Five days ago, when describing the launch of the joint-US, South Korean naval military exercise in the East Sea, we said that "for all his endless posturing, North Korea's Un has done absolutely nothing. And if his inability and unwillingness to translate threats into actions continue, that will pretty much be it for North Korea's hope to even get a few loose pennies Read more.....

Five days ago, when describing the launch of the joint-US, South Korean naval military exercise in the East Sea, we said that "for all his endless posturing, North Korea's Un has done absolutely nothing. And if his inability and unwillingness to translate threats into actions continue, that will pretty much be it for North Korea's hope to even get a few loose pennies as a nuisance factor" be it from the US, Japan, South Korea, or anyone else who is listening. It seems the North Korean leader has taken the hint, and overnight escalated from merely constant jawboning into at least some variant of activity, when he fired three short-range missiles into the sea off the eastern coast of the Korean peninsula on Saturday, "once again stirring tensions that had appeared to ease in the wake of a recent series of bellicose statements directed at South Korea and the U.S."

WSJ reports that in a short briefing, South Korea's defense ministry said Saturday that North Korea had fired two guided missiles into waters off the Korean peninsula in the morning, followed by a third missile in the afternoon.

"In our judgement, the missiles are short-range guided missiles, not mid-range missiles such as the Musudan," defense ministry spokesman Kim Min-seok said. "South Korea's military is on high alert to prepare for any hostile acts from the North following the guided-missile launch today."

This means the launched missile is most likely the appropriately named Nodong:

Is there a reason to be concerned? Hardly, especially for those who have been following the seemingly endlessly escalating rhetoric out of NK, whose only purpose is to extract a nuisance value premium from anyone, just so it shuts up.

Shin Jong-dae, professor at the University of North Korean Studies, said the launches were more likely a means of drawing attention from the international community than a test launch.

 

"North Korea is an expert at crisis diplomacy or crisis marketing," Mr. Shin said.

 

Kim Yong-hyun, professor at Dongkuk University's North Korean Studies department, said the North appears to hope that launching missiles will prompt an offer of dialogue from the U.S.

Which is why ignoring the country so far has worked, however like any irrational actor whose only mode of behavior is attempting the same failed action until there is a response (like the Federal Reserve, for example), at some point North Korea, for whom the opportunity cost of actual military escalation is declining with every day it gets no appeasement from the West, may just lash out. Especially if such overt provocations as a US nuclear carrier swimming in its back yard for "naval exercises" continue.

The Congressional Budget Office put conservative economic thinkers on their ass this week. In this Report (pdf), the CBO concluded that the US budget deficit is about to collapse to insignificance. The improvement in the deficit outlook is so large that it has lead liberal thinkers to start calling for more stimulus spending. If it were not for the three scandals brewing fo Read more.....

The Congressional Budget Office put conservative economic thinkers on their ass this week. In this Report (pdf), the CBO concluded that the US budget deficit is about to collapse to insignificance. The improvement in the deficit outlook is so large that it has lead liberal thinkers to start calling for more stimulus spending. If it were not for the three scandals brewing for Obama (Benghazigate, IRSgate and APgate) I think there would be calls to spend some more government money.

The CBO assessment of the deficit profile relies on every trick in the book. The assumption is that all of the variables that weigh on the deficit will be improving over the next few years. Tax collections will remain at historically high levels. Government spending will decline as the economy improves. Fannie Mae and Freddie Mac will be kicking $95Bn into the coffers. Social Security will cost less than previously thought, the same favorable result is assumed for both Medicare and Medicaid. And of course, there will be no wars or military incursions that have to be paid for. But, by far, the biggest driver of the reduced deficits will come from a robust economic recovery that is set to occur. This is the CBO forecast for top line GDP growth:

Wow! 6.5% growth is coming our way! Don't worry at all about the endless recession in Europe. Don't consider the rapid slowdown in China either. And please don't worry about the fact that the Fed is going to be taking its foot off the gas over the next 24 months - all that won't make any difference. The USA is set for a spurt of growth not seen for years.

What could the CBO be hanging its hat on when making this bold predictions of rapid economic expansion? I wonder if the CBO is relying on Obamacare to provide the big boost. This is the only significant economic development on the horizon. It will change everything when it's finally implemented. It will result in 32 odd million more people having access to healthcare. And when those people do have health insurance, they will be going to Doctors, getting treatments and medicines. And with those visits and related spending, the economy will get a lift - at least that is the thinking.

