Wednesday, 24 August 2016

A Reminder From Bagehot of the Past.

Baltic Dry Index. 692  +05    Brent Crude 49.48

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

'John Bull can stand many things, but he cannot stand two per cent.:'
Walter Bagehot.  Lombard Street, 1873.

We are eight years in to the cental bankster emergency measures of QE forever, ZIRP and now the insanity negative interest rates. Walter Bagehot would never have contemplated the idea of something so completely malinvestment prone as negative interest rates. When he wrote his famous maxim about John Bull and a two percent interest rate, he was writing about a world where outside of GB and some of the British Empire, most savings were held in the form of hoarded coins and/or bullion, earning no interest rate at all. Preservation of savings and wealth was paramount for rainy days ahead.
In Britain and the more developed parts of the Empire, savings were invested in bonds and stocks, with safer bonds earning interest, much preferred over highly risky stocks. Railways boomed and busted with regularity. Storms regularly sank even iron ships. Mines were often just the proverbial  hole in the ground with a liar standing next to it.  Coal mines suffered terrible collapses and explosions. But John Bull expected to earn 5 percent interest for taking on the risk of investing in bonds. Slightly less if they were “gilts” i.e. Her Majesty Queen Victoria’s GB government bonds. If interest rates fell to 2 percent, pushing “gilts” down towards 1 percent, all kind of bad things followed. It was the Victorian equivalent of the negative interest rates of today.
First of all savers were forced to cut back to live within their reduced means. Often that meant firing or not hiring a servant, often a woman or girl. Payments for goods and services already supplied were delayed, or in extremis, not made at all. Today we would say that the velocity of money slowed down.
Next, companies found it harder to raise cash by bond issuance. In a sound money system backed by gold convertibility, there are fewer investors willing to accept risk for a return of two percent. Corporate expansion plans get delayed or even cancelled. More workers get laid off or not hired. Velocity slows some more.
But most egregious of all, fraudsters and scam artists pour out of the woodwork with fast money schemes. Banks and insurance companies start to wobble. Past excess start to emerge as it can no longer be easily hidden. Scandal lurks just around every corner. At 2 percent interest rates on bonds, reckless investment starts to replace good judgement among the investing classes.
From Lombard Street, 1873
And with the Bank of England, as with other Banks in the same case,
these advances, if they are to be made at all, should be made so as
if possible to obtain the object for which they are made. The end is
to stay the panic; and the advances should, if possible, stay the
panic. And for this purpose there are two rules: First. That these
loans should only be made at a very high rate of interest This will
operate as a heavy fine on unreasonable timidity, and will prevent
the greatest number of applications by persons who do not require
it. The rate should be raised early in the panic, so that the fine
may be paid early; that no one may borrow out of idle precaution
without paying well for it; that the Banking reserve may be
protected as far as possible.

Secondly. That at this rate these advances should be made on all
good banking securities, and as largely as the public ask for them.
The reason is plain. The object is to stay alarm, and nothing
therefore should be done to cause alarm. But the way to cause alarm
is to refuse some one who has good security to offer. The news of
this will spread in an instant through all the money market at a
moment of terror; no one can say exactly who carries it, but in half
an hour it will be carried on all sides, and will intensify the
terror everywhere. No advances indeed need be made by which the Bank
will ultimately lose. The amount of bad business in commercial
countries is an infinitesimally small fraction of the whole
business. That in a panic the bank, or banks, holding the ultimate
reserve should refuse bad bills or bad securities will not make the
panic really worse; the 'unsound' people are a feeble minority, and
they are afraid even to look frightened for fear their unsoundness
may be detected. The great majority, the majority to be protected,
are the 'sound' people, the people who have good security to offer.
If it is known that the Bank of England is freely advancing on what
in ordinary times is reckoned a good securityon what is then
commonly pledged and easily convertible--the alarm of the solvent
merchants and bankers will be stayed. But if securities, really good
and usually convertible, are refused by the Bank, the alarm will not
abate, the other loans made will fail in obtaining their end, and
the panic will become worse and worse.

Compare and contrast with today’s unsound, casino banksterism, fiat money, communist money system of today.  Sadly, as the Fedster’s and their ilk start assembling for their annual fixers junket in Jackson Hole Wyoming, we are still headed for the crash of all crashes. 2007-2009 will look like a child’s picnic. Debt today in 2016, is far larger and more dangerous than in 2008.

