In its November presentation, Hinde Capital presents some observations on why fiat money may be the latest exponential concept on its way to singularity status, with the now traditional implications of what this means for hyperinflation: "High (hyper) inflation is caused by financing huge public deficits through money creation. Even 20% deficits were behind but four cases of hyperinflation. The US government deficit is 10% of GDP, but currently the US deficit is over 30% of all government spending. The world reserve currency is in the red." He also points out the only assets not to join the exponential growth ("Global financial assets have risen 17-fold over the last 3 decades from $12.3 trillion to nearly $210 trillion") in other fiat funded assets and liabilities - gold. To wit: "Gold investor holdings stands at $2.0 trillion (Nov 2011), 0.96% of Global Financial Assets (GFA). In 2000 gold holdings were worth $227 billion, or 0.2% of GFA, but this isn’t the whole story... Today 0.2% would be worth $1.45 trillion ($1800 troy oz. Au) or 0.7% of Global Financial Assets (GFA). Therefore new investment gold only provided 0.26% increase in % gold holdings. In 1968 to 1970 % gold holdings of GFA = 5%, to attain this % at current values of gold ($1,800), $10.4 trillion dollars need to be invested. $10.4 trillion is equivalent to 5.8 billion troy oz at $1,800 or 1.2 x gold ever produced.5.8 billion troy oz. is 3.6 x known gold reserves (based on US Geological Survey). Clearly not only is public ownership miniscule, but to return to the 70s % holdings requires too much gold than these prices can handle. This transfer of gold will take place at much higher prices." And the world's central banks are doing their best to make the transfer happen faster...
We need to look at why the funding rates were cut. It is not because everything is better: Firstly this action, coming in a timely fashion, was certainly warranted and shows a new resolve to act in a banking crisis. However it is the fact it was warranted is the problem and whilst it makes Dollar funding cheaper, it remains to be seen if banks trust each other enough to lend. I am not sure about this and the situation must have been really bad for such action as it was clearly not as pro-active as they may like to suggest. A crisis was very close indeed and whilst this action eases the situation it may not be a cure. The banks still face massive headwinds from here. The RRR cut from China helped risk appetite earlier but again is a clear sign that lower growth and thus easing is on the way in China. Hard or soft landing we don’t yet know but a landing for sure as evidenced in last night’s fall in the PMI data. (China PMI came in at 49 vs 49.8 exp) The steep fall in exports was what caught my eye!
Modest beat with prices paid in line with expectations at 45, New Orders rising from 52.4 to 56.7, but the employment index mirroring the Chicago PMI decline and dropping from 53.5 to 51.8: taken in conjunction with today's Initial Claims, probably not the best way to enter the NFP number, yet we are somehow convinced the final NFP print will be 4 std devs above the mean Wall Street consensus. In other news, the headline number is the highest since June. Curiously, and as always happens in strange times, exports increased and imports decreased. One wonders just how realistic an export surge to imploding Europe or China really was in the past month really was.
Following yesterday's shove-liquidity-down-your-throat-of-last-resort action by the Fed et al. 3M USD Libor fell, admittedly marginally, for the first time since July 25th. The 0.1bps compression was practically insignificant as only 4 of the 18 member banks actually reduced their bids - Citi, Rabobank, RBC, and UBS but we are sure headlines will crow of the impact the coordinated central bank action has had already. What is most concerning when we look at the individual Libors of each member is one bank stands out over the last few weeks. Given that we know the dollar funding market is highly stressed (USD-cross currency basis swaps), this appears to be the only efficient way to understand which bank might be under the most stress. Given Credit Agricole's notably weak Tangible Common Equity Ratio and the fact that its Libor was such an outlier recently, it is hard not to suspect the global stick-save was instigated because this $1.59tn asset-heavy bank was on the verge of failure.
