Ainslie Bullion - Daily news, Weekly Radio and Discussions

Rescue Helicopter Arrives

We flagged some months ago to keep an eye out for "Helicopter Money" entering the 'what next' space as the world's economy continues to languish. Some would argue Helicopter is not really any different to the Quantitative Easing we have seen in the US and still seeing in Japan, Eurozone, and UK. Some argue it injects the freshly 'printed' money more directly into the public than via the financial institutions. It is almost a mute point as it is still monetary debasement accumulating more and more debt. It is still a desperate attempt to get you into risk-on investments, out of saving, and create inflation to erode debt that they know cannot otherwise be repaid.

Earlier this week, on our own shores in Australia, one of the members of the US Fed's rate setting committee (the FOMC) Loretta Mester, had this to say:

"We're always assessing tools that we could use.In the US we've done quantitative easing and I think that's proven to be useful.

So it's my view that [helicopter money] would be sort of the next step if we ever found ourselves in a situation where we wanted to be more accommodative."

This came in the same week Japan is set to unleash an additional $130b in such stimulus to already the world's most aggressive monetary stimulus program that is not working.

That a known 'hawk' (anti stimulus) as Mester is talking openly about the possible need for this in a US economy that the Fed's own 'Beige Book' economic summary this week described as 'recovering modestly' indicates they know all is not well.

The markets' response? The S&P500 rallied so hard this week it is now as overbought as at any local high in the last year. What could possibly go wrong? That gold and silver have held firm whilst this is happening may well be the answer

 

Australia's "Emergency Playbook"

There were various articles over the weekend around the Reserve Bank of Australia's (RBA) "emergency playbook" report outlining what they would do should (when) the world faces another financial crisis or Australia's steady decline sees pressure on an Aussie cash rate less than 1%.

Essentially the report (sourced by Bloomberg) outlined that should rates get near 1% they would unleash "unconventional monetary policy" most likely in the form of Quantitative Easing (QE) as has been deployed most notably by the US, Europe and Japan. Unlike Europe and Japan the RBA saw buying corporate bonds and introducing negative rates brought risks that could negate or outweigh the benefits.

This report was released at an interesting juncture in global and domestic economic proceedings.

On Friday the AUD jumped again on a better than expected, albeit unchanged from Q1, Chinese Q2 GDP of 6.7%. Reaching as high as 76.76c. Even after settling down to 76.2%, it is still now 5.5% higher than since the end of May. Not something the RBA wants to see for our export dependent economy.
As we reported in last week's Weekly Wrap, the world now has over $13 trillion of negative yielding government debt. Last week Germany became the first EU country to sell 10 year debt with a negative yield at an auction. Now to be really clear, that means smart people bid and bought at an open auction the right to ensure they lose money over the life of that bond because they see that loss as better than what they think will happen in financial markets.
Japan is openly looking to introduce "Helicopter Money" whereby they commence the slippery slope of taking QE to the next level of the central bank (BoJ, like the RBA) bypassing banks and buying open ended government debt directly to fund stimulus, some of which could include Rudd type handouts to try and stimulate growth.
Bonds used to be favoured over gold by some because they yielded a return. So it is again no surprise that whilst sharemarkets rally on this stimulus beyond fundamentals, gold too is holding strong despite it looking overbought.

Over the weekend the world's biggest fund, BlackRock had this to say in response to the RBA report:

"With 70 per cent of the JP Morgan developed world government bond index below 1 per cent, the yield in Australia stands out like a beacon for investors contemplating low or negative yields."

i.e. the AUD is stubbornly high because everywhere else is even worse. Most predict August will see the RBA cut our rates to 1.5% but that is still higher than the vast majority and hence money will keep seeking the higher yielding Aussie. But as this report admits, that will not last. Westpac today revised their AUD forecast for September to 73c and 71c by December. That would see a 7% increase in the price of your gold and silver off this morning's 75.9c.

And why? BlackRock says the Aussie will "eventually respond to fundamentals of lower commodity prices, weaker growth, lower inflation and lower policy rates."

So it seems inevitable we will enter the world of 'unconventional monetary policy' that has seen nothing but artificial inflation of financial asset bubbles, continued low (and in many cases declining) real growth, enriching the rich at the expense of the middle and lower classes, and a devastating accumulation of debt.

