The Dollar's Move Is More Dangerous than You Think

By Michael E. Lewitt, Special Contributor, Money Morning

April 22, 2015
  With earnings season here, what's lost in the "oohing and aahing" over the incoming results is a reasoned look at what's influencing the dollar's move and, more importantly, the effect it will have on our wallets, if not today, certainly down the road.


Earnings and corporate reports are a long game, and that game is in the early innings. Investors need to understand the reasons behind the strength in the dollar, why it is likely to persist, and how we need to prepare…

Big Earnings are Masking Bigger Problems

The first big multinational company to report earnings was Johnson & Johnson (NYSE: JNJ), and the pharma giant announced respectable earnings but noted a heavy hit from the dollar:

"On an operational basis, sales were up 3.1% and currency had a negative impact of 7.2% [emphasis mine].  In the U.S., sales were up 5.9%. In regions outside the U.S. our operational growth was 0.8%, while the effect of currency exchange rates negatively impacted our reported results by 13.2%."

Make no mistake about it: 13.2% is an enormous currency hit. While the company also reduced guidance based on expectations of continuing currency pressures, the stock held up until a slight retrenchment late in the week.

The market apparently believes that currency, like oil, will have only a transitory impact on earnings.

An even more egregious example of the euphoria over strong earnings masking currency losses is Netflix Inc. (Nasdaq: NFLX). The company announced massive subscriber growth and stronger-than-expected bank earnings but included this acknowledgment of currency issues in its earnings report: "The strong dollar hurt financial results during the quarter, negatively affecting International segment revenue (lower by $48 million y/y using Q1 2014 forex rates) which carried into a $15m negative forex impact on international contribution losses."

Yet, as has been customary during the post-crisis bull market, any bad news related to the oil crash or dollar strength is being explained away as transitory, and indeed, NFLX stock soared over 18% on the news.

That may prove to be a serious mistake.

Indeed, the market as a whole is making a big mistake by ignoring the effect of the strong dollar; its impact is just beginning to be felt.

Here's what's going on that companies are burying in the small print of press releases.

The dollar's strength is being driven by the divergence in monetary policy between the Federal Reserve and central banks in Europe, Japan, and China. While the Federal Reserve is moving to tighten policy by ending its program of buying bonds (known as "QE" or "quantitative easing"), other central banks have loosened their policies by launching trillion-dollar programs of their own to buy their regions' bonds (as well as stocks, in the case of Japan).

Monetary policy is driving the value of the dollar and the rest of the world's currency in starkly different directions.

In addition, the Federal Reserve is openly discussing plans to start raising interest rates later this year; there is little prospect that European or Asian central banks will do anything similar for years.  As a result, interest rates in the United States are expected to move up while those in Europe and Asia are moving down. In fact, rates in much of Europe have been pushed below zero, which is creating huge problems for investors who need to earn a decent return on their capital.

Ten-year U.S. Treasuries were recently yielding 1.89%, which is pathetic, but 10-year German bunds actually hit a microscopic 0.08%, and 10-year Japanese bonds are trading at 0.32%. If you were an investor who had to buy one of these meager offerings, which one would you pick?

The differential in interest rates is driving currencies in opposite directions and is likely to keep doing so for a long time.

Since the beginning of the year, the euro has dropped by about 10% against the dollar (from $1.20 to $1.07), a huge move in such a short period of time. The yen has traded flat at about ¥119 but is poised to drop significantly, having dropped sharply from ¥76 in January 2012 after Shinzo Abe was reelected as Prime Minister and implemented a radical policy to devalue the currency to stimulate Japan's moribund economy.

Both the European and Japanese economies are drowning in debt and encumbered by archaic regulatory, labor, and tax regimes that doom them to slow growth, leaving policymakers with currency devaluation as their only hope – a dim one – to stimulate growth.

Weaker Currency Is Catnip for Foreign Markets

The U.S. Dollar Index (INDEXDXY: DXY) tracks the U.S. dollar against a basket of major currencies. Last December, it broke a 30-year trend line when it rose above 95. Recently it hit 100 before dropping back below that and is currently trading at around 98.

The most astute technical analysts on Wall Street suggest that it could easily hit 110 or 120, which makes sense if you look at where the euro and yen are likely to move. The euro is likely to weaken much further against the dollar, not only moving to parity ($1.00) but eventually trading in the $0.80 range. This is based on the fact that the European Central Bank and its president, Mario Draghi, have made it clear that their policy is to weaken the currency much further.
With interest rates at or below zero, the only tool they have left to stimulate economic growth is to cheapen the euro to make European products more attractive abroad and grow the region's exports. They are content to pick up the pieces from a policy that will destroy their currency and their banking system later.

As for Japan, the yen recently crossed a long-term trend line at 121 before dropping back below it. But the clear mandate from Prime Minister Abe is to cheapen the currency in order to stimulate exports and inflation. Among other things, this is setting up a currency and trade war in Asia among Japan, China, and South Korea that will export lower prices and deflation throughout the world. In the race to the bottom, Asia will be a major player.

The flip side of cheaper currencies has been wildly rising stock markets in Europe and Japan.

In the first quarter of 2015 the Deutsche Boerse AG German Stock Index (INDEXDAX: DAX) rallied by 22%, its best performance since its creation in 1988, and the FTSE Eurofirst 300 (INDEXFTSE: E3X) climbed by 16%. The MSCI AC Asia Pacific Index (INDEXMSCI: MXAP) jumped by 7% and Japan's Nikkei 225 (INDEXNIKKEI: NI225) by 9%. These gains have accelerated in April with China's and Hong Kong's markets joining in and going parabolic.

These moves are almost entirely driven by currency debasement and whatever benefits companies in these regions are gaining from the cheapening of their currencies. Their underlying economies are showing only slight signs of growth, which are unlikely to be sustained absent significant fiscal reforms.

Here's What U.S. Investors Need to Know Today

The important thing for investors to understand is that these currency trends are not going to reverse any time soon. These are major moves that are breaking 30-year trend lines and will not reverse unless central banks change course – which they show no sign of doing.

Accordingly, investors should prepare for further dollar strength and all that brings with it – lower corporate earnings since S&P 500 (INDEXSP: INX) companies earn significant amounts of their profits abroad; deflation since commodities are priced in dollars and will remain under pressure; and rising stock prices abroad that need to be hedged in dollar terms.

The dollar move is in its early innings. Smart investors need to remember it's a nine-inning game.

