Beige Book

September 07 (The Federal Reserve Board) — Reports from the twelve Federal Reserve Districts indicated that economic activity continued to expand at a modest pace, though some Districts noted mixed or weakening activity. The St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco Districts all reported either modest or slight expansion. Atlanta said activity continued to expand at a very subdued pace, while Cleveland reported slow growth and New York indicated growth remained sluggish. Economic activity expanded more slowly in the Chicago District and slowed in the Richmond District. Business activity in the Boston and Philadelphia Districts was characterized as mixed, with Philadelphia adding that activity was somewhat weaker overall. Several Districts also indicated that recent stock market volatility and increased economic uncertainty had led many contacts to downgrade or become more cautious about their near-term outlooks.

[full text]

Germany’s highest court has rejected three lawsuits against euro bailout measures, but its ruling also strengthens the role of the German parliament in determining aid for heavily indebted euro-zone countries. The new procedures are more democratic, but they could also lead to fresh turbulence on the finance markets.

September 07 (Der Spiegel) — Both the plaintiff and the defendant seemed in good spirits. Shortly before the start of proceedings, economics professor Wilhelm Nölling and German State Secretary of Finance Steffen Kampeter stood in the provisional courtroom in Karlsruhe talking shop. The were speaking about the appreciation of the franc , which Switzerland is now trying to stop by placing a ceiling on the exchange rate. Kampeter let his opponent know that he was well informed on the issue. “I want to take vacation in Switzerland,” he said.

Shortly thereafter, the fun came to a halt. Germany’s highest judicial authority, the Federal Constitutional Court, issued its anxiously awaited ruling on the euro rescue package on Wednesday morning. Although their cases were rejected, the decision still represented a partial victory for Nölling and the remaining plaintiffs. The justices declared that the billions in guarantees for Greece and other highly indebted euro-zone countries were fundamentally constitutional, but they also demanded a greater say and participation in future bailouts by Germany’s parliament, the Bundestag.

[source]

Über-dovish speech from Chicago Fed’s Evans.

This excerpt says it all: “…given how truly badly we are doing in meeting our employment mandate, I argue that the Fed should seriously consider actions that would add very significant amounts of policy accommodation.”

[full text]

September 07 (USAGOLD) — Market rumblings I’ve heard this morning suggest it may be SNB or IMF.

*Update* — A well connected market source discounts the market chatter that it’s the SNB selling gold.

By Bill Gross
September 06 (Financial Times) — “Helicopter Ben” Bernanke is a second-generation pilot. As he himself acknowledged in his now well-known 2002 speech, the term was an original of economist Milton Friedman.

Whether father or child, the concept of showering money over national economies to combat deflation has been an accepted principle of monetarism for decades. A helicopter, however, is not your average aeroplane, and the usual laws of aerodynamics do not necessarily apply in all cases. Similarly monetary policy at the zero interest rate bound introduces a new dynamic that may conflict or even reverse standard logic that lower interest rates across the sovereign yield curve are everywhere and always stimulative to economic growth.

This potential paradox arises not just from observation of the Japanese experience over nearly two decades, but from an analysis of our modern-day financial system and its potential inadequacies.

[source]

September 07 (USAGOLD) — Gold remains under corrective pressure after the German constitutional court rejected challenges to German participation in the eurozone bailouts. However, any German participation in future bailouts must be approved by the Bundestag budget committee. The court’s decision was followed-up by a very pro-Europe speech by chancellor Merkel before the Bundestag, where she said the euro “cannot be allowed to fail and will not fail”.

The euro rebounded modestly, but with Greece still on the verge of default, investors remain wary. Nonetheless, a complete collapse of the EU has been averted once again and there has been a modest uptick in risk appetite. Stocks are retracing some of yesterday’s losses and safe-haven gold positions are being pared.

