Short EURUSD position closed

I closed a short EURUSD position that was lagging in my account from sometime ago (from 1.34) and that was very small (I know, it is bold to have a position opened but life at work has not been easy and one has his priorities). Closed at 1.3130, I pocketed $400. If EUR remains weak for the day I might consider going long. It went down a lot for the day and the reasons for a strong EUR reported by Zerohedge are still in place, namely: USD-priced asset repatriation by French banks. This might only be a speculative movement against Manufacturing PMI figures, and might correct itself during the day or week, given that the European markets opened higher.

In any case, a tail move of 100 pips such as this one provided an excellent opportunity to get rid of this "legacy" position.

The Kingdom of SBain

Every news site and blog I follow is releasing pieces about Spain. I have a lot of friends, acquaintances and many interests in that country, so I can add some thoughts to the discussion.

So, let's recap:

• Mainstream media report that unemployment is not a problem for 75% of Spaniads. It is neither a problem for 45% of young people (16-25 years).
• Public transport has risen twice year-to-date and is poised for a third one tomorrow.
• Gas, electricity and water have risen.
• Tuition has risen in a system that has no institution ranking amongst the 100 best ones. The price for one academic year is 2000 EUR.
• While ordinary Spaniards cope with harsh austerity, recession and soaring unemployment, the Spanish king enjoyed a safari and ended up with expensive hip surgery.
• The king's grandson, Foilan, shot himself on his foot while illegally handling a gun with his father and had to be taken to the hospital.
• The king's son in law, Urdangarin, was accused of laundering public money in tax havens.

Still not happy with the summary above? Zerohedge reports that Egan Jones Cuts Spain For Second Time In Two Weeks, From BBB- To BB+. On top of that, "assets of Spain's largest two banks exceed its GDP". Now, how on earth can the balance sheet of two banks be larger than the economy supporting those two banks?

Dan D. is also commenting on the Spanish situation. He correctly states that "Greece was literally a day at the spa for what is about to hit Europe". I put a comment there that I reproduce here for convenience:

Luigi DraghiApr 30, 2012 01:37 PM

I believe their way out is creating a southern euro and a mechanism for foreign investors to cover internal devaluation for their investments. They NEED to steal wealth, and the way out is making people pay sovereign and bank debt via inflation and taxation.

The Spanish government passed a law which makes foreign current/savings/brokerage account disclosure mandatory for Spaniards. Failure to report foreign accounts leads to 5000 EUR per non-reported account. That tells me the EU has already made its mind about some Plan B (or C or D...) in which southern countries will be insulated without (de iure) expelling them from the monetary union. With this new law and the new southern euro, foreign accounts could be taxed as capital gains.

I already wrote about this ( http://federalreverse.blogspot.com/2012/04/spanish-corralito.html )

At this juncture, no European government is safe for investing. However, even if investors are forced to take haircuts, the real smash will be felt by the population. If you are European, especially if you are Spanish, know that your taxes are collateral for your banks.

The grand trick of fiat currency

I met a retired Spanish policeman yesterday and had some beers at a pub. This guy has had a vital experience that is worth the envy of any spy movie character, which is something of note given his "limited" education (and lack of better terms to describe). I had not seen this guy for 4 months and I always enjoy his company. Having been destined to the Ukraine, having no less than five mistresses there, and currently collaborating with the secret service, it was time to share a drink.

After catching up, he brought up the issue of investments. He participated in Bankia's (BKIA.MC) public offering and I recommended he closed down the position because once the stock carer JPMorgan stopped lifting the stock price, it would come down very quickly. He chose to follow the advice of his financial advisor at the bank instead of mine and now he is losing one third of his position. I still recommended him to get out and he told me he could not make losses so he would wait to sell... here is some sheeple mentality.

Then we turned to monetary issues, I wonder where he had heard that since I don't usually talk technically to these people. He asked me straight: "What happens if they devalue the currency, let's say that I have 300,000 EUR in a savings account, would I have the same 300,000 EUR if they devalue the currency?" and I answered "yes, you would nominally have 300,000 EUR, but you would be able to buy much less" and he said, "OK, that's OK then". I did not go further into that conversation because I was not behind a bank desk and my words would fall into oblivion.

