Financial Market Report for Friday December 13, 2011
1) … The S&P downgrade of nine European nations terminates the age of liberal finance and commences the age of sovereign default.
Bloomberg reports “France and Austria lost their top credit ratings in a string of downgrades that left Germany with the euro area’s only stable AAA grade as Standard & Poor’s warned that crisis-fighting efforts are still falling short. France and Austria were cut one level to AA+ from AAA and face the risk of further reductions, the rating company said. While Finland, the Netherlands and Luxembourg kept their AAA ratings, they were put on negative watch. Spain and Italy were also among the nine nations downgraded.”
The WSJ reports the reason for the S&P European sovereign downgrade, "In our view, the policy initiatives taken by European policymakers in recent weeks may be insufficient to fully address ongoing systemic stresses in the euro zone," S&P said in a statement released after the close of New York trading.
CNBC with Reuters reports "The consequence (if France is downgraded) is that the EFSF cannot keep its triple-A rating," said Commerzbank chief economist Joerg Kraemer." That may irritate markets in the short term but wouldn't be a big problem in a world where the U.S. and Japan also don't have a triple-A rating anymore. Triple-A is a dying species," he said. John Wraith, Fixed Income Strategist at Bank of America Merrill Lynch told CNBC the confirmation of a mass downgrade would be another serious step in the crisis and would lead to a serious worsening of sentiment. “It clearly deteriorates still further the credit worthiness of a lot of the European banks and just keeps that negative feedback loop between struggling banks and the sovereigns that may have to support them if things go from bad to worse in full force,” Wraith added.
Tyler Durden in article S&P's Mass Downgrade FAQ May Have Just Hobbled The European Sovereign Debt Market writes of the existing high economic priest John Maynard Keynes and his Keynesian economics religion relating, “The Eurozone's foundation was laid out by academic wizards who thought that Keynesianism was a great idea (and continue to determine the fate of the world out of their small corner office in the Marriner Eccles building), the imminent downfall of Europe will only precipitate the final unraveling of the shaman economic religion that has taken the world to the brink of utter financial collapse and, gradually, world war.”
Reuters reports Debt talks break down, Greece warns of disaster. “Talks between Greece and its creditor banks to slash the country's towering debt pile broke down on Friday, with the Greeks warning of catastrophic results if a deal to swap bonds is not reached soon.”
TheStreet reports Morgan Stanley’s net income from investment banking operations dropped 56%.
WSJ reports Bank of America is considering leaving certain regions of the country as its financial problems deepen.
The World Major Currencies, FXA, FXE, FXM, FXC, ICN, FXB, FXS, SZR, FXF, BZF, FXRU, and the World Emerging Market Currencies, CEW, turned lower in competitive currency devaluation, turning the World Shares, ACWI, EWX, EEB, EPP, EEM, VGK, VSS, VT, VTI, MXI, DVY, RZV, RZG, the Country Shares, EWW, EWL, EWC, EWA, RSX, EWD, INP, EWU, EZA, EWZ, and the Country Small Cap Shares, IWM, KROO, ENZL, BRF, HAO, SKOR, LATM, CNDA, CEE, GMF, EPOL, TUR, ARGT, EWO, lower. The Euro, FXE, closed lower at 126.33, a sixteen month low against the US Dollar, which closed up at 81.51; the USD/JPY closed up, and its inverse, JYN, closed down. The chart of the US Dollar, $USD, shows a cup and handle breakout pattern, with the handle forming in December 2011.
Financials, EUFN, XLF, IXG, RWW, RWJ, KRE, and most of the banks seen in this Finviz Screener, led by BFR, HDB, ITUB, C, BAC, BPOP, traded lower.
Transportation, IYJ, and Manufacturing IYJ, traded lower,
The world’s major stock sectors, TAN, XME, KOL, ITB, XME, XME, KOL, ITB, SLX, COPX, REMX, WOOD, XSD, SIL, GDX, GDXJ, IGN, MXI, PAGG, FAA, SEA, ALUM, IEZ, OIH, CHIM, PAGG, PSCE, IEZ, OIH, ENY, XLE, traded lower.
Natural Gas, UNG, led commodities, DBC, SLV, GLD, CUT, DBB, JJA, lower.
US Federal Reserve monetary policies, insolvent sovereigns and insolvent banks are causing debt deflation, that is currency deflation, which is in turn is causing disinvestment out of stocks, VT, and deleveraging out of commodities, DBC. Bonds, BND, peaked out on December 19, 2011.
All forms of fiat wealth are dying, as fiat money is dying. The chart of the US Dollar, $USD, UUP, shows that it is in breakout. The Milton Friedman Free To Choose Banker Regime that began 40 years is dead, as major world currencies, DBV, and emerging market currencies, CEW, are sinking, being led so by the Euro, FXE, and the British Pound Sterling, FXB. This caused debt deflation in world government bonds, BWX, in September 2011, and emerging market bonds, EMB, beginning in January 2011. Debt deflation commenced in world stocks, VT, and emerging market stock, EEM, beginning in November 2011. Bonds, BND, peaked on December 19, 2011. Junk bonds, JNK, peaked on January 3, 2011. Risk aversion has come to all forms of fiat wealth. Although gold, GLD, traded lower today, gold commenced a breakout in early January 2011, and its value has outperformed stocks ever since as is seen in the chart of gold relative to stocks, GLD:VT. An investment demand for gold will carry gold to levels seemed unthinkable today.
