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The gold to silver ratio moved up very sharply this week, +4.2%. How did this happen? It was not because of a move in the price of gold, which barely budged this week. It was due entirely to silver being repriced 66 cents lower.

This ratio is now 83.2. It takes 83.2 ounces of silver to buy an ounce of gold. Conversely, it takes 1/83.2oz (about 0.37 grams) of gold to buy an ounce of silver.

This ratio is now within a hair’s breadth of breaking out past the high set on Oct 17, 2008. See the historical graph (based on LBMA silver fix and PM gold fix data, provided by Quandl).

The Historical Ratio of the Gold Price to the Silver Price

Monetary Metals has been predicting a ratio well over 80 for a long time. And for two months, we have been calling for it to go much higher still. Could there be a correction? Absolutely. Could the fundamentals change? We expect they will—at some point. We will call that when we see it.

Speaking of the fundamentals, read on for the only true picture of the gold and silver supply and demand fundamentals…

But first, here’s the graph of the metals’ prices.

        The Prices of Gold and Silver

We are interested in the changing equilibrium created when some market participants are accumulating hoards and others are dishoarding. Of course, what makes it exciting is that speculators can (temporarily) exaggerate or fight against the trend. The speculators are often acting on rumors, technical analysis, or partial data about flows into or out of one corner of the market. That kind of information can’t tell them whether the globe, on net, is hoarding or dishoarding.

One could point out that gold does not, on net, go into or out of anything. Yes, that is true. But it can come out of hoards and into carry trades. That is what we study. The gold basis tells us about this dynamic.

Conventional techniques for analyzing supply and demand are inapplicable to gold and silver, because the monetary metals have such high inventories. In normal commodities,
inventories divided by annual production (stocks to flows) can be measured in months. The world just does not keep much inventory in wheat or oil.

With gold and silver, stocks to flows is measured in decades. Every ounce of those massive stockpiles is potential supply. Everyone on the planet is potential demand. At the right price, and under the right conditions. Looking at incremental changes in mine output or electronic manufacturing is not helpful to predict the future prices of the metals. For an introduction and guide to our concepts and theory, click here.

Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio. The ratio was up substantially. 

The Ratio of the Gold Price to the Silver Price

For each metal, we will look at a graph of the basis and cobasis overlaid with the price of the dollar in terms of the respective metal. It will make it easier to provide
brief commentary. The dollar will be represented in green, the basis in blue and cobasis in red.

Here is the gold graph.

        The Gold Basis and Cobasis and the Dollar Price

The price was basically unchanged. The cobasis (i.e. scarcity) was also just about unchanged. This, by the way, was also true for farther-out contracts although we only show April in this free Report.

We calculate a fundamental gold price of over $1,440. This is the price we would have if the price effect of speculation was subtracted out of the market. Who would be shorting gold at this point? We have an idea of one group that may appear sacrilegious to the gold community.

Let’s get it out of the way. No, it’s not the Powers That Be, the commercial banks, the central banks, or the Illuminati. It’s the silver bugs. Consider the widespread belief—at least outside of readers of this Report—in silver outperformance. Who doesn’t think the ratio should be far lower—50 for starters, on the way to 16 as in Ye Times of Olde?

How would you trade this thesis? You would short gold futures and go long silver futures in equal dollar amounts. This would of course push up the price of silver, and push down the price of gold

We would say to anyone in this trade to be careful, but obviously they don’t read this Report. If you must trade this trend, you should do the opposite: long gold, short silver (and be wary of violent corrections).

How do we explain that the price of gold is 15% below its fundamental, while the price of silver is only at a 2% premium? The silver market is less liquid than the gold market, so equal dollar values of this trade would push the silver price up more than it would push the gold price down.

We have two thoughts on this. One, if most traders think of the metals as commodities—we saw yet another article on this theme today—and if commodities are in a bear market, then the metals are hated. Perhaps silver would be 30% under its fundamental—i.e. about $10—if it weren’t for this trade that alters the relationship of silver to gold.

Maybe. Our other thought is that if this is a new bull market in gold—i.e. a bear market in the dollar—it’s in stealth mode at the moment. Mainstream traders are not excited about gold speculation. They’re not buying gold futures, and may even be short. We are aware of the Commitment of Traders report (COT), showing that non-commercials (i.e. speculators) have a net long position. It’s the commercials (i.e. miners and jewelers) who have the short position. Perhaps it’s the miners putting on more hedges—i.e. selling more of their production forward. Maybe it’s the reduced forward buying of the gold users.

Whatever the factors, one thing’s for sure. The price of gold in the futures market is sagging relative to the price of gold in the spot market.

