Archive - May 2013

The last few years have been dominated by one theme and every trade has been a derivative bet on that theme. The idea that by inflating another asset bubble, a wealth effect will ripple through the market to the real economy, encourage animal spirits and spark a renaissance (in something, we are not sure what). Well, so far no good. The real economy, as discussed at length, is not recovering; but the question of just who is benefiting from the wealth effect is unclear. As the following charts across the 100 largest G4 pension plans show, the asset managers have missed the trickle-down. Despite bad (and worsening) under-funding and a Fed repressing 'safe' assets to the point of ultimate risk, G4 pension funds have refused to partake of any mythical 'great rotation', remain avid bond buyers, are as drastically under-funded as ever, and finally, have maintained the same 'cash on the sidelines' for 14 years now...

The collective state of mind in the USA these days may be even more peculiar than what went on in Germany in the early 1930s, when the Nazis were freely elected to lead the country and reconstructed the battered national psyche into a superman cult that soon beat a path to mass death and ruin. America has its own way of going crazy. We don't goose-step to tragedy; we coalesce into an insane clown posse and stumble into it by pratfall -- juggaloes dancing backwards off the cliff edge. A subset of our master wish has been on vivid display in recent months, namely the idea that God has blessed the USA with a limitless supply of new oil that will allow us to keep driving to WalMart forever. Most of the current "endless oil" fantasy revolves around shale oil. Apart from the issue of sheer economic suffering and all the damage that will ensue from the realization of the falsehoods and propaganda, consider that it will be generations before anyone believes the "authorities" again.

UPDATE 1: Chatter of a potential US downgrade from Moody's is being blamed (but that news out hours ago)

UPDATE 2: Silver futures trading volume 82% higher than 100-day average

While the mainstream media will likely be loathed to mention it, gold and silver are surging higher. Gold has retested $1400 and Silver $23 on no news... so it seems the demand for 'cheaper' precious metals was enough to warrant a 4.6% rally off overnight lows in gold and 12.5% in silver amid heavy volume in futures markets...

If Cyrpus blew up with bank assets/GDP leverage of 700% & Iceland blew up with leverage of 880%, what should we expect from Scotland @ 1,250%? Of course, this leverage number likely excludes those top secret charges I found last month...

While we have wondered on numerous occasions previously if the collapse in lumber prices is the far more accurate indicator of end demand for housing (as confirmed by the recent collapse in multi-family housing starts), perhaps an even better indicator of trends in housing (and by implication the broader economy) is private sector intermediate end demand, such as Caterpillar North America sales, which unlike government data, are far less subject to political intervention, interpolation, guesswork, seasonal adjustments and otherwise, general manipulation. And even though we have previously reported on the woes ailing the world's largest seller of bulldozers, excavators and wheel loaders, such focus was primarily targeted in the offshore markets, and especially China (the abysmal European market needs no mention). So maybe the time has come to shift attention to the US, where as Caterpillar just reported, not only are all foreign markets still trending at several impacted levels, but where US machine retail sales just saw the biggest tumble in three years, falling 18% Y/Y: the most since early 2010. What is more disturbing is that CAT equipment is used in far-broader economic activities than merely housing, and likely is a far more accurate indicator of true industrial end-demand than any other number cherry-picked by the government.

Fed chairman Ben Bernanke’s testimony to Congress will be important in setting the tone for the markets (particularly the dollar, equities and US treasuries), as traders hunt for clues on when the Fed is likely to ease its rate of asset purchases.

UPDATE: Gas Prices reach all-time high in Oklahoma City

With the bond vigilantes still suppressed by the heavy boot of central bank intervention, the role of 'governor' of monetary (and fiscal implicitly) largesse has been left to the energy markets around the world. As we noted here, the Brent Vigilantes have indeed capped economic gains in the past few years (and perhaps more worryingly for investors, as we detailed here, have capped P/E expansion hopes). Sure enough, with a one-month lead, crude oil prices are leading retail gas prices higher (now near three-month highs) which point to a rally-ending, economy-sapping $3.80 price within the next few weeks (unless oil prices are rapidly suppressed too).

