Monthly Archives: June 2015
Chinese Gold Standard Would Be “Game Changer” – Bloomberg Intelligence
25-Jun (KitcoNews) — Could gold, the world’s longest running currency be used to create a new order in global currencies? The Chinese central bank is said to be considering backing its yuan with the yellow metal. This move, says Ken Hoffman, Global Head of Metals and Mining Research for Bloomberg Intelligence, would be a “game changer.” Why would China consider such a move? Hoffman explains that Chinese policy makers are already trying to establish the yuan as a reserve currency, and backing it with gold would help attract foreign capital inflows. China is expected to receive approval from its central bank for a yuan-denominated gold fix, with a potential for an announcement as early as next week.
…If China decides to go into some form of a gold standard, Hoffman says it would make the rest of the world view the metal as a currency again. “If they go for it, we’d be talking about fireworks,” he says.
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The Daily Market Report: Gold Consolidates As Greek Deal Remains Elusive
25-Jun (USAGOLD) — Gold remains consolidative within the range, despite yet another failure by Greece and its creditors to strike a deal. Relatively calm markets suggest investors are clinging to optimism that something will happen before Tuesday’s deadline, when Greece is required to make a €1.6 bln payment to the IMF.
However, today was widely viewed as the last opportunity to reach an accord and still have time to get approval from the various governments. The IMF has already pledged that no additional grace period will be granted. While I suppose they could still back-off on that if a deal were reached, it doesn’t sound like any progress is being made in the negotiations at all.
It is a game of chicken, with both sides refusing to alter their courses as they hurdle toward each other. This could still go horribly wrong; with potentially disastrous ramifications for Greece, the whole of Europe and even the global financial system.
Nonetheless the market seems willing to hold its collective breath and hope for the best; that calmer heads prevail. Certainly there is a long history of last second deals to avert disaster, but one of these days, someone is going to make a miscalculation
If that doesn’t occur this time, it may well happen next time. And as we’ve discussed in recent commentary, a deal now would at best get Greece through August. After all, the technocrats of Europe need a deal so they can take their usual 4-week holiday in August.
Just think of all the time, energy and euros expended by policymakers across the Continent over the last five-years: Endlessly kicking the Greek can, just a little ways down the road. This too may be the new normal, if the EU is to continue.
That also leaves the system extremely vulnerable to a black-swan type event. As such risks rise, the need for gold as a safe-haven asset is going to rise as well.
Deutsche Bank Chief Economist “Scared” At Lack Of Economic Concern Amid Historical Oddities
24-Jun (ValueWalk) — What is scary to David Folkerts-Landau, Deutsche Bank AG’s chief economist, is not “we are living through one of the most unusual economic and financial periods ever.” This isn’t the primary concern. “The scary thing to me is how rarely anyone seems to acknowledge this fact,” he wrote in a recent research piece.
Kicking off the Konzept publication, “Reflections on unusual times— negative rates, buybacks and changing corporate governance,” the Deutsche Bank economist introduction paints a picture of the illogical as it benchmarks a unique point in economic history. After spending his academic and professional career at Harvard, Princeton and the University of Chicago, then a professional career at the International Monetary Fund and now one of the world’s largest banks, you might think Folkerts-Landau has seen it all, but think again. The current malaise among the investing class is historic.
Investors, journalists and traders “pick apart” minutia such as “quarterly data releases or the tiniest details of a central banker’s speech. Economists deal everyday in trifles such as: Where are Janet’s dots? Is a weak euro helping growth? Did core inflation rise a smidgeon in Japan? Yet the answers to such questions are immaterial next to $8tn-worth of quantitative easing (and rising) since the financial crisis.”
…”Just stop and think about that for a minute,” he muses. “Heavens, twenty generations have never seen interest rates at these levels!”
But what is more concerning is the dopamine pumping pleasurable stimulus into every economic orfus has dulled the normally sharp observations of economists and market watchers. “Economists discuss the current situation using the same old language and theories. Investors watch their screens as if nothing out of the ordinary is going on. The collective denial is unnerving.”
With such odd economic behavior, why is everyone fixated on meaningless details and not taking a step back and looking at the broader landscape? Financial commentary is so happy to dig through the weeds to keep a positive face on economic news that it is not “stepping back to gasp in awe at arguably the biggest monetary experiments in history.”
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PG View: Despite talk of “normalization,” I think there may be a broad underlying acknowledgement that this is the “new normal”.
Fed’s Tarullo: Something’s Changed in The Bond Market; Unclear Why
25-Jun (Wall Street Journal) – Federal Reserve governor Daniel Tarullo said Thursday changing bond-market liquidity conditions remain unaccounted for, with uncertain implications for overall financial stability.
Mr. Tarullo was addressing rising anxiety that changes in financial firms’ regulation, among other factors, is causing some companies to pull back from the bond market, in turn boosting the risk stress-driven volatility could cause harm to the economy as a whole. The official also took stock of the implementation of new rules aimed at strengthening the regulation of the financial sector, and he warned that leaders of financial firms need to be held accountable when their employees violate the law.
