Archive - Apr 28, 2012 - Story

Way back in 2009, we remember fielding all manner of questions from people wanting to invest in gold, having seen it spike from its turn-of-the-millennium slump, and worried about the state of the wider financial economy. A whole swathe of those were from people wanting to invest in exchange traded funds (ETFs). John Aziz always and without exception slammed the notion of a gold ETF as being outstandingly awful, and solely for investors who didn’t really understand the modern case for gold — those who believed that gold was a 'commodity' with the potential to 'do well' in the coming years. People who wanted to push dollars in, and get more dollars out some years later. 2009 was the year when gold ETFs really broke into the mass consciousness. Yet by 2011 the market had collapsed: people were buying much, much larger quantities of physical bullion and coins, but the popularity of ETFs had greatly slumped. This is even clearer when the ETF market is expressed as a percentage of the physical market. So what does this say about gold now? Especially as Zhang Jianhua of the PBoC noted "No asset is safe now. The only choice to hedge risks is to hold hard currency — gold."

While Greece has had its fair-share of EURs funneled to it and through it over the course of the last year or two, it appears they have now created their first 'internal' bailout as things go from bad to worse. As Athens News reports, Greece will provide EUR250mm in emergency funds to its ailing electricity providers to prevent a California-style energy crisis. This liquidity injection to the country's power utlities was yet another unintended consequence of government intervention action. An increasing number of consumers stopped paying their electricity bills following the TROIKA's Greek government's infliction of EUR1.7bn property taxation via the electricity providers. The main power utility PPC had a liquidity hole blown through it as non-payments mounted and while regulators claimed the system needed at least EUR350mm to stay afloat, the government has agreed to allow PPC to hold EUR250mm of the property tax it has collected on behalf of the state until June 30 - by which time, it is hoped the utility will have managed to secure other lending facilities. Quite an incredible move - to force the electricity provider to gather the property taxes - and while this attempt clearly failed we suspect the next move will be food-and-water-rationing without proof of tax payment.

Krugmann fails to address even a single one of the arguments forwarded by Spitznagel. This is no surprise, as he has often demonstrated he does not even understand the arguments of the Austrians and moreover has frequently shown that his style of debate consists largely of attempts to knock down straw men.  After appraising us of his economic ignorance (see the idea that time preferences can actually 'go negative' implied by his argument on the natural interest rate above), he finally closes a truly Orwellian screed by claiming that everybody who is critical of the Fed and the financial elite is guilty of being 'Orwellian'. As we often say, you really couldn't make this up.

If the now failed monetary union is the soul that Europe sold to the devil countless of times in the past decade just to plunder from the future as greedily as possible, consequences of unsustainable leverage be damned, the heart of Europe was the visa-free and customs unions that allowed the continent to be as one for the vast majority of people. Yet while the end of the monetary union will not be permitted as long as there are banks which stand to go out of business should that transpire, the end of visa-free travel will hardly impact banks much if at all. Which, unfortunately, explains why while the soul of Europe, already rehypothecated countless times to the lowest bidder, is still out there somewhere, the heart has just begun what may be terminal arrhythmia which has only one sad conclusion.

Over the past several months, starting with the great US stock market surge back in October 2011 which was not paralleled by virtually any other index in the world (and especially not Spain which recently breached its March 2009 low), there has been a great deal of speculation that just because the US stock market was doing "better", that the US economy has by implication "decoupled" from Europe. Well, as yesterday's GDP number showed in Q1 the economy ended up rising at a pace that was quite disappointing, but more importantly, which even Goldman admits is due for a substantial slow down in the coming months. And ironically, in the past 6 months it was not the Fed, but the ECB, that injected over $1.3 trillion in the banking system. One would think that this epic "flow" of liquidity from the central bank would result in a surge in the only metric that matters to 'Austrians', namely the expansion in money (or in this case the widest metric officially tracked on an apples to apples basis - M2). One would be very wrong. Because as the chart below shows, while US M2 has soared from the 2009 troughs, money "movement" in Europe has barely budged at all.

