Never Smile at a Crocodile

By John Mauldin

Mar 11, 2015


“High debt levels, whether in the public or private sector, have historically placed a drag on growth and raised the risk of financial crises that spark deep economic recessions.”

– The McKinsey Institute, “Debt and (not much) deleveraging

Never smile at a crocodile
No, you can't get friendly with a crocodile
Don't be taken in by his welcome grin
He's imagining how well you'd fit within his skin
Never smile at a crocodile
Never tip your hat and stop to talk awhile
Never run, walk away, say good-night, not good-day
Clear the aisle but never smile at Mister Crocodile

(From the staff: This week’s letter is a shortened Thoughts from the Frontline. While he was writing the letter, Mr. Mauldin had a personal situation develop that required his attention, but he wanted us to pass on these already-written notes. For those of his friends who are interested, he shares some thoughts at the end of the letter.)

As I sit here on Friday morning, beginning this week’s letter, nonfarm payrolls have just come in at a blockbuster 295,000 new jobs, and unemployment is said to be down to 5.5%. GDP is bumping along in the 2%-plus range, right in the middle of my predicted Muddle Through Economy for the decade. US stocks are hitting all-time nominal highs; the dollar is soaring (especially after the jobs announcement); and of course, in response, the Dow Jones is down 100 points as I write because all that good news increases the pressure for a June rate hike. Art Cashin pointed out that, with this data, if the FOMC does not remove the word patient from its March statement, they will begin to lose credibility. The potential for a rate increase in June is back on the table, but unless we get another few payrolls like this one, the rather dovish FOMC is still likely to wait until at least September. Who knows where rates will be end of the day, though? Anyway, what’ s to worry?

Well, judging from the contents of my inbox, I’d say there is plenty going on to make us nervous. We will briefly survey my worry closet today before resuming our series on debt, in which we’ll encounter Paul Krugman’s lament that “Nobody understands debt.” Warning: this letter is going to be long on charts but hopefully shorter on words – perhaps a little heavy on philosophy. At the end I’ll make a few surprise announcements about speakers for our upcoming Strategic Investment Conference in San Diego, April 29 through May 2. You really want to try to join us for what are going to be a fabulous few days.

Never Smile at a Crocodile

The following two charts from Bank Credit Analyst found their way to my inbox last week. They are nothing if not the most gaping pair of crocodile jaws I’ve seen in many a moon. This should make you somewhat cautious in your long-only portfolios. You need to have a plan to avoid a classic crocodile trap. (And unless you are young, also avoid listening to the Peter Pan song in the YouTube link cited at the top of the letter. Those of us of a certain generation will not be able to get it out of our heads.)

Let’s look a little deeper into the payroll report. You have to like what you see on the surface, as 11.5 million more people are working now than at the February 2010 low.

What’s not as rosy is that wages increased by only 0.1%, which is understandable when you realize that 66,000 of the 295,000 new jobs were in leisure and hospitality, with 58,000 of those being in bars and restaurants. (As Joanie McCullough pointed out, full employment now means three fingers of whiskey in the glass, neat.) Transportation and warehousing rose by 19,000, but 12,000 of those were messengers, again not exactly high-paying jobs. The oil industry is still shedding jobs, though not as fast as many of us thought it would. This employment report was very long on low-paying jobs.

Finally, the labor force declined by 178,000 and the Labor Force Participation Rate declined 0.1% to 62.8%. You have to go back a full 36 years to March, 1978, to find a similar rate. Yes, some of the dropoff was Boomers retiring and some of it may have been due to weather, but it is just a reinforcement of the trend that began in 2000.

Nearly all of my kids have worked in the food-service industry at some point in their lives, as did I, and we are keenly aware how fast those jobs can both appear and disappear in a downturn, not to mention how tips can get a little thinner in tougher times (which prompts me to suggest you think about bumping your tip percentage up a point or two here and there. Your waitperson is somebody else’s kid who needs all the help they can get.)

The employment report was bolstered by this week’s release of the National Federation of Independent Businesses monthly jobs report. All in all, it was a generally bullish report. Then again, the bear in me was struck by how many of the charts seem to be at levels last seen prior to recessions (one example below). The chief economist for the NFIB is William Dunkelberg, or Dunk to his friends. I shot Dunk an email, asking him “Does it bother you that we are approaching levels (in so many charts) only seen prior to the last two sell-offs?”

He came back with this pithy note:

Yes, I keep trying to think of reasons why we won’t fall back, but USA INC is overvalued, stock market at a record high but output of USA INC growing slowly and under-performing. Good thing small businesses are not publicly traded. We know the Fed has boosted stock and bond values so those will [eventually –JM] succumb to rising rates. But the NASDAQ is not the same as the one in 2000, it looks a lot firmer. Lots of stock buybacks, consumer sector may still be a net seller of stocks. There is a shortage of risk-free, safe assets, the central banks are hoarding them. … A “deflation of asset prices” would likely be more like 2000 (financial assets owned by a few fools) than the housing bubble which cut deeper into the middle class wealth AND jobs. I figure you will sort all this out in one of your brilliant essays. I will be watching :) – Dunk

(Dunk is obviously trying to position himself to get me to pick up his next bar tab, which I should hasten to point out can be high, not due to quantity but quality. He is a bit of a wine connoisseur.)

But he makes a point. US S&P 500 corporate profits are forecast to fall by 4.6% in Q1 and by 1.5% in Q2 this year, the first fall in profits for two consecutive Q's in six years, if those forecasts turn out to be true. Falling earnings are not the stuff of roaring bull markets. That being said, the NASDAQ of today is not like 2000’s.

First, the NASDAQ would have to be at 6900 to give an investor a return in terms of inflation. (It’s oscillating around 4925 now.) Remember the secular bear market in 1966 to ’82? It was actually 1992 before the market reached an inflation-adjusted new high. (Tell me one more time why we think 2% inflation is good. When you lose 20% of your buying power in just 10 years, which span has included two deflationary recessions, the 2% inflation premise begins to look a little suspect.) Second, there is actually an E in the P/E ratio for the NASDAQ. Some of the stocks in the NASDAQ 100 are actually on various investors’ value lists.

Even so, valuations are stretched. Doug Short combines four different ways to compute valuations (basically, derivatives of the price-to-earnings ratio) into one average. In the graph below you will note that there was only one previous time (during the tech bubble that popped in 2000) when valuations were higher than they are now. Bear markets and recessions can start from much lower valuations.

