Friday 27 July 2012

We’re Saved! Saved! - Again!

Baltic Dry Index. 958 -24

LIR Gold Target by 2019: $30,000.  Revised due to QE programs.

"When it becomes serious, you have to lie"

Jean-Claude Juncker. Luxembourg Prime Minister and president of the Euro Group of Finance Ministers. Confessed liar.

Let the games begin. No not the London Olympic Games, hoped in jealous Germany to be the Fiasco Games, believed by cultist Mitt Romney to be the Unworthy Games, the games we’re talking about are the ECB-French-German Games attempting to square the circle and “save the euro.” John Fitzgerald Draghi yesterday, in London, with nothing to do with the other games, promised “to do whatever it takes” to save the euro. “Believe me, it will be enough.” And with that, he triggered a short covering rally of less than biblical proportions, as traders headed for the exit in preparation of summer vacations and to watch the other games in London. 

As games go, the new ECB-continental games should be entertaining for a day or two. The ECB will now put its money where JFD’s mouth is, and massively buy up Spanish sovereign debt, allowing Spain to bail out its banks, regions, real estate companies, and long suffering unemployed youth, or the ECB’s impotence will be demonstrated to all in the next couple of weeks. Mr Draghi, it seems, is prepared to fight for the “V” and “Y” euro, to the last German “X” note. With most of Germany and Europe’s politicians already on holiday, I wonder if JFD cleared the fighting talk with EU paymaster Merkel in advance. Unlike the London Olympic Games, these ECB Games seem all too likely to end in comedy or tragedy.

Before a man speaks it is always safe to assume that he is a fool. After he speaks, it is seldom necessary to assume it.

H. L. Mencken.

Sceptics abound as Mario Draghi's ECB bond 'bluff' electrifies global markets

The European Central Bank has opened the door to emergency support for the Spanish and Italian bond markets, setting off a blistering rally on bourses across the world.

Mario Draghi, the ECB president, vowed to do "whatever it takes" to save the euro within limits of its mandate. "Believe me, it will be enough," he said in London.

Picking codewords instantly understood by traders, Mr Draghi said the violent spike in bond yields in recent days was hampering "the functioning of the monetary policy transmission channels" - the exact expression used to jusfify each of the ECB's previous market interventions.

Yields on Spanish two-year debt plunged 72 basis points to 5.47pc in barely an hour, with comparable moves on Italian debt - easing the pressure before a string of debt auctions in Rome over coming days. The MIB index of stocks in Milan surged by 5.6pc. Madrid's IBEX rose 6pc, the biggest jump in two years, led by an explosive rise in bank shares.

Mr Draghi's comments came as Spain claimed backing from France and Germany for activation of the eurozone's rescue fund (EFSF) to buy Spanish bonds, though this would require calling the Bundestag's finance committee back from holiday for a vote. Action by the EFSF would provide "political cover" for the ECB to join the fray in a two-pronged attack.

"We're firing on all cylinders: that is what has ignited the markets," said Hans Redeker, currency chief at Morgan Stanley.

-----The euphoria is unlikely to last long unless the ECB comes through with concrete action after its pre-holiday meeting next week. Angel Gurria, head of the OECD, honed in on Mr Draghi's caveat, saying the legal constraints are the nub of problem. The ECB must "explore the flexibility of its mandate", he said.
Others were blunter. Marc Ostwald from Monument Securities said Mr Draghi's words were "cheerleading bluster", while Gary Jenkins from Swordfish called them "a bluff to get through the summer".

----Mr Jenkins warned that the purchases of Spanish and Italian bonds risk setting off further capital flight unless the ECB makes it "contractually clear" that it does not have senior status. "Investors will just try to get out," he warned.

Critics say the ECB's pin-prick purchases of Greek, Irish, Portuguese, Spanish and Italian bonds have fallen between two stools: enough to create subordination fears, without being enough to eliminate the risk of sovereign default.

July 26, 2012, 4:21 p.m. ET

Noyer Remarks Suggest ECB Is Ready to Act

PARIS—European Central Bank policy maker Christian Noyer said the ECB is "active" and "vigilant" to ensure its lowered interest rates feed through the troubled euro-zone economies, becoming the second central bank official to suggest Thursday that the ECB was ready to help drive down sovereign-bond yields.

"It is very clear that we will do everything so that the transmission of our monetary policy takes place in the best possible conditions for our economies," Mr. Noyer, who is also Bank of France governor, told The Wall Street Journal. "We have done it in the past and we are continuing to work at it."

