iftttwall

Authored by Paul Craig Roberts & Dave Kranzler,

The Federal Reserve and its bullion bank agents (JP Morgan, Scotia, and HSBC) have been using naked short-selling to drive down the price of gold since September 2011. The latest containment effort began in mid-July of this year, after gold had moved higher in price from the beginning of June and was threatening to take out key technical levels, which would have triggered a flood of buying from hedge funds.

The Fed and its agents rig the gold price in the New York Comex futures (paper gold) market. The bullion banks have the ability to print an unlimited supply of gold contracts which are sold in large volumes at times when Comex activity is light.

Generally, on the other side of the trade the buyers of contracts are large hedge funds and other speculators, who use the contracts to speculate on the direction of the gold price. The hedge funds and speculators have no interest in acquiring physical gold and settle their bets in cash, which makes it possible for the bullion banks to sell claims to gold that they cannot back with physical metal. Contracts sold without underlying gold to back them are called “uncovered contracts” or “naked shorts.” It is illegal to engage in naked shorting in the stock and bond markets, but it is permitted in the gold futures market.

The fact that the price of gold is determined in a futures market in which paper claims to gold are traded merely to speculate on price means that the Fed and its bank agents can suppress the price of gold even though demand for physical gold is rising. If there were strict requirements that gold shorts could not be naked and had to be backed by the seller’s possession of physical gold represented by the futures contract, the Federal Reserve and its agents would be unable to control the price of gold, and the gold price would be much higher than it is now.

Gold price manipulation is used when demand for delivery of gold bullion begins to put upward pressure on the price of gold and hedge funds speculate on the rising price of gold by purchasing large quantities of Comex futures contracts (paper gold). This speculation accelerates the upward move in the price of gold. The TF Metals Report provides a good description of this illegal manipulation of the gold market:

“Over a period of 10 weeks to begin the year, the Comex bullion banks were able to limit the rally to only 15% by supplying the “market” with 95,000 brand new naked short contracts. That’s 9.5MM ounces of make-believe paper gold or about 295 metric tonnes.

 

“Over a period of just 5 weeks in June and July, the Comex bullion banks were able to limit the rally to only 7% by supplying the “market” with 79,000 brand new naked short contracts. That’s 7.9MM ounces of make-believe paper gold or about 246 metric tonnes.” http://ift.tt/1v3lGdx

 

In previous columns, we have documented the heavy short-selling into light trading periods.
See for example: http://ift.tt/1sqiPwa

The bullion banks do not have nearly enough gold in their possession to make deliveries to the buyers if the buyers decide to stand for delivery per the terms of the paper gold contract. The reason this scheme works is because the majority of the buyers of the contracts are speculators, not gold purchasers, and never demand delivery of the gold. Instead, they settle the contracts in cash. They are looking for short-term trading profits, not for a gold hedge against currency inflation. If a majority of the longs (the purchasers of the contracts) required delivery of the gold, the regulators would not tolerate the extent to which gold is shorted with uncovered contracts.

In our opinion, the manipulation is illegal, because it is insider trading. The bullion banks that short the gold market are clearing members of the Comex/NYMEX/CME. In that role, the bullion banks have access to the computer system used to clear and settle trades, which means that the bullion banks have access to all the trading positions, including those of the hedge funds. When the hedge funds are in the deepest, the bullion banks dump naked shorts on the Comex, driving down the futures price, which triggers selling from stop-loss orders and margin calls that drive the price down further. Then the bullion banks buy the contracts at a lower price than they sold and pocket the difference, simultaneously serving the Fed by protecting the dollar from the Fed’s loose monetary policy by lowering the gold price and preventing the concern that a rising gold price would bring to the dollar.

Since mid-July, nearly every night in the US the price of gold remains steady or drifts higher. This is when the eastern hemisphere markets are open and the market players are busy buying physical gold for which delivery is mandatory. But as regular as clockwork, following the close of the Asian markets, the London and New York paper gold markets open, and the price of gold is immediately taken lower as paper gold contracts flood into the market setting a negative tone for the day’s trading.

Gold serves as a warning for aware people that financial and economic trouble are brewing. For instance, from the period of time just before the tech bubble collapsed (January 2000) until just before the collapse of Bear Stearns triggered the Great Financial Crisis (March 2008), gold rose in value from $250 to $1020 per ounce, or just over 400%. Moreover, in the period since the Great Financial Collapse, gold has risen 61% despite claims that the financial system was repaired. It was up as much as 225% (September 2011) before the Fed began the systematic take-down and containment of gold in order to protect the dollar from the massive creation of new dollars required by Quantitative Easing.

