European Central Bank

The existing (and ongoing) massive expansion of base money into the banking systems of the US, England, and Japan is without precedent. As Nomura's Richard Koo notes, at 16x statutory reserves, the liquidity 'should' have led to unprecedented inflation rates of 1,600% in the US, 970% in the UK, and 480% in Japan. However, it has not, yet. In short, Koo explains, businesses and households in these economies have stopped borrowing money even though interest rates have fallen to zero. There is little physical or mechanical reason for the BOJ’s easing program to work. But the program could also have a psychological impact - and Japanese media is on an 'inflation' full-court press currently. The risk here is that not only borrowers but also lenders will start to believe the lies. No financial institutions anticipating inflation could ever lend money at current interest rates. No actual damage will be done as long as the easing program remains ineffective. But once it starts to affect psychology, the BOJ needs to quickly reverse the policy and bring the monetary base back to 'normal'. If the policy reversal is delayed, the Japanese economy (and inflation) could spiral out of control.

While Cyprus has been brushed away as a "storm in a teacup" and asset-gatherers stare blankly at their screens pointing at record highs to confirm the "market knows best", it appears something rather important 'broke' that day (and hasn't stopped breaking since). While we have discussed the rather glaring divergences between US equities' exuberance and global equity markets and macro- and micro- data; supposedly the Fed's key indicator (the 5Y5Y forward inflation expectation) has reversed rather significantly. The last two times, forward inflation expectations dropped so significantly, the ECB launched LTRO and the Fed launched QE3. It seems the BoJ's QQE is not having the effect perhaps they had hoped on inflation expectations. Will the Fed have to come to the rescue once again? And how will gold react to that?

Get that “extra space” to move ready, Mr. Draghi. Your promise to provide unlimited buying of bonds might get put to the test!

When the head of the IMF "thinks there is some good news," and applauds Japan for its "innovation," it is clear that Christine Lagarde is struggling for positives in this interview with Bloomberg TV. Though she says all the right things, dots-the-i's-and-crosses-the-t's off as a confidence-inspiring global elite should do, the lack of enthusiasm is clear. "I'm deliberately, decisively, desperately optimistic," she exclaims even as she admits that they just downgraded global growth expectations and somewhat slams the US for "blind and blunt" fiscal consolidation, preferring instead "austerity... but not front-loaded." All-in-all, "a bit of work needs to be done," is as good as it gets for now.

In a world in which one bank after another has scrambled to downgrade its outlook on gold, both before the recent bank CEO huddle with Obama last Thursday - the day the bottom fell out of the gold market - but especially after, when the real onslaught on gold truly started, it has been an outright blasphemy for the sellside to even hint at having a bullish outlook on gold. After all, how dare someone allocate capital to the barbaric metal at a time when the US is recovering nicely (it's not), and when the US currency is one again deemed safe (with the Fed diluting its monetary base by 3% per month every month until the end of 2014 and likely forever, it isn't), any deviation from this latest script which desperately attempts to push savers out of the safety of gold into the fiat paper, where the proceeds are invested into stocks or simply spent (a la what happened in Cyprus and the latent fear of deposit confiscation everywhere in Europe), is not permitted. Yet this is precisely what CLSA's Chris Wood, author of the famous Greed & Fear, which is never afraid to be contrarian or to break the lemming mold, has done. His brief take on the recent gold plunge? "This is a buying opportunity too good for investors to miss." Buyers of physical gold everywhere in the world agree.

The German stock market, the DAX, has officially taken out its trendline from the June 2012 low when European Central Bank President Mario Draghi promised “unlimited bond buying” to support Europe.

There's never a good lawyer around when you really need one! With a 96+% (tens of $billions) loss to equity investors, one would think law firms and regulatory bodies would be chomping at the bit for this one!

Following yesterday's most recent Europe-led rout, the market is attempting a modest rebound, driven by the usual carry funding currency pair (EURUSD and USDJPY) levitation, although so far succeeding only modestly with not nearly enough overnight ramp to offset the bulk of yesterday's losses. In a centrally-planned, currency war-waging world, it is sad that only two key FX pairs matter in setting risk levels. But it is beyond hypocritical and highly ironic that according to a draft, the G-20 will affirm a commitment to "avoid weakening their currencies to gain an advantage for their exports." So the G-20 issues a statement saying nobody is doing it, when everyone is, thus making it ok to cheapen your exports into "competitiveness"? In other words, if everyone lies, nobody lies. Of course, also when everyone eases, nobody eases, and the world is back to square one. But that will only become clear eventually.

