BoJ Jumps on the Inflation Targeting Bandwagon

17-Feb (USAGOLD) — This week there was trumpeting from some quarters of the news that the Bank of Japan (BoJ) had finally decided to target inflation, albeit at a modest 1%. Those doing the trumpeting expressed some optimism that other central bankers would take note and follow-suit in the hopes that some level of inflation will spur languishing economies. For good measure, the BoJ raised its asset purchase target from ¥55 trillion to ¥65 trillion, saying that the additional ¥10 trillion would be dedicated to longer-term government bond purchases.

However, the notion that higher inflation will underpin an economy is misplaced in my opinion. An expanding economy will likely beget some level of inflation, but manufacturing inflation via expansionary monetary policy does not result in a corresponding rise in GDP (and employment).

I would argue the whole purpose of ZIRP, QE and inflation targeting is to disincentivize saving; to make people believe they must spend today for fear that what they need/desire will be more expensive tomorrow. However, in times of economic uncertainty, which is driving broad-based deleveraging, moderate price inflation is unlikely to be sufficient to dislodge the yen, dollars, euros and pounds from the increasingly tight grasps of consumers. As I suggested in a recent newsletter article after the Fed announced it would embark on inflation targeting, what we really end up with is an all-out attack on savers.

I certainly understand why central banks view deflation as the far greater evil, and therefore feel compelled to create inflation: Deflation is bad for the private banking industry served by the central banks. In deflationary times, consumers tend to forestall purchases in anticipation of lower prices, which in turn reduces the need for credit and therefore bank earnings.

From a consumer’s perspective one might argue that deflation stemming from a moribund economy is beneficial, as falling prices make it easier to maintain a standard of living. Those from the Austrian school of economics would say that market forces are simply bringing the prices of goods and services back inline with wages. Although maintaining a standard of living can become very difficult if the aforementioned delayed consumption costs you your job.

In fact, those that suffer the most from inflation-inducing policies — and the resulting decline in real wages — tend to be from the lower quintiles of the socioeconomic strata; those on fixed incomes or living paycheck-to-paycheck. This is especially true when inflation targeted at core-components — as the Fed is now doing — inevitably splashes over into food and energy, where those lower quintiles spend a relatively large percentage of their income compared to the upper-quintiles.

Additionally, those in the higher quintiles generally have the means to hedge the manufactured price risk (especially when it is telegraphed as “policy”) and may actually realize outsized returns if über-easy central bank policies result in an overshoot of the inflation targets, as we saw in the UK in recent years and Europe in 2011.

Actually, the UK is a pretty good example of what I’m suggesting: At the end of Q3-11, inflation was running at more than 5% (150% above target), while GDP was an anemic 0.5%.

Preliminary data suggest UK GDP weakened in Q4 to -0.2%. While inflation had moderated to 4.2% by year-end, I believe that is a result of a weaker economy. Not the other way around.

Nonetheless, the BoE reacted by increasing their asset purchase target by £50 bln to £325 bln. With the BoJ following their lead this week and the ECB hamstrung by the pesky realities of their charter, perhaps it is indeed the Fed’s turn to step back up to the plate…

That’s not going to get me to consume more, but it will likely prompt me to increase the hedges that I already have in place. And I don’t think I’ll be alone.

What’s the classic hedge against inflation? Gold of course…

17-Feb (Yahoo Finance) — As President Obama unveiled the 2013 fiscal year budget, the nation’s financial situation came back into sharp focus. Experts say partisan gridlock in Washington means the budget will probably go nowhere.

Considering this is an election year, however, expect politicians to harp on facts, figures and terms that most Americans weren’t taught in high school. To help out, it’s time to dredge up lots of scary facts to make you pay attention.

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by Nouriel Roubini
17-Feb (Project Syndicate) — Since late last year, a series of positive developments has boosted investor confidence and led to a sharp rally in risky assets, starting with global equities and commodities. Macroeconomic data from the United States improved; blue-chip companies in advanced economies remained highly profitable; China and emerging markets slowed only moderately; and the risk of a disorderly default and/or exit by some members of the eurozone declined.

Moreover, under its new president, Mario Draghi, the European Central Bank appears willing to do anything necessary to reduce stress on the eurozone’s banking system and governments, as well as to lower interest rates. Central banks in both advanced and emerging economies have provided massive injections of liquidity. Volatility is down, confidence is up, and risk aversion is much lower – for now.

