Banks hold reserves to pay out withdrawals or take losses on bad loans, not because law dictates they must. If you’re a bank and you don’t have sufficient money to pay out, in a classical banking sense, well then you’re pretty fucked.

In this day of money printing, I get that banks love having lower limits, because then they can play tight and fast with the houses money. But from their economy’s standpoint, what does lowering loan reserve requirements for their banks mean for China?

Is it a good thing, really?

Or does it indicate that Chinese banks are having some serious issues juggling their obligations without government intervention?

Not all central bank printing needs to lead to higher prices. Come on people. I mean, if an economy has 20X the currency in credit running around and the central bank doubles the currency, then sure the same credit level would result in higher prices. But if the central bank is printing because that 20X number is getting crushed down to 10X as bad loans and poor investments dampen the system, well then that printing really just gets you to about break even.

Especially looking at China’s inflation and housing problems, why on Earth do you think the China reserve cut is a good thing? If anything, it’s an action they shouldn’t have wanted to take.

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Look, this will sound silly, because I’m basically arguing that you should worry when European yields go up, and ignore them when they go down. But that is exactly what you should do, and here’s why:

The ECB is doing the buying.

Now, on that point alone, the ECB can make EU bonds look as low as they want. Markets and auctions are funny things. You could have 99% of trades say that Security A is worth $10. And then the final 1% of trade activity can go for $15 and suddenly the 99% of price discovery never mattered; except that it did matter, way more than a few dumbasses crowding in overpriced sales at the end of the day (and especially if those trades are designed to create suckers to buy much larger volumes of Security A tomorrow at inflated prices).

That’s what’s meant when people talk about markets “pricing on the margin.” It’s why econometrics rarely predicts anything. It’s why, in general, you can get massive bull rallies on little to no volume, or huge price collapses on the same.

The ECB could make Italian 10 years tomorrow read .01%, and it wouldn’t change the situation in the least. But if they did that, then the jig would be up, now wouldn’t it? They’d be called out. So instead, it’s steady drift downwards, and much talk of “renewed market confidence,” which these bastards are still convincing themselves is all that’s missing from the grand success they deserve.

There are two outcomes here which should concern you, given the magnitude of the debt that needs to be cycled. The first is, the ECB keeps buying their member’s bonds, while professing they aren’t/won’t/never, and receiving no help from private equity markets.

In this case, the euro goes to par against the dollar, and our (U.S.) exports go to zero.

The second is, the ECB, realizing they will not trick private market participation, throws in the towel and sends some very large nations into default.

In this case, European demand dries up, and…our (U.S.) exports go to zero.

Are you seeing a pattern here?

The case that avoids these outcomes is not contingent on printing/no-printing. It’s contingent on cooperation from private creditors willing to roll over the debt on their backs, and keeping the EU monetary supply in balance.

If that happens, I will be proven wrong and I will reluctantly cover my oil and energy shorts, hands in pocket, face to the ground.

But now, I ask you, are private markets falling for the “All is well! All is well!” sounding board? Bank participation in European debt is at an all-time low. Money is being held up in reserves. Corporate balance sheets have never been higher. Greece and Portugal are looking read to go over the edge.

But hey, Italian and Spanish yields are lower. Just this: who’s buying?

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Great fucking work Ben; I think you got that 2% inflation target yesterday. Can you point to a commodity that wasn’t up?

A Zerohedge guest post yesterday was discussing the models the Fed is using to define core inflation. Take a look right at them; the variables include oil prices, which are presently going on a tear. The price of oil is given an entire relationship unto itself, it’s so important.

Just looking at that model, the only way that Bernanke’s idiotic “commitment” to more stimulus passes is if the dollar gets so strong that cheap imports flood the system, overcoming the rest of the game (not that the model makes much sense anyway; substituting an estimator for an entire economy of activity is foolish).

By his own standard, he pretty much crushed hopes of devaluation yesterday by setting off the coke run. Although the point of the model isn’t to make sense; it’s to bait idiots who aren’t confident enough to call him on it.

And where are these reports of QE3 promises coming from? I’ve looked for every transcript of that speech imaginable, and nowhere does he say “I’m going to be dipping into MBS paper.” I see the same thing he’s been saying time and again; if deflation returns with a vengeance, he’ll engage in more easing.

You think he’s going to do that here?

The guy said we’d have low yields…maybe. That’s about it.

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Oh well that’s grand, the Fed is predicting it will hold rates low for another two to three years. What a novel bit of statistical modeling that took. I wonder: what methods does one use to forecast one’s own choices? Did they use their prior data to calculate the expected outcome?

“Why I do believe I will hold rates low until 2013,” says Bernanke.

“Wait a second there, sir. I see that from past statements you’ve made, you’re a chronic liar, and your’ forecasting has an error rate of one standard deviation, usually to the high side,” Janet Yellen quips in.

Elizabeth Duke leans over. “Yeah, she’s right. You’d better tack on a solid year, just because you seem to contradict yourself so much.”

“Damn, didn’t realize I was such a hypocrite. Okay, 2014 it is. Well that’s a useful insight; I had no idea what I was going to do. Now at least I can know what I expect I know what I’ll do.”

Fucking. Useless. Drivel.

What point is there to this? You want to know what it tells me? It tells me Bernanke & Co. are stuck with their hands tied behind their backs. It tells me there is actually nothing better they could be doing right now, than restating their “commitment to low interest rates” because the economy cannot withstand more money printing.

It tells me they are boxed in with nowhere to go.

