zerohedge – Page 18571

America Before And After The Government Shutdown (In One Cartoon)

Presented with no comment…

Source: Jim Quinn’s Burning Platform – Sunday Funnies

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Caxton: Goodbye To The Self-Sustaining Recovery

“It’s clear to us now that the US economy just isn’t going to reach escape velocity,” said Andrew Law, head of Caxton Associates (one of the hedge fund industry’s most successful money managers) in a wide-ranging and rare interview with the Financial Times. “Tapering is off the table for the foreseeable future.” As we have explained numerous times, Caxton notes the Fed has little option but to continue its policy of extraordinary monetary easing indefinitely, adding “what happened [last week] was just another can kicking exercise. The problem has not been solved and the hopes for a grand bargain are in tatters.” Simply put, he concludes rather dismally, “there are no incentives for the corporate world to go out and spend right now…“

Via The FT,

One of the hedge fund industry’s most successful money managers has warned that dysfunction in Washington has damaged the US economy, leaving the Federal Reserve with little option but to continue its policy of extraordinary monetary easing indefinitely.

“It’s clear to us now that the US economy just isn’t going to reach escape velocity,” said Andrew Law, head of Caxton Associates, in a wide-ranging and rare interview with the Financial Times. “Tapering is off the table for the foreseeable future.”

…

Mr Law’s stark outlook for the US contrasts with widely-held expectations that the US economy will bounce back quickly in the coming months. Most investors and Wall Street analysts expect the Fed to begin “tapering” its programme of quantitative easing in December.

…

The 47-year old Mr Law said the shutdown and debt-ceiling debate in Washington had “undoubtedly” caused damage to the country’s economy.

“What happened [last week] was just another can kicking exercise,” he said of the political deal reached between Democrats and Republicans in Washington to raise the cap on the government’s ability to borrow. “The problem has not been solved and the hopes for a grand bargain are in tatters . . . the lack of visibility is very damaging.”

…

“We just don’t see how the economy is going to accelerate in the foreseeable future,” he said.

“Sequester spending cuts, the debt ceiling and shutdown have all taken their toll . . . there are no incentives for the corporate world to go out and spend right now . . . that, and the housing market are critical. You’ve already seen earnings release statements for companies mentioning shutdown as a reason for a drop-off in orders.”

The grim outlook, while contrarian, is shared by a number of hedge funds.

…

Caxton also believes the dollar will continue to weaken against the euro – potentially precipitating a currency fight with the eurozone.

“It will be fascinating to see how the ECB [European Central Bank] responds,” said Mr Law, adding that one likely option for Frankfurt would be for it to lower rates. “They are not going to be too pleased [with a weakening dollar],”

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/IMf2DI9PhjU/story01.htm Tyler Durden

Larry Summers Explains How He Would Fix The Economy (In 80 Seconds)

A physically deflated Larry Summers spoke with Charlie Rose about the US economy (“all we need is a few tenths of a percentage more growth…“), the political process (“nobody should be proud of the governance process…”), and the state of American education (“reward merit, remove tenure…”). The following 86 seconds summarizes the twice-denied would-be-central banker’s thoughts…

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Guest Post: Growth Is Obsolete

Submitted by James H. Kunstler via Peak Prosperity blog,

The word that sticks in the craw of many who cogitate over economics is growth. The condition that the word refers to has proven disturbingly problematic in recent years, especially as world’s population continues to expand exponentially and the global ecology suffers in response. In fact, Thomas Carlyle (1795 – 1881) called economics “the dismal science” in direct reference to the work of the Rev. Thomas Malthus, because the Malthusian conclusions were so unappetizing – that sooner or later rising human populations would outstrip the world’s capacity to provide for them.

Now it happened that the Reverend Malthus’s notorious Essay on the Principle of Population was first published in 1798, which was about exactly the take-off moment for the industrial revolution. That extravagant melodrama was about marshaling mechanical invention with fossil fuel. The first act ran on coal and allowed populations to expand because it extended the extractive reach for resources by colonialist nations. The second act featured exploitation of oil, which was more powerful and versatile than coal. It also lent itself much more directly than coal to being converted into food for people. The use of oil powered farming machines, oil and gas (an oil byproduct) based herbicides, insecticides, and fertilizers, and oil based long distance food transport, has allowed us to convert oil into food pretty directly. This has led to the “hockey-stick” swerve of population growth that took human numbers worldwide from under 2 billion in the year 1900 to more than 7 billion today.

