2011 Investment and Trading Performance Review..

Apologies for how overdue this document is.. precious precious time is always the problem.. and the older i get the more i realize just how precious it is.. Wrinkles are appearing where there were none before and this has encouraged me to be more careful with my investment of this precious resource. So i hope you enjoy reading the doc below. As a few words for clarity – this doc is me sharing my own trading experiences for 2011. This is not a reviewe of the 2011 market. I do intend to do such a review and forward as im sure there are many learning points to be gained from doing such a retrospective and forward. For now, here below, was my 2011 trading year.

account review3

Please do comment.. and as negatively as you like, in the forum.. ill add a section to allow an open and frank discussion.. Its a disapline i suggest to everyone as ive found it fairly refreshing to recap where it went wrong and right for 2011.You can load your own docs online and we can discuss in the forum. I dont need this to be about me. The ideal of capsyn is that we learn from each other – this, as always, has been the point.

The best to all Rich

The Deflationary Gorilla Vs The World’s Inflationary Central Banks cont..

The battle continues. In spite of all the inflationary juice the world’s central banks are pouring into asset markets the world wide the debt deleveraging 1000 pound gorilla is back in town and has started to hit asset markets into touch here. Only a massive increase beyond the existing massive increases in central bank balancesheets will knock the gorilla back on his heels.

Many commentators have picked up on the ECB’s balance sheet expansion. Here Bloomberg.

http://www.bloomberg.com/news/2011-12-28/ecb-balance-sheet-increases-to-a-record-3-55-trillion-on-loans-to-banks.html

Financial Sense and others have posted up the Cumber research. http://www.financialsense.com/node/7182

Anyone can see that the ECB, BOE, BOJ and SNB have been expanding their balance sheets. The Fed have increased but the level of increase has slowed. The USD has strengthened therefore and this has increased the asset market sell offs as USDs are repatriated and USD debt paid down. US large cap stocks have held up, thus far due to their strong balance sheets and increasing trend to pay down their cash mountains back to shareholders. This can allow them to outperform but out performance can occur at lower nominal levels if you follow.

Lets be clear here. In spite of the ECB balancesheet approaching the 3trn mark this increase in their balance sheet are three year 1% loans to their banks which have parked investment grade assets with the central bank for this cash. The Fed and BOE, by contrast, have purchased government debt directly and held this on their balancesheet. The Fed/BOE actions, along with tarp (troubled asset relief program) permanently removed pressure from their banks. They both purchased troubled assets outright at 100% of the paper value and purchased government debt directly and so freeing their banks from this responsibility. The private sector banks were and are free to use their balance sheets to lend directly to the private sector leaving the central bank to concentrate on government bond issuance.  The ECB has not followed this model. They are instead providing no new capital to the banks via a euro ‘tarp’ program. And, although providing liquidity they are leaving the euro banks the responsibility to use every % of their extended balancesheets to continue to purchase euro government bonds. Given 1) The disasterous position of the euro bank’s balancesheets due to lending practices 2) Euro deposit drawdowns which are increasing 3) Continued enormous deficits across the euro zone..  this is clearly no solution, at all.

Issue one above we understand. The banks lent too much money to too many capital lite projects across consumer and corporates alike.  They spread themselves too thinly in the boom days. They werent prepared for any fall in asset prices and rest is history. As this recession continues we now find the euro banks are being threatened not only by the consumer and commercial assets on their books  but additionally now by a decline in deposits.

http://www.worldcrunch.com/new-signs-invisible-bank-run-southern-europe-cash-shifts-scandinavia/4223

A decline in deposits threatens the whole shooting match for euro zone banking system. Capital controls have been used many times before to limit such instances of capital flite and i would suspect new rules are being discussed in this respect as i type this note. Financial repression demands that private capital is stolen by the state in the name of the wider good and reallocated for all our mutual benefit. History of course suggests that it never does any good and is simply misallocated towards friends and family of those that get to allocate this stolen capital. Thats the history but who knows maybe this occasion our wise leaders will do a better job.

