Monetary Base

We would call the following just released chart of the Swiss monetary base a black swan, if not for two reasons: i) since this is precisely what Philipp Hildebrand demanded it is not unexpected and is in fact perfectly in line with a central banker's wet dreams, and ii) it looks far more like a Loch Ness monster. And while for the time being the monster is tame, thanks to what Kocherlakota said earlier, namely that "the old and familiar link between increased bank reserves and higher inflation has been broken," if ever the global economy were to actually improve, somewhat paradoxically, then the trillions in cash currently parked with banks the world over (assuming they are not secretly being used to plug trillions in capital shortfalls, to borrow, pun intended, an approach from MF global which commingled client capital; why should global banks not commingle central bank capital?), will immediately spill out into the street. What happens next will be amusing to quite amusing.

With the OWS movement leaving many Americans confused as to whether they should support or stay away, one thing is for certain, Americans are aware of a certain truth that is happening in our country.  We have a certain combination of events that is leaving many people struggling and asking very good questions.  The truth is this; We have structurally high unemployment, salaries are stagnant, debt burdens are rising, costs for education, health and energy are on the rise and we are increasingly overwhelmed with clear and present danger coming from every corner of the earth.  To make matters worse the ruling elite of this country and the very wealthy are continuing to benefit while the remainder of the population struggles.  This is the appeal of the OWS movement despite the fact that the members making up the movement are advocating entirely unappealing solutions in the form of wealth distribution, punishing success and other hard left ideologies...In a country where American Idol and the Jersey Shore are better known than who currently runs the Federal Reserve it is hardly a wonder that cries for Socialism just sound appealing.  To further exacerbate the overall ignorance of the populace our education system and emphasis on history and economics appear to be tilted in the direction that highlight correlation and anecdotal evidence rather that fundamentals.  I understand it does not behoove me to openly ostracize a large segment of the population, but until we address core understanding of our economy and core principles of what makes our society tick then the partisan rifts will continue.  So let us tackle this "explanation" of inequality which is now being circulated on the internet and shared on Facebook with proud posters feeling rather enlightened about their "discovery". 

Gold prices are mixed today as markets remain on edge due to increasing divisions amongst European leaders on how to solve the intractable Eurozone debt crisis. There continues to be very strong demand for physical bullion globally and support is  strong at the $1,600 level due to this demand. The sharp fall of copper yesterday, by 6%, is an indication that the US, Chinese and indeed global economy is very fragile and may soon begin to contract. Physical demand in Asia, mainly India and China, has entered the traditional peak season with Indian festivals and the increasingly important Chinese New Year. This is reflected in premiums in Asia which remain good. There are reports of massive physical buying out of China on gold’s fall close to $1,600 yesterday. The most active Shanghai gold futures traded at a premium of more than $10 over spot prices earlier today. The contract stood at 335.22 yuan a gram, or $1,634 an ounce, at a premium of $3.

Tomorrow, Thursday (October 6th), the Swiss National Bank will report its foreign currency reserves for September at 9am local (3am EST). We will know then how much Euros had to be gobbled up in order to defend the “peg”. Increasing tick volume in recent days looks suspicious – why would there be more volume than on days where the Swiss Franc reached parity? Or the day the SNB introduced the peg? Here is what is going to happen:

•  SNB’s balance sheet will “explode” as they have to buy billions of Euros (a questionable asset, to say the least).
• For every Euro bought, 1.20 CHF are being released into circulation. CHF monetary base explodes, too.
• If the peg falls, the ensuing currency losses might bankrupt the SNB and costing the Swiss tax payer billions of CHF (they already lost 29bn over the last 18 months or 6% of GDP).
• According to rumors, the SNB is so sure about their ability to defend the peg they were selling Euro puts. Those would expire if the Euro did not fall below 1.20, allowing the SNB to keep the option premium. Is this an ill-fated attempt to “make back” some of the losses incurred earlier?
• In order to discourage speculators, the SNB tried floating rumors they might increase the peg to 1.25 or to 1.30.
• As the Euro weakens towards the Dollar, the Swiss Franc has to decline, too (in order not to strengthen towards the Euro). This makes the Swiss Franc cheap vis-a-vis the Dollar.
• A Greek default (or other Euro worries) might make the Euro even weaker, making it harder to keep it stable towards the Swiss Franc.

