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Global Markets

Global Economy

Eurozone Debt Crisis: Why U.S. Investors Still Can't Relax

After nearly four years, billions in bailouts and increasingly strict austerity measures, not only is the Eurozone debt crisis no closer to resolution, but the attempts to solve it are pushing the region deeper into recession.

According to Eurostat, the Gross Domestic Product (GDP) for the 17-nation Eurozone plunged 0.6% in the final quarter of 2012, a steeper drop than the 0.4% economists had expected and the worst decline since 2009.

It's the third consecutive GDP decline for the Eurozone, reaffirming that the area is mired in a recession that started with the 2008 financial crisis and has been exacerbated by the ongoing Eurozone debt crisis.

For all of 2012, the Eurozone economy shrank 0.5%, while the U.S. economy grew 2.2%. Even the GDP of beleaguered Japan increased 1.9%.

Most ominously, the GDP decline of the Eurozone's largest and strongest economy, Germany, mirrored that of the region as a whole, falling 0.6%.

Long one of the few bright spots, Germany is slowly getting dragged down by its weak neighbors, which include Italy, Spain, Greece and even France.

The bad GDP news also belies the sunny assessments recently delivered by many economists and EU leaders.

"These are horrible numbers, it's a widespread contraction, which does not match this positive picture of stabilization and positive contagion," Carsten Brzeski from ING told the BBC.

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Precious Metals

Why Russia is Investing in Gold More Than Anyone

Now we know what Russia has been doing all these years with all its oil mega-profits: investing in gold.

A Bloomberg News article Monday reported that Russia's central bank added 570 metric tons of gold in the past decade, making the country the world's biggest gold buyer. That amount is a quarter more than the world's second-biggest buyer, China.

The amount of gold Russia added to its stockpile is almost triple the weight of the Statue of Liberty, according to Bloomberg.

It certainly makes sense for Russia to add to its official gold reserves. Gold prices have gained about 400% over the past decade.

"The more gold a country has, the more sovereignty it will have if there's a cataclysm with the dollar, the euro, the pound or any other reserve currency," Evgeny Fedorov, a lawmaker for Putin's United Russia party in the lower house of parliament, told Bloomberg in a telephone interview in Moscow.

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Currencies

Best Investments 2013: What to Buy as Global “Currency Wars” Begin

Japanese Prime Minister Abe's recent success in talking the yen lower against other currencies has increased fears over "currency wars." Now investors are on the hunt for the best investments to profit from central bankers' "race to the bottom" in 2013.

As we've pointed out, the Japanese have done nothing overt to weaken the yen – yet. Markets were massively long the Japanese currency and, when Prime Minister Abe called for "unlimited easing" during the election campaign last year and in the run-up to selecting a new Bank of Japan governor, that was all traders needed to hear to begin selling their yen long bets and taking out short positions.

Abe's great success was in getting the market to do all of the heavy lifting for him.

In fact, Abe has been a little too successful. Minister of Finance Taro Aso told reporters in Tokyo on Friday that the yen had weakened too quickly, which prompted an immediate reversal in the currency markets.

Aso's comments came after remarks by European Central Bank President Mario Draghi Thursday raising concerns that the recent strength of the euro might derail the recovery just gathering momentum in Europe now.

Looking at the interplay of comments from Draghi and Aso last week, it is tempting to think that all of this commotion in the currency markets is being coordinated at the highest level of central banking.

But, with the exception of China, which has been quietly pushing the renminbi toward the lower end of its trading range, no one has done anything. It's all just talk.

In the financial markets, however, talk is a big industry. Talk gets people to put on trades and that is how bankers and brokers make money.

This leaves investors wondering the best currencies to invest in to profit from these fluctuating values, which is why Morgan Stanley developed a currency war basket trade.

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Currencies

Is Japan About to Fire the First Shots in a 1930s Style Currency War?

Chances are you've heard about the so-called "race to the bottom" in which various industrialized nations are gradually allowing their currencies to depreciate in an attempt to maintain competitive parity.

Forget about it…the real risk right now is an all-out 1930s-style currency war. I know it's not front-page news yet, but I have a sneaking suspicion it will be shortly.

