Central Banks

Recently, BOE head Mervyn King came out with a very surprising warning to his compatriots, accompanied with an apology that our own Ben Bernanke will never offer, namely: "I sympathise completely with savers and those who behaved prudently
now find themselves among the biggest losers from this crisis." Of course, the US central bank believes it has completed its third mandate job now that the US stock market, not to mention commodities, are starting to be reminiscent of the parabolic phase of the Harare stock market. But back in Europe, even as the EURUSD is surging (killing the dollar, and the primary driver behind US stocks) now that it is accepted that the continent will proceed with its latest full on ponzi scheme and have the EFSF acquire insolvent bonds, even as the ECB proceeds to raise rates, things are getting worse. This is precisely what King warned about in a speech that not surprisingly got absolutely no coverage in the US. Luckily, here is Simon Black's take on the very surprising speech by King which confirmed that the only beneficiaries of Bernanke's policies continue to be the top 1% that make up the financial oligarchy.... as always.

While we await for the Treasury Department to actually update its complete September TIC LT flow data tables, here is some of the data we can compile with what has been released so far. China is now once again solidly ahead of the Fed in terms of total Treasury holdings, owning $883.5 billion USTs in September, a $15 billion increase from August, of which $10 billion came from an increase in non-Bill holdings, and the balance from Short Term, which at $21 billion have risen to the highest since... April 2010. This is peanuts. The Fed will surpass this total by Thursday. The bigger surprise came from Japan, which added $28.4 billion in Treasury debt to a total of $865 billion, of which just $3.5 billion was from ST holdings. The broke UK moderated its torrid pace of gobbling up US debt and added just $10.7 billion in US paper to bring its new total to $459 billion. Notably, in September hedge funds (Carribean Banking Centers) sold $14 billion of Treasuries as they took the proceeds and invested it all in Apple to force the biggest short squeeze in history (note the number of HF adding Apple as of Sept. 30, shares which they have almost certainly disposed of since). The biggest surprise by far in today's TIC update had little to do with Treasury holdings but instead had everything to do with Agencies, the security most in peril courtesy of the massive fraud perpetuated by MERS and the robosigners. To wit: foreign official institutions (primary central banks) dumped a massive $31.4 billion in Agencies: a record number since the TIC data has been reported in 1978. This was offset marginally by Agency purchases by other foreigners of $23 billion, although the dump by central bankers what everyone will be focused on. This is certainly news that PIMCO and all the other RMBS investment funds did not need to see today.

Very much as expected courtesy of 100% correlations, and following the earlier drubbing in the EURUSD, gold is now falling after the central banks of America, Europe, and Asia have all issued press releases they are henceforth ceasing all currency debasements and will never monetize debt ever again. Seriously, though, following the parabolic move higher earlier, as the widely predicted and expected correction is taking place (see Rosenberg's note from yesterday), which has brought gold to the level last seen two long days ago, all the new price does is provide a cheaper entry point to a self-created gold standard. Thank you LBMA.

Something funny (and quite revolutionary) happened during the CBGA's (Central Bank Gold Agreement) year ending this Sunday - the group of 15 signatory banks sold a mere 6.2 tonnes of gold, a massive 96% decline from the year earlier, according to provisional data.This means that unlike in the past, when it was central banker prerogative #1 to sell some gold and every year just to keep all the longs on their toes, this year the trend has finally changed. As the FT reports, "the sales are the lowest since the agreement was signed in 1999 and well below the peak of 497 tonnes in 2004-05." And yes, we do love the FT's brilliant summation of the change in mindset: "In the 1990s and 2000s, central banks swapped their non-yielding
bullion for sovereign debt, which gives a steady annual return. But now,
central banks and investors are seeking the security of gold." Hm, when all of Europe (as well as America) is a smoldering heap of bearer bonds that will never get paid, and China is putting up a building today, only to blow it up yesterday, and boast a GDP growth rate of one gajillion, the FT may want to change the bolded assumption. Back to the Captain Obvious narrative of the original article: "The lack of heavy selling is important for gold prices both because a
significant source of supply has been withdrawn from the market, and
because it has given psychological support to the gold price. On Friday,
bullion hit a record of $1,300 an ounce." So market zero supply, and demand that is growing exponentially, means higher prices, eh? All those Voodoo 101 classes, and Poison Ivy college loans sure are paying off in droves...