Gold Crash: Our Asset's Bitter Fall From Glory - Are You Prepared?

by: Harry Dent            


 
 
Summary
  • Why I don't agree with those gold bugs determining gold as our economy's 'saving grace'.
  • Why we haven't - and won't - see hyperinflation.
  • What I believe will happen to the price of gold and its value in our economy.

Gold bugs are still waiting on the great hyperinflation that will cause the U.S. dollar to fold over and send gold soaring to the heavens to the tune of $5,000.

That might have looked remotely possible in 2011 when gold almost hit the $2,000 mark… but not now.

We've seen everything gold bugs could hope for: endless money printing, 0% interest rates (both short-term and long-term adjusted for inflation), rising debt and debt ratios in the public and private sectors…

So where's the damn hyperinflation?

We've been saying it for years: It just ain't gonna happen!

Why? Because we're in a deflationary period, what we call the "economic winter season." This comes after every great debt and financial asset bubble we've ever seen, driven by the kind of debt and leverage that has fueled our current bubble to such heights.

Money printing has kept deflation at bay for a number of years, but pretty soon that dam is going to break!

But I'll give gold bugs this: They understand that you can't get something for nothing better than even most economists. Some things may seem to be free, but you always pay for them later. There is no free lunch!

What gold bugs don't get is that when such something-for-nothing policies fail, we will see deflation. Not inflation and certainly not hyperinflation.

Gold has already started to feel this painfully:




As you can see in the chart, we gave a sell signal on April 25, 2011. Sure, gold inched just a little bit higher to $1,934 later that year, but then it fell and never returned past the value we sold at.

After 2013, when an acceleration in QE by the U.S. and Japan saw inflation rates fall from around 2% to 1%, gold plummeted out of its bubble. By getting out in 2011, we saved ourselves two years of senseless worry, because we knew the result well ahead of time.

Now, after a waterfall collapse into early 2015, gold looks like it is due for a considerable bounce higher.

When the next financial crisis starts to build - as we're already seeing it begin to - gold bugs will respond in kind, retreating into the supposed safety of their precious metal. It may bounce up to as high as $1,380 or even $1,425… but when the financial world realizes that gold is not the saving grace gold bugs think it is, the asset will suffer a very bitter fall from glory.

Think back to the last financial crisis just a few years ago. Gold continued to climb five months after the last great bubble started to tumble between late 2007 and 2008. By late 2008, gold finally went through the deflationary consequences of the financial meltdown, collapsing 33%.

So don't sell what gold you have left, at least not yet.

But be warned, I see gold crashing again, well below $1,000 by early 2017 or so, when the next stage of deflation sets in. In fact, I've accepted a bet with Jeff Clark of Casey Research that gold will go as low as $740 an ounce before 2017 is over. There are two one-ounce Gold Eagles waiting for me on that one.

The question is: Do you want to listen to us, who have been dead-on about gold falling in the past, especially after real crises have hit… or do you want to keep listening to the gold bugs, whose moralistic arguments continue to miss the finer details?

There's much more at stake here than just the price of gold. Deflation will ripple through the entire global economy.

Fed's Bill Dudley is alert to global liquidity storm, yet signals 3.5pc rates

Head of the New York Fed acknowledges that the institution has a special duty of care for the whole world

By Ambrose Evans-Pritchard

7:37PM BST 20 Apr 2015

An employee works in a foreign exchange office in central Cairo

An employee works in a foreign exchange office in central Cairo. The IMF has warned of a 'cascade of disruptions' for the global financial system if US rates jump suddenly 
 
 
The US Federal Reserve will do its best to avert a bloodbath for emerging markets as it prepares to raise interest rates for the first time in eight years, but warned that it cannot let inflationary pressures take hold in the US itself.
 
Bill Dudley, head of the powerful New York Fed, acknowledged that the institution has a special duty of care for the whole world, vowing to act with caution to soften a potentially brutal squeeze for borrowers holding record levels of dollar debt outside the US.
 
"The normalisation of US monetary policy could create significant challenges for those emerging market economies that have been the recipients of large capital inflows in recent years," he said.
 
"We at the Fed take the potential international implications of our policies seriously. In part, this is out of simple self-interest, since the international effects of Fed policies can spill back onto the US economy and financial markets. In part, too, it reflects a sense of special responsibility we have given the dollar’s role as the international reserve currency."
 
The assurances came after the International Monetary Fund warned of a "cascade of disruptions" for the global financial system if US rates jump suddenly and there is a further surge in the dollar.
 

US Federal Reserve

Jose Vinals, the IMF's head of capital markets, said last week that the world is entering uncharted waters as Fed prepares to pull the trigger, warning of a "super taper tantrum" that could inflict even more damage than the original Fed-induced taper tantrum in May 2013.

That episode set off an exodus of capital from countries with big current account deficits, notably the "Fragile Five" of India, Indonesia, Brazil, Turkey and South Africa.

Mr Dudley said the Fed is listening, but he also left no doubt that the US intends to press ahead with monetary tightening this year despite the risks, warning that underlying inflationary pressures in the American economy have been disguised by a one-off slump in oil prices. "My expectation is that inflation will begin to firm later this year," he said.

The Fed has concluded that the abrupt economic slowdown in the first quarter - with growth falling to 1.5pc from an average of 2.7pc over the past two years - was a temporary blip caused by freezing weather and port disruptions.

Mr Dudley said interest rates in the US should be around 3.5pc once inflation returns to 2pc.

While the comment was tucked away at end of his speech, it is a warning shot that should send shivers down a great many spines.

Borrowing in dollars outside the US has surged from $2 trillion to $9 trillion over the past 15 years. Half of this is now concentrated in emerging markets, including $630bn to Russian companies and state entities, and roughly $350bn to Brazilian firms.

It also includes at least $1.1 trillion of loans to Chinese companies, much of it through Hong Kong and intended to circumvent China's internal credit curbs. It is clear that many investors have been engaged in a currency "carry trade", betting - wrongly as it now turns out - that the dollar would weaken against the yuan. Others took advantage of cheap dollar credit during the era of quantitative easing to speculate on the Chinese property market.

Emerging market borrowers have been issuing dollar bonds at an average real rate of just 1pc.

The great worry is what will happen as increasingly large blocs of bonds or loans - typically on five-year maturities - come due for refinancing in a far less friendly world. The dollar has almost doubled against the Brazilian real and the Russian rouble since mid-2012.



The IMF warned in its global financial stability report that the world must prepare for the double stress test of a soaring dollar and a sudden jump of 100 basis points in 10-year Treasury yields.

“Shifts of this magnitude can generate negative shocks globally. Emerging market economies are particularly exposed: they could face a reversal in capital flows," it said.