But at least four downside risks are likely to materialize this year, undermining global growth and eventually negatively affecting investor confidence and market valuations of risky assets.

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17-Feb (Dow Jones) — Greece’s debt rating could fall into default in the coming days if past comments by ratings firms are any indication after the country completed a debt exchange on bonds held by the European Central Bank.

All three major ratings firms in recent months have said that a bond exchange where Greece replaces current outstanding bonds with new bonds that include worse terms for the bond holders would constitute a default.

Depending on the details of the debt swap the ECB just completed, that could be enough to trigger a ratings default in the eyes of the ratings companies.

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PG View: I think the Greek bond market has already provided the answer to that question: Greek 1 Year At 629%, Biggest One Day Jump In Yield Ever.

By Mary Anne & Pamela Aden
17-Feb (MarketWatch) — U.S. stocks and gold are leading the way. In fact, these are our top picks for the months ahead and they’re looking good. Here’s why …

— Gold has been a consistent winner year after year. The technicals are bullish and so are the fundamentals. Gold’s bull market rise will remain intact by staying above $1560.

Due to monetary uncertainties and massive debt, central banks are big gold buyers. And so is the public, especially in China, India and other emerging nations. This is keeping demand strong.

Ongoing government spending, monetization, low interest rates in the Western world and weak currencies are also putting upward pressure on gold and silver.

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17-Feb (Financial Times) — The US Congress on Friday passed a bipartisan $150bn bill to extend the payroll tax cuts and unemployment benefits until the end of the year, in a boost for struggling Americans and President Barack Obama’s re-election campaign alike.

In a rare show of cross-party agreement, both Republican and Democratic leaders hailed the passage of the in favour of the bill, which they said offered relief to 160m workers struggling to make ends meet and several million more who are looking for jobs.

…According to the Congressional Budget Office, the agreement will increase the federal deficit by $89bn over the next decade, mostly because of lower tax revenue.

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16-Feb (Financial Times) — The World Gold Council believes China’s central bank made significant gold purchases in the final months of 2011, contributing to a surge in the country’s imports.

Marcus Grubb, managing director for investment at the WGC, a lobby group for the gold mining industry, told the Financial Times that buying by the People’s Bank of China could explain a large discrepancy between Chinese imports and the WGC’s estimates of consumer demand in the country.

“There is absolutely a discrepancy in the import figures,” said Marcus Grubb. “The obvious inference is that the central bank is buying.”

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17-Feb (Bloomberg) — Italian anti-mafia prosecutors said they seized a record $6 trillion of allegedly fake U.S. Treasury bonds, an amount that’s almost half of the U.S.’s public debt.

The bonds were found hidden in makeshift compartments of three safety deposit boxes in Zurich, the prosecutors from the southern city of Potenza said in an e-mailed statement. The Italian authorities arrested eight people in connection with the probe, dubbed “Operation Vulcanica,” the prosecutors said.

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PG View: Counterfeiting is an aspect of the “paper market” that is not considered much these days. But that is a huge amount of Treasuries!

17-Feb (USAGOLD) — Gold remains fairly well contained, within the confines of the range established earlier in the week. Tests of the upside have proven unsuccessful, leaving resistance marked by Wednesday’s high at 1736.70 intact.

While no decision on Greece is expected until Monday, the euro is clinging to gains from yesterday’s sharp rebound. But let’s be honest, after months delays, promises and outright lies, what do you suppose the odds are that the Greek ‘can’ truly is kicked again come Monday?

The ECB is reportedly ready to swap the €50 bln in Greek bonds it’s holding on its balance sheet — and may have already done so. While private bondholders are allegedly volunteering to take a 70% (or more) haircut on the Greek bonds they hold, not so for the ECB it would seem.

Yesterday’s release of The World Gold Council’s Gold Demand Trends report confirmed that demand for the yellow metal remained robust in 2011. Global demand exceeded the $200 bln mark for the first time ever and demand in tonnage reached the highest level since 1997, when the gold market was moving into the range that would ultimately prove to be a long-term base. Gold is up nearly 600% from the lows established in the late-90s/early-00s.

Investment demand was up 5% in 2011. And while unsurprisingly, China and India remain primary sources of demand, there was a strong surge in European demand as “the eurozone remains in turmoil and the need for asset protection continues to be a priority.”

