Category Archives: Economy and Meltdown

Guest Post: A Step Towards Gold Confiscation

Submitted by John Aziz of Azizonomics,

In attempting to stimulate risk appetite by taking “safe” assets out of the market, the Fed has actually achieved precisely the opposite of stimulating productive investment. First, it has turned bond markets into a race to the bottom as bond flippers end up piling into the very assets that the Fed is trying to discourage ownership of  — because who care about low yields when the Fed will jump in at an even lower price floor, thus assuring the bond flippers a profit? Second it has energised other safe asset markets (such as gold) as longer term investors look for alternatives to preserve their purchasing power in the context of a global economic depression.

The Fed is firing at the wrong target; the real problem — the thing that is causing investors to scramble for safe assets — is an economic depression brought on by (among other non-monetary causes) the deleveraging costs of an unsustainable debt bubble. Without addressing the problem of excess total debt — and quantitative easing aims to increase lending — the Fed is firing blanks.

However, there seems little prospect that the Fed will listen to the debt-watchers who actually predicted the crisis. The likelihood is that the Fed will continue to attempt to take safe assets out of the market. And after treasuries, what will the Fed try to take out of the market?

Izabella Kaminska writes in FT Alphaville:

Fed purchases are the equivalent of hoarding the system’s supply of safe assets on the Fed’s own balance sheet, and in so doing preventing private investors — especially money market investors – from investing in the assets on favourable terms.

While this is mostly the point of QE — the idea, after all, is to stimulate risk appetite and cause investors to change their portfolios — a continued lack of risk appetite means the money created, rather than flowing into risky securities as hoped, is only crowding out the last remaining safe securities in the market instead. The consequences are negative rates and principal destruction — a lethal combination that is arguably far more dangerous and deflationary than no QE at all.

The idea that the Treasury could once again become the gold buyer of last resort, in exchange for liquidity, is interesting to say the least. Not only would such a strategy ease the squeeze in the Treasury market, it would do so without compromising the liquidity effects of QE.

What’s more it could help to support and stabilize the gold price, while taking zero-yielding safe assets out of the system in favour of yield bearing ones — giving money markets a fighting chance for survival in terms of yields.

While gold purchases have never been communicated as official central bank policy, there’s no denying that a shift in this direction is taking place. Be that wittingly or unwittingly.

A little behind the curve.

Last September I noted:

Bernanke has already heavily targeted yields on treasuries which have absorbed liquidity that has departed from productive ventures. But in recent years gold has offered a significantly increased yield over treasuries.

So what’s a central banker who wants to force investors into productive ventures to do? You can’t print gold — but you can buy it, and take it out of the marketplace.

And as the price of gold (in fiat) continues to rise, buying gold is exactly what central bankers may do.

Just as Roosevelt went out of his way to remove gold from the marketplace, the central bankers of today may eventually determine to do the same thing.

The main question if such an event were to occur is just how “compulsory” such purchases might be.

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Ron Paul’s Legacy: A Complete Audit Of The Secretive Banking Cartel?

Wolf Richter

They only bubble up rarely, these scandals at the Federal Reserve System, but when they do, they're doozies, involving huge amounts of money, massive conflicts of interest, all-out manipulation, collusion, favoritism, dizzying cronyism…. And yet, over the 100 years that the Fed has existed, it has done an excellent job in one of its other primary functions, maintaining the dollar, which has lost only 96% of its value—instead of 100%.

The latest scandal is the Libor fiasco that is spawning worldwide investigations of the largest banks, going back years. The New York Fed under its President Timothy Geithner knew of the manipulations as early as 2007, and knew it involved banks of which it was one of the regulators. There were some hush-hush contacts with British regulators, and that was it. Nothing changed. Status quo maintained.

Just about then, the financial crisis began to expose the house of cards that financial institutions had become. Bear Stearns was saved. During the ensuing bailout mania of 2007 – 2009, the New York Fed, under the same management, handed trillions of freshly printed dollars to the same banks that it knew were manipulating Libor. It was done in secret, and the public wouldn’t have known who got what, how the decisions were made, why Lehman wasn’t bailed out though Goldman was, had it not been for the audit by the Government Accountability Office (GAO) as authorized by the Dodd-Frank financial reform act [for some gory details, read… The GAO Audit of the Fed Doesn’t Call It ‘Corruption’ but it should].

