june 16/Looks like Greece will have its Lehman moment this weekend/Cold War between Russia and the west is heating up/Housing starts falter badly last month/

Good evening Ladies and Gentlemen:

Here are the following closes for gold and silver today:

 

Gold:  $1180.40 down $4.80 (comex closing time)

Silver $15.96 down 12 cents.

 

In the access market 5:15 pm

Gold $1181.70

Silver: $16.03

 

Gold/Silver trading: see kitco charts on the right side of the commentary

 

Following is a brief outline on gold and silver comex figures for today:

At the gold comex today, we had a poor delivery day, registering 17 notice serviced for 1700 oz.  Silver comex filed with 0 notices for nil oz.

Several months ago the comex had 303 tonnes of total gold. Today, the total inventory rests at 244.29 tonnes for a loss of 59 tonnes over that period.

 

In silver, the open interest fell by 3557 contracts even though Monday’s silver price was up by 28 cents.   The total silver OI continues to remain extremely high with today’s reading at 188,970 contracts now at multi-year highs despite a record low price. In ounces, the OI is represented by 945 million oz or 135% of annual global silver production (ex Russia ex China). This dichotomy has been happening now for quite a while and defies logic. There is no doubt that the silver situation is scaring our bankers to no end as they continue to raid as basically they have no other alternative.

 

In silver we had 0 notices served upon for nil oz.

 

In gold,  the total comex gold OI rests tonight at 406,870 for a loss of 277 contracts as gold was up by $6.50 yesterday. We had 17 notices filed for 1700 oz.

 

we had no change in gold inventory at the GLD; thus the inventory rests tonight at 701.90 tonnes. The appetite for gold coming from China is depleting not only gold from the LBMA and GLD but also the comex is bleeding gold.

In silver, /we had no change in silver inventory/327.874 million oz

We have a few important stories to bring to your attention today…

1. Today, we had the open interest in silver fall by 3557 contracts to 188970 despite the fact that silver was up by 28 cents on Monday..  The OI for gold fell by 277 contracts down to 406,870 contracts despite the fact that the price of gold was up by $6.50 yesterday.

(report Harvey)

2. Today, 6 important commentaries on Greece

zero hedge, Craig Roberts)

3. Dave Kranzler discusses the collapse in housing starts in the USA

(Dave Kranzler/IRD)

4. Gold trading overnight

(Goldcore/Mark O’Byrne)

5. Trading from Asia and Europe overnight

(zero hedge)

6. Trading of equities/ New York

(zero hedge)

7. A commentary on the escalation of the cold war
(zero hedge)
8. Phoenix Capital Research discusses the huge 9 trillion USA short and what it means
(Phoenix Capital Research/Graham Summers)
9. Brazil sees its retail sales plummet as emerging markets are witnessing much exits of capital.
(zero hedge)
10 the decision by the European Court of Justice approving the ECB’s OMT will put the ECB on a collision course with the Bundesbank
(zero hedge)

we have these plus other stories to bring your way tonight. But first……..

let us now head over to the comex and assess trading over there today.

Here are today’s comex results:

The total gold comex open interest fell by 277 contracts from 407,147 up to 406,870 as gold was up $6.50 on Monday (at the comex close).  We are now in the big active delivery contract month of June.  Here the OI fell by 9 contracts down to 643. We had 1 notice served upon yesterday.  Thus we lost 8 contracts or an additional 800 oz will not stand for delivery.  No doubt, again, we had this contract number of cash settlements (8) and the farce continues.  The next contract month is July and here the OI fell by 56 contracts down to 626.  The next big delivery month after June will be August and here the OI fell by 782 contracts  to 266,551.  No doubt that the cash settled June contracts, having been bought out for fiat, rolled into August. The estimated volume today (which is just comex sales during regular business hours of 8:20 until 1:30 pm est) was poor at 54,343. The confirmed volume yesterday (which includes the volume during regular business hours + access market sales the previous day) was poor at 133,980 contracts. Today we had 17 notices filed for 1700 oz.

And now for the wild silver comex results.  Silver OI fell by 3,557  contracts from 192,527 down to 188970 despite the fact that the price of silver was up 28 cents, with respect to Monday’s trading. We must have had some bank short covering.  The front non active  delivery month of June saw it’s OI fall by 0 contracts and remaining at 27. We had 0 contracts delivered upon yesterday.  Thus we neither gained nor lost any silver contracts that will stand for delivery in this non active June contract month.The next delivery month is July and here the OI surprisingly fell by 7740 contracts down to 83,588. We have only two weeks left to go before first day notice. The estimated volume today was poor at 21,081 contracts (just comex sales during regular business hours. The confirmed volume on day (regular plus access market) came in at 62,780 contracts which is very good in volume. We had 0 notices filed for nil oz today.

June initial standing

June 16.2015

Gold

Ounces

Withdrawals from Dealers Inventory in oz    nil
Withdrawals from Customer Inventory in oz 154,929.676 oz (Scotia,Manfra)
Deposits to the Dealer Inventory in oz nil
Deposits to the Customer Inventory, in oz nil
No of oz served (contracts) today 17 contracts (1700 oz)
No of oz to be served (notices) 626 contracts (62,600 oz)
Total monthly oz gold served (contracts) so far this month 2649 contracts(264,900 oz)
Total accumulative withdrawals  of gold from the Dealers inventory this month nil
Total accumulative withdrawal of gold from the Customer inventory this month  353,066.0  oz

Today, we had 0 dealer transaction

total Dealer withdrawals: nil oz

we had 0 dealer deposit

total dealer deposit: nil oz
we had 2 customer withdrawals

i) Out of Scotia: 154,833.226 oz

ii) Out of Manfra: 96.45 (3 kilobars)

total customer withdrawal: 154,929.676 oz

We had 1 customer deposits:

i) Into Brinks: 100.02 oz

Total customer deposit: 100.02 oz

We had 1  adjustment:

i) Out of Scotia: 200.735 oz was adjusted out of the customer and this landed into the dealer account of Scotia

Today, 0 notices was issued from JPMorgan dealer account and 10 notices were issued from their client or customer account. The total of all issuance by all participants equates to 17 contracts of which 0 notices were stopped (received) by JPMorgan dealer and 7 notices were stopped (received) by JPMorgan customer account

To calculate the total number of gold ounces standing for the June contract month, we take the total number of notices filed so far for the month (2649) x 100 oz  or 264,900 oz , to which we add the difference between the open interest for the front month of June (643) and the number of notices served upon today (17) x 100 oz equals the number of ounces standing.

Thus the initial standings for gold for the June contract month:

No of notices served so far (2649) x 100 oz  or ounces + {OI for the front month (643) – the number of  notices served upon today (17) x 100 oz which equals 327,500 oz standing so far in this month of June (10.18 tonnes of gold).  Thus we have 10.18 tonnes of gold standing and only 17.07 tonnes of registered or for sale gold is available:

Total dealer inventory 548,844.869 or 17.07 tonnes

Total gold inventory (dealer and customer) = 7,854,155.851 (244.29 tonnes)

Several months ago the comex had 303 tonnes of total gold. Today the total inventory rests at 244.29 tonnes for a loss of 59 tonnes over that period.

 

end

 

And now for silver

June silver initial standings

June 16 2015:

Silver

Ounces

Withdrawals from Dealers Inventory nil
Withdrawals from Customer Inventory 660,730.800 oz (Scotia)
Deposits to the Dealer Inventory  nil
Deposits to the Customer Inventory  599,614.220 oz (CNT)
No of oz served (contracts) 0 contracts  (nil oz)
No of oz to be served (notices) 27 contracts(135,000 oz)
Total monthly oz silver served (contracts) 222 contracts (11,010,000 oz)
Total accumulative withdrawal of silver from the Dealers inventory this month 526,732.4  oz
Total accumulative withdrawal  of silver from the Customer inventory this month 5,068,602.6 oz

Today, we had 0 deposits into the dealer account:

total dealer deposit: nil   oz

we had 0 dealer withdrawals:

total dealer withdrawal: nil oz

 

We had 1 customer deposits:

i) Into CNT:  599,614.220 oz

 

total customer deposit: 599,614.220  oz

 

We had 1 customer withdrawals:

i) Out of Scotia: 660,730.800 oz

 

total withdrawals from customer; 600,730.800 oz

 

we had 0 adjustment

Total dealer inventory: 57.845 million oz

Total of all silver inventory (dealer and customer) 180.176 million oz

The total number of notices filed today is represented by 0 contracts for nil oz. To calculate the number of silver ounces that will stand for delivery in June, we take the total number of notices filed for the month so far at (222) x 5,000 oz  = 11,100,000 oz to which we add the difference between the open interest for the front month of June (27) and the number of notices served upon today (0) x 5000 oz equals the number of ounces standing.

Thus the initial standings for silver for the June contract month:

222 (notices served so far) + { OI for front month of June (27) -number of notices served upon today (0} x 5000 oz ,= 11,235,000 oz of silver standing for the June contract month.

we neither gained nor lost any silver ounces standing for this no active  delivery month of June.

for those wishing to see the rest of data today see:

http://www.harveyorgan.wordpress.com orhttp://www.harveyorganblog.com

end

The two ETF’s that I follow are the GLD and SLV. You must be very careful in trading these vehicles as these funds do not have any beneficial gold or silver behind them. They probably have only paper claims and when the dust settles, on a collapse, there will be countless class action lawsuits trying to recover your lost investment.

There is now evidence that the GLD and SLV are paper settling on the comex.

***I do not think that the GLD will head to zero as we still have some GLD shareholders who think that gold is the right vehicle to be in even though they do not understand the difference between paper gold and physical gold. I can visualize demand coming to the buyers side:

i) demand from paper gold shareholders

ii) demand from the bankers who then redeem for gold to send this gold onto China

vs no sellers of GLD paper.

And now the Gold inventory at the GLD:

June 16./no change in gold inventory/Rests tonight at 701.90 tonnes.

June 15/we lost a huge 2.08 tonnes of gold from the GLD/Inventor rests tonight at 701.90 tonnes

June 12/we had a small withdrawal of .24 tonnes of gold from the GLD/Inventory rests this weekend at 703.98 tonnes.

June 11/we had another huge withdrawal of 1.5 tonnes of gold from the GLD/Inventory rests tonight at 704.22 tonnes

June 10/ we had a huge withdrawal of 2.98 tonnes of gold from the GLD/inventory rests at 705.72

June 9/ no change in gold inventory at the GLD/Inventory rests at 708.70 tonnes

June 8/ a big withdrawal of 1.19 tonnes of gold from the GLD/Inventory rests at 708.70 tonnes

 

 

June 16 GLD : 701.90  tonnes.

end

And now for silver (SLV) Please note the difference between GLD and SLV.  GLD has been depleting of gold/SLV has been adding to its inventory.

June 16./no change in silver inventory/327.874 million oz

June 15/we had no change in silver inventory/327.874 million oz

June 12/we had another addition to the tune of 956,000 oz/Inventory rests this weekend at 327.874.  Please note that there has been an addition on each of the past 5 days.

June 11.2015: we had another monster of an addition to the tune of 2.791 million oz/Inventory rests at 326.918

June 10/another monster of an addition to the tune of 1.126 million oz/Inventory rests at 324.127

June 9/ a monster of an addition to the tune of 3.393 million oz/inventory rests at 323.001 million oz.

June 8/no change in inventory/SLV inventory rests at 319.608 milion oz.

June 5 a huge addition of 1.433 million oz of silver added to the SLV/Inventory at 319.608 million oz

 

June 16/2015: no change in silver inventory/SLV inventory rests tonight at 327.874 million oz

 

end

 

 

And now for our premiums to NAV for the funds I follow:

Sprott and Central Fund of Canada.
(both of these funds have 100% physical metal behind them and unencumbered and I can vouch for that)

1. Central Fund of Canada: traded at Negative 8.0% percent to NAV in usa funds and Negative 8.1% to NAV for Cdn funds!!!!!!!

Percentage of fund in gold 61.6%

Percentage of fund in silver:38.1%

cash .3%

( June 16/2015)

2. Sprott silver fund (PSLV): Premium to NAV falls to +.24%!!!!! NAV (June 16/2015)

3. Sprott gold fund (PHYS): premium to NAV rises to – .33% to NAV(June 16/2015

Note: Sprott silver trust back  into positive territory at +.24%.

Sprott physical gold trust is back into negative territory at -.33%

Central fund of Canada’s is still in jail.

