Global Crunch: Central Banks Anemic Response

Global Crunch: Central Banks Anemic Response
Justin Burkhardt | July 5, 2012
In an effort to prop up the global economy and mitigate further loss from the EU spillover, Central banks around the world swung into action over night. The European Central Bank (ECB) and People’s Bank of China announced this morning that they have just cut their rates, while the Bank of England increased the size of its Asset Purchase-Program. Could these measures instill investor confidence or is it too late?
The ECB has cut their rates by 25 basis points to record lows of 0.75 percent in order to revitalize the European Economy’s ever-dwindling state. However, Central Banks have refused to participate in more drastic measure that would expose them to further liabilities such as purchasing government bonds or re-capitalizing banks with fresh liquidity.
The rate-cut decision has done little to reinforce investor confidence as the Euro’s plunge continues, falling to a one month low.  The overall outlook for the currency remains bleak as the debt crisis heightens.
China’s Central Bank acted unilaterally with the ECB cutting its one year lending cost by 31 basis points to 6 percent, the second rate cut issued since June of this year. This reduction came as a surprise, but the world’s second largest economy is seeking to bolster its weakening growth rate.
China is projected to grow at its slowest pace in 13 years. “Policy makers have had an early look at the June data and didn’t like what they saw, suggesting the economy is weaker than they previously thought,” said Mark Williams, Asia economist at Capital Economics Ltd. in London.
The Bank of England has also taken strides to pull its economy out of a recession by injecting its third round of monetary stimulus. The BofE has announced that they will begin printing $78 billion, which will be wholly used to purchase government bonds. This increases their bond purchase total to $546 Billion to date.
Can the EU Alter This Global Crunch?
Global markets are in reaction mode as the EU crisis continues to intensify. The European Union’s “fight for austerity” cannot produce the desired affect, and it is becoming increasingly obvious that the road traveled will ultimately lead to an unprecedented fate. The global economies of today are very much intertwined, and until EU countries recognize that this crisis demands reform rather than cutbacks, chaos will reign. 



Justin Burkhardt
Editor & Currency Strategist | @JDBurkhardt

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Disclosure: I have no position in any stocks mentioned, and no plans to initiate any position within the next 72 hours.

On The Morality Of Choice

Submitted by James E. Miller of the Ludwig von Mises Institute of Canada

The Morality of Choice

Picture yourself walking into a department store to purchase some laundry detergent.  As you approach the aisle stocked full of brightly-labeled containers, you come face to face with a crucial decision.  Which detergent do you choose?  Do you go with the tried-and-trusted brand?  Do you save money with the generic variety?  What’s on sale?  What about the high-efficiency kind?

The choice between something as inexpensive as laundry detergent seems trivial in a modern economy marked by mass production and the division of labor.  But the large selection of goods that consumers are faced with today is an incredible betterment relative to the past thousand years of human existence.  Indeed, the lives of even the most impoverished in Western economies far surpasses that of kings centuries ago.

For all the condemnation it receives by those considered on the forefront of intellectual thought, capitalism is responsible for lifting mankind out of a dreary life of hand to mouth survival.  Economic freedom is ultimately to blame for the higher standard of living the West enjoys compared to the once Communist East.  Material prosperity is a phenomenon not brought to the world by governments but by entrepreneurial spirit.  The state just is a reactionary institution that derives its power from the gun it puts to the back of public’s head.  Those who succeed in the marketplace only do so by appealing to consumers.  Businessmen force no one to purchase their wares less they play footsie with the political class for special privilege.  The pursuit of profit is what drives competition and expanded choice.  Without it, societal progress stagnates as living standards lower.

In Canada, the demand is growing for the country to allow a private alternative to its public health care program to emerge.  In a new poll conducted by Ipsos Reid for Postmedia News and Global Television, almost three quarters of the respondents were in support of a mixed model of health care delivery.  From the Vancouver Sun:

The majority of Canadians support a “mixed” model of health care that would give them the option of spending their own money for care in a private system, according to the results of a new poll.

And three-quarters of them support being able to buy private health insurance for all forms of medically necessary treatment, including cancer care and heart surgery, which they could then obtain outside of the public health care system.

In recent years, the very health of the system has come into question and there has been persistent debate about whether the federal government should allow the emergence of a “mixed” model in which the non-profit public system and for-profit private system operate side-by-side to give patients greater choice.

