Author: Jesse’s Cafe Americain

Ambrose Evans-Pritchard has a bold headline US Money Supply Plunges at 1930s Pace that is sure to provide much referential action for the UK Telegraph.

I like to read AEP, but have to admit that he is given to sensationalism on occasion. That is because it sells papers, and also draws blog clicks, as posters on the web are wont to emulate that style as well. Fear sells.

But there were some disturbing elements to this particular piece in addition to its florid headline.

The US stopped publishing M3 several years ago. At the time I was not happy about this, and complained quite a bit.

Several enterprising fellows, including my friend Bart over at Now and Futures, as well as John Williams at Shadowstats.com, have been attempting to extrapolate the M3 figures, and doing a fine job given what they have to work with.

I cannot tell what source for M3 that AEP is using since he does not cite the source of his alarming, screaming headline information.

Here is a quick review of the components of the Monetary Supply figures including M3 for your review. You may also wish to refresh your knowledge here: Money Supply a Primer.

The chief component that is ‘missing’ these days which must be estimated is “eurodollars,” which as you may recall are US dollars being held overseas. You know, those dollars that Bernanke has been sending over to Europe en masse lately through the swaplines.

The fellows can estimate this, but the reporting of eurodollars lags by a quarter or more, the only reliable source of information being the forex commercial banking reports from BIS.

I would very much like to have M3 back, but in particular I would like the Fed to be releasing a more accurate and contemporary measure of Eurodollars, the dollar overhang overseas, particularly in light of the huge swings in the DX index, and its almost undeniable relationship to the recent dollar short squeezes on the European banks.

But alas, we do not have this, so we can only estimate M3, particularly the eurodollar component.

But the good news is that we still have both M2 and MZM.

Here are the most recent figures for MZM and M2 from the St. Louis Fed, expressed as a percent of change YoY, not adjusted for seasonality. For good measure I have added GDP and PPI Finished Consumer Goods in the mix.

MZM is the broadest measure of liquidity, and is very much a creature of the Adjusted Monetary Base. As one can see from the chart, the Fed, using their various policy tools, jams the short term money supply higher in response to a lagging economy, and the broader measures like M2 tend to follow with a lag.

The Fed then backs off, and waits to see the effect of their actions, as well as any accompanying fiscal programs, on the real economy as measured by GDP, with an eye on inflation. In this case I am using PPI, but I do greatly prefer John Williams’ unadulterated CPI measure. Unfortunately I do not have it handy in the right format for this study. But PPI will suffice.

Now, looking at this chart, it appears that the Fed is following their usual gameplan. The excess reserves that the banks are holding, at least indirectly in response to the balance sheet expansion and interest rate payments on their own deposits by the Fed, are enormous and unprecedented. If the Fed were to start pulling some levers to motivate those reserves into the real economy through loans, the impact could be dramatic. The Fed will do this if their fear of inflation begins to be overcome by their fear of deflation.

Right now it appears to me that they are overly preoccupied with the status of the biggest of the banks and their asset quality problems an under stimulating the real economy. I think this will be regarded as a policy error as were the actions of the Federal Reserve in 1932 wherein the Fed overreacted to a spike in CPI and tightened prematurely.

I am not saying what MUST or WILL happen. I am not arguing from theory. I am just attempting to demonstrate what is happening now based on the data. And right now Ben is indeed printing money, and figuratively dropping it from helicopters. The problem is that the helicopters are hovering over Wall and Broad Streets, and not Main Street.

If you want to know the theory, in a perfectly fiat system (no external standard constraint) deflation and inflation are always the outcome of policy decisions amongst a number of variables and competing interests. Period. Anyone who does not understand this does not understand money.

Once the US relaxed its adherence to the gold standard by devaluing the dollar, deflation became a moot point. What was not handled well was the continuing lack of aggregate demand because of the resistance of the Republicans in Congress to jobs creation, and the overturning of most of the New Deal initiatives by the US Supreme Court.

