Category: zerohedge

As reported previously the Bank of Japan, which not even the most optimistic central bank watchers had expected would unleash anything remotely as aggressive to prevent price discovery, stimulate asset prices and boost the exporting of deflation, became the latest central bank who, after a 5 to 4 vote, unleashed the monetary neutron bomb of Negative Interest Rates in the process pulling an anti-Draghi and shocking markets, even if admitting it can no longer boost QE due to previously discussed concerns it would run out of monetizable bonds in the very near future.

The initial market reaction was one of shocked surprise, with the Yen crashing and risk soaring, subsequently followed by disappointment that QE may be now be officially over and the BOJ will be stuck with negative rates, and then euphoria once again regaining the upper hand if only for the time being as yet another central banks does all it can to levitate asset prices at all costs, even if in the long run it means even more deflationary exports from all other banks and certainly China which will now have to retaliate against the devaluation of its “basket” of currencies.

The BOJ’s excuse was simple: everyone else is doing it: as Kuroda said quickly after the NIRP announcement, the BOJ’s monetary policy is “just the same as central banks in the U.S. and Europe,” and “doesn’t target currencies.” Well, it does target currencies, but he is right: it is the same as policy in Europe and the US, where as a reminder, NIRP is coming next.

The Japanese government loved it, of course, since recent Japanese data has been ugly and getting worse, and since it allows Abe to punt all reform policies to the BOJ. Sure enough, moments ago Chief Cabinet Secretary Yoshihide Suga spoke to reporters in Tokyo. He said that the BOJ made the appropriate decision and that he welcomes BOJ’s new method aimed at achieving 2% inflation target, adding that he “can sense the BOJ’s strong determination.” He said that a delay in hitting price target due to factors such as lower oil prices than expected.

A full summary of the BOJ has done comes from Goldman which frankly was even more stunned today than after the BOJ’s Halloween 2014 “Yen massacre”when Kuroda boosted QE. Here is what Goldman said:

BOJ surprises with negative interest rate

 

The Bank of Japan (BOJ) surprised by introducing a negative interest rate of 0.1% at the Monetary Policy Meeting (MPM) on January 28-29, while maintaining its monetary base target and Japanese government bond (JGB) purchasing program. Our base scenario called for additional easing at end-April, with today’s move seen as our risk scenario. The Bank called this move “Quantitative and Qualitative Monetary Easing (QQE) with a Negative Interest Rate” and it was passed with a 5-4 majority vote.

 

We think the BOJ intended to cause a strong announcement effect on the forex market in particular, by implementing the measure Governor Kuroda had explicitly denied the idea of resorting to until now, when financial markets remaining volatile and macro data poor. The Bank said it is prepared to lower the interest rate further into negative territory if it decided this was necessary.

 

In specific terms, the BOJ will introduce a three-tier system for the outstanding balance of each financial institution’s current account at the Bank: a positive interest rate (for the basic balance(1)), a zero interest rate (for the macro add-on balance (2)), and a negative interest rate (for the policy-rate balance (3)).

1. The basic balance refers to the balance accumulated thus far by each financial institution under QQE. The BOJ will continue to apply a positive interest rate of 0.1% to this balance, with the aim of preventing pressure on the earnings of financial institutions.
2. The macro add-on balance is the amount outstanding of the required reserve held by financial institutions subject to the Reserve Requirement System, among others, and will be increased as the QQE program makes progress going forward, using a currently unknown calculation method.
3. The policy-rate balance is the amount outstanding of each financial institution’s current account at the Bank in excess of (1) and (2) above. This balance will increase with new transactions. The BOJ will impose a negative interest rate of 0.1% on this balance.

The Outlook for Economic Activity and Prices (Outlook Report), also released today, cut the fiscal 2016 core CPI outlook to +0.8%, from +1.4% in October, as we expected. It also pushed back the timing for achievement of the 2% price stability target by six months to “around the first half of fiscal 2017,” from “around the second half of fiscal 2016.” It only fine-tuned other forecasts.

 

Governor Kuroda’s press conference will be screened live from 15:30 JST today, and attention is likely to focus on the reasoning that led to the introduction of a negative interest rate at this stage after the BOJ had continued to reject it thus far. The introduction of a negative interest rate could suggest the BOJ is close to its limit for purchases of JGBs.

 

An important reason cited when the BOJ maintained its monetary policy in October last year was the strength of price trends, which it gauges by referring to the CPI index that excludes energy and fresh food prices (new BOJ core CPI). Thus attention is also likely to focus on the logic that led to today’s decision at this stage when that index is still robust at +1.3% in December.

BOJ framework for interest rate on current account

 

BOJ economic and price outlook (as of January 2016)

The BOJ’s quantitative and qualitative monetary easing program

 

 

Some other analyst reactions promptly pointed out the biggest flaw in the BOJ’s action, namely the raising of doubts over policy viability:

Izuru Kato, chief economist at Totan Research in Tokyo:

• Introduction of negative rate gives impression of policy stalemate; isn’t a dramatic turn given asset-purchase target was retained
• There is a limit to how deep negative rate can go; further cut would prompt a reduction in retail deposit rates
• Yields likely to fall, overall economic impact unclear

Satoshi Okagawa, global market analyst at Sumitomo Mitsui Banking Corp. in Singapore:

• Effect of BOJ’s additional easing is uncertain given quantity is kept unchanged
• Likely to have only limited impact over Asian currencies because dollar is more largely used in the region
• Move may ease risk aversion, not turn sentiment completely; cites Nikkei 225 paring earlier gains

Tsutomu Soma, general manager of fixed-income department at SBI Securities in Tokyo:

• Indicates central bank’s strong support for success of Abenomics; weaker yen normally boosts stocks, inflation
• Length of impact depends on how strongly Governor Kuroda intends to stick to the 2% inflation target
• USD/JPY may gradually strengthen toward 124 over next three months

Masafumi Yamamoto, chief currency strategist at Mizuho Securites in Tokyo:

• introducing negative rates, BOJ avoids giving impression that there would be no more policy options
• Likely to eliminate short USD/JPY positions in near term; remains to be seen whether Japan’s negative rates can offset yen appreciation pressure stemming from risk aversion

But the comment of the night came from Credit Agricole’s Valentin Marinov who said, correctly, that the BOJ’s easing is not supportive of risk because it will merely reinvigorates currency wars, in the process pushing the USD stronger and commodities weaker, forcing asset prices even lower. As a reminder this was DB’s argument against more QE by the ECB as well.