Mr. Noyer's comments came hours after ECB President Mario Draghi said the central bank was concerned that the high interest rates paid by some euro-zone countries on their government bonds were becoming an obstacle for the ECB's record-low interest rates reaching the wider economy.

The central bankers' comments, which sparked a rally in global markets, come at a time of extreme anxiety over whether euro-zone governments can succeed in preventing Southern European countries from being engulfed by the debt crisis. Greece is struggling to stay on track with the conditions attached to its bailout program; Italy is faced with punishing borrowing costs; and Spain is battling to repair its banking sector without further damaging its public finances.

Many economists say only the ECB has the firepower needed to restore calm in the markets. The central bank, however, has resisted calls to intervene, saying its role is to conduct monetary policy, not bail out governments that fail to get their finances in order.

Greeks deliver fresh austerity measures

The Greek government has presented a new €11.5bn (£9bn) austerity package to its lenders as doubts grow over the country’s future in the eurozone.

Ahead of talks between Athens and the European Union, European Central Bank and International Monetary Fund “troika”, Citibank warned it expected Greece to leave the single currency within nine months.

“We now believe the probability that Greece will leave [the euro] in the next 12 to 18 months is about 90pc and the most likely date is in the next two to three quarters,” said Willem Buiter, Citibank’s chief economist.
New ECB data showed that deposits at Greek banks hit their lowest level in six years last month as investors withdrew funds on fears the country will exit the eurozone.

The troika negotiations will continue into September and will determine if Greece gets the next €31.5bn instalment of bail-out loans, without which it will be forced to default.

The austerity package, expected to come from pension, healthcare and benefit cuts, has been structured by the Greek government to help it negotiate for more time to repay the rescue package in order to cope with a deep recession.

"The swimming and diving were held in part of the old moat ... it was the clammiest, darkest place and the water was frigid. "

Alice Landon, American Diver, on facilities at the Antwerp Games of 1920

At the Comex silver depositories Thursday final figures were: Registered 40.50 Moz, Eligible 99.73 Moz, Total 140.23 Moz.  

Crooks and Scoundrels Corner
The bent, the seriously bent, and the totally doubled over. 

Today, the thoughts of Chairman Krugman. We’re back to deficits don’t matter again. Print Ben, print. But if printing is so good, why don’t we just end poverty once and for all, by printing up a million for all the poor? With only 300 million Americans who would all now describe themselves as poor, it’s only 300 billion dollars after all, far less than the many hundreds of billions given to the banksters. Make the 99% join the 1%. Of course, we all know it’s not that simple since no new goods or wealth is created. But the Fed would get US inflation to pick up, supposedly one of the key anti-deflation goals.

"Finishing second in the Olympics gets you silver. Finishing second in politics gets you oblivion."

Richard M. Nixon

Money for Nothing

By PAUL KRUGMAN Published: July 26, 2012
For years, allegedly serious people have been issuing dire warnings about the consequences of large budget deficits — deficits that are overwhelmingly the result of our ongoing economic crisis. In May 2009, Niall Ferguson of Harvard declared that the “tidal wave of debt issuance” would cause U.S. interest rates to soar. In March 2011, Erskine Bowles, the co-chairman of President Obama’s ill-fated deficit commission, warned that unless action was taken on the deficit soon, “the markets will devastate us,” probably within two years. And so on.
Well, I guess Mr. Bowles has a few months left. But a funny thing happened on the way to the predicted fiscal crisis: instead of soaring, U.S. borrowing costs have fallen to their lowest level in the nation’s history. And it’s not just America. At this point, every advanced country that borrows in its own currency is able to borrow very cheaply.

The failure of deficits to produce the predicted rise in interest rates is telling us something important about the nature of our economic troubles (and the wisdom, or lack thereof, of the self-appointed guardians of our fiscal virtue).

---- So investors are, in a sense, offering governments free money for the next 10 years; in fact, they’re willing to pay governments a modest fee for keeping their wealth safe.

Now, those with a vested interest in the fiscal crisis story have made various attempts to explain away the failure of that crisis to materialize. One favorite is the claim that the Federal Reserve is keeping interest rates artificially low by buying government bonds. But that theory was put to the test last summer when the Fed temporarily suspended bond purchases. Many people — including Bill Gross of the giant bond fund Pimco — predicted a rate spike. Nothing happened.

Oh, and pay no attention to the warnings that any day now we’ll turn into Greece, Greece I tell you. Countries like Greece, and for that matter Spain, are suffering from their ill-advised decision to give up their own currencies for the euro, which has left them vulnerable in a way that America just isn’t.

