31 October 2015

No Real Chance of Another Financial Crisis - 'Silly'

I like Dean Baker quite well, and often link to his columns. On most things we are pretty much on the same page.

And to his credit he was one of the few 'mainstream' economists to actually see the housing bubble developing, and call it out. Some may claim to have done so, and can even cite a sentence or two where they may have mentioned it, like Paul Krugman for example. But very few spoke about doing something about it while it was in progress.  The Fed was aware according to their own minutes, and ignored it.

The difficulty we have in the economics profession, I fear, is a great deal of herd instinct and concern about what others may say. And when the Fed runs their policy pennants up the flagpole, only someone truly secure in their thinking, or forsworn to some strong ideological interpretation of reality or bias if we are truly honest, dare not salute it.

Am I such a person? Do I actually see a fragile financial system that is still corrupt and highly levered, grossly mispricing risks? Or am I just seeing things the way in which I wish to see them?

That difficulty arises because economics is no science. It involves judgement and principles, and weighs the facts far too heavily based upon 'reputation' and 'status.' And of course I have none of those and wish none.

But it makes the point which I have made over and again, that all of the economic models are faulty and merely a caricature of reality.  And therefore policy ought not to be dictated by models, but by policy objectives and a strong bias to results, rather than the dictates of process or methods.  In this FDR had it exactly right.  If we find something does not stimulate the broader economy or effect the desired policy objective, like tax cuts for the rich, using that approach over and over again is certainly not going to be effective.

Economics are a form of social and political science.  And with the political and social process corrupted by big money, what can we expect from would be 'philosopher kings.'

The housing bubble was no 'cause' of the latest financial crisis. More properly it was the tinder and the trigger event. The S&L crisis was just as great, if not greater. Why then did it not bring the global financial system to its knees?

The interconnectedness of the global system with its massive and underregulated TBTF Banks, the widespread and often fraudulent mispricing of risk, all make cause for a financial system to be 'fragile.' In this thinking Nassim Taleb is far ahead of the common economic thought as a real 'systems thinker.'   The Fed is not a systemic thinking organization because they are owned by the financial status quo, and real systemic reform rarely comes from within.

I see the same fragility which existed from 1999 to 2008 still in the system, only grown larger, global, and more profoundly influencing the political processes.

The only question is what 'trigger event' might set it spinning, and how great of a magnitude will it have to be in order to do so. The more fragile the system, the less that is required to knock it off its underpinnings.

And a crisis is not a binary event. There is the 'trigger' and the dawning perception of risks, and the initial responses of the political, social, and regulatory powers.

There is no point in debating this, because the regulators and powerful groups like the Fed are caught in a credibility trap, which prevents them from seeing things as they are, and saying so.

So Mr. Baker, rather than looking for the bubble, let's say we have a fragile system still disordered and mispricing risk, with a few very large banks engaging in reckless speculation, mispricing risk for short term profits, manipulating markets, and distorting the processes designed to maintain a balance in the economy.

Rather than hold out for a 'new bubble' as your criterion, perhaps we may also consider that the patient is still on full life support after the last bubble and crisis.  Why do we need to find a new source of malady when the old one is still having its way?

I think if one exercises clear and open judgement, they can see that we have stirred up the same pot of witches brew that has made the system fragile and vulnerable to an exogenous shock, and has kept it so.

A new crisis does not have to happen. This is the vain comfort in these sorts of 'black swan' events, being hard to predict.  But they can be more likely given the right conditions, and I fear little will be done about this one until even those who are quite personally comfortable with things as they are begin to feel the pain,

The problem is not a 'bubble.'  The problem is pervasive corruption, fraud, and lack of meaningful reform.  The 'candidate' is the financial system itself, with its outsized hedge funds and the TBTF Banks with their serial crime sprees and accommodative regulators in particular.

And if one cannot see that in this rotten system with its brazenly narrow rewarding of a select few with the bulk of new income, then there is little more that can be said.

Neil Irwin, a writer for the NYT Upshot section, had an interesting debate with himself about the likely future course of the economy. He got the picture mostly right in my view, with a few important qualifications.