It warned that markets have been beguiled by the lowest bond yields in history and "an illusion of liquidity", wrongly assuming that central banks will always come to the rescue. "A sudden shift in market views that unwinds compressed premiums and sends yields higher could trigger a market liquidity shock," it said.

Whatever the pieties of international solidarity, the Fed invariably acts in the US national interest when push comes to shove, and there are clear signs that the US is shaking off its deflationary woes and needs tighter money.

Mr Dudley said fiscal austerity is over. Household deleveraging has "largely run its course".

There is no longer an overhang of excess inventory in the housing market. He predicted that growth will soon pick up again, driving unemployment down to 5pc by the end of the year.

While wages have been sluggish, the number of hours worked is rising briskly, swelling pay packets at a rate of 4.7pc in the second half of last year. Sooner or later, this will flood into consumption.

"If financial market conditions do not tighten much in response to higher short-term interest rates, we might have to move more quickly to achieve the appropriate restraint on financial market conditions," he said.

Mr Dudley said some emerging markets - above all India, though he cited no names - have learned from the taper tantrum, taking steps to bolster their defences and push through reforms. But not all have done so.

The emerging world also has better central banks and financial regulation than during past episodes, and ought to be able to weather the storm.

However, Mr Dudley also hinted at a repeat of the Fed tightening cycle from 1994 onwards, a saga that led in turbulent phases to the East Asia crisis and Russia's default in 1998. The problem then was a "considerable gap" between what markets were expecting and the shock therapy that the Fed in fact delivered.

The parallels are becoming uncanny. Markets are pricing in Fed rates of just 0.9pc by the end of 2016. The Fed itself is signalling 1.875pc. One of them is badly wrong.

April 21, 2015, 11:23 AM ET
 
Is Government Debt Too Low?
 
By Greg Ip
The U.S. Treasury building in Washington, DC.
Karen Bleier/Agence France-Presse/Getty Images

Government debt has skyrocketed since the financial crisis, and now tops 100% of GDP on average in rich countries. Is that too high? Oddly, it may not be high enough.

That’s the provocative suggestion Brad DeLong, from the University of California at Berkeley made at the International Monetary Fund’s “Rethinking Macro” conference last week.

Mr. DeLong, who also blogs for the Washington Center for Equitable Growth bases his argument on a simple observation.

The interest rate that rich countries with super-safe debt (in the case of the eurozone, that means Germany but not Spain) pay is astonishingly low: lower than the growth rate of nominal gross domestic product (that is, GDP before subtracting inflation). In the U.S., the Treasury yield has gone from roughly equal to growth in nominal GDP in 2005 to 3 percentage points lower today.

By Mr. DeLong’s reckoning, this means those countries are borrowing too little. Bond yields and prices move in opposite directions, so low government bond yields equate to very valuable government bonds. Mr. DeLong asks, “Isn’t the point of the market economy to make things that are valuable?” Since the debt of rich countries is “very cheap to make… shouldn’t we be making more of it?”

How does that work? How much the government should borrow depends on whether the taxes required to pay off that borrowing in the future are greater, or less than, the benefits that borrowing yields, today or in the future. By Mr. DeLong’s reckoning, the huge gap between interest rates and nominal growth is a signal that the government could borrow a lot more today and make society better off.

What should the government do with the money it borrows? Mr. DeLong’s frequent co-author Larry Summers has repeatedly urged governments to invest more in infrastructure. After all, whatever the return is on highways, airports, water treatment plants or education, it has to be higher than today’s rock-bottom governments bond yields.

But the money could also be used to cut taxes. The government could borrow $100 today, and hand it over to taxpayers. As long as interest rates stay at 2% and the government is happy to keep the debt constant as a share of GDP, and nominal GDP keeps growing at, say, 4%, it could then borrow $104 tomorrow, use $102 to pay off the first $100 with interest, and hand the $2 over to taxpayers as a tax cut.

Mr. DeLong would go further and borrow even more than the additional $4 tomorrow, in fact, he’d keep borrowing until the interest rate on government bonds is driven up to equal the growth rate.

(That, incidentally, is a point that Japan, with a debt equal to 246% of GDP, has already reached: its bond yields and nominal growth rate are both around 0.5%.)

Mr. DeLong’s proposal met with a fair bit of skepticism. “I have a lot of trouble with saying there is not enough government debt,” observed Jaime Caruana, head of the Bank for International Settlements. “If anything, there is too much of it.”

First, some asked, what if interest rates shoot up? Bond markets are notoriously fickle. Mr. DeLong says his read of history (and as an economic historian, his is a pretty good read) is that people don’t often lose their appetite all of a sudden for the debt issued by western European or North American governments absent some terrible bit of news.

Second, what if growth is slower in the future? Paulo Mauro, formerly of the IMF and now at the Peterson Institute for International Economics, raised this issue in a blog post critiquing Mr. Summers’ proposal for more government spending as a cure for “secular stagnation,” which is a persistent scarcity of demand.

In practice, Mr. Mauro notes, it’s hard to tell if slow growth is due to inadequate demand, or inadequate supply, i.e. problems related to technology, demographics, or excessive regulation.

“As years go by, these distinctions become blurred… what matters is whether economic growth in the next decade or two is going to be lower than policymakers assumed.”

For example, suppose the government projects debt will remain at 100% of GDP for the next decade or two. If growth turns out 1 percentage point lower than expected, the debt ratio would soar to 200% after 20 years. A study  of many countries over the past century that Mr. Mauro co-authored while still at the IMF found that governments regularly fail to improve their budget enough when long-run economic growth slips.

Third, perhaps countries should reduce their debt to GDP ratios because they never know when they’re going to need the extra capacity to borrow. Harvard University economist Kenneth Rogoff  argues government bond yields are low because private investors are fearful of some sort of catastrophe – a  financial crisis, a war, or a pandemic – and bonds do much better than stocks in such scenarios.

If those fears are unfounded, Mr. Rogoff agrees it makes sense for governments to take advantage of these low interest rates and to borrow more. But if the fears are rational, then the government has to be ready for the day that catastrophe occurs, at which point it will have to borrow a lot. That means it needs a lower debt today.

Mr. DeLong’s response: surely the dismal state of global economic output today qualifies as that catastrophe.

A War of Values With Russia
.
Anders Fogh Rasmussen
.
APR 20, 2015

Ukraine volunteer soldiers women cryng Russia


COPENHAGEN – Russian authorities recently threatened to aim nuclear missiles at Danish warships if Denmark joins NATO’s missile-defense system. This was obviously an outrageous threat against a country that has no intention of attacking Russia. But it also reflects a more fundamental factor in the Kremlin’s foreign policy: desperation to maintain Russia’s strategic influence at a time of unprecedented challenges to its authority.
 
