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3 Things Worth Thinking About

Submitted by Lance Roberts via STA Wealth Management,

QE Is Dead, But Likely Not Gone

As I wrote on Monday, the end of quantitative easing (QE) has come. While it was announced during Janet Yellen's post FOMC meeting press conference on Wednesday, the last official permanent open market operation (POMO) was this past Monday.

The question that remains to be answered is whether the economy and the financial markets are strong enough to stand on their own this time? The last two times that QE has ended the economy slid towards negative growth and the markets suffered rather severe corrections as shown in the chart below.


Asset prices have a coincident effect with the starting and ending of QE programs. As liquidity is extracted from the markets, the propulsion of asset prices has faded. The economy, not surprisingly, lags changes in monetary interventions as the decline in asset prices eroded consumer confidence that weighed on growth.

As I discussed recently, the Fed's ongoing QE programs have had little effect on the real economy. While the liquidity push drove asset prices higher, only the small percentage of the economy with assets to invest received a benefit.

"While the ongoing interventions by the Federal Reserve have certainly boosted asset prices higher, the only real accomplishment has been a widening of the wealth gap between the top 10% of individuals that have dollars invested in the financial markets and everyone else. What monetary interventions have failed to accomplish is an increase in production to foster higher levels of economic activity.


With the average American still living well beyond their means, the reality is that economic growth will remain mired at lower levels as savings continue to be diverted from productive investment into debt service. The issue, of course, is not just a central theme to the U.S. but to the global economy as well. After five years of excessive monetary interventions, global debt levels have yet to be resolved."

Alan Greenspan recently reiterated this point in a WSJ Report:

“'Effective demand is dead in the water' and the effort to boost it via bond buying 'has not worked. Boosting asset prices, however, has been 'a terrific success.'”


“I don’t think it’s possible for the Fed to end its easy-money policies in a trouble-free manner....Recent episodes in which Fed officials hinted at a shift toward higher interest rates have unleashed significant volatility in markets, so there is no reason to suspect that the actual process of boosting rates would be any different."

Greenspan has this correct; there is an underlying belief that the Fed can raise interest rates without "pricking" elevated asset prices. The removal of liquidity from the markets by the ending of the latest QE program is indeed a "tightening" of monetary policy. The raising of interest rates in a 2% economic growth environment is a stranglehold. (Read: Will Rising Fed Rates Cause A Problem for a complete explanation)

 However, as Dr. Lacy Hunt states in a recent CNBC interview:

""The Fed has spawned this 'buy now, pay later' scheme of the American consumer... but there comes a point when the 'pay later' overwhelms the 'buy now'... and when that happens monetary policy is basically ineffective"

Dr. Hunt hits on the right points in suggesting that we are unprepared for what the future holds. The structural shift in employment, a growing demographic issue, and ballooning entitlement programs have only been masked by the Fed's monetary interventions. As Dallas Fed President, Dr. Richard Fisher, previously pointed out:

"1) QE was wasted over the last 5 years with the Government failing to use "easy money" to restructure debt, reform entitlements and regulations.

2) QE has driven investors to take risks that could destabilize financial markets.

3) Soaring margin debt is a problem.

4) Narrow spreads between corporate and Treasury debt are a concern.

5) Price-To-Projected Earnings, Price-To-Sales and Market Cap-To-GDP are all at 'eye popping levels not seen since the dot-com boom.'"

So, as the latest round of QE fades into history, I would suggest that we have not seen the last of it.


Oil Prices Due For A Bounce - But Lower Lows Likely

Oil prices have fallen sharply in recent months due to the slowdown in global economic growth and rising deflationary pressures. However, there is also a growing supply/demand imbalance that is being driven by the "shale boom" as I discussed recently.

"First, the development of the “shale oil” production over the last five years has caused oil inventories to surge at a time when demand for petroleum products is on the decline as shown below."

"The obvious ramification of this is a “supply glut” which leads to a collapse in oil prices."

In the short-term the collapse in oil prices has reached a technical extreme. As shown in the weekly data chart below, oil prices (as represented by West Texas Intermediate Crude) have fallen by more than 3-standard deviations from the 50-week moving average. I have highlighted past historical periods where such declines from extreme overbought to oversold conditions have existed.

While the current extreme oversold condition suggests that a bounce in oil prices is likely, historically bounces from such early extremes have led to either a period of consolidation with retests of recent lows, or further declines.

Many investors have gotten trapped in energy related issues by chasing either yield or returns in a "hot sector" over the last year. Therefore, it is advisable that bounces in oil prices, which should lead to a relative bounce in energy stocks, be used to reduce exposure to the sector until the current storm passes.


US Dollar Rally Likely Over

The US dollar has had an extremely strong rally in recent months as the global slowdown driven by deflationary pressures has driven money into the safety of the USD. However, utilizing the same technical setup as above for oil prices, the USD is now more than 3-standard deviations above its 50-week moving average.

Historically, such extremes have marked the end of counter trend rallies in the US Dollar. This time will likely be no different as not much in the world has changed over the course of the last several years (i.e. accelerating economic growth, wage growth, etc.) What is beneficial to the U.S. dollar currently is that it just is not as bad as everywhere else. Since oil is priced in US dollars in terms of trade, a strong dollar also has a negative impact on global growth, this is not something that our foreign trading partners are likely to tolerate for long.

However, IF, and this is a fairly big "if," the ECB can indeed launch some type of quasi-quantitative easing program in the months ahead, it will likely reverse flows from the USD back into the Euro. If that analysis is correct, this could provide a lift to depressed European asset prices relative to US related investments in the short term.

Just some things to think about.

Shadow Banking Assets Increase By $5 Trillion To Record $75 Trillion, 120% Of Global GDP

Call it Monitoring Universe of Non-Bank Financial Intermediation (MUNFI), Other Financial Intermediaries (OFI), non-bank financial intermediation or, easiest of all, by its widely accepted name, Shadow banking. Whatever you want to call it, the latest just released estimate by the Financial Stability Board of how many assets current exist outside of the regular banking system (and are thus in the shadows) around the globe should explain why these day the one thing central bankers are most worried about is the uncontrolled proliferation of shadow assets (technically it is liabilities, but that is a different discussion). The reason: according to the broadest measure of shadow banking, it grew by $5 trillion in 2013 to reach $75 trillion. This represents some 25% of total financial assets and when expressed in terms of global GDP, it amounts some 120% of global GDP.

