Those who expected a major response following the surprising, and "preemptive" easing by the Bank of Japan which has now joined the freely CTRL-Ping club of central banks, and went to bed looking for a major pop in risk this morning will be disappointed. The reason is that with every passing day that Spain does not request a bailout, all those who bought Spanish bonds on the assumption that Spain will request a bailout look dumber and dumber (a dynamic we explained nearly two months ago). As a result, the EURUSD has been dragging ever lower, and is now playing with 1.30 support. Providing no additional clarity was Spanish deputy PM Soraya Saenz de Santamaria who said Spain will decide if and when to trigger an ECB bailout once all details have been analyzed. Well the details have been more than analyzed, and Spain has been more than happy to receive the benefits of its bailout, it has yet to trigger the cause. Ironically in a Barclays study,over 78% of investors see Spain requesting a bailout by year end (even though as we explained over the weekend Spain really has to do this ahead of its major cash drawing bond redemption schedule in October when it may well run out of cash). And so, just like the US Fiscal Ceiling, the global markets are expecting some Catchy 22 deus ex machina, where traders can get their cake and politicians can eat it too. Alas, there never is such a thing as a free lunch. And what is making the much needed outcome even less probable is that Spanish bonds this morning are actually trading tighter once again making a bailout less than likely. The Spanish zombie has left its grave and is now romping through the neighborhood unsupervised.
The great day has come and gone when the Fed would once again ride to the action, not daring to be left behind by the ECB’s perverse vaunting of its new ‘unlimited’ programme of bond purchases. But the few, brief sentences from Bernanke contain such a miasma of error that it is hard to know where to begin if we are to restore a fresh breeze of economic rationale to this swamp of non sequiturs and wilful misunderstandings. It is not enough that crude, Krugmanite Keynesianism clings to the cheap parlour trick of using money illusion to fool unemployed wage-earners into lowering the reservation price of their labour, but now we must battle against banal, Bernankite Bubble-blowing – the hope that money illusion will fool cash-constrained asset owners instead. It is not only that Bernanke’s policies will inevitably assist the zombie companies and the obsolescent industries to absorb scarce resources (not least on bank balance sheets) to a much greater degree than is justified, there is also the danger that lax money misleads even today’s supramarginal businesses into over-estimating the depth and duration of demand for their products, ultimately undermining many otherwise sound undertakings and reducing these, too, when the cycle next turns, to the ranks of the Living Dead.
One of the more curious conspiracy theories that has appeared in the past 24 hours, or since yesterday's so far unexplained crude oil flash crash without a subsequent corresponding jump (those only happen in equities it appears), is that Saudi Arabia has decided to come to the aid of the Obama administration two months ahead of the election, and to pump enough crude into the system to offset the pricing in of the inevitable liquidity tsunami from the now global QEternity, or at least until such time as the election passes. Partially confirming this speculation was the FT's report that Saudi Arabia has offered its main customers in the US, Europe and Asia extra oil supplies through the end of the year, a sign the world’s largest exporter is worried about the impact of rising prices on the global economy. Reuters adds, citing a Gulf source that "We would like to see the price coming down and we are working to bring it down... The price now, we believe is high, and it's not supported by fundamentals at all. It's just speculation and geopolitics." "The majority of OPEC countries prefer around $100, including Saudi Arabia," he said, adding that $100 per barrel was "right now the ideal price for the majority of OPEC countries ... the majority is all except one or two." "We think the oil market is well balanced," the Gulf source added. This comes a day after fellow OPEC member Iran, whose output has been substantially curtailed in recent months as a result of a global embargo (with notable exemptions for key Iran clients India and China) made it clear that it would be happy with crude rising to $150 for obvious reasons. Obviously Iran is in the "minority" according to the Gulf source. And while the reasoning for Saudi Arabia to do all in its power to promote amicable relations with America's leadership is easily explainable, it is far less clear if Saudi Arabia can actually do much if anything to really prop up crude production, prop down the price of crude and gas at the pump, and support Obama's reelection chances.