As many know, the Canadian health care system is publicly funded and under strict government control.  Care is administered in so-called “private entities” that receive their funding from the various levels of government.  In reality there is little private competition.  It has been this way since 1984 with the passage of the Canada Health Act.  The only exceptions are dental work and drug coverage which aren’t usually covered by the government but by private insurance.

According to the Vancouver Sun article, the mixed model would allow Canadians to purchase private insurance “for all forms of medically necessary treatment, including cancer care and heart surgery, which they could then obtain outside of the public health care system.”  It is believed that such an option would relieve the wait times for major surgeries.  While the extending of private competition is certainly a step in the right direction, it will by no means be the definitive cure to a non-market model that lacks the necessary characteristics which allow markets to function.

The problem with Canada’s health care system is the same problem every socialized industry faces: the lack of price signaling.  Doctors are prevented from charging extra and user fees are prohibited.  Services can’t be rationally allocated because consumers have little indication of prices.  Government acts as a third party by picking up the tab and concealing the true cost of care.  State administered health care almost always has the same results of high demand, low supply, and scarcity of service.

Economic issues aside, Canada’s health care system isn’t lacking in just market incentives.  What is missing is the allowance for something so simple and taken for granted, it hardly receives serious consideration.

What I am referring to is the option of having a real choice when it comes to medical care.

Choice itself is really an extension of the moral basis for capitalism.  In exercising your preference for a particular good or service, you are really exercising your free will to consume.  Choice is the embodiment of freedom, private property, and is the key ingredient to rising living standards.  As long as people aren’t obstructed from pursuing their interests, they will act in a way to improve their own lot.

What government does through its various regulatory edicts is stomp down upon the free interactions of others.  The political class can only inhibit commerce; it can’t enhance what would otherwise be unrestricted.

To imagine what the prevalence of choice in healthcare would look like, it helps to picture the world of television’s The Simpsons.  In the famous cartoon show, two reoccurring characters are that of Dr. Julius Hibbert and Dr. Nick Riviera (typically referred to as Dr. Nick).  Fans of the show should easily remember that Dr. Hibbert is considered the more competent of the two while Dr. Nick is horribly inept.  Given his track record and blatant incompetence, few would trust Dr. Nick to perform major medical procedures.  However, despite all of his shortcomings in being a professional, he might still be able to perform relatively simple medical procedures and check ups.  Because of the low quality of care he offers, Dr. Nick would thus have to bid down his prices to appease consumers.  As the old saying goes, “you get what you pay for.”

The question is, why should consumers not be able to choose Dr. Nick over Dr. Hibbert even with their clear differences in ability?  Surely Dr. Nick would botch any complex procedure, but should he be barred by the state from practicing medicine?  Should consenting adults not be allowed to pay for his services?

Recommending that someone reconsider their choice in doctors and forcefully prohibiting them from doing so are two starkly opposed positions.  The former is a recommendation without the threat of violence to back it up.  The latter is the crushing of liberty by dictatorial insistence.  In erecting legal barriers to industries, what the political class is effectively telling the public is that they are incapable of making sound decisions without the help of the paternalistic state.  The real objective is instilling an all-encompassing dependency to a nanny government that is always on the prowl for excuses to increase its own power.

It is a shame that Canadians currently have little choice in medical care.  It is equally disheartening that “for-profit” industry is demonized while a system built up on the violent suppression of genuine competition is dominant.  What’s really perplexing to hear big government supporters antagonize over the threat of monopolies when they give full dedication to the greatest monopoly of all.

With the outlawing of a complete private option, the Canadian authorities have denied the people the right to do as they see fit with their own property. It has, in essence, disallowed them to be human and exercise their own free will.  As Ludwig von Mises wrote, “under capitalism, private property is the consummation of the self-determination of the consumers.” With “government knows best” superseding consumer choice, Canada’s health care system will only continue to suffer in terms of quality and service.  And it is all because the most human of all aspects has been forcibly removed; that is the ability to choose for oneself.

