Money Supply

A look the end of the rising cycle and the start of the falling cycle, including its dynamics and capital destruction. How does the central bank respond?

“Is there any good news?”

You bet.

The good news is that this fraudulent system of unchecked, unbacked paper currency is finally coming to an end.

$51, 323, 233, 866, 518. That’s the current global public debt that exists all countries together. Next year it will rise to$54, 020, 847, 580, 179.

Draghi is a clever man in charge of a pretend central bank (for it’s only equipped to fight inflation, not a banking-turned-sovereign-debt-and-unemployment crisis). He must guess that bond investors will soon figure out that a stateless central bank defending a stateless currency is so hamstrung politically that it carries far less firepower than, say, the Federal Reserve has over the US economy and US dollar. If his outright-monetary-transactions bluff collapses, he may well have other tricks ready to suppress yields on struggling sovereign debt and save the euro (without which there is no need for the ECB). If Draghi is out of surprises, he can be thanked for buying time for politicians to come up with durable solutions to the eurozone’s woes. Oh, that’s another flaw with Draghi’s scheme; it removed the pressure for politicians to act. So they haven’t.

The Chinese demand for gold essentially comes from three segments: (1) the People’s Bank of China; (2); the banking sector; and (3) Chinese citizens. We can count on the Chinese central bank to pursue the same steady course they have been pursuing for a while: buying additional gunpowder by increasing their gold reserves. More importantly, it is very likely that the current forced deleveraging will be accompanied by, for instance, a significant cut in interest rates or a lowering of the reserve requirements to offer the banking sector a helping hand (as the PBOC appears to be folding a little on its hard stance). This could have a major impact on gold. We’ll see why by observing that the bulk of Chinese gold demand comes from its third source: Chinese citizens. China has one of the world's highest saving rates, and the public faces few investment options. With negative real interest rates, in case the PBoC does lower rates to support the banking system, gold seems to be an opportune alternative.

It just never stops...

As David Stockman, Reagan's infamous Budget Director, writes in his bestseller, The Great Deformation: The Corruption Of Capitalism In America – "the last thing hedge funds do is hedge."  The hedge fund complex is "not so much a conventional industry as it is a giant moveable trade": Wall Street trading desks frequently morph into independent hedge fund partnerships, and senior hedge funds often sire “cubs” and then sons of cubs. The protean ability of this arrangement to spawn, fund, and replicate successful momentum trades cannot be overstated, and has "generated trillions of permanent momentum-chasing capital." Ultimately, he warns, "apologists for the Fed’s evisceration of the capital markets could not see... they had unleashed the financial furies in the violent momentum trading modus operandi of the hedge fund casino."

The JGB market was completely unfazed by the news that the prime minister’s office was reconsidering the planned consumption tax hike. While the tax hike is unlikely to be changed; in BNP's view, the market’s lack of response to tail risk looks like proof that its function has been impaired by the BoJ’s massive buying. Even if the Abe regime is opting for financial repression to reduce the public debt, however, BNP warns that some degree of fiscal reform is needed to control the long-term interest rate. If the unfazed market is deemed to mean that fiscal reforms can be shelved without fear of a bond-yield spike as long as massive BoJ buying continues, serious problems could ensue.

‘The bigger they are, the harder they fall’ has always been true and is seemingly even more so today with regard to the BRICs (Brazil, Russia, India and China)

The conventional wisdom of the moment is that a weakening global economy will push the cost of commodities such as oil down as demand stagnates. This makes perfect sense in terms of physical supply and demand, but this ignores the consequences of financial demand and capital flows. The total financial wealth sloshing around the world is approximately $160 trillion. If some relatively modest percentage of this money enters the commodity sector (and more specifically, oil) as a low-risk opportunity, this flow would drive the price of oil higher on its own, regardless of end-user demand and deflationary forces. If we grasp that financial demand is equivalent to end-user demand, we understand why oil could climb to $125/barrel or even higher despite a physical surplus.

Those who follow the mainstream media’s “all Federal Reserve, all the time” coverage of financial news naturally conclude that Senator Chuck Schumer neatly summarized reality last year when he declared that the Federal Reserve “is the only game in town.” This lemming-like belief in the power of the Federal Reserve generates its own psychological force field, of course; the actual power of the Fed is superseded by the belief in its power.  The widespread belief in the Fed’s omnipotence is the source of the Fed’s power to move markets. We can thus anticipate widespread disbelief at the discovery that the Fed is either irrelevant or an impediment to the non-asset-bubble parts of the economy. There is much we, as individuals, can do to ignore the Emperor's clothes (or lack thereof) and focus on how to pursue our own prosperity and happiness irrespective of the meddling of central planners. The real power is in our hands, should we choose to believe it.

• Ackman Says Pershing Square Takes 9.8% Stake in Air Products (BBG) - So is APD Carl Icahn's biggest ever short yet
• Latest Hilsenplant: Summers Hedges His Doubts on Fed's Bond Buying (WSJ)
• China Stocks World’s Worst Losing $748 Billion on Slump (BBG)
• U.S. Spy Program Lifts Veil in Court (WSJ)
• Abenomics on the rock again: Japan July manufacturing PMI shows growth at 4-month low (Reuters)
• EADS to be renamed Airbus in shake-up (FT)
• Goldman's GSAM has significantly increased its exposure to European equities (FT) - there is a reason why this is Goldman's worst division
• Japanese Megabanks Post Mega Profit Gains (WSJ) - when one excludes MTM impact from rate surge of course
• Ex-workers sue Apple, seek overtime for daily bag searches (Reuters)
• Hong Kong Yuan Deposits Snap Eight-Month Increase on Cash Crunch (BBG)
• Downtown NYC Landlords Remake Offices in Shift From Banks (BBG)

Is there such a thing as a ‘safe’ fiat currency? The term itself is as intellectually disingenuous as terms like ‘fair tax’ or ‘government innovation’. But as we’ve been exploring recently why modern central banking is completely dysfunctional, it does beg the question – is any currency ‘safe’? Let’s look at the numbers for some data-driven analysis. But which is the safest major currency?

We take a new look at Japan from the 1980s to today in order to decipher what “Abenomics” might do to this fragile nation. We argue that moving Japan from its current stable, but unsustainable equilibrium, through activist monetary policy risk a run on the sovereign. We present part I and part II here today. We hope you enjoy it.

Over the past several decades, people around the world have become so brainwashed that few people really give much thought anymore to the safety of their currency. It’s not something people really understand... there’s apparently some Wizard of Oz type figure at the top of the hill pulling all the levers of the monetary system. And we just trust them to be good guys. This power rests primarily in the hands of four men who control roughly 75% of the entire world money supply. So, how are they doing?