Reversal

Tyler Durden — Tue, 21 May 2013 12:49:47 +0000

Submitted by Mark j. Grant, author of Out of the Box,

The 100% Prediction of a Reversal

A reversal will come. The odds on this are 100%. You cannot have every asset class on the planet in a bubble forever. The world does not operate this way. The disconnect between economic fundamentals and the markets continues but the odds on it continuing forever is Zero. Let us begin the postulate from here.

Corporations, banks, the housing market, borrowers and the securities markets have significantly benefited from the actions of the central banks. Money has been poured, dumped and shoved into the financial markets. The total exceeds $16 trillion to date and perhaps twice that amount if we were given accurate data to be able to count it. It was been a Tsunami of money.

Liquidity has buoyed the world as the central banks acted in concert and in a coordinated effort to provide fresh cash. The balance sheets enlarge but the money has not significantly helped anyone's economy. Europe is in a recession, America is in a muddle and the world's economies, without all of this money, would be in a sinkhole and so it continues. There is nothing else supporting the economies and the markets except the capital provided by the central banks.

Nothing!

The disparity is so large and so universal that something will break the bough as the weight eventually cannot be supported. When this happens it will be Katie bar the door. If you fall from ten feet you get hurt but if you fall from one thousand feet the consequences are quite different.

All of this is knowable but what is not knowable is what will cause the break. It could be the rise of nationalistic political parties in the U.K. or Germany. It could be social unrest, a major bank failure, a major hedge fund blowing up, some sovereign deciding to quit the Euro or a host of other possibilities. The odds on one item are minimal. The odds that a break will happen somewhere are 100%.

The creation of all of this money also has another effect. It causes stupidity. People and institutions rush around to invest their money but when there is too much easy money, such as right before our 2008/2009 debacle, really dumb things are done with money as people search for yield and appreciation. This is another 100% prediction made by me after being in the markets nearly forty years. When too much easy money floats around; stupidity takes its course.

Then there is the made-up fantasy data numbers. Just because you do not count liabilities, or because you do not count people not in the work force or just because you claim exports, in the case of China, that bear no resemblance to reality does not mean that the consequences of the real numbers, and not the phony numbers, do not begin to have serious effects. The lies, let's call it what it really is, that are being produced in Europe, America and in China are in lock-step with the printing of newly minted paper. More money, more lies and virtually every government on the planet hands shovels out more manure and heaps it on its citizens.

Now the central banks have also entered into currency manipulation. I call it "Global Thermonuclear Devaluation." Lower the value of each and every currency so that the cost of goods and services does not cause Inflation though this game is so dangerous, and having never been tried before, you could get quite serious Deflation. No one on the planet really knows how this new game will work but I can tell you this; edgy games often end in disastrous results.

It is quite true that we do not know the "what and the when" of it but my prediction that lacks any "If" will prove to be true. There is no longer an "If." The disparity now is just too great.

Play the game as long as you can. It has gone on to date right in line with the increase in the money and in the lies. Play the game. However if you are smart you will have an exit strategy and a defense lined up well in advance before the man with the scythe shows up and takes a swipe at you. I will tell you this. If you have no plan you will be in danger of losing your head when this fellow smiles at you and sluices in your direction.

It was January 13, 2010 when I predicted Greece would go bankrupt. I looked at the real numbers and not the drivel we were handed out and made my prediction. The yield on the Greek ten year was 4.38% on that day. This is a yield we have never seen again. Money has been made and lost here but history has borne out my prediction.

Later I predicted Ireland, Portugal and Spain. Each country, in my opinion, has gone bankrupt in one form or another. Yes, a giant ruse for Spain with money given to the banks and no admission of guilt from anyone but the charade does not change the reality. Each and every country went over the edge.

We stand on a precipice. There is an avalanche of lies, distortions and currency that has been created and is tumbling all around us. It cannot be dodged forever. Those odds are 100%. That is my prediction.

Goldman Goes Uberhyper-Bullish, Hikes S&P500 Target To 1750 By Year End, Sees 2100 By 2015

Tyler Durden — Tue, 21 May 2013 12:24:20 +0000

"Our positive 2013 outlook for S&P 500 has played out much faster than we expected." That is how the latest equity update from Goldman Sachs, which until today had an S&P target of 1625 for the year end S&P, begins. And, logically, the only option for Goldman is to hike its outlook even more, because not even the Squid apparently could anticipate how quickly the policy it forced down the throats of central banks around the world, levitated markets to surpass its old price targets. The result is David Kostin (who until December had foreseen 1250 on the S&P for the end of 2012) and company were forced to goalseek even higher targets based on tried and true excel model fudging exercises, and such "value" creation as multiple expansion and dividend payments.

To wit: "Our earnings estimates remain unchanged but we raise our dividend estimates and index return forecasts for 2013 through 2015. We expect S&P 500 will rise by 5% to 1750 by year-end 2013, advance by 9% to 1900 in 2014, and climb by 10% to 2100 in 2015. Our 2013 return implies a year-end P/E of 15.0x, a one multiple point premium to our fair-value estimate. We forecast dividends will rise by 30% during next two years. Dividend yield is likely to stay around 2%, in line with the 20-year average." For the record, Goldman had previously seen 1,900 in 2015. And now it sees another 200 points of value due to the magic of multiple expansion. That anyone can even pretend to forecast what happens three years into the future at a time when the central banks are injecting $160 billion (and soon $200 billion), and most likely will have to slowdown and halt such liquidity injection resulting in untold stock market carnage, is so beyond commentary we will leave it hanging for the ridiculous statement it is.

As for 2013, at least Goldman leave out any mention of 2013 consensys earnings... for good reason:

So in lieu of early Tuesday humor, here is how Goldman achieves its "target forecasts." All we can conclude from this is that neither Tepper nor Goldman are anywhere near done selling to muppets.

But don't for a second think any of this is earnings driven. As we showed last night, it isn't. It is all based on prayer that Bernanke and his central planning magicians can keep on expanding the increasingly meaningless PE multiple, which incidentally would collapse if and when rate were to go back to historical levels now that corporate debt is at unseen before levels.

We would spend a few more second reading this drivel, but we have better things to do. Anyone fascinated by wasting time with paperweight is urged to do so on their own.

Frontrunning: May 21

Tyler Durden — Tue, 21 May 2013 11:48:01 +0000

IMF Tells Central Europe to Spend More (WSJ)
Tornadoes Blast Oklahoma (WSJ)
Frenetic search for survivors as 91 feared dead in tornado-hit Oklahoma (Reuters)
JPMorgan investors on edge over vote on Dimon; what if they win? (Reuters)
Wealthy bank depositors to suffer losses in EU law (Reuters)
Yen Slips as Amari Backtracks (BBG)
Japan Ready for More Yen Weakness Despite Recent Comments (WSJ)
IRS officials back on Capitol Hill hot seat over targeting (Reuters)
Li Keqiang pledges China boost to India trade (FT)
Europe's Recession Sparks Grass-Roots Political Push (WSJ)
Obama and Xi to meet in effort to calm growing US-China rivalry (FT)
Berlin plans to streamline EU but avoid wholesale treaty change (FT)
France must reform or face punitive measures - EU's Oettinger (Reuters)
Tumblr’s 26-Year-Old Founder Celebrates $1.1 Billion Deal (BBG)
SocGen Joins UniCredit in Warsaw as Equity Sales Surge (BBG)

Overnight Media Digest

WSJ

* JPMorgan Chase & Co is preparing for a shake up of its board even if every director wins re-election at Tuesday's shareholder meeting and James Dimon keeps his dual job as chairman and chief executive.

* Even in the fast growing realms of the consumer Internet, some businesses are best served by old fashioned consolidation. GrubHub and Seamless, two nationwide startups used for ordering restaurant takeout by smartphone and computer, said they would merge. GrubHub Chief Executive Matt Maloney, who will lead the combined company, declined to discuss valuation.

