Now that it has been made clear that the BIS and its member banks engage in gold swaps, which imply that gold price volatility has to be kept to a minimum, thus inviting the opportunity for, gasp, manipulation, Europe, once again seeing spiking commercial paper rates (yeah, that whole myth about dramatically better money markets was vastly exaggerated), was scratching its head earlier today as to what is a good safe haven for capital. And judging by the EURCHF chart below the answer soon presented itself. After getting sold in droves by the SNB last night as the Swiss Bank was intervening in the pair (contrary to posturing otherwise), today the market is once again testing the bank's resolve,to load up even more euros on its already burgeoning balance sheet.
Another day, another day of endless pain for investors in the "story" IPO of the year, for which positive net income is only an irrelevant side factor and to be ignored (just ask Andrew Tilton, who sees a 99.3% probability the company will make its investors rich to quite rich sooner or later). In the meantime, if you bought the stock as recently as 5 days ago, you are now down 50%. Elsewhere, stocks are doing their own thing and doing the apeshit dance even as credit is once again largely ignoring all the insanity conducted by a few short circuited computers.
Goldman outdoes itself again. After Jan Hatzius has been banging the economic slowdown drums for days now, the firm's other prominent economist Andrew Tilton is out with a new report "Recession Forecast Models Back in Vogue", according to which the firm plugged in a few numbers into an overclocked iMac (appropriately equipped with the No Recession Ever ap), asked if there will be a recession, and the result was, stunning, "no way in hell." Most hilariously, the report contains the following stunner: "Typical recession forecasting models estimate a near-zero likelihood
that the economy has entered recession again, or that it will in the
near future... The best news first: the model shows essentially zero probability that the economy is currently in recession. Payrolls have generally been expanding in recent months and the unemployment rate has actually come down slightly. This is unlikely to be a controversial conclusion for most market participants and so we will not dwell on it further." In other words, because everyone knows that there is really no trouble in the jobless arena, aside from some rumblings in the periphery that the real unemployment rate is, oh, 16.5%, Goldman sees no need to discuss this data point, as it is really completely irrelevant. Oh yes, and the model refs out if you assume in negative input. Moody's coupled with a dash of European stress tests anyone?
After slumping 4% yesterday to close at 2,127, the Baltic Dry has plunged yet another 5% today, to close just above 2,000 at 2,018. This is the lowest level for the index in 14 months since May 5 of 2009 when it last traded by 2,000 and a reason for all Chinese trade "resurgence" bulls to reevaluate their thesis. Did China outsmart everyone, with the Yuan "reval" coming at a time when planned foreign trade would be de minimis? In the meantime, this is bad news for Australia and Brazil, and especially the AUD and the BRL, but who cares about facts anymore.
On Tuesday, gold dropped to its lowest level in 6 weeks as investors explore riskier assets. China’s statement that it has no plans to start allocating more gold to its reserves (percentage wise), isn’t giving bulls much to work with this morning. Gold opened at $1212.2 per 100 troy ounces, and dropped to 1195.1 by closing time.
