August 12 (Financial Times) — The cliche “rollercoaster ride” is often overused in financial markets. But this week has been the real thing: the biggest one-day fall and rise in stocks since the 2008 Lehman Brothers’ collapse, record low yields for benchmark US Treasuries and huge swings in the value of the Swiss franc.

“At some point you laugh at it a bit,” says Christopher Blum of JP Morgan Asset Management. “It is exhausting. The market in the very short term can be so volatile: you could even call it irrational.”

So, where exactly are the financial markets at the end of such a turbulent week? In some ways, not so very far away from where they started.

[source]

PG View: The DJIA ended the week down 175 points from last Friday’s close.

August 12 (Bloomberg) — Investors pulled the most money from global stock funds since 2008 in the past week as the Standard & Poor’s downgrade of Treasuries and the deepening European debt crisis prompted a flight into cash and gold.

Funds that buy global equities suffered $3.5 billion in net withdrawals in the week ended Aug. 10, the most since the second week of October 2008, according to Cameron Brandt, director of research at Cambridge, Massachusetts-based EPFR Global. Investors removed $11.7 billion from funds that invest in U.S. equities, the most since May 2010 when investors pulled money following a one-day market crash that briefly erased $862 billion.

“This week had a feeling of capitulation as we saw investors running for cover,” Brandt said in a telephone interview. “The last time we saw this kind of flight to safety” was in 2008, he said.

[source]

August 12 (Bloomberg) — Confidence among U.S. consumers plunged in August to the lowest level since May 1980, adding to concern that weak employment gains and volatility in the stock market will prompt households to retrench.

The Thomson Reuters/University of Michigan preliminary index of consumer sentiment slumped to 54.9 from 63.7 the prior month. The gauge was projected to decline to 62, according to the median forecast in a Bloomberg News survey.

[source]

Markets Generally Tell the Truth…If You Let Them

It has been an extraordinarily volatile week in global markets, which saw gold establish a new all-time nominal high at 1813.84 before succumbing to corrective pressures. Stocks, bonds and currencies all took wild roller-coaster rides on escalating growth concerns and amid government and central bank interventions, and threats thereof.

In the past couple of weeks we’ve seen the ECB intervening overtly in the periphery bond markets. Some European countries have instituted short-selling bans to stymie bets against shares. The Bank of Japan (BoJ) intervened to squelch the rapid rise in the yen. The Swiss National Bank (SNB) initiated measures to quell safe-haven demand for the Swiss franc. When SNB actions proved unsuccessful, talk of a possible currency peg to the euro circulated, which weighed heavily on the franc into the weekend. Through it all, speculation about additional Fed intervention in the Treasury market, so called QE3, was on the rise.

Why all the interventions? Because freely traded markets eventually will tell you the truth. Sometimes inconvenient truths. Official interventions allow that truth to be distorted, often to fit the preferred narrative that ‘all is well.’ When the housing market collapsed in 2008/2009 and demand for mortgage-backed securities evaporated, the Fed stepped in to provide artificial demand in the MBS market. This price distortion results in inaccurate pricing of risk, which is essentially what led to the financial crisis in the first place.

When US interest rates started to move higher, despite an official zero interest rate policy, once again the Fed stepped in to buy Treasuries in order to suppress those yields. When yields on sovereign debt issuance are artificially suppressed through quantitative easing or other measures, whether its here in the US, Japan or in Europe, it results in an inaccurate pricing of sovereign default risks. The real market strains to reflect something closer to reality, forcing governments and central banks to push harder in the other direction. Increasingly desperate times call for increasingly desperate measures.

When special measures are no longer practical or possible, the terrible truth is all too often revealed with even greater consequences than if there had been no intervention in the first place. As was pointed out on the ZeroHedge blog this week, when the SEC banned short-selling of US financial stocks in 2008, those shares actually plunged nearly 48% in about a months time nonetheless. EU/IMF intervention in Greece didn’t do anything to fundamentally alter the disastrous fiscal course that country was on. The result was that Greece was right back looking for a second bailout in less than a year’s time.