Barclays Wins Euromoney’s Best Global Debt, Best Investment Bank, And Best Global Flow House Of The Year Awards

Financial magazine Euromoney, which in addition to being a subscription-based publication appears to also rely on bank advertising, has just held its 2012 Awards for Excellence dinner event. And in the “you can’t make this up” category we have Barclays winning the Best Global Debt House, Best Investment Bank, And Best Global Flow House Of The Year Awards. Specifically we learn that “the bank’s commitment to the US is exemplified by the addition of another global senior manager to the country – Tom Kalaris is now going to be splitting his time between New York and London as executive chairman of the Americas as well as overseeing wealth management. Jerry del Missier, who has overseen the corporate and investment bank through its Lehman integration and was recently appointed COO of the Barclays group, says the bank is well positioned. “We came out of the crisis in a stronger strategic position and that has allowed us to continue to win market share and build our franchise. Keep in mind that the US is the largest investment banking, wealth management, credit card and investment management market in the world, and in terms of fee share will remain the most dynamic economy in the world for many years. As a strong global, universal bank operating in a competitive environment that is undergoing significant retrenchment, we like our position.” That said, with the Chairman, CEO and COO all now fired, just who was it who accepted the various award: the firm’s LIBOR setting team? And if so, were they drinking Bollinger at the dinner?

From the oxymoronically named Euromoney (shouldn’t it be Eurorehypothecation, or Eurospidermantowelsascollateral?) which just held its

Awards from Excellence 2012: Barclays

With Barclays still the target of invective as a result of the Libor scandal, Euromoney outlines the reasoning behind bestowing the UK bank with multiple accolades for its performance over the past year – a period which supersedes the Libor probe.

Awards for Excellence 2012: Best Global Flow House

An ability to adapt while sustaining a market leading global flow business sets Barclays apart.

There have been some seismic shifts among investment banks active in the flow markets in the past year but not at the top, where Barclays, Deutsche Bank and JPMorgan dominate and should expect to capitalize further on rivals that are scaling down or exiting businesses entirely.

In a world where fixed-income, currencies and commodities sales and trading is becoming increasingly like cash equities, senior management of many of the investment banks outside of this top tier are being forced to decide whether they have the appetite or ability to run a full-scale all-in-one business servicing clients in all the product areas globally.

For Barclays, Deutsche Bank and JPMorgan, which provide institutional clients with this full-scale global capability, the question is not can they grow, but, by how much and in what direction.

Deutsche Bank and JPMorgan have been aggressively building their commodities trading businesses in recent years, while Barclays has sought to expand in cash equities and equity derivatives, and foreign exchange too.

While all three firms can claim success in each of these areas, in addition to sustaining their enviable market shares in rates, credit and FX, it is Barclays that stands out this year.

The UK investment bank has not only performed strongly in serving clients across the whole spectrum of rates, credit and FX, to commodities and equities, but more importantly is leading the advance of a development that could define the future of flow markets – over-the-counter clearing.

Guglielmo Sartori di Borgoricco, head of distribution at Barclays, says: “This is the natural evolution of that flow monster role, and an area that we believe is elemental to the flow market. Clearing will be the umbilical cord to the flow business in the future.”

What investment banks and the broader finance industry are preparing for is that all standardized OTC derivative contracts must be traded on exchanges or electronic trading platforms and cleared through central counterparties by end-2012 at the latest.

This has ramifications for the OTC derivatives market, the investment banks and their investor clients too.

Arguably well ahead of others, Barclays has invested accordingly, and is capitalizing on its lead.

“What does it mean to be a flow monster? The liquidity provision is very important, the ability to deliver great content is important, and the clearing side is the completion of it all, because once you have it all – the front office, back office and pipes working together – then you have great liquidity, content and execution. That is precisely how Barclays is set up,” says Sartori di Borgoricco.

He adds: “What our OTC clearing team is doing today is just as pioneering as the global netting agreement we took the lead on some eight years ago.”

Ralph Segreti, head of FICC OTC clearing distribution for Europe and Asia, is equally bullish, arguing that growth in this area is expected to boom

He says: “Clearing is an area where our work with clients really comes together. We realized early on that clearing was absolutely elemental to the future of our platform and that it would help us strengthen the partnerships we have with our clients. So we had an early and deep commitment to OTC clearing, and it is one where we are starting to reap the benefits.”

Segreti believes this business is set to grow substantially from clearing roughly $60 billion of trades a week currently.

He says: “We are only doing a fraction of the business we expect to do, but we have a very scalable solution in place and we are ready to facilitate the growth as it comes.”

Time will tell if Barclays manages to up-scale this business to a size that generates healthy returns, but in the meantime the firm’s global flow sales and trading business will doubtless continue to perform strongly, and particularly in areas where it has most to gain.

