Gold Daily and Silver Weekly Charts - What Recovery - Peak Junk - Currency Wars

China shocked the world markets overnight by devaluing their currency by the most in two decades.

A devaluation of this sort is designed to improve the domestic economy by stimulating exports, lowering domestic costs of production relative to other sources, and to inhibit imports by raising their relative prices.

In other words, China clearly signaled that the US dollar, to which they were matching their own currency, is overvalued relative to the state of the global economy, and especially their own and their competitors in Asia.

China is 'the canary in the coal mine' for the global economy, a major source of labor and supply. Their own economy is sick because demand from overseas is down.

And why is demand lower? Because multinational corporations and the banking system have been financializing nearly everything to increase corporate profits and the wealth of a very few, pretty much at the expense of everyone else.

So if the people do not have the money to buy, and cannot keep increasing their private debt to service consumption because of the predatory lending rates and usurious fees in the system, guess what happens to aggregate demand? Duh.

This is not new. This is not unknown to economists. Thanks to Wall Street On Parade for reminding us of Franklin Roosevelt's campaign speech delivered at Oglethorpe University in 1932 during the depths of the Great Depression.

"Our basic trouble was not an insufficiency of capital. It was an insufficient distribution of buying power coupled with an over-sufficient speculation in production. While wages rose in many of our industries, they did not as a whole rise proportionately to the reward to capital, and at the same time the purchasing power of other great groups of our population was permitted to shrink.

We accumulated such a superabundance of capital that our great bankers were vying with each other, some of them employing questionable methods, in their efforts to lend this capital at home and abroad. I believe that we are at the threshold of a fundamental change in our popular economic thought, that in the future we are going to think less about the producer and more about the consumer.

Do what we may have to do to inject life into our ailing economic order, we cannot make it endure for long unless we can bring about a wiser, more equitable distribution of the national income.”

The central bankers have everyone focused on their interest rate antics while they have inflated their balance sheets obscenely, primarily for the benefit of the denizens of the FIRE sector who are acquiring productive assets and establishing monopolies with that paper.  The Fed is a key regulator of the banking system.  And they are failing badly.

You may disagree with the methods that FDR used during his 'New Deal' but I think his analysis of the problem was correct.  Andrew Jackson made similar observations in a different time and used different methods to address the issue.  They are outlined in his famous Farewell Address.

"But with overwhelming numbers and wealth on their side they are in constant danger of losing their fair influence in the Government, and with difficulty maintain their just rights against the incessant efforts daily made to encroach upon them.

The mischief springs from the power which the moneyed interest derives from a paper currency which they are able to control, from the multitude of corporations with exclusive privileges which they have succeeded in obtaining in the different States, and which are employed altogether for their benefit; and unless you become more watchful in your States and check this spirit of monopoly and thirst for exclusive privileges you will in the end find that the most important powers of Government have been given or bartered away, and the control over your dearest interests has passed into the hands of these corporations."

The problem was not paper money per se, but the concentration of power and wealth which the abusive use of the paper monetary power had granted to a few powerful individuals and institutions.  No system is foolproof when a foolish people will allow the unscrupulous few to operate it in secrecy and without transparency, accountability and the rule of law.  And if anything is clear, the crony regulation by the Fed and other regulators of the Banking System, or lack thereof, is a failure and the source of much of our mischief.

And the primary reason we cannot acknowledge the facts of our own situation is that our political and financial class are caught in a credibility trap. They cannot speak the truth without compromising their own personal greed and will to power.

And this is daunting to us because FDR was a bit of an outlier, an odd combination of personal advantage and profound physical suffering, in a time that gave rise to terrible demagogues in the US and other countries.  And 'Old Hickory' was hardened by service, sorrow, and conscience to duty first.  How many like these do we see today?

The implications of this are an intensification of the currency war as the financial powers continue their stranglehold over the governments and the economic systems, inflating money but keeping the most of it for themselves, so that wages and income for the great mass of the public remains slack and a broad sustainable recovery is not thereby driven.  Say's Law, which decrees that increased production creates its own demand through necessarily increased wages, is as great a canard as the efficient markets hypothesis.