Perhaps the most startling intervention chatter of the past week centered on the possibility of Switzerland pegging their currency to the arguably failing euro. While both the SNB and ECB officially denied that a currency peg was being discussed, SNB board member Jean-Pierre Danthine said that “nothing is excluded.” Understandably the SNB would have been thrilled with the plunge in the franc on the peg rumor, as they got what they were unsuccessful in achieving with direct intervention, without spending an additional rappen (cent). It is the SNB’s contention that the franc is “massively overvalued;” but overvalued against what? The dollar? The euro?

Flip the table and it’s pretty hard to argue that either the greenback or the single currency are ‘massively undervalued.’ The recent safe-haven flows into the swissy is reflective of this simple reality: In the world of fiat currency, the Swiss franc is simply the best looking horse at the glue factory. So now they are contemplating hitching their horse to the lamest horse in the pen.

The Swiss franc remains near its recently established all-time low against gold. That’s your real barometer of value. In fact, gold has recently traded at new all-time highs against all of the major currencies; perhaps most notably the dollar, in the wake of S&P’s downgrade of US sovereign debt.

Despite the inconvenient reality illustrated by gold, beggar thy neighbor competitive currency devaluations are likely to continue. Investors seeking protection in certain assets classes will continue to be waylayed by government and central bank actions. As some safe-havens are suddenly made wholly unsafe by design, certain physical assets — like gold — that you hold in your possession will become increasingly appealing as the safe-havens of last resort.

Gold ounces held in your possession are unencumbered by counter-party risks. They are unaffected by margin hikes. And for all intents and purposes they can be considered AAA rated.

August 12 (Financial Times) — The French economy delivered no growth in the second quarter against expectations of a 0.2 per cent rise, intensifying pressure on the government to find significant new spending cuts to ensure France will meet its pledge to bring the public deficit to 3 per cent of GDP by 2013.

Francois Baroin, finance minister, said he was confident France would meet its target of 2 per cent growth this year despite a disappointing performance in the second quarter. “We will be in line with our objectives,” he said on RTL radio minutes after the figures were published by Insee, the state statistic agency.

…Rumours that French sovereign debt was set to lose its Triple A status have been denied by all three ratings agencies as well as the government, but continued to circulate in a febrile market atmosphere. French banks have also been the subject of unfounded rumours over their financial strength – strongly denied by the Bank of France.

[source]

August 12 (CNNMoney) — Regulators imposed a temporary short-selling ban in four European nations, effective Friday, in order to tame the wild market volatility that has taken markets throughout the world on a roller coaster ride.

The European Securities and Markets Authority, which is the European version of the Securities and Exchange Commission, said France, Italy, Spain and Belgium have all “decided to impose or extend existing short-selling bans in their respective countries.”

“They have done so either to restrict the benefits that can be achieved from spreading false rumors or to achieve a regulatory level playing field, given the close interlinkage between some EU markets,” the authority said in a statement.

[source]

August 12 (USAGOLD) — Gold is consolidative at the end of a volatile week, amid further official interventions. The short-selling ban in Europe seems to have provided some calm to the market for the time being, tempering gold’s appeal as a safe-haven.

The Swiss franc’s appeal as a safe-haven continues to erode as well as talk of a peg to the euro persists.

• US retail sales +0.5% in Jul, above market expectations of +0.4%, vs upward revised +0.3% Jun; +0.5% ex-autos.
• Eurozone industrial production -0.7% m/m in Jun, below market expectations, highlighting downside GDP risk.
• French prelim Q2 GDP flat q/q, below market expectations of +0.4%, vs +0.9% in Q1.
• Italy cancels bond auction.
• India industrial production +8.8% y/y in Jun, well above market expectations of +5.7%, vs +5.6% y/y in May.
• Hong Kong Q2 GDP +5.1% y/y, below market expectations of +6.0%, vs +7.5% y/y in Q1.
• Japan Jun industrial production little-revised at +3.8% m/m.

by Jeff Cox
August 11 (CNBC) — So whether this equals, falls short of, or exceeds the financial crisis of 2008 hardly seems to matter—investors are afraid, very afraid, and the question as much as anything in the minds of many market pros will be what soothes that fear.