Our approach is not based on aggregate quantities. That’s why we don’t stop at the COT data. We look at spreads. Spreads inform us in a way that strict quantity analysis cannot. If you doubt this, ask how many COT analysts predicted the price action in silver or the ratio.

This graph shows the rates we observe to carry gold for contracts in 2016 (i.e. basis).

        The Gold Bases for 2016 and LIBOR

These yields are hardly worth anyone’s while to buy gold and sell a future against it, not to mention that the cost of funding this trade is about twice the return on the trade. Carrying gold does not pay, because gold is not abundant enough in the market to be available to carry.

Now let’s look at silver.

The Silver Basis and Cobasis and the Dollar Price

In May silver, we see the scarcity (i.e. cobasis) drops on Tuesday when the price of the dollar falls (i.e. the price of silver rises), and a rising scarcity as silver is becoming cheaper. It’s no surprise that the big rise in scarcity occurred on Friday, with the big drop in price. No question, futures sold off.

Another glance confirms it. Look at the epic drop in the basis. It’s down almost to match the gold basis (though the cobasis is nowhere near what is in gold). To review, here are our definitions:

Basis = Future(bid) – Spot(ask)

Cobasis = Spot(bid) – Future(ask)

The basis is down because the bid on the May contract is being pressed down. Silver—at this price—is no longer so abundant. The basis is well below LIBOR. However, it’s not particularly scarce. The ask on the May contract is still strong, still being lifted by buying pressure.

Last week, we showed a picture of “icicles” dripping on the chart of spot silver.

This is in contrast to the futures chart. First, thanks to several folks who wrote to say that these are usually called “shadows”. We used the term icicle because of its connotation of dripping down. We believe that the cause is that metal is being sold, pushing the price down. But then that creates an actionable arbitrage to carry silver. So the market makers buy spot and sell the future. This does two things. One, obviously, it records a trade in the spot market at ask price and lifts the ask. Two, it presses the bid price in the futures market.

If this is correct, then silver is intermittently abundant. At times when there’s selling of metal in the spot market, it’s abundant enough to go into the warehouse. At other times, and we’ll see more of this if the price falls further, it’s not so abundant.

The fundamental price of silver fell about a nickel this week. The market price is much closer to the fundamental now.

This brings us to the ratio. The fundamental on the ratio hit over 100 this week.

What does it mean that the market ratio is just about to break out past its 2008 high, while the fundamental is predicting we could hit the record set in 1991? Ironically, the gold-silver ratio is showing something that most mainstream signals cannot.

The seasonally adjusted unemployment number looks brilliant at under 5%. The S&P 500 index of stocks is only about 10% off its highs from the first half of last year. Sure, there’s that epic collapse in the price of crude oil and other commodities, but pay no heed. Cheap oil means cheap gas which gives money back to consumer who can spend spend spend our way to prosperity.

The gold to silver ratio is showing us that the junior money is getting cheaper relative to the senior money. It is showing us that the metal which has industrial demand as well as monetary is falling relative to the metal whose demand is entirely monetary. It is also showing us that tightening credit conditions are starting to matter. So far as silver is concerned, credit conditions today match those which existed in October 2008.

 

© 2016 Monetary Metals

via Zero Hedge http://ift.tt/1QFOiS0 Monetary Metals

Authored by StraightLineLogic.com's Robert Gore, via The Burning Platform blog,

The populist revolt fueling non-mainstream political movements in both Europe and the US flows from a single source: you can not fool all the people all the time. The central lie of our time is that governments can and should forcibly assume control of individuals’ lives, in the name of vague and always shifting greater goods. The Command and Control Futility Principle holds that governments and central banks can control one, but not all variables in a multi-variable system. The number of variables global governments and central banks have arrogated to their purported control has grown beyond measure. Breakdowns are visible everywhere, and as those failures exact their ever-increasing toll on the masses, the masses are pushing back.

The last financial crisis was a watershed. Capitalism’s rough justice was obviously, and gallingly, not allowed to play out. Favored financial institutions didn’t face the consequences—insolvency and bankruptcy—of their promotion of various bubbles and their leveraged business models. They were bailed out with taxpayer funds. Especially galling was that they knew they were going to be bailed out. More salt on the wound: improvident homeowners and housing speculators who took on too much mortgage debt were, other than a few spotty government programs, not bailed out or even offered appreciable relief. Since the crisis passed, banks have operated on the assumption they will be bailed out again during the next crisis. Despite all the hype about improved capital ratios and cleaned up loan books, fractional reserve banking is still fractional reserve banking; a leveraged business model that is wiped out if enough loans and speculations go bad.

