April 15, 2013 6:45 pm

 
Europe is no longer Spain’s solution
 
The people are losing faith in national and EU institutions
 
An Ingram Pinn illustration of Mariano Rajoy, Spain's prime minister©Ingram Pinn


Travelling between Madrid and Barcelona on a recent weekday afternoon, I wandered into the first-class section of the train. There was only one passenger, snoozing on the black leather seats – and he turned out to be the conductor, who looked up startled at the sound of an intruder.

Spain’s magnificent high-speed rail network testifies to the dramatic modernisation of the country in recent decades. But the empty trains speeding between the country’s two leading cities are evidence of a deep economic malaise. Trouble in Spain is trouble for Europe. All the euro rescues so far have been for relatively small countries: Greece, Portugal, Ireland and Cyprus. But Spain is one of Europe’s largest economies and talk of an eventual bailout is once again commonplace.

The statistics are frightening. Unemployment is about 26 per cent; youth unemployment is more tan 50 per cent. The economy is forecast to contract again this year, by about 1.5 per cent. The banks have had to be bailed out – but there is a fear that if the economy keeps sliding, they will be hit by a second wave of bad debts. The government has cut spending sharply and loosened labour-market regulations. But the fiscal deficit this year remains on track to be about 6.6 per cent of gross domestic product – and the national debt is heading up to 90 per cent, often regarded as the danger level.

The economic crisis is a particular shock for Spain because – since the coming of democracy at the end of the 1970s – the country has been Europe’s most optimistic and exciting. While the French, British and Italians struggled with a sense of national decline, Spain powered forward. Prosperity was soaring and Spain became a global leader in football, fashion, food and cinema.

Spain has suffered deep recessions before, even in the 1990s. But in previous eras, the sacrifices had a purpose, linked to joining first the EU and then the euro. The difference this time is that the Spanish no longer seem sure that there is light at the end of the tunnel. Instead, the economic tunnel keeps growing darker and longer. As a result, Spaniards are losing faith in national and European institutions.

Popular rage against the banks that lent so recklessly is rampant. It has focused in particular on the mis-selling of preference shares in banks to unsophisticated savers – who thought they were buying a safe product, only to be wiped out when banks restructured. As elsewhere, many of the bankers responsible still seem to be doing mysteriously well.

Politicians are also deeply unpopular. A recent poll found that 96 per cent of Spaniards believe that political corruption is “very high”. The ruling centre-right Popular party faces accusations that it ran a secret slush fund. Mariano Rajoy, the prime minister, is entirely lacking in charisma – his idea of a press conference is to summon journalists and then read a statement from another room while reporters watch him mutely on a video screen. The Socialist opposition is ineffective and trailing in the polls. The rise of the indignados, a popular protest movement, led some to think that new political energy would come from the streets. But the indignados peaked over a year ago and have largely dispersed. The main protest movement is now more narrowly focused on mortgage repossessions.

It is not just banks and politicians that are held in contempt. Even the monarchy is under fire. King Juan Carlos, once revered for his role in the transition to democracy, had to apologise for going on an elephant-shooting holiday at the height of the crisis in 2012. His personal life is coming under harsh scrutiny; and his daughter, Cristina, has been formally named as a suspect in a corruption case.

The biggest loss of faith of all, however, may be in the “European project”. In recent decades, the EU seemed to offer a way out of a labyrinth of relative poverty, isolation and authoritarianism. The country’s faith in Europe was reflected in the famous saying of the writer, José Ortega y Gasset: “Spain is the problem and Europe is the solution.”

For many Spaniards, however, Europe looks like a large part of the problem. Economists wonder whether Spain’s plight is closely linked to its membership of the euro, which first stoked a credit boom and now prevents the restoration of competitiveness through a currency devaluation. Germany is widely blamed for insisting on unremitting austerity to balance the Spanish budgetpolicies that risk creating an ever-deeper recession.

The “European dream” that Spaniards embraced promised a middle-class lifestyle for most people. But with little prospect of secure jobs for the young and a threat to the future of the welfare state, the fear now is that the Spain of the future will look more like Argentina than Germany. An Argentine future would involve the constant fear of financial crises – and a widening gap between the social classes, as many continue to enjoy a first-world lifestyle, while a growing underclass becomes detached from prosperity. Above all, Argentine public life is characterised by deep cynicism about national institutions and leaders.

Spain is not there yet. But the country urgently needs an optimistic story to counteract mounting pessimism and cynicism among its people. Spain used to be the poster child for the benefits of the European project. It now risks becoming a symbol of everything that has gone wrong.
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Copyright The Financial Times Limited 2013.

