How Draghi Opened The Door To Hyperinflation And Denied The Fed An Exit Strategy

We will mince no words: Mr. Draghi has opened the door to hyperinflation. There will probably not be hyperinflation because Germany would leave the Euro zone first, but the door is open and we will explain why. To avoid this outcome, assuming that in this context the Eurozone will continue to show fiscal deficits, we will also show that it is critical that the Fed does not raise interest rates. This can only be extremely bullish of precious metals and commodities in the long run. In the short-run, we will have to face the usual manipulations in the precious metals markets and everyone will seek to front run the European Central Bank, playing the sovereign yield curve and being long banks’ stocks. If in the short-run, the ECB is the lender of last resort, in the long run, it may become the borrower of first resort!

Another Ex-Fed Governor Admits "Only So Much Fed Can Do"

It seems the ability to admit defeat a lack of omnipotence comes with retirement from the Fed. The volume of truthiness from ex-Fed governors is growing and Mark Olson just provided a very succinct summary of why he believes not only is the most recent jobs number not a surprise to the Fed, but the market has already priced in what the Fed could do. Olson sees the odds of QE3 as 50-50 at best, believes changes in the employment picture are rounding errors and not driving Fed decisions on a tick by tick basis, and most critically he notes that "the Fed doesn't want to get into a position of is having to react because of the market anticipation." No matter how much political pressure, the need to keep that QE powder dry for when the stuff really hits the fan seems more prescient and Olson provides color on the limits of Central Bankers as he notes the effect of Fed actions as "the only possible impact it would have would be psychological," and that "they've provided all the stimulus you can do with monetary policy in the absence of anything happening with a better fiscal policy."

Speculation in China On Possible Assassination Attempt on Number Two Man Xi Jinping

Inequality Matters: Why Nations Fail

David Rosenberg's New Normal: "The Economy Does Not Drive The Markets Any More"

Bill Gross may be credited with inventing the term 'the New Normal', although his recommendation to purchase gold above all other asset classes, something which only fringe blogs such as this one have been saying is the best trade (in terms of return, Sharpe Ratio, and the ability to sleep soundly) for the past three and a half years, he is sure to be increasingly ostracized by the establishment, and told to take all his newfangled idioms with him in his exile to less than serious people land. Which takes us to David Rosenberg, who today revisits his own definition of the New Normal. And it, too, is just as applicable as that of the Pimco boss: "The new normal is that the economy doesn't drive markets any more." Short and sweet, although it also is up for debate whether the economy ever drove the markets in the first place. But that would open up a whole new conspiratorial can of worms, and is a discussion best saved for after Ben Bernanke decides to save the "housing market" by buying more hundreds of billions in MBS and lowering mortgage yields further, even though mortgage rates already are at record lows (something that mortgage applications apparently couldn't care less about as we showed last week), while "avoiding" to do everything in his power to boost the S&P, which recently was at 5 year highs, and certainly "avoiding" to listen to Chuck Schumer telling him to do his CTRL+P job, and "get to work" guaranteeing Schumer's donors have another whopper of a bonus season.

The Historic Demise Of The Ever-Shrinking Dollar: An Infographic

The almighty Dollar is looking less mighty these days. By almost every measure, the purchasing power of the US Dollar is in precipitous decline. The following infographic, whose contents should be well-known to our readers, visualizes the sad state of affairs that the average American seems to have ignored for far too long. And since the whole world is now engaged in the 4th year of all out currency debasement one can safely channel Lester Burnham and say it's "all downhill from here."

Who Will Be Fed Chairman At The End Of 2014?

It seems most have strong views on who should not be the Chairman of the Fed but based on a recent survey at a Morgan Stanley conference, it seems Ron Paul still has an outside chance. What of Justin Bieber? Jim Grant? Maria Bartiromo? Chuck Norris?

