Archive - May 2011

For those wondering why the Fed's third mandate is so critical, and is arguably about more than padding the brokerage accounts of those top 400 US "taxpayers" who account for 10% of capital gains, the Pew center brings what could be the main reason. Which is that even while factoring an 8% discount rate (for most states, some are probably higher), in other words expecting 8% gains in their assets, "the gap between the promises states made for employees’ retirement benefits and the money they set aside to pay for them grew to at least $1.26 trillion in fiscal year 2009, resulting in a 26 percent increase in one year." The difference is broken down as follows: "State pension plans represented slightly more than half of this shortfall, with $2.28 trillion stowed away to cover $2.94 trillion in long-term liabilities—leaving about a $660 billion gap, according to an analysis by the Pew Center on the States. Retiree health care and other benefits accounted for the remaining $604 billion, with assets totaling $31 billion to pay for $635 billion in liabilities." In other words, states have roughly 5 cents for every dollars in health benefits obligations. Good luck with funding that absent America becoming Weimar. 

March Factory Orders came out at a stronger than expected 3.0%, on expectations of 2.0%, while the previous number was revised to 0.7% from -0.1%. More importantly Durable Goods were revised from 2.5% to 2.9%, with Durables ex-transportation revised from 1.3% to 1.8%. Yet one wonders how March data is all that critical considering April has already passed and according to diffusion indices the economy is already seeing a modest contraction. At best this number will result in a hike to Q1 GDP from already a painfully low 1.8% as reported last week. Needless to say, the Japanese weakness was not to be expected in March and will only affect the economy in April and onward. Look for car sales data for the first true indication of how the Japan effect is impacting US production.

Wall Street's worst kept secret is now out. From Reuters: "The United States sued Deutsche Bank AG, accusing the German bank and its MortgageIT Inc unit of repeatedly lying to be included in a federal program to select mortgages to be insured by the government." And so, 2011 continues being a carbon copy of 2010, with only Deutsche Bank taking the place of Goldman this time around. Oh yes, Greg Lipmmann we hardly knew ye (and we didn't even short your house).

In his latest just released monthly letter, Bill Gross continues to explain why those expecting a cover of PIMCO's short treasury exposure will be disappointed for at least one more month: "Although we have warned for
several years of the deteriorating creditworthiness of America’s AAA
rating, our de minimis Treasury positions had less to do with much more
immediate issues than America’s balance sheet prospects. We are highly
sensitive to the pocket-picking policies that governments in general
deploy to right the ship." This time the symbol for the US (and global) economy, and specifically artificially low interest rates is a "tanker" analogy: " While the global
financial tanker was on automatic pilot, we had changed course well in
advance and it has been relatively smooth sailing since." Needless to say, Gross is convinced said ship is on a collision course. Ergo the title of this month's piece: "The Caine Mutiny." As usual, it is the 'Treserve' that is at fault for doing everything in its power (selling treasury puts?) to keep rates artificially low, a move which Pimco not surprisingly not in favor of: "holding Treasuries at
these yield levels for an extended period of time represents an
abdication of responsibility." Yet Gross does not advocate an outright mutiny, but renewed vigilance: "PIMCO advocates not so much a mutiny but a renewed vigilance on this new ship, stressing bond market “safe spread” alternatives available globally, including developing/emerging market debt at higher yields denominated in non-dollar currencies." Bottom line: "The
Treasury market is on a collision course with financial repression and
it is time to adjust your rudder to starboard to get home safely." Undoubtedly the usual response will be that Gross is just being unjustly alarmist. That is, until he is proven 100% correct.

Remember all those stories about bin Laden posing an armed threat and hiding behind a woman leaving the SEALs no other choice but to shoot him? Turns out they were not quite correct. Politico reports: "The White House backed away Monday evening from key details in its narrative about the raid that killed Osama bin Laden, including claims by senior U.S. officials that the Al Qaeda leader had a weapon and may have fired it during a gun battle with U.S. forces.
Officials also retreated from claims that one of bin Laden’s wives was killed in the raid and that bin Laden was using her as a human shield before she was shot by U.S. forces...During a background, off-camera briefing for television reporters later Monday, a senior White House official said bin Laden was not armed when he was killed, apparently by the U.S. raid team." At this point one wonders, as noted yesterday, just how much of the official story spun by the administration will continue to unravel.

