New From Sprott: "Have We Lost Control...Yet?"

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Fri, Jun 28, 2013 - 9:30am

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Have we lost control yet?
By Eric Sprott & Etienne Bordeleau


Recent comments by the Federal Reserve Chairman Ben Bernanke have shocked the world financial markets. It all started on May 22nd, 2013, at a Testimony to the US Congress Joint Economic Committee, where he first hinted at tapering the Fed’s quantitative easing (QE) program. Then, on Wednesday, June 19th, during the press conference following the FOMC meeting, the Chairman outlined the Fed’s exit strategy from QE.

Since the first allusion to tapering, volatility has been on the rise across the board (stocks, currencies and bonds) (Figure 1A). Moreover, the yield starved, hot money that had flown to emerging markets has been rushing for the exits, triggering significant declines in emerging market (EM) equity and bond markets (Figure 1B). Finally, the prospect of the end of monetary accommodation has triggered rapid and significant decreases (increases) in the price (yield) of longer dated Treasury bonds (also Figure 1B).

FIGURE 1A: VOLATILITY INCREASING FIGURE 1B: ASSET PRICES DECLINING


It has been clear to us for some time that the Fed was uncomfortable with the relative certainty (i.e. Bernanke Put) that has prevailed in the markets since the introduction of QE-infinity last fall. Officials definitely wanted the market to start thinking about a future without non-conventional monetary policy. However, we seriously doubt that the resulting chaos is what they had anticipated. This was evident in the Chairman’s response to a journalist’s question about the rapid rise in rates, saying the FOMC was “a little puzzled by that”.1 The genie is really out of the bottle now.

Indeed, we believe that the recent “market appeasement rhetoric” by James Bullard and Narayana Kocherlakota (Presidents of the St. Louis and Minneapolis Federal Reserve, respectively)2,3 are further proof that the Federal Reserve has realized it went too far and that it is now in damage control mode. (Update: William Dudley, President of the New York Fed mentioned in a June 27th speech that “asset purchases would continue at a higher pace for longer” if the economy was to grow slower than the FOMC’s estimate)4.

However, as the Bank for International Settlements (BIS) so elegantly put it in its most recent annual report, “[…] central banks continue to borrow time for others to act. But the cost-benefit balance is inexorably becoming less and less favourable.” To this they add: “expectation that monetary policy can solve these problems [deleveraging, financial stability] is a recipe for failure”.5 Clearly, the Federal Reserve knows this and wants to exit their QE program. But can they really?

A large portion of the current economic growth depends on housing. However, mortgage rates are closely tied to long-term treasury rates. While housing affordability is still relatively good because of low house prices, significantly higher mortgage rates might slow the housing market. Furthermore, banks are still very cautious about lending and most borrowers have difficulty accessing credit. While gentle increases in yields are good for banks (who lend long and borrow short), meteoric increases in yields (as in Figure 1B) are damaging because they are hard to hedge and create large losses on the banks securities portfolios (mostly composed of government bonds and mortgage-backed securities) as well as mark-to-market losses on their derivatives portfolios. So, the large and rapid increases in rates the talk of tapering has engendered will damage the economic growth the Fed has been working so hard to engineer, potentially requiring even more stimulus down the line.

The US government itself would also suffer from increases in yields. In its Annual Report, the BIS shows that even a small increase in interest rates would have a large impact on the projected government debt-to-GDP ratio. As shown in Figure 2, under the CBO’s base case scenario (bottom line), the US debt-to- GDP ratio would hover around 110%, whereas a 1% increase in rates would take it to 118% in 10 years (middle line). According to the Chairman’s comments, the fiscal drag that has been partly to blame for the lackluster performance of the economy should subside going forward. But, larger debt servicing costs (because of higher rates) will put more pressure on government finances, forcing it to spend an ever increasing portion of its budget on interest payments. This will have the effect of increasing the fiscal drag, going against the hopes of the Fed.

FIGURE 2: U.S. GENERAL GOVERNMENT DEBT PROJECTIONS UNDER ALTERNATIVE SCENARIOS - AS A PERCENTAGE OF GDP


To add to all this uncertainty, the situation in the Euro Zone’s periphery is far from stabilized. Following the surprise Cyprus bail-in, international bank regulators have made a push for a democratization of this alternative to outright government bail-outs of banks. This idea is quickly gaining traction amongst central planners. We recently discussed the shortcomings of the BIS’s “Template For Recapitalising Too-Big-To- Fail Banks”.6 The BIS, again in its annual report, reiterated that “we need resolution regimes to make it possible for large, complex institutions to fail in an orderly way.” As uninsured depositors and bank bond holders realize that they do not benefit from government guarantee anymore, bank funding costs will rise and funding might dry up for peripheral European banks.

