Are Booming Sales of Home Safes signs of the Next Crisis?

In the US, home safes or vaults seem to be in fashion

From Smart Money

In an era marked by financial turbulence, it's probably not surprising that safes have become a popular commodity, with some manufacturers, retailers and installers reporting sales increases of as much as 40 percent from a few years ago. But the bigger eyebrow-raiser is what has happened to those iconic gray-steel boxes of yore: They've undergone an extreme makeover -- or several of them. Taking the place of those old square combination jobs are a range of custom safes, from boutique showpieces to decoy models for the family den -- not to mention the truly offbeat (a hideaway lockbox resembling, ahem, a pair of men's underwear) and the seriously safe (an in-home vault with a price tag of more than $100,000). And that's not even getting into the ever-broadening array of color choices (champagne marble, anyone?) "None of our safes should be hidden in a closet," says Markus Dottling, principal at Dottling, a German specialty-safe manufacturer whose museum-worthy designs can cost more than the average American house.

One thing that isn't driving the safe boom, apparently, is crime. Indeed, U.S. burglary rates have been plunging for years. Still, experts say that many savers and investors feel a lingering sense of insecurity in their finances -- a hard-to-shake fear borne out of the jolting recession and, at times, wobbly recovery -- which is helping to spur the new safeguarding mentality. Tyler D. Nunnally, founder and CEO of Upside Risk, an Atlanta firm that researches investor psychology, says sticking tangible assets in a safe can be a natural reaction to volatility in the markets. "People dislike loss twice as much as they like gains," he says. "They want to protect what they have." Growing numbers of these fearful types simply don't trust their banks to protect them: In a Gallup poll last year, a record-high 36 percent of Americans said they had "very little" or "no" confidence in U.S. banks. (In 2008 and 2009, when the financial crisis was peaking, that figure stood at 22 and 29 percent, respectively.) And growing concern about identity theft has made some people more eager to keep their assets in a form they can see and count, says R. Brent Lang, an investment manager in Surrey, British Columbia: "By acquiring one password, someone can wipe out all your digital wealth," he says.

That’s because many people seem to be taking measures to protect their wealth. “Don’t trust their banks”, “insecurity in their finances” “identity theft” and “crime” has been cited as reasons for the dramatic shift in the perception of risks.

Yet mainstream experts will see “stashing or hoarding cash” as “negative” for the economy which is hardly accurate. As the great Professor Murray N. Rothbard explained in What has Government Done to Our Money? (bold emphasis mine, italics original)

Why do people keep any cash balances at all? Suppose that all of us were able to foretell the future with absolute certainty. In that case, no one would have to keep cash balances on hand. Everyone would know exactly how much he will spend, and how much income he will receive, at all future dates. He need not keep any money at hand, but will lend out his gold so as to receive his payments in the needed amounts on the very days he makes his expenditures. But, of course, we necessarily live in a world of uncertainty. People do not precisely know what will happen to them, or what their future incomes or costs will be. The more uncertain and fearful they are, the more cash balances they will want to hold; the more secure, the less cash they will wish to keep on hand. Another reason for keeping cash is also a function of the real world of uncertainty. If people expect the price of money to fall in the near future, they will spend their money now while money is more valuable, thus "dishoarding" and reducing their demand for money. Conversely, if they expect the price of money to rise, they will wait to spend money later when it is more valuable, and their demand for cash will increase. People's demands for cash balances, then, rise and fall for good and sound reasons.

Economists err if they believe something is wrong when money is not in constant, active "circulation." Money is only useful for exchange value, true, but it is not only useful at the actual moment of exchange. This truth has been often overlooked. Money is just as useful when lying "idle" in somebody's cash balance, even in a miser's "hoard." For that money is being held now in wait for possible future exchange--it supplies to its owner, right now, the usefulness of permitting exchanges at any time--present or future--the owner might desire.

In short, since people don’t know the future and where the perception of the risk of uncertainty are being amplified, the increased demand for money represents people’s satisfaction.

However the mainstream would then use “lack of aggregate demand” or insufficient consumption as further justification for government intrusion. In reality, today’s uncertain environments have been caused by excessive and obstructive role of governments.

Record gun sales (Telegraph) and gold seen as the "best investment option" (Gallup) seem to correspond with the growing demand for home safes or vaults. All these add up to highlight heightened uncertainty.

Add to this a bleak report which noted that the US government may be preparing for a “civil war”.

From Beacon Equity Research,

In a riveting interview on TruNews Radio, Wednesday, private investigator Doug Hagmann said high-level, reliable sources told him the U.S. Department of Homeland Security (DHS) is preparing for “massive civil war” in America.