We are in the third act of the industrial melodrama now where the dire sub-plot of peak oil has taken stage. Despite the wishful thinking and happy-talk propaganda lighting up the media-space, we have arrived at the problematic point of the story: the end of cheap oil. This is poorly understood by the public and, apparently, by leaders in business, politics, and the media, too. They misunderstand because they insist on thinking that peak oil was simply about running out of oil. It’s not. It’s about running out of the ability to extract it from the earth in a way that makes economic sense — that is, at a price we can afford in terms of available capital and energy invested (and also ecological destruction). That dynamic is now exerting a powerful influence on modern civilizations. We ignore it — even at the highest levels of intellectual endeavor — because we have made no alternate plans for running the complex operations of everyday life, and because the early manifestations of the dynamic present themselves in the realm of finance, which is dominated by academic viziers and money-grubbing opportunists who benefit from obfuscating reality.

The sad, stark fact is that oil is now too expensive to permit further expansion of economies and populations. Expensive oil upsets the cost structure of virtually every system we need to run modern life: transportation, commerce, food production, governance, to name a few. In particular expensive oil destroys the cost structures of banking and finance because not enough new wealth can be generated to repay previously accumulated debt, and new credit cannot be extended without a reasonable expectation that more new wealth will be generated to repay it. Through the industrial age, our money has become an increasingly abstract and complex product of debt creation. As Chris Martenson has put it so succinctly in The Crash Course, money is loaned into existence. Thus, the growth of debt (allowing the growth of money) has played a crucial role at the heart of our banking operations, and the very word “growth” has become shorthand for this process in the lingo of current economic discourse.

It is quite clear that the banking system has been thrown into great disarray as the price of oil levitated from $11-a-barrel in 1999 to the great spike of $140 in 2008, and then settled into a range between $75 and $110 since 2010. Most of this disarray is a result of attempts to offset the failure to create new real wealth with fake wealth generated by accounting fraud, "innovative" swindling, insider chicanery, high frequency front-running, naked shorting of securities, and the construction of a vast untested network of derivative counterparty wagers that give every sign of being booby-trapped. All this private monkey business has been abetted by public mischief in central bank interventions and market manipulations, fiscal irresponsibility, political payoffs for favorable legislation, statistical misreporting, and the failure to apply the rule of law in cases of blatant misconduct (e.g., the MF Global confiscation of segregated client accounts; the Goldman Sachs “Timberwolf” CDO scam… the list is very long).

In short, a society with deeply impaired capital formation has turned to crime, corruption, fakery, and subterfuge in order to pretend that “growth” — i.e. expansion of capital — is still happening. The consequences are many and profound. The chief one is that the manufacture of fake wealth is such an alluring activity that some of the smartest people in society have devoted their waking hours to making a profit off it. It absorbs all their energies and they are simply not available for other work, such as figuring out a sane and practical way to run civilization in the absence of cheap energy. Added to this is the administrative effort and the work-arounds needed to support all this corruption and dishonesty, which occupy the hours of another class of smart people who work in government, academia, public relations, and the media. The sustenance of these parasitical cohorts more and more continues at the expense of everybody else in society, who cannot find work, or cannot make enough money to pay their living expenses, and who have become deeply discouraged, disappointed, demoralized, and disengaged in their losing struggle to thrive. Hence there is little public vigor to even mount a discussion of these vexing problems and the final result is the greater wholesale failure to construct a coherent consensus about what is happening to us and what we might do about it.

Another consequence to these disorders of capital is the massive malinvestment directed into things with no future in themselves or, much worse, things that actively undermine the future of everything needed to support any civilized future. For instance, the "innovation" in securitizing and repackaging mortgages — which continues to be a boon for the giant banks in concert with the thoroughly dishonest and technically bankrupt "government sponsored enterprises" Fannie Mae and Freddie Mac — expresses itself in the activity we call "housing starts." Economists overwhelmingly agree that a higher number of housing starts is a good thing for the economy and hence for society. But what do housing starts actually represent? These days they mostly take the form of new suburban housing subdivisions, which are inevitably joined by the kit of the strip mall, the big box store, and all the other furnishings of the highway strip. In short, all that glorious "innovation" by the banks produces more suburban sprawl and destruction of rural land, which is about the last thing this society needs when faced with the realities of peak cheap oil, since it is absolutely certain to make these things obsolete, and very soon. It is not any better, either, if the nominal capital — nominal because it is sure to someday represent a loss for some bond-holder or stockholder — gets invested in
a 30-story high rise apartment because, contrary to a lot of current delusional thinking, skyscrapers also have no practical future for reasons I have explained in other essays here.

