Fake Volume And Increased Volatility

By Trace Mayer, on May 13th, 2010

On 6 May 2010 the DOW dropped a massive 600 points in a mere seven minutes and at one point was down 998.50 points which is the largest nominal drop ever. One of the reasons for this increased volatility is the knowledge of all major market participants that their assets are neither safe nor liquid yet the greed to engage in speculation. As the true state of the worldwide financial markets and their fake liquidity increasingly permeates the zeitgeist more and more individuals will simply withdraw their capital and store it is the monetary metals.

Those who have followed RunToGold for a while have been adequately warned. For example, on 9 October 2009 I was interviewed on BNN and suggested that gold would reach $1,300 in Q2 2010 as the credit crisis intensifies. Now gold is within striking distance. On 7 February 2010 I warned of the approaching Laboon of sovereign debt default and Euro evaporation. Now it is happening. On 27 July 2009 I warned of the coming market crash. While the market is crashing when priced in gold it has still remained fairly orderly and but for The President’s Working Group On Financial Markets it would be a lot more chaotic.

VOLATILITY

When the financial markets experience unusual palpitations then those closely involved often flee for safety and liquidity. With high frequency trading powered by computer algorithms the result is a gigantic electronic herd moving at the speed of light. The result is an explosion in the VIX or CBOE Market Volatility Index.

… value and price are completely discrete.

The higher the VIX the more difficult it is for the entrepreneur, the individual that creates real wealth by providing the goods and services the economy desires, because making mental calculations of value becomes more difficult and therefore decisions to allocate capital become based on more arbitrary premises. In this current economy, value and price are completely discrete.

The end result is that holders of capital, instead of taking risk and buying an ice cream machine or building a new factory, buy gold, silver and platinum while waiting for calmer days. When the devaluation of intrinsically worthless fiat currencies happens it will likely be extremely quick.

THE GREAT CREDIT CONTRACTION

I really wish this liquidity pyramid could accurately convey all I want but it gets the main point across. During a credit contraction capital, both real and fictitious, burrows down the pyramid into safer and more liquid assets. The illusory capital evaporates.

… the riots in Greece are the prelude not the encore …

What happened on Thursday? Capital burrowed into FRN$ Treasuries and gold. Gold is now perched atop a near record all-time high around $1,210 per ounce.

As reported by Bloomberg, the EU’s $645B fund to fend off the ‘wolfpack’ will be like a decrepit brontosaurus trying to fend off 100+ hungry velociraptors. Europe is too old, too beauracratic, too slow and fighting economic law to be able to mount a sufficient defense. The little baby velociraptors, hatched with the merger of bank, currency and state through ignoring Article 1 Section 10 Clause 1 of the United States Constitution and the establishment of the unconstitutional Federal Reserve, have now grown up and they have unlimited avarice to feed.

But I think the real value is to be found in buying platinum which, during the past week, got cheaper when priced in gold. A likely scenario will be a summer consolidation or pullback in gold, silver and platinum and then starting in August the trek towards $1,650 gold with the bulk of the upleg happening in November.

There will come a time to buy the S&P 500 and real estate with one’s monetary metals but that time is still a few years away. In the meantime, the name of the game is to retain the capital and purchasing power already accumulated. Keep in mind, the riots in Greece are the prelude not the encore and will be coming to a city nearby before The Great Credit Contraction is over.

CONCLUSION

The entire worldwide financial and economic system are built on an illusion. Neither I nor other prepared individuals really care if the stock market crashes 700 points in ten minutes. What is going on is fairly simple economic law which I discuss in The Great Credit Contraction. While the time to buy the precious metals at a good value was earlier there is still incredible reasons to at least have some material portion of one’s net worth allocated to them.

After all, whether the fire of inflation or even hyperinflation or the ice of deflation that freezes the global economy in its tracks a holder of capital will be protected when ensconced within a golden forcefield. And the monetary metals can do wonders for reducing blood pressure when watching Iceland, Greece, New York or LA on television.

DISCLOSURES: Long physical gold, silver and platinum with no interest in DOW, S&P 500, the problematic SLV ETF, gold ETF or the platinum ETFs.



