Transparency

German Federal auditors handed in a report slamming the Bundesbank for not inspecting their foreign held gold reserves to verify their book value. The report says the gold bars "have never been physically checked by the Bundesbank itself or other independent auditors regarding their authenticity or weight." Instead, it relies on "written confirmations by the storage sites."  The lion’s share of Germany's gold reserves (nearly 3,400 tons estimated at $190 billion) are housed in vaults of the US Federal Reserve, the Bank of England and the Bank of France since the post-war days, when they were worried about a Cold War Soviet invasion. The Bundesbank stated, “There is no doubt about the integrity of the foreign storage sites in this regard". In contrast with best industry practices Germany’s gold reserves do not seem to be independently verified by a third party. Philipp Missfelder, a politician from Merkel’s own party, has asked the Bundesbank for the right to view the gold bars in Paris and London, but the central bank has denied the request, citing the lack of visitor rooms in those facilities, German’s daily Bild reported. The Bundesbank won't let German parliament members inspect the German gold vaulted abroad because the central bank vaulting facilities supposedly lack "visiting rooms." And yet one of those vaults, the Federal Reserve Bank of New York, offers the public tours that include "an exclusive visit to the gold vault".

If you want to know how the Keynesian Cargo Cult's grand experiment in borrowing money to fund bloated fiefdoms, rapacious cartels and bridges to nowhere ends, just look west (from California) to Japan. The Japanese State, partly because they seem to believe in the Cargo Cult, and partly to avoid exposing the insolvency of their crony-capitalist financial sector, has been borrowing and spending money on a vast scale for two decades. Rather than face the fraud and corruption at the heart of American (and Japanese) finance and governance, the Keynesians just want to leave the predatory, parasitic crony-capitalist Status Quo intact and create an illusory world of bogus "demand" and grotesque malinvestment funded by ever-increasing debt. Does anyone seriously think this is the "road to recovery"? If you want a look at the fiscal future of the U.S., look west to Japan, a nation that sits precariously on a fiscal cliff a thousand feet high.

• 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)

The policy of the Status Quo since 2008 boils down to this assumption: if we prop up an artificial economy long enough, it will magically become real. This is an extraordinary assumption: that the process of artifice will result in artifice becoming real. This is the equivalent of a dysfunctional family presenting an artificial facade of happiness to the external world and expecting that fraud to conjure up real happiness. We all know it doesn't work that way; rather, the dysfunctional family that expends its resources supporting a phony facade is living a lie that only increases its instability. The U.S. economy is riddled with artifice: millions of people who recently generated income from their labor have gamed the system and are now "disabled for life." Millions more are living in a bank-enabled fantasy of free housing. Millions more are living off borrowed money: student loans, money the government has borrowed and dispensed as transfer payments, etc. Assets are artificially propped up lest a banking sector with insufficient collateral be revealed as structurally insolvent. It's not difficult to predict an eventual spike of instability in such a system; the only difficulty is predicting the date of the instability. Hiding a broken, dysfunctional economy behind a facade of artifice and illusion can't fix what's broken, it only adds to the system's systemic instability as resources that could have gone to actually fix things are squandered on propping up phony facades of "growth" and "health."

One by one all the money-laundering loopholes in a broke world are coming to an end. First it was Swiss bank accounts, which for centuries guaranteed the depositors absolute secrecy, and as a result saw money inflows from all the wealthiest savers in the world, who felt truly safe their wealth (obtained by legal means or otherwise) would not be redistributed forcefully. In the ecosystem of finance, Switzerland was the depositor bank. Then 2008 happened, and starting with the US, shortly to be followed by every other insolvent country, demands were issued for a full list of people who had used Zurich and Geneva bank vaults to avoid the risk of asset taxation, capital controls and confiscation on their own native soil. The result was the end of the Swiss banking sector as the ultimate target of all global money laundering. In the ensuing power vacuum, others have sprung up to take its place, most notably Singapore, but its days as a tax-haven are numbered by how long it takes China to fall face first into a hard landing at which point no saving on the Pacific seaboard will be safe.

