22-Dec (The Wall Street Journal) — The Federal Reserve could signal it is likely to keep short-term interest rates near zero into 2014 or beyond, to bolster the fragile economic recovery.

Fed officials have grown increasingly uncomfortable with their August statement that they are likely to hold short-term rates exceptionally low at least through mid-2013. Some believe low inflation and high unemployment could warrant low rates for longer.

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PG View: I’m sure the BoJ played this game at first too: ZIRP for just a couple years…okay maybe 5-years…20-years later interest rates are still 0%…

21-Dec (The Economist) — THE European Central Bank has come under criticism for its failure to act as lender of last resort to embattled sovereigns. Yet when it comes to banks, the traditional recipients of central bank support, the ECB is lender of last resort on steroids. Today, it lent €489 billion to 523 banks at 1%, at its first three-year refinancing operation. It was its largest refinancing ever.

Banks used some of that to pay off shorter term loans from the ECB. Even so, net lending of €235 billion brought the ECB’s total loans to banks to almost €1 trillion. Mario Draghi, the ECB president has repeatedly insisted the ECB’s purchases of government bonds were neither “eternal nor infinite”, but that clearly doesn’t apply to its lending to banks. As banks’ private sector funding dries up, the ECB has supplied not just all the short-term funds they need, but all the dollar funds they need (via the revamped swap lines from the Federal Reserve) and now long-term funds as well.

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21-Dec (Financial Times) — The explosion in central bank balance sheets continues. As explained in this earlier blog, the ECB, the Fed and others have become the holders of last resort for much of the private sector risk which no-one else is willing to touch. Today’s announcement of a record liquidity injection by the ECB, along with a further rise in the Fed’s balance sheet as part of the dollar swap programme, looks particularly dramatic, but it really just represents a continuation of a process which has been underway for many months now.

…we should call a spade a spade. This is quantitative easing on a significant scale, and the lines between this form of QE, and the direct monetisation of budget deficits, which is forbidden by the spirit of the eurozone treaties, are becoming increasingly blurred.

…the monetary base will expand rapidly as central bank funding for the banking sector replaces private funding, and this is likely to prevent the large drop in M3 which would otherwise have occurred.

Questions will be asked, especially in Germany, about whether this liquidity injection will be inflationary.

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22-Dec (HousingWire) — The United States could lose its AAA sovereign debt rating by the end of 2013 if policymakers fail to make inroads in cutting the federal deficit in the next year and a half, Fitch Ratings said Thursday.

Fitch and Moody’s Investors Service still maintain AAA ratings for U.S. sovereign debt even though Standard & Poor’s lowered its rating for U.S. sovereign debt to AA+ from AAA back in August. In August, Moody’s affirmed the country’s gilt-edged rating, but assigned U.S. sovereign debt a negative outlook, saying a downgrade could occur if fiscal discipline weakens in the coming year.

Fitch says political gridlock and the failure of the Joint Select Committee on Deficit Reduction to cut $1.2 trillion from the deficit only forestalls the debt reduction process, creating even more gridlock with 2012 being an election year.

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Gold Eases Within Range

22-Dec (USAGOLD) — Gold is lower this morning and has probed back below $1600 intraday. Mixed US economic data were largely seen as offsetting, so what little activity we are seeing is being driven by position squaring ahead of the long Christmas weekend. While the test back above the 200-day moving average (1625.17 today) was seen as ecouraging, the inability of the yellow metal to register a close above the average leaves the technical picture somewhat questionable.

Keep in mind though that gold has tested below the 200-day on several occassions throughout this rally and the dominant uptrend always re-exerted itself. In fact, reversions to the proximity of the 200-day MA have proven to be excellent buying opportunities over the past decade.

The fundamental picture on the other hand remains broadly constructive for gold. Basically everything that has driven gold higher over the past decade is still in place and expanding. I’ll sum it up by calling it the ‘proliferation of paper’; paper in the form of debt issuance and paper in the form of fiat currency expansion. Yesterday’s massive €489 bln ($638 bln) ECB LTRO drives home my point. In a one day operation, 523 eurozone banks snapped up nearly the equivalent of the 2009 US fiscal stimulus. Astounding.

However, paper ounces of gold have grown rather dramatically over the course of the multi-year rally as well. Just last week, Nigeria’s bourse listed a new gold ETF. Estimates vary widely, but the most commonly cited statistic is that there are 100 ounces of “paper gold” for every ounce of real gold. When you consider the magnitude at which this artificial supply has expanded in just the last several years alone, it’s quite astounding how easily the gold market absorbed those ounces.

