Monday 20 October 2014

Round Three.



Baltic Dry Index. 944 +14

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

A permanent Governor of the Bank of England would be one of the greatest men in England. He would be a little 'monarch' in the City; he would be far greater than the 'Lord Mayor.' He would be the personal embodiment of the Bank of England; he would be constantly clothed with an almost indefinite prestige. Everybody in business would bow down before him and try to stand well with him, for he might in a panic be able to save almost anyone he liked, and to ruin almost anyone he liked. A day might come when his favour might mean prosperity, and his distrust might mean ruin. A position with so much real power and so much apparent dignity would be intensely coveted.

Walter Bagehot. Lombard Street. 1873

It is Monday October 20, 2014. Who can forget that other Great October Monday the 19th, all the way back in 1987. The stock market collapse that day was so bad and the rout so complete in New York, that old “Bubbles” Greenspan dropped any pretence at being a central banker in the style of central banking previous to the Great Nixonian Error of August 15th 1971, and became instead the modern central planning, central bankster so clearly forecast by Bagehot back in 1873. It took only 20 years of serial bubbles, casino derivatives gambling, and Greenspan-Bernanke, for the whole system to blow in 2007-2009. Despite mountains of new funny money out of nothing via QE, and a zero interest rate policy everywhere, this October 2014 is on the verge of becoming another October 2008.

Below what six years of QE failure has brought. We open in round three of the Great Reconnect.

Leveraged Money Spurs Selloff as Record Treasuries Trade

Oct 20, 2014 6:06 AM GMT
When markets are buckling and volatility is signaling a crisis, you sell what you can, not what you want.

That’s what happened last week on Wall Street, where slowing economic growth in Europe, Ebola anxiety and escalating conflicts in the Middle East and Ukraine tore through the calm with a force not seen in three years. Loath to find out what their record holdings of corporate bonds and leveraged loans were worth as liquidity thinned and markets slid, professional traders turned to stocks and Treasuries to defuse risk.

The result was a frenzy. U.S. government debt volume surged to an all-time high of $946 billion at ICAP Plc, the world’s largest interdealer broker, more than 40 percent above the previous record. About 11.9 billion shares changed hands on U.S. equity exchanges on Oct. 15, the most since the European debt crisis of 2011.

“Whenever people can’t sell their illiquid assets, they turn to the U.S. stock market because everyone is involved in it and that’s what they can sell,” said Matt Maley, an equity strategist at Miller Tabak & Co. in Newton, Massachusetts, who has worked in the securities industry for 32 years. “That’s why the market selloff was so sharp. You sell what you can, and the deepest, most liquid asset in the world is U.S. stocks.”
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Greece’s latest woes signal next stage of the eurozone crisis

Greece’s sudden relapse has left many equity, bond and commodity investors running for the hills

If Greece is the canary in the coal mine, then we are all in trouble. Interest rates on Greek debt have jumped in recent days, rocketing to around 9pc on 10-year bonds, an unsustainable financing cost for such a troubled government.

The last time this sort of thing happened, in 2010, the eurozone was soon plunged into near-fatal crisis. Four years later, the debt crisis in the eurozone’s periphery was meant to be over, so Greece’s sudden relapse is one reason why so many equity, bond and commodity investors are running for the hills.

Unlike last time, no hidden debt has been discovered, and Greece’s budget deficit has actually fallen significantly.

While not quite a model student, Greece had at least been trying to mend its ways. The proximate trigger for the surge in bond yields is that the Athens government had been over-exuberant since the start of the year, hoping to leave the bail-out programme early, partly for the wrong, anti-austerity reasons.

None of this will now happen, and the European Central Bank has promised to help out, which may temporarily calm matters down.

The stark reality is that Greece is not out of the woods, contrary to what many had claimed – yet its crisis is containable. Its economy is too small; even under a worst-case scenario it would not be able to take down the whole of the eurozone.

But what this latest flare-up confirms is that merely reducing budget deficits is not enough. Having an excessive national debt remains a major problem, especially now that economists are slashing their growth forecasts for the eurozone as a whole and continent-wide deflation is looming. In such a Japanese-style scenario, the traditional debt-eroding mechanisms of inflation and growth no longer apply.