The US economy and financial system are in worse condition than the Fed and Treasury claim and the financial media reports. Both public and private debt burdens are high. Corporations are borrowing from banks in order to buy back their own stocks. This leaves corporations with new debt but without income streams from new investments with which to service the debt. Retail stores are in trouble, including dollar store chains. The housing market is showing signs of renewed downturn. The September 16 release of the 2013 Income and Poverty report shows that real median household income has declined to the level in 1994 two decades ago and is actually lower than in the late 1960s and early 1970s. The combination of high debt and decline in real income means that there is no engine to drive the economy.

In the 21st century, US debt and money creation has not been matched by an increase in real goods and services. The implication of this mismatch is inflation. Without the price-rigging by the bullion banks, gold and silver would be reflecting these inflation expectations.

The dollar is also in trouble because its role as world reserve currency is threatened by the abuse of this role in order to gain financial hegemony over others and to punish with sanctions those countries that do not comply with the goals of US foreign policy. The Wolfowitz Doctrine, which is the basis of US foreign policy, says that it is imperative for Washington to prevent the rise of other countries, such as Russia and China, that can limit the exercise of US power.

Sanctions and the threat of sanctions encourage other countries to leave the dollar payments system and to abandon the petrodollar. The BRICS (Brazil, Russia, India, China, South Africa
) have formed to do precisely that. Russia and China have arranged a massive long-term energy deal that avoids use of the US dollar. Both countries are settling their trade accounts with each other in their own currencies, and this practice is spreading. China is considering a gold-backed yuan, which would make the Chinese currency highly desirable as a reserve asset. It is possible that the Fed’s attack on gold is also aimed at making Chinese and Russian gold accumulation less supportive of their currencies. A currency linked to a falling gold price is not the same as a currency linked to a rising gold price.

It is unclear whether the new Chinese gold exchange in Shanghai will displace the London and New York futures markets. Naked short-selling is not permitted in the Chinese gold exchange. The world could end up with two gold futures markets: one based on assessments of reality, and the other based on gambling and price-rigging.

The future will also determine whether the role of reserve currency has been overtaken by time. The US dollar took that role in the aftermath of World War II, a time when the US had the only industrial economy that had not been destroyed in the war. A stable means of settling international accounts was needed. Today there are many economies that have tradable currencies, and accounts can be settled between countries in their own currencies. There is no longer a need for a single reserve currency. As this realization spreads, pressure on the dollar’s value will intensify.

For a period the Federal Reserve can support the dollar’s exchange value by pressuring Japan and the European Central Bank to print their currencies with which to support the dollar with purchases in the foreign exchange market. Other countries, such as Switzerland, will print their own currencies so as not to endanger their exports by a rise in the dollar price of their exports. But eventually the large US trade deficits produced by offshoring the production of goods and services sold into US markets and the collapse of the middle class and tax base caused by jobs offshoring will destroy the value of the US dollar.

When that day arrives, US living standards, already endangered, will plummet. American power will have been destroyed by corporate greed and the Fed’s policy of sacrificing the US economy in order to save four or five mega-banks, whose former executives control the Fed, the US Treasury, and the federal financial regulatory agencies.

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

While we already know that “work is punished” in America, with almost 20% of Americans’ disposable personal income made up of US government transfer payments (up from just 5% 60 years ago), it is perhaps no surprise that Bloomberg’s Comfort Index shows the jobless in America haven’t been this comfortable since 2007…

Hope…

 

or a generous government?

 

Charts: Bloomberg

via Zero Hedge http://ift.tt/Y9AOu3 Tyler Durden

While we already know that “work is punished” in America, with almost 20% of Americans’ disposable personal income made up of US government transfer payments (up from just 5% 60 years ago), it is perhaps no surprise that Bloomberg’s Comfort Index shows the jobless in America haven’t been this comfortable since 2007…

Hope…

 

or a generous government?

 

Charts: Bloomberg

via Zero Hedge http://ift.tt/Y9AOu3 Tyler Durden

Authored by Andrea Tambalotti and Argia Sbordone via The New York Fed's Liberty Street Economics blog,

The severe recession experienced by the U.S. economy between December 2007 and June 2009 has given way to a disappointing recovery. It took three and a half years for GDP to return to its pre-recession peak, and by most accounts this broad measure of economic activity remains below trend today. What precipitated the U.S. economy into the worst recession since the Great Depression? And what headwinds are holding back the recovery? Are these headwinds permanent, calling for a revision of our assessment of the economy’s speed limit? Or are they transitory, although very long-lasting, as the historical record on the persistent damages inflicted by financial crisis seems to suggest? In this post, we address these questions through the lens of the FRBNY DSGE model.

DSGE models are a particularly suitable tool to look under the economy’s hood and illuminate its inner workings. Their structure allows us to decompose the evolution of the key macroeconomic variables that we can measure—such as GDP and inflation—in terms of their underlying driving forces, which are unobserved. In terms of the automotive metaphor, with a model of the car/economy in hand, we can trace back its observed behavior—direction and speed, say—to its fundamental determinants, such as the conditions of the road and the actions of the driver on the accelerator and the brakes. The key difference of course is that the economy is much more complicated than a car, and does not have one driver behind the wheel. Therefore our model can only provide a simplified, and in many cases imperfect, account of its workings. Even with these simplifications, however, the model provides useful insights.