But then again, my friend Barry Ritholtz argues in his March 7 Washington Post column, that valuations using other metrics are quite reasonable.

If it appears I’m trying to make you nervous, that’s because I am. I’m not suggesting you exit the market entirely.

As the hero of my youth, Lazarus Long (one of Robert Heinlein’s recurring characters) said, “Certainly the game is rigged. Don’t let that stop you; if you don’t bet, you can’t win.”

I am suggesting you have a well-thought-out, calmly reasoned algorithm that will tell you when to enter and exit specific markets. You should already be out of small-caps, as in a long time ago. And energy and emerging markets, etc. Trying to catch absolute tops or bottoms is a fool’s mission, but with a methodical program you can avoid large drops and, just as importantly, latch onto big runs. It takes a well-reasoned system and discipline. You or your advisor should have both.

Strategic Investment Conference 2015

I am excited to announce a few additional attendees to the Strategic Investment Conference. First, Peter Diamandis, physician, engineer, serial (and parallel) entrepreneur, founder and chairman of the X PRIZE Foundation, and an extraordinary visionary (and my friend) will be doing a keynote dinner presentation. Peter is simply mind-expanding. His latest New York Times bestseller, Abundance: The Future Is Better Than You Think, offers a far different vision of the future from the dystopian images that are in vogue today.

My good friend George Friedman of Stratfor has cleared his schedule to be able to drop in as well. Then, Richard Yamarone, chief economist for Bloomberg, and Gary Shilling (whom all of my readers already know) have both agreed to come grill our speakers. They will be joined by (in no particular order) Peter Briger of the $66 billion Fortress Investment Group, who will talk on the state of credit in the world; David Rosenberg; Dr. Lacy Hunt; Grant Williams; Raoul Pal; Paul McCulley; David Harding (of the $25 billion Winton fund family); Louis Gave; Jim Bianco; Larry Meyer (former Fed Governor); the irrepressible Jeff Gundlach; the wickedly brilliant Stephanie Pomboy; Ian Bremmer; David Zervos; Michael Pettis (flying in from China); and Kyle Bass, along with Jack Rivkin of Altegris and your humble analyst. Seriously, where is there a better lineup of thinkers, people who can give you the insights you need to navigate these unprecedented economic waters – not to me ntion that all of them are A+ speakers and communicators.

The conference is in San Diego, April 30–May 2, and will once again be at the Hyatt Manchester. For the first time this year, our conference is open to everyone, not just accredited investors.  

Attendees routinely tell me that this is the best conference anywhere, every year. And most of the speakers hang around to hear what is being said, which means you get to meet them at breaks and dinners. Plus, this year I am arranging for quite a number of writers and analysts to show up, just to be there to talk with you. And I must say that the best part of the conference is mingling with fellow attendees. You will make new friends and be able to share ideas with other investors like yourself. I really hope you can make it.

Registration is simple. Use this link. While the conference is not cheap, the largest cost is your time, and I try to make it worth every minute. There are also two private breakfasts where hedge funds will be presenting. Altegris will contact you to let you know the details.

Mildred Duke Mauldin, RIP

This last week has been full of paradoxes. I’ve been on the phone and writing with my friend Patrick Cox on some very exciting developments in the whole anti-aging and life-renewal/regeneration arena. Pat in particular, with some cheerleading help from me, has been involved in midwifing several new technologies into companies and people who can actually take them to completion. When these amazing breakthroughs become available, they will have a significant impact not just on our lifespans but on our healthspans. We will live better as we live longer. It is truly an exciting era we live in.

Then Saturday I went with my daughter Tiffani to a surprise birthday party for her high school classmate Scott, who is the son of one of the most remarkable couples I know. Darrell and Phyllis Wayman had six biological children but also adopted 17 special-needs children. Because of my activity in adoption circles (I adopted five children), we became close friends. For the most part, they did not adopt the “easy” kids. Most of them had serious handicaps, problems that would need lifelong special attention. Going to the Wayman’s house was always an adventure, but I always found it full of happiness and love. I never truly understood how they did it. Just thinking about what they did left me exhausted.

Tragically, Darrell passed away suddenly in the mid-’90s, and Phyllis joined him in the middle of the last decade. To watch those children rally around each other, even the young ones, and take care of each other and make sure they all stayed together was very inspiring. With all the bad news about the depravity of humanity on TV, knowing this family gives you hope for the human race. You can see the legacy of Phyllis and Darrell in the way these children work together and care for each other, persevering in the midst of what (to merely normal human beings like myself) seem like overwhelming circumstances.

Those 23 kids now have 21 grandkids; and once again, walking into their family home, we felt the love and happiness. Scott, at 40, has become quite the young software executive and is getting ready to launch his next venture. I’m not certain I understand it, but if you are ever going to bet on a young man with character, drive, and perseverance, this would be that man. I know some venture capital experts who say that picking the right management team is more important than picking the project. I may just ride along on this one, if for no other reason than to see how it turns out.

And, as we were in the area, we dropped by afterwards to see my mother. She has been bedridden for almost two years and has been visibly failing for the last few months. At 97½ years, she has lived a long and amazing life, persevering through many good and some very difficult times, spreading happiness to all who knew her.

When we walked into the family home where mother had lived for almost 50 years, we knew as soon as we saw her that the end was quite close. You could see in her eyes that she knew it, too. She did not want to go to the hospital, but my brother did call hospice, who came and offered some care that provided some relief, and she passed away quietly a short while later.

Even though this was an event we knew was coming for some time, the finality of death always brings a personal confrontation with your own mortality. The loss of a parent compounds the emotions in complex ways. The juxtaposition of the conversations I was having with Pat on our efforts to postpone our own personal eventuality, the overwhelming joy of those 23 kids who I no longer see as having special needs but rather special lives, and then the cruel finality of my mother’s parting, is a bit overwhelming.

We all go through such experiences, and if past performance is somewhat indicative of future results, we endure and go on with our lives. But such times do give us pause for reflection.

I want to believe there is a Very Special Place, beyond a mere heaven, where certifiable Saints like Darrell and Phyllis and my Mother are rewarded for a lifetime of caring for others and spreading blessings in the midst of the chaos of normal human life. If I were a god, I would make it so.