US Federal Reserve monetary policies, ZIRP, QE1, QE2 and Dollar FX Swaps, coupled with the ECB’s LTRO facility have made money bad. Bad money is the reason why stocks turned down today. The only form of money good is gold bullion.
Insolvent sovereigns, such as Greece, have lost their debt sovereignty and rely upon the kindness of strangers, particularly the EU ECB and IMF Troika for seigniorage aid. Insolvent sovereigns and insolvent banks are unable to sustain infrastructure, risk, growth, wealth, or order.
Railroad stocks seen in this Finviz Screener, KSU, UNP, CSX, NSC, GWR, turned lower,
The risk stocks seen in this Finviz Screener, BHP, CLF, AA, SCCO, RIO, MXI, MCP, BTU, FBR, VALE, ZINC, turned lower. The S&P European sovereign downgrade announcement means an end to the risk on trade.
The growth stocks seen in this Finviz Screener, which rose with the rally in the US Dollar, turned lower. Intel, INTC, led ROLL, IP, BA, TRN, ETN, LII, MU, JBL, LECO, LPL, WBC, SBUX, EXP, MON, WXS, RS, MTH, lower. Amgen, AMGN, which rose today will be falling sharply lower soon, as in the age of deleveraging all stocks, even biotechnology stocks, XBI, and IBB, such as ACHN, EXAS, ARIA, IDIX, VPHM, GEVA, CBST, SLXP, unless bought out, will be falling lower in value. Tesla Motors, TSLA, fall of 19%, has proved this investment to be just a flash in the pan. The S&P European sovereign downgrade announcement means an end to growth investing.
The popular small cap consumer discretionary stocks, PSCD, seen in this Finviz Screener, will be turning lower, NUS, TUP, DLB, ACAT, PII, IMAX, WGO, THO, SBUX, WTW, HANS, PSCD, RCL, PANL, HLF, CVCO, POOL, SHFL, LII,
The popular small cap industrial stocks, PSCI, seen in this Finviz Screener, will be turning lower, WTS, HEES, ROLL, AIT, BRC, CLC, DCI, PLL, FAST,
The failure of neo liberal finance means destruction of the fixed income investor. The utilities, XLU, have already turned lower. The electric utilities seen in this Finviz Screener, are now toxic investments as the once lucrative and beneficial spigots of investment liquidity have turned off by bad credit, and are now running toxic, DTE, D, SO, DUK, XEL, AEP, EIX ,NEE, HE, CNL, POR,
The S&P announcement of the failure of sovereign authority in the Euro zone marks a historic inflection point. The age of neo liberal finance is over, and all types of credit will become more dear. The S&P European sovereign downgrade announcement makes it more expensive for all to borrow. It gives the bond vigilantes reason to call interest rates higher globally. The profit margins of lenders seen in this Finviz Screener, will be under increasing pressure, and as a consequence these companies will be losing market value, AXP, NNI, COF, NICK, MA, V, AMT ADS ,CATM, ARCC, GPN, AEA, RWJ, WRLD, RCII,
With credit more expensive and currencies falling in value, the agricultural equipment manufacturers seen in this Finviz Screener, will be seeing sales and profit decline; these companies will be falling lower in value, AGCO, LNN, DE, TSCO, NC, CASC,
With credit more expensive and currencies falling in value, the bedrock of growth has turned to quicksand, and the Industrial Electrical Equipment manufacturers seen in this Finviz Screener, will have fewer sales and will be less profitable, ETN, ROK, AME, ENS, NB, AIMC, AMRC,
Growth has been dependent upon cheap credit coming from US central bank monetary policy, such as QE1, QE2, and Dollar FX Swaps, as well as from carry trade lending from the Bank of Japan, Austrian Banks, and the City of London Financial District. This flood of credit liquidity created the inflationism that underwrote economic advancement and investment profitability. But now credit contraction stemming from the European sovereign debt crisis, and the downturn of currencies that commenced in July 2011 that came with investor’s fears that a debt union had formed in the EU, is causing destructionism resulting in economic contraction.
Infrastructure of all types relies upon a heavy use of borrowing. With interest rates rising and currencies falling in value, the foreign utilities seen in this Finviz Screener, will be come less profitable and less desirable investments, EDN, EOC, EBR, SBS, CIG, CPL. Tonic Books reports the S&P European sovereign downgrade announcement also included state owned utility and infrastructure companies like ANA – Aeroportos de Portugal, Energias de Portugal, Redes Energéticas Nacionais, and Brisa – Auto-estradas de Portugal, despite claims to having solid financial profiles and significant foreign revenue.
India suffers from a lack of capital investment in infrastructure. The S&P European sovereign downgrade announcement is the nail in the coffin for the ability of India’s infrastructure companies to raise capital.
Brazil Infrastructure, BRXX, will be a much less desirable investment from now on out. The loss of debt sovereignty that is implied by today’s announcement marks a historic turning point in mankind’s experience. Humanity will increasingly suffer from the debt debauchery, that is the liberal credit policies of Neoliberalism, as the debt burden of infrastructure becomes more expensive, and infrastructure improvements are not undertaken. The US Federal Reserve monetary policies of ZIRP, QE1, QE2, and Dollar FX Liquidity, together with the ECB’s LTRO facility have finally destroyed the value of money and the ability of government and private investors to finance infrastructure improvements and development. The S&P European sovereign downgrade announcement terminates investment in infrastructure.