Still more salt: despite unprecedented government debt and spending, new programs, particularly Obamacare, central bank debt monetization, and ultra-low interest rates, the purported recovery is the weakest on record, with the labor force participation rate at a multi-decade low, the number of people on food stamps recently reaching a record high, and real incomes back where they were in the 1970s. Those ultra-low interest rates have destroyed the incentive to save and forced retirees back into the workforce (the one group whose labor force participation rate has increased), but provided cheap funding to the carry-trade set, stock options-laden corporate executives, and Silicon Valley moguls. Their trophy art, cars, mansions, and spouses grace the media. That’s beyond salt, it’s rubbing people’s noses in it.

The messes the globalist powers that be have made outside their jurisdictions are even larger than the ones inside. Led by the US, the Western powers have bestowed unending chaos on the Middle East and Northern Africa. They have achieved none of their goals, (see “How To Defeat Your Enemies”) but have created massive blowback with the spread of terrorism and the refugee inundation of Europe. Not only have the war-torn lands not been reordered along liberal democratic lines, but mountains of money and barrels of blood continue to be spent in perpetual war. Meanwhile, ordinary citizens in Western homelands, not the elites, are left to contend with terrorist attacks, refugees burdening already strained social welfare systems, and obnoxious and illegal behavior by some of the new entrants. The elites shun even acknowledging these problems.

It comes as a surprise only to the elites and their media mouthpieces that the peasants are revolting, tired of their prevarication, arrogance, and ineptitude. Don’t, however, expect them to pay attention to anything so insignificant as the popular will; they won’t go gentle into that good night. In the US, the establishment can live with Hillary, and if either Trump or Sanders—the revolution’s candidates—wins, the new president will soon learn who actually runs the government. Or he will have an unfortunate accident or heart attack. However, the Empire is leaving nothing to chance; it has already initiated a preemptive counterattack.

The counterattack has three overlapping fronts: war, the economy, and civil liberties.

“The Quagmire to End All Quagmires” stated that “the US faces the danger of being dragged into World War III.” That phrasing may have been an error (SLL reserves the right, in perpetuity, to make mistakes, see “On Failure”). The US government most likely won’t get “dragged” into World War III; it will probably initiate it. If Turkey and Saudi Arabia invade Syria, assume they’ve been green-lighted by the US government, which will join them in the carnage.

As the economy goes down in flames, central bankers and the usual totalitarian creeps are embracing negative interest rates and bans on cash. Negative interest rates self-evidently destroy the incentive to save, the foundation of honest capitalism and progress. Many commentators have pointed out that negative rates lead to an increased demand for zero return cash, so the monetary Dr. Strangeloves have to ban it to drive money into the banking system. Although negative interest rates are patently absurd and counterproductive, always strong selling points for the Strangeloves, the real reason for locking money in the banking system is to prevent a systemic run. As in the last crisis, on a mark-to-market basis the leveraged banking system—with the largest US and European banks still massively exposed to derivatives—will be recognized as insolvent and subject to a run unless money is kept locked in the banks and expropriated.

This assault on financial freedom goes hand in hand with the war against civil liberties, a specious battleground in the concocted “War on Terrorism.” The mainstream media and even some of the non-mainstream blogosphere have been filled with articles about the “complexity” of the Apple-FBI standoff on encryption. The word “complexity” is often a tip-off that someone’s about to pull an intellectual fast one.

Encryption is simple. It’s one of those issues most people dread: an either-or. Either one’s computer communications are encrypted and safe from prying eyes, or they are not. There is no middle ground, and Apple is ostensibly cutting its throat asking Congress, of all people, to come up with one. Encryption that has been compromised, for any reason, is useless. At Apple and the rest of Big Tech’s behest an encryption “compromise” will emerge that fatally compromises encryption, cementing Big Tech’s partnership with government. Lovers of liberty and privacy will be left searching for quite possibly illegal encryption developed by smaller, guerrilla software outfits.

Many will say that deliberate war, economic destruction, and technological repression are inconceivable; such a strategy is contradictory, counterproductive, depraved, deranged, diabolic, deadly, pathologic, sociopathic, psychotic, and out-and-out evil. All of the above, but if that’s your reaction, read, or reread, “Life, Or Death?” SLL recently posted Matt Bracken’s “Burning Down the House in 2016.” Bracken shares SLL’s forebodings of impending disaster, and it’s an excellent article, but he makes a mistake: granting the destroyers their stated intentions.

The proto-Marxist Jacobins of the French Revolution put it this way: “Out of order, chaos.” But first the Jacobins had to create the chaos, with an artificially engineered grain shortage leading to food riots, which they exploited for their revolutionary ends. Vladimir Lenin put it this way, when told that bread riots were breaking out in Russia: “The worse, the better.” The better for creating the optimal revolutionary conditions. The Black Panthers, revolutionary Marxists of the 1960s, said, “Burn, baby, burn.”

