Monday, September 3, 2012

Marc Faber: Every Central Bank Will Print Money

from Simon Lynda:

Is Spain Running Out Of Cash?

Some hours ago Spain finally bit the bullet, and after months of waffling had no choice but to hand over €4.5 billion (the first of many such cash rescues) in the form of a bridge loan to insolvent Bankia, which last week reported staggering losses (translation: huge deposit outflows which have made the fudging of its balance sheet impossible). As a reminder, in June Spain formally announced it would request up to €100 billion in bailout cash for its insolvent banking system, which subsequently was determined would come from the bank rescue fund, the Frob, which in turn would be funded with ESM debt which subordinates regular Spanish bonds, promises to the contrary by all politicians (whose job is to lie when it becomes serious) notwithstanding. And while Rajoy has promised that the whole €100 billion will not be used, the truth is that considering the soaring level of nonperforming loans in Spain - the biggest drain of both bank capital and liquidity - it is guaranteed that the final funding need for Spain's banks will be far greater. As a further reminder, Deutsche Bank calculated that when (not if) the recap amount hits €120 billion, Spanish total debt/GDP would soar to 97% in 2014 from an official number of 68.5% in 2011 (luckily the endspiel will come far sooner than that). But all of that is well-known, and what we wanted to focus on instead was the fact that bank bailout notwithstanding, Spain will have no choice but to demand a full blown rescue within a few short month for one simple reason: its cash will run out.

EU's Poorest Member Country Smacks Down Euro As Bulgaria Refuses To Join Eurozone

If one needs a shining example of why the days of Europe's artificial currency are numbered, look no further than the EU's poorest country which moments ago said "Ne Mersi" to the Eurozone and the European currency. From the WSJ: "Bulgaria, the European Union's poorest member state and a rare fiscal bright spot for the bloc, has indefinitely frozen long-held plans to adopt the single currency, marking the latest fiscally prudent country to cool its enthusiasm for the embattled currency. Speaking in interviews in Sofia, Prime Minister Boyko Borisov and Finance Minister Simeon Djankov said that the decision to shelve plans to join the currency area, a longtime strategic aim of successive governments in the former communist state, came in response to deteriorating economic conditions and rising uncertainty over the prospects of the bloc, alongside a decisive shift of public opinion in Bulgaria, which is entering its third year of an austerity program. "The momentum has shifted in our thinking and among the public…Right now, I don't see any benefits of entering the euro zone, only costs," Mr. Djankov said. "The public rightly wants to know who would we have to bailout when we join? It's too risky for us and it's also not certain what the rules are and what are they likely to be in one year or two."

The Big Swiss Faustian Bargain

We recently discussed Guggenheim's 'awe-full' charts of the level of central bank intervention from which they noted that the Fed could lose 200 billion US$, when inflation comes back again. Interest rates would increase by 100 basis points and the US central bank would be bankrupt according to US-GAAP. We explain in this post the differences between money printing as for the Swiss National Bank (SNB), the ECB and  the Fed. We show the risks the central banks run when they increase money supply, when they “print”. As opposed to the ECB, the SNB only buys high-quality assets, mostly German and French government bonds. However, for the SNB the assets are in foreign currencies, for the big part they are denominated in euros. Further Fed quantitative easing drives the demand for gold and the correlated Swiss francs upwards.  Sooner or later this will pump more American money into the Swiss economy and will raise Swiss inflation. For the SNB these two are the Mephistos: Bernanke and Draghi, the ones who promise easy life based on printed money.

Gold May Not Be Money But It Is An... Airline? Bloomberg Freudian Slip Du Jour 

Ignore the news about what is surely the next airline to join every other legacy, and not so legacy, carrier into Chapter 11 and focus on the headline, where both the story author and its editor seem to have been preoccupied with Freudian ruminations if not on whether gold is money, then certainly how much paper money one can generate by selling gold...

