Markets can stay irrational for only so long in a crisis

Market rules could lead to 1,700 tonnes gold purchase, says Sharps Pixley

• By: Jonathan Boyd
• 29 May 2012

London precious metals trader Sharps Pixley's CEO Ross Norman says new Basel rules could force banks to buy huge quantities of gold.

 
Banking capital adequacy ratios, once the domain of banking specialists are set to become centre stage for the gold market as well as the wider economy. In response to the global banking crisis the rules are to be tightened in terms of the assets that banks must hold and this is potentially going to very much favour gold. The Basel Committee for Bank Supervision (or BCBS) as part of the BIS are arguably the highest authority in banking supervision and it is their role to define capital requirements through the forthcoming Basel III rules.

In short, they are meeting to consider making gold a Tier 1 asset for commercial banks with 100% weighting rather than a Tier 3 asset with just a 50% risk weighting as it does today. At the same time they are set to increase the amount of capital banks must set aside as well. A double win potentially.

Hitherto banks have been much dis-incentivised to hold gold while being encouraged to hold arguably riskier assets such as equity capital, currencies and debt instruments, none of which have fared too well in the crisis. With this potential change in capital adequacy requirements. bank purchases of gold would drive up its value relative to other high quality qualifying assets, increasing its desirability for regulatory purposes further. This should result in gold being re-priced to bring it on a par with all other high quality assets.

Currently banks have to have core Tier 1 capital ratio of 4% of which will rise to 6% from the beginning of next year. In addition to its store of value merits, central to the argument in favour of gold as a bank reserve is its countercyclical nature to most other assets in that it tends to be inversely correlated. Gold is ideal as it bears no credit risk. it involves no other counterparty and it is no one's liability. It is a reserve asset diversifier if you like.

This is a treble win for gold - it would be a major endorsement of its role in preserving wealth and as a store of value from the highest financial authority, it would lead to significant purchases of gold by major financial institutions and it would lead to a reappraisal of its value with respect to other Tier 1 capital such as quality sovereign debt. Under the new rules gold could become a very significantly larger proportion of a reserve pool which is about to grow very much larger.

The 2 questions that come to my mind are when and how much metal - on timing Basel III kicks in from January 2013 with a further tightening in capital adequacy ratios in 2018. That said, it is not yet clear when gold's re-rating to Tier 1 might take place.

In terms of amount of gold that could be purchased that is harder still - if we thought that say 2% of total current Tier 1 capital held by commercial banks globally might be converted into gold (forgetting for a moment about the increases in capital yet to be seen) - this would suggest that 2% of the $4,276 bn would be converted to gold. That is equivalent to $85 bn in gold which at current market prices is equivalent to 1,700 tonnes of gold.

Another way of looking at this is to consider that commercial banks would be holding gold for precisely the same reason that central banks do - and the largest 110 central banks in the world have 16% of their reserves as gold - as such a figure of just 2% is really quite a modest expectation - ultimately it will be a question of price and expectations of price change that would determine the rate of uptake in the short term.

For those anxiously about the lacklustre market - this could well promise to be game-changer of epic proportions.

Let's all laugh at Europe

The incomparable Dennis Gartman had a great laugh at the boobs over in Europe today.  It seems those ridiculous clowns running the European Economy are buying their own sovereign debt with printed Euros.  Can you believe that?

"Almost laughably, the banks in Europe are the
buyers of sovereign debt and the sovereigns are the
buyers of bank shares. If this were not so comical
and so corrupt it would be sad. But it is comical and
it is sad at the same time for this is Ponzi gone truly
awry: “I’ll buy you; you buy me, and we’ll buy each
other with each other’s money!”  -- Dennis Gartman.



Luckily things are so different here:
 

WSJ: Fed Buying 61 Percent of US Debt

Wednesday, 28 Mar 2012 11:08 AM

By Julie Crawshaw and Forrest Jones

• 7
  inShare

The Federal Reserve is propping up the entire U.S. economy by buying 61 percent of the government debt issued by the Treasury Department, a trend that cannot last, Lawrence Goodman, a former Treasury official and current president of the Center for Financial Stability, writes in a Wall Street Journal opinion article published Wednesday.