* Here is a glimpse at the future of finance. When Deutsche Bank AG set out to win a role on Apple Inc's $17 billion bond, it eschewed Wall Street's traditional tactics. Instead of flying well-groomed bankers to Cupertino, California, to charm Apple's top executives with powerpoint presentations, Deutsche relied on iTunes. The German bank has handled the back office work for Apple's online store in recent years, according to people familiar with the situation.

* Aware that it needs China's sweet tooth, Hershey Co is rolling out a Chinese brand designed for the world's fastest growing candy market. In a first launch beyond the U.S. market, Hershey is unveiling on Tuesday a candy known in English as the Lancaster and in Chinese as Yo-man. Hershey will officially open its Shanghai-based Asia Innovation Center on Wednesday. It will be company's second-largest research and development center world-wide.

The U.S. Senate accused Apple Inc of paying little or no taxes to governments around the world by using loopholes and Irish units that are not tax residents of any country.

Actavis said it would by rival Warner Chilcott in a $5 billion deal that would see the combined company become the world's third-largest generic drug company by sales.

ENRC's co-founders, who are bidding to take control of the miner, are likely to be able to buy the company for a low price, analysts said.

India's Essar Oil will sign a loan-for-oil deal with state-run China Development Bank under which the bank will provide the company with a loan in exchange for oil shipments to PetroChina.

The European Commission is seeking new information from trading houses, including Glencore, as part of its probe into the manipulation of energy price benchmarks.

NYT

* Yahoo's $1.1 billion proposed acquisition of Tumblr is a huge coup for the young founder of the even younger start-up and a splashy move by Marissa Mayer to shake up her company. It also heralds a larger shift in social media. Facebook arguably invented modern social networking, and is still the king. But increasingly its approach is seen as passive and outdated as people flock to sites like Tumblr where they can be more actively engaged in creating personal, expressive content to share - and which could potentially translate to advertising dollars.

* Even as Apple became the nation's most profitable technology company, it avoided billions in taxes in the United States and around the world through a web of subsidiaries so complex it spanned continents and went beyond anything most experts had ever seen, Congressional investigators disclosed on Monday.

* SAC Capital Advisors is bracing for another round of withdrawal requests as fears grow that insider trading investigations could further damage Steven Cohen and his firm.

* Courts are looking to Urban Dictionary, a crowd sourced website, as one way to define words on which a case may turn.

* While companies weigh bids for Hulu and industry heavyweights complain that TV Everywhere isn't going much of anywhere, another way to watch time-shifted television is quietly gaining traction: video-on-demand, or VOD.

* The Obama administration and the European Union have each decided to negotiate settlements with China in the world's largest anti-dumping and anti-subsidy trade cases involving China's roughly $30 billion a year in solar panel shipments to the West, officials and trade advisers in Beijing, Brussels and Washington said.

* Last week's disclosure by Ronald Machen Jr, the United States attorney for the District of Columbia, that his office had secretly seized telephone records of Associated Press reporters as part of a leak investigation surprised and shocked many people. But to some on Wall Street, Machen's involvement in a phone records case had a familiar ring. They recalled the case of Allied Capital, a formerly high-flying business development company based in Washington whose shares collapsed in 2009. Two years earlier, Allied had admitted that one of its investigators had stolen the phone records of a prominent hedge fund manager who had been critical of the company's accounting practices. The chief outside lawyer counseling Allied was Machen, then a partner at WilmerHale.

* Japan's Prime Minister Shinzo Abe's economic shock therapy, which combines a flood of cheap cash, fiscal stimulus and deregulation, is getting early results.

Canada

THE GLOBE AND MAIL

* When Toronto city council meets Tuesday morning to formally kill the proposal for a downtown casino, it will end for good what was once a pet project for mayor Rob Ford.

The meeting will also be the first time the beleaguered mayor must face his council colleagues since accusations he was videotaped smoking crack cocaine surfaced last week. (http://link.reuters.com/heg38t)

Reports in the business section:

* Alaska proposed a multiyear, multimillion dollar plan aimed at determining the true oil and gas potential in the Arctic National Wildlife Refuge. State officials hope the plan will reinvigorate and reshape the debate over whether to drill on the refuge's coastal plain. (http://link.reuters.com/peg38t)

NATIONAL POST

* Canadian Prime Minister Stephen Harper will head to South America this week to suss out membership in a new trading bloc he has been working to join for many years.

The Pacific Alliance was formed by Chile, Colombia, Mexico and Peru in 2011 and Canada took a spot on the sidelines the next year, along with several other countries as observers. (http://link.reuters.com/reg38t) (Compiled by Avik Das in Bangalore)

China

PEOPLE'S DAILY

- Chinese Premier Li Keqiang's visit to India, his first foreign trip since taking office in March, has enhanced the strategic partnership of the two countries, the ruling Communist Party's newspaper said in a report.

CHINA SECURITIES JOURNAL

- China is expected to further increase supervision of local government debt to prevent risk of defaults.

- Chinese wine makers have applied to the Ministry of Commerce to launch an anti-dumping investigation into sales by European counterparts in China.

SHANGHAI SECURITIES NEWS

- Experts believe the Chinese currency yuan has the potential to rise further in the near term as China steps up exchange rate reforms. Driven by strong capital inflows into China, the central bank has guided the yuan to a slew of record highs since early April.

- Bank stocks are still being favoured by Chinese investors and have led a recent rally in China's stock market, although foreign investors have been withdrawing from the Chinese sector.

CHINA DAILY

- China's marine economy will account for 13 percent of the country's GDP by 2020, a government think-tank said on Monday. The China Institute for Marine Affairs said the sector would be worth more than 10 trillion yuan ($1.63 trillion) by then.

- Many of China's first-tier cities are "barely suitable for living", according to a report released on Sunday by a top Chinese think-tank. Beijing, Shanghai and Guangdong all failed to make the list of "habitable cities".

SHANGHAI DAILY

- The number of weddings in Shanghai skyrocketed more than 800 percent to 3,766 on Sunday alone, as happy couples flocked to tie the knot. May 20 is seen as an auspicious date in China.

Corporate Finance

* Charlie Ergen, the chairman of U.S. satellite company Dish Network Corp, has offered to buy bankrupt broadband company LightSquared Inc's wireless airwaves, a source close to Ergen told Reuters. Bloomberg reported the offer to be valued at $2 billion, citing people familiar with the bid.

* U.S. private equity firm Riverstone Holdings LLC is planning to invest as much as $1 billion in a new commodities venture run by Deutsche Bank AG former head of commodities David Silbert, the Financial Times reported.

* India's Essar Oil Ltd will sign a $1 billion loan deal with China on Tuesday that sources with knowledge of the matter said would be backed by supply of refined products to top state oil producer PetroChina Co Ltd.

* Specialty chemicals producer Rockwood Holdings Inc's pigments businesses have attracted offers from buyout firms including Blackstone Group LP and Advent International Corp, several people familiar with the matter said.

* Italian motorway operator Atlantia SpA is close to selling its transmission towers to U.S. investors for almost 100 million euros ($128.56 million), a source close to the matter said on Monday.