Baltic Dry Index collapses/Italian GDP plummets again/Mini raid on gold/silver holds/

Harvey Organ at Harvey Organ's - The Daily Gold and Silver Report - 6 hours ago

Good evening Ladies and Gentlemen: Gold closed down today by $9.00 to $1728.70 as the bankers decided that a mini raid was necessary as they had a look at the burgeoning OI figures.  Silver on the other hand only lost 7 cents to $33.57 as the bankers are loathe to supply the necessary short paper. Dave from Denver correctly states the shortfall of JPM with regard silver: "I just did a quick

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Public Employees: They Are Different From You and Me...

Dave in Denver at The Golden Truth - 9 hours ago

(Note: for those unaware, my title is a play on F. Scott Fitzgerald's quote: "Let me tell you about the very rich. They are different from you and me.") *We live in a self-entitled society and no sector is more self-entitled than those who work for the Government, supported by taxpayers with guaranteed salaries and pensions. Their sense of self-entitlement is worse than that of the lumbering herd of overweight middle class houseswives who drive around in their gas-guzzling, over-sized SUVs, running up credit card debt and chatting on their cellphone the second they get into their c... more » 

 

Commodities: The Bull Market Is A Long Way From Ending

Admin at Jim Rogers Blog - 14 hours ago

The bull market in commodities will end some day – but some day is a long way away. - *in CNBC* Related: United States Oil Fund LP ETF (USO), SPDR Gold Trust ETF (GLD), iShares Silver Trust ETF (SLV) *Jim Rogers is an author, financial commentator and successful international investor. He has been frequently featured in Time, The New York Times, Barron’s, Forbes, Fortune, The Wall Street Journal, The Financial Times and is a regular guest on Bloomberg and CNBC.*

2050 Years Of Global GDP History

The chart below shows 2050 years of relative global GDP, during which there was a surprisingly flat distribution of the major economic powers: China, India, and the "West", at least until the mid-1800s, when the "Western" Golden Age began primarily courtesy of the industrial revolution, followed by the arrival of the Fed and virtually endless leverage (i.e., borrowing from the future until such time as no more debt capacity remains at either the public or private sectors), only to end in the late 1900s when the marginal balance of power shifted back to Asia, which became the next nexus of debt accumulation (see our earlier post on The Great Recoupling for some additional perspectives). And while the chart, from Deutsche Bank and PWC, attempts to predict the next 40 years of relative GDP distribution by eventually regressing back to the the long-term trendline, we feel that this is quite an optimistic assumption for a world in which virtually every "developed" country is insolvent, begs for China to ease whenever western inflation sends gas prices soaring making reelection of the incumbent impossible, and is reliant on the indefinite continuation of the USD's reserve status to preserve the last traces of western superiority (not to mention cheap funding of $-trillion deficits as far as the eye can see).

US August Budget Deficit Soars To $192 Billion, $1.17 Trillion In Fiscal 2012

While the official number from the FMS is not out yet, according to an advance look by the CBO, the August deficit soared from a modest $70 billion to a whopping $192 billion, the highest August deficit in history, and coming at a time when traditionally the US Treasury does not generate substantial deficits. It also means that "that" $59 billion budget surplus in April, coming after 42 straight months of deficits, and which surprised so many, was just as we suspected, nothing but a play on the temporal mismatch between treasury receipts and outlays. Most importantly, with one month left in the fiscal year, a month which, too, will likely come well above last year's $63 billion, the US has now spent $1.165 trillion more than it has received via various taxes. Finally so much for the year over year improvement: at $1.23 trillion deficit in the LTM period, this is only 3.2% less than the August 2011 LTM deficit which was $1.27 trillion, despite nearly 2 million more workers employed (at least according to the BLS) and generating tax revenue. Expect the US to end Fiscal 2012 with a total deficit of well over $1.2 trillion, which in turn means that the average burn rate of $100 billion in new debt issuance each month, will continue into the indefinite future.

Do You Believe In P/E Miracles?

