…but then what happens to consumption?


The Slog offers further reasons why ‘middle-squeezing’ will continue, America is in a corner, gold must rise dramatically before long, and the VIX is being cynically repressed by the US Federal Reserve.

VIX is the accepted acronym among stock market traders and other commentators for the Chicago Board Options Exchange Market Volatility Index, a popular measure of implied volatility. CHEBOOMVIX would’ve been more aptly onomatopoaeic but less memorable, so Vix it is. Basically, the VIX is a warning signal people use to suggest actual or approaching volatility, because it has norms. It is often referred to as the “investor fear gauge”. If there’s one thing sovereign States and bankers can’t abide, it’s fearful investors: cautious investors are bad for business.

Top-heavy US brain and enduring Slogger Butch Cassidy (it’s a pseudonym, like Tyler Durden or Dora the Elf) writes to point out something to me.  The New York Stock Exchange records that in recent months, margin debt has sky-rocketed to $327 billion, passing the levels seen just prior to the collapse of Lehman Brothers. It’s not so much that the frontal-driven lunatics have wrested back control of the asylum, but rather that the Black Dude in the white coat never took it off them in the first place. It was a textbook case of “No I can’t”.

The US market players are now unsustainably over-leveraged (just like Wall Street firms in general) and there’s enough speculative money in there to ensure that only a rampant bull-market forever can stave off what I’ve taken to calling Panicollapse. I believe the term translates into Greek as Panikolopoulus, which is also the brand name of a small taxi firm in Thessalonika.

But here’s a funny thing missus: the Vix futures warning line was going up at a sharp rate during April/May 2012, and then inexplicably went south when it should’ve been heading north to Emergency Klaxon Sound III. There’s a brilliant piece on this at Zero Hedge for those of you who enjoy terrifying yourselves with 1 in 1 wiggly black schüss slopes on charts. But what it all adds up to is directionalising, aka Keeping the Mugs Calm.

This is what happened. At the end of May, the US Fed Reserve’s trading desk acquired a new Supreme Leader called Simon Potter. His style seems to involve 24/7 selling of VIX to keep the market high, happy and hyped. Mr Potter (who bears the same surname as the megalomaniac Scrooge in Frank Capra’s A Wonderful Life) is a former Brit and former Economics Prof. He is also an old crony of the Fed Reserve’s boss, Timothy ‘Bazooka’ Geithner. During 2007, Tim’s diary has an inexplicably indiscreet item headed ‘Fixing Libor’, and a key attendee at that meeting was none other than…..Simon Potter.

Potter is a 14-years Fed Reserve veteran who designed the 2009 US bank stress tests – which were almost (but not quite) as pointless, selective and optimistic as the ezone’s 2011 stress tests. He also produced a solid and honest report on the Fed’s failure to see the US housing bubble wobbling about like a giant soapy dirigible above America: but as he was on the team at the time, we have to consider him at least implicated. The VIX measure of volatility is being suppressed (ie, manipulated) to disguise the natural level of instability in an over-leveraged and over-risk-exposed Bourse. It really is that simple.

There’s no place these bastards won’t go to stitch up the American Dreamer, or even British pisceans like me. But if you think all of them are making it up as they go along, you need to do more historical research. In 1975, Fed Chairman Arthur Burns, sent a “Memorandum For The President” to Gerald Ford, in which several VIPs like Kissinger and the later Fed Chairman Alan Greenspan were included. Declassified in 2004, the memo discussed gold in great detail, especially in relation to what Burns called its ‘fair value’. The trick here is to ask the question, “Fair to whom exactly, Keemosabe?”

Burns must have been a smart bloke, because he worked out that what I posted last week in relation to gold would happen one day unless “the money-gold equivalency is controlled”. Except that he knew that 37 years ago. Nixon having taken the US quietly off the Gold Standard in 1971, Burns made the following points among others:
1. Failure to disguise the equivalency of gold and money, could easily frustrate our efforts to control world liquidity”. Valuing gold at its real market value, he opined, carried “the risk of massive liquidity creation…..of such extraordinary magnitude, it would seriously endanger” the control of inflation.
Thus, controlling global liquidity and inflation was good for US business, and this alone was a strong enough argument to artificially depress the value of gold.  Those Sloggers who don’t believe in gold market manipulation should look away now….
2. The memo openly accepted the near-universal gold price manipulation by central banks even after the gold standard had been formally abolished. It was neither deplored nor supported, but merely accepted as a necessary way to stop freely available gold becoming an investment alternative – dare I say superior alternative – to the US Dollar and the NYSE.
But here’s a specific from the Burns paper that I find rivetting:

“I have a secret understanding in writing with the Bundesbank – concurred in by Mr Schmidt [the BundesKänzler] – that Germany will not buy gold, either from the market or from another government, at a price above the official price.”

The official price being, of course, a repressive fix. It was then $42.22 an oz, but the real value was estimated to be at least $120.

So here we have the US enjoying a cosily dominant relationship with Germany (then West Germany). This was very different to its diplomatic status with the French, however, described by Burns as something of a pain in the arse: ‘…a large measure of freedom for governments to trade in gold at a market related price’ would screw things up because ‘such freedom would provide an incentive for governments to revalue their official gold holding….In fact, there are reasons for believing that the French are seeking such an outcome’.

The important point here is not really that the US had the two founding architects of the EU following entirely opposed gold diplomacy with itself: given later events, it’s hysterically funny, but not exactly unusual. The key point for me is that it shows the much higher degree of global power and control enjoyed by the American State back then compared to now. Several things have happened during those four decades since:

1. The eurozone has emerged with a more powerful and united anti-US policy.

2. China awoke with an insatiable demand for gold, and no willingness to accede to blatant American price controls….except when it favoured Beijing’s collectible hobby.

3. As globalist mercantilism and mad investment paper rocketed ahead, America’s deficit grew…and the amount of US debt owned by China went stratospheric after Wall Street lost the will to invest in anything not made of paper.

Where all of this leads is to a more profound understanding of what the American financial élite is up to in 2012. The chief factor to note, I suspect, is option close-down: the US is running out of fingers to put into pies.

It can no longer depress the price of gold at will, or informally devalue the Dollar beyond a certain point. It can no longer fob off those emerging Powers who want their gold back. More frightening still for them, both gold as a crypto-currency and the Yuan as the forerunner of a global means of exchange threaten to doom the Dollar’s status as the pre-eminent purchasing currency. It will one day run out of QE funds with which to manipulate the NYSE – and is anyway scaring folks with that degree of currency compromising.

But what it has left, for the time being, is the VIX. Smarter minds than mine cottoned on to this some time ago. But you don’t have to be smart to see that this is last-ditch stuff for the United States of America.

Be warned: stay out of the Stock market, and keep a close eye on gold….but don’t jump in too early.

Related: Is Draghi the new Goldfinger?