Lunes 07/09/15 Labor Day - Dia del trabajo

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¿Más QE a la vista?
por Observatorio del Inversor de Andbank •Hace 12 horas
Un Draghi más cauto, sumado a un cuadro macro con rebajas en precios y actividad en todo el horizonte a la vista, parecen sugerir un QE 2.0

•Recorte esperado en las previsiones de PIB e IPC 2015-2017. Muy destacado el «tijeretazo» a las de precios de 2015: del 1,5% al 1,1% YoY, clara indicación de que para septiembre 2016 no se habría logrado el objetivo de estabilidad de precios que pretende el QE. Más aún cuando los riesgos están a la baja y cuando las nuevas cifras se cerraron a mediados de agosto, momento tras el cual el flujo de referencias para algunas de las estimaciones sería a la baja.

•Ampliación del límite máximo de compras por ISIN del 25% al 33% condicionado a que el BCE no tenga una minoría de bloqueo. Válido para los bonos emitidos antes de 2013 (los posteriores incorporan CACs al 75%). Nueva señal de la flexibilidad del programa QE (y quizás de la escasez potencial de papel…). Draghi insiste en la «predisposición y capacidad» para actuar si fuera necesario. Posibilidad aún no debatida pero tema abierto.

•Interesante cambio de la visión sobre la volatilidad. Hasta junio «el mercado tenía que acostumbrarse a volatilidades mayores»; ahora la volatilidad importa y pesa sobre las proyecciones…Volatilidad en niveles de 2011-2012 en la renta variable europea y americana.

•Draghi reconoce que se ha producido un endurecimiento de las condiciones monetarias en un momento en el que el QE ha empezado a surtir efectos positivos en crédito (más flujos, tipos menores, particularmente para PYMES,…) pero aún no se ha desplegado totalmente. Tipos reales más altos no deseables en este punto de la recuperación.

•¿Lectura de todo lo anterior para los mercados europeos? Más QE implica soporte para los mismos, muy particularmente para los de renta fija (gubernamental y con la derivada corporativa), apoyados por la posibilidad de más compras/más tiempo. Desde la renta fija, días de emisiones: Portugal (7 años, 1,6 veces sobresuscrito y con peticiones muy bien diversificadas geográficamente…); España amplía en diversos plazos (5,10 y 30 años), con buenas noticias al rebajar el objetivo de subastas para 2015: 4.000 mill. de euros menos, un 7% por debajo del objetivo inicial.

•Semana de encuestas y datos. Las primeras con mejor tono desde el lado de servicios que el manufacturero y con una Italia que destaca en positivo frente a una Francia «furgón de cola». Datos con el destacado de las buenas cifras de ventas al por menor.

Macro americana como protagonista

Nos acercamos a la reunión de septiembre de la FED cerca de mínimos en probabilidades de subida de tipos para esta reunión del día 17 y con fuertes «platos macro» ya detrás: empleo y encuestas

•Al cierre de este documento, los tipos implícitos descuentan en menos de un 30% una probable subida de tipos en septiembre. Lejos quedan los niveles del 50% de probabilidad de mediados de agosto. FED que en la semana ha alimentado el retraso en las subidas. Kocherlakota (FED) afirmaba que la reciente volatilidad no ha cambiado su visión de política monetaria, siendo partidario de no mover tipos en 2015; Rosengren apuntaba a que los tipos objetivo de la FED a largo plazo serían inferiores a las previsiones actuales, así como a la incertidumbre en relación con la evolución de los precios.

•Encuestas asimétricas. Frente a un ISM manufacturero más débil, con retroceso destacado en nuevas órdenes (indicador de actividad futura), apuntando a crecimientos muy inferiores al 2,3-2,7% 2015 esperado, y no se sabe si temporalmente aquejado de la reciente volatilidad/dudas sobre China, frente a él, encuesta de servicios que bate las previsiones y sigue cerca de altos, y en zona muy expansiva. Poca claridad, ¿divergencia temporal?…

•Empleo, última gran cifra antes de la reunión de la FED. Tras una aparente decepción en la cifra de creación de empleo no agrícola (173K vs. 217K est.), la mejora de las estimaciones anteriores (+44K empleos adicionales), la tasa de paro a la baja y en el 5,1% (niveles de abril 2008, pleno empleo), y la evolución de los salarios que suben más de lo previsto (0,3% MoM vs. 0,2%) y de las horas medias trabajadas, hacen que el dato sea más apoyo que obstáculo para pensar en próximas subidas de tipos.

Universo BRIC, con China como tema central en el G20

Atención centrada en emergentes…

•En China, PMI manufacturero en zona contractiva (49,7). Algo de alivio desde las encuestas de servicios, lecturas en zonas expansivas (53,4), pero con perfiles propios de una economía que pierde fuelle, con datos que vienen cayendo desde la zona de 59-60 en 2009. Sobre China, el propio Draghi esperaba más visibilidad en la próxima reunión del G20.

•Datos en Brasil que siguen a la baja: PMI profundizando en zona contractiva y nuevo descenso de la producción industrial. Banco de Brasil que, según lo esperado, mantuvo tipos (14,25%), en un mercado centrado en los riesgos de una eventual pérdida del «grado de inversión»: real que prosigue la tendencia a la baja (-4% en la semana), ampliación de diferenciales en renta fija,…Moody´s vino a «defender» al país: mejores dinámicas de crédito que otros países high yield y unas previsiones de recuperación fiscal/económica que no justifican mayores recortes de rating. Moodys mira más allá de 2016, mercados más cortoplacistas.

•PIB en la India: +7% YoY a la baja y decepcionando (7,4% est.).

Italia, una alternativa a la renta variable española para los 3 próximos meses

•Durante los próximos meses asistiremos a un proceso electoral casi continuo en España de incierto resultado y como siempre en estos casos, pendiente de las encuestas.

•Aunque las situaciones no son nunca iguales, en el invierno de 2011, el mercado italiano sufrió la falta de estabilidad que dejó detrás la salida de Berlusconi del Gobierno. Incluso contra un índice entonces muy castigados como el español, salió perdiendo.

•Aunque este año el Mibtel es el mejor mercado en Europa, podría seguir haciéndolo bien. Además observamos que el mercado español está teniendo revisiones a la baja, de momento por la caída del real brasileño y su efecto en valores como Telefónica.

•El mercado español que se ha quedado atrás, sigue siendo uno de las opciones más claras a 12 meses, pero no sería extraño que su momento no se vea a corto plazo. Mientras tanto podemos optar por la solidez del mercado italiano.

•Entre los valores que destacaríamos se encuentran Unicredit, Atlantia, Mediaset y Enel. No obstante también se puede optar por un ETF (DBX Ftsee Mib).

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9:14 Claras divergencias bajistas en el S&P 500
El analista técnico Tomi Kilgore, advierte de las claras divergencias bajistas que se están produciendo en el S&P 500 frente al RSI.

Estas divergencias produjeron en el pasado (2007-2009) y (2000-2002), fuertes caídas de las bolsas.

10:22 Glencore acomete dramáticas medidas para reducir su deuda
El gigante minero Glencore ha anunciado una serie de severas medidas para reducir su amplia deuda.

