Hint: It's not the "sovereigns." The chart below (an update of a chart we showed some years ago: not unexpectedly, Dexia no longer made the cut) shows the ratio of the biggest European and American bank assets to domicile nation GDP. The red line is the 50% assets/GDP breakeven. It is safe to say that if a bank's "assets" whether marked to myth, unicorns, or markets (sadly nobody has done the latter in the past 3 years) represents at least half of a domicile nation's GDP, the bank is obviously Too Humongous To Fail, and when it comes to leverage it is its unelected executive committee which calls the real shots for not only the host country, but any monetary union it may be part of. This is how 20 or so corner offices hijacked Europe. The ironic observation is that for all the complaints about the TBTF phenomenon in the US (banks in red), it is Europe where the TBTF spectacle will truly unfurl once the central banks finally lose control, and the giant unwind begins.
While the discussions between these two legends varied from Phat Phong nightlife to Dow 30,000, and from China bullishness to AAPL bearishness, it was the conversation about the actions of Bernanke, and more importantly our political leaders that summed up perfectly the dreadful reality in which we find ourselves. The punchline: "It is very dangerous to have ignorant people believing that they know something."
Alan Wheatley, Global Economics Correspondent for Reuters has written a very interesting article, 'Analysis: China's currency foray augurs geopolitical strains’ where he emphasizes China’s desire to wean out the US dollar’s currency reserve status. China is actively taking steps to phase out the US dollar which will decrease volatility in oil and commodity prices and deride the ‘exorbitant privilege' the USA commands as the issuer of the reserve currency at the centre of a post-war international financial architecture which is now failing. In 1971, U.S. Treasury Secretary John Connally said, "It's our currency and your problem". China is frustrated with what it sees as the US government’s mismanagement of the dollar, and is now actively promoting the cross-border use of its own currency, the yuan, or also called the renminbi, in trade and investment. China’s goal is to decrease transactions costs for Chinese importers and exporters. Zha Xiaogang, a researcher at the Shanghai Institutes for International Studies, said Beijing wants to see a better-balanced international monetary system consisting of at least the dollar, euro and yuan and perhaps other currencies such as the yen and the Indian rupee. "The shortcomings of the current international monetary system pose a big threat to China's economy," he said. "With more alternatives, the margin for the U.S. would be greatly narrowed, which will certainly weaken the power basis of the U.S."
There was a time when the world had (somewhat) free markets. Then Lehman failed as the inevitable culmination of a credit bubble that was second in size and severity only to the one being blown currently, and the central planners took over, converting equity, bond and FX markets into nothing but monetary policy tools dominated by central banks. Below is a great summary of how parallel to SkyNet's HFT takeover of stock trading, the central planners conducted their own not so stealthy take over of all capital markets. The chart is open-ended. Expect much more intervention by the Big 4 in the months and years ahead as the circular nature of increased central bank intervention leading to less faith in financial markets leading to increased private sector deleveraging leading to increased-er central bank intervention and so on, accelerates.
With precious metals once again on the rise, the questions begin as to whether or not gold is in a bubble. While these questions never seem to occur among the cogniscenti when equity prices race ahead non-stop for months on end with no volatility, Brent Johnson (of Santiago Capital) offers up five 'facts' that help to explain why gold at $1800 is far from a bubble - especially as central banks shift from 'measured' responses to open-ended debauchment.
Hayman Capital's Kyle Bass is back and cutting through the caustic bullshit that surrounds every waking moment in this kick-the-can world. Dispelling the myth of our 'deleveraging' virtue, with global debt having grown from $80tn to over $200tn in the last ten years alone (a 10.7% CAGR) and the frightening reality of central bank balance sheet growth of 16% per annum, Bass concludes (rightly) that "you can't do this for very long" as governments infinitely leverage and central banks have begun the endgame of open-ended money-printing. Addressing the question of timing, Bass notes that while Europe and Japan are 'perceived' to be 'staying together' there are in fact devastating losses occurring (ask Greek bond-holders) and he firmly believes that "Germany will never go joint-and-several with the rest of Europe." The world sits at a place it has never been before in peace-time - as far as global debt balances and deficits - and that is why the global investing playbook is so hard. He goes on to address hyper-levered economies, delayed inflationary outcomes, and worries that the cost-push (lower GDP, higher CPI) prints are just beginning in Europe. As a fiduciary, and something all investors should consider, Bass states "Given what we see coming, our job is not to lose money!"
