11-Mar (Bloomberg) — As they have before in the aftermath of financial crises or wars, governments and central banks are increasingly resorting to a form of “taxation” that helps liquidate the huge overhang of public and private debt and eases the burden of servicing that debt.

Such policies, known as financial repression, usually involve a strong connection between the government, the central bank and the financial sector. In the U.S., as in Europe, at present, this means consistent negative real interest rates (yielding less than the rate of inflation) that are equivalent to a tax on bondholders and, more generally, savers.

[source]

PG View: If the attack on savers is here to stay, it would certainly be prudent to protect at least a portion of your savings by choosing to save in gold.

Gold Weakens on China Concerns

12-Mar (USAGOLD) — Gold is under modest pressure on Monday, having been unable to sustain the rebound back above $1700 late last week. Aside from the normal raft of economic issues domestically and in Europe and Japan, concerns about China are starting to mount.

China reported $31.5 bln trade deficit in February as a result of much higher than expected imports. Import growth surged to 39.6% y/y, while export growth was less than half that amount at 18.4%. This was the biggest reported deficit in 22-years. The PBoC reacted immediately by setting the midpoint of yuan’s acceptable trading range sharply lower at 6.3282. It was the second biggest one day cut on record.

A Reuters article said, “Traders and analysts said the PBOC appears to be preparing the domestic and global markets for sharper fluctuations to eventually widen the yuan’s daily trading band.” Given that it happened on the same day that a large trade deficit was reported, call be suspicious. I think they were simply sending the signal that China intends to keep its goods and services relatively cheap, by constraining the upside in the yuan.

The reaction in gold was somewhat muted because the undertone of a slowing Chinese economy is that the PBoC will move toward an easier stance with perhaps a healthy dose of fiscal stimulus to boot. This is consistent with the steps taken by the Western economies in recent years; the central banks push rates lower and offer accommodations, and if necessary the government provides fiscal stimulus as well. While the political will for further direct stimulus has waned significantly in the West — as the political landscape has shifted — that’s not of any particular concern in a country like China; that is until inflation rears its ugly head. If China jumps back on the already crowded bandwagon of monetary accommodations, bailouts and stimulus, just imagine what the longer-term inflationary repercussions might be.

The Fed’s FOMC meets tomorrow in a one day meeting. Rates are on hold at 0% at least through late-2014. There was some escalated discussion last week about the possibility of QE3 in the wake of one-day retreat in the stock market. I think that’s reflective of just how edgy investors are right now. As evidenced by a WSJ article and a Washington Post article today, people are beginning to wonder if recent gains on the employment front are sustainable in light of the continued sluggishness in economic growth. While the Fed may not announce new quantitative measures tomorrow, pressure is already building for them to do more.

12-Mar (The Wall Street Journal) — Something about the U.S. economy isn’t adding up.

At 8.3%, the unemployment rate has fallen 0.7 percentage point from a year earlier and is down 1.7 percentage points from a peak of 10% in October 2009. Many other measures of the job market are improving. Companies have expanded payrolls by more than 200,000 a month for the past three months, according to Labor Department data. And the number of people filing claims for government unemployment benefits has fallen.

Yet the economy is barely growing.

…How can an economy that is growing so slowly produce such big declines in unemployment?

[source]

PG View: Finally, the economists and journalist are starting to question what most people in the real-world have been experiencing all-along; that things out here in the real-world aren’t really improving in any meaningful way.

12-Mar (The Wall Street Journal) — China’s trade sector fell deeply into the red last month after running huge trade surpluses for much of a decade, raising questions about whether the country’s economy is tailing off more rapidly than anticipated.

The weekend report of a $31.5 billion trade deficit in China for February was substantially larger than most analysts expected and followed a string of other disappointing economic data, including weak growth in car sales, industrial production and retail sales, and the continuation of a steep fall in property sales. The only bright economic star was that inflation slackened more rapidly than expected.

…The overall results prompted analysts to predict that China will ease monetary policy over the coming months to bolster growth—but few expect a package remotely on the scale of the stimulus spending and lending that occurred in 2009 and 2010 in response to the global financial crisis.

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12-Mar (Financial Times) — Greece’s new bonds, issued after its €206bn debt exchange, started trading on Monday at distressed levels, indicating that investors fear another restructuring is probable.

A series of 20 bonds with maturities of 11 to 30 years began trading and were quoted with prices of between 23 and 26.5 cents in the euro, a slight rise from Friday’s grey market.

