GLOBAL ECONOMICS: situation abnormal in China, Gold, US, and Eurozone. Situation Normal.

Every upside down concept will one day go downside up

ourhouse

Our house is a very, very, very fine house

Going back for another look at the Shanghai Composite this morning was like peeking through a time-warp and discovering that yes, it’s still Groundhog Day.

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The traders all sell in the morning, then there’s the Chop Suey break, and in the afternoon the PBOC buys it all back again. We all know that this is barmy, but it’s been like this since mid-September: the largest stock exchange in the fastest-growing nation on Earth is adopting a dump-and-hoover tactic that reflects nothing except a lack of bravery, a lack of principles, and a lack of ideas.

But it’s working. It must be, right, because nobody wants to buy gold as a hedge against something nasty being about to happen. No less a source than Bloomberg says Gold may be on the verge of becoming a three figure commodity in $US. It’ll sink below a thousand bucks, says Bloomberg (via Fitch-owned BMI Research) because the Fed will raise rates to bolster an already soaring Dollar.

And yes, the Fed will raise rates because the signs in the US economy are now so good, who wouldn’t?

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Er….well, apart from output production and capacity utilisation falling back noticeably in 2015. But hey – details, details…the Dollar and people long in it can’t be wrong can they?

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So there you go: Bloomberg concludes (my emphasis):

‘Gold has lost about 9 percent in 2015, dropping to a five-year low, as Fed policy makers prepare to raise borrowing costs for the first time since 2006, curbing the appeal of the metal because it doesn’t pay interest.’

Bad gold, naughty gold: how dare it not pay interest. Why, next thing we know, gold dealers will be charging us for the privilege of having some. Like German bunds. Or Zirp at the banks.

Wise man say, Flowermountain sage talk out of ass. People with tons and tons and tons of money are buying gold as a long, long hold. Everybody else is quite rightly wary of investing in a commodity that’s being repressed for the usual rainbow of can-kicking reasons.

Former China Gold Association President Sun Zhaoxue observes:

“More and more people are recognising that the ‘gold is useless’ story contains too many lies. Gold now suffers from a ‘smokescreen’ designed by the U.S., which stores 74% of global official gold reserves, to put down other currencies and maintain the US dollar hegemony.”

That does come under the heading of “he would say that”, but both the Russians and the Chinese – in fact, all the Brics – know precisely that Washington-sur-Wall Street is at….hence their moves towards breaking it by (in China’s case) signing trade deals that freeze the dollar out from as much international trade as possible. Our man with the hatchet Vladimir Putin has openly declared that he “wants to axe the dollar from Russian trade”; today Russia, tomorrow the world

But nihil desperandum chums, because a deal was done with Greece to tighten its chains another notch yesterday, and so things are slowly starting to stabilise in the Eurozone. I mean fine, senior Finnish politician  Paavo Vayrynen yesterday said, “Now is a good time to have a wider debate whether we should continue in the eurozone or not” – but who are these Finns anyway and what do they know? Pah.

Not as much as Thomas Fazi at the Ash Bennington site, I’d be willing to wager. However he, um, concludes that QE has been a failure, and ‘the last thing the eurozone needs is a further dose of quantitative easing. What it needs is a fiscal expansion aimed at boosting investment and demand through direct injections into the real economy, bypassing a broken financial sector.’ Smart bloke: this piece is a cracker in my view.

The upside-down headcase nature of fiscal and financial economics is alive and well, but there’s a burgeoning crowd of opinion leaders who think the Alchemist is a phony. In the Wall Street Journal two weeks ago, Shahin Valée pointed out that ‘The latest European Commission economic forecasts show a disturbing continuation of the recent build up in imbalances within the European Monetary Union’, following which he blasted neoliberal globalism in a manner rarely seen in the old Establishment business media.

Although we have the queer QE, zany Zirp, and bonkers bailin concepts out there, the daftest of the upside-down bunch has always been, for my money, the insane idea of paying to invest in the indebted finances of a country using fiat currency. It’s way past the 40,000 Gilder tulip…so much so, in fact, that a Berlin bund issue charging 0.38% for the fun of it all came unstuck this week: the €5bn offer of a 2 year series was underbought to the tune of €600m.

Is this, perhaps, the end of the beginning for Upside Down?

Were he alive today, Abe Lincoln would probably change the middle line of his famous epithet to “you can fool all the people for a very long time”. But his payoff – “you can’t fool all the people all the time” still holds good….at least in the markets.

If everything is upside down, there can only be an upside as long as the down dimension is suitably disguised. Once that downside outweighs the upside, everything will go tits up until we’re back the right way up. Discuss.

Last night at The Slog: Spock gives Kirk a lesson in computers

15 thoughts on “GLOBAL ECONOMICS: situation abnormal in China, Gold, US, and Eurozone. Situation Normal.

  1. Jeremy Corbyn has proposed Peoples QE which is direct Bank of England creation of money, to be invested in infrastructure ,housing etc and create employment,
    This of course by-passes the private bank monopoly of money creation.
    He has been the victim of incessant MSM villlification ever since the proposal. Of course he is seen as a a danger to the banking cartels cozy arrangement with Govt. and he must be destroyed.
    Actually Peoples QE is a misnomer, the correct term is Overt Fiscal intervention.
    QE is an exchange of money from the Central bank for bonds aand securities from the private banking system. Of course many of these securities are worhless in reality. Hence free money for bankers.

