Archive - Aug 2011

Who would think that all it takes for gold to surge by $40 in under an hour is for the Fed to resume the old song and dance. Yet that is precisely what happened: ever since Chicago Fed president Evans sat down with Steve Liesman to discuss that he would be in favor of more easing, and saying he believes in "room for accommodation" and that we "still need to do more on monetary policy", gold soared from under $1790 to over $1830. And confirming that gold will go far higher is his statement that "Fed policy was not a driver of the commodity price surge." In other words, these buffoons have not learned anything, and the commodity price shock is coming. However, as usual, it will be blamed on speculators. Luckily the CME can hold them in their tracks with a relentless series of margin hikes. Or not. When will the CME finally hike margins on printer toner cartridges?

• German Chancellor Angela Merkel faces growing resistance within her ruling coalition over expanding the powers of the EFSF, according to WSJ. Meanwhile, a senior German government lawmaker insisted that the parliament should have a greater say in future Eurozone bailouts
• According to S&P, slow growth increases risk of a double-dip recession in Europe
• The appetite for risk was dented further after a 10-year BTP auction from Italy registered above 5% average yield
• The International Accounting Standards Board criticised the inconsistent way in which banks and insurers have been writing down the value of their Greek sovereign debt
• Strength was observed in USD and JPY amid risk-averse trade

Quiet day with FOMC minutes due out in the afternoon, Case Shiller confirming more worsening in housing, and Conference Board consumer confidence plunging in August. European headlines may once again reappear.

The UBS daily note reports that “the mood among gold investors appears to be to buy the dip rather than chase the market, which is understandable given last week's volatility.” UBS conclude that the “violent sell-off hasn't done any lasting damage to gold, and the reasons investors bought gold in recent months remain valid. Our one-month forecast of $1950 remains in place.” UBS three month price view is $2,100 per ounce. Very significant demand being seen for bullion internationally and especially in Asia means that gold’s correction is likely to again be of short duration. Indeed, the scale of demand suggests that gold may not need a long period of consolidation and could again surprise to the upside.  Bank of America-Merrill Lynch said in a research note it was revising its 12-month gold target to $2,000 an ounce. JPMorgan said that gold could reach over $2,500 per ounce prior to year end. The recent sell off has not seen banks and analysts revise down their price forecasts. 

• IASB criticises Greek debt writedowns (FT)
• ECB to reassess inflation risks (FT)
• Pimco's Gross rues US debt 'mistake' (FT)
• Trichet and Rehn defend Europe’s banks (FT)
• Japan Parliament Confirms Noda as Prime Minister (WSJ)
• Sino-Forest is Second Time Chan Loses Company (Bloomberg)
• US authorities assess hurricane’s aftermath (FT)
• Solar Purge Drives Weakest Into Buyouts (Bloomberg)
• Republicans to Unveil Bill to Force Major Changes at the UN (Bloomberg)

All eyes were on Italy early this morning when the country auctioned off €2.99 billion of 4.25% BTPs due July 2014 and €3.75 billion in 5% bonds due 2022, because the ECB, unlike in the secondary market, is not allowed to buy bonds at primary issuance. While it would have been unrealistic to expect a bond failure, the bond levels were watched very closely for signs of deterioration despite over €40 billion of SMP purchases by the ESB in the past 3 weeks. And judging by the reaction (+11 bps in the Italian Bund spread), the market was not very happy with the yields of 3.87% (4.8% previously) and 5.22% (5.77% previously) or the Bids to Cover of 1.32 and 1.27 on the 3 and 10 years, as both slipped following the auction in a market that was very disappointed to see a 5 handle yield on the 10 year. This has set a negative  tone to early European trading, with pronounced weakness across markets, and the EURUSD, which has dropped to under 1.44 overnight after trading in the 1.45's late last night. The concern is that even with the ECB buying debt in the secondary market (effectively monetizing), the tail is unable to wag the dog strongly enough, and if the EFSF is not activated soon enough, and expanded significantly, we expect to see the market test the ECB once again, and SMP purchases to soar very soon.