The S&P European sovereign downgrade announcement terminates value investing, as how can there be any value when stocks are continually eroded by debt deflation, that is by currency deflation and an ever increasing cost of money. Inveterate value investors will continually be catching a falling knife.
Simon Johnson in Reuters Blog says, “Treasury bonds are the ultimate global asset class: they’re the epitome of risk-free safety for investors all over the world. the triple-A credit rating is not a credit rating like any of the others. It’s basically a sign saying “no credit risk here”, a way of investing in fixed-income assets without taking credit risk. Triple-A bonds are in this sense a pure interest-rate play, while they can rise or fall in value, and they can get illiquid at times, the idea is that they’ll never default.”
The significance of the loss of AAA rating on sovereign debt is that the "full faith and credit" contract between a country and those who purchase its debt, can no longer be assured.
The S&P European sovereign downgrade announcement calls into question the capability of the countries involved to honor the most sacred of human contracts, and means the end of moneyness as it has been known. Fears of debt contagion, not greed, or speculation, will be driving all currencies, stocks, and bonds lower. Downgrade shock from the S&P European sovereign downgrade announcement, will flow outward to all investment asset classes and credit instruments. The European sovereign downgrade announcement will have a knock-on effect of driving all currencies, stocks and bonds lower in value. Risk appetite will change to risk avoidance.
The S&P European sovereign downgrade announcement is an inflection point in human experience, which pivots humanity experience from growth to contraction, from democracy to diktat, and from trust in fiat money to debt servitude. The US Federal Reserve monetary policies which were a path for some to prosperity, now constitute the road to serfdom for all.
The moneyness, that is the seigniorage, of Neoliberalism will be failing; and the seigniorage of Neoauthoritarianism will be increasing. The moneyness of the former provided choice; while the moneyness of the latter provides diktat.
The January 2011 stock market rally was a false flag rally, instigated by wall street bankers. The January 2011 rally is Neoliberalism’s death rattle rally; given that fiat currencies are dead, the rally cannot be sustained. It is simply a wall street wizards’ zombie rally. The coming investment downturn will propel the world from democracy and capitalism into diktat and regional global governance.
Charts show volatility rising, confirming that disinvestment out of stocks is now underway again.
Finviz VIXM and VIXY
Yahoo Finance VIXM and VIXY
MSN Finance VIXM and VIXY
Google Finance VIXM and VIXY
The S&P European sovereign downgrade announcement is a pivotal event in human experience as it brings forward sovereign armageddon, that is a credit bust and investment breakdown, that has been simply inevitable. This Eurodämmerung, a Götterdämmerung, that is a clash of the current sovereign authorities with investors, will destroy credit and money, as they have been known.
The S&P downgrade of nine European nations terminates the age of neo liberal finance and commences the age of sovereign default. The S&P European sovereign downgrade announcement pivots the world from an age of sovereign solvency into the age of sovereign insolvency. The S&P announcement pivots humanity from the age of neo liberal finance into the age of sovereign default, where out of sovereign bankruptcy, stakeholder credit, that is stakeholder finance, flows from sovereign bodies, such as stakeholder committees, that is public private partnerships comprised of business and government. These sovereign bodies will act for a region’s security and stability, as the world pivots from capitalism to regional global governance. The S&P European sovereign downgrade announcement marks an inflection point from democracy into diktat.
The S&P’s European sovereign downgrade announcement terminates capitalism, and introduces a new epoch for humanity where regional statism and regional totalitarian collectivism rules worldwide. Greeks cannot become Germans. The former are of the olive republic and the latter of the industrious state; yet they will both be one living in debt servitude in a EU super state, as there will be no debt jubilee for the profligates.
2) … The S&P downgrade of nine European nations terminates democracy and commences regional global governance.
The death of fiat money in July 2011 has caused the investment, economic and political tectonic plates to shift, and an authoritarian tsunami is on the way.
Countries such as Greece have lost their monetary sovereignty, and Spain and Italy have as well, this being acknowledge by the S&P ratings cut.
Oezazaxa3205 writes in review of Benjamin J. Cohen book The Future of Money, "Should governments defend their traditional monetary sovereignty, or should they seek some kind of regional consolidation of currencies?”
Indeed, the death of fiat money means that nations will be seeking some kind of regional consolidation of currencies, and consolidation of credit and natural resources as well.
Regional cooperatives have already formed. The Shanghai Cooperative Organization has been established in Asia and CELAC in South and Latin America. These promote regional cooperation based on a non-dollar basis of exchange. Regionalism is the new paradigm in globalism.
Of note, the US relinquished monetary sovereignty, as Andrew du Boulay relates “The US government relinquished monetary sovereignty to a consortium of private banks (predominantly owned by the House of Rothschild) in 1913 when President Wilson signed the Federal Reserve Act into existence.”
Investment capital is being destroyed by debt deflation, that is currency deflation; and now, political capital is rising in its place.
The dynamo of choice that governed for the last forty years is history; and now, the dynamo of diktat, is rising to govern human political and economic activities.
The seigniorage of fiat money is history; and now the seigniorage of diktat is rising in its place. Regional global governance is rising to replace sovereign nation states, as nations loose their debt sovereignty. The only two forms of sovereign wealth are gold bullion and diktat.
The global government finance bubble has burst. History’s largest debt bubble is deflating. Europe is at the epicenter of the soon coming sovereign armageddon, that is a credit bust and financial system breakdown.
