Here Come The SDR Bonds

Submitted by J.C. Collins  –  philosophyofmetrics

IMFLogo041115_0Over two years ago now I began a series of articles titled SDR’s and the New Bretton Woods.  The ten post series focused on the SDR and its eventual evolution into an internationally traded asset. There was very little information out there at the time on this future transformation of the IMF’s Special Drawing Right currency, and POM broke new ground on many of the facts, trends, and methodologies behind the transition to a multilateral monetary framework.

Each month more and more information and confirmation of the POM thesis emerges which further validates much of what has been presented to readers for over two years.  The latest validation comes from the G20 Communique from last weekend’s summit in Shanghai.

Item 11 under Issues for Further Action states the following:

“We look forward to the IMF’s report to examine and reflect on the possible broader use of the SDR by July.”

This one statement provides the largest validation yet for POM readers that we are in fact on the correct course with this thesis.  What isn’t clear in the statement is whether July is the deadline for the report to be presented, or when the broader use of the SDR should begin.  Considering the time it takes to decide on changes and implement them, it would be my interpretation that it is only the report which is meant to be completed by July.

What started as a recreational analysis on the Federal Reserve, China, and a new monetary framework, has morphed into a full time obsession which has defined a new path in my life.  The evolution of my understanding and comprehension surrounding this transition has increased by hundreds of multiples. Presenting this information to the tens of thousands of readers out there who are interested in such things has been one of the greatest honors of my life. Continue reading

Another Dead Cat Bounce – And They’ve Already Buried The Cat

That didn’t take long. We’ve just had another short-covering rip from the 1870 Bullard Bottom on the S&P 500 and it’s already petered out. Not even another one of the St. Louis Fed President’s bouncing billiard balls could keep the machines slamming the buy key.

And that’s why there is a monumental market storm brewing dead ahead. Yes, James Bullard is a complete joke who gives zig-zagging a whole new meaning. After yesterday’s about face from rate increase hawk to dove, I’d even be inclined to designate him as a “monetary whirling dervish”. His policy pronouncements fit the urban dictionary’s definition perfectly:

(n.) A person whose behavior resembles a rapid, spinning object. These actions are often spastic fidgeting and incessant babbling. The actions of the whirling dervish are irritating and annoying, often exhausting other people in the immediate vicinity.

You can’t disagree with that, but the issue isn’t Bullard; its the entire central bank policy regime that is now racing towards a fiery dead-end. Bullard is just idiomatic—–the least reluctant of what will soon be a desperately flailing gaggle of Fed heads trying to explain that recession has returned, but that they are out of dry powder without a clue on what to do next.

So it won’t be long before we get the big breakout to the downside. The stock market has been churning and cycling in no-man’s land between 1870 and 2130 on the S&P 500 for 700 days now. There have been upwards of 35 rally attempts and all of them have failed, including this most recent machine driven three-day spasm.
^SPX Chart

^SPX data by YCharts

It is a sheer understatement to say that the market’s generals are in full retreat and that the internals are looking ever more precarious. As to the latter, fully 60% of the S&P 500 members are down 20% or more and are thereby already wrestling hard with the bear. Continue reading

The true role of gold

Submitted by Alasdair Macleod –

At a time of growing concern about the global financial system, it is time to remind ourselves why physical gold is so important for the benefit of the nearly three quarters of a million BitGold and GoldMoney customers, as well as those who might be considering what the benefits are of opening a gold deposit account.

This article explains the role of gold as money, and the dangers of leaving money on deposit in the banking system. In the interests of informing and educating a wider audience about the potential benefit of using gold for day-to-day payments, I would be grateful for readers to share this article with their friends and family as widely as possible.

We all know that for thousands of years, gold has been used as money. It qualified for this role because of its rarity and its ornamental utility: in other words, it will always have a value, come what may. This contrasts with unbacked paper money issued by governments, which has no such fundamental value. It is no accident that all collapses in money’s purchasing power have involved either debasing gold and silver coinage, or far more often the over-issuance of government paper currency. To these two versions of fraud on ordinary people, we must add a third, and that is by banks licenced by governments to create credit out of thin air.