More importantly, since “almost 60% of the households’ financial assets are held in deposits. If indeed, the Japanese banks pass on some of the costs from the BoJ’s penalty rate to their depositors, this will result in a negative wealth effect, reducing the purchasing power of the Japanese consumers. Domestic demand should suffer and Japan’s contribution to global growth could decrease further. The BoJ’s measures thus should result in more currency wars and continuing slowdown in global trade and growth.”

Here is his full remark:

BoJ easing to reinvigorate currency wars, not supportive for risk

 

In a surprise move, the BoJ cut to -0.1% the rate applied to a portion of the Japanese banks’ current accounts. In theory, the policy should boost the effectiveness of its QE program by encouraging the banks to spend rather than save the cash they receive in exchange for their JGB holdings. In reality, the measure is aimed at cheapening JPY. Indeed, as in the case of EUR, the negative rates could encourage portfolio and FX reserve diversification out of JPY and boost its attractiveness as a funding currency. 

 

The BoJ actions should lead to further intensification of global currency wars with central banks around the world trying to engineer sustained competitive devaluation against the background of slowing global trade and growth as well as persistent commodity price disinflation. With its latest measures the BoJ will allow Japan to borrow more growth from its trading partners and limit the severity of the imported disinflation.

 

At the same time, the negative deposit rates could weigh on domestic demand and hurt the economy’s growth prospects. This is because almost 60% of the households’ financial assets are held in deposits. If indeed, the Japanese banks pass on some of the costs from the BoJ’s penalty rate to their depositors, this will result in a negative wealth effect, reducing the purchasing power of the Japanese consumers. Domestic demand should suffer and Japan’s contribution to global growth could decrease further. The BoJ’s measures thus should result in more currency wars and continuing slowdown in global trade and growth.

 

JPY depreciated sharply in the wake of the BoJ decision and the downside pressure could persist for now. That said, given that the rate cut could fuel more global currency wars and global growth uncertainty, it need not necessarily support investors’ risk appetite. The risk aversion we had since the start of the year could therefore persist and limit the JPY-losses to a degree. We think that other Asian currencies should remain vulnerable and we like to fade the latest bounce in both NZD and AUD especially given the slew of Chinese data next week.

 

We also think that currencies that are vulnerable to more central bank easing and/ or FX intervention like EUR and CHF should remain attractive selling opportunities. Against the background of raging currency wars, we remain constructive on USD and believe that GBP could be in for a short squeeze ahead of the BoE IR next week.      

And now we await for the PBOC, whose hand has just been forced by the BOJ, to respond and devalue further in the process unleashing even greater, record capital outflows and even more market volatility.

However, the best news in all of the above is that the BOJ’s action takes the world one step closer to the full collapse of the central bank regime as with every incremental expansion of “emergency” policies, with every new “policy error”, the monetary emperors demonstrate how naked and ultimately powerless they have been all along.

via Zero Hedge http://ift.tt/1PJgp8O Tyler Durden

Just minutes before The BoJ is due to release its statement, USDJPY and Nikkei 225 went haywire around 2220ET as Nikkei news dropped a headline about NIRP discussions taking place at The BoJ. This is not the BoJ statement but has sparked chaos in Japanese (and all carry trade linked markets). We can only assume this was some well-placed strawman for The BoJ statement enabling Kuroda to get a glimpse of what is possible.

Total chaos broke out ahead of the BoJ Statement…as Nikkei News dropped this headline…

• *BOJ DISCUSSES NEGATIVE INTEREST RATE POLICY, NIKKEI SAYS

BOJ discusses introduction of negative interest rates today at policy meeting, Nikkei reports.

• Negative rates discussed due to growing concern of downward pressure on Japan economy and CPI because of cheap crude oil, China slowdown: Nikkei

Nikkei 225 is up 500 points on the news, USDJPY +50 pips

 

Some context for that move…

 

Having given up all its gains since the last QQE update…

 

 

G622

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Submitted by Michael Snyder via The Economic Collapse blog,

If there is one thing that Americans can agree on these days, it is the fact that most of us don’t like the government.  CBS News has just released an article entitled “Americans hate the U.S. government more than ever“, and an average of recent surveys calculated by Real Clear Politics found that 63 percent of all Americans believe the country is heading in the wrong direction and only 28 percent of all Americans believe that the country is heading in the right direction.  In just a few days the first real ballots of the 2016 election will be cast in Iowa, and up to this point the big story of this cycle has been the rise of “outsider” candidates that many of the pundits had assumed would never have a legitimate chance.  Donald Trump, Ted Cruz and Bernie Sanders have all been beneficiaries of the overwhelming disgust that the American people feel regarding what has been going on in Washington.

And it isn’t just Barack Obama or members of Congress that Americans are disgusted with.  According to the CBS News article that I referenced above, our satisfaction with various federal agencies has fallen to an eight year low…

A handful of industries are those “love to hate” types of businesses, such as cable-television companies and Internet service providers.

 

The federal government has joined the ranks of the bottom-of-the-barrel industries, according to a new survey from the American Customer Satisfaction Index. Americans’ satisfaction level in dealing with federal agencies –everything from Treasury to Homeland Security — has fallen for a third consecutive year, reaching an eight-year low.

