90 seconds at 9 am

90 seconds at 9 am: NZ$ falls under 81 USc as US$ strengthens on Fed backing away from QE III; Norway cuts rates to stop Krone rising; Goldman exec unloads on Goldman

15th Mar 12, 9:03am by Bernard Hickey

NZ$ falls under 81 USc as US$ strengthens on Fed backing away from QE III; Norway cuts rates to stop Krone rising; Goldman exec unloads on Goldman

Here's my summary of the key news overnight in 90 seconds at 9 am, including news the New Zealand dollar has fallen more than a cent overnight to be just under 81 USc in morning trade.

The follows a broad rise in the US dollar of around 0.5% against a range of currencies in the wake of comments from the US Federal Reserve about a stronger US recovery that mean it may not need to carry out a third round of quantitative easing or money printing. Such money printing would have devalued the US dollar, so talk of less need for it is strengthening the US dollar and weakening those currencies that benefit from capital outflows from the US dollar.

Both the Brazilian Real and the New Zealand dollar have fallen sharply. See more here at Bloomberg on the Real's slide.

Also overnight, US long term interest rates rose sharply as more economic confidence emerges. This is also helping support the US dollar. See more here on the rise in US interest rates at BusinessInsider.

Meanwhile, Norway announced a surprise cut in its official interest rate overnight by 0.25% to 1.5% as it struggles to keep its Krone currency from rising too much. It judged the risk from the high currency more of a danger than a surge in its housing market. See more here at Bloomberg.

Norway's challenge is similar to the one outlined last week by the Reserve Bank of New Zealand, which suggested it may even cut the official cash rate if the New Zealand dollar continued to rise. This despite signs from Auckland's central suburbs of house prices rising more than 20% in the last year.

Elsewhere, the S&P 500 was down 0.2% in late trade despite two brokers forecasting a rise in Apple's share price to over US$700/share. Shares in Apple, which starts selling its new version of the iPad this weekend, rose 2% to US$581/share.

But everyone in financial markets was talking about an extraordinary opinion piece published in the New York Times overnight by a resigning Goldman Sachs executive, Greg Smith.

He described the environment at Goldman Sachs as 'toxic' for clients and said his colleagues often described clients as 'Muppets'.

Goldman has denied it treats clients like this and painted him as a disgruntled employee.

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27 Comments

by Roelof | 15th Mar 12, 9:22am 1331756530

One of the purposes of QE...was to lower longer term interest rates.

If those rates start going up....( they are )... will there be a QEIII...??????

I think so.... but I think the FED and Bernanke realize the inflationary impact a QEIII will have..

Food and Oil prices will go up....

Rising interest rates would put huge pressure on deficit spending in America....and the exchange rate.

The FED is between a rock and an economic hard place.

Nobody can make the hard decisions... so I'm thinking there will be a QEIII... which makes a contradiction of the FEDS talk about backing away from a QEIII

http://market-ticker.org/akcs-www?post=203352

by powerdownkiwi | 15th Mar 12, 9:47am 1331758050

There we agree. The Fed is between a rock and a hard place.

I don't think they have an answer, because I don't think there is one. Too much money (expectation to buy) floating around now, and a lot of obfuscation (or cognitive dissonance) going on, covering up the real problem(s).

The Arab way - charging a fixed fee for a loan - may well be the next step, if things don't disintegrate via defaults, reneging, border-closing/protectionism, and unemployed/unfed/disenfranchised angst.

by Roelof | 15th Mar 12, 10:07am 1331759245

Just finished a book called the currency wars ..by James Rickards.

I think our Global.... wise and great leaders ( sarcasm)... are going to destroy our current Global Monetary system.... and out of that will come...??? who knows...

I do believe that the $US is starting to lose its' place as the reserve currency.

It would not surprise me if Russia/China come up with an alternative..( convertible into gold ..maybe )???

AND...according to Rickards this has all happened before.... history repeats.

by steven | 15th Mar 12, 10:24am 1331760279

Yes the Great Depression....

regards

by steven | 15th Mar 12, 10:39am 1331761165

"If things don't disintegrate via defaults, reneging, border-closing/protectionism, and unemployed/unfed/disenfranchised angst."

