August 17th, 2012
Over two years ago, the US Clearing house of the CME, the world's largest derivatives marketplace, had no choice but to allow gold as collateral. Why: because as we showed some days ago, while in Europe bank deposits are expansive, in the US, financial system funding relies primarily on mythical assets as liabilities, i.e., those that exist primarily due to faith in the system, something which has been in short supply, as a result of which the $15 trillion (down from a peak of $23 trillion) shadow banking system long used to fund regular operations, has been imploding. Couple that with a scarcity of other (re)pledgeable assets which in the US do not, unlike the UK, have an infinite rehypothecation chain, and one can see why back in October 2009 the CME had no choice but to accept gold as eligible collateral for clearing purposes. As of minutes ago, the European arm of CME Clearing has folded too, and has released a press release stating that it to0 "has extended the range of eligible collateral types to include gold bullion." Of course, this is the same gold bullion that Germany will be seeking to "repo" in exchange for sovereign bail outs as Europe's periphery continues to run out of endogenous money and has to increasingly rely on the benevolence of the Bundesbank. For now all we need to know is that another exchange just threw in the towel and admitted that contrary to Bernanke's stern position, gold is, indeed money.
While not advocating the break-up of the Euro-zone, Finland's foreign minister Erkki Tuomioja told the Daily Telegraph this evening that "it is only a matter of time". In a somewhat stunning show of truthiness, perhaps the first cracks in Europe's Nash Equilibrium are starting to show through following Monti's 'threats', Draghi's 'promises', and Merkel's 'well, nothings'. The Finn continues, via Reuters, "Either the south or the north will break away because this currency strait-jacket is causing misery for millions and destroying Europe's future." Finland, which has a veto that could be used to block any new bailout measures, has already stirred the pot unilaterally by demanding collateral from Greece and Spain, is quite clear in its view that Europe "is a total catastrophe" but adds that no-one wants to be first to get out of the Euro and take all the blame. Insisting that the break-up of the Euro does not mean the end of the European Union, Tuomioja believes "it could make the EU function better," but comments that he is deeply suspicious of the 'gang of four' - which includes Draghi - with regard his promises (especially ESM seniority) adding that he "does not trust these people."
Legal precedent means nothing. Rule of law means nothing. Free speech means nothing. Their own treaties mean nothing. It’s unbelievable. Anyone in the west who honestly thinks he’s still living in a free society is either a fool or completely out of touch. If that seems too radical an idea, consider that ECUADOR is now the only nation which stands to defend freedom and human rights against an assault from the United States, the United Kingdom, and their spineless allies. The west has just become a giant banana republic. Have you hit your breaking point yet? If not now… when?
When real estate prices made a vertiginous ascent in the 1980s Japan the bullish refrain was that there wasn’t enough land. However, Japanese real estate prices, and even those of crowded Tokyo, have glided downwards over the subsequent two decades, accompanied by rents - interrupted by the Karate-Kid-esque 'recovery-on; recovery-off' hope that we have also started to witness in the US. Very low economic growth and a demographic headwind, despite reasonably high employment, have led to a depressed real estate market. Is this a harbinger for the West? And what defines recovery - price, volume, net equity?
The must see time lapse video below courtesy of Stone McCarthy shows the distribution across the entire curve of the US marketable debt, as it was held by either the Fed, or the private sector over the past three unconventional monetary policy programs: starting in 2003 and concluding yesterday. In one short minute, this clip demonstrates very vividly how the Fed effectively took over the US bond market.