That dear friends is a testament to the underlying fundamentals of this market. And the reality of simple supply and demand economics.

Gold Rallies, Then Falls on ECB Liquidity Pump

21-Dec (USAGOLD) — Gold surged back above the 200-day moving average on expectations that today’s ECB offering of unlimited 3-year money at about 1% would ease liquidity concerns and provide some sense of stability within the eurozone. The uptake on that cheap money was at the very high-end of expectations at €489 bln ($638 bln), with 523 banks participating.

The massive liquidity pump was viewed as a positive for a fleeting moment, but then the market started considering the real implications of so many banks needing nearly half a trillion euros. Upon that second examination, the market determined that the crisis within the EU banking system was worse than they thought and investors quickly switched to a “risk-off” mindset. Gold peaked at 1641.65 and then proceeded to retreat back into the range, moving into negative territory on the day.

It was widely perceived that the abundance of new-found cheap liquidity would be plowed back into sovereign debt markets, lowering refunding costs and providing additional stability within the eurozone. However, the evaporation of risk appetite gave the commercial banks pause and spreads widened. The ECB seemed to be the only one actively buying EU sovereign debt today. Some are already calling the LTRO scheme a bust, but it is in fact too early to tell.

The obvious reality here is that what the ECB created today is more debt. If I’ve said it once, I’ve said it a thousand times; you don’t extract yourself from a debt crisis by creating more debt. PIMCO’s Bill Gross tweeted the following this morning: What does #LTRO stand for? 1. A shell game; 2. Cash for trash; 3. Three-card “monti;” or 4. All of the above.

Undoubtedly the bulk of that €489 bln is going to be invested somewhere; after all these are loans that will have to be paid back, so the banks will have to find something to yield more than the approximately 1% they’re paying on this 3-year money. Speculation about quid pro quo arrangement with the ECB not withstanding, the banks seem to have at least initially determined that sovereign debt purchases are not their first order of business. Perhaps they’re holding out for higher yields. Perhaps they’ll look to buy back the gold they delevered out of last week first…

20-Dec (The Economist) — THE world’s recovery from recession is slowing, according to The Economist’s measure of global GDP, based on 52 countries. Third-quarter growth expanded by 3.6% across the world, down by 1.5% from the same period in 2010.

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21-Dec (Bloomberg) — European banks borrowed enough cash from the European Central Bank at its first three-year offering to refinance almost two-thirds of the debt they have maturing next year amid concern that markets will remain frozen.

The 523 euro-area lenders took a record 489 billion euros ($638 billion) from the Frankfurt-based central bank in 1,134- day loans today, more than economists’ median estimate of 293 billion euros in a Bloomberg News survey. That equals about 63 percent of the European bank debt maturing in 2012, according to Goldman Sachs Group Inc. analysts.

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21-Dec (HousingWire) — The National Association of Realtors revised its existing home sales downward 14.3% in the period from 2007 to 2010, after the group said its data diverged from actual market conditions.

The trade group announced the revisions Wednesday in its monthly existing-sales report. November sales rose 4% from last month and 12.2% from a year ago. Jed Smith, the head of quantitative research at NAR said in a conference call that numbers in reference to supply and demand in the market are unchanged.

Lawrence Yun, NAR chief economist, said about half of the revisions came from a decline in for-sale-by-owner transactions. NAR said those sales dropped from 16% of the market in 2000 to 9% in 2010.

Multiple listings, geographic population shifts and house flipping also contributed to the revisions, Yun said.

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21-Dec (FT Adviser) — Britain’s deteriorating public finances and growth outlook have substantially reduced its ability to maintain its triple A credit rating, Moody’s, the credit ratings agency warned on Tuesday evening in a shot across the coalition government’s bows, reports the Financial Times.

In its annual report into UK sovereign debt, Moody’s maintained the stable outlook on the top-notch rating, but warned that in addition to domestic risks, Britain would not be immune from a crisis in the eurozone. It has placed all of its European ratings, not just those in the eurozone, under review in a move it said “could lead to a repositioning of a large number of sovereign ratings”.

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21-Dec (Financial Times) — The European Central Bank reported stronger than expected demand for an unprecedented offer of unlimited three-year loans on Wednesday, after banks were urged to take the funds as part of concerted efforts to ease severe strains across the eurozone financial system.

