Tag: news

Submitted by David Stockman via Contra Corner blog,

Last Wednesday the markets plunged on a vague recognition that the central bank promoted recovery story might not be on the level. But that tremor didn’t last long.

Right on cue the next day, one of the very dimmest Fed heads—James Dullard of St Louis—-mumbled incoherently about a possible QE extension, causing the robo-traders to erupt with buy orders. By the end of the day Friday, with the market off just 5% from its all-time highs, the buy-the-dips crowd was back, proclaiming that the “bottom is in”. This week the market has been energetically retracing what remains of the October correction.

And its no different anywhere else in the central bank besotted financial markets around the world. Everywhere state action, not business enterprise, is believed to be the source of wealth creation—at least the stock market’s paper wealth version and even if for just a few more hours or days.

Thus, several nights ago Japan’s stock market ripped 4% higher in the blink of an eye after the robo-traders scanned a headline suggesting that Japan’s already bankrupt government would start buying even more equities for its pension plan. And that comes on top of the massive ETF and equity purchases already being made by the BOJ.

Likewise, yesterday morning the European bourses soared on a self-evident trial balloon enabled by Reuters that the ECB might start buying corporate bonds—in addition to asset-backed commercial paper, covered mortgage bonds and targeted loan advances to commercial banks. Moreover, all this prospective asset buying with freshly minted ECB credit was supposedly a prelude to outright QE—-that is, adding sovereign debt to the ECB’s already bloated balance sheet.

The thing is, however, the last injection is never enough in today’s stimulus addicted casinos. In the case of the ECB, the market’s pandering for more monetary stimulus is especially disingenuous. The pot-bangers claim, of course, that the ECB’s current balance sheet inflation plan is just retracing old ground;  and that it simply needs to fill a $1.2 trillion “hole” to get its balance sheet back to where it was in mid-2012 when Draghi’s “whatever it takes” ukase was delivered to Europe’s roiled bond and equity markets.

Let’s see. In just the eight year period leading up the crisis of 2012, the ECB’s balance sheet had exploded by 4X. And the the truth of the matter is that the subsequent shrinkage shown below is a dangerous  pro forma illusion. The ECB’s bloated portfolio of discount loans to member banks which were collateralized by sovereign debt was not really liquidated; it has just slithered to an off-balance sheet parking lot for the interim.

What Draghi’s undeliverable pledge actually did was to incite the fast money crowd into frenetic peripheral bond buying on the usual front-running presumption that smart guys buy now what the central banks announce they will be buying later. Soon the prices of these sovereign junk credits were ripping higher, and the rest of the market piled on—- especially the very same Spanish and Italian banks which had previously retreated to the ECB discount window to fund their stranded books of own country bonds.

Stated differently, in return for three cheap words Mario Draghi was able to access  a  vast financial parking lot, which was quickly filled with the previously shunned peripheral nation bonds. Accordingly, European banks, especially in Italy and Spain, began to liquidate their LTRO borrowings and, presto, the ECB’s reported balance sheet shrunk drastically.

In truth, however, Draghi’s parking lot is inhabited by an assemblage of day traders who can make a bee-line for the exits as fast as they piled-on to the original “whatever it takes” trade. In fact, Draghi’s desperate jawboning and serial announcements about balance sheet expansion ploys are proof positive that the parking lot has a tenuous hold on its tenants.

That means that virtually any unexpected catalyst could start a run on the  trillions of Greek, Italian, Spanish, Portuguese and Irish debt that is now insanely over-valued.  Accordingly, the European bond market is a massive conflagration waiting for an ignition. Worse still, Germany now has all the matches, and it is becoming more evident by the day that its politicians and financial statesman have finally drawn a line in the sand. There will be no outright QE, and, therefore, there is no way to keep Mario’s parking lot from experiencing an eventual stampede for the exist gates.

In that context, today Reuter’s leak was just a probe—-an attempt by the ECB apparatchiks to see whether the German resolve against “state financing” extends to corporate debt as well as outright government bonds. That this desperate ploy elicited an excited equity rally is just a measure of how sick stock markets all around the world have become.

