iftttwall

If yesterday’s 10 Year auction was a success, today’s $16 billion issue of 30 Year paper was poorly received by the market, with the 3.810% yield tailing the 3.796% When Issued, accentuated by a tumble in the Bid To Cover from 2.64 to 2.16, the third lowest in the past 4 years, excluding just the auctions from August of 2011 and 2013 when there was led indicated demand. The internals were less remarkable, with Directs taking down a stronger than average 18.3%, Indirects holding 35.3% of the auction and Dealers left with 46.5% of the auction. Overall, hardly the ringing endorsement in the long-end the Treasury needs.

Perhaps in retrospect this weak auction is not that surprising. As we pointed out earlier, hedge funds have the most conviction in this “asset class” second only to the Nasdaq. And you know what they say about the herd…

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/gNxfx5tKChU/story01.htm Tyler Durden

Discussion of a market bubble (in stocks, credit, bonds, Farm-land, residential real estate, or art) have dominated headlines in recent weeks. However, QEeen Yellen gave us the all-clear this morning that there was "no bubble." Are we currently witnessing a market bubble? It is very possible; however, as STA's Lance Roberts notes, if we are, it will be the first market bubble in history to be seen in advance (despite Bullard's comments in opposition to that "fact"). From a contrarian investment view point, there is simply "too much bubble talk" currently which means that there is likely more irrational excess to come. The lack of "economic success" will likely mean that the Fed remains engaged in its ongoing QE programs for much longer than currently expected – and perhaps Hussman's pre-crash bubble anatomy is dead on…

 

Via Lance Roberts of STA Wealth Management,

"Bubble, Bubble, Toil And Trouble," discussions of a market bubble have dominated the media as stocks have continued to rise unabated.  I have previously asked the question of whether an asset bubble existed and what would cause it to pop:

"The only missing ingredient for such a correction currently is simply a catalyst to put 'fear' into an overly complacent marketplace.  There is currently no shortage of catalysts to pick from whether it is further fiscal policy missteps stemming from the upcoming "Debt Ceiling" debate, a resurgence of the Eurozone crisis, or an unexpected shock from an area yet to be on our radar.

 

In the long term, it will ultimately be the fundamentals that drive the markets.  Currently, the deterioration in the growth rate of earnings, and economic strength, are not supportive of the speculative rise in asset prices or leverage.  The idea of whether, or not, the Federal Reserve, along with virtually every other central bank in the world, are inflating the next asset bubble is of significant importance to investors who can ill afford to lose a large chunk of their net worth."

However, the question of whether or not we are in a bubble was currently addressed by my colleague Cullen Roche who posted recently:

"The word 'bubble' gets tossed around an awful lot ever since the Nasdaq bubble and the housing bubble. I guess it’s not that surprising.

 

But first, what is a 'bubble'? I define a bubble as follows:

 

'A bubble is an environment in which the market price of an asset has deviated from the underlying asset’s fundamentals to an extent that renders the current market price unstable relative to the underlying asset’s ability to deliver the expected result.'

 

When I try to decipher whether a market is in a bubble I don’t like to rely on valuation metrics because I think bubbles are often the result of irrational behavior that makes valuation metrics unreliable for long periods of time. Instead, I prefer to look at underlying fundamentals relative to behavior. When I look at the current equity market I see corporate profits growing modestly, an economy that is expanding modestly and an equity market that is increasingly enthusiastic, but not showing the types of pure exuberance, greed and delusion that are typical in a bubble environment. There’s still a huge amount of skepticism about the equity market rally. This remains an extremely hated rally.

 

So, I would say there’s growing risk as we’re seeing increasing signs of euphoria, but I wouldn’t yet describe this as a 'bubble'. I think that implies much more downside risk than is currently present in the economic and corporate fundamentals. And perhaps more importantly, we’re just not seeing the kind of all out delusion that usually accompanies a bubble. When people at dinner parties start telling me that stocks can’t go down then I’ll start getting scared."