Fly On The Wall 7:00 AM Market Snapshot

ANALYST RESEARCH

Upgrades

American Tower (AMT) upgraded to Outperform from Neutral at Macquarie
BlackRock (BLK) upgraded to Outperform from Neutral at Macquarie
Con-way (CNW) upgraded to Buy from Hold at Wunderlich
Cubist (CBST) upgraded to Hold from Sell at Cantor
Felcor Lodging (FCH) upgraded to Buy from Neutral at SunTrust
IntercontinentalExchange (ICE) upgraded to Outperform from Neutral at Macquarie
Stifel Financial (SF) upgraded to Market Perform from Underperform at Wells Fargo
T. Rowe Price (TROW) upgraded to Outperform from Market Perform at Bernstein
Wet Seal (WTSL) upgraded to Buy from Hold at KeyBanc

Downgrades

Acquity Group (AQ) downgraded to Neutral from Buy at Roth Capital
Beazer Homes (BZH) downgraded to Neutral from Buy at Sterne Agee
CME Group (CME) downgraded to Neutral from Outperform at Macquarie
Carnival (CCL) downgraded to Neutral from Buy at UBS
Coach (COH) downgraded to Equal Weight from Overweight at Morgan Stanley
Deutsche Bank (DB) downgraded to Neutral from Overweight at JPMorgan
First Republic Bank (FRC) downgraded to Hold from Buy at Jefferies
Franklin Resources (BEN) downgraded to Neutral from Outperform at Macquarie
Life Technologies (LIFE) downgraded to Underperform from Outperform at CLSA
Oil States (OIS) downgraded to Neutral from Buy at Sterne Agee
Raymond James (RJF) downgraded to Market Perform from Outperform at Wells Fargo
VF Corp. (VFC) downgraded to Market Perform from Outperform at Wells Fargo
WellCare (WCG) downgraded to Neutral from Buy at Goldman

Initiations

Aetna (AET) reinstated with a Buy at Goldman
BioScrip (BIOS) initiated with a Buy at Jefferies
Cray (CRAY) initiated with a Buy at Sterne Agee
Harris (HRS) initiated with a Hold at Stifel
Hasbro (HAS) initiated with an Overweight at Piper Jaffray
JAKKS Pacific (JAKK) initiated with a Neutral at Piper Jaffray
LeapFrog (LF) initiated with an Overweight at Piper Jaffray
Mattel (MAT) initiated with an Overweight at Piper Jaffray
Sony (SNE) initiated with a Buy at Jefferies
Summer Infant (SUMR) initiated with an Overweight at Piper Jaffray
Taylor Morrison (TMHC) initiated with a Hold at Deutsche Bank

HOT STOCKS

Dish (DISH), Sprint (S) to engage in talks
Softbank (SFTBF) confirmed waiver, expects Sprint (S) deal to close in six weeks
Cadbury Schweppes (CSG) begins modified $125M "Dutch Auction" tender offer
Apple (AAPL) has used Ireland as a tax-haven for the past five years by creating "No-shore" tax entities, said Senator Carl Levin (D-MI)
S&P lowered Dell (DELL) ratings to 'BBB' from 'A-', remains on watch negative
Carnival (CCL, CUK) lowered FY13 EPS to $1.45-$1.65 from $1.80-$2.10, consensus $1.97
General Cable (BGC) initiated dividend and extended $125M repurchase authorization
DOJ reached settlement with Cinemark (CNK) in Rave Holdings deal
Wausau Paper (WPP) agreed to divest specialty paper business for about $110M
Regeneron (REGN), Bayer (BAYRY), Genentech (RHHBY) resolved certain patent disputes

EARNINGS

Companies that beat consensus earnings expectations last night and today include:
hhgregg (HGG), TiVo (TIVO), Urban Outfitters (URBN)

NEWSPAPERS/WEBSITES

JPMorgan Chase (JPM) plans to shake-up of its board even if every director wins re-election at today’s shareholder meeting and James Dimon keeps his dual job as chairman and CEO, the Wall Street Journal reports
Mutual-fund firms are joining activist investors in getting more aggressive over demands for change in how board members are paid at U.S. companies. Activist investors have been experimenting more frequently with incentive pay packages for the board members they nominate in proxy fights, the Wall Street Journal reports
Specialty chemicals producer Rockwood Holdings’s (ROC) pigments businesses have attracted offers from buyout firms including Blackstone Group (BX) and Advent International, sources say, Reuters reports
The Asian prime brokerage unit of Credit Suisse (CS) replaced Morgan Stanley (MS) as the second largest firm servicing the region's $148B hedge funds industry, according to a survey by AsiaHedge. Goldman Sachs (GS) remains Asia's top prime broker with 179 clients and total assets under management of $24.6B, Reuters reports
Bank managers in the U.S. are less likely to engage in mergers and acquisitions this year as regulators heighten scrutiny on potential deals and sellers wait for higher valuations, according to a KPMG survey, Bloomberg reports
PIMCO’s Bill Gross says the bull market for bonds may have ended last month. But investors are staying put. Four years into the biggest rally in U.S. stocks since 2000, bond mutual funds are attracting more money than their equity counterparts, Bloomberg reports

SYNDICATE

Cimatron (CIMT) files to sell ordinary shares
First Potomac (FPO) files to sell 6M shares of common stock
Ironwood (IRWD) files to sell 10.5M shares of common stock
Laclede Group (LG) files to sell 8.7M shares of common stock
NPS Pharmaceuticals (NPSP) files to sell 6M shares of common stock
Oaktree Capital (OAK) files to sell 6M shares of common stock
TCP Capital (TCPC) files to sell 4M shares of common stock
Wesco Aircraft (WAIR) files to sell 15M shares of common stock

It's Tuesday: Will It Be 19 Out Of 19?

Tyler Durden — Tue, 21 May 2013 11:10:24 +0000

Another event-free day in which the only major economic data point was the release of UK CPI, which joined the rest of the world in telegraphing price deflation, despite bubbles in the real estate and stock markets, printing 2.0% Y/Y on expectations of a 2.3% increase, the lowest since November 2009 and giving Mark Carney carte blanche to print as soon as he arrives on deck. In an amusing twist of European deja-vuness, last night Japan's economy minister who made waves over the weekend when he said that the Yen has dropped low enough to where people's lives may be getting complicated (i.e., inflation), refuted everything he said as having been lost in translation, and the result was a prompt move higher in the USDJPY, quickly filling the entire Sunday night gap. That said, and as has been made very clear in recent years, data is irrelevant, and the only thing that matters, at least so far in 2013, is whether it is Tuesday: the day that has seen 18 out of 18 consecutive rises in the DJIA so far in 2013, and whether there is a POMO scheduled. We are happy to answer yes to both, so sit back, and wait for the no-volume levitation to wash over ever. The US docket is empty except for Dudley and Bullard speaking, but more importantly, the fate of Jamie Dimon may be determined today when the vote on the Chairman/CEO title is due, while Tim Cook will testify in D.C. on the company's tax strategy and overseas profits.

Perhaps the only chart that matters: the Dow with and without the impact of Tuesdays:

Key overnight highlights summarized in bulletin form courtesy of Bloomberg

Treasuries steady, 10Y yields holding near highest since March as markets wait for Bernanke testimony and Fed minutes tomorrow amid speculation on QE tapering. JPY resumes decline vs USD while EUR/USD falls.
Japan economy minister Amari, speaking to reporters in Tokyo, said he couldn’t say when correction from strong JPY will end, hopes exchange rate settles at level suited to Japan’s economic fundamentals
China’s trade surplus is one-tenth the official $61b reported so far this year after accounting for fake transactions used to disguise hot-money inflows, Bank of America Corp. says
Spain sold EU3.51b of bills vs. 3.5b target; 3M bills drew 0.331% vs 0.12% in April, 9M bills 0.789% vs 0.787%
U.K. inflation slowed more than economists forecast in April to a seven-month low and producer prices rose the least since 2009 as fuel costs fell
The Reserve Bank of Australia cut its benchmark interest rate to a record low this month to boost businesses weakened by AUD’s sustained strength, even as households reacted to earlier reductions, according to the minutes of its May 7 meeting
New Zealand’s 2Y inflation expectations fell to an 11-year low in 2Q, according to the central bank’s survey of business expectations
Deutsche Bank AG was cut to neutral from overweight by JPMorgan, which said tighter regulation threatens capital levels
The Chinese government is considering a tax on ultra-luxury vehicles that cost more 1.7m yuan ($277,000), according to a report in Nanfang Daily, citing an unnamed official from a German luxury automaker
BofAML Corporate Master Index OAS narrows to 141bps, new tight for the year, from 142bp as $2.925b priced. Markit IG at 71bps from 70bps, YTD low 69bps. High Yield Master II OAS narrows to 434bps from 437bps; $1.85b priced yesterday. CDX High Yield falls to 106.99 from 107.13
Sovereign yields mostly higher. Asian stocks mixed, with Nikkei +0.1%, Shanghai Composite +0.2%. European stocks fall, U.S. stock-index futures mostly lower. WTI crude, copper, gold fall

WHAT TO WATCH:

Economic Data: None scheduled
Central Banks
11:30am: Fed’s Bullard speaks on monetary policy in Frankfurt
1:00pm: Fed’s Dudley speaks in New York Supply
11:00am: Fed to purchase $2.75b-$3.5b notes in 2020-2023 sector
11:30am: U.S. to sell 4W bills

SocGen recaps the key macro highlights:

Flows should pick up across FX and rates today, but the advent of Fed chairman Bernanke's speech tomorrow and the FOMC minutes probably stand in the way of participants taking on meaningful positions. The stabilisation late yesterday in metals (a sense of normality returning to silver prices after trading was halted four times) suggests recent losses may have been exaggerated. The resulting recovery in core bond yields bears close scrutiny as US 10y swaps approach 2.17%, the March high.