The currently existing social compact has to be burnt to the ground before the new world economic order can be built up from the ashes. This will be as true in 2017 as it was in 1917.

Regardless of the rhetoric—Liberté, égalité, fraternité; Dictatorship of the Proletariat; The Thousand Year Reich; The New World Order—the truth is that the means—destruction and death—are the ends. Psychopaths kill millions of people because…they enjoy killing millions of people. As SLL posited in “Life, Or Death?”, citing Ayn Rand, a malevolent desire to kill others is, at root, a desire to kill one’s self. The slogans, the supposed omelets that justify cracking all those skulls eggs, are dross.

That imparts analytic clarity to the future. When one understands that one’s life is on the line, one must fight with everything one has. Or else.

via Zero Hedge http://ift.tt/1TLRH8m Tyler Durden

A funny thing happens to an index's valuation when you choose not to entirely ignore the companies that have negative earnings (i.e. losses). Ever wondered what the P/E ratio of the Russell 2000 was given that it is full of companies where the 'E' is negative? The answer is simple – and ugly – as The Wall Street Journal exposes, the aggregate P/E of the Russell 2000 is over 200x which perhaps explains the gaping chasm between bond and equity valuations for this highly credit-sensitive cohort.

 

It seems very few 'investors' are willing to read or study reality anymore…

If you go to the “fact sheet” for the Russell 2000 index trying to find the standard PE valuation metric, the only one provided by the index keepers is something called “P/E Ex-Neg Earnings.” The current valuation offered is 19.8, which sounds much more reasonable than the latest raw PE estimate from The Wall Street Journal): 295.81…

That can't be right, right? My friendly asset-gatherer would have warned me.. or CNBC's best and brightest would have raised red flags?

It appears not… So here are 3 charts to show him/them next time they try to pile you into this underperforming index.

As the 'dreaming' divergence between GAAP and non-GAAP (as we noted yesterday) widens ever more and the gap between Small cap earnings (inclusive and exclusive of 'losses' and extraordinary items) explodes…

(in simpler terms, green is the index's earnings when you ignore the companies that have negative earnings; red is inclusive of all companies and aggregating losers and winners – which would you prefer to judge the index's valuation?)

Which explains the surging reality of Russell 2000 P/E valuations…

As Alhambra's Jeffrey Snider previously noted, if more and more small companies have started losing money, which the difference between the current real/raw PE and that figure Russell itself provides more than suggests, there are more than a few implications here.

Which explains why Russell 2000 index remains suspended (on a string of faith and momentum) above the ugly reality that credit markets are prophesying…

 

And given that small cap firms are the most-sensitive to credit market access, this is likely to continue as credit market conditions tighten (even absent The Fed)…

 

 

h/t Randy W

 

via Zero Hedge http://ift.tt/1QeFhlU Tyler Durden

It all started off well-enough: the USDJPY was modestly lower but noting big, then the Yuan was fixed a little less modestly lower – well ok, it was the lowest fixing in 8 weeks confirming China just couldn’t wait for the Shanghai summit to be over – and then suddenly the Chinese market realized what we said earlier in the weekend, namely that with the much anticipated G-20 meeting a complete dud, and with no major stimulus on the horizon, suddenly the trapdoor below Chinese stocks opened and the Shanghai Composite has started the new month tumbling over 4%.

 

With this latest plunge, Chinese stocks are now back to levels last seen in November 2014 when the Chinese “replacement” bubbles (out of shadow banking) was just getting started:

And just in case it wasn’t obvious:

• CHINA STOCKS’ TECHNICAL REBOUND IS OVER: HENGSHENG’S DAI MING

But perhaps even more important as the G-20 fiasco, Shenwan Hongyuan Group analyst Qian Qimin told Bloomberg that “the red hot property mkt may attract more and more fund inflows and investors worry this might divert liquidity from the stk market” which incidentally is precisely what we said earlier this afternoon when observing the latest iteration of the Chinese housing bubble:

To us, there is nothing surprising in this behavior: now that the Chinese stock market bubble has burst, the local population has to find a new asset class which to chase for the next few months, and for the time being that asset is housing.

It also means that Chinese stocks are done for the time being. It remains to be seen how the rest of the world will digest this unpleasant fact.

via Zero Hedge http://ift.tt/1XU2WuG Tyler Durden

Authored by Eric Zuesse,

 

via Zero Hedge http://ift.tt/1Sbbkpk Tyler Durden

Following USD strength last week, China has come back to work after the disappointment of the Shanghai non-accord and weakened the Yuan fix by 0.2% – the most since January 7th.

 

This move follows pressure from offshore Yuan weakness since traders returned from Golden Week – driving the onshore-offshore spread out to its widest since The PBOC stepped in and stomped the shorts.

