Archive - Mar 27, 2012

"The statistical component of the European Union, Eurostat, is quite clear; they do not count guarantees or contingent liabilities as part of any nation’s debt. We might all note that if Nestle or IBM or General Electric did this they would find their senior executives jailed for Fraud but never mind; this is the methodology of the EU which quite obviously masks the truth. The problem then is not the simple math used to obtain a more accurate debt to GDP ratio but in digging out the various guarantees, contingent liabilities and obligations of any member nation of the European Union. “Time consuming” would be the accurate words because you have to sleuth around like Sherlock Holmes to come up with the data. Yes, it is all there somewhere or another but it is nowhere all together and so must be found." And as Mark Grant points out what we noted last July, when one factors in all the various guarantees and contingent liabilites by Germany to date, something peculiar appears: instead of a 81.8% Debt/GDP, the country's actual Debt to GDP soars to a Italy-lie 139.8%.

The Turkish central bank has doubled the amount of gold that lenders can hold in reserves (as opposed to paper money - Lira) as part of their reserve requirement changes. As the WSJ reports, this shift from 10% to 20% means that Turkish banks can use their shiny yellow metal as fungible money reserves against foreign currency deposits. This move follows closely on the heels of our comments on last week's 'gold transfer' efforts in Turkey to unleash some of the country's vast personal holdings of Gold. This effort to draw down on the nation's individual gold reserves - the traditional form of savings in Turkey - is part of Ankara's efforts to reduce a finance gap that is currently around 10% of GDP but more importantly it should serve as a lesson reality-check for Bernanke that gold is money and in the words of a 70-year-old housewife "In an emergency, I can convert [gold] to cash and I don't have to wait for the bank to say the asset has matured." It would seem a better store of value than the Lira over the past decade or two and we suspect incentives will have to rise considerably to 'help' the people part with their savings-gold.

All you need to read and some more.

Despite January being the first of 3 record warm winter months, which saw virtually all other economic indicators boosted on the heels of 'April in February', today's incomplete Case Shiller data (Charlotte, NA was missing), indicated that in the first month of the year, prices across the top 20 MSAs dropped once again, posting a 9th consecutive decline, declining by 0.04% to 136.60. The Seasonally Adjusted print brings the average home price to December 2002 levels. And just to avoid Seasonal Adjustment confusion which courtesy of a record warm winter is all the rage, the NSA data showed a -0.84% drop in January.

First it was Bob Janjuah throwing in the towel in the face of central planning, now we get the same sense from Bill Gross who in his latest letter once again laments the forced transfer of risk from the private to the public sector: "The game as we all have known it appears to be over... moving for the moment from private to public balance sheets, but even there facing investor and political limits. Actually global financial markets are only selectively delevering. What delevering there is, is most visible with household balance sheets in the U.S. and Euroland peripheral sovereigns like Greece." Gross' long-term view is well-known - inflation is coming: "The total amount of debt however is daunting and continued credit expansion will produce accelerating global inflation and slower growth in PIMCO’s most likely outcome." The primary reason for Pimco's pessimism, which is nothing new, is that in a world of deleveraging there will be no packets of leverage within the primary traditional source of cheap credit-money growth: financial firms. So what is a fund manager to do? Why find their own Steve McQueen'ian Great Escape from Financial Repression of course. " it is your duty to try to escape today’s repression. Your living conditions are OK for now – the food and in this case the returns are good – but they aren’t enough to get you what you need to cover liabilities. You need to think of an escape route that gets you back home yet at the same time doesn’t get you killed in the process. You need a Great Escape to deliver in this financial repressive world." In the meantime Gross advises readers to do just what we have been saying for years: buy commodities and real (non-dilutable) assets: "Commodities and real assets become ascendant, certainly in relative terms, as we by necessity delever or lever less." As for the endgame: "Is a systemic implosion still possible in 2012 as opposed to 2008? It is, but we will likely face much more monetary and credit inflation before the balloon pops. Until then, you should budget for “safe carry” to help pay your bills. The bunker portfolio lies further ahead."

