CORRECTED - ECB Pumps €50 Billion Into Markets Ahead of Meeting

Thursday, January 31, 2008

-- CORRECTION -- The next meeting of the ECB's governing council is on February 2 and NOT today as I had originally and wrongly written. I apologize to my readers. The conclusions of the post remain unchanged.

The product of the European Central Bank (ECB) may not be as cheap as borrowers are hoping, but rest assured there will never be a shortage of Euros. The ECB allotted €50 billion in a one-week repo on Thursday at an average rate of 4.33%, just ahead of the regular governing council meeting. ECB president Jean-Claude Trichet will announce the results at 1430 hrs local time on February 2. The ECB's leading interest rate stands at 4% while both inflation and money supply M3 growth rates remain far above the target rates of 2% and 4.5% respectively.
It is a safe bet that the ECB will again fail its mandate to really act and fight the worrisome monetary expansion that is the root of the crisis in global capital markets that bubbled to the surface last August. 
The inflation target has been overshot dramatically since mid 2007 and money supply M3 growth has always exceeded the self-set target rates since the inception of the common currency. In this context it does not really matter that M3 growth decreased marginally to 11.5% in December, after a record of 12.3% in October and November.
Tough Talk - Easy Money
The ECB adheres to a split-tongue strategy of tough talk and easy money, as an analysis of the EBC's balance sheet clearly shows a sinking quality of credit collateral accepted for banks' refinancing. Rumours that the ECB accepts collateral of dubious quality have been market talk for while by now. The Telegraph today runs a story that highlights how the "liquidity" is rather used to shore up ailing banks. This way the Eurozone's high priests of perpetually expanding credit can calm the public, avoid a total credit crunch - and delay all problems a littler further.
But the record amounts of freshly digitized money with no corresponding value are a band-aid only while the patients (banks) actually suffer from gangrene. 
Remembering the immediate announcement of Societe Generale about recapitalizing the bank with €5 billion after its record losses in futures markets it appears that the collapse of one major European bank would set a domino-effect in motion, pulling ist counterparties into the abyss too. As these 5 billion will not come from the vault of a rich uncle, this is all about creating more paper, but no values. 
These problems would not be around, had markets really normalized, as Trichet said prematurely in September. Even the multiple repetition of his statement did not end the crisis that has seen corporate financing come to a virtual standstill since August.
This lack of money for real investments will affect European industry in 2008. An industry that is already suffering from record commodity prices and the highest labour costs in the world.
All the new money coming from the ECB does not go to companies modernizing their business operations. These fresh billions, or like today 166 new Euros for each Eurozone inhabitant, are almost exclusively created to help financial institutions avoid bankruptcy. European papers are filled with reports on banks' solvency problems on a daily basis. The ECB's balance sheet has explosively grown since 2006.
We are facing the danger of a total collapse of the banking system, no matter what officials say.
And printing more worthless money has never solved similar situations in history.
The saddest conclusion is this: Whatever the final outcome of this mega-giga crisis in development, Europe's taxpayers will foot the bill. This will raise the question of political responsibility for the folly on behalf of central bankers.

Weak Economy, Markets Drive FOMC to Cut Rates by 50 Basis Points

Continued hypertension in credit markets and declining growth figures have put the Fed's task as an inflation fighter on the back burner while it tries to stimulate the economy. The Federal Open Market Committee (FOMC) on Wednesday lowered the Fed Funds rate for Federal Reserve Notes (FRN's) by 50 basis points to 3%, bringing the rate to the lowest level since June 2005.
According to the statement,
"Financial markets remain under considerable stress, and credit has tightened further for some businesses and households. Moreover, recent information indicates a deepening of the housing contraction as well as some softening in labor markets."
It appears the Fed is even more worried about financial markets where every new day brings 2- to 3-digit loss revelations, and these are billions we are counting these days.

Fed Funds 2001 - 2008
GRAPH: Fed Funds are back to the level last seen in 2005. Chart courtesy of HSH.
I cannot remember when the FOMC did not expect inflation to moderate in the medium term.
"The Committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully."
Most of the FOMC members appear not to be afraid of more rate cuts, should the economy really tank. Only Fed Dallas president Richard Fisher had voted to leave Fed Funds unchanged.
"Today’s policy action, combined with those taken earlier, should help to promote moderate growth over time and to mitigate the risks to economic activity. However, downside risks to growth remain. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks."
My conclusion: We are indeed on the way to rapidly accelerating inflation. The Fed will print whatever Wall Street asks for. The sick patient, burdened with popping asset price bubbles all over, is given more pain killing medicine for its symptoms but treatment of hemorrhaging budgets is neglected as are the bruises from the fights with Arab boys.
This turns into a text (and history) book case on how to destroy an empire.
The Future Will Be Like the Past
Here's your marching route for the future. All severe economic downturns have played out roughly the same way.
All crises were the result of an orgy of monetary expansion and it has never worked trying to print one's way out of problems.
The USA will probably find this out further down the road of a few more trillion in debt. In 1921 one FRN cost 4 German Reichsmarks. In 1924 it was 4.2 billion Reichsmarks.
As always gold will be the beacon of hope. This most reliable inflation indicator jumped $10 to $930 after the FOMC announcement. Silver climbed to a new 28-year high of $16.89.