• Canada IVEY PMI (sa) rebounds to 56.4 in Aug, well above market expectations of 50.0, vs 46.8 in Jul.
• BoC leaves policy rate unchanged at 1.00%, in-line with expectation. Tightening bias diluted somewhat.
• UK industrial production -0.2% m/m in Jul, below market expectations, vs unch in Jun; -0.7% y/y.
• Germany industrial production (prelim) +4.0% m/m in Jul, above market expectations, vs upward revised -1.0% in Jun; 10.1% y/y.
• Riksbank leaves repo rate unchanged at 2.00%, in-line with expectations.
• Japan leading index (prelim) 2.7% m/m in Jul, vs 3.8% in Jun. Coincidence index (prelim) -0.3% m/m.
• BoJ held its target rate steady at 0.0-0.1%, in-line with expectations.
• Australia Q2 GDP +1.2%, above market expectations, vs upward revised -0.9% in Q1.

September 07 (Reuters) — German Chancellor Angela Merkel said on Wednesday that the euro zone’s crisis could not be solved with radical quick fixes like jointly issued bonds, and that instead the bloc faced a “long hard” path to slash back debt built up over decades.

In a closely watched speech to the Bundestag lower house of parliament shortly after Germany’s top court imposed new limits on Berlin’s participation in euro zone bailouts, Merkel said the shared currency “cannot be allowed to fail and will not fail”.

[source]

September 07 (Financial Times) — Germany’s powerful constitutional court has rejected a series of challenges to the eurozone financial rescue packages agreed last year for Greece and other debt-strapped members of the European currency union.

In an eagerly-awaited judgment issued on Wednesday, the judges in Karlsruhe decided that the measures did not infringe the budgetary authority of the Bundestag, the German parliament in Berlin.

But they also ruled that in future the budget committee of the Bundestag must give its prior approval before any further German financial guarantees for loans to its 16 partners in the eurozone.

[source]

PG View: This decision was widely anticipated. While Germany wont be making Greece return the money, the need for budget committee approval for future bailouts will, if nothing else, slow the process down. That will give already disgruntled German voters an opportunity to make their voices heard, which in turn may give German lawmakers pause.

The era of global “currency wars” has taken a dramatic turn after Switzerland abandoned its floating exchange rate, setting a floor against the euro to counter safe-haven flight from eurozone debtors.

By Ambrose Evans-Pritchard
September 06 (The Telegraph) — The Swiss national bank (SNB) said it would “no longer tolerate” a euro rate below 1.20 francs. “The SNB will enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities. The massive overvaluation of the franc poses an acute threat to the Swiss economy and carries the risk of a deflationary development,” it said.

The franc plummeted against all major currencies, falling 9pc against the euro as markets opened on Tuesday. The Swiss action will be studied closely in Norway, Singapore and above all Japan, where the yen has also rocketed to levels that threaten to blight exporters and tip the country into deep deflation.

“The market must fear this will lead to a sharp escalation in currency wars,” said David Bloom from HSBC. “Gold is the only safe haven asset that will not do QE, put in capital controls or complain.”

…The minimim floor is a copy of the bank’s desperate strategy – after all else failed – in October 1978. It did stabilize the franc at that time but at a very high cost.

The flood of liquidity from “unsterilized” interventions stored up all kinds of problems. “Inflation skyrocketed, reaching over 7pc in 1981,” said Paul Mackel from HSBC.

[source]

September 06 (CNBC) — Just as talk had begun to intensify about a gold bubble building, the metal got another boost Tuesday when the Swiss National Bank announced measures to decrease the value of the franc.

The SNB’s move was widely viewed as positive for gold because the metal will gain even more popularity as a safe-haven investment of choice.

[source]

September 06 (Bloomberg) — Brazilian inflation accelerated for the 12th straight month in August to its highest annual level since 2005, reinforcing economist views that the central bank may have cut borrowing costs prematurely.

Consumer prices, as measured by the IPCA index, rose 0.37 percent in August from the previous month, the national statistics agency said today. That was in line with analyst expectations for a 0.36 percent increase, according to the median estimate of 40 analysts surveyed by Bloomberg. Prices rose 7.23 percent from a year ago, the highest since June 2005.

