August 18 (Bloomberg) — Stocks plunged while Treasuries rallied, pushing yields to record lows, amid growing signs the economy is slowing and speculation that European banks lack sufficient capital. Gold climbed to a record, while oil led commodities lower.

The Standard & Poor’s 500 Index tumbled 4.5 percent to 1,140.74 at 4 p.m. in New York. The Stoxx Europe 600 Index lost 4.8 percent in its worst plunge since March 2009 and Germany’s DAX Index slid 5.8 percent, the most since 2008. Ten-year Treasury yields fell as much as 19 basis points to 1.97 percent as rates on similar-maturity Canadian and British debt also reached all-time lows. The dollar gained versus 15 of 16 major peers, strengthening 0.6 percent to $1.4336 per euro. Gold futures rallied as much as 2.1 percent to $1,832 an ounce, while oil slid 5.9 percent.

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August 18 (CNBC) — European equities suffered their biggest daily fall in two and a half years on Thursday, as a slew of data cast further doubt on the strength of the recovery in the world’s biggest economy.

German shares lost most, with traders citing the effects of a short-selling ban on financial stocks in other parts of Europe and intensifying worries about politicians’ lack of a plan to address the euro zone sovereign debt crisis.

The European banking sector, exposed to the euro zone debt crisis, fell 6.6 percent and is down 29.7 percent this year.

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Richard W. Fisher
President and Chief Executive Officer
Federal Reserve Bank of Dallas
Remarks at the Midland Community Forum
Midland, Texas
August 17, 2011

FOMC Decision
Now to the second matter I wish to discuss with you today: my decision to dissent from the commitment of the majority of my colleagues on the FOMC in their decision to hold the base interest rate for interbank lending―the fed funds rate, the anchor of the yield curve―at its current level well into 2013.

I have posited both within the FOMC and publicly for some time that there is abundant liquidity available to finance economic expansion and job creation in America. The banking system is awash with liquidity. It is a rare day when the discount windows―the lending facilities of the 12 Federal Reserve banks―experience significant activity. Domestic banks are flush; they have on deposit at the 12 Federal Reserve banks some $1.6 trillion in excess reserves, earning a mere 25 basis points―a quarter of 1 percent per annum―rather than earning significantly higher interest rates from making loans to operating businesses. These excess bank reserves are waiting on the sidelines to be lent to businesses. Nondepository financial firms—private equity funds and the like―have substantial amounts of investable cash at their disposal. U.S. corporations are sitting on an abundance of cash―some estimate excess working capital on publicly traded corporations’ books exceeds $1 trillion―well above their working capital needs. Nonpublicly held businesses that are creditworthy have increasing access to bank credit at historically low nominal rates.

I have said many times that through the initiatives we took to counter the crisis of 2008–09, and the dramatic extension of the balance sheet that ensued, the Fed has refilled the tanks needed to fuel economic expansion and domestic job creation. Though I questioned the efficacy of the expansion of our balance sheet through the purchase of Treasury securities known as “QE2,” I have come to expect that the Federal Open Market Committee would continue to anchor the base lending rate at current levels and also maintain our abnormally large balance sheet, now with footings of almost $2.9 trillion, for “an extended period.”

I do not believe it wise to commit to more than that, or to signal further accommodation, when the cheap and abundant liquidity we have made available is presently lying fallow, and when the velocity of money remains so subdued as to be practically comatose. At the FOMC meeting, the committee announced that it “currently anticipates that economic conditions … are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.” In monetary parlance, that is language designed to signal that we are on hold until then.

I voted against that commitment-cum-signal. In the press’ reporting of my dissenting vote and those of the other two members of the FOMC who voted against that commitment―Mr. Kocherlakota, my counterpart from the Minneapolis Fed, and Mr. Plosser, my counterpart from Philadelphia―there was substantial speculation as to the reasons for our dissent. I will let my other two colleagues speak for themselves; I can only speak for myself. Let me make clear why I was opposed to freezing the fed funds rate for two years.

…In the interest of full disclosure, I should add that I was also concerned that just by tweaking the language the way the committee did, our action might be interpreted as encouraging the view that there is an FOMC so-called “Bernanke put” that would be too easily activated in response to a reversal in the financial markets. For those of you unfamiliar with the expression “Bernanke put,” or more generally, a “central bank put,” this term refers to the concept that a central bank will allow the stock market to rise significantly without tightening monetary policy, but will ease monetary policy whenever there is a stock market “correction.” Given the extent of the drop in the stock market leading up to and following Standard & Poor’s downgrade of U.S. debt, combined with the FOMC’s commitment to hold short-term rates near zero until mid-year 2013, some cynical observers might interpret such a policy action as a “Bernanke put.” My long-standing belief is that the Federal Reserve should never enact such asymmetric policies to protect stock market traders and investors. I believe my FOMC colleagues share this view.