Despite missing this most recent paper by Buiter at its first publication three weeks ago, it represents the bedtime reading for this evening as it is just as relevant now as it was then. In it, the Citi strategist asks "who will control the deep pockets of the central bank?" and does so from the perspective of a game of "chicken" in a prisoner dilemma context. Buiter summarizes the problem as follows: "As long as neither the monetary authority nor the fiscal authority gives in, the deficit is financed by public debt issuance. With the public-debt to GDP ratio rising without bound, an eventual catastrophe occurs: the sovereign defaults and banks holding large amounts of sovereign debt may collapse, triggering a financial crisis and a deep slump. Following default, the fiscal authority loses access to the government debt markets, at least for a while. The resulting need to instantaneously balance the government’s primary budget means sharp public  spending cuts and tax increases. This would be the "collision" outcome. The outcome where the monetary authority gives in and monetises public debt and deficits is called Fiscal Dominance. Monetary dominance is the outcome where the fiscal authority gives in and cuts public spending and/or  raises taxes to stabilise or reduce the public debt to GDP ratio to prevent a sovereign default." Buiter does a dramatic deconstruction of this theoretical principal to the practicality of Europe, in a truly fascinating and must read analysis. His conclusion is that the "analysis emphasises that the Eurosystem can absorb much larger losses without risking its solvency or undermining the effective pursuit of its price stability target. We don’t, however, argue that the resources of the Eurosystem should be used in this quasi-fiscal manner. Openness, transparency and accountability suffer when the central bank is used/abused for quasi-fiscal purposes, and the legitimacy of the institution can be undermined." Alas, this only means that fiscal stimulus fundamentalists like Krugman will now start pushing for monetary replacements to traditional policy. And with that QE2 (and its myriad of imminent associated alphabet soup programs) is even more of a certainty.

The move in the EUR has just hit ridiculous levels, with the nearly 300 pip intraday move comparable only to the EURCHF surge seen yesterday after quadruple SNB intervention. And frazzled US quants, having no clue what to do, decide to once again turn on the EUR signals pushing the market higher, with a 10% chance of a green close. Make no mistake - this is reciprocal liquidation, where morning margin calls in all other pairs were met by EURUSD covering of shorts,exacerbated massively by what is now almost certain ECB (not SNB) intervention. The negative here is that Germany will look at the Eur response and pitch its naked short ban to all other European countries, which will now gladly accept the proposal, myopically hoping for another 1-2 bp move in the EURUSD. We believe there may well be an announcement of a Europe-wide naked short covering ban this weekend, coupled with the imposition of a transaction tax.

Volatility in Euro trading is now reminiscent of bucket shop penny stocks. After plunging to the mid 1.22, the EURUSD is now back to green for the day. This is due primarily to panicked buying by various central banks every time the EUR drops to support levels, a fact now fully transparent to the entire market. More importantly, the EURJPY which is much more critical as a carry funding source to buy stocks, is almost back to unchanged, which in turn has forced a spike in the market to retrace nearly half its losses in under an hour. If anyone believes stocks track any fundamental news flow, our condolences. As disclosed last week, any stock trade, especially of the short variety, now faces the world's biggest moneyprinters in the world and high priests of Keynesianism as a very malevolent counterparty.

And so we get one step closer to the end. Look for bond yields in Europe, and especially the Bund, to roll over and accelerate to infinity as investors realize what monetary prudence capitulation is. Amusingly, the KomIntern won - comrades Lenin, Stalin, Marx, Engels, and all others who grace the dark pages of US historybooks, would have been celebrating if only they were alive today: May 9, in addition to "victory over fascism" day, is now also "victory over capitalism and free markets day." Rejoice comrades!

As the herpe of sovereign default continues to flare across Europe, Jürgen Stark of the ECB paints a refreshingly honest portrait of the horizon: "we may already have entered into the next phase of the crisis: a sovereign debt crisis." The sum of 'Taking stock: where do we stand in the crisis?' in four lines: while continental Europe is a deformed cripple; the US, UK and Japan are each morbidly obese, wart-ridden trolls; it's last call and everyone's drunk; so who do you want to lay with?