Conclusion: At the last FOMC meeting, by prematurely announcing the timeline and the specifics of an exit from QE, Bernanke might have lost control of rates and volatility. The current US economic growth is still feeble and hinges on housing, which would be slowed down by raising rates. Banks, while better capitalized than pre-crisis, are still not lending to most borrowers and would be dearly affected by too fast increases in rates. Moreover, European woes still threaten the stability of the international financial system and the recent rush to the exit might further exacerbate funding pressures for weak European banks. Finally, the US government (amongst others) debt load, while already unsustainable, would keep on climbing if rates were to increase only by 100bps.

The chaotic reaction by market participants and the corresponding increase in yields now risks destabilizing this very fragile equilibrium. It is yet unclear whether or not the damage control from the other Fed Presidents will put a lid on yields and market volatility, or if the damage to the Fed’s (poorly executed) exit strategy is permanent.

1 https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20130619.pdf
2 https://www.stlouisfed.org/newsroom/displayNews.cfm?article=1829
3 https://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=5128
4 https://www.bloomberg.com/news/2013-06-27/dudley-says-qe-may-be-prolonge...
5 83rd Annual Report, Bank for International Settlements, Basel, 23 June 2013, pages 4 and 6.
6 We discuss this in the Sprott Thoughts article: “The Dijssel_Bomb”. https://sprottgroup.com/thoughts/articles/the-dijssel-bomb

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  147 Comments

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agrock
Jun 28, 2013 - 7:45pm

good stuff - pawn stars

Videos won't embed but good clip

Day after day we are force-fed the typical mumbo-jumbo jargon memes from strategists, analysts, and asset-gethering commission-takers. Today we get a breath of fresh air from, arguably, the man on the street - whose perspective seems very prescient. 'Pawn Star' show business owner Rick Harrison explains to CNBC - in words that we can all understand - why gold remains a crucial insurance for people because "governments can screw up the currency," how our economy is based purely on printing money, physical gold and paper gold disconnects - "I'm having a real difficult time right now getting physical metal. It is the crazy world of gold and silver; sometimes the paper market is going down, but you can't actually find the physical items," and the increasingly bubble-like reality of our housing market (especially in Las Vegas).

https://www.zerohedge.com/news/2013-06-28/even-pawn-star-knows-governments-can-screw-currency

Spartacus Rex
Jun 28, 2013 - 7:45pm

@ AlienEyes

LOL! Oh, Oh! Quick,WHICH Post? Maybe I can still get Turd to delete it before the squadron of drones show up in my neck of the woods to get the "Last Laugh"!

AlienEyes
Jun 28, 2013 - 7:32pm

@Spartacus Rex

Get ready for a visit from the men in black.

Your post is that which many think but few say.

The pitiful Brits have only knives and sticks.

Here in the USA, things are a bit different.

When "Red Dawn" becomes a reality, the "reds" will come from within.

SilverSurfers
Jun 28, 2013 - 7:31pm

Need

a super hero?

Video unavailable

ok, back to mind screwing billionares, its fun!!! LOL

SilverSurfers
Jun 28, 2013 - 7:17pm

Thats it!

Taking off the gloves. To all you English Professors, is it shiny or shinny.

LET THE RAGE BEGIN!!!

First up, is the famous stick save:

shin·ny

Noun

An informal form of ice hockey played esp. by children, on the street or on ice, often with a ball or other object in place of a puck.

shin·niedshin·ny·ing

Definition of SHINNY

: to move oneself up or down something vertical (as a pole) especially by alternately hugging it with the arms or hands and the legs

Origin of SHINNY

alteration of 2shin First Known Use: 1851

===============

So these English professors jump all over me for improper English in the quick type, yet the rank and file HAVE USED SHINNY for the stacks, with not a peep said by the gestopo english professors.

FOUL!!!!! Caught you all dead to rights with your jedi nazie mind tricks.

extacy, before we play rex style blind man's bluff, lets get the rules straight.

Hey Rex a Reck, we playing hotter colder? LOL

Love you Rex, dont change.

INXS - Don't Change

Being flexible, new parlance is easy to learn, but here, the nazie English Professors, set me up. You guys ....

Apr 18, 2013 ... Picked up some shinny stuff from the LCS 100 (%40) Kennedy's pretty close to melt, 20 over. It's a 50:1 buyer to seller's ratio at my LCS, that's ..

1 day ago ... Men, pistol, butch haircut, and all, so, getting bored, with all them rounds around, not shinny of course, so, I turn him an go "The FBI once asked .

So TFMetals is either full of Hockey fans or Nazie English Professors.