“Folks, we’re getting ready for one massive economic collapse,” Hagmann told TruNews host Rick Wiles.

“We have problems . . . The federal government is preparing for civil uprising,” he added, “so every time you hear about troop movements, every time you hear about movements of military equipment, the militarization of the police, the buying of the ammunition, all of this is . . . they (DHS) are preparing for a massive uprising.”

Hagmann goes on to say that his sources tell him the concerns of the DHS stem from a collapse of the U.S. dollar and the hyperinflation a collapse in the value of the world’s primary reserve currency implies to a nation of 311 million Americans, who, for the significant portion of the population, is armed.

Uprisings in Greece is, indeed, a problem, but an uprising of armed Americans becomes a matter of serious national security, a point addressed in a recent report by the Pentagon and highlighted as a vulnerability and threat to the U.S. during war-game exercises at the Department of Defense last year, according to one of the DoD’s war-game participants, Jim Rickards, author of Currency Wars: The Making of the Next Global Crisis.

Where government interventionism and inflationism has been intensifying, all designed to protect the interests of vested interest groups (unions), cronies (such as green energy, banking system, and others) and the welfare and warfare state, then the risks of a political economic meltdown grows.

I hope that Americans will come to the realization that interventionism and inflationism are economically unsustainable policies and promptly act to reform the system before disaster strikes. Remember, what happens to the US will most likely ripple across the globe.

Nevertheless, as for everyone else, while we should hope for the best, we should prepare for the worst.

Germany’s Negative Yielding Debt

In Europe, desperate times calls for desperate measures. Now the public pays the government to hold their money.

From the Wall Street Journal, (bold emphasis mine)

Investors agreed to pay the German government for the privilege of lending it money.

In an auction Monday, Germany sold €3.9 billion ($4.96 billion) of six-month bills that had an average yield of negative 0.0122%, the first time on record that yields at a German debt auction moved into negative territory.

This means that unlike most other short-term sovereign debt, in which investors expect to be repaid more than they lend, investors agreed to be paid slightly less. And they are willing to do that because they are so worried about the potential for big losses elsewhere.

That is particularly the case in Europe, where sovereign-bond markets have been rocked by a years-long crisis. Switzerland and the Netherlands, also seen as relatively safe countries in which to invest, are among the few that have sold debt with negative yields in recent months.

In other words, German, Swiss and Dutch debt holders are losing money in exchange for safety.

Negative yields are symptomatic of an aura of uncertainty, the intensifying state of distress, the insufficiency of an alternative and the urgency to seek safehaven.

Interesting times indeed.

Philippine Mining Sector’s Pause Signifies Buying Opportunity

Even if the mining sector could be in a consolidation phase over the coming week/s, this would likely be temporary event.

A Resurgent Boom in Global Gold Mining Stocks?

With gold prices drifting just a few percentages below the newly established record levels at over $1,900, gold mining stocks in the US, Canada and South Africa seem headed for a breakaway run following what seems like a serial or concerted breakout attempts from about one year period of consolidation.

This can be seen in the charts of US major mining indices, such as the CBOE Gold Index (GOX), the Gold Bugs Index – AMEX (HUI), the Gold & Silver Index - Philadelphia (XAU) and the DJUSPM Dow Jones Gold Mining Index, where except for the XAU which is at the resistance levels, the rest are in a resistance breakout mode.

While price actions of the local mining index has had little correlations with international mining indices, one cannot discount the possibility that a continuity of the recent price advances or of the breakaway run of global mining issues may also filter into local issues.

And considering that local participants have increasingly been more receptive to the mining industry, then share prices of the composite members may just get a second wind going into the yearend.

And part of the mainstream story has been the recent $14 billion political economic concessions[1] “investments” ‘within the next 5 years’[2] signed in China by President Aquino during his latest State visit.

The local mining industry has easily become a political tool for gaining approval ratings.

Mounting Inflationism is a Plus For Gold

The unravelling European debt crisis and the conventional wisdom of heightened recession risks appear to be provoking more aggressive policy responses from a previously ‘dithering’ officialdom.

Central banks as the Swiss National Bank have aggressively been inflating the system[3] allegedly to curb the rise of the franc (which in reality has been part of the scheme to save European banks). South Korea has also reportedly been into the game too[4] but at a modest scale.

Yet as the crisis deepens, political pressure will bear down on political authorities who have represented the inflation hawks camp or dissidents of QEs or asset purchases by central banks such as ECB’s Juergen Stark who recently resigned out of policy schism.