Falling prices – caused by a defective, one-size-fits-all monetary policy, and thus insufficient demand – will push up debt ratios as a share of GDP, especially when economic output is stagnating at best. As Capital Economics points out, any eurozone country with high and rising debt ratios is vulnerable; Italy and Portugal, which both have debt to GDP ratios of about 130pc, could be next in the firing line. Once again, excess debt is the problem – though this time, burdens are rising for partly different reasons.
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One simple reason why global stock markets are reeling

The world's central banks have slashed stimulus by $125bn a month since the end of last year - leading to the current market rout

It is no mystery why global liquidity is evaporating. Central banks have turned off the tap. They have reduced net stimulus by roughly $125bn a month since the end of last year, or $1.5 trillion annualized.

That is a shock for the financial system. The ratchet effect has been incremental, but relentless. We are finally seeing the consequences, with the usual monetary policy lag.

The Fed and People‘s Bank of China (PBOC) have stopped their two variants of global QE altogether (for now). Others have chopped their purchases of bonds by half or more. The Brazilians are net sellers, and in a sense they carrying out reverse QE. The Russians have just joined them again

Fed tapering has taken out $85bn a month. The markets are having to go it alone as of this month, without their drip feed. Less understood is the effect of global reserve accumulation by the BRICS, emerging Asia, and the Petro-states. This has collapsed.

Nomura’s Jens Nordvig has crunched the latest numbers for Q3. They show that China’s PBOC has completely withdrawn from global asset markets. In fact, it may have sold almost $9bn of bonds, (even adjusting for currency effects). This is a policy shift by Beijing. Premier Li Keqiang said in May that China’s $4 trillion foreign reserves are already so big they have become a “burden“.

China bought $106bn as recently as the first quarter of 2014, so this is a very sudden shift. Yes, I know, China’s purchases of US Treasuries, Gilts, Bunds, French bonds, and Japanese JGBs are not quite the same as QE. There are complex sterilization effects.

Yet there is a fungible effect whether the Fed is buying Treasuries or whether the Chinese central bank is buying them. It is all a form of global QE. It all helps to inflate asset prices, and vice versa if it reverses.

This was really what Ben Bernanke meant when he first began talking of the "global savings glut“. The flood money into the bond markets was compressing yields for everybody. Hence the subprime debt crisis in the US, and hence too the Club Med debt bubble.

The money had to go somewhere as the rising world powers boosted global FX reserves to $11.3 trillion from under $1 trillion in 2000. It went into safe-haven bonds, displacing that money into everything else.

Over the latest quarter, almost every country has been choking back: the Bank of Korea has cut net purchases from $25bn to $9bn; the Reserve Bank of India from $43bn to $12bn; the petro-states have cut from $19bn in Q1 to $11bn. (That must surely turn steeply negative with oil at $86 a barrel).

Net sellers were: China (-$9bn), Brazil (-$7bn), Singapore (-$7bn), Malaysia (-$5bn), Thailand (-$3bn), Turkey (-$1bn). Overall FX accumulation worldwide fell from $106bn to $22bn.

The Bank of Japan – now on QE8 -- is buying $75bn a month of Japanese domestic debt. But that is almost a fixture. It is not raising the pace of monthly stimulus.
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Meet The Fed’s Monetary Dunce Of The Week: James Bullard Of St. Louis

by Contributor • 
We already pointed out on Tuesday and again on Wednesday that numerous signs of back-pedaling by Fed officials recently emerged – no doubt in reaction to the sudden wobble in “risk” assets (what else could have been the motivation?). On Wednesday we asked rhetorically whether San Francisco Fed president John Williams was actually serious.

