Archive - Dec 2011

The Chairman of the Federal Reserve System is now writing letters to Congress in response to Bob Ivry articles.  Someone's scared...

In what is likely the most logical follow up to our post of the day, namely the news of the lawsuit between HSBC and MF Global over double-counted gold, or physical - not paper - that was "commingled" via rehypothecating or otherwise, we present readers with the monthly note by Eric Sprott titled "Silver Producers: A Call to Action" in which the Canadian commodities asset manager has had enough of what he perceives as subtle and/or not so subtle manipulation of the precious metal market, and in not so many words calls the silver miners of the world "to spring to action" and effectively establish supply controls to silver extraction to counteract paper market manipulation in the paper realm by treating their product as a currency and retaining it as "cash". To wit: "instead of selling all their silver for cash and depositing that cash in a levered bank, silver miners should seriously consider storing a portion of their reserves in physical silver OUTSIDE OF THE BANKING SYSTEM. Why take on all the risks of the bank when you can hold hard cash through the very metal that you mine? Given the current environment, we see much greater risk holding cash in a bank than we do in holding precious metals. And it serves to remember that thanks to 0% interest rates, banks don’t pay their customers to take on those risks today." And the math: "If silver miners were therefore to reinvest 25% of their 2011 earnings back into physical silver, they could potentially account for 21% of the approximate 300 million ounces (~$9 billion) available for investment in 2011. If they were to reinvest all their earnings back into silver, it would shrink available 2011 investment supply by 82%. This is a purely hypothetical exercise of course, but can you imagine the impact this practice would have on silver prices?" And there you go: Sprott 'reputable' entity to propose to fight manipulation with what is effectively collusion, which in the grand scheme of things is perfectly normal - after all, all is fair in love and war over a dying monetary model. Who could have thought that the jump from "proletariats" to "silver miners" would be so short.

We have spent a great amount of time recently discussing both the re-hypothecation debacle and the 'odd' moves in CDS - most specifically basis (the difference between CDS and bonds) shifts and the local-sovereign-referencing protection writing. Peter Tchir, of TF Market Advisors, provides further color on the latter (as the 'Ultimate' trade) and in an unsurprising twist, how the former was much more critical during the Lehman 'moment' and will once again rear its ugly head. Exposing the underbelly of these two dark sides of the market must surely raise concerns at the fragility of the entire system - as we remarked earlier - but the lessons unlearned, on which Peter expounds, from the Lehman period are reflective of regulators so far behind the curve that it is no wonder the market's edge-of-a-cliff-like feeling persists.

If you're bullish about the long term for gold and silver, it's mouthwatering to watch them undergo a major correction after taking earlier profits that added to your deployable cash. For a little historical perspective on pullbacks, consider the following charts.

Yup ... Virtually everything happening now was planned before 9/11 ...

While the top-down macro perspectives on where we go from here remain stuck in a bi-modal distribution and bottom-up fundamentals may help at the margin but remain dominated by correlated risk asset flows, UBS has created a veritable smorgasbord of charts and technical analysis of the major asset classes. From presidential and economic cycles & secular equity regimes, across precious metals and the USD & the super bull cycle, to bond market bubbles, there is a little here for every connoisseur of cartography or devourer of data.

As we head into the artificial investing horizon of year-end, sell-side research is compelled to offer its best-guess at what will be key for the year ahead. We certainly head into 2012 with considerable potential downside risks - US recession?, breakup of the Euro?, hard-landing in China? - and BofA Merrill Lynch's RIC Report bears these in mind as it suggests investors position for these ten key macro themes (some positive, some negative) from slower global growth to a weakening US consumer and QE in US and Europe. Starting from a neutral equities, long gold, long US corporate bonds, they favor growth, quality, and yield in one of the more complete summaries of expectations we have read.

Summary of the key bullish and bearish geopolitical, macroeconomic and financial events in the past week.

The headlines will crow of the resilience of the US equity market, of the outperformance of US financials today and the better-than-expected consumer sentiment print this morning but just below the surface in both European and US credit markets, something is stirring. Investment grade credit outperformed (not exactly as reflection of the need to add risk fast), European financials (senior and sub) were significantly weaker (day and week), high yield credit notably underperformed stocks and investment grade credit, US financial credit spreads have leaked notably wider from yesterday's early US session to the close today - not tracking the stocks higher at all, and just to rub some salt into the wound, sovereign spreads in Europe weren't exactly ebullient as basis swap spreads decompressed (worsened) to over one week wides.

