SP 500 and NDX September Futures Daily Charts

As a reminder the 'front month' in the US equity futures is now December, and this Friday is a quadruple option expiration.

SP 500



NDX

On the Edge of History: Will Europe Join in Promoting the SDR as the Global Reserve Currency?

There is a tide in the affairs of men.
Which, taken at the flood, leads on to fortune;
Omitted, all the voyage of their life
Is bound in shallows and in miseries.
On such a full sea are we now afloat,
And we must take the current when it serves,
Or lose our ventures.

Julius Caesar: Act 4, scene 3, 218–224

China and Russia and some of the other developing nations have been proposing a reformulated SDR, with less US dollar content, a broader representation of currencies, and the inclusion of gold and silver, as a suitable replacement for the US dollar as the global reserve currency.

The US and UK are opposing the SDR as replacement to the US dollar as the new global reserve currency. They prefer to delay and postpone the discussions, and to maintain the status quo for as long as is possible to support their primacy in the financial markets. Control of the money supply is a huge hand on the levers of financial and political power.

It will be most interesting to see where the European Union comes out on this issue, especially in light of the recent drubbing that their banks have taken via dodgy dollar assets and a vicious dollar short squeeze, alleviated by a rescue from the Federal Reserve. It could have gone otherwise, and that provides things to think about. No one wishes to be at the mercy of a small group of unelected financial engineers who are closely aligned with an equally small set of Anglo-American banks operating with a somewhat opaque discretion. Or the goodwill of totalitarian governments who are acting aggressively from their own mercantilist self-interest for that matter.

One hears things. A deal being offered to Germany by the financial interests, for example, as a counterbalance to sentiment for greater latitude and independence in the EU. The lines of discussion move, and sometimes blur. Currency wars are the continuation of diplomacy, and possibly a revival of the cold war, by other means, to paraphrase Clausewitz. And a chilling fog is rolling over the landscape. This is what the timeless metal has been telling us, as it sounds an historic warning.

This is just the latest episode in a long unfolding macro change I have been calling Currency Wars after the Chinese best seller authored by Song Hongbing in 2007. I viewed it as the definitive spike in the theory of The End of History by Fukuyama.

It will continue to proceed slowly, at least for now, but such events tend to accelerate and sometimes dramatically as they progress. However the longer term implications for a change to the de facto Bretton Woods arrangement in place since Nixon closed the gold window in 1971, are enormous and yet little remarked yet by conventional economists, who too often prefer to glare at photons, gaping in the light. It has all the hallmarks of a classic conflict yet unfolding.

Rather than standing fast on an unsustainable status quo, as noted in Triffin's Dilemma, that serves the special interests of a wealthy few, the US might be well served to reform its banks, and balance its economy between service and industry, and stand once again for independent freedom and the common good, rather than narrow power and greed of the monied interests, and their willing tools and frivolous assistants. That is to trust in the wisdom and altruism of a people and their leaders who have of late shown a greater propensity to greed, deceit, and self-destruction. And so I say we must be in God's hands, because I recoil from Caesar's deathly grasp.

Some worry about deflation and inflation. Those outcomes are both hedged easily enough. I am more concerned about the next global holocaust of human destruction, and the bonfire of the vanities yet to come. That is history.

Financial Times
Germany asks US to give up its IMF veto
By Alan Beattie in Washington
September 14 2010 22:31

The US should give up its veto over important decisions in the International Monetary Fund in return for Europe accepting a smaller say, Germany has proposed.

The suggestion, which experts say will be strongly opposed by the US, addresses a politically highly symbolic dispute about voting power and seats on the fund’s executive board. Shifting power towards emerging market countries is one of the central elements in the Group of 20 nations’ drive to make the fund and other international institutions more representative...

Read the rest here.

Reuters
Lagarde says French G20 to discuss wider use of SDR
2010-09-01 18:06 (UTC)

JOUY-EN-JOSAS, France, Sept 1 (Reuters) - France will use its presidency of the G20 next year to discuss proposals for the wider use of IMF special drawing rights (SDRs) as a reserve currency as proposed by China, Economy Minister Christine said...

Read the rest here.

US Economy: Not Yet a Double Dip, But Certainly a 'Stall'

Chart courtesy of EconomPic

Gold and Silver Daily Charts

Gold

Gold Gains As Central Banks Stock Up - Financial Times

The Curse of Fiat Money - Thorsten Polleit



Silver

SP 500 September Futures Daily Chart

Breakout attempt failed at overhead resistance.

