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.

Even those who don't expect to pay aren't buying

Through the end of October, 1.2 million have signed up through the exchanges, both federal and state. Of these, 800,000 are in Medicaid (or CHIPS), the free overage for those with incomes of up to 133% of the poverty level. (Income is your own earned income, not including rent subsidies, food stamps, and other welfare payments.) Understandably, people who don't have to pay are more enthusiastic than those who do, but even the non-payers are lukewarm. Bottom line: this service has been rejected by paying customers, at least so far.

There is something fundamentally wrong with our US health system, both pre- and post-Obamacare. I don't understand why health care costs so much here. I have lived in England, France and Singapore. In England and France the care is good and costs society half what it costs here, as a percent of GDP. In Singapore,where the health care is the best I have experienced, the cost is one-fifth the US costs. It's puzzling.

Here is the story in the New York Times:

http://www.nytimes.com/2013/12/16/opinion/medicaid-outpaces-private-plans.html?smid=pl-share

Welcome respite from global warming

Yesterday the Boston Globe had an article on the snowy owl problem. These arctic birds have come further south and in greater numbers than in any previous December in living memory due to extreme cold in the arctic. They are posing a problem for planes at airports and the NY airports have started shooting them, to the consternation of naturalists. (Trapping solutions are now being tried.)

While the plight of these birds is a cause for concern, it is reassuring that we seem to be having a break in global warming. Antarctica has just recorded the coldest temperatures on record as well as record ice growth. (see below) Likewise, in the arctic ice growth has reversed its declining trend and the extent of sea ice in the north is now at normal historical levels.

Mexico responds to crime wave

Today's FT Mexico City Notebook reports on an interesting private sector solution to Mexico's crime wave: funeral parlors in Ciudad Juarez are now open 24-hours a day.

Happy at school? Not so much, in the USA

You can't expect them to notice everything

The Mexican authorities have just uncovered an illegal activity that seems to have been going on for years. A Mexican crime syndicate called the Knights Templar has managed to slip illegal iron ore mining operations, giant truck convoys, ship loading facilities and large bulk carriers right under the noses of the authorities and to smuggle the ore to the Chinese. The shipments go through Lazaro Cardenas, Mexico's second largest port.

By a fortunate twist of events, the authorities were able to stumble upon this operation. Firm action is contemplated.

http://news.nationalpost.com/2013/11/29/mexican-drug-cartels-diversify-now-make-money-mining-and-selling-ore-to-the-chinese/

Chinese Yuan Replaces Euro as Second Most Used Trade Transaction Currency

Swift reports that the renmimbi has passed the euro as a currency used in world trade. In January 2012, the renmimbi accounted for 1.89% of world trade. It was up to 8.66% in October 2013. The euro was 7.87%. This is a very dynamic rate of change.

I make bold to suggest that the abuse of the dollar by the Fed is producing unwanted consequences, which may possibly snowball.

The Bloomberg article is linked: http://www.bloomberg.com/news/2013-12-03/yuan-passes-euro-to-be-second-most-used-trade-finance-currency.html
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Housing bubbles proliferate, except for the US and southern Europe

Neil Irwin of the Washington Post has blogged the following report on Nouriel Roubini's recent warning on where the excess liquidity is producing bubbles:

"Roubini doesn't see bubbles in the places where they were most severe in the pre-2008 period. He doesn't mention the United States or Spain or Ireland. Rather, Roubini sees housing prices getting out of whack in quite a few small and mid-sized nations that are well-governed and managed to avoid the worst economic effects of the financial crisis: Switzerland, Sweden, Norway, Finland, France, Germany, Canada, Australia, New Zealand and the London metropolitan area in the U.K. He adds some key emerging markets that show the same dynamic: Hong Kong, Singapore, China and Israel, and major urban centers in Turkey, Indonesia, India and Brazil.

"In this view of the world, a better question might be where in the world is there NOT a housing bubble (the answers, apparently, are the United States, southern Europe, Russia and all of Africa).

"Roubini's argument boils down to this: The major economies have been growing only slowly. Yet with low interest rates and aggressive central bank action across the globe, there is a giant pool of money that has to go somewhere. That somewhere has not been productive new investments, like companies building new factories. Rather, it has come in the form of people taking advantage of cheap credit to bid up the price of existing real estate in cities from Stockholm to Sydney."

Nepheloccoccygia

The weather woman introduced this word, which is new to me, this morning at the end of the weather forecast. She said that one accepted meaning of nephelococcygia is the tendency of people to see familiar objects in the shape of clouds. Googling the word, I found that the original meaning was Cloudcuckooland, the name of the mythical avian city in Aristophanes' The Birds, an imaginary, implausible utopian parody of 5th century B.C. Athens.

Turning this over in my head as I waited for my sister to get ready for me to drive her to the bus station for her return, post Thanksgiving, to Hartford, I came up with a third and new definition: "Nephelococcygia: the tendency to imagine that only good things can result from easy monetary policy." Looking up into the clouds, we discern a land of free money that never loses its value, bringing prosperity and happiness to all. It is a sort of paradise, albeit, I am afraid, only that of a fool.

Driving back from the bus station, NPR reported, since this is the first day of the month, that many people believe that saying "rabbit, rabbit" the first thing upon awakening on the first day of each month brings good luck. (This is also a new one to me.) Franklin D. Roosevelt was reported to have practiced this spiritual exercise throughout his presidency.

So I shall say "rabbit, rabbit" every time I hear or see Bernanke or Yellen on the news. It can't hurt.