We are not exactly sure which is scarier: that total financial assets amount to about 500% of world GDP or that about $75 trillion in financial leverage is just sitting there, completely unregulated and designed with one purpose in mind: to make billionaires into trillionaires (with taxpayers footing the bill of their failure).

Some of the other findings:

  • MUNFI assets grew by 7% in 2013 (adjusted for foreign exchange movements), driven in part by a general increase in valuation of global financial markets. In contrast total bank assets were relatively stable. Within the headline global growth figure of MUNFI assets exists considerable differences across jurisdictions and entities.
  • This year, the FSB continued to refine the shadow banking measure to produce an estimate that more tightly focuses on shadow banking risks, narrowing down the broad MUNFI estimate by filtering out entities that are not part of a credit intermediation chain and those that are prudentially consolidated into a banking group. Using more granular data reported by 23 jurisdictions, the broad MUNFI estimate of non-bank financial intermediation was narrowed down from $62 trillion to $35 trillion.
  • Based on the narrowed down estimate, the growth rate of shadow banking for this smaller sample in 2013 was +2.4%, instead of +6.6% for the MUNFI (using the same smaller sample). The narrowing down approach remains work in progress and will improve further over time.
  • By absolute size, advanced economies have the largest shadow banking sectors, while emerging market jurisdictions recorded the fastest growth rates (albeit from a relatively small base). While the non-bank financial system may contribute to financial deepening, careful monitoring is still required to detect any increases in systemic risk factors (e.g. maturity and liquidity transformation, and leverage) that could arise from the rapid expansion of credit provided by the non-bank sector.
  • Trust Companies and Other Investment Funds were the fastest growing sub-sectors globally in 2013. Trust Companies have consistently grown at a fast pace, whereas the 18% annual growth in Other Investment Funds, the largest sub-sector, was sharply higher than in the preceding years.
  • The Hedge Funds sub-sector remains significantly underestimated in the FSB’s data collection exercise. Further refinement of the data for this sector could provide important additions to future editions of this report

And here is why even the report above is woefully underestimating to summarize the epic leverage in the system:

Hedge Fund assets amounted only to $0.1 trillion in 2013, according to jurisdictions’ submissions for the macro-mapping exercise. However, the size of the sector in the FSB’s exercise is significantly underestimated primarily due to two factors. First, off-shore financial centres, where most Hedge Funds are domiciled, are not included in the current scope of the exercise. Second, the Flow of Funds statistics are not granular enough in many jurisdictions to allow a separation between Hedge Funds and other sectors. Last year’s report referenced results from IOSCO’s Hedge Fund survey which provided a more representative picture of the sector. Updated estimates for 2014 are currently not available, but the IOSCO has launched a new survey which should provide an overview of the global Hedge Fund industry. Information is expected to be available in the first half of 2015. However, data from a private sector source (Hedge Fund Research) show that globally assets under management in this industry amounted to $2.6 trillion at the end of 2013. The U.S. and the United Kingdom, which hold the great majority of global Hedge Fund assets, published results from national Hedge Fund surveys in 2014. In the case of the United Kingdom, the Financial Conduct Authority’s report shows that approximately $470 billion of Hedge Fund assets were managed in the United Kingdom. While data collected by the US Securities and Exchange Commission (SEC) show that registered investment advisors managed $5 trillion of Hedge Fund assets. Note that these numbers are from different sources with generally different methodologies and survey coverage, and are therefore not necessarily comparable.

So just call it $80 trillion in shadow banking exposure.

QE’s Seeds Are Already Sown

Submitted by David Howden via Mises Canada,

The Federal Reserve has finally ended its quantitative easing programs. Since the financial crisis of 2008, the Fed has pursued what seemed like an endless policy of asset purchases. As recently as September 2008 the monetary base in the US was just a hair over $800 bn. Today this figure is just shy of $4.2 trillion, for a total increase of 425%.

For its part Janet Yellen and her gang of Fed economists are probably pretty pleased with themselves. Unemployment is down, headline inflation remains muted, and the word on Wall Street is that a worse crisis has been averted. The stock market is at record highs, and banks (and bankers) are back to their pre-crisis eminence.

One of the true marks of a great economist is an ability to see past the obvious outcomes and into the veiled results of policies. Friedrich Bastiat’s great essay on “that which is seen, and that which is not seen” provides a cautionary parable that disastrous analyses result when people don’t bother looking further than the immediate results of an action.

Nowhere is this lesson more instructive than with the Fed’s QE policies of the past 6 years.

Consider the Austrian business cycle theory. The nub of the theory is that changes in the money market have broader results on the greater economy. In its most succinct form, when a central bank pushes interest rates lower than they should be (by buying assets, for example), the greater economy gets distorted. Some of these distortions are immediately apparent, as consumers buy more goods and everyone takes on more debt as a result of lower interest rates. Some of the distortions are not immediately apparent. The investment decision of firms gets skewed as interest rates no longer reflect savings preferences, and the whole economy becomes fragile over time as erroneous investments add up (what Mises’ coined “malinvestments”).

When a financial crisis or economic recession hits, it’s almost never because of some event that apparently happened at the same time. The crisis of 2008 did not occur because of the collapse of Lehman Brothers. It happened because the whole financial system and greater economy were fragile following years of cheap credit at the hands of the Greenspan Fed. If anything, Lehman was a result of this and a great (if unfortunate) example of the type of bad business decisions firms are lured into by loose money. It wasn’t the cause of the troubles but a result of them. And if Lehman didn’t go under to spark the credit crunch, some other fragile financial institution would have.

The Great Depression is a similar case in point. It wasn’t the stock market crash in 1929 that “created” the Great Depression. It was a decade of loose money policies by the Fed that created a shaky economy. Again, if anything the stock market crash was the result of stock prices being too buoyant and in need of a repricing to reflect economic fundamentals. Just like today, stocks rose to such storied heights as a result of cheap credit, not because of the seemingly “great” investments funded by it.

The Fed has lowered interest rates since July 2006. We have just come off the the period with the most rapid and extreme increase in the money supply ever recorded in American history. The seeds of the next Austrian business cycle have been sown. In fact, they are probably especially fertile seeds when one considers that the monetary policy has been so loose by historical standards. Just as cheap credit of the 1920s beget the Great Depression, that of the 1990s beget the dot-com bust and that of the mid-2000s beget the crisis of 2008, this most recent period will also give birth to a financial crisis.

When the next crisis comes there will no doubt be economists and commentators who blame it on some proximal event, like the failure of a large important financial institution. Don’t be fooled. The seeds of the next crisis are already sown. Fed policy under Ben Bernanke and Janet Yellen has distorted the economy in a way that makes it precariously fragile, and susceptible to collapse.

