30 September 2011

Gold Daily and Silver Weekly Charts



There is intraday commentary on the derivatives markets with an emphasis on the Anglo-American dominance of the precious metals derivatives markets.

Gold caught a little bounce this afternoon and even closed rising despite a stronger dollar and a weak stock performance. But given the technical damage in the chart it was not significant.

It remains oversold and in a trading range as indicated on the chart. It really could go either way depending on whether their is a resumption of liquidation selling. But the fundamental trend and all the reasons for gold and silver to move higher is still in place. So we will most likely see a resumption of the bull market trend.

Wait for it.

The best I can say about this options expiration week, and the recent Night of the Long Knives, is that is over.

Have a pleasant weekend. Good night.




SP 500 and NDX Futures Daily Charts - Down to the Bottom of the River



Not a strong close for the month to say the least.

Traders were not interested in hold long positions over the weekend.

See you on Monday.




The Anglo-American Precious Metals Derivatives Duopoly: Quarterly OCC Report



The US Office of the Currency Comptroller (OCC) issues a Quarterly Report on the Derivatives exposure of US Banks and Trust. The report, including historical archives, can be found here.

The report includes "all insured U.S. commercial banks and trust companies as well as other published financial data." So obviously it is not comprehensive of private funds, and banks without a US subsidiary presence.

The archives go back to 1998, but it is quite clear that the report is not so interesting prior to the repeal of Glass-Steagall and the Gramm-Leach-Bliley Act, also known as the Commodity Futures Modernization Act of 2000.

The report shows that JPM has about 80 percent of the gold derivatives in the world on its book, with HSBC holding the other 20 percent.    And in other commodities, JPM holds a similar position as well as part of their overall $78 trillion derivatives book which is heavily dominated by interest rate and credit derivatives.  But hey, that's without netting, right?  Oh yeah, counter-party risk.

JPM is not just Too Big to Fail.  It IS the market.  And 95% of their transactions are still OTC.

Just for the sake of perspective I did include a chart from the 2Q 2000 report here which shows both the total derivatives exposure, leverage and concentrations, and the gold market in particular. 

Notice that some of the players are no longer with us, and of course there is the big combination of CMB and JPM, when the houses of Morgan and Rockefeller combined after this report was issued to become the leviathan of international banking. 

At that time Chase Manhattan Bank was the biggest player with about $14 Trillion in nominal derivatives with a leverage to total assets of about 43.  The gold market was a three way split amongst Chase, Morgan and Citi, with Fleet grabbing some scraps.

This is for the derivatives gold market among commercial banks.  At that time the silver market was dominated by a non-bank, the now almost infamous AIG. 

As Ted Butler relates in December, 2003:
"Here's how AIG got to be the biggest trader in the silver market. When Drexel Burnham Lambert went bankrupt in 1989, the DBL Trading Group was purchased by AIG, and became the AIG Trading subsidiary, which currently operates out of offices in Greenwich, Conn. You may recall DBL Trading was the subsidiary involved in the temporary gold loan default with the central bank of Portugal at that time.

Before moving over to AIG, the DBL Trading Group worked at Goldman Sachs (J. Aron) in the early 1980's, and before that began at ACLI (A.C. Leon Israel). For the sake of full disclosure, and in an interesting coincidence, I worked at Drexel Burnham Lambert in Miami, for 10 years until 1986, but had no involvement, whatsoever, with DBL Trading."

I include this not only for historical interest, but also to remind you that the derivatives market is only one facet of the markets overall, albeit a growing one that is still about 95% Over The Counter and unregulated. It also still does not include the futures markets in this data.


Here is an overall chart from the June 2011 Report. One thing that immediately jumps out is that JPM now has a total nominal derivatives position of about $78 Trillion. That's a lot of nuts.

The other unmistakable point is that besides the increased concentration, the nominal leverage of Goldman Sachs at 537:1 is that of a hedge fund and not a commercial bank or trust. Even Morgan Stanley is running at a modest 26:1.

By the way,  in a bit of non-metals related gossip, I hear that Mackie Messer is strolling the downtown area, and might be looking to put a blade between the ribs of Meier Schmul with the objective of having one less investment bank in the market, in addition to the fine pickings from the collateral corpses.

Who can really know such things? Not so many as think they do perhaps. But it is good to know who and where your friends are, and with whom they are associating. Just ask Herr Fuld.  Oops, Mistah Kurtz, he dead. John Paulson?


The leviathan JPM, uber bank of Rockefeller and Morgan, holds 80% of the gold derivatives in the world, with HSBC having the rest. HSBC was founded in the British colony of Hong Kong and is now headquartered at Canary Wharf London.