After a few weeks of stability, it appears China is forced to let the Yuan slip back out to where its CDS (a market it is notr manipulating directly yet) implied it to be after shaking out some weak shorts at the end of January.

Stocks are opening modestly to the downside – following weakness in US from Friday

• *CHINA'S CSI 300 INDEX SET TO OPEN DOWN 0.3% TO 2,939.58
• *CHINA SHANGHAI COMPOSITE SET TO OPEN DOWN 0.4% TO 2,754.81

via Zero Hedge http://ift.tt/1KWdbgi Tyler Durden

Submitted by JP Koning via Moneyness blog,

Negative interests rates are the shiny new thing that everyone wants to talk about. I hate to ruin a good plot line, but they're actually kind of boring; just conventional monetary policy except in negative rate space. Same old tool, different sign.

What about the tiering mechanisms that have been introduced by the Bank of Japan, Swiss National Bank, and Danmarks Nationalbank? Aren't they new? The SNB, for instance, provides an exemption threshold whereby any amount of deposits that a bank holds above a certain amount is charged -0.75% but everything within the exemption incurs no penalty. As for the Bank of Japan, it has three tiers: reserves up to a certain level (the 'basic balance') are allowed to earn 0.1%, the next tier earns 0%, and all remaining reserves above that are docked -0.1%.

But as Nick Rowe writes, negative rate tiers—which can be thought of as maximum allowed reserves—are simply the mirror image of minimum required reserves at positive rates. So tiering isn't an innovation, it's just the same old tool we learnt in Macro 101, except in reverse.

No, the novel tool that has been created is what I'm going to call a cash escape inhibitor.

Consider this. When central bank deposit rates are positive, banks will try to minimize storage of 0%-yielding banknotes by converting them into deposits at the central bank. When rates fall into negative territory, banks do the opposite; they try to maximize storage of 0% banknote storage. Nothing novel here, just mirror images.

But an asymmetry emerges. Central bankers don't care if banks minimize the storage of banknotes when rates are positive, but they do care about the maximization of paper storage at negative rates. After all, if banks escape from negative yielding central bank deposits into 0% yielding cash, this spells the end of monetary policy. Because once every bank holds only cash, the central bank has effectively lost its interest rate tool.

If you really want to find something innovative in the shift from positive to negative rate territory, it's the mechanism that central bankers have instituted to inhibit the combined threat of mass paper storage and monetary policy impotence. Designed by the Swiss and recently adopted by the Bank of Japan, these cash escape inhibitors have no counterpart in positive rate land.

The mechanics of cash escape inhibitors

Cash escape inhibitors delay the onset of mass paper storage by penalizing any bank that tries to replace their holdings of negative yielding central bank deposits with 0%-yielding cash. The best way to get a feel for how they work is through an example. Say a central bank has issued a total of $1000 in deposits, all of it held by banks. The central bank currently charges banks 0% on deposits. Let's assume that if banks choose to hold cash in their vaults they will face handling & storage costs of 0.9% a year.

Our central bank, which uses tiering, now reduces deposit rates from 0% to -1%. The first tier of deposits, say $700, is protected from negative rates, but the second tier of $300 is docked 1%, or $3 a year. Banks can improve their position by converting the entire second tier, the penalized portion of deposits, into cash. Each $100 worth of deposits that is swapped into cash results in cost savings of 10 cents since the $0.90 that banks will incur on storage & handling is an improvement over the $1 in negative interest they would otherwise have to pay. Banks will very rapidly withdraw all their tier-2 deposits, monetary impotence being the result.

To avoid this scenario, central banks can install a Swiss-style cash escape inhibitor. The way this mechanism works is that each additional deposit that banks convert into vault cash reduces the size of the first tier, or the shield, rather than the second tier, the exposed portion. So when rates are reduced to -1%, should banks try to evade this charge by converting $100 worth of deposits into vault cash they will only succeed in reducing the protected tier from $700 to $600, the second tier still containing the same $300 in penalized deposits. This evasion effort will only have made banks worse off. Not only will they still be paying $3 a year in negative interest but they will also be incurring an extra $0.90 in storage & handling ($100 more in vault cash x 0.9% storage costs).

Continuing on, if the banks convert $200 worth of deposits into vault cash, they end up worsening their position even more, accumulating $1.80 in storage & handling costs on top of $3.00 in interest. We can calculate the net loss that the inhibitor imposes on banks for each quantity of deposits converted into vault cash and plot it:
 

The yearly cost of holding various quantities of cash at a -1% central bank deposit rate

Notice that the graph is kinked. When a bank has replaced $700 in deposits with cash, additional cash withdrawals actually reduce its costs. This is because once the first tier, the $700 shield, is used up, the next deposit conversion reduces the second tier, the exposed portion, and thus absolves the bank of paying interest costs. And since interest costs are larger than storage costs, overall costs decline.

