Hong Kong

Anti-US protests sweeping across the entire Muslim world (which are continuing today), besieging, attacking and burning down US embassies, are not the only thing that the central banker policy vehicle known as "the markets" have to ignore in the coming days and weeks. Cause here comes China: "Thousands besiege Japan's embassy in Beijing over Tokyo's assertion of control over disputed islands in East China Sea." And China is not happy: "For The Respect Of The Motherland, We Must Go To War With Japan." Sure enough, where would the US be if the focal point of this escalation in militant anger - the Senkaku Islands - was not merely the latest expression of Pax Americana, and America's national interests abroad.

The last time we looked at monthly Chinese imports of gold from Hong Kong in 2012, the comparable country in question was Portugal (whose citizens, if not central bank, incidentally have run out of gold to sell), because that is whose total gold holdings (at 382.5 tons) Chinese imports had just surpassed. Fast forward a month later, and the update is even more disturbing. In July, Chinese gold imports from HK, after two months of declines, have picked up once more and hit a 3-month high of 75.8 tons. While it is notable that this number is double the 38.1 tons imported a year prior, and that year-to-date imports are now a record 458.6 tons, well over four times greater than the seven month total in 2011 which was 103.9 tons, what is far more important is that in the first seven months of 2012 alone China has imported nearly as much gold as the total holdings of the hedge fund at the heart of the Eurozone, elsewhere known simply as the European Central Bank, and just as importantly considering the import run-rate has hardly slowed down in August, which data we will have in a few weeks, it is now safe to say that in 2012 alone China has imported more gold than the ECB's entire official 502.1 tons of holdings.

• Jobs Gauge Carries Election Clout (WSJ)
• Draghi Lured by Fractious EU Leaders to Build Euro 2.0 (Blooomberg)
• Rajoy stance sets stage for EU stand-off (FT)
• China Approves Plan to Build New Roads to Boost Economy (Bloomberg)
• Hollande faces questions on tax pledge (FT)
• Putin Looks East for Growth as Debt-Ridden Europe Loses Sheen (Bloomberg)
• Strike Grounds Half of Lufthansa's Flights (Spiegel)
• The weakest will win in the euro battle (FT)
• Hilsenrath: Fed Economic, Interest Rate Forecasts Will Include 2015 Outlook (WSJ) - because he just figured that out
• Obama Presses Plan for U.S. Resurgence (WSJ)
• Hong Kong to Restrict Sales of Homes at Two Sites to Locals (Bloomberg)
• Drought Curbs Midwest Farm-Income Outlook, St. Louis Fed Says (Bloomberg)

In Rome, the main post office is in a majestic old building with imposing architecture. It was a procession just to buy a few stamps. Stand here, stand there. Take this ticket, fill out this form, print that form. What should have taken 10 seconds took 10 minutes;  the process it took to get there was a real eye opener. They have all these fancy IT systems, but we get the sense that this ‘technology’ just gives the post office a veneer of modernity and sophistication without actually being necessary or adding any value. This is typical of bureaucracy: take a simple task, make it unnecessarily complicated, then spend a bunch of money on technology that makes it even more complicated. Given this experience, Italy has clearly mastered the art of unnecessarily complicating the simple. It’s no wonder they have serious problems paying the bills. Moreover, the country’s demographic challenges indicate the country’s fiscal situation cannot improve. Robust economies are productive… and productivity is typically not associated with the elderly. Italy has one of the world’s oldest populations concurrent with one of the lowest birth rates. This trend drives an unsustainable fiscal quandary: bloated public sector bills with lots of old people to pay pensions to, coupled with a rapidly shrinking population devoid of young workers to pay taxes.

At this point, there can be little doubt that Italy will exit the eurozone... most likely voluntarily. A return to the lira means the Italian government (probably to be headed by Berlusconi once again) would be free to print currency at will. This is the only reasonable solution remaining. When will it happen? Probably sooner than we think.