Enter St. Louis Fed president James Bullard on Thursday, who only a few weeks ago was talking about wanting to alter the FOMC statement toward indicating a more hawkish tone. Nothing but a less than 10% dip in the spoos to completely change a monetary bureaucrat’s views these days. According to the FT:

“From the transcript of St Louis Fed president James Bullard’s interview with Bloomberg Television:
“I also think that inflation expectations are dropping in the U.S. 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. …
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----So the new line is that we have “not enough inflation” (of course, monetary inflation, though it has slowed from its peak, is still going gangbusters). In other words, the dollar is not being debased fast enough according to Bullard and Williams. Now, these are only regional Fed presidents with a very limited influence on how the FOMC votes, but the fact that they are wheeled out now to talk about inflation expectations being “too low” (this is so utterly absurd we have difficulties to wrap out head around it), is simply designed to find a new justification for continuing the Fed’s monetary pumping now that virtually all previously formulated labor-market related goals have been met several times over (anyone remember the 6.5% unemployment rate threshold?).

The stock market apparently liked to hear it:
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We end for this anniversary Monday of the Great 1987 Stock Market Crash which ushered in the era of central bankster stock market rigging, Great Vampire Squids, too big to fail casino bankster gambling, serial central bankster bubbles, and the disastrous era of the Greenspan-Bernanke-Yellen Put.




October’s oil market price collapse of roughly 25% has already blown up the viability of UK (and much of Europe,) fracking. With Brent crude trading this morning at just over $86 a barrel, Scotland must be breathing a big sigh of relief that the majority of Scotland’s voters voted to remain in the Union of 1707.

UK fracking faces bust amid Opec oil price war

With crude prices slumping, Britain’s hoped for shale oil ‘revolution’ may be undermined by basic economics

Experts have warned that a rush to start fracking for oil across Britain may already be over before it has even begun as the slump in global crude oil prices makes the controversial method of drilling look increasingly uneconomic.

Bids from oil companies for licences to search and potentially drill for oil onshore in the UK are due on October 28. The auction of mineral exploration rights across vast swathes of the country will, it is hoped, spur a shale oil and gas “revolution” similar to that which has helped transform the US economy.

Hydraulic fracturing or fracking has made America increasingly energy independent and has broken its reliance on the volatile Middle East. The US, which pumps about 8.5m barrels per day of crude, is forecast to soon overtake Saudi Arabia as the top global producer of liquid petroleum.

However, the recent sharp declines in the price of oil traded on global markets – Brent is down around 25pc since hitting $115 per barrel in June – have cast a cloud of uncertainty over the process of opening up the UK to fracking due to the high costs associated with the process.

Fracking for so called “tight oil” involves the expensive process of cracking open shale rock formations deep underground and then pumping fluid and sand into the fractures under high pressure to force out the thick low quality crude.

----Recent research from Deutsche Bank speculated that if prices of Brent crude slump below $80 per barrel then almost 40pc of shale oil wells in North America could become uneconomic overnight. Although prices fluctuate, the German investment bank argues that relative to the US dollar a current “fair value” for Brent oil could be around $80 per barrels for a prolonged period.
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A large Bank is exactly the place where a vain and shallow person in authority, if he be a man of gravity and method, as such men often are, may do infinite evil in no long time, and before he is detected. If he is lucky enough to begin at a time of expansion in trade, he is nearly sure not to be found out till the time of contraction has arrived, and then very large figures will be required to reckon the evil he has done.

Walter Bagehot. Lombard Street. 1873

At the Comex silver depositories Friday final figures were: Registered 66.46 Moz, Eligible 113.26 Moz, Total 179.72 Moz.    

Crooks and Scoundrels Corner

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

Today the irrefutable case for gold. A terrifying financial disaster lies ahead and gets nearer with each passing day.

Terrifying US cluelessness on interest rates suggests politics is powerless

From turmoil in markets, to Ebola and the Islamic State, global problems require global solutions that may not exist

Clues to the current market turmoil can be found in the Scottish referendum, the Ebola outbreak, and a set of seventeen dots.

The last of these are the “dots diagrams” that the US Federal Reserve uses to illustrate where its officials think interest rates will be in the future. They provide a glimpse inside the decision-making process of the main monetary control room in the world. And the picture that emerges is, frankly, terrifying.

Fed officials currently believe that US interest rates at the end of next year could be anywhere between 0pc and 3pc. Opinions diverge even more for the end of 2016; the officials think that rates could be anywhere between 0.25pc and 4.25pc.