Savings rates remain high across Europe. Every year around 12% on average of GDP is saved. Spanish savings rates are the second highest in europe after France. At circa 15% of GDP a year spanish bank’s capital problems should be solved very quickly in theory. Given 92% leverage through the banking system vast amounts of debt can be added on minimal savings. What is vital is that these savings remain in the euro banking system and do not escape to other banking juristictions. Here Italy imposing 1000 euro maximum cash payments. Anything more than 1000 euros in cash has been made illegal in Italy.

http://www.reuters.com/article/2011/12/04/italy-idUSL5E7N40CB20111204

Cash must be recorded for tax and capital reasons. I.E. cash held personally will not assist the bank’s capital ratios.  Similar measures will be implemented across the developed world.

And here below the latest data from Spain and Italy provides more evidence of this deposite flite as well as the deleveraging gorilla:

http://www.bloomberg.com/news/2011-11-18/spanish-deposits-fell-0-2-percent-in-september-from-august-1-.html

Spain’s deposits must be watched. A decline sept from aug should be expected, even seasonally adjusted. But if this is sustained given such a high spanish savings rate this would be disasterous. From a wider perspective, we can see, consumer and corporate debt declines as deposits decline as government debt continues to increase. The private sectors decline as government expands. Bank’s and insurance companies balance sheets increase their exposures to government debts as they decline their lending to the private sector. The central banks extend almost free money to encourage banks to leverage their balance sheets to the maximum levels in order to increase lending to governments squeezing out private sector lending. Most certainly this is the road to serfdom that Hayek wrote about so clearly in 1947. The private sector creates wealth not governments therefore such policies as we are following, over the coming years, will lead to the greatest decline in living standards this century.

Here the latest eurozone lending figures.. another contraction following the script perfectly of cheap and expanding loans to governments vs more expensive and contracting loans to the private sector.

http://www.marketwatch.com/story/euro-zone-m3-private-loan-growth-slows-in-nov-2011-12-29?link=MW_home_latest_news

Any discussion of this developed world policy trend towards beaurocratic central management and planning must include the Japanese economy.

A good article here on Financial Sense. http://www.financialsense.com/contributors/kieran-osborne/japanese-yen-a-red-dawn

And here the latest budget care of Bloomberg: http://www.bloomberg.com/news/2011-12-24/japan-budget-s-dependence-on-debt-sales-to-rise-to-record-next-fiscal-year.html

When 50% of your public expenditure is debt you have to start looking for the life boats i would suggest. In fairness, many have been looking at these statistics inc Hugh Hendry and others for many years. Japan has stumbled on as other more pressing issues on the global stage has stolen the spot light. The situation keeps weakening however year on year. This year we see a continuation of last year’s theame. I.e. the great Japanese saver that has yoy funded his government has finally turned into a net seller. In 2011 Japanese households became net sellers and at a surprisingly large level scoring a net -13.5% yoy JGBs. As the baby boomers hit retirement their holdings of government paper will have to be liquidated. The pool of capital will be consumed for retirement purposes. The death nail of all ponzi schemes is when investors try and realize the paper value of their capital. The process has started is all we can say. For now, the BOJ qe program as well as overseas buyers and domestic banks came forward to mop up the ever increasing Japanese debt mountain as the economy declines.

http://www.bloomberg.com/news/2011-12-27/japan-factory-output-falls-on-global-slump.html

Interest rates cannot rise in Japan as if they were to rise the government would quickly become insolvent. Capital flite from Japan is also systemically impossible. When inflation starts to show in Japan the situation would quickly become unmanageable. Capital repression will have to exercised on her people on a way that is unimaginable now.

It seems the entire developed world has all her guns pointing at the deflationary gorilla. When the gorilla dies there will be no cause to celebrate. The damage caused by inflation will be even worse. A case of lurching from the frying pan into a fire.

The Santa magic saved many asset markets and will still doubtless allow some to record a positive number for the year. But with so many problems around us the 1000 pound gorilla looks pretty formidable for now. Only continued and ever more extreme central banks actions will prevent asset markets from tumbling. Long USD, hedges for high yielders inc investment grade corp debt are the assets to hold. The gorilla will be defeated but for now he reigns supreme is my view. Technical comments another day.

Rich

 

 

Santa Rally – End of Year ‘Window Dressing’ or more..?

Many bullish trending charts broke in the run up to xmas. But we have not experienced any dramatic falls that price watchers may have expected. Seasonals have done their magic trick of supporting prices and stabalized things. Of course central bankers and some slightly better economic data from the US has assisted. The DOW cash is up nearly 4% for the year. Gold is up for a 10th year, this time by 15%. Gold has once again beaten cash. Ill run through all these charts on an end of year wrap. For the moment we have some illiquid xmas trading. Many have shut up shop already.

