Three Charts to Watch for Signs of
What’s to Come
September 4, 2012
So the Fed
disappointed on Friday.
I know that
everyone in the mainstream financial media along with much of the blogosphere
believe that the Fed left the door “wide open” for QE 3 or some other large
scale monetary program at its September 12-13 FOMC meeting. But, the reality is
that Bernanke used the same tired “we’re ready to act if needed” mantra he’s
been running for over a year now.
Regardless
of the Fed’s verbage, the two key charts for determining whether or not more QE
or some other program is coming are Gold and Silver. Both have just staged
breakouts, the question now is whether these moves are a headfake or the real
deal.
Given that
hedge funds are notorious for pushing Gold and Silver higher at the end of the
month for performance gaming, this really is a toss-up.
Here’s Gold:
And here’s Silver:
It’s a
tough call here. And things are no clearer in the currency markets where the US Dollar is on the cusp of
breaking its uptrend:
What
happens next will determine the true state of affairs for the financial system.
Keep these three charts on your radar…’
Thoughts on a “too quiet” Labor Day
September 3, 2012
‘The stock
market is closed today for Labor Day.
A few
thoughts on the preceding week:
1)
The US Federal Reserve disappointed in a big way during its annual Jackson Hole
meeting. It was in 2010 that Fed Chairman Ben Bernanke hinted at QE 2, which
kicked off a large rally in stocks and other risk-on assets.
Investors
and the mainstream financial media are desperate to claim he did something
similar this time around. He did not. Instead, he issued the same message the
Fed has issued for over a year: we stand ready to act if things get bad.
However,
this has not stopped the media from proclaiming that the Fed has left the door
wide open for announcements of QE at its September 12-13 FOMC meeting. This
however is virtually impossible due to a) food prices, b) gas prices, c) the
upcoming US Presidential election election and d) the fact that the banks don’t
need QE, they already have ample liquidity sitting around (this is a solvency
crisis, not a liquidity one).
2)
The Euro and Euro stocks have lead a tremendous rally ever since the European
Central Bank President Mario Draghi promised the ECB would take major action
that would prove sufficient to stop the crisis. Saner minds have been asking, what
specifically has Draghi accomplished?
From a
banking capital basis, the answer is nothing. EU banks remain under capitalized
and over leveraged. No new capital has been created.
From a
bailout mechanism perspective the answer is again nothing. The EFSF bailout
fund has roughly €65 billion in firepower left while the ESM doesn’t even exist
yet (and won’t until Germany rules it constitutional on September 12… a
development that is not guaranteed).
From a
political perspective Draghi once again has accomplished nothing. Germany,
which remains the real de facto backstop for the EU, remains opposed to more
bailouts. Meanwhile Spain and Greece are back at the bailout trough demanding
more funds or more time. And of course, Italy remains in the side-wings ready
to take center stage in the coming weeks.
So… no new
money, no new funds, and no change in the political landscape. Draghi has
obviously learned the power of verbal intervention (the US Fed’s primary tool
over the last year)… How long can he use this tool successfully remains to be
seen.
Oh, and
France just nationalized its second largest mortgage lender. But don’t worry,
the EU Crisis is definitely contained and Draghi and others have got
everything under control. After all, when the US nationalized Fannie Mae and
Freddie Mac in 2008 the financial crisis came to a screeching halt… didn’t it?
3)
I continue to receive email after email assuring me that the Central Banks are
capable of hitting print and saving the day. My answer to these messages from a
purely logical standpoint is: if that were the case, they would have done
it by now.
From a more
analytical standpoint, we have to consider that this is a solvency crisis. You
cannot solve a solvency crisis via more debt. Nor does liquidity solve
anything major: liquidity only helps in day to day funding which banks need
when they are truly on the brink of collapse a la 2008.
So,
printing doesn’t help or change anything.
But what
about debt monetization? Surely the Central Banks can print money and then use
this money to buy bonds much as the Fed did with QE 1 and 2?
Again, this
argument doesn’t add up. There is a reason that French, US, and German bonds
are yielding so little right now. That reason is that the global financial
system is starved for quality collateral: sovereign bonds remain the senior
most assets/ trading collateral for the major banks.
QE or
printing money to buy bonds actually removes collateral from the
financial system. It may be helpful in terms of short-term funding for banks
and nations that are truly on the brink of collapse and whose collateral is
garbage anyway (Spain and the other PIIGS), but this “help” is much like a shot
of adrenaline for a patient who is on the verge of death.
But why
can’t cash be used as collateral much like sovereign bonds?
Because the
global banking system is based on sovereign bonds, not cash. Look at
any bank’s balance sheet and the senior most items are “cash and cash
equivalents.” Read the notes on this “asset” and you’ll see that it’s
actually “highly liquid sovereign bonds.”
True, banks
use actual cash for day-to-day funding. But when it comes to building their
trading portfolios (where much of the profits are made) it’s sovereign bonds
backstopping the whole mess. And banks have built some truly insane trading
portfolios: the global derivatives market is over $700 TRILLION in size.
This is why
the ECB keeps letting banks pledge their sovereign bonds as collateral for
cash, only to then give them more sovereign bonds which they can then pledge as
more collateral to get more money, rather than the other way around. By the
way, the same tactic is being used in the UK and elsewhere.
To return
to an earlier point: this is why French, German, and US sovereign bonds are
yielding so little: they are considered the least risky of the sovereign bond
market and therefore are the best collateral.
Consequently,
banks are piling into these bonds, pushing the prices up to the point of little
or no yield (the US) or even negative yield (recently France and Germany).
It’s also
why everyone was so clear that Greece didn’t actually “default” during the
second bailout. And it explains why the ECB and others are doing everything
they can to stop any EU sovereign nation from defaulting: because
doing so means the collateral for hundreds of billions of Euros worth of trades
going up in smoke… and down go the EU banks and the EU banking system.
A question
for you on this Labor Day when you’re enjoying a cook-out or playing with your
kids… how can the Central Banks fix this mess?
If you’re
looking for specific investment recommendations along with in-depth macro and
micro analysis of the global economy and capital markets, I highly suggest
taking out a subscription to my Private Wealth Advisory newsletter.
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Best regards,
Phoenix
Capital Research