The tiny Nordic European island country of iceland is presently experiencing one of the greatest economic comebacks of all time.  After the privatization of the banking sector completed in 200o, the economy was thrown into a tailspin when over a five year period,  private bankers borrowed 120 billion dollars (10 times the size of Iceland’s economy). A huge economic bubble was created, causing house prices to double, and making a small percentage of Iceland’s population rich enough to buy up overseas investments, mansions, yachts, and private jets, while leaving an absolutely un-payable debt for all Icelanders. Iceland was facing national bankruptcy.

In response to the failed banking system, in October 2008, Iceland’s revolution against this financial tyranny began, rather casually in the street, in front of the Icelandic general assembly.

In the duration of five months, the main bank of Iceland was nationalized, government officials were forced to resign, the old government was liquidated, and a new government was put in its place. By March 2010, Iceland’s people voted to deny payment of the 3,500 million Euro debt created by the bankers, and about 200 high-level executives and bankers responsible for the economic crisis in the country were either arrested or were facing criminal charges.

In February 2011, a new constitutional assembly settled in to rewrite the tiny nation’s constitution, which aimed to avoid entrapment by debt-based currency foreign loans. In 2012, Iceland’s economy is expected to outgrow the Euro and the average for the developed world, as estimated by the Paris-based Organization for Economic Cooperation and Development….”

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“The Federal Reserve said it will buy $45 billion a month of Treasury securities starting in January, expanding its asset-purchase program, and for the first time linked the outlook for its main interest rate to unemployment and inflation.

“The committee remains concerned that, without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor-market conditions,” the Federal Open Market Committee said today at the conclusion of a two-day meeting in Washington.

The Fed said interest rates will stay low “at least as long” as the unemployment rate remains above 6.5 percent and if inflation “between one and two years ahead” is projected to be no more than 2.5 percent. The committee “views these thresholds as consistent with its earlier date-based guidance.” The Fed dropped its earlier pledge to hold interest rates near zero “at least through mid-2015.”

Chairman Ben S. Bernanke is using his unlimited authority to buy Treasuries in an unprecedented effort to stoke growth and reduce 7.7 percent unemployment. The Fed acted in its last regular meeting of the year as lawmakers and the Obama administration continue talks to avert more than $600 billion of automatic spending cuts and tax increases that threaten to throw the country into a recession.

Stocks and Treasury yields rose after the statement. The Standard & Poor’s 500 Index climbed 0.7 percent to 1,437.67 at 1:38 p.m. in New York. The yield on the 10-year Treasury note was 1.69 percent, compared with 1.66 percent late yesterday.

‘Very Active’

“The Fed has been very active since the crisis began, and they are feeling some time pressure because the longer Americans stay unemployed, the harder it is to incorporate them back into the labor force,” said Dana Saporta, a U.S. economist at Credit Suisse Group AG in New York….”

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“The United States isn’t only pushing full-steam ahead toward a fiscal cliff, but the country is also close to hitting its debt ceiling just like it was in 2011, and the Treasury Department is busy prepping “extraordinary” measures to stave off a default, The Wall Street Journal reported.

As of Friday, the United States was running about $67 billion under its $16.394 trillion debt ceiling, The Journal reported, and at the rate the country borrows and spends, the government will hit the limit shortly.

Congress must lift the debt ceiling, which won’t be easy considering that in 2011 the country lost its coveted triple-A credit rating when political brinkmanship prevented lawmakers from raising the borrowing limit until the very last minute, spooking ratings agencies.”

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“Euro zone finance ministers may achieve a “breakthrough” on Wednesday in their talks in Brussels on reforming supervision of Europe’s banks, a German government official said.

Germany and France have been at loggerheads over how many banks the European Central Bank should directly supervise and some other details.

“We hope for major progress and perhaps a breakthrough (in the talks),” the German official said, speaking on condition of anonymity, adding that Finance Minister Wolfgang Schaeuble had told the German cabinet he was “optimistic” about a deal.

“We are ready to contribute to a solution on banking supervision. We have some questions but if they can be resolved by finance ministers today then Germany will not stand in the way of an agreement,” the source said.

But reaching a deal, which EU leaders want to sign off when they meet at a summit on Thursday and Friday, will require addressing the concerns of Germany, whose support is crucial,while also satisfying France and others with deep vested interests such as Britain, Sweden and the Netherlands.

“It’s not an easy one for Germany,” said one diplomat, close to the talks. “But the markets are watching us.” Another diplomat said it came down to a conflict between quality and speed: For the best banking union possible to be put in place it will take time and it may be necessary to extend agreed deadlines.”

