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Pater Tenebrarum

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  • Gold And Silver Are On Their Last Legs ... For A While [View article]
    Jewelry demand has no influence on the gold price at all. Do you know when jewelry demand was at its record high? In 1999, with gold at $250. The LBMA alone trades more gold in just three days than the jewelry sector demands in an entire year. The main driver of gold's price is investment demand, and within the investment demand portion of gold demand it is reservation demand that is most important.
    What exactly determines the gold price can be read here in detail:
    Aug 16 03:10 PM | 2 Likes Like |Link to Comment
  • Market At Risk Again As Finland, Netherlands Undermine EU Progress [View article]
    It is easy to say that 'Germany, the Netherlands and Finland undermine EU progress' - essentially this is the mainstream opinion. The reality is however that those who want to be bailed out without submitting to deep structural reform are undermining progress.
    Does anyone really believe the Northern Bloc or the ECB possess some kind of magic wand that only needs to be waved and everything will be A-OK again? No, the position of the 'hardliners' is correct: the pressure must remain on, otherwise there will be no reform. Without reform, the euro is doomed.
    Jul 5 03:38 PM | 2 Likes Like |Link to Comment
  • No Bank Bondholder Left Behind In Spain [View article]
    This assessment is correct. In fact, ELA is now a kind of open-ended credit line, financed through the TARGET-2 payments system, with the collateral for ELA (and therefore also the growing TARGET-2 liabilities) in Greece et al. consisting of bank-issued IOU's 'guaranteed' by the government, which is insolvent itself.
    So in the final analysis, there are ever more exchanges of 'nothing' for 'something' going on. A two thirds majority decision by the ECB's governing council is required to turn down ELA requests. Since this would be a highly political decision, no-one expects the ECB to ever say 'no'. 
    Jun 20 01:56 PM | 2 Likes Like |Link to Comment
  • Spain - The Big Squeeze [View article]
    I think precious metals are a good choice. In fact, I have suggested a bar-bell strategy quite some time ago (for investors, not necessarily traders) of being long gold/gold related assets and treasury bonds concurrently. I see nothing that would dissuade me from the idea that it continues to be a workable strategy, although right now I would be inclined to rebalance a bit (shift more into gold and reduce the treasury position - for the obvious reason that the former is quite oversold while the latter look quite overbought).
    If one has access to trading credit default swaps, there may still be opportunities in euro-land and CEE nations, but even in this space I would not chase the market but rather wait for the next pullback (which will likely begin as soon as another half-baked kick-the-can-down-the-... decision is made by the eurocracy).
    Gold may require some patience, as it is still in a consolidation formation that may take some time to work itself out, but I think that both on fundamental and technical grounds a bullish medium to long term stance remains appropriate.
    May 30 04:14 PM | 2 Likes Like |Link to Comment
  • 'Miserere Nobis': More Pain In Spain [View article]
    Your ideas about fractional reserve banking are both theoretically AND historically questionable, to say the least. I can not explain all of this in detail in a reply on SA, but I think it is highly important that everyone check out a little bit of both economic theory and history.
    I can recommend Rothbard's 'The Mystery of Banking', and even more highly de Soto's 'Money, Bank Credit, and Economic Cycles'.
    I promise you that you won't regret reading these books. Both books can be downloaded for free at in pdf form if you want to take a look without risking any money on a purchase (best google for the titles and append 'pdf' to your search).
    I have written a series of articles on fractional reserve banking, monetary and capital theory at my blog
    The articles on fractional reserve banking owe much to de Soto's work and critique of institutions.
    And once again: you err if you think the euro-group is actually 'implementing Austrian policy'. This is most definitely NOT the case. If you think so, then you have misunderstood something.
    If you want to check out my articles for starters, here are a few links (none of these ever appeared at SA, as the site is more focused on financial markets and current events. The banking history of medieval Florence and the development of banking law since antiquity is not considered of importance; but it is important in providing some historical context to monetary theory).
    The Problem of Fractional Reserve Banking, Parts 1-3:
    The Difference between Money and Credit:
    Quantitative Easing Explained:
    The Production Structure:

    Now, the point of my articles on these topics is certainly not to reinvent the wheel. They merely bring the ideas of a number of great economists into a short form and attempt to explain them in a manner that is accessible to laymen and misguided mainstream economists alike :)
    Something you might also want to check out are the diverging views of Austrians and neo-classical/monetarist and Keynesian economists on how to interpret the historical data of America's Great Depression. There is no better example to illustrate that empirical data can never be the basis of a correct economic theory or serve as a 'test' for one theory or another. Theory must always come first in economics - only then can one correctly interpret the facts of history.
    Apr 17 08:18 PM | 2 Likes Like |Link to Comment
  • Argentina On The Brink: What Is The Real Investment Risk? [View article]
    Even so, we can probably agree that the Argentine government deserves to be condemned from an ethical point of view as well. Needless to say, I believe you are quire correct in warning investors of this rapacious populist semi-dictatorship. A country that has no regard at all for economic freedom is only democratic on paper. The danger that one's assets will end up stolen under some pretext is extremely high.