Sprott formally launches its offer for Central Trust gold and Silver Bullion trust:

SII.CN Sprott formally launches previously announced offers to Central GoldTrust (GTU.UT.CN) and Silver Bullion Trust (SBT.UT.CN) unitholders (C$2.64)
Sprott Asset Management has formally commenced its offers to acquire all of the outstanding units of Central GoldTrust and Silver Bullion Trust, respectively, on a NAV to NAV exchange basis.
Note company announced its intent to make the offer on 23-Apr-15 Based on the NAV per unit of Sprott Physical Gold Trust $9.98 and Central GoldTrust $44.36 on 22-May, a unitholder would receive 4.45 Sprott Physical Gold Trust units for each Central GoldTrust unit tendered in the Offer.
Based on the NAV per unit of Sprott Physical Silver Trust $6.66 and Silver Bullion Trust $10.00 on 22-May, a unitholder would receive 1.50 Sprott Physical Silver Trust units for each Silver Bullion Trust unit tendered in the Offer.
* * * * *

end

Early morning trading from Asia and Europe last night:

Gold and silver trading from Europe overnight/and important physical

stories

 

(courtesy Mark O’Byrne/ Steve Flood/Goldcore)

 

Gold Bullion Worth $1 Billion To Be “Repatriated” From NY Fed To New Texas Bullion Depository

– Texas creates state gold depository – bringing gold home from New York Fed
– Move to remove gold from Federal Reserve highlights distrust
– Follows repatriation moves by Germany, Netherlands, Austria and others
– Legislation will prevent Federal government from confiscating gold
– Includes provisions that may lead to return to using gold as currency in the U.S.
– New gold electronic payments system protect fromnational financial or currency crisis
– European, UK and Irish governments could learn from prudent monetary move

The state of Texas has just passed legislation to build its own gold bullion depository, to repatriate $1 billion dollars worth of gold currently stored by the Federal Reserve in New York and to create a new gold electronic payments system to protect from “national financial or currency crisis”.

New York Federal Reserve Employees Auditing Gold?

The move is being widely perceived as a vote of no confidence in the privately owned, bank owned central bank and the federal government.

Governor Abbott said that establishing this Depository means Texas will be, “increasing the security and stability of our gold reserves and keeping taxpayer funds from leaving Texas to pay for frees to store gold in facilities outside our state.” (seeGovernor Abbott Signs Legislation To Establish State Bullion Depository )

The law will go into effect immediately and the new Texas Bullion Depository – soon to be  built- will cater to businesses, state agencies and citizens.

Representative Giovanni Capriglione who introduced the bill was reported by the Star-Telegram as saying:

“People have this image of Texas as big and powerful … so for a lot of people, this is exactly where they would want to go with their gold,” leading some commentators to puzzle over whether New York was not “big and powerful”.

Heretofore, it has been Venezuela and European countries that have been repatriating gold – Germany, the Netherlands and Austria have sought to bring their sovereign gold home from New York amid fears that the Fed – whose gold stocks have not been publicly audited since 1953 – may not be in possession of the gold it claims to hold.

It is highly significant therefore that a powerful state from within the U.S., such as Texas, should display such apparent distrust of the Federal Reserve.

Two of Texas’ largest public pension funds from the University of Texas (UoT) and the Teacher Retirement System (TRS) showed similar concerns in 2011 when they took delivery of $1 billion worth of gold bars out of storage with HSBC in New York.

The asset had been held in an ETF but the pension funds were apparently uneasy about not actually owning the physical gold. ETFs track the price of gold and ETF speculators or investors are merely creditors of the ETF and therefore, are very vulnerable to counter-party risk and exposure to the many banks, who are custodians and indeed sub custodians.

The legislation even seeks to protect the state’s gold from confiscation by the Federal government. Section A2116.023 of the bill states: “A purported confiscation, requisition, seizure, or other attempt to control the ownership … is void ab initio and of no force or effect.”

Under the Tenth Amendment the rights of the state trumps any order from the federal government.

Also significant is a provision which may lead to a return to sound money as proposed by Article 1, section 10 the constitution, i.e. gold and silver. In one section the bill states: “depository account holder may transfer any portion of the balance of the holder’s depository account by check, draft, or digital electronic instruction to another depository account holder or [to a person who at the time the transfer is initiated is not a depository account holder.]” [underline]

The man who initially drafted this legislation is Rick Cunningham of the Texas Center for Economics, Law, and Policy.  Mr. Cunningham is respected and is the Executive Director of the Center, but he is also a magna cum laude graduate of Texas A&M with a degree in Economics, as well as a graduate of the University of Chicago Law School, where he served as associate editor of the Law Review journal.

According to Mr. Cunningham

“this proposal consists of two parts – the “depository” part and the “system” part.  The “depository” part … provides simply for hedging the state’s investment risk by allocating a recommended portion of state and local investment assets to physical gold and other precious metals, and housing those metals in a state-operated facility…”

“But the truly game-changing aspect of this proposal … lies in the “system” part.  This would be an advanced, state-owned and operated system of electronic payments and settlements, denominated in ounces of precious metals, barred from engaging in lending, leasing, speculative or derivative transactions, and always maintaining a 100% ratio of bullion reserves to account balances.  At full scale, not only could it sustain state and local government operations, it could potentially sustain large swaths of the Texas economy, even in the face of a national financial or currency crisis.

If gold and silver were to become widely circulating currencies in Texas, the Federal Reserve issued and continuously devaluing dollar may slowly fall out of favour. Not maintaining a currency monopoly could ultimately lead to a return to using gold and silver as currency in the U.S.

In the coming months and years it is likely that the Federal Reserve and the Federal government of the U.S. will come under increasing pressure from Russia and China to back the dollar with something of intrinsic value rather than simply increasingly empty promises.

goldcore_chart2_16-06-15

If either of those two countries chose to back their currencies with gold bullion, of which they have been accumulating vast volumes in recent years, the U.S. would be forced to follow suit in order to prevent sharp falls in the value of the dollar and in an attempt to preserve reserve currency status.

Now, it would seem, the Federal Reserve note – the dollar bill as issued by a private central bank in defiance of the Constitution – may face pressure from within the U.S. as ‘Lone Star’ state Texas begins to bring gold back into the monetary system.

The days of paper and electronic currencies – backed by little more than faith in governments that the public increasingly do not trust – are numbered. Texas is preparing for this as are European nations such as Germany, Austria and the Netherlands.

Preserve your wealth by acquiring an allocation to history’s only enduring money – gold.

Must Read Guide:7 Key Gold Must Haves


MARKET UPDATE

Today’s AM LBMA Gold Price was USD 1,182.10, EUR 1,050.06 and GBP 759.36 per ounce.
Yesterday’s AM LBMA Gold Price was USD 1,178.25, EUR 1,049.57  and GBP 760.01 per ounce.

Gold climbed $5.20 or 0.44 percent yesterday to $1,186.20 an ounce. Silver rose $0.17 or 1.07 percent to $16.11 an ounce.

Gold in USD - 1 Week

Gold in Singapore for immediate delivery was marginally lower at $1,185.6 an ounce towards the end of the day,  while bullion in Switzerland fell a dollar.

Gold inched down this morning but stayed in lock down in a very narrow range. The yellow metal looks well supported at these levels with safe haven bids increasing due to the unresolved Greek debt crises as the time runs out before the deadline at the end of the month.

Some investors wait for more guidance from the U.S. Federal Reserve during its meeting that begins today. Fed Chair Jane Yellen’s comments and wording of the Fed policy statement tomorrow will be closely watched.

U.S. economic data is still weak.  Yesterday’s data from industrial production was poor underlining concerns about the U.S. economy.

The Bank of China has joined the ICE Benchmark Administration (IBA) gold price benchmarking process.  This increases the number of participants to eight including – JPMorgan Chase Bank, Scotiabank, HSBC, Société Générale, UBS, Barclays and Goldman Sachs in the LBMA Gold Price, which formally replaced the London Gold Fix this spring.

In late morning European trading gold is down 0.16 percent at $1,184.87 an ounce. Silver is off 0.38 percent at $16.01 an ounce and platinum is also down 0.15 percent at $1,086.56 an ounce.

Breaking News and Research Here

Stephen Flood
Chief Executive Officer

I am the CEO of GoldCore. We help investors buy and store gold and silver easily and cost effectively. We work with clients of every variety from wealth family offices to everyday people. We provide the very best market data and client service and we care deeply for our clients interests.

end

An interesting commentary from Saxobank’s Steen Jakobsen who believes that gold will be the best perfomring commodity come the fall:

(courtesy Saxobank/Steen Jakobsen/GATA)

 

Saxobank CIO: Credit Cycle Has Peaked, Gold Will Be Best-Performing Commodity

Submitted by Saxobank CIO Steen Jakobsen via TradingFloor.com,

  • Forget the 1930s. Inflation is different this time.
  • Real rates are finally coming off in the US
  • More and more pundits see inflation ticking higher
  • A summer of European growth – and hell afterwards
  • ECB’s balance sheet as % of GDP little changed despite QE
  • The credit cycle has clearly peaked

PAris

It’ll be a sweet summer but a hellish autumn in Europe. Photo: iStock

The overall position:

Our major allocation shift is working on fixed income, but commodities and gold still need the all clear regarding a Fed hike….
Here’s a reminder of the main points of my major strategy change as detailed in an article on May 18:
 The headlines for the next 6-7 months say:
  • US, German and EU core government bonds will be 100 bps higher by and in Q4 before making its final new low in H1 2016. US 10-year yield will trade above 3.0% and bunds above 1.25%
  • Energy: WTI crude will hit US $70-80/barrel, setting up excellent energy returns.
  • US dollar will weaken to EUR1.18/1.20 before retest of lows and then start multi-year weakness.
  • Gold will be the best performer in commodity-led rally. We see 1425/35 by year-end.
 We need to stop talking about deflation and using 1930s comparison about a Fed hike:

Average annual imflation

 Source. InflationData.com
Real rates are finally coming off in the US: Positive Gold and negative US$?

US real rates

Wow – inflation expectations are rising and rising fast….

breakeven rates

European “cost advantage” is disappearing fast and furiously – enjoy the summer of growth – afterwards, you can expect: zero growth, zero reform and higher inflation “expectations”…..

Euro Growth

Excuse me? Didn’t the European Central Bank start quantitative easing. In a world of madness it’s hard even to see change in the ECB balance sheet. Japan is just not real, indeed, nothing is!

Central Banks balance sheets

This is a poorly constructed chart… but clearly… thecredit cycle has peaked……

US High Yield

LQD US

 Source: Bloomberg
Compare this to the commodity cycle:

Commodity cycle

 Source: Bloomberg
And, just to remind you… when the Fed hikes it’s a margin call. There is no basis in the bank’s mandate to do so, but  its need to normalise policy will have data support over the summer as the CESI (Citigroup Economic Surprise Index) will mean revert.

FEd hike expectations

 Source: Bloomberg
end
This is huge as China now wants a bigger role in the pricing of gold.
(courtesy Eddie Van der Walt/Bloomberg/GATA)

Bank of China joins auction setting gold prices in London

Section:

By Eddie van der Walt
Bloomberg News
Tuesday, June 16, 2015

Bank of China Ltd. will become the first Chinese bank to join the auction process that sets gold prices in the London market.

The bank, along with seven other lenders, will start participating in the twice-daily electronic auction, according to a statement from the London Bullion Market Association on Tuesday. While China is the world’s largest bullion buyer, it has never directly played a role in determining London gold prices.

The addition of a Chinese bank is another sign that China is increasing its influence in gold and currency markets worldwide as the country seeks to make the yuan a viable competitor to the dollar. The Bank of China’s part in the gold auction shows the nation is stepping into the global market, the lender wrote in a press release today. …

… For the remainder of the report:

http://www.bloomberg.com/news/articles/2015-06-16/bank-of-china-to-parti..

 

end
This will be great for miners and for the environment:
(courtesy GATA)

Australian researchers producing cyanide-free gold with Barrick in Nevada

Section:

Eureka! A Solid-Gold Solution to Make Archimedes Proud

By Roger Nicoll
Commonwealth Scientific and Industrial Research Organization
Canberra, Australia
Tuesday, June 16, 2015

“Eureka!” cried the ancient Greek scholar Archimedes as he (allegedly) ran naked through the streets of Syracuse. He’d just discovered a method to prove the purity of gold by measuring its density, and was decidedly proud of his finding.

Thankfully, these days we favor blog posts to running naked through the streets when we make important new discoveries… but it doesn’t mean we can’t still give a good shout:

“Eureka! We’ve found a way to produce cyanide-free gold!”

We’ve been working with an American company, Barrick, at their Goldstrike plant in Nevada to produce the first gold bar that doesn’t involve cyanide extraction. Cyanide is, of course, highly toxic and an environmental hazard. The new process we’re so excited about uses a chemical called thioshulphate, which will greatly reduce the environmental risks and costs associated with gold production.

Thiosulphate has long been seen as a potential alternative to cyanide for liberating gold from ores, but it has proved difficult to master — until now. Thanks to the new process, which incorporates patented technology we’ve developed with Barrick, the company will be able to process and profit from 4 million tonnes of stockpiled ore that was uneconomic to process by traditional methods. …

… For the remainder of the report:

http://csironewsblog.com/2015/06/16/eureka-a-solid-gold-solution-to-make.

end

A must read…James Turk is one smart cookie and he believes (as do I) that Greece has a much stronger position than the creditors:

(courtesy James Turk/Kingworldnews/Eric King/GATA)

Greece has stronger position than its creditors, Turk tells KWN

Section:

8:13p ET Monday, June 15, 2015

Dear Friend of GATA and Gold:

Greece has the stronger position in its confrontation with the European Union, the European Central Bank, and the International Monetary Fund over its unpayable debt, GoldMoney founder and GATA consultant James Turk tells King World News today.

