This blog is turning into a monthly publication.
It was not my intent and I am going to try at least to make it a weekly event.
At the same time it is a way to reflect on a longer period and to avoid being caught up in the daily action that tends to confuse us.
So what's going on ?
Fed cut 25 bps on both fed rates and the discount window on dec 11th.
But Market was disappointed and plunged on that same day
Let's assume that it is because some hoped for 50 at least for the discount window (but you never know the exact cause. 2 weeks before 25bps was supposed to be a good news, but it was co anticipated, and a "surprise" 50 bps was so hoped for that here's a correction.
But next day, Fed announces new injection of liquidity along with the ECB and other Central Banks, to help avoid a Credit Crunch that tends to become a recurrent news, and the market "kind of" rallies.
Of course the Fed says his action had nothing to do with the market's reaction of the day before. Right ?
Gold followed the stock market during these two days. Fell on the 11th, rallied on the 12th.
But Gold is still a small footnote in all these events.
Sentiment in the stock market (and the economy at large) is all that counts in the US right now.
The establishment is doing all it can to avoid a panic that would have disastrous effects (think Wall Street 1929 or Japan 1988).
Of course inflation is much less severe in their mind, but they won't say so.
They continue to say that inflation is a continuing worry.
But you cannot fight both inflation and recession at the same time.
And when you choose not to choose you put the economy in an intractable situation.
It's called Stagflation. I remember that from my History classes.
For Gold it is going to be perfect until they decide to really raise interest rates in the face of a weak economy.
But we are very far from there now.
Showing posts with label Central Banks. Show all posts
Showing posts with label Central Banks. Show all posts
13 December 2007
10 August 2007
What The F. ? What's going on with Jim Cramer ?
If you don't know yet the CNBC presenter Jim Cramer, that should be a good introduction.
It sould be titled :
"Financial crisis are so much fun !"
It sould be titled :
"Financial crisis are so much fun !"
03 June 2007
Heading for a fall, by fiat?
Today, I am publishing some articles from The Economist, because I noticed that they are temporarily free online and make a very interesting reading.
The first one below is an old Economics focus that seems to predict a rise of Gold (which is rare in the Economist newspaper). The others tend to exhibit the usual bias against Gold, and lastly I copied a whole special survey about Investment Banking that contains everything you need to know about modern exotic products such ad CDO, CDS, and more.
Of course they don't recognize the whole extent of the risks that exist in this system
--------------------
Economics focus
Heading for a fall, by fiat?
Feb 26th 2004
From The Economist print edition
The trouble with paper money
IS THE problem with the dollar only that it is falling? It has certainly been doing that. This month, it fell to $1.29 against the euro. This is its lowest-ever rate against the euro, and represents a decline of 19% since the beginning of 2003. In trade-weighted terms, the dollar has fallen less over the same period (15%), but mainly because Asian central banks have been intervening heavily to stem their currencies' rise against it. Of late, it has been wobbling around unconvincingly: America needs a weaker dollar to correct its current-account deficit. But given the dollar's role as a currency of last resort, some wonder if its decline heralds not just an economic adjustment by the United States, but a crisis of sorts in the value of paper money itself.
Money in its present form is a relatively new invention. For most of human history money meant either gold or silver, either directly, or indirectly by means of the “gold standard” which meant, at least in theory, that all paper money was backed by gold. Enthusiasm for the gold standard evaporated in the 1930s, when it made dreadful conditions worse. But it was adopted in a watered-down version after the second world war, when only the dollar was backed by gold. This arrangement made some sense, since America held three-quarters of the world's gold stock. But it came to an end in 1971, when inflationary pressures in America caused the country's manufacturers to become uncompetitive and forced the country off the gold standard. Since then the world has relied on “fiat money”, so-called because it is created by government fiat and is backed only by the promises of central bankers to protect the value of their currencies. It is the value of those promises that some are now questioning.
Promises, promises
Certainly, those promises have only been worth much in recent years. In the early years of fiat money, inflation took off, especially in America, in part because of the two oil shocks of the 1970s. This debased the value of the dollar, and the price of gold climbed from $35 an ounce to $850.
It was only in 1979, in his famous “Saturday night special”, that Paul Volcker, then chairman of the Federal Reserve, raised interest rates sharply to clamp down on inflation. The gold price subsequently fell sharply and in its place came a bull market in government bonds that has, with a few sharp interruptions, continued to this day. Although central banks around the world still hold about 30,000 tonnes of gold in their reserves, many have been offloading their stocks over the years. They can earn only a nugatory rate of interest on these stocks (by lending them out) compared with what they can earn on government bonds. For most people, gold has been relegated to the status, in the words of Keynes, of a “barbrous relic”; its price has risen only feebly when investors have fretted about inflation.