The FRBNY DSGE model attributes the observed movements in macroeconomic variables to several fundamental disturbances, as explained in the previous post in this series and in more detail in our staff report. As it turns out, only four of these shocks account for the bulk of the movements in GDP and inflation since the Great Recession.

• A shock to total factor productivity (TFP), which affects the overall ability of the economy to produce output from any given amount of labor and capital inputs. A positive TFP shock results in higher GDP and, at the same time, in lower costs of production and hence lower inflation. In our model, shifts in TFP have a permanent effect on the economy’s productive potential. They capture a whole range of “structural” factors that will affect the growth trajectory of the economy for the foreseeable future.
• A financial (or spread) shock stemming from increases in the perceived riskiness of borrowers, which induces banks and other intermediaries to charge higher interest rates on loans, thereby widening credit spreads. An increase in perceived risk (a positive realization of this shock) leads to a large increase in the cost of capital for entrepreneurs, which depresses investment demand and hence GDP growth. As a result of the lower demand, inflation also falls. Although the spikes in spreads associated with this shock tend to be relatively short-lived, as they were during the crisis, their effects can linger well past the most acute phase of market disruptions, with persistently tight credit conditions depressing demand, and hence output and inflation, for several years. Unlike the TFP shocks, however, these financial disturbances are not permanent, and their effects will ultimately dissipate, returning the economy to its pre-crisis growth trajectory.
• A shock to investment demand, whose negative realizations persistently depress capital formation, leading to lower growth and lower inflation. This shock has very similar macroeconomic effects to the risk shock we just described, with the crucial difference that it does not move credit spreads. Therefore, this disturbance can be thought of as capturing financial and other factors that do not manifest themselves in higher spreads, but that nonetheless affect firms’ willingness or ability to invest. Examples of such factors are a reluctance to lend by banks that does not lead to higher interest rates on loans, but for instance to a rationing of credit to certain borrowers, as well as the perception by firms of a particularly uncertain outlook, which delays their investment decisions.
• Shocks to monetary policy, capturing changes in the monetary policy stance not reflected in the policy rate, such as the introduction of forward guidance.

The two charts below present the contributions of these four factors to the evolution of past observed and future projected GDP growth and inflation between 2007 and 2018. The variables are in deviation from their sample mean. Released data are represented by the black line. The projections for the rest of 2014 and beyond, captured by the red line, come from the model, as explained in more detail in the last post in this series. The colored bars represent the contribution of the corresponding driving force to the observed (or projected) outcome at any given point in time.

The first feature of this decomposition that we want to highlight is the paramount importance of spread shocks (in purple) during the recession. Starting at the end of 2007, the economy experiences a sequence of large shocks to credit spreads, driven by an increase in the perceived riskiness of borrowers. This progressive increase in risk is accompanied by deteriorating credit conditions, culminating in two spikes in spreads in the third and fourth quarters of 2008 with the failure of Lehman Brothers. These abrupt increases in the cost of credit account for a decline in quarterly GDP growth of more than 5 percentage points (annualized), which is about half of the total drop in output growth at the nadir of the recession. Inflation is also significantly affected by these shocks, which account for about three quarters of the decline in inflation in the second half of 2008.

The other half of the decline in GDP growth in 2008 stems from significant declines in TFP (the red bars). As we already pointed out, TFP shocks have permanent effects on the productive capacity of the economy in our framework, suggesting that the recession caused some lasting damage. However, the negative shocks of 2008 are followed by positive shocks, with the red bars primarily contributing to GDP growth. As a result, the level of TFP, and hence of potential output in our model, emerges largely unscathed at the present time.

As 2008 unfolds and the recession quickly worsens, the only force pushing against the fast deterioration in economic conditions is monetary policy. The orange bars—monetary policy shocks—do not represent the overall reaction of monetary policy to economic developments, which includes changes in the policy rate, but rather the extent to which this reaction exceeds what “normal,” historical reaction patterns would imply. Therefore, the large contributions of the orange bars suggest that the Federal Reserve was particularly aggressive in fighting the crisis early on, deploying several tools that went beyond its conventional weaponry. According to our model’s accounting, this extra effort is worth 2 to 3 percentage points of annual GDP growth in the middle of 2008, for a total boost to GDP of roughly 2 percent for 2008 as a whole. And this estimate does not even include the effects of the many credit and liquidity programs the Fed engaged in to ameliorate conditions in financial markets at the height of their stress.