“The Athens government has asked all cities and other governmental bodies to move their available cash into accounts at the central bank,” Turk says, “This is being reported in the mainstream media as a way for the central government to get its hands on more cash, but that is not correct. It is to prevent the European Central Bank from taking this cash of governmental bodies when the ECB finally bails in the private Greek banks.”

Turk’s interview is excerpt at the KWN blog here:

http://kingworldnews.com/turbulence-in-major-markets-to-be-sparked-by-gr…

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

 

end

Koos comments on demand for the past week: 32 tonnes.  He comments on rectification of Chinese gold trading rules
(courtesy Koos Jansen)
Posted on 15 Jun 2015 by

Rectification Chinese Gold Trading Rules

I’ve found more detailed rules on the workings of the Chinese gold market regarding, (i) the use of onshore renminbi for contracts traded on the Shanghai International Gold Exchange (SGEI), (ii) gold sales of Chinese domestic gold mines. Previously I’ve written posts on these subjects that contained inaccurate information that I would like to correct. (My previous posts are already corrected.)

First, let’s have a quick look at the latest Shanghai Gold Exchange (SGE) withdrawal numbers. In week 22 (June 1 – 5) withdrawals came down 12 % from the week before at 32 metric tonnes. Year to date 1,015 tonnes have been withdrawn. The current downtrend is completely normal as seasonally the summer months are quiet in the Chinese gold market, as opposed to the months around new year.

Shanghai Gold Exchange SGE withdrawals delivery 2015 week 22

SGE Customers Can Use Onshore Renminbi For SGEI Contracts

Chinese citizens in the mainland that have an SGE account are allowed to use onshore renminbi to buy physical gold contracts on the Shanghai International Gold Exchange (also referred to as the International Board or SGEI).On May 30, 2015, I published a post on the current status of trading rules at the SGEI regarding the use of onshore renminbi by domestic traders. From a source at the SGE I was told domestic SGE members (banks, refineries, etc) can trade SGEI contracts using onshore renminbi, but domestic SGE customers (citizens, corporations) cannot. Afterwards I came in contact with an employee of the SGEI who told me this is incorrect, in reality both SGE members and SGE customers can use onshore renminbi to trade International Board contracts. I checked with a source at ICBC and he confirmed SGE customers can use onshore renminbi to trade SGEI contracts.

Related posts on this complicated subject are the ‘Chinese gold market essentials’ posts, The Mechanics Of The Chinese Domestic Gold Market, Chinese Gold Trade Rules And Financing Deals Explained and Workings Of The Shanghai International Gold Exchange | Part One.

Important to understand is that if SGE customers buy SGEI contracts they own gold stored in the Shanghai Free Trade Zone (offshore), but they’re not allowed to withdraw this gold and/or transport. Likewise if SGEI members purchase SGE contracts (in the mainland) they’re not allowed to withdrawal and/or transport.

This is the corrected segment from my post May 30, 2015:

Since September 2014 international traders can use offshore renminbi to trade all contracts on the International Board and most contracts on the Main Board (they can only withdraw gold from International Board contracts stored in the Shanghai FTZ). Domestic traders can trade all Main Board contracts and International Board contracts. Although, only a few Chinese banks – to my knowledge ICBC and China Industrial Bank – offer domestic clients SGEI brokerage to use onshore renminbi to trade International Board contracts.

Have a look at the next table for an overview. Kindly note, delivery is not the same as withdrawals (/load-out).

Screen Shot 2015-04-11 at 7.31.56 PM

In my previous post I quoted Wang Lixing (also known as Roland Wang, Managing Director China for the World Gold Council) saying:

China’s domestic investors still cannot conveniently participate in trading on the International Board. Key reason is control on foreign exchange, which the International Board requires the use of the offshore renminbi.

Now I know SGE customers can also use onshore renminbi on the International Board I disagree with Wang even more.

chinese_symbols_for_mea_culpa_7672_2_64
Chinese symbols for acknowledge a mistake, admit a fault, offer an apology, make an apology.

Not All Chinese Domestic Mining Ouput Is Required To Be Sold Through The SGE

A few years ago I’ve written, “all output from Chinese mines is required to be sold though the SGE”, based on the rule:

All PRC [People’s Republic of China] gold producers are … required to sell their standard gold bullion through the Shanghai Gold Exchange…

Later I found out what standard gold bullion encompasses in the Chinese gold market; gold bars of 50g, 100g, 1Kg, 3Kg or 12.5Kg, with a purity of Au9999, Au9995, Au999 or Au995. Meaning, not all output from Chinese mines is required to be sold through the SGE, only when doré/ore is refined into standard gold bullion it’s required to be sold through the SGE.

In my opinion this rectification is not a game changer. Because the SGE has the best liquidity in the Chinese domestic gold market miners want to sell through the SGE, so they mostly cast standard gold bars to sell.

Mining output and scrap supply can be refined into standard gold bullion or non-standard god bullion, if standard gold is traded over the SGE or SHFE it’s exempt from VAT. Standard gold traded off-SGE is not exempt from VAT. Non-standard gold (for example jewelry) traded off-SGE is exempt from VAT (if there is value added, the value added would enjoy VAT), but many buyers and sellers like to trade standard gold bullion over the SGE for the liquidity and because this gold is granted of the highest quality.

Imported gold can be standard gold bullion or non-standard gold bullion (like doré). Imported standard gold is required to be sold though the SGE. I’m not sure at this stage what the rules are for imported doré/ore, though I know much of it is refined into standard gold and sold through the SGE. (It’s likely the rules for imported gold are the same for domestically mined gold.)

In short, there are many incentives that drive supply in the Chinese domestic gold market to be sold through the SGE. Hence, SGE withdrawals (the demand side) is such significant data.

The author of this post would like to have lunch some time with the architect of the Chinese domestic gold market, but doesn’t yet know who this person(s) is.    

Koos Jansen
E-mail Koos Jansen on: koos.jansen@bullionstar.com

 

end

 

And now overnight trading in stocks and currency in Europe and Asia

 

1 Chinese yuan vs USA dollar/yuan strengthens to 6.2084/Shanghai bourse red and Hang Sang: red

2 Nikkei closed by 129.85  points or 0.64%

3. Europe stocks all in the red/USA dollar index up to 94.94/Euro falls to 1.1261

3b Japan 10 year bond yield: slightly falls  .50% !!!!(Japan buying 100% of bond issuance)/Japanese yen vs usa cross now at 123.48/very ominous to see the Japanese bond yield rise so fast!!

3c Nikkei still just above 20,000

3d USA/Yen rate now well above the 123 barrier this morning

3e WTI 59.82 and Brent:  63.93

3f Gold down/Yen down

3gJapan is to buy the equivalent of 108 billion uSA dollars worth of bond per month or $1.3 trillion. Japan’s GDP equals 5 trillion usa.

Japan to buy 100% of all new Japanese debt and by 2018 they will have 25% of all Japanese debt. Fifty percent of Japanese budget financed with debt.

3h Oil up for WTI and up for Brent this morning

3i European bond buying continues to push yields lower on all fronts in the EMU. German 10 yr bund rises to .81 per cent. German bunds in negative yields from 3 years out.

Except Greece which sees its 2 year rate jump big time  to 29.89%/Greek stocks down another  3.22%/ still expect continual bank runs on Greek banks /Greek default inevitable/

3j Greek 10 year bond yield rise to to: 12.38%

3k Gold at 1184. dollars/silver $16.03

3l USA vs Russian rouble; (Russian rouble up 7/10 in  roubles/dollar in value) 54.21,

3m oil into the 59 dollar handle for WTI and 63 handle for Brent/Saudi Arabia increases production to drive out competition.

3n Higher foreign deposits out of China sees huge risk of outflows and a currency depreciation. This can spell financial disaster for the rest of the world/China may be forced to do QE!!

30 SNB (Swiss National Bank) still intervening again in the markets driving down the SF. It is not working: USA/SF this morning .9313 as the Swiss Franc is still rising against most currencies. Euro vs SF is 1.0475 just below the floor set by the Swiss Finance Minister.

3p Britain’s serious fraud squad investigating the Bank of England/

3r the 3 year German bund remains in negative territory with the 10 year moving closer t0  negativity at +0.811

3s Eight weeks ago, the ECB increased the ELA to Greece by another large 2.0 billion euros.Six weeks ago, they raised it another 1.1 billion and then two weeks ago they raised it another tiny 200 million euros to a maximum of 80.2 billion euros. Two weeks ago, the limit was not raised. Last week, the ECB raised the ELA by 1/2 billion euros to 80.7 billion euros. On Thursday, it was raised by a huge 2.3 billion euros to 83.0 billion.The ELA is used to replace depositors fleeing the Greek banking system. The bank runs are increasing exponentially.This week the ECB is contemplating cutting off the ELA which would be a death sentence to Greece and they are as well considering a 50% haircut to all Greek sovereign collateral which will totally wipe out the entire Gr. banking and financial sector.

3t Greece  paid the 700 million plus payment to the IMF last Wednesday but with IMF reserve funds.  The funds are deferred to June 30.

3 u. If the ECB cuts off Greece’s ELA they would have very little money left to function. So far, they have decided not to cut the ELA but this weekend is the likely time to do it.

4. USA 10 year treasury bond at 2.32% early this morning. Thirty year rate well above 3% at 3.05% / yield curve flatten/foreshadowing recession.

5. Details Ransquawk, Bloomberg, Deutsche bank/Jim Reid.

 

(courtesy Jim Reid/Bloomberg/Deutsche bank/zero hedge)

Global Risk Off From China To Europe To US, As Greek Impasse Hits Markets

Another day of constant Grexit chatter, and this time the futures are really starting to react as what was seen as mostly impossible for the past 4 months is now considered virtually inevitable (even if as both UBS and MS say, very little if any of the upcoming contagion and volatility has been priced in).

The first tremors emerged when Greece announced it would not present a new proposal to the Eurogroup to unlock aid, relying instead on what has already been submitted and which the Troika said was inadequate. Then, confusing matters, a new GPO poll posted on Greece’s Mega TV showed that increasingly more, or over 56% at last count, of Greece would prefer a “bad” deal with creditors than being kicked out of the Eurozone putting the future of Tsipras’ cabine tin jeopardy. And then, hinting that the endgame is officially here, the FT reported that “Eurozone officials discuss holding emergency summit on Greece“, suggesting a second Lehman weekend may be just around the corner.

As a result European equities slipped to a four-month low on Tuesday, with the lack of progress in debt negotiations between Greece and its international creditors making investors nervous and prompting them to cut their exposure to riskier assets like stocks. Greece’s benchmark ATG share index fell 3.9 percent, taking total losses since Friday to about 14 percent, as Greece and its creditors hardened their stances on Monday after talks aimed at preventing a default and possible euro exit faltered.

Quoted by Reuters, Laith Khalaf, senior analyst at Hargreaves Lansdown, said that “the can of Greek debt has been kicked down the road so many times there comes a point when it has to be confronted, and it looks like that time may well be in the next week or so. A Greek exit from the euro zone is looking ever more likely, and seeing as no-one knows what the full implications will be, investors are taking some risk off the table which has caused the market turbulence we have seen in recent days.

The weight of the collapse of the Eurozone is starting to weigh German investor confidence slid to 31.5 in June, far below the 37.3 expected and the lowest level in six months, from 41.0 in May. It is also weighing on peripheral bond prices, with the Spanish 10Y yield rising above 2.50% earlier while both French and Belgian spreads to Bunds surged above 50 bps for the first time this year; even AAA-rated Netherlands and Finland are suffering.

Not helping matters was the announcement by the pro-ECB European Court of Justice which rejected the German Constitutional Court’s finding that the OMT is illegal, and said Draghi’s improvised Outright Monetary Transactions which nobody still has any idea what they are, is legal (although safeguards must be built in to ensure any such programme did not break rules that prohibit central banks from financing governments, unlike the ECB’s QE) and asReuters concludes, the “pro-ECB line of EU judges on Tuesday could set the European and German courts on a collision course.” Because what the suddenly flailing European experiment needs right now is a fight with its anchor participant.

It wasn’t just Greece: overnight China’s stocks fell again, capping the benchmark index’s biggest two-day loss this month, on concern valuations are outstripping earnings growth and a flood of share sales will lure funds from existing equities. And outstripping they are because looking at average or median multiples, Chinese shares are almost twice as expensive as they were when the Shanghai Composite peaked in October 2007 and more than three times pricier than any of the world’s top 10 markets. If the Chinese equity bubble has burst, a bubble which has added $6 trillion in market cap to the value of Chinese stocks in just the past year pushing them over $10 trillion or the same as China’s GDP, then watch out below.

And just to add to the volatility, today the June FOMC meeting begins. While a rate hike announcement tomorrow is not expected (as the Hilsenrath mouthpiece would be screaming bloody murder), it is not off the table, and expect even more risk off sentiment to come as a result.