How banking works

Let us look at bank credit for a moment, because that is the source of most money in circulation today. If a bank agrees to lend you money so you can pay your creditors or buy new equipment, you pay these obligations by transferring money from your loan into their banks. Meanwhile your bank does not need to have the money to lend to you. It balances its books by borrowing the funds from other banks with surplus funds to lend.

To illustrate the point as simply as possible, imagine there is only one bank. The bank lends you money, and you spend it. And as you spend it, the people and businesses who sell you stuff see their bank balances rise as they are paid. The bank created the loan for you, which was then covered by the deposits created by your spending, as you draw down funds from the loan. This works for multiple banks as well. All they need is a mechanism to ensure deposits are efficiently allocated between them, so that all the banks end up with balanced books. That is the function of the money market.

So by this magic, the money originally lent to you was created out of thin air by your bank, and then covered by deposits taken from the other banks where necessary. Banking is in effect a closed money-creation system. Note that your bank has not had to use its own money to create the loan to you. So a simple banking balance sheet consists of its own money (its capital, or shareholders’ funds), money owed to it by borrowers, such as you in the example here, and owed by it to depositors, such as the people you have paid.

If you borrow money from the bank, they will charge you a rate of interest, which if you are an ordinary person, can be anything perhaps between five and twenty per cent. With interest rates close to zero, the bank can fund this loan to you at about half of one per cent. That is nice business, particularly when it doesn’t have to put up its own money. Obviously the bank faces a risk which it it has to cover out of its own capital if necessary, and that is if you default on the loan. Continue reading

Industrial Production Is Leaving Little Doubt

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

Industrial production fell 0.7% in January 2016 which was slightly better than the (revised) -1.9% estimated for December. It was, however, the third consecutive month showing a decline and, more importantly, the 6-month average turned negative for the first time in the “cycle.” Industrial production, at least as far as the Federal Reserve’s estimated series for it, is actually a lagging indication particularly in the average. In other words, in every other cycle by the time the 6-month average falls below zero the recession is already several months old.

The consistency with which we find that to be the case is very significant. In every recession since World War II, we find contracting IP shortly after each official cycle peak (declared by the NBER). The one exception is the 1990-91 recession where industrial production briefly dropped to slightly negative several months prior to the start of that recession, only to rebound somewhat into its early stages and before again falling further below zero in accordance with this overall long-term pattern.

ABOOK Feb 2016 IP SA YYABOOK Feb 2016 IP SA YY LongerABOOK Feb 2016 IP SA 6m Longer

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ABN AMRO Predict Gold At $1,300 By Year End, Up From $900

Submitted by Mark O’Byrne  –  GoldCore

Gold is holding solidly above $1,200, brushing off news of the freshly released Fed minutes. Iranians cautiously welcome the Saudi-Russian oil production pact, while stating that they support cooperation to achieve higher oil prices, they also have domestic pressure to ramp up export of supply and cash in after years of being locked out of the market. This may possibly weigh down future oil price rises.


Gold in USD -1 Year

Interestingly, one of the biggest gold bears, ABN AMRO group have changed their long-held negative slant on gold and turned bullish — targeting $1,300 for 2016, stating that the global economy continues to weaken with lower oil prices affecting emerging markets, but the U.S. in particular. Analyst Georgette Boel wrote, “Having been long-standing bears we have now turned bullish on precious metal prices,” and “Our new scenario sees a longer period of weaker global growth.”

