From Sean Corrigan
In an opinion piece of our own, instigated by the gentlemen at Gold Money, we were asked how we work out whether gold is over or undervalued at any given minute. What a question at the best of times, much less now!
What we came up with was the following, something which encapsulates a theme about which we have written much of late:?
What is ?value? in a world where the single goal of the powers that be is to deny the market the ability to have its constituents? underlying ordering of wants accurately reflected in the price structure?
We have no proper market in capital; severely impaired markets in any number of basic goods; false markets in real estate; distorted markets in labour (hence why so many poor souls are still without jobs); and no certainty about anything except the awful certainty that nothing is off?limits to those who are desperately trying to put Humpty Dumpty together again in time for the next turn of the electoral cycle rather than accepting that he has shuffled off this mortal coil and that it would be better now to see whether at least we can salvage a half?decent omelette out of the remains?
And that pretty much sums up our commentary on the EFSF—the ‘’Excruciating Folly of Suspending Finality’ or ‘Endorsing Falsity to Succour the Few’, or perhaps just ‘Europe = Fastow, Skilling & Fuld’.
Its agreement has ignited a rally—at that, one which could technically unwind much of the preceding rout, unless some renewed problem surfaces from among the many, murky lacuna in the details of how this Archimedean earth?mover will actually be knitted together; not least among them the suggestion that such a nakedly cynical attempt to frustrate the existential purpose of the CDS market might render its whole, multi?trillion edifice unstable and so force a widespread rebalancing of holdings across the physical bond market.
To the extent that the deal does succeed in heading off an immediate meltdown, some removal of risk premia seems entirely justified, but that is not to say that Europe’s problems are at an end, nor that the global economy does not now hover parlously between a stalling recovery and a renewed slump.
Notable, too, is that fact that this month’s stock index rally has been equally strongly felt in the KOSPI as in the DAX and in the TWSE as in the CAC, as the underweight institutionals and the 80% of hedge funds said to be under water scramble to take advantage of a rising tide with scant regard for which boat they are actually clambering aboard.
Adding to the optimism (the jaundiced among us might say, the pessimism) that no bank in Europe is about to close its doors, is the hope that the Chinese authorities are on the verge of issuing one of their heaven?shaking decrees and so will restore the profitability of business there at a stroke, by relaxing their grip on official monetary policy.
Since we all know just how swimmingly such steps have worked out in our own countries, in the aftermath of a dramatic episode of pervasive commodity and property speculation, we can immediately cast all cares aside the minute that the omniscient Communist Party issues a diktat to the effect that it will be adopting the success?garlanded procedures of Bernanke, King, et al.
Sarcasm aside, the hoo?hah has been blown up over the declaration by Premier Wen that policy should be ‘fine?tuned’ and that banks should henceforth be more responsive to the needs of struggling small businesses—an exhortation which has predictably been parlayed up into a signal that the PBoC is about to cut reserve ratios ? and possibly interest rates— before year end.
This comes despite Wen’s continued insistence that the fight against inflation is still the number one priority. It also ignores the fact that while the policy banks may be encouraged to ration out their credit quotas a little more evenly in future, this potential liberalisation will go hand?in?hand with steps being already taken to crack down on the grey market for loans which is those same small firms’ main lifeline at present.
It also overlooks the fact that many SMEs told those conducting a recent survey of the sector that their main worry was not the availability of credit, but the inexorable rise in their cost base in a land where the increase in commodity prices has been second only to the ascent of wage rates in dampening their chances of achieving profitability.
Nor does it pay much heed to the fact that people waking up to the idea that property prices may not just rise by 10?20% a year, but may fall 40?50% in an afternoon, might not be too impressed if SHIBOR trades 25bps lower in the near future.
Never mind. In that old retailing maxim, it’s not the steak that sells, it’s the sizzle. If the story of an imminent Great Wall of Chinese liquidity being unleashed reinforces the desperate need to see asset prices higher, so be it, but those riding what might turn out to be a thoroughly misplaced interpretation of events should at least keep their stop?loss discipline while they ride the updraft higher.