Archive - Sep 26, 2010

First one, now all. Just as we predicted - fan: meet feces.

Something funny (and quite revolutionary) happened during the CBGA's (Central Bank Gold Agreement) year ending this Sunday - the group of 15 signatory banks sold a mere 6.2 tonnes of gold, a massive 96% decline from the year earlier, according to provisional data.This means that unlike in the past, when it was central banker prerogative #1 to sell some gold and every year just to keep all the longs on their toes, this year the trend has finally changed. As the FT reports, "the sales are the lowest since the agreement was signed in 1999 and well below the peak of 497 tonnes in 2004-05." And yes, we do love the FT's brilliant summation of the change in mindset: "In the 1990s and 2000s, central banks swapped their non-yielding
bullion for sovereign debt, which gives a steady annual return. But now,
central banks and investors are seeking the security of gold." Hm, when all of Europe (as well as America) is a smoldering heap of bearer bonds that will never get paid, and China is putting up a building today, only to blow it up yesterday, and boast a GDP growth rate of one gajillion, the FT may want to change the bolded assumption. Back to the Captain Obvious narrative of the original article: "The lack of heavy selling is important for gold prices both because a
significant source of supply has been withdrawn from the market, and
because it has given psychological support to the gold price. On Friday,
bullion hit a record of $1,300 an ounce." So market zero supply, and demand that is growing exponentially, means higher prices, eh? All those Voodoo 101 classes, and Poison Ivy college loans sure are paying off in droves...

This time Gordon Gekko is John Paulson, the bad guy is Goldman Sachs, and Ace Greenberg throws himself in front of a train. Are there any lessons to be learned from this generation’s Wall Street?

Some entertaining observations from BofA's Ethan Harris, who describes in detail why there are 500 billion reasons why gridlock would cripple the economy, and asks whether Obama is (or should be) more like Clinton or Bush in dealing with the approaching deadlines that will result in the first openly negative GDP print as soon as Q3 (good luck justifying thoat 10% EPS growth when the economy is about to decline). And just to confirm how bad it is, Jan Hatzius chimes in to explain why the economy will face a nearly 2% point headwind from inventory liquidation and negative fiscal catch up (think Cash For Clunkers gone viral) nearly every quarter in the coming year.

Bonus question? What's the prize?

Takefuji Corp., the third largest Japanese consumer lender, was limit down on the Nikkei, and was subsequently halted, on reports the company is preparing to file bankruptcy as reported by Nikkei newspaper earlier. The news was also confirmed by the Jiji and Kyodo news agencies. According to Reuters, "Takefuji had 430 billion yen ($5.11 billion) in liabilities as of the end of June, the Nikkei business daily reported, adding that president Akira Kiyokawa would step down." Apparently the reason is that according to Japanese "consumer protection" banks are limited to the paltry 20% they can charge for interest: "Japanese consumer lenders have been struggling to cope with regulations lowering the rates they can charge on loans as well as claims for reimbursement for past interest deemed illegally high by a court ruling in 2006. In June a new set of regulations cemented the interest rate ceiling at 20 percent, down from 29.2 percent, and limited the amount an individual can borrow." Nonetheless, the filing will likely not be a major surprise as even Moody's appears to have been on the case.

The U.S. SEC denied the application by China's Dagong credit rating firm of NRSRO status citing concern with cross boarder supervision. Dagong immediately issued an angry rebuff calling the SEC’s decision discriminatory, and that Dagong aims to enter the U.S. market to protect China's interests as the largest creditor there.

Ever wonder how China can endlessly generate goal-seeked GDP of precisely 8.00001% year after year? Or how it can constantly find use for the massive and ever-larger surplus of warehoused commodities? Simple - never stop building. Which, apparently means blowing up empty building before they are even finished and rebuilding them. Rinse. Repeat. After all gotta keep all those construction workers from rioting, and all those USD reserves redirected into Brazilian and OZ commodities, now that China is not really buying US debt anymore. China Hush has some stunning pictures confirming that in its search of the great home bubble perpetual engine, the politbureau comrades may have stumbled onto the bricks and mortar equivalent of Shangri La.

My last post "Correlation of mortgage rates with real housing prices: how increasing inflation could affect housing prices", raised some questions. I didn't have the chance to respond to them. But before I do, let me go back to the original purpose of the article. I asked the question, "What could happen to real estate in the event of higher inflation?" If inflation shot up from 1% to 7%, what would happen to the real value of your home. My thesis was: you're screwed. You will lose what little equity you have and real housing prices could drop by as high as 50%. - Taylor Cottam

A busy economic week awaits, full of completely irrelevant data, as the market will ramp on any news. Among the completely irrelevant highlights are the prelim September ISM, PCE Core inflation, Case Shiller, Consumer Confidence, China and global PMI, BOJ's Tankan, a whole lot of central bank meetings which will lead to even more central bank interventions, and, thus, even more completely irrelevant future economic data, now that nobody but the CBs are left trading.

In the Eurozone, sovereign debt issues resurfaced with concerns about Irish and Portuguese debt. The weaker-than-expected Irish GDP data heightened fears that bank restructuring added further crippling weight to the government’s debt. Irish real GDP is currently 13% less than it was at its peak in the fourth quarter of 2007.

Oops...

Simply said, nobody is trading... and it is causing massive pain for parasite volume-churning traders and HFT firms.

It is time for the United States to embark on a serious effort to develop a synthetic fuels program. In 1979, Americans imported 30% of our oil. Now that figure is 60% and growing. This raises a national security crisis that we have blissfully ignored, as the price of crude continues to inflate and our enemies grow stronger, financed by our own petrodollars. There has never been an example of a nation so powerful being willing to place its economic life in the hands of so many hostile powers, while denying itself the natural resources within its own borders. To wit: The U.S. has more energy in coal than all of Saudi Arabia has in oil. We float on a lake of natural gas and swim in a sea of agriculture: grain, corn, switchgrass — the three main substances from which we can create all the synthetic fuels our country needs.