[source]

September 06 (Guardian) — Germany’s highest court will this week deliver a ruling on the legality of last year’s multibillion euro rescue package for Greece and other troubled countries.

Theoretically judges could force Germany to demand the money back, putting the future of the euro at risk. Analysts believe they are more likely to impose restrictions on future bailouts.

[source]

PG View: Restricting German participation in future bailout could still spell big trouble for euroland.

Gold Surges Against Swiss Franc

Gold surged dramatically against the Swiss franc as the Swiss National Bank moved to discourage safe-haven interest by debasing the franc. Rumors began circulating several weeks ago that the SNB was considering pegging the franc to the troubled euro as a means of protecting its export market and valuable tourism industry. Today the SNB proved that those rumors were well-founded, capping the CHF at 1.20 against the EUR. The franc tumbled against the dollar as well…and of course against gold. Gold set a new record high of CHF1632.61.

The Swiss are claiming that their currency was “massively” overvalued, but in making that claim, they are essentially claiming that the euro and perhaps the dollar are massively undervalued. Such a claim is arguably pretty tough to substantiate given the ongoing EU sovereign debt crisis and the extraordinary fiscal crisis in America. However, by extension, they must too be arguing that gold is massively undervalued. It’s tough to argue with that veiled claim. Nonetheless, the SNB claims they are prepared to print as many Swiss francs as necessary, in order to buy foreign currency in unlimited quantities to maintain that 1.20 peg. Farewell safe-haven swissy.

Today’s move by the central bank is a dramatic escalation of the currency war as now even the Swiss are seeking to undermine their own currency. HSBC analysts David Bloom, Paul Mackel and Karen Ward wrote today that “central banks have shifted to exchange rate policy aiming to have the weakest currency in town. This is a game that everyone can’t win…but that doesn’t mean they won’t keep trying.” In fact, even if there were to be a winner in this race to the bottom, the people of the ‘winning nation’ lose as inflation is the inevitable result of a debased currency.

The HSBC analysts go on to say, “Those believing they don’t have to enter the war get sucked in via the actions of others. One currency that will benefit most from this is the one that will not complain …Gold.”

September 06 (Bloomberg) — Gold’s rally above $1,900 an ounce shows no signs of a “bubble” as central banks continue to boost money supply that has helped spur bullion to a record, according to investor Marc Faber.

“I don’t think that gold is in a bubble,” Faber, publisher of the Gloom, Boom and Doom report, said in a phone interview yesterday from Chiang Mai, Thailand. “When you buy gold, it’s an insurance against systematic failure and problems in the financial markets.”

…“I’d buy every month a little bit of gold,” Faber said.

[source]

September 03 (ZeroHedge) — Wondering why gold at $1850 is cheap, or why gold at double that price will also be cheap, or frankly at any price? Because, as the following leaked cable explains, gold is, to China at least, nothing but the opportunity cost of destroying the dollar’s reserve status.

Excerpt from US embassy cable – 09BEIJING1134:

3. CHINA’S GOLD RESERVES

“China increases its gold reserves in order to kill two birds with
one stone”

The China Radio International sponsored newspaper World News Journal
(Shijie Xinwenbao)(04/28): “According to China’s National Foreign
Exchanges Administration China ‘s gold reserves have recently
increased. Currently, the majority of its gold reserves have been
located in the U.S. and European countries. The U.S. and Europe have
always suppressed the rising price of gold. They intend to weaken
gold’s function as an international reserve currency. They don’t
want to see other countries turning to gold reserves instead of the
U.S. dollar or Euro. Therefore, suppressing the price of gold is
very beneficial for the U.S. in maintaining the U.S. dollar’s role
as the international reserve currency. China’s increased gold
reserves will thus act as a model and lead other countries towards
reserving more gold. Large gold reserves are also beneficial in
promoting the internationalization of the RMB.”

Perhaps now is a good time to remind readers what will happen if and when America’s always behind the curve mutual and pension fund managers finally comprehend that they are massively underinvested in the one best performing asset class.