US Federal Reserve chair Ben Bernanke has once again signalled that further ‘credit easing’ (a.k.a. inflationism) is on the table, aside from proposing to modify the mix of the Fed’s existing balance sheet via the ‘Operation Twist’ or the lowering of long term interest rates in order to induce the public to take upon more risk[5]. The Fed’s trial balloon or public communications management or conditioning tool comes in conjunction with President Obama’s $447 jobs program, apparently meant to shore up the latter’s sagging chances for re-election.

In other words, political “do something” about the current economic problems is being impressed upon to the public for their acceptance or for justifications for more political interventions from both the fiscal and monetary dimensions.

And it wouldn’t signify a farfetched idea that a grand coordinated QE project or credit easing measures by major central banks something similar to the Plaza Accord as predicted by Morgan Stanley’s analysts could be in the works too[6]. The Plaza Accord was a joint intervention in the currency markets by major economies to depreciate the US dollar in 1985[7]. This time, perhaps, the biggest economies will all act in concert to devalue their currencies impliedly against commodities.

Thus, any of the realization of these ‘arranged or independent’ acts to reflate the system to stem the current wave of liquidations of malinvestments meant to preserve the troika political system of the welfare-warfare state, the central banking and banking cartel and to further attain a permanent state of quasi-booms would be exceedingly bullish for gold.

The current stream of inflationism would be added on top of the existing ones which only would expand the fragility of the incumbent but rapidly degenerate monetary system.

Finally I would like to add that while many see mines as ‘investment’, my long held view is that in absence of a local spot and futures market for commodities, local mining issues would represent as proxy to direct gold ownership or as insurance against mounting policies aimed at destroying the purchasing power of the legal tender based paper money system for Philippine residents.

As gold has been shaping up to be the main safe haven or as store of value, so will gold’s function be represented here. This is where the divergences will likely hold—the gold mining sector.

At this very crucial time, I would seek haven in gold and precious metals.

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[1] See P-Noy’s Entourage is a Showcase of the Philippine Political Economy August 31, 2011

[2] Inquirer.net $14-B investments in mining eyed from China within the next 5 years, September 7, 2011

[3] See Hot: Swiss National Bank to Embrace Zimbabwe’s Gideon Gono model September 6, 2011

[4] See South Korea Joins the Currency Devaluation Derby, September 8, 2011

[5] See US Mulls ‘official’ QE 3.0, Operation Twist AND Fiscal Stimulus, September 9, 2011

[6] See Will the Global Central Banks Coordinate a Global Devaluation or Plaza Accord 2.0? September 9, 2011

[7] Wikipedia.org Plaza Accord

Amidst Market Meltdown: The Phisix-ASEAN Divergence Dynamics Holds

The global financial markets and the local equity market have, so far, been confirming my divergence theory.

There are two implications:

One, market correlations has been continually changing. There is no fixed relationship as every political-economic variable has been fluid or in a state of flux.

This only demonstrates the apriorism of the inconstancy and complexity of the market’s behavior, which strengthens the perspective or argument that historical determinism (through charts or math models) can’t accurately predict the outcome of human actions. Even LTCM’s co-founder Myron Scholes recently admitted to such shortcomings[1].

And importantly, the activist policies by global political stewards, aimed at the non-repetition of the events that has led to the global contagion emanating from the Lehman bankruptcy episode of 2008 (which could also be seen as actions to preserve the status quo of political institutions founded on the welfare state-central banking-politically endowed banking system), have been driving this dynamic.

In short, political actions continue to dominate the marketplace[2].

Thus this transition phase has led to the distinctive performances in the relationships among market classes which can be seen across global markets.

Gold as THE Safe Haven

In today’s market distress, market leadership or the flight to safety dynamics has changed as noted last week. The US dollar which used to function as the traditional safehaven currency as in 2008 has given way to the gold backed Swiss franc and the Japanese Yen. This comes in spite of repeated interventions by their respective governments.

Another very significant change in correlations has been that of the US treasuries and gold prices.

Again, while US treasuries had been traditional shock absorber of an environment dominated by risk aversion, this time, it’s not only that gold’s correlation with US Treasuries has significantly tightened, most important is that gold has immensely outperformed US Treasuries since 2009, as shown above[3].

Gold’s assumption of the market leadership points to a vital seismic transition taking place.

Let me repeat, since gold has not been used as medium for payment and settlement, in an environment of deleveraging and liquidation, gold’s record run can’t be seen as in reaction to deflation fears but from expectations over aggressive inflationary stance by policymakers.

Arguments that point to the possible reaction of gold prices to ‘confiscatory deflation’, as in the case of the Argentine crisis of 2000, is simply unfounded; Gold priced in Argentine Pesos remained flat during the time when Argentine authorities imposed policies that confiscated private property through the banking system, but eventually flew when such policies had been relaxed and had been funded by a jump in money supply via devaluation[4].

