Saturday, September 15, 2012

More bank runs in Spain/Spanish housing contracts another 14.4%/USA consumer prices soar/Retail Sales in USA weak/

Good morning Ladies and Gentlemen:

Gold closed up 70 cents to $1769.80.  Silver was under pressure all day falling by 12 cents to $34.60.
The banking cartel did not want silver to break into the 35 dollar barrier.  The real story is the announcement by Bernanke yesterday of quantitative easing to infinity where the Fed will purchase 40 billion mortgage backed securities plus continue on with operation twist such that 85 billion is purchased per month.  He expects that the Fed balance sheet will reach 4 billion usa dollars by 2013 and Bank  of America believes it will expand again to 5 trillion usa dollars by 2014.  In the USA industrial production fell badly.  Consumer prices soared and yet retail sales were flat as the consumer is still lethargic on buying.

Over in Spain, we witnessed more euros leave the Spanish banking system.  This is nothing but a bank run.
Housing has contracted again by a further 14.4%.  We will go over all of these stories but first.....

Let us now head over to the comex and assess trading on Friday.

The total comex gold open interest continues to ramp higher with our crooked bankers supplying the necessary short paper being cheered on by the regulators who forgot about their duty to the public. The total gold open interest rose by another 5594 contracts rising from 464,281 to 469,875.  The rise in OI over these past few weeks have been relentless. The front September  (non active) gold month saw it's OI rise by 9 contracts from 48 to 57.  We had zero notices filed on Thursday so we actually gained another 9 contracts or 900 additional ounces are standing.  The next active delivery month is October and here the OI fell by 1678 contracts as the paper players rolled into December.  The weekend level of Oct OI rests at 23,509 which is very small. All eyes are really focused on the big December contract and this month has the makings of a huge Battle Royale.  This may be the bankers Waterloo.  The December OI rose another 4,957 contracts from 316,831 to rest this weekend at 321,798.  The estimated volume at the gold comex on Friday, was extremely good coming in at 197,194.  Get a load of the confirmed volume on Thursday, the day QE into infinity was announced:  283,644.  Any regulators reading this?

The total silver comex OI over the past 6 months behaved differently than gold.   However yesterday, the total OI did rise by a huge 3680 contracts from 119,722 up to 123,402 complementing gold's OI rise. The active September contract saw it's OI fall by 73 contracts from 412 to 339.  We had only 18 delivery notices on Thursday so we lost another 55 contracts.  With silver rising by over 1.50 dollars since Thursday, the chance that these guys rolled without compensation is nil. The non active October silver contract saw its OI fall by 27 contracts to 223.  All eyes however will be on the December silver contract and here the OI rose by 2402 contracts from 77,994 to 80,396.
December is the only month of the year that both gold and silver are active in the delivery process.

Comex gold figures for September:

Sept 15-.2012   

Withdrawals from Dealers Inventory in oz
Withdrawals from Customer Inventory in oz
Deposits to the Dealer Inventory in oz
Deposits to the Customer Inventory, in oz
No of oz served (contracts) today
(10) 1,000 oz
No of oz to be served (notices)
(47) 4700 oz
Total monthly oz gold served (contracts) so far this month
(711)  71,100 oz
Total accumulative withdrawal of gold from the Dealers inventory this month
246,685.32 oz
Total accumulative withdrawal of gold from the Customer inventory this month

Activity was quite good today.
We had neither a  customer deposit nor a dealer deposit for the second straight day.
We had the following customer withdrawal :

i) Out of HSBC:   96,756.57 oz
ii) out of Manfra;  1028.80 oz

total withdrawal by customer:  97,785.37 oz
we had no adjustments.
Thus the dealer inventory rests this weekend at 2.52 million oz or 78.38 tonnes of gold.

The CME reported that we had only 10 notices filed on Friday for 1000 oz
The total number of notices filed so far this month is represented by 711 notices or 71100 oz of gold.  To obtain what is left to be filed upon, I take the OI standing for September (57) and subtract out Friday's notices (10) which leaves us with 47 notices or 4700 oz of gold to be served upon our longs.

Thus the total number of gold ounces standing in this non active delivery month of September is as follows:

71,100 oz (served)  +  4700 oz (to be served upon)  =  75,800 oz or 2.357 tonnes.


September 15/2012 

Withdrawals from Dealers Inventorynil
Withdrawals from Customer Inventory 34,493.4 (Delaware, Scotia)
Deposits to the Dealer Inventorynil
Deposits to the Customer Inventory617,909.7 (JPM)
No of oz served (contracts)13  (65,000 oz)
No of oz to be served (notices)394 (1,970,000) oz
Total monthly oz silver served (contracts)1304 (6,520,000)
Total accumulative withdrawal of silver from the Dealers inventory this month700,064.14
Total accumulative withdrawal of silver from the Customer inventory this month9,510,482.26

Activity was fair in the silver vaults on Friday.

We had the following customer deposit:

i) 617,909.70 oz into JPMorgan.

we had the following customer withdrawal:

i) 3,826.70 oz out of Delaware
ii) 30,666.70 oz out of Scotia

total withdrawal by customer:  34,493.4 oz

we had one adjustment of 45,832.35oz at Scotia where the customer leased silver to the dealer.

The dealer or registered silver rests at 39.464 million oz
The total of all silver rests at 141.666 million oz.

The CME reported that we had only 13 notices filed for 65,000 oz.
The total number of notices filed so far this month total 1317 for 6,585,000 oz
To obtain what is left to be filed upon, I take the OI standing for Sept (339) and subtract out Friday's notices  (13) which leaves us with 326 notices or 1,630,000 oz

Thus the total number of silver ounces standing in this active month of September is as follows;

6,585,000 oz (served) + 1,630,000 oz (to be served upon)  =  8,215,000 oz

we lost another 275,000 oz to cash settlements.


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.

Thus a default at either of the LBMA, or Comex will trigger a catastrophic event.

Sept 15.2012:

Total Gold in Trust



Value US$:74,280,007,904.02

sept 13.2012:




Value US$:72,008,769,822.87

Sept 12.2012:




Value US$:71,996,966,574.93

 again, the bozos found religion as they added  9.05 tonnes of gold Friday.  On Thursday they added 3.01 tonnes, so in 2 days they mustered 12.06 tonnes of gold.  These guys are good!!

And now for silver:

Sept 15.2012:

Ounces of Silver in Trust314,077,053.600
Tonnes of Silver in Trust Tonnes of Silver in Trust9,768.89

sept 13.2012:

Ounces of Silver in Trust314,803,748.100
Tonnes of Silver in Trust Tonnes of Silver in Trust9,791.49

sept 12.2012:

Ounces of Silver in Trust315,191,323.300
Tonnes of Silver in Trust Tonnes of Silver in Trust9,803.55

we lost 726,000 oz of silver from the SLV.

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

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 to a positive 5.6percent to NAV in usa funds and a positive 5.7%  to NAV for Cdn funds. ( Sept 15 .2012)

2. Sprott silver fund (PSLV): Premium to NAV  rose slightly today  to  4.61% to NAV  Sept 15/2012   :
3. Sprott gold fund (PHYS): premium to NAV rose to 2.54% positive to NAV Sept 15 .2012.  The reason for the fall was due to the big purchase of gold by Sprott.  The doorknob funds sold on this news. They should have been buying with reckless abandon as precious physical gold is removed from the market.

Demand for physical is very hot.

 Now we witness the Central fund of Canada  gaining big time in its positive to NAV, as we now see CEF at a positive 5.6% in usa and 5.7% in Canadian.This fund is back in premiums to it's former self and it is  about time. Even the Sprott silver fund is almost back to a normal positive to NAV with its premium  at 4.61%. Investors are seeking out physical supplies.  .

It looks like England may have trouble in finding gold and silver for its clients.
It is worth watching the premium for gold at the Sprott funds which is a good indicator of shortage as investors bid up the premiums.


At 3:30 pm the CME releases the COT report which gives position levels of our major players.
Let's see what we can glean from this information:

first the Gold COT:

COT Gold, Silver  - September 14, 2012

-- Posted Friday, 14 September 2012 | Share this article | Source:

Gold COT Report - Futures
Large Speculators
Change from Prior Reporting Period

Small Speculators

Open Interest



non reportable positions
Change from the previous reporting period

COT Gold Report - Positions as of
Tuesday, September 11, 2012

This was a humdinger of a report.

Our large speculators:

Those large specs that have been long in gold continued to pile it on by adding another 9458 contracts to their long side and this weekend they are celebrating at their local pub.

Those small specs that have been short, saw the tea leaves and covered 2094 contracts from their short side.

Our commercials:  (and this is where the fun begins)

Our commercials that have been long in gold and these guys are close to the physical scene added another 3402 contracts to their long side.

Those commercials, like JPMorgan and HSBC and who have been perennially short in gold from the beginning of time, added another monstrous 21,107 contracts to their short side much to the glee of the regulators who seem to not pay much attention to their obvious scandal.  The bankers short positions are all non backed.