Similarly, the public investments going into "shovel-ready" highway projects, although the fiscal outlays are more transparently based on money that doesn't really exist. The public, as well as leaders all across society, serenely believe that the Happy Motoring matrix will find a way to go on forever, and that therefore we must make provision for it, not to mention the beneficial side of effect of "job creation" for all the additional workers. Yet the dynamic at work must be obvious: oil will never be cheap again; it will impair future capital formation; there will be far fewer car loans; there will dwindling public funds to maintain the roads; and there is no practical substitute for gasoline that scales to the existing system, nor any prospect of one within a time frame that makes sense — not to mention the gigantic background problem of pouring evermore carbon into the sky.

If these things I mention — highways, tract houses, condo towers, strip malls — represent our current idea of "growth," and if they are self-evidently bad investments, then we can infer that our current concept of "growth" no longer applies to a reality-based model of our economic prospects. We ought to junk the term and what it implies about the daily business of mankind, and come up with a new way of understanding the place we're at.

In Part II: Getting To a Future That Has a Future, we take a hard look at the critical task facing humanity if we want to enjoy a future of any worth — and that's managing contraction. We have to reorganize all the major systems of civilized daily life. We have to produce our food differently, we have to do commerce differently, and so on with any number of ongoing endeavors including transportation, manufacturing, governance, banking, education, health care, and more.

Click here to access Part II of this report (free executive summary; enrollment required for full access).

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What Each Country Leads The World In

Every country is Number One when it comes to something, and this map from webcomic Doghouse Diaries just what all those somethings are.

As , of course, it's not all maple syrup and raspberries; some countries have some rather tragic distinctions.

(click map for massive version)

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(In)Direct Slavery: We’re All Guilty

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As we sit in our comfortable living rooms, loafing back into our sofas, munching on a bar of chocolate and slurping down the coffee whilst checking the smartphone for message most of us have little idea that the chocolate, the coffee and the smartphone were made by resorting to indirect slavery quite probably. Whether we like it or not, we are contributing to the indirect slave trade of the companies that provide those things and many more to us. Whether we like it or not we are directly contributing to slavery because there are slaves employed in our own back yard still today.

Global Slavery Figures

There are 29.8 million slaves in the world.
They mostly work in developing and emerging countries producing goods that are destined for the Western world and our own markets.
Those 29.8 million people account for 1.82% of world population today.
India is the worst country in the world for the total number of slaves.
There are 14 million of them.
China comes in way behind and in second place with 2.9 million of them.
Pakistan has 2.1 million slaves.
Mauritania has the highest ratio of slaves to the population.
The total population stands at 3.4 million and 4.3% are enslaved people.

The top ten countries that make up 76% of all of the enslaved people in the world are:

India
China
Pakistan
Nigeria
Ethiopia
Russia
Thailand
Democratic Republic of Congo
Myanmar
Bangladesh

The USA is 139th on the list out of a total of 162. The UK is 160th.

India is the worst country in the world for slavery today. Perhaps if they were to ratify the Worst Forms of Child Labour Convention, then they might be able to deal with that problem. Bonded labor might have been outlawed as from 1976by the Bonded Labour System (Abolition) Act 1976, but it has rarely been enforced.

But there are slaves working in the Western world too such as the forced laborers that are made to work on the cannabis farms in the UK. For the first time, the Global Slavery Index has been published this year and it is a telling story of the misery not only of the developing world, but of our own countries. It’s a quantitative index of 162 countries which means that it accounts for almost the entire world population. . Until this report was published estimates stood only at roughly 10 million under the 29.8-million estimate of the Global Slavery Index. Previously, the method of calculation did not include forced labor and did not consider that human trafficking was part of slavery. The Index also uses forced servile marriage and debt bondage in the calculation.

The Global Slavery Index estimates that there is a margin of error of between 5% and 10% and they hope that it will be a “wake-up call” to governments around the world. It is however highly unlikely that this will become reality.Governments in the West remain complacently asleep when it comes to slavery in their own back yards and certainly even more so with other countries that are toiling away for us.

Endemic cultural problems have maintained people entrapped in slavery in countries like India due to caste issues (despite that officially having been abolished (at least Article 17 of the Indian Constitution made untouchability and discrimination on that basis illegal).

