Since Friday morning the price has fallen from the opening at $1561 to a low of $1321 this morning, -15%, and is now having its first rally of any note to $1400. The Friday fall was missed by Asian traders and they took up the bit on Monday, with the US following up in the afternoon. There are no doubt still a few bulls left with positions well under water in hedge fund world and are now probably biding their time for a rally of sorts back to the $1500 level which had been close to support levels for the market since 2011. Any progress past there is going to take time.

 This does however give some lumpy buyers (central banks) the opportunity to buy gold at distressed prices. It would seem that this is not the time to sell gold but to start accumulating again on setbacks which there will be as overleveraged traders are squeezed out. As one blogger put it, “at last someone has done something for the first time gold buyer”…

Massive currency debasement by all the major central banks means that there is still a very strong case to hold gold.

 Don’t you love farce?

My fault I fear

I thought that you’d want what I want,

Sorry my dear

But where are the clowns

There ought to be clowns

Quick send in the clowns, don’t bother they’re here…

 It turned out to be a “little light music” compared to the sequestration dance we are going through now. I find castration a lot easier to say and would have no problems applying the procedure to the members of the political circus that poses as democracy on both sides of the pond. The real problem is that a good number of the electorate require the same treatment for voting the muppets in in the first place.

 The gravy train that poses as the Electoral College in the States is rigged to make it near impossible for anyone other than the Democrat or GOP nominee to get into the White House. Ron Paul was on the ballot paper but he knew that third place was as good as it gets. Eventually the US electorate will wake up to the fact that their political system only works for their politicians. Democracy US style means that the rich get richer and the poor get food stamps…

 In Europe it is very different. We can vote for the Monster Raving Looney Party – yes there truly is such a thing – the Beer party and one day soon the Blessed Nigel of Farage. To get on the list of candidates over here you have to stump up £500, be a UK, Commonwealth or Republic of Ireland (how did that happen?) citizen, be seconded by 10 voters in the constituency and not be a police officer, in the military or a member of the House of Lords or bankrupt or bonkers. UKIP may well have won the Eastleigh by-election had Farage stood as a candidate – along with 13 others – but as it was Diane James took votes off the Tories and Liberal Democrats in equal measure. This may have been spun as an inconsequential protest vote, but the happenings in Italy earlier in the week are beginning to cause the establishment some angst.

 A whole raft of vested interests German newspapers and politicos have been venting spleens; here’s a selection.

 Italy’s Childlike Refusal to Acknowledge Reality – Der Speigel

Silvio Berlusconi ruined Italy and brought it almost as close to bankruptcy as Greece. It is worrying that voters didn’t punish this jester by ignoring him. In the campaign he promised the abolition of the IMU real estate tax and even the repayment of the taxes already paid under it. The failure to punish such nonsense casts a bad light on a country that requires a fundamental political renewal. If you count the results of the Five Star Movement of the rabid Beppe Grillo, who has been preaching wild hatred of the ‘freeloaders up there,’ then more than half of Italians voted for some form of populist. This amounts to an almost childlike refusal to acknowledge reality. – Die Welt

 “More than half of Italians voted for some form of populist”. Well I wonder why that was. Could it be that they have had enough of the “freeloaders up there”? And then there is The Economist that bastion of the establishment with a remonstrating front page headline, “Send in the Clowns. How Italy’s disastrous election threatens the future of the euro”. The democratic process; more than half the electorate voted for Grillo and Berlusconi; has been sidelined as a childish tantrum. Is there any chance that the powers that be have some real skin in this game as in can they get more power and more money? When Grillo was making his name as a proper comedian the then premier of Italy, the head of the Italian Socialist party Bettino Craxi was visiting China. The apocryphal joke runs as follows. “If the Chinese are all socialists who do they steal from?” Craxi spent the latter years of his life in Tunisia to avoid the rather short arm of the Italian law on charges of corruption.

 The euro is a political construct that has been flawed in design and execution from day one of its sorry existence. The Greeks know that; they have just been downgraded by Russell to emerging market status. In Spain with youth unemployment at 55% Catalonia has taken the first steps towards succession and ominously General Juan Antonio Chicharro, until 2010 commander of the Marine Corps, has opined that “What do the Armed Forces do now?” he gave no answer but the inference is quite clear. In Italy the populace has had enough of the German insistence on austerity. Their choice of politicians is, after all, their choice and if they want to live as Italians in a sub optimally run country then good for them.