The theme of 2016 is a world seeing this for what it is and preparing for the inevitable outcome. They have been buying gold and silver hand over fist. USD spot is up 26% for gold and 46% for silver. That 5.5% rise in the AUD has seen a lesser 21% and 40% respectively. The falling AUD would see us outperform from here on top of where the US spot price could go as well. Interesting times.

 

Italian Banks "Bigger Risk Than Brexit"

London's 'The Telegraph' ran a story over the weekend titled "Why Italy's banking crisis will shake the Eurozone to its core". Before we summarise this for you it again strikes us as stupefying that our mainstream news sees it as more relevant for someone in Brisbane to know of a house fire in Melbourne than to report on more of these globally significant situations. Mark our words, anything that shakes the Eurozone to its financial core will have a very big impact on Australia. We remind you Australia now has over $1 trillion in foreign debt, much of that to us as individuals not Government debt. Now, unlike any time before, we are inextricably linked to this global financial Ponzi scheme. Anyway, getting off the soap box

We have written a bit lately on the Euro banking situation (here and here) and Deutsche Bank has taken a lot of the focus but this article outlines just how dire the Italian banking situation is.

The main issue with the Italian banks is the sheer scale of their non-performing loans (NPL's or 'bad loans'). So great is the $525 billion or 18% NPL burden on Italian banks that they are struggling to offer new loans to households and businesses that need them. To put that 18% into perspective, Spain is around 7%. In 2015 the world average was 4.3% and Australia was 1%. You may recall our banks' NPL's were getting headlines in the last quarter as they are on the rise here too.

In last week's Weekly Wrap we told you the IMF has forecast that Italy would "not see their economy return to pre 2007 levels until the mid 2020's and in that time the country would grow poorer compared with other eurozone countries, while its banks would continue to be heavily exposed to economic shocks".

A core issue now is the battle between Rome and Brussels over how this is dealt with. As was agreed at the G20 in Brisbane, the EU has a rule that banks must bail themselves out ("bail in") by taking funds from shareholders, depositors and bond holders; as opposed to the government bailing them out, ala GFC. The Italian government wants to rescue the banks and protect the creditors. All of those creditors are voters at a time when the Euro sceptic Five Star party is gaining serious ground (Itexit anyone?) and many are bond holders vital to propping up the entire Italian banking system. Burn them once and the ensuing exodus could collapse the entire Italian banking system.

The article quotes a lawyer close to the negotiations:

"This could be a bigger risk than Brexit.The Greeks are desperate to be anchored into Europe, they are willing to suffer and suffer and suffer to stay in I am not sure that Italy is willing to suffer."

Unlike the economic minnow of Greece, Italy is the EU's 3rd biggest economy

Click here to read the full article.

 

Gold, The Ultimate Currency Quote of the Week

As you've probably gathered by now, we like the way Greg Canavan of the Daily Reckoning explains things both clearly and in an Australian context. He has been vocal about gold now being in a bull market, having predicted it would occur now early last year. The following is a response to a reader voicing concern about gold being a non yielding, volatile, emotion driven asset.

"I advocate gold ownership because I consider it an important part of a diversified portfolio. With bond yields at record lows, stock prices around the world at, or near, record highs, and cash yielding nothing after inflation, it makes sense to hold some gold in your portfolio.

--Gold is certainly volatile. But does this make it an above-average risk asset? I note that gold priced in Aussie dollars is just below record highs right now. The ASX 200, on the other hand, is some 20% below its 2007 peak.

--Does this mean stocks are riskier than gold? No, it doesn't, but it does tell you that owning gold throughout this time would have improved the performance of your portfolio, making it less volatile in turn. That's a good thing.

--And as far as emotions versus fundamentals go, show me one asset class that doesn't come under the influence of emotions. The stock market is a reflection of human nature. And humans are emotional beings. Don't believe any economic theory that says humans or markets are rational. They aren't.

--On your point about Buffett. I know Warren isn't a fan of gold. You can't compound your wealth by owning gold and compounding is the key to Buffett's huge wealth accumulation. I respect his view.

--But consider that thanks to insane global central banking policies there are now more than US$10 trillion worth of bonds around the world trading on negative yields. That is, it costs you to own them. And consider that the world's major currencies are engaged in a stealth currency war. The aim of this war is to steal demand from competing trading blocs by reducing currency values.