Sovereign insolvency will spread from the EU periphery, that is Greece, Italy, Spain, to the EU core. The loss of debt sovereignty will be a catalyst for the formation of a European Super State based upon unified fiscal rules. Bank failures and EU Treasury auction failures, will be one of the defining issues of the year. These will cause leaders to meet in summits, waive national sovereignty, establish a unified federal authority, mandate a European fiscal union, and establish either the ECB or the Bundesbank, that is Buba, as the Euro’s Bank.
Life in Europe will be characterized as a totalitarian collective. Totalitarian collectivism is the EU’s future. European Socialism will die in 2012. Diktat will provide seigniorage to replace the seigniorage of treasury bonds. Diktat will become a currency, that is a payment used in the exchange of goods or services. Gary of Between relates that Welt reports Europe's interbank market is frozen and the continent's banks are only lending to each other through the ECB due to a lack of confidence within the financial industry, World Bank President Robert Zoellick was quoted as saying. If European banks don't lend to each other, how can others in the U.S. or in China be expected to do it, Zoellick said.
Tyler Durden writes Greek Debt Likely Unsustainable Even With Haircuts. I comment, assuming that Greece stays in the EU, Greece’s level of unsustainable debt means that structural reforms, coming via a ceding of sovereignty, such as an over-ride of the Greek constitution restriction of termination of employment, that has provided lifetime employment, is coming, as EU leaders meet in summits and waive national sovereignty. Substantial fiscal changes are coming. European Socialism, particularly Greek Socialism, grew via the Euro, as the global government finance bubble expanded. Substantial numbers of people were placed onto the public employment rolls as the Euro came on line in 1998, and as Greece’s sovereign interest rate fell lower. Now severe fiscal adjustments will be coming, that greatly reduce state worker employment levels.
The seigniorage of fiat money is failing, and the seigniorage of diktat is rising in its place, as is seen in the rise of power of the EU ECB IMF Troika to appoint technocratic government in Greece and Italy. Diktat is rising as a currency to dominate mankind. Libertarianism’s desire for Freedom and Free Enterprise are a mirage on the Neoauthoritarian Desert of the Real. Choice is an epitaph on Neoliberalism’s tombstone. Choice came by Milton Friedman. Freedom will never see the light of day. There will never be a free market monetary system, as hoped for by F.A. Hayek, Murray Rothbard and other Libertarians.
A world wide credit bust and global financial collapse is coming, and out of it, fate is directing that regional global governance be established. Kings have ruled mankind throughout history; these have included Nebuchadnezzar ruling Babylon; Cyrus and Cyrus and Darius ruling Merdo Persia; Charlemagne ruling Rome; Tony Blair ruling Great Britain, Angela Merkel ruling the EU, and George Bush, The Decider, ruling America with Unilateral Authority. Soon ten kings will come to rule, each in his own regional power base. Most recently two iron kingdoms, the combine of the UK and European rule, and US Hegemony, have governed the world; their power is now flowing into a ten toed kingdom of regional global governance.
Destiny, not any human action, will bring forth a revived Roman Empire, that is a German led Europe.
Fate will open the curtains, and out onto the world’s stage will step the most credible leader. This Little Authority will work behind the scenes in regional framework agreements to change our times and laws to provide order out of the chaos from a soon coming credit breakdown and financial system collapse. The existing rule of law will be replaced by his word, will and way, as fate is effecting a coup d etat in the Eurozone, by transferring sovereign authority from nation states to sovereign leaders and bodies. In the supranational New Europe, national sovereignty will be seen as a relic of a bygone era. Europe’s Sovereign will have have EU wide sovereign authority. The people will be amazed by this, and place their faith and trust in the Sovereign; they will give their allegiance to his diktat.
The Banker regime of Neoliberalism came via the Free To Choose floating currency script of Milton Friedman. The currencies are no longer floating, they are now sinking, causing global disinvestment out of stocks and deleveraging out of commodities. The natural result of destructionism is the rise of despotism.
The Beast regime of Neoauthoritarianism is rising to replace Neoliberalism. It comes via the 1974 Club of Rome’s Clarion Club for regional global governance. This monster of statism and collectivism is rising from the profligate Mediterranean countries of Italy and Greece. The Beast’s seven heads are rising to occupy in all mankind’s institutions, and its ten horns are rising to govern in all of the world’s ten regions. The Beast regime is coming like a terminator that can't be bargained with. It can't be reasoned with. It doesn't feel pity, or remorse, or fear. And it absolutely will not stop, ever, until mankind is totally dominated and subdued.
Banks will be nationalized in 2012; perhaps better said banks will be regionalized as Bloomberg reports Too-Big-to-Fail Definition May Be Expanded. “Global regulators may expand the definition of a too-big-to-fail financial firm, signing up domestic lenders, clearing houses and insurers to capital rules designed for the world’s biggest banks. The “framework should be in place for domestically systemically important banks by the end of the year,” Mark Carney, chairman of the Financial Stability Board, said yesterday after a meeting of the group in Basel, Switzerland. Deutsche Bank AG (DBK), BNP Paribas SA (BNP) and Goldman Sachs Group Inc. (NYSE:GS) were among 29 banks subject to the so-called capital surcharge on globally systemic financial institutions drawn up by the FSB in November. Banks will have to boost reserves by 1 to 2.5 percentage points above minimum levels agreed on by international regulators”. The European Financial Institutions, EUFN, before the S&P European sovereign downgrade announcement were insolvent banks. They could not then, and can not now find funding. The entire eurozone banking system has already been regionalized, first by ECB “loans” under Mr. Trichet, and now by LTRO “loans” under Mr Draghi. These banks will be nationalize, or better said regionalized, and will be known as the government banks. Integration of banks and government will be a global experience.