Show Me The Real Money

The USA owns 261.5 million ounces of gold, according to the latest statement about its forex reserves. This figure has not changed in many years and raises the suspicions of the Gold Anti-Trust Action Committee GATA which demands a public audit of the US gold hoard in Fort Knox and other vaults.
The last independent audit was half a century ago and GATA doubts that the USA has not sold a single gold bar while many other Western central banks will have dumped 4,100 tons of their safest asset within 10 years by September 2009 when the central bank gold sales agreement will expire.
GATA is alerted by the fact that the US Treasury has extended the definition of item #4 in the weekly statement on forex reserves from "gold" to "gold (including gold deposits and, if appropriate, gold swapped)" since May 2007 and claims that the USA has been part of what it calls a gold price suppression scheme.
In a full-page ad appearing in the Jan 31 issue of the Wall Street Journal GATA lists several statements from officials and a Barrick executive that back up their claim that the US has been a major gold seller in the younger past.
GATA now requests from the Treasury under the Freedom if Information Act to shine a light on what amounts of gold have been exactly swapped or discreetly sold, citing former Federal Reserve chairman Alan Greenspan, who told congress in July 1998, "that central banks stand ready to lease gold in increasing quantities should the price rise."
The USA values its gold reserves at $42.22 per ounce. The total value of $11.041 billion represents only a fraction of the actual value of $241.9 billion when today's gold price of $925 is applied.
An official revaluation would mean that the USA/Fed acknowledges the long term damage of even low inflation.
Federal Reserve Notes (FRN's), the constitutionally disputed currency of the USA, have lost 95% of their value in 95 years. All unbacked fiat currencies have been falling victim to a total devaluation in the last 300 years.
GATA is not alone with its claims that the gold market is influenced by central banks. French investment bank Cheuvreux had come out with a recommendation to start hoarding gold in February 2006, citing manipulation by central banks and claiming that they had already sold 10-15,000 tons of their offical total hoard of some 30,000 tons. Find their key points in the second half of this post or download the full report here (PDF).
US Mint Online Shop Is Closed Most of the Time
Not that I think the situation is that precarious, but as a coin collector I notice that the US Mint online shop has not filled orders for gold and platinum coins since more than a month. Some items like the new platinum collectors anniversayr coins were first scheduled to be shipped by January 26.
Now this and some silver coins are expected to be shipped after February 12. Six weeks no coins with mostly very low coinage for collectors. All gold coins are not available until further notice. The only exception is the 1/10th ounce gold Eagle from 2007 whose shipping is preliminarily set to begin on February 12. This is a bit strange. Does the mint want to cash in on the precious metals bull market or are the supply bottlenecks? The USA has to buy silver every year for its mint program since the national silver reserve was sold in the last century.

WSJ Misses 7-Year Bull in Gold, Now Warns of Risks in Manipulative Report

Wednesday, January 30, 2008

Wall Street Journal writer Eleanor Laise delivered an exemplary piece of manipulative journalism on Tuesday. While banks and investment funds announce losses of billions of Federal Reserve Notes on a by now daily basis, Laise worries in her headline "How To Survive The New Gold Rush" on the day gold hit a new record high at $933 as investors seek shelter from the debt-hurricane engulfing the world.
The scary headline, in stocks it's always just about "weathering the storm," is followed by a couple of good examples where I can highlight the methods used by journalists to shape X into U.

Manipulation #1: "The New Gold Rush" The rush into the only asset class that is not somebody else's obligation is not exactly new. Only because major banks (and MSM who believed into banks' permanently wrong forecasts) missed the train in the first six years does not eliminate the fact that gold has gone almost fourfold since it bottomed out at $252. It has performed better than any other asset class in this period except commodities which show the true levels of inflation.

Manipulation #2: In order to keep the gold bull in the WSJ's bear dress the admission,
"Gold has been riding its reputation as a safe haven to new highs"
is immediately followed by the unsubstantiated warning,
"But it also carries substantial risks for investors."
Where is the substantial risk in an asset that does not depend on the future performance of somebody else? Did gold ever decline to zero like Enron and Worldcom did and which will happen to so many other former pillar of US industry in the close future? I think there are many other asset classes where the WSJ could apply the art of protecting investors by informing them with the same skepticism the paper has towards gold.
To back up the unwarranted claim of risk Laise begins to mix apples and pears for her comparison, blanking out gold's stellar performance in 2008 in order to maintain a quote a financial advisor who should check his calculator. This leads to

Manipulation #3 and #4:
"A dollar invested in gold at the beginning of 1969 would have grown to less than $20 by the end of last year, compared with nearly $50 for the S&P 500, according to the firm,"
she quotes some little-known financial advisor. Why does a daily paper quote prices from a month earlier, after using current prices earlier on? It can't have been a problem of a lack of computing power or limited fact-checking capacity, I presume.
Despite this manipulation this financial advisor and the WSJ are still plainly wrong and misleading: A 20-fold increase since 1969 would put gold at $700. But it closed 2007 at $838. So gold has gone up almost 24 times since 1969. I wonder why this beginning date was chosen? The USA was still on the gold standard then.

Gold 1975-2008

GRAPH: Gold from 1975 to 2008. Why do all gold thrashers assume that all gold investors rushed into the market at its old high? Except when applying the highly unlikely thesis that gold bugs bought then and never sold out all other investment periods now rank gold again as the best performing asset in the short, medium and long term. Chart courtesy of Kitco.
I also wonder how this financial advisor arrives at the conclusion that a rise from 100 to 1,350 points in the S&P 500 represents a 50-fold increase as it is very simply not the case. He has to overstate the performance of stocks by more than 300% in order to make gold look bad.
On a general note it is very interesting that the paper asset-cheering crowd always assumes that every gold investor was so stupid to buy his gold at the old record of $875 in 1980. This was not possible either since gold spiked only intraday to this level.
The official fixing prices never went higher than $760 and most physical business at that time was cash-transacted on the closing prices.
I faintly remember online derivatives investing from home with funds drawn from a debt card was not an option then. Buying gold always meant feeling a heavy piece of the metal in one's hands.

Manipulation #5: As the meteoric rise in gold cannot be hidden, the proven method of mixing apples with pears for a good biased comparison is drawn. Buying gold and buying gold stocks are two entirely different things. Again, only physical bullion is a store of value whereas mining shares come with all the risks of corporate failure as all other stocks. The story fails to back it up with data. Why? Because gold share indexes have outperformed most other industries in this millennium. The Amex GoldBugs Index has risen 13-fold since 2001 and is still more than double compared to 1998. Omitting facts is the most used method to keep a story's spin.

Manipulation #6: In her desperation to trash gold's out performance of everything else Ms. Laise uses the same trick the WSJ used in order to teach us in the not too distant past that record nominal oil prices were not that bad when seen inflation-adjusted. So she writes
"What's more, gold has failed to keep pace with inflation in recent decades. The average 1980 price of gold inflated to 2007 dollars would be $1,563 an ounce, well above today's price, says Brad Zigler, managing editor of"
IMHO the other side of this medal is that gold is still undervalued and the gold price has always kept up with inflation in the last 3,500 years. To pick out a recent under performance in a 3,500 year old correlation is, again, one more way of manipulation. Business journalists normally love to spot undervalued investment instruments. There is also no mentioning that central banks have been selling record amounts under the central bank gold sales agreement, dumping up to 500 tons per year on the market and suppressing the gold price.
Manipulation #7: Thank god there is always the trick of the general quote. Nothing is more convenient than quoting a group of anonymous people. Here we go:
"Gold can help investors diversify and reduce their overall portfolio risk, financial advisers say, since it tends to behave differently than stocks. But at current levels, investors may be paying a high price for that diversification."
I need help to follow this reasoning. Should I now avoid gold because it has underperformed inflation recently? Or should I shun the yellow metal because it has risen so much?

