Government Spends Tens of Trillions On Unnecessary, Harmful Projects … But Won’t Spend $100 Million to Prevent the Greatest Threat
What does the Fed's QE 3, a Spanish default, the systemic crisis in the EU and Lehman all have in common?
Earlier today, the Financial Stability Board (FSB), one of the few transnational financial "supervisors" which is about as relevant in the grand scheme of things as the BIS, whose Basel III capitalization requirements will never be adopted for the simple reason that banks can not afford, now or ever, to delever and dispose of assets to the degree required for them to regain "stability" (nearly $4 trillion in Europe alone as we explained months ago), issued a report on Shadow Banking. The report is about 3 years late (Zero Hedge has been following this topic since 2010), and is largely meaningless, coming to the same conclusion as all other historical regulatory observations into shadow banking have done in the recent past, namely that it is too big, too unwieldy, and too risky, but that little if anything can be done about it. Specifically, the FSB finds that the size of the US shadow banking system is estimated to amount to $23 trillion (higher than our internal estimate of about $15 trillion due to the inclusion of various equity-linked products such as ETFs, which hardly fit the narrow definition of a "bank" with its three compulsory transformation vectors), is the largest in the world, followed by the Euro area with a $22 trillion shadow bank system (or 111% of total Euro GDP in 2011, down from 128% at its peak in 2007), and the UK in third, with $9 trillion. Combined total shadow banking, not to be confused with derivatives, which at least from a theoretical level can be said to offset each other (good luck with that when there is even one counterparty failure), is now $67 trillion, $6 trillion higher than previously thought, and virtually the same as global GDP of $70 trillion at the end of 2011.
Thomson Reuters GFMS has published research that says they project silver prices to rise 38% in 2013 from current levels, as a sluggish global economy increases safe haven demand. The bullish silver GFMS forecast was published on the Silver Institute website yesterday and is unusual as the GFMS have been quiet bearish on silver in recent years despite rising prices. Philip Klapwijk of GFMS said that “a rebound in investment demand stemming from continuing loose monetary policies is expected to drive silver prices towards and possibly over $50 during 2013.” Spot silver has risen over 17% this year overtaking gold’s 10% gain, and paving the way for its third consecutive rise in four years. "Strong investment demand, higher gold prices on the back of monetary easing, rising inflation expectations and the persistence of ultra-low interest rates," are among the factors that will lure buyers to the safety of silver,” said Philip Klapwijk of GFMS. "We are thinking prices will trend higher next year. I'm not convinced that we are going to $50. I think we will definitely see $40 to $45 prices."
- Israel Mobilizes Troops as Hostilities Escalate (WSJ)
- FHA Sets Stage for Taxpayer Subsidy With 2012 Deficit (Bloomberg)
- On eve of fiscal cliff talks, positions harden (Reuters)
- Japan PM Noda contradicts challenger Abe on BOJ (Reuters)
- Regulators cut JPMorgan's ability to trade power (Reuters)
- EU Should Reach Agreement on Greek Aid Next Week, Grilli Says (BBG)
- Moscovici rejects talk of French crisis (FT)
- Egypt Urges Push for Gaza Peace as Rockets Hit Israel (BBG)
- Leading Japan politicians draw election battle lines (Reuters)
- Fed Push to Tie Zero-Rate to Economic Goals Faces Doubts (BBG)
- China’s commerce minister voted out in rare congress snub (Reuters)
- China’s new leaders could have reform thrust upon them (Reuters)
- Both Sides of Gaza Border Brace for Further Conflict (WSJ)
- Fed Sees Hurdles in Housing Rebound (Hilsenrath)
- The Complete 2012 Business Schools Ranking (Bloomberg)
The World Gold Council issued a report “Global gold demand reflects challenging global economic climate: ETFs up 56% and India up 9% in Q3 2012” which showed that global gold demand fell 11% in the three months to September from record levels seen during the same period last year, which was curbed by a sluggish Chinese economy and stronger Indian demand limited the drop. In Q3 2012, gold investment demand (total bar and coin demand plus ETFs and similar products) was 429.9 tonnes down 16% from Q3 2011. Although the year-on-year snapshot for investment demand suggests falling interest, this is not the case. Rather, it highlights the strong demand seen in Q3 2011. Interestingly, demand for ETFs rose 56% to 136t, compared to Q3 2011. Demand for gold-backed ETFs in Q3 grew significantly in the quarter partially due to institutions responding to the additional QE measures in the US and Europe. At 87 tonnes, Q3 2012 investment demand for gold surged from 78 tonnes in Q2, a rise of 12%. Examining this over the longer term, Q3 represents the first quarter-on-quarter increase in Indian investment demand since Q2 2011.
