Archive - Apr 20, 2011

From $44 to $45 in 13 hours. At this rate $46 in 6.5 hours. Thank you Chairsatan Benzebub.

Just a quick reminder that the world continues to burn: the yield on the Greek 2 Year bond has just climbed to 22%, an all time record. The actual price is 74.25%. And far more jarringly, the 10 Year is 59 cents on the euro. A 40% haircut is now effectively priced in by the market.

What the so-called silver ‘experts’ neglect to account for in their models and projections is that the fiat money experiment has failed. And in this context, we believe the Market has assigned world reserve currency status to gold - not USD, not EUR, and not JPY. In our opinion, gold’s continued appreciation vis-à-vis every currency is assured because the great flight from fiat has only just begun. Like gold, silver also has a long monetary history, and as such, investors are now also buying silver as protection from the ravages of fiat currency debasement. Yet, when compared to gold, it is silver that offers the most attractive value proposition by virtue of the gross mispricing of its scarcity, which, we might add, has existed for many years. Thus, in our opinion, as this new bimetallic standard takes root, silver investors will continue to be justly rewarded with marked outperformance. We truly believe that this is the investment opportunity of a lifetime, and increasingly so, others are taking heed. What is clear to us is that with equal investment dollars now flowing into silver and gold, the current 35-to-one ratio is unsustainable and has only one direction to go: lower.

Not only has this President squandered his opportunity, but his notion of a what a shared sacrifice is very much skewed.

As silver is about to break $45 any second, we thought we'd take a minute to show the change in the S&P in real terms, i.e. adjusted for the plunge in the dollar. When one compares the YTD change in the S&P compared to the YTD change in DXY, one gets... the following. To all those who hold stocks: congratulations - you have only lost 0.18% in purchasing power year to date. To everyone else: we can only hope Goldman's next downgrade of crude is more effective. That, or take a bicycle to work.

Larry Yun, whose NAR has now lost all credibility, and which data has been confirmed to be flawed and conflicted, released March existing home sales, which allegedly came at an annualized rate of 5.1 million compared to expectations of 5 million. From the release: "Existing-home sales, which are completed transactions that include single-family, townhomes, condominiums and co-ops, increased 3.7 percent to a seasonally adjusted annual rate of 5.10 million in March from an upwardly revised 4.92 million in February, but are 6.3 percent below the 5.44 million pace in March 2010. Sales were at elevated levels from March through June of 2010 in response to the home buyer tax credit." And while we have nothing but ridicule for Yun's thought, for some reason the market still seems to care. This is what he said: “Existing-home sales have risen in six of the past eight months, so we’re clearly on a recovery path,” he said. “With rising jobs and excellent affordability conditions, we project moderate improvements into 2012, but not every month will show a gain – primarily because some buyers are finding it too difficult to obtain a mortgage. For those fortunate enough to qualify for financing, monthly mortgage payments as a percent of income have been at record lows." Yes, all is great, even as housing is now triple dipping.

The various Yen funding crosses have suddenly seen a bit of a hiccup (but fear not: it only means far greater USD shorting instead) following a rumor that Greece may default as early as this weekend. While we think there is absolutely no possibility of that happening, a far more interesting piece of news comes from Finland, where the recent electoral upstart Soini from the True Finns party has said that the May EcoFin meeting would discuss an "entirely different" solution to the debt crisis, than the previous one. Specifically, he was quoted by Reuters as saying the best solution would be one of bank recapitalization whereby banks, and not taxpayers, bear liability. Is Europe about to pull the plug on taxpayer funded bailout for good? And if so, does the European financial system have enough a buffer to absorb what will certainly be hundreds of billions in capital shortfall. Looks like May is shaping up to be another rescue Europe month... just like last year.

In case you missed it, earlier this week China announced that its foreign currency reserves are excessive and that they need to return to “reasonable” levels. In politician speak, this is a clear, “we are sick of the US Dollar and will be taking steps to lower our holdings.” Remember, the US Dollar is China’s largest single holding. And China has already begun dumping Treasuries (US Debt).

Something oddly poetic about the following chart...