So if we are all so fed up with the way that things are running, it should be easy to fix right?

Unfortunately, things are not so simple.

In America today, we are more divided as a nation than ever.  If you ask 100 different people how we should fix this country, you are going to get 100 very different answers.  We no longer have a single shared set of values or principles that unites us, and therefore it is going to be nearly impossible for us to come together on specific solutions.

You would think that the principles enshrined in the U.S. Constitution should be able to unite us, but sadly those days are long gone.  In fact, the word “constitutionalist” has become almost synonymous with “terrorist” in our nation.  If you go around calling yourself a “constitutionalist” in America today, there is a good chance that you will be dismissed as a radical right-wing wacko that probably needs to be locked up.

The increasing division in our nation can be seen very clearly during this election season.

On the left, an admitted socialist is generating the most enthusiasm of any of the candidates.  Among many Democrats today, Hillary Clinton is simply “not liberal enough” and no longer represents their values.

 

On the other end of the spectrum, a lot of Republican voters are gravitating toward either Donald Trump or Ted Cruz.  Both of those candidates represent a complete break from how establishment Republicans have been doing things in recent years.

Now don’t get me wrong – I am certainly not suggesting that we need to meet in the middle.  My point is that there is absolutely no national consensus about what we should do.  On the far left, they want to take us into full-blown socialism.  Those that support Donald Trump or Ted Cruz want to take us in a more conservative direction.  But even among Republicans there are vast disagreements about how to fix this country.  Establishment Republicans greatly dislike both Trump and Cruz, and they are quite determined to do whatever it takes to keep either of them from getting the nomination.  The elite have grown very accustomed to anointing the nominee from each party every four years, and so the popularity of Trump and Cruz is making them quite uneasy this time around.  The following comes from the New York Times…

The members of the party establishment are growing impatient as they watch Mr. Trump and Mr. Cruz dominate the field heading into the Iowa caucuses next Monday and the New Hampshire primary about a week later.

 

The party elders had hoped that one of their preferred candidates, such as Senator Marco Rubio of Florida, would be rising above the others by now and becoming a contender to rally around.

The global elite gathered in Davos, Switzerland are also greatly displeased with Trump.  Just check out some of the words that they are using to describe him…

“Unbelievable“, “embarrassing” even “dangerous” are some of the words the financial elite gathered at the World Economic Forum conference in the Swiss resort of Davos have been using to describe U.S. Republican presidential frontrunner Donald Trump.

 

Although some said they still expected his campaign to founder before his party picks its nominee for the November election many said it was no longer unthinkable that he could be the Republican candidate.

The truth is that the Republican Party represents somewhere less than half the population in the United States, and today it is at war with itself.  Supporters of Trump have a significantly different vision of the future than supporters of Cruz, and the establishment wing wants nothing to do with either candidate.

A lot of people seem to assume that since Trump is leading in the polls that he will almost certainly get the nomination.

That is not exactly a safe bet.

It is my contention that the establishment will pull out every trick in the book to keep either him or Cruz from getting the nomination.  And in order to lock up the nomination before the Republican convention, a candidate will need to have secured slightly more than 60 percent of all of the delegates during the caucuses and the primaries.

The following is an excerpt from one of my previous articles in which I discussed the difficult delegate math that the Republican candidates are facing this time around…

It is going to be much more difficult for Donald Trump to win the Republican nomination than most people think.  In order to win the nomination, a candidate must secure at least 1,237 of the 2,472 delegates that are up for grabs.  But not all of them will be won during the state-by-state series of caucuses and primaries that will take place during the first half of 2016.  Of the total of 2,472 Republican delegates, 437 of them are unpledged delegates – and 168 of those are members of the Republican National Committee.  And unless you have been hiding under a rock somewhere, you already know that the Republican National Committee is not a fan of Donald Trump.  In order to win the Republican nomination without any of the unpledged delegates, Trump would need to win 60.78 percent of the delegates that are up for grabs during the caucuses and primaries.  And considering that his poll support is hovering around 30 percent right now, that is a very tall order.

 

In the past, it was easier for a front-runner to pile up delegates in “winner take all” states, but for this election cycle the Republicans have changed quite a few things.  In 2016, all states that hold caucuses or primaries before March 15th must award their delegates proportionally.  So when Trump wins any of those early states, he won’t receive all of the delegates.  Instead, he will just get a portion of them based on the percentage of the vote that he received.

 

In 2016, more delegates will be allocated on a proportional basis by the Republicans than ever before, and with such a crowded field that makes it quite likely that no candidate will have secured enough delegates for the nomination by the time the Republican convention rolls around.

If no candidate has more than 60 percent of the delegates by the end of the process, then it is quite likely that we will see the first true “brokered convention” in decades.

If we do see a “brokered convention”, that would almost surely result in an establishment candidate coming away with the nomination.  That list of names would include Bush, Rubio, Christie and Kasich.

And if by some incredible miracle either Trump or Cruz does get the nomination, the elite will move heaven and earth to make sure that Hillary Clinton ends up in the White House.

For decades, it has seemed like nothing ever really changes no matter which political party is in power, and that is exactly how the elite like it.

Our two major political parties are really just two sides of the same coin, and they are both leading this nation right down the toilet.

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

As we’ve documented on a number of occasions over the past three or so months, Germans have a newfound love for pepper spray.

In November, we noted that frightened Germans fearing a “foreign invasion” from the Mid-East, were rushing to stock up on what amounts to migrant-be-gone aerosol just in case a refugee should get any designs on trying to get too close.

“There is fear” explains Kai Prase, managing director of DEF-TEC Defense Technology GmbH in Frankfurt, one of the major producers of repellents. “For the past six to seven weeks we have been practically sold out.”