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  2. Pingback: GLOBAL ECONOMICS: situation abnormal in China, Gold, US, and Eurozone. Situation Normal. | My Blog

  3. thanks JW. of course all the financially engineered products from junk bonds to derivatives to more recent creations of debt are all ponzi schemes. Ever more clever clever ways to steal sweets etc. from the sheeple. Rotten con men will leave us all destitute and no doubt will seek to blame us for it. the criminals blaming the victims for being so gullible. fear and threats from that quarter should be totally ignored if any of us are to survive this coming storm. this link from today talks of brexit and the financial implications for the eu. and london.

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  4. How can the City of London want UK to be in locked into European Union?
    They are benefitting from the massive funds pouring into (London) from all over the world as a safe haven.
    They are getting out of the Euro as fast as they can.
    They must see (as if they care), that European legislation is a giant drag on initiative and progress.
    They must also see that Frankfurt is going to have another go at becoming the European financial centre, now that the Germans have realised France is just a hollow, broke man.
    -indeed, why does Dave want us to be handcuffed to Europe.

    Je ne comprends pas.

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  5. @FTW:Q “why does Dave want us to be handcuffed to Europe”?

    A: As the Rev Spooner might well have said: ‘because its a poke in a pig’ ………

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  6. ‘@FTW:Q “why does Dave want us to be handcuffed to Europe”?’
    Dave just does as he is told. Washington makes the decisions and Washington does what’s best for Washington.
    It will be interesting to see just how many of Dave’s men do eventually dissent from the party line and openly campaign to leave, there must be quite a few now that see the writing on the wall, particularly in the light of the recents events in Paris and the possible invocation of Article 42.
    And another thing which is certainly active in some minds and certainly not being discussed in the MSM, what about the cashless society? Can’t see that going down too well here, the thought of no more large brown envelopes……Denmark is well on the way with the Govt. there scrapping legislation that requires retailers to accept cash for a transaction.

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  7. Gold will never make interest as the value of gold is a constant, or in other words an ounce of gold is worth, well an ounce of gold. It’s the currencies which fluctuate, so for example in the case of here in Brazil, even with the price of gold in US$ terms has gone down (or rather the value of the US$ has gone up), the price in Brazilian Reais has gone up (or, in other words the value of the Brazilian currency has gone down). We buy gold when we think that our currencies will take a hit and the more aggressive investors buy the gold when the currency is worth more and flog it off when the currency isn’t all that much valued. Then wait for a strengthening in the currency again to buy more. I myself have bought gold and am keeping it for the long haul, ironically buying less recently because of the recent elevated ‘price’ in BRL.

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  8. Why does a particular investment need to pay ‘interest’?

    Interest, like stock dividends, are one means of providing a return on investment for investors. If your investment is in a plateau-phase-style investment, capital appreciation doesn’t really happen, so you need a hedge against inflation some other way – the interest or dividend. You consider it a good investment if, after reinvesting some of that coupon as the inflation hedge, you get a net return to your treasury.

    There are plenty of ‘stock/equity’ investments, however, where you have no expectation whatsoever of a dividend. Hence according to this, you should never invest in Venture Capital/Private Equity investments if interest rates go up. Well, maybe at the margins, that may be true, but if you know how to do good due diligence to eliminate more of the losers than your competitors or you are better at calculating risk-associated discount factors when making an investment, then you need no ‘interest payments’, ‘dividends’ or the like, since the aim of the investment is to sell it a few years down the line for a lot more than you paid for it. Almost all tech investors do precisely this in Silicon Valley, same with early stage biotech. When I was working in early stage VC, some folks used 60% discount rates for seed corn investments in the earliest years, whereas Series A investors might easily be using 20 – 30%. I don’t think Kleiner, Perkins, Caufield & Byers Partners will be sticking their billions in US Treasuries at 1% in the near future, somehow…..

    Property can be a mix of asset appreciation and ‘dividends’ of course. In my generation, the vast majority of people’s net assets will have been impacted far more by property investments than 40 years of hardish work. If you could have bought London property in 1994 and ridden the wave, you can easily retire now by downsizing to somewhere cheaper. If that’s what you want to do…..

    You could even choose negative interest rates in the Swiss Franc if you judge that the currency value will appreciate sufficiently against the Dollar/Sterling/Euro (according to what you want you money converted back to when you ‘monetise’ your car-park investment……) to make a loss in CHF terms turn into a profit in $/£/E terms…..

    And none of that even discusses the tens of new crypto currencies that are now available for purchase (Bitcoin merely being the most high profile….)

    Me thinks traditional precepts of ‘investment’ are somewhat passé………

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  9. “You can fool all of the people some of the time, and some of the people all of the time, and those are pretty good odds”…
    James Garner as “Maverick” cc 1960

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  10. I thought you and your readers might be interested in this report from a French Bank -http://cib.natixis.com/flushdoc.aspx?id=88106

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  11. The EU banks are now controlled by the US tax system via FATCA (Foreign Account Tax Compliance Act). They (the US) can now see any European citizen’s net worth, where their money came from and so on. We are part of the US (dying) empire I’m afraid. When all else fails they will take us to war (I think they already have).

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