Nomura

History has shown us countless times that centrally-­?planned, command style economies do not produce long-­?term economic growth. We’ve seen this will the Soviet Union, the UK, the US-­?since the Tech Crash, and today in China.

• Draghi Says Next Move Not His as Spain Resists Bailout (Bloomberg)
• EU Doubts on Deficit Cutting May Hinder Spain’s Path to Bailout (Bloomberg)
• Merkel to Visit Greece for First Time Since Crisis Outbreak (Bloomberg)
• Fed's Bullard warns inflation won't ease U.S. debt burden (Reuters)
• Walmart Workers Stage a Walkout in California (NYT)
• Natural Gas Glut Pushes Exports (WSJ)
• BOJ Refrains From More Stimulus as Political Pressure Mounts (Bloomberg)
• Big funds seek to rein in pay at Wall Street banks (Reuters)
• Hong Kong Luxury Sales Fall as Chinese Curb Spending (Bloomberg)
• Dave and Busters Pulls IPO due to "Market Conditions" (Reuters) - so market at anything but all time highs now is market conditions?
• Weak U.S. labor market looms ahead of elections (Reuters)
• Glut of Solar Panels Poses a New Threat to China (NYT)

• Romney dominates presidential debate (FT)
• What Romney’s Debate Victory Means (Bloomberg)
• Obama Lead Shrinks in Two Battlegrounds (WSJ)
• "Everything will fall apart unless the Spanish conditions are extremely tough" German policy-maker (Telegraph)
• Draghi Stares at Spain as Brinkmanship Keeps ECB Waiting (Bloomberg)
• RBS facing loss after Spanish property firm collapse (Telegraph)
• Burdened by Old Mortgages, Banks Are Slow to Lend Now (WSJ)
• The Woman Who Took the Fall for JPMorgan Chase (NYT)
• European Banks Told to Hold On to $258 Billion of Fresh Capital (Bloomberg)
• Europe Weighs More Sanctions as Iran’s Currency Plummets (Bloomberg)

Today’s AM fix was USD 1,766.75, EUR 1,369.36, GBP 1,088.37 per ounce.
Yesterday’s AM fix was USD 1,758.50, EUR 1,361.91 and GBP 1,084.96 per ounce.

Gold fell $8.60 or 0.49% in New York yesterday and closed at $1,764.50. Silver slipped to a low of $33.594 then rebounded in New York, but it still finished with a loss of 1.62%.

Gold Seasonality Chart - Heatmap

• China carrier a show of force as Japan tension festers (Reuters)
• Draghi Rally Lets Skeptics Dump Spain for Bunds (Bloomberg)
• China’s Central Bank Injects Record Funds to Ease Cash Crunch (Bloomberg)
• Obama warns Iran on nuclear bid, containment 'no option' (Reuters)
• When Would Bernanke’s Successor Raise Rates? (WSJ) that's easy - never
• Italy's Monti Downplays Sovereignty Risk (WSJ)
• Portugal swaps pay cuts for tax rises (FT)
• Madrid faces regional funding backlash (FT)
• Berlin Seeks to Push Back New Euro-Crisis Aid Requests (WSJ)
• Race Focuses on Foreign Policy (WSJ)
• China Speeds Up Approvals of Foreigners’ Stock Investment (Bloomberg)

While Nomura's Bob Janjuah remains 100% correct in his diagnosis and prognosis of the current 'grossest misallocation and mispricing of capital in the history of mankind', his tactical short was stopped out last week. The modest loss on the position though provided clarity on the importance of the 1450 level for the S&P 500 and he remains confident that on a multi-month timeframe he expects 800 to be hit with only a muted 10% possible upside in global equities due to underlying growth, debt and policy-maker concerns. Critically, he suggests it is premature to go aggressively short risk at this precise moment, urges traders to stay nimble, and warns "...risk assets are in a bubble which of course can extend, but which can reverse sharply and suddenly. Up here, 'valuation metrics' are not going to help much... this bubble could extend for maybe a few months and by up to 10%, ...but that we could see global equity markets 10/15% lower in virtually a 'heartbeat'."

• Obama, Romney tiptoe around housing morass as they woo voters (Reuters) ... just as ZH expected
• Poll Finds Obama in Better Shape Than Any Nominee Since Clinton (Bloomberg)
• Romney on Offense, Says Obama Can’t Help Middle Class (Bloomberg)
• Fed’s Fisher Says U.S. Inflation Expectations Rising (Bloomberg)
• Citigroup Warns Irish Investors to Plan for Losses (Bloomberg)
• Central Banks Flex Muscles (WSJ)
• China says U.S. auto trade complaint driven by election race (Reuters)
• Brussels sidesteps China trade dispute (FT)
• How misstep over trading fractions wounded ICAP's EBS (Reuters)
• Ex-CME programmer pleads guilty to trade secret theft (Reuters)
• Income squeeze will persist, says BoE (FT)
• South African miners return to work, unrest rumbles on (Reuters)

Without justice for investors, pension funds and banks defrauded to the tune of hundreds of billions of dollars, there can be no investor confidence to support private finance.  

