Global Economy

Since yesterday there has been another of wave of negative, misleading and almost triumphalist commentary on gold most of which studiously ignores the clear evidence of manipulation of the price on Sunday night.

In short, the era the phony recovery narrative has come unhinged.  We have no entered a cycle of actual price discovery in which financial assets fall to more accurate values. This will eventually result in a stock market crash, very likely within the next 12 months.

The power, if not necessarily the Truth, resides primarily with the bulls right now or at least it does in certain parts of the market. The NASDAQ broke out last week to new highs but the S&P 500 and even the more speculative Russell 2000 did not. The market’s advance continues to narrow, to concentrate among fewer and fewer names. Bulls will tell you that this is just a pause and the advance will broaden out. And if enough people believe that and there isn’t any convincing reason to sell, they might be right for a while. But at some point the rose colored glasses will come off and someone might wonder aloud why Celgene paid $7 billion for a company with trailing 12 month revenue of $4.5 million. Someone might wonder why Netflix is worth $48 billion and CBS is only worth $27 billion with more than twice the revenue, better margins, a higher ROE and the ability to produce positive cash flow. Until then it’s just a dream within a dream and somebody keeps hitting snooze on the alarm clock.

In what looked like another successful bid to manipulate the gold market lower, there was massive selling of gold futures contracts - some 700,000 ounces worth of gold futures in mere seconds. The equivalent of one-fifth of a whole day’s trade in a normal session, was sold in a concentrated manner in less than two minutes - pushing prices lower again.

Everyone seems to be focusing on Greece these days – a country so indebted that it needs even more loans to repay just a fraction of its gigantic credits. Clearly this is unsustainable and something has to give. Even the IMF agrees. But what about the other Southern European countries? Actually, Portugal’s financial situation is looking particularly shaky, and any hiccups could have serious cross-border repercussions from Madrid all the way to Berlin.

Andy Brown, a top Shell official, said the Anglo-Dutch oil giant forecasts no quick rebound in the average global price of oil, but only a gradual recovery lasting five years. He attributed this sluggishness to a slowdown in China’s economy, leading a drop in demand for fuel, and the continuing oversupply of oil. “It will take several years [for oil prices to recover fully], but we do believe fundamentals will return,” Brown said. “Until such time, we, like other companies, will have to make sure we stay robust.”

The ongoing downshift in property construction will continue to undercut China's demand for commodities, raw materials and machinery, weigh on property as well as mining and industrial investment, and be a drag for overall GDP growth in 2016. The most direct and important channel through which this impact spreads is trade linkages, given China's role as the top exporter and second largest importer in the world.

What have the bailouts achieved? Well, the Greek economy is doing worse than ever, and the people are poorer than ever; and both have a lot more bad ‘news’ to come. The bailouts needed to be as big as they were to 1) successfully make the international banks ‘whole’ that had lent as much as they had into the Greek economy, 2) get the IMF involved, 3) and absolve the notorious -and cooperative- domestic oligarchy from any pain. And make all the usual suspects a lot more money in the process. It therefore doesn’t look at all unlikely that Greece was saddled with an artificially raised deficit, and that the intention behind that, all along, was to get the Troika ‘inside’ for the long run. So the country could be stripped of all its assets.

While the markets have improved since the "resolution" of the Greek crisis, in my opinion we would have expected substantially more given the overall "angst" that the situation was generating. Yet, the market remains in a bearish consolidation pattern. Furthermore, relative strength, momentum and volume remain a detraction from the "bullishness" of this week's "crisis resolution rally."

After weeks of overnight turbulence following every twist and turn in the Greek drama, this morning has seen a scarcity of mostly gap up (or NYSE-breakding "down") moves, and S&P500 futures are unchanged as of this moment however the Nasdaq is looking set for another record high at the open after last night's better than expected GOOG results which sent the stop higher by 11% of over $40 billion in market cap. We expect this not to last very long as the traditional no volume, USDJPY-levitation driven buying of ES will surely resume once US algos wake up and launch the self-trading spoof programs. More importantly: a red close on Friday is not exactly permitted by the central planners.

Hyperinflation in the U.S. is coming sometime in the next 20 years or so, and this isn't a cry from a Chicken Little, but a conclusion that the analysis strongly suggests. It is possible hyperinflation could happen during the next few years, but that seems unlikely since it would require a series of major crises and political blunders – events unprecedented in the history of the United States. If this led to a corruption of Constitutional rights in the midst of an exaltation of the Executive Branch that resulted in loss of the rule of law, hyperinflation might result. It is much more probable that hyperinflation will be preceded by a long slow decline that will include a protracted period of high inflation, and that the crash of the dollar and hyperinflation will be the final tumble off a looming, steep cliff.

Piling on more debt is the worst possible way to correct structural trade and productivity imbalances, yet that is the Eurozone's "solution" to Greece's debt/ trade/ productivity/ corruption crisis.

"I would push back against the notion that we are unduly affected by the ups and downs of the stock market"

"The AIIB may come to play an important role in keeping America honest. It is difficult to say at this point whether the AIIB will have a negative or a positive impact on the global economy. At the very least, however, the emergence of an international institution with a viewpoint different from that of western creditors will help enhance the quality of debate over emerging economies’ debt problems."

Yes, authentic capitalism still exists, but it's been relegated to the sideshow. The Big Tent with the Big Bucks is all finance/cartel/state/crony capitalism, and financialization is devouring all the other players. With authentic growth scarce, there's no other way to reap huge profits but cannibalism.