Manipulation #8: Next comes the implication that gold investors are eccentric wackos (as in stark contrast to the herd of market players that always act rational, driving shares up and down in 20% ranges these days.)
Again using the convenience to quote anonymous financial advisers, Ms. Laise presents gold bugs as a crowd one does not really wish to be associated with.
"Financial advisers also warn that since gold is considered a haven in times of crisis -- and is less in demand for practical uses than other commodities such as copper and oil -- it tends to attract emotional, speculative investors who can amplify its price gyrations."
And what are the big guys on Wall Street doing these days, sending the Dow hundreds of points up and down within an hour?
Maybe the WSJ will cease all mining share reporting once it finds out that gold investors (like active military personnel) would elect Ron Paul for president. And shouldn't gold be outlawed anyway as it is also favoured by Muslim and Chinese investors (driving prices up in their move out of FRN's?) It would fit the other quirky arguments displayed in this article. No, I deny that this was polemic. And I am backed by a group of financial advisers that say so too.

Manipulation #9: If your are still not scared enough, beware of something not one analyst expects. But the WSj holds up the FRN flag, claiming "some" market watchers claim a dollar restrengthening,
"Some also see risks to gold investors in the current market. The dollar's long decline may be near an end, some market watchers say, and if it rebounds, that's likely to hurt gold."
Manipulation #10: Omitting the positives for gold. Inflation, record commodity prices, new demand from China, Russia's declining gold exports, America losing 2 wars, the real estate crisis, investors only beginning to pile into precious metals; not that the WSJ would know anything about that - or share it with its readers. That's all worth a short sentence:
"An increasingly cloudy financial and economic picture and geopolitical tensions have also helped to spur gold to new highs."
A simple Google search returns more positive aspects of gold investing - and would have led the WSJ writer to contacts with gold experts. She preferred not to talk to a single one, sticking to some generalists instead.
As not even such stories will slow the solid bull market in the oldest universal currency of the world I have a tip.
The next story should not miss out on the old storage costs myth. This sage is still told by uninformed financial advisers and banks certainly don't want your assets go that way: A small size bank vault that can hold a document ledger will be sufficient to store gold with a value of more than 1,000 ounces and costs less than $150/year. Of course, the advertisers of the WSJ will not like this as they cannot lend this gold to real estate and other speculators. I assume, only the costs for a checking account are higher than that. But banks live from pushing paper and charging their clients for it, not preserving value.
To end my criticism on a friendly note I am grateful that Ms. Laise assists in keeping the gold price at artificially low levels, giving me more time to buy more cheaply. And I consider anything below $2,000 cheap, just to keep up with real price raises and not some hedonically distorted official inflation indicators for consumers who neither eat nor commute.
This demonization of gold reminds me of the times when the church told people the sun revolves around the earth.

Is Europe's Banking System Broken Beyond Repair?

Tuesday, January 29, 2008

Are recent events in the European banking industry unmistakable signs that the relative calm on the surface will soon give way to the biggest financial disaster - and the resulting panic - the old continent has ever seen?
The scandal at French banking giant Societe Generale firstly shows that monetary dimensions of the past and present may not work much longer. I am stunned by the growing amounts of losses publicized on an almost daily basis. When the crisis began last August, losses publicized were mostly below the billion mark. Then came British mortgage lender North Rock and pushed for another digit, announcing its de facto bankruptcy and held alive only by government guarantees.
German banks tuned into the choir. From leader Deutsche Bank to lesser known regional lenders, fall was spattered with bad surprises after banks had first tried to defuse mounting speculations in vain and then shyly admitted that the US alphabet soup made from ABS, CDO's, CDS, MBS, SIV indeed played the dominating role in their downfall.
The German crisis, WestLB took a billion hit last week, may still be only the tip of the iceberg. Due to slower reporting mechanisms crucial annual results for 2007 will trickle into markets until April. Do not expect any better performance in Italy, France, Spain, Portugal, Greece, Cyprus and all other countries where property had bubbled until then. Only today Belgian bank Fortis announced one billion Euros in mortgage write downs and expects another billion less in profits. East European financial institutions may be even worse off relative to their size.

DJ Stoxx 600 Banks.jpg
GRAPH: The DJ Stoxx 600 banking sub index is a warning telltale if the old rule that stocks discount the future still applies.
It doesn’t take a forensic accounting degree to see that the general problem is unprecedented over-leverage across the industry. Banks moved gigantic sums - no one can even roughly guess it - into under capitalized legal entities they created for this reason. This offspring used the good rating of its parent companies to borrow at historically low rates and buy still more of the same, driving capital-risk-ratios to ridiculously low levels of less than 3%. Now these entities sit on mountains of unmarketable securities, bought around par. Until December 31, banks could push the problem into the future as interim reports are only pro forma.
The annual report is an entirely different affair. Banks cannot dress the numbers anymore and have to value at market. If prices were not found due to a lack of trading in these securities they will be found in bankruptcy proceedings where every asset is given a price. I guess neither method will be a pleasant experience for the holders of the American alphabet soup. Guesstimates price a good part if not the majority of the volume of these problem papers at anywhere between 15 and 45 cents to the dollar.
What is so difficult to understand is that it appears that the global crowd of money managers all had the same unrealistic expectation: Low rates and rising property prices forever, blanking out inflation although warning signs and deteriorating indicators have been written on the wall since at least 4 years.
Lacking EU internal growth apart from real estate finance banks fanned out to fund whatever came along, as long as it had a modest yield pickup compared to government debt and carried an investment grade rating from rating agencies that had failed in all other financial crises before. Remember Enron, Worldcom and Metallgesellschaft? To name only a few.
Funded with cheap money provided by the European Central Bank - money supply M3 growth is at a record level of more than 12% - and peer pressure from bonus-hungry executives are the two ingredients that led to all manias and subsequent panics:

