Dorothea Lange Farm family fleeing OK drought for CA, car broken down, abandoned Aug 1936
Perhaps Angela Merkel thought we didn’t yet know how full of it she is. Perhaps that’s why she said yesterday with regards to Europe’s refugee crisis that “Everything must move quickly,” only to call an EU meeting a full two weeks later. That announcement show one thing: Merkel doesn’t see this as a crisis. If she did, she would have called for such a meeting a long time ago, and not some point far into the future.
With the death toll approaching 20,000, not counting those who died entirely anonymously, we can now try to calculate and predict how many more will perish in those two weeks before that meeting will be held, as well as afterwards, because it will bring no solution. Millions of euros will be promised which will take time to be doled out, and further meetings will be announced.
But the essence remains that Europe doesn’t want a real solution to the crisis. That’s why Merkel refuses to acknowledge it as one. The only solution Europe wants is for the refugees to miraculously stop arriving on its shores. If more people have to drown to make that happen, Berlin and Brussels and London and Paris are fine with that.
If those who make it must be humiliated by not making basic needs available, by letting them walk dozens if not hundreds of miles in searing heat, then the so-called leaders are fine with that too.
Europe needs leadership but it has none. Zero. At the exact moment that it is time for all alleged leaders to stop talking about money, and start talking about human lives. It’s matter of priorities, and everything Europe has done so far points to nobody in charge having theirs straight. Continue reading
It’s Never Easy…
Readers may recall that in one of our recent updates on the gold sector – which we believe is at an interesting juncture that may at the very least provide a good trading opportunity – we presented the chart of the 1992-1993 low in order to illustrate how extremely tricky the sector can be in the vicinity of turning points.
Specifically, the sector made every imaginable move in late 1992 to convince market participants that a durable rally was nigh impossible. Early recovery attempts were abruptly aborted, giving way to merciless and sharp declines. By the time the real recovery started, very few market participants still found it credible. We remember the high degree of skepticism that prevailed in the early stages of this rally quite well actually.
The sector is once again making things difficult, but from a trading perspective there is the advantage that the most recent lows can be used as a stop. The recent mini-crash in the stock market has complicated things – at first, it was seen as a positive factor for gold and gold stocks, but after gold could not hold on to its initial advance, gold stocks began to correlate with the broader market again in the short term and quickly surrendered their gains. Continue reading
In her testimony before Congress in July, Janet Yellen laid out the same talking points that have been propagated onto Americans time and time again these past eight years. The economy is moving forward and the Fed is doing and has done everything it can, and that there are “green shoots” still though no full and mature growth.
Low oil prices and ongoing employment gains should continue to bolster consumer spending, financial conditions generally remain supportive of growth, and the highly accommodative monetary policies abroad should work to strengthen global growth. In addition, some of the headwinds restraining economic growth, including the effects of dollar appreciation on net exports and the effect of lower oil prices on capital spending, should diminish over time. [emphasis added]
Given that this was July, her bland, boilerplate words were not at all cognizant of what was building; but they should have been since it is her job to notice “dollar” pressures, particularly where that might turn out into a devastating global run. It is those two words quoted above that are most frustrating and most damning in so many respects. It is difficult to suggest, especially now, how the rest of the world has been “highly accommodative” toward growth and how that will be the luck of salvation for this darker economic turn in 2015.
You can take issue with everything spoken within that quoted paragraph but in August 2015, turning now September, it is globally “highly accommodative” that will burn the most. At first, as is typical now, China has sunk (in its economy) erasing all hope of rebound. After three months of seemingly accelerating industrial production, which convinced every economist around the world as extrapolated “proof” the bottom was in, it fell back in July to just 6% – barely above the worst levels earlier in the year. Retail sales also turned down, though slightly, while Fixed Asset Investment (both total and private) continue on with new cycle lows. Continue reading
As the Fed nears its proposed first rate hike in nine years the stock market is becoming frantic. The Dow Jones Industrial Average is down around 10% on the year, as markets digest the troubling reality that our central bank may be raising interest rates into an emerging worldwide deflationary collapse.
The Fed normally raises rates when inflation is becoming intractable and robust growth is sending long-term rates spiking. However, this proposed rate hike cycle is occurring within the context of anemic growth and deflationary forces that are causing long-term U.S. Treasury rates to fall.
The yield curve spread, specifically the difference between Fed Funds Rate and the 10-year Note, is usually close to 4 percentage points at the start of major tightening cycles. This was the case at the start of the 1994 and 2004 campaigns to curb inflation. However, this go around the spread is less than 2 percentage points and the benchmark 10-Year Note yield is falling. This means the yield curve will invert very quickly and cut off banks’ profitability and incentives to lend; which will greatly exacerbate the deflationary impulses reverberating across the globe.
These deflationary forces will collide head on with a stock market that is already extremely overvalued as measured by Tobin’s Q ratio (the total value of corporate equities/replacement cost) and the total market cap to GDP.
Tobin’s Q Ratio:
Total Market Cap/GDP:
A Classical Rebound from Oversold Extremes
Beginning on Wednesday last week, the stock market started a rebound from extreme oversold conditions that was just as volatile as the sell-off that preceded it. Such a rebound was to be expected, but unfortunately it cannot really tell us what is likely to happen next. In the meantime, the S&P 500 Index has reached a first level of resistance, so we should soon know more.
