Month: December 2014

ECB head Mario Draghi made it clear where the real battle is taking place in the world this morning. When asked what form QE would take, his response was to the point… “On what sorts of assets should be included in QE… we discussed all assets BUT gold” and gold dropped, right on cue.

 

Not really sure which assets we discussed but definitley not gold!!

 

And the result…

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So to summarize, the ECB will willingly take on Greek bank CDOs, Italian 3rd lien espresso shop loans, Spanish condo HELOCs, and Portuguese Used-Car ABS… but not – never – gold.

*  *  *

It appears we now know who the enemy really is… not deflation but the dreaded barbarous relic, gold.

Perhaps this is why, as Kyle Bass so eloquently noted:

“Buying gold is just buying a put against the idiocy of the political cycle. It’s That Simple”

Q.E.D.

via Zero Hedge http://ift.tt/12pM1sm Tyler Durden

 

Nathan McDonald for Sprott Money

 

It has been speculated that western central bankers have been dishoarding their peoples hard earned gold reserves in a futile attempt to keep the price of precious metals down and to artificially prop up fiat currencies.

 

 

Although it is a horrible crime against its citizens, one needs to understand that the source of government power comes from its ability to fool its people into thinking fiat currency has real value.

 

 

Governments have done a brilliant job in doing so and have thus been able to make promise after promise to get themselves re-elected. All while leading their countries into unavoidable bankruptcy; but that’s someone else’s problem! Or so they think.

 

 

Not only is there ample evidence that western gold vaults are being depleted, but it is becoming more and more obvious that western politicians and bankers’ influence has spread to other parts of the world.

 

One such country is Ukraine, which has recently reported, that they have sold almost all of their gold reserves. This announcement shocked people, as there was no indication as to why they intended to do this.

 

 

This has lead to widespread speculation that this was the Ukrainian price for Western aid against the Russian government and President Putin. Perhaps this is the case, or perhaps not. Regardless, this announcement has enraged the citizens of Ukraine.

 

 

A Kyiv-based court has taken action, instructing Kyiv prosecutors to file charges against the National Bank of Ukraine. Governor Valeriya Gontareva in case No. 757/33660/14 is specifically charged with “abuse of power or misuse of office under Article 364 of the Criminal Code of Ukraine”.

 

 

The plaintiff is lawyer Rostyslav Kravets, who claims that Governor Gontareva, “has intentionally committed an extremely unfavorable transaction for the gold and forex reserves of Ukraine”.

 

 

Under the Ukrainian constitution, the sale of Ukraine’s gold is seen as a criminal act, given that the central bank is in charge of maintaining its countries gold reserves. I don’t believe any sane person would believe that the sale of all but 1% of anything, would be considered maintaining, but rather liquidating.

 

 

This development has prompted Olena Shcherbakova, head of the of the monetary policy department at the Ukrainian central bank, to resign from her position. Bloomberg, who attempted to reach her by phone was told that she did not need to give a reason for her decision. Clearly, she believes that this case is not going to go well and that the wrath of the Ukrainian people is coming.

 

 

It is unseen as to what the result of these charges will bring. Yet it is undoubtedly a positive sign and shows that the Ukrainian people are awake and tired of being pawns in this global currency war. It is unfortunate that they are unlikely to ever get their gold back.

 

What is most ironic is the fact that the Ukrainian government, much to the outrage of its citizens, was selling its gold reserves, while its enemy, Russia was buying gold in vast quantities and continues to do so.

 

 

Clearly this story goes much deeper than first assumed and is incredibly complex. It is a strong possibility that it was western central banks that encouraged Governor Gontareva to commit political suicide and sell her citizens hard money for fiat dollars.

 

 

Regardless of the motivation, it is clear the people of Ukraine are not going to take this lying down. They have been through enough grief and turmoil as of recently, they should be and are angered that they are being sold out by one of their own.

 

 

Perhaps, people in the West should take note of this and think long and hard about the actions of their central bankers, who clearly don’t have their citizens’ best interest at heart. Perhaps it’s time people took notice and stand up for what is right.

 

 

 

Nathan McDonald for Sprott Money

 

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Submitted by Erico Matia Tavares of Sinclar & Co.,

It has been centuries since the Portuguese last dominated the world's seaways, but in glancing over recent headlines one would be forgiven for thinking that their pirates are still running around.

With the economy still reeling from the effects of the devastating financial crisis in 2010-11, Portugal has been rocked by a series of corruption scandals which go to the very core of the political and financial establishments.