So what is going on? The main answer is that this is what happens when you have a “deleveraging shock,” in which everyone is trying to pay down debt at the same time. Household borrowing has plunged; businesses are sitting on cash because there’s no reason to expand capacity when the sales aren’t there; and the result is that investors are all dressed up with nowhere to go, or rather no place to put their money. So they’re buying government debt, even at very low returns, for lack of alternatives. Moreover, by making money available so cheaply, they are in effect begging governments to issue more debt.

And governments should be granting their wish, not obsessing over short-term deficits.

Obligatory caveat: yes, we have a long-run budget problem, and we should be taking steps to address that problem, mainly by reining in health care costs. But it’s simply crazy to be laying off schoolteachers and canceling infrastructure projects at a time when investors are offering zero- or negative-interest financing.
Another weekend, and the Games begin. For the next 3 weeks a media Games frenzy takes over, as an austerity wracked Europe ties to forget the grinding  reality of daily life. We wish all the competitors well, and hope all attending an watching have a wonderful time. Sadly after all of the madness ends next month, we will still have Europe’s never ending crisis to face, no matter whether the ECB games end in tragedy or comedy. For me, three weeks reduced to watching repeats of Ice Road Truckers, Dog the Bounty Hunter, Man V Food, Murder She Wrote, Minder, Last of the Summer Wine, and oxymoron Master Chef Australia. Have a great weekend everyone.
"All I've done is run fast. I don't see why people should make much fuss about that."

Fanny Blankers-Koen (Dutch sprinter who won four gold medals at the 1948 Summer Olympics)

The monthly Coppock Indicators finished June:
DJIA: +63 Down. NASDAQ: +71 Down. SP500: +41 Down. All three indicators remain down but downward momentum seems stalled. 

To continue reading subscribe to the LIR at Currency Countdown.

Wednesday 25 July 2012

A Chinese Fire Sale.

Baltic Dry Index. 1003 -19

LIR Gold Target by 2019: $30,000.  Revised due to QE programs.

A European war is bound to come sooner or later, and then it will... be a struggle between Teuton [German] and Slav [Russian]. It is the duty of all states who uphold the banner of German spiritual culture to prepare for this conflict. But the attack must come from the Slavs.

General Helmuth von Moltke, 1912, Chief of the German General Staff.

For more on the Chinese fire sale, scroll down to Crooks Corner, where Bloomberg sees a tidal wave of dumped Chinese steel on the way.

Below, short of Club Mad crashing out of the euro, it doesn’t get much worse than this. Europe stands at the edge of the abyss, with no one in Europe much bothered about toppling over. The never ending crisis rolls on, but the ending gets closer by the day. Deficits didn’t matter until one day they did. The euro monetary union will stay together until one day it won’t. While the euro isn’t working for most of Europe any more, austerity is only working to ensure that the euro flies apart.  Europe’s great wars and crises, tend to arrive in July and August, 2012 seems to be following the same script.

It only requires a spark to set the whole thing off.

 Colonel Edward M. House,  1914. Advisor of President Woodrow Wilson, opinion of conditions in Europe after returning from an inspection tour in the Spring.

Europe is sleepwalking towards imminent disaster, warn top economists

The euro has completely broken down as a workable system and faces collapse with “incalculable economic losses and human suffering” unless there is a drastic change of course, according to a group of leading economists.

Europe is “sleepwalking towards disaster”, according to the 17 experts, who warned that over the past few weeks “the situation in the debtor countries has deteriorated dramatically”.

“The sense of a neverending crisis, with one domino falling after another, must be reversed. The last domino, Spain, is days away from a liquidity crisis,” said the economists. They include two members of Germany’s Council of Economic Experts and leading euro specialists at the London of School of Economics, all euro supporters.

“This dramatic situation is the result of a eurozone system which, as currently constructed, is thoroughly broken. The cause is a systemic failure. It is the responsibility of all European nations that were parties to its flawed design, construction and implementation to contribute to a solution. Absent this collective response, the euro will disintegrate,” they added in a co-signed report for the Institute for New Economic Thinking.
The warning came as contagion from Spain pushed Italy’s borrowing costs to danger levels, with two-year yields rocketing 40 basis points to more than 5pc. The Milan bourse tumbled 3pc, led by bank shares. Italian equities have been in freefall since it became clear two weeks ago that the EU’s June summit deal had failed to break the nexus between crippled banks and sovereign states.

