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On the swap
I had this to say on August 20th regarding a big central bank swap deal:
I maintain the next move by the Fed is to massively open up the dollar swap lines with European central banks. I don’t think Bernanke wants to announce this significant step at Jackson Hole. It is an EU issue and the Fed can’t take the lead on this. Opening the swap lines will prove to be very unpopular in the US. Politicians will jump on it as a bailout of Europe while America is struggling.
Bernanke is going to take some heat, when this happens (I think this is now a certainty, just not sure of the timing).
The folks at Zero Hedge and FTAlphaville (and others) were of a similar mind.
I would love to convince you that we were just smart. Actually the evidence was everywhere you looked that something like what was announced this A.M. was in the works.
My point. People who actually move money around (versus writing about it) were also aware that this was pending.
Even more to the point:
This could not have happened without substantial discussion amongst all of the CB’s involved. Dozen of folks knew that this was coming a week ago. That means that dozens more got the tip.
The market action (buy Euro sell gold) the past few days smelled of something. I think this was it.
My conclusion:
Sell on the news. I don’t think the positive reaction will be long lived. There is a flip side to the swap announcement.
This is an acknowledgment of profound weakness in the funding markets in Europe.
The swaps may mask the problem for a few months. But it's going to come back with a vengeance. How could it not?
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Nice one Bruce, i was watching EUR/USD at about 5am BST on monday, (nothing ever happens that early), it was literally hammered through 1.35 and then they just started soaking everything up, it was a real slug-out for days after. Who ever it was also had the clout to get rumours onto the FT and Reuters...cant complain though from a trading perspective, glad of the opportunity.
edit; now they are all over it again this morning, shocking.
Swap Zombies
Horror Of The Debt Plague
The Market Swamp Monster Risen From The Bottomless Pit
Tale of the Black Hole
Starring Chairsatan & The Beast
http://www.youtube.com/watch?v=UGAI0jYAIlQ&feature=related
This is an acknowledgment of profound weakness in the funding markets in Europe.
Yea, this doesn't convince me that all is well, either.
Interesting take on gold/euro. I wonder if that was what my networks were seeing this week. It's been a real blast.
It just seems that JPM is up shit's creep without a paddle on every front now-a-days. Massive silver shorts, counter party risk on Greek debt, who knows what else.. How did they get themselves into this shit, are they that stupid?
Everybody in the the Eu/Fed dominated world is in the same boat. They are going to kick the can and buy up as much cheap gold as they can get. The system is not savable, and they know it. That's why nothing is being done to save the system, and the only long range action they are taking is suppressing gold and buying it. That's it. It's that simple.
We won't have hyperinflation that will let you off the hook for your mortgage. You also won't have perpetual deflation. They will continue to walk the line between these extremes until cheap gold is no longer available to them. Then watch out.
The Greek patient died months ago, but we are keeping it on life support. Because Greece is small, this could conceivably go on forever. But there are patients in the hallway waiting to be put on the mahcines. In addition, the EU banking system is insolvent, and the greek problem, as small as it is, threatens to expose the banks for what they really are, BROKE.
The equivalent in the US would be forcing all banks to mark their real state loans to market. A greek defalut effectively marks Greece to market, forcing the banks to take losses that make their insolvency undeniable.
A greek default will also trigger an avalanche of derivatives. This will cascade through the global financial system putting severe pressure on some institutions. The possibility that none of these will fail is zero. Further failures trigger more derivatives in an already distressed market. More banks go under, more governments that have backed their banks (Ireland), go the way of Greece, and a tidal wave of $1 Quadrillion in derviatives begins to unwind at an exponential rate, sweeping the financial system away with it. Note that monetizing $1Q would increase the world's money supply by a factor of 5 which would consitute a hyperinflation all by itself. Most of those are in dollars, which would explode the dollar supply 10 or 20 fold.
BTW: This tsunami of derivatives, more than any other thing, is why the authories won't break up the insolvent banks. The Titanic was a perfect allegory for the hubris of Europe going into WW-I. Perhaps the Japanese Tsunami will become our generation's allegory for finacnial arrogance.