None other than José Socrates, Prime Minister from 2005 to 2011, is being held in custody in connection with money laundering, tax evasion and corruption charges; the figures involved are rumored to be in the many millions. A number of top officials of the current government have also been detained on graft charges targeting wealthy foreigners – mostly Chinese – seeking Portuguese residency under the "golden visa" scheme.

Earlier in the year, Grupo Espírito Santo, a significant conglomerate that owned a large stake in BES, one of Portugal's largest private banks, failed spectacularly, after dodgy accounting practices and money transfers supposedly intended to fool regulators and investors could no longer remain hidden. Here we have the blue blood of Portuguese finance, with close ties to major domestic and international corporations and governments. The resulting losses are in the many billions.

Over the years there have been recurring allegations of corruption and unsavory dealings in the press, but these have been largely inconsequential. For one, Portugal is still perceived as being “cleaner” than its Southern European peers: according to Transparency International, in 2013 it ranked #33 "cleanest" country in the world, compared to Spain at #40, Italy at #69 and Greece at #80.

Which is why these latest scandals are particularly shocking. Judicial actions of this nature being taken against very high profile political and business figures are extremely rare, even unprecedented in Portugal’s contemporary history.

Now, will these scandals have an impact on the economy? And if so, how?

Jobs and income have disappeared since the breakout of the crisis – and many Portuguese with it. Last year more than 128,000 people left the country (official figure; the real number could be much higher), compared to just 21,000 in 2000; newborns are at generational lows; and immigration, which had been a key source of population growth, has been net negative since 2010. Those wealthy Chinese with golden visas will find an increasingly empty country upon arrival.

This dire demographic situation is symptomatic of a very challenging economic environment. After being one of the founding members of the Euro, Portugal has been a real laggard in terms of growth. Here's the relative performance of its GDP per head on a purchasing power parity (“PPP”) basis in recent decades:

GDP per Head on a Purchasing Power Parity Basis (USD): 1995-2013

Source: World Bank.
(a) Simple average of Cyprus, Czech Republic, Estonia, Hungary, Lithuania, Malta, Poland, Slovak Republic and Slovenia.

Portugal's economic divergence relative to Europe’s core is striking; it has even been overtaken by an average of the newcomers that joined the European Union in 2004, many of which are former communist countries. This in spite of Portugal receiving billions in structural reform funds from Brussels for almost three decades now – a process which is still ongoing.

So how did this significant underperformance come about?

Every year the World Economic Forum publishes the Global Competitiveness Report, which ranks over 140 countries based on their Global Competitiveness Index (“GCI”), a comprehensive tool that measures the microeconomic and macroeconomic foundations of national competitiveness. In order to get a sense of why this is relevant, here’s how GCI correlates with GDP per head (also on a PPP basis) in the latest survey:

Relationship between the GCI and GDP per Head on a Purchasing Power Parity Basis (USD): 2014-15

Source: World Economic Forum.

Clearly there’s a positive relationship, suggesting that high income levels per head are generally accompanied by high competitiveness readings. Stated differently, a country is likely to get richer as it becomes more competitive and vice versa.

And here’s how Portugal is faring in terms of GCI and its variables and sub-components compared to the five most competitive economies of that newcomers group (the higher the ranking, the better the relative performance):

Source: World Economic Forum.

Portugal’s GCI is a little better than most others in this group, but that’s only because of the big jump recorded over the prior year, from #51 to #36 (driven by improvements in market efficiency). The variable that really stands out negatively for Portugal is “macroeconomic environment”, which accounts for things like fiscal balance, government debt, inflation and credit rating (the more negative they are, the bigger the burden on the economy going forward).

But we can dig a little deeper. The following graph compares the evolution of the main “basic requirements” sub-components, “efficiency enhancers” and “innovation factors” relative to the 2006-2007 survey, the oldest publicly available:

Change in Selected Variables 2006-07 to 2014-15 (%)

Source: World Economic Forum.

The drivers behind the deterioration of Portugal’s overall competitiveness since 2006 are fundamentally its institutions, where the robustness of its legal system and corruption are included, and macroeconomic performance. In contrast, the other countries have broadly improved on these variables. Most likely this differential would have been even more pronounced if we had gone further back in time.

The only thing holding up Portugal’s GCI over this period is the big improvement in infrastructure. Portugal now ranks #17 in the world, far ahead of the selected newcomers. In road quality, a sub-component of this variable, it actually ranks #2 (second only to the United Arab Emirates)!