Our small specs:

The big winners of the week:

Our small specs who have been long in gold bought another 3328 contracts to their long side and these guys are joining their older and wiser brothers the large specs at their favourite watering hole.

Those small specs who have been short in gold saw the lay of the land and covered a rather large 2825 contracts.

Conclusion:  Terribly bearish as the bankers went net short by another 17,705 contracts. I believe this is the 4 or 5th straight COT report that the bankers have continually gone additionally net short.

silver COT

Silver COT Report: Futures
Large Speculators
Small Speculators
Open Interest
non reportable positions
Positions as of:

Tuesday, September 11, 2012
Our large speculators:

Those large speculators that have been long in silver somehow missed the tea leaves and covered  912 contracts from their long side.

Those large specs that have been short in silver basically stayed put by adding only a tiny 36 contracts to their short side.

Our commercials:

Please note the big difference in the Silver COT against the gold COT with respect to the commercials:

Those commercials who have been long in silver and are close to the physical scene pitched a tiny 91 contracts from their long side.

Those commercials who have been short in silver added another 2261 contracts to their short side but nearly the level as the brethren in gold.

The Small Specs and again the big winner:

The small specs that have been long in silver guessed correctly and added another 1853 contracts to their long side.

The small specs that have been short in silver also guessed correctly and covered another 1447 contracts from their short side.

Conclusion:  Our commercials went net short another 2352 contracts.  Yet they were loathe to supply the paper as they knew physical demand for silver was strong and prices were rising.  This weekend our bankers in both gold and silver are not happy campers.

And now for some important physical stories:

 One of the great technical analysts out there today is Dan Norcini.  On Friday he tells Kingworld news that the bankers are scrambling to cover their massive shortage in the precious metals.  He worries about inflation rearing its ugly head as this beast destroys the middle class:

(courtesy Dan Norcini/Kingworldnews)

Violent short covering in metals, Norcini says, predicting much inflation

11p ET Thursday, September 13, 2012
Dear Friend of GATA and Gold:
Futures market analyst Dan Norcini tonight tells King World News that the short covering in the monetary metals was violent today but that the whole commodity complex was on fire as the dollar broke down after the Fed's pledge to keep devaluing it. This, Norcini says, augurs for a lot more inflation and the destruction of the middle class. An excerpt from the interview is posted at the King World News blog here:
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc. 


It looks like Jeff Christian has egg all over his face today.  He stated on BNN that you should go short on gold and silver and that the USA will not engage in QEIII.  He was dead wrong.
This is the same fellow that faced off against me at the CFTC hearings and in one of my exchanges with the CFTC, he barked that the true physical picture in London is really 1 oz of physical per 100 oz of derivatives.  Adrian Douglas interjected at that moment and told the world basically that paper gold is being hypothecated and re-hypothecated around the globe.

Hope you enjoy this:

(courtesy CPM/BNN/GATA)

CPM Group's Jeff Christian on BNN on eve of gold and silver explosion: Go short

9:16p ET Thursday, September 13, 2012
Dear Friend of GATA and Gold:
For some reason Jeff Christian, managing director of the metals consultancy CPM Group, long has been getting under the skin of certain GATA folks. But Christian has been a hero to your secretary/treasurer ever since his testimony at the March 25, 2010, hearing of the U.S. Commodity Futures Trading Commission, where he revealed that even the so-called "physical" gold and silver markets in London are mainly just paper shorting operations:
When Christian testified, gold was below $1,200 and silver was at $17. But his comments about the phoniness of the "physical" market inadvertently reinforced GATA's urgings to investors in gold and silver to get out of mere paper claims and into real metal and to remove it from the bullion market and banking system. Whereupon the metals rose steadily over the next 18 months, peaking at $1,900 and $47, respectively.
On Monday this week Christian appeared on Business News Network in Canada and predicted that the U.S. Federal Reserve would announce no substantial bond monetization this week, that the Fed's inaction would smash commodity prices, and that CPM Group had advised its clients to go short gold and silver:
If they took Christian's advice, CPM Group's clients have not done well this week -- nor, for that matter, over the last decade or so.
BNN appears to have banned GATA representatives from interviews on the network:
But as long as BNN keeps giving airtime to Christian, gold and silver may do just fine. He may have become a bit like the hapless police detective played by the late Leslie Nielsen in the "Naked Gun" movies, whose obliviousness was nevertheless thought-provoking:
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.


Thursday's Fed plan is not stimulus but deleveraging claims Brodsky.

(courtesy Brodsky/Kingworldnews)

Fed policy isn't stimulus but deleveraging, Brodsky tells King World News

9:35p ET Thursday, September 13, 2012
Dear Friend of GATA and Gold:
If even today's announcement by the Federal Reserve hasn't convinced you of Jim Sinclair's longstanding prediction of "QE to In-fin-i-tee," you may need to hear fund manager Paul Brodsky's interview with King World News. Brodsky says:
"We have been arguing for quite some time now that this really isn't an economic stimulus game that the Fed and other central banks are playing. What they are really trying to do is to de-lever the system. ... We see the $40 billion a month in mortgage-backed securities purchases as being a way to put your thumb in the dyke. We think it's only going to get larger. There is much more of this to come. The frequency of further QE announcements is going to be greater, and it's going to lead to much higher resource and precious metals prices."
An excerpt from the interview is posted at the King World News blog here:
The latest editorial in the New York Sun drives the point home: "Of course we've been easing quantitatively for years now and unemployment is still above 8%, even as an astonishing number of would-be workers drop out of the labor force altogether. Not only is quantitative easing failing to solve the problem it was ostensibly undertaken to solve, but, according to one of our favorite economists, David Malpass, it is actually making things worse: 'In our view Fed bond purchases are weakening the economy's output by misallocating capital -- channeling capital into [mortgage-backed securities], government bonds, gold, and commodities rather than allowing a market-based allocation of capital to job-creating businesses. The stronger the Fed's forward guidance, the more self-fulfilling the economic weakness.'"
The Sun's editorial is headlined "The Missing Element" and it's posted here:
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc. 


The world's largest consumer for gold sees gold demand jump as jewellers buy despite record gold prices"

(courtesy Reuters)

India gold demand jumps as jewellers buy at record price

Fri Sep 14, 2012 1:34pm IST
MUMBAI, Sept 14 (Reuters) - Gold demand in India, the
world's biggest consumer, rose sharply on Friday despite a
record high price as jewellers and investors scaled up purchases
expecting prices to climb further during the festive season.
    * India celebrates Ganesh festival next week, which will be
followed by Dussehra in October and Diwali in November. Buying
gold during festivals is considered auspicious in the country.
    * Spot gold price in India hit a record high of 32,558
Indian rupees per 10 grams on Friday, compared to previous
session's close of 32,173 rupees.
    * "Buyers were waiting for a correction in prices for a long
period. Now they think the correction is unlikely as the U.S.
Federal Reserve announced stimulus," said a Mumbai based dealer
with a state-run bank importing the yellow metal.
    "Some buyers even think price may cross 35,000 rupees."
    * Spot gold overseas rose to a six-month high on Friday,
extending the previous session's 2-percent gain, after the
Federal Reserve launched an aggressive economic stimulus program
that could add to the risk of inflation and strengthen bullion's
    * "Jewellers and jewellery exporters were keeping lower
inventory. They were postponing purchases, hoping prices will
drop from record level," said a Mumbai based dealer with a
private bank.
    "Now jewellers are buying at record high price since
festival season is just around the corner. They can't wait
    * Investment demand, which plunged 51 percent in the June
quarter to 56.5 tonnes, was also improving due to the price
rally, dealers said.
    * The most-traded gold for October delivery was 0.2
percent lower at 32,261 rupees per 10 grams, after hitting a
record high of 32,421 rupees late on Thursday.
    * A rise in rupee, which determines the landed cost of
dollar quoted metal, weighed on sentiments, dealers said.
    * Following were the prices in rupees at 1:15 p.m., quoted
by HDFC Bank in the spot market :
                           Friday      Thursday      
    Gold .999/10 grams    32,485         32,173  
    Silver .999/kg        66,685         64,240
    At 1:28 p.m., following were the prices in rupees on the
Multi Commodity Exchange of India Ltd <0>:
       Contract       Current price     Net change 
      Oct gold          32,261              -65   
      Dec silver        65,125              -167

 (Reporting by Rajendra Jadhav; Editing by Anand Basu)


Embry: Today's manipulations will prove to be bigger blunder than London Gold Pool

4:04p ET Friday, September 13, 2012
Dear Friend of GATA and Gold:
Sprott Asset Management's John Embry couldn't be more bullish about the monetary metals and their miners -- nor more aggravated about the continuing manipulation of all markets by central banks.
"All the manipulation is doing," Embry tells King World News today, "is creating wonderful buying opportunities for the Chinese, the Russians, and the rest of the central banks that know full well what's going on. In the fullness of time, this group of manipulators will be seen to have eclipsed the blunders and the folly of the original London Gold Pool."
For a good report on the original London Gold Pool, visit Wikipedia here:
For a good report on the current London Gold Pool, see GATA board member Adrian Douglas' 2010 study here:
An excerpt from the latest King World News interview with Embry is posted at the KWN blog here:
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.


