Real Interest Rates
There is blood running in the gold market this morning after vicious selling which began on Friday afternoon and continued in Asian trading and through into European trading. Gold has fallen another 4.4% today after a huge number of stop loss orders were triggered at $1,480/oz pushing gold lower. Reports suggest that a futures sell order worth $6 billion, equal to 4 million ounces or 124.4 tonnes of gold, by a large investment bank sent prices plummeting and spooked the markets contributing to the decline. The order was believed to have been placed through Merrill Lynch's brokerage team. Gold futures with a value of over 400 tonnes were sold in hours and this is equal to 15% of annual gold mine production. The scale of the selling was massive and again underlines how one or two large banks or hedge funds can completely distort the market by aggressive, concentrated leveraged short positions. It may again be the case that bullion banks with large concentrated short positions are manipulating the price lower as has long been alleged by GATA. Those with concentrated short positions may also have been concerned about the significant decline in COMEX gold inventories. The plunge in New York Comex’s gold inventories since February is a reflection of increased demand for the physical metal and concerns about counter party risk with some hedge funds and institutions choosing to own gold in less risky allocated accounts.
"The crisis isn't over yet," warns Carmen Reinhart, "not in the US and not in Europe." Known for her deep understanding that 'it's never different this time', the Harvard economist drops the truth grenade a number of times in this excellent Der Spiegel interview. Sweeping away the sound and fury of a self-serving Federal Reserve or BoJ, she chides, "no central bank will admit it is keeping rates low to help governments out of their debt crises. But in fact they are bending over backwards to help governments to finance their deficits," and guess what, "this is nothing new in history." After World War II, all countries that had a big debt overhang relied on financial repression to avoid an explicit default. After the war, governments imposed interest rate ceilings for government bonds; but, nowadays, she explains, "monetary policy is doing the job. And with high unemployment and low inflation that doesn't even look suspicious. Only when inflation picks up, which is ultimately going to happen, will it become obvious that central banks have become subservient to governments." Nations "seldom just grow themselves out of debt," as so many believe is possible, "you need a combination of austerity, so that you don't add further to the pile of debt, and higher inflation, which is effectively a subtle form of taxation," with the consequence that people are going to lose their savings. Reinhart succinctly summarizes, "no doubt, our pensions are screwed."
Krugman compared apples to oranges to make his point.
- Lesson #1 Government agencies allocate capital better than the private sector
- Lesson #2 Central banks should control asset prices and prevent them from falling
- Lesson #3 Darwin & Schumpeter were wrong, creationists are right; there is such a thing as a free lunch
- Lesson #4 Towards a new orthopraxy
- Lesson #5 Wondrous tools used by the clergy to grow GDP
- Lesson #6 How to finance infinite needs
Though a gold bull, I called for a correction late last year and believe more downside is likely from here.
Hedge fund icon Stanley Druckenmiller sat down with Bloomberg TV's Stephanie Ruhle, saying that he’s decided to speak out now because he sees "a storm coming, maybe bigger than the storm we had in 2008, 2010." His fear is that the ballooning costs of Social Security, Medicare and Medicaid (which with unfunded liabilities are as high as $211 trillion) will bankrupt the nation's youth an pose a much greater danger than the debt currently being debated in Congress. He said, "While everybody is focusing on the here and now, there's a much, much bigger storm that's about to hit... I am not against seniors. What I am against is current seniors stealing from future seniors." While not exactly Maxine Waters' sequestration-based 170 million job loss, this concerning interview is must-see for his clarity and forthrightness from who is to blame, to the consequences of gridlock, our society's short-term thinking, and the concerning demographics the US faces.
While the G-20 and the G-7 haggle among each other, all (with perhaps the exception of France) desperate to make it seem that Japan's recent currency manipulation is not really manipulation, and that the plunge in the Yen was an indirect, "unexpected" consequence of BOJ monetary policy (when in reality as Richard Koo explained it is merely a ploy to avoid the spotlight falling on each and every other G-7/20 member, all of which are engaged in the same type of currency wars which eventually will all morph into trade wars), Europe's energy powerhouse Norway quietly entered into the war. From Bloomberg: "Norges Bank is ready to cut interest rates further to counter krone gains that interfere with the inflation target, Governor Oeystein Olsen said. “If it gets too strong over time, leading to inflation that’s too low, we will act,” Olsen said yesterday in an interview at his office in Oslo.
The baby boomers now retiring grew up in a high returns world. So did their children. But, as Credit Suisse notes in their 2013 Yearbook, everyone now faces a world of low real interest rates. Baby boomers may find it hard to adjust. However, McKinsey (2012) predicts they will control 70% of retail investor assets by 2017. So our sympathy should go to their grandchildren, who cannot expect the high returns their grandparents enjoyed. From 1950 to date, the annualized real return on world equities was 6.8%; from 1980, it was 6.4%. The corresponding world bond returns were 3.7% and 6.4%, respectively. Equity investors were brought down to earth over the first 13 years of the 21st century, when the annualized real return on the world equity index was just 0.1%. But real bond returns stayed high at 6.1% per year. We have transitioned to a world of low real interest rates. The question is, does this mean equity returns are also likely to remain lower. In this compendium-like article, CS addresses prospective bond returns and interest rate impacts on equity valuations, inflation and its impact on equity beta, VIX reversions, and profiles 22 countries across three regions. Chart pr0n at its best for bulls and bears.