Maybe some leaves should be taken out of Brazil’s book and we should be doing more of what they do there. There is a list of ‘dirty’ companies that have used slaves in the production of products. Their national plan is to do away with slavery.

Slavery is not just a figment of our imagination, it means jobs that we can’t walk away from, it’s working for nothing and it’s control through violence and pressure as well as being nothing more than the boss’s property.

We’re All Slaves

To some extent we are all slaves in daily life in the societies that have been elaborated for the benefit of those either at the top or even for those at the bottom. There’s rarely something for those that are stuck in the middle. We go to work, we earn a living and we pay that money to someone else in taxation so that it can go to the common good of all in society under the supreme principle of providing for the needy, whoever they are and whatever being needy really does mean.

But, we work like drudges even though the 19th century sweatshops went long ago from our societies; at least, for most of us, although they still exist in some back room of a dingy apartment building somewhere in the rough part of towns of most cities we live in. We created democracy (or we thought we did) and the upper class was reduced (or the wealth just got spread around with fewer people allowed to rake it in). The poorer got richer and the majority got thrown into the middle band of the class that got little or nothing. Democracy created what we have right now. The few rich people get most of the earnings and the poorest get doled out and propped up. The guys in the middle pay for the rest and get their shoulders thrown into the grindstone, regardless of whether they want their money to be handed around to the needy or to fill the cash-fat obese accounts of the super wealthy in Geneva or somewhere else.

We have all a role to play in the slave trade. But, there are some that are worse off than others in countries around the world.

Which is better: being a slave in India or being a middle-class slave that finances the government through taxation? A no-brainer? Or, does it depend on where we’re sitting?

Originally posted: (In)Direct Slavery: We’re All Guilty

Technical Analysis: Bear Expanding Triangle | Bull Expanding Triangle | Bull Falling Wedge | Bear Rising Wedge | High & Tight Flag

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Mexico Overtakes US As World's Fattest Country; Begins Regulating Food Consumption

Mayor Bloomberg’s crusade to micromanage what New Yorkers put in their mouth has so far failed, but that just means the attempt to impose the first “New Normal” nanny state, in which individual calorie consumption is regulated for the greater good by the even greater government, has simply shifted its geographic location. In this case to Mexico, which according to the OECD has surpassed the US as the world’s fattest country and is “notorious for its love of sweets, fried foods and pastries” and where as the WSJ reports, the lower House of Congress passed on Thursday a special tax on junk food that is seen as potentially the broadest of its kind, part of an ambitious Mexican government effort to contain runaway rates of obesity and diabetes.

Mexico’s weight problem in context:

The WSJ reports on what can only be described as Mike Bloomberg’s wet dream:

The House passed the proposed measure to charge a 5% tax on packaged food that contains 275 calories or more per 100 grams, on grounds that such high-calorie items typically contain large amounts of salt and sugar and few essential nutrients.

The tax, which was proposed just this week, is sure to stir controversy among big Mexican and foreign food companies that operate here. It comes on top of another planned levy on sugary soft drinks of 1 peso (8 U.S. cents) per liter that was passed by the same committee, an effort that New York Mayor Michael Bloomberg supported.

…

The taxes—both aimed at curbing consumption—have broad political support and were expected to later be approved by the Senate as part of a sweeping tax overhaul. The snack food levy is part of a bigger tax proposal from President Enrique Peña Nieto which aims to raise the government’s non-oil tax collections.

“This appears to be the most aggressive strategy anywhere in the world in recent years to improve diets via tax disincentives,” said Michael Jacobson, executive director of the Center for Science in the Public Interest in Washington.

Some have already cast the blame: TV zombies and undereducated “fatsos.”

“We’re a country of malnourished fatsos,” José Antonio Álvarez Lima, a former state governor turned newspaper columnist told Mexican political news website Animal Politico. He pegged part of the blame for Mexico’s high consumption of soda and snacks on incessant TV advertisements and poor education.

Mexico’s attempt to centrally-plan what’s for dinner naturally was met with the adoration of not just Mayor Mike, but every government apparatchik desperate to justify their non-value adding exietsnce. Such as this one:

Harold Goldstein, executive director of the California Center for Public Health Advocacy, called Mexico a role model, saying that the measures could protect the health of consumers while also shielding the economy from productivity losses and runaway public health costs.

Of course, if the “measures” fail at doing all those magical things, the government can just swoop in and start regulating the economy and productivity next, just as the Fed has been doing in the US for the past 5 years, with absolutely disastrous results.

