Notes From Underground: Putin Says Russian Central Bank Sells 12,000 OUNCES of Gold …

(to Pay for Escorts for U.N. Opening Party)

In response to a WSJ headline today, “Gold fades From Investment Picture,” the Russian President announced that dollars were needed in New York. The Russian Central Bank made delivery on 120 Comex contracts by moving the gold to New York and receiving funds for deposit in New York so as not to violate U.S. rules on currency amounts. The Russian delegation to the U.N. opening party needed funds for escorts and booze. Putin assured global financial markets that delivering 12,000 ounces of gold from Russian vaults was a mere dip into petty cash. Seriously, CNBC was all atwitter that central banks were initiating gold sales … all 120 COMEX CONTRACTS. Too bad that the U.N. meetings weren’t in Mumbai for the Russians could have received a $270 premium over the world market price. It’s a major non-story unless tapering is linked with the sale. Maybe Putin really has inside info on Fed intentions.

The Financial Times ran an interesting story today titled, “Troubled Loans at Europe’s banks Double In Value.” During the last four years non-performing loans have risen from 514 BILLION EUROS to almost 1.2 TRILLION EUROS. The report that is cited was done by PwC accountants and predicts increases in the amount due to the “uncertain economic climate.” The report is not overly concerned because global investors seem to be attracted to buying bundles of the troubled assets, as QE programs send investors scurrying for yield. This is exactly what Fed Governor Jeremy Stein warned about in his speech on February 7. The Fed’s aggressive QE program was raising the SPECTRE of financial instability by forcing the market to misprice risk.

The über-low interest rates on high quality debt is forcing lenders to reach for yield by acquiring über high risk “assets.” It will be interesting to see which investors pursue the asset-backed securities of non-performing loans placed on the market by European banks. There may be some Illinois public pension funds will be reaching for the yield. Nothing like a desperate pension fund in need of “juiced returns” to relieve a financial institution of its burdens. Thank you sir, may I have another? If astute investors are the buyers of the distressed debt, low prices will result and European financial institutions will be forced to raise capital or reduce their balance sheets, resulting in further headwinds for economic growth.

***Rick Santelli interviewed Nobel Price Winner Professor Eugene Fama. It was interesting to say the least and CNBC OUGHT to have let it go on for another 10 minutes. My problem with the professor’s comments was that he admits that his analysis of how interest rates would react to the FED‘s quantitative easing were incorrect. Professor Fama thought that short-term rates would go up and long-term rates would fall as the FED merely exchanged short-term debt for long-term. His conclusion as he states–and I am  paraphrasing–is that the FED just does not have much effect on short-term rates.
It seems to me that the FED most greatly affects short-term interest rates rather than long. Otherwise we would have FED FUND VIGILANTES RATHER THAN BOND VIGILANTES. The recent Nobel Prize winner maintains that the over all effect of the FED‘s QE program is de minimis so the equity markets and emerging debt and finance markets recent reaction to TAPERING is IRRATIONAL. OK, then the FED should listen to the recent Nobel Prize winner and end tapering completely at tomorrow’s meeting. The problem is that the professor has miscalculated the FED‘s impact on short-term rates by his own admission. ME DOTH THINK THESE MODEL BUILDERS HAVE BEEN USING TOO MUCH TESTOR’S GLUE!
***After the FED‘s announcement on interest rates we will hear from the Reserve Bank Of New Zealand about its overnight interest rate. At 3 p.m. CST, RBNZ GOVERNOR Wheeler will announce that the Kiwi’s will hold the OCR steady at 2.5%. The important part of the release will be Wheeler’s views on the global economy, especially Chinese economic growth. The Australians have been trying to weaken the Aussie dollar this week by talking down the currency in the wake of slowing global growth. The Aussie dollar has risen 2% this month against the KIWI. Let’s listen to hear if Governor Wheeler attempts to put downward pressure on the KIWI by using “forward guidance” of future global growth. Look at the technicals of the KIWI crosses for potential trading opportunities.

