Archive - Aug 2013

“Is the gold market manipulated?” This is one of those extremely dodgy questions that has left both investors and economists very divided. By arguing whether or not gold manipulation exists, we may find that we are wasting our brain cells on the question. A better question, and one that we might choose to monitor on a regular basis, might be, “To what degree is successful manipulation taking place?” We might then use the on-going answer as a guide, to inform our reasoning going forward, as to what impact any perceived manipulation is likely to have with regard to our precious metals investment.

After a surge at the beginning of the economic recovery, productivity growth has cooled. For the nonfarm business (NFB) sector, BofAML notes that productivity has slowed from a peak of 5.8% year-over-year in 4Q 2009 to just 0.9 in 1Q of this year. This week we will see Q2 data - expected to show a further slowing to just 0.6%. Moreover, what we show below is that, outside of the tech boom in the late 1990s, productivity tends to slow as business expansions mature. Our current 'expansion' is now thoroughly mature...

A recent survey of asset managers globally, managing USD 27.4 trillion between them, found that 78% of defined-benefit plans would need annual returns of at least 5% per year to meet their commitments, while 19% required more than 8%, "a target of 5% per year can be reached but only by using leverage, shorting, and derivavtives." And sure enough, as Deutsche Bank (DB) reports, in short, investors have rarely been more levered than today! According to DB, a MoM change in NYSE margin debt >10% has to be taken as a critical warning signal as there are astonishing similarities in the sequence of events among all crises. As the S&P 500 just hit a new all-time high, investors might want to ask themselves when it is a good time to become more cautious – yesterday, in our view. Simply put, the higher margin debt levels rise, the more fragile the underlying basis on which prices trade; with even a less severe sell-off in equities capable of triggering a collapse.

For the 5th time in the last 7 days, equity market internals have triggered an anxiety-implying Hindenburg Omen. Based on our data, this is the most concentrated cluster of new highs, new lows, advancing/declining based confusion on record. The last few occurrences have not ended well (though obviously not disastrously) but as the creator of the 'Omen' notes, the more occurrences that cluster, the stronger the signal.

The percentage of Americans that are economically independent has dropped to a stunningly low level. What we have in America today is a situation where economic independence is being systematically eradicated and the government is increasingly being expected to provide our daily bread and to take care of all of us from the cradle to the grave. And once you become a serf of the state, it is very hard to resist anything the government is doing in a meaningful way.  After all, the money that you are getting from the government is enabling you to survive.  In essence, your allegiance has been at least partially purchased and you may not even realize it. At this point, the number of Americans that are financially dependent on the government is absolutely staggering, and it gets worse with each passing year.  Just consider the following statistics...

While all the attention of the world's investing public - focused on the short-term repo markets in China - has been ameliorated by the PBOC's 'fold' thanks to ~CNY600bn in liquidity provision (or an equivalent 65bp RRR cut), liquidity concerns remain high (and not so hidden if one knows where to look). Not only has there been a surge in copper imports - based on the cash-for-copper deals replacing short-term funding but concerns raised by investors and the PBOC over duration mismatches (exposed by the recent crisis) has forced Chinese banks to seek longer-term funding. Banks are now raising longer-term deposit rates in order to attract stickier term-deposits and this is causing medium-term Chinese bond yields to surge.

Back in 2010, when few still dared to question that the entire move in the market is predicated on the Fed's daily POMO (then still on QE2), we laid out, in a way so easy even a caveman could grasp it, how every tiny move in the stock market is nothing but a function of the Fed's daily POMO on those days in which Bernanke would be directly injecting liquidity into the capital markets using his Primary Dealer frontmen. Since then nearly three years have passed, and thousands of POMO days. All of which brings us to this quarter's Treasury refunding presentation, and specifically the section "Effects of policy and market structure" from the Presentation to the Treasury Borrowing Advisory Committee, in which we learn that we had in fact been right all along, and that perhaps for the first time ever, the Treasury admitted that not only "no one dares fight the Fed" but that, as expected, it is "all POMO."