And now for other important paper stories which will have an influence on our physical prices of gold and silver:

In the following commentary we find 5 important details worth discussing with respect to Spain:

1. Spanish bank borrowings from the ECB soar to 389 billion euros from 376 billion euros.

2.  Target 2 liabilities of Spain rises to 429 billion euros., explaining the surge in Target 2 imbalances recorded last week by Germany.

3. Housing in Spain contracts by 14.4% in the second quarter.

4. Spanish sovereign debt (excluding regional debt) soared to 75.9% of GDP up 9%.
Total sovereign debt is now 804 billion euros.

5.  Regional debt guaranteed by the sovereign is up 151 billion euros or 14.4% of GDP
with the most indebted region belonging to Catalonia followed by Valencia.

(courtesy zero hedge)

Spanish Debt, Bank Borrowings Soar To Highest In Decades As Home Prices Fall By Most Ever While GDP Shrinks

Tyler Durden's picture

If only the Fed or ECB could print another Spain with the same facility that they engage in currency destruction, (and make no mistake: yesterday's "open-ended" Fed easing, is today's ECB "open-ended" intervention, is tomorrow's BOJ, is Sunday's PBOC, etc.), now might be the time. Because things in Spain, no matter what one is told, are getting progressively worse. The reason: on one hand the continuing surge in regions and total debt, both of which jumped in Q2, on the other hand Spanish bank borrowings from the ECB soared to €389 billion in August, a new record, and up from €376 billion, just as TARGET2 liabilities rose to a new record of €429 billion as well, explaining where that surge in German TARGET2 claims went, on the third hand housing prices collapsed by 14.4% in Q2, the most ever, and tying all the hands together was that the Spanish economy contracted. But please ignore the details. Focus on the important things, such as the surge in the Ibex, the S&P, consumer confidence, goldcrude, etc, however long these continue. Because unless there is such a thing as a free lunch, with every incremental injection, all Bernanke proves is that the underlying reality is far worse than what is telegraphed to the people.
Back to Spain, and its soaring debt...
Spanish government debt rose to 75.9 percent of its economy in the second quarter of the year according to figures published by the Bank of Spain.

The figure is up 9.2 percent year-on-year and is the highest ratio in at least 22 years. The total debt ascended to €804 billion ($1.0 trillion), up €99 billion year-on-year, Spain’s central bank said in a statement Friday.

Central government spending increased by 4.4 percent to €617 billion, representing 58.3 percent of GDP.

Regional government spending grew by 2.8 percent to €151 billion, equivalent to 14.2 percent of GDP, also the highest level in at least 22 years.

The most indebted region in the second quarter was Catalonia with €44 billion followed by Valencia.
... and its plunging homes prices:
Spanish home prices fell the most on record in the second quarter as the euro area’s fourth- largest economy shrank and a reduction in mortgage lending crimped demand for property.

The average price of houses and apartments declined 14.4 percent from a year earlier, the most since the measurement began in 2008, the National Statistics Institute in Madrid said today in an e-mailed statement. Prices fell 3.3 percent from the previous quarter.

“The data reflects a significant drop and confirms that prices haven’t bottomed out yet,” said Fernando Encinar, co- founder of, Spain’s largest property website. “Only homes that are heavily discounted will sell as access to credit has completely dried up for potential buyers.”

The number of Spanish homes sold declined in July for a 17th month, dropping 2.5 percent from a year earlier, according to the statistics agency. Mortgage lending fell 20.4 percent in June from the year-ago period, INE data shows.

The government has passed two decrees this year forcing Spanish banks to make deeper provisions for losses linked to real estate in an effort to push down prices and boost sales.

Spain built on average 675,000 homes a year from 1997 to 2006, more than France, Germany and the U.K. combined, according to a report by a unit of Spanish savings bank Cajamar.
... and its insolvent banks:
We used to make fun of Greece all the time. We had obviously not heard of Spain.

The Fed’s QE 3 Program: Short Term Thinking For Long-Term Pain

Phoenix Capital Research's picture

Yesterday the Fed announced QE 3: an open ended program through which the Fed will purchase $40 billion worth of Mortgage Backed Securities every month until it decides that the world is right again.
The implications of this are severe. However, the first question we have to ask is, “why now?”
After all, stocks were already at 4-year highs, food and energy prices were soaring, interest rates were at record lows, etc. On top of this, the Fed failed to announce QE 3 for over a year (QE 2 ended June 2011). Why announce it now?
There are only two reasons:
1)   Things are in fact far worse behind the scenes than we know (the Fed HAD to do something to get more money into the system)
2)   Politics
Regarding item #1, I want to be very clear here. The fact that my timing was off on predicting a European collapse doesn’t mean Europe will not collapse. Instead it simply means that my timing was off.
With that in mind, we have to look at the Fed’s move from an EU perspective. We know that Obama literally pleaded with Angela Merkel to keep the EU together until the election was over.
Moreover, we know that Europe is in a very bad place. Here’s a quick 30,000 foot view of Europe in bullet point form. I’m focusing on the country that’s in the most trouble (Spain) and the country that is the backstop for the EU (Germany).
All of the following are facts:
1)   Spain’s banking system saw a bank run to the tune of €70 billion in August. The market cap for all of Spain’s banks is just €114 billion. So Spanish banks need to raise at least €20+ billion or so per month in the coming months to stay afloat. This is without depositors pulling additional funds in September onwards. That’s really bad news.
2)   Spain’s now nationalized Bankia just took another €5.4 billion from Spain’s in-country rescue fund. This indicates that once nationalized, problem banks DO NOT cease to be problems.
3)   The region of Andalusia is requesting a bailout from the Spanish Federal Government. This comes on the heels of bailout requests from the regions of Valencia, Murcia and Catalonia (none of which want any “conditions” on the funds).
4)   Spain has set aside €18 billion to bailout its regions. The current bailout requests already amount to €10.8 billion. That’s just from this year alone.
Simply put, Spain has MAJOR problems. And this is after the ECB put over €1 trillion in liquidity into the EU banking system to cover three year funding gaps for EU banks.
Despite these measures, Spain has already asked for a €100 billion bailout for its banks from the EU. However, it’s yet to request a formal sovereign bailout.
The reason for this is Spain doesn’t want the EU or IMF to impose conditions on its already troubled economy (youth unemployment at 50% and total unemployment at 25%).
Also, Spain doesn’t want IMF and EU bean counters to sift through its book. Case in point, the country just discoveredanother €28 billion in debt on its books. One wonders what else is hidden in the darkness of Spain’s officials “numbers.”
1)   The country is now sporting a Debt to GDP of 90% courtesy of its EU bailouts.
2)   Germany has committed over €2.1 trillion in backdoor bailouts to the EU.
3)   German Chancellor Angela Merkel is up for re-election next year. The EU bailouts will be THE election topic. And she is facing backlash from members in her own party as well as opposition leaders concerning her actions in helping the EU.
So, we see a problem country (Spain) facing a severe bank run, regional bailouts, and more at the precise time that its ultimate backstop (Germany) has put its own solvency into question due to various EU bailout schemes.
I believe that the Fed’s decision to announce QE 3 now was in part due to the severity of these issues. One has to remember that a significant number of the Fed’s Primary Dealers are based in Europe. The Fed will be feeding them liquidity via QE 3.
Remember, the ECB’s recent open-ended bond program requires countries to meet “conditions.” The Fed’s QE 3 doesn’t. So this can be seen in some ways as a potential back-door bailout to Europe in that it will get liquidity into European banks.
Again, I firmly believe that one of the primary reasons the Fed did this was to deal with liquidity issues that are occurring “behind the scenes.” The fact the Fed piggy-backed this announcement after the ECB’s announcement of its open-ended bond purchasing program makes this a coordinated central bank intervention.
Why would the Fed and ECB do this? Because they’re scared stiff of what’s happening and are trying to shock and awe the markets into submission with terms like “open ended” and “unlimited.”
There is only one reason to do this: things are in fact much worse than anyone has admitted.
In this regard the announcement of QE 3 should in fact be cause for serious concern about the stability of the financial system. Again, there is no logical reason for QE 3 now. Food and energy prices are high as are stocks. Interest rates are low. US unemployment (based on the official numbers) is not that bad.
So we have to see this QE 3 announcement as a kind of desperate move to support the ECB in its attempt to rein in a European Crisis that is rapidly spinning out of control.
As I’ve noted in earlier articles to you, the EFSF bailout fund has only €65 billion left in funding. And the ESM (which Germany has ratified) is meant to receive 30% of its funding from Spain and Italy. So Europe was about out of options as far as bailouts go. QE 3 is meant to help Europe get through the US Presidential election at which point a larger program might be announced.
Now on to the second reason for QE 3: politics.
I have to say, the Fed’s decision to announce QE 3 now was a real gamble. Mitt Romney has stated several times that he would replace Bernanke if elected. So the fact the Fed decided to announce QE 3 now as opposed to any time in the last year should be perceived as a very political move.
In plain terms, this is Bernanke trying to juice the stock market (and perhaps the US economy) for all its worth to help Obama’s re-election chances. There is simply no other way to perceive this move. Bernanke is doing a “Hail Mary” pass to try and keep his job.
The consequences of this will be complicated. For one thing, with food and energy prices already high (Oil just cleared $100 again). So the Fed is running the risk of increasing the cost of living to the point that voters potentially turn on Obama. The economy is already entering another recession (the recent ISM reading was sub-50 which is recessionary territory). To pile even inflation of top of this is not a wise move.
We also have to consider China and the Middle East.
China’s economy is entering a hard landing. With food prices already high, the Chinese Government is desperate to channel the country’s frustrations towards an external problem rather than face rampant civil unrest.
Thus far the focus of this has been Japan (the long-standing dispute over who actually owns the Senkaku islands). But with the Fed now announcing QE 3 (which will push food prices even higher), we will see a resurgence in the US/ China conflict: more accusations of currency manipulation, trade wars, and other political issues.
In plain terms, the Fed just handed China another problem (even higher food prices). Don’t expect China to ignore this. That’s unintended consequence #1.
As for the Middle East, we need to remember that the entire Arab Spring was started when QE 2 pushed food prices to record highs. With anti-Americanism on the rise in the Middle East (see the numerous embassy attacks), the consequences of more food inflation in the Middle East courtesy of QE 3 will NOT be pleasant.
That’s unintended consequence #2.
Finally, the Fed’s QE 3 program will result in higher operating costs for US companies. Higher operating costs mean lower profits. With companies already lowering their earnings forecasts (in the last month we’ve seen Fed Ex, Bed Bath and Beyond, Proctor and Gamble, Adobe, Starbucks, and McDonald’s do this), the Fed just greatly increased the potential for even more earnings surprises to the downside.
The Fed has also increased the likelihood of more layoffs in the private sector. When operating costs rise, corporations will cut whatever other costs they can. This means firing people. So look for unemployment to actually rise based on QE 3.
So, to recap all of this, the key takeaway items from the Fed’s QE 3 announcement are the following:
1)   This should be seen as a tag-team effort between the ECB and the Fed to try and rein in the European Crisis
2)   It’s also a clear and obvious political move to attempt to boost the Obama re-election campaign (and save Bernanke’s job)
Both of these issues indicate that the Fed is very concerned about issues in the short-term (Europe and the US Presidential election). This should be a big red flag to all of us that things are very likely far worse than we realize.
On top of this, the Fed’s move will have severe consequences for the US’s foreign relations as food prices add fuel to the fire for conflicts in China and the Middle East.
How precisely these issues will play out remains to be seen, but it’s clear none of the consequences will be good (what are the odds the Middle East or China end up grateful to the US/Fed for this?)
So the Fed’s decision to announce QE 3 should be seen as a very big negative if anything. True, stock prices will soar. But:
1)   Profit margins will shrink resulting in lower profits (which will likely lead companies to lay-off workers to cut their costs).
2)   The cost of living will increase globally as well as in the US.
None of these are items to celebrate. If anything the Fed has just added fuel to the fire. The fire was bad enough to begin with (Europe, the US, and China were entering recession). Adding higher inflation to this mess isn’t going to do any of us a lick of good.
I’m currently working on a new portfolio of investments that will profit from this new investment landscape. I do not think it’s wise to buy anything today as risk-on assets are sharply overbought and should stage a pullback.
Moreover, it’s never a wise idea to load up on new investments before a weekend, especially when so many major issues are moving forward. There are too many surprises that can occur while the markets are closed.
So I’ll have another update to you next week concerning which investments to focus on. For now, the most obvious items to look into are Gold and Silver bullion. But I’ll have more for you on Monday.
Until then…
Best Regards,
Graham Summers