Being flexible, damn it, which is it? Being from Laguna Beach, living in la la land, we know how to switch hit. LOL

Silvergunn
Jun 28, 2013 - 7:04pm

Cashless Society within a month coming...

...predicted from this Oxford Club presenter.

A written presentation here

https://pro.oxfordclub.com/MONEY4979IUP/LOXFP331/Full

Audio presentation below

https://pro.oxfordclub.com/MONEY4979BRKIUP/MOXFP510/?o=999223&s=1004707&u=34771733&l=570989&r=Milo

He does say use gold as a way to secure your future and is definitely a sales pitch...

Spartacus Rex
Jun 28, 2013 - 7:03pm

Washington Driving The World To Final War, Paul Craig Roberts

Washington Is Driving The World To The Final War

Paul Craig Roberts

“V For Vendetta,” a film that portrays evil in a futuristic England as a proxy for the evil that exists today in America, ends with the defeat of evil. But this is a movie in which the hero has super powers. If you have not seen this film, you should watch it. It might wake you up and give you courage. The excerpts below show that, at least among some filmmakers, the desire for liberty still exists.

Whether the desire for liberty exists in America remains to be seen. If Americans can overcome their gullibility, their lifelong brainwashing, their propensity to believe every lie that “their” government tells them, and if Americans can escape the Matrix in which they live, they can reestablish the morality, justice, peace, freedom, and liberty that “their” government has taken from them. It is not impossible for Americans to again stand with uplifted heads. They only have to recognize that “their” government is the enemy of truth, justice, human rights and life itself.

Can mere ordinary Americans triumph over the evil that is “their” government without the aid of a superhero? If ideas are strong enough and Americans can comprehend them, good can prevail over the evil that is concentrated in Washington. What stands between the American people and their comprehension of evil is their gullibility.

If good fails in its battle with Washington’s evil, our future is a boot stamping on the human face forever.

https://www.youtube.com/watch?v=KKvvOFIHs4k&feature=youtu.be

https://www.youtube.com/watch?v=_-gHVGOoE48

If you, an American, living in superpower America lack the courage to stand up to the evil that is “your” government, perhaps the courage of Edward Snowden, Bradley Manning, Julian Assange, and tiny Ecuador will give you heart.

A US senator from New Jersey, Robert Menendez, the Democratic chairman of the Senate Foreign Relations Committee, told the Ecuadoran government that he would block the import of vegetables and flowers from Ecuador if Ecuador gives asylum to Edward Snowden. The cost to Ecuador would be one billion dollars in lost revenues.

Menendez’s statement--”Our government will not reward countries for bad behavior”--is ironic. It equates bad behavior with protecting a truth-teller and good behavior with betraying a truth-teller. Menendez’s statement is also a lie. The US government only rewards bad behavior. The US government consistently rewards those who conspire against the elected governments of their own countries, setting them up as dictators when Washington overthrows the elected governments.

Menendez’s threat did not work, but the senator did succeed in delivering yet another humiliating blow to Washington’s prestige. The Ecuadoran President, Rafael Correa, beat Menendez to the punch and cancelled the trade pact with the US on the grounds that the pact was a threat to the sovereignty of Ecuador and to moral principles and was being used by Washington to blackmail Ecuador. “Ecuador doesn’t accept pressure or threats from anyone,” added Communications Secretary Fernando Alvarado who then offered Washington foreign aid to provide human rights training to combat torture, illegal executions and attacks on peoples’ privacy.

Washington, exposed with its hand in the cookie jar devouring the privacy of the entire world and prevented by its hubris from acknowledging its illegal behavior and apologizing, has so mishandled the Snowden affair that Washington has done far more damage to itself than occurred from Snowden’s revelations. Washington has proven conclusively that it has no respect for anyone’s human rights, that it has no respect for any country’s sovereignty, that it has no respect for any moral principles, especially those it most often mouths, and that it relies on coercion and violence alone. The rest of the world now knows who its enemy is.

Washington’s presstitutes, by helping Washington demonize Snowden, Glenn Greenwald, Manning, Assange, and Ecuador, have demonstrated to the world that the US media is devoid of integrity and that nothing it reports can be believed. The US print and TV media and NPR comprise a ministry of propaganda for Washington’s immoral agendas.

On June 24, the Stasi State’s favorite whore, the Washington Post, denounced three times democratically-elected Rafael Correa as “the autocratic leader of tiny, impoverished Ecuador,” without realizing that the editorial not only demonstrated the Washington Post’s lack of any ethics whatsoever but also showed the entire world that if “tiny, impoverished Ecuador” can stand up to Washington’s threats, so can the rest of the world.