Yes, “there is fear”, and that fear only grew after New Year’s Eve when dozens of women reported being sexually assaulted by “gangs” of drunken “Arabs” in Cologne, among other cities.

The New Year’s incidents triggered even more interest in deterrent technology and before you knew it, Germans were Googling “pepper spray” like there was no tomorrow:

Of course, as we noted earlier this month, pepper spray isn’t much good against a Kalashnikov and besides, mace doesn’t sound like nearly as much fun as a “non-lethal gas pistol,” a replica firearm that shoots tear gas cartridges. 

“People no longer feel safe, otherwise they would not be buying so many products here,” a seller in North-Rhine Westphalia told Deutsche Welle who adds that the seller, like many of his colleagues, has been moving “an average of three times as many alarm, gas, and signal guns as he was prior to the attacks that took place in Cologne on New Year’s Eve.” 

Although you can’t go out and buy an AK-47 in Germany, you can obtain a so-called “small arms permit”, which gives you the right to own all sorts of fun things like the aforementioned gas pistol. For those who aren’t familiar with the weapon, here’s a helpful video (note the 1:57 mark when we get a look at “a person running with a… a club at a person who draws and fires on them”): 

There you go. You can shoot someone in the face and not kill them as long as you “have a spotless record ” when you apply for the permit.

“There has been an increase of at least 1,000 percent or more in Google search queries for gun permits since January,” Felix Beilharz, a social media expert from Cologne told DW.

Brauchen die Menschen mehr Schutz? #waffenschein #pfefferspray und #selbstverteidigung nach #koelnhbf Google sagt ja http://pic.twitter.com/gsnzhXHGJM

— Dejan is Available (@a_placeholder) January 8, 2016

And that’s not all.

Germans are also getting more interested in self defense courses. “Currently, those offering self-defense courses are also profiting from the concerns and fears of many German citizens. Many such courses are booked out for the next several weeks – that was not the case a year ago,” DW says.

“Several social media entries tagged with #Koelnbhf (Cologne train station) were advertising “efficient martial arts training,” RT adds.

Here’s a tweet that pretty much sums up the mood in Germany:

Fit und Schlagfertig für den Alltag!
– #Selbstverteidigung und mehr…
Zusatztermine: https://t.co/i3g528ofnw http://pic.twitter.com/XGHFSAkGDf

— Cosimo My (@cosimo_my) January 25, 2016

So perhaps Anders Rasmussen – the prevention specialist at the Danish Crime Prevention Council who we mocked earlier today – was correct to say that a move to make non-lethal deterrents legal “may quickly develop into a sort of armed competition between civilians,” as there does indeed appear to be a non-lethal arms race going on in Germany.

And just like that, Angela Merkel’s move to take in 1.1 million asylum seekers has turned the streets of Germany into the Wild West, where every man, woman, and child is carrying some manner of weapon.

The fine for pepper spraying a would-be assailant in Denmark is 500 kroner. Given the preponderance of Danes who are sneaking away to Germany to buy non-lethal weapons, we wonder what the penalty is for shooting an attacker in the face with a tear gas cartridge at point blank range.

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

Barring some miraculous 8% epic melt-up in the afternoon session – go down as the worst ever January for Chinese stocks. While that is a big enough deal, for now the 24%-plus plunge is the worst of any month since Lehman’s fallout in October 2008. However, it is close… if the Shanghai Composite closes below 2667.50 today, January 2016 will become the worst month for Chinese stocks since 1994… quite a feat in a “stable” and manipulated market.

Worst January ever…

 

“Worse since Lehman” or Worst in 21 years?

 

2667.50 is all that matters…

 

Charts: Bloomberg

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

If Fox asked Facebook to tabulate the number of viewers at tonight’s GOP republican debate in Des Moines, Iowa, the answer would probably be over 1 billion. The reality is that most potential viewers will likely be hijacked to tonight’s “alternative” event, the one taking place just a few miles away at Drake University where Donald Trump – why is boycotting the Fox News debate – will address Wounded Warriors & Veterans but what he will really do is school the rest of the republican field how to control the media narrative and to remain constantly in the spotlight especially when he is nowhere near it.

As WSJ writes, Donald Trump‘s attempt to steal some of the limelight from the Fox News debate drew thousands to the campus of Drake University, a few miles away from where the official debate is being held. The line included hundreds of Drake students, many of whom said they were just curious to see Mr. Trump up close, but also some students who plan to caucus for the Republican front-runner on Monday night. However, many of the young people outside won’t get the chance to see him because the building only holds 700 or so people, leaving many standing outside in the cold.

Meanwhile, as Trump does his event, seven candidates are set to debate, starting at 9 p.m. ET. Here is what the lineup looks like (including Trump).

Few will watch this particular event.

Live webcast below from the event spearheaded by the republican who is now leaps and bounds ahead of the competition in Iowa, New Hampshire and South Carolina.

via Zero Hedge http://ift.tt/1SN1Z7U Tyler Durden

Submitted by Jeffrey Snider via Alhambra Investment Partners,

The simple fact of the matter is that gold is no longer money and hasn’t been treated that way in decades. It is a frustrating and often woeful outcome, but deference isn’t a reason to color judgement. As an investment, which is more like what gold has become, it isn’t all that straight, either. Gold behaves in many circumstances erratically; often violently so. In 2008, gold crashed three times; but it also came back (and then some) three times. The metal remains stuck in some orthodox limbo of duality, sometimes acting an investment while at others, more rarely, as almost reclaiming its former status.

The junction of that dyad format is wholesale collateral. It is a difficult and dense topic because it plumbs the very depths of the wholesale arrangement – factors like leasing, swaps and collateralized lending through binary bespoke arrangements. It is there that I think it helps to form the narrative, however, starting by reviewing what the BIS was up to in late 2009 and early 2010. I am going to borrow heavily from an article I wrote in April 2013 that describes the events in question but this is one of those times when you should read the whole thing.