Of course, Russia’s leaders know very well that NATO’s missile defense is not directed at their country. When I served as NATO Secretary General from 2009 to 2014, we repeatedly emphasized that the purpose was to defend Alliance members from threats originating outside the Euro-Atlantic area. Anyone with even a rudimentary knowledge of physics and engineering – two subjects at which Russians excel – can see that the system is designed to do precisely that.
 
Russia’s nuclear threats, against Denmark and others, are the hallmark of a weak country in economic, demographic and political decline. NATO has not aggressively victimized Russia, as Kremlin propaganda claims. The current conflict between Russia and the West – centered on the crisis in Ukraine – is, at its core, a clash of values.
 
Recall how the Ukrainian conflict began: Tens of thousands of Ukrainian citizens from all parts of society demanded, in overwhelmingly peaceful demonstrations, an association agreement with the European Union. No one was calling for a pogrom against Ukraine’s Russian-speakers, despite the Kremlin’s claims to the contrary. And NATO membership was not part of the deal.
 
Yet Russia reacted swiftly and harshly. Long before violence engulfed the protests, Russian officials began accusing the demonstrators of being neo-Nazis, radicals, and provocateurs. As soon as Ukraine’s then-President Viktor Yanukovych fled Kyiv, Russian President Vladimir Putin began engineering the annexation of Crimea.
 
This was not only a gross violation of international law; it also directly contravened Russia’s oft-stated insistence that no country has the right to ensure its security at the expense of another. The Ukrainian demonstrators marched against their government, not Russia’s.

Indeed, the notion that Ukraine could pose a military threat to Russia is nothing short of absurd. Even if Ukraine were a NATO member, a war of aggression against Russia would be an absurd scenario, as it would not serve any of the allies’ interests.
 
For Russia, the threat posed by the Ukrainian protesters was existential. In demanding change, freedom, and democracy – right on Russia’s doorstep, no less – the protesters challenged Putin’s model of “sovereign democracy,” in which the president eliminates all opposition, restricts media freedom, and then tells citizens that they can choose their leaders. The Kremlin feared that if the Ukrainians got what they wanted, Russians might be inspired to follow their example.
 
That is why Russia’s leaders have been so keen to label Ukraine’s leaders as Russophobes and fascists. It is why they have portrayed the Baltic States for years as dysfunctional oppressors of their Russian citizens. And it is why they are now portraying the EU as decadent, immoral, and corrupt.
 
The Kremlin is trying desperately to convince Russians that liberal democracy is bad, and that life under Putin is good. That requires not only spreading damaging lies at home, but also sowing violence and instability among its neighbors.
 
In the face of a massive Russian propaganda assault, the West must continue to stand up for Ukraine, as well as for Georgia and NATO members like Estonia, Latvia, and Lithuania.

Despite whatever pain we incur, we must maintain – and, if necessary, deepen – sanctions against Russia and reinforce NATO’s front line. And we must face up to the reality that, at long last, we may have to pay for our defense.
 
The West’s greatest strength is democracy; it is what has enabled us to secure peace for two generations and bring an end to communist rule in Europe almost without a shot being fired. Though liberal democracy is far from perfect, it remains the best defense against extremism and intolerance – and the most powerful facilitator of human progress.
 
If the West allows Russia to attack its neighbors simply because they might inspire Russians to seek reform, it will send the message that democratic values are not worth defending. It will undermine the West’s role as a model of prosperity and freedom that societies worldwide hope to emulate. And it will eliminate not only the West’s remaining moral authority, but also the sense of purpose that animates NATO.
 
Such an approach would expose the West to attacks by Putin and similar aggressors. And it would be a slap in the face to all of the courageous men and women worldwide who risk their lives every day in the pursuit of freedom and democracy.
 
No one should be fooled by the Kremlin’s spin doctors. The conflict in Ukraine is not about Ukraine. Nor is it about Russia, or even about NATO. It is about democracy. The West must respond accordingly.
 

The 'Grexit' Issue and the Problem of Free Trade

By George Friedman

April 21, 2015 | 08:01 GMT


The Greek crisis is moving toward a climax. The issue is actually quite simple. The Greek government owes a great deal of money to European institutions and the International Monetary Fund. It has accumulated this debt over time, but it has become increasingly difficult for Greece to meet its payments. If Greece doesn't meet these payments, the IMF and European institutions have said they will not extend any more loans to Greece. Greece must make a calculation. If it pays the loans on time and receives additional funding, will it be better off than not paying the loans and being cut off from more?

Obviously, the question is more complex. It is not clear that if the Greeks refuse to pay, they will be cut off from further loans. First, the other side might be bluffing, as it has in the past.

Second, if they do pay the next round, and they do get the next tranche of funding, is this simply kicking the can down the road? Does it solve Greece's underlying problem, which is that its debt structure is unsustainable? In a world that contains Argentina and American Airlines, we have learned that bankruptcy and lack of access to credit markets do not necessarily go hand in hand.

To understand what might happen, we need to look at Hungary. Hungary did not join the euro, and its currency, the forint, had declined in value. Mortgages taken out by Hungarians denominated in euros, Swiss francs and yen spiraled in terms of forints, and large numbers of Hungarians faced foreclosure from European banks. In a complex move, the Hungarian government declared that these debts would be repaid in forints. The banks by and large accepted Prime Minister Viktor Orban's terms, and the European Union grumbled but went along. Hungary was not the only country to experience this problem, but its response was the most assertive.

A strategy inspired by Budapest would have the Greeks print drachmas and announce (not offer) that the debt would be repaid in that currency. The euro could still circulate in Greece and be legal tender, but the government would pay its debts in drachmas.

The Deeper Questions

In considering this and other scenarios, the pervading question is whether Greece leaves or stays in the eurozone. But before that, there are still two fundamental questions. First, in or out of the euro, how does Greece pay its debts currently without engendering social chaos? The second and far more important question is how does Greece revive its economy? Lurching from debt payment to debt payment, from German and IMF threats to German and IMF threats is amusing from a distance. It does not, however, address the real issue: Greece, and other countries, cannot exist as normal, coherent states under these circumstances, and in European history, long-term economic dysfunction tends to lead to political extremism and instability.

The euro question may be interesting, but the deeper economic question is of profound importance to both the debtor and creditors.