Gold’s recent phenomenal rise has been parabolic! Gold has essentially skyrocketed by $1,050+ in less than TWO weeks! Gold prices jumped by 6% this week. The vertiginous ascent means gold prices may be susceptible to a sharp downside action (similar to Silver early this year) from profit takers.

Nonetheless gold’s relationship with other commodities has also deviated.

The correlations between gold and energy (Dow Jones UBS Energy—DJAEN) and industrial metals Dow Jones-UBS Industrial Metals—DJIAN) has turned negative, as the latter two has been on a downtrend.

However the Food or agricultural prices (represented by S&P GSCI Agricultural Index Spot Price GKX) appear to have broken out of the consolidation phase to possibly join Gold’s ascendancy.

The breakdown in correlations do not suggest of a deflationary environment but rather a ongoing distress in the monetary affairs of crisis affected nations.

The Continuing Phisix-ASEAN Divergences

The same divergence dynamics can be seen in global stock markets.

While markets in the US (SPX), Europe (STOX50) and Asia Ex-Japan (P2Dow) have been sizably down, the Philippine Phisix (as well as major ASEAN indices) appears to defy these trends or has been the least affected.

One would further note that Asian markets, despite the similar downtrends has still outperformed the US and Europe, measured in terms of having lesser degree of losses.

A broader picture of this week’s performance reveals that the ASEAN-4 has been mixed even in the face of a global equity market meltdown.

Thailand and the Philippines posted marginal gains while Malaysia was unchanged. Topnotch Indonesia suffered the most but still substantially less than the losses accounted for by major bourses.

Vietnam, which has been in a bear market, saw the largest weekly gain which may have reflected on a ‘dead cat’s bounce’, whereas Singapore endured hefty losses which also reflected on the contagion of losses from major economy bourses.

The above chart signifies as more evidence that has been reinforcing my divergence theory.

Yet growing aberrations are not only being manifested in stock markets but also in the region’s currency.

Previously, a milieu of heightened risk aversion entailed a run on regional currencies.

Today, the seeming resiliency of the ASEAN-4’s equity markets appears to also be reflected on their respective currencies.

Three weeks of global market convulsion hardly dinted on the short term uptrend of ASEAN-4 currencies seen in the chart from Yahoo Finance in pecking order Philippine peso, Indonesia rupiah, Thai baht and the Malaysian ringgit.

And when seen from the frame of the Peso-Phisix relationship, the recent selloffs share the same divergent (the actions of major economies) outlook.

The Phisix (black candle) appears to have broken down from its short term trend (light blue trend line), so as with the US-dollar Philippine Peso (green trendline) which had a breakout (breakouts marked by blue circle/ellipses) during the week.

Since I don’t subscribe to the oversimplistic nature of mechanical charting, but rather see charts as guidepost underpinned by much stronger forces of praxeology (logic of human action), we need to look at the bigger picture.

The sympathy breakdown by the Phisix, the other week, has not been supported by the broad market.

Market breadth continues to suggest that present activities have been characterized by rotational activities and consolidations rather than broad market deterioration.

Weekly advance-decline spread, which measures market sentiments has improved from last week, even if the differentials posted slight losses (left window).

Foreign buying turned slightly NET positive (right window).

One would further note that sectoral performance had been equally divided.

Services led by PLDT [PSE: TEL] along with the Holding sector, mostly from Aboitiz Equity Ventures [PSE: AEV] and SM Investments [PSE: SM] provided contributed materially to the gains of the Phisix.

The Mining industry closed the week almost at par with the performance of the local benchmark, while Financial Industrial and the property sectors fell. Again signs of rotations and consolidations at work.

These empirical evidences seem to suggest that the short term breakdown by the Phisix and the Peso may not constitute an inflection point. This will continue to hold true unless exogenous forces exert more influence than the current underlying dynamics suggests.

Money Supply Growth Plus Policy Activism Equals Low Chance of a US Recession

As I repeatedly keep emphasizing, it is unclear if such divergence dynamics could be sustained under a contagion from full blown recession or in crisis, because if it does, this would translate to decoupling.

In other words, divergence dynamics is NOT likely immune to major recessions or crisis until proven otherwise.

Yet despite many signs that appear to indicate for a sharp economic slowdown which many have said increases the recession risks in the US or the Eurozone, very important leading indicators suggest that this won’t be happening.

Importantly, the deep-seated bailout culture (Bernanke Put or Bernanke doctrine) practiced by the current crop of policymakers or the ‘activist’ stance in policymaking would likely introduce more monetary easing measures that could defer the unwinding of the imbalances built into the system.