Over 500 European banks took €489bn worth of loans from the ECB’s longer-term refinancing operations, or LTROs, the central bank said.

That is the largest amount ever allocated in a single ECB liquidity operation. The previous record was €442bn in one-year loans offered in June 2009.

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By Brett Arends
20-Dec (MarketWatch) — If the Italians can’t persuade the bond markets to keep them in business, they have another card up their sleeve.

Few people realize it, but Italy holds the world’s fourth biggest stockpile of gold, at 2,452 tonnes. That’s even more than France, and more than twice as much as China.

Only the U.S., Germany and the International Monetary Fund hold more.

The question here is whether some of the troubled European countries — such as Italy and France — are going to have to start selling off the national gold pile to meet their bills.

Some wonder if they already have.

…I continue to suspect that, sooner or later, China is going to move some of its massive $3 trillion-plus reserves into gold, the only currency that no other country controls.

…When that bullion changes hands, it may be the moment when power shifts from the rulers of yesterday to the rulers of tomorrow.

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PG View: Mr. Arends point about the transfer of power is an important one; it may give the current holders of gold pause when it comes to selling. Investor fear of official gold sales undoubtedly played into last week’s sell-off, but I think the author correctly ascertains that any movement of physical gold from its essentially bankrupt current owners into stronger hands is medium to longer term bullish.

By Nouriel Roubini
20-Dec (Financial Times) — For the last three years the world’s biggest economies – the US, eurozone and China – have been living up to the infuriating euphemism so beloved of policymakers: ”kicking the can down the road”. They have been avoiding the tough decisions that are required to address their fundamental economic, financial and fiscal problems.

The US has postponed its fiscal consolidation and avoided the other structural reforms – investments in infrastructure, education and skills and changes to energy policy – that are required to restore its potential growth rate. The eurozone has been in denial of the fact that some of its member states are insolvent, as well as unable to survive and grow in a monetary union. China has persisted in its weak currency, to support its export and investment-led growth model where savings are too high and consumption too low.

In all cases political constraints – the approaching elections in the US and leadership transition in China at the end of 2012, and the inability of the eurozone’s 17 governments and coalitions to coordinate policies coherently while staggered elections and changes of government take place – have led leaders to avoid the short-term pain and political costs of tough decisions that will yield benefits only over the medium term.

…By 2013 at the latest, but possibly already in 2012, a perfect storm of a double-dip recession in the US, a disorderly scenario in the eurozone and a hard landing in China could materialise.

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PG View: I frequently disagree with Roubini, but concur that the ‘can kicking’ does need to stop at some point.

By Bill Gross
19-Dec (Financial Times) — Gresham’s law needs a corollary. Not only does “bad money drive out good,” but “cheap” money may as well. Ultra low, zero-bounded central bank policy rates might in fact de-lever instead of relever the financial system, creating contraction instead of expansion in the real economy. Just as Newtonian physics breaks down and Einsteinian concepts prevail at the speed of light, so too might easy money policies fail to stimulate at the zero bound.

Historically, central banks have comfortably relied on a model which dictates that lower and lower yields will stimulate aggregate demand and, in the case of financial markets, drive asset purchases outward on the risk spectrum as investors seek to maintain higher returns. Near zero policy rates and a series of “quantitative easings” have temporarily succeeded in keeping asset markets and real economies afloat in the US, Europe, and even Japan. Now, with policy rates at or approaching zero yields and QE facing political limits in almost all developed economies, it is appropriate to question not only the effectiveness of historical conceptual models but entertain the possibility that they may, counterintuitively, be hazardous to an economy’s health.

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20-Dec (The Wall Street Journal) — U.S. home building climbed to the highest level in 19 months during November and construction permits grew, with most of the increase in housing starts coming from multifamily construction.

Home construction last month increased 9.3% to a seasonally adjusted annual rate of 685,000 from October, the Commerce Department said Tuesday. The results were better than forecast. Economists surveyed by Dow Jones Newswires expected housing starts would rise by 0.3% to an annual rate of 630,000.

The increase in November was driven by a 25.3% increase in multi-family homes with at least two units, a volatile part of the market.

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20-Dec (Bloomberg) — Russia’s central bank boosted its gold holdings to 28.1 million troy ounces last month, from 28 million at the end of October.

The stockpile was valued at $48.2 billion as of Dec. 1, compared with $48.6 billion a month earlier, Bank Rossii said on its website today.

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