Yesterday we presented a simplistic analysis of why for Japan "This Time Won't Be Different", a preliminary observation so far validated by the just announced Japanese December current account deficit which was not only nearly double the expected 144.2 billion yen, printing at some 264.1 billion yen, but was only the first back-to-back monthly current account deficit since 1985. But perhaps we are wrong and this time Abe will succeed where he, and so many others, have failed before. And, as is now widely understood, perhaps Japan will succeed in finally launching the necessary and sufficient currency war that would be part and parcel of Japans great reflation, as even various G-8 members have recently acknowledged. The question is will it, and when? One attempt at an answer comes from the fine folks at Bienville Capital who have compiled the definitive pros and cons presentation on what Japan must do, and how it will play out, at least if all goes according to plan.
“Facts do not cease to exist because they are ignored.” – Aldous Huxley
The entire system is corrupt to its core. Both political parties, regulatory agencies, Wall Street, the Federal Reserve, and mainstream media are participants in this enormous fraud. They grow more desperate and bold by the day. The lies, misinformation and propaganda being spewed on a daily basis become more outrageous and audacious. They are using the Big Lie method on a grand scale. They frantically need to lure the muppets into the stock market and the housing market to keep the game going a little longer. You can sense we are reaching a tipping point. The system they have created is mathematically unsustainable. Therefore, it will not be sustained.
Back in December, as always happens every year for the past 3, a margin call driven liquidation wave pushed the price of the gold to multi-month lows, providing merely yet another lowball buying opportunity (for which let's all thank John Paulson, again). One buyer who certainly would love to thank whichever marginal seller was liquidating their gold, is none other than China, which as was reported a few hours ago, imported an all time record 114.4 tons of gold in the month of December, or more than all the gold held by the Greek central bank (assuming it hasn't been confiscated by ze Germans or the ECB, or deposited in G-Pap or Venizelos' private HSBC safe in Geneva yet: a very aggressive assumption).
Our credit-based financial markets and the economy it supports are levered, fragile and increasingly entropic – it is running out of energy and time. When does money run out of time? The countdown begins when investable assets pose too much risk for too little return; when lenders desert credit markets for other alternatives such as cash or real assets.
Amid growing concern of yet another liquidity-fueled real estate bubble in the UAE (real estate firms up 92% in the last year in USD terms), the government (via bank regulations) have drastically restricted the proportion of loans that can be provided to foreign investors. However, this has had absolutely no impact as Bloomberg reports that increasingly 'suitcases of cash' are being used to pay for the property. With relatively lax capital controls 'cash is king' as the efforts of the UAE central bank to cap speculation in real estate (which saw property prices crash 65% from their peak in 2009) are failing as one local realtor noted "[the market] is increasingly dominated by cash buyers," and UAE real estate stocks are up over 20% in the last month alone. From Russian diamond dealers to Iranian speculators, Morgan Stanley notes that "property prices ... have continued to rise because of ample liquidity given negative real interest rates and nominal mortgage rates below rental yields," as the world's central banks do what they do best - blow bubbles in unintended places.
G4+CHF can fight the currency wars longer and more aggressively than small G10 and EM countries can. However, as Citi's Steven Englander notes, it also takes a lot of depreciation to crowd in a meaningful amount of net exports. His bottom line, GBP, CHF and JPY have a lot further to depreciate. In principle, the USD can easily fall into this category as well, but right now the USD debate is focused on Fed policy – were it to become clear that balance sheet expansion will end well beyond end-2013, the USD would fall into the category of currency war ‘winners’ as well. Critically, though, the reality of currency wars is that policymakers do not use FX as cyclical stimulus because of its effectiveness; they use it because they have hit a wall with respect to the effectiveness of fiscal and monetary policies, and are unwilling to bite the structural policy bullet. The following seven points will be on every policymakers' mind - or should be.
One of the first axioms of analysis is: "Garbage In, Garbage Out"! If your data is flawed, everything you do with it and the decisions stemming from it are flawed and dangerous to your financial health. Experienced analysts will often be found relentlessly checking, rechecking and validating their inputs and assumptions. If only our economists and the sell side analyst community were this diligent. But then it isn't their money. Only a year-end bonus for the 'extras' in their life is at risk. If economic practitioners were held to higher standards of accountability, they simply wouldn't accept the raft of fundamental data points that are the pillars of most economic assessment. Markets have become so dysfunctional with so much cheap money chasing so few real opportunities, that collateral values within the rehypothecation process are now in jeopardy and exposed to collateral contagion. The question is - what would things look like if the Fed wasn't engaged in Monetary Malpractice?