Which is not to say Mexicans aren’t fat. As noted above, according to the OECD, the average Mexican is now fatter than the average American. Which means very, very fat.

Seven of 10 adults in Mexico, and a third of children, are either overweight or obese. Mexicans have now surpassed Americans for the title of the fattest country in the OECD, according to the organization.

All that fat has contributed to an alarming rise in chronic illnesses like adult-onset Type 2 diabetes, which afflicts an estimated 15% of Mexicans over the age of 20, the highest rate for any country with more than 100 million inhabitants. Illnesses related to excess weight cost the Mexican public health system more than $3 billion a year, according to the legislation.

On virtually every street corner in Mexico, makeshift stands sell the types of packaged items that will be taxed for the first time: potato chips, cookies, ice cream, fried corn chips, chocolates, candy, puddings and local sweets.

However, while those who revel in the government’s intellectual superiority, despite the vivid example of every centrally-planned economy crashing and burning in due course, some are quick to point out that this latest plan to micromanage consumption is idiocy. First, the big food companies:

Mexican industrial chamber Concamin estimates that processed food companies targeted by the new tax employ thousands of Mexicans and account for 4.1% of GDP. “We can’t allow last-minute taxes,” said Concamin president Francisco Funtanet, suggesting that companies might cut back on personnel and investment to absorb the tax hit.

Raul Picard, a top official at Concamin and owner of a chocolate company, argued that vice taxes could lead to a proliferation in contraband goods of questionable origin, possibly posing a threat to public health.

“There’s no such thing as junk food, just junk diets,” said Felipe Gómez, head of a regional food makers’ group in Jalisco state. Even so-called junk food has carbohydrates and calories that the body needs, Mr. Gómez argued.

But it’s not just the big corporations that are skeptical. So are normal people with some common sense.

Some ordinary Mexicans said a tax was unlikely to change their eating habits much.

Héctor Ortega, a 45-year-old operator of a street stand in downtown Mexico City, predicted that consumers may pull back briefly when prices rise, but then return to their old habits.

“Just like the cigarettes, people will go back to their old habits,” said Mr. Ortega. He said junk food was obviously unhealthy, but it was often the only thing that poorly paid office workers and students can afford. “This is a restaurant zone and the food here is expensive. For some people, these products are the only food available.”

Fernando González, 24, an office worker who frequents Mr. Ortega’s stand, is a big fan of sodas and gum, in particular. When the new prices kick in, he said, he won’t give up on his favorites, but will probably buy less chips and candy.

“It’s a craving, it’s an addiction, it’s something people enjoy,” he said of Mexicans and their treats.

The biggest irony, of course, is that the government “of the people”, in its very finite wisdom, will hurt those it supposedly cares about the most: the poor. Because the rich can afford to eat healthy. It is the poor who will merely have to pay more to satisfy their “food addictions.”

Academics say the move could hurt the poor because they spend a greater percentage of their income on cheap, packaged foods, but added that doing nothing was worse.

Sure. Which is why America no longer has a drug (or gun) problem. Oh wait.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/wKEwrWwJ0a4/story01.htm Tyler Durden

Mexico Overtakes US As World’s Fattest Country; Begins Regulating Food Consumption

Mexico’s weight problem in context:

The WSJ reports on what can only be described as Mike Bloomberg’s wet dream:

The House passed the proposed measure to charge a 5% tax on packaged food that contains 275 calories or more per 100 grams, on grounds that such high-calorie items typically contain large amounts of salt and sugar and few essential nutrients.

The tax, which was proposed just this week, is sure to stir controversy among big Mexican and foreign food companies that operate here. It comes on top of another planned levy on sugary soft drinks of 1 peso (8 U.S. cents) per liter that was passed by the same committee, an effort that New York Mayor Michael Bloomberg supported.

…

The taxes—both aimed at curbing consumption—have broad political support and were expected to later be approved by the Senate as part of a sweeping tax overhaul. The snack food levy is part of a bigger tax proposal from President Enrique Peña Nieto which aims to raise the government’s non-oil tax collections.

“This appears to be the most aggressive strategy anywhere in the world in recent years to improve diets via tax disincentives,” said Michael Jacobson, executive director of the Center for Science in the Public Interest in Washington.

Some have already cast the blame: TV zombies and undereducated “fatsos.”

“We’re a country of malnourished fatsos,” José Antonio Álvarez Lima, a former state governor turned newspaper columnist told Mexican political news website Animal Politico. He pegged part of the blame for Mexico’s high consumption of soda and snacks on incessant TV advertisements and poor education.