Everyone, especially various textbook "schools" of postmodernist Keynesianism which (in addition to apparently never having actually been in the real world) believe there is such a thing as a free lunch as long as a reserve currency can issue infinite debt, and stubbornly fail to see the creeping currency devaluation which ultimately represents itself in hyperinflation, should read the following note from SocGen's Dylan Grice who explains pretty much... everything, including why in world starved for honesty, gold is the benchmark, and is now worth $10,000. To wit: "Gold might be a mere lump of dense, useless shiny metal, but it’s one which crackpot central bankers can’t print. Indeed, benchmarked against the printing of The Ben Bernak, the price of gold at which the US dollar would be fully gold-backed is now $10,000. You might think such a ‘price target’ is far-fetched (and I might agree with you). But bear in mind that the last time honesty was perceived to be so scarce – in the 1970s gold mania – the dollar was over-backed by gold (see chart below). If it happened then, why not again?"

Even as the eyes of the world are currently frozen in a spot in time from ten years ago, and Wikileaks is making doubly sure of this by releasing the entire record of Metrocall pager (remember those?) intercepts starting at 9:55 am on 9/11/01, the world itself continues onward, and especially those who determine its global policy of "Prevention of Harm to The Status Quo^TM" are busier than ever this weekend. Chief among these is and always has been the one financial firm which has infiltrated "sovereign" decision-making more than anyone in history: Goldman Sachs, whose alumnus, incidentally, is about to replace Jean Claude Trichet at the helm of the world's largest and most undercapitalized central bank (yes, a central bank can be undercapitalized - read on). Which is why the following note just released by Goldman's Dirk Schumacher is of particular attention. Mere hours after Goldman economist Sven Jari Stehn said that FOMC "easing at the September meeting is very likely—around 75% according to our model", Goldman is now taking on European monetary policy, and specifically the question of further quantitative easing, across the pond, where printing money has always been a far more touchy subject than in the US, courtesy of the German experience with hyperinflation. As a result, the key line in the Schumacher note is the following: "How Far Can The ECB Go In Using Its Balance Sheet.  The Short Answer Is: A Lot Further." To be sure, this is not surprising: after all Zero Hedge first predicted that following the latest market trouncing on Friday, in the aftermath of the ECB's admission of failure on Thursday (who can forget Ze Price Stabeeleetee), see "ECBCTRL+P: The Next Steps In The European Implosion", but we are nothing but a simple blog, which predicts what will happen but certainly does not set policy for a corrupt and failed regime. That's Goldman's job. And what is stunning is the brazenness with which it does it now. To sum up: to Goldman both the Fed and the ECB have to engage asap in yet another episode of bonus-preserving currency debasement, middle class be damned. And, we have very little doubt, they will.

For now it was just Jan Hatzius calling for QE3 now if not sooner. With the addition of JPM to the list of banks now implicitly expecting (read demanding) QE3, it is now quite clear how Wall Street feels - after all someone has to pay those Wall Street bonuses - it sure won't come from M&A activity, underwriting of Chinese IPO frauds, or trading volume. Here is the key sentence from a just released note by JPM's Michael Feroli: "We believe the minutes lend themselves to our view that there is a somewhat better-than-even chance the Fed takes action at the next meeting to increase the average maturity of assets on their balance sheet." Keep an eye on the market tomorrow for confirmation: a third day of the same low volume meltup we have seen this week should make the open QE3 question into case closed.

It is still not too late to submit one's thoughts of what the US downgrade means for various asset classes and for the economy, and world, in general. Here is one of the few worth reading, courtesy of QBAMCO's Paul Brodsky and Lee Quaintance. Their conclusion: "the downgrade is effectively a currency downgrade, which seems very reasonable, overdue and, in real terms, insufficient. We would argue that in real terms, US Treasury obligations are non investment-grade. We think Treasury obligations today and always will be money-good, but principal and interest will be repaid with bad money."

Relevant News by www.thetrader.se

Economists will long debate the efficacy of our traditional policy response but, whatever the results so far, there are constraints that place severe limitations on the effectiveness of such policy going forward. The US deficit and the trajectory of US spending is unsustainably high and, as the late economist Herbert Stein famously observed, “what cannot last, will not do so”. Any further fiscal stimulus risks pushing US finances past the tipping point, which would be a reckless gamble. At near zero short term interest rates, traditional monetary policy has become impotent, QE has been ineffective and the Fed has entered uncharted waters with its massive increase in the monetary base, risking inflation once private sector deleveraging ceases and velocity picks up. So neither traditional remedy is available any longer.

