The smart money is selling Hong Kong and Singapore property. This implies real estate prices may be topping out, with far-reaching consequences.
Far from being a unique situation, the fragile exposure of unsecured depositors across the Euro zone is the norm; and their fragility was further increased in the last twelve months thanks to policies created by the same authorities who now refuse to honor their promise of a banking union, and instead impose capital controls, which have effectively destroyed any credibility on the safety of capital in the Euro zone. However, even if one accepts my view, the unintended outcome begs the following question: Why was there cheap money available for subordinated debt holders to cash out, but there is none now to protect the savings of depositors?
Bloomberg reported recently that Russia is now the world's biggest gold buyer, its central bank having added 570 tonnes (18.3 million troy ounces) over the past decade. At $1,650/ounce, that's $30.1 billion worth of gold. Russia isn't alone, of course. Central banks as a group have been net buyers for at least two years now. But the 2012 data trickling out shows that the amount of tonnage being added is breaking records. Based on current data, the net increase in central bank gold buying for 2012 was 14.8 million troy ounces – and that's before the final 2012 figures are in for all countries. This is a dramatic increase, one bigger than most investors probably realize. To put it in perspective, on a net basis, central banks added more to their reserves last year than since 1964. The net increase – so far – is 17% greater than what was added in 2011, which was itself a year of record buying. The message from central banks is clear: they expect the dollar to move inexorably lower. It doesn't matter that it's been holding up against other currencies or that the economy might be getting better. They're buying gold in record amounts because they see a significant shift coming with the status of the dollar, and they need to protect themselves against that risk. Embrace the messages central bankers are telling us – the ones they tell with their actions, not their words.
Events in Cyprus stem from precisely the same source as the surge in US home prices, namely monetary expansion by the Fed.
Since the 1990s, priced in Real GDP the Dow Jones Industrial Average (as well as the S&P500) has been far above their 20th-century norm. There is an unsurprising coincidence - as stock prices (and corporate profits) have soared above their historical norm, wage growth has been very stagnant. The economy has come to be tilted toward bankers, financiers, insurance brokers and away from wage-earners, manufacturers and artisans. Does that mean that as Hassett and Glassman projected in Dow 36,000, stock prices have climbed to a new plateau? Well, while it is impossible to say exactly what prices will do in future (nominal, or otherwise) the “new plateau” has been very much supported by the Federal Reserve, first by lowering rates and keeping them low. Some might take that as a sign that stocks aren’t going to get much cheaper, because the Fed won’t let them get much cheaper; but gravity is against the Fed. Will it be third-time unlucky for the Fed, hell-bent on wealth-effecting and financialising the US economy to prosperity?
Forget Cyprus. A much bigger story in the coming weeks and months will be in Japan, where one of the greatest economic experiments in the modern era is about to begin.
With the Fed now fully engaged, and few if any policy tools left, the effectiveness of continued artificial stimulation is clearly waning. Lower mortgages rates, interest rates and excess liquidity served well in priming the pumps of the real estate and financial markets when valuations were extremely depressed. However, four years and four programs later, stock valuations are no longer low, earnings are no longer depressed and the majority of real estate related activity has likely been completed. It is for this reason that the returns from each subsequent program have diminished. The reality is that Fed may have finally found the limits of their effectiveness as earnings growth slows, economic data weakens and real unemployment remains high. Reminiscent of the choices of Goldilocks - it is likely the Fed's estimates for economic growth in 2013 are too hot, employment is too cold and inflation estimates may be just about right. The real unspoken concern is the continued threat of deflation and the next recession.
The mooted savings levy in Cyprus is a form of wealth confiscation on behalf of the EU which is making depositors throughout the Union nervous. There has been no dramatic increase in the demand for gold in recent days. However, this could be a ‘tipping point’ moment when savers realise that they are unsecured creditors of banks and their savings are not sacrosanct.
A dispassionate discussion of developments in Cyprus and a few broader implications.
Asia has badly lagged U.S. and European stock markets this year and over the past 12 months. We explain why it's happened and why it may continue.
Democratic governments in low-growth economies sometimes rely on their central banks to support fiscal policy so as to avoid asking voters to share more of the burden. BNP Paribas' Ryutaro Kono notes that it is the pathology of modern democracies to foist our bills onto future generations and one could argue that the prolongation of our zero-rate regimes and quantitative easing are facilitating this. When this societal weakness is combined with today’s financialized economies, we get a pronounced inclination toward monetization, which could lead to very serious problems. While Governor Shirakawa has described the BoJ as the “frontrunner” in venturing into unknown territory with policies like zero rates and quantitative easing, Kono warns that Japan could also become the frontrunner of outright monetization. This could intensify the dilemma of having to choose between price stability or financial-system stability when inflation actually starts to pick up.
The markets have begun to wonder whether the Fed (and other central banks) will ever be able to exit from its Quantitative Easing policy. We believe there is only one reasonable exit the Fed can take. Rather than sell its portfolio of bonds or allow them to mature naturally, we believe the Fed’s only practical exit will be to increase the size of all other balance sheets in relation to its own. This “exit” will be part of a larger three-part strategy for resetting the over-leveraged global economy, already underway...
The Biggest Welfare Queens of All ...
And the Stock Rally Is Due to Money-Printing
As Morpheus said to Neo in the film The Matrix: You still think that is air you are breathing?