January 20, 2015 5:34 pm

Bolder steps from Europe’s central bankers

Martin Wolf

The ECB’s QE programme must now happen — the eurozone economy is at stake

These are exciting times in European central banking. Last Thursday the Swiss National Bank suddenly terminated its successful peg to the euro. This week the European Central Bank is expected to announce its programme of quantitative easing. The SNB has embraced the risk of deflation from which the ECB wishes to escape.
The SNB’s decision was motivated, at least in part, by aversion to being caught up in the ECB’s QE programme. For Mario Draghi, the ECB president, the SNB’s decision is even helpful, since it weakens the euro. For many in northern Europe, however, the Swiss decision will be painful. It will remind them that they no longer enjoy the pleasures (and pains) of a strong currency. The Swiss can readily stop shadowing the euro; the Germans have been imprisoned in it.

The surprise decision created turmoil. By January 20, the Swiss franc had appreciated by 18 per cent against the euro, the currency of its principal trading partner. With core inflation near zero, deflation in Switzerland seems inevitable. So does a recession.
Why end a policy that had delivered such enviable stability? The obvious answer is that the SNB feared huge inflation if it remained pegged to the euro, particularly after QE began — and bigger losses on foreign currency assets the later the peg was dropped. Neither fear is compelling, as Willem Buiter, Citigroup chief economist, argues. It is possible to hold down the value of a currency one creates oneself forever. It is true that the SNB’s balance sheet is already large, at about 85 per cent of gross domestic product. But it had stabilised, and as Mr Buiter notes: “There is no technical limit on the size of the central bank’s balance sheet, in absolute terms or relative to GDP.”

Furthermore, the Swiss could have curbed inflationary dangers without abandoning the peg, for instance by increasing reserve requirements on banks. A sovereign wealth fund could have been set up to manage huge holdings of foreign assets.

Even if a peg to the euro was no longer thought to be desirable, it could have been given up without going cold turkey. The government could instead have pegged the franc to a basket of currencies, which would have anchored its purchasing power while allowing it to move more freely against the euro.

Data for martin Wolf's column

Alternatively, it could have allowed the franc to move within a predetermined range, denying speculators a one-way bet on the value of the currency.

More interesting would have been a decision to go further in the direction of negative interest rates than the minus 0.75 per cent now imposed.

To make such a move stick, the authorities would have had to place limits on withdrawals from bank accounts or move entirely to electronic money, to prevent people from protecting their purchasing power by moving into cash. Needless to say, such radical ideas would horrify the prudent burghers of Switzerland.

QE is going to horrify the burghers of Germany, too. But it must now happen since it is the only way still available for the ECB to meet its definition of price stability. Its credibility is at stake. So, too, is the eurozone’s economy.

Everything is fine in Germany. But Germany is not the eurozone. Everything is less fine elsewhere.

Data for martin Wolf's column

The eurozone is in a slump, afflicted by the “chronic demand deficiency syndrome” that is the world economy’s biggest current weakness. Core inflation is 0.7 per cent, far below the ECB target of “below but close to” to 2 per cent. Five-year inflation expectations have fallen to 1.6 per cent. Nominal demand was a mere 2 per cent higher in the second quarter of 2014 than in the first quarter of 2008, while real demand was 5 per cent lower (see chart).
The question about the forthcoming QE programme is not whether it is needed but whether it will work. The doubts are less technical than political. True, yields on government bonds are already low. Nonetheless, QE should encourage investors to switch out of government bonds into other assets, including foreign ones — as Reza Moghadam, former head of the International Monetary Fund’s European department has powerfully argued.
The political problem is more serious. It seems QE will be implemented in the teeth of opposition — not just from German members of the ECB governing council, who are entitled to their objections, but also from the German political establishment. This raises questions about the sincerity of the latter’s commitment to the independence of the ECB.

Data for martin Wolf's column

The difficulty is not that, to avoid the bogey of debt mutualisation, purchased bonds will end up on the balance sheets of national central banks. That fudge might even be an advantage to the more indebted countries. If the profits were divided in proportion to equity in the ECB, Germany would benefit from the higher interest rates paid on, say, Italian debt. By insisting instead on strict national responsibility, Germany will hurt itself.