Shall We Not Revenge?

Tyler Durden's picture

Via Mark J. Grant, author of Out of the Box,
"Though this be madness, yet there is method in it.”


The gentleman, in this case, “protests too much” and in protest reveals the true meaning of his course which perhaps is a decline to bended knee and a supine position to his Master. It is scant days to the election and I cannot help but think that our continuing trip to the “presses of creation” is an act of contrivance to support “him that must be obeyed” while shameless in its purpose serves not the “greater good” but the lesser path of political contrivance. In reading the explanations and the rationale of the actions undertaken I am not swayed. In fact, there were too many reasons, too much offered of almost an apology that causes me to question the validity of the foundation of our present course. In a world where things are difficult and where our Central Bank rolls out the creation of money, once again, as the end all and be all of our supposed passage to financial Heaven; I mark the day and note the consequences. Down with the Dollar and up with equities and down with mortgage rates and all contrived and perhaps ill conceived and, unlike Europe, “all for one” but not one for all; for who does not wish to be named in any chapter of this ill-begotten play.

"Can one desire too much of a good thing?”

                              -As You Like It

In our world it is reality in the long term and perhaps the much too long term and in the short term; perception and the capture of the winnings. The Great Game is played to win and not too be right and so bragging rights accrue to those that called the ball and a nod to the win of their endeavors and a respectful nod it is but for the perpetrator; a disrespectful shrug and a fair amount of insolence. Not that it was ever disconnected perhaps, the Banker from the State, and the charade is useful no doubt but still; I do not applaud this characterization or any ones that occurred in the earlier chapters. What is difficult now will be made all that more difficult later by the actions of our Fed but then the players will be gone and it is only the barely considered members of the nation that will suffer as a result of these slings and arrows tossed so carelessly across the bow of our nation’s future.

"Conscience is but a word that cowards use, devised at first to keep the strong in awe.”

                   -King Richard III

So, along with the rest, it is to be commodities up, oil up, gold up but what of the citizens; what of the people and no hooray from me for the abuse of power. It is a bill that will have to be paid and a scheme that has a cost and a stroke for the government and a stroke against those that have to pay for it.The dislocation between the governing and the governed could not be greater and I take no pride in watching the machinations of men with no thought for this generation; much less those who will follow. A shameless rout and ill gotten gains and a certain sadness for America.

"If you prick us, do we not bleed, if you tickle us, do we not laugh, if you poison us, do we not die and if you wrong us; shall we not revenge?"

                           -The Merchant of Venice

The Dilemma facing the Spanish.  If they give in and ask formally for aid then Rajoy looses his job and the nation is plunged into economic chaos.  So far the jawboning has worked and Spain does not need aid right this minute.  However next month huge bond redemptions occur together with more bank runs etc will surely change the landscape:

(courtesy Bloomberg)

Spain’s Aid Dilemma in Focus at Euro Crisis Meeting

European finance ministers squared off over a possible aid program for Spain, with creditors unwilling to commit until the government takes additional steps to boost competitiveness and rid the economy of debt.

Mariano Rajoy, Spain's prime minister. Photographer: Angel Navarrete/Bloomberg
Sept. 14 (Bloomberg) -- Dutch acting Finance Minister Jan Kees de Jager says Spain must convince markets that it has a "sound policy" for economic overhauls and budget measures. He spoke today with reporters in Nicosia, Cyprus. (Source: Bloomberg)
Dutch Finance Minister Jan Kees de Jager
“If there will be support, there will be conditions,” Dutch Finance Minister Jan Kees de Jager told reporters before a meeting of euro-area finance chiefs in Nicosia, Cyprus today. Photographer: Hannelore Foerster/Bloomberg
Spain, already drawing on 100 billion euros ($130 billion) to repair its banking system, wants the lightest possible conditions on a European credit line or loan program that would also enable the European Central Bank to buy bonds to bring down its borrowing costs.
“If there will be support, there will be conditions,” Dutch Finance Minister Jan Kees de Jager told reporters before a meeting of euro-area finance chiefs in Nicosia, Cyprus today. “Spain is on the right way but they have to continue to convince the markets that they have a sound policy.”
Spain’s aid-or-no-aid dilemma comes with the euro at a four-month high and Spanish bond yields at five-month lows. As at prior stages in the almost three-year debt turmoil, political leaders run the risk of being lulled into a false sense of security that dilutes efforts to fix the economy.
Europe is stabilized,” Austrian Finance Minister Maria Fekter said. “We’ll be equipped to deal with all phenomena that come along.”