A snapshot of the European Morning Briefing covering Stocks, Bonds, FX, etc.
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While Ben Bernanke has tried to exude confidence, he is now clearly discouraged. As well he should, since none of the Fed's "suite of tools" have worked as intended and almost every forecast the Fed has given since the Crash has been wrong. We are forecasting a stagnant economy and come the elections it is likely that unemployment will remain high. Like all Fed Chairmen, it will be hard for Dr. Bernanke to resist calls from politicians to "do something." He will earn his moniker as "Helicopter Ben" and unleash more quantitative easing, a dangerous and regressive policy.

Every year, at about this time (roughly just before the Fed launches on yet another monetary easing crusade) we get requests to decompose current events into their constituent pieces and present these in parallel with the period in time between 1929 and 1939 better known as the Great Depression. Obviously, doing so in its entirety would require at least a fat paperback, and considering that the average Zero Hedge reader has an attention span that is very stretched when presented with a lengthy bullet point, we fear such efforts may be lost on most. Furthermore, why reconstruct the wheel when it was precisely a year ago (and remember: 2011 is a carbon copy of 2010, so it is effectively yesterday) that Guggenheim's Scott Minerd did just that and in a far more politically and grammatically correct way than we ever could, not to mention with that many more pretty charts. So without further ado, here is Scott Minerd's compare and contrast of the Second Great Depression (the one we are now debating whether or not it has become a recession or not once again) to the original source.

While the key market moving event from last Friday may have been Bernanke's Jackson Hole speech which merely left the door open to future QE episodes, the most important event from an economic standpoint was the first GDP revision Q2, which dropped from preliminary 1.3% to a sub stall speed, in real terms, 1.0%. What is just as important is that as the following chart from Bloomberg demonstrates, the YoY change in real GDP, which is now at 1.5%, is a slam dunk indicator of recession: "Since 1948, every time the four-quarter change has fallen below 2 percent, the economy has entered a recession. It’s hard to argue against an indicator with such a long history of accuracy." Bernanke agreed that "growth has for the most part been at rates insufficient to achieve sustained reductions in unemployment." And while Bernanke is shifting dangerously into Greenspan territory with the open-ended interpretation of his statement, another thing that is more actionable is the observation that virtually every time real YoY GDP has dropped below 1.5%, this has led to a negative nonfarm payroll number. Granted, the result may not be as shocking as what the Philly Fed implied vis-a-vis this Friday's NFP, but we believe a subzero print in the August labor report will convince the three Fed holdouts that the time for yet another monetary intervention is here (Arab Spring part deux consequences be damned).

In light of last week's surprise announcement of Buffett's bailout redux of Bank of America (the first one being Goldman back in 2008), and following today's even more surprising objection by the FDIC which threatens to scuttle the Bank of Ameria settlement and force Bank of Countrywide Lynch to raise far more capital, pushing Warren to double down on his investment throwin more good money after bad, especially if the legal case moves from an Article 77-friendly NY state court to Federal, here are the philosophical thoughts from the Berkshire's oracles contained, in his "Collected Writings", on his desire to put money into banks.

Oops:

• FDIC OBJECTS TO BANK OF AMERICA MORTGAGE-BOND ACCORD
• THE REASON FOR THE OBJECTION IS THAT THE FDIC DOES NOT HAVE ENOUGH INFORMATION TO EVALUATE THE SETTLEMENT

Time to sell the other half of that China Constricution Bank stake... And Merrill... and Countrywide (goodluck), and pretty much anything else that is not nailed down. But don't worry: it's a liquidity, not a capital issue, or something. In other news, the Buffett "Eureka alert" is on BathCon 1.

Over the past decade China has been stuck in an inventory stockpiling and mercantilist process tolling mode, even as it has been posturing about expanding its middle class. Well, the Chinese empire may be finally hinting at what the "next steps" may be. FT reports that Chinese real estate tycoon and former Chinese Central Propaganda Department official Huang Nubo, has struck a deal to acquire 300 square kilometers of "wilderness in north-east Iceland where he plans to build an eco-tourism resort and golf course." That, at least, is the party line. Nobody however is buying it: "Opponents have questioned why such a large amount of land – equal to about 0.3 per cent of Iceland’s total area – is needed to build a hotel. They warned that the project could provide cover for China’s geopolitical interests in the Atlantic island nation and Nato member." And after securing a landing area equidistant from Europe and the US, China will next proceed to purchase bits and pieces of Greece, Spain, Ireland, Portugal, etc. After all, the nouveau-IMF piper ultimately always demands his price for keeping the western world ponzi alive and running for a few more months.