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11 Responses to “Notes From Underground: Putin Says Russian Central Bank Sells 12,000 OUNCES of Gold …”

  1. asherz Says:

    Russia sells 12,000 ounces of gold and in August China bought 110 tons of the metal, the fourth month in a row of purchases over 100 tons.Which is the bigger story?
    The Chinese have discontinued their escort services at their parties.

    • Joe Says:

      EXACTLY. CB’s still net buyers until Fed starts withdrawing reserves, as in declining M3…wait a minute, they don’t publish that anymore. As for escort services, I know nothing about that.

      The Fed has a direct impact on short term rates giving them indirect influence on long term rates, but to what extent is a matter of continued debate. I agree with Yra’s points.

      The best and brightest of the central banks believe they’ve negated the business cycle, so maybe its only natural they now believe they’ve run potential market vigilantes to ground. This present day world monetary structure is still a very young experiment.

  2. BRK Says:

    My thoughts as I watched the Fama interview… If QE is “basically a neutral event”, why do they keep on doing it? Or as Santelli says, why doesn’t every central bank do it infinitely?

  3. yra Says:

    BRK–I also thought that the Santelli’s point was right on—it is creating money out of thin air.Hilsenrath’s piece yesterday also broached that issue –it is the reserves that matter and Fama fails to understand that –or at least in that very short interview

  4. Chicken Says:

    Not everyone can be an insider, myself included.

  5. Alex F Says:

    It is difficult to see the statement pushing expectations of tapering beyond March 2014, and easier to see some subtle signals that tapering is possible before then.

  6. Dustin L. Says:

    Okay Yra so hear me out and hopefully you can help me to see if my reasoning is sound in this case. Professor Fama is claiming that we should have seen rates rise as the Fed has in essence issued more short term debt via IOR and growing reserves held at the Fed. However, it seems to me that the only reason that the Fed has such elevated levels of reserves on it’s balance sheet in the first place is because it has pumped liquidity into MBS and long bonds which then because of a perceived and real lack of investment opportunities, or more accurately a reluctance to take the risks of investment opportunities (we have been in a balance sheet recession were borrowing is muted) these reserves have just flooded back into a relativly non-market sensitive IOR instrument where the rate is set by the Fed. This has also seen money flowing back into short rates where holding to maturity was a way to make sure you got a return of your capital first and foremost and where a return on your capital was of so little concern we got negative real rates. Non of this is particularly unique to my own thinking but Fama’s remarks seem to miss all of the dynamics present by simply stating that since supply of short term debt instruments via IOR rose, short rates should have risen. The problem? All else wasn’t equal as in the econometric world. Demand for short term debt securiies rose drastically at the same time. The future problem, the demand for this short term debt/holding reserves on the Fed’s balance sheet appears to be starting to wane. As you have said Taper is the sideshow to what to do with the reserves problem.

  7. yra Says:

    Dustin L–FOR WHAT IT IS WORTH [buffalo springfield].I agree with you and in the Prof’s model he believes that the excess short reserves should have been bidding rates up to find willing investors but as he opened with the Fed hanged the game in 2008 by paying for OER–if you see that your predicted outcome fails to take place,the model must be flawed.But if you give the model enough time it may prove out—which puts teeth into Keynes’ flip comment about markets remaining irrational longer then you and I can remain solvent.To say that it seems that the Fed has little effect on short -term rates is historically just wrong—see the impact of Volcker’s FED for a start—it again is BOND VIGILANTES AND NOT FED FUND VIGILANTES

  8. Dustin L. Says:

    Yra-First off, great song, and as far as opinions go your’s is very high on my list. I am just finishing up reading Homer’s A History Of Interest Rates and there have been plenty of instances across various centuries and countries fresh in my mind to back up what you have succinctly summed up as the case of “BOND VIGILANTES AND NOT FED FUND VIGILANTES.” Models are like bikinis…

    • Joe Says:

      You might have to read Sidney Homer’s tome twice. I found the first half fascinating as it chronicled a lot of history.

  9. kevinwaspi Says:

    Kudos to R.S. with his interview. Markets were too efficient for the good Professor to read Homer & Leibowitz when I was forced to read it. But then again, he’s received the awards, I’ve just been banking.
    KW

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