Monetization

In other words, the ECB’s balance sheet, which backs up the entire EU banking system it essentially a work of fiction. Unless the ECB officials feel like admitting something is an asset or liability, it doesn’t exist.

This is the third and last of three articles we are posting on the price suppression of gold. In the first article we showed that, under mainstream economic theory, the suppression of the gold market is not a conspiracy theory, but a logical necessity, a logical outcome.  Mainstream economics, framed by the Walras’ Law, believes in global monetary coordination which, to be achieved, necessitates that gold, if considered money, be oversupplied. The second article showed, at a very high (not exhaustive) level, how that suppression takes place and how to hedge it (if my thesis is correct, of course). Today’s article will examine the systemic impact of this suppression and test the claim of the gold bugs, namely that physical gold will trade at a premium over fiat/paper gold, commensurate with the credit multiplier created by the bullion banks. (Hint - it is)

Democratic governments in low-growth economies sometimes rely on their central banks to support fiscal policy so as to avoid asking voters to share more of the burden. BNP Paribas' Ryutaro Kono notes that it is the pathology of modern democracies to foist our bills onto future generations and one could argue that the prolongation of our zero-rate regimes and quantitative easing are facilitating this. When this societal weakness is combined with today’s financialized economies, we get a pronounced inclination toward monetization, which could lead to very serious problems. While Governor Shirakawa has described the BoJ as the “frontrunner” in venturing into unknown territory with policies like zero rates and quantitative easing, Kono warns that Japan could also become the frontrunner of outright monetization. This could intensify the dilemma of having to choose between price stability or financial-system stability when inflation actually starts to pick up.

German Chancellor Angela Merkel has walked a tightrope over the last few years of keeping the EU together without infuriating the German populace to the point of having to abandon ship. What happens if she loses her political "balance"?

We posted this chart previously, but it deserves repeating, for one reason: whereas conventional wisdom in the past was the due to the mutual assured trade destruction between China and the US (with China overly reliant on the US consumer and market for its exports, and the US desperate for Chinese purchases of US bonds as a USD-recycling and, more importantly, deficit-funding pathway), perhaps now that exports to the US as a percentage of total Chinese exports have fallen to an all time low, and with Chinese purchases of US bonds stagnant of 18 months in a row as the Fed's monetization of US paper has replaced the marginal Chinese demand, perhaps it is time to rethink the increasingly unstable MAD Nash Equilibrium that exists between the countries: first in trade, and soon in all other aspects of socio-economic relations.

Those who have been following our exclusive series of the Fed's direct bailout of European banks (here, here, here and here), and, indirectly of Europe, will not be surprised at all to learn that in the week ended February 27, or the week in which Europe went into a however brief tailspin following the shocking defeat of Bersani in the Italian elections, and an even more shocking victory by Berlusconi and Grillo, leading to a political vacuum and a hung parliament, the Fed injected a record $99 billion of excess reserves into foreign banks. As the most recent H.8 statement makes very clear, soared from $836 billion to a near-record $936 billion, or a $99.3 billion reserve "reallocation" in the form of cash - very, very fungible cash - into foreign (read European) banks in one week.

The past week brought us history: on Tuesday, GETCO and Citadel's HFT algos were used by the Primary Dealers and the Fed to send the Dow Jones to all time highs, subsequently pushing it to new all time highs every single day of the week, and higher on 8 of the past 9 days: a 5ish sigma event. But there is never such a thing as a free lunch. And here is the invoice: in the past 5 days alone, total Federal Debt rose from$16.640 trillion to $16.701 trillion as of moments ago: an increase of $61 billion in five days, amounting to $198,697,068 for every of the 307 Dow Jones Industrial Average points "gained" this week. Because remember: US debt is the asset that allows the Fed to engage in monetization and as a result, hand over trillions in fungible reserves to banks... mostly foreign banks.

There was a time when the Fed's unofficial mouthpiece, WSJ's Jon Hilsenrath, who eagerly and promptly put to print anything the Fed deemed worthy of leaking to the access journalist, was relevant. Perhaps the only positive side effect with the advent of QEternity, which essentially took away the "surprise function" from the Fed as everyone now knows what will happen in perpetuity or until hyperinflation arrives, whichever happens first, was making such leaks as Hilsenrath completely irrelevant. After all, when the Fed has shown its cards to everyone, even as it keeps doubling down and pulling jokers out of its sleeve, those who "share" the Fed's thoughts have become completely marginalized. Today was one of those days when Hilsy strove to regain some of his former glory releasing the Fed's his take on today's NFP, which said absolutely nothing new. Yes we know even 500K jobs created a month will not end QE, and neither will 1MM, or more: after all the US still has $1+ trillion deficits needing monetization as far as the eye can see. In fact, the only thing remotely useful in Jon's article was at the very end...