It appears that the strike that had crippled South Africa's precious metals industry is coming to an end. Reuters reports that striking miners at Lonmin's Marikana mine in South Africa said on Tuesday they accepted a management pay rise offer and would return to work on Thursday after six weeks of mining sector unrest that shook Africa's largest economy. The cost to get back to work? A 22% hike in wages, and a corresponding crunch in corporate margins (which we hope finally clears up to all those who have been so confused for years why a surge in the underlying PMs usually tends to backfire on the miners extracting it, as labor costs surge as much if not more). "The gathered strikers cheered near the mine, 100 km (60 miles) northwest of Johannesburg, when they were informed of the 22 percent wage increase offer, a Reuters witness said." Lonmin is not alone: "In another sign that weeks of labour unrest in South Africa's platinum belt could be ending, world No. 1 platinum producer Anglo American Platinum said it had resumed its operations in the strike-hit Rustenburg area. On the news of the Marikana agreement, the spot platinum price fell 2 percent to a session low at $1,627.49/oz and the rand firmed against the dollar."
Global gold production remains at its level of the late '90s, even though prices have risen to over $1,700 per ounce from $252 per ounce in 1999 or roughly 16% per annum in dollar terms. Only Rio Tinto and Ivanhoe's Oyu Tolgoi mine in Mongolia stand out as a major new gold mines expected to begin production in the near future. Bulls note that global production has remained impervious to the price of gold. This may continue to be the case due to the increasingly obvious geological constraints being seen in the gold mining sector. Resource nationalism is beginning to become an important factor again. This will also almost certainly affect supply at a time when demand is increasing from people throughout the world and many hedge funds, pension funds and central banks’ due to geopolitical, systemic and monetary risks. The lesson of QE is that fiat currencies increasingly grow on trees. Gold does not. This is the primary reason that gold will continue to protect investors in the coming months.
- Nothing has changed and things have just gotten worse: Europe Banks Fail to Cut as Draghi Loans Defer Deleverage (Bloomberg)
- Mitt Romney secret video reveals views on Obama voters (BBC)
- Romney Stands by Government-Dependent ‘Victims’ Remark (Bloomberg)
- Video shows Libyans helping rescue U.S. ambassador after attack (Reuters)
- Fannie Mae paid BofA premium to transfer soured loans-regulator (Reuters)
- Northrop to shed nearly 600 jobs (LA Times)
- LOLmarkets: Retail Currency Traders Turn to Algorithms (WSJ)
- U.K. Royal Family Wins French Ruling on Kate Photos (Bloomberg)
- Nevada recluse dies with $200 in bank, $7 million in gold at home (LA Times)
- Gap Between Rich and Poor Grows in Germany (Spiegel)
- Chicago teachers meet Tuesday to decide whether to end strike (Reuters)
- Australia's Fortescue wins debt breather, shares soar (Reuters) ... a deal which ultimately will prime equity and unsecureds by $4.5 billion in secured debt
- Ford car sales fall 29% in Europe (FT)
Protests Reignite On Anniversary Of Japanese Invasion Of China; Boats Enter Japan's Territorial WatersSubmitted by Tyler Durden on 09/18/2012 06:16 -0500
Anyone who thought that anti-Japan protests would quietly go away on the 81st anniversary of the Japanese invasion of Manchuria may have to reevaluate. First, overnight the HKEJ said that China is preparing economic sanctions against Japan, and as the situation again escalates, Reuters reports that at least two of 11 Chinese ocean surveillance and fishery patrol ships sailing near East China Sea islets claimed by both Tokyo and Beijing have entered what Japan considers its territory, public broadcast NHK said on Tuesday, quoting Japan's Coast Guard. Subsequently, NHK reported that "a Chinese fisheries patrol ship has departed after approaching Japan's territorial waters off the Senkaku Islands in the East China Sea. The Japan Coast Guard remains on the alert, saying the Chinese vessel may enter the area again. The Coast Guard spotted the boat some 43 kilometers north-northwest of the largest island, Uotsuri, early Tuesday morning. The Coast Guard confirmed the boat had left the area before 10:30 AM. It said at around 11:10 AM, the vessel again approached Japan's territorial waters off another island and left soon afterward. In response to warnings from Japan's Coast Guard, the Chinese vessel replied the islands are inherent Chinese territory and that its mission is legitimate." Watch this space carefully, especially once the Chinese armada of 1000 fishing boats, which is already en route to Senkaku, engages in a stand off with Japanese battleships: "China's state-run radio has reported 1,000 fishing boats have left the provinces of Zhejiang and Fujian for waters near the Senkaku Islands. But Japan's Coast Guard says it has not yet spotted a large fleet in the area." It will quite soon. Elsewhere, sentiment across mainland China is getting the opposite of better, fast.