First it was Goldman, now it is Barclays lamenting what is painfully obvious: what has gone up violently, will go down doubly so, once the market realizes that what the Fed and the global central banks have done is applying a band aid to a severed artery. Naturally, the disappointment will be substantial, and while Goldman is angry that its tentacles have to be retracted for a few more weeks before it can acquire the equity of some European competitors for a buck a share, Barclays is angry because it is very likely that it, together with fellow British bank RBS, will be on the receiving end of market fury. This explains the statement by Barclays' Paul Robinson who said that the "market updraft" was "exaggerated" and "it is not easy to make a case that the magnitude of the news quite justifies the magnitude of the global market reaction, in our view." That's ok - the short covering knows best... if only for a few days, because as Robinsons says, "Market participants seem as fearful of missing a market updraft as they are of getting caught in a downdraft" - in other words we are all momos now, chasing the leader and pushing the wild market swings into swings with ever greater amplitudes, until one day absolutely nobody will be able to trade the daily gyrations created by ever more frequent central bank intervention.
Reality once again creeps back in, confirming that the 4 sigma beats in the economic indicators pointed out yesterday were mostly duds, except of course for the drop in the Employment index in the Chicago PMI. After a few brief weeks with a 3 handle in initial claims, initial layoffs once again jumped over 400k, to 402,000 in the Thanksgiving shortened week. As is now par for the course of the data fudgers at the BLS, the previous number was revised higher as is 100% the case always now on a weekly basis, from 393K to 396K. As a reminder, last week's forecast had been for a 388K print, so the 5k miss certainly looked better than an 8k, or 60% higher miss. Unadjusted claims was the silver lining, declining by 69.7k following the massive surge the week prior. Continuing claims also missed expectations, rising from an upward revised 3,705K to 3,740K, on consensus print of 3,650K. Probably most notable is the surge in EUCs as over 76k people dropped off continuing claims and had to file for extended benefits. Absent a further extension in the 99 week cliff at the end of the year, many people are going to lose their continuing continuing benefits. And going back to the BS from the BLS, as John Lohman's chart below shows that in 2011 initial and continuing claims have been revised higher the week following 91% and 100% of the time, respectively. A purely statistical explanation for this phenomenon is "impossible."
According to the ECB, deposit facility usage - an indicator of capital flight in the European banking system expressed in euros not dollars, just hit the highest since June 2010, over €300 billion for the first time in 18 months, rising from €297 billion to €304 billion overnight. On its face, this is not a good indication, with the only saving grace being that this was potentially before the market open on November 30, before the central bank announcement. Marginal lending, or the ECB's discount window, also rose from €2.7 billion to €4.6 billion, the highest since October 18. Needless to say tomorrow's deposit facility update will be critical because unless there is a major drop in usage, it will confirm that in addition to a USD-funding shortage which should have been ameliorated even if very briefly, other EUR-based risks are being observed by Europe's banks, who better than anyone know what the interbank system risks are, and the Fed's USD liquidity injection will have failed to achieve anything except to ramp risk higher for a day or two.
As the market digests the European bailout and prepapres to plunge back into the abyss of the unknown, we get ISM, jobless claims, construction spending and vehicle sales
- Lower than expected manufacturing PMI data from China prompted concerns surrounding sustainability of the Chinese growth, and raised hopes for further monetary easing measures by the PBOC soon
- Successful bond auctions from Spain and France resulted in significant tightening of the Spanish/German and French/German 10-year government bond yield spreads with heavy buying from domestic accounts
- Market talk of the ECB buying in Italian and Spanish government debt via SMP
- Gilt futures dropped more than 50 ticks following a lackluster Gilt auction from the UK’s DMO
Gold ended November with a 1.9% gain in US dollar terms, the seventh month of the dollar falling against gold so far this year. The euro fell 5% against gold in November. The British pound fell nearly 4% against gold. The Aussie dollar fell nearly 6.5% and the South African rand by 5%. Thus, gold again protected investors and savers internationally from the global financial crisis. Gold is now more than 20% higher in dollars and 18% higher in euros and pounds in 2011. It is only 9% below the record nominal high of $1,920/oz reached in September and given the degree of systemic and monetary risk in the world this price level will likely again be reached by early 2012. Global ETF holdings of gold topped 70 million oz for a second day in a row, marking not only a new record high, but meaning that ETF holdings of gold are double those held by the Chinese central bank and are just a few metric tonnes behind those of France, the world's 5th largest official holder of bullion (2,435T).
