May 13, 2014 5:55 pm  

Time for Draghi to open the sluice

By Martin Wolf

The recovery in confidence is too fragile, and the revival of growth too feble

Mario Draghi, president of the European Central Bank, gave a clear indication last week that monetary easing would arrive in June. That would be welcome. It would also be vastly too late and, in all probability, too little. Mr Draghi saved the day in July 2012 when he announced that “within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And, believe me, it will be enough.” He needs to promise to do whatever it takes yet again, to eliminate excess capacity and raise inflation to 2 per cent. If he does not, crisis might yet return.
I had doubted whether the ECB’s programme for Outright Monetary Transactions would work. But in the end, this conditional promise by the central bank to purchase government bonds in the secondary markets proved so effective at stopping the panic that it never had to be carried out. Together with the commitment of vulnerable countries to austerity and reform, this has unblocked sovereign debt markets. Complacent policy makers and investors imagine the crisis is over.
One indication is the decline in yields on 10-year bonds. On May 8, Irish bonds were yielding 2.7 per cent; Spanish, 2.9 per cent; Italian, 3.0 per cent; and Portuguese, 3.5 per cent. Even Greek bonds yielded only 6.2 per cent. These countries all ran current account surpluses last year, partly because domestic demand had collapsed and partly because competitiveness had improved. They no longer require net inflows of capital. Combined with the renewal of market confidence, this is reversing financing imbalances, which had left some of the eurozone’s national central banks deeply indebted to others. The OECD’s new Economic Outlook forecasts economic growth of 1.9 per cent in Ireland; 1.1 per cent in Portugal; 1.0 per cent in Spain; and 0.5 per cent in Italy in 2014. This is a welcome turnround.

Yet at the end of last year these economies were between 6 per cent and 9 per cent smaller than before the crisis. Unemployment is very high, especially in Spain. Greece is in still worse shape. Furthermore, credit markets are yet to recover as the Economic Outlook also shows.

Above all, according to the OECD, by 2015 Spanish gross public debt will be 109 per cent of gross domestic product; Irish, 133 per cent; Portuguese, 141 per cent; Italian, 147 per cent; and Greek, 189 per cent. Even if bond yields remain at low levels and these countries run balanced primary budgets (before interest payments) indefinitely, nominal GDP must grow at close to 3 per cent a year (in the case of Greece, far more) merely to keep the public debt ratio stable. If they want to lower it, as they should under the new fiscal compact, the budget must be tighter, growth higher, or both.

Fragile recovery

Eurozone economy

Growth of nominal GDP depends on real rates of growth and rates of inflation. But although higher inflation would ease the burden of public debt, vulnerable countries also need to improve competitiveness with core countries, either through higher productivity growth or lower inflation. In the year to March, core consumer price inflation in Greece, Portugal and Spain was negative, while it was 0.6 per cent in Ireland and 0.9 per cent in Italy. Yet overall eurozone core inflation was only 0.7 per cent and Germany’s 0.9 per cent. This makes adjustment hard.

Suppose vulnerable countries continue with zero inflation. Then their economies need to grow at a real rate of 3 per cent to stabilise public debt ratios, unless they run primary fiscal surpluses. The OECD says Greece will run a structural primary fiscal surplus of 7.5 per cent of GDP, Italy one of 4.7 per cent and Portugal one of 3.5 per cent this year. Markets are betting such austerity will continue indefinitely. If as is easy to imagineit does not, crisis could quickly return.

How might the ECB help? At the end of last year the eurozone’s real GDP was 3 per cent lower than in the first quarter of 2008. This is a sign of excess capacity. Moreover, M3 – a broad measure of money supply grew cumulatively by only 7 per cent between September 2008 and March 2014, while nominal GDP expanded a mere 4 per cent between first quarter 2008 and fourth quarter 2013

Amazingly, the balance sheet of the central bank is now shrinking. The ECB is clearly failing to do its job. A more expansionary monetary policy should raise output sharply and inflation slowly.

Now suppose core inflation were 2 per cent and the eurozone economy cyclically stronger. This might not raise yields on bonds of vulnerable countries by the same amount, since it should reinforce confidence in their ability to grow out of their difficulties

Furthermore, an expansionary policy should raise inflation by more in core countries than in the periphery, where spare capacity is concentrated. That would accelerate adjustments in competitiveness too.

The ECB is right to argue it cannot solve the problems of the eurozone on its own. Yet it should do far more to generate growth in demand in line with potential. It could also help to strengthen credit in the weaker countries. In brief, it needs again to show the imagination it demonstrated with OMT.

A move to negative interest rates is part of the answer. So is an asset-purchase programme that would expand the ECB’s balance sheet by buying collateralised private sector assets and government debt. This could also reduce the persistent fragmentation of credit markets across the eurozone.

Furthermore, the creation of markets for securitised assets, initially with an ECB backstop, must be a part of the escape from crisis. Banks play too big a role

Should the ECB’s asset quality review find big holes in banks’ capital, the eurozone will need a plan to fill them. If all this is done with real force, the eurozone might stop stumbling and regain its ability to run.