Moving on to the recovery phase, which according to NBER dating starts in the middle of 2009, we can see that shocks to investment demand (in light blue) are the main headwinds holding back the economy. As credit spreads return to normal, the effect of financial risk shocks (in purple) dissipates, even though their overall effect continues to be a drag on growth and inflation. At this point, however, investment shocks start taking on a very large negative role in pushing down both GDP growth and inflation. The key feature of these shocks is the persistence of their effect on both variables, which remain depressed throughout the recovery phase, and into the forecast horizon. Admittedly, the fundamentals of investment shocks are harder to characterize than those of the spread or TFP shocks, representing any factor unrelated to credit spreads that might still restrain investment demand. Many such factors have been identified over time as playing a role in the sluggish recovery, including an overall reluctance of banks and other intermediaries to expose their balance sheets to risk, regardless of the pricing of that risk, and the tendency of firms to delay projects in the face of unusually uncertain prospects. Either way, our model squarely points to investment demand shocks as playing a fundamental role in retarding the recovery, consistent with the view that weak investment, more than consumption, has been behind the slow pace of growth and subdued inflation.

Monetary policy remains on the other side of the ledger over the recovery period, serving to counteract the negative effects of the shocks weighing on the economy. Even with the policy rate against its zero lower bound, monetary policy continues to lift economic activity and prevent inflation from falling too far below target, as demonstrated by the positive orange bars in the chart. In the model, this stimulus is achieved through forward guidance, whose effect on expected future policy rates, and hence on long-term rates, is explicitly taken into account in the model estimation.

The model’s forecast for the evolution of the economy over the next few years (the red lines in both charts) remains persistently subpar, with GDP growth about half a percentage point below its mean and inflation recovering very slowly—scenarios that will be discussed in more detail in the last post in this series. Decomposing the forecasts into their determinants highlights two main features. First, the headwinds represented by tight credit and the other factors holding back investment demand abate only gradually, contributing to restrain the economy over the medium term. Second, monetary policy starts representing a drag on growth and inflation over the forecast horizon, even though the policy rate remains lower than it would otherwise be. The reason is that, in the model, monetary policy has no long-run effects on the real economy, so monetary policy shocks can only affect the level of output temporarily.

In conclusion, this analysis finds little evidence of the permanent structural damage to the economy’s productive potential that many commentators see as the main culprit for the subpar recovery from the Great Recession. Instead, our decomposition is quite supportive of the narrative popularized by Reinhart and Rogoff and more recently by Mian and Sufi, according to which a slow recovery is what we should have expected owing to the very persistent damage inflicted by the financial crisis on the real economy. In the FRBNY DSGE model, this damage manifests itself as a sequence of negative shocks to investment demand—shocks that capture many of the headwinds often mentioned as an impediment to a more robust recovery. At the same time, our model suggests that monetary policy played an important role in cushioning the blow from the financial crisis and in sustaining the recovery, which could have been significantly more disappointing without the aggressive actions undertaken by the Fed.

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

Authored by Andrea Tambalotti and Argia Sbordone via The New York Fed's Liberty Street Economics blog,

The severe recession experienced by the U.S. economy between December 2007 and June 2009 has given way to a disappointing recovery. It took three and a half years for GDP to return to its pre-recession peak, and by most accounts this broad measure of economic activity remains below trend today. What precipitated the U.S. economy into the worst recession since the Great Depression? And what headwinds are holding back the recovery? Are these headwinds permanent, calling for a revision of our assessment of the economy’s speed limit? Or are they transitory, although very long-lasting, as the historical record on the persistent damages inflicted by financial crisis seems to suggest? In this post, we address these questions through the lens of the FRBNY DSGE model.

DSGE models are a particularly suitable tool to look under the economy’s hood and illuminate its inner workings. Their structure allows us to decompose the evolution of the key macroeconomic variables that we can measure—such as GDP and inflation—in terms of their underlying driving forces, which are unobserved. In terms of the automotive metaphor, with a model of the car/economy in hand, we can trace back its observed behavior—direction and speed, say—to its fundamental determinants, such as the conditions of the road and the actions of the driver on the accelerator and the brakes. The key difference of course is that the economy is much more complicated than a car, and does not have one driver behind the wheel. Therefore our model can only provide a simplified, and in many cases imperfect, account of its workings. Even with these simplifications, however, the model provides useful insights.

The FRBNY DSGE model attributes the observed movements in macroeconomic variables to several fundamental disturbances, as explained in the previous post in this series and in more detail in our staff report. As it turns out, only four of these shocks account for the bulk of the movements in GDP and inflation since the Great Recession.