--So the fact that gold doesn't have a yield and produces no franking credits isn't a big deal. Presumably, you've got a big chunk of your portfolio allocated to stocks, which should satisfy your demand for yield. But you shouldn't be 100% invested in stocks.

--As I've explained here previously, gold is a currency. Currencies don't yield anythingnot if you think of currency as physical notes in your wallet. Currency only has a yield when you put 'money' in a bank. That's because the bank uses your money for other purposes, and pays you a pitiful amount of interest for the privilege.

--Gold is rising in price in all currencies because currencies are losing value. Gold is one of the few universal stores of value that tells you the real story.

--For example, I mentioned that gold in Aussie dollars is trading just below record highs. That's a reflection of how much purchasing power our currency has lost over the years.

--Just about everyone in Australia knows how expensive a place it is to live in. Housing, health, education, food, beersyou name it. But to tourists from many countries, our prices are simply crazy.

--We're fed the lie that prices are high because we are a prosperous nation. That's true to an extent, but prices are high because of the falling purchasing power of the Aussie dollar.

--The near record high price of gold tells you that. When it comes to currency devaluations, you can't fool gold. One Aussie dollar now buys you the least amount of gold in its history. What does that say about our dollar's purchasing power?

--You can't consider gold without the other side of the equation and the other side of the equation is currency. So when you say that Brexit and the future of the European Union are more important considerations than whether or not gold is in a bull market, you're trying to separate a hip from its joint.

--They are bound together! More than anything, Brexit was a currency event. It weakened the pound AND the euro. Gold, an apolitical currency, benefitted from the vote more than anything.

--Gold thrives on political uncertainty. That's because political uncertainty has a detrimental effect on currencies. And gold has always been, and always will be, the ultimate currency.

--So I hope you can see that owning gold as a part of a diversified portfolio makes senseespecially in this politically fraught age. And I hope you can see that gold is in a bull market because of the things you mentioned, and not in spite of them."

These views are even more relevant in the context of our Monday article on the RBA's agenda to suppress the Aussie dollar further.

 

S&P's Debt Crisis Warning

Financial markets have rallied all week and gold and silver have come off a bit the music machine is cranking up and there's dancing on the (trading) floors. That music machine is central bank stimulus, and post Brexit it's time to double down and boogie. It started with 'Helicopter money' hitting the mainstream vernacular, expectations of government intervention to the Euro banking crisis, tempering of basically any expectation of a US rate hike for some very considerable time, and imminent monetary easing/stimulus (not tightening) flagged from the ECB, BoE, BoJ, PBoC and our own RBA to name just a few central banks. These guys are clearly flagging the easy money game will continue so go forth, borrow and buy shares and houses we've got your back. You don't need that gold nonsense

Coincidentally Standard & Poors Global Raters (yep, those S&P guys threatening to downgrade Australia's AAA rating), have just released a damning report on the rampant corporate debt growth around the world. Indeed they forecast global corporate debt to rise by 50% in just the 4 years to 2020 from an already eye-watering $51.4 trillion to $75 trillion. The breakup is not wide spread either. Of the $75 trillion, $62 trillion is completely new debt, with 'only' $13t financing. The 3 biggest economies making up over 82% alone!

China will add $28 trillion (45%)
US, $14 trillion (22%)
Europe $9 trillion (15%)
As we have written extensively about, they cite too the misuse of all this debt in that it hasn't been used to purchase plant, equipment, or other capital expenditure underpinning future earnings, but rather to buy back shares and pay dividends to artificially prop up the share price.

Here are a few excerpts from their report:

"Central banks remain in thrall to the idea that credit-fueled growth is healthy for the global economy. In fact, our research highlights that monetary policy easing has thus far contributed to increased financial risk, with the growth of corporate borrowing far outpacing that of the global economy."

"nearly half of corporate debt issuers are estimated to be highly leveraged, strongly suggesting that a correction in global credit markets is unavoidable. In fact, analysts believe that the credit correction began in late 2015 and will likely stretch through the next few years as defaults spike."

"Indeed, the credit build-up has generated two key tail risks for global credit. Debt has piled up in China's opaque and ever-expanding corporate sector and in U.S. leveraged finance [the share buying we mentioned above]. We expect the tail risks in these twin debt booms to persist."

