What if Gold and Silver break down hard?
Equity markets are threading water today. The market is trading up in this post Christmas session. We have been receiving many emails regarding the precious metals lately. It feels definitely there are many out there getting rather nervous. At one point this fall, every investor saw gold printing 2K before year end. Well, things have changed. Irrespective if central banks or others are pushing the metals prices lower, there are many investors geared heavily, all waiting for the move higher. Pundits all agree, gold (and silver) must move higher, especially with Europe on the brink of a collapse. We have been rather cautious on those “crowded” trades.
During the past weeks, gold is joining the silver in terms of price action. The bounces to the upside are getting smaller and smaller. The long term trend is still in, especially in gold, but momentum is losing steam. With so many longs, all believing the same fundamental story, one should ask, what if, only what if those trends break to the downside, and the crowd all starts exiting, all cheered by the HFT Algos? It has happened before. With Paulson’s track of “bad luck” lately, this sure is not impossible. Long term charts below.
Real Fear-Banks depositing at the ECB
Today we learn that all the money the ECB flooded banks with a few days ago, pretty much all was deposited at the ECB again. Instead of lending money to businesses, banks parked the money at the ECB. This is nothing else than pure fear from banks. The only ONE banks trust is the ECB itself. With markets grinding higher, and this year showing the smallest SPX movement since 1970, people are forgetting what fear actually means.
The VIX index has plunged recently, and if we get a few days more of slow markets, Vix will soon reach “artificially” low levels, where people once again will start pricing only the moves in SPX, and “forget” about the real fear factor. With banks depositing all that extra money with the ECB is telling us, fear is here, just not reflected in the Vix index, yet. Time to pick up some cheap vol is approaching. More below.
European Charts Update-Santa Fading
As people are waking up from Christmas, trading is rather muted. Renewed “fears” over Italy are doing the rounds, but trading is of course very thin. Beklow are some key levels on various European indices. As we can see, we should be breaking out of the “consolidation” sooner than later.
The Credit Event
Guest post by Macro Story;
There has been a lot of talk about equity’s ability to trade independent of credit. That Fed and ECB policy can put a floor under the equity market and therefore this time “it’s different.” That the US is decoupling from the world once again or that equities can decouple from the currencies.
The two charts below explain why this is simply not happening and unless the currencies reverse their current trend the equity markets will be faced with a selloff regardless of central bank policy.
That may sound like a bold statement but when you consider how currencies and equity relate it’s a purely academic statement. The following three simple graphs show how an unabated credit event will eventually become too much for equities.
Can a Central Bank go bust?
Guest Post by John Redwood.
There is a simple answer to this question which is usually correct – “No”.
If you regarded Central Banks as normal businesses, or even as normal banks, you would be mighty alarmed by their balance sheets today. Several of the leading western Central Banks are doing what they condemned commercial banks for doing in the run up the Credit bubble. They are gearing their balance sheets massively. The Bank of England has a £245 billion balance sheet, with equity and reserves of just £4.4 billion. In other words, its total liabilities are 55 times its capital.
The Governor and Directors of the Bank do however retain some sensible caution. The Bank of England’s balance sheet is massively distorted by the £200 billion of Quantitative easing the Bank has carried out so far. Here the acquired assets, UK government bonds, are matched by a Treasury loan. The Treasury gives a guarantee against loss. The UK state is expected to stand behind the Bank if it started losing significant sums on these assets at market prices, and it could hold them to redemption at par anyway. If you take this off the Bank’s balance sheet, it looks altogether more prudent.
Europe should boo(u)st bail out fund-Japan
Japan has been trying to boost it’s Economy for decades, but without real success. Now they are telling Europe, what needs to be done. Boost the EFSF, and all will be great. It is funny, how all these failed policies, have not produced any wisdom, but to do the same thing over again. We know who does the same thing over and over, while expecting a different outcome-only idiots. From Financial Post.
Europe should boost the total firepower of its rescue fund and frontload its funding to send a positive signal to investors and international partners that it is determined to solve its debt crisis, Japanese officials said on Monday.
Japan has repeatedly expressed its willingness to help Europe contain its debt crisis, but has also stressed it wanted to see a convincing action plan before making any firm commitments.
“Japan like other non-euro countries is prepared to do something, but unless European contries take decisive action it is hard to make those steps effective,” a senior Japanese government official said.
Lifting the combined size of the current bailout fund (EFSF) and the new permanent European Stability Mechanism (ESM) beyond the current 500 billion euros would be a major step and an encouraging signal.
Spain faces a challenging 2012
The Trader has written extensively about the difficult situation in Spain. Somehow the problems in Spain have almost got “forgotten” due to the focus on Greece and Italy. We predict that the coming 2012 will be when the Spanish problems get more attention. The huge unemployment (+22%), the stagnating economy, and the property sector that needs to fall much more before attracting “bargain hunters”, will all add negatively to the economy in 2012. With more than one million empty properties, remarking the values on these properties will create black holes in bank’s balance sheets. During the holidays, the Economy minister, Luis de Guindos, is painting a rather muted economy ahead.
From Huff Post;
Spain will slide back into recession early next year with the current quarter and the first of 2012 both registering negative growth, new Economy Minister Luis de Guindos said Monday.
“Let nobody be fooled, the next two quarters are not going to be easy either in terms of growth or employment,” de Guindos said.
Spain has already made sharp cuts to its national spending and introduced several reforms under the former Socialist government, but the economy has failed to respond.
Spain began to emerge from a near two-year recession last year. It had two successive quarters of growth in 2011 before posting zero growth in the third period.
The Cultural Transformation of the World of Finance-Das
Das on the transformation of Banking, derivatives, finance and the future. Videos to enjoy for the holidays.
Consumer is the Key
Guest Post by D Short.
The chart below is my way to visualize real GDP change since 2007. I’ve used a stacked column chart to segment the four major components of GDP with a dashed line overlay to show the sum of the four, which is real GDP itself.
My data source for this chart is the Excel file accompanying the BEA’s latest GDP news release(see the links in the right column). Specifically, I used Table 2: Contributions to Percent Change in Real Gross Domestic Product.
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