As we head into the US open, European cash equities are seen in positive territory with strong performance observed earlier in the session from the FTSE MIB. This follows reports from the Italian press regarding commentary from the Chinese President Hu Jintao who promised to encourage Chinese industry to look towards Italy with confidence, in a conversation with the Italian PM Monti on the sidelines of the nuclear safety summit in Seoul. Markets have also been reacting to an article from Der Spiegel, citing economists who have warned that the German central bank could be facing hidden liabilities of up to EUR 500bln should there be a break up in the Eurozone. This has prompted some risk-averse flows into the Bund which has seen fluctuating trade so far in the session but remains in positive territory as North America comes to market. In individual equities news, following overnight reports from Abu Dhabi concerning buying a stake in RBS, company shares were seen up 6%. Source comments from earlier in the session regarding the sale speculated that the stake could be up to a third of RBS. Looking ahead in the session, the market awaits US Consumer Confidence data due at 1500BST.

How to get rid of unwanted pests?

Gold is targeting $1,700/oz after yesterday’s Bernanke QE hints and today’s urging by the OECD to boost the Eurozone ‘firewall’ by another $1.3 trillion. Gold is consolidating on yesterday’s gains today above the 200 day moving average (simple) at $1,687/oz after yesterday’s biggest daily gain since January. The gains came after Ben Bernanke warned of the risks to the fragile US economic recovery and signalled the Fed would keep interest rates low and further debase the dollar – boosting gold’s inflation hedging appeal. Gold is also likely being supported by the OECD’s warning that the debt crisis is far from over. The OECD said today that the euro zone's public debt crisis is not over despite calmer financial markets this year and warned that Europe's banks remain weak,  fiscal targets are far from assured and debt levels are still rising. The OECD said that the eurozone needs to boost crisis ‘firewalls’ to at least $1.3 trillion. Gold likes the ‘trillion’ word and talk of ‘trillions’ and will be supported by the risk of the creation of trillions of more euros, pounds and dollars in the coming months. Indian jewellers are on strike to protest against a government levy on gold and the strike is entering its 11th day in most parts of India. It has brought gold imports to a near standstill from the world's biggest buyer of bullion in the peak wedding season.  The Indian government for the second time in 2012 doubled the import tax on gold coins and bars to 4% along with an excise duty of 0.3 percent on unbranded jewellery.

• 6.0+ Magnitude quake strikes near Tokyo (USGS)
• Ireland Faces Legal Challenge on Bank Bailout (Reuters)
• Bernanke says U.S. needs faster growth (Reuters)
• Spain Promises Austere Budget Despite Poll Blow (Reuters)
• Orban Punished by Investors as Hungary Retreats From IMF Talks (Bloomberg)
• Obama vows to pursue further nuclear cuts with Russia (Reuters)
• Japan's Azumi Wants Tax Issue Decided Tuesday (WSJ)
• Australia Losing Competitive Edge, Says Dow Chemicals CEO (Australian)
• OECD Urges ‘Ambitious’ Eurozone Reform (FT)
• Yields Less Than Italy’s Signal Indonesia Exiting Junk (Bloomberg)

Any and all negative overnight news are now completely ignored as the scramble for risk hits the usual fever pitch following Bernanke's latest attempt to transfer cash from safe point A to ponzi point B, aka stocks. First, China's industrial firms suffered a rare annual drop in profits in the first two months of 2012 mainly in petrochemicals, metals and auto firms, the latest signs of weakness in the world's No. 2 economy and reinforcing the case for policy easing, according to Reuters. This was the first Jan-Feb profits downturn since Jan-Aug 2009. Profits fell 5.2 percent so far in 2012, according to the industrial profitability indicator, published by the National Bureau of Statistics (NBS) every month. The last period that China reported nationwide industrial profit fall was in the first eight months of 2009. Then there was the German GfK Consumer Confidence which unlike yesterday's IFO, missed: nobody cares. Also on the negative side was an earlier auction of Spanish Bills which sold EUR 2.58 billion, just barely off the low end of a target issuance of EUR 2.5-3 billion. As noted however, neither this, nor the series of US disappointments which looks set to end March with 15 of 17 estimate misses is relevant. To wit: French consumer confidence soared to 87 on expectations of 82, as the easiest and lowest common denominator to boost risk assets is now abused everywhere, by UMich, by Germany and now by France. And why would people not be confident - stocks everywhere are higher despite fundamentals. After all if something fails, there is a central planner to fix it. Never forget - the taxpayer credit card has no limits. Net result - green across the board. 

And Number 2 Reactor Running Out of Water ...