Bond-Buying Mission

The euro rose as much as 0.5 percent $1.3054 today, the highest since May 8. Spanish 10-year bond yields fell 5 basis points to 5.58 percent, the lowest since April 3. The extra yield over German bonds narrowed by 12 basis points to 396 basis points.
Financial markets were boosted by the ECB’s Sept. 6 offer - - with conditions attached -- to go on a bond-buying mission and a Sept. 12 ruling by the German supreme court that cleared the way for the setup of a 500 billion-euro permanent bailout fund.
Spanish Economy Minister Luis de Guindos continued to play for time, saying that a bond-buying program won’t be on the agenda today and pointing to “important announcements” on economic reforms to be made inMadrid “in coming days.”
Finance ministers are also in a holding pattern on Greece, the first victim of the crisis. Greek Prime Minister Antonis Samaras is facing hurdles within his coalition to proposed wage and pension cuts to meet creditor demands for 11.5 billion euros in budget savings.
Until then, the next installments of Greece’s 240 billion- euro aid package are on hold. Finance ministers today will hear a progress report from the “troika” of the European Commission, the ECB and the International Monetary Fund.
“We will today get informed about the interim situation,” German Finance Minister Wolfgang Schaeuble said. “When the troika report is ready we will discuss the necessary consequences and decide, but not now.”
To contact the reporters on this story: James G. Neuger in Nicosia at; Svenja O’Donnell in Nicosia at; Maud van Gaal in Nicosia
To contact the editor responsible for this story: James Hertling at

Your opening Spanish 10 year bond yield:


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5.634000.00100 0.02%

Your opening Italian 10 year bond yield at 8 am early this morning:

Italy Govt Bonds 10 Year Gross Yield

 Add to Portfolio


4.954000.04800 0.96%

Your key early currency crosses:

Eur/USA  1.3105   up .011
USA/Japan 77.99  up .378
GBP/USA    1.6231  up .0079
USA/Canada  .9639 down .0051

and early trading from Europe as we head into NY

the risk is off is  dominant as Europe punted to the USA and they responded with QE into infinity.

FTSE up  35.5 points or .60%
Paris CAC up 30.5  points or .86%
German DAX up 109.93 points or 1.5%
and the Spanish ibex up 228.4 points or 2.87%


The Arabian Fall of 2012 now has another country to join in:  Lebanon!!

(courtesy zero hedge)

Arabian Fall Update: Egypt, Libya, Yemen, Morrocco, Tunisia, Sudan And Now Lebanon

Tyler Durden's picture

From the Arabian Spring of hope (although technically protesting soaring food prices, something which is about to happen all over again) to the Arabian Fall of anti-American revulsion in under two years: has to be a blowback record. The latest casualty: the German embassy in Sudan:
  • Protestors now inside German Embassy in Khartoum, Sudan - RTRS
  • Protesters pull down emblem at German embassy in Sudan, raise Islamic flag, Reuters witness says - RTRS
  • Protesters set KFC restaurant on fire in Lebanon over pope's visit, anti-Islam film -RTRS
So: Egypt, Libya, Yemen, Morrocco, Tunisia, Sudan and now Lebanon. Did we miss anyone?


Your closing Spanish 10 year bond yield:  (rising again)


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5.785000.15500 2.75%

Your closing Italian 10 year bond yield:

Italy Govt Bonds 10 Year Gross Yield

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5.017000.00800 0.16%
As of 12:04:59 ET on 09/14/2012.

Your more important currency crosses closings:

Euro/USA   1.3126  up .0132
USA/Japan  78.38  up .78
GBP/USA   1.6211  up .0063
USA/Can  .97203  up .0032

and your important bourse closing index results:

Dow: up 53.51 points or 0.4% up
FTSE up 95.63 points or 1.64%.
Paris CAC up 79.49 points or 2,27%
German DAX up 101.81 points or 1.39%
Spanish Ibex  up 218 or 2.75%


Your important USA stories:

The following zero hedge is a very important commentary on what will happen to the Fed's balance sheet as they continue to purchase 40 billion usa dollars of mortgaged backed bonds.  Also remember that this program runs parallel to operation twist where another 45 billion in bonds is purchased by "sterilized" through the sale of treasury bills.

In essence for the rest of 2012:  the Fed's balance sheet expands by 40 billion x 4 months or 160 billion
For 2013: the balance sheet rises by 85 billion dollars x 12 months or 1.02 trillion dollars. It will consist of
40 billion per month in MBS and 45 billion or 1/2 of 85 billion in treasury bonds.

Thus the USA government will monetize 1.17 trillion dollars of a budget of 4 trillion or approximately 30% of its budget.

What is worse is that the Fed's balance sheet expands to 4 trillion dollars by the end of 2013.  If and when they decide to unwind this, it will put hardship on 25% of its GDP of 15 trillion dollars. In other words, its GDP must fall by 25% if unwound.

(courtesy zero hedge)

The Fed's Balance At The End Of 2013: $4 Trillion

Tyler Durden's picture

What happens next:
  • Imminently, the Fed's Open Markets Operations desk will commence buying $40 billion in MBS per month, or about $10 billion each week. Concurrently, the Fed which is continuing Operation Twist, will still purchase $45 billion in "longer-term" Treasurys, sterilized by the $45 billion or so in 1-3 years Bonds it will sell until the end of the year at which point it runs out of short-term paper to sell.
End result: every month through the end of 2012, the Fed's balance sheet expands by $40 billion in MBS.
  • Beginning January 1, 2013 the Fed will continue monetizing $40 billion in MBS each month, and will continue Operation Twist, however it will adjust the program so that it continues to increase its long-term holdings at $85 billion per month, without sterilization as it will no longer have short-term bonds to sell. It will also need to extend its ZIRP language "through the end of 2016" so all bonds 1-3 years are essentially risk free, as they are now, in effect eliminating the need to sell them.
End result: every month in 2013 the Fed will increase its balance sheet by $85 billion, consisting of $40 billion in MBS, and $45 billion in 10-30 year Treasurys, or the natural monthly supply of longer-dated issuance. The Fed will therefore monetize roughly half of the US budget deficit in 2013.
Putting it all together, the Fed's balance sheet will increase from just over $2.8 trillion currently, to $4 trillion on December 25, 2013. A total increase of $1.17 trillion.
This is what the Fed's balance sheet will looks like:

Another way of visualizing this is how many assets as a percentage of US GDP the Fed will hold on its books. Currently, this number is 18%. By the end of 2013, the Fed's historical flow operations will be accountable for 24% of US GDP.
Why is this important? Simple: when the time comes for the Fed to unwind its balance sheet, if ever, the reverse Flow process will be responsible for deducting at least 24% of US GDP at the time when said tightening happens. If ever.
What is scariest, is that as of this moment, all of this is priced in. Any incremental gains in the stock market will have to come from additional easing over and above what Bernanke just announced.
And finally: Fed's DV01 at December 31, 2013: ~$4 billion

QE III will raise the nominal price of all assets including oil and gold.  As the balance sheet of the Fed rises to 4 trillion dollars, then one should expect gold to rise to 2250 dollars per oz and oil at 150 dollars per barrel:

(courtesy zero hedge)

What Does A $4 Trillion Fed Balance Sheet Mean For Gold And Oil

Tyler Durden's picture

Earlier we explained why Bernanke's actions today mean that the Fed Balance Sheet will likely grow to over $4 trillion by the end of 2013. Critically this flood of liquidity will raise the nominal price of every asset (from whimsical pieces of stockholder paper to barbarous relics and black gold). Some of these assets, like stock prices and high-yield credit spreads do have point-in-time 'value limits' to their price - though at times it seems a dream that fundamentals would ever matter again; but some have less of a binding constraint - such as gold. Should the Fed proceed, as seems likely, and do its worst/best to blow its balance sheet wad then we estimate Gold will be priced at least $2250 per ounce by the end of 2013 (of course higher if the Fed sees no evidence of recovery). Meanwhile, deeper underground, the world's mainstay source of energy, WTI Crude oil, could jump to record highs over $150 per barrel (which just happens to coincide with the 'pegged' value of oil in gold). It will be interesting indeed to see how the world's socio-economic infrastructure hangs together should that occur - can't happen? Different this time? Indeed it is now that Ben hit the big red 'panic' button.

Gold vs Fed and ECB balance sheets... notably for QE2, gold priced in all the Fed balance sheet expansion within around half the period (around six months from Jackson Hole) and then overshot - this would infer we see Gold $2250 around the end of the first quarter next year - and expect some overshoot...

Oil vs Fed balance sheet... (which fits nicely into the 0.07 oz of Gold per barrel 'peg' that seems to have been 'agreed' with the world's oil producers).