In other words, Fed officials have almost no clue at all where interest rate for the world’s largest economy will be in 15 months time. And these are the people who are supposed to be setting it. If they’re confused, what hope do the rest of us have?

For several months now the Federal Reserve has been winding down its bond-buying programme and hinting that it will raise rates at some point next year. But, after less than two days of market turbulence (and despite the fact that the Fed says it doesn’t target the markets), St. Louis Federal Reserve Bank President James Bullard yesterday said the Fed should consider prolonging QE.

Are these officials clueless? No. But the complexity of the issues they face is bordering on the overwhelming.
The eurozone looks like it is stuttering again and the market is worried that policymakers either can’t or won’t do anything about it.

The world is still massively over-leveraged. The global debt to GDP ratio hit a new record high of 215pc at the end of last year, up from around 200pc when the financial crisis hit. While one wouldn’t want to fall for the “household fallacy” of assuming all debt is bad, it is undoubtedly true that heavily indebted countries, like many of those in the eurozone, will find it increasingly hard to meet debt payment as inflation creeps ever lower.
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Washington Accounting Magic: US Deficit $483 Billion, New Borrowing $1.1 Trillion

by Wolf Richter • October 16, 2014
On Wednesday, the Treasury Department released its Monthly Treasury Statement for September and the fiscal year 2014. It’s the official account of how the US government arrives at its infamous deficit. And it was a doozie.

Without giving it a second thought, the media gushed about the headline number, how good it looked, how the US government was getting its fiscal mess in order.

Receipts rose $247 billion to $3,021 billion, outlays rose $50 billion to $3,504 billion (including “on-budget” and “off-budget” items) for a deficit of $483 billion. At 2.8% of GDP, as the media gleefully pointed out, it was proportionately the smallest since 2007. The deficit monster has been tamed. And unthinkable as that seemed a couple of years ago, it has disappeared as a political issue, even before the election!

There is just one teeny-weeny problem:

To fill that $483 billion hole, the US government borrowed $1.086 trillion.

Turns out, the US gross national debt, as I’d reported in early October, ended fiscal 2014 at 17.824 trillion, up $1.086 trillion from fiscal 2013. This is the real increase in real Treasury debt that real taxpayers will have to deal with in the future.

The chart of the gross national debt below is a mesmerizing picture of America’s fiscal condition as it developed over the years, with some peculiarities:

One, the US, had four years of official “surpluses” between 1998 and 2001 that at one point exceeded 2% of GDP. They should have brought down the gross national debt by the amounts of the surpluses. But not these “surpluses!” Instead, the debt increased in every one of those four years, in total by $394 billion. That’s how much real debt it took to cover these government accounting “surpluses.”

Two, following four years of “surpluses,” the debt began to grow exponentially. Since 2002, the government has borrowed $12 trillion, or two-thirds of the total debt! Since 2008, it has borrowed $8.8 trillion, or about half of the total debt.

Three, in fiscal 2014, with that smallish deficit of $483 billion, well, look what happened: the debt soared by $1.1 trillion.
More, much more!

Again, it may be said that we need not be alarmed at the magnitude of our credit system or at its refinement, for that we have learned by experience the way of controlling it, and always manage it with discretion. But we do not always manage it with discretion. There is the astounding instance of Overend, Gurney, and Co. to the contrary. Ten years ago that house stood next to the Bank of England in the City of London; it was better known abroad than any similar firm—known, perhaps, better than any purely English firm. The partners had great estates, which had mostly been made in the business. They still derived an immense income from it. Yet in six years they lost all their own wealth, sold the business to the company, and then lost a large part of the company's capital. And these losses were made in a manner so reckless and so foolish, that one would think a child who had lent money in the City of London would have lent it better.  After this example, we must not confide too surely in long-established credit, or in firmly-rooted traditions of business. We must examine the system on which these great masses of money are manipulated, and assure ourselves that it is safe and right.

Walter Bagehot. Lombard Street. 1873

The monthly Coppock Indicators finished September.

DJIA: +141 Down. NASDAQ: +289 Down. SP500: +216 Down.  

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