"What would be a solution for the EU? We have repeatedly said it: Either full fiscal union or monetization of the sovereign debts. Anything in between is an intellectual exercise of dubious utility."
The surge in risky assets has been of course driven by the fall in volatility as a whole in various asset classes as displayed in the below Bloomberg graph although the recent announcement of "tapering" in December has led to a surge in 1 month Treasury options volatility as of late:
MOVE index = ML Yield curve weighted index of the normalized implied volatility on 1 month Treasury options.
In light blue: S&P 500 buybacks
In purple: NYSE Margin debt
In green: inverse US labor participation rate.
In terms of the "dash for trash", it can be illustrated we think by looking at the performance of Small-Cap, Utility Stocks versus the S&P 500 since December 2012 - graph source Bloomberg:
Or by looking at the S&P500 index versus High, Low Quality Stocks since March 2009 - graph source Bloomberg:
And looking at the success by the Fed in "bending" the velocity curve and curbing the fall in the labor participation rate, we wonder if playing the "wealth effect" via asset prices inflation is worth the risk being taken - graph source Bloomberg:
What investors fail to assess is the growing global deflationary risk which, we agree with CLSA Strategist Russell Napier, is significant:
Just note that the ThomsonReuters/Jefferies Commodities Index is now back to where it was at the end of 2009 and 25% below its early peak in 2011. Of course Gold's 28% decline in 2013 has been the worse since 1981.
Of course one of the principal culprit in exporting deflation on a global scale, has no doubt been Japan, as we have posited back in 2013. For the first time since 1992, as reported by Bloomberg, prices in Japan's consumer durables are indicating somewhat a tentative escape from the deflationary forces which have been plaguing for decades Japan - graph source Bloomberg:
The CHART OF THE DAY shows a 0.3 percent gain in November from a year earlier, after a 21-year slide, boosted by price increases for desktop and notebook computers. The gauge has a weighting of about 7 percent in the overall consumer-price index, which rose 1.5 percent.
The increase came seven months after the Bank of Japan unveiled record monetary easing in pursuit of a 2 percent inflation target. The jump defies a trend of technological improvements leading to lower prices and shows manufacturers are moving away from aggressively competing on cost, according to economist Yoshiki Shinke.
“Inflation is spilling across a whole range of products,” said Shinke, chief economist at Dai-ichi Life Research Institute in Tokyo. “The weakening yen has contributed to higher prices for these products as Japan is importing many final goods given that production is shifting overseas.”
Declines in the Japanese currency, which fell last month to its lowest against the dollar since 2008, led companies such as Apple Inc. to raise prices last year of computers and smartphones. Increases of 24 percent and 12 percent for desktop and notebook computers, respectively, in the November consumer- durables data outweighed a 0.3 percent fall in auto prices.
The narrower household durables index, which includes refrigerators and washing machines, fell 0.9 percent. Technological advances for such appliances lag behind those for gadgets, holding back demand and price gains, according to Naoki Murakami, chief economist at Monex Inc. in Tokyo." - source Bloomberg.
On a final note, as we posited in our conversation from December 2013 "All that glitters ain't gold", we still believe the following:
"2014 will also see Europe still facing the pressure from two tectonic deflationary plaques, which have been the US QE but more importantly in 2013 the outpacing of the Fed led by "Abenomics" which is indeed sending a tremendous deflationary force around the world which means that even the US is not immune to, hence our repeated doubts in seeing a "tapering" in 2014."
Therefore unless, the ECB starts another round of QE or some additional "unconventional" policies, with Japan exporting deflation on a global scale, and the recent lackluster US nonfarm payroll numbers, we have a hard time seeing a much lower EUR/USD for the time being.
"Faith consists in believing when it is beyond the power of reason to believe." - Voltaire