They even coin a new phrase, Crexit, which like the UK leaving the EU, we could see investors leaving all this debt (which we will discuss further tomorrow):

"A worst-case scenario would be a series of major negative surprises sparking a crisis of confidence around the globe. These unforeseen events could quickly destabilize the market, pushing investors and lenders to exit riskier positions (a 'crexit' scenario). If mishandled, this could result in credit growth collapsing as it did during the global financial crisis."

So by all means have a punt on the dance continuing and shares rallying. But know this is an artificial set up that will end in tears. That this is so obvious to so many is why both bonds and gold/silver have rallied so strongly beside the sharemarket rebound. What this report highlights however, is you'd better pick those bonds carefully, and that the unavoidable crash is getting close.

 

"CREXIT" Getting Close

Yesterday we reported on S&P's warning around corporate debt expansion. In a world awash with bonds issued to feed our endless consumption of debt many of these bonds are of a far less quality than sovereign bonds or treasuries, and therein lies the big risk defaults. Indeed S&P are calling this threat "Crexit".

Already this year has seen an increase in defaults in this highest risk debt with global corporate bond defaults reaching the unfortunate milestone of 100 in mid July 2016. Lead by US companies that number is 50% greater than the same time last year, and has only been exceeded in the GFC.

As we saw in the GFC, when there is a global loss of faith and scramble for the doors, you can see a spike in defaults, as the dominoes fall. Morgan Stanley Research put this nicely into perspective below in yet another chart showing evidence of how close we appear to that moment.

 

Recycling Gold & Silver v GSR

With the gold:silver ratio at 67 at present it is worth another look at how seemingly out of whack this is on fundamentals. In our Why Buy Bullion brochure we talk about silver mine supply of approximately 27,000 tonne compared to gold's approximately 3,000 tonne, a ratio of 9 to 1. Certainly not 67 to 1.

SRSrocco produced the following charts which neatly illustrate the other anomaly, and that is recycling. As we've reported before, at these low prices recycling has bottomed out over the last few years. With silver seeing a lower low, it has been worse.

Firstly looking at jewellery demand and recycling rates, with the price of silver you can see there is little incentive to recycle..





And as we often point out, about half of all silver mined is used in industry, most of that in the likes of solar panels, electronics and medical that are largely used and discarded. The following charts confirm that is largely the case with a measly 18% recovered. Gold on the other hand nowadays has essentially no industrial demand which is why many argue it is not a 'commodity' where, other than jewellery, it's uses are purely monetary.



So to sum it all up, the following charts show the total picture, reinforcing the anomaly that a gold silver ration of 67:1 is. for now

 

GSR 9 - 1 - fair enough,but Golds desirability is far more than Silver wouldn't you say giving some insight into the "real" GSR.

Gold Is Not Silver - but still certainly worth owning and stacking for sure,I should know I have some

 

The "Fear" Trade Gold & Silver

Unless you live in a cocoon you must be feeling this world is heading in the wrong direction. History shows our world goes in cycles of social upheaval and consolidation, and it is an unfortunate fact that it feels we may be entering a bad phase. There is no one cause or catalyst, but creating inequality through monetary stimulus is certainly one. Vern Gowdie, with the help of a quote, puts it well:

"When you cheapen money, you cheapen a society's values and morals. You fix one problem and create 10 others. Easy money favours the lucky few, at the expense of the many. Eventually, the 'many' get fed up and revolt. This happens in complex and varied ways.

Mark MacKinnon, writing in The Globe and Mail, sums it up nicely:

'Rarely, it seems, has the world spun so rapidly, have events felt so out of control.

'The headlines blur into one another, feeding the sense of a world in chaos. The war in Syria bleeds into the refugee crisis. The refugees' march into Europe boosts politicians on the nationalist right. The truck attack in France is followed by the shooting of police in Louisiana. Then it's a man with an axe on a train in Germany. On Friday, it was a shooting at a mall in Munich. "Brexit" in the United Kingdom is knocked from the top of the news by a putsch attempt in Turkey.

'They seem like disconnected events. But what links the British who voted to quit the European Union with the Turks who gathered in a public square on Wednesday to cheer the imposition of a state of emergency is their anger at how the system has worked until now.'

As I mentioned earlier, the world is becoming darker. There is a lot of hate aroundand fear and anxiety. The system is no longer working for the majority."

