Archive - Mar 2011 - Story

Three months ago, there was some confusion when SocGen's Dylan Grice, one of the brightest big picture strategists out there, released a report profiling the long-term real return on commodities (which was zero), leading some to speculate he was bearish on gold and/or other precious  metals. Today, Grice puts the matter to rest with his latest Popular Delusions piece: "Why this commodity specific value investor likes gold." To wit: "In the hard sciences knowledge builds cumulatively. It propels the relentless growth in man’s ability to do more with less, which makes commodities such a lousy investment in the long term. Yet in the realm of social decision-making mankind is a fool, unable to learn the wisdom of posterity and doomed to repeat its mistakes: the first credit crunch occurred in the Rome of 33AD and the ancient Greeks lived with high inflation. Confidence in central bankers’ ability to learn from past inflation is as likely to be misplaced as it was in their ability to learn from past credit booms. Gold remains the cleanest insurance against such overconfidence." And confirming gold's very unique position in the investment pyramid, Grice's conclusion borders on the ontological: "Shorting mankind’s ingenuity isn’t a smart thing to do. But ingenuity isn’t wisdom. And shorting mankind’s ability to absorb wisdom … well, aren’t you silly if you don’t? With less of the technological risk you’re taking when you buy any other part of the commodities complex, gold is the oldest, purest and simplest way." It appears ever more are starting to agree with this perspective.

The People’s Bank of China are very positive on gold in their just released annual Financial Markets Report. They remain concerned about risks posed to fiat currencies such as the dollar and euro, about asset price bubbles internationally and the risk competitive currency devaluations poses to fiat currencies. The report is much more positive than last year when they appeared to talk down gold’s prospects somewhat. Skeptics suggested that this was in order to allow them to continue accumulating gold without the price running away from them. The Chinese central bank said that inflation risks in economies internationally will support demand for gold, with prices for the precious metal likely to continue to make record highs. While the risks of falling gold prices shouldn’t be ignored, political conflict is likely to support higher gold prices. Inflation risks mean demand for gold will remain strong and investment demand from a 'value preservation' angle will be very strong supporting gold at higher levels. It said it is considering allowing more foreign financial institutions and companies to participate in China's interbank bond market, beyond international development agencies, and it is studying gradually opening the country's gold and futures markets to overseas yuan holders.

Today's final Q4 GDP revision indicated a 3.1% annualized rate of pick up in the economy, modestly higher from the previous print of 2.8% and in line with expectations of a 3.0% reading. Of course, it being almost April 2011, this number is by now completely irrelevant. Nonetheless, here are the components that contributed to the difference: "The increase in real GDP in the fourth quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, and nonresidential fixed investment that were partly offset by negative contributions from private inventory investment and state and local government spending. Imports, which are a subtraction in the calculation of GDP, decreased." As the chart below shows, once again Inventories was the swing factor, which detracted 3.42% from Q4 GDP as opposed to 3.7% in the prior two GDP estimates. As Q1 2011 GDP data starts coming out, we are confident inventories will once again be a contributor to GDP "growth" as this most hollow indicator of economic improvement needs to pick up the slack for declining PCE and trade balance contributions.

And another major hit for all those still unlucky enough to own Portuguese bonds: "Following S&P's lowering of its sovereign credit ratings on Portugal to BBB on Friday 25 March 2011, RepoClear participants are advised that with effect from Monday 27 March 2011 Portuguese Government bonds will no longer be eligible for delivery in any of the RepoClear €GC Baskets. Until today’s downgrade Portugal had been eligible for the single A €GC Basket." Luckily, Portuguese bonds are still eligible for trading on OTC/Bulletin Boards, where the bid/ask will soon be greater than the actual bonds price.