So, the central banks will continue to game the system by adding money, leveraging a broad tax on everyone who holds their currency, by using a number of means to devalue their currencies.  And creating a few winners and many losers by running the confidence game, large and in charge, of being wise and perfectly objective administrators, and not cronies and viceroys for the moneyed interests. As James Montier pointed out in his essay here:

"Lest you think I am being unduly harsh on the world’s poor central bankers, let me turn to the wider idolatry of interest rates that seems to characterise the world in which we live. There seems to be a perception that central bankers are gods, or at the very least minor deities in some twisted economic pantheon. Coupled with this deification of central bankers is a faith that interest rates are a panacea.

Whatever the problem, interest rates can solve it. Inflation too high, simply raise interest rates. Economy too weak, then lower interest rates. A bubble bursts, then slash interest rates, etc., etc. John Kenneth Galbraith poetically described this belief as “…our most prestigious form of fraud, our most elegant escape from reality… The difficulty is that this highly plausible, wholly agreeable process exists only in well-established economic belief and not in real life.”

In response the economists are poking their noses even more deeply into these otherworldly models, and ignoring the carnage which their cockeyed world views have helped to cause.  Not because they are at fault, but because they distract many charged with observing these things from the widespread plunder which they enable, and they provide a cover for the inefficacy of official policy.

The US Dollar did not soar as measured by the DX index, but instead was flat as shown below.  As I noted, it is outdated and is now primarily the inverse of the Euro.  I would imagine the dollar and gold and other alternative safe havens got legs when priced in Chinese Yuan.

I tend to agree with Pater Tenebrarum that Gold Stocks Are At An Interesting Juncture.  But my posture for now is tinged with a serious concern about the equity markets overall.  I just cannot seem to get off my focus on bullion sans intermédiation of a producer or leverage.  Of course at some point when the bull revives this will be a sub-optimal approach.  But for now I am content to sit in a more defensible position.

Stay tuned, because the action is just beginning.

Have a pleasant evening.

SP 500 and NDX Futures Daily Charts - The Financialization Merry Go Round Is Winding Down

Stocks slumped today on the overnight news that China was devaluing their currency by almost 2 percent.

Countries devalue their currencies when their economy is weak, and they wish to hamper imports and stimulate exports.

Stock valuations in the US are fully priced in my opinion.

There was a story today about Viacom's stock buyback program.   The company took on debt in order to buy back stock, thereby improving the companies financial reports which are based on revenues and earnings divided by the total number of shares.

Rather than investing in improved products and services, the company invested heavily in buying its own stock to fatten the bonuses and salaries of executives.  This has cost the company billions and has left their balance sheet heavily indebted.

There is nothing wrong with choosing to finance your company using debt rather than new equity.  This is a classic finance problem.   And with debt yields (costs) at record lows, debt looks attractive.
But it is HOW the company chooses to invest this capital that makes all the difference.  And Viacom is apparently investing it in financialization of their quarterly results.  And that is a more general problem throughout the US economy.

Have a pleasant evening.

Gold Daily and Silver Weekly Charts - Bottom Scraping the Silly Season

Gold and silver popped a bit today, from what can only be described as a 'deeply oversold' condition.   And weakness in the dollar index certainly was a factor, although again it is good to keep in mind that the DX index is largely outdated, and just the inverse of the Euro which is undergoing its own set of secular and systemic problems.

Bottoms and tops tend to be marked by extremes.  There are extremes in sentiment of course, and extremes in the measures by which those who feed off the productive economy seek to hand off their 'investments' to others, and to wring the last dimes out of the public.

I think we might be approaching such a point in the bond and equity markets.  And we have certainly been seeing extremes in sentiment with regard with gold and silver in both directions here.

Of course we are well familiar with the 'pet rocks' crowd, who are falling all over themselves to say increasingly absurd and self-referential things largely about personal taste and bias that do not reference the current reality and even history.  The central banks of the world became net buyers of gold in 2006 or so, and this buying of physical bullion is continuing to grow in statistics that are easily discovered if one looks for them.  This is not to be disregarded, and yet it is.

But in fairness, such times also give rise to some hyperbole on the part of the beleaguered metals bulls, and some misconstruing of what is happening in some of the markets, in their enthusiasm.  There is a creeping inflation in sensational headlines for internet 'clicks' which translate to readership and dollars.  

A recent example was describing the actions of JPM in making a large amount of bullion available to cover demand recently as dramatically 'saving the exchange from default.'

As I have taken some pains to explain in the past, the Comex is unlikely to default, given its current structure and nature which I have described colloquially as The Bucket Shop.  

