Tuesday, December 28, 2010

Forget the currency markets - it's all smoke and mirrors

I have thought about this increasingly, and I think it is time to ignore the currency markets. They are becoming completely worthless as tools to try and discern what is going on (feel free to debate me on this, it might be that I just don't know how). But the way I am beginning to see it, it's not going to matter that much.

Take the dollar index for example. It is weighted over 60% towards the Euro, which makes for a completely ridiculous situation. Why do I say this? Because the equation for the last few months have been :

Bernanke Printing - Worry about European defaults = 0

The dollar is crashing, except most other currencies seem to be as well. The yuan is pegged. The yen is being managed. The EUR is doubtful if it has a future. The CAD is very closely tied to the USD, and in addition Canada as well as Australia has housing market issues coming up. The small currencies have been pushed as far as the markets dare, due to them being small and volatile. The GBP gets kicked in the nuts everytime it is discovered that the British STILL haven't started reducing their monthly deficits. In a word - they're all trash.

And today, we saw something quite interesting. First, the dollar was massively down, and gold, silver and the commodity spectrum gained heavily. Then, a Treasury auction turned out pretty sour, and lo-and-behold, the bond market gets a date with gravity, and the dollar ..... rises. I know, there is probably a nice equation why the dollar rose at this time. The commodities, however, continued their run for escape velocity. Screw the dollar, seems to be the sentiment.

I know that the "paper money returns to its intrinsic value"-story is a bit cliché. And it sure won't do it by tomorrow, or the day after. But it seems that currency movements are becoming increasingly disconnected from everything else. Obviously, this is because currency movements have become nothing put temporary gauges of how unevenly inflation is workign its way through the global economy. In the end, we're all liquified, drunk and ready to fall face first into the gutter.

Forget the currency markets - it'

Thursday, December 9, 2010

The danger for small currencies

A problem I've been meaning to address is the problem for smaller countries that have their own currencies, for example Sweden. Looking at what is happening in the world, we can make two rather disturbing reflections : Both the USD and EUR are pretty crappy currencies. For a while now, they have been taking turns getting beat down, while the smaller currencies have gained on them both. The problem comes if there is an all-out currency-panic.

Imagine for a while that 2008 comes in repeat, but since banks cannot fail and all debt will be bought, it is faith in currencies that disappears instead of faith in banks as counterparties. With the forex market trading trillions and trillions of currency everyday, the question is - what will traders do? And what will everyone who sits on currency hedges or swap lines or derivatives or any other form of financial position not backed by something tangible do?

If the EUR and USD jointly start falling rapidly (the risk for the EUR is still seen as the solvency of the underlying governments and not as an inflationary one), I think things could become very unstable. If the ECB continues its stealth monetization, and suddenly price inflation at the consumer level breaks out in Europe as well as the US, is it unthinkable that we get a EUR/USD rate that fluctuates within a spectrum, but rapid declines for them both against other currencies?

The natural reaction to this by smaller central banks is obvious. They will be under political pressure to inflate as well, to push their currencies down. Both Japan and Switzerland has done it recently, and China does it continously. What I fear is that those who resist will see speculative "counter-runs" on their currencies, meaning that traders figure they will appreciate rapidly, and enormous amounts of money flow into these smaller currencies, turning it into a self-reinforcing spiral. What do central banks do then? Again, I suspect that they will buckle under the pressure to inflate.

The problem is that with floating exchange-rates, smaller countries are very reliant on what the larger currencies do. And currently the worlds largest currencies are all used to monetize government debt. Thus, while I see less risk for massive inflation in smaller countries, we might not be as insulated as we think. The same thing, by the way, goes for government bonds - the difference being that it MIGHT be somewhat easier for small governments to resist printing up bonds just because the yields are approaching the zero-line (if large-country bonds turn sour, investors will scramble for any solvent government's bonds)

What panics bring is volatility, something that 2008 clearly proved. I remember logging on to the internet every morning, and seeing flashing headlines of 10% up! 10% down! Bottom is near! No bottom in sight! Panic in the henhouse, sort of. It is hard to imagine what would occur if this happened to the entire fiat currency spectrum. I am sure that politicians worldwide would announce the tying of this rate to that rate, but not until the situation got completely out of hand and started destroying commerce would anyone do anything real to solve it.