Broken Market (Worse Than 2013 Nasdaq Blackout) Just Fails To Send S&P Back Over 2,000

To 'prove' that the end of QE3 is not a negative for stocks and to 'confirm' the Fed's narrative that the economy is surging (despite all the unsustainable one-offs in the GDP print), algos are tearing stocks higher, targeting the crucial 2,000 S&P level... thanks to 2-week old headlines from Japan, a broken options market, and the NYSE unable to report trades... As Nanex notes "this is a bigger event than the 2013 market blackout"

Despite the best efforts the best they could manage was 1999.40 before the reality of a not-broken market kicked in...


Welcome to Stock Market Blackout 2

— Eric Scott Hunsader (@nanexllc) October 30, 2014

Only quotes/trades are in Nasdaq listed stocks. This is a bigger event than the 2013 blackout

— Eric Scott Hunsader (@nanexllc) October 30, 2014

Anatomy of a market screw up - $SPY

— Eric Scott Hunsader (@nanexllc) October 30, 2014

Of course away from the broken equity markets things are not as exuberant...


*  *  *

So just as the market broke 2 weeks ago at the lows.. now it is breaking at the highs... to enable moar highs... PPT has become DTPT (down-tick prevention team)

Bad Debt At China's - And The World's - Largest Bank Surges By Most Ever

A week ago, when showing the following chart of Chinese housing trends...

... we reported that the "burst Chinese housing bubble leads to first annual price decline since 2012", and warned that it is only a matter of time before both China's GDP, extensively reliant on housing construction, as well as Chinese bank assets, primarily consisting of housing-related loans and other fixed income exposure, take a major hit

This happened yesterday, when in an exchange filing China's Industrial & Commercial Bank of China, the biggest bank in both China and the entire world, reported its biggest jump in bad loans since at least 2006.

Specifically, ICBC’s nonperforming loans rose to 115.5 billion yuan in September from 105.7 billion yuan in June. The increase was the biggest since quarterly data became available. Nonperforming credit accounted for 1.06 percent of total advances.

It wasn't just ICBC: as the chart from the WSJ below shows, bad debt rose at every single other major bank in China as well:

According to Bloomberg, nonperforming loans rose 9 percent in the third quarter from the previous three months, the Beijing-based bank said in an exchange filing yesterday. This increase surpassed the rise in net income which gained 7.7 percent from a year earlier to 72.4 billion yuan ($11.8 billion).

The problem for China is two-fold. On one hand as Bloomberg observes, "a struggling Chinese economy is weighing on ICBC’s share price and is poised to drag the company to its weakest full-year profit growth since at least 2001 as more borrowers default."

The second problem is that as ICBC felt first hand (and surely underreported, because this is China after all), the soaring bad debt notionals make it next to impossible for the PBOC to inject even more good debt which would promptly turn into NPLs until it ultimately drowns China leading to the mass defaults which the Politburo has been avoiding for so long.

“ICBC remains under pressure as bad loans in China continue to rise,” Zheng Chunming, a Shanghai-based analyst at Capital Securities Corp., said by phone yesterday. “The operating environment for companies is getting more difficult as China’s economy faces downward pressure.”

Furthermore, as noted above, since ICBC is the world's largest bank by assets, it has operations everywhere. "In its overseas push, ICBC this year acquired a Turkish lender, won approvals for a branch in London and yuan clearing operations in Luxembourg and Cambodia, and obtained a banking license in Myanmar. The lender previously expanded in Argentina, Canada, South Africa, Thailand and Indonesia. Operations outside China accounted for 7.1 percent of company assets as of June, up from 6 percent a year earlier.

ICBC set aside 8.2 billion yuan of provisions against potential soured credit, 30 percent more than a year earlier.


“Provision charges will be the biggest swing factor for banks’ earnings,” said Mu Hua, a Guangzhou-based analyst at GF Securities Co. “The more bad loans they write off, the more additional provisions they need to set aside to maintain the required coverage ratio.”

This means that growth not only China but the rest of the world (but not the US, don't worry: the US will successfully decouple from the rest of the world for the first time in history) grinds to a halt, ICBC's balance sheet is about to become an epic disaster, suggesting that instead of spending money on growth and infrastructure projects, China will spend 2015 and/or longer simply trying to keep its banks stable. Just as, according to conventional wisdon, the Fed prepare to hike rates.

Market Breaks As Stocks Explode Higher On Algo-Triggering Headline



This was right as the Nikkei headlines hit and e-mini volume exploded.

And here is the NYSE confirming that stocks are now soaring higher on "critical Issue", aka broken market:

Confused what this means: simply said, virtually all quotes, and certainly options, are stale and unreliable, even as dark pools, internalizers and other ATS are filing orders based on 1 hour old data.

In short: a total mess.

Visualizing some of the berserk trades during the outage courtesy of Nanex:


What a total farce!

This Is The 12-Days-Old News That Just Spiked USDJPY And Stocks

Day after day after day this 'market' is manipulated and managed by headlines that memory-less machines read and act upon. Today - yet again - at 210am Japan time, Nikkei news decides it is time to print these headlines:


And sure enough JPY explodes instantly in an attempt to spark momentum. This is not news (it's a constant headline every day since October 18th) as Abe sacrifices his economy and his people's economic future for an uptick in stocks.


The algos react and lift USDJPY


and of course that means US equities surge...

and this is what happened as the headline hit...


15,263 eMini's in 1 second at 13:19:19 $ES_F $SPY

— Eric Scott Hunsader (@nanexllc) October 30, 2014

$550 Million worth of stock traded when EMini popped at 13:19:19

— Eric Scott Hunsader (@nanexllc) October 30, 2014

That was a record for most eMini's traded in a second (excluding market close and the freak event on 1/13/2010) $ES_F

— Eric Scott Hunsader (@nanexllc) October 30, 2014


and volume explodes...


The irony in all of this: this is not news, its 12 days old.


But when betting on algo stupidity and their 15 millisecond memory, nobody has lost yet.

As Tim Cook "Comes Out", These Nations Still View Homosexuality As "Morally Unacceptable"

Tim Cook's decision to openly discuss his sexual orientation is dominating the news cycle with many hoping it can be a watershed moment in the acceptance of openly gay people in the workforce. While it appears nothing but a positive in the United States, there are still stunningly many nations around the world (including Iran, where Apple is trying to sell to now) where Tim Cook's admission is considered "morally unacceptable" by the great majority.