Back in July 2010, the Wall Street Journal caused some commotion when it happened to notice in the annual report for the Bank for International Settlements the sudden appearance of gold swap operations to the tune of 346 tons. Subsequent investigation by media outlets, including the Financial Times, reported that the BIS had indeed swapped in 346 tons of gold holdings from ten European commercial banks. That was highly unusual in that gold swaps are typically conducted between and among central banks.

 

Included in that list of commercial banks were, according to the Financial Times, HSBC, BNP Paribas and Société Générale. The timing of the swaps was pinned down to sometime between December 2009 and January 2010 – just as the world was getting reacquainted with the Greek Republic.

In other words, “dollar” problems had been reborn despite QE1 and ZIRP (and the follow-on programs at the ECB, SNB and elsewhere) because European banks, in particular, had swapped “toxic” MBS collateral for “toxic” PIIGS sovereigns. Now, like MBS before it, even government bonds were becoming non-negotiable in repo (haircuts) and derivative collateral. Stuck not long after the last crisis, banks were in a tight spot since no central bank appeared ready to commit to another great effort so soon risking what they found a fragile but fruitful early revival. Banks then turned to the BIS in what only can be interpreted as great desperation for survivorship.

The amount of physical bullion purchased by private investors in the decade of the 2000’s had ended at custodial accounts in various commercial banks. Some of these investors were discerning and suspicious enough to demand allocated accounts. Some were not. Unallocated gold can get pooled into a house custodial account with rights over custody being retained by the bank, not the investor. In this case, said investor owns not gold, but rather a bank liability payable in gold.

 

Unallocated gold in pooled accounts residing in a bank with growing funding stress makes for a rather easy liquidity target. The gold market offers depth in a broad range of currencies. Gold markets are also very well interconnected, between the physical market in London and various paper markets, particularly the CME in Chicago.

 

In the case of the large gold swap in 2010, the commercial banks accessed dollar liquidity “off-market” since the BIS simply held the bullion in its custody. Being accustomed to holding physical gold, it did have $23 billion, about 1,200 tons already on account, meant no additional hassle. The BIS surely incurred storage and administrative costs, but they would easily be absorbed by the interest rate the banks would pay on this collateralized loan (essentially the gold swap in this case amounted to a dollar denominated loan with gold bullion held as collateral by the BIS).

The reason that customers’ unallocated gold was such an “easy liquidity target” for banks in tight spots was that gold in that position had become a liability of the bank rather than being construed, as it should have under purely monetary terms, in constructive bailment. Unallocated gold was nothing more than another kind of deposit account; you didn’t actually own gold but possessed instead a financial claim on gold through the bank. Under bank liability, the bank may do what it wishes so long as it presumes meaningful care in being able to deliver any physical gold (not specific bars) upon convertibility.

On December 7, 2011, the Financial Times reported that:

Gold dealers said that banks – primarily based in France and Italy – had been actively lending gold in the market in exchange for dollars in the past week

There were rumors (admittedly unsubstantiated to this day) that a large bank (or two) in France was to be declared insolvent on December 8; only a week earlier, on November 30, 2011, the Fed had announced a sudden alteration to its dollar swap lines with five reciprocating central banks, both reducing the cost (OIS +50 instead of OIS +100) but more intriguingly mentioning “temporary bilateral swap agreements so that liquidity can be provided in each jurisdiction in any of their currencies should market conditions so warrant.” Then on December 8, the ECB announced their trillion, the LTRO’s.

On November 30, 2011, the Fed finally relented to unlimited dollar swaps at a low premium (OIS + 50). But still banks were looking to gold leases. So much so that we have no idea at what rates these transactions were occurring. The same Financial Times article cited above quoted “traders” as indicating:

 

“…few, if any, banks were likely to receive the published rates since they have been skewed in recent months by a widespread reluctance among bullion banks to take gold for dollars.”

 

The implication here is that “markets” had no reasonable idea how desperate for dollars some banks had become. It is no surprise in that context that the very day after the Financial Times published that article the ECB announced its massive lending facilities through the LTRO’s. In conjunction with the Fed’s swap lines, the two central banks, coordinating with other central banks, aimed to end the liquidity crisis through massive money stock means.

The relevance of this particularly unnoticed angle in the 2011 re-crisis is the behavior of gold since that point. As noted a few days ago, gold has only come lower as if to signal the “deflationary” impulse of the imploding eurodollar; and that makes sense as that particular time and flow of circumstances was in many ways convincing that there was never going to be a possible pathway to recreating or revisiting the pre-crisis financial system – as every central bank intended and still intends to this day.

What we don’t know, probably can’t know, is how much gold was traded and where it all ended up during that time. In the more traditional setup of gold swaps, the practical effect was for producers to dislodge stored gold sitting in central bank vaults around the world. It was win-win for central banks because they got to both actualize gold into an interest-earning investment while also, through quite dubious accounting rules, never admitting that gold was gone (all activity contained under a single line item: gold and gold receivables; and you never knew how much was the latter and how little the former).

The 2011 episode with the BIS reversed in many ways the causal flows of physical, assuming it was physical at all. Commercial banks that had been receiving customer deposits of the metal were now turning it over the central bank of central banks out of “dollar” (and euro, likely even euroeuro) desperation. While we can’t figure out where the physical gold ends up, we can at least recognize the fingerprints of the gold collateral/liquidity arrangement in various forms such as the stretching of claims on gold in “physical” markets such as COMEX; the more gold swaps churn physical or its approximates, the more opportunity there was to create “paper supply.”