Today the Chinese stock market did something unthinkable: it plunged to fresh post 2009 lows on news so bad they would have been enough to send the stock markets of such "developed" bizarro economies as the US and Europe limit up. The catalyst, as Bloomberg reports, was that Chinese industrial companies’ profits fell in July by the most this year, a government report showed today, adding to evidence the nation’s economic slowdown is deepening. Income dropped 5.4 percent last month from a year earlier to 366.8 billion yuan ($57.7 billion), the fourth straight decline, National Bureau of Statistics data today showed. That compares with a 1.7 percent slide in June and a 5.3 percent drop in May. What is disturbing is that the slide persisted even as revenue in the first seven months increased 10.6 percent to 50 trillion yuan, today’s report showed. Which means that cost and wage pressures are starting to truly bite Chinese corporations, that the US ability to export inflation to China is much more limited, and that one can forget the PBOC easing monetary conditions any time soon for many of the reasons discussed in the past week. It also means that China is now stuck hoping that Wen Jiabao will at least implement some fiscal stimulus. The reality however, judging by the SHCOMP's reaction, is that the benefit from fiscal programs in China, and everywhere else, is far more limited than monetary policy intervention. End result: SHCOMP down 1.74%,to 2,055, a three year low.

If you haven’t heard yet, the committee which is drafting the platform for next week’s US Republican National Convention has announced that they are including a proposal to return to the gold standard. Big news. Remember, a gold standard is a monetary system in which individual currency units are fixed to an amount of gold held by the government; under a gold standard, the paper money supply cannot be expanded without also increasing the amount of gold on hand. At present, the market value of the federal government’s gold holdings only amounts to about $250 billion which constitutes a mere 2.5% of US money supply. Clearly one of the key risks in this scenario is that the US government would need to acquire as much gold as they can get their hands on, likely through Roosewellian-style gold confiscation, and if so - the safest place for your gold is going to be a snug safety deposit box in a place like Hong Kong or Singapore.

There is a frequent tendency to over state the importance of the Fed and its policies and ignore the primary fundamentals driving the gold market which are what we have long termed the ‘MSGM’ fundamentals. As long as the MSGM fundamentals remain sound than there is little risk of gold and silver’s bull markets ending. What we term MSGM stands for macroeconomic, systemic, geopolitical and monetary risks. The precious metals medium and long term fundamentals remain bullish due to still significant macroeconomic, systemic, monetary and geopolitical risks. We caution that gold could see another sharp selloff and again test the support at €1,200/oz and $1,550/oz. If we get a sharp selloff in stock markets in the traditionally weak ‘Fall’ period, gold could also fall in the short term as speculators, hedge funds etc . liquidate positions en masse. To conclude, always keep an eye on the MSGM and fade the day to day noise in the markets.

Gold’s remonetisation in the international financial and monetary system continues.  LCH.Clearnet, the world's leading independent clearing house, said yesterday that it will accept gold as collateral for margin cover purposes starting in just one week - next Tuesday August 28th. LCH.Clearnet is a clearing house for major international exchanges and platforms, as well as a range of OTC markets. As recently as 9 months ago, figures showed that they clear approximately 50% of the $348 trillion global interest rate swap market and are the second largest clearer of bonds and repos in the world. In addition, they clear a broad range of asset classes including commodities, securities, exchange traded derivatives, CDS, energy and freight. The development follows the same significant policy change from CME Clearing Europe, the London-based clearinghouse of CME Group Inc. (CME), announced last Friday that it planned to accept gold bullion as collateral for margin requirements on over-the-counter commodities derivatives.  It is interesting that both CME and now LCH.Clearnet Group have both decided to allow use of gold as collateral next Tuesday - August 28th. It suggests that there were high level discussions between the world’s leading clearing houses and they both decided to enact the measures next Tuesday.  It is likely that they are concerned about ‘event’ risk, systemic and monetary risk and about a Lehman Brothers style crisis enveloping the massive, opaque and unregulated shadow banking system.

Whether it is because the CME just did it; or it's all their clients have left; or Gold volatility is lower than EURUSD volatility (9.0% vs 9.6% in last 3 weeks); or they see the painting on the wall of Draghi's grand-plans, the LCH-Clearnet just announced that as of August 28th, unallocated gold will be accepted as collateral for margin cover purposes. This now means all the major exchanges accept worthless barbarous relics as collateral - as well as worthless fiat paper 'money'.