 Leaving the eurozone is an option unless your pig headedness misguided politico/economic beliefs prevents you from understanding that fact. The populist vote suggests that they want to get back to being what they are very good at – being Italian…..not German. Euro R.I.P.

 The definition of moral hazard has changed over time. It used to refer to the bailing out of “lesser” banks and “minor” economies, which just encouraged others to carry on regardless. Now we have the wholesale support of major economies, their governments and banking overlords to the detriment of anyone else. Government securities used to be the home, during periods of market unrest, for flight to safety investors and others of a cautious disposition. They were also the marker for the risk free rate when calculating the value of equity markets and other instruments. As an aside would the LIBOR scandal have happened if we had had a properly functioning bond market? Hmm.

 On the basis that most sovereign debt issues produce a negative real yield to redemption, investors are being “encouraged” to search for income elsewhere. High yielding corporate bonds have been one of the favourites, but didn’t we have an “issue” with this asset class a few years back or has that episode been consigned to the memory vacuum? Yes a very different set of underlying instruments I agree, but as Mark Twain said, “History doesn’t repeat but it rhymes.” Having enjoyed decades of capital growth from bond investments, those with a lower risk appetite have few other options than to increase their equity weightings.

 If you believe that money printing is the answer; that governments can continue to increase debt levels ad infinitum; that austerity in Europe will propel their economies, unfazed, onwards and upwards and that China will eventually get the hang of capitalism; then I would agree that equity markets look like a steal. In P/E terms the FTSE is at half the level it was at 10 years ago.

 But according to “Economics 101”, quantitative easing, on the heroic scale we have witnessed thus far, should already have led to rampant if not hyper inflation. That it hasn’t is down to the continuing decline in the velocity of circulation of money. In simple terms the banks aren’t lending (compared with the amount of money available to them), but instead are punting on financial assets, which is where “inflation” is ending up and benefitting their balance sheets… Charles Hugh-Smith put the Fed’s actions into context very well, if indelicately for some, on his recent Of Two Minds website. BoE, ECB and BoJ please take note.

 “We can view unprecedented Federal deficit spending as a misguided attempt to compensate for the implosion of money velocity. I say “attempt” because the Treasury borrowing and blowing $6 trillion over the past five years and the Federal Reserve printing $2 trillion, backstopping the parasitic financial cartel and buying over $1 trillion each of mortgage securities and Treasury bonds has only kept the economy stumbling along at essentially zero growth while real wages have declined by 7% to 9%.”

 Markets generally front run the economy, but if, as many folk believe, including our commentator above, that quantitative easing has been a failure from the start, then why are equity markets indicating an upturn in economic activity? At the end of the day, if the central banks continue to believe they have no other option than money printing and you can put up with the volatility, it’s all aboard the equity train. Bond yields won’t rise much either; if at all. The gold price should give some indication of whether this strategy is working or not, but that is a market that is far easier to rig than sovereign debt – the Germans seem to think so as they contemplate repatriating some of their bullion held by other central banks.

 Moral hazard or paranoia; your choice.

 Firstly two messages for our central bankers

“There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.” Ludwig von Mises

and

“Our analysis leads us to believe that recovery is sound only if it does come of itself. For any revival which is merely due to artificial stimulus leaves part of the work of the depressions undone and adds – to an undigested remnant of maladjustments – new maladjustments of its own.” Joseph Schumpeter

 There is however hope

“We are continually faced with a series of great opportunities brilliantly disguised as insoluble problems.” John W. Gardner

Or not as the case may be…

“If all else fails, immortality can always be assured by spectacular error.” John Kenneth Galbraith

 Followed by a rare, truthful observation from one of Europe’s finest

“We all know what to do, we just don’t know how to get re-elected after we have done it.” Jean- Claude Junker

And another from an American banker

“In hindsight, the new strategy was flawed, complex, poorly reviewed, poorly executed and poorly monitored.” Jamie Dimon

 The root of the problem

“The more I studied economic science, the smaller appeared the knowledge which I had of it in proportion to the knowledge I needed; and now, at the end of nearly half a century of almost exclusive study of it, I am conscious of more ignorance of it than I was at the beginning of the study.” Alfred Marshall

“Economics is extremely useful as a form of employment for economists.” John Kenneth Galbraith

 And wishful thinking doesn’t help either

“The road to hell isn’t paved with gold, it’s paved with faith. Faith in a dollar that’s backed by a belief that people have faith in other people’s belief in it.” Jarod Kintz

“The market is not an accommodating machine. It won’t provide high returns just because you need them.” Peter Bernstein

 Whatever happened to the democratic process?