On Volatility, Correlation, And Sentiment Shifts

Since the peak in the S&P 500 around two weeks ago, equities and their sectors have traded in a considerably more disperse manner than one would expect given all the talk of central-bank intervention, liquidity-gasms, and monetization. This is borne out empirically as the average pairwise realized correlation within the 100 stocks of the S&P 100 and the 125 credits of the CDX investment grade credit index has dropped dramatically. Extreme peaks or troughs in realized correlation have tended to coincide with notable (and tradable) trend changes in the market - though we note, as shown below, that the moves are not always so clearly bullish or bearish for stocks (though VIX shows a more consistent reaction). Critically, the outperformance of Healthcare and underperformance of Industrials and Materials in the last two weeks suggests more than a little apprehension at the Central Banks being able to 'bridge' yet another global slow-down with money-printing.

Student Debt Malinvestment

Until 1976, all student loans could be discharged in bankruptcy. Until 1998, student loans could be discharged after a waiting period of five years.  In 1998, Congress made federal student loans nondischargeable in bankruptcy, and, in 2005, it similarly extended nodischargeability to private student loans.  Since 2000, student loan debt has exploded, and private student loans have grown even faster. This presents a bigger problem than simply sending people to college who end up unemployed or underemployed. It means that capital is being misallocated. If debt for education cannot simply be discharged through bankruptcy, as other debt can be, private lenders will tend toward offering much more of the nondischargeable debt, and less of dischargeable debt. This means that there is less capital available for other uses — like starting or expanding a business. If the government’s regulatory framework leans toward sending more people to college, more people will go (the number of Americans under the age of 25 with at least a bachelor’s degree has grown 38 percent since 2000) — but the money and resources that they are loaned to do so is money and resources made unavailable for other purposes.

Moody's Downgrades European Union To Outlook Negative

Not entirely surprising following the outlook changes for Germany, France, UK, and Holland but still an intriguing move right before Draghi's big unveiling: Moodys maintains AAA rating but shifts to outlook negative.
Moody's believes that it is reasonable to assume that the EU's creditworthiness should move in line with the creditworthiness of its strongest key member states considering  the significant linkages between member states and the EU, and the likelihood that the large Aaa-rated member states would likely not  prioritize their commitment to backstop the EU debt obligations over servicing their own debt obligations.
Interestingly they also note that a further cut could occur due to: changes to the EU's  fiscal framework that led to less conservative budget management...

Romney Catches Up With Obama Following GOP Convention: Reuters Poll Has Candidates Tied

Since the best theater is that whose 100% assured outcome is not absolutely obvious, Reuters/Ipsos is happy to advise the 47% or so of American eligible voters who will actually participate in the upcoming presidential election that following the GOP convention, Hurricane Issac and the Invisible Obama, Romney has managed to cut Obama's 4 point lead and is now neck and neck with the incumbent. From Reuters: "President Barack Obama enters an important campaign week tied with Republican presidential nominee Mitt Romney, a Reuters/Ipsos poll found on Sunday, leaving the incumbent an opportunity to edge ahead of his opponent at the Democratic National Convention. With the Democrats set to nominate Obama for a second term this week in Charlotte, North Carolina, the race to the presidential election on November 6 is all knotted up at 45 percent for Obama and 45 percent for Romney among likely voters, the survey found." Of course, this being America, all that is needed is for the Democrats to invite Jason Biggs to deliver the Eastwood counter, and Obama's victory will be assured.

Key Upcoming Events

Europe took August off. Today, it is America's turn, as the country celebrates Labor day, although judging by recent trends in the new 'Part-time" normal, a phenomenon we have been writing about for years, and which even the NYT has finally latched on to, it would appear the holiday should really be Labor Half-Day. After today the time for doing nothing is over, and with less than one month left in the quarter, and trading volumes running 30% below normal which would guarantee bank earnings in Q3 are absolutely abysmal, the financial system is in dire need of volume, i.e. volatility. Luckily, things are finally heating up as the newsflow (sorry but rumors, insinuations, innuendo, and empty promises will no longer cut it) out of various central banks soars, coupled with key elections first in the Netherlands and then of course, in the US, not to mention the whole debt-ceiling/ fiscal cliff 'thing' to follow before 2012 is over. So for those who still care about events and news, here is the most comprehensive summary of the key catalysts over the next week and month, which are merely an appetizer for even more volatile newsflow in October and into the end of the year.