Here the proxy for on and off risk.  The AUDUSD.

 

We can clearly see the technical wedge pattern emerging. For the moment the trend is down. The DX is strengthening and is threatening a sustained breakout. The DX is up for the year at this point but more importantly seems to have scored a chart base in the year 2011. The impact of this strength will most likely be felt in Q1, Q2 2012. For the moment we have an impass now over xmas.

 

The CRB remains broken. We have a spike back up having scored the break. Oil is supporting the move as are the agri instruments for now.

The nas100 remains broken and the semi conductors, considered by many as a lead indicator for all US markets remain broken. Imo there are good reasons for the dow strength as we discussed before.. Here the Nas100.

The nas100 is negative for the year in spite of the last week’s rally.

My summary, this looks like classic year end window dressing to me. I wouldnt take it too seriously. There is no santa really and in anycase the ‘happy season’ will be over all too quickly. Rest up and enjoy. All to play for as we come to Q1 2012. Keep getting paid to wait by high yielders and hedge at least a portion of the long portfolio imo. Its going to be a rocky road in the first half of 2012 this is certain.

All the best guys.

Rich

Portfolio Allocations & Markets.. The Multi Asset BEAR is Very Close Now..

Ok, so where are we? In my opinion, the old trader’s line of ‘buy the rumour sell the news’ has been spot on. Seasonals have a part but they don’t drive the market. We are, therefore, in the process of the entire ‘risk on’ trend breaking.

As a general technical and fundamental comment, rather than near term timing comment, I haven’t more bearish than since 2008.

Technically many asset classes, oil aside, trends are breaking down. Its a gradual process this rather than an avalanche, thus far. Over the last week or so ive been hedged as i explained in various posts.

My long portfolio is a still net 80% with around 25% hedging.. ie im still borrowing, euros and jpy. The portfolio is mainly USD with some usd cash. The shorts are a mix of options and futures. The futures are march dated. The option puts are jan to feb. I cleared some pm positions (inc all the 2012 options in the last week). I like the cad and continue to hold vs the euro in spite of risk off. The cad cash im getting a yield mainly from the reits. (The reits so far have been very defensive and actually added weight in the last few days in spite of the sell moves). Yesterday i started selling a few usds and adding euros. I suspect a bounce in the euro.. everyone is short the euro this 80% of the time does not produce a large move. The herd will take profit very soon.. Possibly right here (although a spike down to catch some stops or trend break sell orders may occur). Thus far the account has not been adversely affected by the weakness and gradual breakdown. This has been due to the bets against the euro which has hedged things especially given equities out performance on the correlation of on risk off risk re the dx and eurusd.

Here the eurusd

We can see the trend line support.. Given participants are very short the euro, that we are a support and that we are over sold on near term indicators the probability is for a bounce and a bounce that may surprise all logic to the upside. Now i dont suggest loading the boat here with euros at all. But i wouldnt chase the euro here either and certainly would not be adding shorts here.

Does this mean asset markets will rise due to the off on risk inverse correlation with the dollar index? We may get a little support but i dont think reistances will be broken at all even with Santa around. The reason for this is the existing over performance of equities vs the dx correlation.Here:

The blue line is the sp500 rebased to dx units.. The bars are the dx (dollar index). We can see what is occuring. On the 3rd of oct the dx rebounded and made a new interim high just as the sp500 bottomed. The oct rebound was hard and fast as the dx sold off and based at 75 or so.  The dx climbed back to close to her prior high but failed to surpass the mark. The sp500 sold off but in turn made a higher high. The ‘risk on’ rally held firm. But look now what is occuring.. The sp500 is very close to her prior high when the dx based. I said two days ago that the inverse correlation was at extremes and i took this as a signal to go short the indexes and oil. I was looking at this chart when i made this statement. Since then the es has sold off a little and the dx has added further weight due to the usd adding weight vs all the basket of currencies not just the euro.

The nas100 has cracked and produced a chart price pattern sell signal yesterday afternoon.

