Where’s the “V?” – Obviously the Fed has injected monetary cocaine into the stock market to make it appear as if stocks are “discounting a “V” economic recovery. But a “V” on Main Street is nowhere to be found (graphic is from Crescat Capital -the comment bubble is my edit):
The chart above plots the NY Fed’s weekly index of economic activity (red line) vs. the Bloomberg U.S. financial conditions index, which attempts to measure the relative strength of the bond, equity and money markets (white line). With the amount of money the Fed has injected into the financial system, it’s no surprise that the financial conditions index is soaring. However, as I’ve suggested in recent issues, this money is having little, if any, effect on real economic activity.
Compounding the insanity of the current market valuations is the fact that no one has any idea just how bad the economic damage has been from the shutdown of the economy and the virus crisis. We won’t know for several months the degree to which unemployment and overall economic activity will recover. Certainly this idea that there will be a full recovery by the end of the summer (per several White House officials) is completely foolish.
The economic numbers that appear positive are merely a “statistical” bounce attributable to the “re-opening” during May from the highly depressed state of the economy during the lock-down period. But household debt delinquencies – credit card, auto and mortgage – continue to rise, while there’s little evidence that the majority of those who lost their jobs will be re-employed any time soon, if ever. What will be the effect on the economy when unemployment benefits expire for a large portion of those receiving them now and who can not find a job?
The Fed asserts that its money printing is necessary to restore economic health. But this is poorly disguised Orwellian propaganda. Most of the Fed’s money printing has been used to keep the Too Big To Fail banks from choking to death on subprime and non-performing “assets,” such as leveraged loans to the retail and oil sectors, CLO liabilities and counter-party exposure from OTC derivatives (credit default swaps, primarily). The resumption of money printing in September 2019 is evidence of that assertion. The rest of the printed money is funding the enormous load of new Treasury issuance.
Gold hit a new eight-year high today. This comes interestingly on the heels of escalating tensions with China. Trump likely does not understand this, but China holds several aces up its sleeve which can be used to undermine the U.S. dollar and detonate the ticking time bombs embedded in the U.S. financial system. The most notable wild card held by China is its increasing control over the global physical gold market.
In the context of these comments from a Vice Chairman at the China Securities Regulatory Commission (i.e. a CCP member), it’s quite possible that China is starting to flex its muscle slowly to reset the price of gold to more closely align the vast spread between the paper derivative gold price determined in London and NYC and a true “price discovered” price of gold that reflects the underlying supply/demand reality:
Fang Xinghai, a vice-chairman at the China Securities Regulatory Commission, said that as China mainly relies on the US dollar payment system in international deals, it makes it vulnerable to possible US sanctions.
“Such things have already happened to many Russian businesses and financial institutions. We have to make preparations early – real preparations, not just psychological preparations,” Fang said at a forum organised by Chinese media outlet Caixin.
Fang’s comment came at a time when Washington is pondering how far it should go to use the US dollar’s key role in international payment to punish Chinese individuals, companies and financial institutions for alleged involvement in issues such as Xinjiang and Hong Kong. (Caixin Gloal, via Zerohedge)
I’m just speculating here, but China may be starting to flex its muscle in the gold market. It’s a widely accepted proposition that China’s Central Bank holds many multiples of the amount of gold officially reported.
China is the world’s largest producer of gold and now its setting its sights on acquiring robust western hemisphere gold mines. Two State-controlled Chinese mining companies have made three notable western gold mining company acquisitions this year: one with a mine in Canada (TMAC); one with a soon-producing gold mine in Columbia (Continental Gold); and one in Guyana (Toronto-based Guyana Goldfields). All three mine properties host very high-grade gold resources. China would not spend hundreds of millions to acquire high margin gold mines to sell the gold produced at a manipulated, artificially low price of gold.
Beyond China’s “invisible hand,” I don’t know how else to explain the strength in the gold price during a period of time – late 2019 through present – when China and India have largely been absent from the gold market based on import data, while at the same time the Comex paper gold open interest has declined over 40% since January.
Gold has been surprisingly strong this morning, hitting an eight-year high at $1785 (August gold basis). If August gold can jump over the $1788-1790 area, which has been defended vigorously by the paper gold slinging western bullion banks, the $1800 level may fall like Gaul…
Nice summary, esepcially the reminder about banks’ exposure to derivatives.
Thanks Dave. I think that I can speak for other readers in saying that we continue to appreciate your insights.
I suspect that the reason that there have been so few comments in recent weeks is, at least in part, due to the disgust over the very policies that you have been highlighting, coupled with the dissonance of where gold remains (in broads terms), and where it should be given the spectacular, though fully expected, further degradation of the USD and other major currencies.
I freely admit to have been naïve, as I expected the house of cards to come crashing down two or three years ago. But the COVID catalyzed acceleration of the process must surely mean that we are now getting very close.
Keep up the good work, and thanks again for your efforts.