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This Gold Slam Is A Massive Wealth Transfer From Our Pockets To The Banks

Apr 15 2013, 18:58

by: Chris Martenson
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I am very disappointed by, but not surprised at, the latest transfer of wealth to the bankers from everyone else. The most recent gold bear raid has vastly enriched the bullion bankers, once again, at the expense of everyone trying to protect their wealth from global central bank money printing.
 
The central plank of Bernanke's magic recovery plan has been to get everybody back borrowing, spending, and "investing" in stocks, bonds, and other financial assets. But not equally so, as he has been instrumental in distorting the landscape toward risk assets and away from safe harbors.
 
That's why a 2-year loan to the U.S. government will only net you 0.22%, a rate that is far below even the official rate of inflation. In other words, loan the U.S. government $10,000,000 and you will receive just $22,000 per year for your efforts and lose wealth in the process because inflation reduced the value of your $10,000,000 by $130,000 per year. After the two years is up, you are up $44,000 but out $260,000, for net loss of $216,000.
 
That wealth, or purchasing power, did not just vanish: It was taken by the process of inflation and transferred to someone else. But to whom did it go? There's no easy answer for that, but the basic answer is that it went to those closest to the printing press. It went to the government itself, which spent your $10,000,000 loan the instant you made it, and it went to the financiers who play the leveraged game of money who happen to be closest to the Fed's printing press.
 
This almost completely explains why the gap between the rich and everyone else is widening so rapidly, and why financiers now populate the top of every Forbes 400 list. There is no mystery, just a process of wealth transfer of magnificent and historic proportions; one that has been repeated dozens of times throughout history.
 
 
This Gold Slam Was By and For the Bullion Banks
 
 
A while back, I noted to Adam that the gold slams that were first detected back in January were among the weakest I'd ever seen. Back then, I was seeing the usual pattern of late-night, thin-market futures dumping, which I had seen before in 2008 and 2011, two other periods when precious metals were slammed hard.
 
The process is simple enough to understand; if you want to move the price down for any asset, your best results will happen in a thin market when there's not a lot of participation so that whatever volume you supply has a chance of wiping out whatever bids are sitting on the books. It is in those dark hours that the market-makers just dump, preferably as fast as possible.
 
This is exactly what I saw repeatedly leading up to Friday's epic dump-fest. The mainstream media (MSM), for its part, fully supports these practices by failing to even note them. The CFTC has never once commented on the practice, and we all know that central banks support a well-contained precious metals (PM) price because they are actively trying to build confidence in their fiat money and rising PM prices serve to reduce confidence.
 
Here's a perfect example of the MSM in action, courtesy of the Financial Times:
Gold tumbles to two-year low
'There is no other way to put gold's recent sell-off: nasty,' said Joni Teves, precious metals strategist at UBS in London, adding that gold would have to work to 'rebuild trust' among investors.

Tom Kendall, precious metals analyst at Credit Suisse said 'Once again gold investors are being reminded that the metal is not a very effective hedge against broad-based risk-off moves in the commodity markets.'
 
There are two things to note in these snippets. The first is that the main ideas being promoted about gold are that it is no longer to be trusted and that somehow the recent move is a result of "risk off" decisions - meaning, conversely, that there is increased trust in the larger financial markets that "investors" are rotating towards. Note that these ideas are exactly the sort of messages that central bankers quite desperately want to have conveyed.
 
The second observation is even more interesting, namely that the only people quoted work directly for the largest bullion banks in the world. These are the very same outfits that stood to gain enormously if precious metals dropped in price. Of course they are thrilled with the recent sell off. They made billions.
 
In February, Credit Suisse "predicted" that the gold market had peaked, SocGen said the end of the gold era was upon us, and recently Goldman Sachs told everyone to short the metal. While that's somewhat interesting, you should first know that the largest bullion banks had amassed huge short positions in precious metals by January.
 
(click to enlarge)
 
 
The CFTC rather coyly refers to the bullion banks simply as "large traders," but everyone knows that these are the bullion banks. What we are seeing in that chart is that out of a range of commodities, the precious metals were the most heavily shorted, by far.
 
So the timeline here is easy to follow. The bullion banks:
  1. amass a huge short position early in the game
  2. begin telling everyone to go short (wink, wink) to get things moving along in the right direction by sowing doubt in the minds of the longs
  3. begin testing the late night markets for depth by initiating mini raids (that also serve to let experienced traders know that there's an elephant or two in the room)
  4. wait for the right moment and then open the floodgates to dump such an overwhelming amount of paper gold and silver into the market that lower prices are the only possible result
  5. close their positions for massive gains and then act as if they had made a really prescient market call
  6. await their big bonus checks and wash, rinse, repeat at a later date 


While I am almost 100% certain that any decent investigation by the CFTC would reveal that market manipulating "dumping" was happening, I am equally certain that no such investigation will occur. That's because the point of such a maneuver by the bullion banks is designed to transfer as much wealth from "out there" and toward the center, and the CFTC is there to protect the center's "right" to do exactly that.
 