There is some evidence that Obamacare is going to ratchet up health spending. The New England Journal of Medicine has done a study on the results of an experiment in Oregon. Some 6,000 people were given access to Medicaid for two years. There was a control group of another 5,000 people who did not get access to health insurance. What did those who won the lottery for the free health benefits do? They went to Doctors of course. The study showed that those with insurance were 2Xs more likely to visit a doctor, and would take twice as many prescription drugs. Obamacare will result in an increase in medical diagnostics; the number of MRI's, X-rays, blood test etc. will increase markedly when free health insurance is available. The cost of all these new medical services will add to GDP, and increase employment in healthcare.

The Oregon study showed that healthcare spending rose by $2,750 for those who had access to Medicaid versus the control group. If these results are applied to all of the 32m people who have no insurance today, it would result in an increase in spending of $90Bn - that comes to 5.5% of GDP. While not all of that spending is going to happen, its pretty clear that Obamacare is going to ramp up the economy by a meaningful amount - a 2% net increase in economic activity is possible.

To the extent that Obamacare is measured as a jobs program it may be considered a "success". More medical spending will be the result. The larger question of what it will do for the health profile of Americans is not at all a sure thing. I was surprised by the conclusions drawn by the Oregon study:

This randomized, controlled study showed that Medicaid coverage generated no significant improvements in measured physical health outcomes in the first two years

The reason why overall health results were not improved for those with insurance was interesting. People who have healthcare available to them often adopt risky behavior. For example, those who had health insurance in the Oregon study were much much more likely to smoke. (10% increase over those that did not have health insurance) This conclusion confirms what has been observed in other situations. When people have seat belts, they think they are safe, so they drive faster. It appears that the same holds true on health related matters.

The pessimist in me says that the roll-out of Obamacare is going to be anything but a success. The state insurance exchanges will not be up and running on time. Getting those 32m people to sign up for Medicaid will not happen at the pace that is currently anticipated. Obamacare will not be the economic stimulus that is hoped for, it won't improve the nations health levels by much, and it's going to cost an absolute bundle in the form of increased taxes. My guess is that in 2-3 years most folks in the country are going to hate Obamacare, but it it will be impossible to get rid of by then.

The US dollar posted strong across the board gains. It is being driven by the anticipation of favorable developments in the US, in the form of a possible slowing of the Fed's asset purchases, and less favorable developments abroad.

While it is technically poised for additional gains, the biggest risk to the dollar comes from Fed Chairman Bernanke's midweek testimony.  His commitment to QE and readiness to taper purchases, a Read more.....

The US dollar posted strong across the board gains. It is being driven by the anticipation of favorable developments in the US, in the form of a possible slowing of the Fed's asset purchases, and less favorable developments abroad.

While it is technically poised for additional gains, the biggest risk to the dollar comes from Fed Chairman Bernanke's midweek testimony.  His commitment to QE and readiness to taper purchases, as others have suggested, will be closely scrutinized.  The failure to confirm these growing market ideas, spurred in part by comments from two (non-voting) regional Fed presidents, could prompt some profit-taking on long dollar positions.

While speculation that the Fed may take one of its feet off the accelerator in the next week month helped lift the dollar, other countries are easing policy.  There has been even more talk about the ECB adopting a negative deposit rate.  Continued sub-50 readings in the flash PMI,  due midweek, will heighten the sense that the euro zone continues to contract for the seventh consecutive quarter.

The ongoing decline in the yen is meeting little official resistance. Chinese officials, for example, seem more upset by comments by the mayor of Osaka (which the US also criticized for being "outrageous") then they about the depreciation of the yen. The US Dollar Index has risen 3.7% from the low on May 1 to its best level since 2010, and it recording its best two week run since in a year.

Euro:   A large head and shoulders pattern is being carved out.  The neckline is seen near the late March and early April lows around $1.2740.  Below there is the low from last November near $1.2660, which is just below the $1.2680 retracement objective ($1.2680) of Draghi's OMT induced rally.  The measuring objective of the head and shoulders pattern would carry the single currency below $1.20, our year-end target.  The euro's 50-day moving average crossed below the 200-day (golden cross) for the first time since last October.

Yen:   The pullbacks in the US dollar continue to be shallow.  This is not giving the longs any pain and it gives many momentum and trend followers a sense that it is a one way bet, a mindset that often proves dangerous.  Support now is seen in the JPY102.35-60 area.  Although there are reports of option structures before, many have their sights set on JPY105.

