Archive for the ‘currencies’ Category

weOctober 03 2010 7:47 AM GMT
Big Mac index gives more than a taste of true worth

By Steve Johnson

Intervention has kept some emerging market currencies artificially weak, at the same time many have raised interest rates to stem inflation. It is only a matter of time before some allow their currencies to appreciate
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Welcome to the Mania!
Submitted by Jeff Clark of Casey Research
With gold punching the $1,300 mark, thoughts of what a gold mania will be like crossed my mind. If we’re right about the future of precious metals, a gold rush of historic proportions lies ahead of us. Have you thought about how a mania might affect you? Not like this, you haven’t…

You log on to your brokerage account for the third time that day and see your precious metal portfolio has doubled from last week. Gold and silver stocks have been screaming upward for weeks. Everyone around you is panicking from runaway inflation and desperate to get their hands on any form of gold or silver. It’s exhilarating and frightening in the same breath. Welcome to the mania.

Daily gains of 20% in gold and silver producers become common, even expected. Valuations have been thrown out the window – this is no time for models and charts and analysis. It’s not greed; it’s survival. Get what you can, while you can. Investors clamor to buy any stock with the word “gold” in its title. Fear of being left behind is palpable.

The shares of junior exploration companies have gone ballistic. They double and triple in days, then double and triple again. Many have already risen ten-fold. You have several up 10,000%. No end is in sight. Your portfolio swells bigger every day. Your life is changing right in front of you at warp speed.

Every business program touts the latest hot gold or silver stock. It’s all they can talk about. Headlines blare anything about precious metals, no matter how trivial. Weekly news magazines and talk-radio hosts dispense free stock picks. CNBC and Bloomberg battle to be first with the latest news. Each tick in the price of gold and silver flashes on screen, and interruptions offering the latest prediction seem to happen every fifteen minutes. Breathy reporters yell above the noise on the trade floor about insane volume, and computers that can’t keep up. Entire programs are devoted to predicting the next winner. You watch to see if some of your stocks are named. You can’t help it.

The only thing growing faster than your portfolio is the number of new “gold experts.” It’s a bull market in bull.

You can feel the crazed mass psychology all around you. Your co-workers know you bought gold some time ago and pepper you with questions seemingly every hour, interrupting your work. They ask if you heard about the latest pick from Fox Business. They want to know where you buy gold, who has the best price, and, by the way, how do I know if my gold is real? They all look at you differently now. Women smile at you in the hallway. You worry someone may follow you home.

Your relatives once teased you but now hound you with questions at family get-togethers – what stocks do you own? What’s that gold newsletter telling you? Where can I keep my bullion? You don’t want to be the life of the party, but they force it – it’s all anyone wants to talk about. Your brother tells you he dumped his broker and is trading full-time. Another relative shoves his account statement in front of you and wants advice. You sense someone will ask for a loan. You don’t know what to tell people. The attention is discomforting, and you feel the urge to escape.

At first it was exciting, then breathtaking. Now it’s scary. You’re drowning in obscene profits but are becoming increasingly anxious about how long it can last. Worry replaces excitement. You don’t know if you should sell or hold on. Nobody knows what to do. But the next day, your portfolio screams higher and you feel overwhelmed once again.

You grab the local paper and read the town’s bullion shop had a break-in last night. They hired a security company and have posted several guards outside and inside the store. Premiums have skyrocketed, but lines still form every day. The proprietor hands out tickets when locals arrive: your number will be called when it’s your turn… the wait will be long… please have your order ready… yesterday we ran out of stock at 11am.

You begin to worry about the security of your own stash of bullion – those clever hiding spots don’t feel quite as secure as you first thought they’d be. Is the bank safe deposit box really secure? Shouldn’t they hire a security guard? Should I move some of it elsewhere? Is there anywhere truly safe? You find yourself checking gun prices online.

And it’s all happening because the dollar is crashing and inflation has scourged every part of life. You curse at those who said this couldn’t happen and mock past assurances from government. Cash is a hot potato, and spending it before it loses more purchasing power is a daily priority. Everyone is clamoring to get something that can’t lose value, but mostly gold and silver.

Your wife calls and says the $100 you gave her that morning isn’t enough to buy groceries for dinner. Prices change often on everything. She urges you to get some bread and milk before the stores raises the price again. You suddenly remember you’re low on gas and make plans to leave work early to beat others to the filling station. Restaurants and small businesses post prices on a chalkboard and update them throughout the day. Employers scramble to work out an “inflation adjustment” for salaries. 

On your way home, the radio broadcaster reports the government has convened an emergency summit of all heads of state. They’re working urgently on the problem, and all other agendas have been tabled. Outside experts have been called in. We’re going to solve this rampant flood of inflation for the American people, they say. In your gut you know there’s nothing they can do.

