Archive - Mar 2012

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 ...

The Fed is clearly worried about the economy. Ben Bernanke's latest speeches aren't exactly inspiring. It is as if he thinks the rosy(ier) numbers are some prank being played upon him by the gods; that soon this will all be taken away. He is right. He admits he doesn't understand why the economy is the way it is. Reality doesn't fit his theory. ("It's supposed to work, dammit!") So, what do you do when you are the head of the world's biggest printing press, and don't know what else to do? Why QE3 of course.

UPDATE: Added link to Matthew Bishop's ebook 'In Gold We Trust'

On a day where gold surged generously on the same thesis with which it managed a five-fold increase in the last decade or so - that of paper money debasement - we thought it appropriate to get some context as to the yellow metal's history, current implications, and potential future. In a mere 111 seconds, we are treated to a history of sound money (from Croesus to The Bank of England to The Great Depression), the growing division between some of the world's most-famous smartest investors with regards to Gold's price (Buffett vs Paulson/Bass), Governments and Central Banks Spending and Printing 'experiments', and a discussion of the endgame of "Where Will All The Money Go?" - all with the help of a magical cartoon hand. As it seems the profligate control of the electronic press is now all that matters to an increasingly correlated and blind-leading-the-ignorant markets, perhaps it pays to consider how markets have changed reactions to the threat promise of the extreme easing upon which the equity market's heart beats so strongly. Once anxious of bond vigilantes (taken care of via LTRO reacharounds and direct Fed monetization), FX markets remain intervention-prone (just ask Azumi how many times he looks at JGBs or JPY risk-reversals every day), and finally to the stock (and vol) markets as 'Bernanke's trailing-strike Put' ensures 'the wealth effect' buoys us all the chosen few to greater and greater spending disconnects between value and price and potentially larger and larger mal-allocations of capital. With Corporate cash stockpiles so huge - the "Where Is John Galt?" line can't help but appear in many minds as reinvestment in a dilapidated, aging, increasingly less cash flow generating asset base remains to be seen.

Spain, Europe, China - The Generational Opportunity to get hit head on by a Black Swan

Following the earlier microphonegate (someone really need to tell politicians that any time they speak, they are now on the record always, and no just for the benefit of the NSA's brand spanking new compound in Utah known as "1984", that includes Portuguese and German politicians too) it was only a matter of time before the more conservative republican elements went beyond the simply rhetorical and asked some pointed questions, such as this from Mike Turner, Chairman of the House Armed Services Subcommittee on Strategic Forces, who minutes ago said that "It’s Unclear What the President has Offered up to the Russians as Bargaining Chips." Additionally, what is funny is that a part of the much hated NDAA which essentially eliminates the bill of rights for American citizens who are suspected of terrorist activity, Congress specifically targeted missile information sharing with Russia. To wit: "Congress has included in the FY 2012 National Defense Authorization Act, Congress, which the president has signed into law, a provision constraining his ability to share classified U.S. missile defense information with the Russian Federation. Congress took this step because it was clear based on official testimony and Administration comments in the press that classified information about U.S. missile defenses, including hit-to-kill technology and velocity at burnout information, may be on the table as negotiating leverage for the president’s reset with Russia." So let's get this straight - Obama signs the NDAA, with supposed reservations because he is well aware it is unconstitutional, and yet when it comes to its plain vanilla provisions, he violates them? Has anyone figured out yet what follows a banana republic in the escalation to pure centrally-planned lunacy, because America is there now.  

Earlier today we presented an extended case by Caixin's Andy Xie, who is now confident that a massive 40% devaluation of the Yen is imminent and inevitable (with dire consequences for regional trading partners), as the opportunity cost, now that the Japanese economy is no longer competitive in the New Normal world (read trade surplus) of delaying what every other central banks has been doing so well (just observe the nominal surge in risk assets at 8 am this morning when Bernanke made it clear more real dilution is coming, as predicted here just yesterday), is the 3 decade long overdue pop in the JGB bond market. Yet as Xie notes, either of these two bubbles popping - the JPY or the JGB - is fraught with danger as both will confirm that three decades of central planning have failed. What is worse, Japan would then become a case study for failed central planning (yes, redundant), everywhere, but nowhere more than in the US. Which in turn, would not be a surprise to most, or at least to those who don't chase dead end momentum trends and heatmapped assets in simplistic hopes of finding a greater fool 1 millisecond into the future. It also would not be a surprise to anyone who sees the following chart from John Lohman which shows the gradual failure of central planning since the second global depression started in 2007 (and offset to date by $7 trillion in central bank private-to-public risk offset), during which time the BOJ has been forced to load up its balance sheet with substantially more assets than its GDP has grown by. Alas, this trend will accelerate which is why with time the exponential chart of central bank balance sheet expansion will only get more "exponential" until it finally pops, bringing with it an end to the truly last bubble. We can only hope we are somewhere far away when that happens.

Sarkozy is grasping at straws ... and created a new classification of people in France and maybe even in the whole entire world.

Bernanke’s argument that he can push demand harder to reduce unemployment is based on the notion that unemployment is more cyclical than structural. Unfortunately that seems like a bad bet given the evidence. The greatest bulge in unemployment in this cycle is from not-temporary unemployment instead of from temporary unemployment. And that category’s contribution to the unemployment rate is larger than in this expansion at this point than in any previous expansion at the 32-month mark since at least the 1970s. Ben seems to be rolling the dice on a bad bet. But it’s a bet that gives him a rationale for postponing tightening which is what his Great Depression lesson tells him to do. Right now all we really know is the ‘what’ of his policy ‘not the ‘why.’

In today's open mic farce that has made the president a target of a fresh republican onslaught, we have Obama telling Russian presidential pawn Dmitry Medvedev that "this is his last presidential election", and that he will have "more flexibility after the election." One can only assume that Obama is referring to the aggressive NATO expansion which has angered Russia substantially as noted previously, and even led to Russia putting radar stations on combat alert. It could be this or it could be anything, including US posturing vis-a-vis Syria assuming the stance a huanitariam, if completely impotent, do-gooder globocop, or for that matter any other foreign policy fiasco in which Russia now have the upper hand by default. Naturally, one wonders why Obama would be pandering to Russia (well, aside for the country's premier export position when it comes to nat gas and crude of course) in the first place. Or more importantly, as the GOP has now figured out, why does the president need to be more flexible after the election to begin with, and to what other special interest will Obama be far more responsive than to his mere electorate. Either way, nothing but more theater as central planning continues on its merry way to terminal dislocation with reality.

Taking Bernanke’s statement to indicate that QE is coming in April is wishful thinking at best. Bernanke’s actual words imply, if anything, that the Fed may have failed to fix the US economy. This is more of the Fed playing damage control because the reality is that Bernanke is well aware of this:  by the Fed’s own data we’re clearly in a structural Depression, NOT a cyclical recession.