Baltic Dry Index. 767 -12
LIR Gold Target by 2019: $30,000. Revised due to QE programs.
“The problem with fiat money is that it rewards the minority that can handle money, but fools the generation that has worked and saved money.”
“Adam Smith” aka George Goodman.
For more on “When Money Dies,” scroll down to “Elliott's Paul Singer On How Money Is Created... And How It Dies.”
We open today with the USA’s downward surprise in Q4 GDP. “The steepest drop in defence spending since the early 1970s, uncertainty over the fiscal cliff and the hurricane that swept up the east coast in November combined to hit growth,” writes the UK’s Telegraph. Well yes, but that merely covers up the fun and games in US accounts during an election year. Q3 GDP had come in at a surprising to say the least, 3.1 percent. Ahead of the election too, a happy coincidence? Well not really, it turns out defence spending and federal government spending was deliberately pulled forward into Q3 from Q4, neatly dressing up Q3 for the voters, and their feel good factor too. Q3s upside was overstated, Q4s after the election downside is equally overstated. Averaging the two quarters, as a rough guide, gets GDP turning over at 1.5 percent. Not good, but better than a negative 0.1 percent.US GDP contracts for first time since end of recession
The US economy unexpectedly shrank in the final quarter of last year for the first time since the end of the recession in 2009, as government spending fell and businesses scaled back investment.
The world's largest economy contracted at 0.1pc annual pace in the final three months of the year, sharply reversing the 3.1pc growth recorded in the third quarter.The steepest drop in defence spending since the early 1970s, uncertainty over the fiscal cliff and the hurricane that swept up the east coast in November combined to hit growth.
----Although economists were shocked by the contraction, there was encouragement taken from the resilience of US consumer spending.
Household
consumption grew at a 2.2pc rate in the fourth quarter, up from 1.6pc in the
third. Investors' attention will now turn to the latest monthly jobs report
which is due on Friday.
----A drop in government spending inflicted the most damage, led by a 22.2pc fall in defence spending. Exports also declined, falling at an almost 6pc annual rate.
"The
economy ended 2012 on a very sluggish pace, even though one-time factors put
the number below the trend," said Kathy Bostjancic, an economist at the
Conference Board.
In European news, the rising stink of scandal in
Siena, just gets worse. Does Italy have an honest banker or regulator anywhere
in the nation? As Monte dei Paschi was trading itself into the sewer, the
management didn’t seem to know or care what the traders were up to. The traders
are accused of taking bribes to take on dodgy derivatives bets, the supervising
Bank of Italy took a Costa Concordia approach to banking supervision. Knowing
of deeply risky problems for several years, and doing what Italy does best,
nothing. With an election coming up later next month, this scandal has nowhere
to go but up. The Davos Spring barely lasted a week. Europe now has both France
and Italy on suicide watch.
Insight: Monte dei Paschi harbored bank within a bank
SIENA, Italy |(Reuters) - The secret document at the heart of the Monte dei Paschi banking scandal lay for months in a concealed safe in a 14th century Tuscan palace.
Chief Executive Fabrizio Viola said he learnt about the safe's contents only last October, a full 10 months after he had been called in to sort out Italy's third biggest bank .
The 2009 document revealing derivatives deals that have run up huge losses for Banca Monte dei Paschi (BMPS.MI) came to light in the office of Viola's predecessor at the bank's headquarters in Siena.
"The document was in a safe, moreover in an office that was no longer mine," said Viola. "I don't think that the person who put it there had been trying to hide it. But there is no doubt that the document had not been used in the bank's accounting."
The document found at the 540-year-old bank's head offices - which are appropriately in a restored ancient fortress - was a contract mandating Japanese bank Nomura (8604.T) to carry out deals on behalf of Monte dei Paschi.
It revealed that, unbeknown to the new management under Viola, two derivatives transactions known as "Alexandria" which had looked separate were in fact linked. This meant they should have received different accounting treatment, leading to heavy losses.
This discovery prompted an internal inquiry that has, so far, revealed losses of up to 720 million euros ($977 million).
----The safe appeared to have been well hidden as there is no evidence that tax police found it when they combed the Siena offices in May, as part of an inquiry into Monte dei Paschi's 2007 acquisition of smaller lender Antonveneta.
----Whether the contract was deliberately hidden or simply forgotten, Monte dei Paschi's former top management seems to have had little idea of what traders in the finance department that negotiated such risky deals were doing - despite repeated complaints from internal auditors, according to senior sources with knowledge of the situation and documents seen by Reuters.
Three years before the document was uncovered, Monte dei Paschi's own risk control unit and its audit committee had already expressed serious concerns to Vigni about the way the bank's finance department handled risky trades.
