What do USD money markets have to do with gold? Money market funds invest in short-term highly rated securities, like US Treasury bills (sovereign risk) and commercial paper (corporate credit). But who supplies such securities to these funds? For the purpose of our discussion, participants in the futures markets, who look for secured funding. They sell their US Treasury bills, under repurchase agreements, to money market funds. These repurchase transactions, of course, take place in the so-called repo market. The repo market supplies money market funds with the securities they invest in. Now… what do participants in the futures markets do, with the cash obtained against T-bills? They, for instance, fund the margins to obtain leverage and invest in the commodity futures markets. In summary: There are people (and companies) who exchange their cash for units in money market funds. These funds use that cash to buy – under repurchase agreements - US Treasury bills from players in the futures markets. And the players in the futures markets use that cash to fund the margins, obtain leverage, and buy positions. What if these positions (financed with the cash provided by the money market funds) are short positions in gold (or other commodities)? Now, we can see what USD money markets have to do with gold! Let’s propose a few potential scenarios, to understand how USD money markets and gold are connected...
Perhaps the biggest affront to the natural order of things set in motion by central planners' intervention in capital markets of all varieties, is that through sheer brute force (of a printer, of posturing, and of outright politicized pandering), several academics in a low-lit room can suppress, for a brief period of time, the Darwinian survival of the fittest. Key word here is "brief" because in the end nature always gets even, and usually with a vengeance. In the meantime, however, epic distortions in what are already indefinitely irrational markets, which however always eventually regress to a rational mean (in popular jargon a process better known as "crash"), succeed in driving out legacy traders who no longer can navigate the chaos unleashed by the authoritarian ambitions oh the kind that ultimately resulted in the collapse of the Soviet Union, and every other centrally-planned establishment, when abused on a long-enough timeline... For a vivid example of what happens "when Darwinism fails" we go to a parable from a just released letter to client by the English hedge fund Toscafund, which looks at modern day trading from the perspective of fishing in the Polynesian seas, which also does an admirable job in explaining why being lucky is almost always more important than being good (sadly, one can not sell "luck" in newsletter format for $29.95/ month).
The Organization of Petroleum Economies, in its August report, said Iranian crude oil production in part led to a decline in overall output from the Vienna-based cartel. OPEC said crude oil production for its members, not including Iraq, was reported at 28.1 million barrels per day in July, a decline of 270,000 bpd compared with the previous month. The decline in OPEC oil production in part was led by Iran, which saw its export options curtailed by sanctions imposed by the U.S. and European governments. Tehran announced it still had a viable consumer base in China, however, which received about 12 percent of its oil needs from Iran. The Indian government, meanwhile, said it would circumvent EU sanctions by extending government-backed insurance to tankers carrying Iranian crude because of the "definite need" for oil.
In four months the debate over America's Fiscal cliff will come to a crescendo, and if Goldman is correct (and in this case it likely is), it will probably be resolved in some sort of compromise, but not before the market swoons in a replica of the August 2011 pre- and post-debt ceiling fiasco: after all politicians only act when they (and their more influential, read richer, voters and lobbyists) see one or two 0's in their 401(k)s get chopped off. But while the Fiscal cliff is unlikely to be a key point of contention far past December, another cliff is only starting to be appreciated, let alone priced in: America's Demographic cliff, which in a decade or two will put Japan's ongoing demographic crunch to shame, and with barely 2 US workers for every retired person in 2035, we can see why both presidential candidates are doing their darnedest to skirt around the key issue that is at stake not only now, be every day hence.