• A shock to total factor productivity (TFP), which affects the overall ability of the economy to produce output from any given amount of labor and capital inputs. A positive TFP shock results in higher GDP and, at the same time, in lower costs of production and hence lower inflation. In our model, shifts in TFP have a permanent effect on the economy’s productive potential. They capture a whole range of “structural” factors that will affect the growth trajectory of the economy for the foreseeable future.
• A financial (or spread) shock stemming from increases in the perceived riskiness of borrowers, which induces banks and other intermediaries to charge higher interest rates on loans, thereby widening credit spreads. An increase in perceived risk (a positive realization of this shock) leads to a large increase in the cost of capital for entrepreneurs, which depresses investment demand and hence GDP growth. As a result of the lower demand, inflation also falls. Although the spikes in spreads associated with this shock tend to be relatively short-lived, as they were during the crisis, their effects can linger well past the most acute phase of market disruptions, with persistently tight credit conditions depressing demand, and hence output and inflation, for several years. Unlike the TFP shocks, however, these financial disturbances are not permanent, and their effects will ultimately dissipate, returning the economy to its pre-crisis growth trajectory.
• A shock to investment demand, whose negative realizations persistently depress capital formation, leading to lower growth and lower inflation. This shock has very similar macroeconomic effects to the risk shock we just described, with the crucial difference that it does not move credit spreads. Therefore, this disturbance can be thought of as capturing financial and other factors that do not manifest themselves in higher spreads, but that nonetheless affect firms’ willingness or ability to invest. Examples of such factors are a reluctance to lend by banks that does not lead to higher interest rates on loans, but for instance to a rationing of credit to certain borrowers, as well as the perception by firms of a particularly uncertain outlook, which delays their investment decisions.
• Shocks to monetary policy, capturing changes in the monetary policy stance not reflected in the policy rate, such as the introduction of forward guidance.

The two charts below present the contributions of these four factors to the evolution of past observed and future projected GDP growth and inflation between 2007 and 2018. The variables are in deviation from their sample mean. Released data are represented by the black line. The projections for the rest of 2014 and beyond, captured by the red line, come from the model, as explained in more detail in the last post in this series. The colored bars represent the contribution of the corresponding driving force to the observed (or projected) outcome at any given point in time.

The first feature of this decomposition that we want to highlight is the paramount importance of spread shocks (in purple) during the recession. Starting at the end of 2007, the economy experiences a sequence of large shocks to credit spreads, driven by an increase in the perceived riskiness of borrowers. This progressive increase in risk is accompanied by deteriorating credit conditions, culminating in two spikes in spreads in the third and fourth quarters of 2008 with the failure of Lehman Brothers. These abrupt increases in the cost of credit account for a decline in quarterly GDP growth of more than 5 percentage points (annualized), which is about half of the total drop in output growth at the nadir of the recession. Inflation is also significantly affected by these shocks, which account for about three quarters of the decline in inflation in the second half of 2008.

The other half of the decline in GDP growth in 2008 stems from significant declines in TFP (the red bars). As we already pointed out, TFP shocks have permanent effects on the productive capacity of the economy in our framework, suggesting that the recession caused some lasting damage. However, the negative shocks of 2008 are followed by positive shocks, with the red bars primarily contributing to GDP growth. As a result, the level of TFP, and hence of potential output in our model, emerges largely unscathed at the present time.

As 2008 unfolds and the recession quickly worsens, the only force pushing against the fast deterioration in economic conditions is monetary policy. The orange bars—monetary policy shocks—do not represent the overall reaction of monetary policy to economic developments, which includes changes in the policy rate, but rather the extent to wh
ich this reaction exceeds what “normal,” historical reaction patterns would imply. Therefore, the large contributions of the orange bars suggest that the Federal Reserve was particularly aggressive in fighting the crisis early on, deploying several tools that went beyond its conventional weaponry. According to our model’s accounting, this extra effort is worth 2 to 3 percentage points of annual GDP growth in the middle of 2008, for a total boost to GDP of roughly 2 percent for 2008 as a whole. And this estimate does not even include the effects of the many credit and liquidity programs the Fed engaged in to ameliorate conditions in financial markets at the height of their stress.

Moving on to the recovery phase, which according to NBER dating starts in the middle of 2009, we can see that shocks to investment demand (in light blue) are the main headwinds holding back the economy. As credit spreads return to normal, the effect of financial risk shocks (in purple) dissipates, even though their overall effect continues to be a drag on growth and inflation. At this point, however, investment shocks start taking on a very large negative role in pushing down both GDP growth and inflation. The key feature of these shocks is the persistence of their effect on both variables, which remain depressed throughout the recovery phase, and into the forecast horizon. Admittedly, the fundamentals of investment shocks are harder to characterize than those of the spread or TFP shocks, representing any factor unrelated to credit spreads that might still restrain investment demand. Many such factors have been identified over time as playing a role in the sluggish recovery, including an overall reluctance of banks and other intermediaries to expose their balance sheets to risk, regardless of the pricing of that risk, and the tendency of firms to delay projects in the face of unusually uncertain prospects. Either way, our model squarely points to investment demand shocks as playing a fundamental role in retarding the recovery, consistent with the view that weak investment, more than consumption, has been behind the slow pace of growth and subdued inflation.