And this is why I am a constant gold bull, if I haven't mentioned that before. Gold is pretty worthless to eat, but it will keep its value while everything else fluctuates madly. Like that Glenn Beck says - don't buy it as an investment, buy it as an insurance policy. And I can tell you, I'm levering up on all the insurance I can get, until we see some real change in the world economics.

Tuesday, December 7, 2010

The european battle-lines are being drawn

I would assume that the recent fights over whether to extend the euro bailout fund means that Germany is now seriously considering leaving the euro-zone. Since Austria and the Netherlands have joined on that side, I think we are beginning to see who are going to use the "North euro" and who will be stuck with the "South euro".

It wouldn't surprise me if Merkel&Co tells our favourite authoritarian french prime-minister he can't join. Finland is probably an automatic member in the North, and the Baltic states may subsequently let in. Club Med will be left to print-print-print to their hearts enjoyment.

Monday, December 6, 2010

Euro-fascists have learned nothing from history

It is truly disgusting to live in Europe these days. Not that any real person residing in Europe calls themselves "European citizens", like the europhile Brussels elite would like, but still - Europe is a content that has a long and disturbing history. And there are signs that history is about to repeat itself, if things continue along this path.

I wrote a few days ago an open letter to Angela Merkel, not because I figured she'd ever get to read it, but because it felt like the correct format for a plea of sanity. I went as far as to call the scenario that the european elite is trying to create a new "Versailles Treaty" for Germany. Since the calls for Germany to extend its "support" for the Euro-zone are becoming worse by the day, I will continue on this topic. But first, we need some revisionist history.

The standard history textbook will teach you this : The first world war happened because someone got shot in Sarajevo, and then Germany and Austria turned evil and fought France/Britain and Russia on two fronts, until the heroic support from the United States crushed the evil monarchies of Germany and Austria-Hungary. Upon the peace talks in Versailles, it was decided that Germany should pay for its sins against the peoples of Europe. Unfortunately, the German people suffered through hyperinflation as they couldn't pay these debts, and after a period of political turmoil where communists and nazis fought eachother, Adolf Hitler rose to power and united the evil Krauts once more, and then set out on a quest to take over the world.

As you can probably discern from the tone, I do not totally agree with this writing of history. Some parts of it are correct, but there is too much missing to give a complete picture. What is missing is of course anything that would make the "winners" of these two wars look bad. So let's fill in some blanks, shall we?

First, it should be noted that by the time the United States under Woodrow Wilson decided to start meddling in Europes affairs, making the world "safe for democracy", most of the countries at war had already exhausted much of their ability to continue warfare. There was attempts at some degree of diplomacy already in December 1916, but as these talks failed, and Germany returned to a policy of "sink anything that moves" (which they implemented after Britain had started a naval blockade of any ships trying to reach Germany), Woodrow Wilson turned from isolationist to interventionist (some say because it gave him a chance to create his beloved "League of Nations"), and started a domestic, fascist media campaign that tried to rally americans to join the war, despite the traditional isolationist stance of the US. With the US entering the war, things tilted heavily against Germany and the Austrian-Hungarian empire.

While it is impossible to say what would have happened if the US had stayed out of the war, we can at least say that it is extremely unlikely that the Treaty of Versailles had been written and effectively giving the people of Germany the entire blame for the war. What should also be noted is that the US entry into the war turned it into more of an ideological conflict, pitting the "free democratic nations" against the "backwards monarchies" of Germany and Austria-Hungary. This interpretation of history is, of course, not something any mainstream historian would accept, and I will freely admit that it is not mine, rather that of Hans-Herman Hoppe. Regardless, we owe it to ourselves to look at history not only from the point of view of what official history tells, rather from the words and actions of those alive at the time.