Greece’s yield curve is still inverted with the 11-year bond yielding about 18.1 per cent and the 30-year bond 13.4 per cent, meaning investors are braced for more distress.

The new yields are the highest in the eurozone, ahead of Portugal, the country considered most likely to follow Greece in needing a second bailout.

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PG View: As I’ve been saying for weeks, the likelihood of Greece making good on the new bonds isn’t really any better. That makes the PSI “volunteers” appear even more the patsies, unless of course there was coercion from the get-go…

12-Mar (Reuters) — The People’s Bank of China (PBOC) set the yuan’s midpoint against the dollar sharply lower on Monday, the second biggest single-day fall on record and the latest signal that China is willing to let its currency move within a wider range.

…Traders and analysts said the PBOC appears to be preparing the domestic and global markets for sharper fluctuations to eventually widen the yuan’s daily trading band.

[source]

09-Mar (Reuters) — Greece triggered the payment on default insurance contracts by using legislation that forces losses on all private creditors, the International Swaps and Derivatives Association said on Friday.

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Gold Recoups This Week’s Losses

09-Mar (USAGOLD) — Gold has traded in a choppy manner, falling in early New York trading after a modestly better than expected nonfarm payrolls report lifted the dollar and stocks. The purported success of the Greek PMI deal may have also diminished the safe-haven appeal of the yellow metal somewhat.

However, these intraday losses were short-lived as news that Fitch downgraded Greece to “selective default” and reports of an Israeli airstrike in Gaza sparked a rebound that saw gold set new highs for the day and threaten the high for the week at 1716.48. A close above the 100-day moving average (1695.66), and more so a higher close on the week (above 1710.50), would offer encouragement to longs for the week ahead. Such action into the close would also likely discourage shorts.

Despite reports of 95% participation in the Greek bond swaps, the euro tumbled back to its low for the week, just below 1.3100 versus the dollar. The Greek cabinet approved activation of the collective action clauses and Fitch downgraded Greece to selective default status. Meanwhile, in the grey market for the new bonds, it appears that the actual haircut for the private bondholders will be closer to 78%. Yields have surged from the get-go with new 2% bonds maturing in Feb 2023 being bid at 19.7% on repayment worries. Basically, the new bonds aren’t even out yet and already there’s ample skepticism about Greece’s ability to pay on them.

Such skepticism is well founded with news that the Greek economy contracted more than expected at the end of last year. The Hellenic Statistical Authority reported today that Q4 GDP fell by 7.5%, rather than the 7% that was initially estimated.

Here in America we’ve started seeing some downward revisions to GDP for this year that are primarily being driven by a surging trade deficit. The January trade deficit jumped to a three year high of $52.6 bln on rising costs for imported energy and food products. At the same time, European demand for our exports fell as their economy teeters on the brink of a new recession. The weaker economic prospects for the US may have prompted the Fed to spur renewed speculation this week about additional quantitative measures.

If the Fed does indeed launch a QE3 down the road, the gold market is likely to react in the same way it did to QE1, QE2 and Operation Twist, by pushing relentlessly higher. When you consider the absolute explosion in the balance sheets of the Fed’s peers — the ECB, BoE, BoJ, among others — it’s reasonable to view gold as being on sale at these prices.

09-Mar (SmartMoney) — The stock market has recovered its losses since hitting bottom three years ago today. But despite gains in employment during that same stretch, America is still down six million jobs, data shows.

The economy added 227,000 jobs in February, more than the 204,000 economists expected, the Labor Department reported this morning. The unemployment rate remained unchanged at 8.3% from last month. But while the economy has added more than 200,000 jobs for three straight months, the damage to employment done by the Great Recession is still far from repaired.

Between December 2007, when the recession officially started, and February 2010, when the Labor Department’s reports show employment hit bottom, the economy lost more than eight million jobs.

[source]

PG View: While limited progress is certainly better than no progress — or worse yet, higher joblessness — there’s still a huge gap to fill.

A great interview with Jim Grant of Grant’s Interest Rate Observer, where he discusses how past, present and future quantitative measures are nothing short of market manipulation.

Grant also advocates for a “sound currency by which i mean a currency that is based on a standard and not at the whim and the discretion of a bunch of mandarins sitting around Washington D.C.”

Yes, Jim believes gold needs to be part of that conversation…

09-Mar (Bloomberg) — Greece pushed through the biggest sovereign restructuring in history after cajoling private investors to forgive more than 100 billion euros ($132 billion) of debt, opening the way for a second bailout.

