Archive - Dec 1, 2011 - Story

Gold ended November with a 1.9% gain in US dollar terms, the seventh month of the dollar falling against gold so far this year. The euro fell 5% against gold in November. The British pound fell nearly 4% against gold. The Aussie dollar fell nearly 6.5% and the South African rand by 5%. Thus, gold again protected investors and savers internationally from the global financial crisis. Gold is now more than 20% higher in dollars and 18% higher in euros and pounds in 2011. It is only 9% below the record nominal high of $1,920/oz reached in September and given the degree of systemic and monetary risk in the world this price level will likely again be reached by early 2012. Global ETF holdings of gold topped 70 million oz for a second day in a row, marking not only a new record high, but meaning that ETF holdings of gold are double those held by the Chinese central bank and are just a few metric tonnes behind those of France, the world's 5th largest official holder of bullion (2,435T).

• Fed Dollar-funding Cut Shows Limits of Action (Bloomberg)
• Global euphoria runs out of steam (AP)
• Chinese Manufacturing Activity Slows (FT)
• Draghi calls for eurozone ‘compact’ (Dow Jones)
• Close Ties Facilitated Coordinated Moves (Hilsenrath)
• Congress Push to Relax US Securities Laws (FT)
• ECB hints at action if euro zone adopts fiscal pact (Reuters)
• Japan to Compile Fourth Extra Budget (Bloomberg)

China cut rates yesterday potentially as part of a globally co-ordinated central bank plan or co-incidentally because their economy was losing steam or both. I would bet there was communication and that may have impacted timing but with the weak PMI number China did what was necessary for China - as they always do. Much was made of the globally co-ordinated rate cut on USD swap lines. Any swap requires a minimum of 2 counter parties and since this plan had been globally "re-instated" or "re-affirmed" in September the market may be making too big of a deal of this global coordination.  This was largely cutting the cost of an existing series of global swap lines by 50 bps. It did not change the liquidity available to banks, just the cost. Currently it seems that only $2.4 billion is being used. It is not a bad step but no new liquidity is added (through I work under the assumption they will increase availability if needed) and it is impossible to cut unilaterally and would be pointless since as recently as September there was global agreement. Rumors that a bank was on the verge of failure seems overdone and changing this fee by 50 bps does nothing for that. Sadly, since the Fed is both independent and unaccountable there may be additional activities behind the scenes that we don't know about that may be supporting strong price action. More people feel forced to follow market moves based on the assumption that some people may actually KNOW something about future policy moves or existing but undisclosed actions. It is a rational reaction but does tend to exaggerate the moves and lead to quick reversals when no one actually KNEW anything.

The first, if very transitory, fruits of a US-taxpayer (insufficient) bailout of Europe bear fruit. This morning Italy’s 10-year yield has dropped below the psychological 7% barrier while the yield of Spain’s 10 year bonds is testing a break below 6% after strong auction results in France and Spain. As noted by Bloomberg, "easing funding concerns is also buoying core bonds as French yields drop the most on record while spreads on Austrian, Belgium bonds over bunds narrow significantly to break/test key 50- and 100-DMA supports." Naturally the safe-havens, Bunds and Gilts, slump, which makes the probability of another failed German auction remote as primary market demand will rise at lower prices. Specifically, in France the 10 year yield dropped -25bps to 3.15% the biggest decline since at least 1990; lowest since Nov. 9. France today sold €1.571 billion bonds due Oct. 2021, Average yield 3.18% vs prev 3.22% and a Bid/cover 3.05 vs prev 2.24. France also sold: €595 million bonds due Oct. 2017, at an average yield 2.42% and a bid/cover 4.4; €1.1 billion bonds due April 2026 at average yield 3.65% and bid/cover 3.24; €1.08b bonds due April 2041 at average yield 3.94% and Bid/cover 2.26. Elsewhere Spain also performed quite well: Spain met its maximum auction target today to sell EU3.75b in 3 bonds, fetching higher bid/cover ratios for all of them: Spain sold EU1.2b 3-yr bond due April 2015 bonds at an average yield 5.19% vs prev 4.27% and a bid/cover ratio 2.7 vs prev 1.66; also sold were €1.15 billion 4-yr bond due January 2016, an average yield 5.276% vs prev 5.187% and aid/cover ratio 2.83 vs prev 2.7, and €1.4b 5-yr bond due January 2017 average yield 5.54% vs prev 4.85% - a bid/cover ratio 2.69 vs prev 1.62. Yet in terms of outright liquidity, the primary beneficiary were USD-factors: 3-month Euribor/OIS  spread continues to rise today to reach highest levels since March 2009 despite the concerted central bank actions on dollar swap funding, specifically the 3-mo Euribor/OIS +1 bp to 1.0 from 0.99 yesterday, highest since March 2009. However, funding strains ease further in cross-currency basis swaps. 3-mo EUR/USD cross currency basis swap +10.63bps to -120.63bps, least since Nov. 15.

First Black Friday, and now the Modern Finance Farce Company Surprise Twist Ending takes on the global bailout...

The United States is quickly becoming a post industrial neo-3rd-world country. Partly as a consequence of worsening unemployment and lack of economic opportunity, falling real wages and household incomes, growing poverty and increasing concentration of wealth, the U.S. government faces a historic fiscal crisis. Dominant corporate influence over the U.S. government, particularly by large banks, weakening rule of law at the federal level and destructive tax policies are compounding the economic problems facing the United States. Barring fundamental reforms or a hyperinflationary collapse of the U.S. dollar (due to the fiscal problems of the U.S. government), the deterioration of the U.S. economy will continue and accelerate. As the U.S. economy continues its decline, public health, nutrition and education, as well as the country’s infrastructure, will visibly deteriorate and the 3rd world status of the United States will become apparent.