Guest Post: You Can't Wipe Your Butt With Gold: Treasuries Since 1798 And Risk-Minimal Trade ConstructionSubmitted by Tyler Durden on 11/25/2009 - 15:03
There is good reason for the Federal Reserve to revive inflation in the economy, but she don’t want a bear market in Treasuries. These two objectives aren’t compatible at this point, because we are way beyond the ability to control what inflates and what doesn’t. Either the Fed re-inflates and a bear market in Treasuries ensues, or the United States government has insufficient political will to re-inflate, and we enter a Japanese spiral of deflationary hell or worse.
A treasury market bear will take the S&P to the fundamental low in this bear market. It will decimate HY and leveraged loans (theorization). Consumer credit will be in a constant downtrend. The financial system will suffer and downsize. A bear market in Treasuries IS deleveraging manifested. In a more positive sense, the bear market will begin the process of creative destruction.
Gold screaming higher doesn’t necessarily imply a doomsday scenario, a currency crisis, or a variant apocalyptic vision. Gold is just a straddle option to hedge government recklessness and theft. It is an instrument to clip the tail risk in otherwise risk-minimal trades, because it is an excellent long in times of inflation and deflation. But it’s not enough. It generates no income, and it is certainly without risk itself.
Developing story. The Tamil tigers are next in line to give Bernanke the one finger salute. Gold now at $1,186 $1,187. Do we hit $1,200 today?
Even with the market trading higher on the 5 or so shares churned by whatever rebate chasers are still in operation, Goldman has been quite week recently, and today the stock hit one standard deviation below the stock's November VWAP of 173.86. One std dev is +/- 3.4 so the most recent price of $169.13 must be looking marginally anomalous to the algos that use Goldman as a leading indicator for financials (and potentially the broader market).
And still everyone keeps on jumping into Treasuries, regardless of position on the curve...equities continue refusing to care.
- Yields 2.835% vs. Exp. 2.878%
- Bid To Cover 2.76 vs. Avg. 2.73 (Prev. 2.65)
- Indirects 62.5% vs. Avg. 62.4% (Prev. 59.35%)
- Indirect Bid To Cover 1.29
- Alloted high 87.98%
When it comes to relative value of the dollar, the last decade has been an eerie recreation of the the period from 1980 to the mid 90's. One notable observation is that while the secular bull market starting in 1980, which many are desperately trying to equate the current bear market/liquidity gusher/Keynesian circlejerk rally with, was accompanied with a 5 year long appreciation in the value of the dollar, things could not be more different now.
Also, if history indeed rhymes, look for the dollar to drop to the magical 70 level before we see both a near term rebound and another major swing up in the DXY to well north of 100 as the third iteration of the dollar cycle begins. Then again, never before has the dollar been the funding currency of choice. Which is why we tend to believe that while the downside is still in play, it will be limited, and once the trade inverts and everyone piles out of the burning dollar carry trade theater, the upswing could easily take out the 120 high reached in the last (red) cycle.
Gold now at $1,185. Just what happens when the DXY hits 70 in a few days?
An expanded look at the prospects for the Hedge Fund industry. Not many surprises: the hedge fund boom is expected to resume courtesy of the bubble building that made billionaires out of some of the most pro-cyclical, unimaginative permabulls in existence. With the concept of a free-market out of the picture as a result of direct intervention by the Fed for years to come, hedge fund inflows are coming back with a vengeance (FoF's, not so much). Yet it appears that in the future, the generous fee and lock up structures that were prevalent in the last bubble, will be increasingly more difficult to replicate.
You'll find the ever widening CDS on the fast-growing Hellenic debt. Rather frightening considering that CDS are revisiting march levels (remember: markets were scared by the slump in eastern Europe economies and numerous rumours on the blast of the euro were flourishing).
Today it seems that those fears are materialising: Ukraine is in a deep syncope (borders have been closed for two months due to the H1N1 pandemic) and Greece could be deeply impacted by the unwinding of the liquidity-driven ponzi on the Hellenic market. While this piece of news could be harmless for HFT or robot traders, it is also completely put aside by fat portfolio managers happy to eat up low priced turkeys for thanksgiving (-30%!!!). The EURUSD is flirting with recent highs (like a turkey dazzled by the headlights of the euphoria-maniac rally car).