Today's action left a 'doji of indecision.

SP 500

Swiss Franc at US Dollar Parity

Swiss franc at US dollar parity and gold and silver soaring to new highs.

Risk off? At least some think so.

I wonder how long US equities can levitate in this environment.

Probably as long as the volumes remain thin and flashers can paint the tape.

If the shorts do not pile on in anticipation of a top we might see a nice dump into option expiration this Friday. Hard to say while the trade is so artificial.

Mom and pop are on vacation with the Griswolds in BondWalleyWorld. And that has the carnies edgy.



I must wait for confirmation from the BIS currency records which lag by six months, but it does appear that the recent dollar strength was attributable to another US dollar short squeezed caused by the further deterioration in the dollar denominated assets held by European banks and customer redemptions for currency.

Gold and Silver Daily Charts

Gold



Silver

SP 500 and NDX September Futures Daily Charts

Remember that this is a quadruple witch option expiration week for US equities.

SP 500



NDX

The Marriage of Mercantilism and Corporatism: When Free Trade Is Not 'Free'

"The consequences of this policy are also stark and simple: in effect, China is taxing imports while subsidizing exports, feeding a huge trade surplus. You may see claims that China’s trade surplus has nothing to do with its currency policy; if so, that would be a first in world economic history. An undervalued currency always promotes trade surpluses, and China is no different." Paul Krugman

And he is exactly right. As regular readers know this matter of Chinese mercantilism and its toleration and acceptance by the West has been a key observation and objection here since 2000. Any economist who does not understand that devaluing and then maintaining an artificially low currency peg with a trading partner distorts the nature of that trade should review their knowledge of algebra.

Sophisticated oligarchs do not need to send real tanks against their people. They can accomplish the same objectives using fraud, debt, and corruption. Control the supply of money and care not who makes the laws. But it helps to have the lawmakers and regulators on the payroll.

It was in 1994 during the Clinton Administration that China was permitted to obtain full trading partner "Most Favored Nation" status, while vaguely promising to float their recently devalued currency some day, and address the human rights issues that were endogenous to their non-democratic, totalitarian government.

"From 1981 to 1993 there were six major devaluations in China. Their amounts ranged from 9.6 percent to 44.9 percent, and the official exchange rate went from 2.8 yuan per U.S. dollar to 5.32 yuan per U.S. dollar. On January 1, 1994, China unified the two-tier exchange rates by devaluing the official rate to the prevailing swap rate of 8.7 yuan per U.S. dollar." Sonia Wong, China's Export Growth

This served Mr. Clinton's constituents in Bentonville quite well, and has some interesting implications for the Chinese campaign contributions scandals. It supported the Rubin doctrine of a 'strong dollar' while facilitating the financialization of the US economy and the continuing decline of the middle class wage earners, under pressure to surrender a standard of living achieved at great cost. "How I Learned to Stop Worrying and Love the Currency Collapse." and China's Mercantilism: Selling Them the Rope

Not to limit this, George W. ratified the arrangement when he took office, and so it has gone on for almost fifteen years now, with China 'taxing imports while subsidizing exports' to the disadvantage of its western trading partners.

I expect certain economists who are serving their Chinese clients to make their case to muddy the waters, since this is what they are paid to do. But the silence of the many in this matter was so striking as to be incredible, almost mind boggling. But given the acquiescence of the many in the face of equally absurd theories such as the impossibility of a national housing bubble or pervasive market fraud in naturally efficient markets, we should not be surprised.

Even now someone as knowledgeable as Mr. Krugman can distinguish the inappropriateness of the Chinese unfair trade practice "in current environment" through currency manipulation with prior periods, as if it was all right back then, but somehow is no longer acceptable because of the current economic slump. How can one argue with a straight face that a currency peg that continues for years is not inherently unfair, and a contributing factor to economic imbalances, given the assumption that it imposes a de facto subsidy for exports and penalty for imports?

This is not a trivial distinction but tied to a generational assault on the US middle class. Class Warfare and the Decline of the West.

Perhaps it is a good time to reconsider the principle of the 'neutrality of money' with respect to exchange rates controls and global trade in a purely fiat reserve currency regime as was done with the 'efficient markets hypothesis.' Currency Manipulation and World Trade: A Caution. China is certainly standing western capitalism on its ear and giving it a spin. But this is not without historical precedent, and was predicted by V.I. Lenin himself. I would enjoy this spectacle perhaps if I were observing it from a distance in time.

