Jim Sinclair’s Commentary
Undermine the recovery is the understatement of the millennium
Exiting QE could ‘undermine the recovery’, IMF warns
Raising interest rates to get the economy back onto a normal setting could prove so complicated it “undermines the recovery”, the International Monetary Fund has warned.
By Philip Aldrick, Economics Editor
4:00PM BST 16 May 2013
Central banks, including the Bank of England, strayed into “unchartered waters” by cutting interest rates to near-zero and launching billions of pounds of quantitative easing, and they will find the exit “difficult to control”, the IMF said. “The market response [to a rise in interest rates] will be less predictable … possibly for several months or even years.”
Long-term interest rates could spike as investors dump over-priced bonds and banks could face a fresh round of losses on both their gilt portfolios and loan books as borrowers struggle to meet higher monthly payments, it added.
“This risk makes it very important that any necessary bank restructuring and recapitalisation is completed as soon as possible,” IMF financial stability deputy chief Erik Oppers said. “Credit risk for banks may increase. Higher interest rates make it harder for bank customers to pay back their loans.”
The IMF’s analysis followed a warning earlier this week from two former members of the Bank’s Monetary Policy Committee that rate rises would result in an economic "shock" to the UK. Early signs of growth have raised the prospect of an earlier return to normal interst rate policy than the markets currently believe.
Sir Mervyn King, the Bank’s Governor, said this week that "it may be possible to raise rates faster than current market expectations" of no increase until late 2016.
The IMF also confirmed earlier work by the Bank that warned of large losses on central bank balance sheets. In a shock scenario, under which rates would need to rise by six percentage points, losses on the current £375bn QE programme in the UK could reach 4.5pc of GDP – or £70bn. Even under a “likely case” scenario where rates rose by four percentage points, the loss would be £50bn.
The Bank has previously calculated that the interest income on the £375bn of QE would more than offset the exit losses in all but the most extreme case, when the taxpayer could end up £8bn out of pocket. The IMF analysis excluded “the income from asset holdings”.
A Bank official said: "As the IMF report acknowledges, this analysis ignores capital gains and coupon income from bondholdings. That makes the results very misleading."
For the economy more broadly, though, the IMF said the risks were considerable. “The risk is interest rate volatility and overshooting in the adjustment of long-term rates. The potential sharp rise in long-term interest rates could prove difficult to control, and might undermine the recovery (including through effects on financial stability and investment),” it wrote in a policy paper.
It also argued that there was clear evidence of “diminishing returns” in continuing with existing policies like QE. The most effective policy now, it suggested, was “conditional guidance” of the sort used by the US Federal Reserve and under review by the Bank. It has also been championed by incoming Governor Mark Carney.
The IMF paper said guidance was “preferable” to “price-level or nominal-GDP targeting”.
“A possibly more promising approach may be to explicitly characterize the conditions or ‘thresholds’ leading to an interest rate lift-off. While avoiding the pitfalls of the above rules, guidance based on thresholds continues to offer an automatic stabilizer, in the sense that as the economy weakens, expectations will automatically shift to a later lift-off date,” it said.
Jim Sinclair’s Commentary
If legacy OTC derivatives on the books of US financial institutions were properly valued, the money on depositors statements in the US financial institutions would be severely reduced or eliminated.
Demand for gold at record high in Q1
Updated: 2013-05-17 03:05
By Cai Xiao ( China Daily)
China’s gold demand jumped to a record high in the first quarter despite a global drop of 13 percent, according to a report released by the World Gold Council on Thursday.
Gold jewelry demand in China surged to a record quarterly value of 60.3 billion yuan ($9.8 billion), the council said.
Traditional Spring Festival-related gold buying and gifting was augmented by a rebound in sentiment regarding the strength of the domestic economy.
China and India accounted for a combined 62 percent of global jewelry demand in the first quarter.
China posted a new record for quarterly investment in gold bars and coins as positive seasonal factors worked in tandem with gold’s enduring investment appeal. Demand grew to 109.5 metric tons, compared with a five-year quarterly average of 43.8 tons.
The Spring Festival period fueled buying in January, but demand was supported throughout the rest of the quarter as Chinese investors, discouraged by the weak domestic stock market, increasingly relied on gold to fulfill their investment needs.
