Euro Dollars - The Great Dollar Overhang and Missing M3 Component - Gold and Silver

These figures are from the Preliminary BIS Reports of November 2011 which reflect reporting bank positions as of the Jun 2011 quarter. Obviously therefore they do not yet reflect the recent Fed expansion of the swap lines for dollars.  The first chart represents the total dollars held by banks as 'foreign currency.'

As you will recall, a 'euro dollar' is any US dollar being held overseas, in currency or in electronic digits, whether in Europe or Asia.  I should add that a certain amount of physical dollars in private hands overseas are held outside the official banking system, particularly in the illicit substances and materials sector.

The 'Euro Dollar Gap' Chart which is the second chart reflects the difference between the reporting banks Liabilities and Assets in foreign held dollars. This gap can cause a Eurodollar short squeeze such as we had seen in 2008, and to a lesser extent in 2010. We are also in a eurodollar short squeeze now, as exemplified by the recent Central Bank effort to make more dollar swaps available to Europe. The BIS figures have obviously not yet caught up with this yet, but they will in time.

As discussed previously, one of the reasons that European Banks require Dollars is because customers were demanding the return of their dollar deposited financial instruments while the Banks dollar assets had markedly decreased in value because of bad investments in Dollar denominated Collateralized Debt Obligations.

In the third chart I compare the Fed's Eurodollar figures in the series that was discontinued in the beginning of 2006. Although the lines are relatively similar, it should be noted that the magnitudes of the numbers just do not match, with the BIS reporting significantly higher numbers even though the relative changes in the lines are similar. I do not know, for example, if the Fed was including Central Bank Reserves or not.

But I think one takeaway is that the amount of Eurodollars are significantly higher now than they have ever been as a result of the growth of the dollar bubble in US financialization of debt, much of which had been purchased by European banks.

The gap between Dollar Assets and Liabilities creates short term demand spikes, as we have just recently seen in the actions by the Fed and a few other Central Banks to make more US dollars available in swaps.

There is another set of BIS reports I am examining that render higher figures with current Eurodollars in the neighborhood of 3.2 Trillion.  I am trying to figure out what these amounts include that the other measurements do not.   In the interim I am using the lower of the two. 

The bigger picture is that this enormous growth in Eurodollars is a result of the US financialization, more colloquially known as 'The Credit Bubble' and the US ownership of what is still the world's reserve currency.

I have some queries into BIS to understand if these figures include official reserves held by Central Banks. I do not think they do.

However, IF the dollar is supplanted by something else, or some combinations of things, as the world's reserve currency, there are obviously going to be an excess of US dollars looking for some place to go from their current havens overseas. And it is mostly likely that they will come home to roost.

I am sure that the Fed has a plan to sterilize this expansion in dollars available for domestic use. Whether that plan can work is another matter altogether. I do not believe that there is any precedent for it.

But one thing that is clear to me is that since 2002 'we aren't in Kansas anymore, Toto,' at least with respect to the growth of the US dollar overseas. And I think there is a linkage between this and the rather impressive bull market in gold and silver.

Gold Daily and Silver Weekly Charts - The Pause That Refreshes?

I changed the weighting of the long gold - short stocks pair back to 'neutral' to slightly short.

There might be some tax loss selling in early December and headline risk remains highly elevated.

Still it is wise not to underestimate the Fed's willingness to debase the currency for their friends.

As a reminder, the Non-Farm Payrolls Report is tomorrow.

I still think the Europeans should nationalize their troubled banks and let the US take care of its own. But that seems rather unlikely.

SP 500 and NDX Futures Daily Charts - Wall Street Talking Up a 'Santa Claus Rally'

The SP 500 has managed to work its way back into the symmetrical triangle from which it had broken down, with a lot of help from Bernanke and the western Central Banks.

Let's see if they can hold it here, and even break out. Headline risk remains elevated, and nothing has really changed except for a short term blast of dollar liquidity.

As a reminder, tomorrow is the Non-Farm Payrolls Report.

Will there be a 'Santa Claus Rally' on the US stock market this year,
or will things just keep getting worse?

The Y-T-D Performance of Various Assets: Gold, Silver, US Stocks, Bonds, and AAPL




Doing Nothing Is Still Making a Choice

And the winner is gold, at least for now with one month left in the year.