In equities, for instance, Barclays now has an 8% market share of all US volume, and in Asia the firm has tripled its market share on the Tokyo Stock Exchange and increased its market share on the Hong Kong Stock Exchange.

Barclays – ranked third by market share in Euromoney’s 2011 FX survey – is also gaining ground on Deutsche Bank’s dominance in the global FX market.

Nick Howard, head of distribution for Europe, the Middle East and Africa, says: “We have been consistently building our FX business in all three regions. In the Americas it takes a couple of years to on-board some of the big accounts, but we have gained market share there, and that is partly a result of the tailwind effect from the Lehman acquisition. We’ve also invested heavily in technology, particularly around the FX forwards market.” 


Awards for Excellence 2012: Best Global Debt House

Barclays has shown skill and strength in adversity to cement its place as the leader in DCM this year.

This year more than any other, success in DCM has required both breadth and depth. With markets as jumpy and unpredictable as they have been, the best global debt house must not only have excellent global reach, it must also be product, tenor and currency agnostic. This year that house is Barclays. Barclays and its shortlisted competitors dominate the DCM markets. But over the past 12 months the UK bank has been everywhere – among the top-three ranked underwriters across all FIG, SSA, US dollar, euro and sterling issuance. This focus on both domestic and cross-border business is underpinned by an enviable trading, distribution and research platform.

League-table strength is a given in this category, but a closer look at the business that Barclays has been writing gives an indication of the regard in which this team is held. In SSA, under the most challenging circumstances imaginable, the bank has excelled amid the storm. It is the number-one underwriter for EFSF and ESM issuance – quite a feat for an institution that is not even a eurozone bank. “There is no natural embedded advantage – we are thought of as a British bank not an indigenous eurozone bank,” says Charlie Berman, head of public-sector EMEA at Barclays. “These issuers want this team working with them on the tough deals.” The bank also underwrote the first benchmark issue for the Republic of Iceland since 2006. Its strength in volatile markets also saw it have 50% market share of corporate issuance in Europe in October 2011 – an extremely stressed time – and it has been instrumental in reopening peripheral markets in 2012. Deals such as those for Portugal’s Semapa and EDP required the kind of access to the domestic retail investor base that very few global banks have.

The past year has been a rollercoaster ride of risk-on, risk-off sentiment, so the ability to identify and exploit relevant and untapped investor bases is a crucial skill. Barclays demonstrated this in spades last year across FIG and corporate issuance. “Access is always about navigating windows, so you need to be with the bank that is in the flows,” says Mark Geller, head of FIG syndicate in London. In its top-tier US franchise it dominated in yankee bank issuance and US dollar covered bonds – key themes of the past year as some banks’ euro liquidity evaporated. This strength was in evidence on the corporate side as well, with yankee deals for BHP Billiton, Teva, GlaxoSmithKline, Tesco and Pernod Ricard among many others. Barclays’ Asian and emerging market yankee business included the underwriting of deals for Honda, Toyota, Brasil Telecom, Ipic and KNOC.

The bank’s strength in cross-border liquidity was also demonstrated as sole arranger of the groundbreaking ¥50.7 billion ($636.2 billion) Tokyo Pro-bond for ING Bank in April. It was ING’s debut benchmark bond offering in Japan. “This was an exceptionally important opening of previously trapped domestic liquidity,” says David Lyon, managing director IBD FIG EMEA. The theme of trapped liquidity was also addressed in the UK, with pioneering retail bond deals for National Grid and Tesco Bank. Barclays was also sole arranger for Lloyds Bank’s US retail notes programme, which enabled the bank to access US dollar funding away from the institutional market. “This was an important diversification for an entity like Lloyds,” says Lyon. In emerging markets the bank had success in opening new funding currencies with deals such as the debut SFr500 million ($520 million) issue for VEB and the £650 million ($1 billion) deal for Russian Railways.

Barclays’ US franchise is the bellwether of the entire firm and its strength was firmly in evidence this year. Its $13.3 billion sole underwrite on the bridge loan for Kinder Morgan’s acquisition of El Paso was the largest sole underwrite ever for a non-investment-grade credit and was done at the same time that other European banks did not even have access to the dollar market. When SABMiller was looking to refinance the $12.5 billion acquisition loan backing its acquisition of Foster’s it mandated Barclays for the preparation of the US 144a/RegS documentation, as an active bookrunner and as a billing and delivery bank.