The crisis is starting to ricochet back into Germany, where the PMI manufacturing index for July fell to its lowest since mid-2009. Doubts are emerging about the creditworthiness of the German state itself.

----The 17 economists said Europe’s political waters have been muddied by disputes over eurobonds, debt-pooling, subsidies and fiscal union. None of this was necessary to break the logjam, they said.

They claimed the system could be stabilised immediately by creating a lender of last resort to back-stop the bond markets, either by mobilising the ECB or by giving the eurozone bail-out fund (ESM) a banking licence to borrow from the ECB.

The deeper problem can then be managed through a European Redemption Fund that takes over a chunk of the “legacy debt” left by the errors of early EMU, much like Alexander Hamilton’s sinking fund in the US to clear up the mess after America’s revolutionary war.

Debt crisis: Greece to run out of money by August 20

Greece may run out of money and go bankrupt by Aug 20, a British government analysis of the ongoing eurozone crisis has warned.

The beleaguered country will have to refinance billions of euros worth of government bonds in less than a month and requires international assistance — which may not be forthcoming — to repay the money.
International inspectors arrived back in Greece on Tuesday to assess the country’s austerity programme with European officials warning that it was “hugely off track”.

David Cameron is now receiving daily written updates on the deteriorating situation and was warned earlier this week that a Greek bankruptcy in the next month is now a serious possibility.

Official economic figures to be published today are expected to show that Britain suffered from a third successive quarter of negative economic growth — suggesting that the country is still in recession. If the figures are negative, it will be the longest double-dip recession for more than 50 years.

One senior source said: “Europe is now paralysing almost every economic initiative.

“The daily analysis of the situation is filled with doom and gloom. Spain is in turmoil and Greece may run out of money by Aug 20.”

July 24, 2012, 5:56 p.m. ET

Downturn Deepens in Euro-Zone Economy

Manufacturing and Services Output Shrinks in Germany, France; In Greece, Debt Inspectors Seen Pessimistic on Progress

Business activity in the euro zone contracted for the sixth straight month in July, a closely watched survey showed, with powerhouse Germany weakening and the government in Greece now predicting an even deeper economic recession for this year.

The data provided new evidence that the downturn in the 17-nation currency bloc isn't limited to financially weaker nations most directly embroiled in the sovereign-debt crisis.

Combined output in both manufacturing and services fell in the region's two biggest economies, Germany and France, data company Markit Economics said after its latest composite survey of purchasing managers.
For the full euro zone, the preliminary reading of the July composite purchasing managers index was unchanged at 46.4, meaning output in the manufacturing and services industries shrank at the same steep pace that it did in June.

A reading below 50 means a month-to-month contraction.

Euro-zone manufacturing activity nose-dived, with a reading of 44.1 in July, its weakest result since June 2009. A subset of that measure also showed order books shrinking during the month. Germany's combined PMI slipped to 47.3, a three-year low. France's PMI rose slightly but still signaled contraction.

The report "supports the view that the region as a whole is in the midst of a pretty deep recession," said Ben May, economist at consultancy Capital Economics.

In central banking as in diplomacy, style, conservative tailoring, and an easy association with the affluent count greatly and results far much less.

J. K. Galbraith.

Seven ‘extremely rare’ signs that recession risks in America are rising: David Rosenberg

The Philly Fed in the red for months on end, soaring food prices and tepid retail sales: We are living in strange times, says Gluskin-Sheff chief economist David Rosenberg.

“Makes you want to go out and bet on the horses,” said Rosenberg. “We are seeing things happen that are extremely rare.”

Rare and risky — Rosenberg has identified seven uncommon occurrences on America’s economic landscape that suggest the recession risk is rising.

Here are his seven signs:

1) The Philly Fed index of factory activity is in the red for the third straight month. Seven out of eight times when the average reading has been that low (-11.8) for that long the U.S. economy has tipped into recession.

2) Retail sales are also down three months in a row (April-June) . Going back in the history books that long a run of declining sales is a one-in-50 chance and each time it has happened, except once, the economy was in recession. The only time it wasn’t was between October to December, 2000, amid the tech bubble wreckage — and the recession began the next quarter.

3) Jobs: A non-farm payrolls reading south of 100,000 for July would make four in a row. In the past 50 years, only once (last summer’s soft patch) did such a decline in the job market fail to push the economy into recession.

4) Disinflation: Inflation is trending down and the flat to negative readings in the past three months has led to a mild deflationary environment where the CPI has declined at a 0.8% annual rate.

