Archive - Jan 2013

Just a few days ago we noted the massive surge in physical gold coin sales from the US Mint, with silver surprisingly lagging. Today, we see an even more dramatic surge in the sales of physical Silver Coins in the first week of January, which in a few short days hit 3.94 million oz, already surpassing the entire December total of 1.64 million ounces. It seems that the paper-to-physical currency rotation is gathering pace even as, or thanks to the trillion dollar platinum coin mercifully ending its 15 minutes of page-clicking, ad revenue infamy. In the secondary market, inventories (via APMEX) of Silver coins remain negligible, if any: American Eagles are available as follows: 2013s may be available 1/18, maybe not; 2012 - 0; 2011 - 0; 2010 - 0; 2009 - 0; 2008 - 0; 2007 - 0; 2006 - 0; 2005 - 0; 2004 - 0; 2003 - 0; 2002 - 0. They do have some 2000, 2001 and 2007, all about $5-6 over spot! It seems ever more people are getting nervous about the impact of currency wars on their "money"... or perhaps just want to make Silver shirts to attract the females?

SSDM: just like in October, and September, and August, and so on, November consumer credit saw a decent pick up of $16 billion, well above the expectation of $12.75 billion, above the $14.1 billion in October, and the third highest monthly print of 2012. And if this was driven even remotely by actual short-term consumption demand, it would likely be a good sign, as it would imply consumers have more faith in being able to repay their credit cards. Sadly, of the entire $16 billion jump, only $817 million, or 5%, was based on a jump in revolving credit. The real "growth" came as usual courtesy of Uncle Sam handouts, solely in the form of auto and student loans, which accounted for a whopping $15.2 billion of the increase in consumer debt, the second largest jump in the year, second only to the $18 billion in January. And as everyone knows, student loans are already on fast track to forgiveness (full forgiveness in 10 years if one works for the government), as will be the case for those NINJAs who buy GM cars using government loans. For all of 2012, a whopping $130 billion of the $137 billion total has been in the form of government handouts. In other words, nearly 1% of 2012 GDP has been funded by Uncle Sam in the form of (dischargeable) loans which everyone else will be responsible for, until nobody at all is responsible.

While we have explained again and again why a falling spot VIX is not the panacea of risk indicators (simultaneous and curve shifts), it is however, the easiest lever for algos to drive equities at the margin on a thin day. Sure enough, as we head towards the 3pmET ramp time, VIX sellers are back en masse and while they managed to get S&P 500 futures up to VWAP, it would appear hedgers are more comfortable unwinding real positions (vol down, vol curve flatter, and stocks down). 60 minutes of fun left to see who wins...

It should come as no surprise that the relationship between the balance sheets of the world's major central banks and risk assets in general are relatively closely correlated (that is not to say dependent to avoid the causation/correlation 'out'). A great example is the tight coupling between the EURUSD exchange rate and the ECB and Fed balance sheets over the past few years - and just what the EURUSD (market) is implying about forward central bank action. As Mark Faber has noted in the past though, the flood of liquidity from central bankers has the unintended consequence that they 'don't know' where that money will sloosh next. 2012 saw European stocks dramatically outperform US stocks, despite the 'unresolved issues', and the chart below of lagged performance of US over European stocks relative to the Fed and ECB balance sheets, suggests that this 'catch-up' of Europe has considerably more legs going forward even as the Fed's balance sheet is set to expand by $1trillion this year. A strange chart indeed...

The world’s largest reinsurance firm, Munich Re, has stated that Natural Disasters alone have cost the world $160 billion in 2012. The US accounted for 67% of those total losses, with Hurricane Sandy proving to be single most expensive disaster of the year, costing around $50 billion in total. Munich Re actually noted that, “had it not been for this exceptional storm, losses would have been very low in 2012.” Hurricane Sandy is the largest hurricane ever on record, and the second most expensive after Hurricane Katrina. The second most costly natural disaster was the summer-long drought which blighted the Corn Belt across the US Midwest, causing severe crop damage to the sum of $20 billion....  As high as the global losses were in 2012 they were still less than 2011 when the cost hit as high as $400 billion due to major earthquakes in Japan and New Zealand and severe floods in Thailand.

In two pictures...

In a somewhat surprising bid to avoid having even more Argentina assets impounded by the increasingly more belligerent hedge fund hordes, president Kirchner opted to squeeze the government's already dwindling coffers further and instead of using her official aircraft, she decided to pay British air charter Chapman Freeborn $880,000 for an airplane rental to take her to Cuba, the UAE, Indonesia and Vietnam. This happens even as Argentina is once again caught in a messy brawl with the UK over the Falklands. And while the nearly $1 million abuse of taxpayer funds will hardly pass unnoticed, we have no doubt that Argentina should be able to finance itself in the international markets efficiently should it choose to: just slap a high yield on the debt and pitch it to Elliott, already in possession of an Argentina boat, who may (or may not) gladly buy it. Stranger things have happened.

