Archive - Nov 2014

Meet the next piece of work...

There are a number of cause-and-effect mechanisms that are creating a "dangerous spiral" in various emerging markets. As Natixis explains, this five-step vicious circle is currently affecting Russia, Brazil, Argentina and South Africa; and some of the components are now manifesting in Turkey and India.

Last week, we brought to the public's attention a controversial 'missing' section from the official transcript of Alan Greenspan's interview last with the Council of Foreign Relations where he dared utter his honest opinion that, "Gold is a currency. It is still, by all evidence, a premier currency. No fiat currency, including the dollar, can match it." Well, it turns out the reason for the practically heterical section's omission was "a glitch in the live stream" and CFR has apologized and posted the full transcript. Interesting coincidence that this gold-loving, Bernanke-denying section was the only one to be hit by the 'glitch', we are confident it's mere coincidence...

For the moment capital markets appear to be adapting to deflation piece-meal. The fall in the gold price is equally detached from economic reality. While it is superficially easy to link a strong dollar to a weak gold price, this line of argument ignores the inevitable systemic and currency risks that arise from an economic slump. The apparent mispricing of gold, equities, bonds and even currencies indicate they are all are ripe for a simultaneous correction, driven by what the economic establishment terms deflation, but more correctly is termed a slump.

Two words tell you all you need to know about today's equity trading... no volume (lowest since Aug27th). The main theme of today - away from stock markets - was to unwind some or all of Friday's moves on the dismal Italy/Greece data: Treasury yields jerked almost 10bps off their lows with 30Y almost retracing the entire Friday rally; The USD rallied, recovering some of its losses from Friday (led by CAD and JPY weakness - which were both stronger Friday); gold and silver were slammed today - almost retracing Friday's gains; and oil prices gave up all their intraday gains to close notably lower. USDJPY and bonds decoupled from stocks which appeared led by a VIX-smashing day, sending the fear index below 12.5. The Dow and S&P closed at all-time highs.

Manipulation of markets can work effectively in the short term. However, in the long term prices will be dictated by the global supply and the global demand of 7 billion people, many in Asia who believe in gold as a store of wealth. Not to mention, sovereign central banks including the People’s Bank of China and the Russian central bank - who also believe in gold as an important monetary asset.  

Moments ago the Obama administration revised its estimate for Obamacare enrollment, now saying - with the bruising midterms safely in the rearview mirror - that it expects some 9.9 million people to have coverage through the Affordable Care Act’s insurance exchanges in 2015, millions fewer than outside experts predicted.  And actually it is not even 9.9 million: "Health and Human Services Secretary Sylvia Mathews Burwell said Monday the administration was aiming for 9.1 million paid-up enrollees for 2015, though the range could extend to 9.9 million, according to the agency’s analysis. Ms. Burwell said she respected the work of the Congressional Budget Office and its projections but that she believed HHS figures were based on the best and most up-to-date information." So really 8 million, or less?

Once again today we see spurious ECB members sending more mixed messages about ECB actions in the near future (and really only impacting precious metals by the look of it. Having said just a month ago that ECB QE would only be undertaken in strict adherence with mandates and treaties, and warning that QE would strain the ECB's risk-bearing ability; today Luxembourger announced that ABS QE would start next week and Sovereign QE is an option if things get worse. One bank, at least, will be overjoyed... as ABN AMRO wrote this morning that that the ECB needs to bid more aggressively for covered bonds to encourage the street to sell to them. Roughly translated is: "we front-ran your program based on entirely non-economic rationales and now it's "fuck you, pay me" time." Unintended consequence #34527, "whatever it takes" means buying everything at the worst possible prices and forcing EU taxpayers to carry that over-paying risk.

In short, our views will shift as the evidence shifts, but here and now, the market has re-established overvalued, overbought, overbullish conditions that mirror some of the most precarious points in the historical record such as 1929, 1937, 1974, 1987, 2000 and 2007. That syndrome is now coupled with continued evidence of a subtle shift toward more risk-averse investor psychology, primarily reflected by internal dispersion and widening credit spreads.

When work is punished, homes are unaffordable, the American Dream is over, Milennials are burning through their assets or going into debt to survive... So just what is it that they are spending their hard-signed-up-for-benefits money on? We have the answer: Kim Kardashian: Hollywood, the freemium app in which you climb up to the A-list next to Kim Kardashian, made $43.4 million in Q3.

For the week ahead, BofAML's MacNeil Curry is focused on the plight of the USDollar, US Treasuries, and commodities; especially gold and oil. All of these markets, he warns, are showing signs of changes in trend. Most notably, Curry explains, we are switching gears on gold from bearish to bullish, "Friday's gains are just the beginning."

Treasury yields have been levitating at an oddly uniform 1bp/hour rate since around 6amET... looks normal... Burton Malkiel would be proud.

What's Really Happening?

While some companies, those lucky few which have no debt on their balance sheet, have the option to mothball projects and wait for the lack of supply to catch up with demand and also price (at least in a world in which physical supply and demand still have some bearing on trading of paper gold) others, those who have creditors breathing down their neck, whose extraction cash costs are above the spot price and who aren't hedged, are essentially out of options. One such company is Russian gold producer Petropavlovsk, which is now worth just $60 million and is in a perilous financial situation, with speculation it may even default on $310 million in convertible bonds in February. 

Buckle Up...The Nasdaq is broken so it's VXX-selling, XIV-buying, stock surging time...