The only notable highlight of a sparse data calendar today is the monthly UK inflation data. Consensus expects a slight drop to 2.6% in April vs 2.8% in March (SG forecast 2.5%) but that does not make GBP offered nor should it spur receiving interest in swaps. The MPC minutes of the May meeting will be published tomorrow and are likely to put GBP in a more positive light if, as we suspect, governor King (and Fisher) pulled his vote for an immediate £25bn increase in QE. Inflation is subsequently forecast to pick up May. With economic recovery in sight, this argues for no change in BoE policy in the foreseeable future. With a minority on the MPC favouring more QE, this will make it difficult for incoming governor Carney to deliver on the dovish premise which was baked into GBP and rates the minute he was appointed last year. This does give GBP a tiny chance of carrying over its quite impressive performance so far in Q2 to Q3, though the short-term prospects of a further erosion in real yields (see chart) argues against a strong bid. Having lost only 0.2% vs the EUR, sterling is up vs every other G10 currency since 1 April, including the USD. GBP trades closest to fair value in our G10 currency sample followed by JPY and CAD.

DB's Jim Reid completes the overnight summary recap:

Markets are certainly calmer than the HK weather at the moment. Indeed it’s been a quiet 24 hours as we await “Fed Wednesday” when Bernanke will be delivering a testimony before the Joint Economic committee, and the latest FOMC meeting minutes will be published. In advance of that, we had the Chicago Fed’s Charles Evans speaking yesterday, and judging by the S&P500’s reaction, perhaps markets thought he sounded a little less dovish than usual. Indeed, the S&P500 was trading about 0.25% higher on the day at the midpoint of the US session, but gave up most of those gains as Evans’ speech hit the newswires to finish at -0.07%. Evans said that the US economy had improved substantially and that he expects to see “self-sustaining (US) growth” at “escape velocity” in 2014. Evans added however, that the Fed is missing on both inflation and employment targets and he wants to see further asset purchases until the job market improves. We get further Fedspeak today with speeches from the St Louis Fed's Bullard and the NY Fed’s Dudley. Both are FOMC voters.

Despite public holidays in parts of continental Europe, there were some notable price moves worth highlighting from yesterday. In credit markets, the European subordinated financials credit index continued to gap tighter (-16bp) after the recent changes to financial CDS contracts proposed by ISDA. The index has firmed more than 40bp in the last four sessions, bringing the financials subordinated/senior multiple to 1.4x, its lowest level since 2010.

In commodities, silver and gold markets rallied an impressive 14% and 4.6% from the intraday lows, after silver was down by as much as 8.6% during the Asian session yesterday. Short covering and the earthquake in Chile were reportedly behind the intraday rally. A Bloomberg headline warning that Moody’s could downgrade the US’ credit rating this year probably helped as well, as did a 0.6% drop in the USD index. In equities, we noted the underperformance in Italian equities yesterday (MIB -0.6%) - perhaps after a poll published by the SWG (released on Friday) suggested that the Italian government's approval rating had fallen from 43% at the start of the month to just 34% currently.

Elsewhere, the Yen remains in focus in overnight markets after further commentary from Japan’s Economy Minister. Mr Amari said that he is uncertain on when the correction from a strong Yen will end. This marks a surprise change in tone from his comments on Sunday when he was quoted as saying that the “correction of the strong Yen is largely complete” and that a further weakening in the yen would negatively impact people’s living costs. As it currently stands, USDJPY is up 0.2% in overnight trading, helping pare yesterday’s losses of 0.9%.

Elsewhere in Asia, equities are trading lower overnight led by losses on the Hang Seng (-0.4%) and KOSPI (-0.23%). S&P500 futures are 0.1% weaker as we type. In a reminder of some of the geopolitical risks facing markets this year, the NY Times wrote that the civil war in Syria is in danger of escalating as Syrian government forces, backed by fighters from the Lebanese militant group Hezbollah, unleashed airstrikes against rebels in parts of the strategic region of Qusayr, close to the Lebanese border. Israel, which earlier this month launched air strikes near Damascus, is said to be concerned at the growing strategic cooperation between Iran, Hezbollah and the Syrian regime (Financial Times). A potential widening of the conflict beyond Syria’s borders is something worth keeping an eye on.

With the relatively light data docket today, the focus will probably be on the Fedspeak. Bullard will be speaking at 4:30pm today London time in Frankfurt on the topic of “Monetary Policy in a Low-Rate Environment” while Dudley will be speaking at 6pm London time on the “Lessons at the Zero Bound”. The BoJ’s two-day policy meeting begins today. In the UK, inflation and retail sales data are scheduled. On the corporate reporting front, Vodafone, Burberry and Marks & Spencer will be announcing earnings.

Why Did Gold Recover More than $53 an Ounce in Yesterday’s Markets?

smartknowledgeu — Tue, 21 May 2013 10:26:53 +0000

Consider this blatant, and what I consider to be deliberate, deception of this UK Telegraph article, in which journalist Nick Squires reports that newly appointed Pope Francis blamed “free market capitalism” for the economic tyranny spreading across the globe today. Upon reading this, I thought to myself, “Well, we may have yet another religious leader with influence over millions that has no clue as to how the global banking system operates and consequently is going to mislead millions into adopting the belief that free-market capitalism (a market theory that is not practiced by any country in the world), and not the global banking system and bankers, are responsible for conditions of global economic misery.” But my second thought was, "Did the Pope really say what Nick Squires said he stated?"

Whether you are religious or not, it is undeniable that the Pope’s public statements have an incredible amount of influence over people. However, religion aside, the key point I want to make is that people in extremely influential positions must be very careful to spread truth instead of falling victim to banker propaganda. In fact, Pope Francis’s alleged statements sounded eerily similar to the disinformation favored by former Federal Reserve Chairman Alan Greenspan, who also blamed free markets and the lack of “regulation” for spreading global economic misery instead of the true source - fractional reserve banking and Central Banks.

However the truth to Greenspan’s massive banker propaganda is that the idea of a Central Bank, an authoritarian entity that centralizes the control of a nation’s credit and reports to no one but its owners, is 1 of the 10 major planks of Communism. Therefore, the very existence of a Central Bank means that no free markets can co-exist at the same time. Greenspan further deceived the people by blaming a lack of “regulation” as the central cause of our current global economic crisis, thereby implying that Central Banks should be granted more power to “regulate” the financial markets. However, most people that read Greenspan’s statements don’t understand that Central Banks never “regulate” capital markets, but only manipulate capital markets for their own benefit and to the detriment of the nation’s people. Only people that understand Greenspan’s propaganda understood that when he used the word “regulate”, one should instead substitute the word “manipulate” to understand the truth.

What does this have to do with being able to grasp the real reasons behind falling and rising gold and silver prices in the past month? Stick with me for a second and I will arrive at this point in just a moment. As I always do whenever I read something in the mainstream media, I decided to perform my own fact-checking, questioned the objectivity of Nick Squires, and went directly to the source of Nick’s article – the transcript of the Pope’s speech. The below is what the Pope REALLY stated versus the Telegraph’s lies that the Pope had blamed “free market capitalism” for the proliferation of economic tyranny worldwide:

“Certain pathologies are increasing, with their psychological consequences; fear and desperation grip the hearts of many people, even in the so-called rich countries; the joy of life is diminishing; indecency and violence are on the rise; poverty is becoming more and more evident. People have to struggle to live and, frequently, to live in an undignified way. One cause of this situation, in my opinion, is in the our relationship with money, and our acceptance of its power over ourselves and our society. Consequently the financial crisis which we are experiencing makes us forget that its ultimate origin is to be found in a profound human crisis. In the denial of the primacy of human beings! We have created new idols. The worship of the golden calf of old has found a new and heartless image in the cult of money and the dictatorship of an economy which is faceless and lacking any truly humane goal…While the income of a minority is increasing exponentially, that of the majority is crumbling. This imbalance results from ideologies which uphold the absolute autonomy of markets and financial speculation, and thus deny the right of control to States, which are themselves charged with providing for the common good.”