    Apr 5 09:24 AM | 2 Likes Like |Link to Comment
  • Already Weak Agnico-Eagle Mines Just Got Sucker Punched By India [View article]
    You have noticed though that gold is up 50 dollars since that 'sucker punch' was delivered?
    FYI, what India buys in one year, is the equivalent of what the LBMA alone trades in about one and a half days. All 165,000 tons of the gold mined in humanity's history still exists. All these data people get hung up on, whether mines produce a 100 tons more or less, or central banks buy a few hundred tons more or less are completely irrelevant to the gold market. They're not even a drop in the ocean.
    Gold can not be analyzed in the same manner as an industrial commodity, to which such news may conceivably matter. The biggest part of the demand for gold is the rising reservation demand of existing gold holders. None of them will alter their decisions just because India slaps an import tax on gold. If the tax e.g. were to lower gold imports into India by 200 tons, it would be a big 'so what?' to the gold market. It's just not relevant. You should really inform yourself as to how the gold market actually works before drawing conclusions. Gold is not viewed as a commodity by the markets - it is viewed as a currency. Non-monetary demand like India's 900 tons/year jewelry demand is a complete side issue that has only marginal influence on gold's price. Global jewelry demand was a thousand tons per annum higher than it is today in 1999 - at the end of a 20 year bear market. Jewelry demand is both price elastic and irrelevant. It rises during gold bear markets and falls during gold bull markets. Lastly, what has any of this to do with AEM? AEM has operational issues, but they are more than discounted in the stock's price by now, which is down over 60% from its highs already. The stock actually looks distinctly undervalued here (I have no position in it, but happen to have taken a good look at it recently).
    Apr 2 02:13 PM | 2 Likes Like |Link to Comment
  • Greece: Wishful Thinking Juxtaposed By Resignation [View article]
    Hi Pier Giorgio - I'm not sure what to say to that, because the quote you ascribe to me is nowhere in this article.
    However, I can give you a brief summary of my personal view: the problem confronted in the euro area is that the fractionally reserved banks have been expanding money and credit - aided and abetted by the ECB - by 135% in the first decade of the euro's existence. The expansion in money and credit moreover occurred at different rates in different countries, so that some of them (such as Spain and Ireland) had large housing booms, while in others the boom led to excessive government spending, as governments that used to pay high double digit interest rates on their debt suddenly could refinance themselves at German rates, while still others languished (recall here that Germany was known as the 'sick man of Europe' while the periphery boomed). Both the credit extended to businesses and the surge in government spending created massive distortions in the economies concerned. The losses that are now becoming manifest are for the most part not just happening 'now' - they actually occurred during the boom, and are unmasked now. Capital tends to be consumed during booms, even while illusory accounting profits create a Potemkin village of false prosperity.
    As to the question 'why does Germany not simply raise its wage rates', German employers might object to this idea, as German labor costs are already among the highest in the world. This is only affordable due to very high labor productivity in Germany. Furthermore, what you propose presupposes that Germany's exporters do not care about their international competitiveness.
    However, only about 40% of German exports are to the euro area, and there France and the Netherlands are the by far largest trading partners, followed by Italy. The other 60% of Germany's exports go to the rest of the world.
    The solution to the crisis is not more and more intervention. The solution is to liberalize the sclerotic economies of the euro area and allow malinvested capital to be liquidated as quickly as possible.
    Mar 22 08:42 PM | 2 Likes Like |Link to Comment
  • Spain - The Next Domino Is Getting Ready To Tumble [View article]
    This is correct, but consider this: of the euro area's total money supply in the form of deposit money, only 4.6% are actually covered with standard money. In practice this means that if more than 4.6% of all bank depositors were to attempt to withdraw their money, the banks could no longer pay them. My point is, it was inter alia this deposit money the failed speculations were used for. People may be outraged at welfare for the banks, but imagine what would have happened if the banks had been allowed to fail. The deposit guarantees given by governments would have either been reneged upon or would have bankrupted the governments concerned. It's a good bet many depositors and savers would have lost their money and that the money supply would have deflated by a fairly large percentage in a short time period. So from the point of view of the political class and the monetary authority, using the central bank to pump trillions of euros into the banking system was the most 'painless' solution. In this manner the losses have been quietly socialized and a deflation of the money supply in the broad sense has been averted.
    I'm not saying I'm in favor of this method - but the politicians found themselves between a rock and a hard place. They might have considered using the central bank to bail out depositors exclusively and directly, but that would have required them to admit that the entire system is a house of cards. Moreover, such an eventuality is not covered by the central bank's statutes. It would have required a change in the laws governing the conduct of the ECB, whereas pumping in trillions against collateral - even if some of that collateral is of somewhat dubious quality - is something it can do at the drop of a hat.