- Suspende el dividendo.
- Venderá 2.500 millones de dólares en acciones.
- Venderá reservas de metales preciosos y agrícolas.
- Suspenderá sus operaciones en dos grandes minas africanas.

El objetivo es reducir su deuda de 30.000 millones de dólares en 10.000 millones. Las acciones de la compañía suben en estos momentos más del 7%

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11:00 Se podrían levantar las sanciones a Irán en el primer trimestre de 2016
Según un diplomático, se espera que las sanciones contra Irán se levanten durante el primer trimestre del próximo año.

11:09 Crude Oil (WTI) (V5) intradía: bajo presión
Trading Central
Punto pivote (nivel de invalidación): 47,25
Nuestra preferencia: Posiciones cortas debajo de 47,25 con objetivos en 43,2 y 41,75 en extensión.
Escenario alternativo: Arriba de 47,25 buscar mayor indicación al alza con 48,45 y 49,4 como objetivos.
Comentario técnico: Mientras 47,25 sea resistente, es probable que haya una baja hacia 43,2.

11:08 Brent rompe importante figura bajista
El analista Adam Button destaca que el precio del barril brent ha roto una importante estructura técnica bajista, lo que sugiere continuación de los descensos por debajo de los 48$ frente los 48,19 dólares que cotiza en estos momentos con una caída de más del 2%

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12:30 Lateralidad en divisas
Bankinter
Eurodólar (€/USD).- La tendencia de la semana pasada fue de lateralidad, a pesar de la reunión de tipos del BCE el jueves en la que revisó a la baja las previsiones (PIB e IPC) y adoptó medidas adicionales de política monetaria. De cara a los próximos días la tendencia será similar, ya que los inversores pospondrán sus decisiones de compra hasta la reunión de tipos de la Fed (15/16 sep.) y en un contexto de reducidas referencias macro. Rango estimado semanal: 1,108/1,125.

Euroyen (€/JPY).- El debilitamiento del euro tras la revisión a la baja de las estimaciones de crecimiento para la Eurozona por parte del BCE, precipitaron una mayor apreciación del yen. Estos días se publican indicadores relevantes de Japón con perspectiva negativa (PIB 2T´15: - 1,8% t/t anualizado y el Indicador Adelantado retrocediendo) lo que debería elevar la expectativa de mayores estímulos de BoJ y depreciar el yen. Rango estimado semanal: 133,2/136,2.



La caída de la productividad debería preocuparnos, y mucho

Carlos Montero
Lunes, 7 de Setiembre del 2015 - 13:43:00

La productividad se está ralentizando. Los datos a nivel global muestran que después de décadas de robusto crecimiento, la productividad se aplanó en la década de los 70 y de los 80, para volver a crecer en los 90 y principios de 2000. Pero en la última década más o menos, la productividad se ha aplanado de nuevo, y la preocupación de muchos economistas, entre los que se encuentran los economistas Robert Gordon y Tyler Cowen, es que la revolución tecnológica fuera solo un respiro de corta duración en un estancamiento de largo plazo inexorable.

Casi nada en economía es tan importante como la productividad, afirma el profesor de la Universidad de Stony Brook, Noah Smith, que añade: La productividad es la cantidad dada de cosas que se producen con una cantidad dada de factores productivos. La productividad separa a los países ricos de las sociedades que están al borde de la inanición. La revolución industrial incrementó de forma sensible la productividad al crear tecnologías como la electricidad, las turbinas y los motores. Vivimos incomparablemente mejor ahora que antes de ella. Si la productividad disminuye, nuestros niveles de vida se estancarán, no importa que otras medidas tomemos.

Según un informe de la OCDE, que analizó la productividad no a nivel nacional, sino corporativo, el incremento de la productividad varía mucho de unos sectores a otros. En un pequeño número de empresas, señala este informe, el crecimiento de la productividad no se está frenando en absoluto. En otras sin embargo se ha estancado, incluso reducido.

¿Por qué está pasando esto?, se pregunta Smith. La respuesta la tiene el economista de la Universidad de Nueva York Paul Romer. Gran parte de la investigación de Romer se basa en la “excluibilidad”, o el grado en el que las empresas dejan a otras empresas que aprendan su tecnología. La exclusión significa que las nuevas tecnologías no fluyen necesariamente de una compañía a otra. Romer ha demostrado que la excluibilidad es, al menos en teoría, muy importante para el crecimiento económico.

Si la tecnología se ha vuelto más excluible - si las ideas y tecnologías no se están extendiendo de una compañía a otra en la forma que solían - entonces tenemos problemas. El informe de la OCDE sugiere que esto está sucediendo, pero no nos da una respuesta clara de por qué. De hecho, nadie lo sabe realmente.


Una posibilidad es que la externalización de la tecnología entre empresas se está ralentizando mientras la globalización se está agotando. Las empresas que interactúan entre sí a través de las cadenas de suministro, naturalmente tienden a intercambiar ideas, ya que cada empresa en la cadena ve lo que hacen las demás. El estallido de la globalización en la década de 1990 y principios de 2000 podría haber permitido una enorme transferencia de conocimientos a lo largo de estas cadenas de suministro. Ahora bien, la explosión podría estar llegando a su fin dado que está cerca de completarse la integración de Asia Oriental en la economía mundial.

Otra posibilidad es que la ley de propiedad intelectual está haciendo que sea más difícil para las empresas utilizar las ideas desarrolladas por otras empresas. Ha habido una explosión en el número de patentes concedidas en los EE.UU. desde principios de 1980. En Japón, el aumento ha sido aún más dramático. Algunas de las de más rápido crecimiento han sido las patentes de métodos comerciales, exactamente el tipo de cosas que debería difundirse entre las empresas para igualar la productividad. En épocas anteriores, las empresas podían copiar libremente la manera en la que otras hacían las cosas. Ahora, a menudo es ilegal.

Cualquiera que sea la razón de la divergencia entre las empresas, tenemos que encontrarla y arreglarla si podemos, añade Smith. La divergencia podría estar afectando mucho más que a la productividad. Un gran número de investigaciones en la última década sugieren que gran parte del aumento de la desigualdad salarial en los países desarrollados se debe a las diferencias en los salarios entre diferentes empresas. La reducción en la divergencia de la productividad podría ayudar a combatir también esta desigualdad.

Así que los gobiernos del mundo desarrollado deberían pensar en cómo derribar los muros entre las empresas. Nuestro futuro económico podría depender de ello.

Lacartadelabolsa

[Fenix]

14:16 Google: sesgo alcista arriba de 604 dólares
Trading Central

[ GOOGLE ]
Punto pivote (nivel de invalidación): 604

Preferencia: Posiciones largas encima de 604 con objetivos en 714 y 745 en extensión.

Escenario alternativo: Debajo de 604 buscar mayor indicación de baja (o de caída) con 566 y 491 como objetivos.

Comentario técnico: A pesar de que no se puede descartar una continuación de la consolidación, su magnitud debería ser limitada.



14:56 Bono EEUU diciembre. Corrección alcista truncada
A juzgar por el comportamiento del precio a corto plazo, el movimiento por encima de 127-2½ no alcanzó el objetivo teórico completo y fue truncado en 128-04.