In other words, I don’t share the view that the US will fall into a recession as many popular analysts claim.

For one, excess reserves held by the US Federal Reserves appears to have topped out (WRESBAL-lowest pane).

And this comes in the face of the recent surge in consumer lending (Total Consumer Credit Outstanding; TotalSL-highest pane). Also we are seeing signs of recovery in Industrial and Business Loans (Busloans-mid pane).

So, perhaps the US banking system could be diverting these excess reserves held at the US Federal Reserve into loans. And once this motion intensifies, this will first be read as a “boom”, which will be followed by acceleration of consumer price inflation and an eventual “bust”.

Yet it’s plain nonsense or naive to say that monetary policies have been “impotent”.

First, ZERO interest rates, which has been and will be used as the deflationary bogeyman, are exactly the selfsame excuse needed by central bankers to engage in activist policymaking (print money).

Policy ‘impotence’ would happen when inflation and interest rates are abnormally high.

Second, growing risks of recessions or crises has been the oft deployed justification to impose crisis avoidance or ‘stability’ measures. Crisis conditions gives politicians the opportunity to expand political control or what I would call the Emmanuel Rahm doctrine or creed.

The debt ceiling deal had been reached from the same fear based ‘Armaggedon’ strategy. And so has the Troubled Asset Relief Program (TARP) under the Emergency Economic Stabilization Act of 2008[5] where the ensuing market crash from the failed first vote led to its eventual legislation.

Morgan Stanley’s Joachim Fels and Manoj Pradhan thinks that the current predicament has likewise been a policy induced slowdown.

Mr. Fels and Pradhan writes[6],

There are three main reasons for our downgrade. First, the recent incoming data, especially in the US and the euro area, have been disappointing, suggesting less momentum into 2H11 and pushing down full-year 2011 estimates. Second, recent policy errors - especially Europe's slow and insufficient response to the sovereign crisis and the drama around lifting the US debt ceiling - have weighed down on financial markets and eroded business and consumer confidence. A negative feedback loop between weak growth and soggy asset markets now appears to be in the making in Europe and the US. This should be aggravated by the prospect of fiscal tightening in the US and Europe.

While we see this as being policy induced, where I differ from the above analysts is that they see these as policy errors, I don’t.

I have been saying that since QE 2.0 has been unpopularly received, extending the same policies would need political conditions that would warrant its acceptabilty. Thus, I have been saying that current environments has been orchestrated or designed to meet such goals[7].

Fear is likely the justification for the next round of QE.

As I recently quoted an analyst[8],

But the political imperative will be to do something… anything… immediately, to ward off disaster.

Importantly, a survey of fund manageers sees a jump of expectations for QE[9].

Expectations of QE3 have doubled: 60% now see 1,100 points or below on the S&P500 Index as a trigger for QE3, up from 28% last month, and global fiscal policy is now described as restrictive for the first time since March 2009.

And we seem to be seeing more clues to the US Federal Reserve’s next asset purchasing measures.

Late last week, the US Federal Reserve has extended a $200 million loan facility via currency swap lines to the Swiss National Bank (SNB), as an unidentified European bank reportedly secured a $500 million emergency loan[10]. This essentially validates my suspicion that the so-called currency intervention by the SNB camouflaged its true purpose, i.e. the extension of liquidity to distressed banks, whose woes have been ventilated on the equity markets.

Moreover a Wall Street Journal article[11] implies that the solution (panacea) to the European banking woes should be more QEs.

Foreign banks that lack extensive U.S. branch networks have a handful of ways to bankroll U.S. operations. They can borrow dollars from money-market funds, central banks or other commercial banks. Or they can swap their home currencies, such as euros, for dollars in the foreign-exchange market. The problem is, most of those options can vanish in a crisis.

Until recently, that hasn't been a problem. Thanks partly to the Federal Reserve's so-called quantitative-easing program, huge amounts of dollars have been sloshing around the financial system, and much of it has landed at international banks, according to weekly Fed reports on bank balance sheets.

So rescuing the Euro banking system would mean a reciprocal arrangement since these banks, under normal conditions would be buying or financing the US deficits via the treasury markets. So by extending funding through the currency swap lines, the US Federal Reserve has essentially commenced a footstep into QE 3.0.

Third, suggestions that grassroots politics would impact central bank policymaking is simply groundless. The general public has insufficient knowledge on the esoteric activities of central bankers.

Henry Ford was popularly quoted that

It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.

That’s why the US Federal Reserve has successfuly encroached on the fiscal realm via QE 1.0 and 2.0 with little political opposition. The current political opposition has been focused on the fiscal front yet the debt ceiling bill sailed through it. Yet in case the public’s outcry for the fiscal reform does intensify, any austerity will likely be furtively channeled to central bank manueverings.