Will his Op-Ed affect sales?


Source: @ConradHackett

Why We're Poorer: Inflation And Deflation Are Now Globalized

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

We're being hit with a double-whammy: Wages are under deflationary pressure, and almost everything else is exposed to inflationary pressure.

As correspondent Mark G. observed in Globalization = Permanent Instability, it's impossible to understand inflation and deflation now except in a global context.

Now that prices for commodities such as oil and grain are set on the global market, local surpluses don't push prices down. If North America has record harvests of grain, on a national basis we'd expect prices to fall as local supply exceeds local demand.
  But since grain is tradable, i.e. it can be shipped to other markets where demand and thus prices are much higher, the price in North America reflects supply and demand everywhere on the planet, not just in North America.
  If we put ourselves in the shoes of a farmer or grain wholesaler, this is a boon: why sell your product for 1X locally, when it fetches 2X in other countries? You'd be crazy not to put it on a boat and get double the price elsewhere.
  As the share of the economy exposed to digitization increases, so does the share of work that can be done anywhere on the planet. When work is digitized, it is effectively commoditized, meaning that it no longer matters who performs the work or where they live.
  If people in countries with low wages can perform the work, why on Earth would you pay double to have high-wage people do the work? It makes no sense. Taking advantage of the differences in local pay scales is called labor arbitrage, as the employer is trading on (i.e. arbitraging) two sets of prices.
  It's not just labor that can be arbitraged: currency, interest rates, risk, environmental regulations, commodities--huge swaths of the global economy can be arbitraged.
  The basic idea of the global carry trade is to borrow money cheaply in a currency that's weakening and use the money to buy low-risk, high-yield assets in currencies that are gaining in relative value. It's a slam dunk arbitrage: not only does the trader earn an essentially free return (borrowing yen at 1%, for example, converting the yen to dollars and buying Treasury bonds paying 3%), but there is a bonus yield on the dollar strengthening against the yen: a two-fer return.
  Global labor is in over-supply--one reason why wages in the U.S. have been declining in real terms, i.e. when inflation is factored in. The better description is purchasing power: how much can your paycheck buy?
  Here is a chart reflecting the decline in purchasing power of U.S. earnings since 2006:
  Courtesy of David Stockman, here is a chart of inflation (i.e. loss of purchasing power) since 2000:
  Whatever isn't tradable can skyrocket in cost because, well, it can--since there's little competition in healthcare and school districts, both of which operate as quasi-monopolies, school administrators can skim $600,000 a year: Fired school leaders get big payouts:
  A former Union City, CA superintendent took home more than $600,000 last year, making her the top earner on a new online database tracking salary and benefit information for California public school employees.
  Since healthcare is only tradable at the margins, for example, medical tourism, where Americans travel abroad to take advantage of treatments that are 20% the cost of the same care in the U.S., healthcare costs can rise 500% when measured as a percentage of wages devoted to healthcare:
  Note that this doesn't mean that healthcare costs rose along with wages--it means a larger share of our earnings is going to healthcare than ever before. Other than a brief period in the 1990s when productivity gains drove wages higher, healthcare costs have risen faster than earnings every decade. The consequence is simple: the more of our earnings that go to healthcare, the less there is for savings, investments and other spending.
  In a way, we're being hit with a double-whammy: whatever can't be traded, such as the local school district and hospital, can charge outrageous fees and pay insiders outrageous sums for gross incompetence, while whatever can be traded can go up in price based on demand and currency fluctuations elsewhere.

Meanwhile, as labor is in over-supply virtually everywhere, wages are declining when measured in purchasing power. Wages are under deflationary pressure, and almost everything else is exposed to inflationary pressure. No wonder we feel poorer: most of are poorer.

"Gold Is A Good Place To Put Money These Days" - Greenspan

"Gold Is A Good Place To Put Money These Days" - Greenspan

As expected, the Fed announced yesterday it would end its six year money printing and bond buying programme.

Given the fragile nature of the U.S. economy, Eurozone economy and indeed the global economy, Fed critics continue to believe that this may be a short term hiatus prior to a resumption of QE, if asset prices start to fall or economic growth falters.

Former Federal Reserve Chairman Alan Greenspan admitted yesterday to the Council on Foreign Relations (CFR), that QE and the Fed’s bond buying program, which aimed to lower unemployment and spur stronger economic growth, fell short of its goals.

It has been a busy week for the man once known as "Maestro”. The end of last week saw him engage in public discussions with the likes of Marc Faber and Peter Schiff at the New Orleans Investment Conference.

Ominously, Greenspan warned at the New Orleans Investment Conference that the Fed’s balance sheet is a “pile of tinder” and gold is a “good place to put money these days” as it will rise “measurably” in the next 5 years.

He told the CFR that the bond buying program was ultimately a mixed bag. He said that the purchases of Treasury and mortgage backed securities did help lift asset prices and lower borrowing costs. But it didn’t do much for the real economy.

“Effective demand is dead in the water” and the effort to boost it via bond buying “has not worked,” Greenspan said. Boosting asset prices, which aids the already wealthy, however, has been “a terrific success.”

When asked about QE, Greenspan made the unusually frank admission that “the Fed’s balance sheet is a pile of tinder, but it hasn’t been lit … inflation will eventually have to rise.”

Greenspan, who headed the Federal Reserve from 1987 to 2006 surprised guests in New Orleans when he stated bluntly, "I never said the central bank was Independent!" in response to criticism that the Fed was financing social programmes.

This stunning admission, if true, begs the obvious question: to what extent are the current policies of the Fed and other central banks the result of careful reasoning by independent monetary experts and to what extent are they being dictated by politicians desperate for public popularity and reelection or worse still by unelected powerful banks and bankers?

Greenspan said that currency debasement had failed to foster economic growth and unemployment had not been alleviated. However, at least asset prices had been boosted which he described as a "terrific success."

So Wall Street reaped tremendous benefits from QE while main street flounders and taxpayers, both living and yet to be born, have the privilege of footing the  USD 4,000,000,000,000 bill - that is $4 trillion. He also indicated that ending QE would "unleash significant volatility in markets."

In what may be the saving grace of his legacy, he continues to expound the virtues of gold.

In New Orleans, he was asked why central banks still own gold. His answer was encouraging if a little vague, "Gold has always been accepted without reference to any other guarantee." When asked where the price of gold was headed in the next five years he said "measurably” “higher."

Question: “Where will the price of gold be in 5 years?”

Greenspan: “Higher.”

Question: “How much?”

Greenspan: “Measurably.”

