Archive - Jul 19, 2015

Conserving what is failing is not a path to stability.

Do you feel safe?

Why Greece is simply a symptom of a much larger problem

If you thought your day was bad, remember: it can always get worse as pro surfer Mick Fanning found out earlier today when during the final of the World Surfing League's J-Bay Open in South Africa, he was attacked by a shark. And perhaps for the first time ever, the stunning encounter was captured on live TV. Most amazing, after Fanning felt the shark attack, he "punched" the shark in the back, which then promptly lost interest and Fanning got away completely unscathed.

So having acquired substantial quantities of gold for itself and having also ensured it is widely held by its public, the Chinese government is arguably in a more compelling position to encourage a gold revaluation as a means of stabilising her economy in a credit crisis than America was eighty years ago. It will be China's only option, and if the government doesn't go for it, China's middle classes certainly will. This simple fact could override all the geostrategic considerations upon which China-watchers have tended to focus. A gold revaluation would be presented to the world as bound up with China's domestic economic problems, instead of an act aimed at undermining the dollar's reserve status: a solution that is less confrontational than outright disagreement with Western central banks over gold's role in the international monetary order.

Everyone seems to be focusing on Greece these days – a country so indebted that it needs even more loans to repay just a fraction of its gigantic credits. Clearly this is unsustainable and something has to give. Even the IMF agrees. But what about the other Southern European countries? Actually, Portugal’s financial situation is looking particularly shaky, and any hiccups could have serious cross-border repercussions from Madrid all the way to Berlin.

"Greek banks expect long queues ... when they reopen on Monday for the first time in three weeks, although withdrawals will still be limited and capital controls will remain," Reuters reports, adding that "Greeks will be able to withdraw 420 euros a week at once instead of just 60 euros a day". Clearly, this is about managing perception. The only way that €420 per week is different than €60 per day is that it will front-load the bank queues on Mondays and thus create a false impression of calm throughout the remainder of the week. 

"...rising asset prices provide investors confirming evidence that their strategy is good and everything is fine. This induction problem lulls investors into a sense of confidence, and sets the stage for the shock when events turn down. That nonlinearity causes sudden change only adds to the confusion."

Thomas Wolfe famously declared that you can never go home again. The same goes for memories like these.

The WSJ has released yet another gold hit piece calling it a "pet rock' and gold bugs "subjects of a laboratory experiment on the psychology of cognitive dissonance" just one day after the PBOC reveals it has added the biggest amount of gold in history in order to "ensure security." But the biggest irony is that none other than Citigroup made a far bolder case that it is not the ownership of gold but of stocks that is the ultimate act of faith: "investors remain united in their faith in the central banks – if not for their ability to create growth, then at least in their ability to push up asset prices. And yet the limits of that faith are increasingly on display." So who is right?

Andy Brown, a top Shell official, said the Anglo-Dutch oil giant forecasts no quick rebound in the average global price of oil, but only a gradual recovery lasting five years. He attributed this sluggishness to a slowdown in China’s economy, leading a drop in demand for fuel, and the continuing oversupply of oil. “It will take several years [for oil prices to recover fully], but we do believe fundamentals will return,” Brown said. “Until such time, we, like other companies, will have to make sure we stay robust.”

The divergence theme is not longer being eclipsed by the Greek drama and the Chinese stock market slide.  See how this week's developments fit into the bigger picture.  

The ongoing downshift in property construction will continue to undercut China's demand for commodities, raw materials and machinery, weigh on property as well as mining and industrial investment, and be a drag for overall GDP growth in 2016. The most direct and important channel through which this impact spreads is trade linkages, given China's role as the top exporter and second largest importer in the world.

There’s one side of the story which hasn’t been highlighted at all by the mainstream media...