Notes From Underground

Monday night the BOJ will announce its newest and latest effort to stimulate the economy and most importantly try to undertake some genuine measures to weaken the YEN. The Japanese economy is suffering under the weight of an overvalued YEN. The YEN was only a minor problem when the global economy was experiencing strong growth but with the BRICs slowing and EUROPE on the cusp of a major recession, the Japanese policy makers have to confront the YEN head on–time is not on their side. The time for the BOJ and Ministry of Finance is now for the market is wanting to be SHORT YEN so if the Japanese policy makers can seize the day and invoke some type of foreign bond buying scheme the currency markets will do the heavy lifting for the BOJ/MOF.

Friday, the DOLLAR/YEN closed above the 200 day m.a. for the first time in many months. With market momentum beginning to shift there is no reason to delay. The latest Japanese trade data revealed how the strong YEN is negatively impacting Japanese corporations. Yes, the Japanese government has been reticent about being aggressive into the U.S. elections but they need to take a page out the Brazilian playbook and thumb their noses at all the other nations invoking policies to weaken their currencies. The Japanese trading partners cannot complain because the DOLLAR/YEN price is merely 6% above its ALL-TIME low.

***The “big” news story over the weekend was “Draghi Backs Schaeuble’s ‘Currency Commissioner.'” ECB president has been very vocal in supporting German FM Schaeuble in moving on the idea the current Monetary and Economic Affairs Commissioner become the repository for all the member states budget plans and then decide if the states are adhering to agreed upon budget deficit levels. This would give Brussels greater control over the “CONDITIONALITY” agreements that those nations seeking ESM bailouts agree, too. Draghi said: “I am certain: if we want to re-establish trust in the euro zone, countries must pass a part of their sovereignty to the European level.”

It seems that Draghi wants nations to surrender sovereignty to assure adherence to ECB imposed conditions. This is a very dangerous position for the ECB President to take considering that the ECB is an unelected body and President Draghi has already used the “mandate” of MONETARY TRANSMISSION MECHANISM to seize a great deal of financial power with virtually no oversight. Calling for nation-sates to surrender sovereignty to an unelected institution–a very dangerous road to go down. The French especially have been very uneasy about giving over its fiscal authority to German conditions. French fears are based on being rendered subservient to German demands of austerity. Draghi must have spent too much time in Switzerland at the Sandoz Labs.

***Friday’s release of the third-quarter GDP left the markets dazed and confused. The headline number was a bit better than expected at 2.0%. Yes, this is another quarter of tepid growth. One element that was a drag on U.S. growth was the summer drought, which purportedly impacted the economy by -0.4%. Exports also were a negative as the slowing global economy left U.S. manufacturers utilizing less capacity to fill international orders. The biggest surprise was the dramatic increase in government spending, especially as DEFENSE ORDERS for procurement increased 13%–this had been an area of contraction for many previous quarters. This may have been a result of the defense department fearing the sequestration from the fiscal cliff and rushing to spend ahead of its impact.

Whatever the case, it is another example of the impact of the “fiscal cliff” and when the mandatory cuts come it certainly appears that the private sector is not strong enough to lift growth to deal with the Fed’s concern about the elevated levels of unemployment. This is the dangerous path the U.S. economy is headed down as its keep borrowing growth from the future–no wonder business capital expenditures were down for the quarter. What business wants to invest when the future is frought with so much political economic uncertainty?

***An issue that has raised its head: Bloomberg ran a story elaborating on the German audit authority’s demand for an audit of Germany’s gold holdings in the vaults of other central banks. During the Cold War, German authorities were worried about the Russians overrunning NATO’s defenses and therefore kept a large part of Germany’s gold reserves outside of Germany. The Bundesbank is now being forced to audit the gold and assay its content. Now it’s in the works as to how Paris, London and the New York Fed are going to meet the demands of the German Audit Court and produce the gold that is in question. This is an interesting time for the audit to be taking place. My question is: WHAT IF THE CENTRAL BANKS HAVE LENT OUT THE GERMAN GOLD TO HEDGERS AND SHORTS,WILL THIS THROW THE GOLD LEASING MARKET INTO TOTAL CONFUSION AND FORCE THE SHORTS TO SEARCH FOR NEW SOURCES FROM WHICH TO BORROW? I only question this because the story will just not go away. What are the Germans so worried about all of a sudden?

Tags: BOJ, Draghi, ECB, Europe, fiscal cliff, German gold audit, MOF, Schaeuble, U.S. GDP, Yen

This entry was posted on October 28, 2012 at 6:36 pm and is filed under Currency, ECB, Germany, Gold, Japan. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.