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Labor Day 2012: The Future Of Work

Both Mitt Romney and Barack Obama will give us happy talk about maintaining entitlement benefits (e.g., Medicare and Medicaid) that cannot possibly be sustained. They will talk about energy self-sufficiency. They will talk about creating jobs. They will tell us that we can somehow ‘grow’ our way out of our economic distress. But neither candidate will admit that technology now destroys more jobs than it creates, because to do so would be to commit political suicide. The fact is that none of the happy talk will ever come true. Instead, the Federal Government, with the tacit approval of both major political parties, continues to run trillion-dollar-plus deficits year after year in a futile attempt to spend our way out of our economic problems and to sustain an economic model that cannot be sustained. Those who believe that bringing manufacturing back to the US will also bring back jobs are trying to fight a war that has already been fought and lost. Why? The answer is technology. It’s actually a fairly simple process now to bring production of many items back to the US, simply because of automation and robotics. A factory filled with robots can operate 24 hours a day, 7 days a week, 52 weeks a year, so long as the raw material inputs keep flowing into the factory. Robots don’t take breaks, don’t make mistakes, don’t call in sick, don’t take vacations, don’t require expensive health insurance, and don’t receive paychecks. A fully automated robotic manufacturing facility might require only 100 workers, while a traditional assembly line facility might utilize 3,000 workers. That’s a huge difference in the number of jobs. The simple fact is that most of the lost manufacturing jobs are never coming back.

As Bonds Are Proven Right Once Again, Is 400 The Next Stop For The S&P?

Once again it seems Japan has a lot to teach the Europeans and Americans of the unstoppable reality that bond markets again and again are "correct in the 'end'". As risky- and 'non'-risky-assets become more scarce (thanks to a central bank bid to monetize or collateralize any and all of it), so equity (and risk) markets become more and more distorted - temporarily suspending normal market relationships - until something triggers the reversion to reality. We discussed regime changes in detail regarding gold and bonds over the past 40 years in the past, but the US and European 'survival' tactics appear to be accelerated (and larger) versions of Japan's balance-sheet-recession-fighting game-plan. Their analog, therefore, provides defensible insight into the bond market's anticipation and equity market's inevitable confirmation that it's not different this time. The question we ask is this: "when TOPIX was at 1800, and JGBs implied it 'should' be 1000 (in 1999 and 2007) - how many people said it was 'different' then?"

Draghi's "Promise" Sends Hope Off The Charts

Between the thinness of European bond markets during the summer doldrums and the hair-trigger momo-monkeys, it would appear that all the hopes and prayers of the Draghi "promise" have been more than priced into the Spanish bond curve already. Of course, short-dated yields could drop further on ECB buying; but where exactly 'should' that risk premia be? Of course, longer-dated yields could compress but does anyone really see a solution here, as opposed to short-term support to get through some debt maturities and avoid a catastrophic contagion? The critical point being - for all the anticipation of Draghi's bond-buying plan and its implicit conditionality, the Spanish yield curve has priced it all in and more - as the 2s10s curve is now at all-time (pre- and post- Euro-era) record steeps. We have seen this pattern before - into and during LTRO - that did not end well; and the crowd is getting larger and doors smaller in this one (and don't forget Corzine won't be your fall-guy this time)...

European Safe Havens Bid As Big Three Questions Remain

Despite a green showing in European equity indices this morning (aside from Spain that is) - as they shrug off the dismal China/Aussie data overnight in the incessant belief that bad is good and worse is better - there is a bid in a number of the major AAA safe-haven assets in Europe. Swiss 2Y rates are dropping notably this morning, German and Danish 2Y rates are stable to dropping, and Dutch and Finnish rates remain extremely low. It seems that between Merkel's comments this morning and the following big three unanswered questions - it's not all risk-on in Europe, and expectations for a squeeze in EURUSD - with net shorts at 2012 lows and USD longs basically neutral - seem exaggerated for now. Summing up on the euro area debt crisis, SocGen notes the issues remain the same; the periphery faces an uphill battle to meet targets that few private forecasters (including ourselves) expect can be reached, the EFSF/ESM is still too small with Spain and Italy combined facing around €800bn of funding needs over the coming three years and while the ECB can be helpful, it alone is not enough.

