Archive - Jun 15, 2010 - Story

First step in assuming full control? Somehow we doubt the UK tabloids and general population will pass this one by.

Jim Rickards, who recently seems to have a quota of one media appearance minimum per day, is back on King World News today, discussing his sense of a shift in sentiment within the G-20 that the dollar may be approaching its "exhaustion" limit, and that as concerns that Russia, China and Germany may be moving to a commodity backed currency (oil and gold), the G-20 will need to preempt a paradigm shift away from worthless Fed-printed paper, to another vehicle, which however, is still under the control of the "developed world." The idea would be to use the IMF's SDR as a shadow replacement to a greenback which is at current recent record high levels not due to endogenous strength, but because all its peers are far, far weaker. And in an environment in which daily FX vol is hitting daily records, and thus increasingly reducing the credibility of capital markets, a gradual transition to a currency which represents nothing but yet another "liquidity pump" as Rickards calls it, just as the dollar was in the years from just before WW1 (thank you Fed creation in 1913) all the way through the 21st century, may be the only answer in which the existing oligarchy does not lose that all important controlling factor - the currency.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 15/06/10

In another unpleasant development for European bankers, the European parliament has proposed to cap bonuses at half the base compensation. In a business where bonuses traditionally run many multiples of the base salary in exchange for providing "financial innovation" this will surely force yet another round of racketeering from the industry, which will now claim that absent proper incentivization, the entire world will surely end. Furthermore, the proposal aims to cap salaries at bailout recipient firms at €500,000 and at least 40 percent of any bonus would be deferred for five years. If this law does pass, and if attempts at scaring the world at the horrendous consequences of this action fail, expect to see boats full of Hugo Boss-clad 22 year old swaption traders to weigh anchor at the Battery Park City marina and flood new york with even more investment "professionals" even as the London City becomes a ghost town.

Anecdotal evidence that Goldman's prop group enjoys doing the opposite of what its sellside recommends and clients do is one thing. Having become the laughing stock of the investing world, in which everyone does precisely the opposite of what Goldman advises its clients to do (but according to Andy Sorkin, the clients just love the firm), is something totally different. The latest example is Goldman's call from June 9 for a 1.15 target in the EURUSD. "Oddly" enough, the pair has gone diagonal since then... in the opposite direction. With every stop in the trade now triggered, is it time for the firm's Long Term strategists to reevaluate their call, not even a full 168 hours since the first abysmal recommendation? We hope the lesson here has now been learned: as we suggested a week ago: "Thomas Stolper is officially advising clients to sell their euros to
Goldman. There is no clearer signal to buy the beaten down currency." Looking at the chart below, never doubt the dodecatuple reverse psychology of the squid.

Just headlines for now, but rather self-explanatory, or should we say self-contradictory.

As algos now focus exclusively on gaming the EURJPY and other funding currency pairs, the stock market is now fully dead and trades purely as a correlation and hedging pair. With under two hours into the trading day, we are already at 40% below average volume: don't be surprised to see a 5% up move if we drop to 50% of cumulative. In other news, the LA Times reports that Americans, for the most part, have now officially said goodbye to stocks. With a broken market such as what is evident every single day, who can blame them. Bernanke has officially failed to lead the lemmings into a risky asset reflation, as primary dealers, HFT algos and mutual funds will need to take profits occasionally, and every time this happens we will see another, ever flashier crash.

A must read presentation from UBS' global commodity research analyst Julien Garran and PM trading srategist Edel Tully. Their summary view: "How should we think about gold? This has to be one of the favorite questions of nearly every investor we encounter, and despite our lack of specialized knowledge and our relative focus on the emerging universe we very often get dragged off into speculative discussions on the nature of gold demand and what gold prices are “telling us”. If we had to summarize the conclusions on gold in a single phrase – keeping in mind that this is a bit of an exaggeration, and one to which Julien and Edel might well take exception – we would say “forget about the fundamentals”. When we talk about investment demand, there are two main drivers: inflation and risk. I.e., gold does well when buyers are worried about inflation prospects, debt monetization and the debasement of national currencies, and also does well in an environment of heightened volatility and fear about the global economy."

Last weeks weak retail sales already suggested that next months NFP may underwhelm with a headline of sub 300k including the census jobs next month. That would naturally suggest poor private sector employment and with the Empire data out this morning that indeed appears to be increasingly the risk. Indeed, that relationship supports the roll we have already seen in the Chicago and Philly data…..Strike 3?

