Archive - Jun 2012

Discussed: Gold, Silver, ZIRP, Swaps, US Dollar, Fort Knox, GLD, SLV, COMEX, and More.

Société Générale head of foreign exchange research Kit Juckes on the US dollar dynamic, QE 3, 4, and 5, "even lower rates for even longer than you thought," and the Bank of Japan slowly learning to match policies with the Fed.

News & headlines from the day

First we got Spain miraculously announcing late at night local time, but certainly after close of market US time, that the bailout so many algorithms had taken for granted in ramping stocks into the close may not be coming, because, picture this, Germany may have conditions when bailing the broke country's banks out, and Spain is just not cool with that, and now, after the close of FX and futures trading, we get Moody's giving us the warning the after Egan-Jones, S&P, and Fitch, it is now its turn to cut the Spanish A3 rating."As Spain moves closer to the need for direct external support from its European partners, the increased risk to the country's creditors may prompt further rating actions. The official estimates of recapitalising Spain's banking system have risen significantly and the country's indirect reliance on European Central Bank (ECB) funding via its banks has been growing. Moody's is assessing the implications of these increased pressures and will take any rating actions necessary to reflect the risk to Spanish government creditors. Moody's rating on Spain is currently A3 with a negative outlook." Moody's also warns, what everyone has known for about 2 years now, that Italy could be next: "However, Spain's banking problem is largely specific to the country and is not likely to be a major source of contagion to other euro area countries, except for Italy, which likewise has a growing funding reliance on the ECB through its banks." Of course none of this is unexpected. What will be, however, to the market, is when all 3 rating agencies have Spain at BBB+ or below, which as ZH first pointed out at the end of April will result in a 5% increase in repo haircuts on Spanish Government Bonds, resulting in yet another epic collateral squeeze for the country which already is forced to pledge Spiderman towels to the central bank. 

With Must-See Commentary By Bill Black ...

Rand Paul just endorsed a man who is deeply hostile to human liberty. Perhaps that’s Rand’s idea of playing politics? Come to the table, strike a deal, get what you can. Trouble is, it’s tough striking a good deal when the guy on the other side of the table believes that the government should be allowed to claim — without having to produce any evidence whatsoever — that certain people are terrorists, and therefore should be detained indefinitely without any kind of due process. John Aziz has always been uncomfortable with the children of politicians becoming politicians. Every anointed child feels like a step away from meritocracy. Dynasties are dangerous, because the dynasty itself comes to be more important than the qualities of the politicians. Who would Rand Paul be if he wasn’t Ron Paul’s son? Just another neocon. They just ride on the establishment steamroller, into foreign occupations, empire building, corporate welfare, and banking bailouts. Into Iraq, and soon into Iran. Rand Paul just got on the steamroller.

... is the news (which is not news, because as we had explicitly stated early this morning, Spain admitting it needs a bailout absent a new bailout plan in place, launches the country's bond yields into hyperspace) that had it hit 30 minute ago would have sent everything red for the day:

• Spain Resisting Conditions On Bank Bailout - EU Official, BBG
  

But why would this news, coming at nearly 11pm Spanish tim, have to come before the market close, when all of the day's gains would have been undone. Why indeed.

In a strange coincidence, President Obama, as reported by Bloomberg, just followed Mario Monti's new normal and 'came clean' about the real state of the economy, following his earlier snafu:

*OBAMA SAYS `ABSOLUTELY CLEAR' ECONOMY NOT FINE, AP SAYS
*AP SAYS OBAMA SEEKS TO CLARIFY PRIVATE SECTOR REMARKS

The President went on to say that he knows the economy "needs to be strengthened" while clinging to his basic belief that there has been some momentum. Is 'truth' the new 'lie'? Or did hope and change just change on less hope?

The S&P 500 gained over 3.5% this week (with a dip-and-rip today on dismal volume). This is the best week of the year amid the lowest volume of the year (ex-holiday weeks). Gold, Stocks, Treasury yields, and the USD all recoupled from last Friday's decoupling and limped higher, ending at the top of the day's range today. Financials and Tech outperformed - up over 1.1% - with the majors best as financials won on the week +4.8%. Treasuries close to close were dull but intraday saw rather notable vol as 30Y yields dropped over 10bps before round-tripping back to its high yields of the day. All-in-all, broad risk assets did leak higher today but nothing like as exuberantly as stocks which was somewhat surprising into a weekend likely full of equity dilution for Spanish banks (and more burden for Spain) - or none at all. The USD rallied into the European close and sold off after for the fifth day in a row. HYG outran stocks on the day and maintained the bid (ES closed at overnight highs) but IG and HY credit lagged on the day - though are al better on the week. Cross asset-class correlations dropped notably into the close, as implied correlation dropped and VIX was very stable given the rally into the close, holding above 21% - even as S&P 500 e-mini futures ended the day more than 2 sigma above VWAP (as we suspect futures roll effects kept some out into the weekend). Lastly, this push higher today in stocks saw a major drop in average trade size - certainly not offering the kind of follow through to yesterday's (or the week's) gains that one would expect on a new bull leg.