Jim Sinclair’s Commentary

Joe’s work has been good. My job is to find solid resources for you. Gold is going to and through $3500. The number that must be figured out is what full valuation will be.


The long-term chart of Gold shows the current period on the right to compare with the late 70’s on the left. We can see the log channel for Gold in the late 70’s in light blue on the left where Gold soared into the first circle to double the log channel. On the right side of the chart we see the current log channel for Gold in light blue with a parallel line above the channel to represent a doubling of the channel, today. The light blue circle, above, would be the equivalent move today to the sharp move that doubled the channel in the late 70’s. The current 3 fan-line formation is “in the red square.” We see fractal pure parabolic 5th wave moves in the late 70’s and today, currently Gold is now ready to go parabolic on the log chart.
The current fundamentals for Gold appear warrant such a move since Gold is driven by the devaluation of the US Dollar; or in Jim Sinclair’s words, Gold is the inverse of Dollar Value (not the Dollar Index.) The Fed has already printed over $1.3 Trillion Dollars since December, but the markets have not devalued the Dollar, yet, since the Fed said “no more QE.” The Fed owns the psychology of the markets since the markets pay attention to what the Fed says, not what it does. Additionally, there are huge needs for QE Dollar printing going forward because the Federal Government needs all of its unfunded liabilities on its balance sheet before Gold goes into free-rise. These unfunded items include Social Security, Federal Pensions, Unemployment, failed loans of Fannie and Freddie, and more. QE Dollar printing does little for the economy so the Federal Government’s cash flow continues to shrink increasing the need for more QE Dollar printing. The bottom line is that there is no way to deal with the huge debt except to devalue the debt by devaluing the US Dollar. Let’s step back a bit to take a look at how Gold got to where it is.