Since The Dreme (Draghi Scheme) began shortly after the EU Summit, the P/E multiple on the S&P 500 has risen by a faith-defining 2x. This is the largest three-month rise in this indicator-of-indifference-to-reality since the initial burst rally off the March 2009 lows. Meanwhile, the actual earnings consensus is being marked down further, heading for an earnings recession as we pointed out last week. It seems investors are too afraid not to believe in P/E miracles or perhaps it is just faith that central banks have it all under control and their 'promises' are as good-as-gold.

Investors, Nostalgic For Logical Markets, Boycott New Centrally-Planned Normal

One of the deepest mysteries related to the ongoing rally in U.S. equities is the persistent lack of retail investor involvement. QAs we have vociferously noted, U.S. equity mutual fund flows remain solidly negative and interest in single stock trading among individual investors is similarly moribund - while corporate bond volumes remain flat and Treasury volumes higher.  As Nick Colas, of ConvergEx group, notes, one missing link to explain this dichotomy must be the fundamental lack of financial literacy among U.S. retail investors, yet this relationship is seldom mentioned as a reason for this group’s ongoing apathy in the face of 4-year highs for domestic stocks. You might argue that “It was always thus…” and that is a fair point.   American investors haven’t grown dumber on financial matters in the last decade; they never had the requisite knowledge to begin with.  But it does appear that the events of the last few years have caused some kind of “Tipping point” with regard to investors’ ability to process the world around them.

The Contrarian Indicator Of The Decade?

SocGen’s Sebastian Galy:

The market decided rose tinted glasses were not enough, put on its dark shades and hit the nightlife.

And the uber-bullishness is based on what? Hopium. Hope that the Fed will unleash QE3, or nominal GDP level targeting and buy, buy, buy — because what the market really needs right now is more bond flippers, right? Hope that Europeans have finally gotten their act together in respect to buying up periphery debt to create a ceiling on borrowing costs. Hope that this time is different in China, and that throwing a huge splash of stimulus cash at infrastructure will soften the landing.

Next: The Great Recoupling

The chart below from UBS' George Magnus captures perhaps better than anything, not only the reason why the global economy grew with the speed it did over the past 40 years, not only why "globalization" (a/k/a finding news places to issue debt in exchange for secured assets and unsecured cash flows all the while under the umbrella of globalist organizations: see Confessions of an Economic Hit Man) was the primary urgency for the status quo, not only why the developed world managed to delay the inevitable day of reckoning for as long as it did, but most importantly, why the global day of debt-saturated reckoning is coming.

India's Second Largest Iron-Ore Miner Halts All Activity

While the plight of precious metal mining in the 3rd largest gold producer in the world has been well-documented here, as on ongoing strike in various South African mines has crippled precious metal supply, so far the mining shut down had not spread outside the continent of Africa (excluding the occasional Bolivian and Venezuelan mine nationalization). Today, however, even more mining capacity was taken offline, as India's Goa, the country's second largest iron ore producer, announced it was temporarily ceasing all mining activity "after an expert panel formed by the central government found "serious illegalities and irregularities" in mining operations." While no gold production has been impacted yet, this move, which likely has political overtones, will likely shift to other extractors soon, as more production capacity is taken offline, for either labor or kickback reasons. And as reported previously, demand by the now largest importer of gold in the world China, refuses to decline with supply, which has clear implications for the equilibrium price. It remains to be seen if Goa going dark will push iron-ore prices higher. It is quite likely that the collapse in Chinese iron-ore demand offline is far greater than anything Goa will remove from the market and as such will hardly push iron prices higher.

Market Realizes It Has Already Priced In QE

Casting a broad eye across all asset classes today, the theme of QE-Off was quite apparent. USD strength, Gold/Silver leaking lower, Stocks gathering downward momentum (as high-beta hotels underperform - AAPL 2nd biggest drop in over 3 months), Treasuries underperforming, and VIX rising rapidly with notable term structure flattening (to its lowest of the year). Volume was on the light side - which suggests this was more longs covering than shorts being laid out (as positioning into recent strength was light and looks to have capitulated Thurs/Fri. Dow Transports outperformed - which appeared more a value rotation as NASDAQ fell back to practically unch (along with the Dow) from the 8/21 swing highs. Equities definitely led the weakness today as cross-asset-class correlation broke down, and futures kept falling after-hours with S&P 500 e-mini futures closing down 12pts - right at the up-trendline of the recent move.