Mr. Tarullo made his comments in an appearance at the Council on Foreign Relations in New York. He didn’t comment on monetary policy or the economy.
“There does seem to be something different” in bond markets right now, the official said. “Something does seem to have changed” in terms of things like the ability of a market participant to easily execute a large trade, he said.
As it now stands, “I don’t think there is at this point a very precise and convincing explanation for exactly what has happened,” Mr. Tarullo said. He noted signs of fragility could be tied to regulatory changes, the rise of high frequency trading and firms’ willingness to engage in the market as potential drivers of current market conditions.
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PG View: You don’t suppose removing all the liquidity provided by the Fed last year has anything to do with?
ECB Official Warns on Greek Banks Aid
25-Jun (New York Times) — The head of Germany’s national central bank is warning that the lifeline keeping Greece’s banks afloat may run afoul of European rules.
Jens Weidmann, who sits on the governing council of the European Central Bank, says the long-term provision of emergency credit to Greek banks “has become the banks’ only source of funding.”
He said lending to banks that can’t borrow elsewhere so they can lend to a government in similar straights “raises serious monetary financing concerns.” That means Weidmann questions whether the practice violates the European Union’s legal prohibition on using central bank powers to finance governments.
The ECB must decide at regular intervals whether to continue to permit Greece banks to draw such emergency credit. Turning off the credit could deepen financial turmoil. Weidmann has only one vote on the 25-member ECB board but a significant one since represents Germany, the eurozone’s largest member.
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Greece debt talks: Crisis deepens amid deadlock
25-Jun (BBC) — Eurozone finance ministers are meeting in a desperate bid to find a solution to the Greece debt crisis amid deadlock between Athens and its creditors.
Earlier talks between Greece’s Prime Minister, Alexis Tsipras, and the country’s international lenders ended without agreement.
Ahead of the Eurogroup meeting, the German finance minister warned that the gap between the two sides was widening.
Greece must repay a €1.6bn (£1.1bn) IMF loan by next Tuesday or face default.
That could lead to Greece exiting the eurozone, with possible repercussions for the rest of Europe and the world economy.
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PG View: This is not how negotiations are supposed to work. As the sides talk, they are supposed to get closer together and closer to an agreement.
US personal income +0.5% in May, in line with expectations; PCE +0.9%, above expectations of +0.7%, vs upward revised +0.1% in Apr.
US initial jobless claims +3k to 271k for the week ended 20-Jun, just below expectations of 272k, vs upward revised 268k in previous week.
Gold easier at 1173.60 (-1.80). Silver 15.83 (-0.078). Dollar & euro consolidate. Stocks called higher. US 10yr 2.39% (+2 bps).
The Daily Market Report: Gold Remains Rangebound as Markets Await Outcome of 11th-Hour Greece Negotiations
24-Jun (USAGOLD) — Gold dipped a little deeper into the recent range, slightly exceeding last week’s low. However, the overall tone remains broadly consolidative as markets await the outcome of the eleventh-hour Greek negotiations.
Creditors reportedly rejected Greece’s most recent proposal, which was quickly followed by Greece rejecting the counter-proposal. It seems no movement has really been achieved and the only thing keeping optimism elevated is the realization that some kind of accord must be reached — and soon — or Greece will be forced into default. But, hope alone does not get a deal done . . .
An FT article this morning suggests that some in the European Commission have been trying to push the IMF out of the negotiations. That’s an interesting turn of events, as the IMF is the organization that is due a €1.5 bln payment on Tuesday.
German finance minister Wolfgang Schäuble apparently took exception and demanded the commission “stop blaming” the IMF for the stand-off. Schäuble went on to reiterate that he will not sign-off on any deal that the IMF will not approve. That does not bode well for a deal.
According to BusinessInsider, a Goldman Sachs report shows in four charts just how dire the Greek situation has become:
Public debt is about 75% larger as a portion of the economy than it was in 2007, GDP has been cut by a quarter (a Great Depression-like reduction) and money has flooded out of Greek banks.
In some ways, the story is actually worse than it looks. Though the acceleration in Greece’s debt to GDP ratio was slowing down in 2014, the subsequent crisis mean it’s probably picked up again. Greece is now back in recession. — BusinessInsider
Since 2010, Greece has already received more than €230 bln in bailout funds. The last tranche, a measly €7.2 bln, is what hangs in the balance for the current negotiations.
As the Goldman report suggests, after five-years the situation in Greece has gone from terrible to horrific. And that’s with what amounts to about a year’s worth of GDP injected into the economy by the troika.
If they do manage to reach a deal to release the €7.2 bln, it does nothing but buy them a very little bit of time. UBS suspects that they will be out of money again by the end of August. At that point, the choice will be default or try and secure a third bailout.