Your reflective analyst,

John Mauldin

The Global Dollar Funding Shortage Is Back With A Vengeance And "This Time It's Different"

by Tyler Durden

03/08/2015 22:46 -0400

The last time the world was sliding into a US dollar shortage as rapidly as it is right now, was following the collapse of Lehman Brothers in 2008. The response by the Fed: the issuance of an unprecedented amount of FX liquidity lines in the form of swaps to foreign Central Banks. The "swapped" amount went from practically zero to a peak of $582 billion on December 10, 2008.

The USD shortage back, and the Fed's subsequent response, was the topic of one of our most read articles of mid-2009, "How The Federal Reserve Bailed Out The World."

As we discussed back then, this systemic dollar shortage was primarily the result of imbalanced FX funding at the global commercial banks, arising from first Japanese, and then European banks' abuse of a USD-denominated asset-liability mismatch, in which the dollar being the funding currency of choice, resulted in a massive matched synthetic "Dollar short" on the books of commercial bank desks around the globe: a shortage which in the aftermath of the

Lehman failure manifested itself in what was the largest global USD margin call in history.

This is how the BIS described first the mechanics of the shortage:

The accumulation of US dollar assets saddled banks with significant funding requirements, which they scrambled to meet during the crisis, particularly in the weeks following the Lehman bankruptcy. To better understand these financing needs, we break down banks’ assets and liabilities by currency to examine cross-currency funding, or the extent to which banks fund in one currency and invest in another. We find that, since 2000, the Japanese and the major European banking systems took on increasingly large net (assets minus liabilities) on-balance sheet positions in foreign currencies, particularly in US dollars. While the associated currency exposures were presumably hedged off-balance sheet, the build-up of net foreign currency positions exposed these banks to foreign currency funding risk, or the risk that their funding positions (FX swaps) could not be rolled over.

... And then the subsequent global public response:

The severity of the US dollar shortage among banks outside the United States called for an international policy response. While European central banks adopted measures to alleviate banks’ funding pressures in their domestic currencies, they could not provide sufficient US dollar liquidity. Thus they entered into temporary reciprocal currency arrangements (swap lines) with the Federal Reserve in order to channel US dollars to banks in their respective jurisdictions (Figure 7). Swap lines with the ECB and the Swiss National Bank were announced as early as December 2007. Following the failure of Lehman Brothers in September 2008, however, the existing swap lines were doubled in size, and new lines were arranged with the Bank of Canada, the Bank of England and the Bank of Japan, bringing the swap lines total to $247 billion. As the funding disruptions spread to banks around the world, swap arrangements were extended across continents to central banks in Australia and New Zealand, Scandinavia, and several countries in Asia and Latin America, forming a global network (Figure 7). Various central banks also entered regional swap arrangements to distribute their respective currencies across borders.
The amount of the implied dollar short was also calculated by the BIS:
The major European banks’ US dollar funding gap had reached $1.0–1.2 trillion by mid-2007. Until the onset of the crisis, European banks had met this need by tapping the interbank market ($432 billion) and by borrowing from central banks ($386 billion), and used FX swaps ($315 billion) to convert (primarily) domestic currency funding into dollars. If we assume that these banks’ liabilities to money market funds (roughly $1 trillion, Baba et al (2009)) are also short-term liabilities, then the estimate of their US dollar funding gap in mid-2007 would be $2.0–2.2 trillion. Were all liabilities to non-banks treated as short-term funding, the upper-bound estimate would be $6.5 trillion (Figure 5, bottom right panel).

One thing to keep in mind as reading the above (and the linked article as a refresher), is that the massive USD synthetic short, and resulting margin call, was entirely due to the actions of commercial banks, with central banks having to step in subsequently and bail them out using any and every (such as FX swaps) mechanism posible.

* * *

Why do we bring all of this up now, nearly 6 years later? Because, as JPM observed over the weekend while looking at the dollar fx basis, the shortage in dollar funding is back and is accelerating at pace not seen since the Lehman collapse.

The good news: said shortage is not quite as acute yet as it was in either 2008/2009 or on November 30 2011 (recall "Here Comes The Global, US-Funded Liquidity Bail Out") when just as Europe was again on the verge of collapse, the Fed re-upped the ante on its global swap lines when it pushed the swap rate from OIS+100 bps to OIS+50 bps.

The bad news: at the current pace of dollar funding needs, it is almost certain that the tumble in the dollar fx basis will accelerate until it hits its practical minimum of - 50 bps, which is the floor as per the Fed-ECB swap line.

But the real news is that unlike the last time, when the global USD funding shortage was entirely the doing of commercial banks, this time it is the central banks' own actions that have led to this global currency funding mismatch - a mismatch that unlike 2008, and 2011, can not be simply resolved by further central bank intervention which happen to be precisely the reason for the mismatch in the first place.

In other words, central banks have managed to corner themselves in yet another policy cul-de-sac, six years after they did everything in their power to undo the last one.

Here is how JPM's Nikolaos Panigirtzoglou frames the problem:

The decline in the cross currency swap basis across most USD pairs in recent months is raising questions regarding a shortage in dollar funding. The fx basis reflects the relative supply and demand for dollar vs. foreign currency funds and a very negative basis currently points to relative shortage of USD funding or relative abundance of funding in other currencies. Such supply and demand imbalances can create big shifts in the fx basis away from its actuarial value of zero. Figure 1 shows that the dollar fx basis weighted across eight DM and EM currencies, declined significantly over the past year to its lowest level since mid 2013, although it remains well above the lows seen during the depths of the Lehman or the Euro debt crisis.
It does indeed, for now, however read on for why the current basis reading just shy of -20 bps will almost certainly accelerate until and unless there is a dramatic convergence in the policies of the Fed and the other "developed world" central banks.

First, what are currency and fx swaps, and why does anyone care? "Cross currency swaps and FX swaps encompass similar structures which allow investors to raise funds in a particular currency, e.g. the dollar from other funding currencies such as the euro. For example an institution which has dollar funding needs can raise euros in euro funding markets and convert the proceeds into dollar funding obligations via an FX swap. The only difference between cross currency swaps and FX swaps is that the former involves the exchange of floating rates during the contract term. Since a cross currency swap involves the exchange of two floating currencies, the two legs of the swap should be valued at par and thus the basis should be theoretically zero.

But in periods when perceptions about credit risk or supply and demand imbalances in funding markets make the demand for one currency (e.g. the dollar) high vs. another currency (e.g. the euro), then the basis can be negative as a substantial premium is needed to convince an investor to exchange dollars against a foreign currency, i.e. to enter a swap where he receives USD Libor flat, an investor will want to pay Euribor minus a spread (because the basis is negative)."