In our time, economic and financial questions tend to become moralistic. On one side, the creditors condemn Greek irresponsibility. The European Union has dropped most pretenses about this being a confrontation between the European Union and Greece. It is increasingly obvious that although the European Union has much at stake, in the long term this is about Germany and Greece, and in the short term it has become about the IMF and Greece.

Germany feels that the Greeks are trying to take advantage of its good nature, while the IMF has institutionalized a model in which sacrifice is not only an economic tonic to debtors but also a moral requirement. This is not frivolous on the part of Germany and the IMF. If they give Greece some leeway, other debtors will want the same and more.

Giving Greece a break could lead to Italy demanding one, and Italy's break could swamp the system.
On the Greek side, the Syriza party's leaders are making the decisions. Those leaders have only limited room to maneuver. They came to power because the mainstream eurocratic parties had lost their legitimacy. Since 2008, Greek governments appeared to be more concerned with remaining in the eurozone than with the spiraling unemployment rate or a deep salary cut for government workers.

That stance can work for a while, if it works. From the Greek public's point of view, it didn't; many Greeks say they did not borrow the money and they had no control over how it was spent. They are paying the price for the decisions of others, although in fairness, the Greeks did elect these parties.

The Greeks do not want to leave the euro, interestingly. They want to maintain the status quo without paying the price. But in the end, they can't pay the price, so the discussion is moot.

The Greek government is thus calculating two things. First, would covering the next payment be better or worse than defaulting? Second, will behaving like the eurocratic parties they forced to the wall leave Syriza internally divided and ripe for defeat by a new party? The German calculation has to be whether a default by the Greeks, one that doesn't cause the sky to fall, would trigger recalculations in other debtor countries, causing a domino effect.

The Future of Free Trade

The more fundamental issue concerns neither the euro nor the consequences of a Greek default. The core issue is the future of the European free trade zone. The main assumption behind European integration was that a free trade zone would benefit all economies. If that assumption is not true, or at least not always true, then the entire foundation of the European Union is cast into doubt, with the drachma-versus-euro issue as a short footnote.

The idea that free trade is beneficial to all sides derives from a theory of the classical economist David Ricardo, whose essay on comparative advantage was published in 1817. Comparative advantage asserts that free trade allows each nation to pursue the production and export of those products in which the nation has some advantage, expressed in profits, and that even if a nation has a wide range of advantages, focusing on the greatest advantages will benefit the country the most.

Because countries benefit from their greatest advantages, they focus on those, leaving lesser advantages to other countries for which these are the greatest comparative advantage.

I understate it when I say this is a superficial explanation of the theory of comparative advantage. I do not overstate it when I say that this theory drove the rise of free trade in general, and specifically drove it in the European Union. It is the ideology and the broad outlines of the concept that interest me here, not the important details, as I am trying to get a high-level sense of Europe's state.

To begin with, the law of comparative advantages does not mean that each country does equally well.

It simply means that given the limits of geography and education, each nation will do as well as it can. And it is at this point that Ricardo's theory both drives much of contemporary trade policy and poses the core problem for the European Union. The theory is not, in my opinion, wrong. It is, however, incomplete in looking at the nation (or corporation) as an integrated being and not entities made up of distinct and diverse interests. There are in my mind three problems that emerge from the underlying truth of this theory.

The first is time. Some advantages manifest themselves quickly. Some take a very long time. Depending on the value of the advantage each nation has, some nations will become extremely wealthy from free trade, and do so quickly, while others will do less well, and take a long time. From an economic point of view this may still represent the optimal strategies that can be followed, but from a more comprehensive standpoint this distinction creates the other two problems with the law of comparative advantage.

The first of these is the problem of geopolitical consequences. Economic power is not the only type of power there is. Disparate rates of economic growth make the faster growing economy more powerful in its relation to the slower growing economy. That power is both political and military and can be used, along with economic advantage, to force nations into not only subordinate positions but also positions where their lesser comparative advantage diminishes even further. This does not have to be intentional. Maximizing comparative advantage makes some powers stronger than others, and over time that strength can leave the lesser power crippled in ways that have little to do with economics.

The last problem is the internal distribution of wealth. Nations are not independent beings. They are composed of autonomous human beings pursuing their interests. Depending on internal economic and political norms, there is no guarantee that there will not be extreme distinctions in how the wealth is distributed, with a few very rich people and many very poor people. The law of comparative advantage is not concerned with this phenomenon and therefore is not connected to the consequences of inequality.

Breaking the Law of Comparative Advantage

In looking at the European Union, the assumption is that each nation pursuing its comparative advantage will maximize its possibilities. By this I mean that each country will export that thing which it does best, importing things that others produce more efficiently. The comparative aspect is not only between nations but also between the products within the nation. Therefore, each nation is focusing on the things that it does best. But "best" does not tell us how well they do it. It merely tells us that it's the best they can do, and from that they will prosper.

The problem is that the time frame might be so long that it will take generations to see a meaningful result of this measure. Thus, Germany sees the results faster than Greece. Since economic power can translate in many ways, the power of Germany limits the practical possibilities of Greece. Moreover, whatever advantage there is in free trade for the Greeks, it flows unequally.

This is when comparative advantage runs as it should. But it has not run that way in Europe, because Germany has been forced by its economic reality to pursue exports of not only those products where it has a comparative advantage internally, but many products for which it lacks an internal advantage but has a comparative advantage externally — these are not necessarily the things it does best, but it does them better than others. Since Germany is efficient in multiple senses, it has advantages in many products and takes that advantage. Germany has a staggering export rate of more than 50 percent of gross domestic product. Comparative advantage assumes it will want to export those things that it produces most efficiently. It is instead exporting any product that it can export competitively regardless of the relative internal advantage.

Put another way, Germany is not following the law of comparative advantage. Social scientists have many laws of behavior that are said to describe what people do and then turn into moral arguments of what they should do. I am not doing that. Germany empirically is not driven by Ricardo's theories but by its own needs. In other words, the law of comparative advantage doesn't work in Europe. As a result, Germany has grown faster than other European countries, has accumulated more power than other countries and has managed to distribute wealth in a way that creates political stability.

Comparative Advantage and the Greek Issue

The result is that Greece is answerable to Germany on its debts. In the same way that no moral judgment can be drawn about Germany, none can be drawn about Greece. It is what it is.

However, whatever problem it has in maximizing its own exports, doing so in an environment where Germany is pursuing all export possibilities that have any advantage decreases Greece's opportunity to export, thereby creating a long-term dysfunction in Greece. The German superiority perpetuates itself.

