Archive - Apr 2011 - Story

Over the weekend, Dian Chu proposed the "precious metals (and specifically silver) are a bubble" argument to a rather vociferous reaction from readers. Today, to keep the argument balanced, we present the counterpoint from Doug Casey: basically, there is no spoon...or bubble: "A meme is now circulating that gold is in a bubble and that it's time for the wise investor to sell. To me, that’s a ridiculous notion. Certainly a premature one. It pays to remain as objective as you can be when analyzing any investment. People have a tendency to fall in love with an asset class, usually because it’s treated them so well. We saw that happen, most recently, with Internet stocks in the late ‘90s and houses up to 2007. Investment bubbles are driven primarily by emotion, although there's always some rationale for the emotion to latch on to. Perversely, when it comes to investing, reason is recruited mainly to provide cover for passion and preconception. In the same way, people tend to hate certain investments unreasonably, usually at the bottom of a bear market, after they've lost a lot of money and thinking about the asset means reliving the pain and loss. Love-and-hate cycles occur for all investment classes. But there’s only one investment I can think of that many people either love or hate reflexively, almost without regard to market performance: gold. And, to a lesser degree, silver. It’s strange that these two metals provoke such powerful psychological reactions – especially among people who dislike them."

As we start this new year, a number of events are likely to occur along with the normal changes in the weather. January gasoline is typically the lowest in any year and, despite the common mythology, gasoline consumption does not normally fall steeply after Labor Day and then recover miraculously after Memorial Day. We do see an element of driving disappear after Labor Day, as drivers in the 16 to 25 year-old age bracket tend to drive less, or at least more predictably. Family vacations are also over by that point, as a general rule. But, there are pockets of demand during foliage sighting season and Thanksgiving Weekend is always the best four-day driving period in any year in which July 4th does not fall on a Tuesday or Thursday. There is usually good driving through the month of December into New Year’s Eve, but it traditionally falls off a cliff right after the champagne glasses touch to ring in a new year. People park their cars and drive to work and school and to appointments. But it is not until March or April that more discretionary driving normally returns. Refineries know this and they typically plan maintenance turnarounds from January through April or early May. During this period, there is a definite tendency for gasoline inventories to be drawn down; even though demand starts the year at its lowest levels, the maintenance usually goes on long after demand has started to mount a comeback.

While we have yet to independently verify the following piece of news which originally appeared in the April 18 edition of the Asia Pacific Journal, we can see how this could be very true. If so, it has very disturbing implications about the "real" truth behind the Fukushima devastation, because outright censorship, Cease and Desist notices, and preemptive takedowns are always the purvey of the "last resort" crew. To wit: "The project team has begun to send “letters of request” to such organizations as telephone companies, internet providers, cable television stations, and others, demanding that they “take adequate measures based on the guidelines in response to illegal information. ”The measures include erasing any information from internet sites that the authorities deem harmful to public order and morality." Of course, if this directive had been in place from the very beginning, nobody would know any of the truth behind the dire catastrophe (which started at sub-3 Mile Island severity and is now equal if not worse than Chernobyl), which has seen enough coverup and lies to make Stalin look like Wikileaks.

"We now have real time, lightning fast, pricing information. This will be the greatest thing since the invention of the world wide web. If MIT does the right thing and announces their discovery to the world, they can still make a lot of money and also be responsible for one of the greatest improvements in productivity in history. Imagine what a single graduate student can do. This is why I am always optimistic about mankind's future. However, if MIT continues to lie about why they are no longer making the data available, then this will be used to decrease competition and allow frontrunning by financiers as they alone are able to watch in real time pricing trends for specific industry, or even a specific business located in a small town near you."... And since there are two sides to every story, here is reader Dave Narby following up with an MIT teammember, and getting direct feedback in the aftermath of our post from Friday disclosing the effective culling of the MIT Billion Price Project. The response may stun some people as to why MIT canceled any relevant public disclosure from the Billion Price Project.

Today, the world has replaced Messrs.. Cleese, Chapman, Palin, Gilliam, Idle and Jones with a new ‘Flying Circus’. Their names are, for the most part, equally well-known and, sadly, becoming ever-more identified with high comedy as they try to convince the world that the dollar is, actually, in rude health. Ladies and gentlemen, I give you ‘Ben Bernanke’s Flying Circus’ - starring Ben Bernanke, Timothy Geithner, Janet Yellen, Bill Dudley, Charles Plosser, Richard Fisher & featuring Barack Obama.

