Archive - Nov 11, 2010 - Blog entry

No increase in taxes sounds good. But nothing is free.

In fact, just yesterday we had a TERRIBLE 30-year note auction on just $16Bn worth of notes. Already Ben is pretty much the only buyer of Tim’s trash paper and, as that bid to cover ratio drops below 2:1, you’ll see rates begin to tick up dramatically, despite the Fed’s best efforts to contain them and that will put pressure on houses, corporate debt, government debt, municipal debt etc and suddenly we’re Greece.

According to the C.D. Howe Institute, Canadian government pensions are grossly underestimating their pension shortfalls and so are European and US governments. Will pension shortfalls trigger the next sovereign debt crisis?

Pixilating the News...

So here were are in 2010 and the US and China are now butting heads in a major way. The US (debtor, consumer, declining empire) wants to devalue the Dollar and export inflation to China. China (creditor, producer, rising empire) doesn’t care for this arrangement as its hurts profit margins at Chinese companies, increases food inflation (food is a higher percentage of income for the average China compared to the average American), which in turn means civil unrest.

What do "hot money," gold, sovereign debt, foreign trade, and Germany and China all have in common? Everything. They are all lined up against the U.S. and our new quantitative easing (QE2). There is fallout related to quantitative easing, and the markets are reacting, from the Fed's perspective, badly.

Earlier in the week we posted that Market-Neutrals were deleveraging, we then further speculated that a market drop would soon follow as liquidity disappeared and small sell block trades would move the market. We received many emails from individuals asking for further explanation of this metric and why we feel it is a useful indicator to look at. While this is merely a theory with no empirical evidence, we would like to display the following chart 2-year with daily closes in which m/n's rapidly delevered days before a market drop. On all 5 occasions, the rapid decline in HSKAX was indicative of the S&P500 index experiencing further weakness.

Visiting the world’s most overpriced asset. The recent action in the markets suggests that the big turn may finally be behind us. Why have bond prices been falling for the past month, despite an assumed promise by the Fed to provide unlimited amounts of liquidity? (TBT).

China is decades ahead of the global curve when it comes to understanding the strategic importance of rare earths. But with demand set to double to 225,000 tons by 2015, not accounting for the burgeoning green energy industry, nobody's immune to the coming supply shortfall, including China.

Marginal macro news, the upcoming G20 meetings, rising commodity margins, and enough uncertainty to make even Heisenberg jealous had the market once again bobbing up and down like Shyla Stylez trying to make her rent.