“How common is that? Not very. It last happened at the depths of the Great Recession in early 2009 and looking all the way back to 1950, is a one-in-20 event”

“The lights are going out all over Europe and I doubt we will see them go on again in our lifetime"

Sir Edward Grey, 3 August 1914, British Foreign Secretary.

At the Comex silver depositories Tuesday final figures were: Registered 40.29 Moz, Eligible 100.94 Moz, Total 141.23 Moz.  

Crooks and Scoundrels Corner

The bent, the seriously bent, and the totally doubled over. 

Today, China. China doesn’t play by any rules but China’s. Ominously, Bloomberg suggests a coming tidal wave of dumped Chinese steel.

IMF Says China Downside Risks Significant

By Bloomberg News - Jul 25, 2012 4:39 AM GMT
The International Monetary Fund said China’s slowing economy faces significant downside risks and relies too much on investment, urging leaders to boost consumption and channel citizens’ savings away from housing.

The IMF repeated an assessment that the yuan is “moderately” undervalued, which China disputed, the Washington-based lender said in an annual review. The fund omitted an estimated range for the currency’s undervaluation that was included in an earlier draft, according to two officials at the fund who had seen the previous language and spoke on condition of anonymity.

The call to support consumer spending echoes priorities set by Premier Wen Jiabao’s government, which is seeking to stem a six-quarter slowdown in economic growth. Leaders have cut interest rates and stepped up investment as the ruling Communist Party prepares for a once-a-decade leadership handover starting later this year.

“The authorities have taken the foot off the brakes, but they have not yet stepped on the accelerator in a major way,” Markus Rodlauer, head of the IMF’s China team, said on a conference call with reporters. The IMF statement followed a July 20 directors’ meeting to discuss the annual staff assessment of China’s policies.

While the economy “seems to be undergoing a soft landing,” achieving it is a key challenge, the IMF said.

China to Flood Steel Market Hurting ArcelorMittal: Commodities

By Bloomberg News - Jul 25, 2012 5:44 AM GMT
China, the world’s biggest steel producer, is exporting at the highest level in two years, exacerbating a global glut that may hurt competitors from ArcelorMittal (MT) to U.S. Steel (X) Corp.

Monthly shipments abroad rose to 8.7 percent of domestic output last month, the highest proportion since July 2010. Chinese steel mills, set for a record production in 2012, are ramping up overseas sales to avoid a softer domestic market, where prices for the commodity have dropped to a two-year low.

ArcelorMittal of Luxembourg, which reports earnings today, and peers in developed markets are closing plants amid slower economies and lower prices. In contrast, Chinese Premier Wen Jiabao is overseeing a $23 billion investment in new mills to stimulate automaking and housing to reignite growth that fell in the second quarter to the slowest in three years. The strategy already is sparking unfair-trade charges by Western rivals.

“Increased Chinese exports take sales directly away from American producers,” Alan Price of Wiley Rein LLP, which acts as the trade attorney for Nucor Corp. (NUE), the largest U.S. steelmaker by market value, said in an e-mail response to questions. “It is highly likely that current Chinese exports across a range of products are being dumped.”

----Daily steel production in China rebounded to 2 million metric tons in June, the second highest following a record of 2.02 million tons set in April. Output, already more than twice the combined daily production in Japan, the U.S., India and Russia, may climb 5.4 percent to 720 million tons this year, further outpacing domestic consumption, according to the median of three analysts surveyed by Bloomberg News.

“Chinese mills have to boost exports as they don’t have self-control on production,” said Xu Zhongbo, chief executive officer of Beijing Metal Consulting Ltd. and a professor at the University of Science & Technology in Beijing.

Reducing output would require idling plants and laying off workers, Xu said. “All those things would incur losses while competitors will come in and take up market share.”

"Indeed the temporary breaks in the market which preceded the crash were a serious trial for those who had declined fantasy. Early in 1928, in June, in December, and in February and March of 1929 it seemed that the end had come. On various of these occasions the [New York] Times happily reported the return to reality. And then the market took flight again. Only a durable sense of doom could survive such discouragement. The time was coming when the optimists would reap a rich harvest of discredit. But it has long since been forgotten that for many months those who resisted reassurance were similarly, if less permanently discredited.”

J. K. Galbraith. The Great Crash: 1929.

The monthly Coppock Indicators finished June:
DJIA: +63 Down. NASDAQ: +71 Down. SP500: +41 Down. All three indicators remain down but downward momentum seems stalled.

To continue reading subscribe to the LIR at Currency Countdown.