Fixing the Dollar Drought
Say you are a socialist, and you have intervened heavily in the economy. Suddenly, things don’t work as you thought they would. Somehow, economic laws seem to refuse to bend to your will. However, you cannot really believe that since according to your convictions, wealth is a byproduct of government plans and decrees. Moreover, your predecessor (also a socialist revolutionary) had the best advice oil money can buy – even from people who are now advising socialist parties over in good old Europe. So the solution to the unintended consequences of the initial intervention is to intervene further, in an attempt to refine the plan, so to speak.
You may have heard about a certain proverb attributed to Einstein about insanity, but you can’t quite recall what it was. So you try again. And again. And again. Chances are, your name is Nicolas Maduro. But eventually, you quit trying – sort of.
Image via diyconfessions.com
And then democracy comes into being after the poor have conquered their opponents, slaughtering some and banishing some, while to the remainder they give an equal share of freedom and power.
– Socrates, Plato’s The Republic
A snowstorm battered the East Coast of the US today. Politics rocked southern Europe.
Sitting here on the edge of the beach, overlooking the Pacific Ocean, a gentle breeze stirring the trees… birds singing… surfers carrying their boards across the sand…
… it’s hard to imagine the tempest in North America, let alone the swirling clouds over the Parthenon. The radical left-wing Syriza coalition party won in Greece.
Once again, Greece is a victim of democracy.
Greece’s elderly president Karolos Papoulias warily eyes Alexis Tsipras as he is about to be sworn in as the country’s new prime minister.
Photo credit: Aris Messinis / AFP
Here We Go …
Last week we wrote in the context of Swiss franc denominated loans to consumers in Europe:
“Another problem is that governments may react to the situation by shifting the losses suffered by mortgage debtors back to the banks – this has e.g. already happened in Hungary. Not surprisingly, this policy has been hugely popular with the country’s population, but very costly for the banks. Since the necessary write-downs have already been taken, no further damage is to be expected from CHF mortgages outstanding in Hungary – the main danger for the banks is rather that the governments of other countries may consider adopting similar policies.”
It didn’t take long for a government to get in on the act. Poland’s government faces elections this year (both presidential and parliamentary), which is likely a major motivation for considering going down Hungary’s path with respect to CHF denominated consumer loans. It presumably hasn’t escaped the attention of Poland’s government that Viktor Orban’s Fidesz party has been faring rather well in Hungarian elections. Hence Polish prime minister Ewa Kopacz informed a throng of potential voters up to their eyeballs in CFH denominated debt that she would seek to move their losses to the banks.
Poland’s prime minister Ewa Kopacz wants to rescue Polish mortgage holders at the banks’ expense.
Photo credit: Sławomir Kamiski/Agencja Gazeta)
Two Comedy Acts
Today, we’re going to tell you why America’s middle class is getting poorer. Or put another way, we’re going to show you how capitalism dies.
The Dow fell 141 points, or 0.8%, on Friday. Gold closed the week below $1,300 an ounce… but not far below.
Two comedy acts appeared last week: President Obama’s State of the Union address and Mario Draghi’s QE announcement.
Mr. Obama claimed credit for a “recovery” that has left the typical American poorer than he was before. And not only is he poorer, but also he is more dependent on the very people who engineered the phony recovery. (See below.)
Mr. Draghi followed up with a series of one-liners, the gist of which was that he now proposes to save Europe from the specter of inadequate inflation.
Europe’s casino boss
Photo credit: Roesseler/EPA
Dow up big time on Thursday – 259 points, or 1.5% Gold up too – to over $1,300 an ounce. This year is going to be a hoot. Boom, bust, lies and claptrap – we’re going to have it all!
What accounted for Thursday’s big bullish surge? From Bloomberg:
“The MSCI Emerging Markets Index added 0.8% to 983.53. Russia’s dollar-denominated RTS Index rose the most in the world and the ruble strengthened as the ECB’s move encouraged investors to buy riskier assets.
Gauges in Poland, Hungary and the Czech Republic increased at least 0.9%. Oil producer Petroleo Brasileiro led gains in Brazil. Asian stocks jumped as China pumped funds into the financial system.
ECB President Mario Draghi unveiled a quantitative easing plan of 60 billion euro a month until at least the end of September 2016. The move, which is intended to counter slowing growth and the threat of deflation, may spur capital inflows into developing countries. China’s monetary authority used open-market operations to add cash to the financial system for the first time in a year and spurred loans amid a fund shortage.”
Underwater in Their Cars
The best things in life are free
But you can keep them for the birds and bees
Now give me money
That’s what I want
– “Money (That’s What I Want)” by Berry Gordy
We have high hopes for 2015. It is starting off so well. Only three weeks in and we almost tore a stomach muscle laughing. So many unwitting comedians. So many political pratfalls and financial gags.
No fraud or no foolishness is too absurd. And the spectators are willing not only to suspend disbelief but also to chuck it out the window.
