Archive - Sep 26, 2011

We are only putting this up because we have been flooded with emails about an event which for some reason readers believe is relevant. The event in question is that according to its website, the London Gold Exchange ("LGE" or the "Joke") has closed. The one thing we would like to say about this is that the LGE is nether an exchange, nor does it trade gold. And, judging by its Wikipedia page, is probably not based in London but in Hong Kong. But yes, if one is concerned about such "currencies" as bitcoin and other digital "currencies", this may be news...And now, carry on.

This post is an example of what a little investigative reporting should look like. Let's attempt to recast pop media in the form of a smart ass blog.

For the last week or so, I’ve had the good fortune to be out in the jungles and savannah brush of southern Africa. If you look up “the middle of nowhere” in Google maps, you’ll probably find where I’ve been. In fact, when I took a small plane from Botswana’s Okavango Delta yesterday, we flew for 124 minutes before I saw so much as a paved road. Here in the birthplace of life itself, you can learn a great deal about humankind by watching animals in the wild. Nature is full of lessons about from whence we came, and to where we are going. This trip has provided unbelievable opportunity for me to reinforce many of these lessons, and I’d like to share a few with you.

Just Bloomberg headlines for now but equities and credit giving some back and EUR selling off modestly as German finmin Schaeuble comments in an N-TV interview:

*SCHAEUBLE SAYS EURO REGION HAS NO INTENTION TO INCREASE EFSF

*SCHAEUBLE SAYS `WOULD BE GOOD' TO HAVE ESM FUND EARLIER

*SCHAEUBLE SAYS ESM MAY COME AS ORIGINALLY PLANNED MID-2013

*SCHAEUBLE SAYS PASSING ESM TREATY TAKES TIME

 

UPDATE: Translation by Peter Tchir of TF Market Advisors

Andrew Brodsky of Stone & McCarthy notes that fed funds and repo rates declined from mid June through mid July amid increased excess reserves in the banking system and reduced collateral. Fears of exposure to European peripheral debt pushed money market funds into the repo market as they turned away from lending to euro-zone banks. In late July and early August, repo rates rose modestly from record low levels. The GC rate jumped to 42 basis points as investors began to pull out of the market and move into cash. Over the past few weeks, short-term rates eased in response to the resolution of the debt-ceiling debacle. The continued concerns over the global economy, European sovereign debt, and Bank of New York Mellon's decision to start charging fees on large cash deposits have spurred a demand for short-term Treasuries and repo. The increased demand for securities amid a shortage of collateral will continue to pressure rates.

In an interview on BBC News this morning that left the hosts gob-smacked (google it... it is the BBC after all), Alessio Rastani outlines in a mere three-and-a-half-minutes what we all know and most ignore. While the whole interview is worth watching, the money shot for us was "This economic crisis is like a cancer, if you just wait and wait hoping it is going to go away, just like a cancer it is going to grow and it will be too late!". While he dreams of recessions, sees Goldman ruling the world, and urges people to prepare, it is hard to disagree with much (or actually anything) of what he says and obviously interventions and machinations means we will have days like this (in Silver for instance), there is only one endgame here and we hope there is less hopeful euphoria (and more preparedness) as we pull back the curtain further and further.

From Goldman head gold trader, not the always wrong sellside analysts or researchs, Zak Dhabalia. Note none of this shoule be a surprise to those who invest in gold, instead of trading it based on 1 minute momentum, which unfortunately is ever more of the bipolar investing public:"There is no doubt that long risk in gold has been drastically cut back. The latest comex data show another 1.5m oz fall to 25m oz and I suspect the data for the week ending tomorrow could show a decline of over 3m oz. The ETF positions appear to have been more resilient. The concern will be if tech funds decide to cut entirely and even go short. In this liquidity that can still have a significant impact on prices. However in the context of the macro markets I am not convinced at all the game is over for gold. In fact far from it. The rally in the dollar is not from a position of strength but more a reflection of panic about the risk of disorderly outcomes to fiscal and monetary policies in the face of poor political coordination. The search is for liquidity and the prices of industrial metals suggest real fears about the future growth of demand."

U.S. Diesel could see significant price spikes before year-end while gasoline demand is at 10-year low.

Traders are "crazier" than true "psychos. Who would have thought?

The Dallas Fed Manufacturing Index joined a long and distinguished list of recently disappointing macro prints by missing expectations - coming in at -14.4 versus an expectation of -11.4 (the fifth negative print in a row). While the Production sub-index was up and will provide fodder for bulls (it is still half what it was in July 2011), it is the drop in the outlook for future business activity to a -1.5 (the first such negative print since April 2009) that should have central planners the most concerned as borrowing demand is surely bound to drop further on these weak expectations. This combined with the Philly and Empire prints implies a sub-50 ISM print is forthcoming.

Put your hardhats on as the ride is going to get bumpy.

The last two days have seen a very dramatic rally in senior financials credit risk in Europe. While the rest of the credit and equity complex has stayed largely in sync, Senior Financials (SENFIN) have significantly outperformed (around 50bps tighter from midday Friday) and now trade a long way from where the underlying financials in the index would suggest. While SENFIN is naturally a higher beta play on any action in Europe, it seems like it is well over its skis here and with ES pulling back to its fair-value relative to a broad basket of risk-assets, and a general lack of news from Europe, we suspect that the last two days have been a short squeeze led by investors rotating out of their macro hedges and unwinding longs into strength or protecting their longs with more single-name protection.

Look at what they are talking about doing.  Look at how unsuccessful any of the previous, poorly thought out plans have worked.   Contagion has spread.  European bank shares are down 50% from a year ago.  European stock indices are down 20% from a year ago.  Portugal and Ireland are in deep trouble, and Italy and Spain are on the cusp of trouble.  Will more bogus plans that don’t really ever get implemented, that fix nothing, but make the system more convoluted really do anything?  Wouldn’t we be better off letting some defaults occur and picking up the pieces.  Maybe more time and energy should be spent on how to pick up the pieces while some are still independent, rather than further linking everyone to the anchor?   Maybe more time should be spent determining if Lehman was “solely” responsible for the problems in late 2008 and early 2009?  Maybe the problem wasn’t Lehman defaulting and it was just another piece of a bigger uglier puzzle and we are so busy trying to avoid another “Lehman Moment” that we have lost sight of whether it is that important to avoid a default?