Monetary policy remains on the other side of the ledger over the recovery period, serving to counteract the negative effects of the shocks weighing on the economy. Even with the policy rate against its zero lower bound, monetary policy continues to lift economic activity and prevent inflation from falling too far below target, as demonstrated by the positive orange bars in the chart. In the model, this stimulus is achieved through forward guidance, whose effect on expected future policy rates, and hence on long-term rates, is explicitly taken into account in the model estimation.

The model’s forecast for the evolution of the economy over the next few years (the red lines in both charts) remains persistently subpar, with GDP growth about half a percentage point below its mean and inflation recovering very slowly—scenarios that will be discussed in more detail in the last post in this series. Decomposing the forecasts into their determinants highlights two main features. First, the headwinds represented by tight credit and the other factors holding back investment demand abate only gradually, contributing to restrain the economy over the medium term. Second, monetary policy starts representing a drag on growth and inflation over the forecast horizon, even though the policy rate remains lower than it would otherwise be. The reason is that, in the model, monetary policy has no long-run effects on the real economy, so monetary policy shocks can only affect the level of output temporarily.

In conclusion, this analysis finds little evidence of the permanent structural damage to the economy’s productive potential that many commentators see as the main culprit for the subpar recovery from the Great Recession. Instead, our decomposition is quite supportive of the narrative popularized by Reinhart and Rogoff and more recently by Mian and Sufi, according to which a slow recovery is what we should have expected owing to the very persistent damage inflicted by the financial crisis on the real economy. In the FRBNY DSGE model, this damage manifests itself as a sequence of negative shocks to investment demand—shocks that capture many of the headwinds often mentioned as an impediment to a more robust recovery. At the same time, our model suggests that monetary policy played an important role in cushioning the blow from the financial crisis and in sustaining the recovery, which could have been significantly more disappointing without the aggressive actions undertaken by the Fed.

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

With a 66% chance of default/devaluation implied by the Venezuelan credit market, BofA economist Francisco Roriguez sprung an unusual question on the struggling socialist nation’s central bank – Can you show me your gold?

As Bloomberg reports, the answer was “yes”…

He’d been itching to take a peek for years and now was the time to ask. With the government’s bonds sinking toward prices that indicate investors are bracing for the possibility of default, the country’s $15 billion of gold bars are crucial to ensuring debt payments are met.

 

His first impression once inside the vaults? Those bars don’t take up a lot of room.

 

“You picture that amount of money requiring a lot of space when, in reality, it all fits in five small cells that were not even full to the top,” Rodriguez, a Venezuela native who covers Andean economies for Bank of America Corp. in New York, said in a telephone interview yesterday.

 

He said he started counting frantically in his head, summing up figures scrawled out on signs near each pile of the metal. By his quick math, the gold was all there.

At least they have all their gold thanks to Chavez’ repatriation, which is more than can be said about Germany.

Gold accounts for about 71 percent of Venezuela’s $21.4 billion of foreign reserves, according to the World Gold Council. About $13 billion of the gold is held at the central bank in downtown Caracas, with another $2 billion at the Bank of England, according to Rodriguez. Those gold assets have grown in importance as Venezuela’s overall foreign reserves plunged 34 percent in the past five years, the result largely of a drain of its more liquid assets.

 

The central bank didn’t reply to an e-mail seeking comment on the meeting. In a Sept. 23 note to clients, Rodriguez said the “rare” look at the gold was “largely symbolic yet reassuring.”

 

“It’s not that the majority of the people doubt that the gold is there,” he said by phone. “But it’s one of these things that linger, something that’s nagging you and makes you wonder: What if it’s not?”

*  *  *

As one commenter noted, “It’s quite sad when Venezuela’s Central Bank demonstrates more transparency with its assets than The Federal Reserve.”

via Zero Hedge http://ift.tt/1B8S92R Tyler Durden

Having infamously "thrown in the bearish towel" late last year (must read), Hugh Hendry's Eclectica fund has not enjoyed the kind of money-printing melt-up euphoria he had hoped for in 2014. According to his August letter to investors, the fund is -10.9% year-to-date, shrinking the firm's performance since inception to a mere +0.7%. His positions are intriguing but his commentary can be summed with this sentence alone, "when central banks are actively pursuing a goal of higher prices the most rational course is to tenaciously remain invested in equities." And so he is…

 

Via Eclectica's Hugh Hendry,

Performance Summary

The Fund lost -1.2% in August.

The best performing strategies were those within the Short EM theme which made +0.4% in aggregate, led by our long Mexican Peso/short Chilean Peso holding (a component of the “good versus bad” EM FX strategy) which performed well on evidence of a continued slowdown in the Chilean economy leading to interest rate cuts.