I agree with Cullen. 

• Are the markets grossly extended?  Yes. 
• Is leverage at levels that pose a disruption threat to stocks?  Yes. 
• Are we seeing signs of increasing investor exuberance?  Yes.

However, there is one potential overriding issue that suggests that we might have not yet reached the peak of irrational exuberance…there is simply too many people talking about a "bubble in stocks."

Throughout history, there have been repeated boom/bust market cycles and at the peak of each previous bubble the common mantra was "this time is different."  The reality is that the vast majority of market participants only realize the bursting of a bubble after the fact.  This time is likely no different.  Bob Farrell's Rule #9 states that when all experts agree that something else is bound to happen.  If the majority of professional investors being paraded on television are talking about the potential of a Federal Reserve driven asset bubble; it is unlikely to be the case.

Chris Ciovacco recently penned three reasons why stocks could move higher from current levels.

1. Central banks continue to print
2. 13-year S&P 500 breakout
3. The economy is still growing

Chris's comment on the 13-year breakout of stocks is important, however, it is no more important than the breakout of sto
cks witnessed at the peak of the market in 2007.  While the breakout does clear the markets of overhead resistance on a technical basis – it also marks the beginning of the next major market top.  As far as the economy is concerned it is indeed growing but only sluggishly at best.  That growth can, and likely will, deteriorate rapidly as the Affordable Care Act sinks its teeth into the relative little disposable personal income currently available to the average American family.  The chart below shows the S&P 500/GDP ratio.  The stock market should be a reflection of the underlying economic strength, however, stocks have currently detached from economic fundamentals.

That leaves the central bank.  Despite signs of growing exuberance in the markets; the Fed is highly likely to remain engaged in their ongoing QE programs longer than most expect.  As I discussed previously in "What Is A Liquidity Trap?:"

 "The issue is that with each economic cycle rates continued to decrease to ever lower levels.  In the short term, it appeared that such accommodative policies did aid in economic stabilization as lower interest rates increased use of leverage.  However, the dark side of those monetary policies was the continued increase in leverage which led to the erosion of economic growth, and increased deflationary pressures, as dollars were diverted from productive investment into debt service. 

 

Today, with interest rates at zero, the Fed has had to resort to more dramatic forms of stimulus hoping to encourage a return of economic growth and controllable inflation. The Federal Reserve is currently betting on a 'one trick pony' that by increasing the 'wealth effect' it will ultimately lead to a return of consumer confidence and a fostering of economic growth?  Currently, there is little real evidence of success."

That lack of "economic success" will likely mean that the Fed remains engaged in its ongoing QE programs for much longer than currently expected.  The real surprise in 2014 could very well be an increase in size and scope of the current quantitative easing programs if interest rates remain elevated, deflationary pressures continue to increase and economic growth stalls.  The injection of more liquidity could very well drive asset prices to the irrational extremes of a true market bubble.  However, if that occurs, the majority of market analysts and economists will not be talking about a "bubble" in asset prices but why "this time is truly different."  

Are we currently witnessing a market bubble?  It is entirely possible, but if it is it will be the first market bubble in history to be seen in advance.  From a contrarian investment view point, there is simply "too much bubble talk" currently which means that there is likely more irrational excess to come.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/7pylsB0ZH-M/story01.htm Tyler Durden

The soon-to-be-confirmed Mr. Chairwoman had plenty to say – none of which came as a great surprise. Overall we scored her comments 32 Dovish to 18 Hawkish (which fits with all pre-conceved ideas about the size of her index-finger in relation to the ‘print’ button. A few cherubs include:

• *YELLEN SAYS BENEFITS OF QE STILL EXCEED THE COSTS
• *YELLEN SAYS QE `CANNOT CONTINUE FOREVER’
• *YELLEN DOESN’T SEE ASSET BUBBLE IN HOUSING PRICES
• *YELLEN SAYS QE IS NOT AIMED AT HELPING TO FINANCE U.S. DEFICIT
• *YELLEN: NO ONE HAS A GOOD MODEL ON WHAT INFLUENCES GOLD PRICES