Sterling:  The upside correction from the mid-March low near $1.4830 has ended decisively.  That correction had held a up trend line, which sterling closed below at the start of the week near $1.5350.  A convincing break now of $1.5120 area suggests a return to, and likely a break of, this year's low.  Sterling has also broken below a trend line connecting the lows of the past three years.  This sours the longer-term outlook and warns of a move toward $1.42.

Canadian dollar:  The US dollar is flirting with trend line resistance against the Canadian dollar going back to 2011.  The year's high was set on March 1 near CAD1.0340.  A break of it opens the door for a move toward CAD1.05-CAD1.06.

Australian dollar: The Aussie has fallen out of favor in a big way.  It has been aggressively sold-off; the largest decline over a 10-day period in more than a year and a half.  It has convincingly broken a trend line drawn off the 2011-2012 lows that came in just above $0.9800.   An investment bank called for a move to $0.8000.  This corresponds to the 2010 lows and a 61.8% retracment of the post-Lehman rally.  It may be a reasonable longer-term objective, and by the OECD's purchasing power parity model,  the Australian dollar is almost 30% over-valued.  However, given the difficulty in forecasting exchange rates and the substantial risks that are involved, as well as mitigating factors like Australia's triple-A credit rating and a currency that is gaining recognition as a reserve asset, we suggest medium term investors should anticipate half of that move, or $0.8900-$0.9000 and place stops accordingly.  

Mexican peso:  Over the past year, the Mexican peso has appreciated by 11.5% against the US dollar; making it the strongest among the G7 and liquid emerging market currencies.   While we recognize attractive underlying fundamentals, technical factors have made us more cautious.  A dollar bottom has been carved out over the past month.  The long peso position remains large and a move above MXN12.40 could spur a further dollar short squeeze.  A correction could carry the greenback into a MXN12.60-MXN12.80 range.

Observations from the latest CFTC report of the CME currency futures:

1.  Participation rose as new gross positions were established across the board, with two minor exceptions, short Canadian dollar and short Mexican peso positions were trimmed.  

2.  There were 4 substantial (more than 10k contracts) position adjustment and they were all adding to the gross short positions:  euro, yen, Swiss franc, and Australian dollar.  

3.  The 36% rise in gross short Australian dollar positions to a record 75.1k contracts was sufficient to switch the net position to the short side for the first time since last June.  Nevertheless, the gross long position remains the second largest among the currency futures, behind the Mexican peso.

4. The gross short euro position is just below 100k contracts.  Last June, as the tensions were mounting that led to the Draghi's OMT offer, the gross short position was 250k contracts.  The gross short sterling position is approaching the record from March of 105k contract.  The price action and the increase in open interest since the CFTC period ended suggests new shorts have been established.  

Submitted by Michael Krieger of Liberty Blitzkrieg blog,

I’d like to say that the following is unbelievable, but it’s not.  Unfortunately, it is all too believable.

From ABC:

Read more.....

The following map (via AON) measures the risk of political violence to international business in 200 countries and territories, based on three icons indicating the forms of political violence which are likely to be encountered: Terrorism and sabotage; Strikes, riots, civil commotion and malicious damage; and Political insurrection, revolution, rebellion, mutiny, coup d'etat, war and civil war.

click image for huge legible Read more.....

Submitted by Adam Taggart via Peak Prosperity blog,

There has been a long string of crummy economic data which has largely been ignored (“bad news is good”) by bulls. However, on Friday, bulls Read more.....

There has been a long string of crummy economic data which has largely been ignored (“bad news is good”) by bulls. However, on Friday, bulls jumped on two reports, Leading Indicators and Consumer Sentiment, which released better than expected results (“good news is great”). The most noteworthy regarded the Consumer Sentiment report, which was the largest "beat" in its history. For the most part, the Consumer Sentiment report is less regarded by us than the Conference Board’s Consumer Confidence report since the former is heavily weighted by stock prices. With a rally in stocks, Consumer Sentiment data was likely to beat. And, given that, they tend to feed off each other.

In other news, there wasn’t any slowdown in QE on Friday, with a large POMO action pumping a cool $5.3 billion into the markets, along with options expiration, which generally creates more volatility. We have just another week or so of earnings news left for the first quarter, and as a result, there's not much left from the sector to support prices.

It’s a “risk on” environment for global equities. This is especially so for countries and regions where central banks are busy printing money. For “risk off” sectors, bonds and commodities are not feeling the love. And, those countries not in the QE game, Latin America and Australia for example, their markets are underperforming.

