Archive - Nov 2009 - Story

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?

An expanded look at the prospects for the Hedge Fund industry. Not many surprises: the hedge fund boom is expected to resume courtesy of the bubble building that made billionaires out of some of the most pro-cyclical, unimaginative permabulls in existence. With the concept of a free-market out of the picture as a result of direct intervention by the Fed for years to come, hedge fund inflows are coming back with a vengeance (FoF's, not so much). Yet it appears that in the future, the generous fee and lock up structures that were prevalent in the last bubble, will be increasingly more difficult to replicate.

You'll find the ever widening CDS on the fast-growing Hellenic debt. Rather frightening considering that CDS are revisiting march levels (remember: markets were scared by the slump in eastern Europe economies and numerous rumours on the blast of the euro were flourishing).

Today it seems that those fears are materialising: Ukraine is in a deep syncope (borders have been closed for two months due to the H1N1 pandemic) and Greece could be deeply impacted by the unwinding of the liquidity-driven ponzi on the Hellenic market. While this piece of news could be harmless for HFT or robot traders, it is also completely put aside by fat portfolio managers happy to eat up low priced turkeys for thanksgiving (-30%!!!). The EURUSD is flirting with recent highs (like a turkey dazzled by the headlights of the euphoria-maniac rally car).

In an interview with Le Figaro, Dominique Strauss-Kahn shares his thoughts on a variety of economic subjects. Notable is his desire for central banks to begin soaking up the "water" which was used to put out the "1929-style" fire. Then again, as the Chairman has said, there is no threat that the Fed will ever end its risky assets Blue Light special, at least not under His watch (still, his December 3 confirmation hearing should be on everyone's TiVo schedule). Furthermore, this will certainly not happen so long as China keeps funding burgeoning US budget deficits, US importers be damned. And that won't happen as long as China needs the disappearing and maxed out credit consumer. Yet the various themes are starting to converge to a point in the future of maximum instability. Their resolution should be quite spectacular. Which is why by then all Goldman Sachs newly minted MD's hope to be far away, on a beach, collecting zero percent, courtesy of their gold holdings.

Trader commentary:

The widening of CDS spreads on Greek Sovereign debt has caught some attention and now Dubai CDS spreads are on the move: Commentary on Dubai from the EM guys...Dubai in focus as they do another $5b local tranche in the $20b Abu Dhabi program, then ask for extension in Nakheel maturities for 5 months. Very strange. Thought whole point of issuing the bonds was to pay for the Nakheel debt. Dubai CDS +130bps from o'night level of 318 ... seems to be hitting the European markets now.

Sequential popping of bubbles to commence shortly.

• Jobless claims drop to 466,000 as everyone moves to emergency benefits (Bloomberg)
• Consumers maxing out credit cards as spending outpaces incomes (Bloomberg)
• Durable goods orders fall (Bloomberg)
• The other side of the bubble: China banks prepare to raise capital - tens of billions needed after lending spree (FT)
• Connecticut AG Blumenthal joins Ohio in suit against rating agencies (Bloomberg)
• Farmers not benefiting from stock market move as Deere reports subpar 2010 forecast (Bloomberg)
• Vietnam devalues currency by more than 5%, after claiming repeatedly it will not devalue currency - sound familiar? (FT)

• Asian stocks rise as Australian Central Bank fuels growth hopes.
• Banks earn $2.8B in 3Q; FDIC says dangers persist -
• Consumer confidence in US unexpectedly gains, easing spending concerns.
• Dollar weakens on global optimism; Aussie gains on RBA's 'upswing' remarks.
• Fed officials say zero interest rates may be fueling undue risk in markets
• Japan property shares fall after developer Anabuki files bankruptcy with $1.58B in debt.
• Japanese exports fall by least in a year as global stimulus boosts demand.