A secondary lateral resistance level is a little further above, and is likely to be reached if the first one gives way:
SPX daily, with two lateral resistance levels indicated – click to enlarge.
Sentiment and Positioning Data
All sorts of extreme short term readings were reached around the lows, and last week was inter alia marked by numerous “selling climaxes” (i.e., stocks reaching new lows for the move, and then ending the week above the levels they started it at). Nevertheless, several short term indicators eased off from their extremes and the short term optimism indicator briefly went all the way to its opposite boundary (“extreme optimism”), but then dipped back again on Friday:
Short term Optix for stocks – bouncing around as wildly as the market itself – click to enlarge.
Many options-related indicators have basically ended the week in the middle of their recent ranges as well, but it is worth noting a few details in this context. For instance, Mish reports that put premiums in Shanghai havereached record highs against call premiums in recent days. He rightly points out that this is a contrary indicator,except if a crash wave is underway. The Shanghai Composite hasn’t made much progress yet from its lows:
The Shanghai Composite has produced a small inside day on Monday – so far, its bounce remains comparatively small – click to enlarge. Continue reading
I think it is worth re-examining at this point, with a lull in the “dollar” at the moment, the effects of dark leverage upon actual bank mechanics and thus actual “dollar” supply. The idea of liquidity in the wholesale system is multi-dimensional and often confusing as it relates to what is typically believed. For example, the week the world woke up to Lehman’s demise saw repo fails rise (both “to receive” and “to deliver”) to more than $5 trillion. That meant that UST collateral was, in rehypothecation, more “valuable” than cash as repo counterparties were actively hoarding collateral and giving up cash. At that point, which is currency?
The deeper balance sheet mechanics in terms of VaR and its relation to bank “capital” is a very real pathology. Bank “desks” operating with some kind of risk metric governing its activities do so not as some public stunt to try to define suitability and overall potential losses, but as a direct link to the capital structure of the bank.
That had an effect not just on bank operations but regulatory interest. Indeed, the Basel Rules that were adopted at that time were a melding of these kinds of mathematical concepts with the “bucket” approach first introduced by the UNCR. Under the Basel II framework, a bank’s capital “charge” could be very heavily influenced by VaR provided it met a minimum set of standards: data sets needed to be updated every three months; VaR was calculated daily; 99th percentile, one-tailed confidence interval applied; 1-year minimum for historical observations; and, 10-day movement in prices were used as the form of “instant price shock.”
Because of the link between VaR and other forms of risk math and the capital structure it made the math as if it were the central focus of “dollar” liquidity. The disruption of the panic was traced in that direction first, through traded balance sheet capacity to offer hedging against irregularity insofar as past projections of volatility and expected volatility were artificially depressed by former recency bias.
That was a lesson learned the hard way beginning in August 2007 for the entire eurodollar system. What changed as a result of the adoption of VaR as more than a regulatory fashion was the very nature of banking and money. By tying quantification of risk to capital, the regulatory structure made that quantification money-like. For example, if a bank bought some specific security, it held a specific capital charge which would affect the ability of the bank to further expand and carry out operations, particularly if that security were “risky”; defined here under Markowitz reasoning as with great variance. However, if the same security was then paired with an offsetting security, some kind of hedge, that reduced the calculated fluctuation potential given the VaR horizon and specifics, that also reduced the capital charge associated with the trade and thus effectively expanded the leverage of the balance sheet. Hedging could, in theory, math and certainly practice, act the money printing press.
That is the whole point of dark leverage, to supply mathematical constructions to banks and financial firms that seem to offer a perfectly quantified risk structure. In that respect, again, offered balance sheet capacity acts as much like liquidity as bank reserves and cash (and I would argue under certain especially strained conditions far more so). Continue reading
Submitted by Mark O’Byrne – GoldCore
Today’s Gold Prices: USD 1141.90, EUR 1012.23 and GBP 744.10 per ounce.
Yesterday’s Gold Prices: Bank Holiday in UK
Friday’s Gold Prices: USD 1,125.50, EUR 998.23 and GBP 730.99 per ounce.
Gold was marginally higher yesterday and closed at $1135.50 per ounce, up $1.10. Silver was 0.3% higher and closed at $14.64 per ounce.
Gold rose 4% in August as stocks globally saw sharp falls on growing concerns about the Chinese and the global economy. Silver was 1% lower for the month of August and also acted as a hedge from falling stock markets globally.
Asset Performance in August – Finviz.com
Internationally, stocks had their worst month in the last three years. In one of the most volatile trading periods since the financial crisis, August saw $5.7 trillion erased from the value of stocks worldwide and no major stock market was left unscathed.
The S&P 500 was down a significant 6.3% and the Dow Jones Industrial Average ended the month 6.6% lower, while the Nasdaq was down 6.9%. At one stage losses were much higher but a sharp bounce toward the end of the month meant the declines were that as bad as they looked like they would be.
The weak performance of equity markets in August was mirrored across the world’s major financial centres, with the FTSE down 6.7%. The pan-European FTSEurofirst 300 index recorded a monthly loss of 9% – its worst monthly performance since August 2011. Continue reading