ES (the e-mini S&P futures contract) leaked higher and higher on low volume (accounting for the roll) supported by TSY weakness (and curve shifts) and Oil's exuberance as the S&P had two targets in mind it seems: the 200DMA and the YTD unch line. Commodities rallied with Gold clinging to the USD's weakness on the day but Gold underperformed on the week as Copper led the charge (though all ended the week lower). The squeeze and algo-driven (CONTEXT and ES were very closely correlated today) rally today remains worrisome until we see higher beta credit join the party - and that doesn't mean HYG which saw record inflows this week and helps explain its idiosyncrasies.

We're not used to things falling apart, and so our first reaction is disorientation. What we've been trained to expect by constant intervention in supposedly "open" markets is that Central States and central banks will "save the day" with a new intervention: an interest rate cut, a new round of money-printing, emergency loans, new bailout funds, the list has been almost endless since the initial evidence of the Great Unraveling appeared in 2007. So when official interventions are announced to great fanfare and then fail to goose the market, we're disoriented. The problem with depending on intervention "sugar" for sustenance is that the market slowly loses its sensitivity to the mechanisms of control (insulin), and at some point the sugar no longer generates a response. We are very close to that point now, as the expected "grand EU treaty agreement" is duly issued as expected and global markets are holding their breath, hoping that some new intervention will keep the teetering financial system from falling over the edge. This is desperation.

That paper gold, in the form of electronic ones and zeros, typically used by various gold ETFs, or anything really that is a stock certificate owned by the ubiquitous Cede & Co (read about the DTCC here), is in a worst case scenario immediately null and void as it is, as noted, nothing but ones and zeros on some hard disk that can be formatted with a keystroke, has long been known, and has been the reason why the so called gold bugs have always advocated keeping ultimate wealth safeguards away from any form of counterparty risk. Which in our day and age of infinite monetary interconnections, means virtually every financial entity. After all, just ask Gerald Celente what happened to his so-called gold held at MF Global, or as it is better known now: "General Unsecured Claim", which may or may not receive a pennies on the dollar equitable treatment post liquidation. What, however, was less known is that physical gold in the hands of the very same insolvent financial syndicate of daisy-chained underfunded organizations, where the premature (or overdue) end of one now means the end of all, is also just as unsafe, if not more. Which is why we read with great distress a just broken story by Bloomberg according to which HSBC, that other great gold "depository" after JP Morgan (and the custodian of none other than GLD) is suing MG Global "to establish whether he or another person is the rightful owner of gold worth about $850,000 and silver bars underlying contracts between the brokerage and a client." The notional amount is irrelevant: it could have been $0.01 or $1 trillion: what is very much relevant however, is whether or not MF Global was rehypothecating (there is that word again), or lending, or repoing, or whatever you want to call it, that one physical asset that it should not have been transferring ownership rights to under any circumstances. Essentially, this is at the heart of the whole commingling situation: was MF Global using rehypothecated client gold to satisfy liabilities? The thought alone should send shivers up the spine of all those gold "bugs" who have been warning about precisely this for years. Because the implications could be staggering.

California on the way to a banana republic. Culprits: declining incomes and disappearing jobs. Where the heck is the recovery?

President Obama's speech at Osawatomie, Kansas this week was deceitful, inaccurate, revisionist, and demagogic. He has clearly drawn a line in the dirt. He is at war with the foundations of American culture and founding ideals.

While consensus forecasts for next year continuing to be muddle-through mediocrity with a crashtastic defensive bias, BofA Merrill Lynch provides a very succinct outline of the bullish, bearish, and interestingly secular cases for risk assets going forward. The cross-asset class implications are noteworthy and provide an excellent jumping off point for asset allocation decisions. We are not sure the seeming knife-catching perspective of "buying humiliation and selling hubris" will work out, but one thing is for sure, with this volatility, relative-value remains the critical alpha as beta chops everyone up. Once again the bull case relies heavily on government printing presses and the bear case on the reality of debt saturation breaking through.

Buffett's deep pockets allow him to play White Knight when fast cash is needed. I think that makes he's a predator.