Archive - Mar 2011

The lack of animal spirits in the gold and silver bullion markets is also seen in the decline of the gold ETF holdings (see chart above) and the Commitment of Traders open interest (see below). Neither show any signs of speculative fever whatsoever. This would suggest that the recent record prices are due to short covering on the COMEX (possibly by Wall Street banks with concentrated short positions as alleged by the Gold Anti-Trust Action Committee or GATA and being investigated by the CFTC) and buying of bullion in the Middle East and Asia, particularly in China. While all the focus is on the geopolitical risk in the Mediterranean, the not insignificant risks posed by the European sovereign crisis, the possibility of a US municipal and sovereign debt crisis and continuing currency debasement internationally are the prime drivers of gold today. Quantitative easing, debt monetisation and competitive currency devaluations have not gone away and are leading to deepening inflation which will likely result in much higher prices in 2011 and 2012.

At least one central bank refuses to drink the Kool Aid: following today's announcement by the ECB which kept its interest rate as expected at 1%, JC Trichet is now making waves in the FX market after announcing, or rather not announcing, that "rates are appropriate" in his opening statement line, a traditional opener to the press conference that follows. Just as notable is that the ECB staff has now hiked the low-end of its inflation expectations for 2011 by about 40%, from a range of 1.3% -2.3% to 2.0%-2.6%, and 2012 from 0.7%-2.3% to 1%-2.4%. Trichet also adds that now very strong vigilance is now warranted and it is paramount to avoid second round effects. Most troubling is Trichet's admission that the latest staff forecasts exclude the impact of the most recent oil jump. And while it is very clear that Trichet is dying to hike rates, the reason he won't is, that's right, Europe's insolvent banks, about which he said that they "should retain earnings, turn to market to strengthened capital bases, and take full advantage of govt. support measures." In other words, it is once again the banks fault that in the inflationary cycle people will be forced to pay more, as the alternative would see the bankruptcy of numerous financial institutions.

The BLS has announced a surprising drop in initial claims, which plunged from a downward revised 388K to 368K, on expectations of 395K. This was the lowest number since May of 2008. "In the week ending Feb. 26, the advance figure for seasonally adjusted initial claims was 368,000, a decrease of 20,000 from the previous week's revised figure of 388,000. The 4-week moving average was 388,500, a decrease of 12,750 from the previous week's revised average of 401,250. The advance seasonally adjusted insured unemployment rate was 3.0 percent for the week ending Feb. 19, a decrease of 0.1 percentage point from the prior week's revised rate of 3.1 percent." The non-seasonally adjusted number came at 351K, a number which if contained means that the so called slack in the economy is evaporating, and that the inflationary picture is far worse than the Chairman expects. These numbers further conform to rumors for a blowout NFP tomorrow, spread yesterday, which says that based on Birth-Death adjustments, the NFP could be well over 300,000. In other news, continuing claims hit 3,774K on expectations of 3,815K, compared to 3,833K previously, and those added to EUC and extended claims were roughly 55K.

Markets positive this morning as the rise in oil simmered and emerging markets posted gains. World food prices met a new high in the latest U.N. report as it seems that the U.S. continues to export inflation. The Fed’s Beige Book released yesterday was optimistic and similar to January’s, with nearly all of the reporting regional banks citing growth in retail and manufacturing despite evidence of rising pressure on prices. Initial jobless claims data today 395K Expected and given last week’s large drop and fairly consistent weather, the release should be on par with last week’s 391K. Fed Chairman Bernanke spoke to House of Representatives yesterday in day two of his Humphrey Hawkins speech, again expressing dissatisfaction with the labor market, confidence in the battle against inflation and concern for America’s fiscal policy. Bernanke’s two days of speeches to Congress showed a conviction to keep short term interest rates low until unemployment levels recovered. Although recent releases show a modest rebound in labor, it may not be enough to push interest rates up as current estimates for 2012 unemployment reach 7.5 to 8.0%.