So there you have it, sheeple wanting to be sheeple, forever and ever. You could not lie to this guy on the street and you would not leave alive if you did but dress white collar and he would put all his money in the financial ponzi of your choice. Bankers are very bright people indeed and their fiat currency scheme, playing with absolute and relative concepts, is truly a great masterpiece.

Two videos we always enjoy

Grab popcorn, please use a 42" screen, enjoy:

Monetary contraction, deflation and gold

Societies and their economies are complex systems that are not easily explained and whose dynamics are too complicated to be captured by statistical and econometric linear models. These linear models come from the linear nature of human thinking.

I hear people that favor the theory of an imminent sudden inflation as credit and the monetary base expand, and others that believe the only thing we will see is a job-destroying deflation that will only be stopped by a centrally-planed monetary policy.

What I think is that both maybe right. The only question is timing, just the same as the markets. Markets can stay irrational longer than you can stay solvent, says a market saying. The general economy may refuse to follow the path designed by planners because there is more to the economy than just the monetary base plus credit. The economy needs energy to move, and energy can't just be printed. The less energy you have, the more restrictive credit and money become if unstable economic processes are to be avoided. Therefore, the use of credit and money has the effect of a drug for the economy. They can boost it during some period, but the sustained use of those must be matched by an equal sustained use of energy. If no new energy is added to the system, inflation will appear but, at the same time, asymmetric access to credit and money can lead to deflation in those sectors affected by a late access to them. However, this is nothing but transitory, and money will flood the markets like a tsunami as credit is suddenly liberated by banks, usually responding all at once to a fear stimulus.

That is brilliantly described by Mike Maloney at his conference in Puerto Rico. His thesis, which I support, describes a scenario in which first a deflation will occur, and then an inflationary or hyperinflationary process will start some years later.

I think that is what we are seeing now. As I reported, the M1 monetary base is contracting in the Mediterranean countries and credit is inflating the housing bubble in Germany and Austria.

For this reason, gold may go down in the following months and still be an excellent investment, maybe the investment of your life. Do not pay attention to the permabull gang of KWN, they sell bullion, they tell you it is a bargain at USD600 and at USD1900: if it goes down is on manipulation and is forming a bottom, if it goes up then we are days away from going to infinity.

Jim Rogers and Marc Faber, who I regard as two stand-up and achieved investment professionals and honest individuals, have been saying in numerous occasions that gold dynamics are very strange and they expect some kind of important correction. Pay attention to them, they tell you for the sake of telling you. Make a little room in your heart for deflation.

Spanish corralito

Argentinian readers know very well what I say with the word corralito. Back in 2001, Argentinians were happy buying foreign products when the Argentinian Peso-USD peg was at full speed. However, one good day at the end of that year, when there were no more dollars left in reserve, the insanity was suddenly over and those dreams based on the lie in which they had dollars deposited in their bank accounts crumbled with no warning. People rushed to the banks to withdraw dollars as a reaction to the news of a Peso depeg, and demanded USD back, invoking the cognitive dissonant normalcy bias they had been surrounded with for years. Obviously they were answered to suck it up and go home, with their Pesos, if they wanted. Families' fortunes were decimated in just a few days.

As per the law just passed last Thursday, the subjects of the Kingdom of Spain must disclose any bank or brokerage account they have abroad. Also, an unprecedented financial amnesty was declared by the government to repatriate up to 2,500 million EUR. My take on this is that the Spanish government is seeking to repatriate these funds not only as a desperate measure to boost the economy, but also as a means to have access to more capital when a possible southern Euro is introduced in Spain.

I arrived at this conclusion by considering that if the euro falls, so does Europe itself, and such a powerful Mammoth will fight to survive, even if it means exhausting everyone underneath. Also, taking into account the inflationary means by which the currency issuer has access to the currency users' wealth, and that it is impossible for Spain to pay back the principal plus the interest of both private and public debt, namely by:

• An European/IMF bailout
• BCE LTRO to infinity
• Spontaneous industrialization and trade surplus achievement

and jointly with the taxation and possible forced repatriation of private funds thanks to the mentioned disclosure law, the most likely solution under my point of view is that the plan of a two-speed Euro might already be in place.