I am not saying what the ‘right thing’ to do is. But what I am attempting to get across is that one way or the other, excess financial sector debt is going to be liquidated, either through default, or through inflation, or through a mixture of higher taxes and sluggish growth with a disparity of income that increasingly resembles 19th century serfdom.

At some point this dynamic is going to become less ‘economic’ and more political and the equilibrium will be reached. A good leading example of this is in Iceland.

Join the conversation about this story »

(This is a guest post from the author’s blog.)

“The 20th century has been characterized by three developments of great political importance: The growth of democracy, the growth of corporate power, and the growth of corporate propaganda as a means of protecting corporate power against democracy.” Alex Carey

The strategy of the Bernanke Federal Reserve and of the Obama Administration’s economic team is fairly clear: prevent the bank failures of the 1930’s by propping up the biggest banks with huge infusions of publicly subsidized capital, and hope that they start lending again as the economy recovers. It is a variation of the ‘trickle down’ theory of economics applied to the perceived policy errors of the first Great Depression.

Bernanke is famously a student of that economic event, even as General Joffre, the architect of the Ligne Maginot, was a student of the first World War. And Larry Summers seems remarkably similar to Marshal Pétain. Timmy is a student of nothing, not even of the tax code he adminsters apparently, except perhaps the art of the useful manservant, a valet.

Failure number one of course is that the banks that they chose to support are not responsible banks engaged primarily in lending to small business and localized activity. Those banks are the local and regional banks and they are failing in record numbers. The banks they chose to save are those who have heavily contributed to the campaign coffers and job prospects of Washington politicians. Goldman Sachs, for example, is a glorified hedge fund dedicated to speculation and enormous amounts of leverage. One only has to look at the source of their profits to understand what it is that they do.

Bernanke has (so he thinks) cleverly tied up much of the liquidity with which he has infused the banks as reserves which are paying riskless returns thanks to his innovation in sustained a floor under the ZIRP. But if you look at what he is doing, all Bernanke has done, even in his buying a trillion dollars of bad mortgage debt, is rescue creditors who engaged in reckless speculation during a housing mania that the Greenspan Federal Reserve had fostered.

The lack of productive investment and genuine stimulus for the real economy is appalling. Bernanke and his colleagues Larry Summers and Tim Geithner would have us believe that they had no choice. But informed and experienced commentators such as William K. Black have told us how they have misrepresented their choices. Their current path seems to lead to a ‘zombie economy’ at best, in which the Banks are doing well, but almost everyone else suffers, particularly the lower and middle classes who obtain their income from the real economy. At worst, the bubble bursts again, and there is another leg down, with greater damage done.

So what would have worked? The Fed and Treasury could have backed the public instead of the banks. They could have temporarily increased and extended the FDIC coverage to much higher levels to guard against further bank runs, and then started dismantling the Wall Street banks through orderly liquidations. They needed no new laws or tools to do this. And financial reform and higher taxes on those who obtain outsized wealth without productive work would have curtailed a recurrence.

So why did they do what they did? Are they in league with the banks? Was this some sort of conspiracy? No, I doubt this, although there are far too many secretive aspects to completely dismiss it.

None of these men have ever held a real economy productive job in their entire lives. They were always the pampered products of the academy, Wall Street, and the government.

So they took care of their own, because that is their world view. It has been said that the Federal Reserve is the worst place to locate certain aspects of banking regulation, because they have a complete aversion to ever allowing a bank to fail. It runs against their nature. And couple this with a career experience in which the world is viewed through the lens of cost plus management, and privileged power, and their inability to make the tough decisions seems more understandable.

And the promise of future positions, and large amounts of lobbying money to their friends and mentors and sponsors, and the policy error that is ruining the country seems more understandable.

So now we have another asset bubble in the making, a new Ponzi scheme in the US equity market fomented by the Wall Street Banks packed with public funds, seeking to drive prices higher, for the apparent reason of obtaining confidence from the public, but with the effect of selling assets at inflated prices to public institutions yet again, with the inevitable collapse to follow when the reality of their value is discovered.