No one wishes for the world to deteriorate as this suggests it might, but you can be prepared. It is a simple fact that gold thrives in such an environment. Common sense says this is especially the case when one of the very catalysts is what central banks call "unconventional monetary policy" i.e. easy money via zero to negative interest rates and enormous amounts of 'printed' new money all accumulating more debt.

The elephant in the room now is of course Trump. Like the Brexit vote, our new Senate and countless other and expanding examples around the world, the disenfranchised are taking one of their only opportunities to protest, via the polls. This is not just a Trump thing either, there are elections fast approaching in Europe that are seeing massive swings in early polling to the far right. Brexit was merely a warning shot. Just last week Bill Beament, CEO of one of Australia's fastest growing gold miners, Northern Star, had this to say:

"Obviously the next big catalyst is who wins the presidential election in America and that has got more of an impact on the gold price than what Brexit will have so it will be interesting," he said.

"We all know if someone gets in it will be quite positive for gold."

Whilst we may be accused of fearmongering, we are simply stating facts that are all too often missing from mainstream media. More importantly it's about educating people that there is an investment that history shows stands tall amid such chaos. Gold and silver.

 

I am loving these fantastic insight's into the "real world"

I have noticed lately that these blurbs seem to be getting longer or so it seems.

Thanks Ainslie Bullion.

 

US Shares Hope & Debt

The S&P500 was a rollercoaster again last night but finished almost where it started. It is still near record highs. To many this seems at odds with the broader economic environment and we agree. We write often that this is a rally on central bank stimulus and not fundamentals. So let's look at that a little more

We are well into US 'earnings season' right now, where listed companies report their last quarter's earnings. About a quarter of the way through on Friday and already the S&P500 is set to post a 3.7% decline in earnings for the 2nd quarter. That is the 5th straight quarter of declining earnings, matching the longest such stretch since the GFC. Now given that you traditionally buy shares with the view they will increase earnings per share and deliver you both capital gain and dividends, it should ring alarm bells that the market is rallying when there are these sorts of real results. And yet you get charts like the following that illustrate ever so clearly the "hope" basis of the current market. To the left of the green line is actual earnings. To the right is projected earnings. Which side of the line reflects reality and which reflects unrealistic hope?



Indeed, unsurprisingly, on Price Earnings (P/E) shares are over valued. The more telling ratio, the CAPE or Shiller P/E takes the price divided by the average of 10 years of earnings (the moving average) and adjusts it for inflation. Right now this ratio shows the S&P500 is 61% more expensive than its historic average. For context, since the late 1800's there have only been 3 times when that has been higher just before the Great Depression, the Dot-com crash, and the GFC. At the moment we have the double P/E whammy of high price AND declining earnings.

So why is the market so high this time in such a poor environment? As we've explained before, US companies are still buying record amounts of their own shares. In the first quarter of this year S&P500 companies bought back an incredible $161.4 billion of their own shares using record low cost debt and of course boosting prices and the aforementioned earnings per share in the process. In addition, when bonds and bank interest are near zero and so is the cost of debt, ordinary people are now also margin lending at near record highs to buy shares in a desperate hunt for yield.

So we have the world's biggest sharemarket at a level the third most overvalued in history, propped up by earnings growth 'hope' and debt accumulating share buy backs and margin lending due to central bank stimulus, in an environment of declining earnings and global growth forecasts. What could possibly go wrong.?

 

Euro Bank Stress Test Tomorrow

As we reported in last week's Weekly Wrap this Friday has the potential to send shockwaves through the already fragile European banking sector as the bi-annual European bank stress test is published. Recently we saw Europe's biggest, Deutsche Bank, fail the US Fed's stress test and the IMF name it as the greatest systemic risk to the global financial system.

We've written about the Italian bank situation with its 18% NPL's (bad loans). Whilst Greece is worse at nearly 35%, the size of the Italian situation dwarfs it. The world's oldest bank, Monte dei Paschi di Siena (MPS) is the one everyone will be looking at after it failed the last test, is Italy's 3rd largest bank, has already been bailed out twice before, and is already widely regarded as needing more capital.

Possibly to prevent any hysteria, they have reduced the number of banks being tested to just 51 from 124 last time and there won't be the usual pass and fail outcome. That said, the 51 are the largest and it will be evident to analysts if they have 'failed'. Maybe it will be like school these days and you get an 'encouragement' or 'participation' award

The problem is that whilst the 51 banks cover around 70% of the Euro banking sector it excludes any from Greece, Cyprus and (maybe critically), Portugal by sheer scale.