In a bank insolvent and sovereign insolvent world, regional stakeholders will be appointed to stakeholder committees, that is regional public private partnerships, for management of the factors of production and oversight of credit.
Public private partnerships, such as Macquarie Infrastructure, MIC, will take the lead in managing the factors of production. Canadian Energy Income Companies, ENY, and Canadian Oil and Pipeline Companies such as Enbridge, ENB, will for all practical purposes, be regionalized, that is something akin to being nationalized. There will be New Credit for the New Europe, it will be stakeholder credit coming from the stakeholder committees, as they meet in working group conferences. This stakeholder credit will complement regional global governance to provide financing for the operations of industry critical to the EU’s security and stability. As for the people, the residents of the New Europe, the prevailing concept will be, let them eat diktat.
The S&P European sovereign downgrade announcement was both a investment Black Friday, and an impact event, that is going to transform mankind’s economic and political activities.
Of note, it seems that the earth is experiencing apocalyptic events.
Huffington Post recently reported Dead Birds Fall From Sky In Sweden, Millions Of Dead Fish Found In Maryland, Brazil, New Zealand
CNN Money Video reports Ohio's Mysterious Earthquake.s
Laywoman Helen Barratt writes of The Earth’s Weakening Geomagnetic Force and Possible Polar Reversal. There is further hypothetical evidence that we are already in the transition phase that precedes a polar reversal, as shown in the growing areas of magnetic anomaly, field lines that are moving the wrong way and signaling an ever weaker and chaotic state for our protective magnetosphere shield. NASA has verified that there is evidence of a positive magnetism energy at the south pole, which is normally supposed to exist in the north pole only. The South pole is supposed to only have a negative magnetic charge. In the past 150 years, it has also been claimed that there has been a migration between the north and south poles and their respective magnetic charges of positive and negative magnetic reversal.
According to a report issued by the British Geological Survey (NYSE:BGS), there is evidence to suggest that the magnetic reversal has begun. The BGS has taken this position after careful analysis of a region of the Earth known as the South Atlantic Anomaly (NYSEARCA:SAA). It's an area where the magnetic field is in a state of flux and has weakened noticeably. The data shows the anomaly is growing rapidly and spreading west from South Africa, indicating that the Earth's liquid core is changing. "This may be early evidence of a forthcoming reversal in the direction of the Earth’s internal magnetic field," states the article on the BGS website.
Scientific opinion is divided on what hypothetically causes geomagnetic pole reversals and flips. Some theories hypothesize that they are due to events internal to the system, that generate the Earth's magnetic field, others propose that they are due to external events.
3) … Suggested related reading
3A) … Let them eat diktat, as in capital controls.
Detlev Schlichter in Paper Money Collapse writes When They Stop Buying Bonds, The Game Is Over I have long maintained that government bonds are a bad investment because the endgame for them will either be outright default or inflation. In both cases, as a bondholder, you lose. To be precise, the outcomes are either default or default. The idea that these debt loads could be elegantly inflated away is nonsense. They are already too big for that. So either you face outright default or, if authorities try to inflate, hyperinflation and currency disaster, and then default. In either case, you will not be repaid with anything of real value.
But are default or inflation and then default really inevitable? What if the present scenario continues forever? This seems to be the new ‘hope’, if you like. It is not a pretty scenario in that it involves the ongoing confiscation of wealth from bondholders but it seems to be less drastic than default or hyperinflation. Could we not work off the excessive stock of debt by suppressing bond yields below (moderate) inflation rates for an extended period of time? Of course, we cannot rely on the self-sacrifice of the bondholder, although he appears rather willing of sacrifice at present. So the government will have to use all its might to force bond-investors into accepting zero or negative returns for an extended period of time. After all, the state is the territorial monopolist of coercion and compulsion. It makes the laws. And controls the banks.
As I stressed many times, in a state fiat money systems banks must ultimately cease to be private, capitalist enterprises. Many banks have already been fully or partially nationalized. The remaining private ones are under tight, and ever tighter, regulation by the state. Should it not be easy for the state to force banks to invest more in government bonds, even at low or negative real returns? Should it not be possible to redirect whatever saving and credit there is from the private to the public sector?
Such a strategy has been outlined, not advocated, by Russell Napier of CLSA. He calls it ‘repression’. It ultimately involves rather draconian market intervention in order to continuously force the diversion of capital from private use to public use at artificially low levels of compensation. At some stage it will require capital controls. But let’s face it: most of what we have experienced over the past three years in terms of government intervention would have been simply unimaginable only five years ago. We should therefore not be surprised if market intervention becomes ever more heavy-handed and is used increasingly to favour the funding of the public sector. Gillian Tett in one of her recent Financial Times articles, Ties Between Sovereigns And Banks To Deepen, also discusses the strategy of ‘repression’ and predicts that we will see more of it.