Bubbles In Bond Land—-A Central Bank Made Mania, Part 2

by David Stockman • 
……….In short, Europe is a financial and political powder keg. The ECB is bluffing a $40 trillion debt market (including bank loans) and the Brussels apparatchiks are bluffing 340 million citizens.
The only problem is that the true facts of life are so blindingly obvious that it’s only a matter of time before these bluffs are called. And then the furies will break loose.
In the first place, the EU-19 is marching toward the fiscal wall and even Germany’s surpluses cannot hide the obvious. During the last six years, the collective debt-to-GDP ratio among the Eurozone nations has gone from 66% to 91% of GDP. The sheer drift of current policy momentum will take the ratio over the 100% mark long before the end of the decade.

Secondly, notwithstanding the ebb and flow of short-term indicators, there is no evidence whatsoever that Europe is escaping its no growth rut. Indeed, euro area industrial output has continued to flat-line, and remains 10% below the pre-crisis peak, and even below the level achieved way back in 2002.

You can’t grow your way out of debt on the basis of a profile like that shown in the graph below. Even then, the underlying truth is more daunting because the picture is flattered by Germany’s exports to China and the EM that are fast coming to a halt.

Thirdly, the state sector in Europe has gotten so big that politics are paralyzed. Accordingly, it is virtually impossible that the true barrier to growth—crushing taxes and interventionist dirigisme—-can be eliminated.
Check out recent pro-market policy actions in Italy, France or Spain. There have been none that amount to anything—–unless you consider the newly conferred right of French shopkeepers to be open 12 Sundays per year rather than 5 to be anything other than symbolism.

In fact, since the financial crisis the state sector in the Eurozone has continued to envelop more and more of the GDP, rising from 45% of output in the EU-19 in 2007 to nearly 50% today.

----The destruction of honest pricing in the European bond market is only the tip of the iceberg. Our lunatic central bankers have unleashed a worldwide pincer movement among market participants that is flat-out suicidal. To wit, the leveraged fast money gamblers everywhere on the planet are chasing prices ever higher as the sovereign bonds of “open to buy” central banks become increasingly scarce.

At the same time, desperate bond fund managers, who will lose their jobs for just sitting on cash, are chasing yields rapidly lower on any bond issued anywhere that still has a positive current return.

This is the reason, for example, that they are chasing yield out the duration curve to 30-year and even 50-year paper. Accordingly, the 30-year US treasury bond has produced a 22% return during the last six months. To say the least, that’s not shabby at all considering that its current yield is just 2.25%.

All the rest, of course, is capital gains—–meaning that the whole scenario is nuts. A recent Wall Street Journal piece entitled, “35-Year-Old Bond Bull On Its Last Legs”,  quotes a European fund manager that explains why everything is going haywire:

Neil Dwayne, global strategist at Allianz Global Investors, is still buying. “Every piece of analysis we do on the bond market tells us they are structurally overvalued,” he said. But he is buying US Treasurys anyway. “That’s what you have to do when you have the ludicrous valuations in Europe and Japan.”

Exactly. The poor man is buying a bond he hates because Draghi and Kuroda have driven him out of what amounts to a $15 trillion corner of the sovereign debt market.

So in addition to front-runners on repo, we now have institutional fund managers from all over the world piling into the US bond market in a frantic chase after the last positive yield standing. Thus, when the 10-year US treasury note hit a low yield of 1.34% in July, it literally made history. There has never been a lower yield since 1790.

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 Tuesday final figures were: Registered 27.43 Moz, Eligible 130.08 Moz, Total 157.51 Moz. 

Crooks and Scoundrels Corner

The bent, the seriously bent, and the totally doubled over.
Today, the good news and bad news on wind power. The good news, wind turbines have gotten much more robust in the last decade, and are able to carry on producing electricity from winds that with earlier turbines would have  forced a shutdown. The bad news is that although many companies are busy working a battery storage solution for any excess electricity produced exceeding immediate demand, that solution still seems more next decade than this.