This all began on Friday, April 12, and one of the better summaries is provided by Ross Norman of Sharps Pixley, a London Bullion brokerage:
The gold futures markets opened in New York on Friday 12th April to a monumental 3.4 million ounces (100 tonnes) of gold selling of the June futures contract (see below) in what proved to be only an opening shot. The selling took gold to the technically very important level of $1540 which was not only the low of 2012, it was also seen by many as the level which confirmed the ongoing bull run which dates back to 2000. In many traders minds it stood as a formidable support level... the line in the sand.
Two hours later the initial selling, rumored to have been routed through Merrill Lynch's floor team, by a rather more significant blast when the floor was hit by a further 10 million ounces of selling (300 tonnes) over the following 30 minutes of trading. This was clearly not a case of disappointed longs leaving the market - it had the hallmarks of a concerted 'short sale', which by driving prices sharply lower in a display of 'shock & awe' - would seek to gain further momentum by prompting others to also sell as their positions as they hit their maximum acceptable losses or so-called 'stopped-out' in market parlance - probably hidden the unimpeachable (?) $1540 level.
 
The selling was timed for optimal impact with New York at its most liquid, while key overseas gold markets including London were open and able feel the impact. The estimated 400 tonne of gold futures selling in total equates to 15% of annual gold mine production - too much for the market to readily absorb, especially with sentiment weak following gold's non performance in the wake of Japanese QE, a nuclear threat from North Korea and weakening US economic data. The assault to the short side was essentially saying "you are long... and wrong."

(click to enlarge)
Source: originally found at ZeroHedge.

The areas circled represent the largest "dumps" of paper gold contracts that I have ever seen. To reiterate Ross's comments, there is no possible way to explain those except as a concerted effort to drive down the price.

To put this in context, if instead of gold, this were corn we were talking about, 128,000,000 tonnes of corn would have been sold during a similar 3-hour window, as that amount represents 15% of the world's yearly harvest. And what would have happened to the price? It would have been driven sharply lower, of course. That's the point; such dumping is designed to accomplish lower prices, period, and that's the very definition of market manipulation.

For a closer-up look at this process, let's turn to Sunday night and with a resolution of about 1 second (the chart above is with 5 minute windows, or candles, as they are called). Here I want you to see that whoever is trading in the thin overnight market and is responsible for setting the prices cannot possibly be human. Humans trade small numbers of contracts and in consistently random amounts.

Here's an example:


Note that the contracts' numbers, in the single digits to tens, are randomly distributed, and that the scale on the right tops out at 80, although no single second of trades breaks 20.

Now here are a few patterns that routinely erupted throughout the drops during Sunday night (yes, I was up very late watching it all):

(click to enlarge)
(click to enlarge)
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These are just a few of the dozens of examples I captured over a single hour of trading before I lost interest in capturing any more. As I was watching this and discussing it with Adam in real time, I knew that I was watching the sort of HFT/computer-trading robots that we've discussed here so much in the past. They are perfectly designed to chew through bid structures, and that's what you see above.

They are digesting all the orders that were still on the books for gold, to remove them so that lower and lower stops could be run.

Anybody who had orders up against these machines, perhaps with stops in place, or perhaps even while sleeping because this all happened in the hours around midnight EST, lost and lost big. There is really no chance to stand against players this large with a determination to drive prices lower. At the very least, I take the above evidence of computer-assisted declines of this magnitude to be a sign that our "markets" are completely broken and quite vulnerable to a crash. That the authorities did not step in to halt these markets during such a volatile decline, when they have repeatedly stepped into other markets and individual equity shares on lesser declines, tells me much about the level of official support for such a decline.

It also tells me that things are speeding up, and the next decline in the equity or bond markets may happen a lot faster than anybody is expecting.


Unintended Consequences


If the intended consequences of this move were to enrich the bullion banks and to chase investors away from gold and other commodities and into stocks, what are the unintended consequences going to be?

While I cannot dispute that the bullion banks made out like bandits, I also wonder if perhaps, instead of signaling that the dollar is safer than gold, the banks did not unintentionally send the larger signal that deflation is gaining the upper hand. With deflation, everything falls apart. It is the most feared thing to the powers that be, and for good reason. Without inflation and at least nominal GDP growth, if not real growth, then all of the various rescues and steadily growing piles of public debt will slump toward outright failure and possibly collapse. The unintended consequence of dropping gold so powerfully is to signal that deflation is winning the day.