(She writes, Now, these days, it is hard to imagine any western government overtly calling for a second wave of such “repression”. After all, as Kevin Warsh, a former Fed governor, recently pointed out, the drawback of financial repression is that it curbs private sector investment and credit growth. And in any case, it is a moot point whether such repression could even be implemented today, given the globalised nature of markets. Nevertheless, the political incentives to flirt with this concept are clear. After all, the beauty of a stealth subsidy is precisely that: it is too subtle for most voters to understand. It is also arguably a more equitable form of burden-sharing, and thus less politically divisive, than, say, state spending cuts. Moreover, governments do not necessarily need to be “repressive” to achieve the “repression” trick; as the economist Alan Taylor observes, if investors are so terrified that they cannot see alternative investment choices, they may end up buying government bonds by default – even at unattractive prices. Indeed, that is arguably what is already occurring today in the Treasuries market, or the world of JGBs. And, perhaps, in the eurozone too; after all, when eurozone banks were given €442bn of ECB money two years ago, they used half of this to buy government bonds – without compulsion at all. Whatever you want to call it, then, the state and private sector finance are becoming more entwined by the day. It is a profound irony of 21st century “market” capitalism. And in 2012, it will only deepen.)
That such a policy will be implemented, and ever more boldly, I have no doubt. In fact, I predicted it in my book. See chapter 10 of Paper Money Collapse The Folly Of Elastic Money And The Coming Monetary Breakdown, in particular pages 226 to 228, I called it ‘the nationalization of money and credit’. It is a phase in the crisis but it is not an endgame.
Where I disagree with the above mentioned writers is the following: Repression, to the extent that it works, will not reduce government debt, and besides, it won’t work.
Consider the recent environment: Certain governments have been able to borrow directly from their central banks via quantitative easing and in the bond market at low or even negative real interest rates. Does that mean they have reduced the amount of outstanding debt? Are such hugely advantageous conditions used to cut back the debt load? No. The opposite is the case. Access to cheap credit, whether that credit was provided by the printing press, obedient bond investors or hyper-regulated banks, has allowed states to run larger budget deficits and accumulate more debt.
Remember, we are not talking here about the workout of a debt-situation resulting from a war, a natural disaster, or some other one-off event. We are talking about the modern welfare state with its ever-growing commitments and increasingly out-of-control spending. Only cutting off the state from cheap funding will ever constrain it, not giving it access to more resources more cheaply.
And then there is this: We do not live in Paul Krugman’s parallel universe of Keynesian fiscal stimulus, where every dollar spent by the government magically translates into 2 dollars of real GDP growth. Here, on planet Earth, the constant shift of resources from private markets to the state bureaucracy weakens the economy. Shrinking the private sector and growing the public sector kills economic growth. In the perverse logic of the modern welfare state, this then requires even more state spending in the next period. As the economy continues to struggle, public sector outlays will grow while tax receipts will shrink.
‘Repression’, to the extent that it succeeds in shifting resources from the private market to the state, makes the crisis worse. It must lead to more debt, more capital misallocation and a weaker economy. We will not save our economy by trampling on the remaining bits of functioning capitalism and by confiscating more resources from the private sector. ‘Repression’ is self-defeating.
Additionally, it won’t work. Private wealth-holders will not sit on their hands forever while their hard-earned savings are being confiscated by the state. If banks become mere tools to fund the state and thus provide zero or negative real returns to shareholders and depositors, shareholders and depositors will pull their money from the banks.
But there are no alternatives for the depositors, are there? Of course, there are: Gold.
As the enemies of gold in the establishment financial press never tire of reminding us, gold pays no interest and no dividend. Because of storage and insurance costs, it is a ‘negative carry asset’. But in an environment of ‘repression’, so are government bonds and bank deposits. With zero or negative returns guaranteed on supposedly ‘safe’ government bonds and bank deposits, ever more investors, including small savers, will turn toward gold which has the additional advantage that its upside is practically unlimited – its price can double, triple or quadruple (all of which I expect) as long as paper money debasement continues, which I consider a near certainty.
Of course, a determined state will counter any evasion of controls with more controls. Maybe we will see taxes on gold investment or even restrictions on trading and owning gold. Via capital controls the country could be locked down. All of this is, of course, hugely destructive for the economy and ultimately self-defeating. I expect that we will see quite a bit of this stuff in coming years. Try and be prepared! But this will not be part of the solution. It will make matters worse. And it means that the endgame is still either voluntary default or hyperinflation and default. ‘Repression’ or ‘nationalization of money and credit’ is a policy of desperation. It is not a solution. It won’t be the endgame.
3B) … An investment demand for gold will arise out of a liquidity trap and the ongoing process of disinvestment and deleveraging.
Neil Charnock writes We Find Ourselves In A Liquidity Trap and therefore, against all logic austerity is currently the wrong solution. The time for austerity and balanced budgets was during the growth years, during the building of the debt bubble not now. This horse bolted long ago.
Liquidity traps are characterised by: 1) failure of stimulus (QE, Twist etc.) to create growth 2) low interest rates failing to stimulate growth 3) private and corporate savings rise in response to fear; money hoarding 4) expansion of the money base fails to translate into inflation 5) unlimited demand for money – in this case mostly in the Government sector for Public Sector payrolls, QE in various forms, debt servicing and debt roll overs.
The US Fed has changed their definition of a liquidity trap and if anybody can make sense of their document on the subject they are doing extremely well. In my understanding; if a thesis is not succinct and easily understood it is not worth the paper it is written on. In my end of year briefing to clients I explained all this and stated that “it quacks, walks and looks like a duck – therefore it is a duck”. Yes we are in a liquidity trap. Right now the government sector demand for borrowings is choking off growth and so many B list clients fail to get funding. The A list gets the cash and the B list doesn’t sending some companies to the wall. We are seeing more of this now and it will continue in 2012. Gold stocks that are not funded to production are at increased risk although I have noticed an unsurprising ability for solid gold stocks and even exploration plays to attract adequate funds in this economic environment.