One read of a substantial divergence from par in the fx basis is that there may be substantial counterparty concerns within the banking system - this was main reinforcing mechanism for the first basis blow out of the basis back in 2008.

Both cross currency and FX swaps are subjected to counterparty and credit risk by a lot more than interest rate swaps due to the exchange of notional amounts. As such the pricing of these contracts is affected by perceptions about the creditworthiness of the banking system. The Japanese banking crisis of the 1990s caused a structurally negative basis in USD/JPY cross currency swaps. Similarly the European debt crisis of 2010/2012 was associated with a sustained period of very negative basis in USD/EUR cross currency swaps.
As noted above, the fundamental reasons for the USD shortage then vs now are vastly different.

Back then, financial globalization meant that "Japanese banks had accumulated a large amount of dollar assets during the 1980s and 1990s. Similarly European banks accumulating a large amount of dollar assets during 2000s created structural US dollar funding needs. The Japanese banking crisis of 1990s made Japanese banks less creditworthy in dollar funding markets and they had to pay a premium to convert yen funding into dollar funding. Similarly the Euro debt crisis created a banking crisis making Euro area banks less worthy from a counterparty/credit risk point of view in dollar funding markets. As dollar funding markets including fx swap markets dried up, these funding needs took the form of an acute dollar shortage."

And as further noted above, while there is no banking crisis (at this moment) unlike virtually every other year in the post-Lehman collapse as commercial banks are flooded in global central bank liquidity (now that central banks are set to inject more liquidity in 2015 than in any prior year, 2008 and 20099 included) the catalyst for the current shortage are central banks themselves:

Given the absence of a banking crisis currently, what is causing negative basis? The answer is monetary policy divergence. The ECB’s and BoJ’s QE coupled with a chorus of rate cuts across DM and EM central banks has created an imbalance between supply and demand across funding markets. Funding conditions have become a lot easier outside the US with QE-driven liquidity injections and rate cuts raising the supply of euro and other currency funding vs. dollar funding. This divergence manifested itself as one-sided order flow in cross currency swap markets causing a decline in the basis.

Who would have ever thought that a stingy Fed could be sowing the seeds of the next financial crisis (don't answer that rhetorical question).

For those who are curious about where this mismatch is manifesting itself in practical terms, look no further than the amount of USD (expensive) vs non-USD (i.e., EUR, i.e., very cheap thanks to NIRP) denominated cross-border debt issuance:
Do we see these funding imbalances in debt issuance? The answer is yes if one looks at cross border corporate issuance. Figure 2 shows how EUR denominated corporate bond issuance by non-European issuers (Reverse Yankee issuance) spiked this year as percentage of total EUR denominated corporate issuance. Similarly Figure 3 shows how Yankee issuance, the share of USD denominated corporate issuance by non-US companies, declined sharply this year. In other words, cross border issuance trends are consistent with higher supply of EUR funding vs. USD funding. We get a similar picture in value terms. Reverse Yankee issuance totaled €47bn YTD which annualized is twice as big as last year’s pace. Yankee issuance totaled $41bn YTD which represents a decline of more than 30% from last year’s annualized pace.

Which makes sense: why would US multinationals, already hurting by the surge in the USD on their income statement, also suffer this move on the balance sheet abnd pay about 50 bps more for the same piece of paper issued in Europe? They won't, of course, however in the process they will hedge fx, and push the basis even further into negative territory. JPM explains:
Does this cross border issuance have a currency impact? It depends. For example, if a US company issues in EUR and swaps back into USD to effectively achieve cheaper synthetic USD funding rather than issuing directly in US dollar funding markets, the transaction has no currency impact. This synthetic USD funding especially attractive right now as credit spreads over swaps are much tighter in Europe than in the US by around 40bp-50bp for A-rated corporate currently in intermediate maturities, which more than offsets the negative fx basis. This means there is a significant yield advantage for US companies using synthetic USD funding (i.e. issuing in EUR and swapping back into USD rather than issuing in USD directly). In theory, the USD-EUR credit spread difference of Figure 4 suggests that the fx basis has room to widen by another 20bp, i.e. to decline to -50bp before the yield advantage of synthetic USD funding disappears. For the EURUSD, the basis cannot go below -50bp as this is the floor implied by the ECB’s FX swap line with the Fed.

And there you have it: all else equal, there is at least enough downside to push the fx basis as far negative at -50 bps: this would make the USD shortage the most acute it has ever been, at least as calculated by this key metric!  And since this is essentially a risk-free arb for credit issuers, and since there are many more stock buybacks that demand credit funding, one can be certain that the current fx basis print around - 20 bps will most certainly accelerate to a level never before seen, a level which would also hint that something is very broken with the financial system and/or that transatlantic counterparty risk has never been greater.

Unlike us, JPM hedges modestly in its forecast where the basis will end up:

Whether the above YTD trends continue forward is a difficult call to make. The widening of USD vs. EUR credit spreads shown in Figure 4 has the propensity to sustain the strength of Reverse Yankee issuance putting more downward pressure on the basis. On the other hand, this potential downward pressure on the basis should be offset to some extent by Yankee issuance the attractiveness of which increases the more negative the basis becomes.

JPM's punchline:
In all, different to previous episodes of dollar funding shortage such as the ones experienced during the Lehman crisis or during the euro debt crisis, the current one is not driven by banks. It is rather driven by the monetary policy divergence between the US and the rest of the world. This divergence appears to have created an imbalance in funding markets and a shortage in dollar funding. It is important to monitor how this dollar funding shortage and issuance patterns evolve over time even if the currency implications are uncertain.

And to think the Fed's cheerleaders couldn't hold their praise for the ECB's NIRP (as first defined on these pages) policy. Because little did they know that behind the scenes the divergence in Fed and "rest of the world" policy action is leading to two things: i) the fastest emergence of a dollar shortage since Lehman and ii) a shortage which will be arbed to a level not seen since Lehman, and one which assures that over the coming next few months, many will be scratching their heads as to whether there is something far more broken with the financial system than merely an arbed way by US corporations to issue cheaper (hedged) debt in Europe thanks to Europe's NIRP policies.

If and when the market finally does notice this gaping dollar shortage (as is usually the case with the mandatory 3-6 month delay), watch as the Fed will once again scramble to flood the world with USD FX swap lines in yet another desperate attempt to prevent the global dollar margin call from crushing a matched synthetic dollar short which according to some estimates has risen as high as $10 trillion.