"Preservation of Capital" is much more important than any other strategy in the marketplace and this has been demonstrated time and time again over the centuries. Gold, since ancient times, has served four functions. The first is for jewelry and this is a subject for lunch at the Four Seasons. This is not where we are dining today. The three other functions of gold are a replacement for a currency, an asset that rises in value in times of inflation and an asset that becomes more valuable when Fear is hard upon the market place. It is then a matter of viewpoint where you think we are now but given the sell-off in gold, the possibility of a dark horse or two beginning to trot after the German elections or the fantasy numbers pumped out of China becoming unmasked; gold is an interesting option these days. But there is potentially another 'trade'...

British Prime Minister David Cameron has written an article in the Daily Telegraph in which he has called for all UK communities to show support for the fracking industry, and welcome the coming shale gas boom, stating that such a boom will lower energy bills and create jobs. Despite his demand for Brits to do the patriotic thing, "experts from Ofgem to Deutsche Bank to drilling company Cuadrilla itself argue that UK shale will not bring down bills, because, unlike the US, the UK is part of a huge European gas market.”

With European stocks at multi-month highs, European bond risk at multi-year lows, US equities near all-time highs, US equity volatility expectations near post-crisis lows, and credit risk volatility fading, one could be forgiven for believing it's all gonna be ok. Of course, that assumes we get through the next six weeks unscathed...

Intraday volatility remains extreme in almost every asset class. Today it was bonds and corn's turn as the former saw 7Y yields jump over 10bps (for the worst 2 days in 6 weeks on moar Taper talk) and the latter dropped 4% on the day to 3-year lows (on record crop expectations). Equity markets performed the now-ubiquitous intraday reversal as early shorting was squeezed back quickly to a green close. short-term VIX was smashed lower soon after the US open but faded back higher into the close to end around 12.5% (but the VIX term structure is now at 4 months steeps). FX markets were very active (JPY -2% and AUD -1% on the week) pulling the USD +0.75% but Treasuries have been battered (10Y near 2 year high yields) with 7Y adding 15bps this week (and Utility and homebuilder stocks have suffered the most). Gold dropped a little on the USD strength, silver stayed green and copper and oil were flat. Oh and Carl Icahn tweeted and pulled Tech and the Nasdaq to outperform.

So is President Obama the worst President in history?

From goal-seeked GDP, manipulated inflation, liquidity-flow-exaggerated trade data, and hidden (and divergent) PMI details, the question of the unreliability of Chinese data is not a new one. However, anecdotes aside, a new study from Peking University finds, conservatively, correcting for housing price inflation in the Chinese CPI data adds approximately 1% to annual consumer price inflation in China, reducing real GDP by 8-12% or more than $1 trillion.

While we congratulate Carl Icahn (or is that iCahn) for once again taking over the spotlight in what has otherwise been a newsflow empty summer doldrum week, and like everyone else, are surprised by his most recent activist target, the country's on-again, off-again most valuable by market cap company, Apple, we do, as we did before when David Einhorn proposed virtually the same activist play, have some questions. Chief among them: how will AAPL fund any proposed expanded buyback or increased dividend using domestic cash?

Every failing organization, from empires to school districts, responds to its embarrassingly visible failure by proclaiming one reform after another. To take but a few from a long list, China is "reforming" its hopelessly corrupt, debt-based central-planning economy, President Obama is "reforming" the Global Surveillance State (into a presumably kinder, gentler machine gun hand?), The European Union is "reforming" its banking sector and the overly complex U.S. Sickcare system is being reformed with 2,300 pages of additional complexity under the Orwellian title of Affordable Care Act (ACA), a.k.a. ObamaCare. The one dynamic that matters is of course left unsaid: the inability of the Status Quo to reform itself, i.e. undertake fundamental, systemic reforms. This inability has many facets but only one root: political sclerosis caused by entrenched, vested interests seeking to protect their perquisites and power. This is as true of local school districts as it is of entire states.