She covered fiscal policy, regulation, gold, income inequality, and bubbles; but it was her admission late in the Q&A that “real” unemployment is around 10%  that perhaps leaves the most room for moar…

 

Full transcript and worldcloud to come…

Dovish
*YELLEN SAYS SHE WOULD BE STRONGLY COMMITTED TO PROMOTE RECOVERY
*YELLEN SAYS JOBLESS RATE REMAINS HIGH
*YELLEN SAYS LONG PERIODS OF UNEMPLOYMENT `PARTICULARLY PAINFUL’
*YELLEN SAYS BENEFITS OF QE STILL EXCEED THE COSTS
*YELLEN: MUST NOT REMOVE SUPPORT WHILE RECOVERY IS `FRAGILE’
*YELLEN SAYS IT’S IMPORTANT NOT TO REMOVE SUPPORT TOO SOON
*YELLEN SAYS FOMC COMMITTED TO 2 PERCENT INFLATION GOAL
*YELLEN SAYS LOWER MORTGAGE RATES KEY TO HELPING HOUSING RECOVER
*YELLEN SEES `NO SET TIME’ FOR TAPERING QE
*YELLEN SAYS WEAK DEMAND IS `A MAJOR DRAG’ ON ECONOMY
*YELLEN SAYS FED DOESN’T SEE BUILDUP OF FINANCIAL RISKS
*YELLEN SEES LIMITED EVIDENCE OF `REACH FOR YIELD’
*YELLEN SAYS FED DOESN’T SEE BROAD BUILD-UP OF LEVERAGE
*YELLEN DOESN’T SEE `MISALIGNMENTS’ IN ASSET PRICES
*YELLEN SAYS BROADER UNEMPLOYMENT GAUGES HIGHER THAN 7.3 PERCENT
*YELLEN SAYS POLICY AIMED TO `BROADLY BENEFIT ALL AMERICANS’
*YELLEN SAYS RECOVERY HAS BEEN `DISAPPOINTING’
*YELLEN WOULDN’T SUPPORT ANY REDUCTION IN FED POLICY LEEWAY
*YELLEN SAYS ECONOMY HAS SUFFERED A DRAG FROM FISCAL POLICY
*YELLEN SAYS STIMULUS BOOST TO HOME PRICES `BROADLY BENEFICIAL’
*YELLEN: FED NEEDS TO TAKE INTO ACCOUNT POLICY IMPACT ON MARKETS
*YELLEN SAYS NORMAL ECONOMY WILL RESTORE `NORMAL RATES’
*YELLEN SAYS FED WILL TRY TO MITIGATE INTEREST RATE RISK
*YELLEN SAYS FISCAL POLICY HAS WORKED AGAINST MONETARY POLICY
*YELLEN SAYS FED `WORRIED ABOUT A FRAGILE RECOVERY’
*YELLEN SAYS FED VERY FOCUSED ON ACHIEVING DUAL MANDATE
*YELLEN SAYS FED INTENT ON AVOIDING DEFLATION
*YELLEN SAYS FED MADE PROGRESS ON EMPLOYMENT, `NOT THERE YET’
*YELLEN DOESN’T SEE ASSET BUBBLE IN HOUSING PRICES
*YELLEN SAYS LOW INTEREST RATES WILL GET ECONOMY BACK TO NORMAL
*YELLEN SAYS SAVERS HAVE BROADER ARRAY OF INTERESTS IN ECONOMY
*YELLEN SAYS SHE’D LIKE TO SEE JOB MARKET RECOVER MORE RAPIDLY