At this sort of concentration you do not have a size advantage, you ARE the market, with all that it implies in terms of knowledge of positions et cetera, at least concerning derivatives. In the non-gold precious metals JPM's derivatives are a more modest 69%.

How important are derivatives to gold and the metals? Not so much, unless you consider it important to know who is hedging what positions and future supply. And it also helps to manage some of the largest non-derivatives positions such as large ETFs for example.

But some might conclude that between them the Anglo-Americans have the gold market in hand.


JPM holds quite a derivatives position in 'other commodities' as well, presumably non-precious metal. Inconsequential thinkgs like food and energy. That makes the commodities boss at JPM, Blythe Masters, Der große Macher in anyone's book.


As general rule of thumb, if you are the House in any game, you should not be able to also sit at the table as a player, internal confidentiality agreements notwithstanding. It really is just that simple.

You should be taking money on a transactional service basis and net zero exposed. And if you can't do that and make enough money, then you need a new business model.

And the notion of commingling this sort of business with insured bank deposits and Federal Reserve subsidies is insane.

Any major commodities player needs to be compact enough to wrap up in a carpet and get rolled out the door, sans bailouts, should conditions require. Even a big player like Enron or Refco.

One cannot help but wonder if some of these mega banks have not become so interwined with government as to be in a virtual partnership in their implementers of fiscal and financial policy, which is a dangerous development indeed.

"Oh the shark has pretty teeth dear,
And he bears them dripping red,
A sharp knife has Macheath dear
And when he flicks it you are dead."

29 September 2011

Gold Daily and Silver Weekly Charts



The markets are waiting for some catalyst, some reason for their next move.

Until then they just churn back and forth.



SP 500 and NDX Futures Daily Charts



Stocks are still weak, and in a trading range, looking for some impetus to their next big move, up or down.



Die Mackie Messers Der Wall Street - The Mack the Knives of Wall Street


Ubi sunt qui ante nos fuerunt?

I was watching old movies and documentaries last night as a follow up to my recent readings. They also have some contemporary and artistic resonance to today.

Here is a clip that I found interesting. You may be familiar with the music if not the lyrics.

Drei Groschen Oper - Die Moritat von Mackie Messer



The above is a scene from the G. W. Pabst movie version of DreiGroschenOper, or Three Penny Opera, with Ernst Busch as the moritat, or street ballad, singer. I have to admit I find his rendition with the jerking enunciation and exaggerated trills a bit distracting. But this original film excerpt gives people who have only been exposed to the jazz versions a better idea of the original meaning and context.

Here is the same tune, with a spoken introduction, performed by Kurt Gerron, who starred in the live premiere of Kurt Weill and Bertolt Brecht's opera at Berlin's Theater am Schiffbauerdamm in August 1928. Gerron played both the street singer and Tiger Brown, the corrupt police chief.



Based on John Gay's satirical Beggar's Opera from 1728, it is set in London just before the coronation of Queen Victoria. The opening night audience, which did not know what to expect, was stunned, demanding encores for almost every song according to eyewitnesses. It was a sensational success that swept Europe, spawning numerous productions, catapulting the authors and actors to fame. Gerron, while remaining a popular character actor, became a successful movie director.

Now it is part of the rustling leaves of history, the voices of ghosts returned, whispers from dead lips.

While watching the 1930 German version of Der Blaue Engel yesterday (with English subtitles as I am not fluent in German) I was reminded that Gerron was third billing as the impresario Kiepert. I had forgotten what a melodramatic piece on morality the movie was, that it launched Dietrich's career, and how riveting a performance is given by Emil Jannings as Herr Dr. Rath. His madness scene is still remarkable, with his high pitched screaming, even in this jaded age of exaggerated emotions and special effects. I find it incredibly prophetic for the German people, and especially the intelligentsia, of that time. They were seduced, and went mad.



One thing always leads to another. If we live here, it does not hurt to get to know the place, before we take our leave.

As you may recall, the 'Weimar Republic' had seventeen governments in fifteen years, and the social and financial disruption had its outlet in the cultural ferment of Berlin.  This phenomenon is brought out fairly well in the CBC documentary, Legendary Sin Cities: Paris, Berlin and Shanghai.

I watched it again this week. If in the 1920's the US was naughty, Paris was voluptuously extravagant, and Berlin was a spasm of idiosyncratic excess.

Actor and director Kurt Gerron had his own very sad end. Although the video clip here merely says he died at Auschwitz in Okt 1944, it does not remind us that just before his death Gerron, himself a Jew, produced a propaganda film documentary, probably under enticement and coercion, for the Nazis about the 'ideal and humane conditions' for the Jewish inmates at Theresienstadt. Such are the ways of the captive mainstream media and the demimonde of the status quo. Mackie, welches war dein Preis?

