Archive - Dec 13, 2012

The economic data dump trifecta has been released, with updates on claims, retail sales and PPI. The end result was a nearly even beat/miss split.

Gold fell nearly 1% in illiquid markets in Asia overnight. Some traders may have decided to take profits on the short term long the FOMC announcement trade. Gold bullion prices had already ran up to $1,723 in the 2 weeks prior to the policy statement. Overnight, as prices fell below the 100-day moving average at $1,705, stop-loss selling was triggered which pushed prices lower quickly. Yesterday, the Federal Reserve took the bold, some would say reckless step, of linking its monetary policy to unemployment, creating concerns that the U.S. dollar will be debased even more in the coming months.  The US Federal Reserve will keep interest rates at close to zero until unemployment falls below 6.5%. This is a historic and very radical change to monetary policy. It is the first time a large central bank has ever tied its interest rate policy directly to one facet of the economy – unemployment.

The Eurozone was once again engaged in burning the midnight oil, in yet another futile endeavor, this time setting the stage for a common bank supervisor in the face of the ECB, which is somehow supposed to "regulate" Europe's thousands of banks. That this was a total practical dud can be seen in the response of the EURUSD to the news. However, for those interested in the theoretical nuances, whose actual implementation has once again been kicked into the future, here is a quick and dirty primer from SocGen.

• Bernanke Wields New Tools to Reduce Unemployment Rate (BBG)
• Home Seizures Rise as Banks Adjust to Foreclosure Flow (BBG)
• EU Backs Release Of Greek Aid (WSJ)
• Democrats Confident They Have 'Cliff' Leverage (WSJ)
• Americans Back Obama Tax-Rate Increase Tied to Entitlement Cuts (BBG)
• Goldman flexes tentacles: Treasury open to Carney radicalism (FT)
• Launch Fuels Asia Security Concerns (WSJ)
• BOJ’s Unlimited Loan Program Seen Open to Use by Hedge Funds (BBG) - there are Japanese hedge funds?
• Abe Set to Face Manufacturing Gloom as Japan Contracts (BBG)
• US and UN condemn N Korea rocket launch (Guardian)
• Eurozone agrees common bank supervisor (FT)
• Berlusconi Adds to Italy Turmoil by Signaling He’d Step Aside (BBG)

Anyone hoping that if left on autopilot, pardon the pun, the frayed relations between Japan and China will fix themselves, is in for a disappointment. Because while the Japanese trade with China has imploded resulting in a collapse in Japanese exports, which in itself is crushing the local economy, the country may offset that economic decline with some "GDP growing" Keynesian voodoo if and when the provocations between the two countries escalate to the point of exchanged fire. Sure enough, Kyodo reports, that a Chinese government airplane entered Japanese airspace over the disputed Senkaku Islands in the East China Sea on Thursday in the first such airspace intrusion in Japan, prompting an immediate protest from the Japanese government. This is only the first time a Chinese airplane has entered the disputed airspace, the the third time in history: once before by a Soviet bomber in 1979 and a Taiwanese civilian aircraft in 1994. We now look forward to what China's response will be to this reaction which will certainly be seen as provocative in itself.

Why the lack of follow through? Because, according to preliminary desk talk, just as we predicted yesterday now that the Fed has reengaged the QEasing machine, the ECB will too have to intervene and ease on its own once again to push the EURUSD lower (as otherwise the internal devaluation for most European countries will be simply unbearable). Which means one thing: the time to drag the Spanish insolvency out of cryogenic sleep is coming, and if Rajoy still refuses to request a bailout, he will get some much needed assistance from Frankfurt to make up his mind, allowing the ECB to inject hundreds of billions into the market and in doing so to keep up with the Fed or else risk dropping too far behind in the global race to debase (with a footnote that in Europe, a drop in the currency always raises redenomination risk now and going forward).

The most commonly forwarded arguments against the implementation of a true 100% gold-backed sound money system can easily be disproven and thoroughly debunked with a small dose of history and another dose of logic.

Borrowed money keeping stocks afloat