The S&P 500 is at its 2012 highs, and rapidly approaching all time highs, even as nothing has changed over the biggest near-term challenge facing America: the fiscal cliff. Ironically, with every tick higher in the market, the probability that Congress will come to a consensus over what would be a haircut of up to 4% to next year's GDP as soon as January 1 2013 gets smaller. Why - the same reason that Spain is unlikely to demand a bailout now that its 10 Year bond is back to the mid 6% range (ironically on expectations it will demand a bailout!): complacency - both by investors, and by politicians. After all, it's is all a matter of perception, and the market is seen to be "perceiving" an all clear signal. It means that the impetus to do something constructive simply does not exist, as we explained recently in the case of Spain (and Italy). It also means that Congress has no reason to be proactive about the biggest threat facing the economy: just look at the S&P - it sure isn't worried, and the market is supposed to be far more efficient than elected politicians. At least on paper. This line of thinking is also the reason why Goldman's head of equity strategy David Kostin (not to be confused with the person he replaced: permabull A Joseph Cohen, who off the record sees the S&P rising to 1600 or more) refuses to raise his year end forecast for the S&P, which has remained firmly at 1250 for the entire year. More muppetry, more dodecatuple reverse psychology, or is Goldman telling the truth? You decide.
How far is the Fed from reaching the bottom of its ammunition box? Well, both Mario Draghi and Ben Bernanke said no to yet more monetary stimulus recently. Wall Street unsurprisingly was disappointed. Wall Street expected more stimulus, as institutional investors are analyzing monetary policy from their own perspective rather than the central bank's viewpoint – understandable, but a big mistake. Wall Street's Conundrum: with the S&P 500 up less than 7% in 2012, the year is almost over, and the investment firms have little to show for it.
In Europe, the "no news" vacation for the past month was great news. The news is back... As is Merkel.
- "The Euro Crisis May Last 20 Years" - Welt
- German finmin: no new aid programme for Greece - Reuters
- Westerwelle Opposes Relaxing Greek Aid Terms: Tagesspiegel
- Euro Countries Plan Strategies to Prevent Break-Up: Sueddeutsche (via Bloomberg)
- Deutsche Bank Among Four Said to Be in U.S. Laundering Probe - Bloomberg
- Bundesbank Vice-Head Opposes Schaeuble’s Banking Proposal: WiWo (via Bloomberg)
- Westerwelle Opposes Relaxing Greek Aid Terms: Tagesspiegel
- German Industry Group Head says No Place In Greece For Eurozone: WiWo (via Bloomberg)
- German Taxpayer Association Head Criticises ESM: Euro am Sonntag (via Bloomberg)
- Spain says there must be no limit set on ECB bond buying - RTRS
- France Favors Greece Rescue Package, Opposing Germany: Welt (via Bloomberg)
Now that the "alternative energy" industry is in shambles following one after another solar company bankruptcy, as the realization that at current prices, alternative energy business models are still just too unsustainable, no matter how much public equity is pumped into them, more "traditional" companies have resumed circling the drain. First, it was Patriot Coal, which finally succumbed to reality a month ago. Now it is the turn of ATP Oil and Gas, which filed Chapter 11 in Texas last night. And sure enough, in a world in which nobody is to blame, and everything is someone else's fault, the CEO promptly made a case that he is blameless and it is all Obama's fault. According to Forbes: "The founder and chairman of [ATP Paul Bulmahn] wants the world to know that the Obama Administration—and its illegal ban on deepwater drilling in the wake of the BP disaster—is to blame for the implosion of his company. Not him. “It is all directly attributable to what the government did to us,” he rails. “This Administration has gone out of its way to create problems for my company, the company that I formed from scratch.”
Yes; correlation does not prove causation. Yes; there are lots and lots and lots of other factors involved — the end of Bretton Woods, globalisation, deindustrialisation, the birth of the computer and the internet, financialisation, the United States’ growth into a global imperial power and more recently the beginnings of a decline. But whatever the exact causality this does not make happy reading for those who lean toward the idea that more government involvement in the economy translates to a bigger share of the pie for the working class.