Looking at capital markets in detail, we start with Asian equities which  mostly fell led by the Shanghai Comp (-3.5%) which trade broke below 5,000 for much of the session, amid worries of a liquidity squeeze. This comes ahead of this week’s 25 IPOs which is said to lock-up as much as CNY 5.7trl worth of liquidity. KOSPI (-0.6 %) saw sharp losses weighed on by on-going MERS outbreak, after the South Korean Health Ministry confirmed 4 additional cases, bringing the total to 154. Elsewhere, the Nikkei 225 (-0.8%) traded in negative territory, after failing to capitalise on JPY weakness.

The sentiment remained a by-product of Greek related headlines, with the latest reports suggesting that Eurozone countries have agreed a contingency plan for Greece and are set to implement capital controls as soon as this weekend. Fears of contagion are clearly visible, with the gap in yields between German and other EU states widening and FR/GE 10y spread almost doubling in the last three trading days. As a result, Bunds (+84 ticks) remained supported, also benefiting from negative NCR in May/June/July, as well as ECJ’s decision in favour of the ECB’s OMT program. Also, to add fuel to the fire, German CDU whip stated that a Grexit is possible if no deal can be agreed, while Greek press reported that negotiations will take place today between Greece and Euro Working Group at 1900 local time. Separately, European stocks (Eurostoxx50 -0.9%) remained on the back foot from the get-go and while all major sectors traded in the red, healthcare outperformed given its defensive appeal in risk-averse conditions.

In FX, the initial surge higher in EUR/USD on touted short-covering and after stops were taken out above 1.1300 level, was gradually reversed and the pair now trades in the red. Of note there is a large 1.1200 option expiry set for 10am NY cut. GBP/USD also seen lower, as the release of an inline CPI headline reading UK CPI (May) Y/Y 0.1% vs Exp. 0.1% was overshadowed by lower RPI and the ONS House Price data which showed the biggest slowdown since April 2005.

The energy complex has seen more exciting sessions with price action in WTI and Brent limited due to a lack of fundamental news and the USD trading in a relatively tight range. However, comments from NOC’s Sanalla who stated Libya are currently producing 430,000bpd and hoped to reopen the Western pipeline after Ramadan which would send production to 800,000 bpd.

In addition to the start of the FOMC, on the US macro calendar we get Housing Starts and Permits, both of which are expected to decline notably from the April prints.

Bulletin Headline Summary from Bloomberg and RanSquawk

  • The ongoing Greek drama weighs on sentiment as sources report that the EU are considering implementing
    capital controls on Greece
  • The FT writes that Eurozone officials are holding an emergency meeting on Greece on Sunday amid fears that the
    impasse may lead to a possible ‘Grexit’
  • Going forward, attention turns to the housing data out of the US, as well as API Crude Inventories report after the
    closing bell on Wall Street
  • Treasuries gain for second day as Greece rules out presenting new proposals to resolve debt crisis; Fed two-day meeting begins today, with rate decision, updated SEP and Yellen press conference due tomorrow.
  • Greece snubbed European pleas to submit a proposal to avert a looming default as the forces pulling the euro-zone’s seams apart grew ahead of a key meeting this week
  • Europe’s bond selloff is spreading to markets traditionally viewed as safer, with only Germany remaining unscathed by Greece’s impasse with creditors
  • French/German and Belgian/German 10Y spreads both surged above 50bps for first time this year; even bonds of AAA-rated Netherlands and Finland are suffering
  • The specter of insolvency in Greece poses the biggest threat to the legacy of German Chancellor Merkel whose political longevity rests on her crisis-fighting diplomacy
  • German investor confidence slid to 31.5 in June (est. 37.3), lowest level in six months, from 41.0 in May, amid risk of Greek debt default
  • The ECB’s 2012 bond-buying program won the backing of the European Union’s highest court, expanding ECB President Mario Draghi’s crisis-fighting arsenal
  • China’s stocks fell, capping the benchmark index’s biggest two-day loss this month, on concern valuations are outstripping earnings growth and a flood of share sales will lure funds from existing equities
  • Looking at average or median multiples, Chinese shares are almost twice as expensive as they were when the Shanghai Composite peaked in October 2007 and more than three times pricier than any of the world’s top 10 markets
  • Sovereign 10Y bond yields mostly lower. Asian, European stocks slide, U.S. equity-index futures fall. Crude oil mixed, copper and gold lower

 

DB’s Jim Reid completes the overnight event wrap.

 

Will the Greece stand-off be resolved within a week? Well there’s a good chance it won’t be as the divisions still appear wide. This Thursday’s Eurogroup meeting might come and go without agreement. If so that’s probably within a couple of days of being the last chance to enable sufficient time for a staff level agreement to pass through the various domestic and institutional approval frameworks (assuming no Greek referendum needed) so monies could be disbursed in an ‘orthodox’ way to Greece to avoid IMF non-payment on June 30th.

However we still have the Heads of State and Government summit on 25-26th June. If there was an agreement then it’s possible that a fudge or extension could be made to the current program to allow payment at or soon after the month-end deadline. The ECB would have to be onside and perhaps raise the ELA and t-bill cap to free up funds for Greece before a disbursement is made. But this is perhaps only realistic if a staff level agreement has been made by the last few days of the month. So it’s possible this could go deep into June before we know whether the worse case scenario has been realised or averted. A need for a referendum could complicate matters but it’s still feasible that the ECB may buy them time to have one even if a staff level agreement is only reached in late June. So it seems it’s possible that I can go on holiday for a week and for not much to have moved on. We’ll see!! It’s almost impossible to second guess timing and outcome at the moment.

It was another of negative headlines on this ongoing saga again yesterday. German newspaper Suddeutsche Zeitung highlighted that Greece may be asked to impose capital controls this weekend should no deal be reached by then, while also noting that an EU leader summit could be possible for Friday in the case that no deal is agreed at Thursday’s Eurogroup. Greek PM Tsipras continues to remain defiant meanwhile, saying that ‘we will wait patiently for the institutions to adhere to realism’ while Greek spokesman Sakellaridis said that ‘we have largely reached our limits’ and that the country’s Creditors would have to show a willingness to compromise before Greece accepts. On the other side the ECB’s Draghi meanwhile reiterated that the ‘ball lies squarely in the camp of the Greek government to take the necessary steps’ while Bundesbank President Weidmann highlighted that the likelihood of no agreement being reached is only rising.

It was therefore unsurprising to see a sell-off in risk assets yesterday. Having tumbled at the open, Greek equities finished -4.68% on the day, led once again by a fall for the banks (-8.46%). There was similar weakness in Greek bonds yesterday where we saw both the 2y (+311bps) and 10y (+37bps) parts of curve climb to 28.2% and 11.7% respectively. That weakness meant we saw pressure in the peripherals yesterday as 10y bond yields in Italy (+13.8bps), Spain (+16.9bps) and Portugal (+21.1bps) all moved higher for the second consecutive session. Core government bond markets in Europe appeared to benefit from more of a safe haven bid however as we saw 10y Bund yields tick down 1bp to 0.822%, while similar maturity yields in Sweden (-3.6bps) and Switzerland (-2.8bps) also closed tighter. Other European equity markets softened, with the Stoxx 600 (-1.63%), DAX (-1.89%), CAC (-1.75%), IBEX (-1.71%) and FTSE MIB (-2.40%) all tumbling. Having fallen as much as 0.7% intraday, the Euro actually ended the day a tad higher versus the Dollar (+0.15%) at $1.128. There was some significant weakness in credit meanwhile as Crossover in particular ended 16bps wider.

The other big story this week is of course tomorrow’s FOMC conclusion. Yesterday’s mixed US data certainly helped confuse markets leading into the meeting. The positive data-flow yesterday came in the form of the housing market where we saw the NAHB housing market index for June rise 5pts to 59 and above market expectations of a 56 print to tie the post recession high in September last year. The data leading up to this was decidedly weaker however. In particular, the June empire manufacturing print (-1.98 vs. +6.00 expected) and May manufacturing production (-0.2% mom vs. +0.3% expected) readings were disappointing, the former dipping into contractionary territory after a modest rebound in May. Industrial production (-0.2% mom vs. +0.2% expected) also did little to help lift the mood while the April revision saw the print taken down another 20bps to -0.5%. Finally capacity utilization fell 0.2% to 78.1% (vs. 78.3% expected), extending the recent downward trend in the data series. There is more important housing market data today when we get housing starts and building permits data in the final releases before tomorrow’s FOMC. Our US colleagues note that the NAHB index provides a decent leading indicator for housing starts and should therefore point towards a decent uptick for starts versus the April reading.

A combination of a bid for safe haven assets and also the soft manufacturing and industrial production numbers helped support something of a bid for Treasuries yesterday. The benchmark 10y eventually finished 3.6bps lower in yield at 2.357%, although it briefly traded as low as 2.311% before the housing market data. Meanwhile, after a 1% fall at the open, the S&P 500 recovered somewhat over the course of the session, eventually finishing -0.46%. It’s interesting to note that despite all the volatility out of the Greece saga, the S&P 500 hasn’t had a +/- 2% daily swing (based on closing prices) since December 18th last year. By comparison, the DAX has moved by that amount 14 times in the same time period. It was a fairly subdued day for the Dollar meanwhile yesterday, with the Dollar index falling a modest 0.13%. US credit markets also succumbed to the risk off environment as CDX IG ended 2.7bps wider. Elsewhere, oil markets continue to remain weak as WTI (-0.73%) and Brent (-1.07%) both declined for the third consecutive session.

Refreshing our screens this morning, bourses in Asia are largely following the lead from Europe and the US yesterday having retreated in early morning trading. China equity markets are leading the declines, with the Shanghai Comp (-1.34%) and Shenzen (-1.79%) in particular tumbling for the second consecutive day. Elsewhere, the Nikkei (-0.56%), Hang Seng (-0.34%) and Kospi (-0.83%) are also lower in trading this morning. The JPY has been fairly active, falling as much as 0.4% versus the Dollar after BoJ Governor Kuroda said that he hadn’t meant to predict a future nominal exchange rate last week when talking about the Yen’s recent weakness. The Yen has pared some of those moves however and is currently 0.12% down against the Dollar. Elsewhere, US 10y Treasuries are another 1.4bps tighter this morning, while yields in Asia are generally mixed.

Just wrapping up yesterday’s data in Europe, Italian CPI was as expected for the month of May with no revision to the final +0.2% annualized reading. Euro area trade data for April pointed to a slightly higher seasonally adjusted surplus at €24.3bn (vs. €19.0bn expected) from €19.9bn last month. Elsewhere, the ECB’s latest weekly figures from its purchase programme indicated little evidence of any front loading of purchases after €10.7bn of public sector purchases were made last week. The ECB’s Draghi, in addition to his comments on Greece, reiterated that ‘it is our clear intention to purchase public and private assets of €60bn a month until September 2016’ and that ‘we remain prudently confident that all economic and monetary conditions are in place to support a gradual reflation of the euro area economy’.

Looking at today’s calendar now, we’ve got a fairly busy schedule in the European timezone this morning with German CPI due along with the May readings for UK CPI/RPI/PPI. Euro area employment data is also expected while there will be focus on the June German ZEW survey print. Focus in the US this afternoon meanwhile is on the aforementioned housing starts and building permits data while the Greece situation will likely continue to generate plenty of headlines.

 

end

You know that there will be no deal with you hear this from Tsipras “criminal IMF”:

 

Tsipras Slams “Criminal” IMF In Defiant Speech

In the wake of reports that Greece could be headed for a “Lehman Weekend” complete with capital controls and an “emergency” Sunday meeting, the headlines are coming fast and furious on Tuesday morning, with Tsipras calling the IMF’s stance “criminal” and Merkel digging in for the worst.

Merkel and Tsipras play headline hockey…

  • TSIPRAS SAYS OLIGARCHS NOT PENSIONERS SHOULD PAY FOR CRISIS
  • TSIPRAS SAYS ECB INSISTS ON TACTICS THAT STRANGLE GREECE
  • TSIPRAS SAYS CREDITORS’ PROPOSALS LEAD TO DEEPER RECESSION
  • TSIPRAS: IMF HAS `CRIMINAL’ RESPONSIBILITY FOR GREEK SITUATION
  • MERKEL SAYS UNFORTUNATELY NOT MUCH THAT’S NEW ON GREECE
  • TSIPRAS SAYS TIME FOR EUROPE TO CONSIDER FUTURE OF EURO AREA
  • MERKEL SAYS GREECE MUST REACH DEAL WITH CREDITOR INSTITUTIONS
  • MERKEL SAYS CAN’T SAY IF CREDITORS, GREECE WILL AGREE BY THURS

The un-conciliatory tone was met with EUR selling…

end
The big story: expect a Lehman weekend for Greece as there is already a scheduled emergency meeting set for Sunday:
(courtesy zero hedge)

“Lehman Weekend” Looms For Greece As Europe Readies “Emergency” Sunday Meeting

Last week, Greek PM Alexis Tsipras submitted two three-page proposals that were ostensibly designed to close the gap with creditors. EU officials were incredulous, calling the drafts “not serious.”