In a global trade environment tied to external standards such as gold or silver, such egregious imbalances could not grow so large because the metals would impose a certain market discipline requiring a reconciliation and adjustment before monetary excesses became a potentially systemic catastrophe as pointed out so skillfully by Hugo Salinas-Price in Gold Standard: Protector and Generator of Jobs.

The policy errors of the Greenspan and Bernanke Fed, and the outrageously unrealistic if not romantic and utopian theories promulgated by economists about self-correcting markets make me, to borrow a phrase, want to 'bang my head against a wall.'

NYT
China, Japan, America
By Paul Krugman
September 12, 2010

Last week Japan’s minister of finance declared that he and his colleagues wanted a discussion with China about the latter’s purchases of Japanese bonds, to “examine its intention” — diplomat-speak for “Stop it right now.” The news made me want to bang my head against the wall in frustration.

You see, senior American policy figures have repeatedly balked at doing anything about Chinese currency manipulation, at least in part out of fear that the Chinese would stop buying our bonds. Yet in the current environment, Chinese purchases of our bonds don’t help us — they hurt us. The Japanese understand that. Why don’t we?

Some background: If discussion of Chinese currency policy seems confusing, it’s only because many people don’t want to face up to the stark, simple reality — namely, that China is deliberately keeping its currency artificially weak.

The consequences of this policy are also stark and simple: in effect, China is taxing imports while subsidizing exports, feeding a huge trade surplus. You may see claims that China’s trade surplus has nothing to do with its currency policy; if so, that would be a first in world economic history. An undervalued currency always promotes trade surpluses, and China is no different.

And in a depressed world economy, any country running an artificial trade surplus is depriving other nations of much-needed sales and jobs. Again, anyone who asserts otherwise is claiming that China is somehow exempt from the economic logic that has always applied to everyone else.

So what should we be doing? U.S. officials have tried to reason with their Chinese counterparts, arguing that a stronger currency would be in China’s own interest. They’re right about that: an undervalued currency promotes inflation, erodes the real wages of Chinese workers and squanders Chinese resources. But while currency manipulation is bad for China as a whole, it’s good for politically influential Chinese companies — many of them state-owned. And so the currency manipulation goes on.

Time and again, U.S. officials have announced progress on the currency issue; each time, it turns out that they’ve been had. Back in June, Timothy Geithner, the Treasury secretary, praised China’s announcement that it would move to a more flexible exchange rate. Since then, the renminbi has risen a grand total of 1, that’s right, 1 percent against the dollar — with much of the rise taking place in just the past few days, ahead of planned Congressional hearings on the currency issue. And since the dollar has fallen against other major currencies, China’s artificial cost advantage has actually increased.

Clearly, nothing will happen until or unless the United States shows that it’s willing to do what it normally does when another country subsidizes its exports: impose a temporary tariff that offsets the subsidy. So why has such action never been on the table?

One answer, as I’ve already suggested, is fear of what would happen if the Chinese stopped buying American bonds. But this fear is completely misplaced: in a world awash with excess savings, we don’t need China’s money — especially because the Federal Reserve could and should buy up any bonds the Chinese sell.

It’s true that the dollar would fall if China decided to dump some American holdings. But this would actually help the U.S. economy, making our exports more competitive. Ask the Japanese, who want China to stop buying their bonds because those purchases are driving up the yen. (Cui bono, Mr. Krugman, cui bono? - Jesse)

Aside from unjustified financial fears, there’s a more sinister cause of U.S. passivity: business fear of Chinese retaliation.

Consider a related issue: the clearly illegal subsidies China provides to its clean-energy industry. These subsidies should have led to a formal complaint from American businesses; in fact, the only organization willing to file a complaint was the steelworkers union. Why? As The Times reported, “multinational companies and trade associations in the clean energy business, as in many other industries, have been wary of filing trade cases, fearing Chinese officials’ reputation for retaliating against joint ventures in their country and potentially denying market access to any company that takes sides against China.”

Similar intimidation has surely helped discourage action on the currency front. So this is a good time to remember that what’s good for multinational companies is often bad for America, especially its workers.

So here’s the question: Will U.S. policy makers let themselves be spooked by financial phantoms and bullied by business intimidation? Will they continue to do nothing in the face of policies that benefit Chinese special interests at the expense of both Chinese and American workers? Or will they finally, finally act? Stay tuned

Net Asset Values of Certain Precious Metal Trusts and Funds