  1. Monetary expansion
  2. Greed
Before SocGen's revelations all misdoings fell into the category of investments gone bad. But now we witness the first mega-giga flop where possibly some fraud is involved. The bank released a letter today that blames the 4.9 billion Euro loss on the misdeeds of a single trader who had risen through the back office, knowing how to hide his trades.
This story will not end here as it raises multiple questions about risk control on a company and supervisory level. The French central bank had said earlier that they had been informed by SocGen before the bank started unwinding trades worth 50 billion Euros. This represents about the annual GDP of Libya or Qatar.
A lot of safety measures seem not to have worked. How can such enormous volumes be traded without anybody raising eyebrows? Such figures have to be put into everyday terms to demonstrate that data-based sanity has left the financial world a while ago. 50 billion Euros divided by 300 million Eurozone inhabitants makes 166 Euros per capita. Squaring these positions led to the strong declines in Frankfurt and London on MLK day.
The game of shifting the blame has begun. According to a Reuters report,
the Paris prosecutor said that derivatives exchange Eurex alerted the bank to (rogue trader Jerome) Kerviel's activities in November.
A French lawyer now sues SocGen as they have not informed markets ahead of their panic selling that wiped out hundreds of billions of Euros market capitalization in one day.
Political Repercussions to Follow
And in a new political twist to the scandal, Bank of France chief Christian Noyer revealed that he delayed telling the government about it for several days because he feared a leak.
"I considered that the huge size of the position meant that any risk of an involuntary leak -- involuntary of course -- should be removed because that was the major risk that could happen in the first hours,"
he told BFM radio in an interview according to the Reuters report.
Kerviel told police he concealed his trades because he wanted to enhance his reputation as a trader, not out of any desire to hurt the bank, prosecutor Marin told a news conference. And his lawyer voices suspicions that the bank tries to make a scapegoat out of Kerviel, offloading hidden skeletons on his shoulders. Kerviel had a salary of 100,000 Euros, including 1,500 Euros performance bonus.
SocGen's problems may be a leading example that there was a bit too much freewheeling in market capitalism, as authorities may once more turn out to be inadequate in a rapidly evolving market that has tried one more time where alchemy never had success: Creating unlimited gold. The alchemists in medieval times did not succeed. Today's equivalent, mathematicians and rocket scientists in derivatives departments, will share their unlucky fate.
UPDATE: Authorities released Kerviel Thursday evening after questioning him. According to a new Reuters report - with all the details here - Kerviel had told the prosecutor others also played fast and loose with bank rules.

Lost recently? Win Back Your Smile Here!

Saturday, January 26, 2008

When the going gets tough, as always British comedians will keep us going.
This 8 minute parody bites hard and has been viewed more than a million times by now. Enjoy it.

ECB Balance Sheet Signals Sinking Quality of Credit Collateral

Friday, January 25, 2008

Rising tensions in the Eurozone banking system begin to show in the balance sheet of the ECB. Checking the latest weekly financial statement of the ECB one notes shifts in the asset positions that may indicate that the ECB is taking on more subprime collateral that would not be accepted in the regular repos.
While those positions where lower grade collateral can be hidden are growing at sometimes alarming rates, the Eurozone central banks have been salting away their best performing asset with undiminished fervor.
Doing Nothing Would Have Made Mega-Multi Profits 
A look at the asset positions of the ECB comes to a mixed conclusion. Due to the sale of hundreds of tons gold each year the Eurosystem has missed out on potentially more than €82.3 billion in profits. The Eurozone's gold hoard (Pos.1) could be worth €283 billion instead of the latest figure of €210.7 billion had central bankers only done what they have been doing in the fight against inflation: nothing. Eurozone inflation has been exceeding the ECB's target rate of 2% since last August. Money supply M3 has been out of control since the inception of the Euro, never falling below the target rate of 4.5% and remaining at a record growth rate of 12.3% in the last 2 months.
This results in a dramatic explosion of the total volume of the balance sheet which blew up by more than 30% since Dec 30, 2005 and now stands at €1.35 trillion. It is interesting to see that the Eurozone economy, limping along with economic growth rates in the 2% area, needs 16% more ECB credit every year since 2006. Is real inflation closer to 14%?
A look at total money market lending results in positive surprise, at least on the surface. Banks had borrowed €459 billion last week (Pos.5), essentially the same as at the end of 2006, when the volume was €450 billion. But that is still 10% more than at the end of 2005. These figures confirm ECB president Jean-Claude Trichet's stance that monetary policy is still accommodating.
Other asset positions clearly show that funding is very easy to get. The stabilization of money market volumes may also be interpreted that Eurozone banks are running out of prime collateral, especially when seen in connection with those asset positions where lower grade collateral may be hidden.
Claims on non-Eurozone residents (Pos. 3) show a sidewards trend with €141 billion at the latest count.
Forex claims on Eurozone residents (Pos. 2) shot up 58% to €37 billion since the end of 2006. These are the Federal Reserve Note repos transacted by the ECB in December.
Euro claims on foreigners (Pos. 4) rose a bit less but still stand with €15 billion more than 22% higher than at the end of 2006.Then comes the first black box. So called "other claims" on Eurozone banks (Pos. 6) have grown more than sevenfold in the last two years, shooting from a mere €3.6 billion to €30 billion by last week. According to the ECB's explanation, "the position securities of euro area residents denominated in euro contains certain categories of marketable securities, which may potentially be used for monetary policy operations." That can be anything.
Euro denominated securities of Eurozone residents (Pos. 7) had seen a dip to €78 billion by the end of 2006 and stand now with €97 billion €5 billion higher than at the end of 2005. The ECB's glossary lacks a closer explanation of this position.
Public debts monetized by the ECB show a slow downtrend, falling €2 billion to €38 billion in the last 2 years.
My worries focus on "other assets" (Pos. 9.) This trashcan has ballooned by 128% from €145 billion to €332 billion since the end of 2005. The position other assets is a collective item including, in particular, items in the course of settlement (settlement account balances, for example the float of cheques in collection), coins of euro area Member States and other financial assets (e.g. equity shares, participating interests, investment portfolios related to central banks' own funds, pension funds and severance schemes or securities held due to statutory requirements). This item also contains tangible and intangible fixed assets, revaluation differences on off-balance-sheet instruments as well as accruals and deferred expenditure.
Again, that can be any kind of paper debt, valued at the discretion of the ECB. For my part, I feel uncomfortable with this long term trend in declining asset quality that may show that the banking system may be broken beyond repair. Is this the beginning of the end of the Euro? I am tempted to take bets.