Hawkish
*YELLEN SEEKS `SUBSTANTIAL IMPROVEMENT’ IN LABOR MARKET OUTLOOK
*YELLEN SEEKS `STRONG’ AND ROBUST RECOVERY
*YELLEN: FOMC HAS TOOLS TO REMOVE STIMULUS TO LIMIT INFLATION
*YELLEN SEES `IMPROVEMENT IN THE LABOR MARKET’
*YELLEN SAYS QE `CANNOT CONTINUE FOREVER’
*YELLEN SAYS FED TAKES RISKS OF QE `VERY SERIOUSLY’
*YELLEN SAYS FOMC UNDERSTANDS RISKS THE LONGER QE CONTINUES
*YELLEN SAYS `WE ARE EXPECTING CONTINUED PROGRESS GOING FORWARD’
*YELLEN SAYS FED NEEDS TO MONITOR POTENTIAL FINANCIAL RISKS
*YELLEN SAYS FED LOOKS OUT FOR ANY POTENTIAL ASSET PRICE BUBBLES
*YELLEN: MONETARY POLICY A `BLUNT TOOL’ AGAINST ASSET BUBBLES
*YELLEN SAYS LOW RATES `CAN INDUCE RISKY BEHAVIOR’
*YELLEN WOULDN’T RULE OUT MONETARY POLICY TO FIX MISALIGNMENTS
*YELLEN: FED TO ENSURE BIG BANKS HOLD MORE, BETTER CAPITAL
*YELLEN EXPECTS GROWTH RATE TO PICK UP
*YELLEN SAYS SHE SUPPORTED AS MANY AS 27 MAIN RATE INCREASES
*YELLEN SAYS FED HAS TOOLS TO AVERT EMERGENCE OF ASSET BUBBLE
*YELLEN SAYS FED NEEDS TO WATCH INVESTMENT IN REAL ESTATE

On QE
*YELLEN SEES `DANGERS’ ON BOTH SIDES OF ENDING QE TOO EARLY
*YELLEN SAYS QE HAS MADE `MEANINGFUL CONTRIBUTION’ TO GROWTH
*YELLEN SAYS QE HAS HELPED PUSH DOWN INTEREST RATES
*YELLEN SAYS LOWER INTEREST RATES HELPING HOMEOWNERS
*YELLEN SAYS QE IS NOT AIMED AT HELPING TO FINANCE U.S. DEFICIT
*YELLEN SAYS POLICY HAS BOOSTED STOCKS `TO SOME EXTENT’
*YELLEN SAYS FED SHOULD NEVER BE `A PRISONER OF THE MARKETS’
*YELLEN SAYS `SAVERS ARE HURT’ BY LOW INTEREST RATE POLICY

But Never expected QE to work…
*YELLEN SAYS FOMC LAST YEAR EXPECTED LITTLE PROGRESS ON JOBS

On Supervision
*YELLEN SAYS EXTREMELY IMPORTANT FOR BANKS TO HAVE MORE CAPITAL
*YELLEN SAYS FED `VERY FOCUSED’ ON BROAD FINANCAIL STABILITY
*YELLEN SAYS ADDRESSING TOO-BIG-TO-FAIL AMONG TOP GOALS
*YELLEN SAYS U.S. WILL RAISE CAPITAL STANDARDS FOR BIG BANKS
*YELLEN SAYS TOO-BIG-TO-FAIL FIRMS GET DE FACTO SUBSIDY
*YELLEN: U.S. FINANCIAL SYSTEM SAFER, SOUNDER THAN PRE-CRISIS
*YELLEN: FED IN COMPREHENSIVE REVIEW OF BANK COMMODITY ACTIVITY
*YELLEN SAYS FED `RAMPING UP’ MONITORING OF FINANCIAL STABILITY
*YELLEN SAYS FED `MASSIVELY REVAMPED’ SUPERVISION OF BIG BANKS
*YELLEN SAYS SUPERVISION JUST AS IMPORTANT AS MONETARY POLICY