With US unemployment lodged stubbornly above 9%, what is to be done? Our policymakers, economists and commentators appear trapped in the confines of a paradigm that is no longer viable. Is there any other policy that might help spur recovery, or must we become resigned to waiting it out?

Aside from a brief dip at the beginning of July, the US monetary base continues its near vertical trajectory, which tells us that the Fed continues to print money despite QE 2 ending. It’s not much of a surprise, the Fed knows how to do one thing only: print money. However, the fact the Dollar is showing so poorly while Europe is taking a hit is a major warning that all is not well with the greenback.

Today's "Breakfast with Dave" from David Rosenberg is a veritable chartapalooza, the inspiration for which appears to have been the "reversion to the mean" theme presented in yesterday's IMF chartpack, presented here. There is, however, one section that is unique: that dealing with gold, and more specifically, why in Rosenberg's opinion gold is still quite cheap and why it is trading at about 50% of what the Gluskin Sheff strategist would consider bubble value. As Rosie says: "we have liked gold for a long time and we remain very constructive. It is more than just a hedge against recurring bouts of global financial volatility. The growth rate of gold production is roughly stagnant while the growth rate of fiat currency in most parts of the world continues to accelerate. It's all about relative supply curves - the supply curve for bullion is far more inelastic than is the case for paper money. It really is that simple." Indeed it is: when one strips out all the fancy talk, mumbo jumbo, and syllogistic gibberish out of modern economic theories, be they neoclassical Keynesianism (or, god forbid, just classical), chartalism (sorry, infinite debt-money issuance won't work: in two years we will all see why), or any other attempts to reduce a broken imbalance in supply and demand propped up by the "invisible hand", it is all about supply and demand. Sure enough, one thing we have an infinite supply of is fiat money, and the resulting debt necessary to "back it up." As for demand, well that's another matter. With gold: it is just a little inverted.

Only now, after three years of roller coaster markets, epic debates, and gnashing of teeth, are mainstream financial pundits finally starting to get it. At least some of them, anyway. Precious metals have continued to perform relentlessly since 2008, crushing all naysayer predictions and defying all the musings of so called “experts”, while at the same time maintaining and protecting the investment savings of those people smart enough to jump on the train while prices were at historic lows (historic as in ‘the past 5000 years’)....Those who instead listened to the alternative media from 2007 on have now tripled the value of their investments, and are likely to double them yet again in the coming months as PM’s and other commodities continue to outperform paper securities and stocks. After enduring so much hardship, criticism, and grief over our positions on gold and silver, it’s about time for us to say “we told you so”. Not to gloat (ok, maybe a little), but to solidify the necessity of metals investment for every American today. Yes, we were right, the skeptics were wrong, and they continue to be wrong. Even now, with gold surpassing the $1600 an ounce mark, and silver edging back towards its $50 per ounce highs, there is still time for those who missed the boat to shield their nest eggs from expanding economic insanity. The fact is, precious metals values are nowhere near their peak. Here are some reasons why…

In the past two weeks, one of the curious development the monetary aggregates, in addition to a spike in the Adjusted Monetary Base (discussed previously here), was the $88.7 billion surge in the M2 for the week ended July 4, the third largest jump in the broadest tracked monetary aggregate in history. Some have speculated that this number may be indicative that the money multiplier has once again started working as bank reserves after 2 long years, finally start making their way into the broader market. Unfortunately as Stone McCarthy explains this is not the case at all (sorry Fed: QE is still a failure) but merely has to do with the repeal of Regulation Q (explained here) which has resulted in a surge in small tie deposits inclusive of money market deposit accounts, which have jumped by $110 billion in the past two weeks, coupled with an accelerating shift of dollar deposits back to banks domiciled in the US. In other words: regulation explains the entire move. There is, however, a kicker, and it goes to another indicator of "economic growth" - the leading economic index, which is actually driven by M2. This means that the fake surge in the M2, will result in an all too real jump in the LEI, which in turn will push the market higher as vacuum tubes interpret the data as positive for the economy as opposed to merely driven by a regulatory forced shift of money from Pile A to Pile B. Expect stocks to surge once the next LEI reading is announced as a result.

Forget M2, the monetary base, irrelevant Keynesian aggregates, reserve balances, and all that other mumbo jumbo. According to Sean Corrigan of Diapason, the ultimate indicator of easy money and speculative access is none other than Sotheby's share price.