Archive - Sep 6, 2012

The monetary policy transmission mechanism is broken in Europe; we all know it and even ECB head Draghi has admitted it (and is trying to solve it). As Bloomberg economist David Powell noted though, Draghi may have to address the economic fragmentation of the euro area before undoing the financial fragmentation of the region. The latter may just be a symptom of the former. The Taylor Rule, a policy guideline that models a monetary authority’s interest rate response to the paths of inflation and economic activity, highlights the drastically different monetary policies required across the various EU nations as a result of their variegated domestic economic conditions. This variation creates concerns over sustainability and the rational (not irrational as Draghi would have us believe) act of transferring deposits to 'safer' nations for fear of redenomination. As Powell notes: Draghi will probably have to convince market participants of the economic sustainability of the monetary union before the financial fragmentation of the region is ended. The large-scale extension of central bank credit to potentially insolvent countries is unlikely to accomplish that - as economies remain hugely divergent.

The dividend theme has hardly run its course. As David Rosenberg of Gluskin Sheff illustrates in his latest note, the income-starved retiring boomers are being forced to garner income more and more via the equity market where dividends are up more than 8% over the past year. Because of ultra-low interest rates, interest income growth has vanished completely. And here is the great anomaly. Back in the early 1980s, investors bought equities for capital appreciation and they purchased Treasury securities for yield. Today it is the complete opposite.

Please sit down before reading the stunning list of new features that Amazon has unveiled this morning for the new Kindle Paperwhite:- (ready)...

Front-Lit
Changeable Fonts
Better Resolution
Better Battery

Compelling stuff! No happy-ending? No buying of Spanish bonds, and (pseudo) sterilized money printing? No coffee-making attachment? Odd, it seems the news is being sold as AMZN slides from intraday highs...

The chart below by way of Grant Thornton shows something rather disturbing: in recent months, the number of IPOs that are trading "at or above their issue price 30 days after IPO pricing" has been collapsing in virtually a straight line since the early 1990s, and in 2012 was just shy of all time lows (which have been recorded during periods of great market crashes, not when the S&P is about to hit its yearly highs). As such the lack of success of such prominent recent names as FaceBook, Zynga, Groupon and many others, is not simply a function of valuation and investor sentiment, but related to the ongoing deteriorating in the underlying market structure for a variety of reason, many of which have been written about here in the past.

Today's announcement of the third-coming of the messiah-like Draghi's Bond-Buying program - even if under a different, more catchy, name - brings to mind a chart we offered by way of genuine concern the last time he mentioned this as an option. While he insists it's different this time (because they'll tell us the CUSIPs? we already knew when they were in; because its conditional? and revocable and who trusts their data; because its at the short-end? simply crushing up sovereign funding capabilities and leaving the roll/liquidity needs even greater; Unlimited? we don't remember a limit before?), it is clear that the immediate gaps tighter in bond yields (and spreads) on the announcement of the program was the best it ever was and bonds sold off through each of the previous two SMP efforts. Just saying...

While partying like its 1999 is still a way away, the NASDAQ has managed to get back to December 2000 levels as it has only dropped by more than 1% once in the last six weeks #yay Retirement-On!

While illiquid short-dated Spanish bond yields plunge and short-sale-banned Spanish stocks (IBEX) surge back above their 200DMA the most in 16 months, one could be forgiven for falling into the age-old CNBC-trap of "well the market is up so it must be good" belief. Rick Santelli and Mark Grant, in a brief few minutes attempt to get below the surface of the actual words and perception of today's Draghi statement and explain just how the conditionality and size/roll constraints make this supposed unlimited "we'll fix it all" scenario rather ridiculous in that "The ECB is never going to be allowed to do anything." Perhaps just as IBEX fell 17% in 3 weeks after rallying 5.6% on EUR Summit-day hope, we will see some sense of reality sink back in to the circularity of this support.

China and India have always been crazy for gold, and the yellow metal remains the choice store of value in those two countries, says Don Coxe, a strategic advisor to the BMO Financial Group. In an exclusive interview with The Gold Report, Coxe explains how demographic shifts are affecting the price of gold and delves into the logic of investing in gold as a long-term strategy. Coxe also draws an important lesson in economics from his reading of Lenin.

Forget the conditionality, Draghi said it would be solved and we should believe - and believe everything in Europe did! Equity markets soared 3-5% (with EuroStoxx catching up to Gold YTD), credit spreads - which had outperformed in the last few days - rallied rather notably, European sovereign bond yields (2Y yield down 15-20bps) and spreads tumbled dramatically (10Y spreads down 30-50bps), Europe's VIX collapsed 4.5 vols to 23%, and EURUSD surged back to the highs of the day into the European close (after being down immediately after the press conference). Capitulation? who knows? Reality? not even close.

So, ok, yes, there’s a huge conditional bazooka out there, but who wants to really use it?

 Seems like a huge defibrillator. Good to have, but beware of not shocking the patient too much. 

Did the German Bundesbank roll over and die as Die Welt suggest, by yielding to the will of the ECB and Goldman? Or is it merely setting the stage for the inevitable German referendum? Many claim the Italian head of the ECB won today in his ever escalating confrontation with the last remaining German on the ECB governing council, although in reality he is merely doing what he has already done twice before. The outcome will be the same: abject failure to contain the crisis which will not be resolved until and if Europe succeeds in creating a united, Federal state, with one bond issuance authority. That will never happen: after all, 17 European states will never hand over their sovereignty to a third party, especially one which is backstopped by German cash. But it can pretend. In the meantime, Buba will not quietly go, instead it has already stated what it thinks, and what it thinks is that what the ECB is doing (once again) is "tantamount to financing governments by printing banknotes" and that monetary policy is now subjugated to fiscal policy. Full text of the Buba's response below.

Dear Friend of GATA and Gold (and Silver):

GATA Chairman Bill Murphy's appearance today on the Russia Today television network's "Capital Account" program, hosted by Lauren Lyster, has been posted at YouTube here:

http://www.youtube.com/watch?v=sxVsosT3GAw

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

Prevent WWIII  (Which Would Be Really Bad for Your Investment Portfolio, Notwithstanding Keynesian Thinking) by Learning this Little-Known Secret of History 

In case you missed it. Here is Draghi's two minute diatribe, courtesy of Bloomberg TV, sprinkled liberally with every algo-headline-seeking word required to raise the perception that something actually just happened other than smoke, mirrors, and and conditional help best summarized by the phrase we used earlier to explain the Catch 22 Europe finds itself in now: "Spanish bonds soar on expectations Spanish bonds will plunge to allow Spanish bonds to soar on ECB purchases... but only after Rajoy hands in his resignation and gives the key to Spain to the IMF"