[full speech]

August 18 (Bloomberg) — Venezuelan President Hugo Chavez ordered the central bank to repatriate $11 billion of gold reserves held in developed nations’ institutions such as the Bank of England as prices for the metal rise to a record.

Venezuela, which holds 211 tons of its 365 tons of gold reserves in U.S., European, Canadian and Swiss banks, will progressively return the bars to its central bank’s vault, Chavez said yesterday. JPMorgan Chase & Co. (JPM), Barclays Plc (BARC), and Standard Chartered Plc (STAN) also hold Venezuelan gold, he said.

“We’ve held 99 tons of gold at the Bank of England since 1980. I agree with bringing that home,” Chavez said yesterday on state television. “It’s a healthy decision.”

[source]

PG View: I wonder if private requests for a return of their gold met resistance; and that’s why Venezuela has gone public?

August 18 (The Wall Street Journal) — .S. stocks tumbled as further concerns rose about flagging global economic activity, as investors digested a grim mix of weak U.S. economic data and fresh concerns about the health of Europe’s banks.

The Dow Jones Industrial Average fell 434 points, or 3.8%, to 10978. The Standard & Poor’s 500-stock index dropped 51 points, or 4.3%, to 1143, while the Nasdaq Composite lost 116 points, or 4.6%, to 2397.
Market Data Center

Gold jumped to above $1,820 per troy ounce, while Treasurys the yield on the benchmark 10-year note briefly dipped below 2.00% in intraday trading, for the first time since at least 1954.

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August 18 (CNBC) — Morgan Stanley slashed its global growth forecast for 2011 and 2012, saying the U.S. and the euro zone were “dangerously close to a recession”, and criticized policymakers in Washington and Europe for not acting more decisively to contain the sovereign debt crisis.

The bank cut its global gross domestic product growth forecast to 3.9 percent from 4.2 percent for 2011, and to 3.8 percent from 4.5 percent for 2012.

“Our revised forecasts show the US and the euro area hovering dangerously close to a recession — defined as two consecutive quarters of contraction — over the next 6-12 months,” Joachim Fels, who co-heads Morgan Stanley’s global economics team, said in a research note dated Wednesday.

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August 17 (MarketWatch) — It’s apparently wrong to believe that growth in emerging markets will benefit developed nations.

While emerging markets should continue to grow rapidly over the next few years – by an average of 6% annually — they also will keep running a large current account surplus, said Neal Shearing, senior emerging markets economist at Capital Economics, in a note to clients issued Wednesday. So “far from helping the developed world out of its rut, emerging economies are becoming an increasing drag on demand in the rest of the world.”

There needs to be a “significant expansion in import demand from the likes of China and the oil producers” if rapid growth in the emerging world is to benefit the developed world, he said.

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August 17 (Reuters) — Venezuelan President Hugo Chavez said on Wednesday he plans to nationalize the gold sector — including extraction and processing — and use the production to pad the country’s international reserves.

Chavez, speaking on state television, said he would carry out the nationalization through a decree in coming days.

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PG View: Okay, right back to questioning Chavéz’s sanity…

August 17 (The Wall Street Journal) — Venezuela plans to transfer billions of dollars in cash reserves from abroad to banks in Russia, China and Brazil and tons of gold from European banks to its central bank vaults, according to documents reviewed Tuesday by The Wall Street Journal.

The planned moves would include transferring $6.3 billion in cash reserves, most of which Venezuela now keeps in banks such as the Bank for International Settlements in Basel, Switzerland, and Barclays Bank in London to unnamed Russian, Chinese and Brazilian banks, one document said.

Venezuela also plans to move 211 tons of gold it keeps abroad and values at $11 billion to the vaults of the Venezuelan Central Bank in Caracas where the government keeps its remaining 154 tons of bullion, the document says.

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PG View: There have been plenty of reasons to question President Chávez’s sanity in recent years, but seeking to lessen Venezuela’s dependence on the dollar and removing assets, particularly their gold, from Western banks is actually pretty prudent. It will be interesting to see how forthcoming those Western banks will be in facilitating the repatriation of Venezuela’s gold.

Dollar Drops, Putting Renewed Upward Pressure on Gold

Gold has rebounded to move back within $10 of the 1800 handle as the dollar comes under renewed selling pressure. Despite recent BoJ intervention, the USD-JPY rate is right back plumming its record lows. While the SNB intervened again today with a big expansion of sight deposits, the impact on the franc was muted because a currency peg is now seen as the central bank’s ‘big stick.’ Anything short of a peg to the euro may now be viewed as a half-measure — a delaying action — and the market will be prone to fade the action.