Sin embargo, se deben perder los soportes de 127-11, 127-02 y 126-24, para iniciar otro movimiento bajista.


Resistencia s127-28 128-04 128-08 128-18 128-24
Soportes 127-12 127-02 126-24 126-18 125-26½

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Los inversores sólo tienen en mente dos factores: China y la Fed

Análisis de Deutsche Bank
Lunes, 7 de Setiembre del 2015 - 15:26:00

A corto plazo los inversores sólo tienen en mente dos factores: China y el futuro de la Fed. Ambos se han revisado en profundidad en la reunión del G20 de este fin de semana, y si miramos entre líneas lo que parece entreverse de la misma es que, sobre todo, hay mucha presión sobre la Fed para que no mueva tipos la próxima semana (sobre todo desde los países emergentes).

También ha sido patente el intento de China de convencer a los inversores de que el cambio en su modelo de crecimiento es definitivo, que será positivo a medio plazo, y que no quiere entrar en una guerra de divisas. Sobre la evolución de sus bolsas, el gobernador del banco central de China aseguraba que “el tipo de cambio del yuan debería dar estabilidad, la bolsa debería haber realizado ya todo su ajuste y espera que los mercados financieros evolucionen a partir de ahora de manera estable”. Además de ofrecer buenas esperanzas, la declaración se interpreta como una promesa de tomar nuevas medidas en caso de que dicha estabilización no se produzca.


Los analistas de Deutsche Bank siguen siendo optimistas. Pese a la rebaja de la tasa de paro del pasado viernes, no hay presiones inflacionistas que justifiquen una subida de tipos en EEUU en este momento (el precio del crudo sigue cayendo), y los efectos sobre la confianza de los inversores a nivel mundial de dicha subida serían muy negativos. Además no hay que olvidar que China supone el destino del 21% de las exportaciones de EEUU, y una subida de tipos más pronto que tarde podría impulsar aun más al dólar, penalizando a las empresas del sector.

[Fenix]

Politica verbal

Lunes, 7 de Setiembre del 2015 - 15:54:00

Miren este gráfico. ¿Echaban de menos la política verbal de los bancos centrales? Yo desde luego que sí, al menos en agosto.

Pero he tenido una buena ración en los últimos días: Fed, BOJ, ECB y desde el G20. ¿Conocen el Comunicado de la Reunión?.

En definitiva.

· We will refrain from competitive devaluations, and resist all forms of protectionism.

· We will carefully calibrate and clearly communicate our actions, especially against the backdrop of major monetary and other policy decisions, to minimize negative spillovers, mitigate uncertainty and promote transparency

Con todo, como se observa en el gráfico anterior las palabras pueden no ser suficientes para que se recupere la calma si muestran contradicción en las posiciones de las autoridades. No es tanto que suban los tipos, como la sensación de que se inicia una tendencia al alza de tipos en USA. O no es tanto que puedan ampliarse las medidas expansivas ya dispuestas, como la sensación de que pueden no ser eficientes. En definitiva, en el fondo no deja de ser el gran debate sobre el margen de actuación de la política monetaria. Y no sólo sobre su magnitud y duración, también sobre su efectividad. Además de considerar el equilibrio de costes y beneficios a lo largo del tiempo.


Dicho todo esto, creo que es un debate que probablemente no se cerrará con una subida de tipos de la Fed en septiembre. Y eso que tengo serias dudas de que suban en el próximo FOMC.

José Luis Martínez Campuzano
Estratega de Citi en España

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For "Fearful, Erratic Markets", China's Reserves Are The New Risk-On/Off Trigger: Goldman
Submitted by Tyler D.
9/04/2015 20:30 -0400

Don’t look now, but China’s FX reserves may become the market’s most important risk-on/ risk-off trigger.

Just as the world finally woke up - with the standard two or three year lag - to what we’ve been saying about an acute lack of liquidity in bond markets on the way to making corporate bond market liquidity the talk of the financial universe, so too has everyone suddenly realized why we began shouting about the death of the petrodollar last November. The drawdown of EM FX reserves - or, as Deutsche Bank calls it, the end of the “Great Accumulation” - means a withdrawal of liquidity from global markets and the cessation of the perpetual bid for US paper that had been sustained for years by the buildup of emerging markets’ war chests.

Now, between falling commodity prices and the global currency wars, the assets in those war chests are being sold, and that means the Fed faces a very, very difficult decision on whether to hike.

It also means that market participants will be watching EM FX reserves more closely than they have at any other time since the Asian Financial Crisis, and that, in turn means that data on reserves, and especially on China’s reserves, is set to become very important as a catalyst for risk-on/ risk-off behavior. On that note, we bring you the following commentary from Goldman out this morning.

* * *

From Goldman

Following the RMB devaluation some weeks ago, markets have been erratic, fearful that the initial move was the beginning of a larger devaluation cycle that could disrupt global markets. We don’t believe this, in part because we think the RMB is close to our estimate of 'fair value', as we showed in a recent FX Views, so that the rationale for a bigger weakening does not look strong to us. That said, markets remain sceptical and are looking to August FX reserves, which will be published overnight (New York time) Sunday to Monday. Consensus (according to data collated by Bloomberg) expects total foreign exchange reserves to fall to $3,580bn from $3,651bn in July, a drop of -$71bn. We estimate valuation effects for the month around $21bn, driven mostly by the rise in EUR/$, which means that the underlying “flow” change in reserves would be -$92bn. Combining this with consensus for the August trade surplus ($49bn) and assuming that the current account surplus is lower due to service outflows, the underlying net capital outflows could be north of $100bn, which seems to us to be a reasonable approximation of market expectations. We think risks are skewed to the upside relative to this consensus estimate.

Given how worried markets have been about China, a better-than-expected reserves number holds the potential for risk assets to rally as devaluation fears abate. That said, the next data point on FX reserves will not be the definitive word on flows, since PBoC FX reserves in recent quarters have not been a good predictor of “true” flows as measured by the Balance of Payments (BoP). In particular, the mapping from PBoC reserves to BoP flows went off track from Q4 last year, with PBoC reserves first over-predicting reserve accumulation in Q4 and Q1, by $50bn and $100bn respectively, and then under-predicting in Q2 (by $100bn). In other words, some caution will still be advised in drawing conclusions on flows, where we see the BoP data as the ultimate arbiter. Our EM strategy team has discussed the broader EM context here.

An additional perspective can be gleaned by looking at official foreign exchange reserves in the rest of non-Japan Asia (NJA), where we also include information on forward books when that is available (Hong Kong, Philippines, Indonesia, Thailand, Malaysia, Korea, India and Singapore). Data for most countries are available through July, but the Bank of Thailand publishes weekly data for the bulk of August. We estimate FX-valuation-adjusted declines in reserves (including forward books) at -$9.2bn for Malaysia in July alone, at -$5.8bn for Thailand in July and August, at -$3.6bn for Indonesia and -$2.9bn for Hong Kong. These declines in official FX reserves are sizeable, and the example of THB suggests that depreciation pressures more generally may have risen materially. The look across the region therefore bolsters our view of potentially bigger outflows from China than is implied by consensus.