Adapting The Blog Header to The New Global Situation

Thursday, January 24, 2008

As the crisis I have been predicting since April 2005 keeps gathering speed I have adapted my blog header. The old version is kept here for posterity.
Old Blog Header
I am an INDEPENDENT Certified Financial Analyst (OeVFA, EFFAS) who worked as a financial journalist for 15+ years and now evaluate global market trends. Analyzing financial and political news permanently I want to share my insight with those who understand that we approach an era of global redistribution of wealth. The US-European centric approach will not work much longer. Five billion people in the developing countries will demand their fair share of the world's resources.
New Header:
I am an INDEPENDENT Certified Financial Analyst (OeVFA, EFFAS) who worked as a financial journalist for 15+ years and now evaluate global market trends. Analyzing financial and political news permanently I want to share my insight with those who understand that we are in an era of global redistribution of wealth. The US-European centric approach does not work anymore. Five billion people in the developing countries now demand their fair share of the world's resources.

Fed Move Turns Out To Be a Flash In the Pan - End Game Has Begun

Looking at a sea of red ink in today's stock index changes after the Federal Reserve's biggest interest rate cut by 75 basis points in 24 years it appears the Fed is massively behind the curve. As only the combination of a US holiday and this rate cut had helped to prevent a crash on Monday and Tuesday this shows that investors worldwide highly doubt that the $140 billion stimulus package will help the USA to move out of the eye of the storm. While traders normally love to greet such news with a relief rally, the sudden fizzle of yesterday's upward move signals IMHO that the over-leveraged investing community has finally recognized what these mega-billion injections really are: New layers of debt.
I have lost track of all special infusions since August. But I remember a few key events:
In August the Fed started flooding the markets with countless extra repos and allowed 3 big banks to transact $25 billion each without adequate underlying equity. It helped in the short term only.
Since September the taps are wide open, alas all these new layers of debt have not helped to reduce the old debts. That this is not possible does not require a MBA degree but only common sense: It is axiomatic that more debt cannot help to have less debt.
After yesterday's rate cut by the Fed the game will go on a little longer unless investors take this lesson in financing 101.
Fed chairman Ben Bernanke left no opportunity unused so far to reinforce his image of a Nanny Benny that starts the money-throwing copters even before stocks fall. An inflationist by the textbook.
While such "liquidity" actions with freshly digitized money that has no corresponding value have not helped to combat runaway inflation - quite the opposite - they may be the primer for a return to real money, i.e. a gold standard (which has worked for 3,500 years.)
It will be as always: As soon as Joe Average finds out that his fiat money will buy him substantially less in the future, he will withdraw his savings (does this really apply in the USA?) and opt to buy goods of all kinds as a way of storing values.
A Fed Funds rate of 3.50% is a most alarming signal and could lead to a stampede out of unbacked Federal Reserve Notes (misleadingly called US dollar.) Why should I lend my money at 3.50% when inflation is already running at 4.1%? Who is so stupid except asset managers who currently pile everything into rising bond markets? This will not work in the medium or long term either.
Central Banks Keep Squandering Their Best Asset
I could go on and on about the mounting irresponsibility of the self-declared inflation fighters in central banks that have followed the worst of all investment strategies in this millennium.
Since 1971 Central banks eagerly tried to eradicate the only absolute value in finance: gold. Without gold prices politicians and central bankers would be able to effectively destroy the only way to compare historical prices with those of today. That would be most convenient for the high priests of ever expanding debt.
Prices of a bushel of wheat in gold can easily be reconstructed for the past 500 years. Try that with any other form of money.
As the gold link could not be broken, European statisticians have been applying another method to create a smoke screen: All price indices are reindexed to 100 every 5 years, making quick comparisons impossible. Check your countries CPI basket and see the discrepancies in the weightings.
ECB Gambled Away $82.3 Billion With Bad Timing of Gold Sales
It will not change my medium term outlook that calls for an implosion of both FRN's and the artificial Euro, an orphan without a common fiscal policy but fathered by 12 central bankers who immediately started selling their only asset with a positive alpha performance: gold.
I am still working to find out who exactly authorized the squandering of the only asset that is not somebody else's obligation. I cannot remember that the sovereign in the Eurozone countries (that's the citizens, not the government!) has permitted to sell the family silverware. At the end of the Central Bank Gold Sales Agreement in 2009 Eurozone central banks will have sold 4,100 tons of gold. This is 127.51 million ounces. In 2001 this represented a value of $32.5 billion dollars that would have risen to $114.8 billion with gold at $900. So the Eurozone missed out on an absolutely risk free capital gain of $82.3 billion. Somehow it is becoming difficult to maintain any respect for central bankers.
As they started at the worst possible point of time, in 1999, these central banks have effectively subsidized the smartest group of investors worldwide: Indian housewives who are expected to buy more than 1,000 tons of gold in 2008. A strange kind of development aid.
What is also interesting is that it is only Eurozone central banks who sell gold. The US Treasury has so far maintained its stance that it never sold gold since 1999. Since a few weeks the Treasury admits to have swapped some gold, an operation long suspected in goldbugs circles. Nobody has ever seen the gold in Fort Knox in the last 40 years because it is so secret. Normally central banks put their forex reserves in the show window.
Western central banks have argued that these sales make sense as gold carries no coupon and will lead to higher returns with paper assets.
This has not worked out.
Who will take the final responsibility for these irresponsible acts of giving away the ultimate savings of several nations? I remind you here on the strongly growing position of "other assets" in the ECB's ballooning balance sheet that may be an indication that the Eurozone has gobbled up a good part of the latest alphabet soup: ABS, CDS, CDO, SIV.
And where are the ratings agencies in regard to the massive worsening of nations finances. Europe and the USA are only left with debt while Eastern sovereign wealth funds sit on trillions of debt paper that only look good if it were not for accelerating inflation. At the end of the German hyperinflation in 1923 one FRN had risen from 4 marks to 4.2 billion Reichsmark. There is no guarantee that American debt, exceeding $9 trillion, will not inflate to this point too.

Do the Western Emperors Wear Clothes?