After it was finished he was shipped to Auschwitz and shot on arrival: advanced profit sharing from the Reich's wages of death. I found a documentary on the internet, Prisoner in Paradise, that speaks to this sad little chapter.

The song of history resonates through time, with like instruments. But what if someone removes all the strings, leaving only empty minds and vacant stares?

I became aware of Brecht as a playwright during a course of study while an undergraduate in university while taking a course in modern drama. I do not remember so much now except that my favorite of Brecht was Mutter Courage und ihre Kinder, or simply, Mother Courage.

The Mackie Messers of Wall Street are nothing new. Each generation has the responsibility to rein in its predators. It is just a question of whether anyone will sing a ballad about them after they are gone.

Let's hope someone sings for our children, so they will not forget, even if they are taken by clumsy hands into insensate barbarity again.

And what if the Café closes, and the lights go out all over Europe again? Our culture is now so artificial, it will not even remain as dust. But the word, and its song and those who hear it, never die, outliving the artifice and most monumental objects of men. And so there is always room for joy and optimism, and even love among the ruins, but not despair.

In Egypt's sandy silence, all alone,
Stands a gigantic Leg, which far off throws
The only shadow that the Desert knows:
I am great Ozymandias, saith the stone,
The King of Kings; this mighty City shows
The wonders of my hand.
— The City's gone,
Nought but the Leg remaining to disclose
The site of this forgotten Babylon.

We wonder, and some hunter may express
Wonder like ours, when through the wilderness
Where London stood, holding the wolf in chase,
He meets some fragment huge, and stops to guess
What powerful but unrecorded race,
Once dwelt in that annihilated place.

Horace Smith, Ozymandias, 1818

28 September 2011

Gold Daily and Silver Weekly Charts



The metals reversed lower today as fresh selling hit the markets along with selling in the equities.

Jitters about the German vote and European debt situation were blamed.

See today's stock charts posting for commentary.

My view of the metals action is skeptical if not downright cynical.  I assumed we would have a down day in the metals to knock out any brave souls whose call options went out in the money yesterday, and found themselves holding fresh futures contracts today.

But the market is what it is, and we need to wait for the downtrend to break. It is drawn on the gold chart in blue.



SP 500 and NDX Futures Daily Charts - "Sell Rosh Hashanah and Buy Yom Kippur"



The old Wall Street adage says:
"Sell on Rosh Hashanah and Buy on Yom Kippur."

Rosh Hoshanah begins at sundown on Wednesday, 28 September this year, and Yom Kippur at sundown on Friday, 8 October.

And the selling did come in today as stocks turned lower after a stronger open.

We are into the end of the month tape-painting period, and barring any fresh negative developments from Europe we *might* have seen a bottom to the selling. But...

There was a gathering of hedge fund gurus today, including the heads of Carlyle and Blackstone. And some of these wealthy and worldly wise sages are saying that the US needs a 'financial shock' to scare the politicians into action, presumably some action that they would approve. Some shock like back to back 1000 point down days, or several huge drops in the dollar.

And Europe is floating the idea of a financial transaction tax again, which would have a devastating effect on the HFT crowd since the amount, although slight at about .1% for stocks and bonds and .01% for derivatives adds up when you are doing thousands of transactions per hour and running trillions in derivatives. The Wall Street crowd is adamantly against it, almost Dimon-esque in its opposition. I suppose that a nice wide exception for the wiseguys would work, but Europe does not seem as inclined to pander as the Yanks.

More threats to the economy from the financial sector? Why not, it has worked every time so far.

So the US market is jittery, and it is hard to see them stick a rally with any conviction in this environment of high volatility and artificial money flows guided by a few hands.

A vote in Germany on the bailouts is coming so let's see how it goes.




27 September 2011

Gold Daily and Silver Weekly Charts - Happy Option Expiration Day - Gold Carry Trade



Today was Option Expiration Day for the metals on Comex. Presumably the call holders have been beaten sufficiently, and now it is the turn of those holding puts.

This is a nice bounce, but as a caution the downtrends in the short term have not yet been broken.

In an earlier piece today about the gold market we discussed leasing of gold by central banks into the markets which certainly does happen. The only question is how often, how much, and for what motives.

Rob Kirby has written a comprehensive piece on the Gold Carry Trade a few years ago, which I link to here.  If you have any interest in this it is a good place to begin.





SP 500 and NDX Futures Daily Charts



We get the third estimate of US Second Quarter GDP on Thursday but otherwise the domestic news is light, and US markets are being dominated by sovereign debt concerns in Europe.




