European Central Bank

The last time we looked at monthly Chinese imports of gold from Hong Kong in 2012, the comparable country in question was Portugal (whose citizens, if not central bank, incidentally have run out of gold to sell), because that is whose total gold holdings (at 382.5 tons) Chinese imports had just surpassed. Fast forward a month later, and the update is even more disturbing. In July, Chinese gold imports from HK, after two months of declines, have picked up once more and hit a 3-month high of 75.8 tons. While it is notable that this number is double the 38.1 tons imported a year prior, and that year-to-date imports are now a record 458.6 tons, well over four times greater than the seven month total in 2011 which was 103.9 tons, what is far more important is that in the first seven months of 2012 alone China has imported nearly as much gold as the total holdings of the hedge fund at the heart of the Eurozone, elsewhere known simply as the European Central Bank, and just as importantly considering the import run-rate has hardly slowed down in August, which data we will have in a few weeks, it is now safe to say that in 2012 alone China has imported more gold than the ECB's entire official 502.1 tons of holdings.

Draghi floods the Eurozone with new money. The Bundesbank says it's like printing banknotes and won't solve the problem. Who is getting sterilized?

Now that oil’s price revolution – a process that took ten years to complete – is self-evident, it is possible once again to start anew and ask: When will the next re-pricing phase begin? Most of the structural changes that carried oil from the old equilibrium price of $25 to the new equilibrium price of $100 (average of Brent and WTIC) unfolded in the 2002-2008 period. During that time, both the difficult realities of geology and a paradigm shift in awareness worked their way into the market, as a new tranche of oil resources, entirely different in cost and structure than the old oil resources, came online. The mismatch between the old price and the emergent price was resolved incrementally at first, and finally by a super-spike in 2008. However, once the dust settled on the ensuing global recession and financial crisis, oil then found its way to its new range between $90 and $110. Here, supply from a new set of resources and the continuance of less-elastic demand from the developing world have created moderate price stability. Prices above $90 are enough to bring on new supply, thus keeping production levels slightly flat. And yet those same prices roughly balance the continued decline of oil consumption in the OECD, which offsets the continued advance of consumption in the non-OECD. If oil prices can’t fall that much because of the cost of marginal supply and overall flat global production, and if oil prices can’t rise that much because of restrained Western economies, what set of factors will take the oil price outside of its current envelope?

• Jobs Gauge Carries Election Clout (WSJ)
• Draghi Lured by Fractious EU Leaders to Build Euro 2.0 (Blooomberg)
• Rajoy stance sets stage for EU stand-off (FT)
• China Approves Plan to Build New Roads to Boost Economy (Bloomberg)
• Hollande faces questions on tax pledge (FT)
• Putin Looks East for Growth as Debt-Ridden Europe Loses Sheen (Bloomberg)
• Strike Grounds Half of Lufthansa's Flights (Spiegel)
• The weakest will win in the euro battle (FT)
• Hilsenrath: Fed Economic, Interest Rate Forecasts Will Include 2015 Outlook (WSJ) - because he just figured that out
• Obama Presses Plan for U.S. Resurgence (WSJ)
• Hong Kong to Restrict Sales of Homes at Two Sites to Locals (Bloomberg)
• Drought Curbs Midwest Farm-Income Outlook, St. Louis Fed Says (Bloomberg)

Several months ago we first suggested that the only outcome of the ongoing antagonism between Germany, the now Goldman-controlled European central bank hell bent on generating inflation at any cost, and the rest of Europe's insolvent states, would be a German referendum in which the German people themsleves are asked what they think of the current mess Europe finds itself in. Naturally, days like today, when the ECB does away with inflationary caution and returns to tried and failed methods - because as a reminder conditional secondary market bond purchases are nothing new, and were last tried in the summer of 2011 when Italy became the latest entrant to the SMP program, and failed - is when the impetus for referendum would be highest. Sure enough, German Spiegel has come out with an article pulling precisely on this increasingly more festering wound for the German population.