President Correa replied that the Washington Post “managed to focus attention on Snowden and on the ‘wicked’ countries that support him, making us forget the terrible things against the US people and the whole world that he denounced.” Correa added that Washington’s “world order isn’t only unjust, it’s immoral.”

The reason Washington hates Correa has nothing to do with Snowden. That Ecuador is considering asylum for Snowden is just an excuse. Correa is hated, because in the second year of his first term he repudiated the $3 billion dollar foreign debt that corrupt and despotic prior regimes had been paid to contract with international finance. Correa’s default threat forced the international financial gangsters to write down the debt by 60 percent.

Washington also hates Correa because he has been successful in reducing the high rates of poverty in Ecuador, thus building public support that makes if difficult for Washington to overthrow him from within.

Yet another reason Washington hates Correa is because he took steps against the multinational oil companies’ exploitation of Ecuador’s oil resources and limited the amount of offshore deposits in the country’s banks in order to block Washington’s ability to destabilize Ecuador’s financial system.

Washington also hates Correa for refusing to renew Washington’s lease of the air base in Manta.

Essentially, Correa has fought to take control of Ecuador’s government, media and national resources out of Washington’s hands and the hands of the small rich elite allied with Washington. It is a David vs. Goliath story.

In other words, Correa, like Venezuela’s Chevez, is the rare foreign leader who represents the interests of his own country instead of Washington’s interest.

Washington uses the various corrupt NGOs and the puppet government in Colombia as weapons against Correa and the Ecuadoran government. Many believe that it is only a matter of time before Washington succeeds in assassinating Correa.

American patriots, who feel that they should be on “their” government’s side regardless of the facts, would do well to remember what true patriotism is. For Americans, patriotism has always meant allegiance to the Constitution, not to the government. The oath is to defend the Constitution against enemies domestic and foreign. The Bush and Obama regimes have proven themselves to be the Constitution’s worst enemies. It is not possible for a true patriot to support a government that destroys the Constitution. The United States is the Constitution. Our country is not the Obama regime, the Bush regime, or some other administration. Our country is the Constitution. The Constitution is our country.

Beyond obligations to one’s own country, all humans have a responsibility to human life itself. Washington’s puppet states, such as the NATO countries, Japan, and Colombia, by providing cover and support for Washington’s aggression are enabling Washington to drive the world into World War III.

The temptation of Washington’s money easily overwhelms weak characters such as Tony Blair and David Cameron. But the governments of NATO countries and other accommodating states are not only selling out their own peoples by supporting Washington’s wars of aggression, they are selling out humanity. Washington’s hubris and arrogance grow as Washington bumps off country after country. Sooner or later Russia and China, will realize that they themselves are targets and will draw firmer lines. Arrogance will prevent Washington from acknowledging the lines, and the final war will be launched.

Washington’s hegemonic impulse is driving the world to destruction. The peoples of the world should realize this and force their governments to stop enabling Washington’s aggression. https://www.paulcraigroberts.org/

Spartacus Rex
Jun 28, 2013 - 6:54pm

Blood In The Streets Of Gold Market. Repeat Of 1970s Bull Market

GoldCore's Mark O'Byrne writes: Today’s AM fix was USD 1,203.25, EUR 921.89 and GBP 789.33 per ounce. Yesterday’s AM fix was USD 1,232.00, EUR 945.51 and GBP 806.07 per ounce.

Gold fell $25.00 or 2.04% yesterday and closed at $1,199.10/oz. Silver finished the day with a slight loss of 0.11% at $18.50/oz.


Cross Currency Table – (Bloomberg)

Gold has inched up this morning after it dropped under $1,200/oz yesterday, which triggered stop loss selling and additional pressure from funds quarter end selling. Although bargain physical buyers in the Middle East and Asia continue to scoop up gold, it has not been enough as of yet to put a floor under prices.

Very little has changed regarding the positive supply demand dynamics of the gold market and much of the recent weakness is due to panic liquidations by speculators, technical trading and momentum.

The 25% price fall this quarter appears to be the biggest price fall ever.

There is blood on the streets of the gold market with many speculators having been badly burnt. The smart money such as Einhorn, Paulson and Bass have not liquidated and have maintained their positions. Indeed, we expect that big money internationally will be licking their lips at the prospects at accumulating gold at these price levels.

As per the unfortunate words of Rothschild - "the time to buy is when there is blood in the streets."

Bloomberg Poll: Gold And Silver To Rise 25% And 43% By Year End

- See more at: https://www.gotgoldreport.com/2013/06/blood-in-the-streets-of-gold-market-repeat-of-1970s-bull-market.html#more

Spartacus Rex
Jun 28, 2013 - 6:45pm

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