Wall Street Journal

The Hilsenrath-Haggle Federal Open Market Committee (FOMC) is likely to ease monetary policy at the July 31-August 1 meeting in response to the continued weakness of the economic data and the persistent downside risks from the crisis in Europe. While we expect nothing more exciting than an extension of the current “late 2014” interest rate guidance to "mid-2015", Goldman adds in their preview of the decision that although a new Fed asset purchase program is a possibility in the near term if the data continue to disappoint, their central expectation is for a return to QE in December or early 2013.

The financial press is far behind in what the public would like or needs as evidenced by the outflow of money from equities and equity funds and into bonds and bond funds. The financial TV press is still fixated on stocks, addressing day traders that are a much smaller group of people than in times past and many shows treat investments as if they were some kind of casino enterprise. In other words, there is a lot of coverage that is directed towards speculators and not nearly enough directed toward investors. The bond markets are multiples of the size of the equity markets and coverage here is close to nil as retail and institutions alike concentrate much more on investing in bonds rather than putting their core money in equities. There is an old saying on Wall Street that to be successful one must “follow the money” and it is quite statistically evident that the money has flowed into fixed-income investments and that the financial press has not followed it. The investment world has changed and we encourage the media to grasp it and to change as a result.

As usual, the stock market was vexatiously out of step with reality last week, soaring on word that the ECB plans to do “whatever it takes” to preserve the euro and the political union that it binds. For U.S. investors, especially those who believe in hope and change (and, presumably, the Easter Bunny), there was also the invaluable news that the U.S. economy is once again verging on recession – a development which is widely believed to portend yet more Fed easing.

Gold held steady above $1,620/oz on Monday, as investors wait for the central banks from Europe and the US to give definite signs on their plans for more QE. QE3 would be bullish for gold and increase the inflation outlook which would benefit gold as a hedge against the rising prices. The public is now interested in the yellow metal again, with investors adding to their physical positions. Market watchers will take their clues from the data out this week. More investors are trading euro gold than ever before and  using euro gold as the barometer of internal health of the gold market right now, says analyst Edel Tully of UBS.  Euro gold is up 9% this year versus US dollar gold's +3% performance. The markets await the Fed’s move.  Certainly some form of QE3 is inevitable whether it is announced this week or at the next FOMC meeting scheduled in early September

28, 2012

The Europeans have played the Great Game badly; are playing it badly and there will be consequences for their failures. All of this nonsense with Greece, with Spain, could have been avoided by telling the truth about the numbers, by not goose stepping with plans meant to mislead instead of illuminating the truth, with trying to hide the self-evident and presenting scams as solutions or by addressing the size of firewalls instead of trying to cure the sickness of the nations that lie within them. There is no Prince, there are no glass slippers and the bills have to be paid and the money to pay them will not be found in the pot of gold at the end of some rainbow. Unless the Germans are willing to have the same standard of living as those in Greece and that will not be happening so that it can be foretold that the play will end badly. It is not economics that will determine the end of the European fantasy but politics.

Financial Titan Repudiates Geithner and Bernanke's Entire Financial Strategy

Is it any wonder that Stephen Roach is now ex-Morgan Stanley? Today's brilliant truthiness in his interview on Bloomberg TV is an absolute must-watch as the veteran market practitioner notes that the Fed is forced to act next week and while consumers are telling you that they want to pay down debt - which all the monetray stimulus in the world is not going to change - that QE is nothing but crack to a ridiculously addicted market. With 70% of the US economy in a balance sheet recession, the Fed knows this (which he notes is now run by WSJ's Jon Hilsenrath since what he prints must be adhered to by Ben for fear of market disappointment) and is "dangling QE in front of the markets like raw meat - but it has not worked and it will not work!" But critically, he believes, the euphoric response of markets will be tempered since they have become "used to the fact that all of this unconventional monetary easing by the central bank is just not what it is supposed to be."

Gold has pushed back above $1600 this morning (and +2.6% year-to-date) as it appears the Hilsenrath-rumor is sinking in and the day of reckoning printing draws nearer. There was little new in the statement, as we have stated, but its timing and specificity is to be noted though we, like BofAML are more predisposed to expectations of a rate extension next week to mid-2015 followed by NEW QE in September (with a disappointed equity market slump in between that 'enables' NEW QE). The herald cry from every hypocritical CEO and retired banker this morning appears to be "but, but, but the central banks have to do something" - even if they 'know' the economic impact is nil - as pre-emptive omnipotence has always worked before.