Remember i mentioned BIDU as a short target.. She is breaking down.. if the euro does get some support here she may bounce off the bottom trend line support.. its worth watching this as a good entry may show. She is suggesting a large move.

CRB looks oh so dangerous here.. but i wouldnt chase either yet. I would wait for that euro bounce and then we see about shorting her heavily, imo.

The HUI and GOLD are a disaster area.. the reaction down could be hard and fast.. the gold miners could be hit very hard and the juniors off the field. These are technical comments only.. of course the whole thing would reverse on a dime when the money printers come out of their caves.

H

Here the HUI and HUI juniors..

In short i havent been so bearish since 2008. These are technical comments but they fit with the fundamentals.. in my view. Euro land doesnt get it. They have tinkered and tinkered. This is a balance sheet problem of too little capital in the banking and private sector driven by ultra low rates misallocating capital to government spending and housing booms. You cannot solve a capital problem by more government spending and increasing banks lending. The ECB needs to create new capital or rather steal middle class capital and reallocate this to its wounded banking system. They cant politically do this so the whole of europe will roll over. The US position is better as the Fed is happy to print and print. But the Fed has expanded her balance sheet for 4 months or so now. We need more juice. The Chinese has been raising rates and the Japanese have printed but its a drop in the ocean compared to the debt mountain demanding interest. The big picture, the world economy is appex. She will crash downward on a deleveraging tidal wave if the printing presses are turned on very very quickly. The IMF and the SDR issue is for FEB. Can we survive that long.. i doubt it.. its possible but the odds now are against. We technically have a small breathing space of the euro bounce along with xmas. Its possible we dont crash pre xmas but its a 50/50 now. Janurary could be a disaster in spite of the seasonal strength that Jan usually brings.

For all said and done the dow continues to look very strong.. The largest corporates in the world with their cash mountains, high dividends and multi currency income streams look the safest asset vs cash, bonds, gold, metals, agri, property. Its no surprise that the dow looks so strong here to me. I am not shorting the dow. The nasdaq and even sp500 are a different matter.  Domestic small caps short on cash and big on dreams are to be hammered here imo.

And its here that i would also finally remind re those gold to equities ratios etc.. Gold may decline nominally here a long way but relative to mid caps and small caps she will rise in relative value. Vs the Dow at this point im not so sure as the dow components have cash and cash in the near term may become king again, albeit for a just a few months. I may have lost some gold and silver futures lots but i retain my physical and many of the miners. A core within core must be held as  our financial system is insolvent and in the hands of mad men. What follows will be messy and unpredictable.

Lastly, for now, i leave you with a thought. Japan is in a mess. This is the first sell off in recent years which has not lead to JPY strength.. why? What is occuring? The circus is coming to Japan having been encamped in europe for the last 2 years. Japan has deep problems. Here the USDJPY. This story is just at her start..

As a last comment please dont forget the euro vs the swedish Krone. The euro has added weight in the last week or so.. And yet Swedish rates are falling like  a stone and the spead to bunds is negative. The Swedish Krone looks very cheap relatively imo. I will be adding Krones if/when we get a euro bounce. Here the problematic 10 yr rate spreads to bunds.

http://markets.ft.com/RESEARCH/Markets/Government-Bond-Spreads

The very very best to all.. There are always opportunities to create capital from every situation.

Rich

p.s and finally a few words of wisdom from Kipling.

“If you can keep your head when all about you

Are losing theirs and blaming it on you,

If you can trust yourself when all men doubt you,

But make allowance for their doubting too

Yours is the Earth and everything that’s in it”

 

 

 

Euro – FX (Inc news update – ECB Cuts Bank Reserve Ratios to 1% But Reminds The Beaurocrats that ‘debt monetization impossible’)

As we can see the technical picture is very weak. It looks as the though the technical breakout has failed, the uptrend defeated.  We moved to oversold levels in reaction. We have recently had a sideways move to reset the technical oversold conditions. We are at a level whereby technicall selling could/should resume. The entire 18 month uptrend vs the usd looks to be broken and the lows are asking to be tested. Technically the euro should be falling off a cliff here but she isn’t.. why? We must accept world wide intervension on this pair via the world’s central banks. Last week’s intervensions being a case in point providing a massive usd swap line for investment grade assets. This supported the euro but as we see the support is barely enough to hold the line. The euro remains on the ropes for as long as this technical pattern sustains. imo. Generally intervensions in the market extend and pretend rather than changing the course of direction, especially where currencies are concerned. Having said this if the fed bails everyone out in the euro zone then yes the euro can rise vs the usd. Once again the ‘free markets’ are hostage to what these central planners declare. We see the technical weakness in spite of their actions and therefore risks are to the downside for the eurousd.