- The Bild is now a source for EURUSD stop hunts: Germany eyes 'bundled' loan payment to Greece-paper (Reuters, Bloomberg)
- Congress comes back Tuesday to confront “fiscal cliff.” (Reuters)
- Gen. John Allen ensnared in Petraeus scandal (Politico)
- FBI Agent in Petraeus Case Under Scrutiny (WSJ)
- Comcast's NBCUniversal unit lays off 500 employees (Reuters)
- University Fees Stoke U.K. Inflation (WSJ)
- Consumers Closing Wallets in Japan Add to Noda’s Woes (Bloomberg)
- John McAfee Wanted for Murder... and explaining bathsalt anal suppositories (Gizmodo)
- Europe Gives Greece 2 More Years to Reach Deficit Targets (Bloomberg)
- Where Spain Is Worse Than Greece (WSJ)
- Microsoft's Windows unit head, once a possible CEO, exits (Reuters)
- Glitch stops NYSE trading in 216 companies (FT)
- Large European Banks Stash Cash (WSJ)
- The death of San Bernardino: How a vicious circle of self-interest sank California city (Reuters)
- Apple stores most productive US shops (FT)
- Treasuries See U.S. Falling Over Cliff as Yields Converge (Bloomberg)
- Bra-Bodysuits Make H&M One Hit Wonder as Zara Prospers (Bloomberg)
Chairman of the LBMA David Gornall told the conference, “When comparing China to the U.S., it would seem that in China, gold asset allocation can only go in one direction. The country has only 2% of its reserves in the form of gold compared with the U.S. at 75%.” The People’s Bank of China hasn’t disclosed any changes to its gold holdings since 2009, when it said they had risen a whopping 76% to 1,054 metric tons. While the U.S., Germany, Italy and France keep more than 70% of reserves in gold, China’s share is less than 2%. “Prices have recently been supported by official sector buying,” Gornall said today, without listing any central bank. “Will the gap between the amount of gold held in reserve by the developing markets and that of the developed world close?” Brazil, South Korea and Russia have all added gold reserves this year data from the International Monetary Fund show. Nations bought 254.2 tons in the first six months and may increase to 500 tons this year, the World Gold Council said in August, exceeding the 456 tons added in 2011. China has the world’s largest foreign-exchange reserves, totaling $3.29 trillion in September, according to data by Bloomberg.
The overnight session has so far been marked with one after another economic debacle out of Asia. First Japan announced that its Q3 GDP fell an annualized 3.5% in Q3, more than the 3.4% expected, the worst decline since last year's earthquake. The drivers were sliding exports and a collapse in consumer spending. The announcement brought on a barrage of platitudes by various Japanese officials who are shocked, shocked, that 32 years of Keynesian miracles have resulted in this horrifying outcome. Of course, everyone knows 33 years is the charm for Keynesian miracles. So much for the boosts from Japan's QE 8 aad QE 9: bring on QE 10. The pundits appear surprised now that Japan is back in a solid recession, which to us is quite surprising as well - does this mean that Japan ever exited the depression? Then China came out with an announcement that its credit growth plunged in October with Chinese banks extended CNY 505bn new yuan loans in October, down from CNY 623bn in September and less than the CNY 590 expected. The trifecta of bad news was rounded off by India, whose Industrial Production joined the rest of the world in global recession, when it dropped 0.4% in September on expectations of a 2.8% rise, even as Consumer prices rose 9.75% Y/Y - the global stagflation wave has arrived... For all those wondering why futures have managed to eek out a modest overnight ramp.
