Money Supply

Jean-Claude Trichet, the former head of the European Central Bank, in an interview with CNBC stated that there was only so much that central banks could do to save the economic situation at the present time.

What is happening today has its roots in history. The end result is shown to us already and is gauranteed at this point.

Overview of the great unwind, which I suggest has three components--tapering talk in the US, Japanese selling foreign assets and the liquidity squeeze in China (squeezing another carry carry trade).

Ten days ago, we penned "Chinese Liquidity Shortage Hits All Time High", in which we predicted ridiculous moves in the Chinese interbank market as a result of short-term funding literally evaporating as a result of the PBOC's stern refusal to step in and bail out its banking sector (despite the occasional rumor of this bank bailed out or that) by injecting trillions in low-powered money. A few days later this prediction was confirmed when the overnight repo and SHIBOR market for all intents and purposes broke down as was also reported here previously.  Now, for the first time, China, via the Politburo's Chinese Hilsenrath-equivalent, Xinhua, has provided its own version of events which is as follows: "It is not that there is no money, but the money has been put in the wrong place."

UPDATE: China 7-day repo +374bps to 12%! China Flash PMI 48.2 (49.1 exp) - lowest in 9 months; worst 3-month plunge since Feb 2011.

Following the hushed-up default by Everbright Bank last week, the liquidity situation in China has gone from bad to worse - with 1Y IRS now at all-time record highs. Many are now questioning whether the dramatic elevation in short-term financing rates is "here to stay," and with the Chinese yield curve now inverted in a similar fashion (and period) as the US Treasury market prior to the US recession in 2007, the clarion call for government stimulus is loud from the addicts. However, as HSBC notes today, since the government is now putting more emphasis on balanced growth and market reforms, it will tolerate GDP growth in the 7-7.5% range and will therefore take no strong measures to boost growth unless there is a risk of growth slowing to 7%. The red flags are piling up in the world's supposed growth engine...

China is snugging, trying to rein in its financial system and shadow banking system.

The 20th century could be categorized as THE century when communications took off and we started living in each other’s pockets. Lives had been ruined by war, trouble and strife. Wealth had been redistributed beyond belief. There were no longer just a few that were making the profits, but there were growing classes of people that wanted recognition.

We discuss legitimate credit vs. counterfeit central bank credit, the concepts of marginal time preference and productivity, speculation, and finally resonance.

...You were considered a hoarder and a slacker if you still resisted turning over your gold to the government.

The days of reasonable economic forecasting are over. Today, an economic forecast is more like the analysis of a criminal mind than the evaluation of economic data. The dominating role of government overpowers markets intentionally. In the short-term that will continue. Reactions to Federal Reserve minutes referencing continuation, alteration or cessation of quantitative easing cause stock markets to move by over 100 points. Other markets are affected by government interventions, just not so noticeably. Long term, markets will overpower government. Welfare states can no longer maintain their level of spending, services and welfare. However, they dare not stop lest civil unrest and violence break out. The bind they are in has no solution. Governments around the world are doing whatever is necessary to survive. Lying, stealing and outright confiscation will begin in order to support their bankruptcies. Cyprus was a minor precursor of what is coming.

Earlier this month, in an article for “Project Syndicate” famous American economist Nouriel Roubini joined the chorus of those who declare that the multi-year run up in the gold price was just an almighty bubble, that that bubble has now popped and that it will continue to deflate. Gold is now in a bear market, a multi-year bear market, and Roubini gives six reasons (he himself helpfully counts them down for us) for why gold is a bad investment. His arguments for a continued bear market in gold range from the indisputably accurate to the questionable and contradictory to the simply false and outright bizarre. But what is most worrying, and most disturbing, is Roubini’s pathetic attempt to label gold bugs political extremists. It is evident from Roubini’s essay that he not only considers the gold bugs to be wrong and foolish, they also annoy him profoundly. They anger him. Why? – Because he thinks they also have a “political agenda”. Gold bugs are destructive. They are misguided and even dangerous people.

The uncertainty about when the Fed will begin tapering its programme of asset purchases has increased volatility, both pushing and pulling on global financial markets. “at this juncture, the markets are more concerned about tapering than about weak [US and global] growth,” says MIG Bank’s Chief Economist, Luciano Jannelli.

The fact of the matter is, QE policies are really not so different from how central banks functioned back in the “old-normal” days of the earlier 2000s. They still just bought an asset and paid for it by increasing the money supply. One critical difference is that in order to increase the money supply by as much as they did, the central banks of the world had to change the scope of assets they were willing to buy. Herein lays the rub. By expanding its range of acceptable assets, the Fed created a market for these assets that did not exist. As a result it maintained their prices above which the market deemed necessary to clear – an essential occurrence in market economies. Instead, by expanding its asset purchases through quantitative easing policies, the effects we see are unreasonable prices among some financial assets, and a housing sector unable to sell its unsold inventory.

India should monetise their huge gold stockpiles of over 20,000 metric tonnes according to the World Gold Council (WGC) as reported by Bloomberg this morning.

“In the long term gold could be monetized as a financial asset," Aram Shishmanian, the CEO of the WGC said in India overnight.

The World Gold Council has approached the Reserve Bank of India (RBI) to work with it so that bullion could be used as a financial asset, rather than just a physical asset. 

Bulls and Bears. It’s all about predicting when that upturn or that downswing in the market is going to take place and when you need to sell or buy that stock to hit the jackpot and make the millions. People have been doing it for centuries and that doesn’t look like it is going to stop right now. There have been dozens of financial crises over the centuries and each of them has had an effect on the lives of people to varying degrees.