It is important to note that Germany did not operate without protections after World War II. It protected its recovering industries from American competition. The United States, an economic colossus that exports a relatively small amount of its production, also was heavily protectionist in the late 19th century. Similarly, the United Kingdom maintained tariffs to protect the British Empire's markets. Greece has no such protection.

The theory of comparative advantage is generally true, but it doesn't take into account time disparities, the geopolitical consequences of time lags or internal social dislocation. That is why I said it was both true and incomplete. And that is also why the European Union, however it might have been conceived in its simplest sense, suffers from massive disparities in the speed that nations accumulate wealth, has nations that do not behave as the theory predicts they should, and creates geopolitical imbalances externally and social dislocation internally. It's not that free trade doesn't work. It's that it has unintended consequences.

This is why I would argue that the Sturm und Drang over Greece's debt and the future of the euro misses the point. The fundamental point is that the consequences of free trade are not always positive.

It is not clear to me how Greece ever recovers without the protections that Germany or the United States had during their early growth period. And since nations do what they have to do, the issue is not the euro, but free trade.

And this is Germany's dread. It is a nation that exports as much as it consumes, and half of that goes to the European free trade zone. More than anyone, it needs the free trade zone for its own well-being. This is why, however the Germans growl, it is not the Grexit they fear but rising tariffs. The European Union already allows substantial agricultural tariffs and subsidies. If they allow broader tariffs for Greece, then when does it stop? And if they don't, and Greece crumbles socially, where does that stop? Free trade can be marvelous or dreadful, depending on circumstances, and sometimes both at the same time.

When All News Is Bad News

By: John Rubino

Tuesday, April 21, 2015


One of the defining traits of financial bubbles is the willingness of traders and investors to interpret pretty much everything as a buy signal. Rising corporate earnings mean growth, while falling profits mean easier money on the way. War means more revenues for defense contractors and easy money for everyone else. Blizzards means consumer spending will rebound in the Spring. Inflation means higher asset prices for speculators while deflation means, once again, easier money for everyone.

When people are this optimistic they find the silver lining in every black cloud and happily to buy the dips with borrowed money.

A timely example is Greece's threat to leave the Eurozone, default on its debt and go back to using drachmas. This could be seen as either the beginning of a chain reaction that destroys the eurozone and the rest of the world as we know it, or as an excuse for vastly easier money. So far -- in a sign that the bubble is still expanding -- each new twist (like last weekend's announcement of de facto capital controls) has been accompanied by European Central Bank reassurances and market acceptance of those promises.

Another case in point is China's twin weekend announcements that two major companies defaulted on their debt while the government eased bank reserve requirements. The pessimistic take on such things happening simultaneously would be that China's financial sector is in crisis and the government is desperately and probably impotently trying to stop the bleeding. But the European and US markets saw only the liquidity side of the story and bid up risk assets pretty much across the board.

When we change our minds

But in the life cycle of every bubble there comes an emotional phase change. Dark clouds start to obscure their silver linings and new highs get harder and harder to achieve. Think home prices rising beyond middle-class affordability in 2007 or tech stocks hitting 50-times sales in 1999. Only unambiguously good news can keep the bubble going, and because few events are that pure, the crowd gets nervous and the spin gets negative. Faster growth means tighter money; a weak dollar means inflation while a strong one means falling corporate profits. War means instability, extreme weather means lower near-term growth. So sell the rallies and hide out in cash.

The world isn't quite at this point -- or maybe it is. The following chart (from Bloomberg) shows the impact of Greece's impending loan deadline on a measure of risk in peripheral eurozone bond markets. Greece is the blue line; the black and red are Italy and Spain.


Europran bond risk 2015
Larger Image



There's no way to know until after the fact if the dark night of the market's soul has begun. But when it comes, that's how its first stage will look.

04/20/2015 05:43 PM

Opinion

Europe Should Protect People, Not Borders

By Maximilian Popp

Migrants arrive at Rhodes island in Greece after narrowly escaping catastrophe on Monday. The bodies of several victims were recovered during the rescue operation.
Migrants arrive at Rhodes island in Greece after narrowly escaping catastrophe on Monday. The bodies of several victims were recovered during the rescue operation.


The mass deaths of refugees like those seen this weekend on the European Union's external borders is not a consequence of politicians looking away. We are in fact causing the problem with our Fortress Europe policies.

Workers at the Warsaw headquarters of Frontex, the European border protection agency, track every single irregular boat crossing and every vessel filled with refugees. Since December 2013, the authority has spent hundreds of millions of euros deploying drones and satellites to surveil the borders.

The EU registers everything that happens near its borders. In contrast to the claims that are often made, they do not look away when refugees die. They are watching very closely. And what is happening here is not negligent behavior. They are deliberately killing refugees.

People have been perishing as they sought to flee to Europe for years now. They drown in the Mediterranean, bleed to death on the border fences of the Spanish North African conclaves of Ceuta and Melilla or freeze to death in the mountains between Hungary and Ukraine. But the European public still doesn't appear to be entirely aware of the dimensions of this humanitarian catastrophe. We have become accomplices to one of the biggest crimes to take place in European postwar history.


Barbarism in the Name of Europe

It's possible that 20 years from now, courts or historians will be addressing this dark chapter. When that happens, it won't just be politicians in Brussels, Berlin and Paris who come under pressure. We the people will also have to answer uncomfortable questions about what we did to try to stop this barbarism that was committed in all our names.

The mass deaths of refugees at Europe's external borders are no accidents -- they are the direct result of European Union policies. The German constitution and the European Charter of Fundamental Rights promise protection for people seeking flight from war or political persecution. But the EU member states have long been torpedoing this right. Those wishing to seek asylum in Europe must first reach European territory. But Europe's policy of shielding itself off from refugees is making that next to impossible. The EU has erected meters-high fences at its periphery, soldiers have been ordered to the borders and war ships are dispatched in order to keep refugees from reaching Europe.

For those seeking protection, regardless whether they come from Syria or Eritrea, there is no legal and safe way to get to Europe. Refugees are forced to travel into the EU as "illegal" immigrants, using dangerous and even fatal routes. Like the one across the Mediterranean.

A Darwinist situation has emerged on Europe's external borders. The only people who stand a chance of applying for asylum in Europe are those with enough money to pay the human-traffickers, those who are tenacious enough to try over and over again to scale fences made of steel and barbed wire. The poor, sick, elderly, families or children are largely left to their fates. The European asylum system itself is perverting the right to asylum.