You change the channel and hear about the spike in arrests of U.S. citizens at the Canadian border. Scads of people are caught trying to sneak bullion and stock certificates out of the country – from airports to rail stations. Violence at borders has escalated, and stories of bloodshed are getting common. The White House ordered heightened security at all U.S. borders, with the media reporting it can take days to cross. Foreign governments offer meaningless help, others mock U.S. leaders for their shortsightedness. Their countries are suffering, too.

You think about the gains in your portfolio and wince at the taxes you’ll pay when you sell. Nothing has been indexed to inflation, so everyone has been pushed into higher tax brackets. Citizens are furious with government. Agencies have been swarmed with bitter taxpayers and revolting benefit recipients. One government office was set on fire. A riot erupted in Washington, D.C. last week and martial law was temporarily declared. It’s too dangerous to travel anywhere.

As crazy as things are, it’s hard not to smile. You’re in the middle of a mania. Your life has changed permanently. You’re part of the new rich. You can quit work, live off your investments. Your wife is ecstatic, and you both feel as if it’s your second honeymoon. Your kids are amazed and gaze at you with the same awe they did when they were children.

You’re thankful you bought gold and silver before the mania, along with precious metal stocks. You daydream of where you might go, what you might buy. New options open up daily. You realize you’ll need to meet with your accountant, maybe hire a second one to protect your sudden wealth. You wonder what you’ll invest in next. You ponder what charities are worthwhile. Better meet with the attorney to redraft the will.

As night settles and your house quiets, you log on to your brokerage account one last time. Even though you’re ready for it, your mouth drops when you see your account balance. It is truly overwhelming. You think of others who own gold and silver stocks and wonder if any have sold yet. Has Doug Casey exited?

You stare at the blinking screen, hand on the mouse, the cursor hovering on the sell button…

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How Gangsters Are Saving Euro Zone


JULY 30, 2010


(Please see Corrections & Amplifications item below.)
Gangsters, drug dealers and money launderers appear to be playing their part in helping shore up the financial stability of the euro zone.
That’s thanks to their demand, according to European authorities, for high-denomination euro bank notes, in particular the €200 and €500 bills. The European Central Bank issues these notes for a hefty profit that is welcome at a time when its response to the financial crisis has called its financial strength into question.
The high-value bills are increasingly “making the euro the currency of choice for underground and black economies, and for all those who value anonymity in their financial transactions and investments,” wrote Willem Buiter, chief economist at Citigroup, in a recent research report. The business of issuing euro notes, produced at almost zero cost, is “wildly profitable” for the ECB, Mr. Buiter wrote.
When euro notes and coins went into circulation in January 2002, the value of €500 notes outstanding was €30.8 billion ($40 billion), according to the ECB.
Today some €285 billion worth of such euro notes are in existence, an annual growth rate of 32%. By value, 35% of euro notes in circulation are in the highest denomination, the €500 bill that few people ever see.
In 1998, then-U.S. Treasury official Gary Gensler worried publicly about the competition to the $100 bill, the biggest U.S. bank note, posed by the big euro notes and their likely use by criminals. He pointed out that $1 million in $100 bills weighs 22 pounds; in hypothetical $500 bills, it would weigh just 4.4 pounds.
Police forces have found the big euro notes in cereal boxes, tires and in hidden compartments in trucks, says Soren Pedersen, spokesman for Europol, the European police agency based in The Hague. “Needless to say, this cash is often linked to the illegal drugs trade, which explains the similarity in methods of concealment that are used.”
A spokeswoman for the ECB declined to comment on who uses the bills.
The ECB and its member governments are beneficiaries of the demand.
The profit a central bank gains from issuing currency—as well as from other privileges of a central bank, such as being able to demand no-cost or low-cost deposits from banks—is known as seigniorage. It normally accrues to national treasuries once the central banks account for their own costs.
The ECB’s gains from seigniorage are becoming increasingly important this year.
The ECB has taken hundreds of billions of euros of assets of unknown quality on to its balance sheet as it has reacted to the global financial crisis.
It holds more than €600 billion in collateral from banks to which it has made loans, and more than €400 billion in securities it holds outright, including government bonds.
Overall, the ECB’s balance sheet has grown to almost €2 trillion. It has a capital base of €78 billion. That creates leverage that makes it look like a “hedge fund on steroids,” Mr. Buiter wrote. It wouldn’t need to lose much on these assets to wipe out its thin cushion of capital.
That’s where seigniorage comes in.
In recent years, the profits on its issue of new paper currency have been running at €50 billion. In 2008, the year of the Lehman Brothers crisis, it was €80 billion.
Even with conservative assumptions about future growth of currency in circulation—at, say, 4% a year, which is in line with the ECB’s 2% inflation target plus a margin for economic growth—Mr. Buiter estimates future seigniorage profits for the central bank between €2 trillion and €6.9 trillion.
Thanks to seigniorage, he says, the ECB is “super solvent.”
An ECB spokeswoman says there’s no plan to withdraw high-value notes, national equivalents of which were used in six member states before the euro was launched. They will be retained when a redesigned series is issued in coming years.
Replacing them with small denominations would increase production and processing costs, she says.

