B+

This scam wasn't made for you and me...

Central banks have added a net of 1,290 tonnes since the fourth quarter of 2008. This total excludes China and other nations that don't regularly report their activity, as well as countries that have been surreptitiously buying their own production. That's a lot of gold buying. One has to wonder whether so much buying may in fact signal a top for gold. After all, a number of prominent analysts have claimed for some time that gold is in a bubble and that it's all downhill from here. Not so fast. Like many mainstream reports, looking at the short-term picture usually leads to erroneous conclusions. Let's put central-bank purchases into historical perspective.

Nice equity (and commodities) close (DAX futures peaking at +2%).

Didn’t seem to impress EGBs, though. Nor credit, as it stands. No ROn mode behaviour here. And certainly not for Italy.

In broad brush, financialization enabled the explosive rise of politically dominant cartels (crony capitalism) that reap profits from graft, legalized fraud, embezzlement, collusion, price-fixing, misrepresentation of risk, shadow systems of governance, and the use of phantom assets as collateral.  This systemic allocation of resources and the national income to serve their interests also serves the interests of the protected fiefdoms of the State that enable and protect the parasitic sectors of the economy. The productive, efficient private sectors of the economy are, in effect, subsidizing the most inefficient, unproductive parts of the economy.  Productivity has been siphoned off to financialized corporate profits, politically powerful cartels, and bloated State fiefdoms.  The current attempts to “restart growth” via the same old financialization tricks of more debt, more leverage, and more speculative excess backstopped by a captured Central State are failing.

Neofeudal financialization and unproductive State/private vested interests have bled the middle class dry.

We throw 7 billion cars into the air every year. What's that about?

The devil is in the details and we finally have the Spanish Bank rescue details. The cost is not mentioned. We do not know the cost of the borrowing or how long it will last for. That ultimately will be key. Short dated, high coupon loans will not help much. Long dated, low coupon loans will help. The seniority issue doesn’t seem too bad but reading the documentation it looks like it must have been extremely contentious as it can’t help but say it is going to Spain time and again where it was unnecessary. The other reason the seniority doesn’t look too bad is because it doesn’t look like much money will get doled out. The timing seems far too long. This is a political fix and one where they live in some bankers world rather than a traders world. We are VERY concerned about the long timeframe for implementation. The immediate availability of €30 billion is good, but as TF Market Advisors' Peter Tchir confirms, we have our doubts that it will be distributed. However, as we noted earlier, even if fully implemented there would be well under EUR200 billion by year-end anyway and now with the German Court stalling implementation further, the devil in the details may just be overwhelmed by the god of reality.

The stock market is precariously close to slipping into a landslide. If the economy and stock market both continue declining into late October, the presidential election could also turn into a landslide--against the incumbent. There is nothing particularly partisan about this possibility; people who vote tend to vote their pocketbooks, and a re-election campaign that boils down to "hey, it's not as bad as The Great Depression" is unlikely to inspire great loyalty in voters who are already culturally predisposed to tire quickly of presidents, wars and a tanking economy. If the economy and stock markets are both slip-sliding away, the opponent need only be "not the incumbent" to win. Presidents facing re-election in deteriorating economic conditions find their support in the critical non-partisan middle is a mile wide and an inch deep. A recessionary economy acts like a drought on that shallow lake of support, and when it dries up then the incumbent loses, and often loses big.

Big Banks Are Rotten to the Core

The chart below is a representation of the Establishment Survey (B.1)showing workers in the Construction of Buildings Space, aka those who, as the name implies, build buildings. At 1,213,500 workers, this was not only the lowest number of 2012, but the lowest since May 2011, and is just 2100 workers above the last decade lows. Perhaps instead of relying on the NAR's self-promotional brochures and Housing Starts data which capture if and when a shovel has met the earth, one should perhaps track how much actual demand there is for building construction workers and how many jobs this critical component of the economy creates. Sadly, as the chart below shows, not much.