You can read the full article on Bloomberg here. Continue reading

The Daily Debt Rattle

Submitted by Raúl Ilargi Meijer  –  The Automatic Earth

• Negative Interest Rates Set The Stage For The Next Crisis (Stephen Roach)
• Why Negative Interest Rates Spell Doom For Capitalism (Romano)
• Central Banking Is In Crisis. Can The World Economy Be Far Behind? (Economist)
• Bank of Japan Baffled by Negative Reaction to Negative-Rate Policy (WSJ)
• Nomura Sees Yen Falling More Than 10% on BOJ Negative Rates (BBG)
• Abenomics? How About Kurodanomics? (BBG)
• OECD Calls for Urgent Increase in Government Spending (WSJ)
• China Bears Say the Capital Outflow Is Just Beginning (BBG)
• Red Ink In China (Economist)
• Overproduction Swamps Smaller Chinese Cities, Revealing Depth of Crisis (WSJ)
• You Cannot Print Your Way to Prosperity (Ron Paul)
• The Real Economy Is Talking, but Treasuries Aren’t Listening (BBG)
• Number Of UK Homes Worth More Than £1 Million Set To ‘Triple By 2030’ (G.)
• 400,000 Americans In Jeopardy As Giant Pension Fund Plans 50% Benefit Cuts (ZH)
• The Political War on Cash (WSJ)
• Swiss MPs Want New 5,000-Franc Banknotes To ‘Save Privacy And Freedom’ (L.)
• The Stressed-Out Oil Industry Faces an Existential Crisis (BBG)
• Oil Gives Up Gains as Inventories Build (WSJ)
• Anglo American Cut to Junk for Third Time This Week (BBG)
• Wary On Turkey, EU Prepares For Refugee Crisis In Greece (Reuters)

The US Economy Has Not Recovered And Will Not Recover

Submitted by Dr. Paul Craig Roberts – Institute for Public Economy

The US economy died when middle class jobs were offshored and when the financial system was deregulated.

Jobs offshoring benefitted corporate executives and shareholders, because lower labor and compliance costs resulted in higher profits. These profits flowed through to shareholders in the form of capital gains and to executives in the form of “performance bonuses.” Wall Street benefitted from the bull market generated by higher profits.

However, jobs offshoring also offshored US GDP and consumer purchasing power. Despite promises of a “New Economy” and better jobs, the replacement jobs have been increasingly part-time, lowly-paid jobs in domestic services, such as retail clerks, waitresses and bartenders.

The offshoring of US manufacturing and professional service jobs to Asia stopped the growth of consumer demand in the US, decimated the middle class, and left insufficient employment for college graduates to be able to service their student loans. The ladders of upward mobility that had made the United States an “opportunity society” were taken down in the interest of higher short-term profits.

Without growth in consumer incomes to drive the economy, the Federal Reserve under Alan Greenspan substituted the growth in consumer debt to take the place of the missing growth in consumer income. Under the Greenspan regime, Americans’ stagnant and declining incomes were augmented with the ability to spend on credit. One sourcre of this credit was the rise in housing prices that the Federal Reserves low inerest rate policy made possible. Consumers could refinance their now higher-valued home at lower interest rates and take out the “equity” and spend it.

The debt expansion, tied heavily to housing mortgages, came to a halt when the fraud perpetrated by a deregulated financial system crashed the real estate and stock markets. The bailout of the guilty imposed further costs on the very people that the guilty had victimized. Continue reading

Another Estimate of ‘Dollar’ Destruction

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

December was one of the worst months on record for foreign dealing with the “dollar.” The latest TIC update further confirms why January was under such persistent and heavy liquidation pressure in almost every corner. There was a record monthly amount of “selling UST’s” in foreign channels, a dearth of private “dollar” activity and, perhaps most important of all, bank liabilities for the last quarter of 2015 shrinking again at a troubling rate.

Just starting with the monthly overall total, the funding disorder is plainly evident in comparison to some of the worst financial months.

ABOOK Dec 2015 TIC Overall

The huge “selling” pressure (and it should be pointed out again that “selling” UST’s and dollar-denominated assets in this context might be something other than liquidation; it could very well be an accounting transfer across jurisdictions, such as repo or derivative collateral flows, which leave market prices undisturbed but have enormous funding ramifications) was coming from the “official” sector, meaning foreign central banks and/or governments. As noted above, the one-month decline was by far the largest on record.