So what's driving these high ass oil prices? Fundamentals, paper pushing derivatives, fraud, or fear? A common sense discussion ensues...

One of the primary purposes of a government, any government, is to sustain itself. In its final hours it will do almost anything possible for its self-preservation. While everyone stares at Frankfurt and the last ditch effort of Mr. Draghi there have been other events which are part of this play and merit your attention. Austria has come out and stated quite succinctly that no more Austrian money will be used for other countries; any other countries. Yesterday the Netherlands stated in absolute terms that no more of their money will be used for Greece. If the condition of any ECB funding is to be the approval of the EU and the use of their Stabilization Funds then what Mario Draghi is proposing may never come to pass, may never happen and may just be a rhetorical exercise in wand waving. To us, the world seems askew at present. China is in serious decline, Europe is in a virtual recession as Eurostat releases the numbers today and points to a -0.2% contraction of the EU-17. The markets rally based upon the supposed three Saviors of the world, the central banks of the United States, Europe and China and so the worse that it gets the larger the rally as the central banks will ease and ease again until some kind of wall is hit.

The ECB has released the details of its SMP 2.0 program, aka the OMT program, which will be pari passu, unlike the SMP 1.0. The full details are a whopping 472 words. Furthermore, we hope that it is quite clear to Greece that if the ECB has bought Greek bonds under the new SMP 2.0 program instead of SMP 1.0, its debt would now be about €100 billion less.

From the ECB:

• Draghi Credibility At Stake As ECB Tries To Save The Euro (Bloomberg)
• Clinton Returns to Back Obama (WSJ)
• Taxi fares up 17% in New York City (Toronto Sun)
• High Speed Scandal: Ferrari Incident Rocks China (Daily Beast)
• China’s Richest Man Benefits From Thirst For Soft Drinks (Bloomberg)
• China August export growth seen weak, imports slow (Reuters)
• Death to PowerPoint! (BusinessWeek)
• Sweden surprises with interest rate cut (WSJ)
• IMF demands greater clarity on Irish austerity plans (Reuters)
• At Abercrombie & Fitch, Sex No Longer Sells (Bloomberg)
• And the best for last: California Treasurer Backs Law to Ban Costly Long-Term Bonds (Bloomberg) -> legislating low, low yields

Whether it is "buying-the-rumor" to "sell tomorrow's news" or some contagion from domestic bank-to-sovereign credit arbitrage, European credit markets are giddy with the Draghi rumors. European sovereigns are better but are leaking back a little now - with 2Y limping higher in yield. European stocks seem thoroughly unimpressed for now broadly-speaking (despite EUR strength helping drag US equities higher?) The world, it seems, has no idea what is going on once again... and then Merkel adds this:

• *MERKEL TELLS LAWMAKERS SHE OPPOSES UNLIMITED ECB BOND PURCHASES
• *MERKEL CAN ACCEPT TEMPORARY ECB BOND BUYING, BARTHLE SAYS
• *MERKEL CAN ACCEPT ECB BOND BUYING OF SHORT MATURITIES: BARTHLE

Which sends EURUSD into spasm...

Gold prices languished from 1980 to 2000 and had declining correlations with debt levels because GDP growth was sufficient to mute fears about budget and deficit issues. The current economic recovery has been too weak to support a sustained rise in real rates above the 2% level that has acted an inflection point for gold prices. With energy and food inflation deepening and soon to affect consumer price indices, interest rates may have to rise significantly in order to restore real interest rates above 2%.  This is with ex Federal Reserve Chairman Volcker did in the late 1970’s - when he increased interest rates to above 15% in order to protect the dollar and aggressively tackle inflation. It is unlikely that similar ‘hawkish’ monetary policy would be implemented by the Bernanke Fed today. It is unlikely that they would and even doubtful if they could – given the appalling fiscal situation and levels of debt in the US and global economy.  A continuing succession of higher real gold prices above the inflation adjusted high, or real record high, of $2,500/oz is likely until we see interest return to more normal levels and zero percent interest policies are supplanted by positive real interest rates.

