Archive - Jan 18, 2010 - Story

With $13,636 million in total 2009 inflows, we present... Gold

There has been much discussion about the possibility of a dollar carry trade. Although I’ve resisted it, it seems pretty clear at this point I was wrong, and there is full-on dollar carry trade. This is bad, bad news for everything else, and I’ve nick-named it The Unwind.

It is the Unwind because the dollar shouldn’t be a carry currency: it is volatile anyway, and that combined with its reserve currency status makes it like playing with gasoline and matches. Wild swings in exchange rates followed by asset markets are often the result of an incremental leveraging and then a violent unwinding carry trade. Get ready for some dollar love that will burst many bubbles and illusions.

The Unwind will initiate the next iteration of debt-deflation. Don’t let the current optimism and propaganda dull your wits: optimism prevailed from 1929 to the spring of 1931.

Much hope had initially been placed in Obama's Home Affordable Modification Plan (HAMP) whose purpose was to keep millions of homeowners out of foreclosure. Yet a recent analysis by Moody's senior director Celia Chen demonstrates that out of the 3 to 4 million loans that the administration had hoped would benefit from HAMP, at most 1 million will experience a foreclosure benefit, and more realistically, this number would be a mere 400,000, less than 1% of all U.S. first mortgages.

Just because the regular US market is closed doesn't mean the ever vigilant futures traders are not HiFTing the living daylight out of the any and all nanopoint trends they can find. And already the market, in the complete absence (literal, not metaphoric) of any volume, has managed to recoup a major portion of Friday's "sell the JPM and INTC news" losses.

All the latest news about the accelerating deterioration in CMBS, courtesy of Barclays' Aaron Bryson.

The World Gold Council has released the latest sovereign gold reserve holdings data. In December, total gold holdings climbed by 132.7 tonnes to 30,117 tonnes. This is the equivalent of 965 million troy ounce equivalents, which at $1,135/Tr Oz comes out to $1.095 trillion. In the grand scheme of things, it seems like a relatively insignificant insurance amount in case the great fractional reserve banking experiment comes to a premature end. The biggest changes in holdings in the September-December period were for the IMF, which sold 212 tonnes of gold, while India (200 tonnes added), Russia (39.3), Sri Lanka (10) and Mauritius (2) all saw an increase in their gold holdings. The top 5 holders of gold continue to be the U.S., Germany, the IMF, Italy and France. China did not adjust its gold holdings in the last three months of 2009.

Poor Greece, and poor Europe: the two are now caught in such an unwinnable tug of war, that the EU is considering unwinding the very fabric of its union (an action, which some say, may not be the worse idea in the here United States) and set the struggling Mediterranean country loose. And if and when that starts, it is game over European Union. Yet posturing will do nothing to change the fact that even as Greek CDS hit an all time high last week, the economic catastrophe in the Ouzo-loving country is accelerating. The latest to join the Greek bashing goon squad is Deutsche Bank, with a note released on Friday, which highlights the key dangers to the country: the ability to finance deficits, capital flights, and an outright default if money does not turn up from under the mattress.

A summary recap of the bullish groupthink gripping the Barron's Roundtable. As David notes: "The emerging consensus is that everything is just going to be fine and that we should expect nothing more than a second-half economic slowdown, and that if there is a sharper turndown the monetary and fiscal spigots will be turned on even harder. The market is seen no worse than fair-value. Treasuries remain the enemy."

The age old question rises: with everyone bullish, who is selling?

Amusingly, of the top 10 large hedge fund winners in 2010, only 6 are above their high water mark. And if what we are hearing about some of the other "winners" is true, make that less than 50%. Curiously, Jim Simons who is currently enjoying his retirement in some country with no collocation facilities whatsoever, lost out to the robot onslaught: Medallion was up a mere 38%, roughly the same as RIEF's S&P underperformance in 2009. And speaking of, we will have some interesting things to say about Medallion/RIEF in a few days.

We are of the view that the gold market will likely be dominated mainly by the demand side of the equation in 2010. We believe that the likely decline in investment demand for ETFs, year on year, will play a pre-eminent role as a swing factor in our supply-and-demand balance in 2010. Jewellery, industrial and dental demand will likely strengthen marginally year on year. The secondary supply of scrap will depend on the gold price but will likely remain above 50% of mine supply. Central banks will likely become net purchasers while de-hedging will reduce significantly as the major players in this arena accelerate their 2009 de-hedging activities. Our calculations show a large oversupply of around 420 tonnes in our supply-and-demand equation for 2010." - Credit Suisse

Greg Mankiw provides a useful primer on runaway inflation done right... and done Ben. Yet his warnings that inflation may be stealthily approaching, sure to risk the ire of deflationists everywhere, may be very much irrelevant: the Fed, which is entering the bottom ninth on the great failed Keynesian experiment realizes it is running out of cards. The one thing that is certain, is that no matter what the true final outcome, the Federal Reserve will certainly miss the Goldilocks landing strip by a mile. And the political and economic ramifications of the Fed's outright failure will be tremendous.

• Must read: Did foreigners cause America's financial crisis? Or what happens when all your debt and equities are belong to us (Newsweek)
• Ben Bernanke's term running out as Senate democrats try to set a vote (The Hill)
• Banks set for record pay, and you thought Goldman was bad - Morgan Stanley prepares to fork over a stunning 63.8% of revenue as compensation (WSJ)
• Dark pools may face pricing disclosure rules, EU watchdog says (Bloomberg)
• In defense of the case against HiFTers (Cassandra)
• Senate to vote on PAYGO legislation to clear way for debate over debt ceiling (The Hill)
• Dubai flare up 2.0? Abu Dhabi's Dubai aid shrinks to $5 billion (Reuters)

RANsquawk 18th January Morning Briefing - Stocks, Bonds, FX etc.