The difficulty is rather that German opposition may fatally undermine the credibility of Mr Draghi’s insistence that the ECB will keep inflation on target. Similarly, the resolute opposition of the German establishment to fiscal deficits even when the yield on its own 30-year bonds is 1.1 per cent — virtually free money — hampers the use of fiscal policy throughout the eurozone. The emphasis on the wickedness of debt, regardless of what it costs, is pathological. No other adjective will do.

It is all up to the ECB. It may well fail, not because it is too independent but because it is not independent enough. Similarly, the eurozone may fail, not because of irresponsible profligacy but rather because of pathological frugality. In the end, the ECB must try to do its job. If Germany cannot stand that, it may need to consider its own Swiss exit.

China's Yuan Enters the Currency "Big Leagues" to Take on the Dollar

By Peter Krauth, Resource Specialist, Money Morning

January 21, 2015

I've been following one of the biggest "stealth" stories of the year: the rise of China's yuan as it gears up to take its place on the world stage.

Towards this very goal, China has taken steady, calculated steps for some time.

It's also no secret that China and Russia have a "special relationship" that will drive this trend.

China is likely to help its neighbor in this time of need, and the longer-term global implications could well be dramatic.

The Yuan's Standout Performance in 2014

As of early December, the yuan was the only one of 31 major currencies to have gained on the dollar in the latter half of 2014.

Now, that's not a shock, given that the yuan is pegged to the dollar for now.

But what is surprising is the rise of the dollar, especially in the context of exploding U.S. debt levels.

Despite the dollar's recent strength, I believe it's unsustainable in the longer term. Given the trillions of currency units created by the Fed since 2008, it's only a matter of time before it returns on the path towards its intrinsic value: Nil.

China's Makes Its Move Slowly

Meanwhile, China continues steadily checking off the items on its "currency reserve" list to gain that status for the yuan.

On December 26, 2014, the China Foreign Exchange Trade System (CFETS) indicated that China would begin trading swaps and forwards between the yuan and the Malaysian rinngit, the New Zealand dollar, and, of course, the Russian ruble.

China is determined to weaken the dollar's global dominance in international transactions and finance, an advantage it enjoys thanks to its status as the world's de facto reserve currency.

But this standing is gradually being chipped away both from inside and outside the U.S.
Having (on a purchasing power parity basis) the world's No. 2 economy, China's currency is becoming too relevant to exclude any longer. In November, we looked at how the European Central Bank (ECB) was considering including the yuan in its reserve currency mix.

As for finding the yuan attractive, the ECB is not alone…

For the Yuan, Few Obstacles Remain

Energy megadeals struck between China and Russia are well known.

Less known is Beijing's $24 billion currency swap program with Russia.

In mid-December, the South China Morning Post suggested that "Russia could fall back on its 150 billion yuan currency swap agreement with China if the ruble continues to plunge."

Meanwhile, China continues its moves to gain eventual inclusion of the yuan in the International Monetary Fund's SDR (Special Drawing Rights) currency basket, which now consists of the USD – 44%, euro – 34%, Japanese yen – 11%, and British pound – 11%.

Later this year, the IMF will perform its review (conducted every 5 years) of the currencies members can include in their official reserves.

In order to achieve inclusion for the yuan, China has to pass the IMF's economic targets; the yuan must be "freely usable," it must account for a large number of exports, and its inclusion must be supported by enough member nations.

The IMF has said that "there have been a number of developments regarding the yuan's international use, and the upcoming review would take stock of these developments."

According to the Society for Worldwide International Financial Telecommunication (SWIFT), the yuan's share of global money transfers set a record in September at 1.72%, ranking it the seventh most-used currency.

But support from the United States could remain the biggest obstacle.

A U.S. Veto May Not Be Enough

The U.S. holds 17% of IMF votes. If backing requires 85% of voting shares, the U.S. could veto China's move.

Given the implications, the IMF's 2010 Quota and Governance Reforms require Congressional approval for the United States to okay them. Congress has yet to pass these, effectively blocking IMF reforms, and still they weren't included in the recent budget legislation before Congress.

However, there seems to be significant support from IMF upper echelons.

