Precious and Industrial Metals

 

Crude oil, gold, silver … are crushed. So are stocks on all the major indices around the world. Wall Street banks and players can finance their own positions needing no help from the central bank; they do require reassurance that the Fed will direct public funds — borrowed from the same banks at interest — toward them if any of their bets go wrong.

 

Stocks Slammed, Bond Yields Surge After Bernanke’s Taper Talk

Wall Street was a sea of red Thursday morning, on the heels of Federal Reserve Chairman Ben Bernanke’s signal that the central bank’s asset purchase program will slow down as soon as late 2013.

Bernanke was sure to qualify his remarks at Wednesday’s press conference, comparing a tapering of asset purchases to taking his foot off the accelerator, but the initial market reaction indicates traders view the Fed chief’s remarks as a warning that the brakes are coming.

The selloff, which began in the U.S. Wednesday afternoon before racing around the world, produced heavy losses in every asset class. Equities took a beating .Japan’s Nikkei dropped nearly 2% and the major European indexes fell even further, while the S&P 500 began the day with losses worse than 1%, falling 18 points to 1,611 in the first hour of trading.

Commodities took a beating, as crude oil dropped almost 3% to $95.75 a barrel and gold prices plunged nearly 5.5% to less than $1,300 an ounce.

The dollar was one of the few assets in positive territory, rising about 1% the euro and even more than that versus the Japanese yen.

 

Notice that the dollar worth increases relative to that of other assets. Notice also that bond yields plummeted as traders bought dollars, this suggests there is more to the ‘crisis du jour’ than fiddling with interest rates. There is the dawning realization that central banks have exhausted themselves, that they have little in the way of policy instruments that would effect a major decline, that there are diminished returns to their reflation efforts.

Realization = decline. The markets are like a magical airplane that stays in the air only because all the passengers believe at once that the plane can fly. As soon as the marginal passenger doubts … the airplane falls … so do the markets.

Be sure that higher interest rates are on their way. The feedback loop that effects rates is within the foreign exchange or currency markets, NOT the bond markets. The currency markets are gigantic and outside the reach of central bankers … and their nonstop efforts at manipulation. There is a sorting out- or consolidation of currencies underway, particularly the euro and the Japanese yen: these are currencies that are overpriced leaving holders with massive risks that must somehow be offloaded onto hapless third parties; pensioners, school-children, farmers in third-world countries and the middle classes everywhere.

The euro is effectively worthless because of associated political and management failures within the European Union. Seeing the effects of currency policy on Spain, Greece, Cyprus and others, the euro is revealed as a poisonous liability for its holders, a derivative instrument for a cruel and unaccountable non-country. In a world guided by reason, the euro would be done away with, it would be worth exactly zero, yet it is not. The euro is exchangeable on demand for petroleum, this gives the euro worth.

The Japanese yen is also worth less as it is nothing but a proxy for Japan’s now-stranded automobile waste, both in- and outside that country. The currency exchanges cannot accurately measure the worth of these two currencies; at the same time holders have little choice but to shed their positions, to do otherwise is to caught out when the markets reset. Exiting a position is the repricing mechanism, the process feeds on itself. What is underway in the various sub- and derivative markets is the outcome of large currency position unwinds and the hunt for market fools large enough to relieve the Chinese’ and others’ currency risks.

Currency markets drive the national bond markets as holders of currencies do not hold paper money in vaults but debt instruments or IOUs of sovereign governments. Bonds must be swapped or sold first to gain the currency which is then swapped for the desired dollars. Mercantile exporters such as Japan have massive, illiquid holdings of their customers’ bonds; there is consequently a shortage of currency in circulation which is why the Shanghai Interbank Overnight Rate(s) are massively volatile as is the Japanese bond market.

 

 

Figure 1: Tapir or Tapirus Indicus, hard to see how this harmless, pig-like creature could do so much damage to the finance industry. As mentioned previously, conventional analysis such as Forbes’ beating on the Tapir is misplaced. The focus should be on Japan’s trade deficit, China’s real estate- and debt excesses, Europe’s failed supra-national experiment and America’s creeping totalitarianism. Market repression has been able to keep the related costs from being priced into these countries’ securities but such efforts cannot succeed forever.

 

 

Hedge fund boss Kyle Bass does a good impersonation of Nicole Foss, leaving out her bits about farming and Peak Oil. Because Bass manages billions of dollars of other peoples’ money, he is free to speak by the necessities of his business regardless of consequences … and his argument is taken seriously.