The Treaty of Versailles did mainly two things, which were not direct but most assuredly indirect reasons to how history played out. It laid an enormous debt to pay on Germany, which influenced its central bank in deciding to inflate away to its hearts content. Whether this was the main reason for German hyperinflation can be debated - to say that it was in no way a reason seems naive. More importantly is the fact that The Treaty of Versailles was a "Treaty of the Victorious" where unconditional surrender of Germany was demanded. The blame for the horrors of four years of intense human slaughter was placed on one nation, despite the fact that the atrocities commited were done from both sides. There were enough disformed German corpses to go around, along-side the French, British and Russian.

What emerged from this was Weimar Germany, which turned into a highly volatile, politically explosive nation, which had its middle-class wiped out and suffered a more or less total societal collapse. Under these circumstances people tend to call out for a strong leader. What is worse, under such circumstances people may well accept any scapegoat. While Adolf Hitler was quick to paint the Jewish people as those behind the "plot" that destroyed Germany, we can easily imagine that the restoration of a functioning society and not being a dishonered, despised remnant of the old German monarchy was in the minds of many of his followers. History can not be blamed on just on man, nor just one treaty, but the influence of both on history should not be forgotten.

This brings us to post-WWII Germany, and the state of the nation that was now blamed for two world wars, and was utterly and completely destroyed. If the blame of WWI was put heavily on Germany, the blame of WWII was put completely on Germany. And it is true that much of the atrocities in the second world war (though by far all - read up on the firestorm of Bremen) may be blamed on the actions of German politicians, military commanders and in the case of the persecution of jews even on german civilians. But again, it is important to remember that not all people that live under one national rule are the same - and not all Germans were evil. This is often forgotten, and it was completely forgotten in post-WWII Europe. Germany was decidedly the bastard, evil child of European history.

And then came the European Union, which became the chance for german people to find redemption for their sins (nevermind that future generations had nothing to do with the actions of previous generations). Germany has, since its inception, been the most vocal proponent of increased European unity and co-operation. It has paid the highest price for keeping the union together, and has lost most of its wealth to keep the euro up, while deficit countries push it down. And while the idea of trade as a force preventing war is indeed valid, the idea of ending national sovereignty by creating a "Euro State" is much less so. The "European project", which has done some good in opening up for free trade and movement, has simultaneously done much damage by trying to create an egalitarian super-state that, in order to exist, must despise any sign of difference between people of different nationalities. Rather ironically, the euro-zone project is moving closer and closer to "Ein Volk, Ein Reich, Ein Führer", not only in how europhiles in Brussels are becoming completely deaf to any criticism what-so-ever, but also in the way that people in Europe are losing more and more control over who commands them. It would be daft to call a dish-rag like Herman Van Rompouy "ein führer", but he is still an utterly dangerous man, in an utterly dangerous position.

And finally, after this rather longish history-lesson, we arrive at the topic of the day, namely that the euro-fascists in Brussels and desperate "periphery-nations" have learned absolutely nothing from history. There are calls for Euro-bonds. There are calls for a "fiscal superpower". Angela Merkel is blasted in the media for saying that private bondholders should take haircuts, when this "threatens" the stability of the bonds of already bankrupt nations. The rescue of Greece came about when the overlords from the IMF flew in to talk to Angela Merkel - and we can only assume that they delivered some version of the Paulsen&Bernanke tanks-in-the-street speech.

Since Germany seems so reluctant to support any idea of euro-bonds, and joining in "responsibility" for keeping the euro stable, one could wonder why the rest of the European Union doesn't create a united fiscal zone without Germany. The reason is that the idea is laughable, and here-in lies the truth - what leaders of the rest of Europe wants is not for Germany to be "agreeable" and "just". What they want is the money of the German population, served on a plate, never to be paid back, in order to be able to continue their fiscal profligacy and corrupt national governing and not have to face defeat at the next election. What they want, pure and simple, is for Germany to feel shame and guilt for not extending a helping hand to the flesh-eating creatures that is already trying to chew off its arm.