All those who were hoping global stock markets would surge tomorrow based on a ridiculous rumor that China would revalue the CNY by 10% will have to wait. Instead, China has decided to serve the world another surprise. Following last week's announcement by PBoC Governor Zhou (Where's Waldo) Xiaochuan that the country's excessive stockpile of USD reserves has to be urgently diversified, today we get a sense of just how big the upcoming Chinese defection from the "buy US debt" Nash equilibrium will be. Not surprisingly, China appears to be getting ready to cut its USD reserves by roughly the amount of dollars that was recently printed by the Fed, or $2 trilion or so. And to think that this comes just as news that the Japanese pension fund will soon be dumping who knows what. So, once again, how about that "end of QE" again?

In the world of bonds, few things have perplexed investors as much as the ridiculously low (and going lower) rates of Japanese Government Bonds (JGBs), at last check yielding 1.22%. Granted "deflation" in Japan has long been quoated as the key driver for the ongoing decline in real and nominal rates, but in practical market terms it was always the fact that there was a buyer of first and last resort, usually this being either Japanese citizens directly or their proxy, the Japanese Government Pension Investment Fund (GPIF) that kept yields in check and sliding. No one has been following the story of the perpetually collapsing JGB yield better than SocGen's Dylan Grice (for the best overview of this issue we suggest: "Upcoming Government Funding Crises: Japan Edition"). And while as Dylan has pointed out before, the direct purchase of bonds by the population has slowed if not reversed entirely (and in the aftermath of the March 11 earthquake we are confident many have entered run off mode - we will attempt to confirm as soon as official fund flow data is released), the GPIF has always been a buyer of last resort. Until now. Reuters reports that the Kyle Bass pain trade, which has for so long gone counterintuitively, may be about to pay off in spade.

Now that the Obama approval rating has hit a plateau where it correlates only with the inverse average price of gas instead of the Russell 2000, the AAA brings some more ominous news for the man who last week launched a crusade to wipe out all oil speculators (and witches) from the face of the earth. While last week the average price at the pump was $3.81, it has since surged once again to hit a new multi year nominal high of $3.86, getting dangerously close to the all time high record price of $4.114 recorded on July 17, 2008. Incidentally premium is already above that mark,currently averaging $4.128. The number is also a nearly 10% increase from a month ago when the average price was $3.561. Seven states reported an average gas price above $4 with Hawaii once again leading the pack at a $5 rounding up $4.534. And of course, instead of focusing on the real cause of surging commodity prices, the administration's response: the creation of a "working group" to battle manipulation.

It is one thing for sellside research, caught in its traditional lemming frenzy, to cut national GDP outlook. In the case of Japan the resistance to reality provide futile early on and based on the average of 43 economists' forecasts, economic growth is now expected to post a 0.22% GDP decline in Q1 and a whopping 2.83% in the April-June period. As had been predicted this is not surprising. What is surprising, is that the head of the BOJ, Shirakawa-san himself has now indicated that Japanese growth is stalling. Per the WSJ: ""We are now expecting production and GDP will decline in the first quarter and the second quarter," Mr. Shirakawa said in an interview on Friday. It is rare for the central bank governor to make such forecasts and is the first time that Mr. Shirakawa officially admitted the likelihood that the economy may shrink in the first two quarters of the year, in line with many private-sector economists' predictions." So for those wondering who will take the temporary lead in money printing in the brief period between QE2 and QE3, look no more: "given high uncertainties surrounding the Japanese economy, many analysts expect Japan's central bank to be eventually forced to take additional easing steps." And just how much money printing are we talking here? "The central bank currently buys ¥1.8 trillion of long-term JGBs every
month from financial firms as part of its regular market operations. The bank's hands are tied by the so-called banknote rule, which
limits long-term JGB buying to the amount of banknotes in circulation.
But the central bank still has capacity to purchase around ¥20 trillion
of long-term bonds, according to the central bank's latest account data." In other words, lots.