During the peak of the financial crisis, Bloomberg sued the Fed to gain access to information relating to the trillions being passed out in secret and in all haste. It won! Finally, November 2011, the Fed dumped 29,000 pages of documents that revealed how many trillions its cronies had received.

The audit results and the revelations from the Fed’s data dump came way late. Popular anger had subsided into a low simmer. Other priorities had edged to the top. And once again, nothing changed at the otherwise hermetically sealed fortress of the Fed. Status quo was successfully maintained.

It remains a secretive banking cartel with unchecked powers. Bankers, top industrialists, and some economists get together with total impunity to engage in market manipulation and price fixing with impact across the globe, including interest rates that savers receive when they hand over their money to these banks—which is zero or just about zero (and negative after inflation).

Hence the need for regular audits—assuming that the country even needs a central bank of this type, though not everyone, including Congressman Ron Paul, thinks so. This audit would be different than the bloated “financial” audits done annually by Deloitte (2011 audit). It would be a complete audit by the GAO of the Federal Reserve System, including the FMOC.

Fed Chairman Bed Bernanke called it a “nightmare scenario” that would create “political influence” and have a “chilling effect.” Indeed, a nightmare for the banking cartel, with a chilling effect on the shenanigans being perpetrated.

Now, the Republicans have an opportunity. Ron Paul is retiring from Congress after 24 plus years of going after the Fed [read…. Ron Paul Slugs At The Fed One More Time]. But during his primary campaign, he gained a lot of supporters, and now it appears that there might be critical mass to push a complete Fed audit into the dynamics of the Republican National Convention on August 27—and elevate it to a plank in the platform.

“It’s good economics and it’s good legislation,” Paul said, “but it’s also good politics, because 80% of the American people agree with it.” But it will be an uphill battle against powerful interests:

Congress. It’s dependent on the Fed. The deficit will be around $1.3 trillion this year, a vote-buying scheme without peer. In a few weeks, gross national debt will exceed $16 trillion. This ballooning debt needs to be funded and rolled over at near zero cost, and the Fed has promised to make that happens—regardless of what it may do to the real economy. So Congress can’t afford to upset the status quo. And it doesn’t want a Fed audit.

Then there is the financial industry, including the TBTF banks, their stakeholders, and large corporations. Many of them were direct recipient of the Fed’s largesse. They want QE and status quo. They want to get bailed out next time. None of them want a Fed audit.

Mitt Romney has been dodging the issue, but given his private equity background, he is unlikely to be gung ho about a Fed audit. Resistance is bipartisan, however, and the White House certainly doesn’t want one.

But it brings together interesting bedfellows: the Tea Party, Ron Paul supporters, independents of all stripes, moderate democrats, liberal democrats, all the way out to the left wing. Senator Bernie Sanders of Vermont, who calls himself a socialist, is a vocal supporter of Fed audits. It’s a mirror of America. And so, if Republicans want to garner support where it would normally be difficult to find, a strong audit-the-Fed plank in their platform might do wonders.

Here is an insanely awesome and hilarious cartoon by Ben Garrison on how Ron Paul is shedding light on the horrid creatures “underneath” the Fed.

And here I am in a conversation with Max Keiser on the Keiser Report, discussing bubbles, central banks, NIRP, and “stupidity arbitrage” (video).

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What Every Farmer And Commodity Trader Will Be Glued To Tomorrow at 830ET

With drought conditions bad and getting worse and agricultural commodities ‘stabilizing’ at their multi-year highs, tomorrow morning could be the catalyst for the next leg in a global food inflation spike (and its accompanying deflationary impacts on economies). The USDA releases it August World Agricultural Supply and Demand Estimates (WASDE) at 830ET  – which is particularly important since it is the first survey-based estimates of the year. It would appear that while pre-positioning has slowed a little, sell-side analysts expect prices (and implied vols) for corn, soybeans, and less-so wheat to rise on the back of not just (dramatically) lower crop yields (in this first of the year survey) but overly optimistic harvested-to-planted estimates and demand limits. Ethanol demand destruction is also emerging as a consensus.