Yet today’s headline was probably worth no more than a one-day rip, and that’s all the casino cares about. It does not discount the future of the real world economy; it only chases the concurrent emissions of central banks liquidity and word clouds.

Indeed, if the European bourse were actually discounting the real world future they would have panicked long ago. And not just because Europe is heading for a triple dip or because the German export machine is faltering owing to the swoon in its heretofore bloated and unsustainable export markets in Russian and China.

In fact, Europe is stuck in a deep rut of socialist tax and debt burdens, economic dirigisme and excessive financialization, and has been so for most of this century. Here is what has happened to the euro area economy while the ECB printing presses were running red hot.  As shown in the first panel below, total industrial production (less construction) in mid-2014 is no higher than it was 14 years ago.

Likewise, the euro area has had no net employment gains since 2006. Accordingly, the unemployment rate for the EU-18 as a whole had soared, notwithstanding sharp improvement in Germany and northern Europe.

 

At the same time that the private  sector has been stagnant, the public debt has continued to soar, and is now 50% higher than the already bloated levels of 2008. Moreover, with a triple dip all but certain, and virtually no growth in nominal GDP in any event, there is virtually no chance that the aggregate debt of the euro-zone nations will not soon catapult past 100% of GDP. In that context, it is plainly evident that the real agenda of the Brussels  bureaucrats and the Draghi gang in Frankfurt is to monetize the public debt, not ignite a miracle of private economic growth and rising corporate profits.

 

On this side of the pond, the equity market puppy is just a sick. Consider the actual gibberish uttered by Bullard last Thursday:

“I also think that inflation expectations are dropping in the US. And that is something that a central bank cannot abide. We have to make sure that inflation and inflation expectations remain near our target.

 

And for that reason I think a reasonable response of the Fed in this situation would be to invoke the clause on the taper that said that the taper was data dependent. And we could go on pause on the taper at this juncture and wait until we see how the data shakes out into December…..So… continue with QE at a very low level as we have it right now. And then assess our options going forward.”

The underscored sentence says it all. Bullard has been drinking the central bank cool-aid so long that he does not even recognize that the “inflation expectations” which he cites as reason for more Fed money printing are actually authored by the FOMC itself. The chart below represents the so-called 5-year breakeven—-which is the subtraction of the inflation protected TIPS bond yield for that period from the regular treasury note. That is, its represents nothing more than trading noise—- the random differences between treasury securities being massive impacted and manipulated by the central banks and the carry trade gamblers that they enable.

So Bullard espied a wiggle in the graph below, and declared it an intolerable breach of the central banks plan for just the right amount of inflation—-that is, 2%, no more and no less. Accordingly, more bond buying was warranted.  Never mind that the Fed has pinned the money market rate at zero for 71 months and unleashed the greatest carry trade gambling spree in recorded history; or that $3.5 trillion of debt monetization during that period has deeply deformed yields and pricing in the entire fixed income market.

 

No, the job of the monetary politburo is apparently to sift noise out of the in-coming data noise—-even when it is a feedback loop from the Fed’s own manipulation and interventions. So the stock market rallies strenuously because an incoherent central banker starts randomly gumming about self-evident financial noise.

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While we understand that following the biggest market rout in years, it was all up to the central bankers to do everything in their power to restore confidence in the market’s upward trajectory in a time when there are only 2 POMOs left under the Fed’s soon ending QE3 program, which explains not only last week’s 2 QE4 hints by FOMC presidents but also yesterday’s ECB “leak” via Reuters that the central bank is contemplating launching corporate bond buying as soon as December. A leak which sent the market soaring to its best day of 2014. And while we give the European central bankers an A for effort, we can’t help but wonder if someone did a major mathematical error when calculating the “bazooka impact” of yesterday’s leak.