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Peter Schiff Warns: Meet QT - QE's Evil Twin
09/04/2015 21:00 -0400

Submitted by Peter Schiff
There is a growing sense across the financial spectrum that the world is about to turn some type of economic page. Unfortunately no one in the mainstream is too sure what the last chapter was about, and fewer still have any clue as to what the next chapter will bring. There is some agreement however, that the age of ever easing monetary policy in the U.S. will be ending at the same time that the Chinese economy (that had powered the commodity and emerging market booms) will be finally running out of gas. While I believe this theory gets both scenarios wrong (the Fed will not be tightening and China will not be falling off the economic map), there is a growing concern that the new chapter will introduce a new character into the economic drama. As introduced by researchers at Deutsche Bank, meet "Quantitative Tightening," the pesky, problematic, and much less disciplined kid brother of "Quantitative Easing." Now that QE is ready to move out...QT is prepared to take over.

For much of the past generation foreign central banks, led by China, have accumulated vast quantities of foreign reserves. In August of last year the amount topped out at more than $12 trillion, an increase of five times over levels seen just 10 years earlier. During that time central banks added on average $824 billion in reserves per year. The vast majority of these reserves have been accumulated by China, Japan, Saudi Arabia, and the emerging market economies in Asia (Shrinking Currency Reserves Threaten Emerging Asia, BloombergBusiness, 4/6/15). It is widely accepted, although hard to quantify, that approximately two-thirds of these reserves are held in U.S. dollar denominated instruments (COFER, Washington DC: Intl. Monetary Fund, 1/3/13), the most common being U.S. Treasury debt.

Initially this "Great Accumulation" (as it became known) was undertaken as a means to protect emerging economies from the types of shocks that they experienced during the 1997-98 Asian Currency Crisis, in which emerging market central banks lacked the ammunition to support their free falling currencies through market intervention. It was hoped that large stockpiles of reserves would allow these banks to buy sufficient amounts of their own currencies on the open market, thereby stemming any steep falls. The accumulation was also used as a primary means for EM central banks to manage their exchange rates and prevent unwanted appreciation against the dollar while the Greenback was being depreciated through the Federal Reserve's QE and zero interest rate policies.

The steady accumulation of Treasury debt provided tremendous benefits to the U.S. Treasury, which had needed to issue trillions of dollars in debt as a result of exploding government deficits that occurred in the years following the Financial Crisis of 2008. Without this buying, which kept active bids under U.S. Treasuries, long-term interest rates in the U.S. could have been much higher, which would have made the road to recovery much steeper. In addition, absent the accumulation, the declines in the dollar in 2009 and 2010 could have been much more severe, which would have put significant upward pressure on U.S. consumer prices.

But in 2015 the tide started to slowly ebb. By March of 2015 global reserves had declined by about $400 billion in just about 8 months, according to data compiled by Bloomberg. Analysts at Citi estimate that global FX reserves have been depleted at an average pace of $59 billion a month in the past year or so, and closer to $100 billion per month over the last few months (Brace for QT...as China leads FX reserves purge, Reuters, 8/28/15). Some think that these declines stem largely by actions of emerging economies whose currencies have been falling rapidly against the U.S. dollar that had been lifted by the belief that a tightening cycle by the Fed was a near term inevitability.

It was speculated that China led the reversal, dumping more than $140 billion in Treasuries in just three months (through front transactions made through a Belgian intermediary - solving the so-called "Belgian Mystery") (China Dumps Record $143 Billion in US Treasurys in Three Months via Belgium, Zero Hedge, 7/17/15). The steep decline in the Chinese stock market has also sparked a flight of assets out of the Chinese economy. China has used FX sales as a means to stabilize its currency in the wake of this capital flight.

The steep fall in the price of oil in late 2014 and 2015 also has led to diminished appetite for Treasuries by oil producing nations like Saudi Arabia, which no longer needed to recycle excess profits into dollars to prevent their currencies from rising on the back of strong oil. The same holds true for nations like Russia, Brazil, Norway and Australia, whose currencies had previously benefited from the rising prices of commodities.

Analysts at Deutsche Bank see this liquidation trend holding for quite some time. However, new categories of buyers to replace these central bank sellers are unlikely to emerge. This changing dynamic between buyers and sellers will tend to lower bond prices, and increase bond yields (which move in the opposite direction as price). Citi estimates that every $500 billion in Emerging Markets FX drawdowns will result in 108 basis points of upward pressure placed on the yields of 10-year U.S. Treasurys (It's Official: China Confirms It Has Begun Liquidating Treasuries, Warns Washington, Zero Hedge, 8/27/15). This means that if just China were to dump its $1.1 trillion in Treasury holdings, U.S. interest rates would be about 2% higher. Such an increase in rates would present the U.S. economy and U.S. Treasury with the most daunting headwinds that they have seen in years.

The Federal Reserve sets overnight interest rates through its much-watched Fed Funds rate (that has been kept at zero since 2008). But to control rates on the "long end of the curve' requires the Fed to purchase long-dated debt on the open market, a process known as Quantitative Easing. The buying helps push up bond prices and push down yields. It follows then that a process of large scale selling, by foreign central banks, or other large holders of bonds, should be known as Quantitative Tightening.

Potentially making matters much worse, Janet Yellen has indicated the Fed's desire to allow its current hoard of Treasurys to mature without rolling them over. The intention is to shrink the Fed's $4.5 trillion dollar balance sheet back to its pre-crisis level of about $1 trillion. That means, in addition to finding buyers for all those Treasurys being dumped on the market by foreign central banks, the Treasury may also have to find buyers for $3.5 trillion in Treasurys that the Fed intends on not rolling over. The Fed has stated that it hopes to effectuate the drawdown by the end of the decade, which translates into about $700 billion in bonds per year. That's just under $60 billion per month (or slightly smaller than the $85 billion per month that the Fed had been buying through QE). Given the enormity of central bank selling, and the incredibly low yields offered on U.S. Treasurys, I cannot imagine any private investor willing to step in front of that freight train.

So even as the Fed apparently is preparing to raise rates on the short end of the curve, forces beyond its control will be pushing rates up on the long end of the curve. This will seriously undermine the health of the U.S. economy even while many signs already point to near recession level weakness. Just this week, data was released that showed U.S. factory orders decreasing 14.7% year-over-year, which is the ninth month in a row that orders have declined year-over-year. Historically, this type of result has only occurred either during a recession, or in the lead up to a recession.

The August jobs report issued today, which was supposed to be the most important such report in years, as it would be the final indication as to whether the Fed would finally move in September, provided no relief for the Fed's quandaries. While the headline rate fell to a near generational low of 5.1%, the actual hiring figures came in at just 173,000 jobs, which was well below even the low end of the consensus forecast. Private sector hiring led the weakness, manufacturing jobs declined, and the labor participation rate remained at the lowest level since 1976. So even while the Fed is indicating that it is still on track for a rate hike, all the conditions that Janet Yellen wanted to see confirmed before an increase are not materializing. This is a recipe for more uncertainty, even while certainty increases overseas that U.S. Treasurys are troubled long term investments.

