall with China narrowed to $17.2 billion in March from $18.4 billion a month earlier.
  • Imports from China were the lowest since May 2006 while exports were a record.
  • See, they're having a small inflation problem over there.
  • Also from the Commerce Department, import prices rose faster than expected in April, up 1.3%.
  • Factoring out the increase less petroleum, import prices were up 0.2% .
  • Non-petroleum import prices were up 2.9% annualized, the same level as in March, so while not particularly bad for inflation, the Fed won't be able to formerly file this in the "inflation-friendly" category.

4. Lock, Stock and Three Warnings Aside, China Equities Barrel Ahead

Despite multiple government warnings of an asset bubble, Chinese equities continue to roar ahead.

  • Central bank governor Zhou Xiaochuan said over the weekend that he was concerned about a bubble in the stock market.
  • Chinese stocks rose 5% this week anyway.
  • Meanwhile, a report from UBS says China's securities regulator is likely to act soon to contain the surging A-share market following a 37% gain in March and April.
  • Separately, a report from Goldman Sachs warns that a fall in Chinese shares is a real possibility amid "risks of market euphoria," according to the BBC.
  • Much of the recent inflow of funds has come from individuals who have opened Investors have opened more than 90 million accounts on the Chinese mainland as of the end of April.
  • Statistics from the China Securities Depository and Clearing Co. show 421,831 accounts were opened on Tuesday alone.
  • Currently, more than 80% of the trade in the Chinese market involves individual investors rather than the institutional variety, according to a report on
  • Oh, one more tidbit to consider: The value of shares traded on China's stock markets on Wednesday was greater than the rest of Asia combined – including Japan.

5. Anti-Consumption: The Philosophy of Absence

We ran across an interesting article in the New York Times yesterday on... kitchen equipment.

  • Kitchen equipment? You mean like this?
    Viking Food Processor - $299.95
  • No. Not like that. Like this.
    Chefs Knife Sani Safe 6" - $20.02
  • Ok, a cheap knife versus a $200 food processor. What do they have to do with one another?
  • Nothing. Yet everything.
  • The point of the New York Times article was that kitchen equipment bears no relationship to the quality of the food that is produced.
  • "Some of the best cooks I've known worked with a battered batterie de cuisine: dented pots and pans scarred beyond recognition, an old steak knife turned into an all-purpose tool, a pot lid held just so to strain pasta when the colander was missing, a food processor with a busted switch. They didn't complain and they didn't apologize; they just cooked," NYT "The Minimalist" food columnist Mark Bittman wrote.
  • Fair enough. But so what?
  • One interesting aspect of the article was the sharp, biting tone taken toward kitchen "Inessentials."
  • Thinking about a bread machine? "You can buy mediocre bread easily enough, or make the real thing without much practice."
  • What about a rice cooker? "Yes, if you eat rice twice daily. Otherwise, no."
  • How about that boning knife the salespeople at Williams-Sonoma always try and foist on us? "Really? You're a butcher now? Or a fishmonger? If so, go ahead, by all means. But I haven't used my boning knife in years. (It's pretty, though.)"
  • From a Socionomic standpoint this is yet another cultural shift in the making with respect to consumption versus savings; ostentatious displays of wealth versus necessity.
  • The article's question, "What do we really need to make good food?", belongs in a subset under a larger question: What do we really need to be happy?
  • In a society exhausted (physically and financially) and pushed to the brink by excessive pursuit of credit and consumption, articles like this one make it OK to stop and reassess priorities.
  • It becomes OK to not consume.
  • Articles such as this, appearing with increasing frequency over the past few years, point toward the beginning of a long-term cultural shift in attitudes toward consumption, a shift precipitated psychologically by the, perhaps subconscious, recognition that many of us are overextended in almost all aspects of life; physically, occupationally, financially, socially.
  • Reacting to this overextension while bombarded incessantly with overt and covert images, overt and subtextual messages urging us toward ever deeper overextension and consumption requires something more than a simple decision not to consume and add to the pile of stuff we are accumulating without purpose and without need.
  • It requires the vilification of excessive consumption; the assertion of simplification and downsizing as, first, something "cool", then later as worthy, higher pursuits; as traits where the measure of worth is the opposite of accumulation and is instead absence.
  • The credit-fueled view of absence as deprivation shifts under this weight of material possessions, so that absence becomes its opposite, the presence of some thing conspicuous by its invisibility, and attractive by the difficulty of measurement at a glance, void of design, label, price tag, categorization.
  • This is not anti-capitalist.
  • It is capitalism evolved, pushed toward the commodification of the intangible, the priceless, involving the exchange of that which defies external measurement.
  • In that view of capitalism what are the modes of production? What is being exchanged exactly? What is it that is being commoditized and valued per this invisible exchange mechanism?
  • Think about it.
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