I am not at all afraid of a Fed announcement ushering in new easing, because I don’t think these people believe it will actually help. Even the likes of Duke have to be questioning the faith, after a half trillion of purchases forcing treasury rates lower managed to accomplish nothing.

Oh, wait, I guess it did circulate a half trillion additional dollars through the economy, forcing oil prices higher and putting the squeeze on the poor. That it did very well…

Let me elucidate this point again. If Bernanke is going to ease, he needs room in prices to do so. We don’t have that now. People can’t stomach another $20 on the price of oil, rolling inflation targets be damned. That oil prices are this high is alone enough to stay his hand. So if you’re projecting Fed intervention coming this year, you’d better be rooting for my oil shorts to take me back to break even from last year, because shy of that, you aren’t getting a penny.

But don’t worry, you’ll keep getting these “clarifications,” “clarity statements,” and my favorite, “clarifying statements of clear clarity.”

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I’m back in the swing of my usual day, after spending most of the weekend in western New York, attending a funeral service.

Weddings in the summer…funerals in the winter…that about sums up my years.

Now, for whatever reason, oil markets are cascading down, bowing to reason. I don’t know if this will be the lead up to the big plunge, or if it’s just another head fake before more pain. But what I do know is that oil prices right now are completely unrealistic. Oil should be in the $80’s, at most.

The Iran embargo is only better for oil prices. There’s more than enough oil for the major economies, but we fight over every barrel produced. The embargo is a de facto division of the planet’s oil; Iran and some others go to China; the rest of the Middle East is Europe’s; and China and Europe in turn butt out of American oil.

This simple restructuring could allow prices to plummet, as you can bet supply will not be affected by this act. However, demand will be controlled, artificially, by non-compete agreements. We’re making a buyer’s market here, but you are all too busy crying in a corner to see the big picture.

Finally, Europe remains a train wreck. The issue at hand is not a Greek default, although it’s proven very funny watching the talking heads go from dismissing a Greek default to declaring it imminent but dismissing any real consequences.

You lot are nuts; the big looming issue is that Europe, in net, needs to either default on a trillion euros this year, or print them, because private markets are not in the least interested in investing in countries with 100%+ GDP and swelling incompetent windbags for leadership.

If (When) Europe continues to break down, the repercussion is going to be U.S. exports that crumble. That will crush U.S. growth as U.S. multinational conglomerates, plus half of emerging markets, are going to see earnings get slaughtered from exchange rate dependent “one-time” line items…indefinitely.

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Hey, do not concern yourself with Europe’s problems. If you want to escape that old sawmill, all you’ve got to do is throw money into China! China is flashy and new, with all the latest and greatest things to mesmerize you. So says Jim Rogers and other noted China bulls.

The fact that Chinese manufacturing continues to shrink at a rapid pace should not dissuade you in the slightest from throwing your life savings into their equity markets; which are of course guaranteed and well respected legal property, as dictated by the Chinese government. Chinese officials carry themselves with the utmost dignity and respect for their fellow man, and would never do anything that might be viewed as overstepping their bounds.

Never you mind that of China’s $1.2 trillion of exports, 20% of those sales go to the EU (before factoring in the UK), or that exports to the U.S. and the EU were down 12.5% and 19% last year, respectively. These are simply facts, and as everyone knows, China is impervious to facts.

In the golden land of China, Chinese officials do not just falsify reports and create phony statistics. The Party of Mao is so thoroughly in command of China that when unemployment is unsatisfactory and the government feels the need to print better numbers, a corresponding number Chinese people immediately find employment to satisfy those publications. Lesser nations have to spend months organizing labor and resources and managing production targets to achieve this end. But China is simply that much better.

Thus, Chinese officials always speak the truth. Unemployment in China persists because China does not wish to make the rest of the world feel inferior. It is their gift to us; but one day China will simply make it law that everyone in China has a job and is content, and then we will all be like “oh damn, I’m envious.”

Actually, China is so good, you should do more than simply buy their companies, with their crowning achievements of superior Eastern processes and zero error reporting. You should take the next step, and tie up 50% or more of your net worth into highly illiquid investments, like Chinese farmland.

Chinese people absolutely love it when foreigners buy up their ancestral homeland in huge swaths, especially when the Chinese overlords dictate that some of them should be unemployed and suffering, as a sort of fasting. When this happens, it never tempts them to encroach upon the absolute legal rights of the non-Chinese men and women who have seized their properties. As is well known, Chinese communists have incredible respect for property rights, especially of non-citizens.

But if this is not enough for you (and I know you may hardly be containing your excitement), then you can take it all one step further; move to China.

Chinese culture is one of the greatest in the world. From refreshing labor in FOXCONN facilities, to a wonderful 300 mph commute; from morning jogs through stimulating rain in Beijing, to a delicious cup of fetus soup on a chilly night; and all the greatest outlets for you to voice your non-native opinions – a permanent relocation to China is a successful choice for any aspiring investor.

If your Chinese farmland already has a homestead on it, then you are all set. However, should you find yourself in need of housing, it is your good fortune that China has many vacant locations for you to buy – literally entire cities of units, actually. This is because demand for Chinese housing in immense, but China foresaw this decades ago, and hence has managed to stay perfectly ahead of the curve.

The wonderful thing about Chinese housing is the poorly kept secret that no one ever loses money on it. In fact, to accentuate this point, China briefly made it illegal to sell your house for anything less…purely a joke, naturally.

What is certain is that, whether you are committed to a 100% Chinese investment lifestyle, or are just looking to grab yourself some rice paddies or tech companies, China will always be a good investment regardless of what the rest of the planet is doing, because they are totally isolated and in complete control of every aspect of their own nation.

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