Until then, just keep an eye on the Fed's weekly swap line usage, because if the above is correct, it is only a matter of time before they are put to full use once again.

Finally what assures they will be put to use, is that this time the divergence is the direct result of the Fed's actions, and its insistence that despite what is shaping up to be a 1% GDP quarter, that it has to hike rates. Well, as JPM just warned it in not so many words, be very careful what you wish for, and what you end up getting in your desire to telegraph just how "strong" the US economy is.

The Paradox of America's Electoral Reform

By George Friedman

March 10, 2015 | 07:56 GMT

We are now in the early phases of selecting the president of the United States. Vast amounts of money are being raised, plans are being laid, opposition research is underway and the first significant scandal has broken with the discovery that Hillary Clinton used a non-government email account for government business. Ahead of us is an extended series of primaries, followed by an election and perhaps a dispute over some aspect of the election. In the United States, the presidential election process takes about two years, particularly when the sitting president cannot run for re-election.

This election process matters to the world for two reasons. First, the world's only global power will be increasingly self-absorbed, and the sitting president — already weakened by the opposition party controlling both houses of Congress — is increasingly limited in what he can do. This is disturbing in some ways, since all presidential elections contain visions of the apocalypse that will follow the election of an opponent. During the U.S. election season, the world hears a litany of self-denigration and self-loathing that can be frightening emanating from a country that produces nearly a quarter of the world's wealth each year and commands the world's oceans. If Honduras were to engage in this behavior, the world would hardly notice.

When the United States does it, the public discourse can convince others that the United States is on the verge of collapse, and that perspective has the potential to shape at least some actions on the global stage.

Tempering the Passions of Politics

The United States sees itself as the City on the Hill, an example to the world. But along with any redemptive sensibility comes its counterpart: the apocalyptic. The other candidate is betraying the promise of America, and therefore destroying it. Extreme messages are hardwired into the vision that created the republic.

The founders understood the inherent immoderation of politics and sought to solve problems by limiting democracy and emphasizing representative democracy. Americans select representatives through various complex courses. They do not directly elect presidents, but members of the Electoral College.

Likely an archaic institution, the Electoral College still represents the founders' fear of the passions of the people — both the intensity of some, and the indifference of others. The founders also distrusted the state while fully understanding its necessity. They had two visions: that representatives would make the law, and that these representatives would not have politics as a profession. Since re-election was not their primary goal, they were freed from democratic pressures to use their own wisdom in crafting laws.

The founders saw civil society — business, farms, churches and so on — as ultimately more important than the state, and they saw excessive political passion as misplaced. First, it took away from the private pursuits they so valued, and it tended to make political life more important than it should be. Second, they feared that ordinary men (women were excluded) might be elected as representatives at various levels. They set property requirements to assure sobriety (or so they thought) in representatives and at least limit the extent to which they were interested in politics. They set age requirements to assure a degree of maturity. They tried to shape representative democracy with standards they considered prudent — paralleling the values of their own social class, where private pursuits predominated and public affairs were a burdensome duty.

It is not that the founders regarded government as unimportant; to the contrary, it was central to civilization. Their concern was excessive passion on the part of the electorate, so they created a republican form of representative government because they feared the passions of the public.

They also feared political parties and the factions and emotions they would arouse.

Parties and Party Bosses

Of course it was the founders who created political parties soon after the founding. The property requirements dissolved fairly quickly, the idea that state houses would elect senators went away, and the ideological passions and love of scandal emerged. 

Political parties were organized state by state, and within state by counties and cities. These parties emerged with two roles. The first was to generate and offer potential leaders for election at all levels. The second was to serve as a means of mediation between the public — for multiple classes, from the wealthy to the poor — and the state. The political machines that dominated the country served as feeders of the republican system and ombudsmen for citizens.

The party bosses did not have visions of redemption or apocalypse. They were what the founders didn't want: professional politicians, not necessarily holding office themselves but overseeing the selection of those who would. Since these officeholders owed their jobs to the party boss, the boss determined legislation. And the more powerful bosses populated the smoke-filled rooms that selected presidents.

This was a system made for corruption, of course, and it violated the founders' vision, but it also fulfilled that vision in a way. The party bosses' power resided in building coalitions that they could serve. In the large industrial cities where immigrants came to work in the factories, that meant finding people jobs, securing services, maintaining the schools and so on. They didn't do this because they were public-spirited, but because they wanted to hold power. Even if companies that kicked back money to the bosses built the schools or the brother-in-law of a party boss owned the company that paved the streets, the schools got built and the streets got paved. The political machines were very real in rural areas as well.

Every four years, party bosses gathered at the party convention with the goal of selecting a candidate who would win. They would allow the candidate his ideological foibles, so long as they retained the ability to name postmasters and judges and appoint federal contracts in their areas. The system was corrupt, but it produced leaders like Abraham Lincoln, Theodore Roosevelt, Woodrow Wilson, Franklin Roosevelt, Harry Truman and Dwight Eisenhower, as well as some less illustrious people.

The Boss System Breaks Down

Starting in 1972, following Richard Nixon's presidency, the United States shifted away from a system of political bosses. This was achieved by broadly expanding primaries at all levels.

Rather than bosses selecting candidates and controlling them, direct democratic elections were used for candidate selection. Since the bosses didn't select candidates, the candidates were beholden to the voters rather than the bosses. Each election year, the voters would select the candidates and then select the officeholder. Over time, the power of the political machine was broken and replaced by a series of elections. The founders did not want this level of democracy, but neither did they explicitly want the party boss.

This change had two unanticipated consequences. The first was that the importance of money in the political process surged. In the old system, you had to convince bosses to support you.

That took time and effort and required that promises be made, but it did not require vast amounts of money. Under the primary system, apart from the national election, primary elections take place in almost all states.

Candidates must build their own machines in each state and appeal directly to voters. That means huge expenditures to create a machine and buy advertising in each state.

As the bosses' corruption was curbed but money's centrality soared, the types of corruption endemic to the political system shifted. Corruption moved from favors for bosses to special treatment of fundraisers, but it was still there. Reformers tried to limit the amount of money that could be contributed, but they ignored two facts. First, a primary system for the presidency is fiendishly expensive simply because delivering the message to the public in 50 states costs a fortune. Second, given the stakes, the desire to influence government is difficult to curb. The means will be found to donate money, and in some cases it will be done in the hope and expectation of favors. The reforms changed the shape of corruption but could not eliminate it.