Tsipras had effectively resubmitted Greece’s previous proposal (i.e. a proposal that did not include concessions on a VAT hike or pension cuts) only this time, he included a second document that outlined how Athens hoped to tap leftover bank recap funds from the EFSF and bailout money from the ESM. Greece took that same proposal to Brussels over the weekend and it didn’t fly there either, leaving Europe to wonder just how far Tsipras was willing to go with the brinksmanship.

The problem is simple and it’s been outlined in these pages extensively. The game of chicken can theoretically go on at the political level for some time. That’s because the bundled IMF payment isn’t due for another two weeks and even if it were missed, Christine Lagarde has quite a bit of discretion as it relates to sending an official failure to pay notice to the IMF board and triggering cross acceleration rights for Greece’s other creditors. In other words, a formal default is a matter of politics and it can be put off for at least 30 days past the end of this month.

What cannot be controlled at the political level is what happens on the ground in Greece. That is, the economy is bleeding jobs and businesses and the banking sector is hemorrhaging hundreds of millions of euros every day. If suppliers cut off credit to the Greek economy and deposit flight turns into a panicked bank run, the glacial pace of political logrolling will prove hopelessly inadequate to contain the situation, meaning the country could descend into chaos while both sides watch in horror from the negotiating table in Brussels. Yesterday, Germany’s EU Commissioner Guenther Oettinger warned of exactly this and suggested that Europe plan for a “state of emergency” in Greece.

And plan they did. Midway through US trading on Monday the German press reported that Europe was prepared to implement capital controls over the weekend should Greece fail to table a workable proposal at a meeting of EU finance ministers in Luxembourg on Thursday. We’ve outlined what capital controls could look like in Greece on a number of occasions (most notably here and here), but for those needing a quick reference, consider the following flowchart:

Here’s Open Europe summarizing the drama:

German daily Süddeutsche Zeitung reports that Eurozone countries have agreed on a contingency plan if no deal between Greece and its lenders is struck by this weekend.According to the paper, if this week’s Eurogroup meeting failed to yield an agreement, Eurozone leaders would hold an emergency summit – potentially as early as Friday evening. The contingency plan would involve imposing capital controls on Greek banks over the weekend.

As for the Eurogroup meeting and the rumored emergency summit, Greece contends it will not be submitting a new proposal and some EU officials are skeptical about the utility of holding a summit if no progress is made in Luxembourg. FT has more:

Eurozone officials are discussing holding an emergency summit on Sunday for leaders to tackle the crisis in Greece amid mounting fears a deal to break an ongoing impasse between Athens and its bailout creditors will not be reached at a high-stakes finance ministers meeting on Thursday.

 

According to two senior officials, the idea of holding a summit of eurozone heads of government was mooted in meetings among representatives of Greece’s creditors on Monday, a day after last-ditch negotiations to reach a deal to release €7.2bn in much-needed bailout aid collapsed.

 

They said that although the idea was discussed, there is considerable resistance to convening the summit among several creditors since technocratic issues like Greek pension reforms and tax rates are not normally the province of EU presidents and prime ministers.

 

“If there’s nothing to discuss among finance ministers, there wouldn’t be anything to discuss among heads,” said one official from a Greek creditor institution.

 

Yanis Varoufakis, Greece’s finance minister, said the country has no plans to present new proposals at the finance ministers meeting, signalling the country won’t make further concessions to unlock bailout funds needed to avoid default.

 

He told Germany’s Bild newspaper: “The eurogroup is not the forum for presenting positions and plans which have not previously been discussed and negotiated at a lower negotiating level.”

 

“The next and hopefully decisive step is the eurogroup [on] Thursday,” said the spokesman, Preben Aamann. “Any further steps will be decided in light of the eurogroup outcome. There should be no illusions that an agreement becomes easier or more advantageous over time.”

 

Alexis Tsipras, the Greek prime minister, has publicly insisted that he will not be presenting any new compromise proposals at the Thursday meeting, and officials said the discussion at the eurogroup of finance ministers on Greece could end up being perfunctory as a result.

 

In addition, some officials believe Athens’ decision to send Mr Varoufakis, the combative finance minister, to the eurogroup session could preclude a deal being worked on Thursday

Recall that the last time Varoufakis attended a meeting of EU finance ministers, he ended up eating dinner alone in Riga and tweeting out FDR quotes after his antics at the negotiating table prompted EU officials to phone Tsipras and plead with the PM to sideline his FinMin or risk throwing the entire process into disarray. Varoufakis was soon demoted on the negotiating team.

All signs thus point to the imposition of capital controls, setting up a potential “Lehman Weekend 2.0” unless all sides suddenly realize what they’ve wrought, convene an emergency meeting among heads of state, and strike some manner of hastily construed stopgap agreement. Whether or not that’s feasible remains to be seen and it appears as though Sunday may the day of reckoning.

For now, the official line is that Europe will only restart talks if Greece “submits something new”, and if the last several weeks are any indication, “something new” is not forthcoming.

Finally, Bild is reporting that Greece will seek to delay its June 30 IMF payment by six months.

Via Bloomberg, citing Bild:

The Greek government is seeking to delay a 1.55b euro payment to the IMF by six months. 

 

Greece has found technical option to delay IMF payment due at the end of June.

And because this is Europe, the Greek government has promptly denied the above:

  • GREEK GOVT OFFICIAL DENIES REPORTS SEEKING TO DELAY IMF PAYMENT

 

end
As we have pointed out to you on many occasions, the Greeks are already making deals with the Russians for the Turkish Stream gas project that will cut through Greece.  It is also interesting that Putin visited Italy last week and got the blessing from the Pope (receiving a peace price).  One would bet that the gas pipeline will travel from Greece through the Adriatic onto Italy and then onto Austria. Greece would no doubt receive huge upfront money.  This money could help them as they transfer from the Euro to the drachma:
(courtesy zero hedge)

Russian Pivot: Greek PM Schedules Putin Meeting Ahead Of “Lehman Weekend”

Earlier this month, we reported that Greece is prepared to sign an MOU of political support for Gazprom’s Turkish Stream Pipeline, when Alexis Tsipras visits St. Petersburg for the International Economic Forum this week.

The deal is a blow to Washington, which attempted to persuade Athens to support an alternative pipeline. In April, US State Department envoy Amos Hochstein met with Greek foreign minister Nikos Kotzia to pitch The Southern Gas Corridor, a project which, when complete, will  allow the EU to tap into Caspian gas via a series of connecting pipelines running from Azerbaijan to Italy. The corridor is aimed at breaking Gazprom’s stranglehold in Europe.

(Turkish Stream)

(Southern Gas Corridor)

Greece, defiant in the face of US pressure and no doubt intent on preserving the last bit of leverage it has in negotiations with European creditors, contended that it did not view the two pipelines as competitors and would pursue participation in both projects. Greece will not, Greek Energy Minister Panagiotis Lafazanis said, be swayed by pressure from The White House:

“We do not considered them to be rivals. On the contrary, we think they both contribute to energy supply of European countries.That’s why it is odd that the Russian project is raising concern and doubts in the US and the European Union. We will not submit to the interests and wishes of any third country. Greece is nobody’s property. We move based on the interests of our people and our national interests. The country must become a development hub for Europe’s energy supply.”

Since then, the situation between Greece and its creditors has deteriorated meaningfully. Athens is now reportedly set to delay a June 30 IMF payment for six months and faces the imposition of capital controls over what could end up being a “Lehman Weekend.” With his back against the wall, and with Syriza party hardliners apparently no closer to backing concessions, Tsipras looks set to once again play the ‘Russian pivot” card because as Kathimerinireports, a “working meeting” between the Greek PM and Russian President Vladimir Putin is now scheduled for Friday in St. Petersburg:

Greek Prime Minister Alexis Tsipras is due to travel to Saint Petersburg on Friday to meet with Russian President Vladimir Putin, the state-run Athens-Macedonian News Agency (AMNA) quoted Kremlin spokesman Dmitry Peskov as saying on Tuesday.

 

“A working meeting has been scheduled with Alexis Tsipras on Friday, July 19, on the sidelines of the World Economic Forum,” Peskov was quoted as saying.

 

The Kremlin spokesman did not reveal what the two men would be talking about.

If we had to venture a guess, the two leaders will be talking about options for Russian aid in the event the relationship between Athens and Brussels continues to deteriorate in the coming weeks.

There are a number of possibilities, including a multibillion euro advance on Greece’s Turkish Stream revenue and the arrangement of a loan from the BRICS bank. Note that this is a perfect time for Greece to explore the BRICS option. As we’ve noted on serveral occasions, Russia has invited Greece to join and reports indicate Athens could be eligible for a loan immediately and would be allowed to tender its paid in capital in installments to ease the financial burden of joining. Further, Russia will host this year’s BRICS summit in Ulfa on July 8-9 where the $100 billion bank will officially be launched along with a $100 billion currency reserve, meaning Greece could serve as a kind of pilot project for the new fund.

All of the above serve to underscore Angela Merkel’s insistence on going to extra mile to keep Greece in the euro even in the face of staunch opposition both from lawmakers and from the German finance ministry. In short, the Chancellor fears the geopolitical ramifications of a Grexit could, in the long run, prove more detrimental than the economic consequences, especially considering the situation in Ukraine.

*  *  *

Summing up the above in one picture…

 end
My goodness: they are showing this on German TV channel for kids:
(courtesy zero hedge)

As Seen On A German TV Channel For Kids

“Learn about the Grexit early, children, and don’t become like those lazy, greedy Greeks or the bogeyman will get you…”

P.S. There are conflicting opinions on whether the Greeks are lazy: see here and here and, of course, here.

 

end

Craig Roberts has it correct. He believes that the Greeks should default on the entire 320 billion euros and walk away and join the Chinese and Russians.  They could provide enough up front money to ease the pain from converting euros into drachma.

(courtesy Paul Craig Roberts)

Starvation Is The Price Greeks Will Pay For Remaining In The EU — Paul Craig Roberts

Paul Craig Roberts

Syriza, the new Greek government that intended to rescue Greece from austerity, has come a cropper. The government relied on the good will of its EU “partners,” only to find that its “partners” had no good will. The Greek government did not understand that the only concern was the bottom line, or profits, of those who held the Greek debt.

The Greek people are as out to lunch as their government. The majority of Greeks want to remain in the EU even though it means that their pensions, their wages, their social services, and their employment opportunities will be reduced. Apparently for Greeks, being a part of Europe is worth being driven into the ground.

The alleged “Greek crisis” makes no sense whatsoever. It is obvious that Greece cannot with its devastated economy repay the debts that Goldman Sachs hid and then capitalized on the inside information, helping to cause the crisis. If the solvency of the holders of the Greek debt, apparently the NY hedge funds and German and Dutch banks, depends on being repaid, the European Central Bank could just follow the example of the Federal Reserve and print the money to secure the Greek debt. The ECB is already printing 60 billion euros a month to save the European financial system, so why not include Greece?

A conservative might say that such a course of action would cause inflation, but it hasn’t. The Fed has been creating money hands over fists for seven years, and according to the government there is no inflation. We even have negative interest rates attesting to the absence of inflation. Why will creating money for Greece create inflation but not for Goldman Sachs, Citibank, and JPMorganChase?

Obviously, the Western world doesn’t want to help Greece. The West wants to loot Greece. The deal is that Greece gets new loans with which to repay existing loans in exchange for selling municipal water companies to private investors (water rates will go up on the Greek people), for selling the state lottery to private investors (Greek government revenues drop, thus making debt repayment more difficult), and for other such “privatizations” such as selling the protected Greek islands to real estate developers.

This is a good deal for everyone but Greece.

If the Greek government had any sense, it would simply default. That would make Greece debt free. With just a few words, Greece can go from a heavily indebted country to a debt-free country.

Greece could then finance its own bond issues, and if it needed external credit, Greece could accept the Russian offer.

Indeed, if the Russian and Chinese governments had any sense, they would pay Greece to default and to leave the EU and NATO. The unravelling of Washington’s empire would begin, and the threat of war that Russia and China face would go away. The Russians and Chinese would save far more on unnecessary war preparation that saving Greece would cost them.

 

end

 

Certain members of the Syriza party have studied the Icelandic model whereby the country defaults on its creditors in full and then nationalize the banks.  It would work quite nicely;

(courtesy zero hedge)

 

 

“Horrified” Syriza Hardliners Back “Immediate” Greek Bank Nationalization, Euro Exit

 

In “Democracy Under Fire: Troika Looks To Force Greek Political ‘Reshuffle’”, we took an in-depth look at the true motivation behind the hardline stance adopted by Greece’s creditors. In short, we’ve argued that the troika is determined to send a strong message to EMU member countries that threatening to expose the idea of euro indissolubility as fiction is not a viable bargaining strategy when it comes to extracting austerity concessions from Brussels. This became even more important after regional and municipal elections in Spain which betrayed growing resentment for the troika and strong support for Podemos, a progressive political movement that is, in many ways, ideologically aligned with Syriza. Here’s what we said last month:

It is becoming increasingly clear that the Syriza show will ultimately have to be canceled in Greece (or at least recast) if the country intends to find a long-term solution that allows for stable relations with European creditors although it may be time for Greeks to ask themselves if binding their fate to Europe is in their best interests given that some EU officials seem to be perfectly fine with inflicting untold economic pain upon everyday Greeks if it means usurping the ‘radical leftists.’ 