The dollar (UUP) rose substantially Friday as the euro (FXE) and yen (FXY) especially were weak. The strong dollar caused further selling in gold (GLD) and other commodities (DBC), while oil (USO) climbed higher. Though on a Friday, the latter isn’t unexpected with the Middle East still at a boil. Bonds (TLT) fell back as stocks rallied.

Leading equity sectors? Pick one, as everything jumped higher across the board. Lagging were Latin America (ILF) and Australia (EWA).

We’ve focused our ETF positions on sectors within the major indexes rather than the large indexes in isolation largely because we believe that these sub sectors can outperform the major indexes. 

Volume was only slightly higher perhaps due to options expiration toward the close. Breadth per the WSJ was positive.

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NYMO

The NYMO is a market breadth indicator that is based on the difference between the number of advancing and declining issues on the NYSE. When readings are +60/-60 markets are extended short-term.

 NYSI

The McClellan Summation Index is a long-term version of the McClellan Oscillator. It is a market breadth indicator, and interpretation is similar to that of the McClellan Oscillator, except that it is more suited to major trends. I believe readings of +1000/-1000 reveal markets as much extended.

VIX

The VIX is a widely used measure of market risk and is often referred to as the "investor fear gauge". Our own interpretation is highlighted in the chart above. The VIX measures the level of put option activity over a 30-day period. Greater buying of put options (protection) causes the index to rise.

...

That was the week that was to quote the old TV series. Markets are quite speculative now and the game is being played by hedge funds, banks and overseas investors with free money from the Fed. It’s almost like musical chairs, for when the music stops there will be trouble. This is why you see so much QE pause/start rhetoric which is field testing investor behavior.

Aside from light volume there’s no argument with the tape. It’s quite positive but much overbought. Earnings news is beginning to wane leaving less for bulls to respond to. Many previous reliable technical indicators are succumbing to all the money printing. Looking at those markets where QE is not taking place perhaps reveals the real market conditions.

Next week will yield Fed Minutes, housing data and Durable Goods Orders.

Let’s see what happens.

Europe's non-performing loan problem is such an issue that there is increasing bluster that the ECB may take this garbage on to its balance sheet since policymakers realize that bad debts and non-performing loans (NPLs) reduce the capacity of banks to lend, hindering the monetary policy transmission mechanism. Bad debts consume capital and make banks more risk averse, especially with respect to lending to higher risk borrowers such as SMEs. With Italy (NPLs 13.4%) now followi Read more.....

Europe's non-performing loan problem is such an issue that there is increasing bluster that the ECB may take this garbage on to its balance sheet since policymakers realize that bad debts and non-performing loans (NPLs) reduce the capacity of banks to lend, hindering the monetary policy transmission mechanism. Bad debts consume capital and make banks more risk averse, especially with respect to lending to higher risk borrowers such as SMEs. With Italy (NPLs 13.4%) now following the same dismal trajectory of Spain's bad debts, the situation is rapidly escalating (at an average of around 2.5% increase per year).

As we discussed in detail here, the bottom line is that at its core, it is all simply a bad-debt problem, and the more the bad debt, the greater the ultimate liability impairments become, including deposits. As we answered at the time - the real question in Europe is: how much impairment capacity is there in the various European nations before deposits have to be haircut? With Periphery non-performing loans totaling EUR 720bn across the whole of the Euro area in 2012 and EUR 500bn of which were with Peripheral banks, it seems the Cyprus deposit haircut non-template may indeed become the key template.

Simply put, the greater the unemployment the more the strain on banks to generate "profits" by any means possible (GGBS?) to cover the capitalization shortfall from NPLs until at some point liability haircuts have to begin...

Non-performing loans as % of total loans across the Euro area

Unemployment rates across Euro area countries

Via JPMorgan:

It is not surprising that the periphery is exhibiting a rising pattern in terms of NPL ratios. What is worrying is the speed of increase, at 2.5% per year. Within the periphery, Greece is the outlier with a NPL ratio of 25%, and no signs of abating yet. Ireland follows with a NPL ratio of 19%. Italy (at 13.4%) is above Spain and Portugal (at close to 10%)...

 

The German divergence is making the task of the ECB very difficult both in terms of setting monetary policy for the whole region, but also in terms of dealing with an impaired transmission outside Germany. Draghi clarified in its latest press conference that it is not the ECB’s role to clean up banks’ balance sheets, meaning that the ECB is unlikely to deal itself with the €500bn large non-performing loan problem in periphery.

Submitted by Lance Roberts of Street Talk Live blog,