The euro remains underpinned even after yesterday’s meeting between German Chancellor Merkel and French President Sarkozy proved to be a general disappointment. The leaders of the EU’s two largest economies stressed that further integration of Europe was necessary; Mr. Sarkozy saying that the status quo is “impossible.” However, they ruled out creation of eurobonds and expansion of the ESFS bailout fund…at least for now. Given the dire situation in the eurozone, the market was hopeful for some measures with immediate impact. Apparently such measures will not be forthcoming and policymakers within the EU will stumble along from emergency meeting to emergency meeting trying to contain the crisis with rhetoric and half-measures.

Yields on the US 10-year note have fallen back below 2.25% this week as investors scramble to find a safe-haven amid rising global uncertainty and growth risks. However, when you factor in the dollar risk to that pittance of a yield, it’s hard to imagine a profitable outcome if you were take such an investment to term. While the odds of further Fed accommodations in the near term are generally still pretty good, today’s higher than expected PPI data for Jul may hamstring the Fed to some degree. Nonetheless, the S&P downgrade seems to have had little impact on demand for Treasuries at this point.

The real shift in appetite for bonds came from our overseas creditors in the early stages of the debt ceiling debate. TIC data released Monday revealed there were $18.3 bln in total non-central bank Treasury sales in June. The net sale was $4.5 bln; the first net sale since May 2009. We’ll have to see if recent Treasury buying was purely associated with flight from the stock market volatility. If the allocations prove not to be sticky — perhaps because of the attendant dollar risks — there may in fact be flight from Treasuries to the safer-haven of gold.

August 17 (MarketWatch) — Gold futures rose on Wednesday, vying for another record close as investors remain nervous about the euro zone’s sovereign-debt crisis and weak global growth.

Gold for December delivery gained $8.40, or 0.5%, to $1,794.30 an ounce on the Comex division of the New York Mercantile Exchange.

[source]

August 17 (USAGOLD) — Gold remains generally well bid after the SNB once again tried to quash the franc by flooding the market with liquidity, expanded sight deposits from CHF120 bln to CHF200 bln. While the franc retreated initially, it has since rebounded, disappointed it seems that a peg to the euro hasn’t been implemented.

While the easing of core eurozone CPI takes some of the pressure off the ECB to tighten further, the rise in US PPI (particularly core) may hamstring the Fed with regard to further accommodations. Heightened price risks should help keep the yellow metal underpinned even as growth risks escalate simultaneously.

• US PPI +0.2% in Jul, above market expectations of unch; core +0.4%, above market expectations of +0.2%.
• UK claimant count +37.1k in Jul, above market expectations, vs significant upward revised 31.3k in Jun. ILO unemployment rate rises to 7.9%.
• Eurozone current account deficit widened to €7.4 bln in Jun (sa), vs €5.6 bln in May.
• Eurozone CPI -0.6% in Jul; Y/Y confirmed at 2.5%; Core eased to 1.2% y/y reducing pressure on ECB to tighten further.

August 16 (Bloomberg) — Switzerland, the nation that hasn’t gone to war with a foreign power since Napoleon, is reluctantly debating a generational taboo: ceding monetary independence to win a battle over its runaway currency.

Swiss National Bank Vice President Thomas Jordan said the central bank is assessing “a whole range of options” to prevent the franc, which reached a record against the euro this month, from making Swiss goods prohibitively expensive. Even a cup of coffee at Cafe St. Gotthard in Zurich costs $8.30, with one Swiss franc buying $1.2816 at today’s exchange rate.

Billionaire entrepreneur Christoph Blocher, one of the politicians who called on SNB President Philipp Hildebrand to resign after the bank lost $21 billion last year in a vain attempt to restrain the currency, now supports a franc target.

“The franc is catastrophically overvalued,” said Blocher, a former justice minister for the People’s Party, Switzerland’s largest. “It’s almost like economic warfare — to wage a war, you must use all measures at your disposal, and you must win.”

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PG View: Again I ask; “catastrophically overvalued” against what? It’s pretty hard to assert with a straight face that the euro, sterling or the dollar are “catastrophically undervalued” given their respective fiscal and monetary woes. I would also contend that there’s nothing “almost” about the economic warfare that is emerging.

August 16 (AP) — All countries that use the euro should have mandatory balanced budgets and better coordination of economic policy, the leaders of France and Germany said Tuesday, pushing for long-term political solutions instead of immediate financial measures like a single European bond.