Euro-region finance ministers agreed on a conference call that the swap meant Greece had met the terms to proceed with a 130 billion-euro rescue package designed to prevent a collapse of the Greek economy. Ministers freed up 35.5 billion euros in public sweeteners and interest now, with a decision on the balance to be made at a March 12 meeting in Brussels.

“It would be a big mistake to think we are out of the woods,” German Finance Minister Wolfgang Schaeuble told reporters in Berlin after the call today. “We have a chance of making it. And we have to seize that opportunity.”

…Investors with 95.7 percent of Greece’s privately held bonds will participate in the swap after so-called collective action clauses are triggered, the Finance Ministry said.

[source]

09-Mar (Reuters) — Grey market trading on the new Greek bonds suggest long-suffering bond holders will receive an approximate net present value loss of 78%, as opposed to the approximate 75% NPV loss Athens negotiated with private sector creditors.

There is a wide price range being quoted in the grey market, but the new Greek 2042 bond is averaging a mid-market around EUR18.75 (yielding around 17%).

The new bonds are not starting from a nominal par value as is typically the case on new issues. Instead, as Greece’ Ministry of Finance has previously specified, they are being issued with a “face amount equal to 31.5% of the face amount of the debt exchanged”. In other words, the grey market trading around EUR18.75 should be viewed as a discount not from par but from 31.5, meaning they are already trading at a discount of 59.5%.

Totalling it up, we find that instead of an approximate 75% Net Present Value loss, holders of Greek bonds will instead receive an approximate NPV loss of 78%.

…The difference of course is only a mark-to-market loss; investors could hold onto the new paper, but clearly the market is already starting to price in further discounts/haircuts at a later date.

[source]

08-Mar (Gallop) — U.S. unemployment, as measured by Gallup without seasonal adjustment, increased to 9.1% in February from 8.6% in January and 8.5% in December.

The 0.5-percentage-point increase in February compared with January is the largest such month-to-month change Gallup has recorded in its not-seasonally adjusted measure since December 2010, when the rate rose 0.8 points to 9.6% from 8.8% in November. A year ago, Gallup recorded a February increase of 0.4 percentage points, to 10.3% from 9.9% in January 2011.

…Gallup’s U.S. underemployment measure, which combines the percentage of workers who are unemployed and the percentage working part time but wanting full-time work, increased to 19.1% in February from 18.7% in January. This is an improvement from the 19.9% of February 2011.

[source]

07-Mar (Forbes) — A report that the Fed is considering “sterilized” QE sparked a risk rally that shouldn’t really make sense. On the one hand, the breakdown of the how the Fed would actually execute the operation provided nothing new, on the other, “sterilized” QE would amount to a capital injection that puts enough restrictions on that capital to make it unusable, making the injection neutral at the end of the day, at least in terms of speculative capital.

What’s really happening? The Fed, via WSJ’s Jon Hilsenrath (dubbed “mouthpiece” by ZeroHedge and “Fedwire” by FT Alphaville), is testing the waters. Bernanke & Co. are telling markets QE is definitely on the table while acknowledging they recognize the inflationary threat carried by another round of quantitative easing.

…Will it work? It seems to me the more appropriate question is “does it matter?” The Fed’s two programs of quantitative easing have definitely fueled risk-asset rallies. During QE2, equities surged, but so did equities markets across emerging markets (which didn’t really help the U.S. economy). QE also fueled non-productive asset rallies as capital massively went into gold and other commodities (effectively helping crude oil prices surge).

[source]

08-Mar (USAGOLD) — Gold traded back above the $1700 level in overseas trading on rising optimism that the Greek PSI deal is going to get done today. Heightened risk appetite lifted global shares as well, with an additional boost offered by affirmation of ongoing easy monetary policy by the BoE, ECB and BoC. The US initial jobless claims number for the week ended 03-Mar disappointed.

Bloomberg is reporting that expectations for participation in the Greek PSI have risen to 60%, from a mere 39% yesterday. While 60% is certainly better than 39%, it is believed that buy-in of 75% or more is needed to make this deal work. With just hours remaining until the 18:00GMT deadline, it seems the private bondholders are going to take this down to the wire.

Let’s be clear though, even if the debt swap is successful and the ISDA and rating agencies can say with a wink and a nod that no default occurred, it would be nothing more than another kick of the can down the road. It does nothing to solve the underlying fiscal issues that put Greece in this mess in the first place. With the economy collapsing, Greece is going to have a very hard time making good on the new bonds and are likely to find themselves right back in the same position at some point along that increasingly short road.