This would be simple: They would say that Europe has not failed since a basic framework of free commerce is preserved. However, people living in the south would struggle to maintain their wealth, and getting Southern Euros to the north would be extremely penalized.

As a first step, only residents of a country would be allowed to exchange their old euros to the newly issued north or south euros at a 1/1 exchange rate in that country, at par with their northern neighbors, ECB guaranteed an all. Savvy southern travelers will try to get some northern euros in their hands but they will be denied amounts that exceed ordinary expenses. Then, as the devaluation commences in a controlled but perceivable way, the general public will flock to their banks, demanding northern euros just as ECB/State/EU had reassured and they will be slapped in the face. At that moment, maximum amounts in withdrawal would already be in place and all electronic transactions would be under strict financial scrutiny by the state treasuries. Such a controlled but steady devaluation with closed boundaries will immediately be met by internal capital flows. Semi-large fortunes will invest their capital in state-denominated job-creating assets, while others will try to get anything they can to preserve value, but everything will be heavily taxed: gold, farms... even housing would (internally) experience some kind rebound, relatively alleviating pressure on big banks at the cost of Juan taxpayer. This means that most of the powerful families will react rapidly and maintain or relatively increase their wealth, while the working class will be made poorer.

From the outside, a mechanism of safe trade would be made available to foreign investors (yes, you have to think bureaucratically), which would act like some form of firewall. Thus, stored wealth and cheap labor could be harnessed by southern countries under the umbrella of inflation without disrupting the northern economies past the upcoming LTRO3 (which are already experiencing unpleasant bubbles).

There are many more problems ahead. Contrarily to what some analysts say, Spanish housing prices have not tumbled since banks have refinanced realtors and home builders during the last four years, even though they have been broke since the peak of 2008. The public and the international investor still need to see what those banks' balance sheets really look like. And Spaniards still need to experience the true meaning of corralito when they finally realize the argentinization of Spain.

A piece of advice... by the IMF

While reading ZH, I found this piece of news and I said WOW:

Further confirmation of gold’s continuing but gradual renaissance as a safe haven asset was given by the IMF yesterday who warned that a “growing shortage of safe assets” poses a threat to “global financial stability.”  The IMF identified $74.4 trillion of potentially safe assets today, including gold, investment grade government and corporate debt, and covered bonds. Sovereign debt crises are reducing the number of governments that investors trust to issue "risk-free" bonds just as new financial regulations are increasing demand for safe securities from banks. Importantly, the IMF’s latest Global Financial Stability Report’s introduction finds that  "In the future there will be rising demand for safe assets, but fewer of them will be available, increasing the price for safety in global markets.” “Both the lack of political will to reshape fiscal policies at times of rising concern over debt sustainability and an overly rapid reduction of fiscal deficits limit governments’ capacity to produce assets with low credit risk.” The IMF has warned regarding illiquidity in “safe haven” markets. Gold remains one of the most liquid markets in the world and the illiquidity in bond markets would see increased safe haven demand for gold.  The IMF is warning regarding deteriorating public finances. As many governments see themselves being downgraded - safe haven bonds may become less safe.

I have no doubt that financial elites are already positioned in gold, and have been for very long. Gold is a storage of wealth, equivalent to the work needed to extract it. It is not subject to the laws of supply and demand the same way other commodities are since its monetary component must be factored in. With the previous article, even the IMF, the very core of the financial monetary and credit system, is telling you.

I was able to detect the past week's temporary bottom with the help of a growing divergence of Gold/EUR ratio. With today's rumors about an incoming QE3, I have even more reason to celebrate. And if it turns down and falls, to quote Jim Rogers, I hope I am smart enough to get some more.

What the IMF is telling you is that energy is a scarce resource, and so is wealth, but currency is created and manipulated at will. In fact, the IMF is just expressing the theory of thermodynamical economics. But gold is beyond human manipulation and there might come times when trust is no longer assumed by every counterparty.