Why we point out Portugal is that whilst the other PIGS, Ireland and Spain, have improved (albeit Ireland is still at 14.9%), Portugal (along with smaller Greece) has continued to deteriorate and is now up to 12.8% and worsening. Last December their Novo Banco bank was one of the first to 'bail in' taking 2b from bond holders. They were to plug the rest via a sale but that sale is not working and is likely to lead to the need for more capital. Barclays recently estimated that Portuguese lenders could need up to 7.5bn to resolve a "systemic banking crisis" that was bringing the country under "close market scrutiny". They went on to say

"Some banks are in need of a large capital injection. This means any material losses from the sale of Novo Banco could end up having to be met by the sovereign, as the capacity of Portuguese banks to absorb them is rather limited."

When they say "the sovereign", they mean taxpayers, and we are then back to Italy's problem of EU regs saying no more bail-outs (Government via debt and taxpayers), only bail-ins (share and bond holders, and depositors). The stage is set for a lot more pain in the EU, hard calls for the EC, and the obvious potential for more Brexit type EU revolts.

 

Looking forward to waking up on Saturday morning to see what has shifted overnight and to reading of course Ainslie Bullion's post tomorrow as per usual.

Thanks AB very good stuff indeed.

 

Record QE One Chart Shows The Result

Any observer of markets whilst most of us slept last night would have seen a market on edge before the Bank of Japan meeting outcomes later today. If ever you wanted to 'observe' a market hooked on stimulus this was your chance. The prospect of 'helicopter money' is upon us The first chart below illustrates the level of volatility in the US dollar / Japanese Yen pair it's highest since the Lehman collapse of the GFC.



Japan is the world's 3rd biggest economy, or 4th if you count the EU as one. They have battled deflation for over 2 decades and unleashed, per head of population, the world's most aggressive monetary stimulus program from 2011. The definition of stupid is often quoted as doing the same failing thing over and over and expecting a different result (aptly illustrated in the Simpson's - "is my brother dumber than a hampster"). Japan's economy has not only not improved, on most measures it is worse. But they do have a "world's highest" debt to GDP ratio of 400% to show for it. So hard have they gone, that they are now within a whisker, and save for QE4 on track to exceed, the balance sheet (accumulated debt to print money) of the US Fed at over $4trillion!

But (as you can see below) they are not alone as the European Central Bank (ECB) has joined the money printing party with gusto, to the point where combined we are now seeing an all time record high global Quantitative Easing (QE = money printed) program of $180billion/month, in excess of even the US Fed's attempts post GFC.



What makes this all the more remarkable is we have nearly 80% of economists predicting BoJ will increase theirs further tonight, Bank of England's (BoE) Mark Carney flagging they could likely do so next meeting, and ECB's Mario Draghi suggesting the same for them.

If you want just one simple illustration to take away today please study the following chart. What it show's in simple terms is a direct correlation between global share prices (MSCI) and global monetary stimulus (via global central bank balance sheets) and NOT the very company earnings projections that should be underlying these share prices.



This is NOT a real market, this is a market supported by debt accumulating cheap money. This can only end one way Is it any wonder the smart money is pouring into gold and silver

 

RBA Set to Cut After 'Awful' US GDP

On Friday we wrote about the world's central banks hitting a new record of global quantitative easing, or money printing. Additionally central banks all around the world are cutting interest rates to jointly stimulate a desire for debt funded investment and also to devalue their local currency to make their exports more competitive on the global market. It is, quite simply, a race to the bottom as you can't maintain competitive advantage if everyone else is doing the same

So on the eve of our own central bank, the RBA, meeting to determine our future it should be no surprise that the Australian Financial Review carries the headline "Weak US pressures RBA to cut".

Why? Well on Friday night we learned that the US GDP for the second quarter of the year came in at less than half the market expectations at just 1.2%. It was even less than the Atlanta Fed estimate of 1.8% we reported in last week's Weekly Wrap. Hardly the 'escape velocity' the hope camp keep talking up as underway. Now that is the headline you will see in the mainstream press, and it is bad enough. But behind the headline, as is increasingly the case with a lot of US economic data, we saw the last two quarters quietly revised down on more accurate final data. Q4 2015 went from 1.38% to 0.87% and Q1 2016 back to just 0.83%. So we have had 3 quarters in a row averaging less than 1% growth. The technical economic term for that is 'awful' And so not surprisingly bets on any US rate rise in 2016 have plummeted.

