Foreign Central Banks
The Chinese New Year celebration is now over, the Year of the Snake is here, and those following the Shanghai Composite have lots to hiss about, as two out of two trading days have printed in the red. But a far bigger concern to not only those long the SHCOMP, but the "Great Reflation Trade - ver. 2013", is that just as two years ago, China appears set to pull out first, as once again inflation rears its ugly head. And where the PBOC goes, everyone else grudgingly has to follow: after all without China there is no marginal growth driver to the world economy. End result: China's reverse repos, or liquidity providing operations, have ended after month of daily injections, and the first outright repo, or liquidity draining operation, just took place after eight months of dormancy. From the WSJ: "Chinese authorities took a step to ease potential inflationary pressures Tuesday by using a key mechanism for the first time in eight months. The move by the central bank to withdraw cash from the banking system is a reversal after months of pumping cash in. That cash flood was meant to reduce borrowing costs for businesses as the economy slowed last year—but recent data has shown growth picking up, along with the main determinants of inflation: housing and food prices."
Michael Woolfolk took the anti-gold position and Komal Sri-Kumar defended a gold standard on Bloomberg TV. Is it true that we don't have enough gold for a gold standard? Is it true that a gold standard is established by government fixing the price of gold?
On May 10, 2000 a GATA delegation consisting of Reg Howe, Frank Veneroso, Chris Powell and Bill Murphy met with Denny Hastert, The Speaker of the House in the United States Congress; Spencer Bachus, the Chairman of the House Subcommittee on Domestic and International Monetary Policy; and Dr. John Silvia, the Chief Economist of the Senate Banking Committee. We presented each of them our 100 page "Gold Derivative Banking Crisis" document and personally delivered it to the staff of every House and Senate Banking Committee member.
For the fourth year in a row we continue our tradition of summarizing what you, our readers, found to be the most relevant, exciting, and actionable news of the year, determined simply by the number of page views. Those first eager for a brief stroll down memory lane of prior years can do so at their leisure, by going back in time to where the top articles of 2009, 2010 and 2011 are recapped. With that out of the way, here is what readers found to be the most popular posts of the past 365 days..
Global Central Banks agree to another year of access to FRBNY FX Swap Lines
Markets getting back to some normality with the Periphery still recovering, although less today after the auctions, Bunds 5 wider on the week, Italy 10, but Spain 7 tighter across the curve from last Friday. Equities and Risk oblivious to that anyway and synching with the US. Getting difficult to find something crisp out there with reduced news flow and volatility. Excitement to be found in the US on FC developments, now that Greece, Spain and Italy are seemingly off the table and that the FED has moved to QE4.
"When It's Sleepy Time Down South" (Bunds 1,35% +1; Spain 5,38% +4; Stoxx 2622 -0,2%; EUR 1,308 +40)
The Bernank is beginning to wind down his "non-bailout" of Europe. On 12/14/2011 the Chairsatan himself reportedly told Senator Corker that he had no intentions of furthering the US's involvement in the European Crisis. Coincidently , a few weeks later CNBC interviewed Gerald O'Driscoll who is a previous Dallas Fed Vice President, after he released an Op-ed in the WSJ calling out the FED's European bailout. O'Driscoll is dead on with his claims and his suspicions about Bernanke's reasoning behind going through the FED market arm to lend USD to the ECB.
In what is the first formal speech of Simon "Harry" Potter since taking over the magic ALL-LIFTvander wand from one Brian Sack, and who is best known for launching the Levitatus spell just when the market is about to plunge and end the insolvent S&P500-supported status quo as we know it, as well as hiring such sturdy understudies as Kevin Henry, the former UCLA economist in charge of the S&P discuss the "role of central bank interactions with financial markets." He describes the fed "Desk" of which he is in charge of as follows: "The Markets Group interacts with financial markets in several important capacities... As most of you probably know, in an OMO the central bank purchases or sells securities in the market in order to influence the level of central bank reserves available to the banking system... The Markets Group also provides important payment, custody and investment services for the dollar holdings of foreign central banks and international institutions." In other words: if the SPX plunging, send trade ticket to Citadel to buy tons of SPOOSs, levered ETFs and ES outright. That the Fed manipulates all markets: equities most certainly included, is well-known, and largely priced in by most, especially by the shorts, who have been all but annihilated by the Fed. But where it gets hilarious, is the section titled "Lessons Learned on Market Interactions through Prism of an Economist" and in which he explains why the Efficient Market Hypothesis is applicable to the market. If anyone wanted to know why the US equity, and overall capital markets, are doomed, now that they have a central planning economist in charge of trading, read only that and weep...