One sector where Barclays has traditionally not been as strong as its closest competition is high yield, but the bank has made progress this year. “The engine behind the high-yield product has been the strength of our global distribution platform,” says Peder Oien, co-head of European leveraged finance. Barclays has increased its share of the US high-yield market from 4.4% in 2009 to 7.1% in 2011, and in Europe it has a 7.2% market share so far this year – up from 3.4% in 2009. “This has not been an easy market to be operating in,” says Oien. “It requires a lot of coordination and a unique set of skills.” The firm was on four of the five largest deals in the US over the past year – HCA, Sprint, CIT Group and Chrysler – and has brought 31 new issuers to the European market since 2010. “We have a pretty unique story,” says Jim Glascott, head of global DCM at Barclays. “It has taken us a long time to get this franchise to where it is today.”


Best Investment Bank and Risk Adviser in United States

But one investment bank has not only kept a clean sheet, it has also managed to make headway in all areas of investment banking. Barclays wins the award for this year’s best investment bank in the US and for best US risk adviser. In DCM, Barclays ranks third in the league tables. The bank excels in being product agnostic, having an integrated loan and bond and securitized offering, and is known for its attention to detail.

Barclays is a leader in covered bonds, leading a $5 billion covered bond for TD Bank over the period. In investment grade debt it has led the last six deals by GECC – more than any other bank. In esoteric ABS, the bank is the leader in the market, with deals for Miramax and Dominos. Together with Deutsche Bank it successfully bid for a portion of the Maiden Lane III legacy AIG assets that were auctioned by the Fed in April this year.

In ECM, Barclays ranks seventh in the league tables and has a way to go to bring itself up to competing with such stalwarts as Morgan Stanley and JPMorgan. But in equity flow and hedging for clients the bank is a leader. It has a high share of US flow products and jostles for first place in block trading with Deutsche Bank. The  bank advised Capital One when it needed $2 billion in equity to finance its acquisition of ING, suggesting instead an equity forward structure to de-risk the deal, showing its equity risk management capabilities to be top-tier.

In M&A, Barclays now ranks fourth in the league tables and last year was third for full-year 2011 – the only non-US bank to make that position in 12 years. Barclays was the sole underwriter of $13 billion of committed acquisition financing for the Kinder Morgan/El Paso transaction, the largest acquisition-related financing of the period and the largest ever sole underwriting to a non-investment-grade company. The bank was also financial adviser to Hewlett Packard in its subsequently troubled acquisition of Autonomy last August. It incorporated an FX hedge and a fully underwritten $8 billion bridge facility. Barclays is also a leader in the LBO M&A advisory sector.

The bank’s commitment to the US is exemplified by the addition of another global senior manager to the country – Tom Kalaris is now going to be splitting his time between New York and London as executive chairman of the Americas as well as overseeing wealth management. Jerry del Missier, who has overseen the corporate and investment bank through its Lehman integration and was recently appointed COO of the Barclays group, says the bank is well positioned. “We came out of the crisis in a stronger strategic position and that has allowed us to continue to win market share and build our franchise. Keep in mind that the US is the largest investment banking, wealth management, credit card and investment management market in the world, and in terms of fee share will remain the most dynamic economy in the world for many years. As a strong global, universal bank operating in a competitive environment that is undergoing significant retrenchment, we like our position.

Thunder Road Report On The Death March: Approaching A New Financial System

From Paul Mylchreest’s latest Thunder Road Report

Death march: approaching a new financial system

If you are reading this, you are probably a member of what the sociologists would term middle class (albeit at the upper end). This is precisely the segment of society which is poised to come off worst from what is coming. Here is a very disturbing idea. As this crisis develops, if you are an equity portfolio manager and you want to outperform the market, you are going to have to position your portfolio so that it benefits most from your own wealth destruction and that  of your family, friends and colleagues. Almost everybody is going to lose and there aren’t many places to hide. This is deeply unpleasant but you can blame the central planners. I’ve written about my own investing, e.g. gold and silver, equities in terms of Maslow’s Hierarchy of Needs, etc. In this Thunder Road Report (below) and going forward, I will discuss this middle class theme and highlight positions I have in individual stocks, etc. The only good thing that can  come out of this is a rise in awareness. It’s just awful.

