Notes From Underground: ALAS, THE ECB STEPPED INTO THE VOID

As expected, the ECB began buying Spanish and Italian bonds. The ECB actions brought about a drop in yields of 82 basis points on the Italian and 92 points on the Spanish. Today was one of the few days in recent memory when the Italian and German Bond Futures both staged significant rallies, meaning this was just not a rotation out of one and into another. The collapse in equity prices obviously caused a flight into DEBT as global investors ran to safety. GOLD, of course, was the greatest recipient of the search for safe havens. BUT THE BID FOR GOLD WAS HELPED BY THE ACTIONS OF THE ECB, FOR TODAY WAS THE FIRST DAY OF QE1 FOR EUROPE. Further proof for this was that the EURO FX failed to rally in conjunction with the ITALIAN BTP rally. Italian bonds up; EURO down as the ECB was creating short-term liquidity.

The markets are in turmoil as fear is dominating as so many unknowns are converging. The markets are approaching the pre-Jackson Hole levels of the S&P/BOND ratio, so it is important to watch if the market can find genuine value in EQUITIES versus extremely low interest rates. If the EQUITIES COLLAPSE FURTHER THEN THE ENTIRE EFFORTS OF BERNANKE’S PORTFOLIO BALANCE CHANNEL HAS PRODUCED NOTHING, ZERO, ZILCH. LET ME SAY THAT AGAIN: THE PORTFOLIO BALANCE EFFECT IS IN DANGER OF BEING TOTALLY ERODED. If there is no wealth effect, what will the FED do to generate some velocity in the economy? Now that the ECB has entered the fray, although we don’t know for how much, will the FED reload its monetary arsenal and try to lift the markets animal spirits.

Tomorrow the FOMC may give some hints as to what possibly lurks in the minds of the SHADOWS. What we must always remember is that Mr. Bernanke is a ’37er and he will err on the side of inflation versus the onerous impact of deflation. For all those who say that the FEAR OF INFLATION IS TIEING BERNANKE’S HANDS I WOULD DISAGREE. THE PORTFOLIO BALANCE CHANNEL IS BERNANKE’S BAROMETER AS LONG AS UNEMPLOYMENT REMAINS AT ELEVATED LEVELS. ALAS, woe to the world’s financial markets if continue to test the leaders of Europe and the U.S. and they fail to meet the challenge.

Something I want to toss out is an old idea from NOTES: It is time that the world’s financial institutions utilize their GOLD reserves by creating GOLD-BACKED BONDS to create liquidity based on responsibility. If the IMF issued GOLD-BACKED BONDS to raise capital for the financially stressed nations, it would create responsible lending as the issuers would not wish to surrender the GOLD HOARD. More needs to be thought out here but it is certainly a way for Western nations to monetize its GOLD. Difficult times require innovative solutions.

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12 Responses to “Notes From Underground: ALAS, THE ECB STEPPED INTO THE VOID”

  1. Pat Lynch Says:

    Yra, U r on the right track. 1040 was the price for SP 500 futures on Aug 27, 2010 when we got the J-hole speech. But why would nation reserve bank or IMF want to issue gold backed bonds. Then it really is on them to repay the debt in real hard cash. Where were u for the south american fiat currency experiments of the 70s? Oh ya you must have been spending to much time at Willys (also known as the Illini Inn! All kidding aside, u know my rational. These people in power only r concerned with staying in power and or pushing the judgement day until after they retire. Long live the printing press is their moto. That is always a sure way to get out of trouble.

  2. danderose Says:

    Yra, another great post after a wacky day! John Hussman of Hussman Funds always has great analysis and has included the statistics behind the “wealth effect.” Accordingly, “the historical impact has been an increase of just 0.03-0.05% in GDP for every 1% increase in stock market capitalization” (Source: http://www.hussman.net/wmc/wmc110801.htm).

    Also, couldn’t agree more on the Mistake of 1937 and the desire to err on the side of inflation but do you think the Fed is already startled? I’ve been watching the TIPS market for a heads up and although 10 year real yields are a mere 14bps, inflation expectations are still well off their lows experienced Aug 24, 2010 right before Jackson Hole. Does the Fed find solace in that or panic amidst the panic?