Proof Positive that Government's "Homeowner Relief" Programs Are Disguised Bank Bailouts ... Not Even AIMED at Helping HomeownerSubmitted by George Washington on 08/16/2012 19:02 -0400
Government Was Just Trying to "Foam the Runway" to Help Giant Banks
The vital question of the moment is whether of not The Bernank will signal an intention of moving towards QE3 in his much-anticipated 'Jackson Hole' conference in two weeks. Citi's Tom Fitzpatrick believes "it would be irresponsible to do so and that we need a more 'responsible fiscal policy' which will not materialize as long as we have an 'irresponsible monetary policy' bailing policymakers out". However, what we think in this regard is totally irrelevant to this discussion for it is what we think the Fed thinks that is critical. Recent data seems to have been a little more supportive of the economy (on the face of it) and may lead the Fed to stay on hold in the near term (September meeting). This will almost certainly raise the bar extremely high for further easing as we head into the Presidential race proper. If this window closes then a move before December will be extremely unlikely barring a major financial/market/economic shock, since after the 9/13 meeting, there are no more meetings until 12/12. However this increases the danger of the Fed getting 'caught behind the curve' which must be balanced with the 'mistake' of one-monetary-step-too-far with very real inflationary consequences.
Like all systems that follow an S-curve of growth and decay, financialization cannot return to its growth phase. But there is another dynamic at play: a self-destruct sequence triggered by central bank and Central State efforts to reflate asset and credit/leverage bubbles. All central bank and State policies aimed at driving capital into risk assets boil down to reflating phantom assets purchased with debt by issuing more debt that is based on newly issued phantom assets. Phantom assets purchased with debt cannot be reflated by issuing more debt that is based on newly issued phantom assets. Piling more debt/leverage on a sandpile of phantom assets (CDS, bonds that cannot possibly be paid back, empty condos in the middle of nowhere, etc.) only heightens the probability that the unstable pile will collapse. The implicit Central Planning campaign to trigger "mild" inflation is part of the self-destruct sequence. Central planners metaphorically fight the last war, or at best the last two wars, and so they remain blind to any dynamics that did not exist in their case studies.
"Houston, we have a problem"
Over the past several years, there has been much speculation and numerous reports that America is deleveraging. It isn't. In fact, consolidated across the 5 different kinds of American debt, which takes into account not only federal, but also financial, municipal, household and non-financial, total debt as a percentage of GDP has not budged over the past 4 years and is flat at 350% of GDP. Which simply means that all of the household debt that has supposedly vaporized (at least until the next major Flow of Funds revision), all of which has taken place purely from discharges on uncollectable mortgage and credit card debt, has been replaced by federal debt, while financial debt has merely soared to take the place of the collapsing shadow debt which is imploding as the confidence in a Fed-free financial system erodes to zero. Which of course, is the worst possible outcome: instead of funding private, individual entrepreneurs, who are the true basis for America's historic growth, prosperity and success (and who, unlike the government can and will fail if they dont allocated capital efficiently) the transferred debt (from household to federal) merely goes to fund the unproductive components of the US economy: the US government which by definition produces nothing, and the financial sector, whose only product is financial innovation which serves to make the TBTFs TBTFer, and pay record bonus after record bonus, and... that's it.
"I paid taxes every single year" is how Mitt Romney retorts to Harry Reid's charge that he paid no taxes in some years. As Bloomberg reports, after review of his tax returns over the last decade, Romney always paid at least 13% of his income in taxes. Romney has released his 2010 return, which shows that he paid an effective tax rate of 13.9 percent on more than $21 million in income, most of it from capital gains and dividends. "The fascination with taxes I’ve paid I find to be very small-minded compared to the broad issues that we face," he told reporters adding that he is "waiting for Harry [Reid] to put up who it was that told him what he says they told him. I don’t believe it for a minute, by the way.”
QE-on or QE-off; Growth or No-Growth; Cleanest 'Dirty' Shirt or Un-Decoupling; none of that matters. There are divergences everywhere - intraday and long-term - but none of that matters. What matters is hope, faith, and a little Central Bank charity. That is, of course, until someone drops the bowl of global Kool-Aid (Merkel 'nein'; Bernanke 'no'; Xiaochaun 'bu') or markets believe they want Romney/Ryan. With the equity markets in general making new 2012 highs today (as we noted earlier), on a day with better-than-recent volumes and heavy average trade-size at the highs, we can do nothing but stand back and admire the year-to-date performance of bonds, stocks, commodities, and verbal diarrhea.