Harold Goldstein, executive director of the California Center for Public Health Advocacy, called Mexico a role model, saying that the measures could protect the health of consumers while also shielding the economy from productivity losses and runaway public health costs.

Which is not to say Mexicans aren’t fat. As noted above, according to the OECD, the average Mexican is now fatter than the average American. Which means very, very fat.

Seven of 10 adults in Mexico, and a third of children, are either overweight or obese. Mexicans have now surpassed Americans for the title of the fattest country in the OECD, according to the organization.

All that fat has contributed to an alarming rise in chronic illnesses like adult-onset Type 2 diabetes, which afflicts an estimated 15% of Mexicans over the age of 20, the highest rate for any country with more than 100 million inhabitants. Illnesses related to excess weight cost the Mexican public health system more than $3 billion a year, according to the legislation.

On virtually every street corner in Mexico, makeshift stands sell the types of packaged items that will be taxed for the first time: potato chips, cookies, ice cream, fried corn chips, chocolates, candy, puddings and local sweets.

Mexican industrial chamber Concamin estimates that processed food companies targeted by the new tax employ thousands of Mexicans and account for 4.1% of GDP. “We can’t allow last-minute taxes,” said Concamin president Francisco Funtanet, suggesting that companies might cut back on personnel and investment to absorb the tax hit.

Raul Picard, a top official at Concamin and owner of a chocolate company, argued that vice taxes could lead to a proliferation in contraband goods of questionable origin, possibly posing a threat to public health.

“There’s no such thing as junk food, just junk diets,” said Felipe Gómez, head of a regional food makers’ group in Jalisco state. Even so-called junk food has carbohydrates and calories that the body needs, Mr. Gómez argued.

But it’s not just the big corporations that are skeptical. So are normal people with some common sense.

Some ordinary Mexicans said a tax was unlikely to change their eating habits much.

Héctor Ortega, a 45-year-old operator of a street stand in downtown Mexico City, predicted that consumers may pull back briefly when prices rise, but then return to their old habits.

“Just like the cigarettes, people will go back to their old habits,” said Mr. Ortega. He said junk food was obviously unhealthy, but it was often the only thing that poorly paid office workers and students can afford. “This is a restaurant zone and the food here is expensive. For some people, these products are the only food available.”

Fernando González, 24, an office worker who frequents Mr. Ortega’s stand, is a big fan of sodas and gum, in particular. When the new prices kick in, he said, he won’t give up on his favorites, but will probably buy less chips and candy.

“It’s a craving, it’s an addiction, it’s something people enjoy,” he said of Mexicans and their treats.

Academics say the move could hurt the poor because they spend a greater percentage of their income on cheap, packaged foods, but added that doing nothing was worse.

Sure. Which is why America no longer has a drug (or gun) problem. Oh wait.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/wKEwrWwJ0a4/story01.htm Tyler Durden

Guest Post: Gold Fails To Obey Script

Submitted by Pater Tenebrarum of Acting Man blog,

Selling Both the Rumor and the News Turns Out Not to Work …

In our interim update on gold a few days ago we wrote:

“It seems possible that news of a budget and/or debt ceiling deal could send gold prices even lower, but the likelihood of that happening is actually not as pronounced as it would have been if prices had risen during the current period of uncertainty.

Usually either the rumor is bought and the news are sold, or vice versa. Cases of 'sell the rumor and then sell the news as well' are generally fairly rare.”

It should be remembered in this context that gold was supposed to follow a certain script in the context of the debt ceiling debate, written by Goldman Sachs analyst Jeffrey Currie and given the placet of analysts at virtually every mainstream bank:

“Once we get past this stalemate in Washington, precious metals are a slam dunk sell at that point,” Currie said. “You have to argue that with significant recovery in the U.S., tapering of QE should put downward pressure on gold prices.”

The markets rarely make things that easy, although one must of course keep in mind that the action over a few trading days cannot yet be called conclusive with regard to the medium term trend. In this particular case, shorts thought they had received an invitation to shoot fish in a barrel, but the market evidently decided otherwise.

Gold, December contract daily – following a false breakdown, the contract shot higher upon the budget deal resolution – click to enlarge.

As the above chart shows, while the especially smart bears who thought they could break gold below short term support by selling over $600 million notional on GLOBEX prior to regular COMEX trading hours had their clock cleaned, the bulls cannot yet claim a decisive victory either. Still, they have won an important battle. Here is a close-up of the action:

December gold, 30 minute chart – click to enlarge.