After 40 years of boozing on easy money and feasting on fantastical asset price inflations, the global monetary system is approaching catharsis, its arteries clogged and instant cardiac arrest a persistent threat. ‘Muddling through’ is the name of the game today but in the end authorities will have two choices: stop printing money and allow the market to cleanse the system of its dislocations. This would involve defaults (including those of sovereigns) and some pretty nasty asset price corrections. Or, keep printing money and risk complete currency collapse. We think they should go for option one but we fear they will go for option two. In this environment, how can people protect themselves and their property? Our three favourite assets are, in no particular order, gold, gold and gold. After that, there may be silver. We are, in our assessment, in the endgame of this, mankind’s latest and so far most ambitious, experiment with unconstrained fiat money. The present crisis is a paper money crisis. Whenever paper money dies, eternal money – gold and silver – stage a comeback. Remember, paper money is always a political tool, gold is market money and apolitical.
In Part I, we looked at the period prior to and during the time of what we now call the Classical Gold Standard. It should be underscored that it worked pretty darned well. Under this standard, the United States produced more wealth at a faster pace than any other country before, or since. In Part II we focus on the Post-1913 (Fed to Nixon) era and the fact that - for many reasons, politicians felt that a quasi-government agency could make better credit decisions than the market. This regime was unstable, as economists such as Jacques Rueff and Robert Triffin realized. Since then, it has become obvious that without the anchor of gold, the monetary system is un-tethered, unbounded, and unhinged. Capital is being destroyed at an exponentially accelerating rate, and this can be seen by exponentially rising debt that can never be repaid, a falling interest rate, and numerous other phenomena.
Presented with little comment since whatever we say would likely be superfluous to this all-encompassing speech. The full Ron Paul 'Farewell to Congress' speech and transcript.
...To achieve liberty and peace, two powerful human emotions have to be overcome. Number one is 'envy' which leads to hate and class warfare. Number two is 'intolerance' which leads to bigoted and judgmental policies. These emotions must be replaced with a much better understanding of love, compassion, tolerance and free market economics. Freedom, when understood, brings people together. When tried, freedom is popular.
The best chance for achieving peace and prosperity, for the maximum number of people world-wide, is to pursue the cause of LIBERTY...
If nothing else, read the five greatest dangers that the American people face today that impede the goal of a free society.
With the Associated Press report appended here, the German gold audit story has just exploded into the English-language press with some important revelations.
The German court of auditors (Bundesrechnungshof) has demanded that the Bundesbank undertake an audit of its gold reserves. In an 'audit-the-fed' style effort, the court wants to ensure that the nearly 3400 tons of gold is in fact in existence - 'because stocks have never been checked for authenticity and weight'. Furthermore, the Bundesbank's gold is stored in three other vaults around the world: The Bank of England, The Bank of France, and the US Federal Reserve. The court questions the practice of relying on a written confirmation from the custodians (foreign central banks). The decision means negotiating with the three foreign central banks for physical verification but in anticipation, the Bundesbank has begun the process of shipping 50 tons per year from the Fed back to Germany for the next three years.
It seems our recent re-introduction of the world to Robert Triffin has struck a note among a number of market participants. The gold-convertible U.S. dollar became the global reserve currency under the Bretton Woods monetary system, which lasted from 1944-1971. This arrangement ended because foreign central banks accumulated unsustainably large reserves of U.S. Treasuries, threatening price stability and the purchasing power of the dollar. Today, central banks are once again stockpiling massive Treasury reserves in an attempt to manage their currency values and gain advantages in export markets. We have, effectively, returned to Bretton Woods. The trouble is, as Guggenheim's Scott Minerd notes, that the arrangement is as unsustainable today as it was during the middle of the last century. None of this should come as a surprise given the unorthodox growth of central bank balance sheets around the world. The collapse of Bretton Woods in 1971 caused a decade of economic malaise and negative real returns for financial assets. Can anyone afford to wait to find out whether this time will be different?
We have mentioned the little-known Belgian economist's works a couple of times previously (here and here) with regard his exposing the serious flaws in the Bretton Woods monetary system and perfectly predicting it's inevitable demise. Triffin's 'Dilemma' was that when one nation's currency also becomes the world's reserve asset, eventually domestic and international monetary objectives diverge. Have you ever wondered how it's possible that the USA has run a trade deficit for 37 consecutive years? Have you ever considered the consequences on the value of your Dollar denominated assets if it eventually becomes an unacceptable form of payment to our trading partners? Thankfully for those of us trying to navigate the current financial morass, Robert Triffin did. Triffin's endgame is simple. A rapid diversification of reserves out of the dollar by foreign central banks. The blueprint for this alternative has been in plain sight since the late 1990's, and if you watch what central banks do – not what they say – you can benefit.