Gold Seasonality and a Convergence of Events at the End of November 2011


"We looked into the abyss if the gold price rose further. A further rise would have taken down one or several trading houses, which might have taken down all the rest in their wake.

Therefore at any price, at any cost, the central banks had to quell the gold price, manage it. It was very difficult to get the gold price under control but we have now succeeded.

The US Fed was very active in getting the gold price down. So was the U.K."

Sir Eddie George, Bank of England, September 1999


"That day the U.S. announced that the dollar would be devalued by 10 percent. By switching the yen to a floating exchange rate, the Japanese currency appreciated, and a sufficient realignment in exchange rates was realized. Joint intervention in gold sales to prevent a steep rise in the price of gold, however, was not undertaken. That was a mistake."

Paul Volcker, Nikkei Weekly 2004


“Central banks stand ready to lease gold in increasing quantities should the price rise.”

Alan Greenspan, US Federal Reserve Bank, 24 July 1998

As an aside, the lease rates for gold went negative about four days before the recent bear raids in the metals markets began.  This was most likely due to an excess of fresh supply being offered on the markets by the Western central banks. The bullion banks saw this and dropped their bids to take full advantage of the knowledge of this operation, or more properly, subsidy.

The central bank gold is leased to the bullion banks, like the market makers at the LBMA. Among these are JPM, GS, HBSC, BofA, DB, and Barclays. The gold is then sold into the bullion markets in London, or used as collateral for leveraged paper transactions.   With a lag, this additional supply affects the futures and ETF trades with additional leverage in New York.

The week of Nov 21 may be one of particular interest to US investors in precious metals.  The cross currents may make it even more volatile than this August with its 'Night of the Long Knives.'  Or perhaps the banking metals bears have their eyes to the future and are pre-emptively striking now.

If this theory is correct, at some point this market operation will fail, and the price reaction, not to speak of the political scandal, may be memorable. It is not clear to me that we will see it coming on the charts, but one can hope. Personally I think China and Russia will use this as a bargaining tool if they are not doing so already. What's the old line about selling them the rope? Brought to the brink for the sake of a relatively few bankers' bonuses.

There is a an option expiration for December 2011 contracts that week, on November 22. December is a big delivery month, so fireworks are always expected. And we are entering a seasonally strong period for the precious metals.

The US 'Super-Committee' to resolve the debt crisis will be facing a November 23 deadline to vote on a plan which they will present to the Congress and the President on Dec 2.  This will avoid triggering 'automatic cuts' to take place in 2013. 

November will be the real kick off month for the US presidential elections.

On November 22 the US will release its first estimate of 4Q GDP.

On November 23 the Fed will release its latest FOMC Minutes.

The November Jobs Report will be released the following Friday on December 2.

And of course, November 24 begins a four day holiday weekend for Thanksgiving, including the famous 'Black Friday' for US retailers.

Super-Committee Timeline

Oct. 14: House and Senate committees must submit recommendations to the committee by this date.

Nov. 23: Deadline for the committee to vote on a plan with $1.5 trillion in deficit reduction.

Dec. 2: Deadline for the committee to submit report and legislative language to the president and Congress.

Dec. 23: Deadline for both houses to vote on the committee bill.

Jan. 15, 2012: Date that the “trigger” leading to $1.2 trillion of future spending cuts goes into effect, if the committee’s legislation has not been enacted.



Thank You for the Pleasant Surprise



My friend Dominique on the Côte d'Azur‎ sent this to me, and it took me a little while to figure out why. So many things are going on.

I am stunned, surprised by joy.   Thank you for your patronage.

Et merci à tous mes amis du café.


This is from The Big Picture by Barry Ritholtz. I assume he was too much the gentleman to allow his own blog to be included in the voting. It would certainly have been either number one or two. He and Yves are giants in the blogosphere alond with ZeroHedge, Calculated Risk, and Mish among others.

And yet there are so many places with special knowledge to frequent, from the hardy fare of LeMetropoleCafe, the cabaret atmosphere of MaxKeiser, and the classic cuisine of iTulip and EconomistsView, as well as those listed on the left hand side of this blog. We can all count ourselves to be very lucky for this creative environment. Let us hope that it will last through the currency war, and that the lights will remain on.


26 September 2011

Gold Daily and Silver Weekly Charts - Night Bombing Raid - Silver +4.50 from Low - LBMA



Gold December futures fell to 1535 and Silver to 26.15 in the overnight session as a determined night bombing raid took them down in the least liquid period of the 24 hour trading day, with the low being reached around 2 AM New York time.

Silver Dec futures are now at 30.78 in New York, virtually unchanged from their open at 30.85, or up over $4.50 from the low.

