First of all, I would like to wish the President of the United States a happy 50th Birthday! I could not think of a better gift for this poser than a 500 point drop in the Dow. Great job saving the economy with that $2.5 TRILLION increase in the US "debt ceiling"...
All joking aside, today was quite the ride! A new Japanese Yen intervention got the ball rolling fast on the heals of yesterdays stealthy Swiss Franc Intervention. Both the Swiss and the Japanese claim their actions were because of "excessive speculation" in their respective currencies...they were getting a bit to hot. Bullshit! Both cut the legs out from under their strong currencies in an effort to throw a life vest to a sinking US Dollar.
The global equity markets were not impressed...THEY TANKED! Which could be considered surprising since following the last Japanese Yen Intervention the equity markets "soared".
The Precious Metals initially continued their strong move higher this week on the news of the Yen Intervention. Considering their performance following the last Yen Intervention March 15, 2011, it should have been no surprise. Gold rose 21% and Silver 74% following that effort to halt the rise in the Japanese Yen. An effort that, after just three short weeks, proved futile...even with the aid of the entire G-8 to drive the Yen lower following the March earthquake and tsunami in Japan.
Gold hit another new ALL-TIME high following news of the Yen Intervention overnight. And then, as on so many days over the years, at right around 12 Noon, Gold suddenly begins selling off. This seem a bit irrational given that Gold had been rising strongly all week as the equity markets fell following the grand climax to the debt-ceiling debate. [Much to the dismay of the many who had called for a Gold sell-off following news of the increase in the US debt ceiling...and a relief rally in stocks.] Then it dawned on me [!], Friday morning at 8:30 AM is the US Non-farm Payrolls Report. The Precious Metals always get a smack down ahead of that phony report. The financial news media however are convinced that Gold was sold to meet margin calls in equity accounts that were being mauled. If that were true, why would people have been buying it the past three days as equity losses were escalating? I would put the blame for the sudden drop in Gold, and in particular Silver, on the usual suspects at the CRIMEX...of course.
Be that as it may, it is no secret that Gold and Silver reacted very positively to the last Japanese Yen intervention. Why? Because currency interventions of this magnitude are HUGELY inflationary.
News agency Jiji said the Bank of Japan had sold up to 900 billion yen in the intervention.
The Bank of Japan said it will increase its fund for asset buying to 15 trillion yen from 10 trillion yen, among other measures. as it cut short its scheduled two-day meeting that started on Thursday.
The central bank also looks certain to leave the intervention "unsterilized" meaning it would not try to absorb cash that enters the market when the authorities buy foreign currencies.
It is important to note that today's Yen Intervention was a "unilateral" intervention, and involved only Yen selling by the Bank of Japan. The March 15, 2011 Yen Intervention was a "multilateral" intervention that included coordinated Yen selling by all the G-8 countries. The previous intervention proved to be a failure after just three weeks. With the Bank of Japan intervening "on their own" today, the forced weakness in the Yen may be fleeting at best.
"The yen's advance reflects the difficult economic and fiscal situation of both the U.S. and the euro zone, so even if Japan intervenes in the market, it won't be able to combat the yen's rise in the long run on its own," said Takashi Kamiya, chief economist at T&D Asset Management Co.
The Fed wants [needs] the Dollar lower, and everybody knows "you don't fight the Fed". Gold and Silver know that quite well and perhaps that is why their rise was "halted" today on the CRIMEX. Nothing hurts more than the TRUTH...and Silver and Gold are the Truthsayers.
Tomorrow's jobs number is expected to be "underwhelming" at best. It would not surprise me in the least to see a sell-off in the US Dollar on a bad jobs number, and a subsequent rally in the equity markets with the Dow getting back half of what it lost today on "talk of QE3". Should this scenario play out, Gold could be at another new ALL-Time high to close the week, and Silver could be back above $40 an ounce. It should be quite a Friday in the Dog Days Of Summer.
Today's "Top Stories" headlines on Yahoo Finance were quite revealing:
'Enjoy it while it lasts' the old saying goes. And much the same can be said about the longevity of the current bounce in the beaten down U.S. dollar.