Hurricane-Force Gusts Prompt Record Pay to U.K. Wind Farms

August 23, 2016 — 10:00 AM BST Updated on August 23, 2016 — 10:46 AM BS
Scottish wind farms received a record 5.5 million pounds ($7.2 million) to shut down this month after hurricane-force gusts produced more electricity than could be consumed. 
Unusually strong summer winds blowing as high as 115 miles (185 kilometers) an hour swept the Scottish Highlands on Aug. 7, prompting National Grid Plc to ask energy generators to curtail production, according to the London-based company’s commercial-operations manager Claire Spedding. The weather resulted in the U.K. grid operator awarding a record 7.3 million pounds in total payments across a range of technologies.
“It was a perfect storm: very windy, very sunny, but not actually that warm,” Spedding said in a phone interview. The Aug. 7 winds blew on a Sunday afternoon when power consumption on the national grid also hit a record low, she said.
Rapid growth in renewables has caused power congestion on particularly windy or sunny days across the world. National Grid sometimes pays operators to switch off in order to balance its network. The company also pays generators to raise output to fill gaps when demand surges. The winds on Aug. 7, which prompted a weather warning from the Met Office, also disrupted train services because of fallen trees.
It’s not just wind farms that receive payments to occasionally to switch off. National Grid paid other fuel types such as hydro, nuclear and oil 8.75 million pounds in the first three months of the year, compared to 10.08 million pounds for wind, it said. The company can also curb trading with other countries through interconnectors.
The morning of Sunday Aug. 7 saw power demand fall to record lows amid seasonally cool temperatures during a month when many people are on vacation.
“When you get temperatures above 25-ish degrees you start to see the impact of people using air conditioning,” Spedding said. “We haven’t really got to those kind of temperatures.”
Wind farms have received more than 255 million pounds to idle since payments began in 2010, according to National Grid. Spedding said the payments cost less than building an over-sized grid that can handle power surges on unusually windy days.
“Although that one day will have cost consumers a lot of money for constraints it’s a relatively infrequent occurrence,” she said. “It’s still a better outcome for households to spend that amount of money on one day restricting the power that’s being generated rather than building a network that’s sized to cope with that amount of power.”
National Grid is also building a new 1-billion pound link with Scottish Power Ltd., known as “the Western Bootstrap” that will improve the flow of energy from Scotland to England when it comes online in summer 2017, she said.

Solar  & Related Update.

With events happening fast in the development of solar power and graphene, I’ve added this section. Updates as they get reported. Is converting sunlight to usable cheap AC or DC energy mankind’s future from the 21st century onwards? DC? A quantum computer next?

Big Batteries Will Help Bring Clean Energy to San Diego

August 19, 2016, 12:09 PM EDT
The region around San Diego will soon get two big battery projects that will help the local utility add in more clean energy and better manage the power grid.

The batteries are being built by an arm of power giant AES, called AES Energy Storage, and the company has been building such projects for close to a decade.

The project is one of a growing number of planned battery farms in California and other states, as utilities look for better and greener options to generate and deliver energy to their customers and meet the state’s regulations. Building owners are also buying energy from batteries to lower their monthly energy bills.

These farms are being built by not just AES’s division, but also by electric car maker Tesla TSLA -0.92% , by conglomerate GE GE 0.22% and a list of startups including Advanced Microgrid Solutions and Stem.

On Thursday AES Energy Storage announced that it’s won two contracts with utility San Diego Gas & Electric to develop two battery projects—in the cities of Escondido and El Cajon—that will total 37.5 megawatts in capacity. That means combined the battery farms will be able to supply 37.5 megawatts on demand to the utility for a four-hour period whenever the utility might need it.

It’s not a ton of energy on demand, but San Diego Gas & Electric can use the batteries to store excess solar and wind energy, and tap into that power when their customers are using a lot of electricity, like on a hot summer’s day. 37.5 megawatts is about the size of a small solar farm; a large natural gas or coal plant can generate several hundred megawatts of power.

It won’t be the biggest project by AES in California. That would be a more than 100 megawatt project for utility Southern California Edison in the Los Angeles area.

But the San Diego projects are still pretty big considering these projects are just starting to get built. AES says when the Escondido battery plant is built by next January, it will be the largest operating one in the U.S.

The monthly Coppock Indicators finished July

DJIA: 18432  +03 Up NASDAQ:  5162 +10 Up. SP500: 2173 +01 Up.

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