Now, it is the turn of real estate.

There was a time before the Fed announced it would commence sterilizing its Large Scale Asset Purchases when every day in which there was a Permanent Open Market Operation, or POMO (remember those?) was a gift from Bernanke, virtually assuring the market would ramp higher. This phenomenon had been documented extensively in Zero Hedge and elsewhere (a comprehensive analysis can be found in "POMO and Market Intervention: A Primer"). The pronounced market effect of POMO was diminished somewhat once the Fed sterilized the daily flow injection by selling short-term bonds to Primary Dealers, even though the Fed continues to buy $45 billion in long-term bonds to this day, effectively mopping up all 10 Year+ gross Treasury issuance, and keeping the stock of long bonds in the private market flat at ~$650 billion as we observed before. All of this is well known. What was not known is who were the Fed's POMO counterparties. Now we know. Yesterday, the Fed for the first time ever released Transaction level data for all of its Open Market Operations. The new data focuses on discount window transactions (completely irrelevant now that there are $1.7 trillion in excess reserves and the last thing banks need is overnight emergency lending from the Fed when there is already a liquidity tsunami floating, yet this is precisely what the WSJ focused on), on FX operations, and, our favorite, Open Market Operations, chief among them POMOs. What today's release reveals is that once again a conspiracy theory becomes fact, because we now know just which infamous bank was by fat the biggest monopolist of POMO operations in a period in which banks reported quarter after quarter of zero trading day losses. We leave it up to readers to discover just which bank we are referring to.

When it comes to spying, eavesdropping on its citizens as well as the complete invasion of American privacy, the first thing that comes to mind is the Patriot ACT and Dubya. And with good reason: because while the rest of the world may "hate us for our freedoms", they certainly love us for the fact that the NSA usually can autocomplete sentences before they are written in any electronic medium (recall: NSA Whistleblower Speaks Live: "The Government Is Lying To You"). However, as it turns out that the first thing that should be coming to mind is none other than the current administration and Barack Obama. Here are the facts: as the ACLU reveals using documents released by the Justice Department following months of litigation, "federal law enforcement agencies are increasingly monitoring Americans’ electronic communications, and doing so without warrants, sufficient oversight, or meaningful accountability." How "increasingly"? Look at the chart below and decide. From the ACLU: Between 20909 and 2011 "the number of people whose telephones were the subject of pen register and trap and trace surveillance more than tripled. In fact, more people were subjected to pen register and trap and trace surveillance in the past two years than in the entire previous decade."

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

The seemingly inexorable rise of corporate bond ETFs (most specifically HYG and JNK is the high-yield market, and LQD in investment grade) have been discussed at length here as both a 'new' factor in the underlying bond market's technicals (flow) as well as their correlated impact on equity and volatility markets. Goldman Sachs' credit team delve deep into the impact of these relatively new (and rapidly growing) structures with their greater transparency but considerably higher sensitivities and conclude that not only are they here to stay but the consequences of ETF-inclusion (dramatic outperformance bias relative to non-ETF bonds) are deepening the liquidity divide (and relative-value) of what is already a somewhat sparsely-traded market. Our concern is that, as the divide grows (and liquidity is concentrated in ETF bonds), given the crowding tendency we have witnessed, (even with call constraints at extremes thanks to low interest rates), this is yet another crowded 'hot potato' trade hanging like a sword of Damocles over our markets (courtesy of Bernanke's repression).