EU Policies Are Causing Refugee Crisis

There is widespread dismay in Europe over the latest ship sinking last weekend -- an incident in which more than 650 people died off the coast of Libya on their way to Italy, the greatest number in such an incident yet. Once again, people are saying that a tragedy like this cannot be allowed to be repeated. But the same words were uttered following the disaster off the coast of Lampedusa in autumn 2013 and off the coast of Malta last September. On Monday, just hours after the latest incident, history threatened to repeat itself, with hundreds of people aboard a refugee ship in the Mediterranean in distress.

European politicians lament the refugee drama. But then they continue to seal the borders -- the very act which is the precondition for the disaster.

The leaders of the EU member states and their interior ministers can no longer be allowed to continue to get away with the status quo. The EU must move immediately to create legal ways for refugees to reach Europe. The United Nations Refugee Agency (UNHCR), human rights organizations like Germany's Pro Asyl and Human Rights Watch have long pointed out ways in which this might be done.

  • The Italian Navy's Operation Mare Nostrum rescue mission, which protected hundreds of thousands of refugees from drowning, needs to be resumed without delay. The Italian government suspended the program due to a lack of funding. And Frontex's own Operation Triton, whose aim is to parry migrants, should be eliminated.
  • The EU should create asylum procedures at the embassies of its member states in the same way Switzerland has done. This would mean that in the future, refugees could apply for asylum at the embassies of EU member states outside of Europe. This would spare them the potentially deadly path across the borders.
  • The EU also needs to finally begin participating seriously in the UNHCR resettlement program. For years now, the UN has been helping bring refugees from acute crisis areas for a limited period of time to secure states without subjecting them to bureaucratic asylum procedures. UNHCR is currently seeking guest countries for several hundred thousand refugees who need to be resettled. In 2013, North America took in more than 9,000, but Germany only accepted 300.

  • The visa requirement for people from countries in crisis like Syria or Eritrea should also be temporarily lifted. That would allow asylum-seekers to request admission at European border control posts without being given blanket rejection by police. The EU's Dublin Regulation, which only allows refugees to apply for asylum in their country of arrival, also needs to be eliminated. Instead, asylum-seekers should be distributed among EU countries through a quota system. The freedom of movement that has long applied to EU citizens should then also be extended to recognized refugees.
  • People fleeing their home country largely for economic reasons rather than political persecution, should be given the possibility of labor migration -- through the creation of a Green Card for immigrants from poorer countries, for example.

These reforms wouldn't suddenly eliminate irregular migration, but they would help to reduce the suffering. Contrary to what European leaders and interior ministers claim, deaths at Europe's borders can be prevented. At the very least, their numbers could be dramatically reduced. But that requires a readiness on the part of Europeans to protect people and not just borders.

Op-Ed Columnist

The Talented Mr. Rubio

David Brooks

APRIL 21, 2015


 
Even more than normal, Republicans seem to want their candidate for president to be drenched in the red, white and blue. 

Along comes Senator Marco Rubio of Florida. Rubio, 43, doesn’t just speak in the ardent patriotic tones common to the children of immigrants like himself. His very life is the embodiment of the American dream: parents who tended bar and worked at Kmart with a son who rose to become a United States senator. His heritage demonstrates that the American dream is open to all who come here legally and work hard. He is what many Republicans want their country to be.
 
So there is beginning to be a certain charisma to his presidential campaign. It is not necessarily showing up in outright support. The first-term senator still shows up only with 8.3 percent support on the Real Clear Politics average of 2016 Republican presidential nomination polls, leaving him tied for 5th in the field. But primary voters are open to him; the upside is large.
 
As Harry Enten of FiveThirtyEight pointed out, Rubio’s net favorable/unfavorable rating is higher than every other candidate except Gov. Scott Walker of Wisconsin. Philosophically, he is at the center of the party. In an NBC News/Wall Street Journal poll, 56 percent of Republican primary voters said they could see themselves supporting him even if he wasn’t their first choice at the time, which put him above every other candidate.

So it’s probably right to see Rubio as the second most likely nominee, slightly behind Jeb Bush and slightly ahead of Walker.
 
He is, for starters, the most talented politician in the race. Set aside who has the most money and who has the best infrastructure. (Overrated assets at this stage in the race.) Set aside the ideological buckets we pundits like to divide the candidates into. (Voters are not that attuned to factional distinctions.) In most primary battles, the crown goes to the most talented plausible candidate.
 
Rubio gives a very good speech. He has an upbeat and pleasant demeanor. He has a great personal story. His policy agenda is more detailed and creative than any of his rivals. He has an overarching argument — that it is time for a new generation to reform and replace archaic structures.

The circumstances of the race might benefit him. With such a big field, nobody is going to lock up the race early. Republicans will likely be beating each other up for months while looking across the aisle and seeing Hillary Clinton coasting along. At some point, they are going to want to settle on a consensus choice.
Advertisement
That point may come around March 15, when Florida holds its winner-take-all primary. Rubio was virtually tied with Bush among Florida Republicans, 31 percent to 30 percent, according to a Mason-Dixon poll conducted last week. If Bush is bloodied in the earlier primaries, Rubio could win Florida and loom as a giant.
 
His weaknesses are not killers. Rubio’s past support for comprehensive immigration reform irks activists. But it’s not clear if it will hurt him with the voters who are more divided on reform. According to a Pew Research Center survey conducted last year, 66 percent of Republicans believed that illegal immigrants should be eligible for citizenship if they meet certain criteria. Immigration reform didn’t kill John McCain’s candidacy seven years ago.
 
Rubio’s inexperience concerns everybody. But at least he was speaker of the Florida House. As Jim Geraghty of National Review has detailed, his record running that body was pretty good.

He was a tough but reasonably successful negotiator. On his first day in office, he handed each legislator a book with the cover “100 Innovative Ideas for Florida’s Future.” The pages were blank. He was inviting his members to fill them in — a nice collaborative touch.
 
Can Rubio win a general election? Well, he believes more in expanding the party than in just mobilizing the base. In his past races, he’s done better than generic Republican candidates because of his success with Hispanics. Youth is America’s oldest tradition. Who’s to say that voters won’t side for the relative outsider over the know-what-you’re-getting Hillary Clinton?
 
One big test for Rubio is this: Are Americans disillusioned with government or just disgusted?

If they are disillusioned, they would likely want to play it safe and go with the experienced, low-risk candidates, Bush and Clinton. If they are disgusted, then they would be more likely to take a flier on change. The New American could be the guy.

Gold and Silver Trading Alert: Silver Stocks' Signal

By: Przemyslaw Radomski

Mon, Apr 20, 2015


Gold Trading Alert originally published on April 20th, 2015 7:59 AM


Briefly: In our opinion, a speculative short position (half) in gold, silver and mining stocks is justified from the risk/reward point of view.