Goldman On WASDE Expectations:

We expect higher corn prices and soybean price outperformance

We forecast a US corn yield of 126 bu/ac and US corn production of 10,750 million bushels. As a result, we believe that ethanol demand destruction is necessary and our corn price forecast is based on the price of corn that pushes the cost of producing ethanol above the price of RBOB gasoline blendstock. Given our forecast for higher oil prices, this puts our 3-mo CBOT corn price forecast at $9.00/bu.



August weather is key to US soybean yields and recent rains will be beneficial to US soybean production. As we had intentionally left our US yield forecast at a high level of 39.5 bu/ac to allow for such an outcome, our US soybean outlook is unchanged. We expect that 2012/13 US soybean ending stocks will be at critically low levels: with the large shortfall in 2011/12 South American production, the global availability of soybeans will be limited until the next South American harvest, with the US the only supplier until then. As a result, we believe that higher new crop soybean prices will be required to limit demand in the coming months and our 3-mo forecast is $20.00/bu.


We forecast lower global wheat production and lower export surpluses given continued hot and dry weather conditions in key producing regions. However, global wheat inventories remain larger than corn stocks and we forecast that wheat feeding will be required to supplement corn and DDG use in the US and globally. As a result, we continue to forecast that US wheat prices will need to trade back near corn prices by next spring. A further deterioration in weather conditions, potential FSU export restrictions and pent-up import demand create risks that global wheat inventories decline even more than we expect and push wheat prices well above corn prices.


Hedging recommendations

Consumers: We forecast higher corn, soybean and wheat prices over the next 3 months given the severity of the current US drought, with our 6-mo price forecast also above the current forward curve. As a result, we recommend consumers lock in current prices as well as layer in upside calls to hedge against the higher prices that we forecast, especially for corn and soybeans. Although up since early July, implied volatility levels remain well below their previous peaks and still represent value especially if weather conditions deteriorate further.

Producers: Following the recent rally in corn, soybean and wheat prices, we recommend Southern Hemisphere producers lock in producing margins.

Morgan Stanley On WASDE Expectations:

We expect a bullish report for the grains with further downside likely for US corn and soybean yields, and shaky global wheat supplies.

Bullish corn, with entire 12/13 balance sheet in play. Armed with its first survey-based yield estimates of the year, the USDA is likely to reduce (dramatically) yield and production estimates for a second consecutive month. While we expect corn yields could easily come in below 130 bu/acre (our weather-driven models show 127 bu/acre), this will not in and of itself be bullish, with consensus already positioned below that level. Instead, we will be watch how the USDA handles the harvested to planted (H/P) ratio, currently at an above-average 92.2% (vs our recently-lowered 88.7%). Over the past 25 years, the 3 seasons with the worst yield disappointments saw H/P ratios fall at least 3% below average. With news already emerging of farmers cutting corn for silage a month earlier than usual and abandoning fields, we’ll be surprised if the USDA does not cut its optimistic H/P estimate.


To balance a production decline of up to 2 bln bu, the USDA will have to make large cuts to all line items. Ethanol demand will be the hardest line item to ration, in our view; accordingly we expect only a 200-300 mln bu reduction to the USDA’s current estimate of 4.9 bln bu. However, feed and export demand could each see cuts as large as 500-800 mln bu. Providing some offset, the USDA will likely lower 11/12 ethanol and export demand (by 50 and 100 mln bu, respectively) with the latest high-frequency data disappointing. Globally, we see little good news, with as much as 1 mln MT and 2.5 mln MT of downside to Russian and Ukrainian production estimates, respectively, as drought hammers those countries. We see upside to Brazilian 11/12 and 12/13 exports on the need to offset lost US supply, while China may well prove the one bright spot for global production, with as much as 2-3 mln MT of downside possible for 12/13 imports on stronger domestic supply.