In what can only be interpreted as a huge disappointment for the ECB and Draghi yielding to German demands, Bloomberg has leaked what likely will be the final plan of the ECB tomorrow, which contrary to previously rumors stating that the ECB will pursue yield caps, or even just buy bonds on an unsterilized basis, appears to be a huge dud:

• ECB BOND PLAN SAID TO REFRAIN FROM SETTING PUBLIC YIELD CAPS
• DRAGHI'S BOND PLAN SAID TO PLEDGE UNLIMITED, STERILIZED BUYING
• ECB PLAN SAID TO FOCUS ON GOVT BONDS, MATURITIES UP TO 3 YEARS
• ECB SAID TO CONSIDER SELLING BONDS IF CONDITIONS NOT MET
• ECB PLAN SAID TO STRESS CONDITIONALITY OF ANY BOND PURCHASES
• ECB BOND PLAN SAID TO HAVE BROAD COUNCIL SUPPORT - but not unanimous, as Germany again objects

The keyword above is highlighted: sterilized, which simply means for those who are unaware, such as all the algos taking the EURUSD higher, that the ECB's entire overhyped plan is nothing more than a continuation of the Securities Market Program, or the SMP, which has been dormant for over 25 weeks, and which was deactivated because it did not work! Because sterilized means no new money enters the system, something which for Europe is unacceptable considering Spain alone is now seeing $100 billion in outflows each month.

With one day to go until the European soap opera hits its peak, and with the ECB doing all it can to spread disinformation and sow discord and disunity between Germany and everyone else on both the ECB governing council and everywhere else, Germany has decided to again make it clear just where it stands on the topic of hyperinflation and other printing matters. The punchline:

• ECB'S DRAGHI DOESN'T HAVE 'TOO MUCH' SUPPORT FROM MERKEL, MERKEL BACKS WEIDMANN
  
• ECB CAN ONLY BUY BONDS ATTACHED TO CONDITIONALITY

But wait, there is much more. Readers may recall that yesterday that one of the articles we pointed out came from Dutch Dagblad which suggested that it was Weidmann who was isolated on the ECB governing council, and that the Dutch member of the ECB council Klass Knot as well as all other members was "for buying government bonds of Southern European countries." Well, prepare to be shocked, because what kind of soap opera would it be if it wasn't for unexpected narrative plot lines. Today, Frankfurt-based Market News reported precisely the opposite, and not only is Knot on the same side as the Germans, but so are virtually all the other "virtuous" European countries, aka the non-beggars.

But now, there is no deus ex machina

In two days Mario Draghi may, although without Germany's blessing most likely will not, announce vague terms of how the ECB plans on monetizing hundreds of billions in short-term (sub-3 Year) bonds by Spain and Italy, which according to the ECB is not really monetization, and the only thing that is needed is for the two countries to admit they are insolvent, something which paradoxically will never happen as long as the ECB does everything in its power to spook markets away from fair clearing levels, and to keep the cashflow implied price at record divergence from the centrally-planned "valuation" determination. But let's assume Draghi does go ahead and one up Bernanke, announcing the next easing round a week ahead of the September FOMC meeting, as both central banks take the lunge into the latest lap of currency devaluation. What happens then? Well, as JPM's Michael Cembalest puts it quite succinctly, Draghi will unleash nothing short of the transformation of the ECB from the European Central Bank to the European Creosote Bank (see below for the reason). Numerically, this will mean that once the ECB is done monetizing another €1 trillion or so in bonds in the next year, the ECB will then hold just shy of a unimaginable 50% of the entire Eurozone GDP, taking the New Normal monetary world well beyond the rabbit hole and deep inside the twilight zone.