Central Banks

We are all embarked upon a grand new adventure. It just hasn't been announced yet. It will never be officially announced but we will all get to play this brand new game in any event. Originally many had provided the name, "Currency Wars," to our new game but recent comments and subtle indications have invalidated the title. The new title is, "Global Thermonuclear Devaluation." The outward appearance will be a "Currency Wars" game but that is just a distraction. There are other motives afoot here and deviousness and distraction are always part of great political maneuvers. Devaluation by fiat may also lead to Deflation by fiat and then we may well all find ourselves on the Dark Side.

Not a day passes without the financial media denouncing gold as an investment option and hailing the bureaucrats heading the world's monopolist monetary central planning agencies as superheroes. It began prior to gold's recent breakdown, with widely cited bearish reports on gold published by Credit Suisse and Goldman Sachs, among others. Never mind that most of their arguments were easily unmasked as spurious. It should be no wonder though: gold's rise was the most conspicuous evidence of faith in central banking being slowly but surely undermined. The banking cartel relies on the fiat money system remaining intact; the legal privilege of fractional reserve banking provides it with what is an essentially fraudulent profit center unparalleled by any other in the world (fraudulent in terms of traditional legal principles, but not in terms of the current law of course). As a subtle reminder, in October (before the Nikkei began its 80% rally), a full 76% of the 'big money' fund managers surveyed declared themselves bearish on Japan. Currently, 69% of the managers surveyed in the most recent Barron's poll are bearish on gold.

We feel that now there is a Bermuda Triangle of economics - a space where everything tends to disappear without radar contact, a black hole in which rationality and science is replaced by hope, superstition and nonsense pundits pretending to understand the real drivers of the economy. The Bermuda Triangle in real life runs from Bermuda to Puerto Rico to Miami. The Economic Bermuda Triangle (EBT) one runs from high stock market valuations to high unemployment to low growth/productivity. There is a myth that the sunken Atlantis could be in the middle of this triangle. It has been renamed Modern Monetary Theory (MMT) to make it suit the black hole's main premise of ensuring there is a fancy name for what is essentially the same economic recipe: print and spend money, then wait and pray for better weather. The EBT is getting harder and harder to justify - if for nothing else because the constant reminders of crisis keep us all defensive and non-committed to investing beyond the next quarter. We all naively think we can exit the "risk-on" trade before anyone else. We are due for a new crisis. We have governments and central banks proactively pursuing bubbles. A long time ago, policymakers entered a one-way street where reversing is, if not illegal, then impossible.

Aside from light volume there’s no argument with the tape. It’s quite positive but much overbought. Earnings news is beginning to wane leaving less for bulls to respond to. Many previous reliable technical indicators are succumbing to all the money printing. Looking at those markets where QE is not taking place perhaps reveals the real market conditions.

Whoever orchestrated the last two hour closing ramp sure has a satanic sense of humor, opting to close the S&P at 1666 or exactly 1000 points above the "generational" low. A late-day desperation to buy-buy-buy, triggered by an avalanche of stops being triggered in the DAX futures market (as it broke all time highs), sent stocks soaring. Treasuries had been weak all day (giving back yesterday's gains and more). The equity spurt was not accompanied by VIX or Credit or Oil or Copper but JPY's break of 103 was another trigger supporting the rise. But that doesn't matter. The release of weak IP and in-line CPI data on Wednesday seemed to trigger the 'change' as gold and silver diverged lower from copper and oil's surge, Treasuries rallied, and stocks and the USD surged thereafter. WTI crude ends the week unchanged (against a USD gain of 1.37%) with PMs down 6-7%. Volume was light today but that doesn't matter either.

Moments ago the USD value basket - the DXY - rose to highs not seen since July 2010. The recent 6.6% swing is at an annualized 25% rate of appreciation. The dollar appears to have now become the flight-to-safety currency, which historically has been associated with plunging risk values. However, now that the dollar strength is simply a function of other central banks perceived as diluting their currencies more, and injecting capital flows into the G-0 system, all of which is expected to sooner or later make its way to US stocks, this is paradoxically, now a risk on factor. For US companies that have to export into such an environment, this may not be quite risk on, but that is something one can roundly ignore for now.

Parasites must balance their drive to maximize what they extract from their host with the risk of losing everything by killing their host. This is the dilemma of the parasitic partnership of the central state and financial Elites everywhere: to extract the maximum possible in debt payments and taxes without sparking rebellion and revolution. The 30 million whose labor funds the parasitic status quo don't have to rebel; they simply have to stop going to work, stop starting enterprises, stop being productive. They just have to tire of being the host, tire of being debt-serfs, tire of being tax donkeys. The trick to suppressing revolution is to keep debt-tax serfdom bearable. The parasitic Elites are keeping the host going, but at a high cost in resiliency. Let's see how long the host lasts once a crisis hits.