The NAHB Home Builder Survey reported a massive 5 point drop, reaching 17, on expectations of 21. The reason for the plunge - concerns about the end of the tax credit. Not even Goldman could spin this news favorably: "Housing market index 17 in June vs. median forecast 21. The National Association of Home Builders reported a 5-point drop in its housing market index for June, pushing it back below the 20 level that had been the low prior to the latest housing market recession. The main driver of the decline was the assessments of current home sales, which dropped 6 points; assessments of future sales and of buyer traffic were down less substantially (-4 and -2, respectively). All four regions suffered declines, but the biggest by far was in the Northeast, where the index had surged to 35 in May only to come back down to 18."Metric by metric, the double dip become increasingly more appreciated.

Watch the Gulf Oil spill hearing live and without permabull voiceovers at the following C-Span link.

Nouriel Roubini was on CNBC earlier, sparring with Mohamed El-Erian, providing a very indecisive prediction about the future of the US economy. The RGE economist who previously would say the depression is only just starting, is unwilling to commit to a prediction of a double dip for the US, and barely do so for Europe. His anticipation of sub 2% GDP growth in H2 is... higher than that of perpetually optimistic Goldman Sachs, which sees 1.5% H2 growth. So much for swinging for the fences. But when existing subscribers expect to a given set of data, it is quite understandable. It is, nonetheless, good to see that the Doctor read the ConvergEx report we posted some time ago indicating how the Fed, and everyone else calling for a projected reduction in unemployment, are pathological liars: "With 130.2 million people presently employed, that works out to an addition of 385,000 jobs in each month, May through December – and that’s just to reach 9.4%. The low-end Fed projection is 9.3%. Considering the economy added 290,000 jobs (more on this later) last month, 385,000 seems a touch ambitious to say the least." And this does not include the atrocious May report, which means the economy has to add over 400k real private, non-census jobs a month. This is impossible. At least Roubini admits: "eventually even the US can't outrun a trillion budget deficit for the next ten years." To all speculators: good luck timing the turning point into the last crash. An oddly unsatisyfing clip, but the head to head between Roubini and El-Erian 5 minutes into the clip is amusing: Keynesian vs. non-Keynesian.

According to the latest Treasury International Capital release, total foreign holdings of US debt in April increased to just under $4 trillion, or $3,957 billion, a $73 billion increase. This represents 47% of total debt held by public at the end of April of $8,434 billion. And while two of the three usual suspects increased their US debt holdings marginally, China buying $5 billion and Japan buying $11 billion, the "UK's" purchases of US debt continue to grow at an exponential phase: these have now hit $321 billion in April, having tripled over the past 6 months ($108.1 billion in October 2009), and increasing by a whopping $42 billion month over month. We put the UK in parentheses as the end purchaser in this case is anyone but an an austerity-strapped and deficit reducing UK. Whether this is the domain of the mysterious direct bidders, an offshore FRBNY holdco, or just Chinese buyers domiciled in the UK, continues to be unknown. Yet one look at the chart of UK holdings below demonstrates that something is very much wrong with this series.

There has been so much written of late about gold, most of it sensationalist crap, which is a related in part to the difficulty for analysts to put a financial measurement on it. We like that. Because it makes it harder for the sell side investment banks to brand and own it as their recommendation. In some ways it is truly a populist product. Sure, launched ETFs are not unlike IPOs that have been branded by the banks that underwrite them. But we are increasingly seeing a diversification within the move to Gold. As the trend becomes more secular, the public is putting money into gold ETFs. Meanwhile, those with ETF holdings and the financial means are rolling their positions uphill to physical gold. Our own evidence is the increase in commission rates coin and bar dealers are charging on top of spot. It is increasing due to “demand”.

• Traders play around with stocks, then leave 'em (Post)
• BP lining up GBP5 billion war chest from banks to help meet costs of oil spill (Sky News)
• Another Spanish auction, another record new issuance yield (Reuters)
• Empire state manufacturing index comes in below expectations at 19.6, higher than prior 19.1 (Bloomberg)
• New York Fed's enhanced power come with reduced autonomy (Bloomberg)
• Farrell: 7 signs toxic partisan politics is killing capitalism, democracy, your retirement (Market Watch)
• Angela Merkel's government threatened with collapse (Guardian)
• Gundlach: Generating high cash flows and managing risk with deflation or inflation (Pensions & Investments)