The reason: the same one we have cautioned about ever since 2012; the same why as we also explained in August the ECB’s ABS QE will be grossly sufficient: Europe simply does not have enough eligible, unencumbered collateral in the private sector which can be monetized by the central bank (the same issue that the Fed itself was forced to taper QE once its holdings of 10 Year equivalents hit 35% as we showed last year and the TBAC started warning about gross bond market illiquidity). This goes back to a different issue, namely that Europe historically has funded itself on a secured basis, where the loans are kept on bank balance sheets (and serve as deposit collateral) unlike the US, where the primary source of corporate debt is through unsecured borrowing directly from lenders. We have shown all this before:

Our summary from March 2012 was as follows:

What is immediately obvious here, is that unlike in the US, where these are less than 30% for corporates, in Europe, bank loans account for nearly a whopping 90% of total corporate funding! These are secured, LTV loans, made by banks, and not syndicated, which means they are kept on the banks’ balance sheets. As a result the bulk of Europe’s assets held by levered entities, are already encumbered through existing security arrangement in the debt market (recall that bond debt is for the most part unsecured, and is thus a junior piece to secured bank loans). It also explains why European banks have to scramble to find new assets which they can “pledge” to the ECB in exchange for some additional cash to plug this liquidity shortfall hole, or that.

And because we understand that few have actually done any math behind the ECB’s leak, here it is:

According to Barclays, based on the iBoxx Euro Corporate Index, there is €495bn in par value of unsecured, senior non-financial debt outstanding from euro area issuers (Market Value €563bn).

In addition there is €271bn in par value of unsecured, senior financial debt from euro area issuers outstanding (Market Value €300bn). The rating and tenor breakdown of the outstanding universe of bonds is shown below.

According to Barclays the reason why nobody else appears to have done the math, is because the ECB itself screwed up the numbers:

We note that these numbers are significantly different from the numbers reported by the ECB. The central bank reports €1.4trn of marketable corporate bonds and €2.2trn of uncovered bank bonds as eligible collateral at its operations. However, this includes MTNs, CP and guaranteed bonds. Starting from the ECB’s collateral list, instead of a broad-based index, we estimate the stock of corporate bonds at €177bn of non-financials and €321bn of financial debt (excluding Landesbank). This is much smaller than the “headline” figure, but also materially different from our index-based estimate, on the non-financial side.

Barclays’ conclusion on the stock of eligible monetizable corporate debt: “Overall, we estimate the upper-bounds of potential bonds that might be in “scope” for an ECB purchase programme at €560bn of non-financial and €320bn of financial bonds (taking the iBoxx and ECB derived estimates, respectively). This falls to €240bn and €220bn if BBB-rated bonds are excluded.“

It doesn’t get any better when one looks at recent trends in net issuance to determine which way the collateral will move in coming quarters and years:

net issuance from financials has been negative in the senior unsecured €-IG space for the past four years, while net issuance from non-financials has been positive. Ex. Subordinated transactions, the average monthly net flow over the past two years has been: +€5bn from non-financials; and -€10bn from non-financials

In chart format:

Ok, so there is roughly about €750 billion in eligible (non-fin and fin, even though the ECB will almost certainly just do the former) bonds that can be bought? Why is that a problem: can’t the ECB just go out and buy them all in one massive BWIC in its holy quest to boost its balance sheet by €1 trillion (apparently the magic number that will get those record youth unemployed in Spain back in jobs).

Well no. Here is JPM with the missing link which has to do with market liquidity and how much the ECB would actually be able to buy without soaking up all bond market liquidity:

It is unlikely that the ECB would buy subordinated bonds as these are not even eligible as collateral in its refinancing operations. That leaves €750 billion of nonfinancial corporate bonds that the ECB may consider buying, around €500bn of which is issued by European corporates. Market turnover may currently be around 2.5% of outstanding (after correcting for double-counting in the turnover data) and the ECB may be able to purchase 10-20% of this turnover. In addition, the ECB could also go into the primary market, buying 10% of new deals (from a total gross issuance of almost €20 billion per month recently). Such considerations suggest that, as a rough guide, they could purchase around €50 billion over a one year period under current market conditions, and perhaps as high as €100 billion if purchases improve market conditions, raising turnover.