"Money power denounces, as public enemies, all who question its methods or throw light upon its crimes."--William Jennings Bryan

While anecdotally we see again and again that equities rally on bad news (The Fed will save us) and good news (see The Fed saved us), none of that matters until it gets the Goldman Sachs stamp of approval. Sure enough, in a detailed study over the weekend, designed to defend their bullish equity view (specifically financials) and expectations for QE3 to continue to Q3 2014, the bank that does God's work offered up these pearls of statistically sound wisdom: "while equity prices respond more to dovish surprises than hawkish surprises, the results suggest that equity prices typically go up regardless of whether the Fed policy surprise is positive or negative (“good news is good for equities, and bad news is good for equities”). But it is not at all clear why the equity market should systematically buy into this pattern." So rest assured, buying wins; of course, that is, until it doesn't.

The IRS routinely obtains information about how we earn a living, what investments we make, what we spend on ourselves and our families, and even what charitable and religious organizations we support. Starting next year, the IRS will be collecting personally identifiable health insurance information in order to ensure we are complying with Obamacare’s mandates. The current tax laws even give the IRS power to marginalize any educational, political, or even religious organizations whose goals, beliefs, and values are not favored by the current regime by denying those organizations “tax-free” status. This is the root of the latest scandal involving the IRS....  Considering the type of power the IRS excises over the American people, and the propensity of those who hold power to violate liberty, it is surprising we do not hear about more cases of politically-motivated IRS harassment. As the first US Supreme Court Chief Justice John Marshall said, “The power to tax is the power to destroy” — and who better to destroy than one’s political enemies? The very purpose of the IRS is to transfer wealth from one group to another while violating our liberties in the process, thus the only way Congress can protect our freedoms is to repeal the income tax and shutter the doors of the IRS once and for all.

While we have become used to the almost daily trading-halts in Japanese government bonds, when the CME reports that Silver trading was halted four times overnight, it is increasingly clear that this market is anything but 'normal':

• *SILVER TRADING WAS HALTED FOUR TIMES OVERNIGHT, CME GROUP SAYS
• *SILVER TRADING WAS STOPPED FOUR TIMES IN 20-SECOND HALTS
• *SILVER TRADING WAS HALTED IN `STOP-LOGIC EVENTS', CME SAYS

Yet somehow, amid all this 'extreme' volatility in 'safe' collateral assets, we still do not hear of funds blowing up (yet). While central bankers would seem to disagree, there really is no stability without volatility and the more that vol is suppressed, the more extreme the inevitable 'event'.

If Japan’s bond market implodes, then global Central Bank efforts to hold the system together will have proven a failure.

While the overnight collapse in precious metals has been notably retraced, the media is unable to take its eyes off the ball that the status quo is shaking focusing on the demise and what that must mean for the future. Well, it seems, the Indian finance minister is very clear. Speaking in New Delhi P. Chidambaram explained his lack of surprise at the increase in gold imports in April (as physical demand exploded amid falling paper prices) adding:

• *CHIDAMBARAM APPEALS TO PEOPLE TO CONTAIN PASSION FOR GOLD, and
• *CHIDAMBARAM: MORE STEPS PLANNED TO CURB GOLD IMPORTS IF NEEDED

So China/Hong Kong is importing near record amounts of the precious metal into reserves and India is not only seeing demand but enough to warrant further government intervention... makes perfect sense that (paper) prices should be falling - or are the planners plans backfiring once again? As we noted here, as long as the price suppression of paper gold prices continues, don't expect any notable changes to these demand trends.

It is likely that the very aggressive selling in illiquid Asian markets overnight was by a large hedge fund or bank or a combination of hedge funds and banks with deep pockets. Reuters quoted an analyst at a Japanese bank who said that silver’s price falls were due to one “unidentified investor”.

While we are told day after day that not only is Europe 'fixed' but that Cyprus was not a template, it seems the bankers in the peripheral nations are a little less confident (never mind their record amount of reach-around-based domestic bond buying). European "leaders need to moderate their language," warned one bank CEO, and as the FT reports, another feared a "Cyprus virus," adding that "you can't keep playing with fire." The comments come in the wake of the depositor haircuts in Cyprus as a rush of clients wanted to move cash from deposit accounts to vaults: "most clients in Portugal don't trust deposit guarantees... they choose vaults instead." Fixed indeed... and why would these bankers worry about the 'precedent' if it were not a 'template' for future bail-ins?