Archive - Apr 3, 2012

Just in case the mainstream media's "record profit" narrative takes a hit during Q1 earnings announcements...

There are many reasons why gold is still our favorite investment – from inflation fears and sovereign debt concerns to deeper, systemic economic problems. But let's be honest: It's been rising for over 11 years now, and only the imprudent would fail to think about when the run might end. Is it time to start eyeing the exit? In a word, no. Here's why. There's one indicator that clearly signals we're still in the bull market – and further, that we can expect prices to continue to rise. That indicator is negative real interest rates.

The Deepwater Horizon incident demonstrated that most of the oil left is deep offshore or in other locations difficult to reach. Moreover, to obtain the oil remaining in currently producing reservoirs requires additional equipment and technology that comes at a higher price in both capital and energy. In this regard, the physical limitations on producing ever-increasing quantities of oil are highlighted, as well as the possibility of the peak of production occurring this decade. The economics of oil supply and demand are also briefly discussed, showing why the available supply is basically fixed in the short to medium term. Also, an alarm bell for economic recessions is raised when energy takes a disproportionate amount of total consumer expenditures. In this context, risk mitigation practices in government and business are called for. As for the former, early education of the citizenry about the risk of economic contraction is a prudent policy to minimize potential future social discord. As for the latter, all business operations should be examined with the aim of building in resilience and preparing for a scenario in which capital and energy are much more expensive than in the business-as-usual one.

A bubble, bad underwring, inflated prices... Anything sound familiar? Nearly every middle class family aspires to this...

Even Zhou Xiaochuan, Governor of the mighty People’s Bank of China, is worried....

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In our busy days, it is all too easy to fall into the trap of hearing (and believing) the latest headline and its associated spin. For some reason, three minute videos can quickly and easily remove these 'spins' without the need for a PhD. In today's 3:06 un-spin, the broken-window-fallacy is addressed as the seen versus unseen impact of the idiocy of a broken-window's (or war, or destroying homes, or...) positive impact on an economy is explained in cartoon style. The sad fact is that this fallacy remains at the core of mainstream policy-making and as the video notes, the government's 'creation' of jobs via public works programs (or any number of stimulus-driven enterprises) it does so at the expense of the tax-payer via higher taxes or inflation and that 'spending' which would have otherwise gone to new fridges or iPads is removed and this does nothing to significantly improve aggregate demand (should there be such an amorphous thing) and in fact (as we recently noted here and here) leaves us more and more dependent on the state for corporate profit margins leaving any organic growth a dim and distant memory.

Having been an onlooker of the recent tiff between Paul Krugman and Steve Keen, I was very eager to see what Mr. Keen had to say in tonight's LSE public lecture on "Banks Versus the Economy." Observing how Keen had quarreled with Krugman and effectively ate his lunch, I thought he would bring a lot to the table. I was wrong. Keen had raised the (very interesting) issue about how neoclassical economists and their models fail to recognize the role of banks in the economy.

In Jobs we trust...

While the S&P closed lower for the day, the dramatic save as ES (the S&P 500 e-mini) hit 1399.5 (again) pushed it all the way back to the safety of VWAP and perfectly unchanged from pre-FOMC news. Meanwhile, Gold and Silver lost around 2%, Treasuries snapped 13-15bps higher in yield and the USD ripped 0.6% higher closing pretty much at their extreme levels of the day. AAPL was unphased as the rest of the world appeared to sell any and everything on news of no more Fed liquidity in the short-term as the stock clung to its VWAP ending with new all-time highs once again. VIX, which managed to surge over 16.5% once again - above yesterday's highs - recovered all the way back to practically unchanged by the close (outperforming the small loss in stocks on the day). With Treasury yields and the USD back at one-week highs and stocks just 0.5% off their multi-year highs, it looked for a moment like equities were going to reconnect with credit's much less sanguine perspective - and indeed they covered half the difference at one point - but by the close HY and IG credit remains unchanged from Friday 3/23 while the S&P is up over 2% from then. Volume was average today but concentrated in the sell-off period of the day but we note that average trade size was very near the lowest of the year (suggesting algos using small lots to tickle us up to VWAP for the close) and some larger blocks going thru in the last few minutes as we peered above VWAP - combined with the shrug from credit, significant weakness in the major US financials, and unwinds in every other asset class - make us nervous for unhedged equity longs here - especially with European weakness now a trend and not a one-off.

Folks, QE 3 is not coming. Not without a Crisis first. End of story. The last time the Fed hit “print” with QE 2 put food prices at all time records and kicked off revolutions and riots around the globe. Today, gas is already at $4, food prices aren’t too far off their highs… do you REALLY think the Fed will kick off more QE in this environment… during an election year? At a time when the Fed is becoming a hot topic in the election?

If there is any one chart out there that puts it all into perspective, this is it.

Repeat the following with increasing vigor...

Jan Hatzius was on TV earlier, stating he expects a whisper of Twist extension in today's minutes, as per Hilsenrath. He did not get what he wanted. His take: it is now just deferred to June. To wit: "March FOMC minutes make easing at April meeting unlikely without substantial deterioration in the outlook. However, an announcement of additional asset purchases remains our baseline, with June the most likely timing at this point."