More
Monte Paschi ex-managers probed over bribery, fraud
SIENA, Italy |(Reuters) - Prosecutors are investigating the former management of Italy's troubled Monte dei Paschi (BMPS.MI) bank for bribery and fraud, judicial sources said on Wednesday, as pressure grew on the Bank of Italy and bourse watchdog Consob.
With parliamentary elections less than a month away, the scandal at Italy's third-largest bank has deepened with questions about the role of banking supervisors and the influence of local politicians.
Milan prosecutors said they had transferred an investigation into allegations that Monte dei Paschi executives took bribes to buy toxic derivatives from Dresdner Bank to Siena magistrates investigating the main corruption case.
At the same time, prosecutors in the southern town of Trani, who have previously taken on ratings agency Standard and Poor's, said they had opened an investigation against the Bank of Italy and Consob over accusations they failed in their regulatory duties.
More
We end for the day back on the dangerous subject of money. Our current
crop of fiat currency central bankster have got a clue how deep they are in,
playing with fire. Zerohedge.com’s whole article is well worth the read. Stay
long physical precious metals against the day our present round of fiats dies.
Though I can’t predict the future any more than the next man, my guess is that
this will be the most important article I link to in 2013.
Elliott's Paul Singer On How Money Is Created... And How It Dies
The
concept of “money” used to be simple: items of recognized value, initially in
the form of shells, livestock, and then precious metals. At some point, someone
decided to print currency on paper, but it was widely understood that it had to
be backed by something real, like gold or silver. That history is
oversimplified, but it illustrates this central truth: Money that is created at
will, rather than grown in the field, mined from the earth, or otherwise
subject to supply limitations, can be easily degraded. Nobody would want to own
something that may or may not have value and purchasing power in the future.
What, then, determines the value of money? The worldview and ethics of those in
charge of the printing presses are obvious answers that are often overlooked.
Another is the confidence (or inertia!) of the people who hold and trade the
money, or claims denominated in money.
Fast
forward to the modern era, which features central banks, so-called “fractional
reserve banking,” leverage, and derivatives. Central banks allowed commercial
banks to create money by making loans while keeping small amounts of reserves
on hand or at the central banks. As money market funds, bank CDs, and other
like instruments were created and then became a sizeable portion of the global
financial system, things got even more complicated. An obvious clue that the
very definition of money, to say nothing of the appropriate ways to analyze and
adjust monetary policy, have departed from the understanding and control of
monetary authorities can be found in the proliferation over time of acronyms to
describe what used to be called simply “the money supply”: M1, M2, M2A, M3,
MZM, and several others.
Add
modern derivatives, which entered the scene in a significant way only some 30
years ago, and the picture becomes even murkier. To demonstrate this, in slow
motion, consider the creation of a credit default swap (CDS), and then a
mortgage collateralized debt obligation (CDO)
---- The purpose of this part of the discussion about money is to show that things have gotten really complex and subtle in the modern banking and derivatives era, and that the old model of money as being solely or mainly the product of bank reserves and bank loans is woefully inadequate.
Now one
more element should be added to this mix: quantitative easing, or QE. The
government spends money on roads, bureaucrats’ salaries, entitlements, etc. To
pay for such spending, Treasury sells a security to the public, and it has an
obligation to repay the purchaser when the security matures. The security might
be a Treasury Bill, a 30-year bond, or anything in between. The Federal
Reserve (or the Fed, as it is commonly known) has the ability to set short-term
interest rates, which has incentive/disincentive effects on bank lending and
consumer spending. In a nutshell, that model has prevailed as the status quo
since the Fed was created in 1913, up until 2008.
Since the
crash of 2008, there has been an additional dynamic at work. Namely, the Fed
is purchasing massive amounts of Treasury securities, either directly or on the
open market. To be clear, the cash outlays by Treasury for government
spending are the same as in the preceding paragraph. The difference is that
post-crash, there are far fewer securities outstanding that the Treasury must
pay off at maturity, because trillions of dollars of such securities are owned
by another department of the federal government. We think this process is
the effective equivalent of money-printing.
For those
who think otherwise, we pose the following question: If QE did not have the
effect of printing money, why would the Fed do it? We do not think that
QE is merely a duration swap.
----
It is critically important for investors to try to understand what global QE is
actually doing, where it may lead, and what will happen when it slows, stops or
shifts into reverse. What we urge most strongly is that the current atmosphere
of calm and stability, and the lack of virulent inflation, must not be relied
upon to continue forever. There are certain words and phrases in official
communications that give some hint of the uncertainty that exists about key
elements of central-bank policies: confidence, anchored inflationary
expectations, and velocity are prime examples. Our takeaway is that when
investors lose confidence in ZIRP-soaked, QE-ridden, faith-based paper money,
the consequences could be abrupt and catastrophic to societal stability. We
do not know exactly what to do about it, except to urge policymakers to STOP
substituting QE for sound tax, regulatory, labor, environmental, and fiscal
policies.