Consumer Credit Posts First Drop Since August 2011 Following Nonsensical Data Revision

On the surface, today's G.19 update, aka the monthly Consumer Credit Data, was a big disappointment due to a major miss in consumer credit, which in July dropped by $3.3 billion from $2.708 trillion to $2.705 trillion. The drop was, as always, on a slide in revolving credit, which dropped for a second consecutive month, this time by just under $5 billion, while non-revolving credit, aka student loans and GM subprime debt, rose by just $1.5 billion: the lowest monthly increase in this series since August 2011, when it declined by $9 billion. Expectations were for an increase of over $9 billion. There was a far bigger problem, however. The problem is the spike on the chart below which represents the November to December 2010 transition (source: Fed). What happened there is that 3 months after the Fed revised the consumer credit data last, it decided to re-revise it again. Frankly, at this point nothing the Fed releases has any credibility, as the central planners are literally making up data every three months as it suits them.

It's Different This Time: PMIs And Global Stocks

The fundamental backdrop, in the shape of economic lead indicators and earnings momentum, has been deteriorating: manufacturing PMIs for the US, China, Japan, Korea, the Euro zone, and the UK are all now sub-50, and consensus earnings growth estimates for 2012 have been halved in recent months. What has this meant for Global Equities? Well, as UBS notes, in the last three months, very little. The MSCI AC World index is up more than 12% from the 4 June low. That markets have rallied while fundamentals have deteriorated in this manner is unusual. Historically, equity market rebounds have tended to coincide with a trough in PMIs and earnings momentum – that is, when PMIs have stopped going down and the pace of earnings downgrades slows (waiting for PMIs to recover to 50 or for earnings momentum to turn positive is usually too late). Markets now appear to be taking their cues from central bankers: potential policy actions are becoming a sort of ‘lead indicator of the lead indicators’, if you will. Given the recent rally, in addition to underlying macro weakness, policy action - and effective action at that – has become increasingly important for investors. Without it this recent rally could end up looking more like a false start than a head start.

Will The Political Fed Launch New QE With Less Than Two Months To The Election? A Historical Perspective

In two days the entire world will learn if the Fed will do away with all pretense it is not a political agency, and despite a presidential election looking in less than two months, proceed with a third historic round of easing, which according to "experts" may range from nothing (yes, some actually see no point at all to further goosing banker bonuses and the AUM of the uber-wealthy which is all QE4 will achieve), to extension of the ZIRP language, to MBS Twist, to combined purchase of USTs and Agencies, either with a deadline, or open-ended. That pretty much rounds it up. No matter what the Fed does though, the reality is that 100% of Bernanke's action, if not much more, has already been priced in, even though as we explained, Bernanke's hands may actually be quite tied due to simple structural limitations in the bond market, in which the Fed is now a 30%+ active player, and approaching 70% in the long end. Perhaps a bigger question is will Bernanke step back from the trees and notice that the forest is less than 2 months from the presidential election, in essence making the Fed's decision a political one in everyone's mind, regardless if more easing was designed to have a political impact. To answer that, we look at what the Fed has done in the past in the period of 0-2 months before US presidential elections. The result, as Credit Suisse reports, is that "More often than not the policy move inside of the two-month window prior to the election has been an extension of the prior regime." All that said, one must keep in mind that all historical precedents should really be thrown out of the window as never before in history has the Fed found itself at the Z/NIRP boundary, with a very limited arsenal of action, and with only prayer left that this time it will be different, and central planning will actually work for once.