Nowhere in the Pope’s speech does he blame free market capitalism for conditions of economic tyranny as Mr. Squires reported. Instead, the Pope referred to “the absolute autonomy of markets and financial speculation” as to blame, but he never referred to these markets as “free” nor did he ever refer to these markets as “capitalistic”. The reality today, of course, is that every major global capital market is unfair, rigged and manipulated by Central Banks and their participant commercial banks. The deduction that the Pope meant “free market Capitalism” in his reference to “markets” and “financial speculation” was one entirely conjured up out of thin air by Squires. That said, I absolutely disagree with the Pope that the right of control should be granted to the State, as the natural equilibrium of the State is to gravitate towards tyranny and the disenfranchisement of the people. Power should be granted to the people instead through the re-establishment of free markets, but this is an argument for a different day. Still, Squires absolutely misled people in his article by implying that the Pope blamed "free market capitalism" for our current plague of economic tyranny, when the Pope clearly blames the immorality of those that control markets and engage in the "manipulation and subjection of people."

So now to gold and silver. Just as one can never trust the mainstream media to report any truth about the real reasons behind the rapidly growing economic suffering of people all over the world, one can never trust the mainstream media to report any truth about gold and silver markets as well. This is the point of this article. If you develop your beliefs about gold and silver by sourcing mainstream media news, everything you believe about gold and silver will always be wrong.

Here is a portion of the text from a Reuters article released early yesterday, with an obvious anti-gold bias filled with many lies: “Gold fell on Tuesday for the eighth of nine sessions, hurt by a firm dollar and persistent outflows from exchange-traded funds, pointing to more downside pressure on the metal…Gold has been hit by a shift in investments into higher-yielding equities as fears grew that the U.S. Federal Reserve could soon end its bullion-friendly bond buying program…‘We can still see some selling pressure this morning. We don't see too much physical demand from the market,’ said Peter Fung, head of dealing at Wing Fung Precious Metals in Hong Kong.” Let’s count the lies in that article:

(1) A firm dollar? Nope. The USD is projecting the illusion of rising because it merely is falling less rapidly than two other major fiat rubbish currencies it is measured against, the Yen and the Euro. Since we know the US Federal Reserve is still creating massive amounts of USD out of thin air, we know that in reality, the USD is merely devaluing less quickly than other major fiat currencies at the present time.

(2) Shift in investments to equities? By whom? Middle Eastern and Asian physical markets have been on fire as of late, and there is a huge rush to unload dollars for hard assets right now.

(3) Not much physical demand for gold right now in Hong Kong? Really? Then why were net flows from Hong Kong to China of physical gold a massive 223 tonnes in March, well over twice the amount from the previous March. Furthermore, as I noted in my interview with Max Keiser several weeks ago, physical gold buying in Hong Kong has exploded as bankers have artificially discounted gold prices. Haywood Cheung, president of the Hong Kong Gold & Silver Exchange Society, stated, "In terms of [physical gold buying] volume, I haven't seen this gold rush for over 20 years. Older members who have been in the business for 50 years haven't seen such a thing."

Thus, the Reuter’s article emphatically reinforces the modus operandus of the mainstream media to spread banker propaganda and the fact that you must seek out alternative media if you want to know the truth, especially in regards to financial matters and the true origins of our current global economic crisis. Consider that when I released my article "Why the Western Banking Cartel’s Gold and Silver Price Slam Will Backfire" to another mass media distribution outlet, Outbrain, in which I disclosed the facts about this current gold and silver banking cartel-initiated and artificial price slam, Outbrain refused to distribute my article for the following reason, even though tens of thousands of other news sites found enough interest and factual content in the article to link to it.

“Unfortunately, we can’t accept and amplify your content across our publisher sites. We’ve had a several complaints about this category/type of content from our audiences, editors and publishers.” - Outbrain

I might have thought that perhaps this was one isolated case, but when Outbrain rejected another one of our articles about bitcoins for distribution that thousands of internet news sites again chose to link to, you may conclude for yourselves if Outbrain is just another mass media distribution site that has an agenda other than spreading truthful financial news. Given this pattern, we're quite sure that if GATA ever attempted to use Outbrain, that every one of their articles would likewise be rejected, even though they are the first organization to publicly speak out against banker manipulation of gold prices of which I am aware, and their documented accusations that were once accused of being "conspiracies" have now long been vindicated as fact.

Articles about gold and bitcoin, rejected for distribution from Outbrain, but distributed by thousands of other news sites

In any event, an individual that seeks out banking truth will never receive the truth about the real source of this massive and intensifying global economic crisis (Central Banks and the fractional reserve banking system) if his only source of information is the mainstream media. One needs to source alternative media news sources if one ever wishes to understand the truth about this monetary crisis and the reasons for gold and silver’s enormous volatile movements as of late. Gold and silver’s recent price fall has zero to do with, as the above Reuter’s article claims, fears that the US Federal Reserve may end its “bullion-friendly bond buying program” or a lack of physical gold and silver purchases.

Gold and silver’s recent price fall occurred not because either precious metal was “overbought”, not because of a “stronger US dollar”, and not because the Federal Reserve may stop intervening in the Treasury bond market and stop artificially propping up the US treasury market. Gold and silver’s recent price fall was 100% created by artificial banker manipulation of bogus paper derivative markets as I’ve explained in the article above. Furthermore, the price surge yesterday in gold (from a low just above $1340 in Asia to a close above $1395) and silver (closed about 8% higher than its low in Asia yesterday) yesterday was simply due to the fact that gold and silver remain in a strong bull market due to the race of competing Central Banks across the world to devalue their fiat currencies, and in the process, bankrupt the wealth of their citizens. Yesterday’s large surge higher in the paper gold and silver markets was merely a counter-movement to the recent massive banking cartel manipulation and an attempt of paper prices to meet the real and considerably higher physical prices. Though gold and silver paper prices are likely to remain choppy and volatile in the short-term, this will not change the fact that physical gold and physical silver markets remain in a strong bull market. Any continuing volatility in paper gold and paper silver prices will also not change the fact that very significant premiums will continue to exist for real physical silver and gold over their paper prices.

For information about the real reasons behind gold and silver’s paper price volatility over the last several weeks, reference the below articles:

"Indisputable Proof Paper Gold Markets are Massively Manipulated"

Why the Western Banking Cartel’s Gold and Silver Price Slam Will Backfire

About the author: JS Kim is the Founder and Managing Director of SmartKnowledgeU, a fiercely independent research & consulting firm that focuses on the best ways to buy gold and buy silver as well as the provision of information about banking manipulation of paper gold and paper silver prices that allows investors to make rational, intelligent decisions versus irrational ones driven by emotion. For those that believe JS to be a gold and silver permabull, our clients were instructed to sell out of an Ultra Short Silver ETF we employed as a hedge at an average price of $85.53 a share in yesterday's markets, right before silver rocketed higher and the ETF plunged to $75.50. We will continue to hedge further volatility with new hedges as necessary.

The Dollar is Going Up

Monetary Metals — Tue, 21 May 2013 07:10:55 +0000

Let’s take a look at a few graphs of the dollar, from Feb 1, 2013 through Friday May 17, 2013. Yes, I said graphs of the dollar. I’ve priced the dollar in gold first (of course), then silver, the euro, and even the yen. The pattern is obvious. The dollar is going up.

I did not show copper, lumber, or wheat though they show the same trend. These commodities are not money, of course.