- Unlike the US, Germany can pass a budget, and a strict one at that (Deutsche Welle)
- Excessive debt may sink global stocks to crisis lows (Bloomberg, h/t Naufal)
- BP is the new RadioShack - now reported in Abu Dhabi talks (Reuters)
- US banks face "untold problem" as muni debt swells (BusinessWeek)
- The sevens sins of GLD (Bullion Bulls Canada, h/t Kyle and Robert)
- Deutsche Bank shakes up algos (Traders
China's State Administration of Foreign Exchange (SAFE ) is once again making waves, by reminding the world about its trillions in dollar-denominated holdings, and that these could be dumped in a heartbeat. Of course, in tried and true Chinese fashion, it is notifying the world it has no intention of using the "nuclear option" which of course is merely a reminder that the nuclear option not only exists but is certainly at the forefront of any "diplomatic" negotiations with the US. As Reuters reports, "In a series of questions and answers posted on its website, www.safe.gov.cn, SAFE asked rhetorically whether China would use its $2.45 trillion stockpile of reserves, the world's largest, as a "nuclear weapon." Apparently, the primary focus of the Q&A was to allay fears that China may be stockpiling gold in the open market: "SAFE was lukewarm about gold as an investment. "It cannot become a main channel for investing our foreign exchange reserves," the agency said, noting the size of the gold market was limited and prices were volatile. Buying more gold would also not help much in diversifying China's reserves." Of course, with all this occurring in light of recent disclosure that the BIS has been involved in gold swaps to provide liquidity to unknown banks, immediately obviates this statement, since, as we have pointed out previously, the Chinese 7 and 30 Day repo markets are still sufficiently strained, and gold would certainly come in useful to allay fears that domestic banks have something beyond massively underwater residential loans on their balance sheets to fund trillions in liabilities. All the Chinese statement really is, is a warning to the US to avoid following the advice of such permaspenders as Krugman, and now Goldman, and to launch into another round of monetary devaluation via QE. We are skeptical that once Bernanke puts the presses into turbo mode once again, that China will theatricize the same kind of wholesome support for US-based assets.
- Asian stocks fall, Yen strengthens on slowing US service industry growth.
- Brazil's Lula falters in bid to cut floating-rate debt as rates increase.
- China has significantly increased its purchases of Japanese govt bonds as it diversifies its foreign-currency reserves.
- China plans new resource tax on coal, oil, gas in Western areas.
- Europe will outline stress test procedure.
- Iceland’s lenders stand to lose as much as $4.3B, after court ruling last month found that some foreign loans were illegal.
- Oil traded near $72 a barrel in New York.
And now the latest joke - the increasingly more incorrectly named "stress" tests being conducted in Europe are now officially confirmed to be anything but. As Market News reports: "Planned stress tests for European banks will cover their resistance to a crisis in the market for European sovereign debt, but not the scenario of a default of a Eurozone state since the EU would not allow such an occurrence, a German newspaper reported Wednesday." Now that is some serious downside stress testing. Of course, by the time the stress tests are found to have been a joke, and the country hosting the bank blows up just becase the bank's assets are 3x the host nation's GDP, and the country is forced to bankrupt, it will be far too late. So let's get this straight - the very issue that is at the heart of the liquidity crisis in Europe, namely the fact that a bankrupt Greece has managed to destroy the interbank funding market in Portugal and Spain, and the other PIIGS, and has pushed EURIBOR and other money market metrics to one year stress highs, and forced the ECB to lend over $1 trillion to various central and commercial banks, will not be tested for? Fair enough - if the ECB wants to treat the CDS vigilantes as a bunch of idiots, only to be hounded in the press with derogatory words as "Wolfpack" and much worse, so be it. But it certainly should not be surprised if this is latest show of idiocy by Trichet's henchmen serves as the springboard for the latest round of spreads blowing up across Europe.
RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 07/07/10
Historical market data that suggest our current situation resembles very scary periods in times past (i.e., the 1929 crash to be specific) is beginning to pile up. Let's look at the set up from the perspective of charts. Most notably, historically, the value of the S&P500 relative to the price of gold reaches a bottom at roughly 28% (all-time low = 19%). The ratio is currently 94%. Either gold is 3x underpriced, or stocks have 75% downside. - Brandon Ferro, Managing Member, Hevea Partners
Another week, another major derisking of European names. While the drop of China out of the Top 10 can only be attributed to the summer doldrums, the top countries are mimicking the World Cup Final, and are all European, amounting to over $1 billion in net notional derisked in the past week. These are Germany, Italy, Spain, Austria and the Netherlands, with Greece and Poland at 6 and 7, and Brazil, South Africa and Colombia rounding out the top 10. On the other end, by a smaller margin, the rerisking of France and Portugal amounted to just over $500 million in the past week. The most active name was Brazil with 1,109 contracts unwound or almost $10 billion in notional, even as the net change was one of derisking. It appears Europe will have no peace from CDS "speculators" testing out the ground in each and every country, until it the rolling wave of defaults finally sets in as Niall Ferguson stated earlier.