On Jobs
*YELLEN SAYS FULL EMPLOYMENT RANGES FROM 5 PERCENT TO 6 PERCENT
*YELLEN SAYS `ALL TOO MANY PEOPLE’ HAVE LEFT LABOR FORCE
*YELLEN SEES `WIDENING WAGE INEQUALITY’ SINCE MID-1980S
*YELLEN SAYS FED POLICIES `MEANT TO GENERATE A ROBUST RECOVERY’
*YELLEN SAYS SHE’D LIKE TO SEE JOB MARKET RECOVER MORE RAPIDLY
*YELLEN SAYS FASTER U.S. GROWTH WOULD BUOY JOB MARKET
*YELLEN SAYS INCOME INEQUALITY `VERY SERIOUS PROBLEM’
*YELLEN SAYS `MANY THINGS’ AT ROOT OF INCOME INEQUALITY
*YELLEN SAYS `ROBUST RECOVERY’ WOULD HELP MITIGATE INEQUALITY

And On Gold…
*YELLEN: NO ONE HAS A GOOD MODEL ON WHAT INFLUENCES GOLD PRICES
*YELLEN SAYS GOLD OFTEN USED AS A HAVEN AGAINST RISK

Other
*YELLEN SAYS FOMC REGULARLY ASSESSES GROWTH, JOBS PROGRESS
*YELLEN SAYS SHE HOPES FOR STRONGER WAGE GROWTH
*YELLEN SAYS SHE STRONGLY SUPPORTS TRANSPARENCY AT FED
*YELLEN SAYS FED NEEDS TO RETAIN POLICY INDEPENDENCE
*YELLEN: FED SHOULD BE FREE OF `SHORT-TERM POLITICAL PRESSURES’
*YELLEN SAYS FED WILL WITHDRAW STIMULUS WHILE SUSTAINING GROWTH
*YELLEN SAYS DEFICIT REDUCTION SHOULD FOCUS ON MEDIUM-TERM GAINS
*YELLEN FAVORS FISCAL POLICY THAT `DID NO HARM’
*YELLEN SAYS U.S. DEBT DEFAULT WOULD BE CATASTROPHIC
*YELLEN SAYS FISCAL SUSTAINABILITY A CRITICAL GOAL

 

Via Bloomberg

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

Wolf Richter   www.testosteronepit.com   www.amazon.com/author/wolfrichter

The huddled masses yearning to breathe free in the European Union drown by the boatload in the Mediterranean. They languish behind bars in detention centers in Greece and elsewhere. They’re maligned, hounded, deported if possible, and sometimes killed. But it’s getting cheaper and easier for the rich.

The path to residency and eventual citizenship has always been paved with money. The more money, the smoother the path. But now in the EU, citizenship (and a passport, one of the most prized in the world) is moving into the realm of not only the super-rich but the run-of-the-mill well-off. EU citizenship has become just another product that strung-out debt-crisis countries can sell in a competitive market by undercutting each other. And Malta just started a price war.

The tiny EU member with a population of 417,000 spread over three islands lies 50 miles south of Sicily, 175 miles east of Tunisia, and a little over 200 miles north of Libya. It’s convenient for foreigners, with English being one of the two official languages.

If you’re from Russia or China or Venezuela or Mali and become a citizen of one of the 28 EU countries, you’ll get a country-specific EU passport, which allows you to establish residency and do business anywhere in the EU. Large international money transfers are less of a hassle. There are all sorts of offshore benefits. And travel around the world is a breeze.

But EU citizenship, though a hot product for those who don’t have it, is not normally considered for sale. You have to invest lots of money in your chosen country. Every country has its own priorities: in Hungary, iffy government bonds; in Ireland, public projects such as education; in Portugal, property. These investments will make you eligible for residency, after which you may or may not be able to get citizenship, similar to programs available in the US.