• Why the Dollar's Reign Is Near an End (WSJ)
• Take a bow Hatzius: John Taylor takes apart Goldman's economic "achemists and quacks" (Bloomberg) - This is what happens when you sellout to the propaganda machine
• William Cohan joins the tinfoil hat brigade - A Conspiracy With a Silver Lining (NYT)
• Gaddafi strikes oil areas, Arabs weigh peace plan (Reuters)
• No criminal charges ever: Officials Disagree on Penalties for Mortgage Mess (NYT)
• Bernanke Sees 200,000 Hit to Jobs from Budget Cuts (Reuters)
• It's Taps For the Still Weakening Dollar (RCM)
• Asia Moves to Shore Up Strategic Oil Reserves (FT)
• Beijing home sales slump in February (China Daily)

When two months ago, in the first week of January, we observed that the U.N. Food and Agriculture Organisation's Food Price Index had hit a record we said: "The last time food prices hit ridiculous levels, the immediate outcome
was global food riots in places such as Haiti and Bangladesh. Which is
why distributors of riot equipment in the world's poorest countries may
be in for a bumper crop as the Food and Agriculture Organization has
just announced that world food prices have just surpassed the previous
record last seen in 2007-2008." Little did we know just how prophetic this statement would turn out to be. Well, the FAO has just released its latest food price update and as expected, it is a new all time high. The U.N. Food and Agriculture Organisation's Food Price Index hit its second straight record last month, further passing peaks seen in 2008 when prices sparked riots in several countries, driven by rising grain costs and tighter supply." And with oil now joining food, which means that the inflationary vicious spiral is now on, it is only a matter of time before ever more hungry countries join the wave of revolutions, now that Tunisia and Egypt have shown it can be done. On the other hand, our expectation is that the IMF will promptly seek to put out any fires before they become infernos, with the US taxpayer reeling from the double whammy of Bernanke's inflationary policy consequences: once at home, and once by subsidizing foreigners.

The main story overnight, which has cut gains in precious metals and oil, and set futures surging is a bizarre rumor that Venezuelan dictator Hugo Chavez has proposed a Libyan peace plan which is being considered by the Arab League. "Oil prices were lower on Thursday as speculation a peace deal may be brokered for Libya prompted some investors to cash in gains, but the market remained elevated on concerns over ongoing unrest in the region. A report the Arab League was considering a peace plan for Libya proposed by Venezuelan President Hugo Chavez led some players who had bet on rising prices to close their positions overnight." In terms of credibility and actual practicality, this story has about the same weight as the false rumor spread last week that Gaddafi was shot. But the desperate market will take any myth that sends it surging and run with it. "As for the proposed peace plan, Arab League Secretary-General Amr Moussa told Reuters, "We have been informed of President Chavez's plan, but it is still under consideration." Analysts were sceptical the plan would lead to peace. "It is doubtful that the protesters in Libya will agree to enter negotiations with Gaddafi as the plan of Venezuelan President Chavez suggests," Commerzbank said in a note." So while a US aircraft carrier is happily swimming toward Libya (fact), stocks once again bury their head in the sand on the smallest amount of misinformation with the hope that central planning has once again regained control.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 03/03/11

GBPUSD continues to remain in the strong zone, consistently moving higher with 67% of traders short the pair, EURUSD is painting a very similar picture. Retail trader positioning still remains fairly extreme with most retailers LONG the USD. Action over the last few weeks has been very much contrary to that opinion. The Euro Rate Decision 7:45am EST and ECB Press conference 8:30am EST often have dramatic impacts on the EUR, it will vital to keep an eye on these developments

No TKO's will be accepted. A full fledged, right cross to the chin of the beast.

Bill Gates will step into the national debate over state budgets Thursday with a call for states to rethink their public-employee benefits systems, which he says stifle funding for the nation's public schools.