QE3 coming, but won't save economy: Roberts- The Daily Ticker
Gold rises to record on haven demand - Bloomberg
I will give the final word this week to Andy Sutton as he suggests in his essay below that the debt-ceiling agreement is really just QE3 in disguise:
Debt Ceiling or QE3?
By Andy SuttonWith the debt deal now signed and the crisis proclaimed to be over by the government and the mainstream lapdog media, it is time to take a serious look at the debauchery that was just perpetrated on the American people – again. The names have barely changed from 2008. The tactics certainly haven’t. The magic of government accounting has had another chapter added to it as something that actually adds to the deficit and requires money be borrowed on its behalf is now a ‘cut'. Isn’t that just special? There are several big myths about the past few weeks that we need to uncover before anyone is really going to understand what is really going on here.
QE3 in Disguise
QE2 was winding down and when you go back and look at it, the USFed had already been blamed (quite properly too) for record high food prices around the globe and some of the unrest in certain locales as well. The overt monetization stage is generally the last one in the fiat life cycle, and obviously it is in Bernanke et al’s best interests to prolong the fleecing, er, rather prosperity, as long as they possibly can. The debt ceiling non-issue was really a work of semi-genius when you think about it. Set an artificial date for the end of the world, get your buddies in the media to put countdown clocks all over their news broadcasts – really a nice touch guys, and then proceed to scare the daylights out of everyone that those checks might not go out if everyone doesn’t get together and take one for the banksters. Uh, the team. So what really happened on 8/2 anyway? Well, I will tell you. QE3 was born. Come again? Here’s the stick. The consumer is now in pullback mode – again. The government is up against the wall with the full light of day being shown on its foolishness. The only institution with any wiggle room is the fed.
I have gotten confirmation from several well-placed sources that the USFed is now buying nearly 80% of all new Treasury bond issues. Most of these are being purchased directly from the primary dealers, who are required to place bids at all auctions. This is one of the reasons why it seems everyone around the world is divesting; yet the Treasury always has plenty of buyers for new debt. Pension funds and other mutual/closed-end funds are good for most of the rest. So follow the logic. The USFed needs cover to launch another round of monetary stimulus even though the first two were an abysmal failure. The USGovt needs to be able to issue a trainload of bonds to make payments on a bunch of ill-advised promises. The best bet at this point would be to borrow enough to divest everyone from SocSec at a 4% per annum rate and opt everyone out and shut the system down. People could invest their own money accordingly and at least if they blow it, it would be on them. And here’s the carrot: we get a debt ceiling extension for $2.8 trillion-ish and this gives the government the ability to borrow and spend while giving the Fed cover for the next round of semi-overt monetary stimulus. The mechanisms may be slightly different, but this one will likely mimic QE1 and 2 in most ways. The fed will be monetizing debt and the government will be spending more of its borrowed money to try to stimulate an economy, and, more and more lately, appears to be beyond stimulation. It would appear that we’ve now reached the phase in Keynes ‘theory’ where the long run is upon us and we’re not dead so now what? Unfortunately, Keynes left us no answers because there weren’t any and he knew it. This may come as a shock to many Keynes proselytizers, but we’re in uncharted territory, with not even the basis of a clue as to how to right this ship. So what we can expect moving forward is more of the same. The ‘cuts’ in this debt deal, from what I’ve been able to see so far, are going to gut the middle two quartiles of the economy. Not at once or immediately, but slowly. Many of the prescribed cuts won’t happen for a while, but others are yet unknown. The ‘super congress’ will have frighteningly dictatorial powers in deciding the winners and the losers and obviously there will be fierce battles by industries, corporations, banks, and pretty much everyone with a lobbyist – except the American people – to get people sympathetic to their cause on that commission. Go figure that 300 million Americans have not one single suite on K Street. Not even a single kiosk. Nothing.
