Bernanke says easy money policy benefits world

Because stronger growth in each economy confers beneficial spillovers to trading partners, these policies are not ‘beggar-thy-neighbor' but rather are positive-sum, ‘enrich-thy-neighbor' actions.

~ Fed Chairman Ben Bernanke, Reuters, March 25, 2013

Felix Zulauf on the Japanese government's massive debt problem

Zulauf: The Japanese government is in a difficult position, with the country's debt running at 230% of GDP. Japan is in a recession. The budget deficit exceeds 8% of GDP, and could top 10% this year and next. The deficit was easy to finance as long as Japan was running a structural current-account surplus and the domestic pool of savings was large enough to do so. In recent times the country's external accounts have deteriorated, and that could continue.

Japanese institutions have always been the largest and steadiest buyers of Japanese government bonds, or JGBs. They recently announced they lack the funding sources to keep buying on the same scale. Japan Post Bank is an example. It formerly was a government institution in which individuals held savings of more than $2 trillion. It was a big buyer of government debt, as were pension funds and life insurers. All said recently they can't keep buying. The moment has arrived where the Bank of Japan needs to bridge the gap and buy more JGBs with newly printed yen. In other words, the supply of yen will increase dramatically. Japanese inflation will be pushed from slightly below zero to 2%, and the yen will be weakened. This is a major change for Japan, because the yen has been one of the world's strongest currencies for a long time, right behind the Swiss franc.

Q: There is definitely a trend here.

Zulauf: Japan's big life insurers are pension-fund-style entities for the Japanese public. They are big investors overseas, and because of the yen's strength, have hedged part of their exposure to the currency. What would happen if they unwound 10% of their hedges? The four largest life insurers would have to buy $25 billion worth of dollars and sell yen. Many pension funds and industrial companies are in a similar position. The potential purchase of dollars and sale of yen is gigantic. Of course, Japanese bond yields would rise under this scenario, which is another problem, as Japanese banks have 900% of their Tier 1 equity capital in JGBs. To prevent the bond yield from rising, the Bank of Japan will have to buy even more bonds, and print more yen. They will keep things under control for a while, but eventually this plan will fail.

~ Felix Zulauf, Barron's Roundtable, January 21, 2013

Rocky White on the housing recovery

Evidence of a housing recovery continues to pile up, but lingering signs of skepticism suggest there's still plenty of sideline cash to fuel further gains. Just last week, the Commerce Department said housing starts rose 0.8% in February, while building permits rose to a four-year high, topping economists' expectations. Furthermore, existing-home sales jumped 0.8% to the highest level since November 2009, the National Association of Realtors (NAR) reported. Technically, the iShares Dow Jones U.S. Home Construction Index Fund (ITB - 24.20) recently bounced from key support at its 80-day moving average. The fund touched a multi-year peak of $24.88 on Wednesday, and is now consolidating atop the formerly resistant $24 level. Among individual equities, KB Home (KBH) and Lennar (LEN) both defied the skeptics, touching their own multi-year highs after reporting solid earnings and announcing plans to ramp up development. Despite bullish magazine covers on the radar -- including "The Great American Housing Rebound" from Bloomberg Businessweek and Money's "Housing is Back" -- pessimism remains prevalent, as evidenced by The Wall Street Journal's recent warning that the sector is "exhibiting froth." Of the 32 names we track under the "builders" umbrella, all are trading north of their psychologically significant 200-day moving averages, yet just 43% of analysts offer up "buy" endorsements -- even less than a year ago.

~ Rocky White, Schaeffer's Investment Research, Monday Morning Outlook, March 25, 2013

Alexis De Tocqueville on empires

Nothing opposes the prosperity and freedom of men as much as great empires.

~ Alexis De Tocqueville, Democracy in America

Mohamed El-Erian compares the Fed to the Wizard of Oz

When you think of it, in today's economy, the role of the wizard is being played by the Federal Reserve Bank. Facing a difficult economic situation, made worse by the inaction of a bickering Congress and essentially paralyzed government agencies, the Fed has found itself forced to take on the role of savior. And since its massive emergency interventions in 2008, it has felt a moral obligation to stay engaged, a role which, over time, it seems to have pursued more willingly.

In trying to do good, the Fed has confronted more than the considerable dark forces of disorderly economic and financial deleveraging. It has also had to overcome the (not-so-occasional) headwinds from a disruptive Congress and a Europe unable to decisively overcome a regional debt crisis.

~ Mohamed A. El-Erian, "The Fed as ‘Oz, the Great and Powerful’," Yahoo!Finance, March 12, 2013

Friedrich Hayek on civilization and central planning

The recognition of the insuperable limits to his knowledge ought indeed to teach the student of society a lesson of humility which should guard him against becoming an accomplice in men’s fatal striving to control society—a striving which makes him not only a tyrant over his fellows, but which may well make him the destroyer of a civilization which no brain has designed but which has grown from the free efforts of millions of individuals.

~ Friedrich Hayek

Jack Welch on hedge fund manager David Einhorn

Apple (AAPL) deserves better than the treatment it's getting from David Einhorn.

Look, these guys are after a quick hit. I'd blow him off. I'd give Einhorn the back of my hand.

~ Former GE CEO Jack Welch, CNBC, March 8, 2013