Thus, with foundering equity markets, rising credit risk environment which risks undermining the US-Euro banking system, a higher debt ceiling, and a sharp economic slowdown, the current environment seems ripe for the picking. It will be an opportunity which Bernanke is likely to seize.

The annual meeting of global central bankers at Jackson Hole, Wyomming hosted by the Kansas City Fed meeting next week could be the momentous event where US Federal Reserve Chair Ben Bernanke may unleash his second measure “another round of asset purchases” which he communicated[12] last July 13^th. This follows his first “explicit guidance” outline for a zero bound rate which had recently been made into a policy[13] (zero bound rate until mid-2013)

All these seamlessly explains the newfound gold-US treasury ‘flight to safety’ correlations.

Global financial markets addicted to money printing has been waiting for the “Bernanke Put” moment. For them, current measures have NOT been enough, and they are starving for another rescue.

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[1] See Confessions of an Econometrician August 19, 2011

[2] See Global Equity Meltdown: Political Actions to Save Global Banks, August 14,2011

[3] Gayed Michael A. Gold = Treasuries, Ritholtz.com, August 18, 2011

[4] See Confiscatory Deflation and Gold Prices, August 15, 2011

[5] Wikipedia.org First House vote, September 29 Emergency Economic Stabilization Act of 2008

[6] Fels, Joachim and Pradhan, Manoj Dangerously Close to Recession, Morgan Stanley, August 19, 2011

[7] See Global Market Crash Points to QE 3.0, August 7, 2011

[8] See The Policy Making Moral Hazard: The Bailout Mentality, August 20, 2011

[9] Finance Asia Investors slash equities, pile into cash amid growth fears, August 18, 2011

[10] See US Federal Reserve Acts on Concerns over Europe’s Funding Problems, August 19, 2011

[11] Wall Street Journal Fed Eyes European Banks, August 18, 2011

[12] See Ben Bernanke Hints at QE 3.0, July 13 2011

[13] See Global Equity Meltdown: Political Actions to Save Global Banks, August 14, 2011

Global Equity Meltdown: Political Actions to Save Global Banks

“However, hanging onto money is highly risky in a time of monetary inflation. The security-seeker does not understand this. Keynesian economists do not understand this. Politicians do not understand this. The result of inflationary central bank policies is the production of uncertainty in excess of what the public wants to accept. But the public does not understand Mises' theory of the business cycle. Voters do not demand a halt to the increase in money. It would not matter if they did. Central bankers do not answer to voters. They also do not answer to politicians. "Monetary policy is too important to be left to politicians," the paid propagandists called economists assure us. The politicians believe this. Until the crisis of 2008, so did voters.” Professor Gary North

Local headlines blare “Global stocks gyrate wildly; sell-off resumes in markets”[1]

To chronicle this week’s action through the lens of the US Dow Jones Industrial Average (INDU), we see that on Monday August 8th, the major US bellwether fell 635 points or 5.5%. On Tuesday, the INDU rose 430 points or 4%. On Wednesday, it fell 520 points 4.6%. On Thursday, it rose 423 points or 3.9%. The week closed with the Dow Jones Industrials up by 126.71 points or 1.13% on Friday.

All these wild swings accrued to a weekly modest loss of 1.53% by the Dow Jones Industrials.

Some ideologically blinded commentators argue that these had been about aggregate demand. So logic tell us that aggregate demand collapsed on Monday, jumps higher on Tuesday, tanked again on Wednesday, then gets reinvigorated on Thursday and Friday? Makes sense no?

How about fear? Fear on Monday, greed on Tuesday, fear on Wednesday, and greed on Thursday and Friday? Do you find this train of logic convincing? I find this patently absurd.

Confidence doesn’t emerge out of random. Instead, people react to changes in the environment and the marketplace. Their actions are purposeful and seen in the context of incentives (beneficial for them).

And that’s why many who belong to the camp of econometrics based reality gets wildly confused about the current developments where they try in futility to fit only parts of reality into their rigid theories.

And part of the realities that go against their beliefs are jettisoned as unreal.

So by the close of the week, these people end up scratching their heads, to quip “weird markets”.

Weird for them, but definitely not for me.

Political Actions to Save the Global Banking System

Yet if there has been any one dynamic that has been proven to be the MAJOR driving force in the financial markets over the week, this has been about POLITICS, as I have been pointing out repeatedly since 2008[2].

I am sorry to say that this has not been about aggregate demand, fear premium, corporate profits, conventional economics or mechanical chart reading, but about human action in the context of global policymakers intending to save the cartelized system of the ‘too big to fail’ banks, central banks and the welfare state.