Gold is at 1623 now, or up $88 from its overnight low.

The December SP 500 Futures had bottomed at 1116 around the same early morning hours, and are now at 1158 or about 42 point from the overnight lows.

Gold has NOT yet broken the short term downtrend, marked with a sharply declining blue line on the chart.

Tomorrow is option expiration on the Comex as we might have expected. I would hope that long term investors would take advantage of these price drops by locking in physical bullion purchases when they can.

However, it is hard to do this with the leverage and margin requirements on Comex especially on the overnight globex trading session. How can an average trader hope to maintain a position? And that is the basis of their schemes.

"It is not immediately clear at this juncture who was selling or why - but in placing such a huge order into the market when the least number of market participants were active tells you that they were out for dramatic effect.

Anyone looking to offload significant amounts of metal at the best possible price would have done so when both London and New York were both open - this would have ensured they would have hit the market when it was most liquid and ensured they got the best price for their sale.

Clearly finessing gold into the market was not their motive - they wanted a statement."

Ross Norman, Sharps Fixley




The interplay between the LBMA 'physical market' and the New York 'futures markets' is fairly obvious. The leverage on the LBMA physical market for gold and silver, as opposed to the London Metals Exchange which trades base metals, is reputed to be around 100 - 1. So any 'run' on the metals will stress the system.

According to their website the LBMA market markers are some of the largest Too Big to Fail banks including UBS, Société Générale, Merrill Lynch (BoA), Credit Suisse, Barclays, Goldman Sachs, JPM, HSBC, The Bank of Nova Scotia ScotiaMocatta, Deutsche Bank.





SP 500 and NDX Futures Daily Charts - Big Reversal In US Equities - Dead Cat Bounce?



US stocks bounced hard today from a deeply oversold short term position.

However, the proximity to support in a somewhat cynical trading range is notable.

If it breaks out of that channel, either direction for more than a day, stay out of the way unless you are riding the trend.



The Golden Bowl - Long Term Update - Intermediate Correction - Target 2360 'To the Rim'



A friend from Strasbourg had sent me a long term gold chart, with the past prices updated for inflation, which I had termed, The Golden Bowl.

He has been kind enough to send the updated prices to it. The past prices are adjusted for inflation, but the current prices are nominal, and of course everything is priced in US dollars.

I should note that all the annotations are mine, so if it is wrong the blame is for me.

Gold Daily Chart Update and a Look at the Golden Bowl

Another reader or two have sent me a similar chart, not updated for inflation, which is The Silver Bowl. I struggle a bit with the reliability of chart formations over such long periods of time.

I should point out that gold has not yet reached the lip of the 'cup' in its formation, so any retracement now would be a conventional one since the last major consolidation or intermediate bottom if you will.

However, assuming that gold does make it to the lip of the cup and break out, the 'handle' ought not to exceed 1580 to the downside for a total 38.2% retracement.

As an aside, I think that anyone who thinks this is just a routine market correction, based on the charts, is not looking at the actual market action, which is highly suspect from any number of dimensions.

But in particular the unloading of large amounts of contracts in the least liquid periods of the 24 hour trading day is highly suspect, and there are far too many 'coincidences' occuring for an intelligent person to blithely dismiss. I do not mind anyone ignoring such information but to dismiss it in the most haughty of manner is not becoming.

And of course for the 'I told you so' crowd that comes out on every correction, well, what else can one expect. They are never long.

I have to admit I was caught a little by surprise with the severity of the reaction to the FOMC announcement, but it is telling in its own way.

But we are in a currency war, whether one realizes it or not, and this has been a 'shock and awe' exercise I think along with other dramatic fiat currency adjustments, especially the Swiss franc.

The Bankers will have their way, until they do not. So let us please exercise caution. I have said, 'wait for it.' I hope that now this lesson is embellished in your memory.

We have not yet broken the blue downtrend line on our Gold daily chart. It is better to miss the first ten percent of any rally and be confirmed in the move. And as always, the early loss is the best taken.

Tomorrow is option expiration on the Comex. I think the bankers once again 'looked into the abyss' and their actions, far from being based in confidence, were fraught with fear and desperation. But a frightened animal, whether it be a badger or a weasel, or a weasely banker, is most dangerous when cornered.





The Garden of Beasts: Die Nacht der Langen Messer - The Night of the Long Knives




I have finished reading The Garden of Beasts by Erik Larson, and I now understand why it is such a popular book of non-fiction.

It is remarkably well-researched, with an impressive set of footnotes based on original sources from diverse places. They are worth reading in themselves as they contain little delights and vignettes. The book provides deep insight into some of the minds of eyewitnesses grappling with the events of the day.