One of the key stories of 2011 was the revelation, courtesy of MF Global, that no asset in the financial system is "as is", and instead is merely a copy of a copy of a copy- rehypothecated up to an infinite number of times (if domiciled in the UK) for one simple reason: there are not enough money-good, credible assets in existence, even if there are more than enough 'secured' liabilities that claim said assets as collateral. And while the status quo is marching on, the Ponzi is rising, and new liabilities are created, all is well; however, the second the system experiences a violent deleveraging and the liabilities have to be matched to their respective assets as they are unwound, all hell breaks loose once the reality sets in that each asset has been diluted exponentially. Naturally, among such assets are not only paper representations of securities, mostly stock and bond certificates held by the DTC's Cede & Co., but physical assets, such as bars of gold held by paper ETFs such as GLD and SLV. In fact, the speculation that the physical precious metals in circulation have been massively diluted has been a major topic of debate among the precious metal communities, and is the reason for the success of such physical-based gold and silver investment vehicles as those of Eric Sprott. Of course, the "other side" has been quite adamant that this is in no way realistic and every ounce of precious metals is accounted for. While that remains to be disproven in the next, and final, central-planner driven market crash, we now know that it is not only precious metals that are on the vaporization chopping block: when it comes to China, such simple assets as simple steel held in inventories, apparently do not exist.
Marc Faber, one of the few analysts, to have predicted the current crisis correctly and to have protected his clients in the process, remains very bullish on gold. In another excellent Bloomberg interview, Faber said that “the trend for gold prices will be steady but the trend for the dollar and other currencies will be down. So in other words gold in dollar terms will trend higher.” “How high it will go, you will have to call Mr Bernanke and at the Fed there are other people who actually make Mr Bernanke look like a hawk and so they are going to print money.” Faber is on record as to the importance of owning physical gold and he again warned about the importance of owning gold but not storing it in the U.S. “You ought to own some gold but don’t store it in the U.S., the Fed will take it away from you one day,” Faber astutely noted. He said that Bernanke is a money printer and this could lead to massive inflation and the Dow Jones at 20,000, 50,000 or 10 million. Faber cheerily predicted that the “the Federal Reserve’s monetary policy will destroy the world” and “eventually we will have a systemic crisis and everything will collapse.”
- Anti-Japan demonstrators protest in New York City (China Daily) ...and the propaganda: Younger generation feels wave of emotions (CD)
- And the retaliation: Obama to launch auto trade case against China (Reuters)
- Spanish Banks Bleeding Cash Cloud Bailout Debate (Bloomberg)
- Chicago teachers extend strike (Reuters); Emanuel Promises He’ll Sue to End Chicago Teacher Strike (Bloomberg)
- China hurts own credibility with Xi's vanishing act (Reuters)
- European Squabbling on Euro Crisis Solution May Test Rally (Bloomberg)
- Two South Africa mines reopen, most don't (Reuters)
- Finance Industry Warns of ‘Cliff Effect’ in ECB’s Bond Plan (Bloomberg)
- China struggles to cure the violent ills of health system (Reuters)
- QE3 is for Main Street, except... it isn't: QE3 hit by mortgage processing delays (FT)
- Probe focuses on JPMorgan's monitoring of suspect transactions (Reuters)
- As explained here before: Spanish Bonds Decline as EU Policy Makers Clash on Bank Plan (Bloomberg)
Here is a summary of where the world stands:
- Unable to reach a compromise over the weekend, South Africa is now in an all out labor strike, with the police again firing rubber bullets at miners with lethal escalation guaranteed
- Back from vacation, the once again penniless citizens of Spain, Greece, and Portugal have resumed protesting austerity
- US embassies attacked, in many cases with numerous casualties, in Egypt, Libya, Tunisia, Morocco, Sudan, Lebanon, India, Balgadesh, Indonesia, and others.
- Japan "appropriating" China-contested islands provoking a firestorm of retaliation including demands for "war with Japan"
- The Japanese ambassador to China dying mysteriously
- Netanyahu telling Meet the Press Iran will have a nuke in six-seven months and must be stopped beforehand
- Warships from more than 25 countries, including the United States, Britain, France, Saudi Arabia and the UAE, launching a military exercise in the Straits of Hormuz
- A third US aircraft - the CVN-74 Stennis - carrier is en route to Iran with an ETA of about 10 days
- And finally, a potential catalyst to light this whole mess on fire, Iran's Revolutionary Guard announcing that its troops are now on the ground in Syria.