What a shame. What a disappointing performance for a reform government that promised change that the people could believe in.

“…surveys show that the usual investors in major rallies – pension funds, hedge funds and retail investors – have not been net buyers of equities. And he says the most likely explanation for this anomaly in the biggest stock market rally since the 1930s is that major investment banks are the anxious buyers.

“Their buying would appear to be for one of two reasons. Firstly because they think the authorities will prevail in their (so far unsuccessful) efforts to inflate their way out of debt liquidation; or secondly because they are too big to fail and so can afford to take a huge gamble that enough buying will convince others to rush in and buy their inventory of risk assets at even higher prices.”

Financial Times, Equity Rally Not Driven by the Usual Investors, Financial Times, April 28

And it should be noted that the Wall Street demimonde, the financial media, the financial commentators regulators and legislators, are widely supportive of this, because they draw they pay and employment prospects from an enlarged financial sector. So they are natural enthusiasts.

And of course there is the mainstream media, which is generally silent, or simply pleads confusion and ignorance, when things financial are discussed out of deference to their corporate owners, and the difficulties of actually engaging in investigative journalism, rather than acting as a guest host to a competitive debate among lobbyists and ideologues. It is the path of least resistance, and greatest returns. And it leads to an economy that consists of little else besides usury, propaganda, and fraud.

Why be negative? Better to be playing safe while the New Rome burns.

Join the conversation about this story »

(This post appeared at the author’s blog.)

Here is Paul Krugman with a reasonably good explanation of what happens when countries ‘manage’ their currencies lower. It provides a boost to exports and an impediment to imports. It is not much different than restraints of trade like tariffs and subsidies.
Although I am glad that some of the economic sites and economists are willing to discuss this now, the question should be asked, “Where were they for the past ten years?” Now that Krugman has made it respectable they are willing to speak, although some continue to uphold myths and blatant propaganda to support their favorite commercial interests, think tanks, ideology and honorariums.

The Chinese manipulation of the currency to the dollar was not subtle. China devalued the renminbi significantly in the latter part of the 1990’s, and then pegged it to the dollar. It then penetrated the usual safeguards of fair trade by obtaining ‘favorable’ rulings first from Bill Clinton and then from W. Bush that really ought not to have been granted until they allowed their currency to float on some prearranged conditions at the very least.

It suited some people to ignore it then because the arrangement provided cheap goods to the US while depressing the domestic manufacturing sector and working class incomes, while boosting the financial sector. It was a means of empowering Wall Street at the expense of the real economy.

Now China’s currency manipulation does not suit them, and they are willing to discuss it, since China is not ‘playing ball’ with the financial engineers and encouraging domestic consumption and adopting Western financial engineering as their masters as planned. There is also a realization that their financial engineering has brought the world to the brink of a global crisis of insolvency and a tremendous blow to authentic capitalism.

Join the conversation about this story »

See Also:

• Paul Krugman Savaged For His ‘Get Tough On China’ Approach
• Krugman: It’s America That Has China Over A Barrel, Let’s Take Advantage Of it
• Krugman: Bring It On Republicans, You’re About To Lose On Healthcare Reform

The US stock market seems to be getting rather tired after what can only be described as a remarkable rally on light volumes and program trading.

The market is trying to rise here, with announcements like the Cisco backbone router for carriers and the AIG unit sales being hyped incessantly on financial media. The hype over the Cisco backbone router today is almost embarrassing. The anchors on Bloomberg keep saying that the router can download entire movies in 4 seconds, which is a lot faster than the 10 minutes it takes today. To anyone who knows anything about how networks are provisioned this is a howler of the first order, to say the least. For the consumer, the network is only as fast as the last mile.