“The best argument against democracy is a 5 minute conversation with the average voter.” Winston Churchill

“Bipartisan usually means that a larger-than-usual deception is being carried out.” George Carlin

 Are there any rational thinkers left?

“I can calculate the movement of the stars, but not the madness of men.”  Isaac Newton

“Two things are infinite: the universe and human stupidity; and I’m not sure about the universe.” Albert Einstein

 Can history help?

“History – one damned thing after another” Churchill

“History is a set of lies agreed upon.”  Napoleon Bonaparte

 Finally – to prove that many a true word is spoken in jest – The euro according to Blackadder

 Baldric: “What I want to know, Sir is, before there was a euro there were lots of different types of money that different people used. And now there’s only one type of money that the foreign people use. And what I want to know is, how did we get from one state of affairs to the other state of affairs?”

Blackadder: “Baldric. Do you mean, how did the euro start?”

Baldric: “Yes, Sir.”

Blackadder: “Well, you see Baldrick, back in the 1980s there were many different countries all running their own finances and using different types of money. On one side you had the major economies of France, Holland and Germany, and on the other, the weaker nations of Spain, Greece, Ireland, Italy and Portugal. They got together and decided that it would be much easier for everyone if they could all use the same money, have one Central Bank, and belong to one large club where everyone would be happy. This meant that there could never be a situation whereby financial meltdown would lead to social unrest, wars and crises.”

Baldric: “But this is sort of a crisis, isn’t it Sir?”

Blackadder: “That’s right Baldric. You see, there was only one slight flaw with the plan.”

Baldric: “What was that then, Sir?”

Blackadder: “It was bollocks.”

 Greek Prime Minister Antonis Samaras declared that the Grexit era was dead; speaking in Brussels to reporters after the Eurogroup approved the mammoth bailout fund of €52.5 billion. Plus ça change, plus c’est la même chose. Nothing has changed; political spin is alive and well, Greece is still bust and the eurozone is in for yet another unsecured loan. He would probably have liked to have said a “new dawn for Greece” but the ultra right wing party – New Dawn – have the lien on that catchphrase. In a way he is right as the can has been given a seriously good kicking and Greece is off the agenda for a while, but we still have Spain and Italy to worry about. The ECB’s new mandate to regulate eurozone banks is all about sorting out the Spanish Cajas and Bunga Berlusconi has put a spanner in the Italian Job. That iconic film ended with a coach, full of gold bars, hanging over a precipice. Given Italy’s burgeoning gold reserves this is not a bad metaphor for the state that country finds itself in.

 Meanwhile in the US, as predicted, QE3 has morphed into QE4, with a specific target to reduce unemployment; another triumph of hope over reality in the Greek vein. Yes we are seeing an improvement in non-farm payrolls and the unemployment rate, but both are relatively anaemic compared to past recoveries. The assumption that we will return to previous employment rates and GDP growth is truly heroic. Hurricane Sandy has added a new dimension to “seasonal adjustments” and if you believe everything the US Bureau of Labor Statistics has to say, then your name is probably Antonis Samaras.

 The “Big Issue” that no one is prepared to address is how we unwind this enormous central bank largesse. If you throw enough money at the problem one part of the equation will go away, but how do you expunge the debt burden that it creates? Central bank printing creates the short term life blood for profligate government spending at very accommodative rates of interest, but the baby they are left holding is a going to be one hell of a problem child.

 As the world is coming to an end on December 21^st, according to Mayan mythology, why should we care? As with any prediction timing is the problem. I have every intention of enjoying my Christmas turkey, complete with brussels sprouts (am I the only one who does), on the 25^th, but I am still more than a little concerned about the pile of tin ware building up outside the doors of our central banks.

 Every four years around the same time presidential elections are held in the US, but this year, although there has been much “plotting”, there have been no fireworks. From a UK perspective the choice between Obama and Romney is about as unattractive as that between Camerlot and the Ed Miller band. Politicians – and central bankers – are no longer merely “economical with the truth” they have taken to outright lying, aided and abetted by the mainstream media and the banking cabal, who are their true masters, not the electorate, who, in the main, swallow the party line whole.

