Central Banks

All you need to read.

Here's the video of my original interview, recorded on Monday, February 27, 2012, about gold and silver price manipulation on the Keiser Report with Max Keiser.

The last time Laszlo Birinyi came out with a bold market prediction was back in January 2011, when he forecast that the market would go to 2,854 by September 4, 2013 (more or less precisely to the dot). Many thought he was joking; he was not, and a month later he repeated the same forecast, leading to the advent of the Birinyi ruler. Needless to say, a year after his initial forecast the market was down. However, now that we have had yet another of the now traditional market blow off top moves on massive liquidity injected by central banks, the time to trot Birinyi back on the stage is upon us, and sure enough earlier today he made an appearance in Bloomberg where he proposed his latest forecast of 1,700 in the S&P by year end. Granted this is less aggressive than his previous forecast, which however still stands, so below we present visually the move that the market has to undergo in order to hit both of his targets, courtesy of John Lohman. Since we now have two waypoints on the road to exponential market nirvana, it is no longer a smooth single sloped, but rather a bi-sloping ramp, for which we can only assume one has to use a "bi-ruler" whatever that may be.

We were speechless when we read this from Bloomberg...

Back in September, before the transition from then ECB head J.C. Trichet to current Goldman plant and uber printer Mario Draghi we asked whether "Trichet will disgrace his already discredited central banker career by pushing a rate cut before he is swept out of the corner office by Mario Draghi, or will the former Goldmanite Italian become the most hated man in Germany soon, after he proceeds to ease, even as Germany still experiences Chinese inflationary re-exports. The answer will be all too clear in just a few months." Sure enough, following a whopping €1 trillion in incremental liquidity released by the ECB in the three shorts months since Draghi's ascension on November 1, all under the guise that the ECB is not printing when it most certainly is, albeit "hidden" by the idiotic claim that it accepts collateral for said printing (what collateral - Italian and Spanish bonds, which will become worthless the second even more printing is required in a few short months? This is run time collateral that can be issued "just in time" to convert it to even more cash as UniCredit did again today), the answer is becoming clear. Slowly but surely the realization is dawning on Germany that while it was sleeping, perfectly confused by lies spoken in a soothing Italian accent that the ECB will not print, not only did Draghi reflate the ECB's balance sheet by an unprecedented amount in a very short time, in the process not only sending Brent in Euros to all time highs (wink, wink, inflation, as today's European CPI confirmed coming in at 2.7% or higher than estimated) but also putting the BUBA in jeopardy with nearly half a trillion in Eurosystem"receivables" which it will most likely never collect.

There’s a lot of talk right now, for example, about rising oil prices which have created uncomfortably high gasoline prices. In gold terms, however, gasoline prices are in a deflationary spiral. The chart below shows unleaded gasoline prices in grams of gold since January 1976. Priced in grams of gold, gasoline is near an all-time low. Buffett (and others) argue strongly that investors should be in stocks… that a company like Coca Cola or productive farmland is a better long-term investment than a useless hunk of metal.He’s probably right. Except that the useless hunk of metal isn’t really an investment. It’s an anti-currency… appropriate for those who want to sit out of the market and be in cash without having to be in cash.

All this money sloshing around is nothing but kindling. This is enough to start one hell of a large inflationary fire, but probably not until we have a deflationary panic first – which will add even more kindling to the pile. The progression from the $1.5 billion Chrysler rescue to the current multi-trillion dollar worldwide financial support operations seems to parallel the march from the first US forestry service attempts to limit forest fires about a century ago to the far more sophisticated efforts possible today... Studies have shown that the onset of that catastrophe is almost totally unpredictable. By suppressing small fires, the forests approach an unstable state where the dead wood, resulting from the natural cycle of birth and death in the wild, is piled high, ready to explode into flames if the conditions are right. The central banks and other governmental authorities have piled the money so high that bubbles are popping up everywhere. With so many bubbles and so much kindling, volatility in price is a sure thing. As research has shown that the timing of these dramatic breakdowns, whether a forest fire, an earthquake, or a market crash cannot predicted, or mitigated as it runs its course, the time to control these crises is way before they start. The US Forestry Service knows that, please tell Bernanke!

The positive PMI data would ordinarily result in some price weakness as would the testimony from Bernanke which suggested that the Federal Reserve's ultra loose monetary policies may not continue much longer. However, the scale of the selling and size of the price falls was unusual. Respected analysts such as legendary Jim Sinclair, John Embry and Jean-Marie Eveillard suggested that the sell off was due to manipulation by bullion banks. Sinclair said it was an “intervention” and was “window dressing” that long term bullion investors should not be concerned about as inflation was coming due to “QE to Infinity.” Embry said that it was a “smash down” and a “paper fiasco.” Jean-Marie Eveillard suggested that central banks may have intervened, as they are doing in fx and bond markets, and sold gold in volume into the market. It is of course very difficult to ascertain what caused the sharp falls in the precious metals yesterday however it would be naive to completely discount what Sinclair, Embry and Eveillard believe may have happened.