While Koo-nesianism is only one ideological branch removed from Keynesianism, Nomura's Richard Koo's diagnosis of the crisis the advanced economies of the world faces has been spot on. We have discussed the concept of the balance sheet recession many times and this three-and-a-half minute clip from Bloomberg TV provides the most succinct explanation of not just how we got here but why the Fed is now impotent (which may come as a surprise to those buying stocks) and why it is the fiscal cliff that everyone should be worried about. As Koo notes, the US "is beginning to look more like Japan... going through the same process that Japan went through 15 years earlier." The Japanese experience made it clear that when the private sector is minimizing debt (or deleveraging) with very low interest rates, there is little that monetary policy can do. The government cannot tell the private sector don't repay your balance sheets because private sector must repair its balance sheets. In Koo's words: "the only thing the government can do is to spend the money that the private sector has saved and put that back into the income stream" - which (rightly or wrongly) places the US economy in the hands of the US Congress (and makes the Fed irrelevant).

It took the ECB a year of endless behind the scenes Machiavellian scheming to restart the SMP program (which was conceived by Jean-Claude Trichet in May 2010, concurrent with the first Greek bailout). The markets soared with euphoria that this time will be different, and that the program which is a masterclass in central planning paradox, as it is "unlimited" yet "sterilized", while based on "conditions" none of which have been disclosed, and will somehow be pari passu for new bond purchases while it retains seniority for previous purchases of Greek and other PIGS bonds, will work - it won't, and the third time will not be the charm as we showed before. Yet it has been just 48 hours since the "bailout" announcement and already Europe is being Europe: namely, it turns out that nobody wants the bailout.

A few hours after the US reported a jobs number which missed consensus estimates on broad weakness, which saw a nearly 400K increase in those no longer even caring about work, and which confirmed that the economic deteriorating is nowhere close to ending, stocks did their thing and with no news, and on no volume (the same reason why like Nomura, ever fewer banks can afford to keep trading desks), decided to surge into the close even as volume slid, with the NYSE trading its new post-Knight normal average of a few shares over half a billion. This sent the ES to a new post-2008 high. In other news, we are approaching 15x forward P/E even as the world's global economies are grinding to a screeching halt.Central planning is here to stay and the stock market will merely levitate ever higher on hope that the central bankers have it all under control.

Over the past several months (and years) we have been warning that the ongoing collapse in trading volumes, in part due to the lack of faith in capital markets that now have all the integrity of a rigged Vegas casino from the 1960s, in part due to investors' need to monetize assets in a world in which wages simply refuse to keep up with prices, will have not only irreversible implications on the shape of market structure, but also substantial consequences when it comes to the layout of modern banks, and associated up and downstream variables, such a jobs, real estate, support professions, municipal taxes and much more. Nowhere is this more evident (for now at least) than in the massive corporate reorganization taking place at Nomura's American division, which among many other things is about to lose its brand new $270 million trading floor even before a single trader set foot in it.

While hardly saying anything new, more and more pundits are waking up to the reality that faced with an environment of epic capital outflows predicated by a complete loss in the system (see Greece), Spain simply can not survive. We wrote about the record outflow in Spanish deposits last week (here and here) and the fact that with banks urgently seeking to plug liquidity holes, coupled with soaring NPL levels, in the absence of actual profits they are forced to sell all those SPG bonds they had been purchasing during the open ponzi phase, where ECB funding would be recycled by local banks to meet primary market demand. Overnight even the New York Times has finally understood this simple identity: record outflows = the end. And now, the banks begin to chime in, pointing out what is patently obvious: from Nomura - "Spain will need full-blown bailout which will include more active role of ECB in Spanish bond markets."

• The ESM Violates the Law And EU Treaties (Welt)
• Fears Rising, Spaniards Pull Out Their Cash and Get Out of Spain (NYT)
• RBA stays put for third straight month (SMH)
• Why PBOC will not cut rates: China’s Repo Rate Drops Most in Six Months as PBOC Injects Cash (Bloomberg)
• Manufacturing Downturn Spreads Gloom Across Asia, Europe (WSJ)
• "Sources" tell Dutch Dagblad that Weidmann is isolated in his objection to ECB monetization (Reuters, FD)
• Europe Bank Chief Hints at Bond Purchases (WSJ)
• Australia's Fortescue slashes capex as iron ore mkt drops (Reuters)
• Loan rates point to eurozone fractures (FT)
• U.S. nears deal for $1 billion in Egypt debt relief (Reuters)
• Majority of New Jobs Pay Low Wages, Study Finds (NYT)

European equities opened higher, risk appetite boosted following overnight comments from Chinese Premier Wen that easing inflation in China left more room for monetary stimulus. However, summer thin volumes saw these gains pared, with particular underperformance in the FTSE 100, which currently trades in negative territory, despite stronger than expected UK retail sales for July. European CPI data for July was in line with market expectations, with no reaction seen across the asset classes following the release. Elsewhere, reports that Spain is to accelerate the bank bailout and is about to receive an emergency disbursement from the EUR 100bln bailout failed to support domestic bond market; the Spanish 2-year spread with respect to the German equivalent trading 6bps wider, though the Spanish 10-year spread is tighter on the day by 3.2bps and the 10-year yield is lower on the day,  currently at 6.852%. The Spanish IBEX is outperforming on the back of this news, led by Bankia and Banco Santander.