Goldman Sees "Disturbing Signs" If Government Does Not Bow Down To Krugman, Reflate Monetary And Fiscal BubblesSubmitted by Tyler Durden on 07/06/2010 - 20:09
Last week, Goldman, in a piece unambiguously titled The Second Half Slowdown has Begun, made it all too clear that unless the US government were to succumb to yet another, and another, and another round of drunken sailor spending, the gratuitous ability of its sellside analyst to place crap companies on Conviction Buy lists may suddenly become mysteriously impaired as reality seeps through the gaps, thereby infuriating CEOs of worthless and overlevered widget makers, who know all too well their corporate earnings are about to be taxed through the nose by the Obama crack economic team, as their stock is about to plunge. Today, just in case the threat may have been missed by the cheap seats the first time around, here comes Jan Hatzius with the ominously titled "Disturbing Signs" which reads like Paul Krugman's induction essay into the Useless Economists' Society.
Now that America is on record spending autopilot and nobody cares or knows just what the 2010 deficit pattern of the government will look like, and, more importantly, the debt issuance, we have compiled historical quarterly data comparing the change in US deficit and debt data. As the chart below demonstrates, over the past 10 quarters, on average the US had added $400 billion in debt each quarter, while increasing its deficit by about $275 billion, with debt issuance surpassing any given period's deficit by almost 50%. To be sure, the data in the debt change is skewed by the outliers of Q3 and Q4, which were not so much an increase in term debt, but a massive issuance in short-term debt holdings, as the entire world scrambled to place their money into ultra-secure 30 Day and other Bill securities. As a result of these two debt outlier points, the US is now stuck with rolling over half a trillion in short-term debt on a monthly basis. Either way, it is obvious that it will likely be impossible for the US to trim it quarterly debt issuance materially below $400 billion per quarter, and will likely see this number increasing as tax receipts continue declining. Additionally as quarterly deficits are unable to drop below $300 billion (note the Q2 '10 data excludes June deficit data), once interest rates start climbing, look for these numbers to surge once ever greater portions of the US deficit go to simply pay the interest on the federal debt. Bottom line, with the US expected to generate a deficit of about $1.5 trillion in the next fiscal year, the napkin estimate says that the US will likely incur between $2 and $2.5 trillion in debt over the next year. And now you know even better why the administration is now spending money with no blueprint whatsoever.
US Ends June With $13.2 Trillion In Debt, Adds $210 Billion In Total Debt, On Track To Breach Debt Ceiling In Under Six MonthsSubmitted by Tyler Durden on 07/06/2010 - 17:25
In case one is wondering why the House Democrats attached a document to the emergency war supplemental bill that "deemed as passed" a non-existent $1.12 trillion budget, which basically allows the ruling party to start spending money for Fiscal Year 2011 without the constraint of an actual budget, here is the answer: on June 30, the US closed the books with just over $13.2 trillion in total debt, an increase of $210 billion in one month, or $2.5 trillion annualized. There is just $1.1 trillion left on the ceiling. As we have long been warning, at the current run rate, the ceiling will be breached in under six months, or just around November 2. More disconcerting is that the monthly debt roll continues to be in the "ridiculous amount" category, hitting a total of $660 billion, of which $583 billion was rolling off Bills (we are not sure what the $19 billion im "GSE investment" was for, but we are fairly sure the words Ponzi and Perpetuation are part of it). Of course, if America knew that according to the Obama non-existent budget the debt ceiling would be breached in 2010, it may not have a favorable reception among those few who are still willing to vote for either party of the bipartite farce that passes for a government.