• JPMorgan provided rescue financing to Knight (WSJ)
• HSBC hands U.S. more staff names in tax evasion probe (Reuters), HSBC, Credit Suisse Sacrifice Employees to U.S., Lawyers Say (BBG)
• Hong Kong shares slide to two-week closing low, China weak (Reuters)
• Israel Would Strike Iran to Gain a Delay, Oren Says (Businessweek)
• Britain 'threatened to storm Ecuador's London embassy' to arrest Julian Assange (AP)
• You have now entered the collateral-free zone: Spain Said to Speed EU Bank Bailout on Collateral Limits (BBG)
• China Can Meet Growth Target on Positive Signs, Wen Says (BBG)
• Risk Builds as Junk Bonds Boom (NYT)
• Berlin maintains firm line on Greece (FT)
• Brazil unveils $66bn stimulus plan (FT)

While the highly "sophisticated" traders that make up the gold market continue to buy or sell the precious metal based on whether the Fed will or will not do the NEW QE tomorrow (or just because, like Bruno Iskil, they have a massive balance sheet, and can create margin position out of thin air with impunity), China continues to do one thing. Buy. Because while earlier today we were wondering (rhetorically, of course) what China is doing with all that excess trade surplus if it is not recycling it back into Treasurys, now we once again find out that instead of purchasing US paper, Beijing continues to buy non-US gold, in the form of 68 tons in imports from Hong Kong in the month of June. The year to date total (6 months)? 383 tons. In other words, in half a year China, whose official total tally is still a massively underrepresented 1054 tons, has imported more gold than the official gold reserves of Portugal, Venezuela, Saudi Arabia, the UK, and so on, and whose YTD imports alone make it the 14th largest holder of gold in the world. Realistically, by now China, which hasn't provided an honest gold reserve holdings update to the IMF in years, most certainly has more gold than the IMF, and its 2814 tons, itself. Of course, the moment the PBOC does announce its official updated gold stash, a gold price in the mid-$1000 range will be a long gone memory.

Think the US has it bad with its "soaring" gas price, which is now back to $3.75 per gallon? Think again. Here, courtesy of Bloomberg, is a list of the countries whose gasoline cost puts what Americans pay at the pump to shame. In order of descending gas prices, below are the 20 places in the world where one does not want to "fill 'er up."

Think the attempted fake suicide by Bayou Capital's Sam Israel which dominated the headlines for a few days in 2008 was strange? You ain't seen nothing yet: as the following excerpt of Octopus, The Secret Market And The World’s Wildest Con by Guy Lawson via the Daily Mail explains, that was merely the anticlimatic culmination of an amazing tale of bogus London traders, 'secret' Bond markets, frontrunning the Fed, fake CIA and MI6 spies, ponzi schemes and staged murders.

Over the past month America's ever vigilant law enforcers have taken to task not one but two foreign (domestic bank lobbies are sufficiently large to make Congress muppets perfectly eager to look the other way as noted previously) banks: HSBC and now Standard Chartered, for money laundering. Yet, when it comes to the true elephant in the room, which is not foreign and is fully domestic, they continue to ignore events such as this one just described by the Wall Street Journal: "A Florida home that originally listed for $60 million has sold for $47 million, a record for a single-family house in Miami-Dade County. The home, in Indian Creek Village, had been on the market since early 2011, when construction was still being completed. The asking price was reduced to $52 million this year." And the punchline: "The identity of the buyer, a foreigner who purchased the home in the name of a U.S.-based limited-liability company, couldn't be learned." In other words a foreigner who may or may not have engaged in massive criminal activity and/or dealt with Iran, Afghanistan, or any other bogeyman du jour at some point in their past, and is using US real estate merely as a money-laundering front perhaps? Sadly, we will never know. Why? As explained before, it is all thanks to the National Association of Realtors - those wonderful people who bring you the existing home sales update every month (with a documented upward bias every single time) - which just so happens is the only organization that actively lobbied for and received an exemption from AML regulation compliance. In other words, unlike HSBC, the NAR is untouchable, even if it were to sell a triplex to Ahmedinejad on West 57th street.

Market players are watching for any details on the ECB’s bond purchasing plans, after bank chief Mario Draghi said last week that the ECB would target short-term debt, fuelling optimism in the bond markets. A Reuter’s poll of economists on Friday highlighted that they expect the Fed to start QE3 in September, but a top Fed official said that a stimulus package so close to a presidential election would not be prudent. Since the ECB conditioned it would buy more government debt from Spain & Italy if they agreed to strict austerity packages, this has decreased pressure on either country to act quickly. The Financial Times interviewed Ken Wattret, a BNP Paribas economist who said: “If people think this will all be sorted in a matter of days, or weeks, then they will be disappointed. We could be in limbo for months.”