This is the hard part for those who appreciate real money, as money is itself an asset without liability. But here are banks and central banks abusing gold to turn it into just another agent of rehypothecation – further distorting capitalism’s foundational respect for property rights into more financial terms that obey no such constraint (MF Global being the institution caught at it). I wrote about this in May 2013, explaining why, in general, gold leasing in these kinds of situations is negative on gold price:

The accounting rules are such that the central bank continues to hold “gold” on its books despite the leasing arrangement that moved that actual physical metal into the marketplace. Thus the market has actual gold sold into it while central banks report no loss of supply (under the accounting line “gold and gold receivables”). Since these are opaque transactions, nobody really knows what has been leased out and what actually remains.

 

Gold lending takes a similar form. Banks typically hold client gold in unallocated accounts – this is intentional since unallocated accounts have smaller fees and clients have not been educated as to the legal distinctions. Unallocated gold is a liability of the bank; the client continues to hold title to physical bullion, but that is in the form of a “paper” promise by the bank to deliver future gold. Often, the agreement that creates the unallocated arrangement even allows for the bank custodian to settle the client claim in cash under certain circumstances.

 

Therefore, the bank can use the unallocated metal toward its own purposes, in exactly the same way that prime brokers rehypothecate hedge fund credit holdings in margin accounts. In a gold lending relationship, the bank uses the unallocated gold as collateral for cash (in whichever currency is needed, which is one of the appeals of using bullion for collateral). Now, the gold is in the hands of an intermediary that, apart from any haircut set with the borrowing bank, is at price risk. The cash lending bank will either sell the gold outright, since it only has to replace metal at the end of the agreement, or hedge its collateral position (based on the cost of selling futures).

That would also hold for central bank claims in the prevailing leg of an earlier swap arrangement. Like rehypothecated treasury securities in repo, all that matters is balance sheet ledgers between counterparties agree on balance at the end of the day; each and every day. So long as that happens, there are no cascading triggers that reveal the fractioning.

While my intent in revisiting the gold crash in 2013 was to add to the weight of financial warnings that have occurred almost regularly since then about the fate of the global “dollar” system, it was a ZeroHedge article from yesterday that brought it further into focus – particularly the current unknown (out)flow of physical metal that “somehow” left undisturbed the futures volume (the paper gold). From that article:

This means that the ratio which we have been carefully tracking since August 2015 when it first blew out, namely the “coverage ratio” that shows the total number of gold claims relative to the physical gold that “backs” such potential delivery requests, – or simply said physical-to-paper gold dilution – just exploded.

 

As the chart below shows – which is disturbing without any further context – the 40 million ounces of gold open interest and the record low 74 thousand ounces of registered gold imply that as of Monday’s close there was a whopping 542 ounces in potential paper claims to every ounces [sic] of physical gold. Call it a 0.2% dilution factor.

Is that the anguishing end of years of “dollar” liquidity being literally swapped for physical and paper gold? Much more so the latter? It is, of course, impossible to determine but there are so many corroborating factors that the suggestion is at the very least compelling; and thus why gold has been warning about the eurodollar system since 2013 and really 2011. The fact that gold had so much collateral appeal at that time speaks to that very notion; the artificial MBS “toxic waste” that stood for it during the ravenous runup to 2007 was no sustainable substitute for a small monetary system, let alone the global predicate for global finance and trade.

Pre-2011 (Gold and Comex Cover were highly correlated)

 

Post-2011 (Gold and Comex Cover were almost perfectly anti-correlated)

[ZH: Something 'broke' in the gold complex when China devalued]

To that fact, banks were forced throughout 2007-09 and again in 2011 (2013 too? How about 2015?) to alternate funding means no matter how distasteful (to the eurodollar practitioner, gold stands against all of it). Wholesale banking in its purest distillation is a system that seeks to fraction every kind of liability no matter original intent or even customer intent (banks are the central focus, where their balance sheet and financial resources stand as “money”) – to the point of fractions upon fractions; rehypothecations of rehypothecations. It went so badly that the system seems to have repurposed gold once more, the only asset where fractioning is still sensitive enough to signal the desperation. In other words, if the eurodollar and wholesale banking system had been sliced to such a thin margin again by 2011 so as to so heavily depend on the modern duality of gold, it not only would not survive it literally could not survive. The paper dilution we see now may just be that judgement finally seeking open admission.

via Zero Hedge http://ift.tt/1SN20st Tyler Durden

On Tuesday we learned that Malaysian PM Najib Razak won’t have too much explaining to do domestically when it comes to why Saudi Arabia decided in 2013 to make a $681 million “donation” to his personal bank account.

Najib’s political opponents have accused the PM of deliberately undermining an investigation into where the money came from. The public has also angrily asked for transparency and in August, street protests led by former PM Mahathir Mohamad were held in Kuala Lumpur. “I don’t believe it is a donation,” Mahathir said at the time. “I don’t believe anybody would give [that much], whether an Arab, or anybody.”

No, probably not.

In short, no one is buying Najib’s story except, apparently, Malaysia’s top prosecutor Attorney General Mohamed Apandi who ordered the probe into the transfer closed earlier this week.

Like many other Malaysians, Mahathir has some questions for Apandi and Najib. Here are a few:

• “It seems there was a letter by a Saudi stating that a sum of US$681 million or RM2.08 billion was a donation for the PM’s contribution to the fight against Islamic terrorists. Who is this Arab?”
• “How does he have the huge sum of money to give away?”
• “What is his business?”
• “What is his bank?”
• “How was the money transferred?”
• “What documents prove these?”
• “Just a letter from a deceased person or some non-entity is enough for the A-G?“

And some more:

• “How and when was this done?”
• “We are told the balance is frozen by Singapore. Can Singapore explain the unfreezing and the delivery back to the Saudis?”
• “Or does Singapore also believe in the free gift story, the letter and the Saudi admission?”

All great questions. Questions which will likely never be answered. 