Now back to the AFR story and you can see that after the low inflation data last week (again reported in the Weekly Wrap), the myriad of global central bank stimulus either started or muted to be close since Brexit, our strengthening Aussie dollar, and now more confirmation of a weak US economy, and the RBA looks compelled to drop our rates to 1.5% tomorrow. Their dilemma is that this would simply further inflate the already unstable looking property bubble and consumption of debt. Just remember that Australia already has the highest personal debt to GDP in the world.

If they don't the AFR reports AMP predicting the Aussie dollar could hit 80c. That Bloomberg's survey of economists had 20 out of 25 predicting a rate cut after the CPI print, but before the abysmal US GDP, could lead you to think it is now almost a certainty.

The implications for Aussie gold and silver investors are many, but principally buying gold today see's you buying cheaper (at a higher AUD) then it would be after a rate cut. But that is short term 'noise'. The big picture see's us, as with the rest of the world, on a stimulus fuelled debt binge and currency debasement race to the end. History tells us those with gold and silver survive that 'end' much better than those who don't.

 

Euro Banks Stress Test Results

Late Friday night when markets were closed for the weekend the European Banking Authority (EBA) released the results of their 2016 stress test we wrote of last week. As expected they did not use the pass and fail mark but the results spoke for themselves. As predicted Italy's Banca Monte dei Paschi (MPS) clearly failed, having a negative capital ratio (bust) under the 'adverse circumstances' scenario and needs a 5 billion bank bailout. EBA set the 'bar' at just 7% for the CET1 (Tier 1 core equity capital : total risk-weight assets ratio). On that measure 4 banks failed the test. To give an idea of the sensitivity and implications of setting this bar, if it had been 8% an additional 6 banks would have failed and that would have included A-listers (TBTF's) Commerzbank, Unicredit, Barclays, and you guessed it Deutsche bank. The latter also failed the US Fed's stress test and is the IMF's #1 GSIB.

There has been a lot of commentary after the report's release amongst analysts that it appeared a market appeasement exercise rather than a robust stress test. For a start, as we discussed last week, 51 banks is less than half of the 124 banks tested last time and excludes all the real problem childs in Greece and Portugal. Secondly the 'adverse circumstances' scenario saw a real GDP growth rate of -1.2% in 2016, -1.3% in 2017 and +0.7% in 2018, all of which pales next to what we saw at the onset of the GFC. Thirdly, a major threat to Euro banks is negative interest rates killing profitability and that was not included in the stress test. As we reported in Friday's Weekly Wrap, Deutsche Bank last week announced its second-quarter net income fell 98% from a year earlier, as one such example. Finally there was disbelief that the stress test made no mention, nor medium term scenario modelling for Brexit implications.

And so the market spoke and the Stoxx index of European banks was down close to lows seen during the financial crisis. Finally if you want another example of 'everything is fine, nothing to see here' market appeasement, just hours ago the Stoxx Europe 50 index announced it was booting out Europe's 2 biggest banks Deutsche Bank and Credit Suisse, effective 8 August. They are being replaced by much better performing companies. Spot below which are out and which are in All fixed.

 

RBA Rate Cut v Japan's New Record & Helicopter

Yesterday the RBA dropped our interest rate to a record low 1.5% drawing widespread criticism from economists that it will both achieve little and leave less bullets in the gun for when it is really needed. On the latter point, we wrote about the RBA's "Emergency Playbook" for when rates get near 1% and that is getting close. When one of the main reasons for the cut is deflating our dollar the critics appear right as it has barely budged. Indeed this morning it is actually up. Why?

The fact is everything is relative and when the rest of the world is easing more aggressively than Australia, 1.5% still looks attractive. Japan has been the leader in debt : GDP at an eye watering 400%. Per the graph below, they have now exceeded the US, an economy 4 times bigger, in monetary expansion. That monetary stimulus is increasing too



Unlike the US Fed, who cannot buy equities and ETF's, the Bank of Japan, having run out of debt to buy, has been aggressively buying shares and ETF's with all this freshly printed money. Like their debt levels the scale is incredible. The Bank of Japan are now a top 10 shareholder of 200 of the Nikkei's 225 companies! They also own around 55% of all Japanese ETF's, buying around $58 billion per year.