If this view is correct, then the current sell-off in gold as well as in other commodities will simply be the trigger for a loss of both confidence and liquidity in the system, and that will not bode well for the larger economy or equities. There are growing signs that the money-printing efforts of the central planners are seeing diminishing returns and are failing in their intended effect to kick global economic growth higher. Deflationary forces appear poised to take the upper hand here, sending asset prices lower - potentially much lower - across the board.

If deflation indeed manages to break out from under the central banks' efforts to contain it, even if only for a short period, how bad will the ensuing wave of price instability be? How can one position for it? How extreme will the measures the central banks take in response be? And what impact will that have on asset prices, the dollar, and precious metals? We are entering a new chapter in the unfolding of our economic emergency, one in which the risks to capital are greater than ever. And the rules are increasingly being re-written to the disadvantage of us individuals. The one unfair advantage we have is that history is very clear on how these periods of economic malfeasance end. Let's exploit that as best we're able.

Tocqueville Gold Strategy Update

John Hathaway
Portfolio Manager and Senior Managing Director
 
April 15, 2013




Gold bullion prices have been subjected to a cleverly orchestrated bear raid in our opinion. Selling of paper Comex contracts on Friday, April 12th, and Monday, April 15th, totaled 1 million contracts, exceeding global annual gold production by 12%. The attack succeeded when the technical support in the low $1500’s/oz. easily gave way and led to waves of forced selling.

The volume is without precedent and has all the characteristics of a panic liquidation driven by naked short selling. There is no way to know where or when the liquidation will end, but it will inevitably do so, probably sooner rather than later.

According to our source at the World Gold Council, physical buying from India and China, which represents half of global gold consumption, remains robust. Central bank buying activity shows no signs of abating. The notion that weak peripheral European states will be forced to sell their gold holdings is fanciful. A more likely scenario is that these holdings would be used as collateral to support additional credit to the sovereign.

All in all, it appears to us that this gold sell off was made in America, based on an assessment of technical weakness by a large number of opportunistic players, and supported by dubious macroeconomic speculations. At the very least, a sharp rebound based on short covering and physical buying should be expected once the panic has run its course. The bigger consideration is whether the validity of the rationale for gold has changed.

It is quite possible that all of the known bullish arguments had been expressed when gold peaked above $1900/oz. in 2011. Negative real interest rates, financial repression, intractable fiscal issues, and central bank money printing were on the tip of a thousand tongues. Today, these concerns are widely dismissed or down played. The financial crisis of 2008 is a thing of the past. We are beyond it. The economy is on the mend, real interest rates will rise to levels competitive with gold, central bankers have the tools to exit money printing and will act with resolve to do so when the time comes, and government inefficiencies will someday be fixed.

We have our doubts about the sanguine sentiment that seems to prevail. We believe that crisis of 2008 was never resolved, only papered over with sovereign credit. It is our belief that another, perhaps more dire crisis, lies ahead, centering first on the credit of weaker sovereigns but ultimately drawing fire on the very strongest. Consensus belief in global economic growth seems misplaced.

Europe is stagnant, momentum in the US is slackening at best, and possibly illusory, and China seems to be slowing. Japan’s aggressive monetary policy is potentially deflationary and certainly destabilizing to what little global growth there may be. Without economic growth, debt burdens whether sovereign or private, will become extremely problematic. It seems quite likely that extreme monetary policies are not a passing phase but a thing of permanence. The idea that the Fed and other central banks will exit on a timely and forceful basis has no historical basis.

Should our views turn out to be accurate, there are a few potential flies in the ointment for those with more complacent views of financial assets than my own. In my view, economic stagnation will lead to inflation, sharply higher tan consensus interest rates, and concerted attacks by the political class on holders and generators of private wealth in order to balance the public books.

On the other hand, if the events in Cyprus and Japan, combined with a return to stall speed in the global economy, represent a newly discovered lurch towards deflation, one only need remember how that all turned out. It was the birth of quantitative easing and massive public deficits. We believe that a deflationary turn of events will rekindle the sentiment that public policy is impotent, that paper money is toast, and that private wealth must be conscripted in bail ins yet to come.

We recognize that our views are contrarian and at odds with conventional wisdom. Frankly, that has never bothered me, however painful. Market panics often present great opportunity. We believe that the current sell off in gold and gold mining shares provide a very inexpensive call option on the possibility that the next few years may not turn out to be as rosy as widely anticipated.


© Tocqueville Asset Management L.P.