If banks go all-out and cash in the full $1000 in deposits, this allows them to completely avoid the negative rate penalty. However, as the chart above shows, storage & handling costs come out to $9 per year ($1000 x 0.9%), much more than the $3 banks would bear if they simply maintained their $300 position in -1% yielding deposits.

So at -1% deposit rates and with a fully armed inhibitor installed, banks will choose the left most point on the chart—100% exposure to deposits. Mass cash conversion and monetary policy sterility has been avoided.

How deep can rates go?

How powerful are these inhibitors? Specifically, how deep into negative rate territory can a central bank go before they start to be ineffective?

Let's say our central banker reduces deposit rates to -2%. Banks must now pay $6 a year in interest ($300 x 2%). If banks convert all $1000 in deposits into cash, they will have to bear $9 in storage and handling costs, a more expensive option than remaining in deposits. So even at -2% rates, the cash inhibitor mechanism performs its task admirably.

If the central bank ratchets rates down to -3%, banks will now be paying $9 a year in interest ($300 x 3%). If they convert all $1000 in deposits into cash, they'll have to pay $9 in storage & handling. So at -3%, bankers will be indifferent between staying invested in deposits or converting into cash. If rates go down just a bit more, say to -3.1%, interest costs are now $9.30. A tipping point is reached and cash will be the cheaper option. Mass cash storage ensues, the cash escape inhibitor having lost its effectiveness.

The chart below shows the costs faced by banks at various levels of cash holdings when rates fall to -3%. The extreme left and right options on the plot, $0 in cash or $1000, bear the same costs.
 

The yearly cost of holding various quantities of cash at a -3% central bank deposit rate

So without an inhibitor, the tipping point for mass cash storage and monetary policy impotence lies at -0.9%, the cost of storing & handling cash. With an inhibitor installed the tipping point is reduced to -3.1%. The lesson being that cash escape inhibitors allow for extremely negative interest rates, but they do run into a limit.

The exact location of the tipping point is sensitive to various assumptions. In deriving a -3.1% escape point, I've used what I think is a reasonable 0.9% a year in storage and handling costs. But let's assume these costs are lower, say just 0.75%. This shifts the cash tipping point to around -2.5%. If costs are only 0.5%, the tipping point rises to around -1.7%.

This is where the size of note denominations is important. The Swiss issue the 1000 franc note, one of the largest denomination notes in the world, which means that Swiss cash storage costs are likely lower than in other countries. As such, the Swiss tipping point is closer to zero then in countries like the Japan or the U.S.. One way to push the tipping point further into negative terriotry would be a policy of embargoing the largest note. The central bank, say the SNB, stops printing new copies of its largest value note, the 1000 fr. Banks would no longer be able to flee into anything other than small value notes, raising their storage and handling costs and impinging on the profitability of mass cash storage.

Good old fashioned financial innovation will counterbalance the authorities attempts to drag the tipping point deeper. Cecchetti & Shoenholtz, for instance, have hypothesized that in negative rate land, a new type of intermediary could emerge that provides 'cash reserve accounts.' These specialists in cash storage would compete to reduce the costs of keeping cash, pushing the tipping point back up to zero.

The tipping point is also sensitive to the size of the first tier, or the shield. I've assumed that the central bank protects 70% of deposits from the negative deposit rate. The larger the exempted tier the bigger the subsidy central banks are providing banks. It is less advantageous for a bank to move into cash when the subsidy forgone is a large one. So a central bank can cut deeper into negative territory the larger the subsidy. For instance, using my initial assumptions, if the central bank protects 80% of deposits, then it can cut its deposit rate to -4.6% before mass paper storage ensues.

Removing the tipping point?

There are ways to modify these Swiss-designed cash escape inhibitors to remove the tipping point altogether. The way the SNB and BoJ have currently set things up, banks that try to escape negative rates only face onerous penalties on cash conversions as long as the first tier, the shield, has not been entirely drawn down. Any conversion after the first tier has been used up is profitable for a bank. That's why the charts above are kinked at $700.

If a central bank were to penalize cumulative cash withdrawals (rather than cash withdrawals up to a fixed ceiling) then it will have succeeded in snipping away the tipping point. This is an idea that Miles Kimball has written about here. One way to implement this would be to require that the tier 1 exemption, the shield, go negative as deposits continue to be converted into cash, imposing an obligation on banks to pay interest. The SNB doesn't currently allow this; it sets a lower limit to its exemption threshold of 10 million francs. But if it were to remove this lower limit, then it would have also removed the tipping point.

What about retail deposits?

You may have noticed that I've left retail depositors out of this story. That's because the current generation of cash escape inhibitors is designed to prevent banks from storing cash, not the public.