In response to congressional unresponsiveness, IMF Managing Director Christine Lagarde said, "As requested by our membership, we will now proceed to discuss alternative options for advancing quota and governance reforms and ensuring that the Fund has adequate resources, starting with an Executive Board meeting in January 2015."

Of course the October vote at the IMF could go either way, but right now my sense is odds are good the yuan will make it into the SDR basket.

So what does this mean for you?

Limit Your Exposure

In the near term, the yuan could actually be due for some weakness, especially given the strength of the U.S. dollar. Recent action by the Swiss National Bank abandoning the franc's peg to the euro demonstrates the challenges inherent in just such policies.

For its part though, the dollar has already experienced a dramatic rise since July, one that it truly doesn't deserve, especially when you consider the ongoing deficits and the dubious milestone of $18 trillion in debt.

Despite recent strength, the dollar is in a long term downward trend worthy of caution.

If the yuan makes its way into the SDR basket, that doesn't guarantee China will maintain the current peg to the U.S. dollar.

At the first sign of serious economic challenges, the People's Bank of China (PBOC) could choose the path of least resistance, similar to Japan, and purposely weaken its currency to make exports more attractive.

If China extends help to Russia by buying rubles to support that currency, this too could contribute to weakness in the yuan.

With all these cross currents pushing and pulling currencies in different directions, your best defense is to avoid being overexposed to any particular one. And that includes the so-called "almighty" dollar.


Mike Maloney  



sábado, enero 24, 2015



Gold's New Friend: The Swiss Franc!

By: Stewart Thomson

Tuesday, January 20, 2015

  1. While I predicted a huge rally in gold would usher in the new year of 2015 in a spectacular way, the top bank economists have failed again.
  2. Most of them predicted, "No rally for gold!" Their dire predictions in 2014 all failed to materialize, and this year they are off to an even worse start.
  3. The bank economists, quite frankly, look ridiculous. They clearly need to reset their thinking about the powerful demand coming from billions of Chinese and Indian citizens, or they risk turning themselves into clownish figurines.
  4. The daily chart for gold looks spectacular. Please click here now . Note all the buy-side support lines that I've highlighted on this chart.
  5. For another look at that daily chart, please click here now . Note the green trend line. The breakout above that line will attract a large number of technicians and momentum-oriented hedge funds.
  6. The commercial traders are shorting gold into this strength, but I suspect they may end up booking heavy losses on this trade. They don't lose often, but they appear to be in some serious trouble here.
  7. Please click here now . Chinese hedge funds have emerged as a new potential threat, to the Western bank dominance of the world's metals markets.
  8. It's impossible to know if these giant Chinese funds are running long gold/short copper trades of size. If they are, the Western banks may decide to fold on their short gold positions, rather than risk even bigger losses.
  9. Gold is up again this morning, as Indian wedding season has fuelled what the media is rightfully calling "frantic buying". Please click here now .
  10. Chinese New Year buying is also extremely strong. I was a buyer of fine 24 carat jewellery yesterday, from my favourite Chinese jeweller. The mood in the store was jubilant.
  11. A third force that is bullish for gold has unexpectedly appeared, which is the Swiss franc's mauling of the US dollar. The franc has a stellar track record of being a hard currency, and a key lead indicator for the price of gold.
  12. Please click here now . That's the monthly chart of the dollar versus the franc. The dollar has essentially imploded.
  13. Entire brokerages and funds have been destroyed, as the dollar has gone into "meltdown mode" against the franc. As painful as it's been for these dollar bugs, I think there's much more pain to come. Here's why:
  14. There's a massive sell signal on the 14,3,3 Stochastics series on that monthly chart. The dollar has already tested its 2011 lows against the franc, and I think it's going to break them.
  15. Mainstream media continues to boast of a "dollar bull market", but against the gold-related currencies, the dollar is collapsing. Please click here now . Double-click to enlarge. That's the weekly chart of the Indian rupee against the dollar.
  16. There's a massive inverse head and shoulders bottom pattern in play, and most indicators and oscillators are flashing beautiful buy signals. I'm predicting the rupee will become the most powerful fiat currency, in the history of the world. The dollar might be able to put a "whuppin'" on a reincarnated Greek drachma, but against the franc and the rupee, it looks ready to incinerate.
  17. Most of the emails I'm getting from the global gold community are generally bearish. That tells me that the rally in gold can become much stronger than it already is.
  18. My suggestion to the struggling bears is to throw in the towel, and book a plane ride to India. Most Western gold bears probably need to experience Indian gold demand firsthand, to understand its titanic power.
  19. How can anyone be gold-bearish now, against the background of Indian wedding season, Chinese New Year, and the franc's mauling of the dollar?
  20. Over the past few months, truly enormous volume has appeared in many key gold stocks. Please click here now . That's the GDX daily chart. I love the price action. It's solid. Also, the ascent is made for Goldilocks; not too slow, and not too fast.
  21. In 2014, the early rally in gold stocks was led by junior stocks. This one is led by the seniors, which suggests much bigger and stronger players are the buyers. The world gold community should feel "amped" this morning, as they turn on their quote machines!
  22. I've suggested that a "changing of the guard" is taking place in the gold stocks sector, with large institutions buying stock from disappointed retail resource investors. There is record-setting volume in play, on the GDX chart.
  23. The push into gold stocks by big value-oriented players is likely forcing bearish hedge funds to exit their naked short positions. On that note, please click here now . Institutional heavyweight Morgan Stanley is clearly very positive about Australian mining stocks. I think their enthusiasm, and their buy orders, will quickly spread to most of the world's major gold stocks.
  24. Please click here now . That's the daily silver chart. Just as junior gold stocks are lagging the seniors (which is bullish for the sector), silver is bullish, but not racing ahead of gold. That's because this is not a Western fiat collapse oriented bull market. It's a gold jewellery bull era, and investors need to roll with the golden changes! Silver will do very well, following gold steadily higher, with gains that are not a flash in the pan, but here to stay.
  25. Have a spectacular week, and thanks for your time!