Those who doubt the continued worth of paper money as a store of value point to two things. The first is that the price of gold has been rising even though official inflation is low. From $253 an ounce in the late 1990s, gold now fetches just over $400 an ounce, and it rose as high as $430 an ounce earlier this year. It is not just the price of gold that has been rising: so, too, have the prices of precious and base metals. There may, of course, be many other reasons for these rises. China's rapidly expanding economy is gobbling up metals and other commodities for its factories. Moreover, the rise in the price of commodities also reflects the weakness in the dollar: these rises look much less impressive when quoted in euros or yen. But the rise in the price of gold in particular has raised questions.
The biggest of these—and the second main reason for concern—is the amount of debt that rich-country governments have been running up. America's official budget deficit has surged in the three years since George Bush became president, to around $520 billion and climbing. But this is just the shortfall this year. The government's total future liabilities are much larger. In fact, according to a forthcoming book by Laurence Kotlikoff, an economist, the present value of the American government's future obligations, taking into account promised pensions and health-care benefits, is a staggering $45 trillion. European governments are only slightly better at managing their budgets—witness the breaching of the single currency's growth and stability pact. Japan's attempts to coax its economy back to life have left it with a gross national debt of some 160% of GDP, the highest of any big country. No country has tried harder to debase its currency.
In theory, such debts would not be tolerated for long by investors, since the easy way out for central banks is to “monetise” them with inflation. Bond prices would fall (and thus yields rise) as investors worried that they would be paid back in a debased currency. But capital markets currently seem oblivious to spiralling debts. At some 4%, yields on ten-year American Treasury bonds are close to their lowest in two generations, although this is partly explained by huge purchases by Asian central banks. Yields elsewhere are also very low, nowhere more so than in Japan, where ten-year government-bond yields are now 1.3%.
The problem may be that bond investors, far from being far-sighted, are in fact myopic, and are perhaps being fooled by the temporary disinflationary effects of excess capacity and debts built up over the bubble years in both Japan and America. Perhaps, too, investors have been lulled into a false sense of security by the performance of central banks in recent years, and the independence that has been granted to many of them by governments. But this very aura of inviolability may be storing up problems, since it means that governments can borrow still more at cheap rates. And if governments then find themselves crushed by debt, you can rest assured that this independence will be taken away. And then, once again, the paper in your pocket will only be as good as a politician's promise.
The first one below is an old Economics focus that seems to predict a rise of Gold (which is rare in the Economist newspaper). The others tend to exhibit the usual bias against Gold, and lastly I copied a whole special survey about Investment Banking that contains everything you need to know about modern exotic products such ad CDO, CDS, and more.
Of course they don't recognize the whole extent of the risks that exist in this system
--------------------
Economics focus
Heading for a fall, by fiat?
Feb 26th 2004
From The Economist print edition
The trouble with paper money
IS THE problem with the dollar only that it is falling? It has certainly been doing that. This month, it fell to $1.29 against the euro. This is its lowest-ever rate against the euro, and represents a decline of 19% since the beginning of 2003. In trade-weighted terms, the dollar has fallen less over the same period (15%), but mainly because Asian central banks have been intervening heavily to stem their currencies' rise against it. Of late, it has been wobbling around unconvincingly: America needs a weaker dollar to correct its current-account deficit. But given the dollar's role as a currency of last resort, some wonder if its decline heralds not just an economic adjustment by the United States, but a crisis of sorts in the value of paper money itself.
Money in its present form is a relatively new invention. For most of human history money meant either gold or silver, either directly, or indirectly by means of the “gold standard” which meant, at least in theory, that all paper money was backed by gold. Enthusiasm for the gold standard evaporated in the 1930s, when it made dreadful conditions worse. But it was adopted in a watered-down version after the second world war, when only the dollar was backed by gold. This arrangement made some sense, since America held three-quarters of the world's gold stock. But it came to an end in 1971, when inflationary pressures in America caused the country's manufacturers to become uncompetitive and forced the country off the gold standard. Since then the world has relied on “fiat money”, so-called because it is created by government fiat and is backed only by the promises of central bankers to protect the value of their currencies. It is the value of those promises that some are now questioning.