Marcus Grubb, Managing Director, Investment at the World Gold Council summed the data up nicely by saying, “What is certain is that the long-term fundamentals for gold remain strong, with a diverse and growing demand base, coupled with constrained supply side activity.” And as any first year economics student can tell you, growing demand and contracting supply is a recipe for higher prices.

• US leading indicators +0.4% in Jan, below market expectations of +0.5%, vs positive revised +0.5% in Dec.
• US CPI +0.2% in Jan, below market expectations of +0.3%; core +0.2%, in-line with expectations.
• Canada leading indicator +0.7% in Jan, a tick above expectations, vs +0.7% in Dec.
• Canada CPI +2.5% y/y in Jan, above expectations of +2.3%; core +2.1%, near median.
• Germany CPI +0.6% in Jan, above market expectations of 0.4%, vs -0.4% in Dec; 3.4% y/y.
• Eurozone current account (sa) €2.0 bln in Dec, vs -€0.9 bln; €16.3 bln (nsa).
• UK retail sales +0.9% m/m in Jan, well above market expectations of -0.1%, vs 0.6% in Dec; 2.0% y/y, down from 2.6% in Dec.

17-Feb (The New York Times) — The European Central Bank plans to swap its holdings of Greek bonds for new debt as part of a maneuver to avoid having to share in losses absorbed by private investors, a person with direct knowledge of the matter said.

But the plan to trade bonds with an estimated face value of €50 billion, or $66 billion, is being carried out over the objections of the German Bundesbank, which fears that giving the E.C.B. preferential treatment could further undermine investor willingness to buy the debt of other hard-pressed countries, such as Portugal.

Investors would worry that their losses will be greater if Portugal or another country also restructures its debt, according to the person, who confirmed reports in the Frankfurter Allgemeine newspaper and other media.

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PG View: Newswires are quoting sources this morning that say this swap has already taken place. Some speculation that the swap constitutes a technical default.

17-Feb (Financial Times) — A split has emerged in the German government over whether to grant Greece a second bail-out package with Wolfgang Schäuble, finance minister, pushing to let Athens default while Chancellor Angela Merkel is firmly against, according to German and eurozone officials.

Mr Schäuble was said to have come to his hardline view in the light of haggling over Greece’s fresh austerity measures under a second rescue programme and the refusal of some Greek politicians to promise to back the deal after elections due in April.

“Schäuble doesn’t think the Greeks can deliver any more,” said one official in Ms Merkel’s Christian Democratic Union, adding that the minister was worried about putting more of German taxpayers’ money into a second bail-out.

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Daily Telegraph (Feb 16) — By Graham Smith

A team of builders renovating a vineyard facility in France were stunned when U.S. gold coins worth $1million rained down on them from the rafters.

The treasure trove of 497 coins was hidden in the attic of an old building in the rural village of Les Riceys in the country’s famed Champagne region.

The pieces, which have a face value of $20 each, were minted between 1851 and 1928 and are the equivalent of 17 kilograms of gold.

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JK Comment: Its interesting to think about this story in the context of the time in which these coins were stashed away. In 1933, FDR confiscated gold. Many citizens smuggled gold coins out of the United States to relatives in Europe to avoid this confiscation. Fearing similar draconian measures in their own country, these coins were hidden with such care it took 80 years for them to resurface. Impressive to witness the great lengths some go to to protect their gold.

Breakout (February 16)

JK Comment: My favorite part is the casual statement that, “Remember this (gold) is a currency, everybody’s printing money, even the Japanese now are going to start buying bonds.” Given that proponents for gold are often marginalized with references like “gold bugs” and “conspiracy theorists”, its refreshing to see such matter-of-fact analysis on gold. Gold is a currency. That simple fact, when taken into the context of how developed countries around the world are managing their paper currencies, is all the argument one needs to justify diversification into gold.

Another interesting point from Yamada worth noting, “…and the interesting thing is, in many cases now, did you that India now is going to pay for Iranian oil in gold to bypass the embargo in dollars” As events like this repeat into a trend, the dollar’s role as the world reserve currency is increasingly threatened.

16-Feb (CNBC) — Demand for gold hit an all-time high in 2011 as European, Indian and Chinese demand soared.