Japan's Ambassador To China Dies As Chinese Police Use Tear Gas, Water Cannon On Anti-Japan ProtestersSubmitted by Tyler Durden on 09/16/2012 09:12 -0500
Yesterday we described that anti-Japan sentiment across China was spreading like wildfire with some even suggesting it is time to declare war on Japan (see picture) in retaliation for the unprecedented shift in Japan's status quo vis-a-vis the Senkaku Islands. Today it has gotten even worse. From Reuters: "Chinese police used pepper spray, tear gas and water cannon to break up an anti-Japan protest in southern China on Sunday as demonstrators took to the streets in scores of cities across the country in a long-running row over a group of disputed islands. The protests erupted in Beijing and many other cities on Saturday, when demonstrators besieged the Japanese embassy, hurling rocks, eggs and bottles and testing police cordons, prompting the Japanese prime minister to call on Beijing to ensure protection of his country's people and property. In the biggest flare-up on Sunday, police fired about 20 rounds of tear gas and used water cannon and pepper spray to repel thousands occupying a street in the southern city of Shenzhen, near Hong Kong. Protesters attacked a Japanese department store, grabbed police shields and knocked off their helmets. One protester was seen with blood on his face. At least one policeman was hit with a flowerpot." And while the populist reaction was widely expected, the most surprising development came from Japan, where the designated ambassador to Beijing mysteriously died several hours ago after collapsing in the street without any obvious cause.
Over two weeks ago we first described what at that point was merely the hint of trouble at Australian mega-miner Fortescue which is slowly but surely losing the fight with insolvency courtesy of plunging iron ore prices, whereby it was once again proven that bonds always have a better grasp of the situation than equities. Sure enough the cash crunch which we predicted was imminent at Fortescue, has since hit the company over the past several days, as the firm is currently in dire liquidity straits, desperate to renegotiate covenants and get waivers that allow it to continue operations even as creditors get the short stick (in exchange for some serious money upfront). It is unknown whether it will succeed, although judging by its halt from trading until next week by which point it hopes to restructure its debt, things are certainly not rosy for the megalevered iron-ore company. In retrospect, FMG AU is lucky to be alive as is, having had a comparable near-death experience back in 2007/2008: should its bondholders end up owning the equity, so be it. However, another far more troubling and certainly underpriced covenant renegotiation has struck, this time impacting Chinese conglomerate Sany Heavy Industry, a company which is the Chinese equivalent of US Caterpillar and Japanese Komatsu, which is owned by Liang Wengen who is mainland China's richest man with a $10 billion net worth, and which is so big and diversified that under no circumstances should it be forced to request covenant waivers, especially not under a soft-landing scenario for China. And yet this is precisely what it did.
The YouTube video depicting Mohammed is nothing more than the straw that broke the camel’s back. This kind of violent uprising against American power and interests in the region has been a long time in the making. It is not just the continuation of drone strikes which often kill civilians in Pakistan, Yemen, Somalia and Afghanistan, either. Nor is it the American invasions and occupations of Iraq and Afghanistan. Nor is it the United States and the West’s support for various deeply unpopular regimes such as the monarchies in Bahrain and Saudi Arabia (and formerly Iran). Nor is it that America has long favoured Israel over the Arab states, condemning, invading and fomenting revolution in Muslim nations for the pursuit of nuclear weapons while turning a blind eye to Israel’s nuclear weapons and its continued expansion into the West Bank.
What is it that makes Keynesians so insanely self destructive? Is it their mindless blind faith in the power of government? Their unfortunate ignorance of the mechanics of monetary stimulus? Their pompous self-righteousness derived from years of intellectual idiocy? Actually, I suspect all of these factors play a role. Needless to say, many of them truly believe that the strategy of fiat injection is viable, even though years of application have proven absolutely fruitless. Anyone with any sense would begin to question what kind of madness it takes to pursue or champion the mindset of the private Federal Reserve bank… Quantitative easing has shown itself to be impotent in the improvement of America’s economic situation. Despite four years of free reign in central banking, employment remains dismal in the U.S., the housing market continues its freefall, and, our national debt swirls like a vortex at the heart of the Bermuda Triangle. Despite this abject failure of Keynesian theory, the Federal Reserve is attempting once again to convince you, the happy-go-lucky American citizen, that somehow, this time around, everything will be “different”.