Guest Post: A Swap Spread Puzzle And Some Thoughts On This Time Being Different

This article has two weekend brainteasers. I don’t understand their significance fully. I know that human beings create beautiful delicate architectures to manage risk and they work imperfectly. Whether the motive is extinction avoidance, or to build a heaven out of hell, or eros playing off logos; creativity is the reason for beings. I enjoy studying the archaeology of risk mitigation.
Remember volatility first cracked a smile after October 1987, because sellers of equity puts became more afraid of jumps than they were before. Smiles and skews endure to this day, as classical tribute to persistence.
My point is that there are times when it really is different. This may be one of those times. Further, I’m not sure how to interpret these new things. Here are two open questions for the weekend related to some artifacts I found.

Eric Sprott On How Central Banks Are Setting The Stage For The Next Big Move In Gold

Gold bull markets are unique in that buying becomes driven by both fear and greed. Gold is quickly moving into the hands of those who are unwilling to gamble on fiat currencies or bonds as a store a value. The new owners of gold are unconcerned with its lack of yield but instead are focused on its historic ability to preserve wealth and its unquestionable value. Given the difficulty we have valuing paper money, it becomes extremely difficult to come up with a reasoned price target for gold. Today’s gold market is significantly different from the gold market of the 1970s for two reasons: 1) Central Banks are more likely to be buyers of gold today and 2) They clearly have little ability to dramatically raise interest rates with the massive increases in government issued debt. Thus, it is easy to envision a similar twenty-five fold increase in the gold price that was seen between 1970 and 1980, which would result in a gold price today above $6,000 per ounce. We expect the often quoted “1980 inflation adjusted high” of approximately $2,200 to be achieved in short order. These targets may well prove to be irrelevant, however, as the quality of our lives will be more greatly impacted by the continued evolution of our money and how the general public chooses to value it, or not. - Eric Sprott

Weekly Chartology And Prophetology

This week's most relevant estimates and charts from Goldman Sachs:

On Earnings:

Our top-down EPS forecast of $76 and $90 for 2010 and 2011 reflect +33% and +20% growth, respectively. Our pre-provision and write-down EPS forecasts are $81 for 2010 and $91 for 2011. Bottom-up consensus forecasts a 38% increase in 2010 to $79, and a 21% increase in 2011 to $95.

On Valuation:

Top-down, the S&P 500 trades at an NTM P/E of 14.3X (13.4X on pre-provision EPS). Bottom-up, it trades at NTM P/E of 14.1X and LTM P/B of 2.3X

Argentina Central Bank President Quits

After this week's Bernanke reconfirmation vote, which saw a record number of Senators vote against the Fed Chairman, the tenuous relationships between governments and central banks was put on exhibit once again, this time in Argentina, where as we previously reported, the confrontation between the Central Bank President Martin Redrado and president Kirchner had already reached a climax. Today Redrado finally quit, "saying the government has tried to destroy the bank’s independence and that he has sought to follow the law." Here is to hoping that Harry Reid's recent complete politicization of the Fed, in which he provided a Bernanke with a "votes-for-keeping my commercial real estate values high" deal, forces the Princeton economist to take the high road. We are not holding our breath.

CMBS Delinquencies Surge To $42 Billion, Or 5.2% Of Total; Average Loss Severity Hits All Time High Of 52.7%

The most disturbing observation from this month's RealPoint CMBS analysis, aside from the surge in delinquencies to an all time high of $42 billion, is that the average loss severity on CMBS liquidation has just hit a record of 52.7%. That means that on average less than half the loan is recovered in liquidation. Surely, this is not the kind of news that REITs are looking for as they perch from atop 52 week highs.

"Deny All Rumors" Is Almunia Lying About No Greek Bailout?

European Union Economic and Monetary Affairs Commissioner Joaquin Almunia speaks to Bloomberg, and says "Greece will not default. In the euro area, default does not exist. There is no bailout problems." Too bad crooked budgets and associated deficits can not be funded with hopes, dreams and bureaucratic pragmatism.

PIMCO's El-Erian Dissects Greece: "A Shift From Interest Rate Exposure To Credit Exposure"

"Over the next few days, we are likely to get some combination of Greek and European donor announcements aimed at calming markets, reducing volatility and reducing contagion risk. But the impact on markets is unlikely to be sustained as both sides face multi-round, protracted challenges which contain all the elements of complex game dynamics." - Mohamed El-Erian