Promises, promises
Certainly, those promises have only been worth much in recent years. In the early years of fiat money, inflation took off, especially in America, in part because of the two oil shocks of the 1970s. This debased the value of the dollar, and the price of gold climbed from $35 an ounce to $850.
It was only in 1979, in his famous “Saturday night special”, that Paul Volcker, then chairman of the Federal Reserve, raised interest rates sharply to clamp down on inflation. The gold price subsequently fell sharply and in its place came a bull market in government bonds that has, with a few sharp interruptions, continued to this day. Although central banks around the world still hold about 30,000 tonnes of gold in their reserves, many have been offloading their stocks over the years. They can earn only a nugatory rate of interest on these stocks (by lending them out) compared with what they can earn on government bonds. For most people, gold has been relegated to the status, in the words of Keynes, of a “barbrous relic”; its price has risen only feebly when investors have fretted about inflation.
Those who doubt the continued worth of paper money as a store of value point to two things. The first is that the price of gold has been rising even though official inflation is low. From $253 an ounce in the late 1990s, gold now fetches just over $400 an ounce, and it rose as high as $430 an ounce earlier this year. It is not just the price of gold that has been rising: so, too, have the prices of precious and base metals. There may, of course, be many other reasons for these rises. China's rapidly expanding economy is gobbling up metals and other commodities for its factories. Moreover, the rise in the price of commodities also reflects the weakness in the dollar: these rises look much less impressive when quoted in euros or yen. But the rise in the price of gold in particular has raised questions.
The biggest of these—and the second main reason for concern—is the amount of debt that rich-country governments have been running up. America's official budget deficit has surged in the three years since George Bush became president, to around $520 billion and climbing. But this is just the shortfall this year. The government's total future liabilities are much larger. In fact, according to a forthcoming book by Laurence Kotlikoff, an economist, the present value of the American government's future obligations, taking into account promised pensions and health-care benefits, is a staggering $45 trillion. European governments are only slightly better at managing their budgets—witness the breaching of the single currency's growth and stability pact. Japan's attempts to coax its economy back to life have left it with a gross national debt of some 160% of GDP, the highest of any big country. No country has tried harder to debase its currency.
In theory, such debts would not be tolerated for long by investors, since the easy way out for central banks is to “monetise” them with inflation. Bond prices would fall (and thus yields rise) as investors worried that they would be paid back in a debased currency. But capital markets currently seem oblivious to spiralling debts. At some 4%, yields on ten-year American Treasury bonds are close to their lowest in two generations, although this is partly explained by huge purchases by Asian central banks. Yields elsewhere are also very low, nowhere more so than in Japan, where ten-year government-bond yields are now 1.3%.
The problem may be that bond investors, far from being far-sighted, are in fact myopic, and are perhaps being fooled by the temporary disinflationary effects of excess capacity and debts built up over the bubble years in both Japan and America. Perhaps, too, investors have been lulled into a false sense of security by the performance of central banks in recent years, and the independence that has been granted to many of them by governments. But this very aura of inviolability may be storing up problems, since it means that governments can borrow still more at cheap rates. And if governments then find themselves crushed by debt, you can rest assured that this independence will be taken away. And then, once again, the paper in your pocket will only be as good as a politician's promise.
The little yellow god
Dec 1st 2005
From The Economist print edition
Even at $500, it's still a barbarous relic
NOTHING swells the breast so much as the thought that you have been proved right at last. After riding high at the start of the 1980s, gold bugs had a miserable couple of decades. The price declined relentlessly, mocking their credo that the security of the financial system ultimately depends upon the yellow metal. Lately, though, the faithful have enjoyed their reward. In the past five years the price of gold has doubled. This week in Asian trading it briefly surpassed $500 a troy ounce—a level last breached in 1987. You can almost feel the bugs' excitement as the message sinks in: gold is back.
This being gold, the resurgence has brought forth all manner of alarming prophecies. The price is an omen of rampant inflation; bonds are doomed; the dollar is about to fall prey to the United States' reckless deficits; the euro will shortly be revealed as a worthless creation of bureaucrats.
The world is an unpredictable place. But, with the possible exception of a fall in the dollar, not much of the above catalogue of doom looks likely; and none of it has much to do with gold's good run. The dull truth is much less bullish for gold. Investors have put money into a wide range of metals, and precious metals' prices, including gold's, have risen with the base. Meanwhile, gold remains fundamentally unattractive. It yields nothing and central banks are sitting on vaultfuls of the stuff that they want eventually to sell. Gold bugs hope that $500 is the threshold at which mainstream investors will start once again to take an interest in the metal. Caveat emptor.