The biggest positive is in our view the 'false break' highlighted above. Selling thousands of contracts in the 'off hours' has this time not been enough to actually break support. When a market isn't going down when it 'should', it often goes up instead. This is an excellent example for this rule. However, bullish traders require some follow-through buying at this juncture to produce a decisive trend change. There is strong lateral resistance in the 1340-1350 area, and it needs to be overcome to pronounce the trend truly changed.

Interestingly, as can be seen in the chart of 1 month GOFO (gold forward rate) by Societe Generale below, the gold forward rate has once again turned into negative territory in the London market. While this is not quite as significant as some people have asserted in light of extremely low LIBOR rates, it is still remarkable – moreover, negative GOFO rates always tend to provoke rallies in the gold price in the short term. There simply are no exceptions to this rule we know of.

Normally, gold is lent out in order to obtain collateralized dollar loans at a very low interest rate, as the lease rate paid on gold is deducted from LIBOR in these transactions. The situation actually reverses when GOFO is negative, as then whoever is on the other side of the trade actually pays for obtaining the temporary use of gold. Why would anyone want to do that?

We believe the answer has to do with the fractionally reserved gold system involving unallocated gold accounts (i.e., irregular gold deposits). According to what must be considered quite credible estimates, the leverage employed can be as high as 100:1 – which is to say that unallocated gold accounts are backed by only a single ounce of gold per 100 ounces deposited.

The remainder of the deposits has been employed by bullion banks for their own business purposes – it is essentially fractional reserve banking, only it is using gold as the underlying currency. So what happens when delivery demands or demands to move gold from unallocated to allocated accounts exceed the amount of physical gold actually at hand? One way to satisfy such delivery demands in the short term is to borrow gold. So we suspect &ndas
h; although we cannot prove it – that this is why GOFO has turned negative.

1 month GOFO turns into negative territory again – click to enlarge.

We also like that Thursday's rally was greeted with incredulity all around. A friend sent us the following smattering of quotes from the mainstream financial press. We especially like the guys who just know that the 'gold bull market is definitely over':

“The markets had anticipated a last-minute compromise of this kind," says a note from German investment bank and bullion dealers Commerzbank. "What is more, this also means that the scaling back of Fed bond purchases will be further postponed. A renewed sell-off of precious metals thus failed to materialize."

Issued before the debt-limit fix, "Resistance lies between 1301 and 1307," said Scotiabank's technical analysis Wednesday night, pointing to gold's 50% retracement of both its 2008-2011 uptrend and this year's June-August rally.

Longer-term, however, "Desire to buy gold as a hedge against the consequences of monetary policy has diminished," reckons Credit Suisse analyst Tom Kendall, who in February announced the "beginning of the end of the era of gold".

"When you've got other asset classes, equities in particular, doing so well, then it's hard to divert investments out of them and into something like gold, which is falling."

A lot of gold," agrees Robin Bhar at Societe Generale, also speaking to Bloomberg today, "has been held for speculative purposes, investment and a store of value, and that's less of a reason going forward.

"If you sell your gold and put your money into equities, other fixed-income assets or real estate, you're going to show a return. The gold bull market is definitely over."

But "although the US has managed to avert a default," counters Nic Brown's commodity team at French investment and bullion bank Natixis, "[it] has clearly lost some credibility" with foreign creditors led by China. Not only did Washington's behavior annoy T-bond holders, says Natixis, "a concrete long term solution has once again failed to emerge."

(emphasis added)

And so it goes – we are going to keep these quotes for reminiscence purposes.

Gold Stocks

Yesterday the HUI gapped up above its 20-day moving average. We have become a bit wary of such gaps, but want to point out that the action so far looks quite similar to what happened in early July. Even today's pullback is reminiscent of the action following the gap up in July.

Whether the similarities will continue we cannot say, but we do like the fact that the index has done what it was expected to do in view of the wedge-like decline that preceded the recent rally.

HUI daily – now we have an MACD buy signal as well, tentative though it may be – click to enlarge.

Also worth noting is that in spite of gold's very strong rally, the HUI-gold ratio continued to improve somewhat:

HUI-gold ratio still improving – and the recent move to new lows is beginning to look like a false breakdown as well – click to enlarge.

So here we have another 'false breakdown' in terms of the ratio of gold stocks to gold and obviously it would be quite encouraging if it manages to hold up.