The second unintended consequence was that it institutionalized political polarization. The party boss was not a passionate man. But those who go to the polls in primaries tend to be.

Turnout at American elections is always low. The founders set the election for a Tuesday rather than a weekend as in many countries, and it is a work day, with children to be picked up at school, dinner to be cooked and so on. The founders designed politics to be less important than private life, and in the competition on Election Tuesday, private life tends to win, particularly in off-year elections and primaries.

The people who vote in primaries tend to be passionate believers. The center, which holds the largest block of voters in the general election, is not a passionate place. The kids' homework comes first.

Passion exists on the wings of both parties. This means that in the primaries, only two types of candidates win. One is the extremely well funded — and the passion of the wings make funding for them even more important. The other is the ideologically committed. The top fundraisers face the most passionate voters, and the contest is whether the center can be turned out with money.

Frequently the answer is no. The result is that the wings, although likely a minority in the party, frequently select candidates in the primary who have trouble winning the general election. From their point of view, winning means nothing if you give up principles.

All of this applies equally to elections to the House and Senate. It has been said that there has never been less bipartisanship than there is now. I don't know if that is true, but it is certainly the case that the penalties for collaboration with the other party, or for moving to the center, are extremely high.

The only ones who can do it are the ones who can raise sufficient money to draw the center out. And that is hard to do. As a result, everyone must run to the extreme in the primary and run to the center in the general election. The reforms have institutionalized hypocrisy and outsized strength for marginal groups, though they succeeded in breaking the party bosses.

Since 1972, the United States has elected presidents like Ronald Reagan, the two Bushes, Bill Clinton and Barack Obama. I will leave it to the reader to determine how this compares to the boss-generated leaders. However, I would argue that the ombudsman system has broken down.

Bosses, because they were corrupt, could provide an interface for voters with employers (who wanted contracts) and government. I suspect that the collapse of the boss system made it easier for the Italians, Irish and Jews to integrate into society, and harder for blacks and Hispanics.

There are pockets of bosses, but they are not the norm, and they cannot offer as much without going to jail.

This is not meant to romanticize the bosses. We are, on the whole, better off without them, and we can't resurrect them. I am trying to explain why our elections have become so long, why they cost so much money, and why the wings of the parties get to define agendas and legislative and executive behavior.

The Geopolitics of the U.S. Elections

There is a geopolitical side to this as well. The internal political process of the leading global power is always a geopolitical matter. The structure and method whereby leaders are selected shape the kinds of leaders who govern and define, to some extent, the constraints placed on governments. Geopolitics, as Stratfor uses the concept, argues that the wishes and idiosyncrasies of individual leaders make little difference in the long run. This is because leaders are constrained by global realities. It is also because internal political processes define what must be done to take and hold power. Those internal political processes have their own origins in impersonal forces.

There has been a long struggle between the founders' vision of how politics should work and the reality of the process. The party boss was, in a weird way, an implementation of the principle of representative government. He was also a symbol of corruption and anti-democratic behavior. His demise has created the primary system, which carries with it its own corruption. Moreover, it has systematically limited the power of the center and strengthened the power of the most ideological. It has also caused U.S. elections to put the world ill at ease, because what the world hears in the Georgia, Vermont or Texas primaries can be unsettling.

The American Republic was invented and it is continually being reinvented on the same basic theme. Each reform creates a new form of corruption and a new challenge for governance. In the end, everyone is trapped by reality, but it is taking longer and longer to enter that trap.

This situation is not unique to the United States, but the pattern differs elsewhere. Over the centuries, the U.S. public has been shaped by immigration, and the U.S. government was consciously constructed out of the theoretical constructs of its founders. It was as if the country were a blank slate. It was in this context that waves of reform took place, all changing the republic, all with unintended consequences.

I have tried to show here the unintended consequences of the post-Watergate reforms to illustrate why the American political system works as it does. But perhaps the most important point is that redrawing the government is endemic to the kind of government the United States has, and that the United States both absorbs change well and is frequently surprised by what change does. In other countries, there is less room to maneuver, and perhaps fewer surprises and standards of success. The political parties emerged against the founders' intentions, because political organization beyond the elite followed from the logic of the government. The rise of political bosses followed from the system, and simultaneously stabilized and corrupted it.

The post-Watergate reforms changed the nature of the corruption but also changed the texture of political life. The latter is the issue with which the United States is now struggling.

China, Russia and Europe are all struggling, but in different ways and toward different ends, frequently because of problems endemic to their cultures. The problem endemic in American culture is the will to reform. It is both the virtue and vice of the U.S. government. It has geopolitical consequences. This is another dimension of geopolitics to be considered in the coming weeks and months.