In Austria, where citizenship is almost impossible to get for normal foreigners, the super-rich are sought after. The government, through paragraph 10, section 6 of the Citizenship Act, can confer citizenship “because of the services already provided by the foreigner and the extraordinary achievements still to be expected of him in the special interest of the Republic.” A Saudi hotel investor and the Russian singer Anna Netrebko reportedly received Austrian citizenship (and passport) in this manner. Few succeed: none in 2012 and only 23 in 2011.

But nowhere in the EU could you actually just go and buy citizenship off the shelf.

Cyprus got close. In 2012, as it was veering toward bankruptcy, it offered citizenship through a “fast-track” scheme to anyone willing to plow at least €10 million in direct investment into the country, which is a lot of money for the average rich guy, just to get a travel document and EU residency. There were also some other onerous criteria, and it wasn’t seen as a good deal.

By April 2013, Cyprus was desperate. Depositors in its collapsed banks were treated to high and tight haircuts. Its offshore financial industry, the mainstay breadwinner, had cratered. Cyprus needed money badly. So President Nikos Anastasiades, in office for only a couple of months, announced that the price of citizenship would be slashed to €3 million, but it would still be tied to investment in Cyprus. It was in part an olive branch he held out to Russians who’d stashed their money in the cesspools of corruption that were the Cypriot banks: they too would be eligible for citizenship if they’d lost at least €3 million.

But that era of tying citizenship to investment and residency is now over in the EU. Malta put it up for sale at 78% off! And you can buy it off the shelf and leave.

The Parliament of Malta passed legislation that set the price for Maltese citizenship at €650,000 for any non-EU applicant. It’s not linked to any residency or investment requirements. People can just come by, jump through some minor hoops, pay, get their citizenship and passport, and then settle in Germany or wherever. Simon Busuttil, leader of the opposition Nationalist Party, warned that Malta could end up being compared to shady tax havens in the Caribbean.

Prime Minister Joseph Muscat admitted that the deal was designed to sell the product. Malta is struggling. It needs the money. He claimed that about 45 people would end up buying citizenship during the first year, for about €30 million in revenues.

No big deal?  Henley and Partners, an international consulting group, was awarded the contract to run the program. The firm specializes “in residence and citizenship planning,” for “wealthy individuals and families, as well as their advisors worldwide.” CEO Eric Major claimed that the program would be transparent. But unlike the Prime Minister, Mr. Major estimated that Malta would sell between 200 and 300 citizenships per year. Hence, at the upper range, nearly €200 million in annual revenues – not bad for a little bit of paperwork. And a lot of money for such a small place.

And if the product really takes off? The price point is advantageous, given what Cyprus charges, and there are hundreds of millions of well-to-do but not super-rich Chinese, Indians, and others who would like to establish an escape route. This could be Europe’s next big thing. It could be HUGE! 

But it’s competitive out there, as Cyprus found out. The Maltese government said that other EU countries were also considering the outright sale of citizenship. This can mean only one thing: downward pressure on prices.

Will Greece offer citizenship for €599,000 each? Perhaps, no questions asked, to be even more competitive? It’s going to be what the bailout Troika and everyone else have been looking for: a phenomenally profitable export product with minuscule input costs and unlimited potential. If it sold 1 million citizenships over the next three years at this price, it would be able to pay off all its debts, bail out its banks properly, allow politicians and tycoons to syphon off €100 billion for personal gain, and still have some cash left to buy some German tanks and frigates. Debt crisis solved!

Unless Slovakia jumps in and cuts the price to €399,000 a piece….

Despite a miraculous economic “recovery,” EU-wide youth unemployment hit 24%. New records were set in Spain (56.5%), Greece (57.3%), and other countries. The warnings from history are clear: governments that allow youth unemployment to escalate, do so at their own peril. Read….  No Country For Young Men

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/pF2WizEz3Kk/story01.htm testosteronepit

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Since the SDR is just an aggregate of fiat currencies, it cannot really change the fundamentals of the current status quo.