And how were these world-class roads financed? In a country with chronic budget deficits, no doubt at the expense of macroeconomic performance – which as we have seen is now badly hurting its competitiveness. Profligacy, it seems, has a price.

With all of this in mind, let’s go back to the question we posed earlier: how will the recent corruption scandals impact the economy?

The Most Problematic Factors for Doing Business in Portugal: 2014-15

Source: World Economic Forum.

According to the results of a recent survey on the most problematic factors for doing business in Portugal, shown above, corruption ranked far lower than government inefficiency, the #1 concern. While this survey was conducted much before the latest scandals came to the fore, we could argue that these two factors are actually interrelated.

That large government bureaucracy gradually grew in order to handle, among many other things, the billions in development funds pouring in from the EU over many years. Coupled with a lack of transparency of government policymaking (Portugal ranked #81 here, right after Uganda), high favoritism in decisions of government officials (#54, after Kazakhstan) and a horrendous legal framework efficiency (#111, after Russia), the temptation for a select few to put their hands on the public purse may be just too great.

A likely consequence? A raft of infrastructure projects with dubious returns, and possibly many more other shadier dealings; in other words, spectacular roads – and a bankrupt economy.

This of course may be a gross oversimplification and we still don't know the extent of any wrongdoing; the judges need time to do their work. Moreover, the vast majority of public servants are (and should remain) beyond reproach. The fact is, however, that something went horribly wrong in Portuguese policymaking. After all, the country did go bust, and now millions of people are paying a heavy price, jeopardizing whatever’s left of their European aspirations.

Therefore, Portugal’s judicial system showing its teeth on politically sensitive cases is a good thing. Improving the credibility and effectiveness of its institutions is an absolute necessity to reverse the country’s misfortunes and enhance its overall competitiveness. So tackling these scandals may actually have a positive impact going forward.

For sure, much more needs to be done to get Portugal’s economy humming again. We have written previously on the de facto currency appreciation which has left Portugal increasingly out of the world markets, as well as on its ballooning indebtedness. Fixing these issues will require much more than just vigilant judges.

But hopefully, with some luck, from now on the pirates will be the ones leaving Portugal, instead of its hardworking citizens.

via Zero Hedge http://ift.tt/12pM1s9 Tyler Durden

A funny thing happened in China in July. Ever so quietly, and with little aplomb, the PBOC unleashed CNY 1 trillion of ‘Pledged Supplementary Lending’ (PSL) to China Development Bank – later dubbed “QE-Lite.” Economic indicators temporarily blipped higher, a new recovery was proclaimed by the masses, and the world fell back into its stupor… despite the post-credit-impulse hangover which has seen Chinese data collapse in the last 2 months. But that did not stop speculators… tired of betting on Chinese real estate (which never goes down), the ‘signal’ of QE has sparked a stunning 41% surge in Chinese stocks since PSL (and boosted by the recent rate cut). However, this exuberant resurgence (+4.3% last night alone) rests on shaky foundations as margin trading balances have more than doubled during this period…

 

Probably just coincidence, right?

Charts: Bloomberg

As The Wall Street Journal notes,

Desperately low valuations for China’s biggest companies, especially its banks and property developers, may have helped, but hardly explains the sudden jump. These sectors have been cheap for years. Lower oil prices help at the margins for China’s big industrial companies. And the opening of the Shanghai-Hong Kong Stock connect, while failing to meet expectations, has added a new source of fuel.

 

A bigger factor may be a great rotation among retail investors who make up the bulk of mainland traders. Stocks have been moribund since rising to bubble levels and then crashing in 2007. Households turned instead to property and high-yielding shadow banking products. Both of those have now lost favor. Property prices are falling, while wealth management products are being squeezed by regulators, and in a few cases failing to pay back in time or in full.

 

Declining interest rates in the market for interbank funds further reduces returns on savings.

But the steepness of the rally should have investors on edge.

While authorities have certainly moved to a more pro-stimulus stance, the chances for an all-out easing campaign aren’t assured. Many within the government remain resolute that credit-fueled growth must be curbed. And property woes, while ebbing somewhat, are far from solved.

 

Leverage has proved a potent accelerant. Margin trading in Shanghai and Shenzhen has doubled since July to 800 billion yuan ($130 billion), notes Chen Long at GaveKal Dragonomics.

