Say what you want about the gold price languishing below $1200 (or not, as the case may be, after this week), and say what you want about the technical picture or the “6,000-year bubble,” as Citi’s Willem Buiter recently termed it; but know this: gold is an insurance policy — not a trading vehicle — and the time to assess gold is when people have a sudden need for insurance. When that day comes - and believe me, it’s coming - the price will be the very last thing that matters. It will be purely and simply a matter of securing possession - bubble or not - and at any price. That price will NOT be $1200. A “run” on the gold “bank” would undoubtedly lead to one of those Warren Buffett moments when a bunch of people are left standing naked on the shore. It is also a phenomenon which will begin quietly before suddenly exploding into life. If you listen very carefully, you can hear something happening...
Virtually every day there is an eruption of lunacy from one central bank or another somewhere in the world. In short, the central banks of the world are embroiled in a group-think mania so extreme and irrational that it puts one in mind of the spasm of witchcraft trials that erupted in the Massachusetts Bay Colony nearly four centuries ago. As a practical matter, this mania amounts to a race to the currency bottom and the final extinguishment of the price discovery mechanism in every financial market on the planet. Flying blind, the financial markets are thus bubbling - in the delirium phase - like never before. That is, until they don’t.
The financial media is euphoric because stocks are rallying. But stocks are ALWAYS the last to “GET IT.” The currency markets (which trade $5 trillion per day) realize that something MASSIVE is underway. And it’s only just beginning.
The story here is not Oil; it’s about a massive bubble in risk assets fueled by borrowed Dollars blowing up. The last time around it was a housing bubble. This time it’s an EVERYTHING bubble. And Oil is just the canary in the coalmine.
Could the Entire Post-2011 Move Be Just One Big False Breakout...A Blow Off Top Induced By Manic Money Printing?
China's overnight destruction of $80 billion of eligible collateral from the great global carry trade has had destructive consequences on the massively crowded short JPY (long USDJPY) trade. Haviung already lost ground following the dismal downward revisions in GDP, USDJPY is down 350 pips from yesterday morning's highs (This is the biggest 2-day drop in USDJPY in 18 months.) and the Nikkei 225 is down over 700 points in the same period... Abe approval ratings are plunging-er. Did the downward revision to Japanese GDP straw finally break the back of the Central Bank Omnipotence camel?
Amid the collapse of the global carry trade, no nation on earth has benefited more (and is now suffering more) from the dash-for-trash, buy-the-pig-sty trade than Greek stocks and bonds. Combining carry unwinds with uncertainty over snap Presidential elections (which could usher in a left-wing anti-EU party into power) and a 'technical-only' extension of its handouts from Troika and Greek capital markets are in freefalll. The Athens Stock Index is down over 11% on the day, destroying 3 weeks of gains; the Greek 3Y bond price has collapsed (as the carry-traders pile out through small doors) inverting the yield curve - never a good sign.
While it took a few hours for people (and machines) to realize exactly what China did last night, the fallout in risk markets is now clearly evident when a central bank decides enough-is-enough for speculative wealth creation bubble-followers. As we described last night, China's tightening has dramatically influenced the carry trade (USDJPY back under 120) and thus global stocks (from Abu Dhabi to Greece), global corporate bonds (all significantly wider) and European peripheral bonds (cracking wider) all face pressure. The beneficiary safe havens so far are precious metals (Gold > $1315) and US Treasuries (30Y at 2014 low yields). For now the mainstream media's narrative is that this oil-driven (which is fantasy as oil prices are up today) - this is the fallout from the marginal removal of $80bn of leverage collateral from the world's carry trades...
It wasn't just China's long overdue crash last night. In addition to the Shanghai Composite suffering its biggest plunge since August 2009, there has been a sharp slide in the USDJPY which has broken its uptrend to +∞ (and hyperinflation), and around the time Chinese gamblers were panicking, the FX pair tumbled under 120, although since then the 120 tractor beam has been activated. Elsewhere, the Athens stock exchange is also crashing by over 10% this morning on the heels of news that the Greek government has accelerated the process to elect the next president and possibly, a rerun of the drama from the summer of 2012 when the Eurozone was hanging by a thread when Tsipras almost won the presidential vote and killed the world's most artificial and insolvent monetary union. And finally, the crude plunge appears to have finally caught up with ground zero, with ADX General Index in Abu Dhabi plunging 3.5%, also poised for the biggest drop since 2009. In fact the only thing that isn't crashing (at least not this moment), is Brent, which did drop to new 5 year lows earlier under $66, but has since staged a feeble rebound.
This problem is north of $9 trillion… literally than the economies of Germany and Japan COMBINED. And it's bursting NOW.
As long as corporations continue borrowing money to buy back their own stocks and the yen keeps dropping, the SPX will continue lofting higher.
Thanks to the People's Bank of China...
In the final part of Hugh Hendry's 3-part (part 1 and part 2 here) interview with MoneyWeek's Merryn Somerset the Sanguine Scot, perhaps surprisingly to some given his previous negativity - though fitting with his world view of fiat currency destruction - believes "to bet against China or Chinese equities, or the Chinese currency is to bet against the omnipotence of central banks. One day that will be the right trade, just not ready or sure that that is the right trade today."
Stability is a myth yet it’s what we humans strive for...
"The market has been dodging boomerangs, not bullets, and they are likely to come back harder for it." Importantly, rich valuations here cannot be “justified” by appeals to current interest rates or profit margins unless that justification carries with it the assumption that both zero interest rate policy and cyclically-elevated profit margins will be sustained for decades, coupled with the assumption that economic growth will proceed at historically normal rates.