Less than a week later, Syriza hardliners called for a default to the IMF and a return to the drachma. The motion was defeated by just 20 votes, prompting us to contend that Greek PM Alexis Tsipras will need to ensure that any serious proposal presented to creditors is first cleared by Syriza’s more radical members because the only thing worse than capital controls and “Grimbo” (i.e. a slow motion train wreck) is the chaos that would ensure should Tsipras strike a deal with creditors only to see it fall apart in parliament amid raucous party infighting and the rapid disintegration of government.

Now, it appears as though EU officials aren’t the only ones drawing up plans for capital controls and Grexit because as The Telegraph reports, the far-left faction within Syriza is ready to transition back to the drachma. Here’s more:

The radical wing of Greece’s Syriza party is to table plans over coming days for an Icelandic-style default and a nationalisation of the Greek banking system, deeming it pointless to continue talks with Europe’s creditor powers.

 

Syriza sources say measures being drafted include capital controls and the establishment of a sovereign central bank able to stand behind a new financial system. While some form of dual currency might be possible in theory, such a structure would be incompatible with euro membership and would imply a rapid return to the drachma.

 

The confidential plans were circulating over the weekend and have the backing of 30 MPs from the Aristeri Platforma or ‘Left Platform’, as well as other hard-line groupings in Syriza’s spectrum. It is understood that the nationalist ANEL party in the ruling coalition is also willing to force a rupture with creditors, if need be.

 

“This goes well beyond the Left Platform. We are talking serious numbers,” said one Syriza MP involved in the draft.

 

“We are all horrified by the idea of surrender, and we will not allow ourselves to be throttled to death by European monetary union,” he told the Telegraph.

 

Syriza’s Left Platform has studied the Icelandic model, extolled as a success story by the International Monetary Fund itself.

 

“The Greek banks must be nationalised immediately, along with the creation of a bad bank. There may have to be some restrictions on cash withdrawals,” said one Syriza MP.

 

“The banks will go ape-s*** of course. We are aware that there will be a lot of lawsuits but at the end of the day we are a sovereign power,” he said.

 

Syriza has a strong ideological motive to strike at the financial elites. They view the banks as the nerve centre of an entrenched oligarchy that has run the country for more than half a century as a family business. Forcing these institutions into bankruptcy provides cover for a socio-political purge, best understood as a revolution.

 

Iceland is a tempting model for Greece, but the parallel can be pushed too far. The Nordic country seized control of its three big banks – Glitnir, Kaupthing, and Landsbanki – when the crisis span out of control in late 2008.

As a reminder, this year Iceland will become the first European country that hit crisis in 2008 to beat its pre-crisis peak of economic output. In spite of its total 180-degree treatment of nefarious bankers, the banking system, and the people of its nation when compared to America (or The UK), Iceland has proved that there is a different (better) option that western dogma would suggest: imprisoning the bankers and letting the banks go bust. Here’s what happened next:

In any event, it’s also becoming clear that Tsipras is indeed limited by party hardliners in terms of what he can propose to EU creditors, and while Syriza claims this is evidence of party unity, it more likely represents the fact that the PM is stuck between allowing Greece to exit the euro or facing a severe political backlash in the event he comes to parliament with a draft proposal that includes concessions on pensions and the VAT. Here’s The Telegraph again:

The creditors argue that ‘Grexit’ would be suicidal for Greece. They have been negotiating on the assumption that Syriza must be bluffing, and will ultimately capitulate. Little thought has gone into possibility that key figures in Athens may be thinking along entirely different lines.

 

Tasos Koronaki, the party secretary, said on Sunday that attempts to split the party will fail. “The government will not enter into any agreement that is not accepted by the parliamentary group. We are more united than ever,” he said.

 

Mr Tsipras faces a critical choice. If he accepts creditor demands, he may lose a large bloc of his own party and have to rely on the establishment parties to push the deal through the Greek parliament.

 

Such a course of action would render him a Greek version of Britain’s Ramsey MacDonald, the Labour prime minister in the 1930s who enforced austerity and became the socialist figurehead of a Conservative national government.

 

MacDonald never overcame the accusations of betrayal by the Labour movement. He died a broken man.

One is reminded of the demonstrations staged last week by members of the Communist-affiliated PAME union who displayed a banner depicting Tsipras alongside his two predecessors with the phrase “We have bled enough, we have paid enough.” The implication was that Tsipras is nothing more than a pandering technocrat, a characterization the PM is keen to dispel.

Ultimately then, Tsipras must decide how he wants history to remember his tenure as Prime Minister. Either he will be the leader who allowed Greece to crash out of the euro on its way to a redomination-driven economic collapse, or he will go down as the fiery advocate for change who caved under pressure and allowed the troika to stamp out democracy in the place where it was born.

*  *  *

Here’s some bonus color from Barclays on possible political outcomes:

We have argued that the cost of a U-turn by Greek Prime Minister Alexis Tsipras – that is, accepting the Institutions’ terms of an agreement – is likely to be a divided party, including raising opposition from radical Syriza MPs and possibly from its junior coalition partner, the Independent Greeks. However, in our view, this is something that PM Tsipras could survive, politically. The chances of early elections would be high in this scenario, but the likelihood of Mr Tsipras to be re-elected seem fair, in our view, even without the more radical factions of Syriza.

Instead, under the alternative scenario of no deal with the Institutions, in all likelihood we believe Greek banks’ access to ELA funding could be frozen shortly after the end of the month when the programme expires, and bank controls to limit deposit outflows and transfers abroad would be required. In addition, this scenario would also mean a divided Syriza, with the more moderate members opposing the government´s decision not to reach a deal. We think a majority of Greeks would blame the government for the failure in the negotiations and the freezing of their deposits. In our view, PM Tsipras would be worse off in this scenario, and we think it is unlikely that the government would be able to survive it.

end
The following will pit the Bundesbank squarely at odds with the ECB.
The decision could not have come at a worse time:
(courtesy zero hedge)

OMT Decision By EU Top Court Sets Europe On Renewed “Collision Course” With Germany

Last February, when relations between the ECB and the Bundesbank were comparable to those currently between the US and Russia (and then something dramatically changed for reasons still unknown but likely having to do with a deeper look inside the derivative books of Deutsche Bank, leading to a major backing down by Jens Weidmann), the German Constitutional Court took an aggressive approach with the ECB when it said that, in its judgment, the ECB’s Outright Monetary Transactions program likely exceeded the central bank’s powers.

“There are important reasons to assume that [the OMT] exceeds the European Central Bank’s monetary policy mandate and thus infringes the powers of the member states, and that it violates the prohibition of monetary financing of the budget. Subject to the interpretation by the Court of Justice of the European Union, the Federal Constitutional Court considers the OMT decision incompatible with primary law.”

However, instead of issuing a binding ruling, at that point the court quickly washed its hand of the consequences of having founds the OMT illegal, and referred the final decision on the legality of the European Central Bank’s bond-purchase program to the European Court of Justice.

This is what we said over a year ago: “in doing so gave the ECB a panel of judges that is more sympathetic to the OMT and the central bank’s ability to conduct monetary policy as it sees fit. It also killed two birds with one stone: allowed Germans to claims internally that the OMT is illegal, while everyone else in Europe gets to pretend that the continent is solvent, and that the ECB can backstop sovereign bond purchases with an imaginary contraption that contrary to mass delusion, simply does not exist and would fall apart the second it is used for the first time.”

And, just as expected, earlier today the pro-ECB top European Union court found that Draghi’s impromptu announcement of an OMT, which was basically the wrapping of his “whatever it takes” policy from 2012 to prevent the collapse of the Eurozone when peripheral bond yields were hitting daily records, was perfectly legal. From Dow Jones:

In its judgment on Tuesday, the ECJ said “this program for the purchase of government bonds on secondary markets does not exceed the powers of the ECB in relation to monetary policy and does not contravene the prohibition of monetary financing of member states.”

 

The ruling isn’t surprising, as a nonbinding opinion by one of the court’s judges in January also said OMT was legal.

 

“This is a clear sign that the ECJ supports and defends the ECB’s independence. This allows the ECB to continue on the real important things: quantitative easing and the Greek crisis,” said Carsten Brzeski, chief economist with ING-DiBa.

As also expected, the ruling is set to rekindle tensions between Germany and Brussels, not to mention the ECB, over the implicit question that has always been the key one: “who decides the fate of Europe.” From Reuters:

Hans-Werner Sinn, the head of Germany’s IFO think tank and long-standing critic of the ECB, attacked the court for its “regrettable mistake”.

 

Others, including Lutz Goebel, president of a German association for family-owned companies, were also critical of the ruling. “Through its actions, the ECB is going far beyond its mandate,” he said.

 

The pro-ECB line could now set the European and German courts on a collision course.

 

Germany’s Constitutional Court, asked to rule on complaints by the German group, had said there was good reason to believe the OMT broke rules forbidding the ECB from funding governments.

And then Bloomberg reported that Peter Gauweiler, a former German lawmaker who’s a plaintiff in a case against the ECB’s  OMT bond-buying program, said he’s convinced that he can still block the measure in Germany’s Constitutional Court.

Gauweiler says he wants German top court to prohibit the Bundesbank from participating in the execution of the OMT program. “The ECJ even falls short of the opinion of the Advocate General, who at least viewed the linkage between the OMT program and the conditionality of the EFSF or ESM as an encroachment of the economic policy competencies of the member states.”

So will this this vivid reminder that not all is well in the relations between Frankfurt and, well, Frankfurt, cast a pall of indecision over Europe at precisely the worst time, just as Greece is increasingly expected to Grexit, and when a united European response to the inevitable contagion and volatility will be so very critical to preserve the doomed monetary experiment? We may know the answer as soon as this weekend, when a repeat of the Lehman weekend, only this time in favor of Greece, is now looming.

end
As indicated to you yesterday, the cold war is now intensifying:
(courtesy zero hedge)

The Second Nuclear Arms Race Arrives: Russia Will Add 40 ICBMs In 2015 In Response To “NATO Encroachment”

With the US and Russia in a state of (renewed) cold war for over a year now, it was inevitable that that “other”, far more important attribute of the first Cold War would soon return: the nuclear arms race.

And indeed it did just around dinner time in Russia today when speaking at an arms race fair, president Putin said that Russia will put more than 40 new intercontinental ballistic missiles into service in 2015 as part of a wide-reaching program to modernize the military.

The move is in response to what Russia has slammed as an aggressive expansion of military presence in NATO states in Eastern Europe, which as we reported yesterday would provoke Russia to respond by stationing its army on its western borders. To wit: “stationing heavy U.S. military equipment in the Baltic states and eastern Europe would amount to “the most aggressive step by the Pentagon and NATO” since the Cold War, Interfax news agency quoted a Russian Defense Ministry official as saying on Monday. “Russia would be left with no other option but to boost its troops and forces on the western flank,” General Yuri Yakubov was quoted as saying.

And since nuclear escalation usually takes place in a tit-for-tat mutual defection regime, earlier it was reported that the “the U.S. is preparing a set of various measures, and among them the placement of heavy weaponry in Poland and other countries will be very important,” according to Polish defense minister Romaz Siemoniak.

And sure enough Russia, which it says is merely responding to NATO escalation, was promptly accused of escalating even more by the same NATO that keeps parking its own forces ever since the US-orchestrated Ukraine presidential coup was meant to convert Kiev into a potential NATO country and military base.

Nato and Western leaders accuse Russia of sending soldiers and heavy weapons, including tanks and missiles, to the pro-Russian separatists in eastern Ukraine. Russia has repeatedly denied this, insisting that any Russians fighting there are “volunteers”.

 

Later on Tuesday, Nato Secretary-General Jens Stoltenberg said that the statement from Mr Putin was “confirming the pattern and behaviour of Russia over a period of time; we have seen Russia is investing more in defense in general and in its nuclear capability in particular”. He said: “This nuclear sabre-rattling of Russia is unjustified, it’s destabilising and it’s dangerous.

And just to stabilize things, NATO may well deploy some of its own tactical nukes in the region as a deterrence measure now that the second nuclear arms race is fully up and running. To be sure Stoltenberg essentially admitted that the next retaliation by NATO countries will also be a nuclear one: that “what Nato now does in the eastern part of the alliance is something that is proportionate, that is defensive and that is fully in line with our international commitments.

Here, from the BBC, is an estimate of Russia’s existing nuclear arsenal:

  • Military stockpile of approximately 4,500 nuclear warheads
  • These include nearly 1,800 strategic warheads deployed on missiles and at bomber bases
  • Another 700 strategic warheads are in storage along with roughly 2,700 non-strategic warheads
  • A large number – perhaps 3,500 – of retired, but still largely intact warheads await dismantlement

In conclusion, and as a reminder, none of this is new: we reported back in December 2013 that as one of the first nuclear moves in the current Cold War 2.0 arms race, Russia stationed nuclear-capable Iskander (ss-26) missile launchers along the polish border to deter the US missile defense system in Poland.

As such, all that the current second nuclear arms race needs is a spark.