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The Welfare State and the Future of the Eurozone

By Rok Spruk, on May 13th, 2010

The $140 billion rescue package to Greece is a milestone in the European Monetary Union. A lively debate on recent macroeconomic imbalances in the weakest economies of the Euroarea – Greece, Italy, Spain and Portugal – in the Eurozone has reopened the old debate on whether the Eurozone is an optimum currency areas (here, here, here and here). The idea of optimum currency areas was first proposed by Nobel-winning economist Robert Mundell. In general, if several countries form a currency union, they should have at least four common macroeconomic features as essential framework of the currency union. In this article, I’ll review the labor market criteria and fiscal adjustment criteria in the light of a recent imbalances in the Euroarea, and leave production diversification and export criteria for future discussion.

First, there should be a high degree of labor mobility between countries in the currency union. The basic idea behind the labor mobility criteria is that the lack of labor mobility triggers divergence of productivity growth rates and asymmetric adjustment of wages. If inter-country productivity divergence persists, there is an upward pressure on wages adjustment given the lack of exchange rate adjustment since the countries share a common monetary policy. The formation of the currency union in the United States was relatively straightforward given the fact that labor mobility between the states is very high. In Europe, the level of labor mobility is relatively low. The lack of labor mobility has a lot to do with labor market institutions in European countries. Workers from the European periphery can hardly move to Germany, Netherlands or Denmark as they do not speak the same language. The lack of inter-country mobility resulted in significant wage premiums and rise in rents since European labor markets share a pretty high degree of monopoly power since European workers can’t switch easily between labor market structure. The resulting outcome of the lack of labor market competition was a significant “union capture” of the labor market, leading to rigid wage determination and high market switching costs.

Paul Krugman recently argued (link) that the major problem behind the European Monetary Union is the lack of common fiscal policy. To a very large extent, the absence of common fiscal policy seriously affects the future prospects of the European Monetary Union. Common fiscal policy could easily absorb asymmetric shocks withing the Euroarea. However, instituting the policy could not alter the trade-off between fiscal autonomy and asymmetric shock intensity. In other words, the main problem of the Euroarea right now is the free-riding of Eurozone’s most problematic countries on a common monetary policy using disrectionary fiscal policy. Before the economic crisis, Spain had a budget deficit while, at the moment, the 2010 budget deficit forecast is more than 8 percent of the GDP. The estimate Greece’s balooning public debt in 2009 ranges from 110 to 115 percent, depending on the consensus forecast. If the EMU countries unified a fiscal policy, the countries would not have an incentive to free-ride on discretionary fiscal policy and further increase the stock of public debt. The major impediment on the recovery and long-term economic outlook of Eurozone countries is largely dependent on how these countries will reform the pension systems in the light of a growing old-age dependence and a near fiscal insolvency of the pay-as-you-go (PAYG) pension schemes. It will be impossible to reverse the aging population and its persistent pressure on an increasing public debt. The integration of fiscal policy would require a sizeable harmonization of taxes given high costs of coordination and sufficient incentives for moral hazard. Without the reversion of long-term public debt pressure from aging, discretionary spending and entitlements, countries such as Greece, Spain and Portugal would leave the Eurozone.



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Economic Events on May 13, 2010

By B.P.T., on May 13th, 2010

At 8:30 AM EDT, the U.S. government will release its weekly Jobless Claims report.  The consensus is that there were 440,000 new jobless claims last week, which would be slightly less than the number reported last week, and would continue the trend of slightly improving employment statistics.

Also at 8:30 AM EDT, the monthly Import and Export Prices index for April will be released, providing some data that can be used to monitor the threat of inflation.

At 10:00 AM EDT, the weekly Energy Information Administration Natural Gas Report will be released, giving an update on natural gas inventories in the United States.

At 12:30 PM EDT, Federal Reserve Chairman Ben Bernanke will speak at the Philadelphia Federal Reserve Bank’s conference on community development withDeputy Chairman Jeremy Nowak.

At 4:30 PM EDT, the Federal Reserve will release its Money Supply report, showing the amount of liquidity available in the U.S. economy.

Also at 4:30 PM EDT, the Federal Reserve will release its Balance Sheet report, showing the amount of liquidity the Fed has injected into the economy by adding or removing reserves.

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