ABOOK Feb 2016 TIC OfficialABOOK Feb 2016 TIC Official 6m

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Gold Gets a Paulson Boost

Submitted by Pater Tenebrarum  –  The Acting Man Blog

This is too Funny…

We have nothing against hedge fund manager John Paulson…after all, we don’t know the man. In fact, he is inter alia known for his philanthropy, having gifted $400 million of his not inconsiderable fortune to Harvard’s School of Engineering and Applied Sciences. But ever since hitting the big time by shorting assorted MBS prior to the 2008 crisis, he has frequently served as an excellent contrary indicator.

John-PaulsonJohn Paulson looking at a recent chart of gold …

Photo credit: Bloomberg

First he bought bank stocks in 2010, announcing that he was betting on a rebound in growth that would ignite the sector. Not long thereafter, bank stocks began to decline sharply, as the euro area debt crisis went into overdrive. Paulson finally admitted that his strategy was a failure and sold the bulk of his exposure to banks in the fall of 2011 – literally within days of the sector taking off sharply.

1-BKXBank stocks and John Paulson – click to enlarge.

Gold investors should have realized that this represented a warning sign. Paulson had decided to jinx them in 2010 – 2011 as well. He announced his thesis on investing in gold and gold stocks in 2010 and eventually launched a dedicated fund for the purpose. He even offered a version of it that was denominated in gold, which we thought was actually a great feature. Continue reading

Empathy for the Devil

Submitted by Danielle DiMartino Booth – DB Money Strong

Empathy for the Devil,

Mick Jagger has credited Charles Pierre Baudelaire for inspiring him to write “Sympathy for the Devil”.The French poet wove gorgeous verses around darker subjects that refuted mankind’s inherent kindness; his advocacy of the diabolical was pure allegation. As for the Rolling Stones, the song is a platform from which to present mankind’s atrocities from the devil’s point of view – to allow the devil himself to play devil’s advocate on history’s annals of tragedy. The controversial but undeniably timeless hit bridges from the trial and death of Jesus Christ to the Russian Revolution and World War II. The intense lyrics peak with Jagger demanding to know, “Who killed the Kennedys?”

A recent enlightening listen to this classic among rock classics reminded yours truly of the dangers of confirmation bias, the quest to validate one’s views by rejecting others’. After nearly a decade inside the Federal Reserve, one could only conclude that this contrarian-minded thinker would have been damagingly brainwashed to not bask in the clean light of skepticism.

Nevertheless, the dangers of deriving incomplete conclusions necessitates you play devil’s advocate to yourself from time to time. Caveat lector: this is purely an exercise in introspection. The writer’s full loss of faculties is not the conclusion you should draw at the end of this piece. So, now that we’ve set the stage, knowing said writer’s tongue is firmly in cheek, let’s channel our inner devil’s advocate. Shall we?

Our advocacy may as well start with the stalwart U.S. consumer, who we’ve all learned might take a body blow from time to time, but is never knocked out. The January release of retail sales was all it took to send those who’d temporarily jumped on the bearish bandwagon scurrying for their caves. Forget 2015’s Polar Vortex that made for easy comparables; the 3.4-percent gain over last year was still the best in a year. And December was revised up to boot. Isn’t it plain to see that the $140 billion de factor tax cut at the gas pump (which apparently kicks in with a long lag) and buoyant wages are finding their way into the real economy?

As for the strongest component of retail sales, it’s not only subprime loans that are behind the 6.9-percent growth in car sales over 2015. Super prime auto loan borrowers’ share of the pie is now on par with that of subprime borrowers – each now accounts for a fifth of car loan originations. What’s that, you say? Can’t afford that new set of wheels? Not to worry. Just lease. You’ll be in ample company — some 28 percent of last year’s car sales were made courtesy of leases, an all-time high. For bigger ticket items, anecdotal evidence suggests that while Gulf Stream sales have hit the skids, financing for yachts can still be had for two percent, a song in and of itself. So why not live a little?