So… the entire mega ramp yesterday was over an ECB monetization leak that boils down to a whopping €50 billion ($60 per year) or a tiny $5 billion per month, which is $15 billion per quarter?

Keep in mind at its peak in 2013 the Fed monetized $85 billion per month, while the BOJ added another $75 billion or so in its QE. So as the Fed is about to completely pull out of the “flow injection” market (even as the BOJ still pushes on with its existing remit which as a result of soaring non-wage inflation will certainly not increase any time soon) it will be replaced by $10 billion or so in ABC/Covered bond purchases and another $5 billion per month in corporate bonds?

And this is the best Hail Mary pass that the central planners could come up with?

All of this is critical because as Citi explained over the weekend, in order to keep the market from crashing, central banks need to inject at least $200 billion per quarter:

For over a year now, central banks have quietly being reducing their support. As Figure 7 shows, much of this is down to the Fed, but the contraction in the ECB’s balance sheet has also been significant. Seen from this perspective, a negative reaction in markets was long overdue: very roughly, the charts suggest that zero stimulus would be consistent with 50bp widening in investment grade, or a little over a ten percent quarterly drop in equities. Put differently, it takes around $200bn per quarter just to keep markets from selling off.

In other words, the “mega-leak” from the ECB will hardly scratch the surface in terms of the required liquidity injections, and certainly will be insufficient if at some point in the coming year, the BOJ finds it too has run out of collateral and is forced to wind down its own QE.

So after actually doing the math we wonder: how long before the market realizes Draghi’s latest bazooka was another water pistol, and how long until Reuters is forced to go with the nuclear leak – that the ECB is now considering monetizing ETFs and, gasp, stocks.

Because that, ladies and gentlemen, is the endgame here.

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

What a difference a day makes…

 

 

Charts: Bloomberg

 

Bonus Chart: Credit hedging under way

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Saxo Bank's Chief Economist Steen Jakobsen is predicting another 'shock drop' in the markets within a few weeks. With debt and low inflation continuing to create a nervous atmosphere behind most markets, Steen argues that we will hit fresh lows in mid-November. Steen takes the view that central bank policy is creating a 'fantasy land' for investors and he points out that the recent 'day dive' in markets was a closer reflection of reality. Steen outlines his suggestions for trading ahead of another dip in mid November with targets for the S&P 500 around 1810 and the Dax at 8000 – 7800. Be long fixed income as it is "a free put on the equity market.. and the economic cycle is not yet ready to adapt to a rising interest rate."

 

 

 

Source: TradingFloor

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Submitted by Mike Krieger of Liberty Blitzkrieg blog,

The trend of average U.S. citizens being incarcerated by overzealous judges and prosecutors within the police state formerly known as America continues with reckless abandon. In fact, these sorts of cases are becoming so commonplace I simply cannot keep up with all of them. The following story is a perfect followup to my piece earlier today, which shows how American public school students are being arrested or harassed by police for the most minor of infractions, such as wearing too much perfume, sharing a classmates’ chicken nuggets, throwing an eraser or chewing gum.

If you are an adult American slave, you can add not mowing your lawn to the list of prison-worthy crimes in the police state.

 

From Yahoo News:

If you are a resident of Lenoir City, Tennessee, you might want to remember to mow your lawn — otherwise, you will be spending the night in jail.

 

Karen Holloway just spent six hours in a jail cell for failing to maintain her yard in accordance with the standards set by the city.

 

The saga began last summer, when Holloway was sent a citation for her overgrown grass and shrubbery. Holloway, who works a full-time job and has two children living at home, a husband in school, and one family vehicle, admits the yard needed some attention but that it just wasn’t feasible to do the work.

“The bushes and trees were overgrown. But that’s certainly not a criminal offense,” she says.