"First, his negative scenario is another recession and possibly a financial crisis. I know a lot of folks are saying this stuff, but it's frankly a little silly. The basis of the last financial crisis was a massive amount of debt issued against a hugely over-valued asset (housing). A financial crisis that actually rocks the economy needs this sort of basis.

If a lot of people are speculating in the stock of Uber or other wonder companies, and reality wipes them out, this is just a story of some speculators being wiped out. It is not going to shake the economy as a whole. (San Francisco's economy could take a serious hit.)

Anyhow, financial crises don't just happen, there has to be a real basis for them. To me the housing bubble was pretty obvious given the unprecedented and unexplained run-up in prices in the largest market in the world. Perhaps there is another bubble out there like this, but neither Irwin nor anyone else has even identified a serious candidate. Until someone can at least give us their candidate bubble, we need not take the financial crisis story seriously.

If we take this collapse story off the table, then we need to reframe the negative scenario. It is not a sudden plunge in output, but rather a period of slow growth and weak job creation. This seems like a much more plausible story...

Anyhow, a story of slow job growth and ongoing wage stagnation would look like a pretty bad story to most of the country. It may not be as dramatic as a financial crisis that brings the world banking system to its knees, but it is far more likely and therefore something that we should be very worried about."

Dean Baker, Debating the Economy with Neil Irwin, 31 October 2015

30 October 2015

Latest Shanghai Gold Withdrawals Cross the 10,000 Tonne Mark - 2013 a Pivotal Year

In the first chart we see that there were about 57 tonnes of gold bullion withdrawn from the SGE into China in the latest week.  This is not 'official reserves' but all gold without regard to the receiving party.

This pushes the cumulative withdrawals of Shanghai gold over the 10,000 tonne mark.  Not bad for less than seven years in the business.

This does not include gold that flows through Hong Kong, or through any other non-exchange means purported to be used by the People's Bank of China.

On the second chart you can see that Year-To-Date Shanghai has released 2,119 tonnes into China.  Compared to prior years 2015 is clearly going to be a new record if the withdrawals maintain this pace.

One thing that struck me on that second chart tonight is that Shanghai withdrawals took a definite leg up in 2013.

This is also the same year that the price of gold in Dollars was smacked lower, and the ratio of potential claims to registered gold on the Comex began to climb, and eventually start to go parabolic this year.

Perhaps the bullion bank apologists and shills are right, and this is all just meaningless, an optical illusion, or some fantasy.  Gold is just like pet rocks,  and the majority of the people in the world, and throughout recorded history for that matter,  are just confused and demented.

As I mentioned earlier this evening, the tails risks look rather fat.  One might wonder that even a dingy gray swan with a weak wing could trigger a fairly impressive set of 'unforeseeable incidents.'

They'll never learn.  Why should they?  Winning....

But perhaps we are much closer to the end of this than most people might imagine.  Given the explosive ingredients in place it may be hard to miss.

Related: LBMA Apparently Altered Its Gold Flow By 2,200 Tonnes

These charts are from Nick Laird at Goldchartsrus.com.

Gold Daily and Silver Weekly Charts - Non-Farm Payrolls Next Week - Tail Risk Warning

Gold just will not give us a signal to buy for the short term here yet.  So I remain sitting tight on all my long term positions.  Same with silver.

I did buy a little short side on stocks themselves today.

The action in the precious metals the past few days seemed exceptionally artificial, and that is saying a lot in these markets.

I suspect some of this was end-of-month shenanigans.

The December gold contract is a fairly significant force, and we should start feeling its effects sometime in November.

The Bucket Shop warehouses showed a little more gold passing to the house account at JPM,  and the usual slow leakage out of the silver stores.

The 'nested W' bottom formation is off the table, and now we are in the uptrending range trade, if that can hold as shown on the first chart below.

It has been a long time since we have seen any kind of chart formation working.  This is not a surprise given the obvious price manipulation in gold and silver, similar to what we have seen in so many other markets including the forex which is a cousin to the metals trade.

A Russian bank has joined the Shanghai Gold Exchange, which continues to move impressive amounts of gold bullion from various sources, especially Switzerland and London, into China.