Saturday, January 19, 2008

Excuse my very lazy blogging lately, I start catching up with this truly global economic and political analysis. But searching for a new residence in my hometown took all my energies and very often my breath when I saw what is on offer for what prices. (And I spent dark winter evenings reading about crises and the history of money along with more general history.) Having overcome this most important hurdle I am in a sticker shock ever since. Daily trips (with record price gas) to the DIY market for renovation supplies remind me painfully how cheap it all was - before the Euro. Visits to designer furniture stores made me feel like 20 years ago too: As then price tags can only be described as outlandish. Bedside lamps for 350 Euros! Inflation in Austria surged to a record 3.6% annual rate in December.
A higher inflation rate is circumvented by funny weightings in the price basket with an emphasis on consumer electronics but little to eat and almost no commuting. A back of the envelope calculation indeed put my new TV below prices of the 1980s - the last time I bought one. Then came the internet, offering so much more information and saving me thousands in information costs. Let alone the possibility to follow the world from my couch. Biased TV is no competition for this wealth of information.
But I am straying off my original topic: The coming rapid decline of the Western world, brought upon us by
  • the imperial hubris of both the EU and the USA
  • the bursting of the biggest debt bubble, private, public and commercial
  • weapons of financial mass destruction, as Warren Buffett calls derivatives
  • a developing global food and energy crisis and
  • a complete misunderstanding of the different attitudes around the world towards those nations that once saw the globe as their god-given playground.
Developments since the beginning of the current crisis have largely followed the path I have described in this blog since 2005, pointing readers to the safety of precious metals in a turbulent age.
As in all crises the root problem is a rapid monetary expansion fuelled by the lowest interest rates any living member of the financial community can remember.
Rates are still low in a historical comparison, at least for sovereign borrowers. Commercial borrowings have come to a virtual halt already in the USA and the situation does not look much better in most parts of Europe.
Unemployment is on the rise due to orgies of outsourcing in the past that have not left much productive capacity on both sides of the Atlantic.
We Pay You Later
As all big powers the EU and the USA have followed the traditional path: From agriculture to industry to service and trade. An obsession with the concept of the virtual corporation and unrealistic yield expectations led the West into the fatal trap of believing that pushing papers alone would make everybody eternally rich while the poorhouses of the world be happy to dig up their resources and energy and send it refined and packaged to the (former) first world in exchange for papers that essentially say "we pay you later."
Economic growth was not based on higher productivity (do we know how this gets calculated?) but on more credit.
Credit by the Truckload
Americans and Europeans did not get richer in the last decade. In a modern version of the Tulipmania people started to believe that condo flipping was an easy ticket to capitalism for everybody. I never understood why a house for 500k plus 50k renovations turned suddenly into a 650k house. I mean, for wooden houses? A bubble that was based on Ninja loans (No income, no job or assets) in the extreme end.
While the conomy is currently falling off the cliff - as predicted here since 2005 - the West still displays an arrogance towards the rest of the world that could cost it dearly in the near term.
Having travelled more than 70 countries since 30 years and been on 4 continents in the past 18 months only I have noticed a growing resentment towards those colonialist nations that invaded Africa, Asia, Australia and Latin America in the last 5 centuries.
While we are still admired for our living standards the rest of the world does very clearly see the deficiencies in our system and the weak points.
And weak points we do have in the West. Our dependence on raw materials and energy, coupled with the highest labour costs in the world make the West hardly an attractive location for investments. Add catastrophic demographic projections and you wonder who is left to do the work when most of us retire soon and there are simply not enough children conceived since 40 years.
International visitation politics since the beginning of the crisis demonstrate clearly that the global centre of power has shifted from Washington to Beijing. US Treasury secretary Hank Paulson to ECB president Trichet, Germany's Angela Merkel and countless other Western dignitaries have been polishing door handles in China which has what the West needs most: Money and goods. It's like with every debtor: When the bank is worried about your financial status better get your best tie out and pay them a visit.
Golden Rule: He Who Has the Gold Makes the Rules
China and the Arab countries sit on the receiving end these days. Sovereign wealth funds holding trillions of Federal Reserve Notes, a private unbacked currency, muscled their way into the western financial system, taking stakes in battered financial institutions when only 3 years ago the USA tried to shield itself from any foreign influence. Now they have no more choice. The long term implications of the fire sale of shares in US banks is yet to be seen. But I cannot remember one instance where a major shareholder kept quiet when his billions were at stake. The Chinese will be no exception, honoring the golden rule: He who has the gold makes the rules. If one were to apply this rule strictly the West could one day get its orders from Indian housewives who are estimated to hold already 10% of all the world's gold.
Recent aquisitions of luxury car brands Jaguar and Rover by the Indian Tata dynasty show how quick the positions on the table can change. Only 60 years ago Britain fled its responsibility in India, exiting what is now the world's biggest democracy in only 90 chaotic days after which a blood bath between Muslims and Hindus cost millions of lives.
I also wonder how much of a friend China wants to be with the West: After all it was Britain that started a drug war of its own kind. The British Army guaranteed the sales of opium from its colony India, filling the coffers of British trading houses in the process. Before this opium was literally unknown in China. The politics of the British empire led to the addiction of millions of Chinese. So how friendly, exactly, can we expect the Chinese to be?
Regarding opium I am also looking for a logical explanation for the surging opium record production in Afghanistan. While under Taliban rule the opium crop had been reduced to less than 100 tons annually. Only a few years of Western occupation and the country produces more than 3,500 tons. I mean, how does all this heroin find its way to Western cities under the technology-assisted eyes of the Western occupators?
Do not think the West has friends in Africa. Africa rejects both the installation of planned US army Africom bases as the West's efforts to secure itself a supply of vital resources in the last huge continent not yet fully exploited. The latest EU-African summit ended with nothing but polite words. China, not really welcome in Africa due to cultural differences, has a much better hand, offering African potentates a life in luxury in exchange for mining and drilling rights. And China has no history of enslaving Africans to work the tobacco fields in Virginia. Would you welcome the ancestors of those cultures that robbed Africa for more than 5 centuries from its commodity and human resources. Africa is not backward because it is poor. It was made poor by the warring West.
The situation in Latin America is well known too. Venezuela's Chavez and Bolivia's Morales frequently criticize the US double standard on issues like torture, human rights and political intervention and one cannot blame them.
And Russia's Putin can suffocate Europe simply by turning off our gas tap. Europe imports most of its natural gas which heats probably 40% of European households.
Arab countries currently suffer from inflation because of their dollar pegs. OPEC mulls to reject Federal Reserve Notes. This currency is backed by nothing and Arabs wonder why they should accept "we pay you later" paper from a nation that will only use the oil to keep a warmachione running that could any day turn against themselves.
What all these countries have in common now is a growing skepticism towards two economic super powers that are by all objective means in a rapid decline, while still patronizing the rest of the world. While the West talks a lot about freedom and democracy, civil liberties have never been more curtailed under the guise of the "war on terror" hoax. Our human rights record is no better than that of countries that get blamed for it by the West.  The president of Austria's constituional court recently said that surveillance in Austria has surpassed the intrusionary levels that were the norm in former communist East Germany. So how was that about the free market economy and a reduction of government?
Running huge budget deficits it is interesting to see that all social spending proposals get under immediate fire while no word is ever spent on the limitless spending for security that is increasingly seen as what ist is for real: An intrusion of privacy by governments who know how unpopulatr they are and who probably erect all these security layers to quell any social unrest that is certain to come with a depression.
How do you expect me to travel to the USA when the goons at immigration can force me to reveal the password of my computer, whose hard disk is an extension of my memory? Or otherwise put me in detention when not complying with their "rules" that are all intimidating to the normal tourist? Brazil has reacted correctly by giving US travellers a lengthy security check on arrival.
This patronizing attitude towards the coloured world will not go down well much longer. While most history books paint a Western perspective every people that has once been oppressed will not exactly hold out its hands to be exploited all over again. And this is the experience of the world outside Europe and North America (why has there never been a discussion of the holocaust of American Indians?)
Add in the frightening estimate that we will need two globes by 2050 in order to maintain our current living standards and I think it is clear that the world is probably steering towards the biggest humanitarian catastrophe in history.
In the current growing tensions about global resources we will have 2 alternatives:
  1. Either the world learns for the first time in history to live together in peace or
  2. it will be as always: One half tries to kill the other half.
A sad perspective indeed. It does not get better by the ignorant arrogance of Western leaders who still think they rule the world. Sorry, nobody has ever ruled the world with empty pockets. Western leaders wear no more clothes. Read history before you are doomed to repeat it.