The CIA Is Taking Over the Dirty Work in Fighting America’s Wars

A month after December's 3 Year bond auction drew a record Direct bidder takedown, the Treasury has just auctioned off another batch of $32 billion in TSYs, which was almost a carbon copy of last month, with weak Indirect interest (28.4% Indirects), a stable Bid To Cover of 0.3623, increasing from last month's 0.3356%, a high yield of 3.85% (5.51% awarded at the high), just inside of the 0.386% When Issued, and another record Direct Bidder take down, rising to 26.4%, and just shy of surpassing the Indirects, as happened in December. The curious shift away from Indirects to Directs continues, even as Primary Dealers as usual pocket around half of the auction, to be used a near cash-equivalent collateral in various repo markets (and afterwards perhaps using the cash repo proceeds to sell IG9 indices?) Keep an eye on the Bid to Cover in future auctions as we may have hit a ceiling in this old-fashioned metric which has lately been moving sideways, and outright downward in some other TSY bond year.

2012 was unusual for many reasons. As Morgan Stanley's Adam Parker notes, the kind of stocks that worked in what was a big up tape were very atypical - higher-quality, larger-cap. While the Strategist graciously accepts that his year-end 'bearish' call for 2012's S&P 500 performance was a miss, it is his reasoning that is key. Having a framework is critical and while CNBC anchors merely look on and judge a book by its cover, Parker's critical insight that last year's performance was all multiple expansion and "The reason we got multiple expansion last year was the Fed is creating trillions of dollars on a computer" is perhaps the most critical take-away for anyone claiming victory. His succinct summary for 2013 (e.g. earnings consensus needs to come way down, and Fed unconventional policy-driven multiple-expansion has 'robbed from the future') in the following clip is also worthwhile to clarify exactly what is going on under the covers of our equity markets.

The debt limit was formally reached last week, and we expect the Treasury's ability to borrow to be exhausted by around March 1 (if not before) and while CDS are not flashing red, USA is at near 3-month wides. Like the previous debt limit debate in the summer of 2011, the debate seems likely to be messy, with resolution right around the deadline. That said, like the last debate we would expect the Treasury to prioritize payments if necessary, and Goldman does not believe holders of Treasury securities are at risk of missing interest or principal payments. The debt limit is only one of three upcoming fiscal issues, albeit the most important one. Congress also must address the spending cuts under sequestration, scheduled to take place March 1, and the expiration of temporary spending authority on March 27. While these are technically separate issues, it seems likely that they will be combined, perhaps into one package. This remains a 'very' recurring issue, given our government's spending habits and insistence on its solvency, as we laid out almost two years ago in great detail.

Perhaps it is time for the punditry and the chatterbox media to start considering what happens not when the much anticipated rotation out of bonds and into stocks, which has not happened for 4 years now, and won't, at least not until the government bond bubble finally pops which will only happen when the central banks finally lose control, but what happens if even a tiny amount of the global pension capital allocated to bonds and/or equities, is rotated into gold.

“Pension money invested in bullion is ‘peanuts’ at the moment,” Toshima said. “If 1 percent of their total assets shift to the metal, the gold market would explode.”

Could not have said it better ourselves.

A douche bag is someone who lets you know who and what he is without any need of explanation: Mike Norman

The groupthink in the world of finance is some of the worst on the planet. It’s incredible how such an educated, experienced group can willfully ignore reality, stick their heads in the sand, and repeat the same mantras over and over again until they become axiomatic. The desire to be accepted by one’s peers is part of human nature. And when it’s one’s peers who are rigging the financial system, the pressure to adopt industrial groupthink is enormous. The dawning of a new year is invariably a time for forecasts. But we have some reservations about the seemingly ubiquitous binary decision to ditch bonds and put the proceeds into the stock market. To put it more plainly, ditching bonds to buy stocks may be jumping from the frying pan into another frying pan. To put it more plainly still, stock markets are only cheap by reference to grotesquely expensive government bonds, and the risk of significant price falls is ever present, especially at what is likely the tail-end of a multi-decade expansion in credit. A falling tide might sink more than one type of boat.

It is one thing for Pineapple republics like Greece (because only the US has full faith and credit in the "Banana" adjective) to have their former Prime Minister's mom be uncovered with $700 millions in Swiss accounts, or its former finance minister get caught literally whiting out his relatives (and perhaps himself?) from a list exposing tax evaders and offshore bank holders, but when the rulers of that bastion of neo-socialism, where everyone is equal, are shown as having done the same, and ostensibly "laundering tax fraud" and hiding unpaid taxes in some bank vault deep under the Swiss alps, implicitly having been part of that group of much hated "rich people" that the same regime is doing all it can to expel to progressive places such as Russia and Belgium, one can't help but wonder, are some more equal than others?