viernes, marzo 13, 2015



The Fed Under Fire
Barry Eichengreen
MAR 10, 2015

Yellen testifies Congress

CAMBRIDGE – The Federal Reserve is under attack. Bills subjecting the United States' central bank to “auditing" by the Government Accountability Office are likely to be passed by both houses of Congress. Legislation that would tie how the Fed sets interest rates to a predetermined formula is also being considered.
Anyone unaware of the incoming fire only had to listen to the grilling Fed Chair Janet Yellen received recently on Capitol Hill. Members of Congress criticized Yellen for meeting privately with the president and treasury secretary, and denounced her for weighing in on issues tangential to monetary policy.
Still others, like Richard Fisher, the outgoing president of the Dallas Fed, have inveighed against the special role of the Federal Reserve Bank of New York. Reflecting the New York Fed's heavy regulatory responsibilities, owing to its proximity to the seat of finance, its president has a permanent seat on the Federal Open Market Committee, the body that sets the Fed's benchmark interest rate.
This, its detractors warn, privileges Wall Street in the operation of the Federal Reserve System.
Finally, some object that bankers dominate the boards of directors of the regional Reserve Banks, making it seem that the foxes are guarding the henhouse.
This criticism reflects the fact that the United States has just been through a major financial crisis, in the course of which the Fed took a series of extraordinary steps. It helped bail out Bear Stearns, the government-backed mortgage lenders Freddie Mac and Fannie Mae, and the insurance giant AIG. It extended dollar swap lines not just to the Bank of England and the European Central Bank but also to the central banks of Mexico, Brazil, Korea, and Singapore.
And it embarked on an unprecedented expansion of its balance sheet under the guise of quantitative easing.
These decisions were controversial, and their advisability has been questioned – as it should be in a democracy. In turn, Fed officials have sought to justify their actions, which is also the way a democracy should function.
There is ample precedent for a Congressional response. When the US last experienced a crisis of this magnitude, in the 1930s, the Federal Reserve System similarly came under Congressional scrutiny.
The result was the Glass-Steagall Act of 1932 and 1933, which gave the Fed more leeway in lending, and the Gold Reserve Act of 1934, which allowed it to disregard earlier gold-standard rules.
The Banking Act of 1935, as amended in 1942, then shifted power from the Reserve Banks to the Board in Washington, DC, and confirmed the special role of the Federal Reserve Bank of New York.
These reforms reflected an overwhelming consensus that the Fed had been derelict in fulfilling its duties. It had failed to prevent the money supply from contracting in the early stages of the Great Depression. Heedless of its responsibilities as an emergency lender, it had allowed the banking system to collapse. When financial stability hung in the balance in 1933, the Reserve Banks' failure to cooperate prevented effective action.
Given such incompetence, it is not surprising that subsequent reforms were far-reaching. But these reforms went in precisely the opposite direction from today's proposed changes: fewer limits on policy makers' discretion, more power to the Board, and a larger role for the New York Fed, all to enable the Federal Reserve System to react more quickly and robustly in a crisis. It is far from clear, in other words, that the right response to the latest crisis is an abrupt about-face.
Ultimately, whether significant changes are warranted should depend on whether the central bank's interventions in fact aggravated the recent crisis, as they aggravated the crisis of the 1930s. But the Fed's critics have been curiously nonspecific about what they regard as the Fed's mistakes. And where they have been specific, as with the accusation that the Fed was fomenting inflation, they have been entirely wrong.
Fed officials, for their part, must better justify their actions. While they would prefer not to re-litigate endlessly the events of 2008, continued criticism suggests that their decisions are still not well understood and that officials must do more to explain them.
In addition, Fed officials should avoid weighing in on issues that are only obliquely related to monetary policy. Their mandate is to maintain price and financial stability, as well as maximum employment. The more intently Fed governors focus on their core responsibilities, the more inclined politicians will be to respect their independence.
Finally, Fed officials should acknowledge that at least some of the critics' suggestions have merit. For example, eliminating commercial banks' right to select a majority of each Reserve Bank's board would be a useful step in the direction of greater openness and diversity.
The Federal Reserve System has always been a work in progress. What the US needs now is progress in the right direction.

Mar 9, 2015 11:51 am ET

How Far Below Zero Can Interest Rates Go?

By Greg Ip

Sweden’s Riksbank is among several major central banks to put interests rates into negative territory in recent years. Here, Riksbank chief Stefan Ingves earlier this year.
TT News Agency/Reuters

Several central banks in Europe have ventured past the frontier of conventional monetary policy by pushing some of their policy rates below zero.

This raises two interesting questions. First, how is this  possible? And second, will it work?

It has long been said that interest rates cannot go below zero because people will simply hold physical currency rather than incur a charge for leaving money in the bank. But the “zero bound” was never really zero for the simple fact that money is a pain to store and to use. As David Beckworth, who blogs at Macro and Other Market Musings, notes, what we are really interested in is the effective lower bound: the true level below which interest rates cannot go.

That number is probably negative, but how negative?

Evan Soltas, who blogs at economics & thought, says people seem willing to tolerate credit card and related fees of around 2%, and reckons people would tolerate negative interest rates of 3% before switching to cash. The European Central Bank puts the total economic cost of cash at 2.3%  of the face value of transactions.

True, much of those costs are borne by retailers or intermediaries, not households. But even households must cope with the time spent visiting the ATM and making sure they aren’t robbed. The time Danish households spent using cash was worth an estimated 1.3 billion krone (about $200 million) in 2009,  about 0.3% of GDP. The relative inconvenience of cash has grown as electronic alternatives have become ever more ubiquitous and frictionless.

But Paul Krugman at the New York Times points out that convenience is only one of the factors that people consider in weighing whether to hold cash or bonds (or bank deposits, or anything that pays interest). The other is that it’s a store of value. Cash is pretty inferior as a store of value when bank deposits pay positive interest, but clearly superior when they pay negative interest; a zero rate of return is clearly better than negative. Thus, he says, convenience is irrelevant for people who hold as money as wealth rather than for spending.

All true, but even those who hold currency as wealth must consider the hassles if they opted for paper currency. Big investors, corporations, banks and governments hold hundreds of millions of dollars, even billions, as cash.

Even when these people aren’t spending cash, they’re using it to settle huge sums with each over night to facilitate trillions of dollars in payments. Keeping this money in the form of deposits or bonds makes transacting these sums relatively easy thanks to a complex, well-developed payments and settlement infrastructure. An alternative system based on physical currency would require setting up storage houses of currency and shuttling large mounds of it between them.

This is clearly feasible. A century ago, the world’s central banks settled gold payments among themselves by moving ingots from one vault below the Federal Reserve Bank of New York to another. It’s not hard to imagine a clever financial innovator buying up a billion Swiss francs in currency, putting it in a storage house, and selling depository receipts that could then become a tradeable instrument, much like money market mutual fund shares. To make the considerable upfront costs of such a parallel payments system worthwhile would require interest rates to be both negative enough, and to stay negative for long enough.

Here, it’s important to note that while the headline interest rates central banks have established can be quite negative, it is not always indicative of what is being charged. When Sweden’s Riksbank lowered its excess deposit rate to minus .85%, for example, it also reintroduced a “fine-tuning corridor,” which keeps the deposit rate between minus 0.1% and minus 0.2%.

Banks with excess cash can lend it back to the Riksbank each week at minus 0.1% or minus 0.2% each night; only cash not mopped up in these nightly operations is charged the minus 0.85%, which in practice is a trivial sum. By contrast, the minus 0.2% deposit rate charged by the ECB really does affect very large balances.

Another important difference between countries is the holders of its currency.  Swedish and Danish currency is primarily held and used by residents; very little circulates abroad. Neither country is a financial center. By contrast, a large portion of American, euro and Swiss currency is held by foreigners, often because they don’t trust the local financial system, but also to facilitate underground transactions. All are home to financial centers. Foreigners trying to decide between cash and bank deposits probably care less about the inconvenience of banknotes since they don’t use them that often. This could explain why Swiss currency in circulation has risen 27% since 2010, to 66 billion francs.