While ECB President Mario Draghi avoided specific comments on the Greek debt swap in his presser today, he did confirm a less than optimistic assessment of the eurozone economy as a whole. The ECB now expects the economy to contract in 2012 by 0.1%. They also negatively revised their growth outlook for 2013 from +1.3% to +1.1%. Meanwhile Draghi said that he expects inflation “to remain above 2% in 2012, with upside risks prevailing.” Above target inflation in a contracting economy? Sounds like stagflation to me.

Perhaps it is similar concerns that have prompted the Fed to consider additional quantitative measures in the form of “sterilized” bond purchases. It was just days ago that The Wall Street Journal’s Fed watcher Jon Hilsenrath wrote that the Fed would be taking a “breather”, now suddenly it’s QE3 on!. Hilsenrath says in his latest piece that, “the Fed would print new money to buy long-term mortgage or Treasury bonds but effectively tie up that money by borrowing it back for short periods at low rates.” Amazing how quickly a mere 1.57% drop in the Dow on Tuesday changed the dialogue…

I think it’s suggestive of how vulnerable the Fed perceives the stock market to be. And of course the “sterilization” aspect is an acknowledgement by the Fed of the inflation risks associated with quantitative measures.

February nonfarm payrolls come out tomorrow. The median forecast is holding steady around +210k, with the jobless rate expected to hold steady at 8.3%.

• BoC leaves policy rate unchanged at 1.00%, in-line with expectations.
• US initial jobless claims +8k to 362k for the week ended 03-Mar, above expectations of 355k, vs upward revised 354k in previous week.
• ECB leaves refi rate steady at 1.00%, in-line with expectations, lowers growth forecast, raises inflation outlook.
• BoE leaves repo rate unchanged at 0.50% asset purchase target unchanged as well. No statement.
• Switzerland CPI +0.3% m/m in Feb, above expectations of +0.2%, vs -0.4% in Jan; -0.9% y/y, vs -0.8% y/y in Jan.
• Germany industrial production +1.6% m/m in Jan, above expectations of +1.1%, vs positive revised -2.6% in Dec; +1.8% y/y, vs +1.3% y/y in Dec.
• Japan Q4 GDP SAAR – 2nd prelim -0.7%, vs -2.3% 1st release.
• Japan current account (nsa) falls to -¥437 bln in Jan, vs ¥304 bln in Dec. First deficit since Jan 2009.
• BoK holds repo rate steady at 3.25%, in-line with expectations.
• Bank of Indonesia holds rates steady at 5.75%, in-line with expectations.
• RBNZ holds steady on Official Cash Rate at 2.50%, in-line with expectations.

08-Mar (The Wall Street Journal) — The European Central Bank Thursday admitted that the euro-zone’s economy is likely to contract this year, and that inflation will outstrip the bank’s medium target.

Opening his monthly press conference, Mario Draghi said that higher-than-expected energy prices, along with increases in various state-administered prices, meant that “inflation is expected to remain above 2% in 2012, with upside risks prevailing.”

The central inflation forecast for 2012 is now 2.4%, up from 2% three months ago, Mr. Draghi said.

At the same time, the central assumption of the Eurosystem’s forecasters is now that the economy will shrink by 0.1% this year, that being the mid-point in a range between -0.5% and 0.3%. For 2013, the ECB now expects growth of 1.1%, compared with a prior forecast of 1.3%.

[source]

PG View: What the ECB seems to be predicting here is stagflation.

08-Mar (Bloomberg) — Greece moved closer to sealing the biggest sovereign restructuring in history as investors indicated they’ll participate in the nation’s debt swap.

Holders of about 60 percent of the Greek bonds eligible for the deal, including Greece’s largest banks, most of the country’s pension funds and more than 30 European banks and insurers including BNP Paribas (BNP) SA and Commerzbank AG (CBK), have agreed to the offer so far. That brings the total to about 124 billion euros ($163 billion), based on data compiled by Bloomberg from company reports and government statements.
Enlarge image Investors With 58% of Greek Bonds Agree to Swap

The euro and stocks gained on speculation Greece will reach its participation target by the deadline of 10 p.m. in Athens today. The goal of the exchange is to reduce the 206 billion euros of privately held Greek debt by 53.5 percent and turn the tide against the debt crisis that has roiled Europe for more than two years.

…While Greece would prefer a voluntary deal, the government has said it will use collective action clauses to force holders of Greek-law bonds into the swap if the so-called private sector involvement falls short and it gets sufficient approval from investors to change the bonds’ terms.

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