In part because of the source materials, the book spends what one might feel is an inordinate amount of time showing things from the perspective of Ambassador Dodd's daughter, the femme fatale Martha, and her many flirtations and affairs with the prominent of that city, including the head of the Gestapo and an NKVD agent from the Soviet embassy. She is not a particularly sympathetic character, being such an obviously shallow, albeit well-connected, narcissist.   Even these episodes are well written enough to be interesting if one enjoys that sort of background perspective and romantic intrigue.  And it is entertaining to read about the involvement of great literary names like Carl Sandburg and Thorton Wilder,  amongst others.  There is nothing in fame and recognition that deters personal folly.

Ambassador William E. Dodd himself is a frustrating figure, the southern born history professor from the University of Chicago who stumbles into the hornet's nest while looking for a sinecure. He comes across as petty and ineffective, carelessly anti-semitic in the manner of those times, and certainly no hero. And yet in the end he 'does the right thing' and looks good, and quite prescient, in comparison with his fellows. We might make some allowances to the need for a diplomat to be discreet while in office, and to manage perception for the support of official policy.

But it does bring home that point so many miss, that even while great events grind slowly along, ordinary and even extraordinary lives with all their petty preoccupations and diversions go on, the sun still shines, and people marry and are given in marriage, until the moment that, however slowly and in stages it may happen, the door finally closes.   .

I gained a new understanding of how some of the earlier events in the post-Weimar government progressed, and how the rise of the Nazi party unfolded, slowly, with more, but unfortunately ineffective, opposition than we might have believed, at least from 1932 to 1935. And so it was very worthwhile. No one should have been caught by surprise if they had their eyes open.

In particular I finally understand the 'Night of the Long Knives' as more than a passing intramural event as it is depicted so often in documentaries which compress the great sweep of history into an hour or two, and too often crush out the real significance, the many human undercurrents amidst ordinary preoccupations and foibles that comprise great events.

The 'Night of the Long Knives' was the first overtly extra-legal action in the Nazi rise to power. And this might be a lesson for us today as we interpret contemporary events and the perversion of mere legality without regard to morality, tradition, or honor. It was a clear sign of things to come, for those who had a mind to see it.

The book ends with the recall of Ambassador Dodd to Washington, replaced with one of the crony members of 'The Pretty Good Club.' Dachau is full of political prisoners, Jews are being individually terrorized and denied basic human rights, the infirm and defective are being sterilized and murdered, and all political and public information has been brought into conformity with the Nazis through their program of Gleischaltung

The real dark night of the soul and Kristallnacht lay in the future, having been born and emboldened by the continuing appeasement in the face of each worsening outrage against all convention and social norms. The Americans could overlook the progression of abuses against others as long as the Hitler regime 'would do business with them.'  It is the fatal weakness of realpolitik, its cumulative moral hazards, writ large. 

It is interesting to contrast the complacency of the career diplomats,  at that time most often Americans of privilege, and their preoccupation with obtaining full payment of the German bonds for their wealthy domestic constituents and the banks, with the agony of the German people as they slowly sunk into the abyss.  The lone voices that were raised in protest were suppressed, ridiculed, marginalized, and ignored even in America.  

This is a fine example of serial policy error in the service of privilege and the status quo. To many amoral minds, including especially the capitalists of the free world, Hitler's rise to power was just another business opportunity, and the plight of his victims a crisis not to be wasted, a source of great profit. And not all those who benefited were censured and punished. Some families rose to greater prominence and power, even in America, on a pile of European corpses.

In Germany the hopes of liberals and moderate conservatives alike fell before the uncompromising obsession for power and unrelenting fanaticism of a minority of some of the most banal and oddest people ever to take power in a major developed nation.   Not one of them could have risen by individual merit, but they did have a talent in exploiting other people's fears and weaknesses, and the sharp and unwavering focus of the sociopaths and psychopaths, that seems to bewilder and beguile the more diffused nature of the average person.

I was struck in fact that the great failure that was made by so many was the assumption that as the leader of a great and educated nation, Hitler was rational, and would eventually make the most rational decisions. So they believed his many assertions of his peaceful intents, and good wishes, even as he turned Europe into an abattoir. Like the efficient market hypothesis, people were blinded to reality by a theory about the natural goodness and rationality of politicians.

The dichotomy is never so apparent as in contrasting the leaders of the movement with their own Aryan ideals: the club footed Goebbels, Himmler the chicken farmer, the sybaritic Göring, the weak minded and superstitious Hess, and the boorish fanatic Hitler.  And the ordinary people made jokes about it, until even humour was crushed under the jackboot, choked out as fear and greed became pervasive.  Through an astute combination of terror, propaganda, and the perversion of the law, an entire people were persuaded to sleepwalk into the abyss.