California Lt. Governor: This Aggression Against Our Expropriation Of Private Property Will Not Stand, Man

It is not news that California, despite what the money laundering practices aided and abetted by the NAR at the ultra-luxury segment of housing may indicate, is and has been for the past 5 years neck deep in a massive housing glut (with millions of houses held off the books in shadow inventory), which together with a complete economic collapse of this once vibrant economy, which happened to be the world's 7th largest, led various cities to resort to the socialist practice of expropriation, or, as it is known in the US, eminent domain, whereby a citizen's rights in property - in this case their home - are forcefully expropriated with due monetary compensation, naturally set by the expropriator. It is also no secret, that Wall Street, which has the most to lose by handing over property titles on mortgaged houses in exchange for money that is well below the nominal value of the mortgage, is not happy about this draconian quasi-communist measure, and has apparently told California to cease and desist. It is, apparently news that California has had enough of these bourgeois capitalist pawns, and has decided to, appropriately enough, channel El Duderino, and to tell Wall Street that this aggression against forced socialist expropriation, by broke deadbeats, will not stand... man.

Why 'Tax The Rich' Doesn't Solve Anything: It's The Math, Stupid

While watching the political conventions over the past couple of weeks, JPMorgan's Michael Cembalest wonders aloud: What if, something like the CBO’s Alternative Case scenario came to pass; debt markets were no longer willing to fund trillion dollar deficits, so the deficit had to be reduced to 3% of GDP by 2020; taxing the rich was the only thing the country could agree on doing? If this happened, how high would top marginal Federal income tax rates have to go? The answer, after some number-crunching: 71% for the top bracket, and 57% for the second highest bracket. Adding state, local, and payroll taxes, and in 'Blue' states like NY and CA, income taxes will approach 80%. This is not a projection, but an illustration that there are not enough Americans subject to the top brackets to reduce the deficit to 3%. Eventually, the US will more likely have to adopt broader-reaching tax reform (e.g., raising taxes on the middle class), larger spending cuts than those already adopted, and/or Federal Reserve monetization of the public debt.

Poll Finds More Than Half Americans Take Out Loans To Buy iGadgets

Ahead of Wednesday's mega-launch of the all-singing, all-dancing, all-happy-ending-providing (rumor) iPhone 5, the stunning reality is that a recent poll (via CouponCodes4U) found that 81% of consumers admitted they could not keep up with the latest and greatest from Apple - and worse still that 51% used credit to buy one of the must-have iDevices. As The Street notes, the findings of the survey show "the crazy lengths people will go to be the first person to have the latest iPhone of iPad" and the pollster was "shocked and very surprised about how many Americans freely admit that they are willing to spend their way into debt by buying Apple gadgets that they simply cannot afford."

Two Days Ahead Of More QE, JPM Finds That World Is Already "Drowning In Liquidity"

A few days ago, the BOE's Andy Haldane, rightfully, lamented that the apparent "solution" to the exponentially growing level of complexity in the financial system is more complexity. Alas, there was little discussion on the far more relevant central planning concept of fixing debt with even more debt, especially as the US just crossed $16 trillion in public debt last week, right on schedule, and as we pointed out over the weekend, there has been precisely zero global deleveraging during the so-called austerity phase. But perhaps most troubling is that with 2 days to go to what JPM says 77% of investors expect with be a NEW QE round (mostly MBS) between $200 and $500 billion in QE, the world is, also in the words of JP Morgan, drowning in liquidity. In other words, according to the central planners, not only is debt the fix to record debt, but liquidity is about to be unleashed on a world that is, you guessed it, already drowning in liquidity. The bad news: everything being tried now will fail, as it did before, because nothing has changed, except for the scale, meaning the blow up will be all that more spectacular. The good news: at least the Keynesians (or is it simply Socialists now?) out there will not be able to say we should have just added one more [    ]illion in debt/liquidity and all would have worked, just as our textbooks predicted. Because by the time it's over, that too will have happened.