In brief, the recovery in confidence is encouraging and the revival of growth welcome. But the former is too fragile and the latter too feeble. The eurozone’s authorities – and above all the ECB, its only effective actorcan and must do far more.

Avoiding catastrophe is still not guaranteed. That is anyway a grossly insufficient goal. The aim must be to secure a healthy recovery. It is the ECB’s job to hit its inflation target and strengthen credit markets. It must do whatever it takes. It has not yet done enough.

Ukraine: The waiting game

By Pepe Escobar 

 May 13, '14

Everything one needs to know about mediocre political elites allegedly representing the "values" of Western civilization has been laid bare by their reaction to the referendums in Donetsk and Lugansk.

The referendums may have been a last-minute affair; organized in a rush; in the middle of a de facto civil war; and on top of it at gunpoint - supplied by the Kiev NATO neo-liberal neo-fascist junta, which even managed to kill some voters in Mariupol. An imperfect process? Yes. But absolutely perfect in terms of graphically 
depicting a mass movement in favor of self-rule and political independence from Kiev. 

This was direct democracy in action; no wonder the US State Department hated it with a vengeance. [1]

Turnout was huge. The landslide victory for independence was out of the question. Same for transparency; a public vote, in glass ballot boxes, with monitoring provided by Western journalists - mostly from major German media but also from the Kyodo News Agency or the Washington Post.

What should come after the Donetsk People's Republic proclaimed itself a sovereign state, and asked Moscow to consider its accession into Russia, is not secession, nor outright civil war, but a negotiation.

That's clear by the Kremlin's measured official reaction: "Moscow respects the will of the people in Donetsk and Lugansk and hopes that the practical realization of the outcome of the referendums will be carried out in a civilized manner."

The cautious tone is also reflected by the Kremlin urging the Organization for Security and Cooperation in Europe (OSCE) to help broker the negotiation.

Yet once again, there's concrete proof that the NATO neo-liberal neo-fascist junta does not want to negotiate anything. Farcical "acting" President Oleksandr Turchynov labeled the exercise in direct democracy a "farce, which terrorists call the referendum"; and Washington and Brussels branded it "illegal".

And all this after the Odessa massacre; after the deployment of neo-nazi paramilitaries disguised as a "National Guard" (the goons US corporate media calls "Ukrainian nationalists"); dozens of CIA and FBI agents on the ground; plus 300 of the inevitable Academi - former Blackwater - mercenaries. What else to expect when the current Ukrainian Secretary for National Security is neo-nazi Andriy Parubiy, the previous commander of the Maidan's "self-defense forces" and a cheerleader of World War II nazi collaborator Stepan Bandera.

Banderastan - with its remix of 1980s Central American-style death squads - doesn't do referendums; they'd rather burn to death ethnic Russian civilian "insects" who dare to occupy buildings.

So this is the key message of the referendums. We reject the Kiev NATO neo-liberal neo-fascist junta. It's an illegal "government" of putschists. We are not "pro-Russian" separatists. We don't want to secede. What we want is a unified, federal and civilized Ukraine, with strong autonomous provinces.

R2P, anyone?

The Empire of Chaos wants - what else - chaos. Crucially, the Empire of Chaos now blatantly supports the deployment of an "army against their own population"; this was strictly verboten - punishable by NATO bombs or NATO-enabled jihad - in Libya and Syria, but now is just the new normal in Ukraine.

In Libya and in Syria - they tried three times at the UN - this would be the ultimate pretext for R2P ("responsibility to protect"). But in Ukraine the "terrorists" - Dubya-era terminology included - are the population, and the good guys are the Kiev neo-nazi militias. US ambassador to the UN and top R2P cheerleader Samantha Power exceeded all her previous levels of batshit craziness when she depicted the NATO junta onslaught against civilians as "reasonable" and "proportional", adding that "any of our countries" would have done the same in face of such a threat.

Berlin, for its part, wants, tentatively, to go the diplomatic way, although there's a clear split between stony Atlanticists and German captains of industry - who have identified clearly how Washington is aiming no holds barred to destroy the Russo-German economic synergy. The Empire of Chaos's game is to erect a wall between them, manifested in practice by a Russian "invasion". It's true that Moscow could easily pull a Samantha and invoke R2P to protect Russians and Russophones in Ukraine. But chessmaster Putin knows better than to invent a new Afghanistan in his western borderlands.

For Berlin all that matters is the economy. Germany will grow by 1.9% at best in 2014. With 6,200 German businesses in Russia and over 300,000 German jobs depending on two-way trade, American-style sanctions are beyond counter-productive, although Russophobia and Cold War 2.0 hysteria remains somewhat rampant.

Paris, for instance, has seen the writing on the wall. The US$1.66 billion contract to sell two Mistral-class helicopter carriers to Russia will go ahead, as Paris diplomats admitted the cancellation - in terms of penalties and lost jobs - would hurt France much more than Russia.

Over a month ago, on April 10, Putin sent a crucial letter to the 18 heads of state (five of them outside of the EU) whose countries import Russian gas via Ukraine. He was more than explicit; Moscow could not by itself keep financing the about-to-default Ukrainian economy. Between discount after discount and failing to impose penalty after penalty, since 2009 Moscow has subsided Kiev to the tune of an astonishing $35.4 billion. Europeans, Putin wrote, would also have to come to the table.   