Incidentally, recall from our post last night on how back in 1937 a comparable Fed rate hike such to the one the Fed is currently contemplating, led to a 50% crash in the stock market. More importantly, less than two years later, World War II broke out.

One hopes this time be different.

end

 

I have highlight the following to you on many occasions.  Generally the world has borrowed 9 trillion USA dollars to purchase and fund commodity and other ventures. The emerging markets e.g. Brazil has 50% of this total or 4.5 billion USA short. This 9 trillion USA short is now unraveling and no doubt will cause much devastation

a very important commentary…

 

(courtesy Graham Summers/Phoenix Research Capital)

 

The Single Most Important Chart of the Last Century

The single most important story for the investment world is the US Dollar.

 

The US Dollar rally took a breather starting in late February 2015. Since that time, it has corrected a total of 7.2%. Technically this isn’t even a correction (it would need to fall 10%) and it’s far from entering a bear market (it would need to fall 20%).

 

 

In spite of this… the financial media is trumpeting that the bull market in the US Dollar is over. I think they are grossly underestimating what is happening in the US Dollar.

 

First of all, during the last two US Dollar bull markets (the early ‘80s and the late ‘90s) the Dollar had no shortage of 5%+ corrections.

Here’s the Dollar bull market of the early ‘80s.

 

 

Here’s the US Dollar bull market of the late ‘90s. Again there are five corrections of 5% or more.

 

 

My point is that 5%+ corrections are normal during US Dollar bull markets. Remember, the greenback rallied over 25% before starting this cool down period. So it was due for a pull back.

 

Moreover, in the BIG PICTURE, this correction has not violated the larger technical pattern we’ve been following in the US Dollar in any way:

 

 

This is the single most important chart in the investment world. It is the largest bullish falling wedge pattern in fiat money history. And we’ve broken out of it to the upside.

 

If you want to think of this in terms of macro-economics… think of it this way: since the US abandoned the Gold standard via Breton Woods, it has been in an ongoing process of devaluing the US Dollar while issuing paper debt/ credit.

 

When you borrow in US Dollars, you are effectively shorting US Dollars. So the entire Credit Super Cycle of the last forty years has seen the financial system become increasingly leveraged at the expense of the US Dollar.

 

We believe that the above chart is telling us that this Super Cycle of leveraging is ending. This means that we are entering a period of DE-leveraging.

 

This period will be marked by defaults and debt restructurings. Both of those processes reduce the number of US Dollars in circulation. This is especially true when you consider that there are over $9 trillion in the US Dollar carry trade currently (this doesn’t include US Dollar denominated bonds or credit instruments… simply US Dollars that have been borrowed and invested in other financial securities).

 

With that in mind, the hype surrounding the US Dollar’s recent correction is overblown. Being long the US Dollar was the most crowded trade in the world at the beginning of this correction… so it’s not surprising that the correction has been sharp.

 

When the next leg up begins for the US Dollar, we’re going to see the REAL fireworks in the markets. What happened in Oil last year was just the first round… the next will hit emerging market stocks, bonds, and even US stocks.

end

 

Brazil retail sales drop the most on record as money flees their country. Goldman Sachs warns that it will get worse. This is what happens when the huge USA short position begins to unravel!!

(courtesy zero hedge)

Brazil Retail Sales Drop Most On Record, Goldman Warns Will Get Worse

Just a few months ago, we warned Brazil’s economy was on the verge of collapse as the fiscal situation was deteriorating rapidly. It appears, judging by the most recent data from the oil-rich nation, that we were right. Broad retail sales have now declined for five consecutive months with the seasonally adjusted broad retail sales index now at the same level as early 2012. Core retail sales declined 3.5% YoY during April (weakest print since Aug 2003) and broad retail sales declined by an even larger 8.5% YoY (lowest on record), and as Goldman warns, the outlook for private consumption and retail sales in the near term remains very weak.

 

 

Via Goldman Sachs,

BOTTOM LINE:

The core retail sales measure (excluding autos and building materials) missed market consensus (+0.7% mom sa) by surprisingly contracting 0.4% (mom sa) in April. In addition, the March figure was revised slightly down from -0.9% mom sa to -1.0% mom sa. Similarly, broad retail sales contracted 0.3% mom sa in April, and the March figure was revised down from -1.6% mom sa to -1.8% mom sa.

Broad retail sales have now declined for five consecutive months at an average monthly rate of 1.6% mom sa per month. The seasonally adjusted broad retail sales index is now at the same level as early 2012.

In annual terms, core retail sales declined 3.5% yoy during April (weakest print since Aug 2003) and broad retail sales declined by an even larger 8.5% yoy.

Given the weak April print the carry-over for sequential 2Q2015 growth is now at a very weak -1.2% qoq sa for core, and -1.9% qoq sa for broad retail sales.

The outlook for private consumption and retail sales in the near term remains very weak owing to moderating credit flows by both private and public banks, high levels of household indebtedness, decelerating job creation and real wage growth, rising interest rates, higher taxes, higher utility and transportation tariffs, and very depressed consumer confidence.

KEY NUMBERS (April):
Core/Control Retail sales: -0.4% mom sa (-3.5% yoy) versus consensus forecast of +0.7% and GS forecast of +0.8%.

Broad retail sales: -0.3% mom sa (-8.5% yoy) versus consensus forecast of -0.5% and GS forecast of +0.2%.

MAIN POINTS:

  • Core/control retail sales (excludes autos and building materials) surprisingly contracted 0.4% mom sa in June (consensus expectations were for a 0.7% increase).
  • The decline of (core) retail activity in April was driven by weak prints in office and communication equipment (-12.2% mom sa), clothing & footwear (-3.8% mom sa), furniture and appliances (-3.1% mom sa), and other articles of personal and domestic use (-5.1% mom sa).
  • Broad retail sales contracted 0.3% mom sa in April, and the February figure was revised down to -1.8% mom sa from the original -1.6% mom sa. The sale of building materials declined 1.2% mom sa April (fourth consecutive monthly decline), while sales of autos and autoparts expanded 4.4% mom sa (partly offsetting the -5.2% mom sa variation seen in March).

*  *  *

As we noted previously, in short – the entire economy is now on the verge of total collapse. This is what happened in a few bullet points:

  • The fiscal picture has deteriorated very sharply since 2011 at both the flow (fiscal deficit) and stock (gross public debt) levels. The primary and overall nominal fiscal surpluses at year-end 2014 were at levels last seen in the late 1990s.
  • The steady decline of the public sector savings rate is leading to a wider current account deficit despite weaker growth and low investment. In fact, the twin fiscal and current account deficits are now tracking at a combined, very troublesome 10.9% of GDP, the worst picture in 15 years (since August 1999). Repairing the severely unbalanced macro picture would require a deep, structural and permanent fiscal and quasi-fiscal adjustment and a significantly weaker BRL.
  • The new economic team faces, among other things, the very significant challenge of repairing the severely deteriorated fiscal picture.
  • The steady erosion of the fiscal stance pushed net and gross public debt up. Furthermore, fiscal and quasi-fiscal activism undermined the effectiveness of monetary policy, contributed to keep inflation very high and drove the current account deficit to a very high level despite weak growth.

Good Luck Brazil.. and so much for BRICS-based global growth…

end

 

 

Oil related stories:

 

Oil Pumps-And-Dumps On Smaller API Inventory Draw

Crude oil jumped (algorithmically) and then dumped (humanistically) after API reported a 2.9 million barrel inventory draw. This drawdown is notably lower than the 6.7 million barrel draw last week…

 

 end

Your more important currency crosses early Tuesday morning:

 

Euro/USA 1.1261 down .0014

USA/JAPAN YEN 123.48 up .068

GBP/USA 1.5611 up .0013

USA/CAN 1.2339 up .0023

This morning in Europe, the Euro fell by a tiny 14 basis points, trading now well above the 1.12 level at 1.1261; Europe is still reacting to deflation, announcements of massive stimulation, a proxy middle east war, and the ramifications of a default at the Austrian Hypo bank, a possible default of Greece and the Ukraine, rising peripheral bond yields and today crumbling bourses.

In Japan Abe went all in with Abenomics with another round of QE purchasing 80 trillion yen from 70 trillion on Oct 31. The yen continues to trade in yoyo fashion as this morning it settled down again in Japan by 7 basis points and trading just below the 124 level to 123.48 yen to the dollar.

The pound was down this morning as it now trades just above the 1.56 level at 1.5611, still very worried about the health of Barclay’s Bank and the FX/precious metals criminal investigation/Dec 12 a new separate criminal investigation on gold, silver and oil manipulation.

The Canadian dollar is down by 23 basis points at 1.2339 to the dollar.

We are seeing that the 3 major global carry trades are being unwound. The BIGGY is the first one;

1. the total dollar global short is 9 trillion USA and as such we are now witnessing a sea of red blood on the streets as derivatives blow up with the massive rise in the rise in the dollar against all paper currencies

2, the Nikkei average vs gold carry trade (still ongoing)

3. Short Swiss franc/long assets (European housing/Nikkei etc. This has partly blown up (see Hypo bank failure). Swiss franc is now 1.0489 to the Euro, trading well below the floor 1.05. This will continue to create havoc with the Hypo bank failure.

These massive carry trades are terribly offside as they are being unwound. It is causing global deflation ( we are at debt saturation already) as the world reacts to lack of demand and a scarcity of debt collateral. Bourses around the globe are reacting in kind to these events as well as the potential for a GREXIT>

The NIKKEI: this morning : up down 129.85 points or 0.64%

Trading from Europe and Asia:
1. Europe stocks all in the red

2/ Asian bourses mostly in the red … Chinese bourses: Hang Sang red (massive bubble forming) ,Shanghai in the red (massive bubble ready to burst), Australia in the red: /Nikkei (Japan) red/India’s Sensex in the green/

Gold very early morning trading: $1184.00

silver:$16.03

 

Early Tuesday morning USA 10 year bond yield: 2.32% !!! down 4 in basis points from Monday night and it is trading just above resistance at 2.27-2.32% and no doubt setting off massive derivative losses.

USA dollar index early Tuesday morning: 94.94 up 13 cents from Monday’s close. (Resistance will be at a DXY of 100)

 

This ends the early morning numbers, Tuesday morning

 

And now for your closing numbers for Tuesday:

 

Closing Portuguese 10 year bond yield: 3.21%  down 4 in basis points from Monday ( still very ominous)

Closing Japanese 10 year bond yield: .50% !!! down 1 in basis points from Monday/very ominous/central bank intervention

Your closing Spanish 10 year government bond, Tuesday, down 4 points in yield ( still very ominous)

Spanish 10 year bond yield: 2.35% !!!!!!

 

Your Tuesday closing Italian 10 year bond yield: 2.33% down 3 in basis points from Monday: (very ominous)

trading 2 basis point lower than Spain.

 

IMPORTANT CURRENCY CLOSES FOR TODAY

 

Closing currency crosses for Tuesday night/USA dollar index/USA 10 yr bond: 4 pm

 

Euro/USA: 1.1244 down .0031 ( Euro down 31 basis points)

USA/Japan: 123.38 down  .039 ( yen up 4 basis points)

Great Britain/USA: 1.5649 up .0052 (Pound up 52 basis points)

USA/Canada: 1.2310 down .0005 (Can dollar up 5 basis points)

The euro fell marginally today. It settled down 31 basis points against the dollar to 1.1244 as the dollar moved aimlessly against most of the various major currencies. The yen was up by 4 basis points and closing well above the 123 cross at 123.38. The British pound gained some ground today, 52 basis points, closing at 1.5649. The Canadian dollar gained a little ground against the USA dollar, 5 basis points closing at 1.2310.

As explained above, the short dollar carry trade is being unwound, the yen carry trade , the Nikkei/gold carry trade, and finally the long dollar/short Swiss franc carry trade are all being unwound and these reversals are causing massive derivative losses. And as such these massive derivative losses is the powder keg that will destroy the entire financial system. The losses on the oil front and huge losses on the USA dollar will no doubt produce many dead bodies.

 

Your closing 10 yr USA bond yield: 2.32% down 5 in basis point from Tuesday// (just above  the resistance level of 2.27-2.32%)/ and ominous

Your closing USA dollar index:

94.96 up 15 cents on the day

.

European and Dow Jones stock index closes:

 

England FTSE down 0.42 points or 0.01%

Paris CAC up 24.50 points or 0.51%

German Dax up  59.04 points or 0.54%

Spain’s Ibex up 29.30 points or 0.27%

Italian FTSE-MIB up 55.45 or 0.25%

 

The Dow up 113.31  or 0.64%

Nasdaq; up 25.58 or 0.51%

 

OIL: WTI 59.98 !!!!!!!

Brent:63.74!!!!

 

Closing USA/Russian rouble cross: 53.68  up 9/10  roubles per dollar on the day

 

end

 

And now for your more important USA stories.