There is of course still the expectation they may yet unleash 'helicopter money'. This from Reuters:

"Central banks might inject no more cash into economies by dropping money from aircraft -- whether real or imaginary -- than via well-worn QE schemes, but in breaking a long-standing taboo they may do far more damage to currencies.

After decades of zero interest rates and quantitative easing-style asset purchases, Japan is still mired in deflation.

The other big risk is the cure becoming worse than the disease.

Global bond investor PIMCO said that since the 18th century there have been 56 examples of direct monetary financing, from France in 1795 to Zimbabwe in 2007. All had dire economic consequences.

Dropping cash directly onto consumers may well be the end of that line and, if that fails to work, governments may be very reluctant to reinstate monetary financing bans in future - creating the threat of systemic collapse.

"The main difference between helicopter and other possibilities, lies in the credibility of the whole monetary system," Swiss economist Reto Foellmi told a discussion on Reuters Global Markets Forum this week. "If helicopter money is done literally, they would cross a point of no return."

As the country gears up for yet more stimulus, financial market speculation has swirled that the Bank of Japan may now go one step further and, by introducing direct funding of government with newly-minted notes, cross into the realm of 'helicopter money'."

When you combine this with negative interest rates and most of their bonds negative yielding you start to see why our RBA dropping rates 0.25% to 1.5% can't compete

 

Gold Price : Monetary Base Ratio Bull Market Signal

Yesterday we showed you the mammoth scale of monetary expansion in both the US and Japan, where Japan has exceeded even the previously unprecedented efforts of the US. Whilst it is harder to get 'real numbers' it appears China has easily exceeded both as well. With the ECB now joining the party with gusto, it is a world awash with new money. Recall the Global Central Bank Balance Sheet graph we showed you last week here. So how does all this new money track against gold? We haven't found a global one, but the following graph (from macrotrends.net) shows the ratio of the price of gold to the US monetary base (the world's reserve currency) from 1918, and it is one to take special note of.

Last time we shared this chart ($20,000 Gold v Monetary Base) the ratio was carving out a new all-time low, i.e. gold had never been cheaper against the supply of money. As you can observe now, that ratio is strongly and consistently on the up as was the case before each of the bull markets before it. But this time it is starting from a much more undervalued base.

This trend see's gold restate its position as the protector of wealth when currency 'money' is being debased either through inflation or rampant printing. It has a lot of catching up to do and a purchase now could see you enjoy that ride

 

Contagion & The Globalised Economy

We often talk about how unprecedented the current 'interconnectedness' of the global economy is and how different it will be when, not if, we have the next financial crisis. There are a myriad of potential threats to bringing down this global house of cards, whether it is Deutsche Bank going down in Germany, MPS in Italy, a big shadow banking default in China, an unexpected US rate rise, Trump winning the US election, or an escalation of the South China Sea tensions just to name a few. The risk, or dare we say certainty, of global contagion on one event is very real.

We've written before how Australia (relatively) cruised through the GFC but now have over $1 trillion in foreign loans and no China to our rescue. There are many examples of this 'new world' of economic globalisation but the following is both hot off the presses and so instructive it is worth sharing. It also shows how, apart from record corporate share buy backs, US shares are reaching new heights against this poor economic back drop (listen to today's Weekly Wrap for a summary of the last week's economic news). The following charts from Bank of America Merrill Lynch (BofAML) paint a very clear picture of the 3 main traditional participants leaving the US sharemarket.




You will note 'central banks' are not listed in this chart. As we mentioned in today's Weekly Wrap, this week saw global quantitative easing hit $200b/month. Traditionally QE just bought domestic sovereign bonds with its freshly 'printed' money. The problem is there is not enough for the amount they are printing so they have started buying corporate bonds as well. Even that has its limitations. So where else? Well you can buy shares of course. We wrote on Wednesday Japan has gone so hard in this regard it is now a top 10 holder of 90% of the Nikkei. And now yesterday we learn that the Swiss National Bank has bought over $20billion of US shares in just the last 6 months, taking their total long position on Wall Street to $61.8 billion! What could possibly go wrong.? Contagion anyone?

 

Contagion - noun - the passing on of a disease - bad influence - undesirable idea - etc - from one person or thing to another - sounds about right :/

Source - Heinemann Australian Dictionary.