It's going to blindside Washington and most of Europe, where central bankers, politicians, and more than a few economists fail to recognize that events from nearly 100 years ago are now primed to repeat themselves.

Worse, it will devastate an entire class of investors who have put their faith in the current economic dogma of endless bailouts and money printing.

Ironically, this currency war won't start because of international problems. Instead, it will be touched off in earnest because of domestic concerns– only they aren't ours. My guess is Japan fires the first shots.

Here's why:

  1. Japan's newly elected Prime Minister, Shinzo Abe, is calling for unlimited stimulus and more aggressive financial intervention in an effort to boost Japan's flagging economic situation and eviscerated domestic economy.
  2. The Bank of Japan has doubled its inflation target to 2% while also promising to buy unlimited assets using a page from Bernanke's playbook. Bear in mind that Japan's combined private, corporate and public debt is already nearly 500% of GDP, which is much larger than the 250% that's commonly bandied about in the media.
  3. Japan has one of the strongest fiat currencies on the planet, which means it has the most to gain and everything to lose if somebody beats them to the punch. An expensive yen holds back Japan's exports by making them more expensive in global markets, while the debt I just mentioned hobbles future economic development by robbing the private sector of capital it needs for an actual recovery.

Top News

Early Exit from Bank of Japan Governor is Good for Abe

Bank of Japan Governor Masaaki Shirakawa told Prime Minister Shinzo Abe yesterday (Tuesdsay) that he will step down a few weeks early, on March 19, in order to align his term, which expires on April 8, with those of the two BoJ deputy governors.

"I told the prime minister that I will resign on March 19 so that a structure with a new governor and two deputy governors can start simultaneously," Shirakawa said at a press conference called after a meeting of the Council on Economic and Fiscal Poicy.

This will enable Abe to replace the entire central bank leadership all at once with people who are more sympathetic to his policy of unlimited easing.

Although some press reports have highlighted the apparent unenthusiastic support Shirakawa is giving to Abe's policies, Shirakawa's resignation is really just putting the Bank of Japan leadership transition process back to normal.

The Bank of Japan governor must be approved by both houses of the Diet. Back in 2008, former deputy governor Toshiro Mutoh was nominated for the top spot by the ruling Liberal Democratic Party (LDP) which held a majority in the Lower House but not in the Upper House, where the opposition Democratic Party of Japan (DPJ) held sway.

The DPJ rejected Mutoh's nomination and it took three weeks of political infighting before Shirakawa was approved as a compromise candidate and took office on April 9.

The situation is exactly the same today. Abe's LDP has a super majority in the Lower House but must get some opposition support to get their nominee approved by the Upper House.

By resigning as governor effective March 19, Shirakawa is undoing the delay caused by political wrangling five years ago.

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Global Trends

How the Pentagon Aims to Stop China's Cyber-Hacking of America

Given the deficit fears and budget skirmishes that are focus of the moment down in Washington, it's tough to get excited about defense-related investments right now.

Defense outlays are destined to shrink.

But there's one area where spending is slated to go up …

And I mean go way up.

I'm talking, of course, about defense-related spending that will promote cybersecurity and combat cyber-terrorism.

Global Economy

Eichengreen: Eurozone Debt Crisis To "Heat Up Again in 2013"

Contradicting optimism at the World Economic Forum in Davos, Switzerland, that the worst of the Eurozone debt crisis is over, U.S. economist Barry Eichengreen warned that it would "heat up again in 2013."

While the pledge of European Central Bank (ECB) head Mario Draghi to buy short-term debt from struggling EU members has eased worries of an imminent Eurozone meltdown, Eichengreen contends it hasn't fixed the problem.

"None of the underlying problems have been solved. There is no economic growth in Europe. Germany itself is on the verge of recession," Eichengreen told The Associated Press while attending the Davos conference.

One flash point in particular, he said, is the lack of progress toward a banking and fiscal union.

"The banking union doesn't exist. There's less consensus on completing it than we thought last year, so the markets are going to lose patience at some point and the crisis will be back," said Eichengreen, who has written books on international finance, the European Union and the Great Depression.