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“WASHINGTON (AP) — The Federal Reserve is wrapping up 2012 the way it began the year, searching for ways to help a U.S. economy that is still struggling with high unemployment and sub-par growth.

The expectation is that the Fed will announce a revamped bond-buying plan at the conclusion of their second day of discussions on Wednesday. The Fed’s policy statement will be followed by the release of a revised economic outlook and a news conference with Federal Reserve Chairman Ben Bernanke.

If the central bank does revamp its bond purchases, the goal would be to keep downward pressure on long-term interest rates and encouraged individuals and businesses to borrow and spend more.

The Fed’s final meeting of the year is being held against the backdrop of the looming “fiscal cliff,” the sharp tax increases and spending cuts that will hit the economy in January if Congress and President Barack Obama are unable to reach an agreement this month to avert them.

Bernanke has said that the Fed’s efforts will not be able to rescue the economy if the budget negotiations fail and the country does go over the fiscal cliff.”

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“It’s increasingly tricky to understand how investors really feel about the stock market. On the one hand, they are withdrawing assets from equity mutual funds, according to the weekly fund flows data reported by Lipper and other organizations that use this information as a barometer of investor sentiment. That trend has given rise to reports that investors are fleeing stocks and foolishly piling into bond funds. On the other hand, investors continue to plow money into equity-linked exchange-traded funds, or ETFs.

That sounds counterintuitive, since in theory a large-cap stock fund is going to give an investor roughly the same kind of market exposure as an ETF based on the S&P 500 index or other similar broad market barometer. And yet, the pattern repeated itself in the most recent five-day period reported by Lipper, as investors yanked some $4.1 billion from the coffers of equity mutual funds while investing a net $6.3 billion into equity ETFs. That’s the 20th consecutive week in which U.S. equity mutual funds have experienced net withdrawals, a trend that has remained in place regardless of whether major market indexes happen to be gaining ground or falling.

In contrast, the flows into or out of ETFs appear to be more volatile; while during many of those five-day periods investors have continued putting money into ETFs, it hasn’t been as consistent a trend. In mid-September, for instance, ETFs lost assets.

Have investors developed some kind of multiple personality disorder? Or is there a logical explanation for this kind of data? ”
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“The Fed is set to become considerably more dovish in 2013 and beyond as Evans and Rosengren become voting members. It seems unlikely that any new ‘Bernanke’ would drastically alter the Fed’s path; and so we present the ‘Doves’ path to prosperity (in nominal terms)….

Via BofAML:

The rise of the doves means Fed policy should stay easy even if the data continue to show improvement.

Over the past several weeks, the markets have focused on who might succeed Chairman Bernanke once his term as Fed Chair expires in January 2014. With President Obama winning re-election, we expect continuity in Fed policy in 2014. Meanwhile, as the end of the year approaches it is worth noting that the 2013 FOMC could be one of the most dovish in some time. Thus, market participants should be careful not to price out further Fed easing on somewhat better data.

 

Doves rule the nest”

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“China’s new yuan loans trailed forecasts last month, restraining the pace of recovery in the world’s second-biggest economy after a seven-quarter slowdown.

Banks extended 522.9 billion yuan ($84 billion) of local- currency loans, the People’s Bank of China said today. That compares with a 550 billion yuan median estimate in a Bloomberg Newssurvey of 30 economists and 562.2 billion yuan the same month last year. M2, the broadest measure of money supply, rose 13.9 percent from a year earlier, below the median estimate of 14.1 percent.”

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“Overall, Wall Street’s strategists are bullish on stocks for 2013 for various reasons.

One reason worth taking a second look at is expanding corporate profit margins, which are already at historic highs.

A slew of experts like GMO’s Jeremy Grantham, SocGen’s Albert Edwards, LPL Financial’s Jeff Kleintop, and John Hussman think these margins are unsustainable.

But the equity analysts and the companies they cover disagree.

Here’s a chart from Goldman’s David Kostin showing the analysts’ forecast for S&P 500 margins next year:”

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“As investors sought a refuge from inflation in August amid concern about Federal Reserve efforts to prop up the U.S. economy, David Brownlee was buying the securities most vulnerable to rising consumer prices.

Brownlee, who helps oversee $29 billion at Sentinel Asset Management, bought 30-year Treasuries, proved prescient as the Fed’s third round of monetary stimulus failed to ignite inflation. The government’s longest-maturity bonds gained 6.42 percent, compared with 1.37 percent for Treasury Inflation Protected Securities, since the central bank said Sept. 13 that it would buy $40 billion a month in mortgage bonds.