It is only logical that when one of the smarter people in finance warns that he "sees bubbles everywhere" that he should be roundly ignored by those who have no choice but to dance. Because Bernanke and company are still playing the music with the volume on Max, and if not for POMO there is always FOMO. However, if there is any doubt why this "rally is the most hated ever", here are some insights from the Bond King from an interview with Bloomberg TV earlier today: "We see bubbles everywhere, and that is not to be dramatic and not to suggest they will pop immediately. I just suggested in the bond market with a bubble in treasuries and bubble in narrow credit spreads and high-yield prices, that perhaps there is a significant distortion there. Having said that, it suggests that as long as the FED and Bank of Japan and other Central Banks keep writing checks and do not withdraw, then the bubble can be supported as in blowing bubbles. They are blowing bubbles. When that stops there will be repercussions. It doesn't mean something like 2008 but the potential end of the bull markets everywhere. Not just in the bond market but in the stock market as well and a developing one in the house market as well."

There are no surprises in the latest World Gold Council Gold Demand Trends report other than the fact that statistics show global demand for gold in Q1 2013 was on the increase before the COMEX raid on April 15th. This is a clear indication that the fundamentals supporting a strong price for gold in the long term remain and also helps to explain why there was such a shortage of gold bars and coins in the weeks after April 15th.

China's demand for gold jumped 20% to 294 tonnes in the first quarter of 2013, while global gold demand overall slid 13% thanks to the dramatic rotation of demand from paper to physical. Chinese demand in gold bars and coins grew to 109.5 tonnes - more than double the five-year quarterly average of 43.8 tonnes. Central banks added 109.2 tonnes of gold to their reserves in Q1 2013, the ninth consecutive quarter of net purchases. But it was the Q1 ETF outflows of 176.9 tonnes, equating to a 7% decline in total gold ETF holdings that obscured the strong rise in investment for gold bars and coins at the retail level. In the face of the huge 'paper' gold ETF outflows, 'physical' gold demand surged to its highest in 18 months...

In a world in which fundamentals no longer drive risk prices (that task is left to central banks, and HFT stop hunts and momentum ignition patterns) or anything for that matter, it only makes sense that the day on which Japan posted a better than expected annualized, adjusted Q1 GDP of 3.5% compared to the expected 2.7% that the Nikkei would be down, following days of relentless surges higher. Of course, Japan's GDP wasn't really the stellar result many portrayed it to be, with the sequential rise coming in at 0.9%, just modestly higher than the 0.7% expected, although when reporting actual, nominal figures, it was up by just 0.4%, or below the 0.5% expected, meaning the entire annualized beat came from the gratuitous fudging of the deflator which was far lower than the -0.9% expected at -1.2%: so higher than expected deflation leading to an adjustment which implies more inflation - a perfect Keynesian mess. In other words, yet another largely made up number designed exclusively to stimulate "confidence" in the economy and to get the Japanese population to spend, even with wages stagnant and hardly rising in line with the "adjusted" growth. And since none of the above matters with risk levels set entirely by FX rates, in this case the USDJPY, the early strength in the Yen is what caused the Japanese stock market to close red.

Major central bank activism and some sporadically good economic data in the U.S. have lifted equity markets and also helped the credit markets continue their rally. Central bank policy has been focused on an emergency bailout footing to stave off sudden panic and is also is aimed at stimulating economic activity. This has involved incentivizing households and businesses to expand and take some more risk. But no new policy initiative is perfect – not in implementation nor is it precise in its impact. Some in the markets and even in the Fed itself worry that the massive and unprecedented easing could be causing its own distortions and perverse side effects. It has clearly triggered a chancy search for yield that may yet lead to new asset bubbles and financial instability. There are numerous examples as Abraham Gulkowitz's PunchLine (chart extravaganza) shows. While the liquidity provided by key central banks -- including the move by the Bank of Japan to initiate massive monetary easing -- will likely continue suppressing yields, there is a serious argument to be made that the rallies have moved beyond fundamentals... This increases the likelihood of more surprises, not less...

The greatest disconnect in the world today is the underlying economies of the world and the markets; all of the markets. This river is wide and getting wider given the money that the central banks are pushing downstream. The flood has reached all of the markets, Real Estate, the banks, many corporations, any and all borrowers with our incredibly low interest rates, but it has had little impact on the Main Streets of the planet. There is, in fact, a bubble of epic proportion.

Confirming that in a world in which either commercial or central banks have to be constantly be churning out debt, and in a world in which Europe is doing neither (with European commercial loan growth posting sequential declines across the board, and the ECB's balance sheet still declining although likely not for long), "growth" as defined by conventional standards, is impossible, we got today's European Q1 GDP data. Not only was it bad, but it was even worse than most had expected.

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• EU Oil Manipulation Probe Shines Light on Platts Pricing Window (BBG)
• BMWs Cheaper Than Hyundais in Korea as Tariffs Crumble (BBG)
• Stock Boom Isn't a Bubble, Says BOJ's Kuroda (WSJ)
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• Private-Equity Firms Build Instead of Buy (WSJ)
• Bloomberg Saga Highlights Clash Between Two Worlds (WSJ)
• Bank documents portray Cyprus as Russia's favorite haven (Reuters)
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• Argentines Hold More Than $50 Billion in U.S. Currency (BBG)