The comments out of Greece, when the rescue was not yet complete, that Germany should be ashamed of having "looted the gold of the greek" during WWII was the first time I felt like throwing up. Are these people even aware of what they are trying to do here? Has anyone even reflected on what happens if a populist regime takes over Germany - one that no longer believes that Germany should pay for the rest of Europe, and that it is in fact the rest of Europe that is responsible for sinking the European continent into economic crisis? The most blatantly obvious thing of the whole euro-zone crisis is that the European Union has gone from being a project for European peace, to hoards of political hyenas trying to steal resources from its responsible members. And of course, when Europe collapses under the weight of the corrupt welfare regimes of its members, who will get to take the blame but Germany? After all - if only they had been more "agreeable" and "supportive" of the other members....

So, when Italian and Belgian leaders join together to call for the creation of eurobonds, when Herman van Rompay says that there is no place for nations anymore - we can only have the centrally planned, anti-democratic European Superstate, when the fiscally irresponsible PIIGS-nations lie over, and over, and over again about how deeply they are in debt, to assure that they can steal some more money that they will never pay back, I ask you - who is it that is trying to create a fascist, corrupt, looting Third Reich to devour what is left of the European economy? Who is it that should be blamed for the coming European disaster? We may blame German politicians for being naive, and for paying so long for the profligacy of other european nations, but the blame for once again trying to create the inflammatory environment in which dictatorships and oppression grows lies strictly in those countries that are now demanding that others pay for their sins.

Germany should tell the rest of Europe to go to hell, pure and simple. Get out while you can.

Friday, December 3, 2010

The senseless monetary madness continues

I said back in early November that the only thing that could prevent a dollar crash is if someone wrecked the euro. Well, they tried. And, it seems that Mr. Trichet stepped up to the plate and pulled out his monetizing bazooka, creating short-squeezes in the PIIGS bond markets. I've been wondering when they would start resorting to this. The thing is, you can do it with small European countries, because their markets are, well, relatively small. Bernanke, one could argue, is on his second try and it still doesn't work. Everytime "the Bernank" tries "the Quantative Easing", US Bonds seem to start rising.

I guess Trichet figured out much earlier that in order to destroy a working market you have to do hit and runs. His credibility in claiming that he will not be monetizing is quickly evaporating, however. He might have saved the eurozone for an additional year, since starting in May, but he cannot do it forever. And when the fear and fury of the bondtraders is released for real, he will have made it all that much worse. Bond-rates for the PIIGS won't go up - they will disappear. They will have no bond markets left. But I digress.

What I really wanted to bring your attention to is the following chart, which shows that unless we get a substantial bounce in the dollar index some time soon, the markets have decided that Europe is again not the bigger problem, rather the US is. And then we are back to the "oh-my-god-it's-going-to-break" mode again. Although in reality, I think that the classical dollar index will in the end not matter anymore, as the euro is more than 60% of it and they are both coming down.


I also wrote earlier about asset hyperinflation. You are watching it happen, if you look at any chart of commodities or stocks. Bonds are starting to decouple, since bond traders are finally starting to realize that the value of the USD is starting to look very uncertain. The problem is, bond traders seem to be treating bonds like US currency with the benefit of it paying interest.

This is a problem, because if enough people trade something like it will always be liquid, and never collapse in price - it is going to stop being liquid and collapse in price. I cannot fathom a guess at how fast a collapse of the US bond market would be - maybe we are watching it in slow motion, maybe it will accelerate, or maybe, just maybe, people will realize that the US is as much in the hole as the PIIGS and the market will simply disappear. The question remains - how much can you manipulate markets and currencies and still expect them to work? Who honestly thought they could do what they have done to the US economy and it still working to any extent at all?

Wednesday, December 1, 2010

Death of Euro to be blamed on the ECB

Calls for open monetization by the ECB to "save the euro" are now being heard. As you well know, this won't save the Euro, only make sure that it dies the inflationary death instead of the breakup.

When will Germany have enough? Will their constitutional courts judge that the entire bailout-scheme has no legal standing in Germany? Will the threat of civil unrest in Germany finally cause german politicians to give up? Who will end this financial oligarhy and the mayhem it is wrecking on Europe?

Here's Reuters.