Recently came news that US auto sales were increasing. Everyone hailed this as good news. Then it emerged that auto sales have become the latest subprime finance scheme. Bloomberg:
Automakers are increasingly selling vehicles with 84-month loans that reduce monthly payments while making it tougher to repay faster than cars lose value, John Mendel, Honda’s US sales chief, said in an interview.
The Tokyo-based company will avoid longer-term loans even as Nissan tries to supplant it as the fifth-biggest automaker in the US, he said.
Sales will keep growing as the Federal Reserve’s zero-interest-rate policy encourages investors to collect yield from auto loans, said Tom Webb, chief economist at Manheim Consulting.
“We’ve seen this movie before, we know how it ends, and it’s not pretty,” Webb told reporters at an event before last week’s show.
“It can have some negative impact on the market in creating a vicious cycle of negative equity if the consumer doesn’t hold onto their vehicle long enough,” Melinda Zabritski, senior director of automotive finance for Experian, said by phone.
“Something has to be done to keep the market affordable, or consumer buying is going to have to change and we’ll have to return to less frequent purchases.”
In other words, auto buyers will be underwater … in their cars. They have, in effect, “taken out” the equity from their wheels just as they once did their bedrooms.
Where you don’t want to be with your car…(as we detailed here, the problems actually started showing up some time ago already).
Photo credit: jasondecairestaylor.com
Swiss Franc Revaluation Repercussions – Swiss, Polish and Austrian Banks in the Crosshairs
The SNB’s unexpected suspension of the EURCHF minimum exchange rate continues to claim victims. There have been a number of spontaneous combustion events striking forex brokers and hedge funds, but there are also effects that will only play out over a longer time period.
As Coveredbondreport.com reports, the credit rating agencies feel compelled to reevaluate their ratings of a number of European banks and their covered bond issues, i.e., European-style mortage-backed securities. Contrary to “normal” MBS or ABS, the assets backing covered bonds remain on the balance sheets of the issuing banks. This makes them safer for investors, as e.g. non-performing assets are usually replaced with performing ones, and other safety-enhancing measures are often taken; at the same time, it means that banks issuing these bonds are exposed to risks that in US style MBS are borne by investors. According to the report:
“Noting that while the move is credit positive for the Swiss sovereign, Moody’s said that the removal of the peg is credit negative for Austrian, Polish and Swiss banks and to covered bonds exposed to euro/Swiss franc exchange rate risk”
Most affected are apparently Austrian banks, with 17% of their mortgage covered bond assets denominated in CHF and Austrian households exposed to the tune of €25 bn. to CHF denominated mortgage loans. The “bad bank” that is administering the wind-down of the assets of Hypo Alpe Adria, an Austrian bank that fell victim to the 2008 crisis and has turned into a major headache for the country’s taxpayers, has taken a hit as well. 21% of its public sector covered bonds are denominated in CHF, which is so to speak adding insult to injury, as it makes the already horrendously expensive wind-down even more so.
When this happens, it’s all over.
Photo via grassvalley.com
Decades of Falling Rates
The old joke is, “(with a Russian accent) In America, you correct newspaper, but in Soviet Union, newspaper corrects you.” Switzerland is now experiencing the bond market equivalent. In America, the government pays you to borrow but in Switzerland you pay the government. All Swiss bonds have a negative yield out to 9 years. Negative means you pay them to lend them your money. The 10-year Swiss government bond has effectively zero yield. For comparison, the 10-year US Treasury is 1.8%.
Here is a graph of the Swiss yield curve.
Allah’s Credit Card
Today, we were going to talk about stop losses. But we need to look first at what is going on in the markets. In short: Things are starting to happen! The Dow rose 191 points, or 1.1%, on Friday. Gold topped off a 5% rise for the week.
You probably thought we were exaggerating the connection between the Paris terrorist killings and the credit bubble, right? We almost thought so ourselves. But then a report in the French newspaper Libération told us about Amedy Coulibaly, the terrorist who took hostages at a kosher supermarket and killed four of them.
With no job and no income, how did he finance his life? How did he buy his weapons? He borrowed €6,000 ($6,964) from a consumer credit company, Cofidis, which offers online loans. His attack was financed on credit! And not just his. He also helped finance the brothers who attacked Charlie Hebdo. Coulibaly:
“I helped him (one of the Kouachi brothers) by giving him a few thousand euro so he could finish buying what he needed.”
So, now we see that both sides in the war on terror are financed on credit. But wait. How are those terrorists going to pay back these loans? The local radical imam had a conversation with Coulibaly. Don’t worry about your debts, he told the terrorists, “Allah will take charge of them.”
No kidding. And he’s right, of course. The gods will take care of it.
Only the Sheeple Are Sane
This post is about an issue that is by now a bit dated (though the topic as such certainly isn’t), but we have only just become aware of it and it seemed to us worth rescuing it from the memory hole. In late 2013, the then newest issue of the American Diagnostic and Statistical Manual of Mental Disorders (DSM for short) defined a new mental illness, the so-called “oppositional defiant disorder” or ODD.