Additional gains came from our Russian FX short, which we have traded tactically throughout the course of the year. Having begun 2014 short the ruble as a result of our concerns regarding the health of the Russian economy, the situation in eastern Ukraine has provided an additional catalyst.

Within the China theme (which gave back -0.2% during the month), we initiated a tactical long position in the Hang Seng China Enterprises Index via call options. This reflects our view that the Chinese Government will underwrite the domestic banking system. Furthermore, the authorities have embarked on a coordinated push to encourage investment in Chinese stocks, both through increasing domestic interest and by further opening the market to international investors through the Hong Kong – Shanghai stock connect. With Chinese stock valuations and sentiment at rock bottom the potential is there for a strong outperformance.

Gains from holdings in European pharma and global internet companies were insufficient to offset losses incurred during the early part of the month on European index positioning and peripheral equities as the Long DM component returned – 1.1% in aggregate.

In Japan, Nikkei futures were the main drag on performance as, in contrast with equity markets elsewhere, the index fell – 1.3% after three consecutive months of gains. The total return for the theme was -0.6%. Elsewhere, our holding in the US 30 year Treasury generated a return of +0.6% as geopolitical events ensured that demand for “safe” assets held up and speculation regarding further ECB intervention made the yield on US bonds look relatively appealing.

Manager Commentary

We should have done better in August. We shuffled our equity cards rather than buying more into the weakness. This has prompted us to rethink our book.

As we have said previously, the global macro environment continues to be defined by a historically tepid recovery from the depths of the 2008 contraction. And this demand-light, low inflation recovery has been met by a wholesale purging of those public officials charged with running the largest central banks.

The presence of Draghi and not Weber, Trichet or Duisenberg (or in Japan Shirakawa, or an American hawk such as John Taylor) helps to explain why the German, Japanese and American stock markets all rose 30% in dollar terms last year. It also helps explains why, with the European recovery wilting and medium term inflation expectations making new lows, the ECB found the wherewithal to ease further. With European stock prices down over 10% during the summer, the central bank eased policy considerably and stock prices are rising once more. Clearly this marks a monumental shift in Europe: the once austere German based central bank has jettisoned its tradition and is explicitly targeting higher prices.

The same could be said about Japan. Japan’s recovery has been shaken by the consumption tax hike and any further economic weakness will most likely be met by further monetary accommodation. Again, price weakness has presented an opportunity to buy. Japan’s stock market had fallen 15% earlier this year, today it is not far from challenging its previous high. When central banks are actively pursuing a goal of higher prices the most rational course is to tenaciously remain invested in equities.

Following this latest announcement of policy easing in Europe we have been actively accumulating more equities. In mid-September, we are currently long 107% equities, with 25% invested in the Nikkei, a further 10% invested in European stock indices and 8% equivalent exposure from short dated options on China’s Hang Seng China Enterprises Index, not to mention a further 63% invested in an equity book that spans Europe’s largest pharmaceutical franchises, Japan’s robotic machinery businesses and a global internet basket.

That is not all. We also have a further 6bps DV01 exposure to receiving rates, predominantly long dated Treasuries. The reasoning is similar to our equity book. Central banks seem capable of expanding their price setting franchise to establish nominal rates low enough to support the tepid global recovery. We have simply cherry picked anomalous rates where market prices are not consistent with this view that very low rates are required to ensure that domestic expansions are sustained.

 

*  *  *

As Hendry concluded previously,

Where will it all end?

Remarkably, the aftershocks of Japan's volte-face seemed to catch American policy makers out. In May, the Fed, convinced that its QE program had succeeded in re-distributing global GDP away from China and towards the US economy, began signalling its intent to taper its easy money by autumn. However, with 10-year Treasury rates having moved from 1.75% to 3% and its fourth largest trading paltrier having devalued by 20% since the previous November, the anticipated vigorous domestic American growth never actually materialised; it was captured instead by the new and even looser monetary policy of Japan. Yet again the reflexive loop had worked to sustain the monetary momentum that is feeding global stock markets. And the not so all-knowing Fed? It had to shock market expectations in October by removing the immediacy of its tighter policy and stock markets rebounded higher. Where will this all end? Can it ever end?

There are multiple possible outcomes. The one markets are most vulnerable too is the re-emergence of bullish bankers. They could lend such that the consumer boom in the US and Europe finally sparks and in doing so provoke the Fed to finally tighten policy. That would spook developed market equities but not as much as you might think – they will have the palliative of the stronger GDP growth. Emerging market equities are closer to the edge of a bubble and could prove more susceptible to a greater drawdown owing to th
e fragilities of their debt fuelled economies. But for now, the re-emergence of risk-seeking bankers fuelling a lending boom in the West seems remote. We aren't too worried about it. In Europe for instance the banking system has an estimated 2.6trn euros of deleveraging (circa 30% of GDP) still to complete, having shed 3.5trn euros already.