That spectacular nullity, outgoing European Commission (EC) President Jose Manuel Barroso, although agreeing a dialogue is necessary, answered that Gazprom's new rule of only allowing gas to flow to Ukraine if paid in advance was "worrying". As if any European energy major would gladly dismiss unpaid bills.

A neutral, Finlandized Ukraine would finish off for good the current mess. It's just a matter of waiting for the NATO neo-liberal neo-fascist junta to go broke, and frozen to death.


1. see here.

Pepe Escobar is the author of Globalistan: How the Globalized World is Dissolving into Liquid War (Nimble Books, 2007), Red Zone Blues: a snapshot of Baghdad during the surge (Nimble Books, 2007), and Obama does Globalistan (Nimble Books, 2009). 

May 14, 2014

Soon Rates Will Spike and So Will Gold
 Chris Vermeulen

Since the top in gold in 2011, gold has been in a bear market. Depending on your outlook, this 3 year down trend could also be seen as consolidation within a major cyclical bull market. Either way, the outlook is bullish, that is if gold can bottom this year.

The average bear market in gold has corrected roughly 33% and lasts about 550 days. And the current correction in gold has thus far been 38% and about 700 days. So it’s easy to assume precious metals are nearing a significant low.

You can see my recent technical analysis and gold forecast.

Snap shot of the gold forecast chart:
The weekly chart while still in a clear down trend, could be in the early phase of a stage 1 basing pattern. Technical are pointing to strength with the MACD moving higher, relative strength is rising, and the first down trendline on the gold price chart has been broken.
Also we had the Golden Cross happen which is not shown on the chart. This is when the 50 day moving average crosses above the 200 day moving average. This is a long term bullish signal for many investors, though I do not put much weight into moving averages crossing over one another.
If historical data/statistics, and technical analysis prove to be correct we should expect to see gold trading between $2300 - $2500 per ounce within 24 months.
gold buying
Gold Forecast Conclusion:

With the average gold bull market lasting roughly 450 days, and the average percent gain in gold being 95% I feel precious metals are will bottom this year, if they have not yet done so.
Note that until gold breaks out of its Stage 1 Basing pattern, I will remain bearish/neutral on the metal.

EM Carry Trade Looks Vulnerable

John Mauldin
May 14, 2014
Last year, post-taper tantrum, the story was all collapsing BRIC walls and emerging-market doom. This year the so-called “fragile five” – Brazil, India, Indonesia, Turkey, and South Africa – the countries that were most vulnerable last year, are looking downright robust. Since their January lows, the Turkish lira has climbed 13%, the Brazilian real 10%, the South African rand 8%, and the Indonesian rupiah and Indian rupee 6% each. In the last two months, the MSCI Emerging Markets Index is up 7% in US dollar terms, a whole lot better than the 1% the developed markets have logged.

But not so fast, says Joyce Poon, Gavekal Asia Research Director (and for my money the best of the young generation of analysts working the Asia markets). “The trouble,” says Joyce, “is that this rally has been driven primarily by investors’ growing enthusiasm for carry trades in an environment of declining global volatility. Experience teaches this is an engine which can all too suddenly be thrown into reverse.”

And before we move on, I just have to share with you a marvelous bit of whimsy concocted a couple days ago by my associate Worth Wray (who always seems to be two steps ahead of the game in sensing these macro trends). As I mentioned over the weekend, you’ll be hearing from Worth every day during the conference, as he and I summarize all the goings on for you in a special Thoughts from the Frontline series. But first this:
And that is the name of that tune.

Gold is a buy under $1,000 an ounce; here's why it could get there: Jim Rogers

Gold is traditionally an investment of choice when inflation is rising or global tensions are growing. But this year, despite the conflict between Russia and the Ukraine, gold prices haven't moved much, and inflation in much of the developed world is muted.

"I'm not buying gold at the moment," international investor Jim Rogers tells The Daily Ticker. "But if the opportunity comes along -- and it will in the next year or two -- I will buy more."

When The Daily Ticker's anchor Lauren Lyster asked Rogers in the video above what such an opportunity might look like, Rogers said that a 50% decline in gold prices, to under $1,000 an ounce would justify buying the precious metal. (That's a 50% decline from its record high just under $2,000 an ounce in August 2011.) But Rogers also says, "if America goes to war with Iran," he'd be "begging to buy at $1,600 an ounce."
As of mid-day Wednesday gold futures were trading at $1,300 an ounce, or about 8% higher than the 2013 year-end close of $1,202. Gold prices fell a whopping 28% in 2013, but Rogers says a 50% correction every three or four or five years is more normal for an asset class, and therefore, a reason prices could fall from here.
As for why gold prices haven't taken off this year, Rogers says demand from China, the number one consumer of gold, is declining because the market there is "saturated." He says investors, meanwhile, would rather put their money into stocks. The Dow (^DJI) and S&P 500 (^GSPC) closed at record highs Tuesday but have since retreated, while the 10-year Treasury note price has advanced, as its yield slipped to 2.55%.