Due to the existence of the liquidity trap and associated economic conditions it seems obvious that low interest rates and various incarnations of QE will need to continue. Of course the spread paid by lower class borrowers, over and above the Fed rate can grow larger pushing up stress levels for these borrowers. Continued capital destruction will offset new cash creation which will be soaked up by government demand. This creates all sorts of challenges and extreme risk of major upheaval, not just default as sovereign borrowing costs soar.
We also have a banking crisis due to sovereign debt exposure in this sector in addition to the deleveraging process itself. As certain asset values fall loans flip to negative equity. As the spread on loans increase for SME’s and other clients the debt servicing stretches the business or individuals to the limit. This is not a good environment for business expansion and jobs growth.
What does this have to do with gold? Everything. Gold was sought as a safe haven and will be again. As upheaval increases the environment for gold improves. Then you have negative real interest rates. The interest rates are lower than cost inflation even if many asset prices are falling (deflation). Inflation for energy and food combines with deflation to create stagflation. Negative real interest rates are great for gold.
The current stagflation will be met by QE, read that as money printing which will also be needed to fund government debt roll over. Governments will not unwind this it has to blow up first; this has been the way of history and I see no change due here. I interviewed an officer of a major London bank who confirmed this ‘distress and deleveraging’ thesis recently. They are offloading assets and talking clients into allowing same. They are taking 50%+ haircuts and glad to get this level of return while they can. Their view on the coming few years is for a protracted period of deleveraging and default. Other costs are rising, which combines to increase foreclosures and bankruptcies which are still very high and this will continue also.
The Ratings agencies faced a major change to their business model (legal and in effect operational) in 2010 so they are now forced to apply more honest assessments on their own clients and financial products. This was seen as disruptive, for instance USA down grade from AAA mid last year and the recent threat of a down grade on France and several banks. However they have no choice so expect this to continue to create ‘news headline volatility’ and reflect risk more appropriately.
There was also serious trouble in the Credit Default Swap markets in 2011 as Greece was classified as a voluntary restructure which the banks decided did not trigger payouts ‘on default’ to bond holders. This caused bond yields to rise and increased doubt in the inherently risk adverse debt markets. Debt markets are in a bubble in the stronger economies as capital was hoarded in this asset class for ‘safer’ keeping during 2011. A major top has been formed or is forming signalling the end of this Bull Run for this asset class.
This no longer remains safe when rates are at record lows, nothing but down side risk for bond holders. This can create a massive wave of capital and disrupt the debt roll over process forcing monetization of national debt to continue. This can be classified as QE. Defaults and haircuts will result in massive capital destruction.
3C) ... The economies of the Eurozone have never been able to support the current level of sovereign debt … the bill for European socialism has come due.
Marxist Update details The Age of Sovereign Insolvency, and writes of the ongoing European saga.
Whenever the US financial pundits feel the need to cheer themselves up, they take a look at what is happening in Europe and console themselves that things in the US could, after all, be worse.
At the heart of the crisis are the various countries in the eurozone whose economies are clearly unable to generate sufficient income to keep up their debt interest and repayment obligations. This pushes down their credit ratings while the rates of interest they have to pay move vertiginously in the opposite direction. Sovereign debt on which interest rates reach 7% are generally deemed to be unserviceable. This of course is what gave rise to the need for rescues for Greece, Ireland and Portugal.
The cure was seen in gigantic amounts of money being made available from a pool created by the various European governments for lending at relatively reasonable rates of interest to the afflicted countries. However, these rescues are always accompanied by the familiar demands for really severe cuts in public spending which in every case have of necessity caused GDP to shrink and the country’s debt, therefore, to increase as a percentage of GDP even while the absolute amount of the debt was being reduced. The shrunken economies became even less able to pay their debts than they had been previously, calling for yet more rescues, as is currently the case with Greece.
In other words, to borrow a metaphor coined by one Yanis Varoufakis, an Athens economist, “if you keep cutting like this you start to cut into muscle, which affects your growth and your tax revenues” (quoted by Landon Thomas Jr in ‘Austerity Plan Might Not Work for Spain and Italy’, New York Times of 9 August 2011).
As Greece’s desperate situation, notwithstanding (or rather because of) the stringent cuts that were forced on it, became apparent, what happened was that first one of the credit-rating agencies, Moody’s, downgraded Greece’s creditworthiness yet again to the second lowest rating available – in effect its sovereign debt was classified as junk. This pushed up Greek borrowing costs beyond the affordable and Greece to the edge of default, owing various European banks so much money that the default threatened various banks’ solvency, or certainly the sufficiency of their capital base to maintain confidence in their various banking activities. As a result there was a panic summit held on 21 July of various heads of eurozone states to rustle up some kind of response that would, hopefully, minimise the damage that was threatening the entire eurozone banking system.
What did the European states decide? The deal contained three main elements: 1. reduced interest rates on the bail-out loans to Greece, Ireland, and Portugal; 2. some losses for private investors to reduce Greece’s debt; and 3. a transformation of the euro zone’s temporary bailout fund, the EFSF, into a cash-point that banks and possibly Spain and Italy could tap, but so far without the necessary funds.