Charts: Bloomberg


By the end of 2014, Bank of America sees the Fed balance sheet surpassing 5 trillion usa dollars and thus gold at 3350 per oz and crude at 190 per barrel:

(courtesy zero hedge)

BofA Sees Fed Assets Surpassing $5 Trillion By End Of 2014... Leading To $3350 Gold And $190 Crude

Tyler Durden's picture

Yesterday, when we first presented our calculation of what the Fed's balance sheet would look like through the end of 2013, some were confused why we assumed that the Fed would continue monetizing the long-end beyond the end of 2012. Simple: in its statement, the FOMC said that "If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability." Therefore, the only question is by what point the labor market would have improved sufficiently to satisfy the Fed with its "improvement" (all else equal, which however - and here's looking at you inflation - will not be). Conservatively, we assumed that it would take at the lest until December 2014 for unemployment to cross the Fed's "all clear threshold." As it turns out we were optimistic. Bank of America's Priya Misra has just released an analysis which is identical to ours in all other respects, except for when the latest QE version would end. BofA's take: "We do not believe there will be “substantial” improvement in the labor market for the next 1.5-2 years and foresee the Fed buying Treasuries after the end of Operation Twist." What does this mean for total Fed purchases? Again, simple. Add $1 trillion to the Zero Hedge total of $4TRN. In other words, Bank of America just predicted at least 2 years and change of constant monetization, which would send the Fed's balance sheet to grand total of just over $5,000,000,000,000 as the Fed adds another $2.2 trillion MBS and Treasury notional to the current total of $2.8 trillion.
In other words, for once we actually were shockinglyoptimistic on the US economy. Assuming BofA is correct, and it probably is, this is how the Fed's balance sheet will look like for the next 2 years:
Or, in terms of US GDP, the Fed's balance sheet will have "LBOed" just shy of 30% of all US goods and services.
It gets worse:
Since the Fed is effectively becoming the marginal player in both the MBS and Treasury markets, a very relevant question is how much private market debt is left to sell. Short answer: not much. According to BofA's calculation, the Fed will own more than 33% of the entire mortgage market by 2014.
 That's half the story.
On the Treasury side, in just over 2 years, "Fed ownership across the 6y-30y portion Treasury curve is likely to reach about 50% by end of 2013 and an average of 65% by end of 2014." You read that right: in just over 2 years, the Federal Reserve will hold two thirds of the entire bond market with a maturity over 5 years (which by then will be part of the Fed's ZIRP commitment, yield 0% and essentially be equivalent to cash).
No wonder that David Rosenberg is worried that the Fed will soon run out of securities to buy (well, there are always equities of course, but the Fed will not monetize those until some time in 2015 when hyperinflation is raging).
And speaking of hyperinflation (and our earlier note that nothing "else is equal") the real question is if indeed the Fed will own $5 trillion in "assets" in 27.5 months, what does that mean for gold and crude? The answer is plotted below:
In case it is unclear, the answer is:
  • $3350 gold
  • $190 oil.
Luckily the Fed has already factored all these soaring input costs (and "alternative money" prices) in its models, and there is nothing to worry about. Lest we forget, the Fed can crush inflation cold in 15 minutes cold... somehow. Even when unwinding its balance sheet would mean sacrificing 30% of US GDP and, let's be honest about it, civil war.
* * *
That's it in a nutshell. Those who are interested in the nuances of the BofA analysis, which is a replica of our own, can read on below:
The Fed Bazooka
Given our growth forecast, we expect the Fed to follow up the expiration of Operation Twist with an open-ended outright Treasury purchase plan at the December meeting. We expect the pace could be between $45 billion (which would be equal to the current size of Twist) and $60 billion/month for two years [in 10 year equivalents]. We expect a long program given the slow improvement in the labor market as well as the Fed’s focus on a “substantial and sustained improvement” in the employment situation.
Table 2 compares different asset purchase programs by the Fed in terms of the net notional and duration take-out. Were the Fed to engage in renewed Treasury purchases post the end of Twist (in the same maturity distribution), this could easily become one of the largest programs in terms on monthly 10y equivalent demand from the Fed. Note that even MBS buying takes duration out of private hands, which would put downward pressure on rates
Mortgages: Fed buys most of monthly issuance
We estimate that Fed purchases will take out about 60% of monthly MBS production. However, our mortgage strategists note that historically the Fed has concentrated its buying in 30y conventionals. For example, in August the Fed bought $23bn of conventional 30s, $2.5bn of conventional 15s and $3bn of GNs. This compares with gross issuance at $122bn, which is split into $88bn in conventionals ($66bn in 30s, $22bn in 15s) and $34bn in GNs. In other words, the Fed has concentrated 80% of its purchases among conventional 30y. A similar pattern would suggest that the Fed would buy an additional $30bn in this sector, which could end up being almost 90% of all issuance in conventional 30y. This explains the significant tightening in the mortgage basis, and would argue for the Fed to buy some other sectors as well.
In terms of outstandings, we expect the Fed to end up owning more than 33% of the total market by the end of 2014, which is also significant since many mortgage investors tend to reinvest paydowns. These investors would need to be persuaded to sell MBS to the Fed, which would require tighter spreads.
Treasuries: Fed will own a 45-50% in the long end in a year
Given our growth forecast, we expect the Fed to follow up the expiration of Operation Twist with an open-ended outright Treasury purchase plan at the December meeting. We estimate further what the potential ownership of the Fed could look like in the Treasury market over the course of the next two years. We assume that: 1) Purchase sizes are in the same distribution as Twist, sans the sales; 2) Treasury coupon auction sizes remain constant; and, 3) The Fed does not change the 70% per issue maximum SOMA limit.
Table 3 and Table 4 simulate the Treasury universe during the course of 2013 and 2014. Fed ownership across the 6y-30y portion Treasury curve is likely to reach about 50% by end of 2013 and an average of 65% by end of 2014. Given the current issuance schedule, we believe it is very likely that the Fed changes its purchase buckets through the next round of Treasury purchases. In particular, the Fed will begin to run out of issues in the 8y-10y bucket and will be forced to buy newly issued 10y notes should they choose to maintain the same distribution. We believe this is unlikely, and that the Fed is likely to redistribute its purchases and possibly include the 5y portion of the curve to provide some room.


A lesson on inflation and what hyperinflation can do to an economy.  Is the USA headed in that direction?
Find out..courtesy of Wolf Richter/

QE, Zimbabwe, And The Surreptitious 30% Haircut Every Decade

testosteronepit's picture

Wolf Richter
Dizzying QE gobbledygook is upon us once again. It would restart its big 480-volt money printer, in addition to the desktop machine it had been using recently, the Fed said, in order “to help ensure that inflation, over time, is at the rate most consistent with its dual mandate,” namely “maximum employment and price stability.” Thus, more inflation magically creates more jobs, and “price stability” requires more inflation in order to become more ... stable maybe?
The Dallas Fed shed some light on this conundrum. Inflation hounded the Zimbabwean dollar ever since its creation in 1980, when it was worth US$ 1.54. By 1997, when I was in Zimbabwe, the Zim dollar had plummeted to about 10 cents. I’d been traveling solo through Africa by whatever “public transportation” was available. There were days on dirt roads with washed out bridges or no bridges, dry river beds, expressways, rickety railroads, or the sand of the Sahara—and some remaining landmines. By comparison, Zimbabwe was still in decent shape. [That life-changing journey through 24 countries in Africa is subject of a forthcoming book, the third in the series. The first one, Big Like: Cascade into an Odyssey—a “funny-as-hell nonfiction book about wanderlust and traveling abroad,” a reader tweeted—is available now at Amazon.]
But inflation steepened. In 2006, the Reserve Bank of Zimbabwe created the new (second) Zimbabwean dollar by chopping off three zeros. It still wasn’t hyperinflation. Just plain inflation. In March 2007, the Z$ 500,000-note was issued, signaling the official arrival of hyperinflation (more than 50% inflation per month). By 2008, the Zim dollar had become useless for transactions. To keep the country from total collapse, authorities finally allowed transactions to be made in dollars.
In January, 2009, Zimbabwe issued the one-hundred-trillion Zim dollar note, the largest denomination banknote ever. It marked the end of the currency. In February, the Reserve Bank of Zimbabwe—which was still around despite the mayhem it had caused—introduced the fourth Zim dollar, which chopped off 12 zeros. Forget it, the people said, and the currency was abandoned. An ignominious end.
The US greenback, the South African rand, and the Botswana pula were given official status, prices “stabilized,” and real GDP per capita turned significantly positive in 2009, the first such reading since 1998. Decades of inflation and two years of hyperinflation left desperation and destitution in their wake; they’d destroyed wealth and the economy, and knocked real per capita GDP down by nearly 50% to a level not seen since the early 1950s.
Does the Fed want to create this kind of scenario in the US? Its stated inflation objective is 2% per year, as measured by PCE (Personal Consumption Expenditure), which understates the already questionable CPI numbers. So perhaps their goal is just under 3% per year as measured by CPI, or just under 30% per decade.
They succeeded: 27.5% from 1990 to 1999 and 24.6% from 2000 to 2009. But that isn’t enough anymore: inflation must be higher, the Fed said. 30% per decade perhaps. That’s the surreptitious haircut they impose on all assets every decade. If you live long enough—knock on wood—pretty soon it’ll add up to real money.
Make it up with yield? You bet. I mean, forget it. Its Zero Interest Rate Policy will stay in place indefinitely, the Fed reassured us, as it pushed its ZIRP horizon from mid-2014 to mid-2015, to be extended ad infinitum. Make it up with higher wages? Um, no. Wage increases must lag behind inflation ... to make wages competitive with those in China or Mexico. And that’s been happening since 2000 [read.... The Pauperization of America].
That’s the kind of inflation modern central banks collude to create. When it gets out of hand, they know how to slow it down. These folks are smart and powerful, and unlike the guys in Zimbabwe, they know what they’re doing. Governments, the financial industry, and large corporations benefit from “contained” inflation as it pays off part of their massive debts. They’re the constituents of central banks. Others benefit as well, such as homeowners, but they’re just bystanders. And anyone who owns that crappy debt gets a haircut.
Once inflation edges towards 10% per year, even the Fed’s constituents no longer benefit from it, but are threatened by it. And a consensus forms among central bankers to act, however painful it will be for everyone else—and suddenly, the “maximum employment” mandate is out the window.
So here’s a thought: Gold! “Its pullback a year ago shook out a lot of nervous buyers,” writes Jeff Clark, “but there are signs to watch for.” Read.... When Will Gold Finally Take Off Again?