The retail sales figures from that perspective show a couple of very clear points: 1. Last year's Christmas season was not only weak and disappointing, it may have marked the inflection point in consumer spending (at least as far as retail sales measure); 2. The July "improvement" is far less impressive. June 2012 had an extra holiday shopping weekend, but registered only a 3.3% improvement over June 2011. Without an extra holiday weekend, July 2012 saw almost identical year-over-year growth; 3.4%. No matter what or how weekends were arranged within the calendar context, non-adjusted growth was not really all that inspiring in either month. If this inflection in consumption is indeed valid, it makes sense that the early part of 2012 would then experience economic “volatility” – revenue pressures at firms cause them to cut back on capex or re-investment in real projects, including a decrease in the pace of hiring new workers. Manufacturing falls off (seen in the ISM and regional Fed surveys) as reduced demand from businesses works its way back into this vicious cycle of employment malaise where job growth is consistently and vitally below population growth or labor force expansion. As government transfers drop off, the segment of the economy under the gun of stagnation rises in proportion and the bifurcated economy becomes more so – except that as the troubled half grows it inevitably pulls down the half doing relatively well. What looks like a muddle of weak growth is really the rot of monetary intrusions eating at what should be a free market-driven reset to the previous dislocation of failures from past monetary episodes. And it is all in the name of some ephemeral “wealth”.
"And yay verily it was written that as the moon passes thrice through the sky after providing your funds to the IPO-of-the-decade, thou shalt see said funds smite in two..." Faceberg just touched $19, that is a 50% haircut on its IPO launch price from exactly 3 months ago - but as CNBC's Simon Hobbs seems convinced...what about the short-interest? Ask JCP or GRPN! Well, easy come, easy go. Just ask Mark, who has lost half his net worth in 3 months. Do we feel bad for him and his $9.6 billion? No. But we will check back in another 3 months just in case.
While the Achilles heel to the endless "economic data" BS coming out of China may be its electric production and demand, both of which show a vastly different picture than what the Beijing politburo's very wide brush strokes paint, the US itself is not immune from indicators that confirm that anything the BEA dishes out should be taken with a grain of salt. One data set that we showed recently that paints a drastically different (read slowing) picture of the US economy which we noted recently is railcar loading of waste and scrap for the simple reason that "The more we demand, the more waste is generated by that production." Of course, the propaganda manipulation machinery only focuses on the "entrance" of production, and completely ignore the "exit." But an even far more important metric of the general health of the US economy may be none other than broad energy demand, in the form of petroleum deliveries and gasoline demand. If this is indeed the relevant metric to observe, then things are about to get far, far worse. As Dow Jones notes: "U.S. petroleum deliveries, a measure of demand, fell by 2.7% in July from a year earlier to the lowest level in any month since September 2008, the American Petroleum Institute, an industry group, said Friday." It gets worse: "Demand in the world's biggest oil consumer, at 18.062 million barrels a day, was the weakest for the month of July since 1995, the API said. Year-to-date demand is down 2.3% from the same period in 2011."
Moments ago Apple, long since the largest company in the world by market cap, just crossed $600 billion in capitalization, needless to say a record high, after adding the equivalent of 2.4 RIMMs in market cap in a few short hours. As of this moment, the company that makes a phone, a tablet, various computers (all of which now have an upgrade lifecycle inside of 1 year and ever shorter), has a product "ecosystem", retail stores and may be launching a cable box, is larger than the entire semiconductor sector, larger than the entire retail index, and at this rate of parabolic blow off top growth, will be larger than both combined in about 5-6 months. We can only hope that the company will soon use its $110+ billion cash hoard to launch a captive bank to finance the purchase of its products because unless consumers' disposable incomes are growing at the same rate (with penetration already quite high), and assuming of course it is still cool to have an AAPL product in a few years (just as it was the peak of coolness to have a Palm Tungsten a decade ago... or a RIM phone 5 years ago), the company that is now owned by about 250 hedge funds will certainly have growing pains in the future.
In a gold-based monetary system, every asset is ultimately backed by gold. This does not mean that every debtor (including banks) keeps the full amount of its liability in gold coin just lying around. Why would one bother to borrow if one did not need the money? It means that every asset generates a gold income and every asset could be liquidated for gold, if necessary. If a debtor declares bankruptcy, the creditor may take losses. But he can rely on the gold income stream for each asset or if need be he can sell the asset for gold. In a gold-based monetary system, money is gold and gold is money. Money cannot disappear; it does not go “poof”. Bad credit can be defaulted and must be written off. But money merely changes hands.