The most recent addition to Goldman's economic team Zach Pandl is fitting in nicely: overnight he was told to come up with a note discussing the range of Q2 GDP numbers, following the firm's Friday night cut of Q1 GDP by over 50% to 1.75%, which he does admirably: on one end he proceeds to show that based on traditional methods of regression analysis, Q2 GDP is about to surprise far to the downside again, coming at 2.2%. However, here is where some creative liberty with reality comes into play: As Pandl says: "it turns out that real GDP growth in any given quarter is not a particularly good predictor of GDP growth in the next quarter, once other information is taken into account." And in order to "take other information into account" Goldman reverts to its recently inaugurated GDP substitute, the CAI (also defined by Zero Hedge as the Completely Arbitrary Index, discussed previously here). As a reminder this is the artificial economic growth indicator that literally plugs selected goalseeked numbers that allow Goldman to print out whatever "growth" number it desires. Such is the case here as well. Because in the case when one uses the CAI and does some autoregression mumbo jumbo, one ends with a 4.8% implied Q2 GDP growth. So basically: 2.2% to 4.8% in Q2 GDP. Way to earn your money Goldman. Here is our estimate: Q2 GDP will come below the firm's worst case (i.e., based on reality) scenario.

One of the key news from the past week was that Chinese FX reserves passed a record $3 trillion for the first time, a surge of $200 billion in the first quarter alone. And with the bulk of that in dollar, it is not surprising that the recently collapse in the dollar has forced more posturing out of both the PBoC and SAFE (the State Administration of Foreign Exchange). In comments published Tuesday, Zhou Xiaochuan, governor of the People's Bank of China said that China's huge stockpile of foreign exchange
reserves have become excessive and the government
must diversify investments using the reserves. "Foreign exchange reserves have exceeded our
country's rational demand, and too much accumulation has caused
excessive liquidity in our markets, adding to the pressure of the
central bank's sterilization." That this is a not so subtle hint aimed at the dollar was confirmed earlier today by SAFE which said that the US government should take responsible measures
to protect the interests of investor. "U.S. Treasuries reflect the credit of the US government and are an important investment product for domestic and international institutional investors," the ministry said in a statement carried today on SAFE's website. "We hope the U.S. government takes responsible measures to protect investor interests." Alas, with the US administration solely focused on making confetti out of the US currency, we hope that China is not holding its breath too long. On the other hand, should the DXY take out its 2009 lows, all bets will surely be off and only another market collapse will be able to generate a potential flight to safety in the dollar. In the meantime, both gold and silver continue to benefit, and the only thing that appears to be able to drag down precious metals at this point is a wholesale margin call invoking cross asset liquidation.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 20/04/11

• Obama Fights Back Against S&P Move (FT)
• China Speeds Yuan Push (WSJ)
• BOE Voted 6-3 to Hold Rate as Majority Noted ‘Downside.’ (Bloomberg)
• Apple to ship new iPhone in September (Reuters)
• Singapore Aims To Be Renminbi Hub (FT)
• GM Defying China Slowdown May Reclaim Sales Lead from Toyota (Bloomberg)... or not
• Cameron Dismisses Idea of Brown at IMF (FT)
• Banks Lag S&P as Slower Loan Growth Outweighs Higher Dividends (Bloomberg)
• Syria Government Approves Lifting State of Emergency (Reuters)
• USA: That ratings agency downgrade meeting (BBC)

Gold has breached the $1500 level and reached new record nominal highs at $1,505.65/oz. Since yesterday it has gradually risen in all currencies and is approaching record nominal highs in all major currencies. $2,400/oz is the inflation adjusted (CPI) high of 1980 and given the very uncertain macroeconomic climate of today and concerns about the dollar and all major currencies, arguably even more uncertain than the 1970’s, the real high remains a very viable target. It is important to remember that while gold has risen some 6 times in 11 years ($250 to $1500) it rose by 24 times in 9 years in the 1970’s – from 1971 to January 1980 ($35 to $850). This puts the recent reasonably gradual increase in gold prices in perspective and should give gold bears and top callers pause for thought.

Google's post Q1 earnings reaction is one of the most blatant examples of nearsightedness I have seen for awile, rivaling the S&P AAA rating of subprime NINJA loan CDS writing monoliness using 120x leverage at the top of the housing market in 2007.