Archive - Nov 25, 2009 - Story

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"In my opinion, the current equivalent of the mythical Four Horsemen of the Apocalypse are our financial leaders in the western world who are enthusiastically promoting and aggressively implementing quantitative easing in an attempt to sustain an obviously failed system and to bail out their banking cronies. They would include the atavistic Lawrence Summers...the extremely naive Fed chairman, Ben Bernanke, the truly feckless U.S. Treasury Secretary, Timothy Geithner and Bernanke's British equivalent, the hapless Mervyn King, head of the Bank of England."

1. ECOPET, 35.9 million, 20 trades
2. CCU, 34.5 million, 10 trades
3. GMAC, 34.5 million, 13 trades
4. PDE, 33.1 million, 10 trades
5. HEIGR, 25.8 million, 8 trades

Spreads closed mixed with IG unch and HY marginally tighter as volumes dried up this afternoon ahead of the holiday. With low volumes in indices and less in single-names and intraday ranges in IG and HY at their lowest in months, picking out themes from today's market action seems useless although we do note that between Dubai and Gold, the economic headlines seemed to be forgotten about.

Ben "Darth" Bernanke...

At this point there is little sense in putting up any more gold charts. It is pretty clear what is happening: John McClane and Samuel L. Jackson are waiting for the next phone call with detailed instructions from Bernanke on how to short the dollar as the kleptocrats haul the 33 Liberty Street gold stash using garbage trucks.

It is difficult to draw comparisons between last year's market for gold futures and today's, given that gold wasn't exactly on anyone's radar in late 2008, but we'll try anyhow. Curiously, the January contract (expiring January 5, 2010) might as well be chopped liver according to volume today. What does it say about futures traders that none want a contract that expires 4 days after the new year? Just that they plan on having a significant hangover? Or that they want zero roll risk after a long market holiday?

"I believe deeply that it's very important for the U.S. and the economic health of the U.S. that we maintain a strong dollar. We bear special responsibility for trying to make sure that we are implementing policy in the U.S. that will sustain confidence not just among American investors and savers but investors around the world that the U.S. will fix its budgetary problems as its economy improves." - Tim Geithner

There is good reason for the Federal Reserve to revive inflation in the economy, but she don’t want a bear market in Treasuries. These two objectives aren’t compatible at this point, because we are way beyond the ability to control what inflates and what doesn’t. Either the Fed re-inflates and a bear market in Treasuries ensues, or the United States government has insufficient political will to re-inflate, and we enter a Japanese spiral of deflationary hell or worse.

A treasury market bear will take the S&P to the fundamental low in this bear market. It will decimate HY and leveraged loans (theorization). Consumer credit will be in a constant downtrend. The financial system will suffer and downsize. A bear market in Treasuries IS deleveraging manifested. In a more positive sense, the bear market will begin the process of creative destruction.

Gold screaming higher doesn’t necessarily imply a doomsday scenario, a currency crisis, or a variant apocalyptic vision. Gold is just a straddle option to hedge government recklessness and theft. It is an instrument to clip the tail risk in otherwise risk-minimal trades, because it is an excellent long in times of inflation and deflation. But it’s not enough. It generates no income, and it is certainly without risk itself.

Developing story. The Tamil tigers are next in line to give Bernanke the one finger salute. Gold now at $1,186 $1,187. Do we hit $1,200 today?

Even with the market trading higher on the 5 or so shares churned by whatever rebate chasers are still in operation, Goldman has been quite week recently, and today the stock hit one standard deviation below the stock's November VWAP of 173.86. One std dev is +/- 3.4 so the most recent price of $169.13 must be looking marginally anomalous to the algos that use Goldman as a leading indicator for financials (and potentially the broader market).

And still everyone keeps on jumping into Treasuries, regardless of position on the curve...equities continue refusing to care.

• Yields 2.835% vs. Exp. 2.878%
• Bid To Cover 2.76 vs. Avg. 2.73 (Prev. 2.65)
• Indirects 62.5% vs. Avg. 62.4% (Prev. 59.35%)
• Indirect Bid To Cover 1.29
• Alloted high 87.98%

When it comes to relative value of the dollar, the last decade has been an eerie recreation of the the period from 1980 to the mid 90's. One notable observation is that while the secular bull market starting in 1980, which many are desperately trying to equate the current bear market/liquidity gusher/Keynesian circlejerk rally with, was accompanied with a 5 year long appreciation in the value of the dollar, things could not be more different now.

Also, if history indeed rhymes, look for the dollar to drop to the magical 70 level before we see both a near term rebound and another major swing up in the DXY to well north of 100 as the third iteration of the dollar cycle begins. Then again, never before has the dollar been the funding currency of choice. Which is why we tend to believe that while the downside is still in play, it will be limited, and once the trade inverts and everyone piles out of the burning dollar carry trade theater, the upswing could easily take out the 120 high reached in the last (red) cycle.

Gold now at $1,185. Just what happens when the DXY hits 70 in a few days?