In the midst of the Great Depression, Treasury Secretary Andrew Mellon famously advised President Hoover to “liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate” instead of propping each industry up with tax dollars. This liquidation doctrine would “purge the rottenness out of the system” and make certain that “people will work harder” and “live a more moral life.” Contrary to popular belief, Hoover did not take Mellon’s advice and went forth with his own version of the New Deal that gave relief to farmers and supported wage rates in certain industries. These efforts, which were exacerbated under the presidency of Franklin Roosevelt, effectively prevented the market from clearing. The boom of the late 1920s that was driven by the Federal Reserve’s monetary inflation was not allowed to bust. Instead of liquidating the debt and allowing the economy to reach a sound footing, both the Hoover and Roosevelt administrations attempted to manage it back to health. The result was the longest period of unemployment ever recorded in American history.
The financial crisis of 2008 shook politicians, bankers, regulators, commentators and ordinary citizens out of the complacency created by the 25-year "great moderation". Yet, for all the rhetoric around a new financial order, and all the improvements made, many of the old risks remain (and some are far larger). The following 'story' suggests a scenario based on an 'avoidable history' and while future crises are not avoidable, being a victim of the next one is.
"John Banks was woken by his phone at 3am on Sunday 26th April 2015. John worked for Garland Brothers, a formerly British bank that had relocated its headquarters to Singapore in late 2011 as a result of..."
It will not come as a surprise to anyone who has spent any time reading Zero Hedge (here, here, and here very recently) but now yet another one of our 'crazy fringe blog' non-consensus ideas - the fact that China is cornered by inflation concerns and unable to ease aggressively - has now been confirmed by none other than the Bank of China and Bank of Korea themselves. As the WSJ reports, "The rise in global liquidity could lead to rapid capital inflows into emerging markets including South Korea and China and push up global raw-material prices." The latest round of easing by the U.S. will increase inflationary pressures for emerging-market economies, Mr. Chen said. "This contributes to a monetary-policy dilemma for Chinese authorities", he added. While markets have looked for signs of more forceful action by China's leaders to rekindle growth, some officials attribute the government's caution to fears of reigniting inflation. This confirms previous comments by the PBoC that "A domestic policy may be optimal for the U.S. alone. However at the same time it is not necessarily optimal for the world," he said at the time. "There is a conflict between the U.S. dollar's domestic role and its international settlement role."
So who will be buying Spanish bonds? Apparently no one but the ECB. And the ECB will only do this if Spain agrees to austerity measures… which Spain doesn’t want. Talk about a mess.
It appears that JPM and HSBC's monopoly in the warehousing of tungsten gold is coming to an end. Just two weeks after QEternity was announced, it has become obvious that the only things, literally, that will matter in the future are the ABCDs: Anything Bernanke Can't Destroy. And as a result of a surge in physical purchases, buyers need to store their metal somewhere. Sure enough, one of the the UK's most insolvent banks - Barclays - is more than happy to provide its brand spanking new warehousing services, with the opening of what will be on of Europe's largest PM vaults. From Dow Jones: "Barclays has opened its first precious metals vault in London in a bid to satisfy growing client demand for bullion as a store of value, the bank said Thursday. The vault, which houses gold, silver, platinum, palladium and rhodium and began operating earlier this month, is one of the largest in Europe. While the bank already has extensive trading and clearing capabilities, this is the first time that Barclays has been able to offer its own precious metals storage facility to its customers, having previously relied on third-party storage." Of course, if and when the scramble comes and everyone demands their gold from the vault located in an unknown location, but somewhere in the inner loop of London's M25, Barclays will just say "Ooops." But we will cross that bridge when we get to it.
Jens "I don't say no to everything" Weidmann just said "nein" again. This time confirming Germany's position that the banking union idea - or an aggregation of deposit guarantees - will not cover existing bad debts. In other words, this will not be allowed to become a back-handed way of transferring wealth from Germany to peripheral banks in a free lunch. He had more to say (via Bloomberg):
- *WEIDMANN: MUST ENSURE PEOPLE DON'T LOSE TRUST IN CENTRAL BANKS
- *WEIDMANN SAYS CENTRAL BANKS SHOULDN'T TAKE ON FISCAL TASKS
- *ECB'S WEIDMANN SAYS PRINTING TOO MUCH MONEY LEADS TO INFLATION
- *WEIDMANN SAYS BANKING UNION NEEDS TIME FOR PROPER PREPARATION
- *WEIDMANN SAYS BANK UNION SHOULDN'T COVER EXISTING BAD DEBTS
John Taylor, founder and CEO of the world's largest FX hedge fund, spoke with Bloomberg TV this morning and was his typically clarifying - if not sanguine - self when it comes to prospects in Europe and the US. Stating that he'll "probably always be a bear on the Euro", Taylor added that it is "hard to look at the European situation and see a cloudy sky become clear," and while there has been noisy swings in the movements of currencies of late, "the reason the euro is up is because the dollar is down - two guys have done this: Draghi and Bernanke." Ranging from FX to volatility, Taylor opines on the time-varying correlation of the weak euro with a strong US equity market and notes, however, that "the equity market is not showing any legs."
