Posts Tagged ‘gold’
Inflation: An Expansion of Counterfeit Credit
The Keynesians and Monetarists have fooled people with a clever sleight of hand. They have convinced people to look at prices (especially consumer prices) to understand what’s happening in the monetary system.
Anyone who has ever been at a magic act performance is familiar with how sleight of hand often works. With a huge flourish of the cape, often accompanied by a loud sound, the right hand attracts all eyes in the audience. The left hand of the illusionist then quickly and subtly takes a rabbit out of a hat, or a dove out of someone’s pocket.
Laelaps was a dog that never failed to catch what it was hunting, while Talos was a giant made of bronze who circled Crete to protect the island from attack. Somehow both the dog and the javelin seem to have been lost.
The volume of financial news Europe generates in a single day is almost overwhelming - for a newspaper editor these days it must be sheer agony to decide which one of all these items should actually decorate the front page.
Hoping For the Helicopter Pilot
Funny enough, a few hours after we noted that wounded stock bulls were likely pinning their hopes on Bernanke's upcoming Jackson Hole speech, the WSJ reported that 'stocks jump on hopes for Fed action'. 'Hope' is of course the worst possible investment strategy. Also, if true, then this is an interesting case of Pavlovian conditioning. It apparently took only a single instance of inflationary promises emanating from this otherwise rather sleep-inducing gabfest last year (a gathering of people whom the market economy would undoubtedly be far better off without) to induce an advance reaction in stock traders one year later. This year the patellar reflex, otherwise known as the 'knee-jerk', went into action even before the chief printer had a chance to add to his already ample stack of promises of free money forever and ever.
The market rally, though impressive for a single day, once again seems to rest on weak foundations. This is not to say that the bounce can't or won't continue, we are merely++ noting that similar to previous rally attempts, it was marked by decreasing volume relative to the preceding sell-off. However, volume was better than on the immediately preceding rally attempts, and the divergences we have recently discussed have solidified. So it certainly seems possible that the bounce will live beyond a single day.
Facts and Rumors
The recent bounce in stock and commodity markets didn't go as far as we had thought it would. In fact, it was interrupted rather rudely on Thursday. There was no discernible single trigger one could pin the swoon on, but rumors regarding the state of the European banking system keep bubbling to the surface and economic data continue to weaken dramatically.
More specifically, the fact that one euro-land bank recently borrowed $500 million from the ECB at a penalty rate has raised a few eyebrows, as has the reopening of currency swap lines between the Fed and the SNB to the tune of $200 million. It appears there is ever more dollar funding trouble in the European banking system, something we have pointed out was inevitable, as US based money market funds have pulled back from lending to euro-area banks. The funding problem continues to be confirmed by the action in euro basis swaps as well. The only thing that has to our slight surprise not happened thus far is a visible strengthening of the US dollar, but this can probably be explained by the fact that money supply growth remains ample and that the market expects even more easy money from the Fed.
Speaking of the Fed, the US central bank has begun to scrutinize the finances of euro area bank subsidiaries in the US. Note here that these subsidiaries have US banking licenses and thus fall within the Fed's regulatory ambit (they are also allowed to borrow from the Fed's lending facilities).
… but it stands on a weak foundation.
The expected rebound in stocks and commodities has continued on Monday, but there are a number of signs that this is not much more than a short covering rally that is unlikely to last. Although yields on euro area government bonds and CDS on them have continued to decline (we will update the euro area charts tomorrow), the fact remains that the economy is under pressure, so bounces in stocks have to be approached with great caution – they are more likely to represent selling opportunities than a reason to buy at this stage. Notably the recent rally has inter alia been triggered by a short selling ban in several European countries. Short selling bans have historically always been medium term bearish events – they can trigger a bounce lasting for a few days, but in the long run they are extremely counterproductive, as they lower liquidity and hinder the price discovery process. By taking away the opportunity to hedge, they ultimately create even more selling pressure than would have appeared otherwise. This latest short selling ban is thus likely destined to fail as well – one wonders why the authorities even bother.