With central bank monetization supporting gold prices and fiscal deficits, DoubleLine's Jeffrey Gundlach's latest chart extravaganza contains more than a few charts you will have seen browsing these very pages. From Japanese demographics (and their apparent love of debasement) to US deficits (and US ignorance of them), from structural unemployment to ongoing private-to-public risk transfer, and from the diminishing returns from QE programs to the illusory nature of inflation; the new bond guru, as we noted yesterday, raises more than a few 'doubts' about the new reality in which our markets live - Gundlach fears 'trade protectionism' is coming (and will hurt the global economy); sees monetary easing going on for years (not months); dismisses the 'money on the sidelines' myth by noting that retail involvement is about the same as in 2007; thinks a 2% 10Y is 'reasonable' value; says to avoid banks; likes Silver; thinks the Student Loan debt market is a bubble set to burst; sees the perceived strength in housing as 'overblown'; blows the 'great rotation' meme away - "there can be no net rotation, for every buyer there's a seller"; and is sticking to his long Nikkei, Short S&P 500 trade.

When even Home Depot's Ken Langone is questioning the reality of this rally (CEO of one of the best performing stocks since the Dow last traded here), you have to be a little concerned. However, it is Duquesne's Stanley Druckenmiller's point that with QE4EVA it is impossible to know when this will end but warns that "all the lobsters are in the pot" now as he notes that "if you print enough money, everything is subsidized - bonds, stocks, real estate." He dismisses the notion of any sell-off in bonds for the same reason as the Fed is buying $85 bn per month (75-80% all off Treasury issuance). The Fed has cancelled all market signals (whether these are to Congress or market participants) and just as we did in the 1970s, we will find out about all the mal-investments sooner or later. "This is a big, big gamble," he notes, "manipulating the most important price in all of free markets," that ends one of only two ways, a mal-investment bust (as we saw in 2007-8) or full debt monetization and "off we go into inflation."

As we have been warning for nearly a year, the biggest threat facing China has been the fact that contrary to solemn promises, the problem of persistent, strong and very much relentless real-estate inflation has not only not been tamed but has been first and foremost on the minds of both the PBOC and the local government. After all with the entire "developed" world flooding the market every single day with countless billions in new cheap, hot money, it was inevitable that much of it would end up in the mainland Chinese real estate market. And since both the central bank and the politburo are well aware that the path from property inflation to broad price hikes, including the all critical to social stability pork and other food, is very short, it was inevitable that the issue of inflation would have to be dealt with eventually. Tonight is that "eventually", when following news from two days ago that yet another Chinese PMI indicator missed, this time the Services data which slid from 56.2 to 54.5, the government announced its most aggressive round of property curbs yet. The immediate result was that the Shanghai Stock Exchange Property Index slumped by a whopping 9.3%, the steepest drop since June 2008, and pushing it down to -11% for the year. The weakness also spread to the broader market, with the Composite closing down 3.65% the biggest drop in months, and now just barely positive, at +0.2%, year to date. We expect all 2013 gains to be promptly wiped out when tonight's risk off session resumes in earnest.

Even as the gargantuan $1+ trillion student debt load has been the bubbly elephant in the room that few are still willing to talk about, there have been until now zero opportunities for a the proverbial highly convex "ABX" short in the student debt space. This of course is the trade that was put on by those who sensed the subprime bubble is about to pop in early/mid 2007 and made billions as the yield chasers were summarily punished one by one as first New Century blew up, and then everyone else. Yet while one was able to buy synthetic "hedge" exposure with limited downside and unlimited upside (by shorting synthetic index spreads) in subprime, so far the only way to be bearish on student debt has been to short the equity of various private sector lenders - a trade with very limited upside and unlimited downside, and which in the current idiotic New Normal is more likely to leave one insolvent and crushed in a smoldering heap of margin calls following yet another epic short squeeze as GETCO's stop hunting algo run amok. This may be about to change. As WSJ reports, SecondMarket Holdings, the private-market securities trading firm best known for allowing numerous overzealous fans to buy FaceBook at moronic valuations, on Monday "will roll out a platform allowing lenders to issue securities backed by student loans directly to investors." 

Its been three long years for the 'net' speculative futures, options, and ETF holders of gold who have been reducing their exposure to the precious metal. Three long years of hearing day after day that "gold's day is done" or some other perspective that stands in the face of reckless government deficit expansion and morose monetization by all the world's central banks.Three long years and hedgies are the least exposed in years to GLD. Three long years because, as the chart below shows extremely clearly, they simply don't appear to count at the margin. The total disconnect as paper gold positioning - ETF holdings and net futures/options speculative positioning -  has had no correlation with the price of Gold since August 2010 when the world started anticipating QE2 (and beyond). With global central banks expanding their balance sheets and many governments still increasing their gold holdings, perhaps this is the clearest indication of a rotation from paper gold to physical we can see. Furthermore, it appears the current slowdown is similar to each of the past surges post major Fed action, and arguably, as central bank balance sheets remain bloated (though in the short-term thanks to LTRO repayment the gross USD-based balance is fading marginally) - the fact that the Fed has promised QE4EVA implies the ever-expanding growth of fiat will support gold prices implicitly.

From “I’m appalled that two clowns have won” in Italy to fear

That the policies of central states and banks have led to one disastrous asset bubble after another over the past 15 years is undeniable. This poses the question: is this serial bubble-blowing intentional, or are the bubbles merely unintended consequences of the neoliberal, neofeudal model of financialization that dominates global finance? The answer boils down to this: inflate assets or die. Inflating phantom assets to collateralize expanding debt is failing due to diminishing returns on stimulus, zero-interest rates, money-printing and monetization of Federal debt.