It has also been reported by Adam Johnson on Bloomberg television that J.P. Morgan, a major broker dealer, stopped lending shares in AIG and Citi today “on rumours that the US government might ban short selling in stocks in which it has a financial interest.” This squeezed the shorts and helped give an artificial boost to financial stocks over all. The company has since stopped this self-imposed ban on loaning shares and stocks are falling off their highs.

Needless to say, the SEC is unlikely to investigate this, or advise market makers not to start arbitrarily constraining the supply of stock based on market rumours, especially when they might be trading these same stocks for their own proprietary portfolios. They ought not be able to institute ad hoc bans on buying or selling by manipulating the supply.

Perhaps another leg up, after some consolidation, but this market is now very vulnerable to a reversal. The volumes are light on the rallies, and tend to increase quite a bit on the declines.

Don’t get in front, wait for it. But start getting defensive if you have not done so already.

The Ides of March are on the 15th.

Join the conversation about this story »

See Also:

• Why The One-Year Anniversary Of The Rally Is Bad News For Stocks
• Lessons To Learn From The Incredible 12-Month Rally
• The Three Major Near-Term Risks To The Market

(This guest post originally appeared at the author’s blog)

Thanks to friend Dave at Golden Truth for this updated chart.

As you know, Russia, India, China and some of the BRIC-like countries will continue to push hard for a gold and silver content in the new formulation of the SDR this year. The US and UK are vehemently opposed.

Europe is still wallowing in confusion and is virtually leaderless, as the most recent financial crisis in Greece shows. This may not be all bad, because it highlights the weaknesses in their union, and gives them the incentive to take it to the next step.

One cannot have a common currency with uncommon fiscal policies and laws. While there is some room for discretion, it is sorely tried in changing economic conditions and social attitudes. America went through a bloody Civil War for this reason.

This is why a one world currency, except for international trade only and at the discretion of trading partners, is so dangerous. One cannot maintain their sovereign freedom when someone else controls the supply of their money: either you cheat or you submit. All serious economists understand this; too few of the voting public do.

What Will the World Currency Become? The Stakes Are Enormous

And the Winner Is…the SDR?

This is the fallacy of the US dollar as the reserve currency for the world. It ‘worked’ as even Mr. Greenspan noted, as long as the US dollar was able to demonstrate the objective stability of an external gold standard relative to other currencies. That lasted for a few years, and the rest is foreign policy and currency wars. The time for its replacement is long past. The BRIC’s understand this, and are playing their hands accordingly.

If one submits to a single world or regional currency for domestic use, they may as well take their constitutions and individual rights and throw them away. And globalization has been serving as a proxy for this, paving the way.

Gold and Economic Freedom: Did Greenspan Know What He Was Doing? – ZeroHedge

The moves here are slow and subtle, since great nations are involved. I get the impression, though, that most traders are playing checkers at a chess match. Well, that works for the daytrade. But only time will tell what will happen, and when. But sometimes events can break free and move quickly. Best to gather those nickles off the freeway before the rush hour commences.

Or as the man behind the .50 cal would say, ‘Git some. Come git some.’

Read more market commentary at Jesse’s Cafe Americain >

Join the conversation about this story »

See Also:

• Faber: It’s Dead Simple, The Supply Of Dollars Will Grow Way Faster Than The Supply Of Gold
• Eric Sprott Has Purchased Nearly 9 Tonnes Of Gold Bullion This Week
• Sorry, We’re Not Weimar Or Zimbabwe, And Gold Is Never Going To Be A Currency Again

(This guest post originally appeared at the author’s blog)

The Sprott Physical Bullion Trust (PHYS) is now holding 286,870 ounces of gold, with a market value of $327,003,510. The estimated net proceeds of their IPO are approximately $390,000,000, possibly higher depending on total fees for the IPO and initial bullion purchases.

They have now purchased 8.923 tonnes of gold bullion since last Friday (at 32,150.746 Troy ounces per metric tonne).

The total units outstanding are 40,000,000 for a Net Asset Value of 9.50 including cash and bullion. With the price of the Trust closing at 9.96 today, it is at about 4.85% premium according to their website.