- Fed Dollar-funding Cut Shows Limits of Action (Bloomberg)
- Global euphoria runs out of steam (AP)
- Chinese Manufacturing Activity Slows (FT)
- Draghi calls for eurozone ‘compact’ (Dow Jones)
- Close Ties Facilitated Coordinated Moves (Hilsenrath)
- Congress Push to Relax US Securities Laws (FT)
- ECB hints at action if euro zone adopts fiscal pact (Reuters)
- Japan to Compile Fourth Extra Budget (Bloomberg)
China cut rates yesterday potentially as part of a globally co-ordinated central bank plan or co-incidentally because their economy was losing steam or both. I would bet there was communication and that may have impacted timing but with the weak PMI number China did what was necessary for China - as they always do. Much was made of the globally co-ordinated rate cut on USD swap lines. Any swap requires a minimum of 2 counter parties and since this plan had been globally "re-instated" or "re-affirmed" in September the market may be making too big of a deal of this global coordination. This was largely cutting the cost of an existing series of global swap lines by 50 bps. It did not change the liquidity available to banks, just the cost. Currently it seems that only $2.4 billion is being used. It is not a bad step but no new liquidity is added (through I work under the assumption they will increase availability if needed) and it is impossible to cut unilaterally and would be pointless since as recently as September there was global agreement. Rumors that a bank was on the verge of failure seems overdone and changing this fee by 50 bps does nothing for that. Sadly, since the Fed is both independent and unaccountable there may be additional activities behind the scenes that we don't know about that may be supporting strong price action. More people feel forced to follow market moves based on the assumption that some people may actually KNOW something about future policy moves or existing but undisclosed actions. It is a rational reaction but does tend to exaggerate the moves and lead to quick reversals when no one actually KNEW anything.
French Yields Fall By Record, Other Sovereign Spreads Collapse Following Successful French, Spanish AuctionsSubmitted by Tyler Durden on 12/01/2011 - 07:09
The first, if very transitory, fruits of a US-taxpayer (insufficient) bailout of Europe bear fruit. This morning Italy’s 10-year yield has dropped below the psychological 7% barrier while the yield of Spain’s 10 year bonds is testing a break below 6% after strong auction results in France and Spain. As noted by Bloomberg, "easing funding concerns is also buoying core bonds as French yields drop the most on record while spreads on Austrian, Belgium bonds over bunds narrow significantly to break/test key 50- and 100-DMA supports." Naturally the safe-havens, Bunds and Gilts, slump, which makes the probability of another failed German auction remote as primary market demand will rise at lower prices. Specifically, in France the 10 year yield dropped -25bps to 3.15% the biggest decline since at least 1990; lowest since Nov. 9. France today sold €1.571 billion bonds due Oct. 2021, Average yield 3.18% vs prev 3.22% and a Bid/cover 3.05 vs prev 2.24. France also sold: €595 million bonds due Oct. 2017, at an average yield 2.42% and a bid/cover 4.4; €1.1 billion bonds due April 2026 at average yield 3.65% and bid/cover 3.24; €1.08b bonds due April 2041 at average yield 3.94% and Bid/cover 2.26. Elsewhere Spain also performed quite well: Spain met its maximum auction target today to sell EU3.75b in 3 bonds, fetching higher bid/cover ratios for all of them: Spain sold EU1.2b 3-yr bond due April 2015 bonds at an average yield 5.19% vs prev 4.27% and a bid/cover ratio 2.7 vs prev 1.66; also sold were €1.15 billion 4-yr bond due January 2016, an average yield 5.276% vs prev 5.187% and aid/cover ratio 2.83 vs prev 2.7, and €1.4b 5-yr bond due January 2017 average yield 5.54% vs prev 4.85% - a bid/cover ratio 2.69 vs prev 1.62. Yet in terms of outright liquidity, the primary beneficiary were USD-factors: 3-month Euribor/OIS spread continues to rise today to reach highest levels since March 2009 despite the concerted central bank actions on dollar swap funding, specifically the 3-mo Euribor/OIS +1 bp to 1.0 from 0.99 yesterday, highest since March 2009. However, funding strains ease further in cross-currency basis swaps. 3-mo EUR/USD cross currency basis swap +10.63bps to -120.63bps, least since Nov. 15.
First Black Friday, and now the Modern Finance Farce Company Surprise Twist Ending takes on the global bailout...