He told the CFR that "gold is a good place to put money these days given it's value as a currency outside of the policies conducted by governments."

So, the primary policy the Fed has - which is to put a floor under favoured markets and support U.S. bond and asset prices and give the process a complicated sounding title - has failed, according to the ‘Maestro’ who devised said policy.

What happens next? We don't know but for once we would be inclined to follow Mr. Greenspan's advice.

As we discussed last year, Mr. Greenspan is not the only person to have chaired a major central bank who views gold as a highly relevant strategic asset.

Mario Draghi, head of the ECB and former governor of the Bank of Italy, has this to say:

"Well you’re also asking this to the former Governor of the Bank of Italy, and the Bank of Italy is the fourth largest owner of gold reserves in the world, which is out of all proportion to the size of the country. But I never thought it wise to sell it, because for central banks this is a reserve of safety, it’s viewed by the country as such.”

“In the case of non-dollar countries it gives you a value-protection against fluctuations against the dollar, so there are several reasons, risk diversification and so on.”

The smart money continues to understand the importance of gold as diversification.

Marc Faber, who also spoke at the New Orleans Investment conference, summed up our view perfectly when he suggested that each individual should be their own central banker, holding the reserve currency that is gold as insurance against government bungling.

See Essential Guide to  Storing Gold and Silver In Switzerland here

Today’s AM fix was USD 1,205.75, EUR 958.09 and GBP 753.59 per ounce.
Yesterday’s AM fix was USD 1,228.00, EUR 963.67 and GBP 761.65 per ounce.

Gold fell $17.40 or 1.42% to $1,211.20 per ounce yesterday and silver slid $0.14 or 0.81% to $17.07 per ounce.

Gold for Swiss storage or immediate delivery dropped 0.7% to $1,203.22 an ounce in late trading in London. The yellow metal hit $1,201.53 today, its lowest since October 6th.

Gold for December delivery slid 1.8 % to $1,202.50 on the Comex in New York. Futures trading volume was 65% above the average for the past 100 days for this time of day, data compiled by Bloomberg show.

Silver for immediate delivery slipped 1.5% to $16.60 an ounce in London. Platinum fell 0.7% to $1,251.75 an ounce. Palladium lost 0.9% to $787.50 an ounce, after a five-day bull run.

Gold fell on the expected Fed announcement and confirmation that the Fed is to end QE and their highly unorthodox money printing and six year monthly bond purchasing programme.

The move was not unexpected by precious metals market participants and therefore the sudden sharp selling raised some eyebrows. Indeed, it has all the hallmarks of continuing manipulation of the gold and silver futures market.

If the mooted end of QE is bearish for gold and silver, then it is also equally bearish if not more so for overvalued stock and bond markets. Yet, those markets saw far less volatile trading and saw minor losses - the S&P closed down just 0.14%.

The move lower yesterday also took place despite very high global coin and bar demand in recent days which would ordinarily have led to higher prices. It also comes at a time of heightened geopolitical and economic concerns and the emergence of the Ebola virus. Not to mention, the bullish “Save Our Swiss Gold” initiative.

Is yesterday’s trading another sign of manipulation? If it walks like a duck and quacks like a duck ...

Gold is testing support at $1,200/oz and below that is support at the triple bottom at $1,180/oz.

Prudent money will continue to dollar cost average into coins and bars on price weakness.

Get Breaking News and Updates on the Gold Market


Gold Drops Below $1200 On Heavy Volume, Silver Freefalls To Feb 2010 Lows

It appears the machines forgot the shift in DST across the pond and started their European close flush a little early. Someone/something decided it was an opportune time to dump thousands of contracts of gold and silver futures this morning - clearly ignoring Alan Greenspan's advice. Gold ETF holdings are now back at levels first seen in April 2009. Gold's break below $1,200 likely brought some momentum chasers but Silver is in freefall, down over 5% and back to Feb 2010 lows. WTI Crude also broke below the crucial $81 level...



And Silver...


and from FOMC...


Gold ETF holdings are back at levels first seen in April 2009....


and one more thing....


Charts: Bloomberg

BusinessWeek Wants YOU To Become A Keynesian Debt Slave

There are those, increasingly more of them, including such shocking statist luminaries as Alan Greenspan (the person more responsible for today's global depression than anyone else) and the Treasury Borrowing Advisory Committee, who are realizing that the old debt=growth, saving=bad, spending=prosperity and inflation=utopia economic paradigm, the one unleashed by John Maynard Keynes, is the primary reason for today's worldwide economic devastation, a condition where $100 trillion in global debt has brought global growth to a crawl, and which coupled with endless "wealth effect" printing by central banks who have deposited $10 trillion in electronic money at their favorite commercial banks with the explicit instruction to buy spoos, have bet everything on reflating the world out of its debt quagmire, instead having achieved a world that has never been more split between the haves and have nots.

And then there is BusinessWeek, which quite to the contrary, is urging its readers in its cover story, ignore common sense, and do more of the same that has led the world to dead economic end it finds itself in currently. In fact, as NYT's Binyamin Appelbaum summarizes it best, it calls "the world governments to become the slaves of a defunct economist. "

And spend, spend, spend, preferably on credit.

Because, supposedly, this time the resulting crash from yet another debt-funded binge will be... different?

Then again, an article that has this line...

With fiscal policy missing in action, the world’s biggest central banks tried heroically to plug the gap.

... surely has to be premised on sarcasm: hardly anyone can be so clueless not to realize that it is the "heroic" central banks "getting to work" for the past 6 years that has enabled fiscal policy to stay on the sidelines as politicians become nothing but Wall Street marionettes, that has led to the most dysfunctional Congress in history, to a Europe that in the past 5 years has implemented precisely zero reforms, and where nothing at all has changed... except debt has hit new record highs, the amount of reserves in circulation is unchartable, the number of billionaires is hitting new records every week even as the people living on foodstamps and out of the labor force is unprecedented, and, of course, the S&P 500 is at an all time high.

So we will operate on the assumption that indeed BusinessWeek's Peter Coy, in his cover story, is merely pulling a prank.  Because the alternative is far scarier, if funnier to contemplate.

There is a doctor in the house, and his prescriptions are more relevant than ever. True, he’s been dead since 1946. But even in the past tense, the British economist, investor, and civil servant John Maynard Keynes has more to teach us about how to save the global economy than an army of modern Ph.D.s equipped with models of dynamic stochastic general equilibrium. The symptoms of the Great Depression that he correctly diagnosed are back, though fortunately on a smaller scale: chronic unemployment, deflation, currency wars, and beggar-thy-neighbor economic policies.