As I pointed out last week[3],

Important: The US has been downgraded by the major credit rating agency S&P after the market closed last Friday, so there could be an extended volatility on the global marketplace at the start of the week. This largely depends if such actions has already been discounted. The first thing on Monday is to watch Japan’s response.

The S&P’s downgrade tsunami reached the shores of global markets on Monday, where the US markets crashed by 5.5%.

It is very important to point out that the market backlash from the downgrade did NOT reflect on real downgrade fears, where US interest rates across the yield curve should have spiked, but to the contrary, interest rates fell to record lows[4]!

And as also correctly pointed out last week, the US Federal Reserve’s FOMC meeting, which was held last Tuesday, introduced new measures aimed at containing prevailing market distresses.

The FOMC pledged to:

-extend zero bound rates until mid-2013, amidst growing dissension among the governors,

-maintain balance sheets by reinvesting principal payments of maturing securities,

and importantly, keep an open option to reengage in asset purchases[5].

Some have argued that the Fed’s policies has essentially been a stealth QE, as the steep yield curve from these will incentivize mortgage holders to refinance. And this would spur the Fed to reinvest the proceeds.

According to David Schawel[6],

A surge of refinancing will reduce the size of the Fed’s MBS holdings and allow them to re-invest the proceeds further out the curve

The Fed’s announcement on Tuesday, basically coincided or may have been coordinated with the European Central Bank’s purchases of Italian and Spanish bonds or ECB’s version of Quantitative Easing. The combined actions resulted to an equally sharp 4% bounce by the Dow Jones Industrials.

Mr. Bernanke has essentially implemented the first, “explicit guidance” on Fed’s policy rates, among the 3 measures he indicated last July 12th[7].

The resumption of QE and a possible reduction of the quarter percentage of interest rates paid to bank reserves by the US Federal Reserve signify as the two options on the table.

My guess is that the gradualist pace of implementation has been highly dependent on the actions of the financial markets.

I would further suspect that given the huge ECB’s equivalent of Quantitative Easing or buying of distressed bonds of Italy and Spain, aside Ireland and Portugal, estimated at US $ 1.2 trillion[8], team Bernanke perhaps desires that financial markets digest on these before sinking in another set of QEs.

And to consider that US M2 money supply[9] has been exploding, which already represents a deluge of money circulating in the US economy, thus, the seeming tentativeness to proceed with more aggressive actions.

Wednesday saw market jitters rear its ugly head, as rumors circulated that France would follow the US as the next nation to be downgraded[10]. The US markets cratered by 4.6% anew.

On Thursday, following an earlier probe launched by the US Senate on the S&P for its downgrade on the US[11], the US SEC likewise opened an investigation to a possible insider trading charge against the S&P[12].

Obviously both actions had been meant to harass the politically embattled credit rating agency. The possible result of which was that the S&P joined Fitch and Moody’s to affirm France’s credit ratings[13].

To add, 4 Euro nations[14], namely Italy, Belgium, France and Spain has joined South Korea, Turkey and Greece[15] to ban short sales. A ban forces short sellers to cover their positions whose buying temporarily drives the markets higher.

These accrued interventions once again boosted global markets anew which saw the INDU or the Dow Industrials soar by 3.9%.

Friday’s gains in global markets may have been a continuation or the carryover effects of these measures.

Unless one has been totally blind to all these evidences, these amalgamated measures can be seen as putting a floor on global stock markets, which essentially upholds the Bernanke doctrine[16], which likewise underpins part of the assets held by the cartelized banking system and sector’s publicly listed equities exposed to the market’s jurisdiction.

Thus, like 2008, we are witnessing a second round of massive redistribution of resources from taxpayers to the politically endowed banking class.

Gold as the Main Refuge

AS financial markets experienced these temblors, gold prices skyrocketed to fresh record levels at over $1,800, but eventually fell back to close at $1,747 on Friday, for a gain of $83 over the week or nearly 5%.

From the astronomical highs, gold fell dramatically as implied interventions had been also extended to the gold futures markets. Similar to the recent wave of commodity interventions, the CME steeply raised the credit margins of gold futures[17].

We have to understand that gold (coins or bullions) have NOT been used for payments and settlements in everyday transactions. So gold cannot be seen as fungible to legal tender imposed fiat cash (for now), even if some banks now accept gold as collateral.[18]

In an environment of recession or deleveraging—where loans are called in and where there will be a surge of defaults and an onrush of asset liquidations to pay off liabilities or margin calls, fiduciary media (circulating credit) will contract, prices will adjust downwards to reflect on the new capital structure and people will seek to increase cash balances in the face of uncertainty—CASH and not gold is king. Such dynamic was highly evident in 2008 (before the preliminary QEs).