NY trading for today:

Stocks Up, Bonds Up, VIX Up, Dollar Up, & Oil Up; Time’s Up, Fed’s Up

Despite the strength of the bullishness in stocks today, US equities have told us that they “self-identify as bears”…

Yeah that just happened…

 

The March FOMC saw the same “buy everything” idiocy… that did not end well for stocks…

 

As liquidity disappeared and traders focused on tomorrow’s Fed, sparking a total meltup in stocks (NOT driven by Greece – the comments were actually bad, NOT driven by US housing data – we were already well on our way by them, and NOT driven by any great rotation)…

 

On the day, Trannies remained red as the rest all grouped together…again seeming to stall after EU Close…

 

Cash indices managed to get green… because why wouldn’t you be a net buyer of stocks ahead of FOMC and Grexit uncertainty…but the mahicns took profits in the last few minutes leaving us red for the week… Trannies refuse to play along from the start

 

Healthcare is dragging the rest higher on the back of M&A hope…

 

For June, Small Caps are surging 2% but Nasdaq, S&P and Dow are all red still…

 

Stock protection was bid – VIX dropped on the day but as is clear, protection is well bid relative to the algo-driven exuberance in stocks…

 

and credit protection was bid

 

Treasury yields all tumbled today…

 

As The Dollar strengthened (led by EUR weakness)…notice a pattern here?

 

Crude managed gains as copper, gold, and silver dropped…

 

Copper clubbed like a baby seal was a standout…dumping to 3 month lows…

 

It appears – based on the surge in US and EU stocks and European peripheral bonds today – that the Plunge Protection Team was hard at work proving Grexit was not contagious and that the status quo is maintained.

Charts: Bloomberg

Bonus Chart: Avalanche Biotech… [INSERT YOUR OWN PUN]

 

Bonus Bonus Chart: One enterprising chap has a ‘final solution’ for The Greeks…

 end
Housing starts plunge 11%.  As this is a very reliable figure, you can dismiss last week’s optimism as pure fantasy!!
(courtesy zero hedge)

Housing Starts Plunge 11% As April “Bounce” Fades, Permits Soar To 8 Year High

Following April’s hope-filled spike in Housing Starts and Building Permits SAAR (and the exuberant jerk to 10 year highs in NAHB Sentiment), May data is more mixed.Housing Starts plunged 11.1% MoM (against expectations of a 4% drop) missing for the 3rd of last 4 months. Permits, on the other hand, spiked 11.8% (against expectations of a 3.5% drop) smashing the hope to its highest since August 2007. So – in summary – hope is soaring, reality is falling and all the hope is based on America as ‘rental nation’ with a record number of multi-family unit permits.

 

 

Starts longer-term…

 

As Permits soar…

 

Take a look at this chart again! notice anything similar? The desperate spike in hope that occurred in early 2008 (that prompted calls for recovery) appears to be echoing awkwardly!!

 

Charts: Bloomberg

end

 

Dave Kranzler of IRD discusses in detail the housing starts plunging!

(courtesy Dave Kranzler/IRD)

Housing Starts Plunge – Apartment Building Bubble Is Popping

Every new apartment building in Denver is now offering one month free as a move-in incentive; some buildings will give you two months free if you push them. There are at least 12 new big buildings in central Denver in various stages of construction. – Investment Research Dynamics

Housing starts plunged 11% in May LINK.  Ironically, this comes a day after the National Home Building Associating reported huge jump in homebuilder “sentiment.”  Let’s remember, “hope” is not a valid investment strategy.

This housing starts number is about as bearish as it can get for the new construction market.  It is also consistent with my detailed research which shows that homebuilder companies have accumulated an all-time high level of inventory, despite a unit sales run-rate which is about 60% below the previous all-time high in inventory back in 2005:

HousingSentimentAs you can see from this graph to the left which shows homebuilder “sentiment,” industry “hope” has perilously disconnected from the reality of sales. Today’s housing starts report is consistent with the actual transaction data. Since when has a business – other than tele-evangelists – ever been able to convert “hope” into cash flow?

The Orwellian financial media is going to focus on the “housing permits” number.  But, to begin with, the filing of building permit is not a valid economic metric.  It costs next to nothing to file a permit and the act of filing for a permit merely gives a builder the right to build.  Second, and more important, the large jump in permits was for mult-family units:

startsandpermitsDespite signs of a glut forming in apartment buildings in most cities, builders filed “permits” to build even more buildings. I know from my own due diligence that every new building in Denver will offer a new tenant up to two months free as a move-in incentive. I am getting reader reports of similar
apartment gluts in many other cities.

Six years of ZIRP and $3.6 trillion of printed money has stimulated an unprecedented degree and catastrophic amount of capital misallocation.  Massive bubbles have formed in every major asset category:   bonds, stocks, real estate and collectibles.

The bubble that has reformed in the housing market is going to result in a more painful collapse than the original housing bubble.  More on this later, but data available from the National Association of Realtors and RealtyTrac shows that 40% of the sales volume this year has been driven by individual investor/flippers.  We are at the point in the cycle at which many of them will be left “holding the bag.”   To compound the problem, many of these “retail” home traders are now using mortgages to fund their  game of hot potato.

I can’t speak on this for every major city, but I know for a fact that in metro-Denver there has been a recent “flood” in home listings.  Even more indicative, I am now receiving “new price” alerts via REColorado several times a day, mostly in the over $800,000 price range. The glut that has formed in both rental apartments and higher end homes for sale in Denver is nothing short of stunning.

The Fed is out of the type of bullets that can be used to support the massive Housing Bubble 2.0 that it has premeditatively blown.  Interest rates are already at zero, although starting to rise uncontrollably on the longer end.  Mortgage rates have blown out close 100 basis points from the recent bottom.  Easy credit has flooded the mortgage banking system in many different forms.

To be sure, the Fed can print a lot more money – and most likely will.  But at this point in the game it will be the equivalent of pushing on the proverbial string.  Only this time the hole through which the Fed will be trying to push the string will be closed.

 

end

The Fed is now contemplating raising rates for the first time.

Bank of America reminds everyone what happened it 1937 when the USA raised rates a little too early

(courtesy zero hedge)

 

 

Bank Of America Begins 66-Day Countdown Until The “Ghost Of 1937” Returns

In 66 trading days on September 17, 2015, the Federal Reserve will, according to Bank of America, hike rates for the first time since 2006, which according to BofA will “end the era of excess liquidity.”

We disagree entirely, but let’s hear what BofA’s Michael Hartnett has to say:

On September 17th the Fed will hike the Fed funds rate by 25bps according to Ethan Harris & our US economics team, the first hike since June 2006. 

 

Recent US economic data support this view, in particular the solid May payroll & retail sales reports. Note that after a Q1 wobble, one of our favorite cyclical indicators, US small business confidence, has also bounced back into expansionary territory. Ethan Harris forecasts 3.4% US GDP growth in Q2, after 0.2% in Q1, and US rates strategist Priya Misra forecasts a Fed funds rate of 0.5% by year-end, and 1.5% by end-2016. Like Ethan & Priya, the futures market also looks for a modest Fed tightening cycle: Eurodollar futures contracts are currently pricing in 3-month rates in the US rising from 0.01% today to 0.65% by year-end, and to 1.54% by end-2016.

Yes, the US economy is so strong the Bureau of Economic Analysis has to fabricate double seasonal adjustments to goalseek GDP data that is non-compliant with the narrative. As for economists being wrong about a rate hike, or overestimating future US growth, let’s just say it won’t be the first time they are wrong…

Still, one thing BofA is right about: this time the normalization process will be different.

Past Fed performance is no guide to future performance

 

Gradual or otherwise, the first interest rate hike by the Fed since June 2006 marks a major inflection point for financial markets. Three reasons suggest that the impact of higher Fed rates will be far less predictable than normal, that historical comparisons may be less powerful, and that volatility across both credit & equity markets should continue to be owned.

Actually, the main reason is one, and it is very simple. It is shown in the chart below.

Here are some other reasons why the Fed’s rate hike will lead to a period of, to put it mildly, volatility which “will mark the beginning of the end of massive monetary easing and a collapse of interest rates to effectively zero across the globe, and follows a humungous bull market in both equities and credit in the past 6 years:”

  • Central banks now own over $22 trillion of financial assets, a figure that exceeds the annual GDP of US & Japan
  • Central banks have cut interest rates 577 times since Lehman, a rate cut once every three 3 trading days
  • Central bank financial repression created $6 trillion of negatively-yielding global government bonds earlier this year
  • 45% of all government bonds in the world currently yield <1% (that’s $17.4 trillion of bond issues outstanding)
  • US corporate high grade bond issuance as a % of GDP has doubled to almost 30% since the introduction of ZIRP
  • US small cap 5-year rolling returns hit 30-year highs (28%) in recent quarters
  • The US equity bull market is now in the 3rd longest ever
  • 83% of global equity markets are currently supported by zero rate policies

Put simply, central bank’s provision of liquidity for financial markets has been unprecedented. The extent of Wall Street addiction to liquidity is about to be revealed and the potential for unintended consequences is clearly high.

Which is not to say that attempts to “renormalize” rates are unheard of: previously both Israel and the RBNZ tried it and failed, with markets promptly forcing them to reverse tightening.

More notably, it was the ECB itself which in April of 2011under Jean-Claude Trichet tried to halt Chinese inflation exports in their tracks, and pulled off one rate hike… before the wheels came off from under Europe and the continent promptly entered a double dip recession, leading not only to a return to ZIRP, and the replacement of Trichet with an Italian Goldman Sachs apparatchik, but ultimately pushed Europe into its first ever NIRP episode.

But no episode is more notable than what happened in the US in 1937, smack in the middle of the Great Depression. This is the only time in US history which is analogous to what the Fed will attempt to do, and not only because short rates collapsed to zero between 1929-36 but because the Fed’s balance sheet jumped from 5% to 20% of GDP to offset the Great Depression.

Just like now.

And then, briefly, the economy started to improve superficially, just like now, and as a result the Fed tightened in a series of three steps between Aug’36 & May’37, doubling reserve requirements from $3bn to $6bn, causing 3-month rates to jump from 0.1% in Dec’36 to 0.7% in April’37.

Here is a detailed narrative of precisely what happened from a recent Bridgewater note:

The first tightening in August 1936 did not hurt stock prices or the economy, as is typical.

 

The tightening of monetary policy was intensified by currency devaluations by France and Switzerland, which chose not to move in lock-step with the US tightening. The demand for dollars increased. By late 1936, the President and other policy makers became increasingly concerned by gold inflows (which allowed faster money and credit growth).

 

The economy remained strong going into early 1937. The stock market was still rising, industrial production remained strong, and inflation had ticked up to around 5%. The second tightening came in March of 1937 and the third one came in May. While neither the Fed nor the Treasury anticipated that the increase in required reserves combined with the sterilization program would push rates higher, the tighter money and reduced liquidity led to a sell-off in bonds, a rise in the short rate, and a sell-off in stocks. Following the second increase in reserves in March 1937, both the short-term rate and the bond yield spiked.

 

Stocks also fell that month nearly 10%. They bottomed a year later, in March of 1938, declining more than 50%!

Or, as Bank of America summarizes it: “The Fed exit strategy completely failed as the money supply immediately contracted; Fed tightening in H1’37 was followed in H2’37 by a severe recession and a 49% collapse in the Dow Jones.”

As can be seen on the above, in 1938, the stock market began to recover some. However, despite the easing stocks didn’t fully regain their 1937 highs until the end of the war nearly a decade later.

Wait, the Fed hiked only to easy? That’s right: in response to the second increase in reserves that March, Treasury Secretary Morgenthau was furious and argued that the Fed should offset the “panic” through open market operations to make net purchases of bonds. Also known now as QE. He ordered the Treasury into the market to purchase bonds itself.

Fed Chairman Eccles pushed back on Morgenthau urging him to balance the budget and raise tax rates to begin to retire debt.

How quaint: once upon a time the US actually had an independent Fed, not working on behalf of the banks, and pushing back on pressure to monetize debt and raise stock prices.

Those days are long gone.

So is the imminent rate hike which guarantees the ghost of 1937 is about to wake up and lead to stock losses which could make the Lehman crash seem like a dress rehearsal just the precursor to QE4, as happened nearly 80 years ago? We don’t know, but neither does the manager of the world’s biggest hedge fund. This is what Ray Dalio says ahead of the upcoming rate hike:

… in our opinion, inadequate attention is being paid to the risks of a downturn in which central bankers’ abilities to ease are significantly impaired. Please understand that we are not sure of anything but, for the reasons explained, we do not want to have any concentrated bets, especially at this time.

We don’t know either, but we do know that if the S&P is cut in half the Fed will launch not just QE4, but 5, 6 and so on, resulting in every other central bank doing the same as global currency war goes nuclear, and the race to the final currency collapse enters its final lap.

end
Well that about does it for tonight
I will see you tomorow night
Harvey
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4 comments

  1. You don’t think, do you, that the European banks are trying to get Greek gold? I thought it was already gone until I saw the chart yesterday. European banks couldn’t be desperate enough to get the gold that they’d be killing all those vulnerable Greek people, would they? If they are that desperate to cover their naked gold shorts, aren’t they completely screwed already? It looks like Spain lost most of their gold, but now have nothing to build their own currency on. Portugal is still standing, but vulnerable, as are Italy and France. My, my, my. Everyone wants the gold, don’t they.

    Like

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