*  *  *
Nothing to see here, move along…

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Say what you want about Bill Gross, but the legendary bond investor is absolutely spot on in the following paragraph from his latest, December, investment outlook:

How could they? How could policymakers have allowed so much debt to be created in the first place, and then failed to regulate their own system accordingly? How could they have thought that money printing and debt creation could create wealth instead of just more and more debt? How could fiscal authorities have stood by and attempted to balance budgets as opposed to borrowing cheaply and investing the proceeds in infrastructure and innovation? It has been a nursery rhyme experience for sure, but more than likely without a fairytale ending.

Here is the full letter (link):

How Could They?

Punch and Judy fought for a pie.
Punch gave Judy a sock in the eye.
Said Punch to Judy, “Would you like any more?”
Said Judy to Punch, “No my eye is too sore.”

   – Mother Goose nursery rhyme

Ah, nursery rhymes! Intended for kids no less! The above little ditty could serve as a modern day NFL domestic playbook, I suppose, while a century ago it was but one of many “lesson plans” on what not to do when you grow up. There was Jack and Jill, and Little Miss Muffet – all of whom had to be careful – the Muffet Ms. especially so if she ever sat on a tuffet; spiders were lurking! Then there was the Old Woman Who Lived in a Shoe, the moral being that if you lived in one, lots of kids would drag you down for the rest of your life. Honestly – conception must have been pretty awkward for the old gal, maneuvering between laces and all. And instead of scented candles, well, you get the picture. Even Buster Brown’s dog, Tige, wouldn’t have lived in there.

The Punch and Judy rhyme pretty much exposes the early 20th century for what it was: male dominated and domestic violence permitted. Actually, back then, the way comic strips allowed women to get revenge was a metaphorical frying pan in the kitchen. Watch out, Dagwood – here comes Blondie! Today, all of that is frowned upon and so much the better. Outside of comic strips and nursery rhymes, the AMC series “Mad Men” takes us back to the bad old days when everyone smoked in the office and right next to you on airplanes, no less. “How could they?!!” is the almost immediate response, because we have adapted and adjusted to a different set of social, moral and ethical standards. Race, gender, sexual orientation, you name it … things are moving forward. You could shriek a “How could they?” for all of the above while understanding perhaps why they did. Maybe they didn’t know any better, maybe the time wasn’t right, maybe they just needed a Martin Luther King, a Betty Friedan, or a Harvey Milk to lead the way. In each case the “How could they?” can only be answered by “they did – but now they don’t as much.”

What I find equally interesting is to project forward and try to guess what things we are doing now as a society that our grandchildren will ask, “How could they?” That indeed is a tough one, because like cigarette smoking on “Mad Men” in the ’60s, it’s difficult to conceive of an alternative environment. Perhaps it will be food and cuisine oriented. Corn in everything we eat and drink; genetic modification – “How could they?” Perhaps it will be robot driven cars, prompting our grandchildren to ask, “How could they? No wonder there were so many fatalities.” Maybe going to college will top the charts of future unthinkables. “Spending $200,000 for four years of partying – how could they?” We shall see, or better yet, our kids will. They will mold their own world as their environment, and developing ethical standards will mold them in turn; a wheel within a wheel. Punch and Judy would be amazed.

Speaking of the future and life’s lessons, there is an ongoing process of discovery taking place amongst the world’s central bankers which they hope will rejuvenate their respective economies without creating the inflationary horror of the 1970s. If Federal Reserve Chair Janet Yellen were the fictional Little Miss Muffet, she would be hoping to eat the “curds and whey” of 2% to 3% real economic growth while avoiding spiderous increases in future prices. If European Central Bank President Mario Draghi were the old fashioned “Punch,” he might figuratively be attacking German Chancellor Angela Merkel and her tight monetary and fiscal heritage. “Take that Judy/Angela!” I don’t know who to compare Bank of Japan’s Governor Haruhiko Kuroda to – perhaps little Jack Horner hoping to stick his thumb into a Christmas pie, pulling out a plumb and exclaiming, “What a good boy am I!” Ah, policymakers. Perhaps the last five years have been one giant nursery rhyme.

But each of these central bankers is trying to achieve the same basic objective: Solve a debt crisis by creating more debt. Can it be done? A few years ago, I wrote that this uncommonsensical feat could be accomplished, but with a number of caveats: 1) Initial conditions must not be onerous; 2) Both monetary and fiscal policies must be coordinated and lead to acceptable structural growth rates; and 3) Private investors must continue to participate in the capital market charade that such policies produced.