The author includes, almost as throwaways, some interesting insights into the German character and its mutation under the Nazis.  In particular I was struck by his description of them doting on their dogs and their horses, and the national laws forbidding cruelty to animals, so that the horses, as Dodd the Virginia gentleman farmer observed, were among the fattest and best kept he had ever seen.  And in the end of it all, during the Russian assault that leveled the area around the Tiergarten and the Reichstag, a stray shell struck the stables, and the horses stampeded down the ruined avenues, in flames.

As long as the personal interests of the status quo of the wealthy and powerful were served, those in positions of responsibility said and did nothing, until it was too late even for them.

"What most occupied the attention of the State Department [in 1934] was the outstanding German debt to American creditors. It was a strange juxtaposition. In Germany there was blood, viscera, and gunfire; at the State Department in Washington, there were white shirts [of the wealthy career diplomats and career politicians], Hull's red pencils, and mounting frustration with [Ambassador] Dodd to press America's case [for full payment of the sovereign German debt]...

In Berlin, Dodd was unmoved. He thought it pointless to pursue full payment, because Germany simply did not have the money, and there were far more important issues at stake...

Through his first year in Germany [1933], Dodd had been struck again and again by the strange indifference to atrocity that had settled over the nation, the willingness of the populace and the moderate elements in the government to accept each new oppressive decree, each new act of violence, without protest...

Dodd continued to hope that the murders would so outrage the German public that the [Hitler] regime would fall, but as the days passed he saw no evidence of any such outpouring of anger...

For Dodd, a diplomat by accident, not demeanor, the whole thing was appalling. He was a scholar and a Jeffersonian democrat, a farmer who loved history and the old Germany in which he had studied as a young man. Now there was official murder on a terrifying scale. Dodd's friends and acquaintances, people who had been to his house for dinner or tea, had been shot dead.

Hitler's purge [June 30, 1934] would become known as 'The Night of the Long Knives,' and in time would be considered one of the most important episodes in his ascent, the first act in the great tragedy of appeasement...

This lack of reaction arose partly because many in Germany and elsewhere chose to believe Hitler's claim that he had suppressed an imminent rebellion that would have caused far more bloodshed. Evidence soon emerged, however, that showed that in fact Hitler's account was false...

The controlled press, not surprisingly, praised Hitler for his decisive behaviour...In a letter to Hull, Dodd forecast an even more terroristic regime... 'The people hardly notice this complete coup d'etat. It takes place in silence...I would swear that millions upon millions have no idea what a monstrous thing has occurred.'"

Erik Larson, The Garden of Beasts

24 September 2011

Year-To-Date Performance of Various Financial Assets



Check out the Treasuries in the second chart, particularly the 30 Year Bond.

If the Fed had not been targeting assets to create some of these price moves it would be the best case for deflation which I have seen thus far.

I think this might be a case in which Fed does something with the right hand, which the audience is watching, while it does something very different with its left hand, using the misdirection of the markets to distract the viewers from its true purposes.

Whatever that may be, the performance is what it is. It shows no recovery in the real economy and an expansion of the 'financing sector.'




23 September 2011

Gold Daily and Silver Weekly Charts - Liquidation Panic - Martian Gold - Comex Hikes Margins



"Yesterday, the textbook was thrown out the window. All asset classes saw sudden and sharp moves far in excess of normal volatility patterns. To an old timer, that points to one conclusion. Liquidation. Wide-spread liquidation across asset classes. Currencies, bonds, commodities and stocks all moved swiftly and sharply in a direction that screamed - Seek safety! Raise cash! Get liquid...

All of that had a quick and discernible negative impact on markets. But, the selling was far more pervasive and dramatic than simply a conscious adjustment of positions based upon new data. Thursday’s action screamed liquidation - and not all of it voluntary."

Art Cashin, 22 September 2011


"That day the U.S. announced that the dollar would be devalued by 10 percent. By switching the yen to a floating exchange rate, the Japanese currency appreciated, and a sufficient realignment in exchange rates was realized. Joint intervention in gold sales to prevent a steep rise in the price of gold, however, was not undertaken. That was a mistake."

Paul Volcker, Nikkei Weekly 2004

There was a major sell off in gold and silver today that was due in part to the liquidation of assets coming out of Europe. That is the basis of the quotation from Art Cashin, and he is right in what he says.

But while stocks and the dollar all paused today, gold and silver were hammered, and the selling looked to be more calculated than incidental as it has been throughout the week.