Does believing in the "recovery" make it real? The propaganda policies of the Federal Reserve and the Federal government are based on the hope that you'll answer "yes." The entire "recovery" is founded on the idea that if the Fed and Federal agencies can persuade the citizenry that down is up then people will hurry into their friendly "too big to fail" bank and borrow scads of money to bid up housing, buy new vehicles, and generally spend money they don't have in the delusional belief that inflation is low, wages are rising and the economy is growing.... Data is now massaged for political expediency, failure is spun into success, and consequences are shoved remorselessly onto the future generations. The entire policy of the Federal Reserve and the Federal government boils down to pushing propaganda in the hopes we'll all swallow the con and believe that down is now up and our "leadership" is a swell bunch of guys and gals instead of sociopaths who will say anything to evade the consequences of their actions and policy choices.

The good days are over, at least according to Goldman's Jan Hatzius. Now that "Cash For Coolers", aka April in February or the record hot winter, has ended, aka pulling summer demand 3-6 months forward, and payback is coming with a bang, starting with what Goldman believes will be a 125,000 NFP print in April, just barely higher than the disastrous March 120,000 NFP print which launched a thousand NEW QE rumors. But before you pray for a truly horrible number which will surely price in the cremation of the USD once CTRL+P types in the launch codes, be careful: from Hatzius - "Despite the weaker numbers, we have on net become more, not less, worried about the risks to our forecast of another round of monetary easing at the June 19-20 FOMC meeting. It is still our forecast, but it depends on our expectation of a meaningful amount of weakness in the economic indicators over the next 6-8 weeks. In other words, our sense of the Fed’s reaction function to economic growth has become more hawkish than it looked after the January 25 FOMC press conference, when Chairman Bernanke saw a “very strong case” for additional accommodation under the FOMC’s forecasts. This shift is a headwind from the perspective of the risk asset markets....So the case for a successor program to Operation Twist still looks solid to us, and the FOMC’s apparent reluctance to deliver it is a concern."

In short? Nothing good.

The European Central Bank prints money and hands it to the banks in undiminished size and at an interest rate which compels massive carry trades. The European banks buy sovereign debt that helps to lower the price of the sovereign’s funding costs, the banks use some of the money to increase their own capital and lend some of the money to individuals and corporations in the nations where they are domiciled. The money gets used and eventually dries up and a some of the capital is used to come into compliance with Basel III. The yields of the periphery nations fall but then begin to rise again. Germany, using Target-2, keeps lending money to the other central banks which use part of the money to support their currency, the Euro. The circle is then completed and the equity markets, notably in America, trade off of the strength of the Euro and some days at almost a point by point movement. Never before in the history of the world has such a grand scheme been implemented and in such an all-encompassing fashion. The unlimited amount of money that is available, because they can print all the money they want, has allowed Europe to game the world’s financial system while no one looked or caught on to the scheme. The world’s fiscal system has been rigged by Europe.

Bill Black is a former bank regulator who played a central role in prosecuting the corruption responsible for the S&L crisis of the late 1980s. He is one of America's top experts on financial fraud. And he laments that the US has descended into a type of crony capitalism that makes continued fraud a virtual certainty - while increasingly neutering the safeguards intended to prevent and punish such abuse. In this extensive interview, Bill explains why financial fraud is the most damaging type of fraud and also the hardest to prosecute. He also details how, through crony capitalism, it has become much more prevalent in our markets and political system.  A warning: there's much revealed in this interview to make your blood boil. For example: the Office of Thrift Supervision. In the aftermath of the S&L crisis, this office brought 3,000 administration enforcements actions (a.k.a. lawsuits) against identified perpetrators. In a number of cases, they clawed back the funds and profits that the convicted parties had fraudulently obtained. Flash forward to the 2008 credit crisis, in which just the related household sector losses alone were over 70x greater than those seen during the entire S&L debacle. So how many criminal referrals did the same agency, the Office of Threat Supervision, make?

Zero