The situation in the precious metals market is quite specific at this time. We have gold moving higher on low volume and moving lower on increased volume (which is bearish), but during the last few weeks miners have outperformed gold which seems to indicate strength. One of the signals that help to decide what the outlook really is comes from silver stocks.

Before we move to silver miners, let's take a look at gold and silver (charts courtesy of http://stockcharts.com).

$GOLD Gold - Spot Price (EOD) CME
Larger Image


As mentioned above, the price of gold moved back and forth and the corresponding action in volume was bearish. Volume very often confirms the direction in which the market is going and it allows to differentiate between true rallies (that are likely to be followed by even bigger rallies) and corrections (that are likely to be followed by declines). In this case, we saw the latter type of action.

Gold is after a confirmed breakdown below the rising support line and after reaching the 50% retracement based on the February - March decline, so it's been likely to decline and the price-volume action makes this even more likely.

$SILVER Silver - Spot Price (EOD) CME

Silver's bearish outlook also remains unchanged as the price didn't do much on Friday. Silver tried to move above the previously broken black support/resistance line, but was only able to move to it on an intra-day basis and decline shortly thereafter.

GDX Market Vectors Gold Miners NYSE

Yesterday's price action in mining stocks (the GDX ETF includes both gold stocks and silver stocks) might seem surprising to those who believed that miners would soar right after the breakout as miners refused to rally even despite the gold's rally on Friday. That's a bearish sign.

Have we just seen another top? Based on the Nov. 2014 highs being reached - yes. However, we wouldn't rule out a move to the $21 level as such a move would make the head-and-shoulders pattern more symmetrical. Please note that we don't have to see this type of move for the pattern to have bearish implications - the pattern doesn't have to be perfectly symmetrical and a top (right shoulder of the pattern) at exactly the previous top (left shoulder of the pattern) would very much make it meaningful anyway.

Our previous comments about the head-and-shoulders pattern's implications for mining stocks remain up-to-date:
The red resistance lines that you can see on the chart are based on the possible head-and-shoulders pattern. If we see a move to the Nov. high or even to the $21 level but without a visible breakout above them and then see a decline, the implications will be very bearish. If we don't see such upswings and miners decline before these levels are reached (which seems likely), then the implications will be very bearish anyway, because the head-and-shoulders pattern will continue to be formed. If it is completed, the decline following the breakdown below $17 could take the GDX ETF below $13.

SIL Gloval X Silver Miners NYSE
Larger Image


What about the silver stocks?

Silver stocks formed bearish head-and-shoulders patterns a few times previously. In each case, these patterns resulted in much lower values of silver stocks and the rest of the precious metals sector.

What's particularly interesting about these patterns is that the right shoulder was quite often (2 out of 3 cases) smaller than the left one. Consequently, a move higher here is not required for the right shoulder of the current head-and-shoulders to form. In fact, it's top could be already behind us.

All in all, the thing that silver stocks tell us is that we can really see a move lower right away, without another small upswing (hence, exiting the small short positions at this time seems premature).

$SILVER:$GOLD
Larger Image



Furthermore, let's not forget that the silver to gold ratio has recently moved sharply higher, causing the RSI indicator based on it to become overbought. In EACH case that we saw this development a major decline followed (at times we had to wait for it a few weeks, but it ultimately happened without a bigger rally before it). We have not seen a major decline so far, so the bearish implications remain in place.

The gold to oil ratio closed the week well below its 2011 high, and - because of the size of the move and the weekly close - we consider the breakdown to be confirmed. The implications are bearish and our previous comments remain up-to-date:
We think that there's nobody in the precious metals market that needs to be convinced that the 2011 top was a major event. However, it was not only major in gold itself, but also in the case of its ratios, including the gold to oil ratio. 
This ratio peaked in 2011 as well and it was not until this year that it was broken. The initial move lower in the ratio earlier this year and a rebound from the 2011 high proved that this is indeed a major support/resistance level. This important level was just broken yesterday in a very profound way. 
The gold to oil ratio moves in tune with gold, so such a major breakdown in this ratio has bearish implications for gold as well.
$SUD US Dollar Index - Cash Settle (EOD) ICE

The USD Index declined on Friday, but only initially - it came back up in the following part of the session. Will the USD decline based on the breakdown below the rising trend channel? It's possible, but it's not very likely. Please note that this line was invalidated a few times in the past and in each previous case the USD rallied back above it.

Moreover, the 50-day moving average provides support (just like it was the case in mid-March and early April) and so does the red dashed support line based on the December and March lows. Consequently, the outlook did not deteriorate significantly - we can still see much higher USD values in the coming days and weeks.

Summing up, even though it seems that the situation in the precious metals market is improving based on last week's strength in mining stocks, we think that this is not the case - in fact, the opposite might be taking place. The strength in miners was no longer present on Friday and practically no other market or ratio (i.a. gold, silver, silver to gold ratio, gold to oil ratio, silver stocks, USD Index) is confirming it. While we could see some more strength in miners, it's not likely to be significant and - more importantly - we don't have to see more strength for the bearish head-and-shoulders pattern to be completed. The right shoulder has already been formed (it's after the right shoulder's highest point) in the case of gold and silver and it seems that it's about to be formed in the case of mining stocks.

The implications are very bearish and it seems that exiting small short positions in the precious metals sector at this time would be premature. If we see an invalidation thereof, we'll close the positions, but it seems more likely that we will see a bearish confirmation, which will likely result in increasing the size of the short position.

To summarize:

Trading capital (our opinion): Short (half position) position in gold, silver and mining stocks is justified from the risk/reward perspective with the following stop-loss orders and initial (!) target prices:

Gold: initial target price: $1,115; stop-loss: $1,253, initial target price for the DGLD ETN: $87.00; stop loss for the DGLD ETN $63.78

Silver: initial target price: $15.10; stop-loss: $17.63, initial target price for the DSLV ETN: $67.81; stop loss for DSLV ETN $44.97

Mining stocks (price levels for the GDX ETN): initial target price: $16.63; stop-loss: $21.83, initial target price for the DUST ETN: $23.59; stop loss for the DUST ETN $12.23

In case one wants to bet on lower junior mining stocks' prices, here are the stop-loss details and initial target prices:

GDXJ: initial target price: $21.17; stop-loss: $27.31

  JDST: initial target price: $14.35; stop-loss: $6.18

Long-term capital (our opinion): No positions

Insurance capital (our opinion): Full position

You will find details on our thoughts on gold portfolio structuring in the Key Insights section on our website.

Thank you.