Some of the other pearls.

This isn’t a stable status quo. The mid-October shock in global stock markets betrayed grave concerns about a relapse. While the U.S. economy is growing adequately for now despite the drag from fiscal policy, China’s pace is slowing, Japan is suffering from the self-inflicted wound of its consumption tax hike, and the 18-nation euro zone had zero growth in the second quarter. That simply isn’t good enough, Treasury Secretary Jacob Lew said in an October visit to Bloomberg. “You need all four wheels to be moving,” he said, “or it isn’t going to be a good ride.”


Enter Lord Keynes. Cutting interest rates is fine for raising growth in ordinary times, he said, because lower rates induce consumers to spend rather than save while stimulating businesses to invest. But where rates sink to the “lower bound” of zero, he showed, central banks become nearly powerless, while fiscal policy (taxes and spending) becomes highly effective as a fix for inadequate demand. Governments can raise spending to stimulate demand without having to worry about crowding out private investment—because there’s plenty of unused capacity, and their spending won’t lift interest rates.


It’s the closest thing economists have found to a free lunch. Keynes, ever the provocateur, argued that in a deep recession anything the government did to induce economic activity was better than nothing—even burying bottles stuffed with bank notes in coal mines for people to dig up.


Of course, it’s far better if the money is spent well. Considering the crying need for better roads, bridges, tunnels, schools, and the like, it’s a no-brainer for governments to build them now, when there are willing hands and cheap loans. Harvard economist Lawrence Summers, a former Treasury secretary, and Brad DeLong of the University of California at Berkeley argued in 2012 that infrastructure investment might even pay for itself, in part by keeping people employed so their skills don’t atrophy.




Love him or hate him, there’s no one like Keynes on the world stage today. He was a statesman, a philosopher, a bohemian lover of ballet, and a member along with Virginia Woolf in the artsy, intellectual Bloomsbury Group. He made and lost fortunes as an investor and died rich. In 1919, in a prescient book called The Economic Consequences of the Peace, he condemned harsh reparations imposed on Germany after World War I, which were so punitive that they helped create the conditions for Adolf Hitler’s Third Reich. In 1936 he essentially invented the field of macroeconomics in his masterwork, The General Theory. From 1944 until close to his death at age 62 two years later, he led Britain’s delegation in negotiations that resulted in the founding of the International Monetary Fund and the World Bank.

The world was lucky in the 1970s and early 1980s, when finally Keynes lunacy quickly unravelled, when as even Coy admits, "his theories couldn’t readily account for stagflation—the coexistence of high unemployment and high inflation."

Academic economists were drawn to the new theory of “rational expectations,” which said that government couldn’t possibly stimulate the economy through deficit spending because foresighted consumers would rationally expect that the stimulus would have to be paid for eventually and so would save for future tax hikes, offsetting the initiative. Supply-side economists said Keynes missed how low taxes could stimulate long-term growth by inducing work and investment. “Unsuccessful policies and confused debates have left Keynesian economics in disarray,” the Swedish economist Axel Leijonhufvud wrote in 1983 for a conference celebrating Keynes’s centennial. A successor theory that evolved in the 1980s and 1990s, New Keynesianism, attempted to inject rational expectations theory into Keynes’s worldview while preserving his observation that prices and wages are “sticky”—i.e., they don’t fall enough in a slump to equalize supply and demand. New Keynesians range from conservatives such as John Taylor of the Hoover Institution to liberals like Berkeley’s DeLong.

Of course, what ended up happening is that one bad theory was replaced by an even worse one, when in 1980s Alan Greenspan unleashed the "Great Moderation" genie and the Fed's bubble factory was put on Max. But that is a topic too complex for the BW author. Instead, he quotes Joe Lavorgna:

On Wall Street, Keynesianism never really died, because its theories did a good job of explaining the short-term fluctuations bank economists are paid to predict. “We approach forecasting more from a Keynesian perspective whether we like him or not,” says Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities

Actually, Joe, speak for yourself. And then there is the inevitable outcome of the entire world following Keynesian policies. War.

If Keynes were alive today, he might be warning of a repeat of 1937, when policy mistakes turned a promising recovery into history’s worst double dip. This time, Europe is the danger zone; then it was the U.S. What’s called the Great Depression was really two steep downturns in the U.S. The first ended in 1933. It was followed by four years of output growth averaging more than 9 percent a year, one of the strongest recoveries ever. What aborted the comeback is still debated. Some economists blame President Franklin Roosevelt for signing tax hikes and cuts in New Deal jobs programs. Others blame the Federal Reserve. Dartmouth College economist Douglas Irwin argues that the Roosevelt administration triggered the relapse by buying up gold, removing it from the U.S. monetary base. The move to prevent inflation succeeded all too well, causing deflation. Whatever the cause, Britain and other trading partners were dragged down, and U.S. output plunged and didn’t fully recover until America’s entry into World War II. “We are really at a kind of 1937 moment now,” says MIT’s Temin. “It’s a cautionary history for us."

In short, let's accelerate the world's collapse into yet another global war and listen to Keynes once again. Judging by the number of all out conflicts around the globe, and how much the latest "war on terror" boosted US Q3 GDP we are already half way there.

Not enough humor? The rest can be found here.

Then again, maybe the joke's on us, and the only thing that one can hope is "stimulated" are magazine sales.

Monetary Lunacy At Work: IMF Puts 0.05% "Floor" Under SDRs

Via Acting Man's Pater Tenebrarum via Contra Corner blog,

No negative rates for the putative Bancor... Keynes must surely be rotating in his grave. It turns out the IMF is not going to lend SDRs for less than nothing, thus breaking ranks with some well-known central banks out there (no need to name names), and even the central bank-manipulated “market” in which investors accept negative rates on certain government bonds as if that made any sense.

Instead, the IMF has decided to set a floor for its SDR interest rate to maintain its role as a profit center…it will be at what is nowadays a downright usurious height of 0.05%. So at least at the IMF, there will be no pretense that time preferences can actually turn negative.


There will be no funny money for nothing from me, busters!


However, the IMF is thereby effectively raising its interest rate, which until recently was at a mere 0.03%:

“The International Monetary Fund is setting a 0.05 percent floor on the interest rate used to determine borrowing costs for some of its loans.

The executive board modified rules today to make the change, according to a statement today in Washington.


The IMF’s Special Drawing Right, based on a basket of the dollar, yen, euro and pound, is the fund’s unit of account that serves as a supplemental reserve asset and was designed to improve global liquidity.