Moments ago the following headline flashed across the Bloomberg terminal:

• Sentiment Improves Ahead of Weekend Eurogroup Meeting

All one can do here is laugh - we can discuss how this is simply the latest idiotic case of perpetual deja vu, where a broke continent sits down, orders catering service, only to realizes it is broker than before, but not before scheduling its next meeting, while Jean-Claude Juncker utters some more lies... or we can simply once again present David Einhorn's brilliant summation of the sequence of motions that the USS Troikatanic goes through every single time as it achieves absolutely nothing.

We can only assume that the technocrat-in-chief of Italy, Mario Monti, has read the second chapter of 'how to be a European leader' as he switches from Juncker's "When it's bad, you have to lie" mantra to "Maybe the real truth will scare 'em into it" as he pushes the spending of other people's money and a growth agenda (which of course will solve all the insolvency problems). As Bloomberg reports, the blackmail negotiations threats continue:

*MONTI SAYS THERE IS PERMANENT RISK OF CONTAGION IN EURO ZONE
*MONTI SAYS SPAIN BEING DEALT WITH PROMPTLY, ADEQUATELY
*MONTI SAYS EU NEEDS GROWTH POLICIES QUICKLY TO STOP CONTAGION
*MONTI SAYS MARKETS DEMANDING EUROPEAN GROWTH

Perhaps he just noticed the underperformance of Italian bonds the last day or two and just how this will rapidly spill back into his back-yard.

When you hear two politicians in the US going toe to toe arguing about public finances (i.e. money that isn’t theirs), they’ll often cite numbers published by the Congressional Budget Office (CBO). In political circles, the CBO is considered an honest broker - an objective referee that simply presents the facts without taking a position on the numbers. Today they’ve released an infographic showing America’s debt to GDP ratio over the last 100-years, through World War I, the Great Depression, World War II, the Nixon Gold shock, and the Global Financial Crisis. For what it’s worth, both of the CBO’s scenarios for future debt growth seem absurd  underpinned by an even larger assumption– that the status quo is maintained, i.e. the United States remains the world’s most powerful economic force, can print currency at will without consequence, and can inspire foreigners to buy Treasuries. Rather than relying on some bureaucrat, though, history is really the best indicator for what will happen in the future. It may not repeat, but it’ll certainly rhyme. And history shows that the long-term likelihood is financial repression, severe inflation, and/or default.

Rick Davis of The Consumer Metrics Institute plays Clark Kent to Charles Biderman's Superman as the two dig into the latest GDP data. Critically, they break down the components and using inflation levels (CPI-U or The BPP) that make some sense Davis and Biderman are "really worried" that the real economy appears to be in a contractionary state if inflation is adjusted for correctly. Even the anemic BEA's 1.88% growth rate is 'very very poor' for an economy that is supposed to be 3 years into a recovery. The per-capita income (the money available to all households to spend) actually shrank - even using the BEA's inflation data. This juxtaposes shrinking household disposable income with a real economy supposedly growing (though slowly) which was driven almost exclusively by consumer spending - leaving Davis and Biderman questioning 'where this money is coming from?'. The simple answer is the savings rate has plunged, freeing up over $200bn in annual spending (and student loans have added another $100bn, refis $50bn, and strategic defaults $80bn) - all unsustainable one-time increases. Spending is not coming from income. Davis concludes that the BEA is notoriously bad at calling turning points (only getting the Great Recession 'direction' correct after 16 months and magnitude after 40 months) - leaving him of the opinion that we may well be in the first quarter of the next recession.

No Guts, No Glory...

"The global banking system is functionally insolvent and will fail without exogenous policy action" is how QBAMCO's Paul Brodsky begins his latest treatise noting that asset monetization (and in, particular, gold monetization) would solve many more problems than it would create. The negatives would merely recognize the balance sheet damage already done and beginning to be manifest (first, in the private sector and now, increasingly in the public sector). The global economy is threatened because, in real terms, it continues to misallocate capital and rolling unfunded debts and debating in the political sphere over the merits and risks of unfunded growth or policy-administered national austerity programs is a futile endeavor. The math suggests strongly neither can work. Brodsky is convinced policy-administered asset monetization would stop the global financial system from seizing, restore sorely needed economic balance, and reset commercial incentives so that real growth can once again gain traction.