The Global Monetary Architecture: Change is on the Horizon

There is no better way to descibe the international monetary system today than through the statement made in 1971 by U.S. Treasury Secretary, John Connally. He said to his counterparts during a Rome G-10 meeting in November 1971, shortly after the Nixon administration ended the dollar’s convertibility into gold and shifted the international monetary system into a global floating exchange rate regime that, “The dollar is our currency, but your problem.” This remains the U.S. policy towards the international community even today. On several occasions both the past and present chairpersons of the Fed, Ben Bernanke and Janet Yellen, have indicated it still is the U.S. policy as it concerns the dollar.

 

vyingTwo empires vying for supremacy?

 

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Wealth and Income

Once upon a time, before banks and before even private lending, there was only one way to prepare for retirement. People had to hoard something durable. Every week, they would set aside part of their wages to buy salt (later, it was silver). Assuming it didn’t get wet, the salt accumulated until they couldn’t work any longer. Then, they would begin selling it off to buy groceries.

 

Piles-of-saltPrehistoric piles of retirement savings

Photo credit: Alicia Nijdam-Jones

 

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Losing Confidence

GUALFIN, Argentina – September is here. As expected, market volatility is increasing. The Great Zombie War is intensifying. And investors are getting scared. On Tuesday, the Dow lost 470 points – a nearly 3% drop. Bloomberg:

 

“U.S. stocks joined a worldwide sell-off, after equities’ worst month in more than three years, amid continuing concerns that China’s slowdown will weigh on the global economy.

‘The problem is, as much as China is the catalyst for this, it’s also that we’re seeing weakness in fundamentals here,’ said Matt Maley, an equity strategist at Miller Tabak & Co LLC in New York.

‘A lot of company earnings were hurt by China in the second quarter and it’s only gotten worse. People are losing confidence with the whole situation there breaking down, not just in the stock market but in data as well.’”

 

Burning_MoneyNow they even want to do away with the State’s own scrip – because it might help you to escape the depredations of madcap central bankers.

Image credit: Stephen Krow / Getty Images

 

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Greece is Still Lying in Wait …

We haven’t written much about Greece recently, but there have actually been a few developments worth paying attention to. Several easily foreseeable things have indeed happened in the meantime: Prime minister Tsipras felt forced to call a snap election after securing the first bailout tranche, the radical Marxist faction of Syriza led by Panaghiotis Lafazanis has split from the party, and so has its “youth wing”. In the meantime, the Greek economy has predictably nosedived as a result of the banking system freeze (Mish reports the grisly details here).

 

persto

 

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The Gift that Likely Will Keep Giving …

Jay Taylor has mailed us an infographic he and his colleagues at Boston University and Pearson Education have put together, entitled “Why the Euro Zone Crisis is not Over”. We have decided to reproduce it here, as it provides a good overview of the most important data points surrounding the still festering crisis situation.

 

Why-the-Eurozone-Crisis-is-Not-OverInfographic by Boston University and Pearson Education – click to enlarge.

 

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Nuts to Lend at Zero

GUALFIN, Argentina – The Great Zombie War is proceeding as expected …

Cannons to the left. Cannons to the right. And a fool on every corner. It will become more and more dangerous, we predict. Then in a fiery ball of hyperinflation and bombastic imbecility, it will all be over …

 

Invalides_cannonsReady… aim… fire! These are the cannons of les invalides in Paris… we couldn’t find the cannons of les imbeciles in a hurry, but if we do, we’ll update the image.

Photo credit: Eric Gaba

 

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Not Enough Rebound Oomph

Yesterday we wrote about the fact that last week’s rebound had brought the market (in the form of the S&P 500) back to a first zone of resistance (former support). We actually suspected the market may try for the second resistance level above, but it was not to be. Here is the situation at the time of writing (obviously, high intra-day volatility means that today’s candle can change relatively quickly):

 

SPX
The SPX rebound hasn’t managed to go beyond the initial lateral resistance level – click to enlarge.

 

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Sometimes Things Work as They “Should”

Hopefully readers were able to take advantage from what turned out to be two extremely well-timed recent posts on the upside potential for crude oil (admittedly the timing was just a case of luck). We recommend checking them out again if you missed them, as they are laying out the “very lonely” bullish case in detail (see: “Is Crude Oil Close to a Low?”, and “More on Crude Oil and Industrial Commodities”).

 

17832412-v2_xlarge

 

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It’s Never Easy…

Readers may recall that in one of our recent updates on the gold sector – which we believe is at an interesting juncture that may at the very least provide a good trading opportunity – we presented the chart of the 1992-1993 low in order to illustrate how extremely tricky the sector can be in the vicinity of turning points.

Specifically, the sector made every imaginable move in late 1992 to convince market participants that a durable rally was nigh impossible. Early recovery attempts were abruptly aborted, giving way to merciless and sharp declines. By the time the real recovery started, very few market participants still found it credible. We remember the high degree of skepticism that prevailed in the early stages of this rally quite well actually.

 

 

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[Ed. note: for a change, we are presenting a post by a stock market bull below, namely Sid Riggs, via Bonner & Partners. It is always refreshing to see a well-reasoned argument that is contrary to one’s own opinion – after all, no-one really knows the future and Sid makes a number of important points, which deserve to be given attention. Sid is actually quite correct with respect to the historical correlation between rate hikes and the stock market. The strongest counter-points we can offer are these: 1. the market is extremely overvalued, 2. long-term positioning data show that everybody is “all in” already and 3. a rate hike would not be the first act of tightening monetary policy, but in fact the third. Act one was the “taper”, act two the cessation of QE. Given the paramount importance of money supply growth to stock prices, we would argue that the decisive factor will be whether or not commercial banks decide to expand credit.]

 

A Powerful Lesson from the Recent Past

There is a lot of lip service being paid to the stock market crash that we’re supposed to expect once the Federal Reserve starts raising rates. Every time we get close to a regularly scheduled Federal Reserve statement, financial pundits pontificate about the nuances of what the Fed chair might say, not say, or imply. It’s like clockwork.

 

 

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