As those who have followed the 1MDB story will recall, the fund has strong ties to Goldman and more specifically to Tim Leissner, chairman of the bank’s Southeast Asia ops. 

1MDB was set up by Najib six years ago and has been the subject of intense scrutiny for borrowing $11 billion to fund questionable acquisitions. $6.5 billion of that debt came from three bond deals underwritten by Goldman and orchestrated by Leissner, who is married to hip hop mogul Russell Simmons’ ex-wife Kimora Lee who, in turn, is good friends with Najib’s controversial wife Rosmah Manso.

What Goldman did, apparently, is arrange for three private placements, one for $3 billion and two for $1.75 billion each back in 2013 and 2012, respectively. Goldman bought the bonds for its own book at 90 cents on the dollar with plans to sell them later at a profit.

Now, just as Najib is cleared by Malaysia’s top prosecutor and amid multiple 1MDB investigations unfolding in other countries, Tim Leissner is taking a leave of absence from Goldman and is leaving Singapore for Los Angeles. 

“Leissner, who has been with Goldman Sachs for almost 18 years and was most recently Singapore-based chairman of its Southeast Asia operations, remains an employee,” Bloomberg reports. “The bank’s dealings with the country’s state-owned investment company, 1Malaysia Development Bhd., drew public scrutiny because of the high fees Goldman was paid.”

“His departure comes as Najib Razak, Malaysia’s prime minister, fights to extricate himself from a donations scandal alleged to be linked to the investment fund, known as 1MDB,” FT adds. “[Leissner’s] close relationships with top officials in Kuala Lumpur produced what one executive described as a ‘golden period’ for the bank.”

The ubiquitous “people familiar with the matter” say Goldman was unhappy with the amount of time Leissner spent in Los Angeles where his wife is busy building a fashion business.

Whether or not Leissner’s leave and decision to high tail it out of Singapore has anything to do with the 1MDB scandal is an open question, but the timing certainly looks curious. 

Incidentally, Leissner will have plenty of places to stay in L.A.

Najib’s stepson and Jho Low (described as a “close family friend”) own a $39 million mansion on Oriole Drive in the Hollywood Hills in Los Angeles, the L’Ermitage Hotel in Beverly Hills, a home in Beverly Hills known as the pyramid house for a gold pyramid in its garden, as well as other properties in the Los Angeles area.

via Zero Hedge http://ift.tt/20wiw1p Tyler Durden

Submitted by Eric Zuesse via Strategic-Culture.org,

On January 21st, George Soros, who has throughout his life been passionately opposed not just to communism but also to Russia, has finally stated in a Bloomberg News interview at the World Economic Forum, that the United States (and possibly the EU, but he says that the EU is in terrible economic shape itself) must now fund a new Marshall Plan for all of Europe, including, this time, even his bête noire: Russia.

However, is he ending, or merely suspending, his lifelong war against Russia? Let’s look at the evidence, including the background for his comments here – the crucial background in order to understand his statement is provided in the links here:

Previously, he had been urging both the United States and the EU to pump variously $20 billion (in some of his articles) to $50 billion (in others) more into Ukraine’s war to seize back control over Ukraine’s former regions of Crimea and of Donbass, both of which had voted overwhelmingly (75 % in Crimea and over 90 % in Donbass) for the democratically elected Ukrainian President, Viktor Yanukovych, whom Obama overthrew on 20 February 2014 in a bloody staged coup whose gunmen were mainly from Ukraine’s two racist-fascist or ideologically Nazi parties and were all paid by the US via laundered funds through the CIA. Those two regions of Ukraine are strongly pro-Russian and anti-Nazi – they were anti-Nazi in World War II, and are anti-Nazi today.

However, now that the US-led effort to re-arm the Ukrainian government that it had installed, and to enable them to go to war yet a second time, attempting to seize (or reabsorb) Crimea and Donbass, has failed, and US President Barack Obama has thus at least temporarily given up in all but rhetoric his determination to enable Ukraine to crush those regions, George Soros is stepping back in.

Soros had, himself, via his International Renaissance Fund, helped to finance the overthrow of Yanukovych. He is now urging that the US (and maybe Europe) help Europe including Russia, to recover from the damages that the US had imposed upon that broader Europe – imposed by means of Obama’s invasions and coups in not only Ukraine but also in the Middle East. (After all, most of the refugees into Europe come from America’s invasions of Iraq, Libya, and Syria, and from the support of jihadists there by America’s Saudi, Qatari, and UAE allies. The refugee-crisis is generated by America and its allies.) Soros says that the fleeing refugees from the Middle East into Europe will break the EU unless stopped, and that US taxpayers (and maybe EU taxpayers) thus now need to fund the salvation of all of those countries which the US – largely at Soros’s own urging and with his help – has all but destroyed. Perhaps he just wants Western taxpayers to bail him out.

His comment attributes, as being the precedent for his current support of a taxpayer-bailout for Europe including Russia, his prior, 1989, support of a bailout of Eastern Europe including Russia. However, at that time, he was looking for public funds to create debts that those then-communist nations would have toward Western taxpayers. His proposal was rejected, because democracy was, at that time, strong enough in the West, so that the public’s rejection of it caused his proposal to be politically impossible to achieve. The situation is drastically different now, after the Harvard Economics Department and George Soros guided the Russian government into a ‘capitalism’ that’s crony-capitalism or «fascism», from which Harvard University and George Soros extracted billions in giveaways of state property from formerly communist countries that were insider-dealt to not only Russia’s and Ukraine’s (etc.) insiders, but also to America’s, including especially Soros himself (and that link is also here). That link presents the great Janine Wedel reporting that, as a result of one particular insider-rigged auction, «H.M.C. [Harvard Management Company] and Soros became significant shareholders in Novolipetsk, Russia's second-largest steel mill, and Sidanko Oil, whose reserves exceed those of Mobil».