Just off the wires the ECB, as if to remind all of the catch22 we are in. The ECB 1) extends 3 month (almost interest free loans to the banking sector), 2) Lowers quality of assets against which it will offer new cash loans to the banks 3) Re-affirms no direction debt monetization and no loan to the IMF due to the convenants under which the ECB operates.  Summary, Euro banking system insolvent, ECB cannot print under current treaty.

http://www.marketwatch.com/story/draghi-eu-treaty-prohibits-monetary-financing-2011-12-08-922140

http://www.bloomberg.com/news/2011-12-08/draghi-says-ecb-to-lend-banks-more-to-avert-credit-crunch-as-key-rate-cut.html

The Euro solution to a banking crisis caused by the banks holding too little reserves is to lower their reserve requirement. I would laugh if it wasn’t so serious.

Here below the euro vs Cads, Auds, Seks, I hold all vs the euro.


 

“Buy the Rumour Sell the News”

We have had rumour on top of rumour. Central banks took action to liquify the system through their collateralized swap loans, equity markets were over sold and we recorded one of the best weeks for asset prices in years. Markets have risen nicely to resistances and tomorrow the euro meetings start. The good news is priced into the market, imo. Ask yourself how the solution to the euro problems have actually changed in the last week or so. Should we be encouraged by the public statements? And, in addition, remember words are cheap vs actions. Actions, laws and capital speak far more loudly than mere words. In my opinion the words have been weak, lack detail and show little flexibility. Fiscal Union seems as far away as ever as does ECB monetization, as do euro bonds, as does an increase in the scope and size of the EFSF and as does an increase in IMF SDRs. All the sorts of elements we would expect to see coming to together to form a ‘final solution’ are not coming to together quickly or materially enough. The central bank liquidity injections have assisted and bought a little time but this is not a permanent fix and all eyes are on these euro meetings tomorrow and Friday. If they disappoint again its hard to see the central banks holding the line without significantly expanding their balance sheets and printing like crazy. This feels like a classic case of “buy the rumour sell the news”.

As always here the devil is in the detail. The technicals on most equity indexes do not hint at anything more than a short term sell signal as prices have hit resistances. Eurusd is technically, however, very weak and the dx looking more promising. (The euro continues to fall vs the CAD from the resistance that i flagged a few weeks ago. This has been an excellent trade and continues to run). The CRB looks weak. Copper a good lead instrument on the industrial complex look ok actually.

but its equity miners look horrid. Here the copx etf, a basket of copper miners.


Oil remains strong, having added 33% since October vs gold barely rising over the same period.

We have mixed signals therefore and imo this is part of a gradual correlation breakdown between risk on/off assets. This process has been underway now for some time.

I would suggest some hedging option puts for now on equity markets. I would remain short the euro and long more solid currencies from cads, seks, usds, etc. I am still personally long around 90% but this ultra bullish stance is mitigated a great deal depending on the euros performance vs world fx. I am retaining around 15% leverage to hold high yielding conservative equities to take the yield. My net, as i say is at 90% as i hold a few YMs futures shorts. As well as NQ, YM and ES puts.  I hold DX calls. I would like to expand the shorts with some specific stock short targets rather than index shorts. I’ll pick up these specific asset targets and instruments in the forum pages.

I strongly suspect this euro meeting is a ‘buy the rumour and sell the news’ event although technically it continues to be a mixed picture thanks, in great part, to continued central bank meddling. The theory suggests markets should always revert to their prior course once the meddling diminishes. If the euro area doesn’t provide the market with crediable money supply increasing strategies the markets will resume the path they were previously on.. ie down.

All the best guys. Take care..

Rich

Central Bank of Zimbabwe Governor “Worried About the US Dollar”

This is a wonderful story that i had to post up.

Gideon Gono, the infamous Governor of the Central Bank of Zimbabwe, is worried about the US dollar it seems. From 2010 he has pegged his country’s currency to the dollar. He is interpretting recent events re the continued printing of money and debt monetizations as being vindication for his own money strategies.

