The Fed is caught between a rock and a hard place. If they inflate, they risk the danger of initiating a damaging and deleterious trade war with creditors who do not want to take an inflationary haircut. If they don’t inflate, they remain stuck in a deleveraging trap resulting in weak fundamentals, and large increases in government debt, also rattling creditors. The likeliest route from here remains that the Fed will continue to baffle the Krugmanites by pursuing relatively restrained inflationism (i.e. Operation Twist, restrained QE, no NGDP targeting, no debt jubilee, etc) to keep the economy ticking along while minimising creditor irritation. The problem with this is that the economy remains caught in the deleveraging trap. And while the economy is depressed tax revenues remain depressed, meaning that deficits will grow, further irritating creditors (who unlike bond-flipping hedge funds must eat the very low yields instead of passing off treasuries to a greater fool for a profit), who may pursue trade war and currency war strategies and gradually (or suddenly) desert US treasuries and dollars. Geopolitical tension would spike commodity prices. And as more dollars end up back in the United States (there are currently $5+ trillion floating around Asia), there will be more inflation still. The reduced global demand for dollar-denominated assets would put pressure on the Fed to print to buy more treasuries.
Senate Throws The Book At HSBC Accusing It Of Massive "Money Laundering And Terrorist Financing", No Comment On NAR Money Laundering YetSubmitted by Tyler Durden on 07/16/2012 18:30 -0400
Just because there is already an overflow of confidence in the financial system, here comes the Senate's Permanent Subcommittee On Investigations with a 340 page report detailing how HSBC "exposed the U.S. financial system to a wide array of money laundering, drug trafficking, and terrorist financing risks due to poor anti-money laundering (AML) controls." Of course, since HSBC is one of the world's largest banks, what it did was not in any way unique, and it is quite fair to say that every other bank has the same loose anti-money "laundering" provisions. What HSBC was likely most at fault for was not providing sufficient hush money to the appropriate powers in the highest US legislative administration. But at least tomorrow we will have yet another dog and pony show, accusing that HSBC did what the NAR does every single day. Because let's not forget that the National Association of Realtors lobbied for and received a waiver for anti-money laundering provision regulations: after all how else will US real estate remain at its current elevated levels if not for the drug, blood, and fraud money from various Russian, Chinese, and petrodollar kingpins, mafia bosses and otherwise rich people who need to launder their money in the US, in the process keeping Manhattan real estate in the stratosphere? But one can't possibly pursue the real truth if it just may impair the fair value of that backbone of honest, hard-working US society: still massively overpriced housing in a world in which those who need mortgages will never get them.
By now it really, really should be obvious. While the insolvent "developed world" is furiously fighting over who gets to pay the bill for 30 years of unsustainable debt accumulation and how to pretend that the modern 'crony capitalist for some and communist for others' system isn't one flap of a butterfly's wings away from full on collapse mode, China is slowly taking over the world's real assets. As a reminder: here is a smattering of our headlines on the topic from the last year: ""World's Second (China) And Third Largest (Japan) Economies To Bypass Dollar, Engage In Direct Currency Trade", "China, Russia Drop Dollar In Bilateral Trade", "China And Iran To Bypass Dollar, Plan Oil Barter System", "India and Japan sign new $15bn currency swap agreement", "Iran, Russia Replace Dollar With Rial, Ruble in Trade, Fars Says", "India Joins Asian Dollar Exclusion Zone, Will Transact With Iran In Rupees", 'The USD Trap Is Closing: Dollar Exclusion Zone Crosses The Pacific As Brazil Signs China Currency Swap", and finally, "Chile Is Latest Country To Launch Renminbi Swaps And Settlement", we now get the inevitable: "Central bank pledges financial push in Africa." To summarize: first Asia, next Latin America, and now Africa.
Peak oil is a phenomenon many will be aware of – peak gold remains a foreign concept to most. Peak gold is the date at which the maximum rate of global gold extraction is reached, after which the rate of production enters terminal decline. The term derives from the Hubbert peak of a resource. Unlike oil and silver, which is destroyed in use, gold can be reused and recycled. However, unlike oil gold is money, a store of value and a foreign exchange reserve and gold is slowly being remonetised in the global financial system and indeed may soon play a role in a new international monetary system. Ore grades have fallen from around 12 grams per tonne in 1950 to nearer 3 grams in the US, Canada, and Australia. South Africa's output has halved since peaking in 1970. Peak gold may not have happened in 2000. Nor may it have happened in 2011. However, the geological evidence suggests that it may happen in the near term due to the increasing difficulty large and small gold mining companies are having increasing their production. The fact that peak gold may take place at a time when the world is engaged in peak fiat paper and electronic money creation bodes very well for gold’s long term outlook.