 This year’s election, like many in the recent past, is not the democratic process it is held up to be. Third party candidates are denied the right to debate along with the Democratic and GOP nominees and the two party debate itself is a series of secretly pre-arranged questions agreed by both sides. Even worse is that the US now has the equivalent of the “rotten borough” system, legislated against in the UK in 1832, whereby large corporates can make unlimited campaign contributions; and please don’t tell me it is all done in the name of altruism!

 Even Mother Nature has played her part allowing Obama to take on the role of a caring father figure in the aftermath of hurricane Sandy. He has obviously learnt from the errors of his predecessor, whom we must assume, from his nonchalance, thought that New Orleans was somewhere in France…Given the devastation along the eastern seaboard one can’t help wondering if the outcome of the election will again be decided in the courts if many voters are disenfranchised by having nowhere to vote.

 So tonight in the UK things will go with a “bang”, but on Tuesday, in the US, don’t expect anything other than a damp squib…especially if you are unfortunate enough to live on Staten Island or in Lower Manhattan.

When I’m falling I’m in peace

It’s only when I hit the ground

It causes all the grief – Florence + The Machine

 The last time I jumped out of a perfectly serviceable aeroplane for a tandem skydive the exit altitude was 12,000 feet; scary. Felix Baumgartner has just done that but from 120,000 feet plus; bonkers. The difference between the two separated by one zero and a phenomenal amount of experience and funding might help give people an idea of the enormity of quantitative easing. Only with QE we are adding three zeros to a billion and ramping up the big number, with undeniably a lot less skill and even Red Bull don’t have the wherewithal to fund it.

 So who will pay the bill for this monetary “experiment”? Gavyn Davies in his FT blog has suggested that central banks will “forgive” some of the sovereign debt they hold. He is thus speaking to the reality of the situation in the same way as FB on the edge of space – the only way is down. Down to zero altitude and as well as zero bond redemptions; arguably good for the governments concerned, but with a potentially severe inflation kicker. This in effect would be money printing on steroids.

 But will the financial markets go into a flat spin if that happens? Felix didn’t know whether reaching the speed of sound and the resulting shock wave would knock him off course, but when it did he had the experience of over 2000 previous jumps to get himself out of the problem. Bernanke, King and Co are standing on the precipice with no previous encounters to help them. If Felix hadn’t done exactly the right thing at the right time the headlines would have been very different. Central bank actions await a similar binary outcome.

 So to Felix our congratulations for proving that the “Austrians” have the right handle on things, whereas the Keynesians appear to have jumped without a ripcord on their parachute…

 And politics in power

That you don’t understand

You’ve no ripcord

No ripcord, no ripcord, no ripcord – Radiohead

 But did this stop most of the eurozone countries – and the Southern “Methadone” Zone in particular – from getting on board the gravy train and going on one hell of a trip courtesy of German style interest rates. It would have been rude not to! And no worries about the lack of a long term structure to keep this thing on the rails; we can deal with that later. Well later is now and guess what? They all want to stay on the train but can no longer afford the fare; ignoring the fact that they never could in the first place.

 One of the many problems the eurozone faces, along with the US, UK, Japan et al, is how to service their massive debt burden. They can’t, but insist on reapplying the band aid to create the illusion of progress. As Einstein put it, “insanity is doing the same thing over and over again and expecting different results.” We now have OMT to ponder upon – Outright Monetary Transactions. My reaction thus far has been “OMG!” Typical of an ill conceived contrivance, the press release on the “technical” features of OMT comprises 17 short sentences; one of which says, “the liquidity created through Outright Monetary Transactions will be fully sterilised,” but doesn’t say how – that would just be too technical!

 Money “printing” involves a central bank buying “assets”, usually sovereign debt, and crediting the seller with money that it has created electronically. The theory being that this money is used to encourage spending by way of loans to consumers and corporates, but which has the potential outcome of higher inflation. It should also drive short term rates down if, like with the OMT operation, the ECB is buying at the short end of the curve – the complete reverse of the Fed’s Operation Twist by the way. The announcement of OMT has had the desired effect on rates, especially Spanish and Italian, where the cost of new issuance was creating the debt servicing issue mentioned earlier. However with more than a nod to the Bundesbank, the ECB has declared that it will sterilise the purchases so that there will be no inflationary effect. They can do this either by selling other assets, for example long dated issues or attract deposits at the ECB both of which remove the newly created money from circulation. The first option is unlikely as they really don’t want to drive longer term rates upwards, so they are left with the second or they could instead sell some of their gold reserves, but that would be akin to selling the family “silver”. They wouldn’t do that would they? Well they might! Thinking that politicians and central bankers wouldn’t be so crass is another example of one of life’s “heroic” assumptions. The Chinese would have it off them in a trice and how would that help the cause?