As TheMindUnleashed.org informs us, the definition of this new mental illness essentially amounts to declaring any non-conformity and questioning of authority as a form of insanity. According to the manual, ODD is defined as:
[…] an “ongoing pattern of disobedient, hostile and defiant behavior,” symptoms include questioning authority, negativity, defiance, argumentativeness, and being easily annoyed.
Every time a new issue of the DSM appears, the number of mental disorders grows – and this growth is exponential. A century ago there were essentially 7 disorders, 80 years ago there were 59, 50 years ago there were 130, and by 2010 there were 374 (77 of which were “found” in just seven years). A prominent critic of this over-diagnosing (and the associated over-medication trend) is psychologist Dr. Paula Caplan. Here is an interview with her:
Allen Gregg in conversation with psychologist Dr. Paula Caplan
Returning to a Traditional Subject
We promised to return to a more traditional subject: money. And so we do. The Dow was down 187 points, or 1.1%, on Wednesday.
We repeat our guess: It will probably take a real crisis in the stock market to bring the Fed back into the QE business. Then we’ll see the real fireworks of a bubble market.
In the meantime, money changes hands in a world filled with economists, central banks, newspapers and TV. What people believe about it, and what they see and hear, affects what they think of the money in their pockets and what they do with it.
Vale of Tears
Vale is the world’s largest producer of iron ore. The price of iron ore has recently hit a 5 year low, as China’s mad-cap building of ghost cities and the associated infrastructure has slowed down considerably. Iron ore prices are highly volatile – they rose far more than those of most other commodities during the bull market and are liable to fall more as well. In fact, the long term history of the iron ore price suggests that there is still a lot of potential downside – current prices are only low compared to the prices seen at the height of the bubble.
62% iron ore, January futures contract – click to enlarge.
Breakdown of a Marriage
The Dow fell 96 points on Monday, or 0.5%. Gold jumped up $16.70, or 1.4%, to settle at $1,232 an ounce. But let us return to the big picture … and the explosion of credit under the post-1970s fiat money system.
As long as America’s accounts had to be settled in gold, the supply of money was constrained. It could go out and about town and have a good time. But when the party was over it had to go home and face an unforgiving and unyielding spouse – gold – to which it was bound in marriage. Too bad …
But after repeated infidelities, the marriage broke down. And in 1971, President Nixon finally annulled it. The new fiat money system that took the place of the gold standard was different. It was free and fun loving. It could stay out all night, for as long as it chose, and not get in trouble with anyone.
Wall Street – no slouch when it comes to making money – saw the potential almost immediately. Stirring its innovative and larcenous spirits, it figured out how to make use of the new liberated currency a hundred ways from Sunday.
Photo via Wikimedia Commons
A Look at a few Charts
Our friend T.R., who has constructed the gold-silver ratio adjusted VIX, an excellent indicator for timing short term peaks and lows in stocks, has provided us with a few annotated charts that show that a number of markets are very close to important support and resistance levels. Note that some of these charts are about a week old, but this doesn’t alter the message and doesn’t matter much since they are all very long term charts anyway.
In some cases, these levels have already given way. In some markets it should probably be expected that a short to medium term counter-trend reaction is imminent, while others seem likely to break these levels.
One very interesting chart is the first one, which compares 5-year US inflation break-evens to the MSCI emerging markets index. There has been a very close correlation between the two data series, and inflation break-evens have recently broken through a support trend line:
New Positioning Extremes
We recently discussed the astonishing surge in net long positions in the US dollar, and the lopsided reading of associated sentiment surveys, which have broken all previous records (See “How Much Further Will the Dollar Rally?” for details). Here is a brief update in light of last week’s quite noteworthy commitments of traders report, which has seen an enormous additional increase in speculative net long positioning.
The chart below shows the net hedger position, which is the inverse of the net speculative position. Last week the net speculative long position in DXY futures rose by 21,749 contracts, which to our knowledge is one of the largest one-week surges in history, possibly even the largest.
Public sentiment (Optix, an amalgamation of all important surveys) continues to be stuck at 89% bulls. However, the short term oriented DSI (daily sentiment index) compiled by tradefutures.com recently clocked in at a reading of 98% bulls, which not surprisingly is an all time high as well and suspiciously close to the never before attained 100% barrier.
The net position of hedgers in DXY futures, via sentimentrader. The new record high 85,162 contracts net short position of commercial hedgers mirrors the equally large speculative net long position. Last week’s surge of 21,749 contracts was huge for a single week – click to enlarge.
More Articles of Interest:
- It's Official: If You Question Authority, You Are Mentally Ill
- The Lunatics Are Running the Asylum: Draghi's Money Printing Bazooka
- Mainstream Financial Press Promotes Economic Illiteracy
- The Fat Lady is Clearing her Throat
- The Best “Old-Timer” Advice for Investors
- In America, Government Pays You Interest. In Switzerland, You Pay Government.
- The Ph.D.’s Guide to Avoiding Big Stock Market Losses
- The Beginning of the End for the Credit Bubble?
- The Latest Subprime Scam
- The Most Important Phenomenon in Investing