Russia sends Syria upgraded anti-ship cruise missiles
DEBKAfile May 17, 2013, 8:55 AM (GMT+02:00)
US officials report the delivery to the Syrian government of Yakhont anti-ship cruise missile updated with advanced radar for extending its range and accuracy. It is designed to counter any effort by international forces to supply Syrian rebels from the sea, impose a naval embargo, establish a no-fly zone or carry out limited strikes. DEBKAfile adds: The improved Yakhont enables Syria to keep Israeli missile ships far from its coast and block troop landings.
Four Russian S-300 batteries shipped to Syria
DEBKAfile May 17, 2013, 9:00 AM (GMT+02:00)
Moscow reports that four batteries of S-300 systems with 100-150 simultaneously deployable, guided anti-aircraft missiles have already been shipped to Syria complete with Russian military “adviser” crews. DEBKAfile: An Israeli strike to smash this weapon in Syria could not avoid hitting its Russian crews.
Jim Sinclair’s Commentary
I so love animals.
The World’s Central Banks Added To Their Gold Stockpiles Even As Prices Tumbled
Mamta Badkar | May 16, 2013, 10:47 AM
Gold prices are down about 12.5% since the start of April. But global central banks have been increasing their reserves of the yellow metal.
A new report from the World Gold Council shows that central banks bout 109 tonnes of gold in the first quarter.
This was the seventh straight quarter in which they purchased over 100 tonnes of gold.
Central banks held 31,735.4 tonnes of gold as of May 2013. This was up from 31,694.8 tonnes as of April 2013.
Gold entered a bear market during that quarter. In the current quarter, gold has gone from $1,603 on April 1 to below $1,400 today.
According to the WGC, Russia and South Korea were among the biggest buyers of gold.
“The price drop in April, fuelled by non-physical moves in the market, proved to be the catalyst for a surge of buying that has left many retailers short of stock and refineries introducing waiting lists for deliveries," said Marcus Grubb managing director at World Gold Council in a press release. "Putting this into context, sales of bars and coins, jewelery and consumption in the technology sector still make up 81% of the market.
Jim Sinclair’s Commentary
Courtesy of CIGA David Madisonstyle.com
Congressman: Department of Justice Tapped Congressional Rooms as Well as Reporters’ Offices
Has the Obama Department of Justice Violated the Separation of Powers?
California Congressman Devin Nunes (R-CA) says that the Department Of Justice tapped phones in the rooms where Congress members speak informally and off the record, eat, sleep and socialize when they’re not on the floor of the House of Representatives or in their individual offices.
These rooms are known as “cloak rooms”, which are the spaces in which a lot of informal conversations occur … both between Congress members, and Congress members and reporters.
Congressman Nunes told Hugh Hewitt:
[Congressman Nunes]: I don’t think people are focusing on the right thing when they talk about going after the AP reporters. The big problem that I see is that they actually tapped right where I’m sitting right now, the Cloak Room.
[Interviewer]: Wait a minute, this is news to me.
Congressman Nunes: The Cloak Room in the House of Representatives.
[Interviewer]: I have no idea what you’re talking about.
Swiss Party Puts Gold Repatriation, Protection on Ballot
May 9, 2013
The Swiss People’s Party, a nationalist political party in Switzerland, has succeeded in getting the required number of signatures to put a gold referendum on the national ballot. The “Save Our Swiss Gold” initiative, if passed by voters, would require the Swiss central bank to double its gold reserves from 10% to 20% and repatriate all gold reserves held abroad. The measure would also forbid the sale of any gold reserves.
This would make the gold reserves worthless to the bank, according to Thomas Jordan, chairman of the governing board of the Swiss National Bank. He explained that if the gold was unsellable, it could not be counted as an asset at all, while still tying up 20% of the central bank’s reserves. He warned that the bank would have to issue treasury bills and pay interest on them in order to manage the money supply, and would lead to printing more money.
Jordan also revealed for the first time where Switzerland’s gold reserves are held – another demand by the Swiss People’s Party. Switzerland has a total of 1,040 tonnes of gold, with 70% in Switzerland, 20% in the Bank of England, and 10% in the Bank of Canada. Jordan said that keeping a portion of the nation’s gold reserves abroad was necessary for “adequate regional diversification and good market access.” Central banks will keep reserves in foreign central banks for use as collateral when buying foreign currencies.