As central bank deposit rates fall ever deeper into negative territory, any failure to pass these rates on to retail depositors means that bank margins will steadily contract. If banks do start to pass them on, at some point the penalties may get so onerous that a run develops as retail depositors start to cash out of deposits. The entire banking industry could cease to exist.

To get around this, the FT's Martin Sandbu suggests that banks could simply install cash escape inhibitors of their own. Miles Kimball weighs in, noting that banks may start applying a fee on withdrawals, although his preferred solution is a re-deposit fee managed by the central bank. Either option would allow banks to preserve their margins by passing negative rates on to their customers.

Even if banks don't adopt cash escape inhibitors of their own, I'm not too worried about retail deposit flight in the face of negative central bank deposit rates of -3% or so. The deeper into negative rate territory a central bank progresses, the larger the subsidy it provides to banks via its first tier, the shield.  This shielding can in turn be transferred by a bank to its retail customers in the form of artificially slow-to-decline deposit rates. So even as a central bank reduces its deposit rate to -3% or so, banks might never need to reduce retail deposit rates below -0.5%. Given that cash handling & storage costs for retail depositors are probably about the same as institutional depositors, banks that set a -0.5% retail deposit rate probably needn't fear mass cash conversions.

So there you have it. Central banks with cash escape inhibitors can get pretty far into negative rate land, maybe 3% or so. And with a few modifications they might be able to go even lower.

via Zero Hedge http://ift.tt/1RyscUQ Tyler Durden

Much to the chagrin of the political establishment, Donald Trump is on the verge of locking up the GOP nomination.

New Hampshire: Trump.

Nevada: Trump.

South Carolina: Trump.

Put simply, if the brazen billionaire locks up Super Tuesday, it’s all over for the field. Here’s a preview of next week’s critical polls via Politico:

Alabama primary; 50 delegates

Don’t be fooled by Gov. Robert Bentley’s endorsement of his colleague John Kasich. This is conservative country. It’s the home of immigration hardliner Jeff Sessions, whose endorsement has been courted by both Cruz and Trump. There have been few polls of the largely rural state, but Trump dominated the most recent one, a December poll funded by state lawmakers that showed Trump with a 20-point edge over Cruz.

Brent Buchanan, an unaligned Republican strategist in Alabama, said he expects the state to mirror the results of South Carolina: a strong Trump win, and a Rubio second-place finish. Buchanan noted that Rubio just earned the endorsement of 31 state lawmakers and Cruz pulled out of an Alabama forum set for Saturday, though Rubio still plans to attend. Anecdotally, he said, energy for Cruz has slid. It could leave Cruz empty-handed if he fails to reach 20 percent support in the state, the minimum threshold for receiving delegates.

Alaska caucuses; 28 delegates

The Alaska caucuses are virtually invisible. The low-population state is so far out of the way, few candidates devoted much time there. One potential factor: Sarah Palin. A longtime Cruz ally, Palin endorsed Trump last month. In a small state like Alaska, where Palin was governor before her vice presidential run in 2008, an endorsement could carry weight. The only poll that included Trump, taken in early January, showed a close race between the mogul and Cruz.

Arkansas primary; 40 delegates

One of the few obvious opportunities on the map for non-Trump candidates is here. The only recent poll shows Cruz with a narrow lead and a second-place tie between Trump and Rubio. Rubio is the beneficiary of a recent endorsement by Gov. Asa Hutchinson, part of a wave of establishment support he received after Jeb Bush dropped out of the race last weekend. Trump has spent time here, though. He held a rally shortly before the New Hampshire primary and he returned Saturday for a rally in Bentonville. He also recently hired Sarah Huckabee, daughter of former Arkansas Gov. Mike Huckabee, as a senior communications adviser.

Georgia primary; 76 delegates

Donald Trump holds massive leads over his rivals in recent polls of Georgia, the second-largest prize on Super Tuesday. It may be the reason that Trump will spend his night of the week in Valdosta. The state also has a 20 percent support threshold for doling out delegates, a dangerous dynamic for Cruz and Rubio who have both floated around that level in recent polls. Rubio recently opened his first office in the state, though Trump and Cruz have had a presence there for a while.

