A View from the Trenches

Martin Sibileau's market letter

A View from the Trenches, April 23rd, 2012: " Remembering Von Hayek"

(Originally posted on April 23, 2012, at www.sibileau.com)

Because simplicity is a virtue, we decided to skip a week and write our comments today. Why? There had really not been any developments during the past two weeks that would have made us change our views. To be certain, even today we think nothing really fundamental has changed.

What has been keeping us awake at night however is the late and blatant manipulation of markets and key prices. The most obscene example is that of gold, where one can almost time the automatic sell-offs that are repeated continuously after 3am or between 10-11am Eastern time. Looking at the charts, the manipulation is so obvious that were it in a particular stock, the SEC would have already acted. But of course, it is gold we’re dealing with here…In general, we think the world is witnessing a phenomenon that Friedrich Von Hayek had already anticipated it could occur in a context like the one we’re living in. Here is an interesting interview on the subject:


In Von Hayek’s view, Economics is the study of social cooperation, where markets are an institution and a process for such cooperation. To be more productive and improve their standard of living, individuals specialize and allocate resources farther from the final act of consumption. But if that is the case, and the production process becomes so complex that it is carried out in different geographies by different people…how do all these people know what and how much to produce? Do men count with a signaling system to cooperate and achieve this economic calculation? The answer is fortunately positive: That signal is given by prices. The market signals that a production process is desirable by making the producer profitable and tells the same producer his resources would have been better used somewhere else, by making him unprofitable. Profit and loss therefore are nothing else but key signals needed for social cooperation.

But when men live in a levered world, with fiat currencies, these signals, particularly prices, are completely distorted. This would not be a problem if ultimately, the distortions were corrected. However, they cannot when governments start to repress markets by imposing capital ratios, bands on currencies, caps on commodity prices or manipulate interest rates (i.e. the intertemporal rate of exchange).

Taking this thought to the current context, it is clear to us, that thanks to these interventions, the European Union, to maintain its common currency has destroyed its capital markets, which consist mainly of its banks. There is a lesson to be learned: If you want to keep an overvalued currency with its banking system, you will lose both! But the authorities of the Euro zone are not alone. Back in September 2011, we had warned that the Fed currency swaps would put a floor to the Euro (just like the Swiss National Bank did), enhancing this distortion. We were not wrong here, we think, as the Euro has been able to stay above $1,30. One more thing needs to be said: The Fed swap is not targeting an exchange rate between currencies, but a maximum sovereign yield above which counterparty risk would explode generating a run against the USD financial system. The resulting implicit exchange rate is only a symptom and not the cause. If this is true, as Spain’s sovereign yield approaches key, dangerous levels, it would not be surprising to see a bailout of the Spanish system via swaps. Of course, just like they did in 2011, this time, authorities would also deny any specific bailout.

We are aware that today’s discussion may have sound too theoretical. But we are confident that very practical conclusions may be taken from it. First, this constant intervention and manipulation is going to make any economic/jobs growth unsustainable. As we mentioned in January, companies have been using this window of cheap US dollars, since December 2011, to increase dividends and leverage their operations. Default risk has consequently increased. In this regard, we maintain our bearish view of stocks, regardless of the fact that they have been making higher lows since April 10th. We think that the situation out ofSpain is going to imminently turn things for the worse. Second, and although gold may further be sold by the manipulators to the $1,500s, it will recover its value.

We should finally make some comments on the confiscation of YPF by the Argentine government, from Repsol. But we lack the space and time. Briefly, we are impressed to see how the world has been taken by surprise on this action and fear that it may become a symbol of what is to be expected in the coming years from trade and currency wars.

Martin Sibileau

The comments expressed in this website and daily letters are my own personal opinions only and do not necessarily reflect the positions or opinions of my employer or its affiliates. All comments are based upon my current knowledge and my own personal experiences. You should conduct independent research to verify the validity of any statements made in this website before basing any decisions upon those statements. In addition, any views or opinions expressed by visitors to this website are theirs and do not necessarily reflect mine. My comments provide general information only. Neither the information nor any opinion expressed constitutes a solicitation, an offer or an invitation to make an offer, to buy or sell any securities or other financial instrument or any derivative related to such securities or instruments (e.g., options, futures, warrants, and contracts for differences). My comments are not intended to provide personal investment advice and they do not take into account the specific investment objectives, financial situation and the particular needs of any specific person.


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# April 24, 2012 9:29 PM

Friedrich Dominicus said:

Great that at least here one can get some other posts. I commented on diverse blogs on the actions in Argentina.  It's a proof of the untrustworthiness of  this country. It has made a similiar move some 10 or so  years ago where all the private creditors were expropriated. And since then the "so called" middlle class seems to have vanished like snow in the sun.

To the manipulations I once wrote: fdominicus.blogspot.de/.../kleine-spekulation.html

It's in German but I try to translate the part I meant:

"Es sieht fast so aus als ob man in gar nicht so ferner Zukunft mit Massenverkäufen von Gold rechnen kann, denn wie sieht es wohl für die Fiat-Geldhüter aus, wenn Die Leute Ihr Papier nicht mehr haben wollen"

It looks  as if we'll see some mass selling of  gold from gold. One may ask how it looks for the fiat-moneykeepers if people do not want that paper any longer....

As you can see I posted that 2 and a half year ago. I since have read from diverse manipulation on the precious metal markets.

Anyway I still do not  think the end is near. Argentina just may lead the way. Disappropriation always was, is and will be an "option" for the deledefs world-wide.

You can see some the tries to get money sendign under control in diverse european countries it's "illegal" to pay in cash over a certain amount (down to  1000 €) The suckers are making it more and more obvious what bastards they are....

# April 25, 2012 12:32 AM

Martin Sibileau said:

Es sieht so aus, wirklich. Ich spreche Deutsch auch, aber nicht mehr so gut wie in meiner Jugend. Danke.

# April 26, 2012 3:41 AM

Friedrich Dominicus said:

Well it's quite not that easy as in the past to suprise me. But I know there's not end to the fantasies of defrauders. And if it't about the fiat-money-dealers one can bet: "It will get worse"

Haben Sie mal in Deutschland gelebt?

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