Analyst Dick Bove at Rochdale Securities says he knows why: More restrictive capital requirements and near-zero interest rates set at the Federal Reserve that make lending neither easy nor lucrative, a trend that will make it difficult for the economy to grow.

“If one thinks through these limitations it can be seen that banks must shrink their balance sheets and change their business patterns to maintain their profits. What they are unlikely to do is to expand their lending activities in order to grow the economy,” Bove wrote in a lengthy banking analysis Thursday.

“However, the Federal Reserve is suggesting that the economy is unlikely to grow,” he wrote. “If the Fed is prescient, then banks are facing higher loan losses, lower loan volume, and reduced margins on a wide array of banking products. The outlook is not appealing.”

“Even though the United States is able to both print and borrow money, it is as bankrupt as the Europeans,” Bove wrote. “Covering deficits and paying debt with borrowed funds, some of which is newly printed, does not constitute meeting debt service requirements.”

The worries in the market, then, seem to be as substantive as they are superstitious that a crisis lurks somewhere, even if investors aren’t able to pinpoint exactly where.

Asked whether the market was merely having a knee-jerk reaction to fear or taking a more careful measure of fundamentals, Rick Bensignor, chief market strategist at Dahlman Rose in New York, said, “Can I answer both questions ‘Yes’?”

“There’s paranoia and there are real reasons,” he said. “There’s been a real repricing of risk in the markets.”

[source]

by Frank Byrt
August 11 (Globe and Mail) — Standard & Poor’s is recommending gold and gold miners as top investment picks only days after downgrading U.S. Treasuries, which sparked a firestorm in financial markets worldwide that boosted the price of the precious metal.

Gold futures (GC-FT1,770.00-14.30-0.80%) tumbled today after CME Group, owner of the world’s biggest futures market, increased margins on gold contracts by 22 per cent. Gold had soared 8 per cent in the previous three days, bringing a one-year gain to 49 per cent, on U.S. and European debt concerns and a slowdown in global economic growth.

“We believe that gold is in a bull market,” writes S&P analyst Leo Larkin in a research note, because demand will outstrip supply “for the foreseeable future.

“Gold’s price still has room to run despite its stellar advance and we believe that the precious metal could also continue to carry the prices of certain gold-related equities right along with it,” he added.

[Source]

By Ambrose Evans-Pritchard
August 11 (The Telegraph) — The franc retreated against the euro in a wild-one day move on Thursday after top officials at the Swiss National Bank (SNB) floated ideas for a temporary euro peg, a once unthinkable move.

“Nothing is excluded,” said Jean-Pierre Danthine, a SNB board member. “The situation is extremely complex and difficult. There is no magic wand.”

The Swiss franc has moved with gold over recent weeks, acting as a magnet for capital flight from the discredited debt currencies of West. The SNB said the franc is “massively overvalued” and has moved into dangerous territory over the past month.

[source]

PG View: So it begs the question; “massively overvalued” against what? That statement would suggest that the euro and the dollar are ‘massively undervalued.’ It’s pretty hard to make either case. The franc just happens to be the best looking horse at the glue factory. The swissy remains near record lows versus gold: There’s your true gauge of value.

August 11 (Financial Times) — Food commodities prices surged after the US government slashed its forecast for the country’s crops due to the impact of a heatwave and drought.

The US Department of Agriculture painted a bullish picture in particular for corn prices, saying: “Unusually high temperatures and below average precipitation during July across much of the Corn Belt sharply reduced yield prospects.”

…But it could reduce central banks’ room for manoeuvre as higher corn prices rapidly translate into more expensive beef, lamb, pork and poultry and, thus, higher food inflation. China, India and other developing countries have raised interest rates this year in part due to rising food inflation.