How can it not? we seem hell bent on not starting to adjust because too few want to and the vast majority see no need, led by Pollies who dont or cant understand....

regards

by Stephen Hulme | 15th Mar 12, 10:24am 1331760255

@ Roelof

The rock and the hard place is represented by Wiemarisation of the currency or the great depression collapse of the stock market.

@ PDK

Sharia laws prevent Arabs from receiving interest, hence the fees you mention.

In the past I have done many a deal for the richer ones buying the front month futures while simultaneously selling the deferred months for the carry.

by powerdownkiwi | 15th Mar 12, 10:45am 1331761534

SH - yes, but the law was put in place for good reason, one presumes. Then as now, the underwrite of money was resources, and a Beau Geste landscape (pre D'Arcy and Reynolds at any rate!) wasn't good on underlying resources.

I don't regard zero-sum games on the upper deck. as the problem The fact that the board is sliding off the table, should indicate to the players that there is a bigger game playing out.

by iconoclast | 15th Mar 12, 10:57am 1331762236

Hah. Sharia Law. How to get around it.

Buying the front month and selling the back month is capturing the interest component ie the "cost" of the carry assuming no intrinsic.

by Andrewj | 15th Mar 12, 12:15pm 1331766948

Isnt the end result of inflation a deflationary collapse?

If you go back to 1931 you would be amazed how many people were still rabbiting on about the inflation risk. Many of those in Germany in the Bruning administration making such arguments would soon be shot -- literally -- as the effects of their policies destroyed Weimar.

German democracy died because of deflation, not inflation.

The great inflation was in 1923. Much the same happened in France, Belgium, and Poland. Essentially the middle class was badly hit in all countries. Nothing special about Germany in that respect (10,000pc inflation is the same 100,000,000,000pc inflation. It makes no difference at that point)

Germany recovered very fast and then had a roaring credit boom in the late 1920s (financed by excess US capital under the deformed Gold Standard, a near exact replica of German finance for Spain under the deformed EMU Standard),

The Bruning deflation was in 1931-1932. It was the July Reichstag elections in 1932 that killed Weimar. The Nazis and Communists together won half the seats.

There are masses of books. I like Eichengreen's Golden Fetters for the macro analysis, and Lords of Finance is a good read.

by Andrewj | 15th Mar 12, 12:27pm 1331767635

Britain's inflationary route to default

For how much longer can governments sustain the “financial repression” which lies behind today’s negative real interest rates? Mr Osborne claims Britain’s safe-haven status by way of explanation for these rates, but might they not have just a little to do with the fact that the Bank of England is effectively hoovering up every pound’s worth of gilt-edged stock the Government issues to finance the still burgeoning deficit? By the time the Bank completes the present round of quantitative easing, it will own approximately a third of the national debt.

Government has also rigged the solvency rules to ensure a steady stream of demand for its debts from banks, pension funds and life assurers. The gilts market has become entirely fixed, and does not properly reflect underlying realities.

http://www.telegraph.co.uk/finance/comment/jeremy-warner/9144471/Britai…

by Ralph | 15th Mar 12, 12:30pm 1331767809

I'm not at all certain inflation must end in deflation.

Is that what has happened in Zimbabwe?

is that what happened in Argentina?

Hyperinflation can destroy savings, no one holds the bad money and hoarding of real assets is the main game. The endgame might be what has happened in Zimbabwe where I understand USD (good money) finally drove out the old bad money. Currency collapse is followed by an outside currency. This happened in Argentina, where to settle a house sale you would turn up with bags of USD that the other side would sit and count while you checked the paperwork.

by Andrewj | 15th Mar 12, 1:04pm 1331769847

but this time its the US $ thats got the problem, any ideas of a better currency to default to, the Euro the ₤, yen ? Ive friends who have gone back to Zim to buy their old house back , in US $ and at a bargain price.

by Ralph | 15th Mar 12, 1:39pm 1331771990

As you would expect the house is cheaper in USD (good money) terms. That fact, in and of itself, is not evidence of deflation.

The US is no where near hyperinflation and regular garden variety inflation doesn't have to end in deflation.

by Andrewj | 15th Mar 12, 2:15pm 1331774132

Thanks for your comments, so what does it end in? High interest rates? Do you think this is just regular garden variety inflation, I mean, 7.6 trillion taken off house values in the USA is a fair bit of destruction, can you really just have a little and then calm her down and go back to respectable monetary policy, once a prostitute its hard to loose the label, next time it gets tough, a little more inflation? Moral hazard ?So then whats your thought on the best investments, farmland and housing? Sit it out take a long term view?