Let me explain each of these three caveats in turn.

1. By initial conditions, I am referring to existing structural headwinds that would thwart the successful rejuvenation of old normal, nominal growth rates. Certainly a country’s current debt/GDP ratio factors enormously into the oddsmaking for success. It is difficult, for instance, to imagine Japan getting out of its quagmire of debt by simply creating more of it and buying 100% or more of the new and current supply. Similarly, Greece (which has already suffered several restructurings) as well as neighboring Euroland peripherals begin the healing process well behind the debt/GDP eight ball. But there are other significant initial conditions – structural headwinds – that my version of the “New Normal” envisioned as early as 2009: aging demographics, technology/the race (rage) against the machine, and the ongoing reversal of globalization, are all growth-stunting factors to consider. Economist and former Treasury Secretary Larry Summers has labeled this “Secular Stagnation” and rightly so, but it is just another way to describe the New Normal and its deleterious effect on future growth.
   Monetary and fiscal policies must work side by side; they must be stimulative as opposed to being counterproductive. It makes little sense, for instance, for Euroland to be running a tight fiscal policy resembling the balanced budget mandate of Germany, while at the same time initiating quantitative easing and negative interest rate monetary policies. The same holds true for the Bank of Japan’s massive monetary stimulus on the one hand, and Japan’s raising of its consumption tax on the other. One could even apply that complaint to the U.S. with its fiscally restrictive rebalancing of its budget deficit from 10% to 3% over the past five years. If not for fracking, Uncle Sam might be labeled the Old Man in the Shoe for not knowing what to do. In fact, in the U.S., as elsewhere, there has been little focus on public investment and infrastructure spending. It’s been all monetary policy, all of the time, with most of the positives flowing over to markets as opposed to the real economy. The debt currently being created is not promoting real growth and solving a debt crisis – it is being used by corporations to repurchase shares and accentuate the growing inequality between the very rich and the middle class.
2. Keeping private investors playing the “game” in our financial markets even though they smack of a pyramid scheme might seem like a no-brainer. “Where else can they go” has been and continues to be the commonsensical refrain. Not sure, but perhaps Google Maps can show the way. But on the fringe and at the margin, there are alternatives to negative interest rates or artificially low cap rates, or escalating P/E ratios based on historically high profit margins. And even if investors must buy something, they don’t necessarily have to buy it in their own or any specific country. If 3-year German government bonds yield -.05%, then how about a 3-year Brazilian government bond at 12.5%? At the moment the negative yielding German bond gets the market’s vote, but you must see the point. Creating more debt with artificially low yields leads to currency wars and exchange rate volatilities that distort global capitalism. Solving a debt crisis by creating more debt cannot cure the disease if higher volatility distorts the historical flow of markets and associated commerce.
3. And of course economic theory might suggest that artificially low interest rates gradually but inevitably lead not to more consumption and real growth, but to more savings in order to meet future liabilities such as education, health care, and eventual retirement. If a household needs $250,000 for any or all of these future commitments, it will be twice as hard to meet them with 5-year Treasurys at 1.5% instead of 3%.

With each of my three primary caveats coming up short in an answer to my earlier question: “Can a debt crisis be cured with more debt?” it is difficult to envision a return to normalcy within my lifetime (shorter than it is for most of you). I suspect future generations will be asking current policymakers the same thing that many of us now ask about public smoking, or discrimination against gays, or any other wrong turn in the process of being righted.

How could they? How could policymakers have allowed so much debt to be created in the first place, and then failed to regulate their own system accordingly? How could they have thought that money printing and debt creation could create wealth instead of just more and more debt? How could fiscal authorities have stood by and attempted to balance budgets as opposed to borrowing cheaply and investing the proceeds in infrastructure and innovation? It has been a nursery rhyme experience for sure, but more than likely without a fairytale ending.

Markets are reaching the point of low return and diminishing liquidity. Investors may want to begin to take some chips off the table: raise asset quality, reduce duration, and prepare for at least a halt of asset appreciation engineered upon a false central bank premise of artificial yields, QE and the trickling down of faux wealth to the working class. If the nursery rhyme theme is apropos to the future, as well as the past, investors should remember that while “Jack and Jill went up the hill,” that “Jack fell down, broke his crown, and Jill came tumbling after.”

Someday soon, perhaps.

-William H. Gross

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