Destructive effects of US QE on Australia and Canada

If QE stabilized weak economies like the US, then it also inflated to dangerous levels healthy ones like Canada and Australia.

Lincoln

From the Bank Credit Analyst:

Outlook For Canada And Australia
january 7, 2014 by bca research


It is widely known that both Canada and Australia avoided the banking/housing meltdown and their fiscal position is much better than in most other developed economies. However, there are no grounds for complacency in either case.



In both countries, house prices have continued to climb in recent years with the result that household debt-to-income ratios now exceed the levels reached in the U.S. before the housing market fell apart. Debt burdens are especially worrying in Canada. Both economies also have high exposure to commodities and the gloss has long disappeared from that sector. We are not predicting a collapse in either Canada or Australia in 2014, but any growth improvement over the coming year is likely to be relatively modest.

In terms of equity market performance, both markets are commodity dependent. There is a case for a cyclical bounce in commodities as global growth improves. Thus, Canadian and Australian stocks may enjoy a reversal of some of their recent severe relative underperformance. However, these markets also are vulnerable to investors downgrading their long-run commodity price expectations, even if there is a cyclical bounce. We recommend staying underweight.

$500 billion in gold futures in a single trade

This morning gold dropped about $30/oz briefly when 4,200 futures contracts were sold in a single trade. At 100 oz/contract, that about $500 billion in nominal value. That's a lot for a single trade. A 1% move in gold around this price is plus or minus $5 billion. Who would make such a trade? Article below:



January 6, 2014, 12:26 PM ET
Gold market ‘flash crash’ explanations vary from ‘fat finger’ to ‘price manipulation’




Gold futures suffered a sudden, brief drop in prices early Monday on the Comex division of the New York Mercantile Exchange, with market watchers blaming the move on everything from a “fat finger” to trader liquidation to price manipulation.

According to Nanex (that’s its chart above), a trade of about 4,200 contracts sent February gold GCG4 tumbling by $30 an ounce on heavy volume at around 10:14 a.m. Eastern and triggered a 10-second trading halt. Prices fell from about $1,245 to around $1,215 an ounce in just moments. The crash came about 14 minutes after the release of U.S. factory orders and ISM services index data.

Phil Flynn, a senior analyst at Price Futures Group, at first said the drop looked like it was due to a “fat finger,” then added there was speculation over a broker liquidating positions.

Mark O’Byrne, executive director at GoldCore, said the “flash crash today had the hallmarks of price manipulation.” Still, “as ever, it is nearly impossible to tell and could have been a fat finger trade or a large fund or bank liquidating a gold position.”

Meanwhile, Ross Norman, chief executive officer at Sharps Pixley, said that the move “looks to be shorts defending their substantial positions.” But “some of us have doubts, which makes gold a steal at these prices,” he said. “In fact, [it’s] the cheapest insurance in town against economic difficulties.”

February gold was last up $1.80, or 0.2%, at $1,240.40 an ounce on Comex.

Now the real question is whether the U.S. Commodity Futures Trading Commission and exchange “will investigate and try to actually enforce its regulations,” said Brien Lundin, editor of Gold Newsletter.

“Apparently there was no investigation into the mid-April episode where gold contracts were dumped simultaneously to push the price through sell

From today's Boston Globe: Murphy and the 2014 outlook

Happy New Year: Horse Coins!

Brazil is ready for the World Cup

Is China's central bank aiming at becoming the world's largest holder of gold reserves? They are rapidly going in that direction.

China is importing large amounts of gold. Macquarie estimates that 1,800 tons went into China in 2013. This is hard to verify as China, unlike other countries, does not disclose gold import figures. !,800 would make China the world's top importer and would represent the bulk of annual mine production of 2,600 tons.

China's central bank has not reported its reserves since 2009, when they were 1,054 tons. Currently the US Fed has,or at least has title to, 8,000 tons, or about 30% of world central bank holdings. Given that the NY Fed, which holds, or at least has some sort of call on, 6,500 tons on behalf of other countries' central banks, is unable to return Germany's paltry 300 tons that were supposed to be on deposit there, one assumes that all the gold has been lent out, which is standard practice among central banks. But the fact that Germany cannot be repaid immediately indicates that the NY Fed is having trouble recovering its lent gold. The Fed lends gold to banks like JP Morgan, which then sells it. So one can assume JPM is short and having trouble covering, which would explain why this bank is the biggest taker of physical delivery on COMEX, although the numbers are not huge.

In this context, the gold price has so far held up fairly well despite massive ETF selling. (Of course, it depends on what one means by "fairly well.")

The basic question is what is the Chinese central bank up to? Rumors are that it wants to become the largest holder of gold reserves in the world. As of 2009, the Fed had 7,000 tons more. We don't know where the Chinese are now, however, but there are probably several thousand tons more to buy.

QE's big success: Renaissance of the junk bond market

There was a good article this morning in the FT, "Corporate bond sales set to beat 2012 after passing $3 trillion." The story inside the story is more specific, however: Junk bond issuance is at record levels and the ability to issue has depressed defaults to only 2.2% of outstanding bonds. It is estimated that issuance will be greater than $500 billion globally, over twice the 2006 level of $208 billion. ($56 billion in 2008)

QE has certainly encouraged some degree of imprudent lending in the public markets but how much is hard to say. Of course, the higher the future inflation rate the lower will be the default rate in these issues, and vice versa.

I have been asking myself why free money in the public markets has not sparked a boom. I suppose the answer is that the contraction of the banking system has offset the looseness in the public markets. This is an advantage for large companies and a disadvantage for small and medium ones, as the latter do not have access to the public markets.