[source]

PG View: If food price inflation is indeed kicking in again, can a rebound in gold be far behind?

August 11 (Bloomberg) — Gold futures fell the most in seven weeks after CME Group Inc. (CME) boosted margins on Comex contracts, prompting investor sales after a three-day rally to a record topping $1,800 an ounce and as equities rebounded.

CME Group, owner of the world’s largest futures market, raised margins on gold contracts by 22 percent. The minimum amount of cash that speculators must keep on deposit for an initial account increased to $7,425 on a 100-ounce contract from $6,075. The Standard & Poor’s 500 Index rose as much as 3.2 percent after a drop in U.S. jobless claims.

“The strength in equities, coupled with the increase in margins, is pushing gold down,” Matthew Zeman, a strategist at Kingsview Financial in Chicago, said in a telephone interview. “Investors are waiting for a deeper correction before they start buying again.”

[source]

August 11 (Financial Times) — The Swiss National Bank, which has been waging battle to rein in the strength of the currency, has left open the possibility of pegging the Swiss franc to the beleaguered euro.

Thomas Jordan, vice-president of the SNB, said a temporary franc peg with the euro was within the range of options that policymakers might use to stem the Swiss franc’s strength. “Any temporary measures to influence the exchange rate are permissible under our mandate as long as these are consistent with long-term price stability,” he said.

[source]

August 11 (PIMCO) —

• Taxpayers have been hoodwinked into believing the cost from profligate government spending is low relative to the benefits.
• The Keynesian revolution ignited a decades-long abuse of the core principle of Keynesian economics: for government to increase spending when private sector aggregate demand weakens and stymies job growth.
• The central banker is left to shoulder the burden, seeking all the while to pressure the fiscal authority to amend the abuse of Keynesian economics and decades of fiscal folly.

​The reasons are different yet very much related – deficits are big and growth still tepid in the U.S. and U.K., while emerging nations are worried about growth (and therefore demand) from their developed nation partners – but the upshot is the same: Central bankers across the world appear poised to ease.​

[source]

August 11 (Bloomberg) — Consumer confidence dropped last week to the lowest level since mid-May as American high earners, homeowners and those working full time turned more pessimistic.

The Bloomberg Consumer Comfort Index was minus 49.1 in the period to Aug. 7, down from minus 47.6 the prior week and the second-lowest level in a year. The measure was less than five points away from the record low of minus 54 reached in November 2008, during the depths of the last recession.

[source]

August 11 (The New York Times) — A European market regulator is considering recommending a temporary ban on negative bets against stocks across the continent, in an effort to stop the tailspin in the markets, according to two people with knowledge of government discussions.

The European Securities and Markets Authority, a body that coordinates the European Union’s market policies, has been requesting information from member states about such bets against stocks, known as short-sales.

[source]

August 11 (USAGOLD) — Gold is under pressure following CMEGroup margin hikes on the yellow metal late yesterday. This news was initially dismissed and gold extended to a new record high of 1813.84 in Asian trading. However, it seems that official efforts to slow the flight to quality are escalating. The SNB added liquidity again today via swaps. There is also a rumor circulating that the SNB and ECB have been discussing a currency peg. That rumor has been denied by both central banks, but the Swiss franc has fallen dramatically today.

A currency peg seems so ‘un-Swiss’, but if they truly are discussing such an option, I would call that a testament to just how desperate the central banks have become; talking peg just as the Chinese yuan peg is crumbling. Today the PBoC set the yuan reference rate at 6.3991 against the dollar, the lowest since the yuan was quasi-floated 17-years ago. It was also the biggest one-day yuan rise in 9-months.

Meanwhile the yen retested its trend highs amid further BoJ jawboning. If officials are successful in scaring safe-haven investors out of certain assets, it may further heighten the appeal of physical gold. They can’t raise margins on physical gold in your procession and as market analyst James Rickards pointed out this morning: Gold is still rated “AAA.”