In the very long run getting rid of our infinitely corrupt financial system will be a good thing. The actual experience of it will be horrific.
not with the German economy going into recession, French banks collapsing and the entire "thing" called "Switzerland" in danger of being vaporized.
Good summary. Now, the time line is:
a) "the very longrun" Beyond the lifetime of anyone reading ZH.
b) "The actual experience of it will be horrific." We die peacefully as paupers (best case scenario).
The "very long run" extends to July-November 2012. Perfect Storm convergence of economic-political clusterfuck. 1860----->2012
You mean since the beginning of the rise of central government? Hayek much?
Bruce,
Great call. Can you explain in more detail about what you see happening next?
Tinsu
Volatility across all markets will rise. Great trading market. disaster for the buy and hold.
I would buy the dip in gold. I don't think this is the fix. It could well backfire.
you mean "today's dip" in gold? Looked like more than a "dip" to me--especially when combined with all the short selling that was advocated. Look: an angry goldbug!
http://www.youtube.com/watch?v=90rp5-58YGI&feature=player_detailpage
BK, why do you forsee rising volatility when the CB's are working in tandem to provide liquidity? I am really missing something you are seeing. Volatility to rise vs what time frame?
VS (4) 500pt moves on the dow in a week? I value your analysis and I just can't begin to understand this. Do tell.
Bruce; there's no support here on the gold chart. It took out 1800 in a pretty convincing way; suppose there are further selling waves next week ?
Bruce,
What's your take on these moves in spot gold on both the swissy peg announcements and then again on this bout of debt creation?
If I'm using my trusted "motive and opportunity" criteria, I suspect that somewhere around the EU, an entity is orchestrating bullion sales to raise cash and simultaneously craft a narrative of "confidence" for the media to pick up.
What's the best way to look for tangible evidence of this type of move?
no comment.
Great job in predicting the announcement.
I'm trying to picture what this means. As an aggregate for everyone involved, let's say I have my money in a bank but I pull it out.
The bank is levered 100%, so every euro I withdraw has a 100 multiplier effect. Additionally, Tier 1 capital, or what is considered cash equivalent, consists of treasuries, which may not be equivalent at all.
The bank turns to this swap line to ensure the next depositor will have money for withdraw and to maintain the required liquidity ratios without having to cash in any cash equivalent instruments held at mark-to-model not mark-to-market. .
So far, so good, but what is the end game?
Either I will eventually need to put my money back in the bank, the bank will need to reduce exposure and lend far less, or both.
1 week, 3 months, 3 years, what exactly is the event that is going to make this problem more manageable tomorrow than it is today?
Confidence!?! Really? If we all just believe enough, spend enough and save enough then just like a fairy tale, everything comes true.
In the immortal words of Aldo Nova: "Life is just a fantasy, can you live this fantasy life?"
Why call it a swap? Because a swap sounds clever and the swap market is the biggest in the world second only to the, oh, second only to the fx market?
Well I call it an fx sale of dollars in exchange for euros with one counterparty the Fed and the other the ECB. Sort of like choice price any volume really, a la Prince Charles with his 15 yards the other day. It's not a swap its an fx deal where the participants have no credit lines and agree to create money out of thin air and deliver it into thin air electroncially. The Fed borrows US$ out of thin air and the ECB lends euros out of thin air. When you swap thin air for thin air, you don't even get hot air. Seems a bit artifical really, why not just let the ECB print dollars when it feels like and the Fed print Euros. It's not theirs to begin with and is not anchored in any form of value.
Still I guess if the ECB can lend all these newly minted out of thin air dollars to cover the withdrawal of US$ credit by US money market funds from European banks, so we can now all watch the usage of ECB bail-out facilities by European banks balloon to new records.