I started doing “price pattern analysis” on the Gold chart back in 2001, which suggested the current Gold Bull would be a pure 5th wave parabolic move like the one into 1980 because:
1) The Dollar printing necessary to overcome the massive deflationary backdrop of K-Winter would need to constantly accelerate to stave off a deflation. Thus, a parabolic Dollar inflation/ Devaluation would create parabolic Gold.
2) The correction in Gold from 1975 into late 1976 was a “declining wedge”- most likely a 4th wave correction much like 1980 to 2000, also a modified wedge- a 3 fan-line formation. This increased the probability that the 1975 correction correlated to the 1980 to 2000 correction. Thus, a current Gold pure parabolic 5th wave of a higher Elliott Wave Degree- created by a pure parabolic rise in Dollar Inflation/ Devaluation seemed logical.
3) Price advances and corrections in the current Gold Bull at that time aligned nicely with 1976, forward, relative to the resistance areas on the chart off of the 1975 decline.
4) Thus, I produced charts like the two, below, tracking Gold today versus the 70’s. The following two charts were created in 2007 comparing current Gold to the late 70’s and noting “the coming Deflation Scare” waterfall decline into the 4th quarter of 2008. This was all based on the late 70’s side of the chart including the expected 2008 Gold re-test down to the $680 to “old top support.” On other charts from that 2007 period, we coined the term “Deflation Scare” that is so often used, today.
The relevance of these two charts is:
The price advances in the early Gold Bull could be “projected” using regular technical analysis and chart support/resistance through “pattern analysis.”
Once Gold reached new historical highs, there was no more chart support and resistance reference points to track or to project price moves.
This necessitated other TA tools to project future price. “Price pattern analysis” then became “fractal analysis”, based on a study of “time and price relationships.”
In late 2010/ early 2011, fractal analysis off the late 70’s projected Gold to $1860 in the middle third of 2011- adjusted to $1920 via normal TA in April, the target hit in early Sept.
The late 70’s fractal model next projected Gold to $3500/ $3600 into the middle third of 2012. The fundamentals and Gold’s rise into March looked good with the Fed printing more Dollars in swaps to Europe. The Dollar Supply came in on time, but the markets “chose what the Fed said- not what it did” as it printed double the Dollars that drove Gold from $1300 to $1900 in 2011. The markets failed to devalue the USD so Gold moved down to continue a lateral correction. This leaves a huge Dollar Devaluation to come that will drive Gold up and out of the log channel so value investors and Central Banks accumulated Gold at the channel bottom.
As Gold’s rise failed in March, we turned to a Model of a 3 fan-line formation as an alternative corrective formation. The model played out almost perfectly. The cycle time delay fits Elliott Wave Theory since corrections can extend based on current psychology. Nothing has changed except Gold’s potential has increased with the rising channel. Currently, a Dollar Devaluation is starting to be factored in – one that could drive Gold up to Alf Fields price projections if the channel doubles.
Gold’s rise up into late February, anticipating more Dollar Printing QE by the Fed, was nicely aligned to the 70’s cycle until the Fed confused the market by saying “No more QE.” The markets listened to the Fed’s words, ignoring its actions. Instead of the markets devaluing the Dollar per the huge Dollar Supply and running Gold sharply higher, Gold sold off sharply. The Gold chart started to lag the 70’s fractal in time while price diverged lower. For subscribers, we turned to a 3 fan-line Model to compare to Gold. Gold’s price and technical indicators played out much like the Model so we tracked their progress and time projections for a break-out. The Model projected a late August break-out for Gold. Gold’s 3 fan-line formation was stronger than the Model since Gold’s price was supported by the bottom of the upward angled log channel where value investors and Central Banks bought heavily. The Gold 3 fan-line chart is posted next, with a redacted Model 3 fan-line formation following it.
The above shows that at times markets can be pretty inefficient, especially as the Fed heavily manages market psychology. Market price is developed, not by the fundamentals, but by the market’s perception of the fundamentals. This recent perception failure of the markets, now creates a huge positive opportunity for investors in Gold, Silver, and the PM Stocks.
As shown in the first overview chart of the late 70’s, Gold made a huge move to double the log channel around this point in the cycle. Such a move into 2013 might look huge on the chart, but it played out in the late 70’s and seems to fit current fundamentals. The blue lines above the log channel chart, below, show what a doubling of Gold’s log channel into 2013 would look like. That range appears to fit Alf Field’s EW projection, should Gold rise out of the log channel.
Goldrunner maintains a subscription website at GOLDRUNNERFRACTALANALYSIS.COM. Goldrunner is also starting a new and free public Fractal Letter via e-mail. If interested in “The Fractal Letter”, you can send an e-mail to GOLDRUNNERBLOG44@AOL.COM. The Fractal Letter will discuss various aspects of the Fractal Markets, but will at times be targeted to newer investors to Gold, Silver, and the Precious Metals Stocks.


Jim’s Mailbox

The real story behind those Ron Paul delegates from Maine (Video of march from floor) CIGA Eric
The public’s growing realization that the sovereign debt crisis cannot be solved by either political party after the 2012 election increases the probability that a formable third party will emerge for the 2016 election.

Headline:  The real story behind those Ron Paul delegates from Maine (Video of march from floor)
TAMPA, September 2, 2012 – By the time of Marco Rubio’s speech at the Republican National Convention (RNC), rhetoric overload and sore feet had overcome any desire I had to listen. I sat down at a table in the corridor of the Tampa Bay Times Forum. A few minutes later, several young people sat in the other chairs.
One of them was wearing a tee shirt that read, “Texas Remembers the Alamo, and the Maine, and the Oklahoma, and the Louisiana, and the Oregon, and the Massachusetts.”
Those are the other five states in which Ron Paul had majorities one week before the RNC. Together with the three states he actually won (Iowa, Minnesota and Nevada) Ron Paul would have carried eight states had many of those delegates not been unseated at the last minute.

Coordinated Central Bank Actions For One More Kick Of The Can

My Dear Friends,

Monty Guild, a friend of mine for more than forty years, is the most honest and capable man, in my opinion, in money management.
I respect Monty’s feelings on many matters, certainly the macro picture. Monty, like I, believes it is possible that coordinated central bank actions in the USA, EU, Japan and China are being discussed. The economic problems are so severe, so international, so global, so entwined, so insoluble and still caused primarily by the greed of 1990 to present finance in the form of OTC derivatives that only coordinated global action can kick this can one more time.
Gold is truly going to and through $3500. The gold business is the best business to be in.

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