• US initial jobless claims 395k in the week ended 30-Jul, below market expectations of 400k, vs upward revised 402k in the previous week.
• US trade deficit widened to -$53.1 bln in Jun on expectations of -$48.0 bln, vs downward revised -$50.8 bln in May.
• Canada trade deficit widened to -C$1.6 bln in Jun on expectations of -C$1.1 bln), vs -C$1.0 bln in May.
• Canada’s new home price index rose 0.3% in Jun, as expected, +2.1% y/y.
• French President Sarkozy and Germany Chancellor Merkel plan to meet in Paris on Tuesday.
• Sweden CPI 3.3% y/y in Jul, vs 3.1% in Jun.
• Japan core machinery orders +7.7% m/m (sa) in Jun, but foreign orders fell 5.9%.
• Bank of Korea held repo rate steady at 3.25%; paused was widely expected amid global uncertainties.
• Australia full time jobs fell 22k in Jul; unemployment +0.2% to 5.1%.

August 9 (Reuters) — Measures that gauge the level of European banks’ reluctance to lend to one another are approaching levels unseen since the aftermath of Lehman Brothers Holdings Inc. (LEHMQ)’s collapse.

“We’re going back to a post-Lehman scenario where banks are reliant on the ECB and funding is more expensive,” said Marcello Zanardo, an analyst at Sanford C. Bernstein & Co. in London. “This may lead to a credit crunch” if banks can’t pass on all their costs.

“Banks are beginning lend more cautiously, and increasingly park their money at central banks,” ECB Governing Council member Ewald Nowotny told Austrian state radio ORF today. “Bank deposits at the ECB have risen massively. That’s not a good sign.”

[Source]

August 10 (CNBC) — Fears of a new global banking crisis moved to the foreground Wednesday and are driving investors out of stocks and into safe-haven Treasurys, gold and Swiss francs.

The catalyst was an idea that’s been circling markets for several weeks—that France is next in line to lose its triple-A credit rating now that the U.S. has been downgraded.

Bank stocks, which had recovered some of their steep losses in the afternoon, sold off sharply in another wild ride lower into the closing bell. The S&P financial sector was down 7.1 percent Wednesday, and is now down 9.5 percent for the week and more than 23 percent year-to-date.

Banks were the worst performers in the stock market, which also closed with steep losses. The Dow was down 519 points at 10,719, its second more than 500-point loss in three days. The S&P 500 was down 51 at 1120.

[Source]

August 10 (CNNMoney) — Ding! Gold broke yet another record Wednesday, reaching as high as $1,801 an ounce, as investors keep fleeing from the volatile stock and currency markets.

In midday trading, the precious metal surged $58 to $1,801 per ounce, before retreating slightly to settle at a record high of $1,788.30 on the Chicago Mercantile Exchange.

It marked the first time ever gold has exceeded $1,800 in intra-day trading.

In less than a month, it has surged more than $200 amid worries about the debt ceiling, the S&P downgrade, Europe’s sovereign debt woes and weakness in the U.S. economy.

[source]

August 10 (AP) — The United States’ budget deficit has topped $1 trillion for a third straight year….

But the deal fell short of the $4 trillion in cuts that Standard & Poor’s said was needed to achieve a credible deficit plan. As a result, S&P downgraded the U.S. government’s credit from AAA to AA+.

Before 2009, the deficit had never come close to $1 trillion in a single year. The government last recorded a budget surplus in 2001, when revenues were $127 billion greater than spending. The surpluses were expected to total $5.6 trillion over the next decade.

[Source]

JK Comment: Looking at this, its easy to see why the paltry $2 Trillion in cuts over 10 years in Congress’ budget deal was received as basically meaningless by the market, and S&P in its subsequent downgrade. Trillion dollar deficits are more or less expected for the next decade, so $200 billion in savings per year (though not until 2014) still equals massive contributions to the national debt on an annual basis, and a perpetuation of all of the problems currently dominating markets worldwide.