IMF Chief Shares Concerns About The Economy, Excess Liquidity, The Sino-US Coupling, And Wall Street CompensationSubmitted by Tyler Durden on 11/25/2009 - 11:00
In an interview with Le Figaro, Dominique Strauss-Kahn shares his thoughts on a variety of economic subjects. Notable is his desire for central banks to begin soaking up the "water" which was used to put out the "1929-style" fire. Then again, as the Chairman has said, there is no threat that the Fed will ever end its risky assets Blue Light special, at least not under His watch (still, his December 3 confirmation hearing should be on everyone's TiVo schedule). Furthermore, this will certainly not happen so long as China keeps funding burgeoning US budget deficits, US importers be damned. And that won't happen as long as China needs the disappearing and maxed out credit consumer. Yet the various themes are starting to converge to a point in the future of maximum instability. Their resolution should be quite spectacular. Which is why by then all Goldman Sachs newly minted MD's hope to be far away, on a beach, collecting zero percent, courtesy of their gold holdings.
The widening of CDS spreads on Greek Sovereign debt has caught some attention and now Dubai CDS spreads are on the move: Commentary on Dubai from the EM guys...Dubai in focus as they do another $5b local tranche in the $20b Abu Dhabi program, then ask for extension in Nakheel maturities for 5 months. Very strange. Thought whole point of issuing the bonds was to pay for the Nakheel debt. Dubai CDS +130bps from o'night level of 318 ... seems to be hitting the European markets now.
Sequential popping of bubbles to commence shortly.
- Jobless claims drop to 466,000 as everyone moves to emergency benefits (Bloomberg)
- Consumers maxing out credit cards as spending outpaces incomes (Bloomberg)
- Durable goods orders fall (Bloomberg)
- The other side of the bubble: China banks prepare to raise capital - tens of billions needed after lending spree (FT)
- Connecticut AG Blumenthal joins Ohio in suit against rating agencies (Bloomberg)
- Farmers not benefiting from stock market move as Deere reports subpar 2010 forecast (Bloomberg)
- Vietnam devalues currency by more than 5%, after claiming repeatedly it will not devalue currency - sound familiar? (FT)
- Asian stocks rise as Australian Central Bank fuels growth hopes.
- Banks earn $2.8B in 3Q; FDIC says dangers persist -
- Consumer confidence in US unexpectedly gains, easing spending concerns.
- Dollar weakens on global optimism; Aussie gains on RBA's 'upswing' remarks.
- Fed officials say zero interest rates may be fueling undue risk in markets
- Japan property shares fall after developer Anabuki files bankruptcy with $1.58B in debt.
- Japanese exports fall by least in a year as global stimulus boosts demand.
$1,200 here we come. Bernanke just got punk'd. Again. From the Financial Chronicle of India: "The Reserve Bank of India (RBI) may well buy IMF’s remaining hoard of 201.3 tonnes on acceptable terms, which are now under negotiation."
Even as the government has taken on leadership roles in virtually every segment of the financial and corporate arena, and we see the impact of excess central bank liquidity every single day not in pass-thru lending by the major commercial banks, but in the price of Amazon stock which is now trading at Strong Conviction Lunatic Buy levels, there is yet one segment that the government is powerless to manipulate, no matter how hard CNBC tries (with its constantly declining audience each month the administration could have chosen a more popular medium to brainwash the masses). And, unfortunately for Obama, it is the one segment that is critical to this economy improving: the US consumer, which until recently accounted for 75% of America's GDP, and by implication, almost a third of world GDP.
The recurring problem: continued massive credit contraction - seen every month not only in the government's G.19 report, but direct from the horse's mouth: the big credit card companies. The most recent picture is indeed gloomy. After total unused credit card lines peaked at $4.7 trillion in Q2 2008, the number has plunged to $3.5 trillion: a $1.2 trillion evaporation of consumer purchasing power. The flipside- utilization rates continue to rise as the actual amount borrowed on credit cards is also declining, but a much slower pace. According to the FDIC's just released report, there was $784 billion borrowed between credit card loans and securitization receivables. The U.S. consumer is not only retrenching, but banks continue to limit credit card purchases, which further constrains spending, creating a vicious deleveraging, and thus deflationary, loop.
Even with equities rocking as gold's top blasted off yesterday, the credit picture was mixed. While most financials outperformed, with the exception of AIG, the action in other sectors was decidedly mixed, with industrials widening by a large margin even as underlying stocks ramped higer. Every product is now left to fend for itself.