Anyone who may have been concerned by the slowdown in Chinese gold imports in August, when the country imported "only" 53.5 tons of gold from Hong Kong (down from 75.8 in July), can breathe a sigh of relief. According to the Hong Kong Census Bureau, in September Chinese gross imports soared by 30% reverting to the long-term trendline of 65 tons in gross imports per month, and rising to a total of 69.7 tons. Net imports were 40% less, although that excludes organic Chinese gold mining and recirculation, which is why for all intents and purposes the gross number is the apples to apples one. And using that, Year-To-Date China has now imported a whopping 582 tons of gold, more than the official holdings of India at 558 tons, and which through November has certainly surpassed the holdings of the Netherlands, and make China's gross imports in just 2012 nominally the equivalent of Top 10 largest sovereign holder of gold.
Does China have what it takes to get from here (industrialized export economy) to there (sustainable growth, widespread prosperity)? The same can be asked of every nation: do they have what it takes to move beyond their current limitations to the next level? Consider corruption. Corruption isn't just a "values" issue: corrupt societies have corrupt economies, and these economies are severely limited by that corruption. A deeply, pervasively corrupt economy cannot get from here to there. Corruption acts as a "tax" on the economy, siphoning money from the productive to the parasitic unproductive Elites skimming the bribes, payoffs, protection money, unofficial "fees," etc. By definition, the money skimmed by corruption reduces the disposable income of households and enterprises, reducing their consumption and investment... Pull aside the curtain and what you find is a China crippled by corruption and debt.
Today’s AM fix was USD 1,715.00, EUR 1,347.42, and 1,075.84 GBP per ounce.
Yesterday’s AM fix was USD 1,730.50, EUR 1,345.86, and GBP 1,080.75 per ounce.
Silver is trading at $31.85/oz, €25.10/oz and £20.00/oz. Platinum is trading at $1,546.75/oz, palladium at $607.30/oz and rhodium at $1,100/oz.
Gold rose $2.10 or 0.12% in New York yesterday and closed at $1,718.30. Silver hit a low of $31.209 then recovered in late trade but still finished with a loss of 0.56%.
European equities have made tentative progress this morning, led by the technology and basic materials sectors. The European morning was relatively peaceful until a flurry of activity on the back of European sources commenting that Spain are unlikely to seek ESM aid until the end of the year, and the ECB are not in a rush to commence bond-buying using their OMT facility. The delay of expectations of purchases has taken its toll on the Spanish debt markets which, despite completing their 2012 issuance smoothly today, show signs of strain as the 10yr yield breaches 5.81%, and the yield spread approaches 450bps against the German benchmark – the level at which LCH begin to review margin requirements. The pain in Spain has also impacted the EUR currency, with the major EUR/USD pair printing a two-month low of 1.2720 this morning.
It is not going to be a new government that necessarily ushers in a whole new era of growth, prosperity and confidence. Even under the revered Ronald Reagan, the period of secular growth and bull market activity took two years to unfold — it didn't happen right away. It took the inflationary excesses to be wrung out of the system and concrete signs that the executive and legislative branches could work together to usher in true fiscal reform — and to get blue Democrats on board with reduced top marginal tax rates. Hope isn't generally a very useful strategy, but there is reason to be hopeful nonetheless. The critical issue is going to be how we get Washington to move back to the middle where it belongs. This requires bipartisanship which in turn requires leadership. Reagan's whole eight-year tenure in the 1980s occurred with the House being in Democrat hands the whole way through. Bill Clinton's second term coincided with both the House and Senate controlled by the Republicans.
It can be done!
With this in mind, the best that can happen is a Reaganesque and Clintonesque return to compromise on the road to fiscal reform. It will be painful. We all know it will be painful.
Investors should prepare for rising prices and more expansionary monetary policy now that President Barack Obama has won re-election, investor Jim Rogers told CNBC on news of the election. The co-founder with George Soros of the Quantum Fund said he expected Obama’s policies to drive up commodities and drive down the U.S. dollar. As the Federal Reserve moves to ‘stimulate’ a stalled economy through debt purchases, Rogers says markets should expect the status quo to remain the same. “If Obama wins, it’s going to be more inflation, more money printing, more debt, more spending.” Rogers told CNBC, saying he expected to sell U.S. government debt and buy precious metals, such as silver and gold. “It’s not going to be good for you me or anybody else.”