A handy aid for keeping track...

The Bin Laden death will likely prove to be a brief, but welcome, distraction for the Obama administration and other governments who are confronting an extremely difficult economic situation with deepening inflation, the euro zone debt crisis and the deteriorating economic situation and nuclear catastrophe in Japan. Gold is a barometer and is sensing that the Bin Laden death and burial at sea is a mere sideshow when compared to the real macroeconomic, monetary and geopolitical risk facing the world today. Even at these price levels, demand for gold remains robust, particularly in India (see News), China and Asia.Silver remains vulnerable to further short term weakness and the concentrated shorts may attempt to press their advantage after the CME raised margins once again. However, the very sound supply demand fundamentals mean that long term physical buy and hold buyers will continue to be rewarded. Leveraged speculation should as ever be avoided with gold and particularly silver as intervention and manipulation can result in short term sharp price drops which can wipe out those trading with margin or leverage. Bullion buyers buying with cash and not debt are not subject to these losses and are thus “strong hands” who can ride out price pullbacks and be rewarded for their long term prudence.

Conservative Party wins outright parliamentary majority, with New Democrats now in role of official opposition. Liberal Party has its smallest representation ever and Bloc Quebecois dwindles to just a few seats.

The departure of several senior pension fund managers marks the tension at public pension funds over pay, as schemes struggle to retain their best talent...

In my worst nightmares, when the lights are swallowed by the smog of some nefarious gloom and the air itself becomes a stale sarcophagus into which I am entombed, and the grim hands of putrefied fate sink their wretched grip into the thick of my neck and all seems irrevocably lost, I merely recall that soon I will awaken to the horror of a terminal America infested by career criminals and certifiable morons, and suddenly, my off color dreams don’t seem so bad. Ultimately, there is nothing worse to me than a public majority that takes everything they hear from the mouths of political warlocks at face value. Even the fear of death is truly a pittance compared to the threat of being enveloped by a stampeding herd of frightened, stupid, human cattle. Is this melodramatic? Not at all. When a man is aware, and by aware I mean honest with himself, he inevitably suffers the pain of being certain while the rest of the world enjoys the bliss of false assumptions. We live in a culture that inflicts great punishment on those who know, and lavishes enticing but short lived rewards on those who ignore. In such a place as this, meaning disappears, and countries die.

A light data calendar today in an otherwise busy week.

• Treasury Will Act to Avoid Default (WSJ)
• Conservatives Romp to Crushing Canadian Election Win (Reuters)
• China Housing Buyers Hang Back (Shanghai Daily)
• Fed Says Banks Eased Terms as Loan Demand Rose (Bloomberg)
• Morgan Stanley Joins Funds Buying Commodities As Goldman Sachs Says Sell (Bloomberg)
• U.K. Manufacturing Index Dropped to Seven-Month Low in April (Bloomberg)
• Global Standard on Banks’ Lending Risks Urged (FT)
• New Bundesbank Chief Takes Helm (FT)
• Swiss Freeze Gaddafi, Mubarak and Ben Ali’s Funds (FT)
• Nations Brace for Retaliation (WSJ)

After a few less than negative pieces of economic data out of the UK came out recently leading some to believe that the UK appreciation is a safe bet in advance of what seems an imminent BOE hike, today all the GBP bulls got another cold dose of reality after the PMI came at 7 month lows. From Reuters: "Manufacturing activity grew more weakly than expected in April, at its slowest pace in 7 months, and a sharp slowdown in new orders cast a cloud over a sector that has been a rare bright spot in the UK economy. The Markit/CIPS manufacturing PMI headline index, published on Tuesday, fell to 54.6 in April, its lowest since September, from a downwardly revised 56.7 in the previous month and well below the 56.9 consensus forecast in a Reuters poll on Friday." So to update: Japan slashes growth forecasts, Europe is overheating and due for a major monetary tightening, China already is (although the PBoC it pushed the parity to just above 6.50 last night so as not to seem too desperate), and the UK is in shambles. And somehow reverse decoupling is still expected to work? Judging by the now traditional futures levitation each and every morning the answer is a resounding yes.

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The bubble talk is getting insane, be sure to take advantage of this scepticism!