Corrections & Amplifications
The volume of €500 notes in circulation is €285 billion, accounting for 35% by value of all euro notes outstanding. An earlier version of this article incorrectly said the €285 billion figure represented all euro notes.
There are 570 million €500 bills in circulation. The scale on a chart accompanying an earlier version of this article misrepresented the number as 570,000.
Write to Stephen Fidler at

The MasterBlog

Subject: All 96 Cent Currencies go to a Dollar
 Bruce Krasting
Looking at the FX screen today you have to conclude: The dollar is weak. Oh the pain. How many big names have stuck their heads out and said that the strong dollar bet was the trade of the year.

It is tempting to look at this and conclude:

“The market got way ahead of itself back in June when the EURDLR broke 1.20. What we are seeing today is slo-mo reversal of all of those long dollar positions that were put on in the first half of the year. On a pure comparison basis it is hard to get excited about buying Euros, it is even less exciting to get long the Yen at these historic levels. Each area has its own set of problems. Anyone who thinks that the EU’s problems are behind it is just wrong. We are just having a pause in the action.”

Alternatively it is quite possible that the issues facing the US will overwhelm sentiment and position taking. That would be my best guess for the month of August. Being short Euros might look compelling, but it is a risky trade.The market is not positioned for that reality

What might the factors be that influence the outcome?

There is not going to be a crisis in the EU for the next 2-3 months. They have a lid on things.  A crisis could evolve in Europe if the bond markets unravel (again). If spreads widen and CDS is again a topic in the papers then the dollar would be in demand. But that is unlikely to happen with the EU defense mechanisms in place. They have mega billions available to buy bonds. They have been able to contain the crisis with a modest amount of intervention. Shorting Spanish bonds is no longer a sure winner. There is a big carry cost to being short. There is two-way risk. The world is “short” yield today. There seems to be a limitless demand for fixed income paper. This will pass at some point. But not for the foreseeable future.

There is a slow motion crisis evolving for the dollar in my view. There is a lack of viable options for the US. There are a number of possible outcomes:

A) The Fed and The Administration continue to pour on the gas. (QE-2 from Ben and a hefty $500b spending package AKA “the Krugman” option)

B) We could go to December 1st when the fiscal commission confirms what we already know (we are about 4-5 years away from an explosion) and a credible plan is put forward to increase taxes and reduce expenses.

C) We do essentially nothing on monetary or fiscal policy.

If we get A it will surely be bad for the dollar across the board. It would imply that there would be a financial penalty for owning dollars; our deficit would rise to over 10% of GDP. Where’s the beef for owning the buck in that scenario?

If we get B it will be in the form of, “We are going to tighten our belts, but not now. It would aggravate unemployment so we are going to get serious about our budget, but not until 2013.” Kiss of death for the dollar.

Some form of C is most likely. We continue with ZIRP as we now know it (with minor tweakage). No major new fiscal approaches are undertaken. The benefits of the 09 ARRA stimulus will fade. Some taxes will be raised. Dividends, capital gains and incomes over $250,000 will be taxed at higher levels. On paper the deficits will look smaller as a result (6-7% at best). But this will kill the economy. In this scenario long-term growth will fall to sub 1%. As that happens the deficits will explode on their own. Who wants dollars if this happens?

The FX markets rule the roost. Central banks can only watch and hope that things turn out as they wish. The Japanese and Swiss CBs tried to contain the fx market. They failed. In the midst of the EU chaos the ECB did not intervene. They knew their presence would just have attracted more sellers. It has been quite a few years now that the Fed has stuck its toes in the intervention waters. But that does not mean we should ignore what the CBs and Treasury types are signaling. I see evidence that the major European countries are moving in a direction that would be friendly to their currencies. The US is going down a decidedly different path. According to the WSJ’s Jon Hilsenrath, QE-2 (Lite) will be announced next week. He gets his thoughts straight from Ben B., so the cards are being dealt.

Bernanke has a Bloomberg. He knows exactly where the EURDLR is trading. He is whooping for joy today. He wants a weak dollar more than anyone in the world. He is praying for inflation at this point. A weaker dollar is very helpful in achieving that. So when you weigh the sides of this, and if you’re looking to place a bet, always keep in mind that there is no one who has a hand on the levers that wants a strong dollar. They all want it weak.

We are seeing this play out already. Look at crude. Why is it breaking out? I think the dollar is driving it. I ask the question, What possible benefit could this bring to the US economy? Inventory profits for big oil is a good plan? Lining the pockets of those we import oil from helps America?  But it will make inflation go up, and headline inflation is what the Fed wants to see. We’ll just be poorer as a result.

The line “All 96 cent currencies go to par” was a reference to the Swiss Franc. It is currently worth 96.25 cents (1.0389). In my many years of watching this silliness I have observed that most things that get to 96 do go to 100. We shall see.

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