Europe's Leaking

After Thursday/Friday's capitulative spikes in all things risk-on (from credit spreads to equity indices and from Swiss 2Y rates to European VIX), today saw a more modest give back of some of those gains. Spanish and Italian bond curves saw quite notable deterioration (yields up 5-20bps across the curves - dominated by short-dated weakness) - though of course in the context of the previous week's rally this was modest. Equity indices fell around 0.25% and Europe's VIX rose notably - but again all in the context of the recent rally, these were small moves. EURUSD regained 1.28 into the European close but the ranges were mininal in most risk assets and correlation across asset-classes were low too - just a noisy day with little signal ahead of the week's more cataclysmic events.

Hedging Against Capital Controls: Opening An Account Overseas

Two signs that fear and instability have reached critical mass are capital flight and capital controls. Capital flight is people and enterprises moving their capital (cash and liquid assets) to an overseas "safe haven" to avoid devaluation of the currency or confiscation of their capital/assets. (Devaluation can be seen as one method of confiscation; high taxes are another.) Capital controls are the Central State's way of stemming the flood of cash leaving the country. Why do they want to stop money leaving? If we think of each Central State as a neofeudal fiefdom, we understand the motivation: citizens are in effect serfs who serve the State and its financial nobility. If the serfs move their capital out of the fiefdom, it is no longer available as collateral for the banks and a source of revenue for the State. Once capital has drained away, borrowing and lending shrink, cutting off the revenue source of the banks (financial nobility). Since financial activity also declines as cash is withdrawn from the system, the State's "skim"--transaction fees, sales taxes, VAT taxes, income taxes, wealth taxes, etc.--also declines. Both the State and its financial nobility are at increasing risk of decline and eventual implosion as capital flees the fiefdom. The Central State imposes capital controls as a means of Elite self-preservation.

GM Loses Over $49,000 On Every Chevy Volt

Watching Phil LeBlow providing Ford with a reacharound this morning reminded us of the total farce that is both the forest and the trees of the US auto industry. We have discussed the FUBAR channel-stuffing and the subprime-lending SNAFU but now, as Reuters reports, we see the ugly truth about GM's little baby "the Volt is over-engineered and over-priced". Nearly two years after the introduction of the path-breaking plug-in hybrid, GM is still losing as much as $49,000 on each Volt it builds. Furthermore, there are some Americans paying just $5,050 to drive around for two years in a vehicle that cost as much as $89,000 to produce. Of course, with seemingly unlimited Government backing the hope can continue, funded by the US taxpayer, as GM's Volt development chief admits "It's true, we're not making money yet," but the Volt will "eventually will make money. As the volume comes up and we get into the Gen 2 car, we're going to turn (the losses) around." Estimates on the cost to build a Volt range from $76,000 to $88,000, according to four industry consultants contacted by Reuters with one concluding: "I don't see how General Motors will ever get its money back on that vehicle." 

Previewing The Dutch Elections

Even in the face of worsening odds of re-election (no sitting government has been returned to power in EU elections since the start of the crisis) one would expect national governments to do what is necessary to maintain current stability. The ultimate arbiter of burden sharing capacity, or whether the Euro will continue on the steady incremental path to integration, is whether regular voters vote for it. Hence the importance of elections, like the Dutch election this week. The anti-austerity Socialist Party (SP) has gained significant ground on the incumbent VVD party - focusing the market's attention on the willingness of the Dutch to meet the 3% of GDP deficit targets in 2013. The two 'extreme' parties look set to gain considerably more seats, and either a very broad coalition would be required, including a tail of small parties, or all four mainstream parties will have to participate in the new government: either way, government stability might be questionable. The scenario troubling markets is the potential for a long government formation process coinciding with the euro area’s need to fight the crisis and progress communal policies - though in the last week or two, support for the SP has declined. With the 2013 budget an immediate test, a 'new' Dutch government faces decisions over Greece, Cyprus, EFSF bond buying, and a common-bank supervisory body - none of which have anything like majority support across the coalitions.

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