World Bank

The G-20 meeting in Seoul was not a good one for the Obama Administration and President Obama in particular. Mr. Obama was unable to conclude a free trade agreement with South Korea, and China told him to stop meddling in their internal affairs and put his own house in order first. China is right.

CLSA's Chris Wood latest Greed and Fear is out, and in his latest discusses virtually all the critical issues that are at the forefront of investor minds, namely QE3, the next collapse in the GSEs courtesy of the current housing bubble, any signs of releveraging in the private sector, a potential rise of capex in corporate America (not sure where he is seeing this), insolvent states, Japan, which he thinks may be an reflationary alternative to gold (as Dylan Grice has claimed in the past) and last but not least, his disagreement with Goldman's take on China, which he believes is still an attractive investment opportunity.

After making some very unwelcome advances calling for a return to the gold reserve, World Bank head Robert Zoellick is again back, and refuses to shut up. The FT reports that earlier Zoellick said
the increasing use of gold as a monetary asset was an “elephant in the room”
that was being ignored by policymakers in the debate over how to correct global
trade and fiscal imbalances. It gets worse: during a conference presentation, Zoellick said the price of gold indicated that the world was heading towards a new monetary system in which the US dollar would be only one of a number of reserve currencies with flexible exchange rates. As we highlighted yesterday, a variety of factors have already conspired to make it appears that not the dollar, but the Chinese currency is increasingly starting to act as a reserve currency on its own merit.

A couple of luminaries share their perspectives on recent developments in the precious metal space. First, we have Jim Rickards sharing his thoughts on what today's Comex margin hike means for trading. And second, and just as important, is Peter Schiff, who grades WB president Robert Zoellick's call for a new gold standards, and its implications for the future. Both are as always insightful and enlightening.

Ooops

• CEOs most optimistic on US profits since 1999 in bull signal for S&P 500: Bloomberg.
• China is 'available' to support Portugal through financial crisis, Hu says.
• China's trade surplus likely rebounded in October after narrowing in September.
• ECB rejects request for files on Greek derivative use, cites 'acute' risks.
• Euro falls as concern over Irish bond sales, Greece damps investor demand.
• G-20 conflict risk eases as US says current-account targets unrealistic.
• Oil extends longest rally since April as US jobs report beats forecasts.
• World Bank Chief: G20 should consider adopting a global reserve currency based on gold as part of structural reforms.
• World Bank’s IFC plans to offer benchmark debt in US dollars.
• AIG hopes to complete its government exit before year end. Posts $2.4B loss in Q3.

One of the most serious condemnations of the race to the currency bottom to date comes not come from some peripheral media, but from the head of the World Bank itself, who in a just released Op-Ed in the Financial Times says that since the system of floating currencies established by the 1971 Bretton Woods II system, has broken down, it is time to look to a new international system of commerce, one which "should also consider employing gold as an international reference point
of market expectations about inflation, deflation and future currency
values." In other words, welcome back gold standard 2. Of course, this proposal will never attain more than a casual academic reference, as even a partial gold standard will immediately establish a lower bound on how much any given monetary authority can debase its (and, by retaliation, others') currencies. What, however, if very curious, is why this proposal is being floated precisely 3 short days after the Fed has launched its most ambitious attempt to reflate global asset prices and devalue fiat paper. And as is well-known, the IMF has also been quietly proposing a return to an ven more powerful version of the SDR.... Just what will take for the scales to tip, and for the dollar to remain a reserve currency just in retrospect.

Gridlock can be a good thing. Don't expect much from the Republicans.

• Election reaction: GOP Wins House in Huge Swing (WSJ); El-Erian: We've Voted. What's Next For The Economy? (WaPo), Obama Confronts Setback to Agenda (FT), Obama's Window for Change May Close With Republican Win (Bloomberg), G.O.P. Captures House, but Not Senate (NYT), Republicans to Take On U.S. Health Law, From Taxes to Insurance (Bloomberg)
• Bernanke Bond Buying May Risk Rise in Prices Similar to 2004 (Bloomberg)
• Straight from the Fed via Hilsenrath: Central Banks in Rate Clash (WSJ)
• Business Looks to Republicans to Block Obama on Rules, Taxes (Bloomberg)
• Borrowing Costs Rise for Weak in Europe (WSJ)
• Greece Suspends Outgoing Airmail After Wave of Bombs (NYT)
• Markets like divided government but real problems will go unaddressed (Barrons)
• The Fed at Jekyll Island: 100 Years Later, They're Baaack! (Economic Policy Journal, h/t John)

• API: Crude supplies decline 4.1 mln barrels - larger than expected decline.
• CFTC to probe range of natgas derivatives-trading activity spanning parts of 2008, 2009.
• R&D spending drops for the first time in a decade at major firms: Booz & Co.
• World Bank: China should raise interest rates, allow a stronger yuan to damp inflation.
• Aetna Q3 profit jumps 53% to $497.6M on lower costs.
• BP: Dividend policy to be reconsidered in an effort to restore growth.
• GM to save up to $45B in taxes under an unusual provision of its govt-funded bailout.

The subcontinent is poised to overtake China’s white hot growth rate. India will grow by 8.5% this year. Growth could exceed that in the Middle Kingdom as early as 2013. Financing and construction of huge transportation, power generation, water, and pollution control projects are underway. India is also a huge winner on the demographic front, with one of the lowest ratios of social service demanding retirees in the world. Many hedge funds believe that India will be the top growing major emerging market for the next 25 years. (INP), (FXI).

Geithner’s strong dollar comments, China's surprise rate hike, and worries about the U.S. mortgage market led a flight by investors into U.S. Treasuries. Some analysts believe that there may be a currency accord right before the G20 meeting. However, from all indications, China and Geithner appear to be acting under totally separate agendas however “coordinated” they might seem.

• Brazil hikes tax on incoming fixed income investment to 6% from 4%.
• China remained a net buyer of US Treasurys in Aug. China's hldgs jumped $21.7B.
• Euro zone's current account deficit widened in August to €7.5B ($10.49B).
• German investor confidence may decline to 21-month low as economy cools.
• IMF advocates capital controls as a way to handle vast flows of capital into Asia.
• Oil falls from two-week high as US crude stockpiles forecast to increase.
• World Bank cuts China, East Asia growth outlook, cautions on 'bubble'.

INCIDENT: The traditional Swiss finishing school taught young women etiquette and social graces, but international bank regulators are talking about something much tougher when they refer to a “Swiss finish” for global banks.
Just how tough became clear last week, 4 October, when a Swiss commission proposed that its two giant banks, UBS and Credit Suisse, be subjected to capital requirements of up to 19%, nearly three times as tough as the 7% capital-to-assets ratio recently suggested by the Basel Banking Committee as a minimum global standard.

What is to stop U.S. banks and their customers from creating $1 trillion, $10 trillion or even $50 trillion on their computer keyboards to buy up all the bonds and stocks in the world, along with all the land and other assets for sale, in the hope of making capital gains and pocketing the arbitrage spreads by debt leveraging at less than 1% interest cost? This is the game that is being played today.