The SDR interest rate was quoted on the IMF website at 0.03 percent today compared with 0.13 percent in April and more than 3 percent in August 2008, before central banks slashed borrowing costs to zero to boost growth in the aftermath of the financial crisis.


The rate will be 0.05 percent on Oct. 27, the IMF said.


The board also approved changing the rounding convention for calculating the SDR rate to three decimal points from two, the statement said.


The SDR interest rate is used to calculate interest charged to member nations for non-concessional loans and SDR allocations, and the rate paid to members for SDR holdings. It is calculated from a weighted average of the short-term money market rates of the SDR basket currencies.


A floor will prevent the SDR rate from going negative, in the event that money market interest rates on some of the currencies in the underlying basket themselves go negative, an IMF official told reporters on condition of anonymity. The fund has no legal basis for charging a negative rate on SDRs.

(emphasis added)

So this is a precautionary measure in case the phenomenon of negative market interest rates on short term government debt instruments starts spreading further. Needless to say, we take the fact that the IMF feels it has to prepare for this eventuality as yet another sign that the whole world has essentially gone insane.


Clear signs of the spread of central bank-induced insanity – German government debt yields are negative out to two years – via BigCharts. click to enlarge.

Stocks Are On Borrowed Time

The Fed announced that QE is officially over.


This is a MAJOR concern for stocks. The markets are currently holding up because it’s the end of the month.


Let me explain…


Unlike individual investors who don’t have to report returns until year-end, most investment funds have to report their performances for each month.


For this reason, it’s very common for stocks to rally into month end as institutions buy stocks to force the markets higher. Doing this allows them to record month end returns at the best possible levels.


The simplest term for this is “performance gaming.”


With October having been a terrible month for most investors courtesy of the 9% drop in stocks earlier, institutions are highly incentivized to push the markets higher today, despite the fact that QE has ended.


At the end of the day, the single biggest driver of stock prices has been QE. Every time QE ended, stocks have tanked. So a new QE program is not coming anytime soon.


This is a major problem for stocks. The Fed has “saved” stocks every time in the last four years with a new QE program. It won’t be this time.


In 2010, the S&P 500 staged a death cross, where its 50-DMA broke below its 126-DMA (the half year moving average). Stocks were in a perilous state with the 2008 Crash still in everyone’s short-term memory.


The Fed stepped in, hinting at, then all but promising, and then finally launching QE 2 in July, August, and then November, respectively.


This set off a rally in stocks that lasted until the EU Crisis erupted in full force in 2011. Once again stocks staged a death cross. And once again, the Fed stepped in with promises of action followed by the announcement of Operation Twist in September 2011. Stocks took off and we were back to the races.


Which brings us to 2012. Europe was really going down in flames. Greece, then Portugal, and even Spain were lining up for bailouts. And the bailouts were getting larger by the month with Spain requesting €100 billion in June 2012.


ECB President Mario Draghi promised to do “whatever it takes” to hold the EU together. But the carnage was spilling over even into US markets. So Bernanke’s Fed promised yet another QE program, though this new program would be “open-ended” in June.


Sure enough, Bernanke unveiled QE 3 in September 2012. He then upped the ante, unveiling QE 4 in November 2012.


Stocks took off again, launching one of the sharpest, strongest rallies in history.


Which brings us to today.


The Fed has ended QE. And it won’t be launching a new program anytime soon. So when this rally ends and stocks collapse, the Fed won’t be coming to the rescue.


Be prepared.


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A Glimpse Inside The FX "Cartel's" Chat Rooms

First it was Libor, then gold, then dark pools, now for those who want a glimpse into just how for years bank FX traders, whether belonging to "The Cartel" or "The Bandits Club" or otherwise, colluded on trades around the daily fix, breached fiduciary duty, and generally engaged in illegal rigging of the world's largest market by volume, Bloomberg News had received a transcript of the instant-messages by various FX traders currently being investgated for FX rigging.

As Bloomberg news reports, it has "reviewed the transcript of a conversation that spanned about 40 minutes on the condition that neither the traders nor clients named in them would be identified. Another dealer from Barclays and two from Zurich-based UBS AG were logged onto the thread at various points during the chat. The exchanges are the sort of discussions banks are trying to end by banning group chats involving employees at other companies."

Here is glimpse into how yet another market was, and still is, rigged on a daily basis.

“Any fix quid?” a currency trader at Barclays Plc asked a counterpart at HSBC Holdings at 2:25 p.m. on June 23, 2011. “Get 50 cable on fix,” he said as he tried to sell British pounds.


“Nothing as of yet mate,” replied the HSBC trader, according to a transcript of the “Sterling Lads” instant-message group provided to Bloomberg News by a person with knowledge of a global investigation into alleged currency-rate rigging. “I hope not either, as everything I touched today has cost me money. I just lost 10k there typing.”


A minute after the Barclays trader’s request to sell 50 million pounds ($81 million) in exchange for dollars, the HSBC trader typed, “I can match. 50 quid.”


The Barclays trader came right back with “Ta,” an informal way to say thanks.


“Rhx in about 50 quid at the fix,” the HSBC trader responded, probably a typo for rhs, or right-hand side, a term meaning he would buy the pounds at the 4 p.m. WM/Reuters rate. The benchmark is based on trades in a minute-long period starting 30 seconds before 4 p.m. in London.


“I let u know if i get any more,” the Barclays employee typed. “Can do 58 all day.”


After his counterpart said he’d do it, the Barclays trader wrote “actually 59 if ok,” indicating he wanted to sell as much as 59 million pounds.


“Fook off,” the HSBC trader wrote back.


“59 done thks u helm,” the Barclays trader said, signing off with a slangy British epithet.

And that is how FX is "traded" these days.

More can be found here, but the real question we have is how many, if not all, of the abovementioned anonymous "traders" were part of the alleged, if legendary, Sage Kelly "Defendant's Drug Cohorts."

Russian Ruble Soars Over 5% (Swings Most Since 1998) On Intervention, Rate-Hike Rumors

Having made new record lows for 7 days in a row, various technical triggers, short squeezes, and rumors of Central Bank intervention prompted the Russian Ruble to rally over 5%  - the biggest swing since 1998 as chatter of a very aggressive (greater than 50bp) rate-hike at tomorrow's meeting.

Massive shortr squeeze


and intraday the move is immense!