The arrival of Quantitative Tightening will provide years' worth of monetary headwinds. Of course the only tool that the Fed will be able to use to combat international QT will be a fresh dose of domestic QE. That means the Fed will not only have to shelve its plan to allow its balance sheet to run down (a plan I never thought remotely feasible from the moment it was announced), but to launch QE4, and watch its balance sheet swell towards $10 trillion. Of course, these monetary crosscurrents should finally be enough to capsize the U.S. dollar.

[Fenix]

The Failed Moral Argument For A "Living Wage"
09/04/2015 22:00 -0400

Submitted by Ryan McMaken
With Labor Day upon us, newspapers across the US will be printing op-eds calling for a mandated “living wage” and higher wages in general. In many cases, advocates for a living wage argue for outright mandates on wages; that is, a minimum wage set as an arbitrary level determined by policymakers to be at a level that makes housing, food, and health care “affordable.”

Behind this effort is a philosophical claim that employers are morally obligated to pay “a living wage” to employees, so they can afford necessities (however ambiguously defined) on a single wage, working forty hours per week. This moral argument singles out employers as the morally responsible party in the living wage equation, even though the variables that determine a living wage go far beyond the wage earned.

For example, as I discussed here, the living wage is a function not simply of the wage, but of the cost of housing, food, health care, transportation, and a myriad of other factors. Where housing costs are low, for example, the living wage will be lower than it would be in a place where housing costs are high.

So, what matters is not the nominal wage paid by the employer, but the real wage as determined by the cost of everything that a wage is used to purchase.
Why Is Only the Employer Responsible?

So, if it’s the real wage that matters, why is there a fixation on the nominal wage itself? After all, wages, in real terms, could be increased greatly by forcing down food costs and rents. So, why is there not a constant drum beat for grocers to lower their prices to make necessities affordable? Why are activists not picketing outside grocery stores for their high prices? Why are they not outside KB Homes headquarters for KB’s apparently inhumane efforts at selling homes at the highest prices that the market will bear? Why are people not picketing used car dealers for not lowering their prices to make transportation affordable for working families? And why are gas stations strangely exempted from protests over the high cost of gasoline? Certainly, all of these merchants are just as instrumental in determining real wages as any employer. Grocers, landlords, home sellers, and the owner of the corner gas station can put a huge dent in the family budget when they allow their “greed” to impel them to charge the highest prices they can get away with in the market place.

And yes, it’s true that plenty of activists regularly denounce landlords as “slumlords” or greedy capitalists for charging the highest rents the market will bear. And there are still plenty of activists who argue for price controls on rents and food. But they’re in a small minority nowadays. The vast majority of voters and policymakers recognize that government-dictated prices on food and housing lead to shortages. Setting a price ceiling on rents or home prices simply means that fewer housing units will be built, while setting a price ceiling on eggs, or milk or bread will simply mean that fewer of those staples will be brought to market.

Such assertions are barely even debated anymore, as can be seen in the near-extinction of new rent-control efforts in the political sphere. You won’t see many op-eds this Labor Day arguing for price controls on fruit, gasoline, and apartments. You won’t see any articles denouncing homeowners for selling their homes at the highest price they can get, when they really should be slashing prices to make homeownership more affordable for first-time homebuyers.

So, for whatever reason, homeowners, grocers, and others are exempt from the wrath of the activists for not keeping real wages low. The employers, on the other hand — those who pay the nominal wage — remain well within the sights of the activists since, for some arbitrary reason, the full moral obligation of providing a living wage falls on the employer.

Were food prices to go up by 10 percent in the neighborhood of Employer X, who is responsible? “Why, the employer, of course,” the living-wage activists will contend. After all, in their minds, it is only the employer who is morally obligated to bring up real wages to match or exceed an increase in the cost of living.

So while price controls on food, housing, and gasoline are generally recognized as a dead end, price controls on wages remain popular. The problem, of course, as explained here, here, here, and here, is that by setting the wage above the value offered by a low-skill worker, employers will simply elect to not hire low-skill workers.
A Low Wage Is Unacceptable, but a Zero Wage Is Fine

And this leads to the fact that when faced with high wages, employers will seek to replace employers with non-human replacements — such as these automated cashiers at McDonalds — or other labor-saving devices.

But this phenomenon is simply ignored by the living-wage advocates. Thus, the argument that employers are morally obligated to not pay low wages becomes strangely silent in the face of workers earning no wage at all.

Indeed, we see few attempts at passing laws mandating that employers hire human beings instead of machines. While it’s no doubt true that some neo-Luddites would love to see this happen, virtually no one argues that employers not be allowed to employ labor-saving devices. Certainly, anyone making such an argument is likely to be laughed out of the room since most everyone immediately recognizes that it would be absurd to pass laws mandating that a road builder, for example, hire people with shovels instead of using bulldozers and paving machines.

Meanwhile, successes by living-wage advocates in other industries — where automation is not as immediately practical — have only been driving up prices for consumer goods. Yes, living wages in food, energy, and housing sectors will squeeze profits and bring higher wages for those who luckily keep their jobs, but the mandates will also tend to raise prices for consumers. This in turn means that real wages in the overall economy have actually gone down, thanks to a rising cost of living.

All in all, it’s quite a bizarre strategy the living-wage advocates have settled on. It consists of raising the prices of consumer goods via increasing labor costs. Real wages then go down, and, at the same time, many workers lose their jobs to automation as capital is made relatively less expensive by a rising cost of labor. While the goal of raising the standard of living for workers and their families is laudable, it’s apparent that living wage advocates haven’t exactly thought things through.

[Fenix]

How Much More Ridiculous Can It Get?
09/05/2015 08:30 -0400

Submitted by Pater Tenebrarum
Pretense of Knowledge

Wall Street breathlessly awaits the newest payrolls report, which is widely held to contain the information needed for the FOMC to decide whether or not it should raise the overnight interbank lending rate from zilch to zilch plus a few basis points later this month.



aggression

The payrolls report is going to be revised umpteen times after its initial release, is in many ways driven by statistical artifacts (such as the “birth-death” model) and concerns a lagging economic indicator – in other words, its “signal to noise” ratio makes it utterly useless, even if one erroneously ascribes a lot of meaning to economic statistics describing the past.



Monthly non-farm payrolls

Change in monthly non-farm payrolls in 1000ds, via Saint Louis Federal Reserve Research, click to enlarge.

And yet, this utterly devoid of informational content data point is what the central planning bureaucrats are held to need to decide on their next steps in terms of interest rate manipulation! We are continually surprised by the fact that people can discuss this obvious nonsense with a straight face.

In this context we have recently come across an interesting article at Forbes, by sound money and free market advocate Ralph Benko. It is entitled “If The Fed Is Always Wrong How Can Its Policies Ever Be Right?” and is well worth the read. As Mr. Benko points out, the Fed’s economic forecasts leave a lot to be desired, primarily because they tend to be dead wrong with unwavering regularity.

He proceeds to ask how a bureaucracy that couldn’t forecast its way out of a paper bag can possibly know what policies it should implement. It seems totally absurd to expect it to be able to ever get it right, except perhaps by sheer accident.



2014-Interactions-Main_0



Mr Benko inter alia quotes from F. A. Hayek’s famous Nobel Prize speech “The Pretense of Knowledge” (a speech that may have made his hosts regret their decision to award him the prize):

“We have indeed at the moment little cause for pride: as a profession we have made a mess of things. It seems to me that this failure of the economists to guide policy more successfully is closely connected with their propensity to imitate as closely as possible the procedures of the brilliantly successful physical sciences — an attempt which in our field may lead to outright error.