And while you’re at it – turn up the heat! Not only are lower heating and gasoline prices paying off in spades for all households, Ford 150 and Ferrari drivers alike. But the other side of the story, that of the damage inflicted by crashing energy prices on all those displaced highly-compensated oil patch workers, is set to finally abate. All we need is for the always-accommodating countries of Iran and Iraq to both agree to play nice in the diplomatic sand box for the greater good of the world economy. Russia has held out an olive branch. Why shouldn’t they as well? Continue reading

Why Keynesian Market Wreckers Are Now Coming For Even Your Ben Franklins

Larry Summers is a pretentious Keynesian fool, but I refer to him as the Great Thinker’s Vicar on Earth for a reason. To wit, every time the latest experiment in Keynesian intervention fails——as 84 months of ZIRP and massive QE clearly have—–he can be counted on to trot out a new angle on why still another interventionist experiment or state sponsored financial fraud is just the ticket.

Right now he is leading the charge for the greatest stroke of foolishness yet conceived. Namely, negative interest rates based on the rubbish theory that the “natural” money market rate of interest is at an extraordinarily low point. Accordingly, the central bank should drive the “policy rate” to sub-zero levels in order to achieve the appropriate level of “accommodation” in an economy that refuses to attain “escape velocity”.

 As can’t be pointed out often enough, however, there is no such economic ether as “accommodation”. It’s just a blanket cover story for what Keynesian central bankers believe they are accomplishing by pegging interest rates below market clearing levels and by bending and mangling the yield curve to cause more investment.

But after 86 months it is evident that all of this putative monetary “accommodation” has failed. Falsifying the cost of money and capital can only work if it causes households and businesses to borrow more than they would otherwise; and to then lay credit based spending for consumption and investment goods on top of what can be funded out of current production and income. Another name for that is leveraging private balance sheets and thereby stealing production and income from the future.

With $62 trillion of public and private debt outstanding the US economy has hit a economic barrier called Peak Debt. For all practical purposes, it can be measured as the macroeconomy’s aggregate leverage ratio at 3.5X national income. That represents fully two turns of extra debt on the economy relative to the stable 1.50X ratio that prevailed during periods of war and peace and boom and bust during the century before 1970. Continue reading

Never A Good Sign When Central Banks Feel the Need

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

You can’t blame the PBOC for trying, as if they were even going to do it, Monday was the day. With the US closed and after the turmoil all over the “dollar” up to last Thursday, the Chinese central bank was left with practically no choice. With Hong Kong shaping up to the mess in the eurodollar, there wasn’t any surprise over the weekend. As I wrote Friday in anticipation (subscription required):

With volume in Hong Kong heavy and losses severe in many places, there isn’t a lot to suggest a durable turnaround in stocks, banking or currencies. The mess of imbalance survives in Hong Kong, meaning that it will likely continue to afflict the mainland only further eroding sentiment all the way around. It will be interesting how the PBOC reacts, as surely they will and must.

And they did, fixing the CNY all the way up to 6.50. It was unusually welcome news to a mainstream view that is more often predicated on “devaluation” as some sort of miracle solution. In other words, even the mainstream is starting to notice the correlation between the CNY’s regular and serious downdrafts and the liquidations that suddenly appear everywhere else in tandem. Even if you have no idea how or why that might be, just blind observation suggests the relationship.

The problem of “how” becomes the issue going forward, and maybe even not too far into the future. While it was somewhat gutsy the size of the move on Monday, today open business across the eurodollar left the CNY fix already pushed lower to 6.518 (middle rate) with a selling rate as low as 6.531 (according China Merchant’s Bank). In short, the one-day window to rush to 6.50 seemingly worked in instilling enough confidence for a short-term rebound (perhaps just aiding the rebound that had started Friday), but already the conditions for its end are apparent across a wide selection of indications – starting with both China and the US internals (subscription required) beyond just the stubborn economic decay.

SABOOK Feb 2016 Dollar CNY

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