Quote Of The Day: QE3 Should Have Been "More Stronger"

Tyler Durden's picture

A $4 trillion Fed balance sheet in 15 months (40% increase) and guess who is not happy. Yup, you got it.
From Bloomberg:
Nobel-prize winning economist Paul Krugman said that the third round of Federal Reserve asset purchases announced yesterday may be too small of a stimulus for the struggling U.S. economy.

The Princeton University economist, speaking at an event in Sao Paulo today, said that the Ben S. Bernanke’s pledge to buy $40 billion of mortgage debt a month could’ve included a commitment to maintain the asset purchase program for an extended period of time or until the unemployment rate falls to a targeted level. 

"The change in tone is important but I would have liked a more stronger [sic] statement,” Krugman said. “It leaves things a bit unclear.”
When one hears such brilliance, what can one say but... Krugman.
And as a reminder...

Consumer Prices Soar By Most Since June 2009, Retail Sales Ex-Autos And Gas Expose Lethargic Consumer

Tyler Durden's picture

Following yesterday's producer price shock, when PPI soared by the most since June 2009, today's CPI follows suit, with the largest jump in over 2 years, printing up 0.6%, in line with expectations, up from an unchanged print in July. In other words, the food inflation which is already spreading through the economy courtesy of the record drought, is about to be supported by some brand new Fed-generated inflation. Luckily, as yesterday, nobody uses gas or food. And in other news, retail sales posted yet another very disappointing print, when despite a better than expected headline print of 0.9% in August advance retail sales, a number which included gas and auto sales, retail sales excluding these very volatile components,rose by only 0.1%, on expectations of a 0.4% rise, and a downward revision from 0.9% to 0.8%. This was the 5th miss in 6 months, and ugly all around. In other words, the US consumer, revised consumer credit data notwithstanding, is levering up and not generating any real new sales. Expect yet another round of GDP revisions. However, in light of yesterday's Bernanke announcement, it is pretty obvious that no macro economic data for public consumption does the disaster that is the economy in the Fed's eyes, justice, and makes us wonder just how ugly the underlying reality must be. All that said: with inflation spiking, and consumers lethargic, it certainly appears that Bernanke picked the perfect time for more monetary paper dilution.
And from the CPI report:
The seasonally adjusted increase in the all items index was the largest since June 2009. About 80 percent of the increase was accounted for by the gasoline index, which rose 9.0 percent and was the major factor in the energy index rising sharply in August after declining in each of the four previous months.

The food index increased 0.2 percent in August, with major grocery store food group indexes mixed. The index for all items less food and energy rose 0.1 percent for the second month in a row. The indexes for shelter, medical care, personal care, new vehicles, and recreation all rose in August. These increases more than offset declines in the indexes for used cars and trucks, apparel, household furnishings and operations, and airline fares.

DJ U.S. Aug Industrial Output Posts Biggest Drop In Over 3 Years, Down 1.2% 
Fri Sep 14 09:15:10 2012 EDT

WASHINGTON--U.S. industrial output contracted sharply last month, as Hurricane Isaac hit production in the Gulf of Mexico and overall manufacturing activity sputtered.
Industrial production tumbled 1.2% in August, the steepest decline since March 2009, providing further indication that the economic recovery is losing steam.
Output for July was revised down to a 0.5% increase, after an initial estimate of a 0.6% gain, the Federal Reserve said Friday.
Capacity utilization slumped, as well, falling to 78.2% from 79.2% the previous month. Those operating rates remain a bit below the 1972-2011 average just above 80%.
The report was much worse than expected, with economists surveyed by Dow Jones Newswires forecasting a 0.3% decline in output and capacity utilization of 790%.
Part of the blame can be put on Isaac, which the Fed estimated to have subtracted about 0.3 percentage point from overall production.
"Precautionary shutdowns of oil and gas rigs in the Gulf of Mexico in advance of the hurricane contributed to a drop of 1.8% in the output of mines for August," the Fed said. It was also a big factor in the 3.6% drop in utilities.
But manufacturing activity also cooled significantly, retreating 0.7% after a 0.4% gain in July. Year over year, manufacturing is up 3.8%, with overall industrial production remaining 2.8% higher compared with July 2011.
Manufacturing has been a pillar of the recovery, but factory output has slumped in recent months. The latest Institute for Supply Management report showed that manufacturing activity contracted for the third straight month in August. The ISM's manufacturing index slipped to 49.6 from 49.8 in July, remaining below the expansionary level of 50.
On Thursday, the Fed launched a new round of mortgage-backed security purchases to try to shore up the economy and boost the disappointing pace of job growth. In its statement, the central bank's policy committee noted that business investment seems to be slowing. Manufacturing employment fell by 15,000 last month, while the overall economy added 96,000 jobs.
In Friday's report, most manufacturing sectors registered declines in August, with motor vehicles and parts sliding 4.0% after a 2.7% gain in July.
Excluding autos, manufacturing output was down 0.4%, after rising 0.2% the previous month.
Production of consumer goods fell 1.2%, with declines of 0.2% in business equipment and 0.1% in construction supplies.
Output by the service sector, which makes up most of the U.S. economy, isn't reflected in the industrial production data.


Dr Kevin Warsh, a former Fed Governor gives his take on the new QE to infinity and he does not like it at all as he believes that the Fed has panicked in the economic environment which is not panicking! He claims that the new i phone 5 will do more to stimulate the economy that QEIII. He is worried about asset prices melting up by concentrating on the labour side of thing:

(a must view/courtesy CNBC/Kevin Warsh/zero hedge)

Dr Kevin And Mr Warsh: A Former Fed Governor Exposes The Fed

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Ex-Fed Governor Kevin Warsh provided much food for thought during his appearance on CNBC this morning. Over the course of the following clip, he addresses concerns from just how bad the reality of the global economy must have been for Bernanke and his merry men to have gone "all-in" aggressive - reflecting on this as a panic-like reaction during times now where we are not panicking, the ineffectiveness of QE3 "iPhone 5 will do more for the real economy than QE3", fears over how bad this could get as "there is a reason 'exit' is a four-letter word." Warsh notes the paradox of Bernanke "trying to pull a rabbit out of a hat' each time the economy loses control while calling for Washington to do more - as the politicians know "there's not much we need to do, Bernanke has our back." We are not in a panic, we are in a lousy recovery and when asked what he would do, Warsh added that there is a ton Washington can do - and the key difference between him and Bernanke is the ranking of costs and benefits - indeed with WTI already over $100/bbl, the costs are rising.
On Bernanke's exit strategy: "In the history of central banks, getting out is harder than getting in"
His comments are far-ranging but mostly 'disappointed' in our view that Bernanke has done this. "We are running these program like infomercials" is how he describes the short-term actions of the Fed, but the following conclusion is perhaps the most humbling for any and every bull long-only manager who has backed up the truck of unreality:
Look at the markets now; asset prices continue to melt up. When asset prices are driven less by fundamentals and more by speeches and policies coming out of Washington, you're taking risksRisks are highest in the economy when measures of risk are he lowest; and when I look at the VIX at this level and you compare that to the headlines you read every morning, they certainly don't seem in sync, and that's exactly when shocks happen.

and one more shot across the bow:
"If they believe the economy and prospects were moving even slowly to a higher path, I don't think they would have decided to be nearly as aggressive."

"I don't like the bang for the buck. I'm not persuaded by the efficacy. I think there are people out there, perhaps even of prevailing opinion in Washington, who think the balance sheet can grow another $3 trillion to $5 trillion to bring us to optimal policy.

The reason I don't believe much of that, who are we buying this debt from? Last year, the Federal Reserve bought 77% of all of the debt that Tim Geithner issued. It doesn't mean that the Federal Government doesn't have an important role to play; but our largest buyers of securities, domestically and overseas, they aren't fooled."

Rosenberg: "If The US Is Truly Japan, The Fed Will End Up Owning The Entire Market"

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David Rosenberg, Gluskin Sheff: BernanQE Plays With A New Deck

It would be glib to ask "well, wasn't QE3 priced in?"
What the Fed did was actually much more than QE3. Call it QE3-plus... a gift that will now keep on giving. No maximum. No time limit. The Fed also lowered the bar on what it will take, going forward, for even more intervention.
The Fed announced that it will buy $40 billion per month in MBS (together with the on-going Operation Twist program, this brings total asset purchases to around $85 billion monthly through year-end), but the press statement contained an open-ended commitment to QE until labour market conditions not only improve, but do so 'substantially". This is a radical shift.
Before, the QEs had an explicit maximum limit in magnitude duration. That is no longer the case — $40 billion in MBS buying month in, month out, perhaps until such time that the Fed owns the entire market (the Fed already has $843 brillion of Agency MRS on its balance sheet as it is — if this is truly Japan and it takes another ten years for the economy to improve "substantially", the Fed will end up owning the entire market).