[source]

September 06 (USAGOLD) — Gold extended to a new all-time in overseas trading at 1919.94 after German Chancellor Angela Merkel’s CDU suffered its fourth consecutive state election defeat, calling into question the German commitment to EU bailouts. The euro fell sharply as did European shares, igniting fresh safe-haven demand. The renewed bid in the Swiss franc prompted the SNB to make good on the recent rumors and peg the franc at 1.20 versus the euro.

The SNB acknowledged that it is “aiming for a substantial and sustained weakening of the franc,” and “is prepared to buy foreign currency in unlimited quantities” to achieve that goal. In other words, they are prepared to create an unlimited amount of francs and use them to purchase other currencies. In hitching their currency to the troubled euro, the SNB has effectively removed one of just a handful of safe-havens from the global equation. While the yen remains elevated, the SNB action caused some holders of yen to pare-back positions. After all, if the Swiss can peg their currency, so too could the BoJ. It is also worth remembering that euroland and the United States want weaker currencies as well. The latest escalation of the currency wars — the race to the bottom — makes real safe-havens like gold even more attractive.

• Eurozone Q2 GDP (sa) – 2nd Release confirmed at 0.2% q/q; 1.6% y/y, down from 1.7% previously.
• Eurozone Q2 household consumption – 1st Release -0.2% q/q, vs negatively revised 0.2% in Q1.
• SNB sets EUR-CHF target of 1.20.
• Switzerland CPI +0.3% m/m in Aug, above market expectations of -0.1%, vs -0.8% in Jul.
• Germany BBK factory orders (preliminary) -2.8% m/m in Jul, below market expectations, vs +1.8 in Jun; annual pace falls to 8.7%.
• RBA holds the Official Cash Rate steady at 4.75%, in-line with expectations.
• Australia current account balance narrows to -A$7.4B in Q2, vs downward revised -$11.1B in Q1.
• Taiwan CPI 1.3% y/y in Aug.
• Indonesia CPI climbed to 4.79% y/y in August, vs 4.6% y/y in Jul.

September 06 (The Wall Street Journal) — An internal test vote among the parties of Angela Merkel’s coalition late Monday cast doubt on whether the German Chancellor would get a majority in the lower house of parliament without the help of the opposition at a crucial vote on changes to the euro zone’s rescue fund.

If Ms. Merkel fails to get a majority in the vote with coalition lawmakers alone, it could undermine her ability to lead Europe’s largest economy at a time when there is renewed market turbulence because of the currency bloc’s deepening sovereign-debt crisis.

[source]

September 06 (Der Spiegel) — Angela Merkel’s conservative Christian Democratic Union has suffered a setback in a state election which could see the beginning of a renaissance for the center-left Social Democrats (SPD).

With 35.7 percent of the vote, the SPD were the clear winners of Sunday’s state election in the northeastern German state of Mecklenburg-Western Pomerania.

…Observers put the poor showing of the CDU and FDP in the state partially down to the problems of the national coalition government, including growing discontent over Merkel’s handling of the euro crisis.

[source]

September 06 (Bloomberg) — The Swiss central bank imposed a ceiling on the franc’s exchange rate for the first time in more than three decades and pledged to defend the target with the “utmost determination.”

The Swiss National Bank is “aiming for a substantial and sustained weakening of the franc,” the Zurich-based bank said in an e-mailed statement today. “With immediate effect, it will no longer tolerate a euro-franc exchange rate below the minimum rate of 1.20 francs” and “is prepared to buy foreign currency in unlimited quantities.”

[source]

September 06 (Reuters) — The Swiss National Bank said on Tuesday it would set a minimum exchange rate target of 1.20 francs to the euro and would enforce it by buying foreign currency in unlimited quantities.

[source]

PG View: They will be buying foreign currency in unlimited quantities with the unlimited power of the printing press. The debasement of the Swiss franc narrows the field of safe-havens and makes gold all the more appealing.