Markets positive again this morning amid better than expected corporate profits while the debt crisis in Europe intensifies. The Fed announced yesterday that Bernanke will hold four press briefings a year to improve transparency and explain its decisions to the public. The first two sessions will be in April and June and will likely focus on providing clarity on QE2. Today will see the release of GDP estimated at 3.0% QoQ v 2.8% prior. German pressure pushed EU leaders to cut the amount of initial startup capital for the EFSF/ESM in 2013 from €40B to €16B, reducing Germany’s burden in the rescue mechanism. S&P downgraded Portugal two notches to BBB and left the country on negative watch. Fitch downgraded two notches to A- also leaving the rating on negative watch.

In today's NYT, in a surprising critique of the company that is the right arm of Obama's administration, there is finally an extensive focus piece on how GE, which made $14.2 billion in 2010 ($5.1 billion of which came from the US), paid, wait for it, zero taxes in 2010. NYT summarizes this odd quandary as follows: "Its extraordinary success is based on an aggressive strategy that mixes fierce lobbying for tax breaks and innovative accounting that enables it to concentrate its profits offshore. G.E.’s giant tax department, led by a bow-tied former Treasury  official named John Samuels, is often referred to as the world’s best tax law firm. Indeed, the company’s slogan “Imagination at Work” fits this department well. The team includes former officials not just from the Treasury, but also from the I.R.S. and virtually all the tax-writing committees in Congress." In fact, it is far, far worse. As Zero Hedge disclosed, when we looked at GE's tax allergy six months ahead of the NYT, or as early as October 2010, we observed that "between 2002 and 2009, during which timeframe the firm made a generous
$164.4 billion in pretax net income (not to mention $639 billion in domestic revenue, just over half of total revenues of $1.2 trillion) it paid only $5 billion in domestic current taxes, or a 3.17% tax rate!" In other words, GE has now made over $700 billion in domestic revenues, and has paid $5 billion in the period 2002-2010. Truly tax evasion Imagination at Work.

While Zero Hedge readers have long known about the eerie phenomenon known as China's ghost cities (and ghost malls), Australia's SBS' Dateline has done a terrific documentary on the topic of "64 million empty apartments in China." As each passing day brings more confirmation that not only is China's real estate market one massive bubble, but it is also, as expected, completely hollow, both literally and metaphorically. The full brief clip is a must watch for all those who wonder how central planning manages to hit its goal-seeked and manipulated GDP number each and every quarter .We are surprised that in keeping with the Japanese earthquake economic miracle, China has not destroyed the vacant city yet only to rebuild it immediately.

Goldman provides a brief summary of the ongoing irrelevant EU summit (as discussed yesterday, with Portugal in flux no decision can be enacted for at least two months, or long after Portugal is declared technically insolvent). More important is keeping a track of picking up German regional elections which this weekend include Rhineland-Palantine and Baden Württember. As Dirk Schumacher says: "Although a change in government in BW would have no immediate
consequences for the ruling coalition in Berlin, it would be a heavy
blow in political terms nonetheless."

Some irrelevant data again today (at this point the market will continue going up irrelevant of news, until it doesn't): final GDP, Fed speeches, Consumer sentiment and more.

The latest development in the Fukushima saga is probably one of the more ominous to date. Yomiuri reports that radioactive Zirconium 95 has been found after samples were taken near the water outlet. Google translated: "Zirconium is used for nuclear fuel cladding, the cladding melts some of the spent nuclear fuel was hot cooling water is lost, possibly mixed with sea water flowing into the large drainage There. TEPCO am on March 23, collected about 330 m south from the water at the point of outlet. Zirconium-95 concentration was 0.23 becquerels per cubic centimeter. Atomic Energy Research Institute of Kinki Sugiyama Wataru teachers (of nuclear safety), "The evidence that melting in the heat of the fuel cladding, said first find. Will come from a spent fuel storage pool at," he said." Shortly thereafter NHK spokesman admitted that this is why large amounts of radiation are leaking into the environment, making attempts to control the situation 'very challenging'. If indeed the fuel rod zirconium casing is coming off, it means that the risk for recriticality could be increasing.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 25/03/11

According to Asahi Shimbun which is quoting the Japan NRC, the Fukushima event has just surpassed Three Mile Island in terms of seriousness, and has been upgraded from Level 5 "Accident with Wider Consequences" to Level 6 "Serious Accident." Only Chernobyl is a Level 7 event. We believe Fukushima should get there within 2 weeks as ever more of the current devastation becomes public. Of course, all of this is a paper-pushing formality. What isn't, are people who may be developing serious diseases as the government continues to misrepresent the severity of the situation.