In government bonds, the natural inflow of funds is approaching the end of the road – although there is probably one more short-lived and “wrong-footing” move downwards in the yield on the 10-year US Treasury. Increasingly, the flow of funds into government bonds is merely a direct reflection of newly created liabilities (debt) on the balance sheets of central banks like the Fed, ECB and Bank of England. Long-term US Treasury bonds are in their highest ever supply and at their highest ever price/lowest ever yield. Just another example of our “upside down” world.

Brief aside: besides (or maybe in conjunction with) inflation/currency devaluation, there is one other way the US could extinguish the Federal debt (US$15.8 trillion dollars when I just checked the real time national debt clock) just like that…gone! Used in isolation, almost nobody would suffer! And some people (probably less than 1%) would gain…and boy would they GAIN! Do you know what I’m talking about? Got any? Don’t know if it’ll happen, but at least it would cheer my wife up. She is still trying to work out how I could have forecast the Great Financial Crisis and made so little money out of it?

“You knew Fannie Mae was bust, you should have made millions.”

At least she didn’t add “you idiot”. She’s nice like that.

Meanwhile the price of the only financial asset with zero counterparty risk in the biggest global debt crisis in history has been “locked down” for months. There is a reason. It must move in volume to where there is an insufficient quantity prior to the denouement of the current financial system. A new system is coming with a bigger role for gold. You see “the man” isn’t stupid, even if some of his acolytes are. He has a plan. But there’s one “person” who could make things difficult for “the man”, so he had to be brought “onside” first.

Dr Kurt Richebacher was the publisher of “The Richebacher Letter” until his death in 2007. Paul Volcker commented that:

“Sometimes I think that the job of central bankers is to prove Kurt Richebächer wrong.”

Ain’t going to happen. Richebacher himself sagely remarked that:

“The only cure for a bubble is to prevent it from developing.”

Well it’s far too late for this financial system. Ten years ago, before the debt bubble became catastrophic, the free market could have resolved this issue. But Greenspan, the “Great Architect”, had to create yet another bubble in real estate and the “point of no return” was left far behind.

Then the helicopter-flying monetary psychopath took over and he is creating the bubble to end all bubbles in MONEY itself.

Cue a great comment from Damon Vrabel in “Harvard Lobotomies And The Disgrace Of The Economics Profession”:

“The truth is that economics has been designed to completely hide the monetary system that hovers above the economy. Economics assumes money is just a medium of exchange floating through the economy to facilitate a free market and generate wealth. At times that has been true, but today it’s probably the biggest lie of modern history.”

Let’s take most people’s current favourite “safe haven”, the mighty United (Socialist) States of America. This is the chart of the debt in the economy (total Credit Market Debt Outstanding) since the current Kondratieff cycle began.


There She Goes – debt in the US economy (US$bn)


Imagine telling people that you’d set up a Ponzi scheme and asked them to invest in it. They’d be very offended that you could take them for being so stupid. But you only need to look out of the window, or in the mirror. Salaries, pensions, mortgages, savings, etc. are all paid in…MONEY. And nearly everybody is “all-in.”

The Euro, or its purchasing power anyway, is clearly finished if they try to keep the system together, but what about the dollar?

The songwriter, Noel Gallagher, formerly of Oasis and now with his High Flying Birds, commented
“There’s only one boy in this country who scares me and that’s Lee Mavers.”

Raoul Pal, of the Global Macro Investor, said in May 2012 that:

“All that is left (to buy) is the Dollar and Gold”

I f—–‘ love reading Raoul Pal’s stuff when I can get hold of it, which is incredibly difficult. He grew up (at least for a few years) near where I did and not far from Lee Mavers. I can’t recommend his work highly enough. I don’t disagree with him on much, but I do disagree with his view on the dollar (although he might be bullish on the dollar just from a trading perspective and he’s been right since May).

The two remaining “sacred cows” preserving the US dollar as the world’s reserve currency are:

  1. The belief that the Chinese will continue to buy US Treasuries; and
  2. The US dollar will maintain its monopoly on world trade.

Regarding number one, the Chinese have been sellers since the end of July 2011 (note the date). With regard to number two, have you noticed how China has set up currency swaps with nearly all of its trading partners? Have you noticed how Iran has been excluded from the SWIFT system and has begun selling oil to some countries in currencies other than dollars?