Massachusetts primary; 42 delegates

Trump is poised to run away with a win in Massachusetts. The main question is by how much. A resounding victory that features buy-in from the state’s significant contingent of blue-collar, Reagan Democrat/independent voters is already spooking Democrats about Trump’s strength for the general election. It’s also bad news for Kasich, whose team and supporters hoped his second-place finish in New Hampshire would come with Massachusetts coattails. Kasich is expected to get crushed in the South and hasn’t had the resources to build much of an organization, so he’s been counting on victories on less conservative turf to carry him through Super Tuesday. He won’t find much shelter here though. He will, however, likely pick 

The only Midwestern state on the calendar Tuesday, Minnesota will be a true wildcard. Trump reportedly has limited organization in the state, and the most recent poll there actually puts Rubio and Cruz in a statistical tie with Trump. That might explain Rubio’s recent visit there. He’s in search of any state to notch an outright win, so he’s not swept on Super Tuesday as he was in the early states. Rubio received endorsements last week from two prominent Minnesota Republicans, former Gov. Tim Pawlenty and former Sen. Norm Coleman. Trump didn’t schedule any time in Minnesota over the past week, as he barnstormed the South.

State GOP chairman Keith Downey said Minnesota is one of the few mysteries on the map. He’s urged party officials to prepare for up to twice their record-level of turnout reached in 2008. “I think Cruz, Rubio and Trump might be a little more bunched together in Minnesota, similar to Iowa,” he said. Downey added that Trump, of late, has begun assembling a field team that could help him corral more votes on Tuesday.

Oklahoma primary; 43 delegates

Oklahoma is looking like the “bragging rights” state. That’s the way Party Chairwoman Pam Pollard sees it. Pollard noted that Oklahoma, one of three most conservative states in the country, also holds the first totally “closed” primaries — meaning only voters who registered as Republicans by Feb. 5 can cast ballots. Earlier states and even other Super Tuesday states allow some crossover voting by Democrats or voting by independents.

That means, the winner here can demonstrate he won a stte in which only “Republicans voted for Republicans.” That might explain the late flurry of activity here. Trump was in Oklahoma City on Friday, and Pollard said Rubio would be in the state for two stops on Monday. Cruz, she said, had visited three times and would be back again before Tuesday’s primary.

Polls have shown Trump holding a solid but potentially surmountable lead. The Oklahoman poll put Trump ahead with 29 percent support to Rubio’s 21 percent. According to the State Elections Board, as of Friday afternoon, mail-in absentee ballots in Oklahoma hit 13,600, already significantly outpacing the 10,500 in 2012, and early voting hit 15,700, already beating 2012’s 14,500

Tennessee primary; 58 delegates

The state — whose elongated geography drew candidates due to its overlap with media markets in a slew of surrounding states — is something of an ideological mystery. The state’s governor, Bill Haslam, was reelected resoundingly in 2014, but he drew ire from conservatives during a failed attempt to expand Medicaid. Haslam endorsed Rubio last week. An MTSU poll taken in mid-January showed Trump lapping the field with 33 percent to Cruz’s 17 percent, though more than a quarter of voters were still undecided.

Texas primary; 155 delegates

This is must-win turf for Cruz. In fact, anything other than a huge victory would be a problem for his campaign. Cruz’s path to the nomination revolves around dominance in the South, starting in his home state. If he doesn’t come away from Super Tuesday with a delegate lead, it will raise enormous questions about his viability going forward. Absent that kind of showing, his best hope may be a divided electorate that sends the contest to a floor fight at the July convention. Cruz has shown strength in recent polls, leading by double digits in a new Monmouth University survey.

The state party requires a 20 percent threshold of support for candidates to receive delegates. Trump and Cruz may be the only two who come away with delegates if current polling trends hold.

Vermont primary; 16 delegates

The tiniest pot of delegates up for grabs Tuesday, Vermont hasn’t gotten much attention. But Trump did hold a rally here in January, and Kasich has argued that like Massachusetts, this generally liberal state could be a pickup opportunity for a more moderate candidate. The state’s only recent poll tells a different story. Trump is dominant, and trailed distantly by a second-place Rubio. If these, as well as Massachusetts poll results hold, Kasich could come away winless on the day. The state only doles out delegates to candidates who earn 20 percent support or more — meaning Trump could shut out his rivals if he holds his large lead.

Virginia primary; 49 delegates

Donald Trump held a double-digit lead over Rubio and Cruz here in recent polls of the state. But the state’s impact will be diluted because it doesn’t have a delegate threshold, ensuring that even lower-performing candidates will come away with a share of delegates. Kasich made three stops here last week, and his team has cast Virginia as a state where he could prove sneaky-strong, but polls don’t bear that out. A Roanoke College poll out Friday gives Trump a 23-point edge over Cruz, who is statistically tied with Rubio. Carson and Kasich lag the field with just 8 percent support apiece.

Wyoming convention; 29 delegates

No drama here. Wyoming will send its 29 delegates to the July convention unbound. It holds no presidential preference poll or vote of any kind, a decision shared only by North Dakota and Guam. If the Republican convention becomes a first-ballot nail-biter, these unbound delegates could help tip the balance.

via Zero Hedge http://ift.tt/1LOzeAt Tyler Durden