By way of comparison, the Central Gold Trust (GTU) closed at a premium of 8.2%. This is on the high side, reflecting gold’s recent run higher, and a flight to safety over recent concerns regarding sovereign debt. Gold has reached record prices in the euro and the British pound.

It will be interesting if we can see identify the drawdowns in the inventories that sourced this gold, wherever they may be. There are those who contend that the supply is coming from the unallocated inventories of bullion banks who are engaging in a kind of ‘fractional reserve’ gold selling to their customers.
If Your Gold Is at an LBMA Bank, You May Be Just an Unsecured Creditor by Adrian Douglas.

Let’s see if the price of spot holds its levels after this unusual level of bullion purchasing in what is reputed to be a tight market.

Read more market commentary at Jesse’s Café Américain >

Join the conversation about this story »

See Also:

• Is Eric Sprott In The Market Trying To Buy 10 Tonnes Of Gold?
• Can You Guess Which Country Is About To Launch A New Gold Bullion Coin?
• Sorry, We’re Not Weimar Or Zimbabwe, And Gold Is Never Going To Be A Currency Again

(This post appeared on Jesse’s Café Américain.)

Sprott Asset Management is involved with a new physical gold bullion trust, now trading with the ticker symbol “PHYS.”

The IPO for the fund was last Friday 26 February, with a reported 40 million shares outstanding at 10 $Canadian. The trust is not yet listed in Toronto, but is actively traded in the States. There is no hard news yet on how much of the IPO was held by underwriters.

Here is their website for the Sprott Physical Gold Trust, and the link to their NAV financials.

As you can see, there is still some key information missing. The cash assets less expenses of the trust are not yet listed. And more importantly, the trust lists only 13,686 ounces of gold owned, with a market value of approximately US$15 million.

According to the prospectus, the fund will store its gold in Canada, is based in Ontario, but will calculating its NAV in US$.

IF the trust has sold all its units, they are in a cash position of approximately $390 million. Their prospectus commits them to holding 97% of their assets in London Ready gold bars. And they are only listed $15 million in current gold assets.

Nine out of ten Americans might notice that the Sprott trust needs to buy gold in the size of most small central bank purchases, if they have not secured delivery already. And again according to the Prospectus, the trust does not traffic in paper and derivatives.

I am more familiar with trusts and funds taking a more incremental approach in their bullion purchases, and the negotiation for delivery before the units are sold in size. I am not sure what the case is here. It obviously is worth watching. Spot gold has risen quite a bit since last Friday. There is not enough data to suggest a correlation.

I have heard that the lead underwriter is holding some of the proceeds of the IPO until the gold is purchased. Its a big impact to the gold market in the short term if this is the case. Lots of arbitrage and front-running potential some might say.

Above and beyond the short term interest in potential physical gold buying pressure, the Trust has some promising innovations in terms of holdings and transparency as compared to some other similar funds.

What I found appealing, subject to details, is the ability for individual unit holders to redeem their shares for delivery of as little as one bar of London Ready bullion, at the NAV but subject to delivery fees. This will obviously have its appeal for those who wish to add bullion for retirement accounts, with an eye to taking physical delivery at some point without incurring storage fees which can be significant over time.

I know some ETF writers are working on this. It is not really my area of recent knowledge, and I have to admit that the IPO completely escaped my attention, although I did know it was coming some months ago.

Disclosure: I bought some units yesterday despite not feeling comfortable yet about being able to calculate the NAV for myself. It was listed by the company on their site at less than 2 percent which is advantageous and more than reasonable.

Read more market commentary at the author’s site >

Join the conversation about this story »

See Also:

• Want A Non-Productive ‘Hard Asset’ With Psychological Value That Beats Gold? Buy Collectibles And Art
• You Thought Gold Was Looking Ugly? Gold Miners Are Trading At Levels Not Seen In Years
• Broker: Buy Gold At Any Price And If You Lose, Blame ‘Them’