In Europe, Germany and Switzerland were the main drivers of the growth as the euro zone debt crisis escalated and investors looked for safe havens, according to the World Gold Council’s annual report.

While the jewelry market was resilient, the gold investment market grew more, with a 5 percent increase in annual demand.

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16-Feb (WGC) — Global demand for gold in 2011 rose to 4,067.1 tonnes (t) worth an estimated US$205.5 billion – the first time that global demand has exceeded US$200billion and the highest tonnage level since 1997, according to the World Gold Council’s Gold Demand Trends. The main driver for this increase was the investment sector where annual demand was 1,640.7t up 5% on the previous record set in 2010 and with a value of US$82.9 billion. The pre-eminent markets for investment demand in 2011 were India, China and Europe.

…There was also a surge in demand in Europe with the region posting its seventh consecutive annual gain to 374.8t. Germany and Switzerland were the main drivers of growth in the region as the eurozone remains in turmoil and the need for asset protection continues to be a priority.

…Marcus Grubb, Managing Director, Investment at the World Gold Council remarked, “What we can see from these 2011 figures is that there were two main factors driving the results: Asian growth and optimism on the one hand and western desire to protect assets against uncertainty on the other. Looking particularly at Asia, there was a major boost to the overall figures from the increase in Chinese demand, which is a trend that we see continuing over the next year. It is likely that China will emerge as the largest gold market in the world for the first time in 2012. What is certain is that the long-term fundamentals for gold remain strong, with a diverse and growing demand base, coupled with constrained supply side activity.”

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16-Feb (ZeroHedge) — There are those who have been waiting to buy undilutable precious metals in response to a headline announcement from the Fed that it is starting to buy up hundreds of billions of Treasurys or MBS. This is understandable – after all that is precisely the trigger that the headline scanning robots which account for 90% of market action in the past year are programmed to do. And the worst thing that one can do is put on the right trade at the wrong time. Yet it may come as a surprise to some, that while the world was waiting, and waiting, and waiting, for Bernanke to hit the Print button, virtually every other central bank was quietly unleashing it own mini tsunami of liquidity. In fact, as Morgan Stanley puts it, “the Great Monetary Easing Part 2 is in full swing.”

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16-Feb (USAGOLD) — Gold’s correlation to the dollar on Wednesday has proven unsustainable as the yellow metal retreated along with the euro today on further dimming of the prospects for Greece to get its next bailout. Eurozone policymakers have once again put-off making a decision on Greece. The next meeting is slated for Monday.

The proposal to forestall a decision on Greece until after the April elections, when commitments to reform may actually have some credence, seemed to have gained some traction. Furthering such speculation, the German daily Die Welt reported that EU officials were considering a €14.5 bln bridge loan to get Greece passed a likely uncontrolled default in March and through the April elections, at which point a full bailout can be reconsidered. Shortly after this report broke, the German finance ministry claimed it was off the table.

Later in the morning, another rumor broke that an agreement had been reached on how Greece would achieve the additional €325 mln in cuts being demanded. Like a cat responding to a can-opener, the euro jumped back into the range, dragging gold along for the ride. The yellow metal has rebounded nearly $20 off the intraday low and support defined by the short-term range low at 1704.75 has been reinforced.

Positive misses on initial claims, housing starts and Philly Fed index, heightened risk appetite, lifting stocks and helped gold find support. This despite word from Moody’s that they had placed 114 European financial institutions and 5 major US banks on watch for possible downgrades.

• US Philly Fed index jumped to 10.2 in Feb, above market expectations of 8.8, vs 7.3 in Jan.
• US PPI +0.1% in Jan, below market expectations of +0.4%; core was the opposite, rising 0.4% on expectations of +0.1%.
• US housing starts +.5% to 699k in Jan, above market expectations of 675k, vs 689k in Dec.
• US initial jobless claims -13k to 348k in the week ended 11-Feb, below market expectations of 365k, vs upward revised 361k in previous week.
• Spain Q4 GDP (sa) confirmed at -0.3% q/q; +0.3% y/y.
• Norway Q4 GDP (sa) +0.5% q/q, vs negative revised +1.1% in Q3; 1.5% y/y (nsa).
• Riksbank cuts repo rate 25 bp to 1.50%, in-line with expectations.
• Australia employment rebounds in Jan by 46.3k jobs, vs negative revised -35.6k in Dec; unemployment rate ticks lower to 5.1%.
• Singapore Q4 GDP confirmed at 3.6%.