The US money market funds can then go and invest in US Banks who now end up borrowing the US dollars instead of the European banks from the US money market funds, despite the fact that the US banks are now charging for handling fresh deposits over a certain size from new clients. The US banks will then give all these US dollars back to the Fed to earn no interest but make nice little pennies in front of the dumbass Fed steamroller in the Feds bail-out facilities and we have a complete circle. Which has achieved double O, triple O fuck all blank. Zero hedged of course, since its a spot and forward trade that can now can permanently rolled with no intention to ever pay any p/l like any other fx deal and no credit limits to worry about.
In sum, P-O-N-Z-I. Like everything else these daze.
Yep, we called this accurately, not hard to.
Now let's see if what I expected to see next also comes to pass. Namely that the swap line will fail to provide adequate liquidity where needed due to the low resolution of the ECB's operations and a lack of ECB power (legal constraint).
This scenario will force the Fed's hand and it will have no choice but to repeat QE2 (which was all about providing dollar liquidity within Europe). Initially, the Fed will swap for US TSYs and other dollar denominated assets, but as things get really out of hand and the ECB can't handle it, we may well see the Fed having to swap for Euro-denominated assets including toxic European sovereign debt.
If it does this, it will deplete its Euro reserves and be forced to draw on it's swap line with the ECB (which is capped as I recall, unlike the reverse). This is something that the ECB can handle as it's a very simple, low resolution operation. In effect, the ECB can delegate to the Fed to leverage the Fed's flexibility in place of the ECB's lack of flexibility. Alternatively, the Fed will swap for Euro denominated assets in dollars but at a fixed exchange rate independently of the forex market rate.
Doesn't really matter exactly how QE2 2.0 ends up playing out, the one thing that will be done to make it very different from QE2 is that all the Fed's actions will create obligations for the ECB. Ie, if the Fed is buying Eurotrash it will only be on the condition that the ECB buy it off the Fed at a future date, at par. In essence, the Fed will expand its balance sheet on the condition that the ECB must take it all off the Fed's hands down the track, allowing the Fed to unwind the position completely. The Fed's balance sheet will therefore remain expanded for the time it takes for the ECB to get the powers that it craves within Europe (basically, a massive expansion of the EFSF + the right to buy eurotrash debt unlimited = bringing forward of the ESM by 2 years and causing Bernanke to re-evaluate ZIRP until 2013).
On paper, it's a non-event, long term because it's zero sum. Central banks will go for it.
In reality, different story. The problem, as we have learned from the past (QE1, QE2) is that it's really simple to inject liquidity, you stick the needle in the arm and press the plunger, it takes 10 seconds. That liquidity quickly disperses, some of it ends up where it was needed, the rest goes where it is not needed and causes trouble. Now how the hell it is exactly reversed? It's impossible to pull out exactly what was put in and that's a problem. We saw it with QE2 and commodity inflation was the consequence (leading to civil disorder in the MENA and undercutting global GDP).
There are two ways this ends really badly. Both ultimately mean inflation.
First, the ECB goes down in flames. European 'unity' (*cough* oppression *cough*) breaks down and nations go their own way. Worst case, they ditch the euro. The Fed has expanded its balance sheet and finds itself sitting on a pile of shitty Eurotrash assets that are never going to come good. The liquidity that went into the system for those assets will never be recovered (inflationary).
Second, the ECB pulls it off and becomes as flexible (reckless) within Europe as the Fed is within the USA. Massive amounts of liquidity get injected both sides of the pond and banks stabilize (become zombies). Because central banks are so stupidly afraid of deflation, they will keep those banks as zombies indefinitely meaning that, again, the liquidity that got pushed into the system to enable zombification (instead of default), is there to stay (inflationary).
I think we get one of those two things. A scary deflationary collapse as European banks go nuclear, followed by the swap we predicted and then QE both sides of the pond, targeted at European banks, followed by creation of zombies left, right and center and then a huge surge of inflation in liquid markets (commodities), leading to negative GDP prints and more pain for the real economy. To add insult to injury, the USA might decide that it's time to introduce austerity measures, making things even worse for the real economy.