Soybean production is likely to fare better than corn, though we still see the need for more demand rationing. With old-crop demand still running inline with last month’s expectations, we expect no changes to the 11/12 balance on Friday, leaving all of the focus on the 12/13 crop. The market has long understood that the soybean crop is more resilient than corn (and recent rains should shore up confidence that conditions can still stabilize). However, with the US soybean crop rated in the worst condition since 1988 (when soybean yields fell 20% YoY to just 27 bu/acre), we see the USDA’s current yield estimate of 40.5 as too high (our models show 38 bu/acre). As with corn, stories of failed soybean fields will likely increase the pressure to reduce the USDA’s elevated h/p ratio — currently pegged at 98.9%, vs our estimate of 98.2%. To offset weakness in US production, we see downside of as much as 200 mln bu to the USD’s 12/13 export forecast, balanced by a combination of higher exports from Brazil and a 1.5 mln MT reduction to Chinese 12/13 soybean imports. We see limited downside to US 12/13 crush, on the need to keep US soy meal and oil stocks above record-tight levels.


Expecting a bullish report for wheat, on faltering international production. Falling production in Russia and China — seen lower by 4 mln MT and 10 mln MT, respectively, from the USDA’s official estimates in the most recent Attaché dispatches — is likely to further support US wheat export demand. We would not be surprised to ultimately see US 12/13 exports lifted by 25 mln bu. However, the slow pace of US export sales MYTD, may keep the USDA on the sidelines this month. While we have raised our 12/13 all wheat yield estimate to nearly flat with the USDA, we continue to view its higher than average h/p ratio assumption of 87% as overdone, particularly given the decelerating pace of the winter wheat harvest.

Citi On WASDE Expectations

Given that large regions of the Midwest are now categorized as being in “Extreme” or “Exceptional” drought, we expect the USDA to significantly lower their July yield estimates of 146 bu/acre and 40.5 bu/acre for corn and soybeans, respectively. Citi’s commodity futures strategist currently estimates yields of 133 and 38, respectively, while on their 2Q conference call, AGU management indicated that they believe corn yields may be in the 120s. As a comparison, following the severest drought in recent history (1988), nationwide yields were ~25% below the trend yield at that time. A similar decline from the current trend would point to a corn yield in the low 120 bu/acre range. At this yield corn demand destruction is necessary, with ethanol and feed usage at risk.

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Guest Post: Signs Of The Times