As I have noted previously, the completely new phenomenon of spiking leverage with paper over physical gold in New York and London coincides with the attempt to take the price down after its increase in the most recent leg of the bull market.

I am inclined by what I can see to think that unless the exchanges and the regulators get their act together and rein in the big bullion traders and the mispricing of risk that they are going to have a real mess on their hands if these high levels of leverage get forcibly unwound.

I think the facts bear this out, despite the 'down your nose' scoffing at any risks by apologists and insiders.  But that's just my own opinion, and I doubt anyone involved in the money flows from this trade will care.  And if it does fall apart, 'no one could have seen it coming.'

As Kyle Bass pointed out, no one with a fiduciary (or regulatory) responsibility can ignore what has happened in the gold market since 2013.  But some are, and with an almost reckless disregard.

Let me be clear, since one of the tactics that the apologists use is to purposely misconstrue any warnings.   I am not concerned about a 'default' on the exchange, in the form of a failure to deliver.

Rather, I am saying that the factors that effect tail risks are now so extended in the gold market that even a relatively small imbalance or exogenously driven spike in demand can result in a market dislocation in price that will bring the exchange and perhaps some participants to their knees, and result in a global cascade of grossly mispriced counter-party risks.

Non-Farm Payrolls for October will be reported next week.

Have a pleasant weekend.

SP 500 and NDX Futures Daily Charts - Roll Over Rover

Stocks were weak throughout the session, and the futures started sliding a bit into the close.

This looked quite a bit like the effort to mark an 'end of month print' after a sharp rally higher that looks increasingly shaky.

Let's see if stocks start rolling over next week.

Non Farm payrolls coming on Thursday.

All in all the economic numbers are not good, and the real economy shows signs of slipping into recession. That is if you cut through some of the numbers massaging and spin. We might already be in a new recession. The leadership both in terms of economic and political thought is pretty thin, if not sad.

Happy Halloween everyone.

Have a pleasant economy. Not with these results. lol

29 October 2015

Gold Daily and Silver Weekly Charts - Bread and Circuses - Get Ready

"When a candidate for public office faces the voters he does not face men of sense; he faces a mob of men whose chief distinguishing mark is the fact that they are quite incapable of weighing ideas, or even of comprehending any save the most elemental — men whose whole thinking is done in terms of emotion, and whose dominant emotion is dread of what they cannot understand.

So confronted, the candidate must either bark with the pack or be lost. All the odds are on the man who is, intrinsically, the most devious and mediocre — the man who can most adeptly disperse the notion that his mind is a virtual vacuum.

The Presidency tends, year by year, to go to such men. As democracy is perfected, the office represents, more and more closely, the inner soul of the people. We move toward a lofty ideal. On some great and glorious day the plain folks of the land will reach their heart's desire at last, and the White House will be adorned by a downright moron."

H. L. Mencken

I thought we had already been there and done that, several times perhaps, but I suppose it could always get worse.

The US GDP number for the third quarter was pretty bad coming in at only 1.5%. And that number is likely to be revised lower.

The Atlanta Fed is forecasting about the same or lower for Q4.

What is even worse, if you peel back the headline number, the big growth driver in that GDP number was healthcare costs. Talk about an unproductive was of capital in paying too much for healthcare.

Gold and silver were hit by a rather orderly bear raid today with the price declining throughout the day on a steady program of selling. It was most likely a follow up to the FOMC trying to knock down the open interest a bit more ahead of the key month of December.  The Dollar was drifting lower today, so that provided no support for the metals bears.

There was the usual slow bleed of silver out of The Bucket Shop warehouses, and a little more gold passed from the house account of HSBC to JPM. I notice that a little more gold was marked deliverable in the Nova warehouse, and one might speculate that this is some of the recently acquired gold by JPM still held in Nova's warehouse.

Can't prove it without a warrant and a couple hairy-knuckled Federal lawmen to back it up, but I think it fits the model of JPM taking on the role of the bullion provider of last resort for physical bullion demands on the Comex.

The amounts of physical gold moving around in Asia dwarf the action in NY, and accounting for the musical chairs paper flows, provide a stark comparison to London as well.