Beware: "Allocated" Gold May Not Really Be There

Two weeks ago, the ECB, which is now largely expected to cut rates by at least 25 bps imminently, announced it was aggressively expanding the eligible collateral pool of worthless "stuff" it would accept at face value in exchange for fresh EUR bills, in essence engaging in clear cut money printing with the footnote that it was really a loan. The only problem is the loan quality is absolutely worthless and the ECB knows this. Hence money for nothing. Today, the ECB has released another announcement on collateral eligibility, saying that "counterparties participating in Eurosystem credit operations should be allowed to increase current levels of own-use of government-guaranteed bank bonds subject to the ex-ante approval of the Governing Council in exceptional circumstances." However, lest it be seen as merely the latest confirmation that Europe no longer has money good assets, and the ECB is merely encouraging banks to pledge anything they can get their hands on in order to obtain a short-term liquidity injection, it also added the following rider: "[counterparties] may not submit such bonds or similar bonds issued by closely linked entities as collateral for Eurosystem credit operations in excess of the nominal value of these bonds already submitted as collateral on the day this Decision enters into force." But before someone takes this to mean that the ECB actually cares what "assets" on its balance sheet make back its now record €3+ trillion in liabilities, it added Rider B: "Governing Council may decide on derogations from the requirement laid down in paragraph 1." Translated: the free for all rehypothecation race is on, and probably in its last lap, as once any and all collateral is already pledged, the ECB's only hope will be to allow already hypothecated collateral to be rehypothecated. Something which in a non-banana republic would have cost Jon Corzine his job.

Joe Saluzzi, expert on algorithmic trading -- also known as high-frequency trading, or HFT -- returns as a guest this week to explain how the players behind this machine-driven process act as parasites that are destroying our financial markets (and, increasingly, even themselves). Since Joe first spoke with us last year, HFT firms have only increased in size and share of market activity. Here are some staggering statistics on how influential they have become:

• HTFs make up between 50-70% of the volume seen across market exchanges today
• 2% of the traders on many exchanges (HFTs, specifically) represent 80% of the volume
• a single large HFT firm (referred to as a Direct Market Maker) can account for 10%+ of a market's volume on a given day
• Large HFT firms make between $8 to $21 billion a year
• HFT trades occur in milliseconds (i.e. a small fraction of the time it takes your eye to blink)

With such scale, speed and profitability, HFTs have turned the market away from being an efficient price-setting mechanism and perverted it into a casino where the clientele (i.e. human investors) gets fleeced. And our regulators are so outmatched by the scope, complexity and funding of these titanic HFT players that at moment, there are pretty much zero consequences for bad actors.

A confluence of factors is forming a perfect storm for the oil market to face some major headwinds for the next 5 years. 

Everyone knows that Italy's unelected PM, Mario Monti, is a former Goldman Sachs International 'advisor.' As such, it is only natural that being part of the banking cartel he would do everything in his power to promote an inflationary agenda, one that seeks ECB bond monetization intervention, (another central bank headed by a former Goldmanite of course), perpetuates the status quo, and one that naturally contravenes everything that German citizens have been pushing for in their desire to avoid the risk of another hyperinflationary episode. Especially if, as is well-known, resolving Europe's problems, however briefly, facilitates an Obama re-election campaign because as conventional wisdom is also catching on, should Europe implode before November, Obama's reelection chances plunge accordingly. And yet, even as Goldman's tentacles had spread all over Europe (as seen here), conventional wisdom was that Goldman's influence in Germany was relatively muted.

Wrong.

"Mistakes are what superior investing is all about" is how Oaktree's Howard Marks begins his latest treatise, adding that for a trade to turn out to be a major success, the other side has to have been a big mistake. In any trade it is generally safe to say that one side has to be wrong (since win/win transactions are far less common than win/lose) leaving the buyer and seller unequally happy. Marks believes it is highly desirable to focus on the topic of investing mistakes. First, it serves as a reminder that the potential for error is ever-present, and thus of the importance of mistake minimization as a key goal. Second, if one side of every transaction is wrong, we have to ponder why we should think it’s not us. Third, then, it causes us to consider how to minimize the probability of being the one making the mistake. From the real-world 'issues' with the efficient market hypothesis, to behavioral sources of investment error, Marks concludes: "In the end, superior investing is all about mistakes... and about being the person who profits from them, not the one who commits them."