My point is simple. It’s not gold that is going anywhere. In past articles, I’ve used the analogy of measuring a steel ruler using rubber bands. Using the dollar to measure gold is like that. In this article I show that it’s not just gold, but silver, other currencies, and commodities. The dollar is rising now matter how we measure it.

The question not to ask is: “how are they manipulating gold?” The question is: “why is the dollar rising?”

To answer that, we first have to understand why the dollar had been going down. Most would say that it’s because the Fed has been “printing” and increasing the quantity of dollars. If that is so, then why would the dollar ever rise, as it has before (e.g. in the 1980’s), and as it is doing now? The Fed cannot and does not “un-print” dollars. This stock explanation is not satisfactory.

In one word, the answer is: arbitrage.

Let’s take a step back and look at the Treasury bond. The government pays for net expenses above tax revenues by borrowing. To borrow money, the Department of the Treasury sells bonds. This is an important aspect of our current form of government, as voters have demanded far more government expenditures than they are willing or able to pay for via taxes. In this aspect, the Treasury bond is a tool of fiscal policy, or spending, and cash flow to pay for it.

There is another aspect to the Treasury bond. It is the key asset of our monetary system. It is the asset on the Fed’s balance sheet (increasingly, post 2008, there are also mortgage bonds) to back its liabilities. The liability of the Fed is the Federal Reserve Note, commonly called the dollar. The Treasury bond is also a significant backing for the liabilities of commercial banks, pension funds, annuities, and insurance funds. Finally, the Treasury bond is used as collateral to enable borrowing.

The monetary system today is entirely based on credit, and the Treasury bond is the base of it. The peculiar characteristic, one could even say the shabby little secret, is that the Treasury bond is payable in dollars but the dollar is the liability of the Fed which is backed by the asset of the Fed which is … the Treasury bond. It’s circular and self-referential.

People often use the shorthand of saying that the Fed is “printing” dollars. It is actually borrowing them into existence and lending them. It is true that there is no actual lender. The Fed has sole discretion to create these dollars, unlike any normal bank, that must persuade a saver to deposit his capital in the bank. The Fed’s expansion of credit involves no saver. The Fed’s credit is counterfeit.[1]

The dollars appear ex nihilo at the Fed, and they use them to buy an asset, basically a bond, or to otherwise lend. Thus the Fed creates both a liability and an asset in this process. If the value of its assets should ever fall significantly, the market will not accept the Fed’s liability—the dollar—at face value. When gold owners refuse to bid on the dollar, the dollar will collapse.

Let’s get back to arbitrage. If a bank borrows money from the Fed, they will use it to buy an asset or lend it to a third party who will. This is an arbitrage. The short leg is the loan from the Fed, and the long leg is the asset purchased. As with all arbitrages, it will act as a force to pull the two values towards one another. Market price is always pulled down by the short leg, and pushed up by the long leg.

In the case of all borrowing from the Fed, the short leg is the dollar itself. I define arbitrage as the act of straddling a spread in the markets.[2] The arbitrager is often trying to profit from the interest rate spread directly, as in borrowing from the Fed at the discount rate and buying a Treasury bond that offers a higher yield.

Another strategy is to try to profit from a change in the spread, as in borrowing dollars to buy gold. In this case, if the dollar price falls, this will be a profitable trade. This is a weaker arbitrage than buying a bond, as gold does not have a yield.

As I noted above, the very act of arbitrage pulls down the price of the short leg and in the case of borrowing from the Fed the short leg is always the dollar. Whether a bank borrows dollars, to buy Euros and from there to buy Greek government bonds; whether it lends to a hedge fund to buy gold; or whether it lends to a consumer to buy a home, the dollar is pulled down. On the other side of the trade, these assets are pushed up.

This, rather than the rising quantity of dollars, explains the falling value of the dollar. And now, recently, the dollar has been rising. The logical explanation is that these trades are being unwound, either voluntarily or under duress. My definition of deflation is a forcible contraction of credit. It is not the shrinking number of dollars (if the number is even shrinking). It is the closing of innumerable positions, by the opposite arbitrage. Previously it was sell dollar / buy asset. Now it is buy dollar / sell asset.

Gold is the most liquid asset. Its bid-ask spread does not widen much when large quantities are sold on the bid or bought at the offer. In contrast, the bid in other assets can drop precipitously in times of crisis. They are hardest to liquidate precisely at the time when one must sell. In some extreme cases, the bid can be withdrawn altogether. Though the spread does not widen in gold, heavy selling does push down the bid on gold. Market makers will then pull down the offer to maintain a consistent spread.

Being the most liquid, gold is the most sensitive. It is the first asset, the “go to” asset to sell when a balance sheet is under stress. Gold therefore has the least lag in response to a change in the monetary system. Compare to real estate, where due diligence alone could take weeks or months. Additional inertia comes from how properties are valued: by looking at recent comparable deals. Real estate would not be the first asset that a bank or fund would want to sell, due to several factors including long closing time, wide bid-ask spread, and high costs to sell such as sales commissions and attorneys. In real estate, there are no market makers. The offer can remain high even with the bid plunging, as the typical holder of real estate is not willing to sell at a loss and holds out for a number that covers all costs and fees and allows an exit at a profit.

Equities are usually liquid, closer to gold than to real estate in this regard. However, for the past few years, there have been many flash crashes. In a flash crash, the bid drops to $0.01 for a brief moment, and typically at least one market sell order is filled far below the “normal” price for the stock. These flash crashes prove that there are serious problems, that there are structural cracks beneath the surface.

An important principle to keep in mind is that in times of stress or crisis, it is always the bid and never the offer that is withdrawn. While there have been a few flash smashes (an amusing term) it is not a coincidence that these are vastly outnumbered by the flash crashes. This is because stress and crisis always come with a need for liquidity to pay debts that cannot be rolled over, margin calls, or to be flexible and agile. In bad times, people prefer to own a more marketable asset compared to one that is less marketable. They especially prefer to own the asset that is the unit of account for their balance sheet.

By definition, there is no risk to holding dollars if your balance sheet is denominated in dollars, and your liabilities are in dollars. This is the reason for the so-called “flight to safety” for the “risk-off asset”. You are not making, nor losing, money when you hold dollars. On gold denominated books, holding dollars is quite risky, of course.

Going back to the falling dollar, as the interest rate falls the discount factor used for an enterprise’s future earnings also falls. The same $1 in earnings in 2023 is worth more at a discount of 3% annually vs. 6% ($0.74 vs. $0.56). The result is rising stock prices.

In addition, the “animal spirits” of John Maynard Keynes have been set loose. Most people hold the false theory about the quantity of money and its impact on the price of everything, and it is quite popular to believe that this means stock prices can only rise. Proponents of this theory should look at Japan. In any case, deprived of other means of obtaining a yield (i.e. in the bond market), they must do something. People know the dollar is falling, though they attempt to measure it by looking at the rate by which consumer prices, measured in dollars, rise. They should be looking at the rate at which the dollar, measured in gold, is falling.

Right now, everyone is on the same side of the trade: long equities. This is dangerous because when it reverses, the market may not find a bid for quite a distance down. In a normal market, it is the short sellers who make the bid. By the indications I can see, those who have attempted to short this market have capitulated by now.

In Part II (free registration required), we consider why stocks are rising in this depressed economy, and look at the abyss we are now rapidly approaching.

[1] My definition of inflation is an expansion of counterfeit credit, discussed in this paper: http://keithweinereconomics.com/2012/01/06/inflation-an-expansion-of-counterfeit-credit/

[2] I define and discuss in my dissertation: A Free Market for Goods, Services, and Money

Oil Market Manipulation Reaches Absurd Levels

EconMatters — Tue, 21 May 2013 05:49:11 +0000

By EconMatters

Markets & Manipulation: A long History

Most markets these days are manipulated to some extent, and this is nothing new if we look back through the history of financial markets. But there are some strange things happening right now in the oil market worth mentioning.