With minutes left until the output of the =RAND() cell better known as China GDP is announced to the world, the US has decided not to wait and take matters into its own hands. Just as an FYI to all countries out there, this is how you escalate a simmering trade war right into the next level:
FBI probes Chinese telecom giant ZTE over alleged sale of U.S. technology to Iran - RTRS
You mean to say that those same Chinese who have had bilateral, USD-bypassing relations, with Iran, and who got a direct exemption from the Iran oil export embargo from Hillary herself, have been playing by their own rules? You have to be kidding. And now what: the US will sell the $1.2 trillion in Chinese debt is owns? Oh wait...
A lack of transparency, a lack of enforcement of law and a compliant media which failed to ask the hard questions and do basic investigative journalism led to the price fixing continuing and the manipulation continuing unchecked on such a wide scale for so long - until it was exposed recently. Similarly, the gold market has the appearance of a market that is a victim of “financial repression”. Given the degree of risk in the world – it is arguable that gold prices should have surged in recent months and should be at much higher levels today. The gold market has all the hallmarks of Libor manipulation but as usual all evidence is ignored until official sources acknowlege the truth. However, like LIBOR the gold manipulation 'conspiracy theory' is likely to soon become conspiracy fact. It will then – belatedly - become accepted wisdom among 'experts.' Experts who had never acknowledged it, failed to research and comment on it or had simply dismissed it as a “goldbug accusation.” Financial repression means that most markets are manipulated today - especially bond and foreign exchange markets.
Josh Barro of Bloomberg has an interesting theory. According to him, conservatives in modern day America have become so infatuated with the school of Austrian economics that they no longer listen to reason. It is because of this diehard obsession that they reject all empirical evidence and refuse to change their favorable views of laissez faire capitalism following the financial crisis. Basically, because the conservative movement is so smitten with the works of Ludwig von Mises and F.A. Hayek, they see no need to pose any intellectual challenge to the idea that the economy desperately needs to be guided along by an “always knows best” government; much like a parent to a child. CNN and Newsweek contributor David Frum has jumped on board with Barro and levels the same critique of conservatives while complaining that not enough of them follow Milton Friedman anymore.
To put this as nicely as possible, Barro and Frum aren’t just incorrect; they have put their embarrassingly ignorant understandings of Austrian economics on full display for all to see.
After surging away from risk-assets into Friday's close (only to revert yesterday) and once again surging into yesterday's close, broad derisking among most risk-assets finally saw US equities catching-down to that reality in the short-term today - as they broke the EU-Summit/Spain-Bailout/Greek-Election shoulder and ended comfortably below the 50DMA. Short-end Treasury yields made new record lows as belly to long-end all fell notably close to those record lows (with 10Y back under 1.50% and 30Y under 2.60%). The USD rallied back from a 0.3% loss on the week to a 0.1% gain - thanks mostly to EUR's new 2Y low at 1.2235 intraday and AUD weakness (as JPY remains better on the week - more carry unwinds). Commodities plunged - far exceeding the USD-implied moves - with WTI down over 3% from yesterday's highs and Gold and Silver in sync down around 1% on the week. Staples and Utilities were the only sectors holding green today (marginally) as Industrials, Materials, and Energy (all the high beta QE-sensitive sectors) took a dive. It seems the message that no NEW QE without a market plunge is getting through and the reality of a global slowdown looms large. Credit outperformed (though was very quiet flow-wise) but HYG underperformed - cracking into the close - as it just seems like the most yield-chasing 'technicals-driven' market there is currently. Slightly below average volume and above average trade size offers little insight here but a pop back above 19% in VIX (and a 2-month flat in term structure), a rise in implied correlation, a rise in systemic cross-asset class correlation, and the leaking negatives of broad risk assets suggest there is more to come here (especially given the BUBA's comments this morning and a lack of real progress in Europe). The ubiquitous late-day ramp saw aggressive trade size and volume (with a delta bias to selling) as it remained far below VWAP.