Negative developments in the Eurozone debt crisis typically drag down U.S. markets, as the EU
is a chief U.S trading partner. Fresh problems in 2013 would be bad news for U.S. stocks.

Efforts of EU leaders to tame the Eurozone debt crisis succeeded in calming European stock markets in the later part of 2012, and have given some bond market relief to such debt-plagued nations as Greece, Ireland, Italy and Spain.

But as Money Morning Global Investing Strategist Martin Hutchinson pointed out in December, the bond market isn't always the best judge of a nation's fiscal health.

"Don't be fooled by those bond yields," Hutchinson said. "In 2006, after all, they were trading Greek bonds at less than 0.5% yield above German bonds. So much for rational markets."

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Global Economy

French Internet Tax Should Have U.S. Web Giants Very Worried

A proposed French Internet tax is just the latest sign of an increasing desire among the major European Union economies to do more to force the big U.S. tech companies to pay their "fair share" of taxes.

The French Internet tax, an option proposed in a 150-page report released last week, would attempt to tax the collection of personal data. It's directed at such U.S. tech titans as Google Inc. (Nasdaq: GOOG), Amazon.com Inc. (Nasdaq: AMZN), Facebook Inc. (NYSE: FB) and Apple Inc. (Nasdaq: AAPL).

All four companies collect massive amounts of personal data. Google collects information via its free search engine; Facebook, through the activities of users on its social network. Amazon and Apple collect credit card data and customer habits via their retail operations.

"We want to work to ensure that Europe is not a tax haven for a certain number of Internet giants," France's digital economy minister, Fleur Pellerin, told reporters in Paris last Friday.

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Weak French Economy Threatens Anxious Eurozone

Fears that the socialist policies of French President François Hollande would make a weak French economy worse appear now to have been well-founded.

France announced Thursday that growth for the third quarter was a mere 0.2%. The French economy shrank 0.1% in the previous quarter, and most economists expect that contraction to resume in the current quarter.

Meanwhile, unemployment has risen to 10.2%, its highest level in 13 years.

Since Hollande won the French presidential elections in May, he has increased the minimum wage, lowered the retirement age for some workers (which his predecessor has just raised in an attempt to reduce government costs), created tens of thousands of education jobs and, of course, announced big tax increases.

But instead of reviving the weak French economy as Hollande promised, all indications are that his policies are making a French recession in 2013 more likely.

"The third quarter is probably the result of a temporary rebound at the European level," Michel Martinez, an economist at Societe Generale in Paris told Bloomberg News. He added that business sentiment indicates France's "economy is heading to a moderate recession or at best remaining flat."

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What Hope Means in Japan These Days

[Kyoto] – Frustrated by a system that has trapped them in decades of low to no growth, an entirely new generation of Japanese may be working with the most precious of all resources – hope.

They're taking matters into their own hands and going around the traditional Japanese way of doing things.

That's good.

The so-called "Lost Decade" is now entering its 3rd lost decade following 8-10 separate bailout failures, depending on how you count the various initiatives over the years.

Growth remains a paralyzed version of its former self with the nation's GDP roughly the size it was in 1990.

Worse, many Japanese companies like Panasonic and Sony, once at the vanguard of innovation, now find themselves scrambling to keep up with clever rivals who have taken the lead and who now threaten to push them out of the global industries they once dominated for good.

Combined public, private and corporate debt now approaches 500% of GDP.

Roughly 35% of the working population here remains trapped in arubaito, or part- time work. T hat's a far cry from the vision of lifetime employment that once dominated the corporate landscape.

Some, like Tadashi Yanai, who founded and heads the Japanese brand Uniqlo (pronounced yu-ni-klo), are deemed "young thinkers" bent on change through the sheer force of will and the economic means to bring it about. Yanai is actually 63 years old.

Speaking Truth to Power

Others are truly young, like Osaka's controversial mayor, Toru Hashimoto. At 43, he's as frank as they come in the staid world of Japanese politics where change is nearly impossible to come by.

To give you an example of what I am talking about, consider Hashimoto's recent observation that the Japanese political system is "crap." Not "difficult," not "worth consideration," not deserving of "careful thought," as would be the traditional ways the hyper- polite Japanese have expressed their opinions — but "crap" as in the four- letter variety.

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