 Currently, such is the lack of trust in the interbank market that attracting money into ECB deposits is not a short term problem, but by such sterilisation the benefit of loan growth on spending is lost. So this is just another short term breathing space to allow the PIIGS to refinance their maturing debt at less penal rates, but does absolutely nothing to solve the longer term problems of creating growth in economies stifled by ECB “conditionality”; a very sterile landscape indeed. But cheer up! QE3 will be along any day now to help the banks remain solvent for a while longer. Can exits stage right after another good kicking…

 The dissenter was almost certainly Jens Weidmann the president of the Bundesbank, although both Austria and the Netherlands have said recently that they will not provide any further funds for other countries bailouts. So if the good doctor thinks he is going to get eurozone government approval for this latest in a long line of ineffective plans he had better have already started on the next one. I lost count of the number of times he used the word “conditionality” and that “the ECB would remain independent.”

 Conditionality means more austerity which will knock a big hole in the ECB’s estimates of growth. For 2012 their projected number is negative and for 2013 the range will be -0.4% to 1.4%. Yet equity markets are off to the races. This too we have seen before followed by a reversal as soon as some bright spark alerts the herd to the nakedness of the emperor. The ECB has in effect said that they will provide assistance to countries whose bond markets are “mispriced” – a dangerous assertion to make as any trader knows only too well – but if the rules of engagement are broken then the deal is off. How many times have the governments of Greece, Italy and Spain said one thing and done another – in fact I can’t think why I am singling out these three countries; name me any government, or central bank for that matter, that doesn’t follow this particular “strategy”!

 The German constitutional court is due to rule on the efficacy of the ESM on the 12^th. If it was indeed Weidmann who voted “nein” and had the tacit approval of la Merkel and Dr Strangelove then the “irreversibility” of the euro is going to be tested. If not, and they give it the green light, then we await the to see the hand played by the King of Keynesianism who will be itching to give us QE3 (go and re-read his Jackson Hole epistle – he is seriously worried about US growth and unemployment). When that happens you had best be long a few bars of the barbarous relic.

 So we have two weeks of sport to take our minds off the global financial malaise. The EU commissars have all gone on holiday, but not before Mario Draghi (ECB Chairman) announced that he will do whatever it takes to save the euro. Really? His statement did knock the Spanish 10 year bond yield back below 7%, but this had become a one way and illiquid trade that was due for break. We have seen it all before with Greece. Denial, denial, denial all the way until days before default restructuring. Talking of which, the Greeks think they are in line for a further handout. Those whirring sounds you can hear in the distance are printing presses knocking out “new” drachma.

 The question being asked now is, “where are the risk free assets?” In truth there have never been any. Cash has rarely, if ever, beaten inflation and are there any bankers left that you trust? Last week Barclays put aside £450 million to provide for “Lieborgate” claims stating they had no idea what the final figure would be. Try adding a few more “noughts” guys and you might be close. Government bonds always manage to flatter to deceive in the end as inflation inevitably finds its way back into the equation. You will have done very well in gilts over the past two decades (10%+ yields in the early 90s) but at 1.5% now I would hardly call that a risk free investment.

 The reverse yield gap disappeared a long time ago and equities (and high yield corporate bonds) are touted as the place to go for income but are certainly not risk free either. And do remember that corporate debt is priced as fixed interest on the way up, but like equities on the way down…LTRO 2 a la Draghi or QE3 from Ben’s helicopter may help for a while but neither of the previous such operations have had any long lasting effect and there are no logical reasons to believe that a further dose should produce a different result, unless you have been taking the Keynesian medicine from an early and impressionable age.

 Along with Team GB, I will be going for gold. Not a totally risk free option I grant you as Cav found out in Saturday’s bike race. My money is on Bradley for the time trials; he does have a “yellow” jersey to his name after all.