The ECB's executive board member Juergen Stark had a rare admission (and even rarer for a central banker demonstration of rationality) that not only are most advanced economies about to enter a "third wave, a sovereign debt crisis in most advanced economies", not only is a "timely exit of extraordinary fiscal measures crucial in order to ensure a continued recovery",  but that the mentioned recovery and economic improvements are largely as a result of "massive support measures taken by governments and central banks." In other words, the whole episode of the past year has been a one-time item which most analysts would exclude from "recurring operations" yet due to the magic of the Keynesian magic wand, the new normal is expected to persists as the magical "consumer" at some point takes over the recovery from the government effort. Alas, while the economy has indeed stabilized (effect), the cause continues to be purely based on governmental actions, as the consumer, and the private sector in general, continues retrenching. Too bad the US Federal Reserve has no aerobic critters than can formulate the same critical thoughts as Mr. Stark, or else they would realize that the path they are leading the US on is pure disaster, and furthermore, with the lessons from the last bubble fresh in everyone's mind, doing all they can to be branded mad, at least according to the Einsteinian definition of insanity: let's just keep flooding the system with money and keep hoping that something will change. In retrospect, pleading insanity in a decade when the entire western world is in ruins, before a tribunal of the people may not have quite the desired effect.

Gold bull markets are unique in that buying becomes driven by both fear and greed. Gold is quickly moving into the hands of those who are unwilling to gamble on fiat currencies or bonds as a store a value. The new owners of gold are unconcerned with its lack of yield but instead are focused on its historic ability to preserve wealth and its unquestionable value. Given the difficulty we have valuing paper money, it becomes extremely difficult to come up with a reasoned price target for gold. Today’s gold market is significantly different from the gold market of the 1970s for two reasons: 1) Central Banks are more likely to be buyers of gold today and 2) They clearly have little ability to dramatically raise interest rates with the massive increases in government issued debt. Thus, it is easy to envision a similar twenty-five fold increase in the gold price that was seen between 1970 and 1980, which would result in a gold price today above $6,000 per ounce. We expect the often quoted “1980 inflation adjusted high” of approximately $2,200 to be achieved in short order. These targets may well prove to be irrelevant, however, as the quality of our lives will be more greatly impacted by the continued evolution of our money and how the general public chooses to value it, or not. - Eric Sprott

We apologize in advance for the NY Magazine-style headline, but this is a report that has to be read by all Senators who are preparing to reconfirm Bernanke for a second term. When voting for the Chairman, be aware that all of America will now look at you as the perpetrators who are encouraging the greatest inter and intra-generational theft to continue, and as prescribed by Newton 3rd law, sooner or later, an appropriate reaction will come from the very same middle class that you are seeking to doom into a state of perpetual penury and a declining standard of living.

America spoke in Massachusetts and will speak again very soon if you do not send the appropriate signal that you have heard its anger - Do Not Reconfirm Bernanke.

One month ago, Zero Hedge did an exhaustive examination into the topic of over half a trillion of foreign FX liquidity swaps to central banks issued by the Fed, and how by administering this unprecedented incursion into international monetary policy, Ben Bernanke became the lender of last resort not only to US institutions on the brink, but to all those foreign central banks, and thousands of foreign financial institutions, who were massively short the dollar the last time the bubble popped (ring a bell?). Since we have ended up in the same boat promptly once again, and since the ponzi scheme can only continue so long before all those short the dollar scramble to cover shorts at some point in the future, as Roubini has predicted, it is merely a matter of time before the Fed will need to disburse another trillion or so of FX swaps to bail out all those who are shorting the US middle class into oblivion. We ignore the ethics of bailing out those who have done nothing but piggyback on the dollar carry trade, and in doing so, have decimated the purchasing power of America's working class, which is precisely what Ben Bernanke did. Buying stocks may be patriotic but bailing out those who want your dollar to purchase less tomorrow than it can today, sure does not pass the sniff test (Bernanke, of course, being at the top of that particular food chain).

India buys 200 metric tons of IMF gold.

Who's next?

Asian central banks have left unattended a bunch of pretty upset carry-traders... We had a well-established support line on EURUSD and on Friday when we tested it (for the 5th or 6th time) central banks came to the rescue. However, when we tried to break again this morning, the market awaited... in vain, and with no massive buyers it's a wave of stops that met the swing traders selling the break.