Read more: WSJ: Fed Buying 61 Percent of US Debt

Fed Now Largest Owner of U.S. Gov’t Debt—Surpassing China

By Terence P. Jeffrey

November 16, 2011

Subscribe to Terence P. Jeffrey's posts

    

Federal Reserve Chairman Ben Bernanke (AP Photo/Alex Brandon)

(CNSNews.com) - At the close of business on Tuesday, the debt of the federal government exceeded $15 trillion for the first time--with the largest single owner of the publicly held portion of that debt being the Federal Reserve.
Over the past year, as the Federal Reserve massively increased its holdings of U.S. Treasury securities and entities in China marginally decreased theirs, the Fed surpassed the Chinese as the top owner of publicly held U.S. government debt.

All kidding aside:

Look, everybody who understands this mess at all understands there are TWO THINGS that need to be done, first and foremost.  And these two things will go a very long way to setting us back on  the right path:

1) Re-institute Glass Steagall, or the equivalent so the banks can not operate as Hedge Funds with public money.

2) Run ALL DERIVATIVES through a transparent exchange, so that they can by tracked and accounted for and regulated.

Those 2 things will not solve all our problems.  But without them we are lost.  No exaggeration.

Everybody understands this.  Nobody is doing anything about it.

WHY?

Whither the Savior?

Sensible business people argue cogently that, sure, things look bleak, but our capitalist system is supple, and some new industry/technology will come along and lift us right out of this funk.

In the past this has been true - sometimes.  War - and the accompanied industrialization lifted us out of the last depression.  But we have had several periods of amazing innovation.

Here's what many people miss.  ALL new technologies are developed in labs - not at companies - but in UNIVERSITIES.  ALL.  EVERY.  Sure, you can look to individual entrepreneurs who developed Commercial applications for new technologies, but all the breakthrough technologies are developed from work done in advanced labs at top universities.

The reason is that corporations are largely bureaucratic bogs - just like the government.  Top scientists all want to work running their own labs and working for themselves on what they like at top universities.  It is often years before entrepreneurs and corporations even understand the breakthroughs sufficiently to commercialize them.

Corporations are good at EVENTUALLY stealing or paying for these technologies and then developing them commercially.  And that's valid and important.  But they create nothing.

Sure, it seems like an amazing advance when apple creates an phone the lets you text a pal while you watch a movie and order a pizza - but that's more of a marketing coup than a technological advance.

That's just the way it is.  And there's nothing wrong with it.

Except this: Currently there is a tremendous and frightening hatred of education and Universities amongst certain sectors of the political elite.  Many top Republican power brokers - like Rush Limbaugh and Shawn Hannity -- never went to college and hate University Education with a passion.

Education and University funding is under tremendous siege.  Tops University labs are being defunded at an alarming rate - to preserve tax cuts for the wealthiest 1 percent.

We are systematically crushing the place we look to to save our sinking economy.

Good luck to us.

Where is gold going short term?

Where is gold going short term?

Over the next 3 months?  Over the next month?  Over the next 30 seconds?

How about over the next nano second?

Here's how you can tell for sure:  Get a common house fly, let it loose in your bedroom.  Shut all the windows and doors.  Then chart it's movements for several hours.  Study the tape for days and days.  Get another house fly and then try to predict its movements based on the movements of the first housefly.

Repeat this exercise for weeks on end.  At some point you'll know exactly where all the financial markets are headed in the short run.

How about this: Where is gold headed over the long run?

To answer this, figure out the currencies in which gold is quoted.  Chart the movements of the Central Banks that issues those currencies.

Then you'll know exactly where gold is headed in the long run.

Both exercises can be tremendously profitable.

I've personally had a lot more success with the second one though.

STUPID

Every day we are pelted by a barrage of meaningless economic blather.  Everyone has their own favorite Stupid Anlayst.  I'd like to cite Jim Paulsen of Wells Capital Management as my current Biggest Moron in the Finacial World, as he consistently mouths the most astounding bromides:

A) The market it incredibly cheep at 12 times earnings.

Why is this stupid?  Because current accounting standards render earnings figures completely meaningless.  Armies of lawyers are employed by all major corporations to hide the true value of companies though legal Off Balance Sheet Structures, Excluded 'One Time' Items, and Fantasy Mark to Model Values for Junk Assets.

B) Companies have record cash on their balance sheets that they're all set to put to work.

Why is this stupid?  Companies also have record debt on their balance sheets.  And there's no evidence they have any desire to put the cash to work.

C) Confidence is picking up as the rebound broadens.  HUH?

D) We're seeing an expansion of consumer credit. 
      Yeah, along with an erosion of earned income.  That's how we got in this problem in the first place.

E)  Finally, Gold stocks are set to outperform bullion as confidence returns and the Dow surges.
      The Dow has gone nowhere for 10 years.  Gold has quintupled over the last ten years.  Gold stocks have underperformed bullion by a huge margin for the last ten years.  Every factor that has caused this to be so is currently intensifying.

