Suddenly the delicate balancing of variables is once again an art and not a science, ahead of a week packed with binary outcomes in which the market is already priced in for absolute perfection. Per DB: We have another blockbuster week ahead of us so let's jump straight into previewing it. One of the main highlights is the German Constitutional Court's ruling on the ESM and fiscal compact on Wednesday. On the same day we will also see the Dutch go to the polls for the Lower House elections. Thursday then sees a big FOMC meeting where the probabilities of QE3 will have increased after the weak payrolls last Friday. The G20 Finance Ministers and Central Bank Governors will meet on Thursday in Mexico before the ECOFIN/Eurogroup meeting in Cyprus rounds out the week on Friday. These are also several other meetings/events taking place outside of these main ones. In Greece, PM Samaras is set to meet with representatives of the troika today, before flying to Frankfurt for a meeting with Draghi on Tuesday. The EC will also present proposals on a single banking supervision mechanism for the Euro area on Tuesday. If these weren't enough to look forward to, Apple is expected to release details of its new iPhone on Wednesday. In summary, it will be a good week to test the theory that algos buy stocks on any flashing red headlines, no longer even pretending to care about the content. Think of the cash savings on the algo "reading" software: in a fumes-driven market in which even the HFTs no longer can make money frontrunning and subpennyiong order flow, they need it.
A place incapable of supporting life as we know it – a good description of where ECB monetary policy is leading us. In its current form the euro is a busted flush and is being held together solely by political intransigence and ECB connivance. From the very beginning the rules of engagement were ignored because without political and fiscal centralisation they weren’t going to work anyway. We now have OMT to ponder upon - Outright Monetary Transactions - which is just another short term breathing space to allow the PIIGS to refinance their maturing debt at less penal rates, but does absolutely nothing to solve the longer term problems of creating growth in economies stifled by ECB "conditionality"; a very sterile landscape indeed. But cheer up! QE3 will be along any day now to help the banks remain solvent for a while longer. 'Can' exits stage right after another good kicking...
Ken Burns and Alfred Hitchcock are movie makers. 'The Ken Burns Effect' - panning and zooming to focus attention on a certain isolated piece of the full picture; and the 'Hitchcock Zoom' - a 'shocking' dramatic change in perspective; keep the viewer occupied and entertained by material that would otherwise look a little staid and to ensure that attention is paid to the precise piece of the picture that the director wishes to be the center of focus. As Grant Williams ruminates on the Draghi Scheme (The Dreme), the devices of Burns and Hitchcock came to mind as central bankers attempt to either unsettle the viewers or make them focus on a specific part of the whole, rather than the big picture. For the last eighteen months, we, the viewers, have been manipulated by a seemingly never-ending procession of Eurocrats, bureaucrats, technocrats and who-said-thats to look at a very precise part of the economic picture rather than be allowed to step back and try to take in the wider situation. Accordingly, we thought this week we would take a step back, ignore where the Ken Burns Effect of Draghi’s words were pointing our attention, turn a blind eye to the conflicting rhetoric emanating from the various actors in the Theater of the Absurd and concentrate on the big picture - to try and make sense of the broader reality in Greece, Spain, TARGET2, and The Dreme. It damned near gave us vertigo.
While there is still some debate whether the proper alternative nomenclature of the Greek ultranationalist party Golden Dawn is "neo-nazi", there is no debate that the party, which is a manifestation of every broken Greek hope and dream, after posting a shocking result in the recent Greek parliamentary election which saw it coming in fifth and entering parliament after, continues to soar in popularity and is now the third most popular party in Greece with 12% of the vote. Above it are only two other parties: the conservative New Democracy which won the June elections with 29.6% of the vote, which is now down to 28%, and on top, in an ominous development for EUR-bulls, is the anti-bailout and anti-memorandum leftist coalition Syriza, which has threatened to end the bailout, and effectively to take Greece out of the Eurozone, setting off the much dreaded dominoes.
Lock Up Your Sacred Cows Before We Find and Slaughter Them!
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?
One look at the short squeeze in the EURUSD, coupled with the endless jawboning out of Europe, and one may be left with the faulty impression that Europe has been magically fixed and that Greece couldn't be more delighted to remain in the Eurozone. One would be wrong. This is what is really going on in Europe: "As a pharmaceutical salesman in Greece for 17 years, Tilemachos Karachalios wore a suit, drove a company car and had an expense account. He now mops schools in Sweden, forced from his home by Greece’s economic crisis.“It was a very good job,” said Karachalios, 40, of his former life. “Now I clean Swedish s---." That more or less explains everything one needs to know about the "fixing" of Europe.
Just over three months ago, George Soros said the Eurozone has three months to come up with a master plan or else face disintegration. Two months into this countdown, Spanish bonds at both the long and short ends soared to record wide levels, approaching the predicted "game over" state as they nearly inverted, only to see the world's most powerful jawboning intervention by the ECB commence in late July when Draghi delivered his famous "believe me" speech. As of today, Spanish 2 and 10 years bonds have retraced a lot of the priced in doom, with the short end collapsing by a record 350 bps, leading to the steepness on the Spanish bond curve to hit unseen historical levels. However, as the chart below shows, this is not the first, nor even second time that the Spanish bond curve has reacted violently to promises (and even actions - something we have yet to see from the ECB for all its endless talk) that all shall be well, coupled with further promises that this time it's different. It isn't. But enjoy the euphoria while it lasts.
It’s easy to be pessimistic over the future prospects of liberty when major industrialized nations around the world are becoming increasingly rife with market intervention, police aggression, and fallacious economic reasoning. The laissez faire ideal of a society where people should be allowed to flourish without the coercive impositions of the state is all but missing from mainstream debate. In editorial pages and televised roundtable discussions, a government policy of “hands off” is now an unspeakable option. It is presumed that lawmakers must step up to “do something” for the good of the people. Thankfully, this deliberate false choice will slowly but surely bring the death of itself. Illogical theories can only go on for so long before the push-back becomes too much to handle. For those who desire liberty, it’s a joy that the statist economic policies of the Keynesians become even more irrational as the Great Recession drags on. The two following examples will illustrate this point.
Not Cypriot money flowing into Russia, but Russian money flowing back.
China and India have always been crazy for gold, and the yellow metal remains the choice store of value in those two countries, says Don Coxe, a strategic advisor to the BMO Financial Group. In an exclusive interview with The Gold Report, Coxe explains how demographic shifts are affecting the price of gold and delves into the logic of investing in gold as a long-term strategy. Coxe also draws an important lesson in economics from his reading of Lenin.
Did the German Bundesbank roll over and die as Die Welt suggest, by yielding to the will of the ECB and Goldman? Or is it merely setting the stage for the inevitable German referendum? Many claim the Italian head of the ECB won today in his ever escalating confrontation with the last remaining German on the ECB governing council, although in reality he is merely doing what he has already done twice before. The outcome will be the same: abject failure to contain the crisis which will not be resolved until and if Europe succeeds in creating a united, Federal state, with one bond issuance authority. That will never happen: after all, 17 European states will never hand over their sovereignty to a third party, especially one which is backstopped by German cash. But it can pretend. In the meantime, Buba will not quietly go, instead it has already stated what it thinks, and what it thinks is that what the ECB is doing (once again) is "tantamount to financing governments by printing banknotes" and that monetary policy is now subjugated to fiscal policy. Full text of the Buba's response below.
Confused by the implications of Draghi's pre-leaked speech? Don't worry, you are not alone. As the following sampling of opinions by Wall Street experts via Reuters confirms, opinions range from the positive to the negative, to the completely clueless.