 

Last week, Judge Terry Vann handed down a five-day jail sentence to Holloway for refusing to comply with the city ordinances regarding yard maintenance, specifically the lack thereof. Holloway feels this was all just too much, saying, “It’s not right. Why would you put me in jail with child molesters and people who’ve done real crimes, because I haven’t maintained my yard.”

 

In addition to the severity of the sentencing, Holloway say she also feels that she was bullied during the process because she was never read her rights or told that she could have a lawyer present.

And you wonder why so many Americans feel the country is on the wrong track. As the Wall Street Journal noted yesterday:

The only time the public has felt worse was in October 2008, during the first, deep spasms of the recession. Then, 78% said the nation was on the wrong track, and only 12% felt good about the country’s direction. The last time “right direction” beat out “wrong track” was in January 2004 — and the last election cycle where that was the case was 2002.

For related storied about serfs being arrested for minor incidents, while the rich and powerful get away with enormous criminality, see:

Connecticut Man Arrested for “Passive Aggressive” Behavior to a Watermelon

New Jersey Threatens to Take 13-Year-Old Student From His Father Due to “Non-Conforming Behavior”

Hyper-Sensitive Illinois Mayor Orders Police Raid Over Parody Twitter Account

Charleston Man Receives $525 Federal Fine for Failing to Pay for a $0.89 Refill

The “War on Street Artists” – Puppeteer Unlawfully Arrested and Harassed in NYC Subway

Video of the Day – Thuggish Militarized Police Terrorize and SWAT Team Iowa Family

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India Gold Demand Surges 450% and Bank of Russia Demand At 15 Year High

Demand for gold continues to be robust and has indeed increased significantly in recent weeks despite gold’s most recent paper driven gold weakness.

Demand in China and India surged again and gold reserve diversification by the central bank of Russia hit a new record high in September as geopolitical tensions rose. 

The seemingly insatiable appetite of the growing Indian middle class for gold is causing the government in India to again consider imposing sanctions on the importing of gold. 

Gold imports into India in September were worth $3.8 billion. This figure is almost double the $2 billion spent by Indians in August as, once again, the Indian middle class, like their Chinese counterparts, used the opportunity of a weakened gold price to increase their holdings. This was particularly the case in recent weeks and in the run up to the Diwali festival which began yesterday with Dhanteras. 

To put this figure in context it is worth noting that in August 2013 gold imports were valued at just $739 million.

Indian gold imports were up 449.7% y/y in September, which is approximately 94 tonnes, using the average gold price for September.

From the point of view of the government in India, this level of demand for the precious metal, which must be imported, is an unwelcome development. “The trade deficit worsened to an 18-month high of $14 billion in September following a 450% rise in gold imports as importers rushed to take advantage of lower prices” reports India’s Economic Times.

The government in India claims that this staggering level of demand is causing a weakening of the rupee which undermines India’s ability to import the other commodities upon which it depends. 

Exactly how the Indian government intend to deal with the problem is unclear. The previous attempt to control gold imports in 2013 was aborted due to it’s deep unpopularity and to the fact that vast quantities continued to be smuggled into India regardless, resulting in loss of revenue to the state.
In China, gold imports have surged again. 

In the world’s largest gold buyer China, premiums recovered to $2-$3 an ounce from $1-$2 overnight, showing higher demand and lending support to global prices. Shanghai Gold Exchange (SGE) gold withdrawals were very high this week and saw a huge rise for the week to 68.4 tonnes with most of the buying after their Golden Week holiday.

Last year alone, China imported almost 2,000 tonnes of gold as seen in the important metric that is withdrawals from the SGE.  To put that figure in context, global mining supply will be around 2,700 tonnes this year.

What we in the West need to appreciate is that – in the case of both India and China, where around one third of the population of the Earth reside, – it is masses of individuals, families and local businesses who are driving this demand.

It is being driven particularly by the burgeoning middle classes who are accumulating whatever gold they can with their disposable income. The desire to own gold as savings and financial security is culturally embedded in these ancient cultures. 

Asians experience of fiat, paper currencies has not been a good one.