I included AAPL because it is the poster child for the stock rally and is often touted by shills for Wall Street and the hedge funds as a superior investment amongst stocks on chat boards and 'news programs.'

It should be noted that recently the US 30 Year Bond has greatly outperformed the US 10 Year Note because of the Fed's 'Operation Twist.' It has still underperformed gold in the short term at about 19% unless you wish to compare some derivative of the bond like zero coupons or a fund rather than the bond plus accrued interest. The discrepancy there between the bond and the derivatives is most likely an indication of speculation based on the Fed's actions.

Remember the charts below do not include any interest payments received on the notes so the overall return is a little higher.

Also, Silver is notoriously volatile, and it is perfectly capable of 'catching up' with gold rather quickly. And I do think the silver market is being massively manipulated for some reason by one or two of the money center banks. When that manipulation breaks down, the resultant rally could be memorable.  But as you know I do think that silver is more 'speculative' than the safer haven of gold.

But for now the comparisons are what they are. If you have held gold through thick and thin you have done well.

And if you think of all the money you could have made if you had traded in and out of it cynically, be warned that those gains are illusory.

Thanks to notorious lapses and the ideology of deregulation this is one of the most corrupt and treacherous markets I can remember in thirty years, or even read about except perhaps for a few of the pre-crash bubble markets.

I think Ian McAvity has summarized this quite well:

The big change has been the utter corruption of Wall Street and that nearly 80% of the trading on the New York Stock Exchange now is being done by high-velocity computers. When an investor puts in an order, it's basically one computer versus another computer operating in nanoseconds. That's why all of a sudden the volume is up or down 10 to 1 and you get a couple of hundred points added on or taken off the Dow in minutes. To me that's a corruption of the process. "Ethics" and "Wall Street" are words you never use in the same sentence.

The trading mechanism is broken down. Leveraged exchange-traded funds (ETFs) are designed to consume the client's capital in leveraging and rebalancing premiums. The high velocity traders literally get the opportunity to "front-run" public orders as the order flow to "the market" is available to them for a fee. It's outrageous in the sense that they've legalized front running for those who pay up for the high-speed data feed. And then there's the initial public offering (IPO) business. Anytime the public can get shares in an IPO, they don't want it. If they can get some, it's only because it's not going to be that good a deal...

It's the culture of greed coming out of the banking system. The Street always wanted to make money. That's never gone away. But there was a time when good clients were actually respected by a firm. A firm wanted to do well for a good client because it wanted to keep the family assets in the firm. These days a client is considered to be a mark. The system is designed to convert the client's capital into their fees and income as quickly as possible. The public is being chased out. There have been persistent outflows from domestic equity mutual funds since 2007. A lot of people justifiably don't trust it...

As you know my personal preference is to hold gold and silver bullion in a fully owned and secure situation, and to keep the rest of your wealth in specific income producing investments which you closely control and manage preferably in an area in which you are experienced and knowledgable.

And as you must, find the safest banks available and store your necessary cash holdings there. Canadian and Swiss banks come to mind. US Treasury Direct in short term maturities is acceptable for those who must hold Dollars, but keep in mind that at some point those funds too may be subjected to the same seignorage by Wall Street that all other paper assets and savings are now enduring.

The mispricing of risk always involves the inevitable loss for some and gains for others. And as a rule of thumb, the further your money is away from the Wall Street and global money center banks, the better off it may be. As desperation sets in, the cheating and theft will become increasingly brazen and blatant, until the system breaks down and then is hopefully reformed.

Something like MF Global was unthinkable just a few years ago, for those who have forgotten the lessons of history. And it will get worse before it gets better.    Do what you can to support change and reform, even if it is to passively support those who speak out, or to stop encouraging the worst by continually fall for their tricks and  mindlessly repeating their false arguments and propaganda.

But at the very least protect yourself.  A few things may be relatively safer, but nothing will be easy.  It is going to be a rough year ahead.

And for those who have a mind to it, you may wish to consider how foolish it is to endlessly worry about how to protect your money, while giving so little care about not losing the only thing  that you really possess and may take from this world, which is yourself, your very being.  "For what does it profit a man...."