In case you thought the pullback in gold has dicouraged the wealthy:

 

Morton & Eden Auction of Four Exceptional Ancient Greek Coins realises over £4 million.

 

Babe Ruth’s 1920s Jersey Sells for World Record $4.42 Million

By Dex McLuskey - May 20, 2012 2:58 PM ET

Babe Ruth’s earliest-known jersey has sold at auction for $4.42 million, a record for an item of sports memorabilia.
A New York Yankees cap worn by Ruth in at least one game during the early 1930s fetched $537,278, while the Super Bowl ring won by former New York Giants’ linebacker Lawrence Taylor following the 1990 National Football League season went for a bid of $230,401, SCP Auctions said in a news release.

NYC spring art auctions abound in records

By ULA ILNYTZKY | Associated Press – Sat, May 12, 2012

NEW YORK (AP) — The city's spring art auction season was red hot.

The frenzy began with Edvard Munch's "The Scream" on May 2, when a phone bidder at Sotheby's plunked down nearly $120 million for the iconic image, earning it the title of most expensive artwork ever sold at auction.

Then, Mark Rothko's "Orange, Red, Yellow" stole the record for any contemporary artwork at auction when it sold for nearly $87 million at Christie's on Tuesday.

But it didn't stop there. Artist records also were shattered at the two auction houses for works by Yves Klein, Jackson Pollock, Gerhard Richter, Alexander Calder, Roy Lichtenstein, Cy Twombly, Chinese dissident artist Ai Weiwei and others.

allow me to state the obvious

When debt reaches unsustainable levels there are only 2 solutions:

A) DEFAULT

B) DEVALUE THE CURRENCY.

That's it.  There are many moronic gobbledygook phrases that sound like options, but they aren't:

"A combination of austerity and growing the economy."

"A support of the banking system while cutting taxes and reigning in spending."

"A flattening of the yield curve and and a shoring up of banking balance sheets."

"A restructuring of debt along with a program of checks and balances on the fiscal structure."

"A rejiggering the thingamajobber along with a positronic alteration of the cosmo-fiscal Order."

Make up your own.

Then go back to A and B.

That's all the choice Greece has.  That's all the choice Spain has,  That's all the choice japan has.  That's all the choice the United States of America has.

Learn it.  Love it.

What if there were a QE And.....

What if there were a Quantitative Easing, and the banks stopped plowing all that free money into the Stock Market?

Bernanke has the power to give the Banks as much money as he wants.  Nobody can stop him.  The banks don't have to lend the money.  They can gamble it til the cows come home.

But what if - just what if - the banks decide the stock market is under too much pressure - for any number of reasons.  So they hesitate, and put that money somewhere else for a while.  What if that money goes into derivatives - commodities - currencies - corporate preferreds - corporate bonds - balance sheet cash - anything else?

Imagine - just for a second - a world where the Fed loses control of the stock market.

What would that world look like?

Several on FOMC Said Easing May Be Needed on Faltering

By Joshua Zumbrun - May 17, 2012 12:01 AM ET

The Federal Reserve signaled further monetary easing remains an option to protect the U.S. economy from the danger that lawmakers will fail to reach agreement on the budget or Europe’s debt woes worsen.
Several members of the Federal Open Market Committee said new actions could be necessary if the economy loses momentum or “downside risks to the forecast became great enough,” according to minutes of the Federal Open Market Committee’s April meeting released yesterday in Washington.

Gold spiked on the news.  We'll see for how long.

Let's be clear.

Easing is the ongoing state of Fed Money Creation.  Any Member Bank can "borrow" Billions at Zero Percent, any time for any duration for any purpose.

The usual purpose is to gamble the money in the risk markets.  When they win they keep the profits.  When they lose, they go get more from the Fed to cover the losses.  (See JP Morgan and their latest 2 billion dollar loss.)

What other definition of "EASY MONEY POLICY" do you need?

So why have the risk markets been falling?  And why in the world is gold a risk asset?

Because the latest OFFICIAL EASING 'Operation Twist' is expiring.  And the sheer numbers of freshly created cash in these programs overwhelms all other fund flows in the trading arena.

When the newest round of Easing is announced the risk markets will stabilize.

At some point the very fact that all markets are dependent on freshly injected Fed (TAX PAYER) money will create a massive loss of TAX PAYER confidence. 

Then the game will change.

Then the risk markets will become impossible to prop up.

Then gold will become a safety hedge against the risk markets.

When will this happen.