In early-21st century America, as in other periods and other places, the content of an argument doesn’t matter so much as the size of the arguer’s bank account and whether the topic can hold the hope for some free money for suckers.

All the crises are interconnected and basically all about the same thing: fuel has become scarce, it has become costly, too costly for ‘others’ to subsidize, the managers desperately try to cheat and then fail, the failure is now becoming apparent and now the speculators are stumbling toward the exits so that they might keep what they can.

Foss offers suggestions to the non-investor on how to withdraw outside the line of financial fire, to exit the Titanic before it hits the ice. Bass looks to profit by the misery of others, to rent seats in the lifeboat; the seats gained from bankers and other finance riff-raff, in reality pensioners and institutional stand-ins for ordinary citizens — widows and orphans — will be the victims suckers as they have since the beginning of time.

Bass is trapped in his own paradigm: when Japan’s calamity occurs, one of the casualties will be Bass, himself. His firm is dependent upon counterparties being willing or able to make good losing wagers, for there to be anything left of the market fools … from which to collect.

It is hard to see those counterparties staying alive with fortunes intact when they themselves must collect from their own failed counterparties. Bass runs a hedge, his hedge is dependent upon all the hedges, all others are hedged against each other; in the very real sense nobody is hedged at all. Here is the reason for the frantic effort over the past five years to prop up every single ‘systemically significant’ finance player on Planet Earth: every one is a counterparty to all the others. The casino which makes up finance is nothing other than trillions of stupid bets, every one made for their own sake, none of which was ever intended to be collected. Because this is so, there is naught but fees demanded by the brokers putting the gamblers — like Bass and his counterparties — together.

The institutional bias fails Bass, what he does not- and cannot understand. The correct strategy is Nicole’s; to stand aside as far as possible from the fracas which is enveloping the entire developed world, to not bet on particular sides because all sides will fail. Bass succeeded in 2008 by taking the opposite side of clearly stupid trades by large banks. The banks sustained losses — which were gains for Bass and his clients — because they were backstopped by the taxpayers’ ability to borrow from the very same banks. The crisis in 2008 illuminated the incestuous circularity of both the lending process and the dependence of each borrower on all the others. When the system Bass depends upon falters, there is no other (ex-planetary) system to bail Bass out!

… or any of the rest of us.

Japan depends its non-Japanese overseas trading partners to subsidize the country’s resource waste by way of its trade surplus. That is, Japan gains more from the goods it sells overseas than what the customer gains from the use of the goods. At some point the customer is exhausted by its ‘Made in Japan’ goods and cannot afford to buy any more. Put another way, Japan has borrowed as much as it possibly can against the accounts of its customers by way of foreign exchange. The customers refuse or are unable to borrow, that strands Japan, (Bloomberg):

 

L.A. Breaks Driving Addiction as Bike-Train Commutes Grow

James Nash

Bikes, Buses Replacing Car Addiction in L.A.

Los Angeles embodied America’s love affair with the automobile in the last century. In this one it’s trying to kick the car to the curb.

The city that put drive-thru restaurants on the map has doubled its network of bike lanes to 292 miles (470 kilometers) and expanded light rail by 26 percent in the past eight years, with another 18 miles of track coming by 2015. Bus and train ridership is on the rise, while the total number of passenger cars registered has declined in Los Angeles County — evidence more commuters are breaking their dependence.

Shrinking Allegiance

“The next 10 years will be as important to the auto industry and transportation literally as the invention of the Model T,” Scott Griffith, former chief executive officer of Zipcar and a strategic adviser to the company, said at the Bloomberg Link Next Big Thing Summit in Half Moon Bay, California, on June 17. “We’re now on the edge of all these new business models coming along and the intersection of information and the car and transportation. If you look out 10 years, I think we’re going to see a huge change, particularly in cities.”

While the new-car market has rebounded from the recession, Los Angeles County had 28,000 fewer passenger cars registered in 2012 than five years earlier, according to California Department of Motor Vehicles data. Boardings on the Los Angeles County Metropolitan Transportation Authority’s buses and trains increased 4.7 percent to 41.3 million in May 2013, compared with May 2011.

 

It isn’t just California, car sales are declining along with stocks and commodities. Taking away the cars punishes Japan while adding more makes matters worse as the fuel burned in the new cars is lost forever. At the same time, the economies of the world are dependent upon more car sales. This is the dilemma that is being resolved right now, to car or not to car …

that is indeed the question.