There is little doubt that some of this is the association with usual gaming of the Comex option expiration next week, and the potential delivery situation on that exchange with their unusually thin supplies and concentrated short positions held by a few of the banks. Comex Hikes Gold, Silver, Copper Margins After the Bell.

But today in particular seems to be even a little more than that.

Every time the central banks and their affiliates get desperate, some economic essayist trots out an outlandish argument about why gold is a 'barbarous relic.'   Here is one that tops even the almost petulant argument of Willem Buiter in 2009. 

The Price of Gold in 2160 - Statsguy and James Kwak

I had to read this essay twice to make sure it just was not satire. I can summarize my reaction by saying that finding gold in outer space with assumed technologies speaks to supply, but the author does not present any assumptions about population, economics structures, and of course future demand.

The method by which gold is formed in relatively rare supernova events is fairly well known, and its distribution relative to other elements and compounds is not completely eccentric, at least not as random and eccentric as pseudo-scientific economic theories might become these days.

The author's premise of the discovery of new bullion supplies in outer space is analogous to the discovery of the New World by Europeans, and the remarkable finds of gold and silver on those two vast continents.

And yet here we are today.

Some might say that the author was merely saying in a cute way that commodity based currencies always fail, with an example being salt or Yap stones as Mr. Buiter had argued to greater effect.

And I would say that all currencies do go in and out of favor in their time, since there is an element of relativism in value that can be enforced by ruling authorities, who themselves tend to come and go, even if in their time these authorities might seem invincible, their empires intended to last for a thousand years.

But some stores of value, not based on passing utilitarian criteria or force, do tend to be resilient, and come back again and again, and retain an element of value from generation to generation. Or as some might with a more profound understanding of money might say, they maintain the confidence of their steadfastness that is a pre-requisite of sound money that is difficult to maintain by mere force of will.

As some historians of money have pointed out, the Federal Reserve was initially set up to emulate this type of external immutability of value in what later became a purely fiat currency. As men like Andrew Jackson would have predicted, they failed in exactly the same ways and for the same reasons that every other attempt at this has failed throughout history.

All systems are prone to corruption and decay, but none so much as those that rely exclusively on the goodness and wisdom of small groups of powerful men, especially when acting in secret.

It does seems quite cheeky for a modern economist to criticize a natural store of value with a 5000 year history, while standing on the platform of a purely fiat currency, given the short half life of every fiat currency throughout history. They may be recreated and devalued, but they never retain much of their value and character, with the only remnant their name.

I hear the sounds of printing presses over the horizon. Get ready for Quantitative Easing European style, and massive European bailouts, and increasingly absurd arguments from the econo-sphere as they avoid the subject of justice for the sake of expediency.

I have some limited sympathy for the dilemma facing the increasingly desperate western central banks, and understand their rationalizations.  But they are doing something that is the very epitome of moral hazard, and abuse of power, in their attempts to stabilize the unsustainable, without allowing for meaningful change and reform.

The heart of the issue is that the existing monetary and financial system is becoming increasingly arbitrary and corrupt. A relatively small group of interconnected crony capitalists wishes to create a digital money out of nothing, and distribute it increasingly as they will, to whom they will.

And this is the basis of my resentment with this policy abuse, and the irritation with the assault on reason by those in the financial demimonde engaging in what might be politely called perception management.

This self-serving arbitrariness, even if done for 'good motives,' is the very reason why all fiat currencies fail. No matter how you want to rationalize it they are going to create money out of nothing, and give it to whom they will, while corrupting the political system in the process.

And the cumulative results of this abuse of power are corrosive to society. Lawless example by a ruthless few brings out the worst in all the people, always. And that is a shame.

"Our government teaches the whole people by its example. If the government becomes the lawbreaker, it breeds contempt for law; it invites every man to become a law unto himself; it invites anarchy.”

Louis D. Brandeis
I am reading The Garden of Beasts by Erik Larson, and it is diverting as well as instructive, full of personal vignettes of Berlin in the 1930s told from the standpoint of the US Ambassador and his family.  It is perhaps not surprising that most cruelty is based in casual disregard for others, and a pre-occupation with the self.  And of course, that evil flourishes when the good do and say nothing.

As a preparation for this I read The Long Night by Steve Wick. Perhaps this is responsible for my gloomy frame of mind this week. But these things do not happen overnight, but by measures, until one is firmly in the crude grip of the banality of evil.  And then of course it is too late to escape from the maw of the abyss. 

So don't go there.

Have a pleasant weekend.







SP 500 and NDX Futures Daily Charts - US Equities Pause In Hopes of Intervention



US equities paused their selling and found some support today.

Next week is another story. The markets are looking for some official response on the European debt situation.

There is also concern about political discontinuity in Washington, and it appears to be well-founded.