Month: September 2014
European Bank Deposits Once Again Declining
As everyone already knows, the LTRO from the ECB this September was a complete failure.
So that means liquidity for the European banks has not improved a lot. They expected that European banks would take credit from the ECB of €385 billion, but instead it became €82.6 billion across 255 counterparties. Excess liquidity has jumped up a bit from €77 billion to €122 billion, but it’s still not enough to be safe in my opinion. I wrote about that here.
This is also being confirmed in the deposits at the European banks. The latest number from August 2014 showed a decline in deposits.
And so excess liquidity keeps drying up. Let’s wait till the second LTRO in December and see how that goes. They can’t wait any longer as Europe is now entering a deflationary cycle, probably along with a lot of unemployment claims.
Gold and Silver Bullion in Heavy Demand
In the previous week, precious metals investors have seen gold and silver prices plunge due to heavy shorting as we can see in the most recent weekly COT report (charts below created by Correlation Economics). The probability of a short covering rally has increased tremendously.
What is most interesting to see here is that the silver market is leading the gold market with some unseen events in the silver market. For example, on September 21, we saw heavy volume to the downside in after hours trading in the Silver Trust (SLV). This is very unusual as we have never seen such high volume before in after hours (see chart below by Netdania.com).
The unintended consequences from these takedowns are very pronounced when we look at gold and silver bullion demand, the premiums and the declining stock levels in Shanghai.
To read the analysis, go here.
SHFE silver inventory hits new low
SHFE silver inventory hits new low.
80000 kg. Losing 14000 kg/week = empty vaults in less than 2 months. 10% premium today.
Managed Money Gold/Silver Short Update
Believe it or not, the shorts are starting to cover.
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This is why interest rates can't be raised
Janet Yellen may be telling us that she will increase interest rates next year (and the market believes that). But here is why it can’t happen.
Because when we arrive at 2015, the long term bond yields (red and blue chart) will have almost intersected with the short term treasury bills (purple chart). We call this flattening of the yield curve.
If Janet Yellen even increases its interest rates half a percent, the 2 year treasury yields will skyrocket. The yield curves will flatten out and a recession will start, just like in 2008 where the yield curves were flat.
Note: A flattened yield curve means that all maturities (3 month, 2 year, 5 year, 10 year, 30 year bonds) have the same yield. This is typically a recessionary indicator.
Look how the 2 year bond yields go up because of Janet Yellen’s talk about increasing interest rates.
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| 2 year U.S. bond yields |
This is why interest rates can\'t be raised
Janet Yellen may be telling us that she will increase interest rates next year (and the market believes that). But here is why it can\’t happen.
Because when we arrive at 2015, the long term bond yields (red and blue chart) will have almost intersected with the short term treasury bills (purple chart). We call this flattening of the yield curve.
If Janet Yellen even increases its interest rates half a percent, the 2 year treasury yields will skyrocket. The yield curves will flatten out and a recession will start, just like in 2008 where the yield curves were flat.
Note: A flattened yield curve means that all maturities (3 month, 2 year, 5 year, 10 year, 30 year bonds) have the same yield. This is typically a recessionary indicator.
Look how the 2 year bond yields go up because of Janet Yellen\’s talk about increasing interest rates.
|
| 2 year U.S. bond yields |
This is why interest rates can’t be raised
Janet Yellen may be telling us that she will increase interest rates next year (and the market believes that). But here is why it can’t happen.
Because when we arrive at 2015, the long term bond yields (red and blue chart) will have almost intersected with the short term treasury bills (purple chart). We call this flattening of the yield curve.
If Janet Yellen even increases its interest rates half a percent, the 2 year treasury yields will skyrocket. The yield curves will flatten out and a recession will start, just like in 2008 where the yield curves were flat.
Note: A flattened yield curve means that all maturities (3 month, 2 year, 5 year, 10 year, 30 year bonds) have the same yield. This is typically a recessionary indicator.
Look how the 2 year bond yields go up because of Janet Yellen’s talk about increasing interest rates.
 |
| 2 year U.S. bond yields |
Commodities Will Be Hit By China Slowdown
I have bad news for commodity fans. China is indeed slowing down as power consumption has reached sub-zero year over year growth in August 2014. This means that China GDP growth will be sub 6% as the correlation suggests on chart 2.
Chart 1: China power consumption growth |
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| Chart 2: Power output growth Vs. GDP growth |
Peter Schiff Was Right Bitcoin Version
As the Bitcoin bubble has burst (Bitcoin price under $400), I wanted to look back on Peter Schiff’s call on the Bitcoin bubble.
Here is one of his funniest moments from November 2013.
Correlation Economics (Backup) 