Central banks’ purchases of bonds and foreign exchange with newly created money has left banks with trillions of excess reserves on deposit at their central banks, and these are like a hot potato: A bank can get rid of its deposits only by forcing another bank to hold more (the same is true of efforts by banks such as J.P. Morgan Chase to shed unprofitable deposits).

So even if some of this gets converted to cash, negative interest rates can still be effective so long as most isn’t. (Deposits at the Swiss National Bank soared 10-fold since 2010, to 385 billion francs, as the SNB printed francs to buy euros in an effort to keep the franc pegged to the euro.)

Like Switzerland, Denmark has sought to keep its currency from rising against the euro, in part through purchasing euros with newly printed krone. After the ECB introduced negative rates and promised to buy bonds, euro bond yields fell into negative territory and money flooded into both Switzerland and Denmark in search of less-negative returns. Switzerland surrendered and let the franc appreciate, but then introduce a negative interest rate, which is probably why, after initially skyrocketing more than 15% against the euro, the franc has retraced much of that climb. Inflows into Denmark similarly slowed substantially after it introduced its minus .75% deposit rate, and its currency peg has held.

So negative rates can be quite effective, at least insofar as they are aimed at altering financial market behavior. Europe’s negative rates are an important reason Italy and Spain are now paying just 1.3% on long-term bonds, and why European stocks are up  20% since the Greek election.

Less certain is whether they can also revive the real economy, that is persuade businesses to invest and consumers to spend. There, pushing interest rates into modestly negative territory is, in theory, no more stimulative than a similar-sized cut that left them in positive territory. It helps at the margin, though not by much. Yet it would be wrong to underestimate the potential impact. Peter Berezin of BCA Research notes that people have a psychological aversion to loss, and the prospect of losing money on a super-safe deposit or government bond may have a more powerful effect than a modestly lower, but still positive, interest rate.

Christina Romer and David Romer have written a paper called, “The Most Dangerous Idea in Federal Reserve History: Monetary Policy Doesn’t Matter.” The same sentiment can be applied to Europe. It is probably not a coincidence that the European economic data have begun to brighten, just as the ECB has ventured more resolutely into uncharted territory. It may be true that rates can’t go much more negative than they have; but they may not have to.

viernes, marzo 13, 2015



The Wrap

March 12, 2015

As has been the case for eight days running, silver (and gold) has hit successive new price lows on the COMEX through today. I know some things for sure – how and why this is happening, even though I can’t know what everyone (including me) wants to know, namely, where’s the exact bottom?

That will only be known after the bottom has passed. So let’s stick to what is known – the how and why of the decline.

This price decline is a 100% pure COMEX production, as is nearly always the case. It is not the result of any developments in the physical world of silver, such as investors selling physical silver on balance. It is not the result of any sudden increase in silver (or gold) mine production or falloff in physical industrial demand.

Technical funds and other price momentum speculators are selling into the lower prices that the commercials know how to create.

The commercials rig ever lower prices for the purpose of buying whatever contracts the technical speculators can be induced into selling. The game has become so obvious and repetitive and proven by the CFTC’s own data, that the only wonder is how everyone can’t see it after it’s explained to them.

What is also known is that there is a limit to technical fund selling.

There may be no limit, in theory or practice, as to how many contracts the commercials can buy or sell, but there is a very finite limit for the technical funds. Quite simply, if the equation was reversed and it was the commercials who were limited in any way and the speculators could buy or sell in unlimited quantities, the COMEX silver manipulation would not have lasted even a year, to say nothing of not enduring for 30 years.

JPMorgan demonstrated on several occasions over the past seven years that it was allowed to hold over 40,000 net contracts of COMEX silver short, the equivalent of 200 million ounces. Never would an individual technical fund or other speculator be allowed to hold 40,000 contracts of COMEX silver. I’m not telling you anything you don’t know about the COMEX paper game being rigged and how the key to ending the manipulation now rests in the physical silver market, but even the current price take-down will soon be exhausted in strictly paper terms.
Silver analyst Ted Butler
11 March 2015

I'd like to think, based on the share price action in both silver and gold, that we saw the lows in the precious metals for this move down during the COMEX trading session yesterday.  But as Ted Butler pointed out in the quote above, we won't know for sure until it's plainly visible in the rear-view mirror.

Here are the 6-month charts for all four precious metals---and it's obvious that we are at, or very close to, the lows from last November, which are pretty much bottom-of-the-barrel numbers.

We're oversold in three of the four precious metals---and because palladium has been trading to its own drummer for many months now, I don't think that the current RSI-neutral position means much in the grand scheme of things, as it's a very tiny market.

As I type this paragraph, the London open is thirty minutes away. 
All four precious metals hit their lows of the Far East trading session at 10 a.m. Hong Kong time on their Thursday morning---and shortly before 2 p.m. they all popped to the upside in unison. 
This had nothing to do with supply and demand---and everything to do with trading in the futures market.  At the moment, they're all up decent amounts---and only time will tell if they're allowed to keep those gains.  Not surprisingly, net gold volume is already pretty chunky at 29,000 contracts---and silver's net volume is 6,100 contracts.  It's obvious that these rallies, such as they are, aren't going unopposed by JPMorgan et al.

The dollar index, which peaked out at 100.60 at noon Hong Kong time on their Thursday, is now down 38 basis points as of this writing.

I was happy to see the new low prices that were set yesterday---and the corresponding rise in their associated equities.  As I said further up in today's missive---"I would guess that we saw some serious bottom fishing, or the insiders were buying like crazy because they knew that the low was in yesterday.  We'll see."

The only unfortunate thing is that because yesterday's price action occurred after the cut-off for tomorrow's Commitment of Traders Report, we'll probably never know what the true bottom was in terms of long and short contracts held by the Big 8 traders---and their technical fund prey in the Managed Money category.

And as I send this off to Stowe, Vermont at 5:20 a.m. EDT, I note that the prices of all four precious metals got stepped on shortly after 7:00 a.m. GMT in London.  They're all still up on the day, at least for the moment, but the gains have certainly been pared back.  Net gold volume is now 39,000 contracts---and silver's net volume is around 7,700 contracts.  As I said before, these rallies are not going unopposed---and the volume and price action certainly bears that out.

It appears that the dollar index ran into "gentle hands" at the 99.00 mark at 8:00 a.m. GMT right on the dot, which was the London open, but the precious metals got capped about an hour before that.   Right now the index is down 36 basis points.

That's more than enough for another day---and I'll be more than interested in what the price charts show when I roll out of bed later this morning.