Synopsis: Chancellor Merkel continues to resist calls for EU bonds (shared liabs.) and money printing and is pushing for fiscal controls and the seniority of bailout funding. Germany is likely to be outvoted by other ECB members and therefore will have greater prospective exposure. Watch for the EFSF and the ESM morphing into banks (thereby depressing eventual recoveries) and a rise in the number of euros. Watch progress on the EU banking union. We used the IMF's data for Germany's debt which is greater than Eurostat's data. Downgrading.

First it was former ECB executive board member Lorenzo Bini-Smaghi saying that "policy makers led by President Mario Draghi will act to weaken the euro" which led to the first shock in the European currency this morning, and now it is Bundesbank head Weidmann, reminding the world that in a monetarist currency war world, he who crushes their currency last, loses. As a result moments ago he said that the ECB may cut rates if new info warrants, something that was actually quite obvious two weeks ago and some 300 pips lower, yet the relentless purchases of Italian bonds by Japanese financials drove the EUR ever higher to its highest level since February yesterday. Net result: time to reacquaint the EUR with gravity.

When the final "bailout" structure of the Cypriot deposit-confiscatory bail-in was revealed in late March, the implied victory for the Troika (which has since notched up its demands for the insolvent country to now sell its 14 tons of gold) was that instead of the deposit haircut passing as a tax, and thus needing a parliament ratification, it would come in the form of a bank resolution, with Laiki bank liquidating and being subsumed by the remaining Bank of Cyprus, and with uninsured depositors in both banks ending up crushed. However, as previously reported, in the interim period deposit outflows have continued and accelerated despite the assorted ineffective "capital controls" which has led to additional underfunding for the local banks, and to a second bailout of Cyprus, this one rising to €23 billion or a 35% increase from the original, as part of which the Troika has demanded that Cyprus sell their gold in the open market. Now, a month later, it appears that the Troika's initial victory may have been a Pyrrhic one, as yesterday the Cypriot attorney general announced, and today the government's spokesman confirmed, that the parliament will have to ratify the €23 billion bailout of the tiny island nation after all, thereby refocusing the popular anger from some ephemeral technocrat in Europe to the country's own elected representatives, thereby changing the calculus of the Cypriot decision by 180 degrees.

Every scheme in Europe than can be rigged has been or is being rigged and, in the end, it will only be the fools that are left in this game. It is not the greater fools either but the mandated fools who take directions from Brussels who takes their directions from Berlin. We cannot emphasize enough the great risk that anyone takes now by investing in anything in Europe. You can ignore liabilities, you can play pretend and not count liabilities but in the end they are still there and the losses must be finally acknowledged. Gold gave you a head's up.

It's time to go in for the kill. Buy as much physical Gold as you can.

Time after time, it appears, in Europe 'beggars can be choosers'. That is, it seems, until Cyprus, when the Merkel hammer was brought down and a new 'template' to avoid German taxpayers implictly taking on the burden of southern European largesse. The initial pro-Euro indifference to the bailouts has turned increasingly to resentment in Germany - and, as we noted here, the rise of anti-Euro parties in the very heart of the political project. The following Bloomberg Briefs chart explains the tension and why the German 'five-wise-men' are pushing for a broad-based 'wealth tax' across Europe's periphery. Simply put, the Germans bearing the burden are 'poorer' than the peripheral nations as the chart of median wealth so clearly indicates. Combine this with the fact that Germany has the lowest rate of home ownership in Europe and it is little wonder that 'Alternative-for-Germany' party is already at a 3% polling? However, as discussed below, this is misleading since wealth is very unequally distributed in Germany, creating a perception among less wealthy Germans that these transfers are unfair.

Investors take note, the global economy appears to be contracting again. China’s recent GDP miss is the just the latest in a series of economic surprises to the downside. And stocks are always the last asset class to realize this.