Many observers believe the U.S. dollar (USD) will lose its status as the world's reserve currency sooner rather than later. Proponents of this view often mention China's agreements with various trading partners to settle trade in their own currencies rather than the dollar as evidence of this trend.

More substantial evidence can be found in the diversification of reserves held by many nations. The euro now makes up about a fourth of all currency reserves:

Here is the IMF (international Monetary Fund) page on voluntarily reported currency reserves: Currency Composition of Official Foreign Exchange Reserves (COFER). Note the large amount of reserves that are not "allocated," i.e. the currency being held is not specified.

Some see the replacement of the U.S. dollar by some other currency as a welcome development, not just for the world economy but for the U.S., as the reserve currency has substantial burdens. Regardless of whether such a replacement would be positive or negative, many analysts see no plausible alternative to the USD as the primary reserve currency for a host of reasons.

Another camp sees China's purchases of gold as paving the way for China's currency (renminbi a.k.a. yuan) to replace the dollar as the global reserve currency. Those who have studied China's policy makers doubt this is the goal; rather, they see China as most likely pursuing a multi-polar world in which no one nation issues the reserve currency.

One set of observers has long held that the ideal replacement for the dollar is a hybrid currency issued by the IMF called SDRs (Special Drawing Rights). The IMF describes the SDR thusly:

"The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries' official reserves. Its value is based on a basket of four key international currencies, and SDRs can be exchanged for freely usable currencies."

The four currencies are the U.S. dollar, the euro, the Japanese yen and the British pound. China is widely seen as working toward floating the renminbi (that is, no longer pegging it to the dollar) so it could be included in the SDR currency.

The SDR seems to many to be the ideal replacement of the USD as the reserve currency, especially if China's currency joins the basket of currencies that make up the SDR.

Though the advantages of a multi-currency basket are fairly self-evident, questions remain if the SDRs are a realistic or practical option. These questions come to mind:

1. Since the SDR is just a basket of currencies, doesn't it simply aggregate the weaknesses of all fiat currencies? In other words, what happens to the value of the SDR when priced in gold, oil or other commodity if every nation in the basket prints its currency with abandon? The SDR will lose value just like any any fiat currency, because it is simply a composite fiat currency.

2. Couldn't a nation simply hold all currencies in the SDR in the same percentages as in the SDR basket? Clearly, this is possible: a nation could acquire the same basket of currencies held by the SDR and in the same weighting. In that case, what is the purpose of the SDR?

3. What happens to the relative value of one of the constituent currencies in the SDR if the issuing nation experiences a currency crisis or devalues its currency by one means or another? Clearly, the relative weighting of that currency would decline within the SDR basket.

The SDR, then, does nothing to impede currency crises or devaluations; it is simply a risk-management tool that works by diversifying the risk of holding too much of any one currency. But since any nation can pursue the same risk-management strategy directly by diversifying its reserves with multiple currencies, what's the point of holding SDRs as a risk-management tool?

4. Since the SDR is just an aggregate of existing currencies, it is not an independent currency. An independent currency would need to be supported by either enforceable taxation rights or some commodity or basket of commodities: gold, for example, or a "bancor"-type basket of commodities (gold, oil, grain, etc.) owned by the issuing nation/entity.

(Another potential independent currency that could serve as a reserve currency is a non-state issued digital currency such as Bitcoin: Could Bitcoin (or equivalent) Become a Global Reserve Currency? (November 7, 2013). Digital currencies' valuation is based not on taxation or gold but carefully managed scarcity.)

Since the SDR is just an aggregate of fiat currencies, it cannot really change the fundamentals of the current status quo.

Boiled down to its essence, the SDR is presented as a shortcut solution to deeply seated problems. The reserve currency problem cannot be fixed by a basket of fiat currencies, as fiat currencies (and the trade imbalances they generate) are the problem.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/VBeJSCC6L54/story01.htm Tyler Durden