  3. Notes From the Underground « Jim Sinclair's Mineset Says:

    […] As expected, the ECB began buying Spanish and Italian bonds. The ECB actions brought about a drop in yields of 82 basis points on the Italian and 92 points on the Spanish. Today was one of the few days in recent memory when the Italian and German Bond Futures both staged significant rallies, meaning this was just not a rotation out of one and into another. The collapse in equity prices obviously caused a flight into DEBT as global investors ran to safety. GOLD, of course, was the greatest recipient of the search for safe havens. BUT THE BID FOR GOLD WAS HELPED BY THE ACTIONS OF THE ECB, FOR TODAY WAS THE FIRST DAY OF QE1 FOR EUROPE. Further proof for this was that the EURO FX failed to rally in conjunction with the ITALIAN BTP rally. Italian bonds up; EURO down as the ECB was creating short-term liquidity. More… […]

  4. yra Says:

    lynch–had a few beers at Illini Inn and palyed the KLONDIKE pinball game—that was Klondike when gold was just coming off the bretton-woods era.I know that gold bonds would make the system resposible.The only problem is will the market trust the bonds after the stunt FDR pulled in 1933

  5. Pat Lynch Says:

    Yra,
    WIll use your pinball theme—we have the TILT light lit up on the board tonight!
    Whatever country issues the gold bonds I will open up a business selling paint lead bars. Buy two crates and get one free. Guess what color? U got it GOLD. And my best customer will be the government I bet!! Someone has to be a loser in this European deal. Who is is going to be? In US who will it be? I think the show is just getting started. Lock up your women and children and trade 10 percent of usual money. We are going to have crazy price moves in all products

  6. Alf Falfa Says:

    I seriously doubt that today’s American public would comply peaceably with a Gov’t attempt to grab private gold. Back in FDR’s day, the mentality was quite a bit different. Such a move today would risk kick-starting a violent resistance.

    • Writer X Says:

      Alf Falfa, the American people are long past the point of rebelling against anyone for any reason. All we are waiting for is a Strongman to pluck us off the vine. We let our children get groped at airports, so what’s a few stolen gold coins compared to that?

  7. Bair was right on Bear Says:

    Yra, the mistake of 1937 was to raise rates during a fledgling recovery. This is quite different from doing additional QE3 that is worse than nothing because it harms the Fed’ inflation-fighting credentials.

    Bernanke would prefer consensus (unanimous) votes to start QE3, I think he needs a few months of declining prices to justify wasting (indirect) taxpayer dollars on a QE3 program

  8. rohrintl Says:

    Like the pinball metaphor, but this feels more like Through the Looking Glass with JC Trichet (Alice was long puts, and is on holiday in St Tropez.) Concerns about US losing AAA weakening the global credit market foundation are now fully complemented by ECB balance sheet ever more cluttered with shifting sands of peripheral Euro-zone debt.

    And your point about the portfolio balance channel efforts being wiped out are in fact already here: SP future has knocked out SEP & OCT 2010 technical UP Breaks; which means resistance now as low as 1,150-1,200. Speaks of degree to which it was all only risk asset bubble with no impact on real economy… which we all knew, but the market expression of it is indeed impressive. El Erian, Whitney, Roubini, etal. look more prescient by the day.

    And the typical perma-boob, er bull, commentators are on CNBC telling us the market is out of touch with the ‘real economy’ based on current indications. They obviously lack the collective memory to appreciate the financial trend precedes/foments the real economy response. Even allowing it’s not 2008, it is also not a growth economy. Which markets that are overvalued compared to real intermediate term potential are now simply reflecting; back to sanity rather than crazy, even allowing the pace is indeed a bit breathtaking.

  9. Je Currie Says:

    “No man is allowed to be a judge in his own cause, because his interest would certainly bias his judgment, and, not improbably, corrupt his integrity.” –James Madison, Federalist No. 10, 1787
    http://patriotpost.us/
    That applies to both sides of the isle, but we will anyway. We may be skewed, but the other side has few options and are corrupted. The world is less tolerant as the rioting in London demonstrates. Doesn’t mean they won’t try.

  10. ARTHUR Says:

    Two hours ago, Nouriel Roubini: “Stranded shaken markets are rallying this morning only because they are hoping that helicopter ben will come to their rescue today…”

  11. monty guild Says:

    Yra …like your comments.

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