When I was young in the 70's I remember my father buying posts by the thousand and wire by the tonne, if you get 18% inflation it changes your perspective. I remember after the inflation ended thinking, I know how to survive inflation the next time it hits, but everytime its a little different, in the 2000's it was only happening in assets not things like posts, infact they got cheaper. Now houses are pretty expensive looking at local wages and returns are not that good, lots of jobs going around here. In 1984 my farm costs were %35 of gross sales today its %85. Even a better example is my vineyard where it was %40 now its %110. I went to boarding school as a nipper in 1970, $800 a year a steer was $1100 , went didnt know how lucky we were. Fert was capped at $20 a ton about the price of a lamb now its 6x the price of a lamb. It was 3 cattle to a new mazda b1600 ute now its 45, we were rich but no body told us. Can you get inflation in a globalised world where competitve advantage and arbitriage rule, making wage increases very difficult and where the government is %55 of gpd?

I always thinbk that farm prices are as high as farmers can borrow, in 2005 my bank manager told me to forget about the overdraft limit and if we saw a farm we liked, just buy it we will work out the details later.that policy worked out well. Now if you have under 500k debt you dont even get a bank manager just a support number.

by Ralph | 15th Mar 12, 2:36pm 1331775382

Whilst 7.6 trillion is a looney number it isn't hyperinflation and there are complicating factors. here's why;

Looking at one side of the coin never gives a full view and so if we look at 7.6 trillion of creation we also have to look at how much was destroyed at the same time. If it were exactly 7.6 trillion you could *theoretically* have no asset price movement at all. Enormous amounts of dollars have been destroyed by the banking system, to the extent that without a bailout it was bankrupt - that's the destruction side in motion.

To ask the simple question, if we printed 7.6 trillion - where is the inflation that they say *must* eventuate?

The answer I suspect is in the velocity of money.

The monetary system can be thought of as a pressure based system. The amount of water inside the pipes is important, but equally important is the heat of that water. When molecules are heated they move faster, eventually as heat is applied the same volume of water changes state from ice to water to steam. The pressure this can create in a system is more important (or dangerous) than the simple volume of the water. Money is very similar.

What happened in the system collapse of 2007 is a significant amount of water was destroyed in the banking system, the government started created replacement water - and - the speed at which the water/money moves (the velocity of money) dropped through the floor.

So the net result has been governments have been able to print trillions whilst still suffering significant deflation at the same time. What happens next, from a monetary point of view, is if the water/money temperature finally starts to rise do governments remove water from the system to balance it. If they don't then the pressure (inflation) that inflationists have been waiting for years now to appear might just do that. Like in the 70s.

by Ralph | 15th Mar 12, 2:49pm 1331776173

If you believe hyperinflation will be the road we end up on the following will happen:

Cash savings, both private and public will be destroyed.
No want wants worthless paper money so people begin to over consume, like your father did by buying 1000 fenceposts. Anything real is worth more than paper.
Hoarding of real everyday assets will start as people learn to fear the future.
Investors refuse to invest anymore and business stops growing.
Unemployment skyrockets.
Any savings or investment money will flee the country to anywhere it perceives as safe.
The black market for goods will expand hugely and the use of foreign money increase dramatically.
The best performing asset class will be the stock market.
Every workers real income is eroded and the country ends up with a lower material standard of living.

But in truth I don't think these things are the real dangers.

When things like this happen governments get into real trouble and sometimes, to distract people from the disaster, enter wars. And if they don't we may see negative revolutions like the french one where minorities are victimised. Fascism can take hold like in Italy and Germany after the depression. Or charasmiatic leaders appear full of promise and we end up like Russia under Stalin. People love to blame anyone but themselves.

Just read site comments on here.

by powerdownkiwi | 15th Mar 12, 3:05pm 1331777116

Ralph - well put.

Mea Culpa is not a common attitude hereabouts, for sure.

by Gummy Bear Hero | 15th Mar 12, 3:15pm 1331777713

Most of the money that governments and reverse bankers have biffed at the zombie banks has plopped down into the banks balance sheets .......