While TIPS, whose principal rises and falls with the U.S. consumer price index, beat Treasuries that aren’t indexed to inflation in previous episodes of quantitative easing, or QE, this time is different. The bond market expects inflation to remaincontained for the next decade, giving Fed Chairman Ben S. Bernanke and President Barack Obama time to boost the economy five years after the start of the worst financial crisis since the Great Depression.

“Inflation is on the backburner until you see a strong economy,” Brownlee, the head of fixed-income at Sentinel Asset Management, said in a Dec. 7 interview from Montpelier, Vermont. “We take the Fed at its word that rates are going to be relatively low.”

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“(MoneyWatch) The Federal Reserve’s Open Market Committee will finish its 2012 work this week with the final policy meeting of the year; economic forecasts; and a Bernanke press conference chaser. The central bankers are likely to urge the president and lawmakers to avert the so-called “fiscal cliff,” a term now credited to Chairman Ben Bernanke himself.

Also on the agenda will be the nation’s moribund economic growth and ways the Fed may be able to help boost it through monetary policy. Analysts now believe that economic growth for the fourth quarter will sink to about 1 percent, down from the 2.7 percent annualized rate seen in the third quarter. If that were the case, total growth for 2012 would be less than 2 percent, matching 2011’s pokey rate.

At that rate and given the continued weakness in the nation’s labor market (see “November jobs report: Sandy impact muted“), the question facing the Fed is whether to extend “Operation Twist” beyond its year-end expiration. Operation Twist, which was implemented in September 2011, was a policy where each month, the Fed sold $45 billion worth of short-dated government bonds and bought an equal amount of government bonds with longer maturities. The goal was to lower long-term rates to encourage more borrowing and spending, which would in turn (hopefully) create more economic growth….”

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It may be time to take a bite out of China for your portfolio. Recent data suggests a retreat from downward GDP pressure.

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“Barron’s just published its 10 Favorite Stocks For 2013.  The feature has writeups on each stock.  But here’s a peak:

• Apple: “Even after implementing a dividend — now providing a 1.9% yield — and a modest buyback program, Apple should build cash at a rate of $40 billion annually.”
• Barnes & Noble: “The Nook division is losing money, but that reflects a market-share grab, as Barnes & Noble seeks to get its e-readers into the hands of as many consumers as possible and then sell them profitable digital content, including books and magazine subscriptions.”
• BlackRock: “Bulls such as Morgan Stanley analyst Matthew Kelley see double-digit earnings growth next year, driven by iShares.”

Top 10 picks

“Most of America is focused on the fiscal cliff and the over $600 billion in tax and spending provisions set to expire at the end of 2012.

But Gillian Tett at the Financial Times warns of another ‘cliffhanger’ that Americans should pay attention to.

This cliffhanger she writes is the expiration of the Transaction Account Guarantee (TAG) program, introduced by the Federal Deposit Insurance Corporation (FDIC) in 2008.

Bank of America’s Priya Misra and Brian Smedley warned about this in September.

The TAG program allowed companies and individual put any amount of money into a non-interest account, and the entire amount would be guaranteed by the FDIC in the event that the bank went under. Prior to the TAG program the FDIC only guaranteed $250,000.

In the past two years, Tett points out that TAG accounts doubled to $1.5 trillion with over 50 percent of this coming from corporate accounts.

There is a chance that corporates are comfortable with American banks, and they’ll be happy to leave their deposits in place or withdraw them at a slow pace.

But some estimate that about $600 billion could be withdrawn, and with that end of month deadline fast approaching, Tett points out the worst case scenario: ”

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“John Rolls Submits, Michael Snyder writes: When financial markets in the United States crash, so does the U.S. economy.  Just remember what happened back in 2008.  The financial markets crashed, the credit markets froze up, and suddenly the economy went into cardiac arrest.  Well, there are very few things that could cause the financial markets to crash harder or farther than a derivatives panic.  Sadly, most Americans don’t even understand what derivatives are.  Unlike stocks and bonds, a derivative is not an investment in anything real.  Rather, a derivative is a legal bet on the future value or performance of something else.  Just like you can go to Las Vegas and bet on who will win the football games this weekend, bankers on Wall Street make trillions of dollars of bets about how interest rates will perform in the future and about what credit instruments are likely to default.  Wall Street has been transformed into a gigantic casino where people are betting on just about anything that you can imagine.  This works fine as long as there are not any wild swings in the economy and risk is managed with strict discipline, but as we have seen, there have been times.