As such, the demand is not speculative and a cyclical, short term blip. Rather, it would appear to be a long term, structural shift to higher demand. While the trend may dissipate it is very unlikely to reverse into a trend of mass selling and it is unlikely to reverse trend anytime soon given the fiscal and monetary challenges facing the Western and indeed the Eastern world.
Apart from massive store of wealth demand in the East, the gold reserve demand by many large, creditor nation central banks continues unabated. 

In Russia, the central bank added a very large 37.3 tonnes of the metal to it’s reserves in September – it’s largest purchase in fifteen years. 

It is an indication of the strategic importance that Vladimir Putin and his government place on gold that such a large amount was purchased at this time of international tensions. 

The rouble has been under tremendous pressure due to Western imposed sanctions and the slump in oil prices – Russia’s largest revenue source. According to the Russian Central Bank: “In the past ten days we have sold about $6 billion” to support the rouble rate, Reuters reported yesterday. And yet $1.5 billion was made available to acquire gold reserves. 

Asian people are acting like their own central bank and diversifying their wealth. 

It is safe to say that – in the event of a global monetary crisis brought on by a tsunami of insurmountable QE compounded debt – the average Indian or Chinese family will be reasonably well equipped to weather the financial and monetary storm. 

The same cannot be said, unfortunately, for their Western counterparts where ownership of tangible assets is abysmally low and only a tiny fraction of the population own gold and silver bullion.

Get Breaking News and Updates on the Gold Market Here 

GOLDCORE MARKET UPDATE
Today’s AM fix was USD 1,246.75, EUR 982.08 and GBP 777.66 per ounce.
Yesterday’s AM fix was USD  1,251.75, EUR 978.85 and GBP 774.17 per ounce.
    
Gold climbed $2.20 or 0.18% to $1,248.30 per ounce and silver rose $0.07 or 0.4% to $17.51 per ounce yesterday. 

Silver in U.S. Dollars – 10 Years (Thomson Reuters)

Gold in Swiss storage or for immediate delivery lost 0.2% to $1,246.08 an ounce by 1200 in Zurich.
Silver for immediate delivery lost 0.7% to $17.43 an ounce. Platinum fell 0.5% to $1,276 an ounce. Palladium was 0.4% lower at $776 an ounce.

Gold retreated from the highest in almost six weeks in dollar terms due to profit taking and renewed risk appetite which saw stocks globally bounce from their recent lows although european shares are showing weakness again this morning. Although gold continues to eke out small gains in euro, pound and other fiat currency terms.

Gold reached $1,255.34 an ounce yesterday, the highest since September 10. Demand in India, the second biggest gold buyer, surged before the Diwali festival, Indian’s Christmas.

Diwali, the festival of lights is celebrated tomorrow and Dhanteras, the biggest gold buying festival, was celebrated yesterday. Dhanteras is considered an auspicious time to buy gold coins, bars and jewellery. Researcher CPM Group estimates the holiday generates about 20% of India’s annual purchases.

Platinum in U.S. Dollars – 10 Years (Thomson Reuters)

Gold has risen 3.2% so far in October as stocks fell sharply and traders pushed back estimates for when the Federal Reserve might raise U.S. interest rates from near 0%. The IMF has cut its economic growth outlook this month and Fed policy makers said slowing foreign economies were a risk to U.S. expansion. Indeed, the U.S. economy itself looks very vulnerable to a recession. 

The Shanghai Gold Exchange is working to implement China’s first forwards and options in gold, in a race to put China as the main Asian pricing benchmark that could rival the London gold fix. 

The European Central Bank is planning to buy corporate bonds on the secondary market and may decide as soon as December with a view to begin purchases in early 2015. This is another sign of desperation on the part of central bankers who are attempting to kick start the structurally broken Eurozone economy.

A diversified portfolio of precious metal coins and bars, owned in a segregated and allocated manner in the safest jurisdictions in the world remains very prudent.

See Essential Guide to Storing Gold In Switzerland here.

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