16-Feb (Politico) — After a turbulent day of negotiations, the two top tax writers in Congress announced early Thursday morning that they reached a bipartisan deal to extend tax cuts and jobless benefits affecting millions of Americans.

Senate Finance Committee Chairman Max Baucus (D-Mont.) and House Ways and Means Committee Chairman Dave Camp (R-Mich.) emerged from a Capitol meeting room to say the agreement — hashed out by a bicameral, bipartisan conference committee — would garner enough support to move forward in both chambers.

…They declined to discuss the details of the compromise, but it would extend for 10 months both the 4.2 percent Social Security payroll tax rate and unemployment benefits, and it would forestall a sharp decrease in payment cuts to physicians servicing Medicare patients.

...But the $100 billion cost of the payroll tax cut would be added to the budget deficit, a significant concession by GOP leaders that has provoked opposition on the right.

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PG View: The bottom line here is that we’ll be borrowing the $100 bln that American workers won’t be paying into Social Security for the next 10-months.

16-Feb (Bloomberg) — China, the world’s largest consumer of energy and base metals, is set to displace India this year as the biggest gold user on an annual basis as surging incomes drive increased demand for jewelry and investments.

Demand in China jumped 20 percent to 769.8 metric tons in 2011, while consumption in India fell 7 percent to 933.4 tons, according to a report from the producer-funded World Gold Council today. “It is likely that China will emerge as the largest gold market in the world for the first time in 2012,” said Marcus Grubb, managing director of investment.

China’s economic growth has lifted the nation’s consumption of everything from soybeans to copper, while boosting incomes in the world’s most populous country. Gold has rallied for 11 years on rising investment and jewelry demand, led by consumers in Asia, and increased central-bank buying. China is also the world’s [biggest] gold producer.

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16-Feb (Financial Times) — The president of the group of eurozone finance ministers said a decision to supply Greece with a new €130bn bail-out would not be made until next week, representing yet another delay in the fractious and prolonged process to help the indebted country avoid a messy default.

Jean-Claude Juncker, the Luxembourg prime minister who chairs the group of finance ministers, said in a statement following a conference call on Wednesday night that he was “confident that the group will be able to take all the necessary decisions” on Monday, adding that “substantial further progress” had been made this week.

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16-Feb (Reuters) — The euro fell to a three-week low versus the dollar on Thursday as euro zone officials put off agreeing further aid for Greece, sparking fears of a chaotic default and leaving the euro vulnerable to more falls.

Frustrated by Greek political wrangling, euro zone finance ministers on Wednesday failed to reach agreement on a bailout package for Athens, delaying a decision on the matter until ministers meet on Monday.

Analysts said most in the market still expect Greece to avoid a disorderly default, and anything that shakes this conviction would trigger another wave of euro selling. The options market showed investors were increasingly looking to buy protection against further euro losses.

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PG View: Desire to delay any final decision until after April elections seems to be gaining some traction.

15-Feb (CNNMoney) — Five big U.S. banks were among 17 global institutions placed under review for downgrades Thursday by the rating agency Moody’s, reflecting the ongoing economic pressures from Europe’s fiscal crisis.

Separately, Moody’s placed 114 European institutions under review, including nine that are subject to the review of global banks.

Moody’s is placing under review the long-term ratings and credit assessments of Bank of America, For, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, as well as the Royal Bank of Canada. All except JPMorgan Chase and Royal Bank of Canada are having some or all short-term ratings reviewed.

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16-Feb (Dow Jones) — Moody’s Investors Service placed various ratings of 114 financial institutions in 16 European countries on review for possible downgrade Thursday, highlighting the region’s banks’ vulnerability to the euro-zone sovereign debt crisis.

The institutions affected include Barclays, BNP Paribas, Commerzbank, Credit Agricole, Deutsche Bank, HSBC, ING Group, Royal Bank of Scotland, Santander, Societe Generale and UniCredit.

European bank shares were lower Thursday amid renewed worries about their exposure to the crisis in the currency bloc. Analysts noted that the move by Moody’s was largely priced in by the markets and that the day’s losses were mainly driven by reports that the second bailout package to Greece could face a delay.

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