I suspect rallying support for a third bailout will be exceedingly difficult across Europe. In continually delaying what appears to be an inevitability, Greece and its creditors may amplify the fallout to the point of another economic crisis.
The dangers of living in a subnormal interest rate world
23-Jun (Financial Times) — It is curious to reflect that when US and UK policy interest rates were cut to their lowest ever levels in March 2009, markets expected them to be on the rise within the year. More than six years later the rates remain the same and the markets are still obsessed with the timing of a rise. When that will happen is as clear as mud in the wake of the Federal Open Market Committee’s statement last week.
The one thing that is beyond doubt is that the “normalisation” of monetary policy is a long way off. Janet Yellen, chairwoman of the Federal Reserve, has indicated that when the rises do come they will be small, incremental and predictable. For some years we will confront a subnormal interest rate world.
It will also be a low growth world — witness the downward revisions to growth projections of both the Federal Reserve and the Bank of England this month. The eurozone and Japan, despite enjoying the benefits of big competitive devaluations, are struggling to deliver half-decent growth rates.
And competitive devaluation is anyway a zero sum game that does nothing to boost the global economy. . .
…In such a world any reversion to the historic interest rate mean is distant. There is no generalised sword of Damocles hanging over the heavily indebted developed world for the moment. Yet for individual countries an early reversion may be the reward for bad policy. Japan and southern Europe are the laboratories in which this hypothesis will be tested.
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US Q1 GDP (3rd report) revised up to -0.2%, in line with expectations, vs -0.7% previously.
Gold edges off one-week low as Greece news knocks stocks
24-Jun (Reuters) – Gold edged higher on Wednesday after Greece said international lenders had rejected its latest proposals to avoid default, knocking stocks, and as a softer dollar helped the metal recover from a one-week low.
The precious metal has declined for the last three days as the dollar strengthened, and as optimism over the prospects for a deal on Greece prompted investors to favour assets seen as higher risk, such as stocks.
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Greek debt talks appear to stumble
24-Jun (USAToday) — A hoped-for debt deal for Greece appeared to stumble Wednesday as Greek Prime Minister Alexis Tsipras suggested that international creditors did not accept the latest round of reform proposals from Athens, according to a report.
Global markets, which have been gaining all week on expectations that a last-minute deal is likely, fell on the news.
Bloomberg reported the development, citing the Greek government.
However, it was not immediately clear what caused the fallout after it earlier emerged that Greece and its international creditors have just a few remaining items to agree on before a deal can be done to break months of deadlocked debt-crisis negotiations, according to the nation’s economy minister.
…Without a deal, there are fears the southern European country could default on $1.8 billion loan repayment to the IMF that is due at the end of the month as part of a $270 billion financial assistance package Greece received during the financial crisis.
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Gold easier at 1176.40 (-2.41). Silver 15.87 (+0.043). Dollar lower. Euro higher. Stocks called lower. US 10yr 2.38% (-3 bps).
The Daily Market Report: Gold Slips as Optimism for Greek Deal Rises
23-JUN (USAGOLD) — Growing optimism that a deal will be struck between Greece and its creditors continues to weigh on gold. The yellow metal has retraced most of last week’s gains, but activity remains confined to last week’s range.
Despite the rising hopes, some reports suggest that the IMF remains dissatisfied with the latest proposal. There is also considerable concern that even if an accord is reached, the Greek government won’t be able to get it passed through parliament before the June 30 deadline is reached. That could still result in a technical default.
Even being optimistic though, release of the final tranche of the bailout funds will allow Greece to make upcoming payments of the previous bailout funds through the end of August. It’s a very short kick-of-the-can down the road.
In raising taxes and pension contributions, Greece may be hard-pressed to reach their budget surplus targets. What happens then? Does the deal become null-and-void, requiring immediate repayment? Good luck with that.
A CNNMoney article calls the proposal “deeply flawed,” as it would allow Greece to make the impending payment to the IMF, but does very little — if anything — to address the underlying causes of the crisis. That will make for a bigger crisis down the road . . . a very short road.
Gold Slumps on Likelihood of Greek Debt Deal
23-Jun (Wall Street Journal) — Gold prices fell Tuesday, as investors sold the precious metal amid signs that Greece is nearing a deal with its creditors.
Gold for August delivery, the most actively traded contract, was recently down 0.6% at $1,177.50 a troy ounce on the Comex division of the New York Mercantile Exchange. Silver for July was down 1.9% at $15.84 a troy ounce after touching a near-two-month low in early trade.
Greece’s creditors were scrutinizing the country’s fiscal promises on Tuesday ahead of a crucial meeting of eurozone finance ministers on Wednesday that could determine whether the country receives last-minute bailout financing before the end of June. The news prompted those who had piled into gold in recent days to sell the safe-haven metal, as the crisis appears to be nearing its end. Some investors buy gold in times of economic and political uncertainty, believing that it will hold up better than other assets in frothy markets.
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