Commerzbank suggests intervention:

...looks like either a substantial one-off central bank FX intervention, or indirect intervention to the local banking community, Simon Quijano-Evans, head of EM Research at Commerzbank


If RUB recovery is not due to any geopolitical progress, a strong message in defense of the RUB is needed in tmrw’s CBR meeting: Quijano-Evans


This would include a rate hike of at least 200bps, and/or one-off FX interventions, and dropping the corridor policy

UBS' EM desk suggest 3 drivers:

a) hope of rapproachment between Ukraine and Russia


b) risk that central bank hikes rates very aggressively tomorrow


c) expectations that oil price isn’t going much lower from here; small tactical rally is possible near term

And technical drivers:

"Ruble may be poised to appreciate against the U.S. dollar in coming weeks after the slow-stochastics study, which measure the velocity of a security’s price movement, exhibits a bullish crossover near the oversold threshold,” says Bloomberg Technical Analyst Sejul Gokal. “A similar crossover in March this year, led to a 6.2% appreciation of the the Russian ruble versus the greenback, over a period of 13-weeks.”

As Goldman adds,

The sharp decline in the Ruble and US$28bn in reserve losses month-to-date are likely to be of significant concern to the CBR, given related risks to financial stability as well as to inflation expectations, and we think this is likely to cause the CBR to enact decisive changes to its FX policy.

While the recent uptick in inflation expectations increases the risk of a larger rate hike and this is now being priced by the market, we continue to expect the CBR to hike its policy rate by 50bp at its board meeting on Friday morning (October 31).

In our view, the rationale for a rate hike of this magnitude would be grounded in the recent deterioration in inflation dynamics, and we think a larger rate hike would not be the most cost-effective tool to stem the recent weakening of the Ruble. Given the options available, we expect the Bank to abolish its current intervention rule and conduct a discretionary currency intervention of a magnitude sufficient to stabilize the FX market and signal to the market that the CBR views the recent FX volatility as a significant risk to its mandate.

Such a policy choice would likely be more effective and significantly less costly than a large policy rate hike.

Timing the change to the FX policy is difficult. Nonetheless, we think that a change to FX policy prior to Friday’s rate decision would give the CBR additional policy optionality with respect to its interest rate decision. Our expectations for the CBR’s decision continue to suggest that OFZs and Russian sovereign credit remain attractive.

The Wrath of Draghi: First German Bank Hits Savers with Negative Interest Rate

Wolf Richter

Deutsche Skatbank, a division of VR-Bank Altenburger Land, which was founded in 1859, is not the biggest bank in Germany, but it’s the first bank to confirm what German savers have been dreading for a while: the wrath of Draghi.

Retail and business customers with over €500,000 on deposit as of November 1 will earn a “negative interest rate” of 0.25%. In less euphemistic terms, they have to pay 0.25% per annum to the bank for the privilege of handing the bank their hard-earned money or their business cash.

Inflation has had a similar effect in the zero-interest-rate environment that the ECB and other central banks have inflicted on savers, but this time it’s official, it’s open, it can’t be hidden. Instead of lending your moolah to the bank so that the bank can lend it out to businesses and retail customers for all sorts of economically beneficial purposes, you’re financially better off hiding it in the basement. Grudging respect is due the ECB and other central banks: through the perverse regime of ZIRP, they have succeeded in transmogrifying “cash in bank” from an income-producing asset to a costly liability.

“Punishment Interest” is what Germans lovingly call this. It’s the latest and most blatant step of the central-bank strategy to confiscate in bits and pieces and over time the wealth that prudent people and businesses have accumulated, and that should have re-entered the economy via the intermediation of the banks.

Last summer, the ECB imposed negative deposit rates on member banks. At first, it was 0.1%, which has now doubled to 0.2%. The reason? The ECB dragged out its “mandate,” which is, as it said, “to ensure” that “price stability” is “below but close to 2% inflation,” which in turn is “a necessary condition for sustainable growth in the euro area.” Whatever. There is not a scintilla of evidence that inflation is required for economic growth; however, there is plenty of evidence that economic growth can stir up inflation. The good folks at the ECB know this. It’s just the official pretext for using inflation to eat up debt – along with savers.

“There will be no direct impact on your savings,” the ECB announced five months ago. “Only banks that deposit money in certain accounts at the ECB have to pay.” But it added ominously, “Commercial banks may of course choose to lower interest rates for savers.”

And that would be good for savers:

The ECB’s interest rate decisions will in fact benefit savers in the end because they support growth and thus create a climate in which interest rates can gradually return to higher levels.

Thank you hallelujah, ECB, for helping out the savers!

This is in line with its policy, as it says, to “punish savers and reward borrowers.” No kidding. To bring some perspective to it all, it adds, “This behavior is not specific to the ECB; it applies to all central banks.”

Now the wrath of Draghi is hitting German savers and businesses. The first bank is already trying it out. Other banks haven’t yet jumped in line. They’re taking a wait-and-see stance but refuse to exclude the possibility.

“There is no planning in that direction,” Direktbank ING Diba told the Welt.

“We believe that negative interest rates on deposit accounts – whether for private or business customers – are a dangerous signal…” said a spokesman of the German Savings Banks and Giro Association (DSGV). But he did not rule out either that some member banks might not follow the same example in the future.

“The banks will try to avoid negative deposit rates,” explained the Federal Association of German Cooperative Banks, but in this zero-interest-rate environment imposed by the ECB, negative rates on large deposits “cannot be excluded.”

“At the moment, we are not imposing negative interest rates on retail customers,” said the second largest bank in Germany, Commerzbank. At the moment….

“We cannot earnestly rule out punishment interest in the future,” said Frank Kohler, CEO at the Sparda-Bank Berlin, the largest cooperative bank in Germany in terms of membership. He pointed out that the banks that are the most susceptible to punishment interest are those whose business model relies on pure banking with individuals and businesses, and whose earnings cannot be improved by investment banking, risk-taking, gambling, market-rigging, and other big-bank activities that “have triggered the financial crisis in 2007.”

“So precisely those banks suffer the most that have never put the financial system at risk,” he said. “This is unfortunately not free of bitter irony….”

The door to punishment interest has been cracked open. It starts with large deposits and small rates. Then step by step, deposit amounts get smaller and punishment interest rates get larger until everyone gets smacked with it, and no money is save. It’s all part of the time-honored central-bank strategy to flog savers until their mood improves.

Germans don’t get to do this, but the lucky Swiss get to: they get to go to the polls and tell their central bank what to do about gold. A yes-vote will send shock waves through the gold market and other central banks. Read… What the Swiss Gold Referendum Means for Central Banks