Something very notable happened today receiving exactly zero recognition by the mainstream press: the process of winding down the Supplementary Financing Program ended, with either zero (assuming the entire $25 billion in 56 Day CMB matured without rolling) or $5 billion (as per the Treasury's disclosure), remaining under the SFP. This means that the entire $200 billion buffer that had previously afforded the Treasury breathing room with the looming debt ceiling, is now gone, and next steps include such drastic measures as a partial or complete government shutdown, as no incremental funding will be available to fund the daily deficit. As a reminder, as of today the Treasury had a total of $12.24 trillion in debt, just $70 billion below the ceiling, and $14.172 of debt subject to the limit. Which is not good because as per today's refunding announcement there is $99 billion in 2, 5 and & 7 year debt coming down the line next week. Which means that while the formal debt ceiling will not be breached, the total amount of debt including the fluff not counted, will surpass $12.4 trillion by next Friday. In the meantime, the SFP unwind continues to have a major impact on the adjusted monetary base. As we have discussed in the past, excess reserves continue to go parabolic, purely as a function of the SFP unwind and ongoing QE2, which in turn is impacting the adjusted monetary base, which is now half a trillion greater year to date. As we predicted previously, excess reserves will hit $1.7 trillion by the summer. These rose by $72 billion in the past week to approximately $1.4 trillion, which means that by the time QE2 is over, the Adjusted Monetary Base will hit $2.7 trillion, a $750 billion increase in 6 months. And if QE3 gets the green light, all bets are off. And once this surging monetary base is converted from excess reserves to currency in circulation, that is the moment when Weimar comes a-knockin'.

Back in April 2010, before Waddell and Reed sold a few shares of ES, effectively destroying the market on news that Europe was insolvent, we made the following observation: "The IMF has just announced that it is expanding its New Arrangement to Borrow (NAB) multilateral facility from its existing $50 billion by a whopping $500 billion (SDR333.5 billion), to $550 billion." Little did we know that our conclusion "something big must be coming" would prove spot on just a month later after Greece, then Ireland, then Portgual, and soon Spain, Italy, Belgium, and pretty much all other European countries would topple like dominoes tethered together by a flawed monetary regime. Well, based on news from Dow Jones we can now safely predict the following: "something bigger must be coming." As if the IMF's trillions in open lending facilities (many of which have recently been adjusted to uncapped) were not enough, we now learn that the world lender of last resort (which in theory is the Fed, but apparently Bernanke has been getting a little shy lately so is offsetting his direct lending directives to secondary organizations like the IMF, leaving the Fed with only USD liquidity swaps) is about to activate a "Special Funding Pool" - Dow Jones explains: "The International Monetary Fund is expected to soon activate a special funding pool that will boost the fund's ability to prevent or resolve economic crises, two people familiar with the situation said Thursday. One of the people said the activation of the funding--which can only be made by a special request from the IMF managing director to the board--was in anticipation of an expected wave of new IMF programs, including the possible expansion of the Greek bailout package." Wonderful. Global financial cataclysm rinse repeat all over again...

It appears that someone may have called the bluff on our earlier post of a possible commencement of trading in advance of QE3 (and how anyone could be surprised that QE3 is coming is beyond us - it has been our conviction that the Fed is now on a slippery slope from which there is no return since late 2010), and decided to take our every offer in ES afterhours for nearly 10 points straight. That this trade was very much out of the ordinary is confirmed by the complete absence in any of the traditional correlation pairs (see chart below) such as the AUDJPY. Is the prevalent mindset finally one that QE3 is inevitable? If so, look for gold and silver to follow suit promptly and even promptlier nullify today's latest margin hike by the CME.