For those needing yet another reminder of how in America the incestuous conflicts of interest between the various branches of government and Wall Street run to the very top, here is Time with an article highlighting yet another example of impropriety. Today's case focuses on Iowa’s Democratic Attorney General Tom Miller, who at least superficially took the noble lead on the investigation by all 50 state attorneys general into the “robo-signing” foreclosure scandal. Alas, one look below the surface reveals that we may be days away from a very ignoble and very BAC-friendly settlement, courtesy of a few backroom "arrangements" brought to you by none other than Bank of America's petty cash account.

Confused by the recent dramatic moves in General Collateral repo rates? Carry trade killing FDIC assessments got you down (and copycatting other blogs)? Still anguished by relentless end of quarter window dressing even as primary dealers reduce leverage to post crisis lows? Surprised by the ongoing deterioration in near term shadow banking despite the so-called improvement? Stunned by how the Fed has seemingly lost control of the near end even as the announcement of implicit tightening could be a few shorts days away? Then the following presentation from Barclay's Joseph Abate on the regulatory changes in money markets, and their broad consequences for funding markets is a must read for anyone concerned by the very peculiar recent goings on in shadow banking.

The WSJ reports that another very likely casualty of the not so velvet revolution in MENA, and of backdoor deals with Saudi Arabia the UAE, is Yemen's president Ali Abdullah Saleh who has accepted "a political deal brokered by neighboring Arab countries that would have him step down from power after 30 days in exchange for immunity for himself and his close relatives, according to a presidential aide." Let's not forget that Gadaffi also offered to step down (or was rumored in one of the frail attempts to take down oil before the big guns, read Goldman, had to step in with their "research") - a gambit which led to just more massacres of innocent civilians. And since Al Qaeda is likely the biggest loser in such a deal, we don't expect this plan to be pulled off without a lot off fireworks.

In this podcast, Axel explains:

• Why Ben Bernanke is hell-bent on debasing the US dollar to spur economic growth
• How the politics of the Fed work, where the power lies and which arguments and actions are likely to carry the day
• Why inflation expectations actually matter more than actualy inflation, and why the Fed will not rest until it is satisfied the market expectations for inflation are higher
• That the US is on its way to a fiscal trainwreck - a reality our political leadership continues to lack to backbone to address honestly
• The Fed's powers are prodigious, but not as great as the market. If and when the market moves against policymakers, nothing will stop it. The growing risk is we quickly tip into the inflation the Fed wants, which then quickly leads to runaway prices
• His outlook for gold and why he thinks this "ultimate currency" can go much higher from current levels
• How the US is caught in a Catch-22: our loose monetary policy continues to encourages credit consumption that makes us increasingly vulnerable; but we're so indebted already that if the Fed tightens rates, the economy could easily fall into a full-blown depression

Jonathan Weil hits another one out of the ballpark.: "Geithner says the chance of a downgrade is zero. S&P says the odds it will cut its rating might be greater than one out of three. So who are you going to believe? Geithner? Or the people at S&P who actually will be deciding what S&P will do about S&P’s own rating of U.S. sovereign debt? It would be one thing to express the view that a downgrade would be unwarranted, or that the chance of it happening is remote. Either of these positions would be defensible. Geithner went beyond that and staked out an absolutist stance that reeks of raw arrogance: There is no risk a rating cut will occur. He left no room for a trace of a possibility, ever."

So I'm flipping through the channels late Wednesday night and I stop on O'Reilly visiting with Lou Dobbs. I notice that they're talking about oil prices so I figured I'd give it a listen. As the interview dragged on, I was amazed at their points of view. O'Reilly: Its all the evil speculators, oil companies and OPEC who are at fault. They are driving up the price of oil for their own benefit and screwing the consumer. Dobbs: It's all Obama's fault. He should be putting the screws to OPEC to force them to pump more oil and bring the price down. That these guys are apparently so clueless bugged me all day yesterday. In fact, I even discussed this on the phone with Mr. Hyde. How could these guys not get it? Anyone with a brain knows that crude is going up because of concerns of unrest in the Middle East and, more importantly, the rapidly declining dollar. But here are O'Reilly and Dobbs taking 5 minutes in front of O'Reilly's massive audience to construct bogey men for everyone to blame. WHY? Seriously, this really bugged me.