If there is one dominant consensus in the financial sphere, it is that the Federal Reserve's $85 billion/month bond-and-mortgage-buying "quantitative easing" will inevitably send stocks higher. The general idea is that the Fed buys the mortgage-backed securities (MBS) and Treasury bonds from the banks, which turn around and dump the cash into "risk on" assets like equities (stocks). This consensus can be summarized in the time-worn phrase, "Don't fight the Fed." This near-universal confidence in a QE-goosed stock market is reflected in the low level of volatility (the VIX) and other signs of complacency such as relatively few buyers of put options, which are viewed as "insurance" against a decline in stocks. The usual sentiment readings are bullish as well.
But what if QE fails to send stocks higher? Is such a thing even possible? Yes, it does seem "impossible" in a market as rigged and centrally managed as this one, but there are a handful of reasons why QE might not unleash a flood of cash into "risk on" assets every month from now until Doomsday
Today's quote of the day award goes to...
- AHMADINEJAD SAYS SITUATION IN IRAN `NOT SO DIRE'
- AHMADINEJAD SAYS IRAN ECONOMY `CERTAINLY BETTER' THAN U.S., EU
The irony of course is that absent the trillions in fiat created out of thin air by the "developed world's" central banks, and the destruction of the purchasing power of their populations, he would be absolutely right. The bigger irony is that the Iran is by far winning the global race to debase, with its currency hitting a new record low of 26,500 vs the USD just yesterday, and has lost more than half of its value in the past year. Needless to say, Iran's epic ability to destroy its currency with such utter disdain is making central bankers around the world green with envy.
Spain’s ten-year bond yield has broken back above 6%. To see Spain’s sovereign bond yields rising like this after the ECB announced it would essentially provide “unlimited” buying as support is simply stunning. And it indicates in plain terms that the ECB’s program was in fact a dud.
Desperate North Korea has exported more than 2 tons to gold hungry China over the past year to earn US $100 million. Even in tough times during the Kim Il-sung and Kim Jong-il regimes, North Korea refused to let go of its precious gold reserves. Chosun media reports that “a mysterious agency known as Room 39, which manages Kim Jong-un's money, and the People's Armed Forces are spearheading exports of gold, said an informed source in China. "They are selling not only gold that was produced since December last year, when Kim Jong-un came to power, but also gold from the country's reserves and bought from its people." This is a sign of the desperation of the North Korean regime and also signals China’s intent to vastly increase the People’s Bank of China’s gold reserves.
There has been a lot of ink spilled about how the stock market performs during Presidential election years generally leaning to why investors should be fully invested to the hilt. The current election year, with just three months remaining, has certainly played out to historical norms with the markets advancing on expectations of continued government interventions even as economic and fundamentals deteriorate. To wit Bespoke Investment Group wrote back in July: "We have highlighted the similarities between this year and prior Presidential Election years numerous times. Most recently, in early July we noted the fact that based on the historical pattern, the S&P 500 could see a modest pullback in mid-July coinciding with the kick-off of earnings season. Sure enough, the market saw some choppiness about a week and a half ago and subsequently rebounded in the middle of last week. Holding to the historical pattern, that rebound came right at the same time that the market historically sees its summer low. If the pattern continues, the S&P 500 could be set up for a nice rally to end the Summer. Will it hold? Only time will tell, but if the historical pattern has worked so far, what's to stop it from continuing?"
SNB bond-buying is "exacerbating" the gap between borrowing costs for stable countries like Germany and the rest of the 17-nation euro zone.
Liquidity, Fund Flows and Technicals matter now. Fundamentals, Dow Theory and the real economy, not so much.
Today’s AM fix was USD 1,766.75, EUR 1,369.36, GBP 1,088.37 per ounce.
Yesterday’s AM fix was USD 1,758.50, EUR 1,361.91 and GBP 1,084.96 per ounce.
Gold fell $8.60 or 0.49% in New York yesterday and closed at $1,764.50. Silver slipped to a low of $33.594 then rebounded in New York, but it still finished with a loss of 1.62%.