China Gold Futures Trade Limit-Up On Debut

Friday, January 11, 2008

China takes over the gold market. Since Thursday Shanghai's new gold futures exchange adds fresh fuel for the gold bull, pushing prices to new all-time highs since trading began. The most active contract touched its daily 10% limit and forward prices indicate a strong expectation that gold will jump the $1,000 barrier soon. Do not underestimate this new - bullish - market force. The Chinese have a much more conservative attitude to gold, honoring its role as the only asset that's not somebody else's obligation.
From The Hongkong Standard:
China's first gold futures contract surged by its 10 percent daily limit on trading debut - on a day that the spot price of gold hit a record US$891 (HK$6,949.80) an ounce on the back of a weak dollar and inflation concerns.
Contracts for June delivery hit US$988 an ounce in Shanghai.
Spot gold hit US$891 in London afternoon trade yesterday, surpassing the previous high of US$881.10 reached on Tuesday.
Gold for June delivery, the most active contract in Shanghai, rose as much as 21 yuan (HK$22.53) to 230.99 yuan a gram, or nearly US$100, leading to the belief the metal may reach US$1,000 an ounce.
Trading was heavy yesterday with more than 120,000 contracts exchanged and 21,810 still outstanding.
As the third-largest consumer of gold, China has made clear its intention to gain stronger bargaining power through setting up a futures market.
However, prices are expected to be pushed up further with the addition of a new trading center and more demand within the country, a spokesperson at the Chinese Gold and Silver Exchange Society said.
The start of futures trading in Shanghai is one of the biggest events in the gold market over past few years, which also saw the launch of gold exchange- traded funds.
"Futures will allow leveraged investment in gold from Chinese investors and speculators," wrote John Reade, a London-based metals analyst at UBS. It is expected that Chinese gold producers will use the market to hedge low-cost exposure to the metal while investors will leverage their holdings to bullion.
China is the world's second-largest gold supplier, producing 191.456 tonnes during the first nine months of last year. Its manufacturing sector consumes about 9.2 percent of the world's total, according to Xinhua News Agency. The global gold price gained 31 percent in 2007 against the backdrop of a declining dollar and concern the United States would cut interest rates to avert a slowdown.

I don't think we will see a strong pullback in gold in the next 3 months.

Gold Hits A Record -You Would Not Know From the WSJ

Wednesday, January 09, 2008

Investors in the oldest currency of the world have every reason to celebrate. Gold traded up to a new record of $881 per ounce, erasing the previous alltime high at $875 almost exactly 28 years later. No matter what fiat currency is measured against it, gold has never been stronger all around the world.
You would not know from Wall Street Journal online. Their only reference to the strong show of gold prices counts a meager 13 words, hidden in the 15th paragraph of Peter A. Mckay's report on today's markets:
Gold futures hit a new record high, up $20.8 to $882.80 an ounce. (You have to pay for this information.)
The reason for gold's stellar performance can be found in the rest of this report. Stocks, especially financials, are plunging and no day passes without a couple of former top bankers leaving their keycards with their PA.
Why is it that MSM keep to ignore the strongest bullrun of this millennium, when gold has outpaced most other investments except energy and silver? Is it the same reason that oppresses information on Ron Paul's political agenda in the Murdoch empire? A media conglomerate afraid of honest politics and honest money?
It may sound tough to those not holding gold but it will not be possible to escape the coming wave of asset deflation with paper assets. The exit gold offers will become costlier with every day. It cannot be created at free will and is the only asset that does not depend upon the reliable fulfillment of an obligation by a counterparty.

Eurozone PPI Rises Faster Than CPI

And here is another quiz that may earn you a free subscription to this blog. 
I am looking for an explanation how European industry manages to report higher profits when their input prices rise faster than consumer (sales) prices. According to Eurostat Eurozone producer prices gained further speed last November with a 0.8% (October 0.7%) MOM rise and annual PPI roars ahead at 4.1% while CPI came in a full percentage point lower at 3.1% last week.
European companies are expected to report better profits for 2007.
This does not work out for me.