In a post entitled 'Mugabenomics: Inflation in UK Higher than in Zimbabwe,' Guido Fawkes points out how the Liberal Democrats Vince Cable once warned that Quantitative Easing (QE) was “Mugabenomics.” This was prior to coming to power and a swift u-turn which would make even the most slippery politician proud. Remember when Vince Cable warned that Quantitative Easing (QE) was “Mugabenomics”? Vince flip-flopped on that even before he joined the coalition. Guido Fawkes then reminds its readers about the time when George Osborne said “Printing money is the last resort of desperate governments when all other policies have failed.” Alas as the blog rightly warns, "In government Osborne has overseen the printing of more money than any other Chancellor in British history. A quarter of the national debt – all this government’s overspending – has been bought by the Bank of England via QE." “So it is not a shock that inflation in Zimbabwe (3.63%) is now lower than inflation in the UK (3.66%, August 2011-July 2012).” Those who have been warning about this monetary madness for some years are gradually being proved right
Our analysis of the physical gold market shows that central banks have most likely been a massive unreported supplier of physical gold, and strongly implies that their gold reserves are negligible today. If Frank Veneroso’s conclusions were even close to accurate back in 1998 (and we believe they were), when coupled with the 2,300 tonne net change in annual demand we can easily identify above, it can only lead to the conclusion that a large portion of the Western central banks’ stated 23,000 tonnes of gold reserves are merely a paper entry on their balance sheets – completely un-backed by anything tangible other than an IOU from whatever counterparty leased it from them in years past. At this stage of the game, we don’t believe these central banks will be able to get their gold back without extreme difficulty, especially if it turns out the gold has left their countries entirely. We can also only wonder how much gold within the central bank system has been ‘rehypothecated’ in the process, since the central banks in question seem so reluctant to divulge any meaningful details on their reserves in a way that would shed light on the various “swaps” and “loans” they imply to be participating in. We might also suggest that if a proper audit of Western central bank gold reserves was ever launched, as per Ron Paul’s recent proposal to audit the US Federal Reserve, the proverbial cat would be let out of the bag – with explosive implications for the gold price.... We realize that some readers may scoff at any analysis of the gold market that hints at “conspiracy”. We’re not talking about conspiracy here however, we’re talking about stupidity. After all, Western central banks are probably under the impression that the gold they’ve swapped and/or lent out is still legally theirs, which technically it may be. But if what we are proposing turns out to be true, and those reserves are not physically theirs; not physically in their possession… then all bets are off regarding the future of our monetary system.
Technical indicators such as MACD, RSI and STO show that silver is slightly overbought short term.
However, silver can remain overbought in the short term as was seen in silver’s rally in 2011 when silver nearly doubled by surging from below $27/oz to nearly $50/oz in just 3 months - from January 27th 2011 to April 28th 2011.
At its most fundamental level, SocGen's Dylan Grice notes that economic activity is no more than an exchange between strangers. It depends, therefore, on a degree of trust between strangers. Since money is the agent of exchange, it is the agent of trust. Debasing money therefore debases trust. Grice emphasizes that history is replete with Great Disorders in which social cohesion has been undermined by currency debasements. The multi-decade credit inflation can now be seen to have had similarly corrosive effects. Yet central banks continue down the same route. The writing is on the wall. Further debasement of money will cause further debasement of society. Dylan, like us, fears a Great Disorder.
Just in case there are still any hopes that the FT, or any other credible media outlet, may come up with a story, like it used to do almost daily back in 2011 and early 2012, that China, whose stock market continues to plumb 3 year lows, has some capacity to inject cash (that it doesn't have) into a broke continent (which would never repay said cash even if it existed), here comes none other than China's Sovereign Wealth Fund to make sure there is never again a rumor that China will bail out Europe. From Reuters: "China would be interested in buying into a Eurobond backed by core euro zone countries and considers investment in bonds issued by heavily indebted European countries unrealistic, a senior official with China's $480 billion sovereign wealth fund said. Jin Liqun, chairman of the supervisory board of the China Investment Corporation (CIC), said until fundamental problems of fiscal, social and monetary policies in euro zone countries burdened by debt are solved, there could be no investment." They never will be so scratch that possibility out. Now we can limit the universe of idiotic Europe is saved (it isn't - it is only a matter of time now before the ship sinks) rumors to at least one less.
When it comes to investing in gold, investors often see the world in black and white. Some people have a deep, almost religious conviction that gold is a useless, barbarous relic with no yield; it’s an asset no rational investor would ever want. Others love it, seeing it as the only asset that can offer protection from the coming financial catastrophe, which is always just around the corner. PIMCO's views are more nuanced and, we believe, provide a balanced framework for assessing value. Their bottom line: given current valuations and central bank policies, we see gold as a compelling inflation hedge and store of value that is potentially superior to fiat currencies.
To those familiar with Algebra, we suggest that the Ponzi scheme we live in is actually an overdetermined system, because there is no solution that will simultaneously cover all the financial and non-financial imbalances of practically any currency zone on the planet. Precisely this limitation is the driver of the many growing confrontations we see: In the Middle East, in the South China Sea, in Europe and soon too, in North America. That these tensions further develop into full-fledged war is not a tail risk. The tail risk is indeed the reverse: The tail risk is that these confrontations do not further develop into wars, given the overdetermination of the system! We have noticed of late that there’s a debate on whether or not the US dollar zone will end in hyperinflation and whether or not the world can again embrace the gold standard. The fact that we are still in the early chapters of this story does not allow us to state that hyperinflation is only a tail risk. The tail risk is (again) the reverse: That all the steps central banks took since 2008 won’t lead to spiraling quasi-fiscal deficits.
Venture capital (VC) has delivered poor returns for more than a decade. VC returns haven’t significantly outperformed the public market since the late 1990s, and, since 1997, less cash has been returned to investors than has been invested in VC. Speculation among industry insiders is that the VC model is broken, despite occasional high-profile successes like Groupon, Zynga, LinkedIn, and Facebook in recent years. As The Kauffman Foundations finds, from its 20-year history, investment committees and trustees should shoulder blame for the broken LP investment model, as they have created the conditions for the chronic misallocation of capital (no doubt driven by the failure of 'hope' over experience). All is not lost to the money-pumping narrative-followers though as five myths are destroyed and five recommendations made that may help LPs allocate and follow-through more effectively.