Who is Sandy Weill? He is none other than a retired Citigroup Chairman, a former NY Fed Director, and a "philanthropist." He is also the man who lobbied for overturning of Glass Steagall in the last years of the 20th century, whose repeal permitted the merger of Travelers of Citibank, in the process creating Citigroup, the largest of the TBTF banks eventually bailed out by taxpayers. In his memoir Weill brags that he and Republican Senator Phil Gramm joked that it should have been called the Weill-Gramm-Leach-Bliley Act. Informally, some dubbed it “the Citigroup Authorization Act.” As The Nation explains, "Weill was instrumental in getting then-President Bill Clinton to sign off on the Republican-sponsored legislation that upended the sensible restraints on finance capital that had worked splendidly since the Great Depression." Of course, by overturning Glass Steagall the last hindrance to ushering in the TBTF juggernaut and the Greenspan Put, followed by the global Bernanke put, was removed, in the process making the terminal collapse of the US financial system inevitable. Why is Weill relevant? Because in a statement that simply redefines hypocrisy, the same individual had the temerity to appear on selloutvision, and tell his fawning CNBC hosts that it is "time to break up the big banks." That's right: the person who benefited the most of all from the repeal of Glass Steagall is now calling for its return.

No doubt, Eastern Europe is a part of the world where people are accustomed to being abused by politicians. After decades of Soviet Rule, the cultures in places like Ukraine, Moldova, Azerbaijan, Belarus, etc. have been inculcated with a strong mistrust of government. All government. One obvious sign of this is how little confidence people have in their own national currencies. Here in Ukraine, for example, people who have any level of wealth whatsoever hold hard currency– dollars and euros, rather than the local hryvna. (Naturally, their relative confidence in dollars and euros is misplaced, though I was pleased to see that gold is starting to penetrate the cultural psyche here.) They even have a funny nickname for these regional currencies that get inflated and devalued by corrupt central bankers and politicians– rabbits… because they grow and multiply in such huge numbers so quickly. As two different economics students this weekend told me, ‘we are starting to look at the US dollar in the same way…’ I guess that makes the euro a dodo bird.

China has proposed to broaden trading of precious metals in its local market in order to help China become a "major gold trading centre" (see News). The Wall Street Journal was briefed about China's plans by "a person involved with the matter." The paper reports that "the move could increase liquidity and help Beijing gain stronger pricing power for key commodities like gold". China is the largest consumer and now the largest producer of gold in the world and has aspirations to become a major gold trading center on a par with London and New York. China is also the fifth largest holder of gold reserves in the world after the U.S., Germany, France, Italy. Chinese officials have spoken of China’s aspirations to have gold reserves as large as the U.S. in order to help position the yuan or renminbi as a global reserve currency. Indeed, it would be only natural for China to aspire to have their currency become the global reserve currency in the long term. In the longer term, being a major gold trading center would make China a more powerful financial and economic player and indeed could allow them to influence commodity and other important market prices. Indeed, Reuters reported that becoming a major gold trading center "would boost the country's clout in setting global prices".

The head of now bankrupt futures brokerage PFG may not have been very successful when it comes to executing succesful suicide attempts, but when it comes to spending stolen client money over a period of two decades he had few equals. From the WSJ: "Peregrine Financial Services Inc.'s founder said he spent most of the money allegedly embezzled from customers to cushion his futures brokerage's capital, fund a new corporate headquarters—and to pay regulatory fines and fees, according to previously undisclosed parts of a suicide note and signed statement." It also appears that it was all the regulators' fault: "Most of the misappropriated funds went to maintain the increasing levels of Regulatory Capital to keep [Peregrine] in business and to pay business [losses]," said the signed statement, which was reviewed by The Wall Street Journal. The statement says the misappropriated customer funds also were used to build Peregrine's headquarters in Cedar Falls, Iowa, and to "pay Fines and Fees charged by the regulators." So... to summarize... the guy who stole money for twenty years, stole it only to comply with regulators requirements for compliance... Now that does not compute.

Folks, the political game has changed in the US. The Fed is no longer invulnerable. In this climate more QE cannot possibly happen. End of story. Indeed, if the Fed were to launch QE at any time between now and the election, Obama is DONE. The last possibly chance for QE without it being a clear hand-out to Obama (and a gift from the political gods to Romney) was June. The Fed passed on that.

Here we are one year and over 10 Fed FOMC meetings later and the Fed hasn’t launched any new QE programs. Think about that. For over a year now the financial media has been awash with “experts” saying “QE is just around the corner, the Fed will launch QE any minute now, etc” Every time stocks rally. But. No. QE.