“God had been on my side and had come to vindicate me.”

http://blog.mises.org/19658/gono-is-worried-about-the-u-s-dollar/

Judging by the recent actions of the world’s central bankers, perhaps Mr Gono was simply ahead of his peers. He should, perhaps, be held up as a thought leader and be appauled for his money printing actions rather than being dismissed as a corrupt destroyer of capital.  Of course the impact of all money printing actions suggest these strategies never work for the benefit of the people. But since when has this ever mattered to policy makers and the elite of society.

GDP per capital in zimbabwe now is less than 500 US dollars per annum. Zimbabwe is one of the poorest countries on the planet in fact. She ranks 223rd out of 236 countries surveyed. Only Liberia, Congo and Birundi have a lower standand of living. Zimbabwe used to be one of Africa’s richest countries.  Life expectancy in Zimbabwe has nearly halved. Life expectancy has fallen to 34 (women) and 37 years old (men) as the mean average.

http://www.medicalnewstoday.com/articles/41339.php

When you debase your currency you destroy the fabric of your society. Even Keynes, unlike his neo Keynesian sons, understood this.

“Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency.” Keynes

Rich

 

 

Weekly Technical Update.. (Inc Janjuah Interview)

Short term at over bought levels (and price resistances). UBS expects another few percentage points on the basis of the xmas rally before the cyclical bear resumes. In spite of the mildly bullish call UBS declares selling into strength the better move at this point – which, in my opinion, is the correct move due to the european mess that shows no signs of a swift resolution. Here below the report.

Weekly06-12

I also want to point to an excellent, non technical, comment from Janjuah. Imo, he is spot on the money in this interview. Large caps will do just fine and are safer than bank deposits. If you have the skills to hedge do so otherwise ride out the volatility in these large caps. Do not go over 20% leverage in this coming phase. imo. The volatility could be immense.

http://www.youtube.com/watch?v=JGtMJMLnBS4

All the best

Rich

“Buy The Rumour Sell the News”

Following the central bank’s actions last Tuesday its been right to wait and see how prices of the different asset classes have reacted to the intervensions before commenting and taking too many actions. On the news last week, it was correct to add risk via reducing the hedging shorts and adding a few euros. The pro risk rally enabled by the central banks was hard and fast as so many (inc myself, although not a net bear) were short the market and bearish the euro. Equities across the globe have rallied up to their current resistances. The central bank action crucially bought the European’s some time which was the point of the action. All eyes remain on European matters and little else.

The ECB is lending the european banks as much liquidity as they desire accepting all sorts of assets as collateral for the loans. This is repeated across the developed world. The Italian government is talkng budget cuts as is the Spain’s new government as is France’s. Merkel and Sarkozy are talking fiscal union as the issue to emerge from the 9th of December euro meeting. The ECB is saying it could be more aggressive in monetizing soverign debt (printing) if europe enables closer fiscal integration. (The ECB makes no mention of how this would affect the German constitution nor its own terms of reference that prohibit debt monetization). The ECB came out last week and acknoweldged that several billion of debt monetization had not been sterilized on its latest round of monetizations. This presents consititutional issues to the all powerful German courts but for the moment silence on the matter it seems. Greece remains in chaos and Portgual remains shut out of debt markets.

We have said this so many times before re europe but this week seems to a crucial week in determining a ‘final solution’, or not, to the European farce. Today Merkel meeting Sarkozy. Tomorrow Geitner in Europe and so on.

http://www.bloomberg.com/news/2011-12-04/merkel-sarkozy-seek-again-to-resolve-debt-crisis-in-week-full-of-summits.html

Looking through the political ‘fog’ there are several strands emerging that need to be woven into some sort of solution.

I include:

1) Fiscal Union

The reality of a fiscal union would mean that any national executive could have their budgets over turned by the european courts if they provided a deficit over and above that which was approved by the European fiscal executive. This would be the price/protection Germany is seeking.  Henri Guaino has today come out and declared this would unacceptable to France although how else would such a measure be implemented? As ive commented before fiscal union will force some states out of the euro. Especially the fiscally weak states. In spite of the public noise this is what policy makers in Paris and Berlin actually desire.

2) To Monetize debt or not to Monetize debt, this is the question?