These decisions indicate a belated realisation by the various European banks that there is no way they are after all going to be able to force the Greek masses to pay back all that is owed. When the money was originally borrowed, it was assumed that Greece would be able to continue selling commodities all over the world in order to generate the necessary income to repay the loans with interest at the rates then applicable. It is not Greece’s fault that, as a result of a crisis of overproduction within the capitalist system as a whole, it is not after all able to sell its commodities to the extent that had originally been envisaged. Greece is in the situation of a worker who is unable to pay his mortgage once he has, through no fault of his own, lost his job.
The hope is that by accepting today small reductions in what is owed to them, the banks will avert much greater losses in the future. The financial number-crunchers have, however, expressed the view that this mouse of a rescue plan that the mountain of European heads of state managed to give birth to after a fraught labour will have no such effect. Ambrose Evans-Pritchard points out in the Telegraph of 2 August (‘America is merely wounded, Europe risks death’):
“As the details dribble out from the summit deal, we can now see that Greece will enjoy no debt relief despite having been pushed into default. Citigroup said the net effect will increase Greece’s debt by a further 4pc of GDP to more than 160pc next year. Since this is obviously untenable, Greece will need a third rescue.
“The EU has brought about the first sovereign default in Western Europe since the Second World War and set a fateful precedent without actually resolving the Greek problem. This is the worst of all worlds.”
In the Irish People’s Movement article cited above it is estimated that to return Greece to solvency at least a 40% “haircut” to the country’s debt is needed. But the plot hatched up by the European heads of state achieves a mere 7½% debt reduction, according to most estimates. In other words, Greece’s problems are by no means over.
However, Greece’s problems do not stop in Greece. Because so many European banks are holding Greek bonds, they themselves risk being driven to insolvency by Greek default, and it is all too likely that the various European states will feel constrained to rescue their banks at huge cost to the public purse because of the need to maintain the essential services that the banks provide in a capitalist system. Investors do not require a crystal ball to be able to foretell that this will of necessity cause these countries’ sovereign debt to escalate – to the point that they will be unable to meet their obligations.
Spain, Italy, Cyprus and to some extent France are already feeling the fallout, and the EU has been struggling for months to avert Spain being sucked into the morass. In the past few weeks, Italy too has been sliding closer and closer to the abyss, with the interest rates both countries have to pay in order to borrow the money they need gradually edging up towards the fateful 7% mark. Spain and Italy are countries that are regarded to some extent as “too big to bail”. Nevertheless, some thought is currently going in to how that might be done:
“The bond vigilantes broadly agree that the EFSF needs €2 trillion in pre-emptive firepower to forestall a twin crisis in Italy and Spain [as compared to the $440 bn of which it disposes at present], though quite how France might pay for this without being drawn into the maelstrom itself is an open question.” (Ambrose Evans-Pritchard, op. cit.). Italy, it is estimated, would cost $1.4tr to bail out and Spain $700bn.
But who would provide this money which is, after all, to be invested in risky holdings at rates of interest below the market rate? As the various national states within the European Union try to work out how they can individually save themselves from being swallowed up in the crisis, it becomes hard for them to reach agreement on any kind of collaborative effort.
3D) … A Greek default is coming … An inquiring mind asks, will it be hard or will it be soft?
Mike Mish Shedlock writes Greek 1-Year Bond Yield Tops 408 Percent; Hard Default Appears Imminent.
3E) … Central bankers have developed and sustained moneyness through a sovereign credit boom; that boom is now over; the sovereign credit boom is turning to sovereign credit bust.
Doug Noland writes in Safehaven.com More On Moneyness The perception of ongoing dollar devaluation has been a critical factor for global sovereign "moneyness" (helping explain why negative U.S./dollar fundamentals have been generally viewed bullishly with respect to global risk markets).
A weak greenback ensures the ongoing recycling of dollar liquidity by (primarily Chinese and Asian central banks) global central banks back to the Treasury market. Ongoing dollar devaluation would also continue to entice huge speculative flows to "undollar" assets, including the emerging markets and commodities - fashioning an unusual degree of "moneyness" for securities issued by countries with unimpressive histories of monetary management. And the worse things look for the dollar, the more the world's new financial powers (accumulators of massive international reserves) would have a vested interest in supporting the euro as a competitive store of value to dollars.
So, the markets' hardened perceptions of "moneyness" owe a great deal to the notions 1) that the Fed will buy as many Treasurys as it deems necessary to sustain abundant market liquidity and support economic recovery; 2) that "developing" economy Credit systems will continue enjoying unprecedented flexibility and capacity; 3) that Asian central banks have too much invested to back away from dollar and Treasury market support; and 4) that China and others will bolster an increasingly fragile euro as a critical counterbalance to the dollar. In sum, markets have viewed global central bankers as sharing a unified interest in sustaining the sovereign Credit boom.
I really worry when I see divergences between headstrong market perceptions of "moneyness" and a marked deterioration in the trend of underlying creditworthiness. Such "gulfs" are the trappings of market dislocations and crises of confidence. I believe this is especially the case currently. Emboldened by past successes, market perceptions have been driven by unrealistic assumptions of the efficacy of government policymaking.
3F) … Thoughts on gold and fiat money
Peter Schiff relates Gold puts the power to the people, fiat money gives the power to the government so that's the reason they oppose it. I comment that gold provides people economic sovereignty; but fiat money hands sovereignty to dictators.
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