The US Dollar:
The one and one only real present flow of money into the dollar. It is a product of the broad discussion of what is certainly coming in finance. Bail-in is a strategy that confiscates major funds that are on the statement of large depositors to fund a bankrupt bank. Most of the public conversation about this has centered on Euroland. It would be natural for large depositors to flee Euroland for other places like the USA. That is of course falling from the frying pan into the fire.
If you shift deposits it should be to other than entities outside the Western financial system. Holding cash is quite sane when all you get on it is 1% interest and you take all the risk of the solvency of the institution.
The argument that modern wealth is so large that it is immobile and therefore will not move en masse to physical gold.
To this point I first pose a question. Where has all the physical gold gone? Central banks have gold on their books but a major percentage, maybe a shocking percentage, is leased out with counter party risk. Simply stated, if the lease is not renewed the central banks must drop the gold from their assets therefore the leases are renewed constantly knowing full well the gold is gone. The theft of gold is the second largest crime in world history, second in size to the fraudulent legacy of OTC derivatives that caused the entire mess.
The paper gold market is in its death throws right now due to the downside manipulation and the knuckle draggers do not even appreciate that. With the automatic and forthcoming elimination of paper gold as the price setting mechanism, physical gold will seek much higher prices than anyone can conceive of.
I mentioned that a price of $50,000 an ounce was possible when physical gold is emancipated from paper gold. To that a popular previous gold writer turned Trojan Horse simply dismissed it as Jim being extreme rather than argue the subject.
Jim Sinclair’s Commentary
Today’s latest from John Williams’ www.ShadowStats.com.
- Inflation Remains Very Much a Threat
- April Year-to-Year Inflation: 1.1% (CPI-U), 0.9% (CPI-W), 8.7% (ShadowStats)
- CPI Decline Boosted Real Retail Sales, Re-Intensifying Recession Still Signaled
- April Housing Starts Showed Statistically-Significant Plunge
"No. 525: April CPI, Housing Starts"
Jim Sinclair’s Commentary
Of course the Federal Reserve can do whatever the pleases to do, but the consequences will be immediate and severe. To slow or cease QE would kick the support of the equity market and US dollar right out from under both.
Since the day QE started all we have heard is stopping it while it continued to grow. This article is nothing new, but rather a statement as old as QE itself.
Fed blame game leads to QE end game
May 15, 2013, 12:01 p.m. EDT
By John Nyaradi
The Federal Reserve’s controversial quantitative-easing (QE) program has generated a new round in the "blame game," and the Fed itself is now forecasting the end game for QE.
The Federal Reserve’s quantitative-easing program has been controversial ever since it began in 2008. Over the years, the program has drawn increasing criticism from many corners, but recently, the criticism has reached deafening levels as a series of high-profile commentators chime in to voice opposition to the program.
The chief complaint is that the program punishes those who prefer savings accounts, while the program benefits investors, big banks and institutional investors. The conclusion reached in these arguments is that QE benefits the investing class at the expense of those who rely on passbook savings accounts, thus making the program an act of class warfare. Paul Singer of Elliott Management often makes this argument, emphasizing that quantitative easing has caused a "distorted recovery" which brings great benefits to investors, while doing nothing for the middle class.
Ron Paul’s views regarding the Federal Reserve are well known, (abolish it), however, even a fellow central banker, European Central Bank President Mario Draghi, took a poke at Bernanke during a May 2 press conference in Bratislava. When questioned about the ECB’s approach to the euro-zone economic crisis (which involves imposition of an austerity mandate on countries requesting bailout funds from the ECB) Draghi distinguished the ECB approach from that of the Federal Reserve in the United States. In an obvious reference to Dr. Bernanke’s now-infamous "Helicopter Ben" speech, Draghi remarked that one does not "go around with helicopter money, throwing money."
Dissension also exists within the Fed, itself. On Thursday, May 9, Dallas Federal Reserve President Richard Fisher pointed out that the lack of job creation is a result of poor fiscal policy rather than monetary policy. Fisher explained that monetary policy had accomplished all it could in stimulating the economy and that ongoing bond buying by the Fed amounts to "overkill." Fisher’s suggestion that quantitative easing should be scaled back was the first "trial balloon" to test public reaction to the idea of weaning the economy (and more importantly, the stock market) from the liquidity pump.