There is not enough physical action on the Comex in the metals, with the exception of silver which is largely due to the actions of CNT which is using it as a wholesale delivery mechanism, to warrant many serious concerns about a physical default.

But for those who may call out this sort of excessive language as a strawman for ridiculing all examination of the antics at The Bucket Shop is equally misfooted and silly.

Any analysis of supply and demand and delivery that does not consider price, the price setting mechanisms, and the major players dominating the game is probably naive, and possibly a bit disingenuous.  To talk about supply and demand without regard to price is misleading and meaningless.

For the Comex, to consider all the inventory held in their certified warehouses as deliverable at the current price is presumptuous.  This is like saying that all the people in the country are there to provide labor at any price without regard to the job or their willingness to do it.  Certainly you could say you will not run out of labour if you can conscript everyone at will, but that is hardly a market.

Once bullion has been certified acceptable into a Comex warehouse there is some incentive to keep it stored there if one is merely using it for speculative purposes, because you are merely holding a warehouse receipt for it, and taking it out of the system adds some friction and expense to the transaction if you intend to bring that bullion it back in again.

By the way, as Koos Jansen informs us, this is the rule at the Shanghai Gold Exchange.  If you take delivery of gold it is withdrawn out of that system.  And this rule does not seem to deter people from doing business there, as their deliveries dwarf the Comex.  The SGE is oriented towards actual buyers and sellers, and not so much to facilitate mere price speculation.

It is no accident that only '2% to 4% of the contracts at the Comex' actually take delivery of the metal.  That is what opens it up to large scale paper speculation if the regulators and exchange permit it.   And the chart of the ratio of contracts open to ounces deemed deliverable by the owners now at historic highs compared to the norm at the Comex itself!

Price matters.

If a person decides that the current price is an acceptable price for any number of motivations, they may rather easily place their eligible inventory at the Comex up for delivery to another by declaring it to be 'registered.'

Excessive attention to the technical details of how things are done in a certain place, while ignoring other equally important dimensions of the equation  may cause one to completely overlook all the other positions, motives, and conversations that may be occurring amongst the players, as we saw recently in the case of LIBOR and the London gold fixes.

Talking about even detailed supply and demand, without considering who is delivering what and at which price,, in the context of the current market dynamics of sizing and positioning is just talking without considering the underlying information that makes the market.  And I would like to think that most people familiar with markets and speculation would know this.

People tend to talk their books and their biases.  I get that.  And people may legitimately disagree about things, and still be friends, as long as they are acting in good faith and with a civil manner.  That is essential to sorting things out.

But when an argument starts off with an ad hominen characterization, as so many precious metal comments seem to be couched in this bottom scraping silly season, then one has to raise a hand and say that this is more distraction, a very weak argument, and not useful information.  And there is certainly enough of that in the 'pet rock' school of analysis.

Those who are standing for reform in the markets are a small minority these days indeed.  And for them to cut off others because they do not find their politics or their religious beliefs or race or any other of the myriad of things that make a person who they are in good conscience, are asking to fail alone in a contemptible and miserable struggle.

Reform must be a broad principle that unites diverse peoples.   Because the greed and pride that unites their opposition is certainly stronger and more broadly funded, and relying on the kind of weakness in character that finds at least some place in most people's hearts.

Based on the number of financial scandals in a remarkably broad range of major global markets, those who think that we are not enduring a time of excessive market manipulation and pervasive dishonesty must be living in a cave, or in a deep well of subjectivity.

Have a pleasant evening.

SP 500 and NDX Futures Daily Charts - How This Wall Street Asset Bubble Will End

Stocks were in rally mode today despite the poor economic news out of China over the weekend, or perhaps because of it.

Some of the Streetsweepers noticed that Fed Gov Lockhart did not say 'September' in his latest pronouncement about his bias towards raising rates, barring an economic Armageddon.

Why in particular a three month difference in raising rates off the zero bound by 25 basis points strikes me as odd.

More likely today's rally was a 'just because' excuse to start a new wash-rinse cycle, because after all, the little people were selling into the fears of last week, so it is now time to turn the greediators back on and heat this bubble back up.

This market is so bent that it is hard to be cynical enough about it.

Let's see if they can keep this going, with a little help from Shake Shack after the bell.  What an emblem for our financialized economy.

Everyone would like to know when this bubble will end.   Timing is difficult.  But the 'how' it may look is a little more approachable.  For an idea on what it might look like, see the video below.

Have a pleasant evening.