September 05 (USAGOLD) — Gold has traded with a $1900 handle in thin holiday trading, spurred by concerns that German support for various bailout facilities may be fading after German Chancellor Angela Merkel’s CDU party suffered yet another election defeat; this time in her own home state of Mecklenburg- Western Pomerania. The euro has fallen sharply, European stocks are under pressure and periphery debt spreads continue to blow out. Greek 2-year yields have pushed to record highs above 50%. Gold is being supported by solid safe-haven interest.

US markets are closed today for the Labor Day holiday.

By Adam Posen
September 02 (Reuters) — It is past time for monetary policy to be doing more to support recovery. The Jackson Hole conference has come and gone, and no shortage of excuses was provided for central banks to hold their fire — even though most economists acknowledged the grim outlook for the advanced economies.

Too much attention has been paid, however, to the failings of fiscal policies and to the shortfall from effects of earlier quantitative easing. Further asset purchases by the G7 central banks are needed to check not just a downturn, but the lasting erosion of productive capacity and of debt sustainability — especially when even justified fiscal and financial consolidation is undercutting short-term recovery. Easier monetary policy will increase the odds of other policies improving, and those policies’ effectiveness when they do.

It is also past time to stop fearing inflationary ghosts. There is no credible threat of sustained higher inflation in the advanced economies that should restrain central bank action.

[source]

PG View: While official data would indeed suggest that core inflation (excluding food and energy) remains in check, should the inflation genie be released, she may prove extremely hard to get back in the bottle. Clearly some are willing to take that risk.

September 02 (ZeroHedge) — Remember when one month ago the US, to much pomp and circumstance, not to mention one downgrade, announced a grand bargain raising the debt ceiling from $14.294 trillion to something much higher, with a stop gap intermediate ceiling of $14.694 trillion, or $400 billion more. Well, as of today, or less than a month since the expansion, total US debt is at $14.697 trillion. Yep – the total debt is again over the ceiling, which means the US debt increased by $400 billion in one month. Score one for fiscal prudence. And while the total debt subject to the limit is still slightly less, at $14.652, one week of Treasury auctions and will be time for Moody’s to justify again why the US is a quadruple A credit.

[source]

PG View: Yeah, $400 bln just doesn’t last as long as it used to.

September 02 (The Wall Street Journal) — Economists and others weigh in on the unchanged nonfarm payrolls number and steady 9.1% unemployment rate.

–It’s often said when it rains, it pours. That is an apt description of the August employment report and the likely path in the labor market later this year. Given slowing growth in the real economy there is little in the employment report to indicate a pickup in job creating heading into the final 16 weeks of 2011. –Joseph Brusuelas, Bloomberg

[source]

September 02 (NPR) — The unemployment rate didn’t budge in August, according to this morning’s jobs report. Net job growth was zero.

Also basically unchanged: The number of people who have been out of work and looking for a job for six months or more.

More than 6 million Americans are now among the long-term unemployed, up from about 1 million before the recession. The long-term unemployment rate is far higher than it’s been at any time since before War II.

That’s very bad news not just for the unemployed, but for the long-term health of the U.S. economy.

[source]

September 02 (Bloomberg) — Inflation? No, thank you.

We just endured and survived a major political crisis over the possibility that the U.S. government might default on its debts. Most people — other than a few high-stakes poker players on the right wing of the Republican Party — agreed that this would be a terrible thing. But now, a growing number of voices, mainly on the left wing of the Democratic Party but also in the Federal Reserve, are calling for what is in effect default in slow motion. It goes by the name of inflation.

…As it happens, a couple of years of 6 percent inflation is exactly what the leading economist advocating this approach — Kenneth Rogoff at Harvard — recommends. He is joined by Paul Krugman and by a growing number of economic journalists and commentators. Some of these people have been saying that inflation is no threat worth worrying about, because it has not appeared despite circumstances that ordinarily would have produced it. Now they say inflation is no threat because a little of it would actually be a good thing.

[source]