Brent-WTI Spread/Scam

Another scam in the Oil market is the Brent-WTI spread this has been one of the biggest scams over the years in the Oil market. Just to provide some data to the absurdity which is this much hyped about nonsensical spread Cushing Oklahoma has 49.7 million barrels in storage, it had 45.1 million barrels in storage a year ago. Cushing had 50 million barrels in storage at the start of the year. Moreover, in June Cushing will be adding additional supplies to storage due to current pipeline capacity going offline. So for all this talk about pipelines finally unlocking all the glut of oil supplies from the Cushing hub, and this being the reason for the impressive reduction in the Brent-WTI spread it is just a bunch of nonsense.

Cushing Oklahoma Supply Glut

So there is basically more oil trapped in Cushing Oklahoma then there has ever been when the spread was 25! So regardless if the spread is 25 or 8 it has very little to do with supplies residing in Cushing Oklahoma that is quite evident. Now there are a bunch of factors contributing to the nuances of the spread which I will not go into detail here but the takeaway is just to point out the absurdity which is the false and misleading rhetoric that encompasses this spread and Cushing Inventory levels.

400 Million Barrels & Climbing

While we are talking about inventory levels it is funny that WTI sits at $97 a barrel when the entire year we have had basically 3 minuscule draws in inventory supplies which stand at a record breaking 395 Million Barrels in storage. So the Dow keeps hitting new highs every week, and the US keeps setting new modern records for Oil in storage each week.

Weak Demand in an Artificial Economy

But it is not just the supply issues in an obviously oversupplied oil market with the US domestic production being the biggest culprit. The demand side of the equation has been equally bearish for the fundamentals with China`s actual economy slowing over the past 2 years, Europe being stuck in a perpetual recession, and the US being a mature market with higher fuel standards and a stagnant economy that requires $85 Billion of stimulus each month to keep from cratering. The demand side had been very underwhelming from the products side of the equation. For example, Gasoline supplies in the northeast are 10% higher than normal for this time of year.

Strong Dollar Bearish for Dollar Denominated Commodities

Finally the strong dollar is supposed to be bearish for commodities and oil, and with the US Dollar Index hovering around 84 and threatening to strengthen from these levels it is a wonder that the Oil market has barely noticed this strange occurrence in Dollar strength, unlike the Gold and Silver Markets.

Fundamentals: Are we talking about the Fundamentals Again?

The takeaway is that none of the actual fundamentals ever matter in the Oil markets. When you have a house style advantage that would make any Las Vegas Casino envious the fundamentals play little part in a manipulated Oil market. It is all about protecting the huge supply chain that is the oil market and everybody`s livelihood. When in doubt follow the money trail, and money is the biggest reason oil prices are where they are currently despite the bearish fundamentals of the commodity. Oil prices wouldn`t be at these levels if the powerful manipulators of the commodity were not making a whole lot of money as a result.

Oil Analysts Clueless

So the next time some Oil analyst tells you some hard studied reason why Oil prices are up it is all nonsense. Oil prices are up or down depending upon what the powerful players want oil to do, one week it can be at $86, the next $97, or $77, it is all about the money to these players, and they will do whatever it takes to make the money. And if it means being very creative with their methods then so be it, it is not like this is a regulated market!

Guest Post: The Coming Collapse Of The Petrodollar System

Tyler Durden — Tue, 21 May 2013 02:48:56 +0000

Authored by Andrew McKillop,

PETRODOLLAR WAR

The theory of Petrodollar Warfare can be attributed to US analyst and author William R Clarke, and his 2005 book of that title which interpreted the US-UK decision to invade Iraq in 2003. He called this an "oil currency war", but the concept of the petrodollar system and petrodollar recyling dates back to the eve of the first Oil Shock in 1973-1974. The role of the petrodollar system as a driving force of US foreign policy is explained by analysts and historians as basic to maintaining the dollar's status as the world's dominant reserve currency - and the currency in which oil is priced.

The term "petrodollar warfare" as used by William R. Clark says that major international war, legal or not, was seen as justified to protect the petrodollar system. Over and above the loss of human life, the combined costs of the Afghan and Iraq wars for the US are controversial like the interpretation of these wars as "oil wars", but analysts like Joseph Stiglitz and Linda Bilmes put the total combined war cost at above $4 trillion. This can be compared with - and totally dwarfs - the annual cost of US oil imports, which are now sharply declining on a year-in year-out basis as domestic shale oil output ramps up, and US oil demand stagnates.

Clarke's theory, like the explanation of the role and power of the "petrodollar system" depends on two basic drivers. Most major developed countries rely on oil imports, which are purchased using dollars, so they are forced to hold large stockpiles of dollars in order to continue importing oil. In turn this also creates consistent demand for dollars, and prevents the dollar from losing its relative international monetary value, regardless of what happens to the US economy.

Variants of the Petrodollar War concept include the role of oil currency conflicts and rivalry, notably concerning US relations with Iran, Venezuela and Russia, and possibly with Europe concerning the gradual replacement of US dollars with the euro, for oil transactions. More important, the entire petromoney system and the potential for Petrodollar War hinges on global oil import demand and the oil price. Both of these have to hold up. When or if they do not, foreign oil importer nations who formerly found it beneficial to hold dollars to pay for oil, would have to find some other (unexplained) reason for huge holdings of dollars, when their oil imports decline and-or oil prices also decline.

The "currency war" variant of the petrodollar system theory, holding that a shift to notably euros or gold for oil payments would undermine the system, is unrealistic when given any serious analysis, because all world moneys are interchangeable or convertible, and gold is priced in US dollars.

THE THREE PHASES OF THE SYSTEM

These are easy to define.

1974-1986 The first phase. The 1972 start of "petrodollar recycling" initiated by Nixon and Kissinger just before the fivefold rise in oil prices of 1973-74, set the process of US-Saudi Arabian cooperation for the near-exclusive benefit of these two players. The US dollar was "backstopped" by the transfer of Saudi liquidities to the US Federal Reserve system banks, especially the Federal Reserve Bank of New York. A small number of other chosen central banks, especially the Bank of England, and the central banks of Germany, France, Italy and Japan also benefitted.

1986-1999 The second phase. This also featured US and Saudi control, but under Clinton's two mandates the focus radically changed to the controlled deflation or reduction of both oil prices and the world value of the US dollar. While the US continued to benefit from "petrodollar recycling", Saudi Arabia was the major loser, undoubtedly changing its perceptions of the system's utility to KSA.

2000-2013 The third and last phase. This period featured a major longterm rise in oil prices and the entry not in force, but progressively of the euro currency into the now enlarged "petromoney recycling" process. Euros now cover about 25% of global oil transactions, for an annual value of around €700 billion, with about the same amount of back-to-back additional lquidities. The massive growth of QE and central bank "easing", from 2008, has heavily reduced the role of "petromoney recycling".

Among the major changes of the petromoney system during these 3 phases, the first phase set the basic political concept among US deciders that "petrodollar recycling" could at one and the same time enable the US to run huge trade and budget deficits, low or very low interest rates, and prevent the collapse of the dollar's value due to the forced need of all world buyers of oil to hold US dollars to make purchases of oil. By the second phase, this underlying concept shaded to including non-oil assets as the focus of value manipulation, controlled inflation and controlled deflation of value. In the third phase, massive increases of the oil price to 2008 played a major role in enabling the continued depreciation of the dollar's world value as US sovereign debt also massively increased, but since 2008 and the start of central bank QE the need for, and role of the petrodollar system have heavily contracted.

THE SYSTEM IS NOW MENACED

Estimates of the exact size and role of petrodollars and petroeuros in the international money system, finance system, and economic system are varied. Many analysts however say the minimum role of the petrodollar system is to create, back-to-back, liquidities at least equivalent to the transaction value of the world oil trade, which for crude and products is about $3.4 trillion-a-year. Combined, the approximate minimum total $6.8 trillion annual value of oil trade plus the petromoney system is about 10% of world annual GNP, equivalent to about 45% of US annual GDP. This may appear as still large and important but has to be compared with, for example, the exposure of national private banks only in Europe in relation to national GDPs, which is often 300% - 400%.

Only QE can "plaster over" these liabilities.