Who knows.  But it will happen.

This is why you buy bullion

Gold is in a vicious swoon.  Everything that should make gold soar is occurring: massive debt dislocation of of capital resources, coupled with massive printing of paper.  Yet gold swoons.

To those who look at pure capitalist models (mapping financial worlds that only exist in the imagination) this is evidence that the gold bull is dead, and they sell their paper gold.

To those who bought gold at 1600-1900 they are bearing losses and they sell their paper gold.

To those who bought bullion this is a major pain in the butt, but it's way too much trouble to sell their bullion.  So they're just sticking it out.

This - like all financial markets - is a coordinated, managed gold swoon, necessary as prelude to the next major coordinated money printing program.

When the inevitable printing becomes known (it is probably going on right now) gold will take off again.

Only those with the prescience - or luck - to hold bullion will still be on board.

JP Morgan loses another 2 Billion of your money

JP Morgan Bank, one of the principal owners of the Federal Reserve Bank, announced yesterday they had gambling losses of 2 Billion Dollars of money they stole from the tax payers.

How exactly did they steal this money?

 The FED printed it up, and "lent" it to them at ZERO PERCENT, thus proportionately diluting all the rest of the TAXPAYER'S MONEY.

Bad J P Morgan!  We thought we told you to stop gambling with money you're stealing from our pocketbooks!  Bad!

What?  You think this is funny?  Then wipe that smile off your face.  What you did was very very bad.

Gosh Darn you, you promised!  Part of the "tough" Dodd Frank Financial Oversight Bill was the JP Morgan and other banks would voluntarily wind down this type of proprietary gambling with public funds.

Hey!  You guys promised!

Why you!  If you keep gambling away all our taxpayer money, why we'll .... we'll be forced to stand out in Zuccotti Square and sing songs at you.

Watch out JP Morgan!  You better promise not to do that again....

The FED'S END GAME

The Emperor is Naked: David Stockman

A "paralyzed" Federal Reserve Bank is in its final days, held hostage by Wall Street "robots" trading in markets that are "artificially medicated" according to David Stockman, former Republican U.S. Congressman and director of the Office of Management and Budget under Reagan.

 

DS: We are in the last innings of a very bad ball game. We are coping with the crash of a 30-year–long debt super-cycle and the aftermath of an unsustainable bubble.

The Fed is destroying the capital market by pegging and manipulating the price of money and debt capital. Interest rates signal nothing anymore because they are zero. The yield curve signals nothing anymore because it is totally manipulated by the Fed.

Capital markets are at the heart of capitalism and they are not working. Savers are being crushed when we desperately need savings. The federal government is borrowing when it is broke. Wall Street is arbitraging the Fed's monetary policy by borrowing overnight money at 10 basis points and investing it in 10-year treasuries at a yield of 200 basis points, capturing the profit and laughing all the way to the bank. The Fed has become a captive of the traders and robots on Wall Street.
 
The danger to the world is not classic inflation or deflation of goods and services; it's a drastic downward re-pricing of inflated financial assets.

Q: Is there any way to unravel this without this massive dislocation?

DS: I do not think so. When you are so far out on the end of a limb, how do you walk it back?
The Fed is now at the end of a $3 trillion limb. It has been taken hostage by the markets the Federal Open Market Committee was trying to placate. People in the trading desks and hedge funds have been trained to front run the Fed.  

Bill Dudley, who runs the New York Fed, was formerly chief economist for Goldman Sachs and he pretends to solicit an opinion about financial conditions from the current Goldman economist, who then pretends to opine as to what the economy and Fed might do next for the benefit of Goldman's traders: If they think the Fed's next buy will be in the belly of the curve, they buy the belly of the curve
 
But how does the Fed ever unwind its current lunatic balance sheet? If the smart traders conclude the Fed's next move will be to sell mortgage-backed securities, they will sell like mad in advance; soon there would be mayhem as all the boys and girls on Wall Street piled on. So the Fed is frozen; it is petrified by fear that if it begins contracting its balance sheet it will unleash the demons.

The point is, this is not the free market at work. This is central bank money printers and their Wall Street cronies perverting what used to be a capitalist market.

The Big Question

The big question facing Europe and the US is this:

How do you simultaneously boost an economy and slow a deficit?

The Stupid Answer: Business friendly Pro-growth policies along with fiscal restraint.

Why is this so stupid?

Because "pro-growth policies" means "negative real rates to encourage lending" along with printed money to support the stressed banking system"  and fiscal restraint means "stop printing money and let rates become market-determined to discourage reckless lending."