So we are happy to run a long developed market stock position with a short hedge composed of emerging market equity futures. We are running an unhedged long in Japanese equities as our wild bullish card (we have, of course, hedged the currency).

It seems then to us that the most likely outcome is that America and Europe remain resilient without booming. But with monetary policy set so much too loose it is inevitable that we will continue to witness mini-economic cycles that convince investors that economies are escaping stall speed and that policy rates are likely to rise. This will scare markets – and emerging markets in particular – but it won't actually materialise: stronger growth in one part of the world on the back of easier policy will be countered by even looser policy elsewhere (the much fabled "currency wars"). So market expectations of tighter policy will always be rescinded and emerging markets will recover rather than crash. Developed markets just keep trending positively against this background – and might accelerate. Remember what we said about 1928 and 1998 at the beginning.

Just be long. Pretty much anything.

So here's how I understand things now that I am no longer the last bear standing. You should buy equities if you believe many European banks and their sovereign paymasters are insolvent. You should buy shares if you put a higher probability than your peers on the odds of a European democracy rejecting the euro over the course of the next few years. You should be long risk assets if you believe China will have lowered its growth rate from 7% to nearer 5% over the course of the next two years. You should be long US equities if you are worried about the failure of Washington to address its fiscal deficits. And you should buy Japanese assets if you fear that Abenomics will fail to restore the fortunes of Japan (which it probably won't). Hey this is easy…

And then it crashed

I have not completely lost my senses of course. Eclectica remain strong believers in the most powerful force in the universe – compounding positive returns – and avoiding large losses is crucial to achieving this.

We have built a reputation for getting the calls right in the difficult space that is macro investing, which has served us and our clients well during both trending bull markets and times of crisis. Today, of course, the market is "golden" which is to say that the 50 day price trend is above the 200 day. But remember that during those forays into the "dead-zone", years like 2008 and 2011 when equity markets crashed, Eclectica performed handsomely. I like to think therefore that I own an alpha crisis management franchise that has rewarded our investors at limes of stock market stress.

via Zero Hedge http://ift.tt/1B8S92I Tyler Durden

While it is easy, even sentimental, to pin what may (or may not) be a bubble, or as some call it – market – top on the recent liquidity and euphoria-soaking IPO of China’s megaretailer Alibaba and its sliding chart since it broke for trading, a la what the Blackstone IPO did to the previous bubble, it is also wrong. The reality is that the attention of what few carbon-based investors and traders are left, is glued to very different chart: the one below from Deutsche Bank, showing the  between the S&P and the total assets owned by the Fed.

Read on for the reason why:

Less central bank liquidity

 

In Figure 8 we show what has probably been one of our most used charts of the last year or so. It looks at the relationship between the size of the Fed balance sheet and the S&P 500 (as a proxy for risk generally). As you can see, since the Fed balance sheet was used as an aggressive policy tool post-GFC, the graph suggests that the S&P 500 is well correlated with its size with the former leading the latter by 3 months. For the past 5 years or so the times where we have seen strong performance from risk assets have broadly coincided with periods where the Fed was aggressively expanding its balance sheet. In the periods where the balance sheet wasn’t increasing we generally saw a more challenging environment. So as we have highlighted recently the wobbles seen during the summer months may in part have been due to the imminent end to asset purchases next month (given the 3-month lag in the relationship) and arguably demonstrate the potential challenges facing investors in a world where liquidity is less freely available.

However…

Here we’ve focused only on the actions of the Fed. Since the GFC it’s not just the Fed that has increased the size of its balance sheet. In Figure 9 we track the YoY growth rate (in dollar terms) of the four main central banks globally (Fed, ECB, BoJ, PBoC). We can see that pre-crisis overall balance sheet growth was fairly strong due to the expansion in China. We then get the post-GFC boost from the Fed and to a lesser extent the ECB. We can see that central bank balance sheet expansion seems to have come in waves since then following the various different forms of policy accommodation and QE. Having reached a peak of around 13% in Q1 this year with the growth rate declining since. With the Fed balance sheet likely to be static as of next month much might depend on the BoJ and the ECB from a global liquidity standpoint. China’s actions are less predictable and it could be they react to slower growth by expanding the money base.

However, as of today, they appear far more predictable. Recall: “Get To Work Mr. Chinese Chairman”: China Set To Fire Its Central Bank Head, Unleash The Liquidity Floodgates

So, Deutsche Bank’s conclusion: “Overall we would argue that markets might experience a few more bumps in the road as the global liquidity picture is not as supportive as it has been.”

Also known as Euphemism 101.

via Zero Hedge http://ift.tt/Y5ZCTj Tyler Durden