Somehow, following three years of defaults, the world has only now figured out that the ISDA CDS trigger determination committee is made up of the same bankers, who stand to lose everything in the case of global out of control contagion, such as that which may occur if an unwelcome CDS trigger sends the house of cards collapsing, and force mark to market losses on all those institutions which hold impaired debt at par (all of them). As a result, the ISDA meeting which is currently in process is expect to find absolutely nothing, and we agree, however not for that particular 'conspiratorial' reason, but because ISDA is waiting for the PSI outcome for a realistic finding on a credit event. Because after all ISDA is not stupid: they don't want to appear like a pushover - remember how vehemently ISDA had opposed a Greek CDS trigger in the days when Europe still was not prepared for this outcome -  but on the other hand wants to preserve some CDS market credibility, which would disappear if none of the recent events in Greece were to trigger CDS. Yet more Greek creditors are getting impatient. Even as the first ISDA meeting has to find (that there has been no CDS trigger), the association's determination committee has just released that it has gotten a second question whether a "Restructuring Credit Event occurred with respect to The Hellenic Republic?" We find it rather odd (or not really) how suddenly quite a few requests are springing out of the woodwork by creditors who obviously are interest in a Greek default. As such the PSI gets quite interesting, because if the pre-PSI action is any indication, quite a few creditors are rather interested in triggering just the event they now consistently badger ISDA with.

While hardly needing a full-on onslaught by an Austrian thinker, when even some fairly simplistic reductio ad abusrdum thought experiments should suffice (boosting global GDP by a few million percent simply by building a death star comes to mind), Diapason's Sean Corrigan has decided to take MMT, also known as "Modern Monetary Theory", to the woodshed in his latest missive in a grammatical, syntaxic (replete with the usual 200+ word multi-clause sentences) and stylistic juggernaut, that only Corrigan is capable of. So sit back in that easy chair, grab your favorite bottle of rehypothecated Ouzo, and let the monetary hate wash through you.

Why is the financial world so messed up? Because it’s run by Central Bankers. And those folks view money very differently than the businesspeople who create businesses, jobs, and wealth.

Risk off. On one of the highest volume days in months (for equity cash and futures), ES (the S&P e-mini futures contract) fell over 20pts from high to low following Bernanke's lack of expansionary comment. Right at the close we accelerated very fast losing around 6pts almost instantly as the market had a very jittery feel. The major financials were off 2.5-3% from the 10amET Bernanke speech release (and XLF was down 1.4% from that peak) but it was the precious metals that shocked. Gold had it largest percentage drop (over 5%) since early December 2008 (around $100) and Silver plunged over 7% at its worst, managing to come back a little to close down around 6%. Oil did not follow the Central-Plan (to talk down the print-fest) as WTI pushed back up to $107 and Brent over $123 as the USD rallied aggressively - now up over 0.5% on the week. Treasuries early dislike for the removal of the punchbowl was quickly dismissed as equities sold off this afternoon and we drifted back 1-2bps from high yields of the day (though still higher yields close to close). As we noted two days ago on Twitter, the market seems only capable of reacting to addition or removal of central bank liquidity and what was perhaps odd today was the delayed reaction - one of incredulity maybe at the gall of these printers to stop/pause.

In what is increasingly peculiar market action, gold dropped over $100 intraday, following triggering of $1700 sell limits, at which point sell signals hit every bid all the way to $1685 then a knee jerk bounce appeared, in some rather chaotic late day trading in paper gold. Whether this is due solely to algo driven liquidations following the earlier described shift in sentiment, or has some assistance from central banks is irrelevant as anyone and everyone who is happy to convert paper fiat into hard currencies is taking advantage of this latest short-term rout, to prepare for the next battery of printing which will come with 100% certainty. Remember: as we have been saying since the summer of 2011, Bernanke needs a tumble in stocks to get a green light for more easing, and he obviously won't get that with the S&P where it is, nor with WTI still sticking to $107.

As good news appears to be bad news for now and the hopes of imminent dovish QE3-gasms gets pushed off a week or two, we thought it useful to dig into the mysterious central bank go-to play in a little more detail. Morgan Stanley's European Economics Team asks and answers five of the most frequently discussed questions with regard quantitative easing. From whether QE has worked to inflation fears and concerns over policy normalization and what happens if the public lose confidence in central bank liabilities, we suspect these questions, rather dovishly answered by the MS team, will reappear sooner rather than later, and as they interestingly note, the deployment of central bank balance sheets is, in essence, a confidence trick.

Germany is in a great squeeze. On one side the ECB and G20 want Germany to step up with more money to save Europe. On the other hand, German CEOs, voters, and even the courts, are increasingly wanting out of the Euro. This is not a situation that gives one much confidence that Germany will stick around for too much longer. It is my view Germany is going to do all it can to force Greece out of the Euro before March 20^th (the date that the next round of Greek debt is due) or will simply pull out of the Euro (but not the EU) itself.