....... what inflation ? ....

.... all the debt that tax-payers worldwide are saddled with now , is purely to bail-out the banks and the bondholders .......... it ain't going into renewed credit creation .....

by dogma | 15th Mar 12, 11:43am 1331764985

PDK and steven, you might be interested to know the Newt Gingrich claimed yesterday that there could be up to 500 billion barrels of oil in Nth Dakota, yesterday on fox news.

by Nic the NZer | 15th Mar 12, 12:01pm 1331766091

Then he announced, that he would only reveal the location if he was made president, immediately.

by dh | 15th Mar 12, 12:43pm 1331768616

That's how Gingrich is going to pay for his moon base "By the end of my second term, we will have the first permanent base on the moon, and it will be American,"

by Gummy Bear Hero | 15th Mar 12, 2:42pm 1331775752

...... we could all chip in , if Newt agrees to be the first man to inhabit the moonbase .......

Lunar tick !

by powerdownkiwi | 15th Mar 12, 11:55am 1331765730

And? So?

At what EREI?

At what collateral environmental cost? Water required? Gas?

Even if true, and there are 500 billion barrels freely available with little collateral cost, 500x11.76 (days to the billion @ 85 mbpd) =5882 days, by 365 = 16 years. AT CURRENT RATES OF CONSUMPTION ( with no growth). Less with growth. Big game-changer, huh?

Fox are a long way from being truth-prurveyors. Believe at own risk.

by dogma | 16th Mar 12, 11:03am 1331848991

I don't believe it for a second, just thought you might be interested.

by Ralph | 15th Mar 12, 12:05pm 1331766343

Mr Greg Smith will likely be lynched from all quarters.

The idea that morality really exists isn't popular anymore (it died with truth) and to propose it not only exists but is foundational to good business ... well that's a heresy nowadays.

by David George | 15th Mar 12, 12:22pm 1331767347

Ethics, morality? An excellent letter from toby roberts in todays Telegraph:Today 11:16 AM. My highlights.

"In the 90's I used to work for Merrill Lynch, another big Wall Street firm. It invested an enormous amount of time and money in trying to distill an ethical culture. They really did take it seriously, as did most firms back then (including GS, incidentally. The one which famously didn't was Salomon.) I was on a committee under the chairman, Dave Komanski, when someone raised the question about how to quantify the cost of ethics - i.e. the opportunity cost of not engaging in sharp practices. Komanski (who was about 6'6'', and maybe 23 stone) interrupted and said "I don't give a f*** about the cost of integrity, because I can tell you what the cost of not having integrity is: potentially everything. It's the only way we can lose the whole firm". Later someone else asked him to define integrity. "That's simple," he said. "Integrity is never doing anything you'd be embarrassed to tell your kids about." That's real leadership and I promise you those values genuinely permeated throughout the culture of the company. Ten years later, Merrill, teetering on the verge of bankruptcy, had to sell itself for peanuts to Bank of America. A new chairman - Stan O'Neill - had thrown over the old culture, and the old guard who embodied it, and was encouraging the trading desks and the corporate bankers to chase every dollar available. In doing so, he proved Komanski prophetically right: he lost the whole company. What this Smith chap writes rings very true to me. GS was an honourable firm just ten or fifteen years ago. But they seem to have lost themselves.

by Plan B | 15th Mar 12, 12:31pm 1331767919

This is the John Key future of New Zealand. We are for sale, he has put out the For Sale sign. And we are going to have to pay the price.

"I remember in my first few weeks I sat down with one of the structured products guys. He was selling so-called PFI deals, where local authorities buy a complicated financial instrument to pay for, say, a hospital. I asked him: where's the benefit for the local authorities in this? He was aghast. "What are you, a socialist?""

http://www.guardian.co.uk/commentisfree/joris-luyendijk-banking-blog/20…

The rediculous South Auckland PPP Prison 900million dollar joke at our expense is simply one of a great many exercises in cash extraction from New Zealand. Why do you think that `salesman from the City of London is over here. There are a great many people working in The City whos only job is to extract cash from people willing to let them take it. Not a single deal has any actual social/economic benifit for New Zealand as a whole, it is simply an extractive exercise.