Petromoney recycling is still treated by "the elites" as a critical prop to monetary system integrity, and explains why the USA is far from the only country depending on the system holding up. All oil producers, even smaller-sized, are beneficiaries the same way as all major developed nations' central banks, but the US is still the prime beneficiary. However, the basic supports for the system's operation - continuing high oil demand, high oil prices, and oil priced in dollars - have all weakened or are threatened, today. In particular when global oil demand declines or stagnates, and when oil prices decline, the dollars that will no longer be needed for global purchases of oil will return in massive amounts back to their country of origin, the USA. The consequences can only be dramatic, and threaten the start of a process completely unlike the Clinton-era controlled devaluation of the dollar's value along with the decline of oil prices consented by Saudi Arabia.

The now-menaced "petrodollar system" is also weakened because of worldwide change in the perception of oil and oil energy. From the dawn of the petroleum age to its accelerating twilight, today, geopolitical strategies concocted by developed nations featured the maintenance of secured access to world oil supplies. This was believed to be a win-win strategy for developed nation policy makers, and especially for US policy makers. From the 1970s and the first Oil Shock of 1973-1974, the only "morph' in this policy and strategy was to substitute expensive oil, for cheap oil.

For the USA's ability to run deficits and the petrodollar system, much higher oil prices were a major gain, not a loss, and this is almost surely still the perception of the Obama administration today.

In its first phase and last phase, the economic and political incentives for ensuring national access to oil supplies, and the existence of the petrodollar system as a monetary and finance tool - unrelated to the economy - worked better with higher oil prices. Today however, with the major and massive changes of oil resource availability revealed by the shale energy revolution, rising global oil production capabilities, stagnating oil demand, and rising renewable energy supplies in all major developed countries, and the constantly declining role of oil in the economy, the Petrodollar System's days are surely numbered, like the notion that $100-oil prices are "normal".

The impact of this will be massive.

Russia Adds Two More Warships To Mediterranean Task Force Near Syria

Tyler Durden — Tue, 21 May 2013 02:12:55 +0000

A few days when reporting that the Russian Pacific fleet had crossed the Suez canal for the first time in decades in order to form a Mediterranean task force parked in Cyprus for obvious symbolic reasons (in close proximity to Syria and the Israel-parked Kearsarge), some observed that while the submarine support was adequate, the actual warship fleet designated to support any potential escalation in Syria would be largely insufficient. Perhaps the Russian Navy heard these complaints, and several hours ago RIA reported that two extra warships from the Russian Black Sea fleet had joined the Mediterranean task force, citing Capt. First Rank Vyacheslav Trukhachyov, has said. None of these recent deployment should come as a surprise: in March Russian Defense Minister Sergei Shoigu said a permanent naval task force in the Mediterranean was needed to defend Russia’s interests in the region. Read Syria, Cyrpus (where the task force will be on anchor indefinitely), and, of course, any and all western offensive involving Iran. And slowly but surely said task force is nearing completion.

"During a planned rotation, large landing ships Nikolai Filchenkov and Azov from Russia’s Black Sea Fleet have started performing their tasks in the Mediterranean,” Trukhachyov said.

The two ships in question:

the Azov:

and the Filchenkov:

The two ships will be added to a fleet that is becoming increasingly imposing in both numbers and capability: the task force currently includes vessels from the Pacific, Northern, Baltic and Black Sea fleets: the Admiral Panteleyev and Severomorsk destroyers, the Yaroslav Mudry frigate, the Peresvet and Admiral Nevelskoi amphibious warfare ships, the Fotiy Krylov, Altai and SB-921 salvage/rescue tugs, the PM-138 repair ship, the Pechenga, Lena and Dubna tankers. The task force may be enlarged to include nuclear submarines.

Admiral Vladimir Komoyedov, head of the parliamentary defense committee, previously told RIA Novosti that the Mediterranean task force should be comprised of 10 warships and support vessels as part of several tactical groups tasked with attack, antisubmarine warfare and minesweeping.

In other words, check to you America, we are ready.

And speaking of checking, just a month earlier it was the US that was deploying its own naval support in the area with the LHD-3 Kearsarge crossing the Suez canal, and now on anchor in Israel. Here is a 60 second timelapse video of what it looks like when a US naval ship cross the Suez Canal, direction escalation.

Bitcoin – The Tyranny Test

Tyler Durden — Tue, 21 May 2013 01:40:05 +0000

Via Paul Rosenberg of Free-Man's Perspective blog (via Jim Quinn's Burning Platform blog),

An increasing number of people have complained about governments and central banks in recent years, even using the word “tyranny” to describe them. They are, of course, called names in the establishment press: conspiracy theorists, mainly.

Calling someone a name, however, does not erase their argument (at least not among rational people) and both the governments and the big banks stand accused.

Up till now, however, these accusations were never accepted by the general public. The average guy really didn’t want to hear about the evils of government money. After all, that was the only thing he had ever used to buy food, clothes, gasoline, cars, and so on. He didn’t want to acknowledge the accusations because he feared what might happen to him without his usual money.

Now, however, we have a brand new currency (called Bitcoin) available to us: something radically different. This gives us a new way to directly address the subject of monetary tyranny, providing a clear test for the governments and money masters of the world:

If they are truly NOT tyrannical, they will leave this new currency alone.

If they ARE tyrannical, they will attack the new currency because it eats into their scam.

In other words, Bitcoin is a test for “the powers that be.” The way they deal with this new method of exchange will reveal their true nature.

If they ignore Bitcoin, they refute the charges of tyranny. If they attack it, they verify those charges.

After all, what honest reason could there be to attack an inherently peaceful tool for transferring value?

Prospective Reasons

Reasons to attack Bitcoin have recently appeared in the “public square.” Here are the three most popular ones, each followed with some analysis:

It can be used for money laundering.

Of course it can be used for money laundering — ANY currency can be used for money laundering. Currencies are neutral — that is their purpose! Currencies are valuable precisely because they can be exchanged for anything else — that’s why we use them!

Moreover, dollars and Euros and Pounds are used for money laundering every day. Consider the recent money laundering crimes of HSBC and Wachovia/Wells Fargo. These banks laundered hundreds of billions of dollars for violent drug cartels. And consider that this amount of laundered money is several hundred times the value of every Bitcoin in existence.

No one from either bank went to jail. Neither bank was shut down. Neither bank suffered more than a minor fine. So, how much of a concern can money laundering really be to governments and banks? Clearly not much.

But, since they accuse Bitcoin of being used for bad things, let’s be clear about the situation:

Every mafioso uses government money.

Every drug smuggler uses government money.

Every terrorist uses government money.

Every pornographer uses government money.

Every criminal of every type uses government money.

They also use the telephone system and the mail and banks and a wide variety of government services. But government money is good and Bitcoin is bad?

The argument fails.

It could destabilize the current system.

A tiny, new currency is a threat to the long-established king of the hill? Comparing Bitcoin to dollars, Euros and Yen is like comparing an ant to a dinosaur. This is a threat?

Please understand also that no one is forcing anyone to use Bitcoin. If you don’t think it’s a great idea, you don’t have to use it. If its price movements (relative to dollars) bother you, you don’t have to use it. How is that destabilizing to the current system? It is entirely separate.

And what of the current system? It was falling apart on its own before the Bitcoin program was ever written. And I could go on at length on the insane levels of government debt, hundreds of trillions in derivatives, rehypothecation, and innocent people being forced to bail-out failed banks.

The current system has massive problems, but none of them can be blamed on Bitcoin.

This argument fails also.

Bitcoin provides no customer protection.

Well, no, it doesn’t. Bitcoin is a currency, not a legal system.

What is implied by this argument is that the government banking system does protect customers. That is an outright lie. People are ripped-off via the banking system every day. And more than that, consider what happened just a month ago in Cyprus: Thousands of innocent people were ripped-off BY the banking system — purposely — all at once and without recourse. This argument is, really, an insult to one’s intelligence.

And I should add something else: If Bitcoin is used properly, the crime of identity theft (a big problem with government money) vanishes – there is no identity available to be stolen.

So, again, the argument fails. Only those people who believe anything a government says will buy it.

In the End

In the end, it is said, we judge ourselves. Bitcoin has now put governments and banks in the position of judging themselves. They will write their own verdicts.

It should be interesting to watch.