Priming Demand for GBonds
On cue, USEquity markets have deteriorated over the past several weeks, pushing investor money across the aisle into Treasuries. I have made the case both anecdotally and factually in our paid publication for almost 2 years that the small investor is largely out of markets. Much of Middle America’s investments are in managed plans such as 401s, pension plans, and the like. Funds and banks have been driving the markets for quite some time now, shaving pennies off each other each day, with everyone claiming victory at the end of the quarter. I’ve chronicled how several firms have bragged on quarter long winning streaks. When you look at all the information, it becomes very clear that the big banks are running that show now more than ever. So why the recent selloff? There are a couple of reasons really, and the first is the easiest to understand. The general public, for the most part, regards the stock market as the economy itself. Running down the markets was one way of making the fear campaign launched by Washington stick. Thanks to subterfuge and disinformation, Main Street really doesn’t understand most of the economic reporting other than unemployment, and perhaps GDP, but it certainly understands the stock market. Dropping the markets was part of the psyop against the American people over the past several weeks. Secondly, there is typically a flow from more risky to less risky assets. Let me be clear that I preface both of those qualifiers with ‘perceived’. Perceived increased risk in the equity markets will push money into bonds and vice versa. That has been a basic paradigm for many years now and is fairly well understood by most investors. That paradigm is going to be ending in the not-too-distant future, but that is another article for another week.
The mere fact that so much money is piling into the long end of the yield curve reeks of manipulation since it simply defies common sense. A stay of execution is not a pardon, and the ridiculous spending spree in Washington will continue, albeit, most likely to a lesser extent in Middle America’s direction. There will be plenty of money for wars, regulation, and plenty of money for the next bailout when the banksters get zapped (most likely by design) by the derivatives time bomb they’ve created on a global scale. Nothing has been done to alter the trillions that SocSec and Medicare pass onto the nation’s plate in terms of unfunded liabilities each year. Perhaps the plan is simply to make the liabilities go away, and then there will be no need for funding. The supercongress could easily have that as its mandate. It will not be comprised of Ron and Rand Paul types, that is for sure, or even main line fiscal conservatives. Or advocates for the people. I wouldn’t be surprised if General Electric CEO Jeff Immelt wasn’t given a spot despite the fact that he isn’t even a Congressman.
Gold Smells the Rat(s)
In short, the run-up of the bond market is to push the perception that US government bonds are safe. There is likely a minor residual effect from the ongoing (and worsening) crisis in Europe, which is spreading well beyond Greece. Gold is properly responding to the debt and derivatives mess globally. At this point, it is one of the few markets that is ‘working’ yet the mainstream press calls the rally ‘ludicrous’. And make no mistake, the roiling of markets is just as much about derivatives as anything else. Remember all the credit default swaps that were written on junk US mortgages? There are plenty of those written against various European (and American) government bonds, banks, and pretty much anything else that isn’t bolted down. And the nature of the derivatives time bomb is such that it will not matter where it begins, once the avalanche starts, it will take the entire financial system with it. That is the magnitude of the greed that has been poured into this rather unknown and virtually unregulated arena.
Ratings Russian Roulette
Another benefit to pushing up the bond market is to cover what declines may occur if a ratings agency actually does something other than talk about downgrading USGovt bonds. At this point at least it would appear to be a rather safe bet that this will not happen. Moody’s has already affirmed the top rating while saying everything negative they possible can in a vain attempt to save face. These agencies are merely political animals, serving the masters who pay their exorbitant fees. Nothing more. They are not independent by any stretch, because as anyone can understand, your allegiance is to who pays you. When a bank pays the agency to rate its mortgage tranches, the rating agency has a choice. Make the rating pleasing to the customer or lose the business. It is very simple. Amazingly the agencies essentially admit this, claiming their sovereign ratings are ‘more independent’. More independent than what? Than the AAA ratings slapped on C mortgage tranches?
If the Eurozone nations want the ratings agencies to stop arbitrarily and capriciously downgrading them, then they’d better take some of that rescue fund and send a large check. That is what appears to work best with these firms – a large application of money. There is also a little talked about motivator in there for the ratings agencies to keep the USGovt’s rating sterling. If they cut it that could very well mean that fewer bonds will be issued, and therefore diminished demand for ratings. When in doubt, always, always, follow the money.
There was certainly a lot of borrowed money to be followed today as the debt curve resumed its relentless upward climb to oblivion and the loss of the American standard of living we’ve come to enjoy. Meanwhile, awful economic reports continue to flow out of the various reporting agencies and if nothing else, maybe this time folks will come to understand you just can’t put humpty dumpty back together with endless monetary and fiscal stimulus; it is truly the ultimate exercise in financial futility.