Will the ECB finally be given a green light to print? She gave a clear signal last week that the process has started. She did not sterilize all the debt she monetized so there was fresh money pumped into the system without the corresponding money being parked at the ECB by her banking system.  The no money printing virginity has been lost. Its a tiny amount of money thus far vs the US and UK but the principle is clear. We have the prospect re fiscal union for a treaty change of the European Union. This is an opportunity to change the prinicples under which the ECB operates visavis inflation targeting, monetizations, etc etc.  As interesting as the issue of fiscal union is, for my mind, the issue of debt monetization is even more interesting and relevent to asset markets and speculators therefore.The issues are joined at the hip as a fiscal union on a core europe would let the door open to allow the ECB to monetize as the amount of monetization needed would be restricted and managable.  In theory, note.

3) Euro Bonds

The issue of euro bonds is being pushed by the French who desire euro bonds. Merkel is being clear she is not an advocate of joint euro bonds although this view is not represative of the broader German political scene. Most of the political parties in German are strong advocates of euro bonds and fiscal union. If the issue of fiscal union is agreed then the path to accepting euro bonds becomes almost inevitable, imo. I don’t expect euro bonds to be agreed anytime soon but i do believe core europe is on a path toward this event. For speculators a key indicator to this this occuring is how many states the ‘core’ is made up of. Imo the more states there are the weaker the euro core will be and therefore the more likely euro bonds will be needed. If both Spain and Italy are in the ‘core’ without massive ECB intervensions the more likely euro bonds will come into existance.

4) EFSF

The EFSF is in a mess.. A complete mess. We learnt last week that the EFSF is to be doubled not trebled due to debt market stress. An EFSF bond sale was cancelled last week as it was clear no buyers would be coming forward for EFSF bonds or that the prices they would demand would be too high as confidence was so low. This would have made a mokery of the EFSF triple A rating. Better to call the sale off than risk a public humiliation.

The new Italian premiere nicely summed up the lack of clarity last week.

http://uk.reuters.com/article/2011/11/30/eu-italy-monti-idUKR1E7MC02A20111130

The IMF’s role in supporting the EFSF is still very unclear. The IMF has around 280bn in funds given her current SDRs. Beyond this she would need permission from her members to allow SDRs to be increased. This permission would need an emergency meeting of the IMF to be called and the members to agree. At the recent g20 meeting there was no indication, at all, that member states were willing to increase the IMF’s SDRs. An alternative method which is being looked at is for the ECB to create money (print) and lend this directly to the IMF which could then lend directly to troubled states. This routes does not break the ECB convensions of debt monetization as it would not directly be buying debt but lending this new money to the IMF. Yet another route is for the national central banks like the Bundesbank etc to increase their balance sheets by lending money to the IMF. http://uk.reuters.com/article/2011/12/03/uk-eurozone-imf-resources-idUKTRE7B20F420111203

I would think such a measure would be breaking some european treay convensions as national european central banks should not be able to increase money supply via their own balance sheets although this is being examined as the above article discusses. And here in the German News paper Speigel:

http://www.spiegel.de/international/europe/0,1518,801715,00.html

There is much more to say but im out of time right now.. i will come back later today to update this report.

All the best for now

Rich

 

 

 

Central Banks Swaps Lines Attempt to Re-set Pro Risk Rally

I dont have time now to comment fully now but the latest central bank action represents massive intervension in the fx markets.

http://www.bloomberg.com/news/2011-11-29/stock-futures-in-u-s-decline-after-bank-ratings-cut-by-standard-poor-s.html

In summary its clear signal to market participants that no cash is safe. That central banks will be willing to accept overseas soverign debt junk (ie euro debt) as acceptable collateral for fx credit lines in which ever currency the banks require. Its a sort of double whammy providing liquidity to the banks as well as trashed currency as a safe heaven asset. This may have saved the xmas rally. Ive covered some short on the news and even bought a few euros back. This is bullish asset markets in spite of it solving nothing medium term. Short term enjoy the run up. Its good news AUD as the BOA seems not to be involved though this needs too be double checked. Morally im disgusted by the action although the account is rising. Its very good news for gold bugs as it clearly, once again, demonstrates fiat cash is trash!

A reminder here of the last time this action ”saved” asset markets care of Zerohedge.

Rich