Prior QEs seemed predicated on relapses in economic growth (or at least no follow-through). This was the case with QE1 in March 2009, QE2 in November 2010 and Operation Twist just over a year ago. Now the economy has to strengthen dramatically and if it doesn't - the Fed is clearly targeting the jobs market and specifically on the unemployment rate here - then the spectre of even more balance sheet expansion will remain fully intact. We could soon be attaching Roman numerals to future QE actions (January 31st 2014 is Bernanke's last day as Fed Chairman and that is a loooong way away).
The payroll data always move the market but now more than ever and the Fed's explicit goal of generating "substantial" improvement in the jobs market will ensure that this 'bad news is good news' psychology will remain fully intact (why the stock market so easily managed to shrug off last week's data - this new normal of bad news being good news is now going to be more fully entrenched for the market). And with the Fed targeting mortgages, it is clear that it views housing as the transmission mechanism for its objective of strengthening the jobs market. So each housing indicator going forward is also going to very likely elicit a stronger market reaction than normal - remember, because the stock market is addicted to QE, weak data can still be expected to be supportive. A notable improvement in the data will be even more supportive because the Fed will still keep the hope alive of more QE even if economic conditions get better.
I have to stress this but anything less than "substantial" is just not going to cut it for the Fed - I don't know how that is defined numerically, but if the economy and specifically the jobs market does not go gangbusters, more QE can be expected. And it won't always be in MBS - the Fed came right out and said that it will also "undertake additional asset purchases and employ other tools as appropriate until such improvement is achieved in the context of price stability".
That reference to "price stability" is a bit comical because in the prior rounds of unconventional stimulus: market-based inflation expectations (from the TIPS market) were sub-2% and falling. Going into today's meeting, they were 2.6% and rising. This, for a central bank that spent an inordinate amount of time talking about how important it was to prevent inflation expectations from becoming unhinged when it was busy tightening policy in the 2004-2006 rate-hiking cycle. The times, they are a changin' (in other words, the price stability objective has a big fat R.I.P. on its tombstone). This is why gold swung from a moderate decline to a huge gain yesterday afternoon, and the DXY is breaking. It is clear that out of its dual mandate, a lower unemployment rate right now clearly trumps any concern over higher inflation expectations (whether justified or not).
Equities have ripped to the upside. Commodities are bid. Gold has broken out. The U.S. dollar is sliding. Yet the bond market refuses to buy in. The yield on the 10-year note has remained stable through this entire dramatic response to QE3 (and pledges for more). The Fed announced that it was buying mortgage-backed securities, not Treasuries, so it is curious as to why the bond market is not selling off dramatically. I can count numerous Fed meeting days when the stock market rallied sizably and bonds sold off alongside the reflationary view. I recall all too well the June 26, 2003 FOMC meeting when the Fed cut rates for the last time in that cycle and told the market it was on its own because the economic clouds had finally parted. The Dow ran up more than 100 points from the intra-day low that session and the 10-year note yield jumped 17 basis points, basically ratifying the view of the equity market at the time. But this time around, the Treasury market remains the odd man out on this new pro-growth view evident in the pricing of other asset classes. For any perma-bull out there, Mr. Bond is like having a mosquito in your ear on the putting green.
So from a markets standpoint, let's talk about what all this means.
  • The Fed is setting us up for more risk-on/risk-off volatility. Long-short strategies or relative value strategies are perfectly appropriate.
  • The Fed extended the period of ultra low policy rates through to mid-2015 (one FOMC member is at 20161) from the end of 2014, which will nurture a low yield environment even further. Not only that, but the Fed said that "a highly accommodative stance of monetary policy will remain appropriate fora considerable time after the economic recovery strengthens" which means that even if growth miraculously manages to accelerate earlier than expected, the Fed is not going to begin raising rates. The age of "pre-emptive" tightening is long gone. This nurturing of a low policy rate environment for years to come will continue to underpin the income (dividend) theme in the stock market.
  • The fact that the Fed is embarking on an even more aggressive course with inflation expectations on the rise should be viewed constructively for gold and other precious metals (and gold mining stocks).
  • The Treasury market is like the brake lights on a car - we need to acknowledge that it is not signalling better growth ahead. Screen for earnings visibility and less cyclicality. Bonds usually have the economy right.
  • Corporate bonds should be a beneficiary as the Fed continues to anchor a low interest cost environment and as such, correspondingly keep debt- servicing charges and default risks at bay.

I don't think this latest Fed action does anything more for the economy than the previous rounds did. It's just an added reminder of how screwed up the economy really is and that the U.S. is much closer to resembling Japan of the past two decades than is generally recognized. Maybe in the central bank world of the "counterfactual" these QEs prevent a worse outcome but the most radical easing in monetary policy ever recorded has not stopped this post-bubble-bust American economy from posting its weakest recovery ever whether measured in real, nominal or per capita terms.
The economy is saddled with too much debt, a shortage of skills, bloated government, an uncertain tax rate outlook, the costs associated with Obamacare, banking sector re-regulation and a spreading European recession. Home prices may have revived of late, but there are still an amazing 22% of debt-ridden homeowners who are upside-down on their mortgage. Monetary policy is best equipped to deal with the vagaries of the business cycle but is a blunt way to deal with deep structural, fiscal and regulatory hurdles. QE has done squat for the economy and I don't expect that to change. Even the Fed cut its 2012 real GDP growth projection for this year to 1.85% from 2.15% - for a year when typically growth is closer to 4% - and so the bump-up in 2013 to 2.75% from 2.5% has to be viewed in that context (in fact, it would seem as though for all the bluster, the level of real GDP is actually lower now at the end of next year compared to the pre-QE3 forecast... maybe this is what the Treasury market has latched on to).
It would seem as though the Fed's macro models have a massive coefficient for the 'wealth effect' factor. The wealth effect may well stimulate economic activity at the bottom of an inventory or a normal business cycle. But this factor is really irrelevant at the trough of a balance sheet/delivering recession.The economy is suffering from a shortage of aggregate demand. Full stop. Perhaps most importantly, in order for the Fed's action to have a lasting impact on the direction of the equity market, it must foster at least some significant belief that the action will lead to self-sustaining economic expansion. The scars of real family median income declining for two years in a row - the Fed's action in a perverse way perpetuates this by forcing essential basic material prices higher - and an unprecedented five-year decline in household net worth are lingering, and exerting far more powerful dampening effect on spending and confidence than the Fed's repeated attempts to generate risk-taking behaviour.
To the extent that the Fed is at least temporarily successful in nurturing a risk-on trade for portfolio managers, the reality is that changing the relative prices of assets does not create demand.

It just perpetuates the inequality that is building up in the country, and while this is not a headline maker, it is a real long term risk for the health of the country, from a social stability perspective as well.


Let us conclude with this weekly wrap up from Greg Hunter of

Weekly News Wrap-Up 9.14.12

By Greg Hunter’s 
I just want to focus on two stories today: the Federal Reserve’s latest round of money printing and the Middle East.  Let’s start with the Fed’s announcement.  It will print money and spend it buying $40 billion a month in sour debt.  It says it is to keep interest rates low and to spur employment, but it’s much more about a continued bailout of the big banks.  That’s what economist John Williams of says.  Inflation is a lock, and gold and silver prices shot up on the money printing news.  Over in the EU, the European Central Bank is doing the same thing, but theirs is “unlimited.”  The Germans caved to the pressure, and fresh money is being printed on both sides of the Atlantic.  You have to be crazy to be long on the dollar or the euro.  On to the Middle East, and what a mess that is.  It will not get better anytime soon.  Just last week, I was telling you how the Russians were warning the U.S. about using terrorists in Libya, Egypt and Syria to further their goals of regime change.  The Russians basically said this type of plan can blow up in your face, and voila–it did.  The U.S., Libyan and Egyptian embassies were attacked on 9/11, and one U.S. Senator, Bill Nelson, says it’s the work of al-Qaeda.  They hate us.  It has been widely reported we used al-Qaeda in Libya and Syria and backed the Muslim Brotherhood in Egypt.  Meanwhile, we killed a top al-Qaeda official in Yemen with a drone strike!!  What kind of foreign policy is this?  Now, there is an open feud between Israel and the U.S.  The Prime Minister of Israel, Benjamin Netanyahu, is asking the Obama Administration what’s the holdup for an attack on Iran’s nuclear program.  Join Greg Hunter for analysis on these stories and more in the Weekly News Wrap-Up.


Well that about does it for today.

I hope you all have a grand weekend.

To all our Jewish friends, I wish you all a very happy and prosperous New Year.

see you all on Monday.


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