Thus, it would signify a ridiculous self-contradictory argument to suggest that record gold prices has been manifesting risks of ‘deflation’.

Instead, what has been happening, as shown by the recent spate of interventions, is that for every banking problem that surfaces, global central bankers apply bailouts by massive inflationism accompanied by sporadic price controls on specific markets.

Alternatively, this means that record gold prices do not suggest of a fear premium of a deflationary environment, but instead, a possible fear premium from the prospects of a highly inflationary, one given the current actions of central banks.

This panic-manic feedback loop or in the analogy of Dr. Jeckll and Mr. Hyde’s “split personality” which characterizes the global markets of last week has been materially different from the 2007-2008 US mortgage crises.

Not only has there been a divergence in market response across different financial markets geographically (e.g. like ASEAN-Phisix), the flight to safety mode has been starkly different.

The US dollar (USD) has failed to live up to its “safehaven” status, which apparently has shifted to not only gold but the Japanese Yen (XJY) and the gold backed Swiss Franc (XSF).

It’s important to point out that the franc’s most recent decline has been due to second wave of massive $55 billion of interventions by the SNB during the week. The SNB has exposed a total of SFr120 billion ($165 billion!) over the past two weeks[19]. The pivotal question is where will $165 billion dollars go to?

Bottom line:

This time is certainly different when compared to 2008 (but not to history where authorities had been predisposed to resort to inflation as a political solution). While there has been a significant revival of global market distress, market actions have varied in many aspects, as well as in the flight to safety assets.

This implies that in learning from the 2008 episode, global policymakers have assimilated a more activist stance which ultimately leads to different market outcomes. Past performance does not guarantee future results.

The current market environment can’t be explained by conventional thinking for the simple reason that markets are being weighed and propped up by the actions of political players for a political purpose, i.e. saving the Global Banks and the preservation of the status quo of the incumbent political system.

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[1] Inquirer.net Global stocks gyrate wildly; sell-off resumes in markets, August 12, 2011

[2] See Stock Market Investing: Will Reading Political Tea Leaves Be A Better Gauge?, November 30, 2008

[3] See Global Market Crash Points to QE 3.0, August 7, 2011

[4] See Has the S&P’s Downgrade been the cause of the US Stock Market’s Crash?, August 9, 2011

[5] See US Federal Reserve Goes For Subtle QE August 10,2011

[6] Schawel, David Stealth QE3 Is Upon Us, How Ben Did It, And What It Means Business Insider, August 9, 2011

[7] See Ben Bernanke Hints at QE 3.0, July 13, 2011

[8] Bloomberg, ECB Bond Buying May Reach $1.2 Trillion in Creeping Union Germany Opposes, August 8, 2011

[9] FRED, St. Louis Federal Reserve, M2 Money Stock (M2) M2 includes a broader set of financial assets held principally by households. M2 consists of M1 plus: (1) savings deposits (which include money market deposit accounts, or MMDAs); (2) small-denomination time deposits (time deposits in amounts of less than $100,000); and (3) balances in retail money market mutual funds (MMMFs). Seasonally adjusted M2 is computed by summing savings deposits, small-denomination time deposits, and retail MMMFs, each seasonally adjusted separately, and adding this result to seasonally adjusted M1.

[10] The Hindu, Fears of France downgrade trigger massive sell-off in Europe, August 11, 2011

[11] Bloomberg.com U.S. Senate Panel Collecting Information for Possible S&P Probe, August 9, 2011

[12] Wall Street Journal Blog SEC Asking About Insider Trading at S&P: Report, August 12, 2011

[13] Bloomberg.com French AAA Rating Affirmed by Standard & Poor’s, Moody’s Amid Market Rout, August 11, 2011

[14] USA Today 4 European nations ban short-selling of stocks, August 11, 2011, see War against Short Selling: France, Spain, Italy, Belgium Ban Short Sales, August 12, 2011

[15] Business insider 2008 REPLAY: Europe Moves To Ban Short Selling As Crisis Spreads, August 11, 2011, also see War Against Market Prices: South Korea Imposes Ban on Short Sales, August 12, 2011

[16] See US Stock Markets and Animal Spirits Targeted Policies, July 10, 2010

[17] See War on Gold: CME Raises Credit Margins on Gold Futures, August 11, 2011

[18] See Two Ways to Interpret Gold’s Acceptance as Collateral to the Global Financial Community, May 27, 2011

[19] Swissinfo.ch Last ditch defence of franc intensifies, August 10, 2011