It's Getting Really Bad: Bush Now Part of the Plunge Protection Team

Saturday, January 05, 2008

The president's Working Group on Financial Markets has for the first time in history met with George W. Bush himself. White House spokesman Tony Fratto said at Friday's press briefing that is is the first time that Bush met with the members of the group as a unit. The group is nicknamed "The Plunge Protection Team" (PPT) and held most of its meetings out of the media limelight.
Read the most important part here or go here for the complete transcript.

Q And his meeting with the financial working group is as a unit?
Q Even though this is the first time in this presidency that he's met with them as a group, we shouldn't draw any significance or inference on --
MR. FRATTO: No, I wouldn't. Obviously, there are important market-related issues out there that he would like to have a discussion about, and received a lot of news coverage lately. You've seen some of these stories move from the front page of the business section to the front page of the A section in newspapers, and people are paying more attention to it. But these issues have been out there for a long time, and he's been briefed and received lots of information on these issues. But there was no one sort of triggering event that led to this meeting. He just wanted to have a chance to have a conversation with all of them together.

And here is an earlier part of the Q&A:
Q Tony, off camera you talked about the economy. I'm wondering, on camera, if you can talk a little bit about where things stand from the White House perspective on the economy based on the latest data, and if today's meeting is a sign of perhaps more concern from the President, that he's never met with this group before?
MR. FRATTO: Well, he's met with -- you're referring to the President's Working Group on Financial Markets that the President will be meeting with in about 25 minutes. Of course he's met with all of these members somewhat regularly. Hank Paulson he meets on a very regular basis with and speaks to Hank directly on broad economic issues and also on -- Hank reporting on the work of the President's Working Group on Financial Markets, the work they're doing and on the condition of our financial markets.

Although this may sound as Bush is just having a cup of tea with his fellas from the Fed, the Treasury, the SEC and the CFTC I highly doubt that any of the five has time for courtesy calls these days. Nasdaq is currently falling apart, down 3.7% and the Euro jumped one cent to 1.48 in a matter of minutes earlier this day. Gold softened a fiver to $860 after yesterdays all time high.
For an extensive background on the secretive PPT click here.

Eurozone Inflation Stays at a Record 3.1% - ECB Has No Room For a Cut

Who wants to be in the shoes of the governing council of the European Central Bank (ECB) next Thursday? 
Despite all statistical tricks Eurozone inflation remained unchanged at a record 3.1% last December, overshooting the ECB's target of 2% by a horrific 55%. As blogged yesterday money supply M3 growth remained at a record 12.3% for the second consecutive month too. This is almost 3 times more than the target rate of 4.5% M3 growth. (You win a free subscription to The Prudent Investor if you can find this reference value on the ECB's website in less than 5 minutes.)
If the ECB would really stick to its mandate of fighting inflation (which central banks with their unbacked fiat currencies create in the first place) it would come to no other conclusion than to raise its reference rate, currently standing at 4%. 
Also take note that the deposit facility of the ECB pays a negative real interest rate at currently 3%. But I don't think European banks would have much to deposit anyway as it appears that Europe will drown in a sea of debt in 2008. Investors here have been good buyers of property related US debt, relying on wrong AAA ratings and enjoying a moderate yield pickup compared to sovereign debt. It will cost them their corporate life. 
But don't worry too much. It will be as in all financial cycles: In good times private shareholders cash in dividends and when it goes bankrupt the bucket gets passed on to the taxpayer via nationalization. Banks have always been a specially protected industry.
While the ECB's inner workings are hidden from the public - no minutes of the meetings are published - we can nevertheless expect raised voices next Thursday. Cyprus, a Euro member for only the fourth day, has already expressed its opinion that the thinking should rather circle around a rate hike.
The ECB faces a dilemma, though. If it raises rates it risks further unwelcome speculative inflows and would also accelerate the drop of Federal Reserve Notes (FRN.)
European politicians hope for a rate cut in order to stimulate the declining economies in the Eurozone, with only competitive Germany shining as a better example.
But hey, the structural problems we face in Europe cannot be cured by creating more worthless debt=credit=fiat money.
From a global perspective Europe's relevance will decline rapidly. After all, Europe has
  1. almost no commodity or energy resources
  2. the highest labour costs in the world, and
  3. a rapidly aging population.
So think again before you consider the Euro as a safe haven. It will not be.

ECB Aims For Top Spot Among Inflationist Central Banks

Thursday, January 03, 2008

So you think the Federal Reserve Dollar is dead? Give it a second look! While the investing world focuses on the weakness of Federal Reserve Notes (FRN) I can take no relief from a Euro that looks good only from the front.
Don't believe reports that the ECB is draining liquidity these days. A comparison of the weekly financial statement of the European Central Bank (ECB) from December 29, 2006, and from December 28, 2007, results in a hefty shock. The balance sheet grew by more than 30% from 1.15 to 1.5 trillion Euros within 12 months. Despite all the claims about a responsible monetary policy the ECB is further away from it than ever before.
Today's release of a continuation of record breaking money printing excesses again proves that Jean-Claude Trichet (triche=cheat) only knows how to create more debt without corresponding values. Money supply M3 growth remained at its record level of 12.3% in November, with the 3-month average rising to 11.9% (11.7%.) The ECB has never reached its M3 target growth rate of 4.5% since the inception of the Euro.
But back to the ECB's balance sheet:
  • Lending to banks rose by 41.4% from 450 to 637 billion Euros YOY.
  • The black box of the ECB, so called "Other assets" zoomed more than 50% form 218 to 327 billion Euros.
These rapidly expanding figures corespond with a time of weakening growth in the Eurozone and exploding current account deficits in Portugal, Spain and Greece where real estate speculation may induce a slump similar to the situation in the USA.  Consumers are over-extended on both sides of the Atlantic.  
If the ECB were really in the game of fighting inflation it has no other option than to raise rates at its next governor's meeting on January 11. Short reminder: Eurozone inflation has zoomed past the 3% mark. The ECB's inflation target is 2%.
Don't worry too much about a rate hike (which all creditors are waiting for in order to get interest rates above true inflation) as the ECB has to avoid further inflows into the Euro that could create a speculative bubble.
As for European banks; don't lend them your money. When banks advertise 6% interest for the balances on checking accounts on business TV I am left with the question why they don't approach the ECB where they are supposed to get it for 4% or 5% at the discount window?

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