Clowns and jokers. They will never allow what is desperately needed. Snap deflation to eliminate all the surplus credit in the system that has built up over 40 years and liquidation of the FIRE sector. It would reveal that the US has no clothes, having exported them to China years ago.
that doesn't sound very nice. i guess someone woke up on the wrong side of the trading desk this morning! i would correct in one sense: "zombie nations" and not "zombie banks" would be the result. and that would make Europe almost exactly like the USA.
Quote:
The liquidity that went into the system for those assets will never be recovered (inflationary).
End Quote
This represents the destruction of vast quantities of money and the effect should be deflationary not inflationary as you posit.
The other unaddressed issue is these CB shenanigans all fail to address the central issue in both US and Euroland economies. Both have expanded the financialization of their economies and seek to buy real goods and commodities from elsewhere. The financialization has concentrated wealth at the the top in the oligarchy and greatly reduced purchasing power and economic opportunity for all others. It is like a house in which the inhabitants are running around trying to strategize making their credit card payments while ignoring the fact the house is burning down and nothing is being down to address that issue. When the guys with the pitchforks show up to put out the flames it will be too late.
Quote:
The liquidity that went into the system for those assets will never be recovered (inflationary).
End Quote
This represents the destruction of vast quantities of money and the effect should be deflationary not inflationary as you posit.
I think you read the article backwards. What I read it to say is that the assets (i.e. $) that the Fed pumped out into the system will never be recovered by the Fed and so the Fed cannot destroy the money. As long as the new $ are in the system, they will be inflationary.
That's correct Nels.
Central banks love asset swaps because net $'s in the system doesn't change. All they are doing is taking assets out of the real economy and replacing those assets with equivalent cash. The assets are then iced on the CBs books (just as the infinite cash coin was iced before the swap occurred). Cash is highly liquid whereas the assets in question are likely not (given that they are toxic / overvalued). Hence, the swap entails a liquidity injection.
Where the inflation comes into play is that the assets are worth much less than the value they are swapped at. People often forget that you don't just get inflation by creating more money, but you can also get inflation by destroying 'stuff' (eg war). Either way, the ratio of money to stuff increases (inflation).
Central banks have the luxury of sitting on a massive unrealized loss indefinitely. The underlying of their assets is worth far less than they paid and to cover the loss, the CB should be pulling money out of the real economy, but it doesn't. Real 'stuff' has vanished but the money used to pay fantasy price is still out there in the service of 'liquidity' as nobody has had to mark the crap to market (central banks ignore the fact they're underwater, at some point they can easily just print the negatives away). This is hugely inflationary (from a base money perspective as opposed to credit which may continue to implode independently) but due to the targeted nature of liquidity operations (play money for banks), that inflation plays out in highly concentrated ways (eg, stock market or commodity market inflation).
We have seen this in money stock measures. Massive expansion of base money. Credit is still dicey but if the environment stabilizes, it will EXPLODE as it now has a much larger base to leverage.
Read that way it makes sense.
Cheers!
So this is what we get for letting the banks (including CB's) try to fix the real economy, not "free market economy" by printing phony baloney paper money? Why can't the truly "free market" print the paper money? They do a wonderful job of producing everything else.
Thanks for wonderful insight.
V for vengenance. The angle of V will be the precipitous drop, shortly.........
For something of this magnitude, this is Lehman 3 yrs to the day later. Bubblegum and bandaids are fine, but the single biggest issue is that growth is crashing and absent trillions in spending on three continents, we are heading down...
Yes, three years to the day. Quite a coincidence, eh? I think I hear the Cosmic Giggle.
Wed - 9/15/2011 Just came in from an errand. Radio NPR one of top stories... Federal Reserve is going to extend the time and increase the amounts that European Banks can borrow off of the Fed. From 1 week to 3 months (No mention on the increased amount $). Actual story has about 45 seconds w/ terms - "European Crisis" "Greek Bailout" "European Banks" "Exposure" "Geithner going to ECB meeting this weekend where he'll announce..." From Bruce's mouth to "The Bernankster's Ear". Great Cheater Analysis Bruce - but not enough front-running time. Keep it up!