Conclusion:

As before, we cannot yet say whether a trend change is definitely in the bag. However, considering how absolutely dismal sentiment on gold is, considering the many similarities to the 2008 'retest' that could be observed recently (back then, gold was also declared 'dead' by the mainstream) and given the fact that for a change, the gold market has not acted in the way that was widely expected, it continues to make sense to look for more signs of a trend change to emerge.

Ideally declines should continue to be kept in check by support at $1275, while any rally that manages to exceed the $1350 level on a closing basis and confirmed by the gold stock indexes can probably be interpreted as a sign that the short to medium term trend has finally reversed for good.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/1ovjvUaC6_4/story01.htm Tyler Durden

Free Volling: As VIX Plunges, Someone Bets $6.7 Million On Prompt Rebound

While last week’s relentless panic buying has been extensively commented on, it was last week’s nearly 50% plunge in near-term stock vol that the major news as the world went from risk off mode to risk on. It wasn’t just stocks whose volatility imploded: as the following charts from Bank of America and associated commentary show, it was the implied near-term volatility of all assets classes that was hammered in the last three days.

First equities:

Chart of the week: VXV/VIX ratio says risk rally to continue

While the VIX index has just reached fresh 2m lows, it still has plenty of room to fall; particularly against its curve. Indeed, the VXV/VIX ratio (VXV is the Bloomberg ticker for 3m S&P500 Volatility) continues to trend higher. Until this ratio reaches 1.2 or greater (indicating investor complacency) the US equity rally remains on firm footing.

But also Treasurys:

US Fixed Income volatility breakdown

The MOVE index has broken its yearlong pivot at 73.00 and completed a 3m top in the process. Expect Treasury volatility to decline further in the weeks ahead towards the May lows at 48.87 before greater signs of basing emerge.

FX…

FX volatility descent accelerates

G7 FX volatility remains under pressure. The mid-September completion of a 7m Head and Shoulders Top says that the fall in volatility can extend to the Dec’12 lows at 7.06% before all is said and done.

And Crude:

Oil volatility spills lower

After 6m of a very choppy consolidation, WTI Crude Oil volatility has broken sharply lower to resume its year and a half downtrend. The completed Triangle formation points to further downside in the weeks ahead. The initial target is the Mar-28 low at 17.60, with risk for a move to its long term channel base near 13.53.

Finally, while everyone is fascinated by the rapid VIX down move, it is what someone did on Friday by betting that VIX will double by February in a 24/29 VIX Call Spread, that was of note. The amount wagered: $6.7 million. Whether or not this was an outright trade, or a hedge (and if one listens to Jamie Dimon perjuring himself to Congress, any trade is a hedges, adding further to the confusion) is unknown, but it is not pocket change betting that the plunge in vol will be merely transitory. From Bloomberg:

An investor paid $6.7 million for a trade that will pay off if the Chicago Board Options Exchange Volatility Index more than doubles by February.

The trader today bought 160,000 bullish contracts on the VIX expiring in February with a strike price of 24, while selling the same number of February 29 calls in a strategy known as a call spread, according to New York-based Trade Alert LLC. The trade profits if the volatility gauge rises above 24.42 from the current level around 13, data compiled by Bloomberg show. It has a maximum payoff if the VIX jumps 115 percent to 29.

“This is probably an investor with a portfolio of stocks who is using the VIX to hedge against an increase in market volatility,” Frederic Ruffy, a Chicago-based senior options strategist at Trade Alert, said in a phone interview. “The focus is on the February options, so it expresses concern over what will happen during the next three months, which coincides with the next deadlines on the government budget.”

Congress resolved a deadlock on funding the U.S. government and avoiding a default this week, driving the VIX down from a three-month high of 20.34 on Oct. 8. The agreement funds the federal government through mid-January and lifts the nation’s debt ceiling until Feb. 7.

The VIX, which hasn’t closed above 29 since the end of 2011, slumped 3.3 percent to 13.04 today, a one-month low.

The purchased February 24 calls cost 90 cents per contract, while the February 29 calls were sold at 48 cents. The total cost of the trade was 42 cents per contract, or $6.7 million, according to data compiled by Bloomberg.

So with the latest can-kicking set to expire in less than three months, and at least one investor already putting in millions in a wager that Vol, currently plunging, will once again double as the Congressional dysfunction returns, one wonders: Will Mr. Chairman, who runs the world’s biggest hedge fund, get to work as usual, and make sure any and all risk hedges expire worthless?

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/4kCvqsHSv_A/story01.htm Tyler Durden