...the pushback from Wall Street was intense and multi-pronged. The Blob oozed through the halls of government, seeking, through its glutinous embrace, to immobilize the legislative and regulatory apparatus, thereby preserving the status quo. The executive jets of the Wall Street air force flew sortie after sortie, transporting high-ranking emissaries from new York to Washington to meet with the SEC, [Senator Chris] Dodd and [Senator Richard] Shelby staff, and the staff of other senators on the Banking Committee. Some of the executives, no doubt less enthusiastically, even met with Josh and me. The research companies and market experts Wall Street employs also raised their voices against us. At times it got ugly. Ted was called a crackpot and dangerously uninformed. He was accused of “politicizing” market regulation (a strange notion considering he wasn’t running for election). It seemed as if Wall Street, which wasn’t used to someone on Capitol Hill asking in-depth questions about arcane issues, wished to silence or marginalize its critics. Industry people would always ask me, “What got Kaufman so interested in this stuff?” Used to politicians whose top priorities were to please their home-state business interests and raise money, they had trouble fathoming that Ted was so interested because it was the right thing to do. He believed in fair markets. And because he was genuinely concerned about emerging issues that threatened the stock market, where half of all Americans keep a sizable portion of their retirement savings.

We will explore how QE and the new Fed plan might work- might work...So far what the Fed is putting in front of us and what Paul Krugman has written about are two wholly differnt things. It makes me wonder if there is any stucture behind QE besdies prayer...

The unleashing of QE3--unlimited money-printing in support of the financial Status Quo-- is proof the Fed has failed, failed, failed. If anything the Fed has done in the past four years had actually had a positive consequence in the real economy, Bernanke would have identifed that policy and expanded it in a measured response. Instead he went all-in, emptying the Fed's toolbox in one big dump: unlimited money-printing, unlimited propping of the mortgage market, unlimited support of low Treasury rates and three more years of zero-interest rate policy (ZIRP). Here is the translation of the Fed Chairman's public comments: whatever. Did you see any of his testimony? It was painfully obvious that either 1) he was sky-high on Ibogaine or 2) he was just going through the motions, duly enunciating PR "cover" that he finds tiresome to repeat and impossible to say with any sincerity or conviction. His body language and delivery said: "You think I believe this canned shuck and jive? Get real, chumps."

Here are some common-sense rules for such a "new market":

1. Every offer and bid will be left up for 15 minutes and cannot be withdrawn until 15 minutes has passed.
2. Every security--stock or option--must be held for a minimum of one hour.
3. Every trade must be placed by a human being.
4. No equivalent of the ES/E-Mini contract--the futures contract for the S&P 500--will be allowed. The E-Mini contract is the favorite tool of the Federal Reserve's proxies, the Plunge Protection Team and other offically sanctioned manipulators, as a relatively modest sum of money can buy a boatload of contracts that ramp up the market.
5. All bids, offers and trades will be transparently displayed in a form and media freely available to all traders with a standard PC and Internet connection.
6. Any violation of #3 will cause the trader and the firm he/she works for to be banned from trading on the exchange for life--one strike, you're out.

Is such a retail-trader friendly exchange possible? There would certainly be a nice profit in it, for everyone who is tired of providing liquidity for HFT firms would flee the existing exchanges in a New York minute.

You could be forgiven for believing that the ECB's talk/plans have indeed solved the European problems. The market's reaction appears to confirm all anchoring bias and thanks to overly bearish positioning (and thin summer markets) has sent all but the long-term-est bears scurrying for their rabbit-holes - as once again 'tail-risk has been removed' - just like LTRO, the SGP, and The Grand Plan before it. However, as BofAML notes in this must read note, we do not believe the ECB move will necessarily lead to a permanent stable equilibrium for the euro area for two reasons: 1) a stable equilibrium would require certainty about the ability of countries to restore debt sustainability, i.e. that they will respect an agenda of economic policy reforms and/or; 2) certainty about the ECB course of action, i.e. that the ECB will purchase bonds in such a way that we will not observe renewed financial market stress as we did this summer. Such certainty would require both Spain and Italy to put their faith in the Troika’s hands and the ECB to pre-commit in return, which seems to us very unlikey at this time. The ECB’s conditional backstop is some way from the “bazooka” that many were expecting