Bruce - always look forward to your posts and the art. I may just need more coffee but I can't figure this one out SE_K? Any FX opportunities now?
"Any FX opportunities now?"
Absolutely. The best one out there right now:
Go to local coin dealer.
Purchase gold with x. X = any paper currency.
Go back home and put it in a safe place.
Spend the rest of your time gardening, getting to know the neighbors, enjoying time with family and friends.
@PF ... That was my plan 10 years ago and it worked well. Now I advise others to do the same
because I believe the upside for physical is greater now than it was 10 years ago.
SELL!!! I took grafitti in grade school.
Big Picture:
The Washington pyschopaths (Congress, Pres, Fed, etc) believe since the dollar is the world's reserve currency that infinite printing/loan guarantees is possible as long as they continue to pretend they are concerned about fiscal discipline. This allows them to control all financial matters. They know this is hyperflationary but believe they can allow it to occur slowly under the radar until it is too late and middle classes around the world become obsolete.
It looks like all the credit drunkards have banded together to provide each other with mutual support while the rest of the world looks on in amazement.
With the introduction of the swap lines Euroland now has a strong vested interest in the the USD as world reserve currency. The BRICs do not share this interest. They get killed as the USD value of their bond holdings is inflated away and they will be squeezed by paying inflating prices for inputs while getting declining value in trade dollars. The BRICs face a huge margin squeeze yet these are the primary growth countries.
Still not sure how this plays out apart from US and Euroland forming one mercantilist bloc due to common interest around shared reserve currency vs the rest of the world with most of the growth potential hurting.
My hunch is that we see further price spikes in crude coupled with US effort to promote domestic oil and gas and a Euroland focus on convservation.
Only a Central Bank could conceive of selling Gold to obtain fiat so this actually makes sense...
I don't get it - increase the dollar supply thru swaps - the most inflationary addition of money possible - and one would sell Gold?
It's possible the funds are selling Gold to participate in the stock market party; if this is true; it may continue for a awhile. It's just one rumor among many right now.
Keep in mind there are two markets for gold, retail and inter-CB. Only on inter-CB can you buy/sell in size, 100 tons at a time. At what price is another matter, some say it's much higher than retail right now (see GATA and FOFOA). But the point is that you can't really figure out ST price movements in the retail market because of all the inter-CB shenanigans. There are also leases where CBs allow people to lease gold as collateral, it's been subject to a huge carry trade for years now because as a collateral asset gold has the lowest "interest rate". There are persistent rumors that the CBs of the world have "rehypothecated" (leased out) the gold in their vaults as much as 100:1.
I'm a long-term gold bug and have been buying since 2004 (smiley face here). But I think the CBs want an "orderly" gold price rise as fiat depreciates and retail price starts to approach the inter-CB price. That probably means an average 15% annual price rise from here. Nice, but not parabolic.
IMO, that is.
I think he meant that for those insiders that knew about this, that they were buying the Euro and selling Gold knowing this would happen and so they could make a quick buck.
Not being a financial guy, it gets hard to follow all of this shit. This move is staight forward but some of the crap ZH banters about is rather confusing. It is often speculated the the common man does not keep up with what is going on, no wonder.
Just watched Leno ask questions of college students on the street. One question was to name a country that bordered the US and the girl answered Europe. That was a college student, no wonder we are fucked.
Canadia?
No, wait. Candida, right?
she must've been a USC student.
let's hope so!
...That was a college student, no wonder we are fucked....
Maybe it was the girl who had just fuked with a european and had fond memories which made her mistake her desires for reality. ..."he does feel very close to me ya know!"...
yeah yeah true!
I just read this post by a guy that complained about not understanding what he was reading and then he admitted to watching Leno!
It reeks of desperation. I dont think it will take months to play out however. To many things can go wrong right now. All we need is a small stone to start the avalanche and all it would take is a well placed rumor or a mid sized bank caving in. There is also a ton of money to be made on the crash. Lots of traders and hedgies licking their chops to make some easy cash.