It is an approach which has come to be described as the “scientistic” attitude — an attitude which, as I defined it some thirty years ago, “is decidedly unscientific in the true sense of the word, since it involves a mechanical and uncritical application of habits of thought to fields different from those in which they have been formed.” I want today to begin by explaining how some of the gravest errors of recent economic policy are a direct consequence of this scientistic error.”

(emphasis added)



FriedrichHayek

Friedrich Hayek, critic of “scientism” in economics



Hayek simply reminded everybody that economics is not akin to the natural sciences and that the attempt to apply the methodologies of the natural sciences to economic problems is therefore bound to lead to nothing but error. We term this tendency “physics envy” – economists want their science to be as “precise” as physics, and are employing mathematical models in the attempt to attain this precision. It seems to us that all of this is based on a fundamental misunderstanding of what economic science actually is.

We certainly do not agree with those who say that economics is a “pseudo-science”, i.e., that it isn’t a science at all. It has become fashionable for critics of the current economic dispensation to make statements to this effect, but they err. Economics is a social science, and as such is certainly fundamentally different from the natural sciences, but that doesn’t mean it isn’t a science. If one insists on averring that economics isn’t a science at all, one implicitly denies the existence of economic laws. However, economic laws do exist, and it can be shown that they do.

Hayek was critical of the “pretense of knowledge” as evidenced by the methods modern-day economists employ to determine the proper course of “economic policy”. He surely didn’t mean to indicate that there is nothing for economists to know, only that what they actually can know is vastly different from what they nowadays pretend to know. As Murray Rothbard noted in his foreword to Ludwig von Mises’ great work on methodology, Theory and History:

“Mises saw that students of human action are at once in better and in worse, and certainly in different, shape from students of natural science. The physical scientist looks at homogenous bits of events, and gropes his way toward finding and testing explanatory or causal theories for those empirical events. But in human history, we, as human beings ourselves, are in a position to know the cause of events already; namely, the primordial fact that human beings have goals and purposes and act to attain them. And this fact is known not tentatively and hesitantly, but absolutely and apodictically.”

(italics in original)

In other words, economists in a sense have an advantage over natural scientists, in that they have apodictic knowledge of the cause of economic events from the outset – they don’t need to conduct (and indeed, cannot conduct) falsifiable experiments to “test” the laws of economics. On the other hand, they are also at a disadvantage, as the uniqueness and complexity of every slice of economic history makes historical statistics and data entirely useless for the formulation of economic theory. As Rothbard said ibid. on the problem with “empiricism”:

Is the fact of human purposive action “verifiable”? Is it “empirical”? Yes, but certainly not in the precise, or quantitative way that the imitators of physics are used to. The empiricism is broad and qualitative, stemming from the essence of human experience; it has nothing to do with statistics or historical events. Furthermore, it is dependent on the fact that we are all human beings and can therefore use this knowledge to apply it to others of the same species. Still less is the axiom of purposive action “falsifiable.” It is so evident, once mentioned and considered, that it clearly forms the very marrow of our experience in the world.”

(emphasis added)



rothbardsmile

Murray Rothbard – the empiricism of economics is qualitative, not quantitative


Socialism as Institutional Aggression Against the Free Exercise of Human Action

If you look at the comments section at the Forbes article mentioned above, you will inter alia find a brief comment by us. We made the following remark:

“[…] the very notion that there should be a “policy” is already mistaken. It is just as mistaken to assume that the science of economics is about making “predictions”. It isn’t, and it will never magically get better at this task.”

Regular readers are no doubt aware that we believe central planning by a monetary authority to be superfluous and harmful. As we have pointed out on numerous occasions, central banks represent a special case of the socialist calculation problem (see e.g. “Sell ’em All! Central Banks and the Socialist Calculation Problem” for some background on this).

This is based on an idea first formulated by Jesus Huerta de Soto as far as we are aware, who has proposed to broaden the scope of the socialist calculation problem originally presented by Mises. In his own work on socialism – ‘Socialism, Economic Calculation and Entrepreneurship’ – de Soto makes the case that one should actually broaden the scope of what the term socialism itself means.

While Mises defined socialism very narrowly – namely as a system in which the State is the sole owner of the means of production – de Soto tries to incorporate the ideas of Hayek, Kirzner and others on the topics of economic calculation, knowledge and entrepreneurship to arrive at a definition that probably has more practical applicability in modern times, i.e., the era after the collapse of the communist system. He writes:

“Our expressed desire to apply subjectivism with the greatest possible rigor and consistency to the analysis of socialism manifests itself, above all, in our definition of this social system. Indeed, we have already stated our view that the core, or most characteristic feature, of human nature is the ability of all people to act freely and creatively. From this standpoint, we consider that socialism is any system of institutional aggression on the free exercise of human action or entrepreneurship.”

(italics in original)



entrevista_a_jesus_huerta_de_soto_por_luis_figueroa

Jesus Huerta de Soto: a broader definition of socialism

One can certainly agree that central banks fall within the scope of this definition: their actions do represent a form of “institutional aggression on the free exercise of human action or entrepreneurship”, as they manipulate interest rates which would otherwise form freely in the market.


Economics and Prediction – Historians of the Future

However, we want to briefly focus on the second part of our comment at Forbes, concerning economics and “prediction”. Modern critics of economics are very much focused on this point, as it can be shown again and again that economists as a group are almost uniquely unable to make correct economic forecasts. They are on average worse at predicting the future course of the economy than house wives (there actually exists a study conducted by the Economist magazine that has compared the economic forecasts of house wives to those of professional economists over a period of ten years and has come to the same conclusion).

And they have to grin and bear the critique, because they themselves have invited it with their “scientistic” approach to economics. The original motto of the US Econometric Society was “Science is Prediction”. By implication, if economic science is incapable of furnishing correct predictions, it cannot be a science. Hence the widespread accusation that “economics is not a science”. In this case however, it is the motto that is mistaken.



etrica3

Economic theory cannot be “advanced” by the application of mathematics and statistics.



Unfortunately, human beings are not “predictable”. They continually soak up new knowledge as it emerges, their value scales are in no way “fixed” and their actions are based on future states of knowledge that are simply not known yet. A physicist can tell us precisely where a rock we have thrown will land, provided he is made aware of all the necessary data – all of which can be precisely measured. He doesn’t have to worry that the rock will change his mind in mid-flight, mainly because the rock has no mind. Human beings – most of them, anyway – do have minds.

The premise that economics should be based on some variant of positivism – i.e., that it should employ “data” and “statistics” and use them to make “predictions” is fundamentally erroneous. Not only is this simply impossible, it is not even the task of economics. As Mises noted, economics is essentially the best elaborated part of the broader science of human action – which used to be called “sociology” before Mises renamed it praxeology (he didn’t do this lightly) due to the anti-economics stance embraced by most sociologists in his time.



einstein

Einstein stumbles on an economic law by accident

As such, the task of economics is to elaborate economic laws. This is done by logical deduction based on the action axiom. Within reason, it is not only legitimate, but necessary to employ models in economic theorizing. These allow economists to create a simple world with numerous so-called “ceteris paribus” conditions, to which new conditions are then added in a step-by-step process. For instance, the model of the evenly rotating economy (an economy in “equilibrium” that can never exist in the real world) is extremely useful in explaining how savings, investment and interest rates affect the economy’s structure of production.