Submitted by Nicholas Bucheleres of NJB Deflator blog,
Retail stores are so 20th century.  Really, between Starbucks, McDonald’s, and Facebook, who has time to walk around the block, let alone read a book?  Never read a book before?  Don’t worry; Fifty Shades of Grey is on audiobook, so you can live Tweet your favorite sex quotes.  Amazon’s got you covered.
Amazon (white), $SPX (purple), Staples (green), Barnes & Noble (yellow), and Best Buy (blue) over 5 years.
Best Buy, Barnes & Noble, and the likes are closing stores and slashing jobs like its 1929 in order to prevent bankruptcy like the barely profitable Circuit City (Rest In Peace).  The 21st century consumer is clearly choosing to stay at home and shop for perfectly demanded goods, so that they can prevent even the smallest amount of sunlight from hitting the waxy rolls in their arms.
I always thought that the perfect competition model in micro-economics was mental masturbation, but I suppose this is a perfect example of its application: US retailers carry such similar products and offer such homogenous services that eventually there is not enough demand to go around and businesses fail.  What the micro-economics model I learned failed to incorporate was technological progress–Amazon.  We should have been taught that not only will some businesses fail while others enter the low-barrier market, but that if one single business can offer a better product than every other, then they will usurp the entire marketplace.  We are currently witnessing this take place.
It’s a Fat-Kid World
With nearly every form of media that we consume quickly becoming digitized, it is no surprise that the analogs are rapidly being replaced by the digital.  Today’s youth are especially drawn to digital platforms because most of them don’t know how to read anyway, and the grease from their sausage-fingers can be quickly wiped off the screen of their iDevice. 
This is all great preparation for their high school years: Wake up in pool of own urine, pop Zoloft, drive to McDonald’s to eat two sausage McMuffins and two hash browns, pop large dose Adderall, drive to school, wipe nose with shirt while Facebooking in class, more McDonald’s, get a couple good hours in on the Xbox while popping more Adderall, Starbucks Mocha Frap extra Whip for dinner, Ambien to fall asleep, then repeat.
…but wait! College gets even better:  Fatso gets to do everything above, but he doesn’t have to go to class!  Talk about the sweet life; big boy gets his student loan through Education Management Corp., who partners with our friends at Goldman Sachs.  They will get you a student loan with a snap of a finger so long as you attend one of their prestigious for-profit online higher-learning institutions.  No need to worry about repaying those student loans; you’ve got a college degree, bro!  After 8 years of daily speed-balling on amphetamine and tranquilizers, this McStudent will have such chemically induced confidence that taking a job without a college degree prerequisite will be beneath him. 
Next stop: government dole.  The New American Golden Boy will collect not one, but two weekly checks from the government.  First he will get the well-deserved unemployment check, and on top of that he will receive his disability check simply for being a fat-ass.  Oh yeah, and government/US taxpayers pick up the tab when he defaults on his student loans, because Goldman and Education Management Corp. are backstopped by Congress.   TARP2.0 will be of spectacular proportions.
$SPX (green), Goldman Sachs (blue), McDonald’s (red), Apollo Group (purple), Teva Pharmaceuticals (yellow),  Starbucks (orange), Apple (sea-foam green?) since 1999.  
 Looks like our man is making a pretty good name for himself.  Every company that he and his friends and family touch has beat the S&P over the past 13 years. 
But let’s be real here: these are not rational consumers making rational consumptions decisions.  This is the new America that is being engineered by corporations that force mindless individuals to become addicted to their products with zero regard for health implications.  We are witnessing consumption for capitalism’s sake.  This is clearly not a sustainable form of economy if not for the health implications, then for the student and credit-card debt that this cycle is founded upon. 
Is There a Pill For That?
Rate of change of population (blue), rate of change of GDP (red), and unemployment rate (green) since 1970.  Black line is roughly 1999.
 The corporate benefits of the New United States of Pill Poppers was made clear above: all industries connected to the engineering of the new consumer have been wildly profitable since the arbitrary date of 1999 that I chose.  The economic implications are much more dire: the US population is contracting, GDP growth rate is falling, and unemployment has risen rapidly.  The corporate/economic effects could not be more stark, but everyone is too busy consuming to realize what is going on.
An economy is the aggregate of its consumers, and just like its consumers, this economy is structurally sick.  The monetary policy pill that central planners and investors have been high on since 2008 has caused the economy to build up such a tolerance that it is no longer effective unless taken in doses that will kill the patient.

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Confused Why Goldman Will Face No Criminal Charges? Here's Why

Yesterday, in a brief but informative post, we asked and answered a simple question: “Confused Why So Many Foreign Banks Are Suddenly Being Charged By The US? Here’s Why.” Naturally, the reference was to such foreign banks as Standard Chartered, Barclays and HSBC (but not UBS and Credit Suisse) which have recently fallen under the US pre-election scapegoating scythe and have found themselves in hot water with US regulators.

Today, on the other hand, we learned courtesy of Goldman’s 10-Q, that the US justice department will not press criminal charges against Goldman Sachs. This, despite Senator Carl “Shitty Deal” Levin, in one of the most bombastic kangaroo court spectacles on live TV ever, asking for a criminal investigation after the subcommittee he led spent years looking into Goldman, and in which he said Goldman misled Congress and investors (and according to which billions in fraudulent RMBS misrepresentations are all still only Fabrice Tourre’s fault, at that time under 30 years old). And so we pose the same answer, and provide the same anwer, as yesterday, only flipped around: “Confused Why Goldman Will Face No Criminal Charges? Here’s Why.”

Since we are lazy, we will even reuse the same table. It needs no explanation.

And let that be a lesson to you dear foreign banks: if you want to play, you have to pay. Of course, the returns are more than worth it.

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