The fascination of gold lies in its being not only a commodity but also a store of value and means of exchange. The glamour and the mystique lie in the latter, monetary part. This is what draws gold bugs, but their story doesn't quite add up. The unbalanced world economy still faces risks. But the most recent rises in the gold price have come against a strong dollar, which is normally a sign of weaker gold and continues to confound warnings of a collapse in the greenback. Oil prices are plainly far higher than they were, but they have come off their peaks. Moreover, there have been few signs so far that oil prices are feeding through to a 1970s-style stagflation. Nothing in either bond or stockmarkets suggests that investors see much danger of such a thing happening.
Bear on bullion
Gold's renewed shine is best explained by thinking of the metal not as money but as a commodity dug out of the ground. In the past few years the price has climbed because mining companies stopped locking in prices by selling gold in advance—in effect, withdrawing a huge source of supply. Even then, gold has captured only 40% of the gains of other metals in The Economist's metals index, which has almost doubled since the start of 2003 thanks partly to fundamental demand from emerging markets and partly to investors in search of better returns than those from other assets. Gold would have done better had Chinese demand risen as fast as some expected; in fact, figures from GFMS, a consultancy, suggest it has been flat, even falling, over the past 20 years. Chinese investors now have other places to put their money.
Gold is still cheap compared with its peak of $850 in 1980. Today, adjusting for changes in American consumer prices, it is worth only a quarter as much. Gold bugs might see that as a chance to buy; others as a reminder of gold's enduring capacity to disappoint.
From The Economist print edition
Even at $500, it's still a barbarous relic
NOTHING swells the breast so much as the thought that you have been proved right at last. After riding high at the start of the 1980s, gold bugs had a miserable couple of decades. The price declined relentlessly, mocking their credo that the security of the financial system ultimately depends upon the yellow metal. Lately, though, the faithful have enjoyed their reward. In the past five years the price of gold has doubled. This week in Asian trading it briefly surpassed $500 a troy ounce—a level last breached in 1987. You can almost feel the bugs' excitement as the message sinks in: gold is back.
This being gold, the resurgence has brought forth all manner of alarming prophecies. The price is an omen of rampant inflation; bonds are doomed; the dollar is about to fall prey to the United States' reckless deficits; the euro will shortly be revealed as a worthless creation of bureaucrats.
The world is an unpredictable place. But, with the possible exception of a fall in the dollar, not much of the above catalogue of doom looks likely; and none of it has much to do with gold's good run. The dull truth is much less bullish for gold. Investors have put money into a wide range of metals, and precious metals' prices, including gold's, have risen with the base. Meanwhile, gold remains fundamentally unattractive. It yields nothing and central banks are sitting on vaultfuls of the stuff that they want eventually to sell. Gold bugs hope that $500 is the threshold at which mainstream investors will start once again to take an interest in the metal. Caveat emptor.
The fascination of gold lies in its being not only a commodity but also a store of value and means of exchange. The glamour and the mystique lie in the latter, monetary part. This is what draws gold bugs, but their story doesn't quite add up. The unbalanced world economy still faces risks. But the most recent rises in the gold price have come against a strong dollar, which is normally a sign of weaker gold and continues to confound warnings of a collapse in the greenback. Oil prices are plainly far higher than they were, but they have come off their peaks. Moreover, there have been few signs so far that oil prices are feeding through to a 1970s-style stagflation. Nothing in either bond or stockmarkets suggests that investors see much danger of such a thing happening.
Bear on bullion
Gold's renewed shine is best explained by thinking of the metal not as money but as a commodity dug out of the ground. In the past few years the price has climbed because mining companies stopped locking in prices by selling gold in advance—in effect, withdrawing a huge source of supply. Even then, gold has captured only 40% of the gains of other metals in The Economist's metals index, which has almost doubled since the start of 2003 thanks partly to fundamental demand from emerging markets and partly to investors in search of better returns than those from other assets. Gold would have done better had Chinese demand risen as fast as some expected; in fact, figures from GFMS, a consultancy, suggest it has been flat, even falling, over the past 20 years. Chinese investors now have other places to put their money.
Gold is still cheap compared with its peak of $850 in 1980. Today, adjusting for changes in American consumer prices, it is worth only a quarter as much. Gold bugs might see that as a chance to buy; others as a reminder of gold's enduring capacity to disappoint.
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