China has been preparing for dollar devaluation for nearly a year now, but hardly anybody has noticed. While everybody frets about the Euro, the dismantling of the US dollar’s reserve currency status is occurring within plain sight. I think a deal was done between the US and China in late Summer or early Autumn of last year. Have you also noticed how Ben Bernanke has used just about every unconventional method of monetary policy he’d discussed in his earlier writings on preventing deflation…bar one big one? Dollar devaluation. Let me repeat that, dollar devaluation.

We are heading into a truly mega-financial crisis. This is (another) classic “I hope I’m wrong, but…” report. I think the crisis is going to result in the transition to a new financial system as the current one implodes. Best guess is that it will be either happening, or perfectly obvious that it’s going to happen, within 6-12 months, i.e. within our investing time horizon.

This report connects a lot of dots and analyses each one of them. The dots include:

Dot – Loss of US AAA credit rating in August 2011
Dot – China lashes out at US “addiction to debt”
Dot – Peak in Chinese holdings of US Treasuries
Dot – China starts selling US Treasuries
Dot – Surge in the gold price in August 2011 followed by steep decline
Dot – Lock down of the gold price (using “paper gold”) ever since
Dot – Movement of large quantities of physical gold from London to Asia (notably China)
Dot – Collapse of MF Global
Dot – Radio silence on China being a currency manipulator
Dot – Exter’s Pyramid playing out in front of our eyes
Dot – Iran excluded from SWIFT system
Dot – BRICS countries signed the Master Agreement on Extending Credit Facility in Local Currency and the Multilateral Letter of Credit Confirmation Facility Agreement
Dot – US granted China a 6-month extension on sanctions for buying Iranian oil (India already had one)
Dot – Revisiting Bernanke’s old speeches on deflation
Dot – Operation Twist
Dot – Comments by World Bank President, Robert Zoellick
Dot – BIS proposal to upgrade gold to a zero risk weighted asset in line with sovereign debt as part of Basel III
Dot – Comments by Robert Rubin (“consigliere” to the elite)
Dot – Recent meeting between Kissinger and Wen Jiabao
Dot – Why debt deflation now would paradoxically precipitate hyper-inflation
Dot – Demise of the middle class (theme)
Dot – Putting all of the above in the context of the fourth (and ongoing) price upwave of the last 1,000 years
Dot – How each of the three earlier price upwaves came to an end.


Full report below:


To Hollande, With Love

Monsieur le Président de la République
Palais de l’Elysée
55, rue du faubourg Saint-Honoré
75008 Paris

Paris, 4th of July 2012

Monsieur le Président,

You have just been elected after a particularly adroit and fortunate electoral campaign which has awarded you full powers. This gives you the historic opportunity to carry out the in-depth reforms this country needs to help it face its major challenges, with a widened social support.

Unfortunately, the first projects unveiled by your government do not engage on this path. On the contrary, they portend a number of ominous consequences. The implementation of a confiscatory fiscal policy would cripple our major companies by accelerating the exodus of their management heads, while freezing investment into small and medium-size businesses. The fleecing of the middle classes as well would accentuate the weakening of the work ethic, already damaged by the 35-hour week. Finally, modest and low incomes would also suffer. Increase taxation of overtime would erode their purchasing power, while the project to raise the ceiling on the Livret A savings account may well support the financing of public debt, but would encourage an increased amount of the working-class savings to be sunk into an investment with lacklustre returns.

The plan to fleece the entire country in order to sustain the survival of an obsolete social welfare system is doomed, yet it may be implemented for a few months. But endeavouring to also fleece our German friends is a dangerous and reckless ambition. Why should they accept to contribute to the financing of a 60 year retirement age in France when they have just raised it domestically to 67? Certainly, Germany would have a lot to lose with the implosion of the euro. But it is politically untenable to demand support for social benefits that the Germans have denied for themselves and unrealistic to imagine they can single-handedly carry the burden of a spendthrift Europe.

You are faced with a formidable dilemma. Either to consolidate the viability of our core social progress by embarking on a courageous reform program or threaten it by impoverishing the country, while endangering the European construction project. By all means, consider the odds before taking your decisions.

With this hope in mind, Monsieur le Président, I remain yours faithfully,

Edouard Carmignac

Source Carmignac Geston, h/t Sean Corrigan

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