Another Former Central Banker Finally Gets It: "The Idea That Monetary Stimulus Is The Answer Doesn't Seem Right"

by Tyler Durden

01/20/2015 10:12 -0500

What is it about central bankers who wait to tell the truth only after they have quit their post. First it was the maestro himself, the Fed's Alan Greenspan (most recently in "Greenspan's Stunning Admission: "Gold Is Currency; No Fiat Currency, Including the Dollar, Can Match It"), and now it is the Bank of England's former head, Mervyn King, who yesterday told an audience at the LSE that "more monetary stimulus will not help the world economy return to strong growth." That this is happening just as we learn that in one year the world's 1% will collectively own more wealth than the rest of the world combined, and two days before Goldman's Mario Draghi unleashed up to €1 trillion (if not unlimited) in QE, is hardly as surprise, and will be surely ignored by everyone until the inevitable outcome of another "French revolution" finally arrives.

From the Telegraph:
In his first public speech in England since his term at the BoE ended in June 2013, Mr King said he was concerned about a persistent weakness in global economic demand, six years on from the depths of the financial crisis.
"We should worry about that," Mr King told an audience at the London School of Economics, where he was once a professor.
"We have had the biggest monetary stimulus that the world must have ever seen, and we still have not solved the problem of weak demand. The idea that monetary stimulus after six years ... is the answer doesn't seem (right) to me," he added.
Unlike the US Federal Reserve and the Bank of England, the European Central Bank has until now resisted trying to boost the economy by buying government bonds with newly created money, known as quantitative easing (QE).
"There are quite serious disequilibria both between and within economies that, for good economic reasons, are depressing demand. Simply lowering rates even further or adding more monetary stimulus is unlikely to solve that problem," he said.

Which is not only ironic but hypocritical because under King, the BoE bought £375bn of government bonds between 2009 and 2011. Mr King said this was right just after the crisis, but that using loose monetary policy to bring forward spending was not a long-term strategy. 

Actually, wrong: since the entire global economy has been hijacked by the same people who would be sleeping under bridges had they not received a multi-trillion bailout in 2008, and since the global financial system now exists only to serve them, and to raise them from billionaire to trillionaire status, QE is precisely that: a long-term strategy, one which will ultimately pillage all the wealth of the middle class and hand it on a golden platter in some non-extradition country to the 0.001%.

Well, long-term at least until the 99% realize they have been subject to the most epic, historic robbery in the history of the world.  Of course, by the time what was formerly the world's middle class realizes what happened, there will be nothing left.