More
"Those entrapped by the herd instinct are drowned in the deluges of history. But there are always the few who observe, reason, and take precautions, and thus escape the flood. For these few gold has been the asset of last resort."
Antony C. Sutton
At the Comex silver depositories Wednesday final figures were: Registered 38.06
Moz, Eligible 116.23 Moz, Total 154.29 Moz.
Crooks and
Scoundrels Corner
The bent, the seriously bent, and the totally
doubled over.
Today it’s the Eurozone again. Who is going to pay for all the banks “legacy
Assets,” using the term “asset” loosely. Finland, Germany and Holland seem to want to renege
on one of last year’s many fixes. As
usual, there’s little hope of making the shareholders and bondholders pay. Not
when there’s a bottomless pit called the taxpayers.
"Gold would have value if for no other reason than that it enables a citizen to fashion his financial escape from the state."
William F. Rickenbacker
Analysis: Pall of bank "legacy assets" hangs over euro zone
BRUSSELS |(Reuters) - In September last year, at a below-the-radar meeting in Helsinki, three euro zone finance ministers came up with a two-word phrase that sounded harmless at the time but has since troubled European leaders a great deal.
Banks' "legacy assets" sound innocent enough but in the context of Europe's debt crisis, and particularly for Ireland and Spain, the question of how to deal with existing bad debts is a time bomb that has not been defused.
In the months since the term entered the EU's lexicon, efforts have been made to parse it or play it down.
But those that came up with it -- the finance ministers of Finland, Germany and the Netherlands -- appear determined to keep it alive, and until June 2013, the deadline leaders have set themselves to resolve it, the issue will fuel uncertainty.
At its heart, it comes down to the difference between a euro zone country getting direct banking assistance from the region's 500 billion euro rescue fund, known as the ESM, or a country largely being left to fend for itself, with the market volatility and high borrowing costs that go with it.
In that respect, "legacy assets" are a critical link in the chain that binds governments to their banks -- the "vicious circle" that has dragged several states down with their lenders which policymakers are desperate to break.
From the Finnish, Dutch and German point of view, any banking problems that have already come to light, or emerge before the European Central Bank takes over as the euro zone's single banking supervisor in mid-2014, are "legacy".
As Finnish Prime Minister Jyrki Katainen said earlier this month, "a line has to be drawn somewhere" so that European taxpayers aren't left footing the bill for badly run banks.
Katainen says existing banking problems in Ireland, Spain or elsewhere should remain chiefly the responsibility of their governments, and only in the future, after mid-2014, would the ESM, and ultimately European taxpayers, provide any backstop.
----The problem is that is not the way Italy, Spain, Ireland and others have interpreted the rule since it was drawn up at a summit of euro zone leaders in Brussels last June.
At that time, Italian Prime Minister Mario Monti praised the deal, which said the ESM could "have the possibility to recapitalize banks directly", as a breakthrough that would change the debate after nearly three years of debt turmoil.
----In meetings of euro zone finance ministers since then, discussions have taken place about precisely what steps would need to be taken before a country can receive funds from the ESM and how to resolve the "legacy assets" issue.
While the
process will only be finalized in the months ahead, it is expected there will
be specific rules stating that banks have an obligation to raise their own
capital first. If that is insufficient, then the national government would step
in, and as a very last resort, the ESM could, under strict conditions, provide
capital directly, euro zone officials say.
That is a
far more convoluted process than first envisaged, but one that even Ireland's
finance minister, one of the strongest advocates for direct recapitalization,
including for "legacy assets", has acknowledged is likely.
----Part of the aim of Finland, Germany and the Netherlands is to make accessing the ESM so onerous that few countries will do it. If it is too straightforward, a string of states will apply and the scarce resources of the fund will be used up.
The ESM is based on paid-in capital, which will eventually total 80 billion euros. To bail out a bank, the fund would either have to dip into that, which would get depleted quickly, or borrow on the market to buy bank shares, which is inherently more risky than lending to a government.
More
"Until government administrators can so identify the interests of government with those of the people and refrain from defrauding the masses through the device of currency depreciation for the sake of remaining in office, the wiser ones will prefer to keep as much of their wealth in the most stable and marketable forms possible - forms which only the precious metals provide."
Elgin Groseclose
The monthly Coppock Indicators finished December:
DJIA: +100 Down. NASDAQ: +123 Unch. SP500: +129 Up.
All three indexes are giving different
signals. A time for caution.