    Mar 22 06:31 PM | 2 Likes Like |Link to Comment
  • Spain - The Next Domino Is Getting Ready To Tumble [View article]
    You are not wrong about 'welfare for the banks' , but Deja Vu's argument is just as correct. Today most of the EU is an incredibly overregulated and overtaxed sclerotic moloch.
    Just to give you a few real world examples as to what this means: a recent study has found that it is far easier and faster to start a new business in the nominally socialist dictatorship of Lukashenko in Belarus than in the nominally capitalist EU member nation Austria. A Greek company that tried to open an online shop got all permits it needed in the US within 24 hours. In Greece, it fought a running battle with numerous bureaucracies that lasted over 10 months, cost a fortune and included such demands as the provision of chest x-rays and stool samples of the shop's owners to one of the government departments involved.
    If you want to change a light bulb in the EU, you can easily become a criminal if doing so requires use of a ladder. In that case you are supposed to call in a professional. You are not allowed to change it yourself. Oh sorry, light bulbs are no longer allowed in the EU! These days you must use 'environmentally friendly' mercury-laced energy saving light devices, the light of which reminds one of the lighting of morgues in horror movies.
    There is a cheese made in France that is made in only three mountain villages (name of the cheese escapes me now) . They have been making it for several hundred, perhaps even a thousand years. For 97% of the time no regulations were required for them to make this cheese. Today there is a pamphlet issued by Brussels that regulates this cheese-making process in every detail. The pamphlet has more than 1,000 pages.
    I could go on, but you probably get the drift.
    Mar 21 06:22 PM | 2 Likes Like |Link to Comment
  • Spain - The Next Domino Is Getting Ready To Tumble [View article]
    Read again - I call it 'too big to bail', not too big to fail. As to Greece, ISDA has in fact issued a default ruling in the meantime (or as it is put 'declared a credit event' that has led to a payout of the CDS contracts), which I expected it to do. Once the Greek government invoked collective action clauses - and it was always clear that this would happen - there was no way around declaring a 'credit event' anymore. The EU tried for a long time to avoid that, thereby playing a very dangerous game indeed. Luckily the validity of CDS on sovereign debt has in the end been affirmed in the case of Greece. Funny enough, this is also lucky for the euro area, as a failure to affirm the validity of CDS on sovereign debt would likely have resulted in a big sell-off in peripheral bond markets.
    Mar 19 08:39 PM | 2 Likes Like |Link to Comment
  • Spain - The Next Domino Is Getting Ready To Tumble [View article]
    I concur with you that the WSJ graph is not really the best depiction of what is happening. Unfortunately I could not find a better chart in the short time I had to write this report. However, occasionally Spain's home appraisal group TINSA releases its own charts and I will certainly post the updated version of that chart when I get my hands on it. I know mainly from TINSA's work and some follow-up research done by Nomura that the official data gravely understate the true extent of Spain's house price declines. Entire ghost towns dot the landscape in Spain these days.
    Mar 19 08:31 PM | 2 Likes Like |Link to Comment
  • Spain - The Next Domino Is Getting Ready To Tumble [View article]
    You err - speculators have NOT been creamed - on the contrary, the trade in Greek CDS was one of the best trades ever. They produced a return of 59,000% in 5 years, as Greek CDS were at 44 basis points in mid 2007 and went out at 26,135 basis points on the penultimate day of trading before the ISDA declared a credit event in Greece. From the point in time when Trichet said that those betting on a Greek default were 'fools eager to lose their money' (July 2007), the return was still 1,000% in less than 9 months.
    Mar 19 08:27 PM | 2 Likes Like |Link to Comment
  • Spain - The Next Domino Is Getting Ready To Tumble [View article]
    I would note to this point that I'm not necessarily near term bearish on the euro either. In relative terms, the Fed has been more successful in the money printing arena than the ECB (the amount of money that actually 'leaked out' into the economy in the form of deposits in the wake of 'QE1+2' was much larger in the US than in the euro area).
    However, longer term there is a real risk of the euro area falling apart, as the mixture of bailouts and austerity measures is becoming incredibly difficult to sustain politically - both in the countries that are the paymasters and those that are forced to implement austerity.
    Mar 19 08:22 PM | 2 Likes Like |Link to Comment
  • Has Real Estate Really Hit Bottom? [View article]
    There is no doubt some foreign buying, but allow me to convey a small anecdote in this context: I recently discussed the possibility of buying entire tracts of houses in Detroit with a friend over here in Europe. His reasoning went: if you get entire houses for anywhere between $1 and a few thousand dollars, depending on their state, why not buy and then just wait? Your worst case scenario is a small loss if Detroit never recovers again, but on the other hand, your upside could be enormous if the unexpected happens.
    However, in the end he refrained. The reason: property taxes. You can not just sit and wait, you have to pay property taxes every year. So this investment has a negative carry unless you find someone to rent the house to. But renting out houses is no longer a 'passive' investment - suddenly you have to worry about things like renters damaging the house, or not paying rent on time, etc.
    So for foreign investors there are some significant hurdles to overcome.
    Feb 24 03:37 PM | 2 Likes Like |Link to Comment