Economic theory, i.e. the body of economic laws, can be used to explain economic history – but the reverse cannot be done, i.e., economic history cannot possibly serve to construct economic theory. Economic predictions are in a way akin to the task of a historian rather than that of an economist. The study of history requires that the historian employ the known data, as well as the knowledge provided by other scientific theories, but it ultimately goes beyond that.

Mises referred to this as the “understanding” of the historian. When e.g. discussing important historical personalities such as Julius Cesar, it won’t be enough to merely consider the documentary evidence from Cesar’s time. What were Cesar’s motives? Why did he act the way he did? This is where understanding comes in. When economists make predictions, they are no longer wearing the hat of the economist – instead, similar to speculators in the stock market – they become “historians of the future” as Mises put it.



crossing the rubicon

Alea iacta est – Cesar crosses the Rubicon – but why did he do that?

To be sure, economists should have an advantage over others when engaging in economic prediction. As long as they are aware of sound economic theory, they can use their theoretical knowledge as a constraint on their predictions. In that sense, economic predictions are certainly not a completely useless effort (we are obviously not speaking of popular guessing gam-es such as whether next month’s CPI reading will be “0.2%” or “0.3%”). However, economists should be aware that when making predictions, their knowledge of economic theory can at best help them to exclude certain outcomes and refine those that remain.

Thus they can at most hope to make correct qualitative forecasts, but not quantitative ones. An example would e.g. be the following: “We predict that the suppression of interest rates and the enormous amount of money printing instigated by central banks will eventually lead to a major bust, because we know with certainty that it has led to massive capital malinvestment.” An example of a completely useless (and likely wrong) forecast based on the same data points would be: “We predict that GDP will contract by 4.3% in Q2 2017”.

Most modern-day economists are primarily making forecasts of the second kind these days, a result of the “scientism” error discussed above. It is no wonder that they are continually ridiculed for this. They deserve it.


Conclusion

If one considers that the next major interest rate manipulation by the Fed appears to hinge on a notoriously unreliable report about a lagging economic indicator, it should immediately become clear on what a flimsy foundation modern central economic planning rests. How much more ridiculous can it possibly get?

Incidentally, it also serves to demonstrate how far off the reservation economists have veered in their desperate and laughable attempts to transform economics into a discipline akin to the natural sciences. They have swallowed Milton Friedman’s arguments on positivism in economics hook, line and sinker. This is one area of economics in which Friedman couldn’t have been more wrong.

The debate over proper economic methodology and the epistemological problems of economics deserves to be revived (readers interested in these problems should take a look at this collection of essays by Mises on the topic). Economics is an aprioristic science, not an empirical one. For all their sophistication, the makers of the DSGE models on which the central planners base their decisions are ultimately simply “groping in the dark”.

[Fenix]

This Has Never Happened To VIX Before
Submitted by Tyler D.
09/05/2015 - 10:45

Amid the carnage and chaos of the last two weeks, one thing has become crystal clear - the effect of massive one-way bets on 'everything', predicated on the omnipotence of central bankers, has left a market (stocks, bonds, FX, commodities) bereft of fundamental linkages and instead driven entirely by technicals (flows, forced unwinds, systematic gamma). While many 'records' were broken in terms of velocity of moves, it is the VIX complex that seems to have suffered most, and as the following chart shows, positioning is now at an extreme in both stocks, vol, and bonds once again.




Exorbitant Privilege: "The Dollar Is Our Currency But Your Problem"
09/05/2015 10:00 -0400

Submitted by Dan Popesceau
There is no better way to describe the international monetary system today than through the statement made in 1971 by U.S. Treasury Secretary, John Connally. He said to his counterparts during a Rome G-10 meeting in November 1971, shortly after the Nixon administration ended the dollar’s convertibility into gold and shifted the international monetary system into a global floating exchange rate regime that, "The dollar is our currency, but your problem.” This remains the U.S. policy towards the international community even today. On several occasions both the past and present chairpersons of the Fed, Ben Bernanke and Janet Yellen, have indicated it still is the U.S. policy as it concerns the dollar.

Is China saying to the world, but more particularly to the U.S., “The yuan is our currency but your problem”? China’s move to weaken the Yuan against the US dollar is in fact a huge response to America’s resistance to reforming the international monetary framework. It’s telling American policy makers that the longer they delay acting on reforming the international monetary system, the harder and longer they are going to make it for the U.S. to climb out of their trade deficit and depreciate their currency to where they need it to be.

China has been preparing for this moment for several years by accumulating gold through its central bank but also by using banks/corporations and individuals. It has in recent years signed several international agreements to bypass the US dollar in international trade and use preferably the Yuan. It has created an alternative World Bank (Asian Infrastructure Investment Bank) and a gold fund to invest in gold mining for more than 60 countries. The project is being overseen by the Shanghai Gold Exchange (SGE) and it is likely that the newly mined gold will be either traded on the SGE or be sold directly to the PBoC and other central banks. It has also bought a large amount of gold and kept the exact amount as secret as possible.

The international monetary system is in crisis and ready to collapse. It has been since at least 1971 but it seems we are very close to the end (within five years). The International Monetary Fund (IMF) is working discreetly to have the Special Drawing Rights (SDR) replace the US dollar as the international standard. Since the delinking of the dollar from gold in 1971, the US dollar has been the de facto international standard. The IMF itself makes no bones about its ambition to establish the SDR as the global reserve currency.

In a 2009 essay, Governor Xiaochuan of the People’s Bank of China (the Chinese central bank) also called for a new worldwide reserve currency system. He explained that the interests of the U.S. and those of other countries should be “aligned”, which is not the case in the current dollar system. Xiaochuan suggested developing SDRs into a “super-sovereign reserve currency disconnected from individual nations and able to remain stable in the long run”. What does he mean by “disconnected from individual nations”? The present SDR is a mathematical formula of the price of its composing currencies of “individual countries” with no backing whatsoever. Does he imply some kind of link to gold? That would explain many other statements in favor of gold by China’s officials and their aggressive encouragement of Chinese institutions and individuals to buy gold.

Julian D. W. Phillips, of Gold Forecaster, says, “What has become clear in the actions of the Chinese government and the central bank is that they are determined to accelerate the Yuan’s passage to a reserve currency, hopefully with the cooperation of the IMF, but if not, they will walk their own road.” However, this is not the final objective of China. Its target is to eliminate the “exorbitant privilege” of the dollar, not just to join the “club”. China doesn’t want to destroy the dollar, only to eliminate its “exorbitant privilege”.