As we speculated last week, the LHD 3 Kearsarge deftly left the treacherous waters of the Red Sea a few days ago, and after crossing the Suez is now well on its way to the shores of Tripoli (where it is set to meet Canadian, Korean and Dutch warships). Yet to those who argue that the US military is a well-oiled machine, look no further than the schizophrenic moves the Enterprise has had to endure in the past two weeks: after it was just off the coast of Libya as recently as February 9, and rushing into the Red Sea in direction Straits of Hormuz two weeks ago, the storied aircraft carrier was halted dead in its tracks en route, and ordered to do a 180. It is now hot on the heels of the Kearsarge and we believe will also cross the Suez within 48 hours as it moves in to provide air support to Libya by the weekend. And with air coverage, the no fly zone will likely be instituted by Monday of next week, which, as Robert Gates telegraphed earlier, is the codeword for a "NATO" invasion. Which means this weekend will likely be do or die in terms of game theory defection choices for the Gaddafi family: will he defect peacefully and spend the rest of his days with his friend Robert Mugabe, the world's second best performing stock market after the NYSE Borse, and a few hundred pounds of gold, or will he set fire to the Libyan oil infrastructure as he leaves the scene kicking and screaming.

In a surprising turn of events, today's biggest piece of news received a mere two paragraph blurb on Reuters, and was thoroughly ignored by the broader media. An announcement appeared shortly after midnight on the website of the People's Bank of China. Reuters provides a simple translation and summary of the announcement: "China hopes to allow all exporters and importers to settle their cross-border trades in the yuan by this year, the central bank said on Wednesday, as part of plans to grow the currency's international role. In a statement on its website www.pbc.gov.cn, the central bank said it would respond to overseas demand for the yuan to be used as a reserve currency. It added it would also allow the yuan to flow back into China more easily." To all those who claim that China is perfectly happy with the status quo, in which it is willing to peg the Renmibni to the Dollar in perpetuity, this may come as a rather unpleasant surprise, as it indicates that suddenly China is far more vocal about its intention to convert its currency to reserve status, and in the process make the dollar even more insignificant.

The "subprime" vehicle maker is back to its old bag of tricks - of the variety that ultimately resulting in its bankruptcy. After Zero Hedge had been pointing out for months that GM's sales number are in small part a function of its "inventory stuffing" gimmick, which has seen the number of cars held by dealers explode over the past 12 months as seen in the linked chart, leading us to speculate that GM is essentially recreating the AOL "channel stuffing" strategy that worked out oh so well, we now get confirmation that things are in fact far worse than even we had expected. Bloomberg reports that "General Motors Co. is offering buyers interest-free financing on some 2011 models after the company increased discounts and incentives to lead all major automakers’ U.S. sales gains last month." As of yesterday desperate car buyers who can't rub two dimes together, can drive to the local unemployment office in the luxury of their brand new Chevy Imapala, or alternatively pick a just as worthless Chevy Malibu, HHR WAgon, Traverse SUV, as well as a Silverado, Colorado and Avalanche pickups, which are now offered at either 72 or 60 months of interest-free loans. "The 60-month deal also applies to the Buick
Enclave and GMC Acadia SUVs and Sierra pickups." That pretty much covers the entire line up. And that's not all: "GM raised discounts 12 percent from a year earlier to an
estimated $3,732 per vehicle last month, the most among major
automakers and 45 percent more than the average, according to
researcher Autodata Corp." As Jeremy Anwyl, chief executive officer of Santa Monica, California-based Edmunds.com summarized it all too well: "GM’s rhetoric has been saying one thing -- discipline,
discipline, discipline -- and then their actions have been going
completely in another direction." And as the stock, which is now firmly below the IPO prices indicates, the direction is a given: down. It is time for another poll (now that the one about the IPO price floor has been resolved): how long before GM files Chapter 22?

Other than THAT, it's free market capitalism ...