I hope to put something more out about London and the leverage being used there, in addition to the leverage in New York.

Last night's GOP political debate was embarrassing.  And not all of it was the fault of CNBC but they get an A++ for pandering.  And since that is what they do on their financial broadcasts and commentary every day, it is not surprising.

Is this what we have come to at long last, this clown show?

Have a pleasant evening.

SP 500 and NDX Futures Daily Charts - Disorder of the Day

The third quarter GDP number this morning was a rather light 1.5%, and likely to be revised lower.

Stocks ignored the real economy, and were trying to hold their gains and push higher, most likely with an eye on the easy money flows from the central banks, and not on real world economic results.

This provides us some information about the broken and disordered relationship between Wall Street and Main Street.

Have some pleasant evening.

NAV Premiums of Certain Precious Metal Trusts and Funds

Premiums are definitely falling on the Central Gold Trust, no doubt due to the acquisition offer from Sprott.

The Sprott Silver Trust has a negative cash balance, although I have just marked it to 'zero.' They will likely sell some bullion to raise money.

28 October 2015

Gold Daily and Silver Weekly Charts - US Dollar - Le Douleur Douce du Monde

I saw pale kings and princes too,
Pale warriors, death-pale were they all;
They cried—'La Belle Dame sans Merci
Hath thee in thrall!'

John Keats, La Belle Dame Sans Merci

Today was a classic.  It was like tuning in to an old Milton Berle show and hearing all the familiar jokes, pratfalls, and goofy faces.

Gold came in steady, near to unchanged from yesterday's close.  It was roughly the same for silver.

Both precious metals were jammed higher for no particular reason in the early morning trade in NY, late London.

And both were smacked lower on the 'hawkish' FOMC statement, although stocks were having none of it, not one bit.

The reason for the metals smack can be attributed to their pricing in the dollar cross, as the dollar caught a bid.  Not surprising since most of the developed world is busy cutting rates and trying to devalue for the sake of their economies, and the Fed is talking recovery, even though there really isn't any sustainable recovery evident just about anywhere.  I discuss the stronger dollar a bit today here.

Looking at the end of day we see that silver is slightly higher by about $.10, and gold is down about ten dollars from the close at yesterday afternoon.

I hope you were not caught up in today's exercise in perception management, unless you were a daytrader, in which case you are in God's hands.  Or something to that effect.

I have switched to my second scenario for the gold retracement, taking the intraday low around 1152 as a hit on that objective.

Today was all about the stronger dollar.   I would hope that the stronger dollar's effect on the price of gold and silver in dollars does not require an explanation.

One can also justify higher stock prices by thinking that it will encourage foreign investors to buy our dodgy paper at these fat valuations.

Personally I think it is a mistake to attribute much to these short term antics.   So I will be skeptical for now.

I do not think the Fed can afford to sustain this stronger dollar, especially since they are looking for an excuse to raise rates for policy reasons, ie they want to get off ZIRP so they can cut rates in the future when their latest paper asset bubble ends in yet another financial crisis, without having to resort to negative rates.

It is a hard policy choice to go lower than zero, especially with a well-armed, cantankerous population.

In other news, Deutsche Bank has checked itself into balance sheet rehab for the next two years.  Considering they are a pre-eminent global counter party risk, I suppose that could be interpreted as 'good news.'

There was also intraday viewing of the fruits of neoliberalism with Chris Hedges and John Ralston Saul here.

So let us see how things progress.   I have a feeling that today was a bit of bravado, but it is wrong to underestimate the willful resourcefulness of the white collar criminal class.

Have a pleasant evening.

SP 500 and NDX Futures Daily Charts - Credibility Trap De Luxe

The mavens of Wall Street heard the 'tough talk' from the Fed, flipped them off with about as much brazen disregard as Donald Trump might show to his opponents, saw a chance to jam the shorts by gunning stocks higher this afternoon, and so they took it.

That is the long and short of it.

Let's see how things go with the Fed 'talking tough' at these lofty levels for paper asset valuations with inflating housing bubbles and a stagnating real economy.

Have a pleasant evening.