In other words  pro-growth really mean "Print Money" and fiscal restraint means "Stop printing money."

How you do both simultaneously is a real trick.


O yeah, of course there's other stuff like absurd bankrupt entitlements programs and destructive labor laws the are a real drag on an economy.  But reforming them means necessarily temporarily slowing growth.   This could turn a recession into a depression.

What's a global economy to do?



In case you think I'm the only one who thinks this watch:

http://www.youtube.com/watch?v=HRduwYgrU7A&feature...

World economy: Prediction for 2012

These things indisputably occurred during the fantastic Dow and Housing run up from 1980-2008:

A massive socialist strengthening of world central banks by the dismantling of the gold standard.

A massive socialist expansion of government fueled by an incredible expansion of government debt.

A massive capitalist dismantling of the financial regulatory system.

A massive capitalist expansion of the financial sector fueled by the creation of massive new complex unregulated debt markets

A massive socialist program of bank and savings and loan bailouts and subsidies financed by more massive government debt engineered by Reagan and Bush 2.

A massive capitalist dismantling of the progressive tax code.

A massive socialist coordination of the destruction of the purchasing power of the dollar in order to decrease the burden of the debt load, engineered primarily by Alan Greenspan along with Reagan, Bush, Clinton, Bush.

A massive socialist financing of several wars by more massive government debt.

A massive capitalist relaxation of regulations and tariffs that permitted unprecedented financial globalization.

To understand what will happen in the future of our economy all you need to do is answer this simple question:  Which of these are causes of the Dow and Housing run up that fueled our 30 year expansion, which are correlations?

The winners get to preserve their capital over the next 10 years.  The losers lose pretty much everything.

Investing 2012

To invest your money you need a very clear idea of what is likely to happen in the future.

Without that clear idea, you're simply gambling.

The two most important concepts in understanding the future are:

A) Understanding the difference between causality and correlation.

B) Understanding the nature/function of money.

To understand those two things you have to do a lot of work.  Go do it.

The absolute most dangerous method of trying to understand the future involves looking at past periods and expecting them to repeat.

This is the way of financial devastation.

Not always.  But certainly now.

Why?

Because our financial edifice is built upon debt.

This is true globally. 

This is inherently extremely unstable.

There has never been a period in world history with a commensurate global build-up of debt.


To understand how this will resolve you must understand two things:

A) Understand the difference between causality and correlation.

B) Understand the nature/function of money.

To understand these two things your have to do a lot of work. 

Go do it.

Your financial future depends on it.

The coming depression isn't all bad

http://www.youtube.com/watch?v=hHVMAa-21aY&feature=related

Zuckerberg Facebook IPO to Make Him Richer Than Ballmer 

Facebook Inc. (FB)’s $11.8 billion initial public offering will cement the status of 27-year-old Mark Zuckerberg as one of the world’s richest men and put his social network among the highest-valued companies in the U.S. 

 

What has this guy done for society but give a bunch of narcissistic, preening, massively-entitled exhibitionists an opportunity to advertize and mythologize their vapid self-serving lifestyles?

 

And this is who society showers with accolades, massive wealth, and florid paeans in the press. 

 

Talk about massive misallocation of resources.

 

Now whole generations of brain dead twenty somethings are spending all their time figuring out how to become compensated for ever new methods of wasting each other's time.

 

Yeah, I know, I just don't get it.

 

Neither will they when the economy turns down again.  

 

And yeah, you damned kids better get off my lawn.

 

 

Stating the obvious: willful blindness or pure greed?

Every day a barrage of financial analysis is released, most of which derides the idea that world markets are managed and manipulated.

We have Free Markets, according to the conventional wisdom, and anybody who think that commodities like Gold and Oil and risk assets like Stocks and Bonds are being manipulated by governments. central banks, sovereign wealth funds  and large speculators are just alarmist, sour, uninformed, fringe voices crying out in the wilderness.

Let me point out the obvious:

A) If it became accepted wisdom that all risk markets are manipulated a crisis of confidence would ensue that would destroy all risk markets.  Who would invest in manifestly crooked markets?

B) If it became accepted wisdom that all risk markets are manipulated then all forms of technical analysis would become worthless, and even fundamental analysis would be worthless in the short and intermediate term.  Therefor every financial adviser would become redundant.

Does this mean manipulation is a certainty?  No.  What it means is that there is an enormous value to the financial establishment to ridicule the idea of manipulation.  If that idea ever took hold in the broad popular consciousness, the Financial Establishment would be finished.

I'm not proving anything here.  Just stating the obvious.