French President Nicolas Sarkozy and German Chancellor Angela Merkel also pledged to harmonize their countries’ corporate taxes in a move aimed at showing the eurozone’s largest members are “marching in lockstep” to protect the euro.

Both leaders stressed their commitment to defending the common currency, a cornerstone of integration on this long-fractured continent.

…The two leaders ruled out, however, issuing common government debt in the form of eurobonds, at least for now, despite demand by many investors for such a bold but politically difficult move.

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PG View: What is being proposed would require renegotiation of the Lisbon Treaty and the implication is that core-European nations would hold even greater sway over periphery policies and budgets. I’m not so sure the Italians and Greeks for example are necessarily inclined to be “more German.” The failure to advance the eurobond issue, or to expand the ESFS means the immediate crisis will remain in full swing.

August 16 (Bloomberg) — The yen may climb past the record it reached in March as the fading influence of the U.S. and Europe in the global economy spurs investor flight to haven assets, said Eisuke Sakakibara, formerly Japan’s top currency official.

The U.S. economy has yet to overcome the fallout from the collapse of Lehman Brothers Holdings Inc. in 2008 and now faces the risk of a double-dip recession, Sakakibara said in an interview yesterday. The U.S. will enter a “lost decade” as Japan experienced in the 1990s, while Europe’s debt crisis may deepen, he said.

“What we’re seeing is the downfall of the West,” Sakakibara, 70, said in Tokyo. “Dollar weakness will be unavoidable, and the U.S. will likely tolerate that.”

[source]

EUR rallied then retreated.

August 16 (Financial Times) — German economic growth slowed to a near standstill in the second quarter of this year, dealing a further, unexpected blow to the crisis-hit eurozone.

The surprisingly-sharp deceleration in activity in Europe’s largest economy hit overall eurozone growth and intensified fears about the global slowdown. It also threatened to complicate the challenge facing the region’s policymakers as they seek to combat its escalating debt crisis.

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August 16 (USAGOLD) — Gold continues to retrace the recent corrective losses as global markets go ‘risk-off’ once again. The yellow metal have moved back within $15 of the $1800 level after GDP data released today revealed that the eurozone economy slowed more than expected in Q2. More significantly, economic growth in Germany came in at a much weaker than expected 0.1% in Q2, on expectations of 0.5%. Germany is the last real economic engine in the EU, if that engine fails there will be nothing to keep the eurozone aloft. If Germany turns inward to address its own growth risks, that will raise doubts about their ability to simultaneously support the periphery, not to mention the weaker core nations like Italy and Spain.

Despite the grim GDP data, escalating talk about possible eurobond issuance has helped keep the single currency underpinned, as has ongoing discouragement to buy former safe-haven alternatives like the Swiss franc. The narrowed safe-haven field makes gold shine all that much brighter.

• US industrial production +0.9% in Jul, above market expectations of +0.4%; cap use 77.5%.
• US housing starts -1.5% to 604k pace in Jul, above market expectations of 600k.
• US import prices +0.3% in Jul, above market expectations of -0.1%; export prices -0.4%.
• Canadian manufacturing shipments -1.5% in Jun, well below market expectations of -0.6%, vs -0.7% May.
• UK CPI – EU Harmonized 4.4% y/y in Jul, above market expectations of 4.3%, vs 4.2% in Jun.
• Spain Q2 GDP Preliminary +0.2% q/q (sa), near expectations, vs +0.3% in Q1.
• Germany GDP Q2 1st Release +0.1% q/q (sa), well below market expectations of +0.5%, vs negative revised +1.3% in Q1.
• Eurozone GDP Q2 1st Release +0.2% q/q (sa), below market expectations of +0.3%, vs +0.8% in Q1; +1.7% y/y.
• India monthly WPI 9.22% y/y in Jul, near expectations, vs 9.44% in Jun.

by Egon von Greyerz
August 15 (GoldSwitzerland.com) — Gold has gone up for 12 straight years in a stealth market. In the last ten years gold has had a compound annual growth of 20.5%. This is an absolutely outstanding return but investors should not look at gold as an investment but as money. Gold reflects governments’ deceitful actions in totally destroying the value of paper money by printing unlimited amounts of it. With gold up 7 times since the bottom in 1999, is it too late to jump on the Goldwagon?

The answer to the above question is a categorical NO. Virtually no major investor group has participated in gold’s spectacular rise. In spite of a seven fold increase in the gold price, only circa 1% of world financial assets are invested in gold. Whenever I talk to major institutional investors, not only do they not own gold, but they don’t understand gold either.

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