With a different approach, but also very aggressively and more so since the U.S.-EU sanctions that amplified the new cold war, Russia has also accelerated its gold buying. Russia and China have also started a new payment system to avoid the U.S. dominated and controlled international payment system. Elvira Nabiullina, Chairwoman of the Russian Central Bank, said, “Recent experiences forced us to reconsider some of our ideas about sufficient and comfortable levels of gold reserves.” Also in a recent CNBC interview, Ms. Nabiullina remarked on Russia’s increasing gold reserves, saying, “We base ourselves upon the principles of diversification of our international reserves and we bought gold not only last year but during the previous years. Our gold mining industry is very well developed and it is ready to supply gold.” Dmitry Tulin, who manages monetary policy at the Central Bank of Russia, said, "The price of gold swings, but on the other hand it is a 100% guarantee from legal and political risks." Russia is boosting gold holdings as defense against “political risks”.

In 1997 Robert Mundell, Nobel prize of economics, wrote in an article, “The problem with the pure dollar standard is that it works only if the reserve country can keep its monetary discipline.” Aristotle said something similar 2,500 years ago: “In effect, there is nothing inherently wrong with fiat money, provided we get perfect authority and god-like intelligence for kings.” It is evident that since at least the collapse of Bretton Woods the U.S. has not kept its monetary discipline and has no intention to do it.



US debt and debt limit vs gold



Dr. Mundell, in the same article, said, “The United States would not talk about international monetary reform … because a superpower never pushes international monetary reform unless it sees reform as a chance to break up a threat to its own hegemony … The United States is never going to suggest an alternative to its present system because it is already a system where the United States maximizes its seigniorage … the United States would be the last country to ever agree to an international monetary reform that would eliminate this free lunch (exorbitant privilege of the dollar)”. He seems to have been right. The U.S. is dragging its feet. The U.S. has not yet ratified the IMF reforms agreed even by the U.S. government in 2010. I doubt it will pass before the U.S. election at the end of 2016. This has upset not only China and Russia, but also the European Union and most of the international community.

During the 2008 crisis that almost succeeded in bringing down the current international monetary system, gold made a stunning comeback into the system. During the crisis, gold became the only accepted guarantee in order to get liquidity. What was significant was that after having been ignored for decades, gold was coming back into the international monetary system via settlements of the Bank for International Settlements (BIS). These transactions themselves confirmed that gold was coming back into the system. They revealed the poor state of the financial system before the crisis and showed how gold has indirectly been mobilized to support the commercial banks. Gold’s old emergency usefulness has resurfaced, albeit behind closed doors at BIS in Basel, Switzerland. Since the 2008 crisis both China and Russia have accelerated their purchases and accumulation of gold by any means possible as it can be observed in the chart below.



Gold demand –china, India, Russia and Turkey



Since 2010 we have been in a G-0 world (no dominating power), in currency and gold wars and a new cold war. The world desperately needs a new world order and a new international monetary system. Will it happen after a major collapse and possibly war or through collaboration and consensus avoiding a war? It is evident to me that, as Dr. Mundell said in 1997, “Gold is going to be a part of the structure of the international monetary system for the 21stcentury, but not in the way it has been in the past.” What form will it take? It’s hard to say now. In this adversarial environment of a cold war and currency/gold wars I can hardly see a fiat monetary system succeed (fiat SDR). That requires trust and consensus at the international level between countries. A détente, disarmament and collaboration environment was there between 1990 (end of cold war) and 2008 (start of new cold war and currency wars), but no more.

In the conflictual environment we are now in, it looks more and more to me that gold will impose itself as the de facto money. Jim Rickards, in Currencies after the Crash, edited by Sara Eisen, said, “When all else fails, possibly including a new SDR plan, gold is always waiting in the wings as a stable, widely accepted store of value and universal money. In the end, a global struggle between gold and SDRs for supremacy as “money” may be the next great shock added to the long list of historic shocks to the international monetary system.” Any fiat SDR international settlement currency will only be postponing the inevitable “big reset” to some form of gold standard.

[Fenix]

China's Central Bank Chief Admits "The Bubble Has Burst"
Submitted by Tyler D.
09/05/2015 - 12:15

In a stunningly honest admission from a member of the elite, Zhou Xiaochuan, governor of China’s central bank, exclaimed multiple times this week to his G-20 colleagues that a bubble in his country had "burst." While this will come as no surprise to any rational-minded onlooker, the fact that, as Bloomberg reports, Japanese officials also confirmed Zhou's admissions, noting that "many people [at the G-20] expressed concerns about the Chinese market," and added that "discussions [at the G-20 meeting] hadn't been constructive" suggests all is not well in the new normal uncooperative G-0 reality in which we live.




Anatomy Of A Market Top, Part 1: Internal Combustion
Submitted by Tyler D.
09/05/2015 - 11:30

The first change often occurs below the surface. The deterioration of the market’s internals typically occurs in the lead-up and development of a cyclical market top, but this dynamic too can persist for an extended period. However, eventually these divergences reach a head, and the most egregious cases have historically occurred within close proximity to major, cyclical market tops. The deterioration of the broader market is so great that the resultant foundation of support below the surface of the popular market cap-weighted averages is nearly non-existent. Once the relatively few leaders propping up the market begin to collapse under the weight, the inevitable cyclical decline can commence.

[Fenix]

Global Economic Fears Cast Long Dark Shadow On Oil Price Rebound
Submitted by Tyler D.
09/05/2015 - 13:00

The EIA released a report this week that showed that there would be little effect on gasoline prices if the U.S. government lifted the ban on crude oil exports. In fact, gasoline prices could even fall because refined product prices are linked to Brent much more than WTI, so more supplies on the international market would push down Brent prices. The report lends credence to the legislative campaign on Capitol Hill to scrap the ban, a movement that is picking up steam. On the other hand, although few noticed, the EIA report also said that the refining industry could lose $22 billion per year if the ban is removed. So far, many members of Congress have been reluctant to weigh in on this issue for exactly that reason: it pits drillers against refiners, both of which are powerful political players.



Don't Forget China's "Other" Spinning Plate: Trillions In Hidden Bad Debt
Submitted by Tyler D.
09/05/2015 - 13:45

Given the global implications of what’s going on in China’s stock market and the fact that the yuan devaluation is set to accelerate the great EM FX reserve unwind while simultaneously driving a stake through the heart of beleaguered emerging economies from LatAm to AsiaPac it’s wholly understandable that everyone should focus on equities and FX. That said, understanding the scope of the risk posed by China’s many spinning plates means not forgetting about the other problems Beijing faces, not the least of which is a massive collection of debt.

[Fenix]

Did COMEX Counterparty Risk Just Reach A Record High?
Submitted by Tyler D.
09/05/2015 - 14:30

The last few months have seen a steady drip-drip-drip increase in US, European, and Chinese bank credit risks, even as stock prices rose (aside from the latter). The turning point appears to have been the downturn in oil prices as traders began to hedge their counterparty risk in massive levered derivative positions tied to commodities. But it is not just banks... COMEX counterparty risk mut sbe on the rise, as Jesse's Cafe Americain notes, the 'claims per ounce of gold' deliverable at current prices has spiked higher once again, to a record 126:1.



"We Do Not Think This Is Sustainable": Barclays Warns On Massive Cost Of China's FX Intervention
Submitted by Tyler D.
09/05/2015 - 18:15

"If the pace of FX intervention remains at USD86bn per month, we estimate that the PBoC could lose up to USD510bn of its reserves between June and December 2015, which would represent a nonnegligible decline of 14%."