There are those who say gold may go to $10,000 or to $0, or somewhere in between; in a different universe, they would be the people furiously staring at the trees. For a quick look at the forest, we suggest readers have a glance at the chart below. It shows that just in the first five months of 2012 alone, China has imported more gold, a total of 315 tons, than all the official gold holdings of the UK, at 310.3 according to the WGC/IMF (a country which infamously sold 400 tons of gold by Gordon Brown at ~$275/ounce).
The last time the US navy sent three aircraft carriers into the Arabian Sea/Persian Gulf was just a few short weeks before WTI broke above $110, and aggressive military tensions, coupled with concerns of an imminent invasion of Iran by Israel and/or 'others', were running high. Then summer arrived, as did the need to lower the price of gas and crude ahead of a veritable cornucopia of central banks easing into June and July, not to mention the need to keep gas as low as possible into the July 4th holiday. Now that the peak summer months are behind us this is all changing, and 4 months ahead of the presidential election, the need to have the "Wag the Dog" put option to round up the troops, not to mention votes, has arrived, as has the need to return to an outright aggressive military stance where Iran is concerned. Which is why we were not very surprised to learn that that Middle East veteran aircraft carrier, the CVN-74 Stennis, is going right back into Mordor, a few short months after it came back from its long stint in the Fifth Fleet, and will shortly complete the trio of aircraft carriers stationed within miles of Iran.
A question on the minds of many people today (increasingly those who manage or invest money professionally) is this: How do I preserve wealth during a period of intense official intervention in and manipulation of money supply, price, and asset markets? As every effort to re-inflate and perpetuate the credit bubble is made, the words of Austrian economist Ludwig Von Mises lurk ominously nearby: "There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner, as the result of a voluntary abandonment of further credit expansion, or later, as a final and total catastrophe of the currency system involved." Because every effort is being made to avoid abandoning the credit expansion process -- with central banks and governments lending and borrowing furiously to make up for private shortfalls -- we are left with the growing prospect that the outcome will involve some form of "final catastrophe of the currency system"(s). This report explores what the dimensions of that risk are.
European equities are seen firmly in the green at the North-American crossover, with outperformance noted in the peripheral bourses. Overnight news from the Eurogroup has confirmed that the EFSF/ESM rescue funds will be given the powers to intervene in the secondary bond markets, easing sentiment towards the European laggard economies. Gains are being led by a particularly strong technology sector, with the riskier financials and basic materials also making solid progress. Asset classes across the board in Europe are benefiting from risk appetite, with the Bund seen lower and both the Spanish and Italian 10-yr yields coming below their key levels of 7% and 6% respectively. The moves follow a spurt of activity in Europe with a number of factors assisting the way higher.
More and more Asian nations — led by China and Russia — have ditched the dollar for bilateral trade (out of fear of dollar instability). Tension rises between the United States and Asia over Syria and Iran. The Asian nations throw more and more abrasive rhetoric around — including war rhetoric. And on the other hand, both Obama and Romney — as well as Hillary Clinton — seem dead-set on ramping up the tense rhetoric. Romney seems extremely keen to brand China a currency manipulator. In truth, both sides have a mutual interest in sitting down and engaging in a frank discussion, and then coming out with a serious long-term plan of co-operation on trade and fiscal issues where both sides accept compromises — perhaps Asia could agree to reinvest some of its dollar hoard in the United States to create American jobs and rebuild American infrastructure in exchange for a long-term American deficit-reduction and technology-sharing agreement? So the future, I think, will more likely involve both sides jumping off the cliff into the uncertain seas of trade war, currency war, default-by-debasement, tariffs, proxy war and regional and global political and economic instability.
European equities have been grinding lower throughout the European morning, with basic materials seen underperforming following the release of a multi-month low Chinese CPI figure, coming in at 2.2%, below the expected 2.3% reading. The focus in Europe remains on the Mediterranean periphery, as weekend reports from Spanish press suggest that the heavily weighted Valencia region may be pressed into default unless it receives assistance from the central government. The sentiment is reflected in the Spanish debt market today, with the long-end of the curve showing record high yields, and the 10-yr bond yield remaining elevated above the 7% mark. News from an EU council draft, showing that Spain is to be given extra time to meet its deficit targets did bring the borrowing costs off their session highs, but they do remain stubbornly high at the North American crossover. The gap between the core European nations and their flagging partners continues to widen, as Germany sell 6-month bills at a record low of -0.0344%. As such, the 10-yr government bond yield spread between the Mediterranean and Germany is seen markedly wider on the day.