Ukraine is one of the countries that was stripped this way, and it more recently was taken over by the United States, with Soros’s help, and stripped even more.

The post-Soros, post-Obama, coup-government of Ukraine is essentially bankrupt after all of their ‘anti-corruption’ verbiage has collided with their total-corruption policies in Ukraine, just as had happened under Yeltsin in Russia, so that, notwithstanding Soros’s urgings for $20B+ of Western taxpayer funds to be contributed to that government, it simply won’t happen. Soros therefore now is urging his new proposal for a «Marshall Plan», not only to get Eastern Europe deeper into debt to Western governments, but, perhaps, also to enable Soros’ own investments in Eastern Europe (including Russia) to turn profits for him. Only with taxpayer assistance can such investments now be made profitable.

That’s the problem with private-investor meddling in foreign policies: governments become controlled by international aristocrats.

*  *  *

Here is the transcript of this brief interview-segment, from a Bloomberg, which cannot be accurately understood without reference to the links that were provided in that restatement here of his statement – those links document the reality behind what he is here asserting:

SOROS: The European Union is in an existential crisis, and it needs to get out of that because of the migration problem [which] is effectively distressing the European Union – it’s falling apart, and that’s a time when you need to have a major initiative, a Marshall Plan. It’s absolutely appropriate. It’s amazing that it comes from Schaivo, who has been one of the proponents of Bundesbank orthodoxy, but I have been in favor of it all along. I was propose[ing] a Marshall Plan for Eastern Europe more than twenty-five years ago [before the end of the USSR], in 1989 in Potsdam, when Potsdam was still in Eastern Germany, and I said this would be a Marshall Plan for Eastern Europe including Russia, and it should be financed by the Europeans for a change, and actually led by the – representative, who started laughing, and the front of the Algemeine [Zeitung] reported that my proposal was greeted with amusement. Now I think this proposal should not be treated with amusement. This should be taken very seriously. It’s going to have a very difficult time passing, because there’s a lot of dissension now, part of the disintegration, but I think it needs public and enthusiastic support. But I think that most people know that something has gone catastrophically wrong and it has to be put right.

 

INTERVIEWER: Is there a danger of break-up. Last year we were worried about Greece, what should we be worried about this year?

 

SOROS: I think Greece is still a problem. It’s the one problem that has no solution, because it has been so messed-up that you can only muddle along. But there is no solution, and actually that problem is now coming to the boiling point again. You can see it on the face of the press, but [it] is not a major problem in the scheme of things.

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

While China’s currency devaluation has, alongside the price of commodities, become one of the two key drivers of market volatility and tubulence around the globe, when it comes to risk, one far more important Chinese metric is the actual amount of capital that leaves the nation.

The reason for this is that as explained over the weekend, in a world where Quantitative Tightening by EMs and SWFs has emerged as a powerful counterforce to Quantitative Easing – or liquidity injections – by developed central banks, what matters for global risk levels is the net effect of these two opposing money flows.

Of all the global “quantitative tighteners”, the biggest culprit is China, which has seen over $1 trillion in reserve selling since the summer of 2014, the direct result of a virtually identical amount in capital outflows.

Furthermore in for a “closed’ Capital Account system like is China, the selling of FX reserves is a direct function of capital outflows, so the only real data needed to extrapolate not only the matched reserve selling and thus Quantitative Tightening, but also the direct impact onglobal risk assets, is how much capital outflow has taken place.

This takes place in one of two ways: by relying on official Chinese historical data, or by estimating how much outflows take place on a concurrent basis, thus allowing one to estimate how much capital is flowing out in real time. Indicatively, China’s SAFE released onshore FX settlement data for the whole banking system (PBoC+banks), suggesting some $97bn of FX outflows in Dec, which is broadly in line with the fall in official reserves.

But much more important is the question what is taking place right now, the answer to which can either wait until SAFE releases January data in several weeks… or rely on day to day estimates of outflows in the form of central bank FX intervention. 

Luckily, we have just that.

According to a Goldman report, so far in January “there has been around $USD 185bn of intervention (with the recent intervention predominantly taking place in the onshore market)” split roughly $143 billion on the domestic side and $42 billion on the offshore Yuan side.

This would make January the month with the second largest amount of intervention since August 2015, and thus the second highest month of capital outflows, and would explain the ongoing deterioration across global asset classes as China’s various FX reserve managers have been forced to sell not just government bonds but equities as well. 

Goldman also calculates that “total intervention over the last 6 months, using our estimates, sums to USD 775bn.” Run-rating this amount would suggest that nearly $1.6 trillion in Quantiative Tightening is taking place just due to China’s attempts to stem capital flight. This number excludes the hundreds of billions in reserves that all other petrodollar and EM nations have to liquidate as well to prevent the rapid devaluation of their own currencies as the world remains caught in the global dollar margin call we first explained in early 2015.

The implications from this are two-fold:

• For the selling culprit, responsible for the recent market weakness look no further than China, whose reverse “flow” has been responsible for the terrible start to 2016 capital markets.
• For the Beijing politburo, halting capital outflows is becoming a matter of life or death, because there are only so many liquid reserves China can liquidate before it enters dangerous territory; worse, the less the reserves, the greater the desire will be on behalf of the local population to take their money and run.

Of course, China’s rabid defense of further capital outflows means that its original intent, to devalue the Yuan to a degree that boosts its economy via exports, has been put on hiatus, or in other words China is trapped, and instead of an external rebalancing it is forced to boost its economy in the one way it knows best: by issuing ever more debt. However, with China’s total debt now estimated at 350% of GDP, it only has a finite amount of time before the debt bubble finally pops as well.

In other words, for China there is, as of this moment, quite literally no way out, and what’s worse the longer it delay the decision of how it will reset its economy, the worse it will be for global risk markets.

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