For example, do you know why the largest insurance company in the world, AIG, crashed back in 2008 and required a government bailout?  It was because of derivatives.  Bad derivatives trades also caused the failure of MF Global, and the 6 billion dollar loss that JPMorgan Chase recently suffered because of derivatives made headlines all over the globe.  But all of those incidents were just warm up acts for the coming derivatives panic that will destroy global financial markets.  The largest casino in the history of the world is going to go “bust” and the economic fallout from the financial crash that will happen as a result will be absolutely horrific.

There is a reason why Warren Buffett once referred to derivatives as “financial weapons of mass destruction”.  Nobody really knows the total value of all the derivatives that are floating around out there, but estimates place the notional value of the global derivatives market anywhere from 600 trillion dollars all the way up to 1.5 quadrillion dollars.

Keep in mind that global GDP is somewhere around 70 trillion dollars for an entire year.  So we are talking about an amount of money that is absolutely mind blowing.

So who is buying and selling all of these derivatives?

Well, would it surprise you to learn that it is mostly the biggest banks?….”

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“A decision by the Federal Reserve to expand its bond buying next week is likely to prompt policy makers to rewrite their 18-month old blueprint for an exit from record monetary stimulus.

Under the exit strategy, the Fed would start selling bonds in mid-2015 in a bid to return its holdings to pre-crisis proportions in two to three years. An accelerated buildup of assets would also mean a faster pace of sales when the time comes to exit — increasing the risk that a jump in interest rates would crush the economic recovery.

“There is certainly an issue about unwinding the balance sheet” in a way that “is effective and continues to support the recovery without creating inflation,” St. Louis Fed Bank President James Bullard said in an interview in October. The central bank might have to “revisit” the 2011 strategy, he added.

The Fed is already buying $40 billion a month in mortgage- backed securities to boost the economy, and policy makers meeting Dec. 11-12 will consider whether to purchase more assets. John Williams, president of the San Francisco Fed, has proposed adding $45 billion of Treasury securities a month.

The bigger the balance sheet, “the riskier the exit becomes,” Richmond Fed President Jeffrey Lacker said during a Nov. 20 speech in New York. “That is something we need to think carefully about.”

Krishna Memani, director of fixed income at OppenheimerFunds Inc., said a too-rapid sale of assets risks disrupting the $5.2 trillion market for agency mortgage debt….”

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“ATHENS (Reuters) – Greece says it is sticking to plans to close its offer to buy back its own bonds from investors on Friday in a deal that should meet a debt writedown target set by its international lenders.

The government said it would shield the country’s banks from any lawsuits over losses booked if they take part in the buyback.

The buyback, part of a broader debt relief package worth 40 billion euros ($52 billion) agreed by Greece’s euro zone and International Monetary Fund lenders last month, is central to efforts to bring its debt to manageable levels.

Athens has no plans to extend the deadline for bids beyond Friday, finance ministry officials said, dismissing a Greek newspaper report suggesting the government could extend the deadline to early next week.

“The process will close today and there is no need for an extension,” a senior finance ministry official said. A second official confirmed the 12.00 p.m. EST deadline….”

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“FRANKFURT (Reuters) – Key Euribor bank-to-bank lending rates fell on Friday, a day after European Central Bank President Mario Draghi said the bank discussed cutting interest rates at its December meeting but in the end decided to leave them unchanged at 0.75 percent.

Draghi said on Thursday there had been “a wide discussion” on rate cuts during the Governing Council meeting, which fuelled expectation that the ECB was ready to lower rates further in the coming months.

The central bank also announced a six-month extension to its full-allotment policy in all liquidity operations….”

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“There’s nothing like having a local guide. Whether you’re a climber trying to scale the heights of Mount Everest or an investor exploring a stock, you can benefit from the insight of a person who spends endless hours learning a particular terrain. That’s why we’ve turned this year to sage investing guides who’ve honed their expertise in a dozen sectors and stock styles, delivering lengthy records of superior performance. Read on to discover their most promising stock picks for 2013. It’s always easier to find a path when someone who knows it is there to point it out for you.”

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“Bank of England officials left their bond-buying program on hold as they assessed the need for more stimulus a day after Chancellor of the Exchequer George Osborne committed the country to five more years of austerity.

Governor Mervyn King and the Monetary Policy Committee kept their quantitative-easing target at 375 billion pounds ($604 billion), a move predicted by all 36 economists in a Bloomberg News survey. Still, they have indicated the door is open to more purchases if needed, and Osborne said yesterday his “credible” fiscal plan “allows for supportive monetary policy.”

The Bank of England is struggling to stoke a recovery amid a squeeze on consumers, cooling global growth and headwinds from Europe’s debt crisis. It introduced its Funding for Lending Scheme this year to boost credit, and Osborne’s affirmation of his fiscal strategy confirmed the central bank’s role as the key source of stimulus for the economy.”

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