Archive - May 2011 - Story

And the US stagflation continues. The just released Empire Manufacturing index has plunged nearly by half from 21.7 to 11.9 in May. The general business conditions index fell ten points to 11.9. The new orders index declined fi ve points to 17.2, and the shipments index slipped three points to 25.8. The inventories index climbed to 10.8, its highest level in a year. The prices paid index rose to  69.9, its highest level since mid-2008, and the second highest ever, while the prices received index held firm at 28.0. And more on the stagflation as defined by the ongoing surge in Prices Paid: "The prices paid index rose sharply, indicating that price increases accelerated over the month. The index advanced twelve points to 69.9, its highest level since mid- 2008, with roughly 70 percent of respondents reporting price increases, and none reporting price declines. This index has moved up a cumulative fifty points over thepast six months." Downward GDP revisions are a-coming.

Many have been wondering why Bill Gross, with his atavistic aversion to holding US paper, has not yet branched out into precious metals which are the natural hedge to surging rates (not to mention sovereign default). Probably the primary reason for this is that the firm's flagship credit funds do not have the mandate, nor permission, to invest in such asset classes. As such, the firm's $200+ billion TRF flagship fund, at least, is limited to fixed income securities. However, the same limitation does not apply to the firm's other funds, especially the recently launched $1.2 billion equity fund, the Pimco EqS Pathfinder. The fund was launched in 2009 under the stewardship of Anne Gudefin and Charles Lahr, who jointly ran the $16 billion Mutual Global Discover mutual fund. So in an interview recently granted to Fortune by Gudefin, we were not very surprised to hear her response on what her largest investment position is in: "The largest position in the fund is gold, which we think is a very good form of protection against what can go wrong. We were encouraged by the fact that a lot of the central banks, especially in Asia, are big buyers. We think that's an underlying trend that's very favorable for gold." So to all those asking why Gross does not invest in the yellow metal, here is your answer.Should the EqS Pathfinder fund grow in AUM, one can assume that an increasingly bigger pro rata portion will be allocated to precious metals.

The Shanghai gold exchange demonstrates that unlike in the US, where margin hikes only go one way, following a surge in volatility which results in margins getting hiked, once said volatility declines, margins usually are cut. According to a press release from the exchange issued overnight, the Shanghai Gold Exchange said it will lower margin requirements for silver to 15% from 18% after the close of business Monday if there are no sharp price movements during the day. It will reduce upper and lower limits to 10% from 13%, effective Tuesday, if Monday's intraday trading doesn't hit either limit, the exchange said in a statement on its website. This is the second margin drop at the exchange following a comparable one last week when margins peaks at 19% only to see a 1% decline. For those not versed in math, this is a whopping 20% drop in silver margins over the span of two days. In the meantime, the crickets from the CME continue, and in fact we are hearing rumors of more margin hikes from the Chicago boys.

The Financial Times reported on Saturday that “the sharp drop in gold and silver prices has stimulated a surge in buying from India in a sign that consumers in the world’s largest gold-buying country retain faith in the decade-long bull story for precious metals.” Chhabil Jain, a Mumbai silver trader told the Financial Times that “demand for silver bars was going through the roof” and that “many vendors were starting to run low on stocks”. “People are booking incredible amounts of silver as they see the current drop in prices as a great opportunity to buy more ... most are buying for pure investment,” he added. Bloomberg reports this morning that silver was the most traded commodity in April.

Lots of data with Empire Index, Capital Flows and the Housing market index on deck, but the biggest news everyone will be waiting for is the predicted debt ceiling breach, which should be formalized at 4:00 pm today.

As expected, the world's most grotesquely disguised LBO in the form of the debt-financed acquisition of the NYSE by Nasdaq and ICE, has been pulled, formally on grounds of regulatory approval concerns, realistically but due to "market conditions" manifesting in the form of a market downtick. This could very well be the market top.

Yesterday we brought up the likelihood that more women would step up against DSK now that his supposed reign of terror is over, with revelations that journalist Tristan Banon, goddaughter to his second wife, may have been raped by the IMF head some time ago, a topic now picked up by the Guardian. Well according to BFMTV, as of this morning she has officially deposed a complaint in the police office of Neuilly-sur-Seine (92), France for rape and sequestration. As a result DSK is now technically under two rape investigations: one in the US and one in France. And this is just the beginning.

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We decided to round off this weekend's barrage of surrealist news with some comedy. This is what some expect the imminent escape from Harlem NYPD by the IMF head will look and sound like (and there were those who said Raj Raj is a flight risk).

Minutes ago the IMF announced that it has postponed its informal crisis meeting which was supposed to take place this evening, following the rapidly changing situation in New York, where it was just announced that DSK's court arraignment would be delayed until tomorrow, in order for him to undergo a physical examination checking for scratches and other DNA evidence from the accuser. And for those concerned about DSK's well being now that he is relegated from a $3,000 a night room to a metal cot in a Harlem cell, his lawyer said that "He's tired but he's fine." Presumably this means that DSK does not have to consult with a physician as an erection longer than 4 hours has failed to materialize.

A French reader of Zero Hedge steps up and makes the following bold prediction: a "Tiger Woods effect" is now imminent, as many other rape accusations against Dominique (or will that soon be Demonique?) Strauss-Kahn emerge, since yesterday's rape episode is most certainly not the first time this has occurred (granted, DSK is innocent until proven guilty). "Until now, hes has been bale to fight back allegations by "fixing" the situation through influence and keeping the French press shut up, or by pressuring the women into not getting into a public battle with him." Now this status quo is over, and it is very likely that very soon many more will step up from under the cloak of anonymity and tell their story.

Time for another dose of original observations and compiled content from the pen of Grant Williams and his latest "Things that make you go hmmmm" which this time focuses, appropriately, on the topic of complacency: "It seems to me that if there were a futures contract in complacency, it would certainly not be in need of a CME margin hike due to a completely lopsided supply/demand picture. Yes I’m sure there would be all kinds of whack-jobs talking about a conspiracy to sell complacency short and thus flood the world with unbacked self-satisfaction and unawareness, but the simple truth is, complacency occurs naturally for the most part and is in abundance roughly 95% of the time. Lately, however, a curious phenomenon has taken place. Back in the dying days of the 20th century, Doctor Alan Greenspan discovered a way to manufacture a super-strain of artificial complacency by adding confidence and using the power of words and the setting of interest rates.  Greenspan soldiered on and, when Long Term Capital Management hit the skids in 1998, he set about his grand experiment - introducing manufactured complacency into the financial marketplace. Prior to 1998, the business world had largely existed on a traditional cycle of boom and bust as contraction followed expansion and failing businesses were allowed to meet their inevitable demise. They were heady days indeed. People were wary of the potential pitfalls of bad decision-making and, while complacency was most certainly evident, its supply/demand situation spent many long periods in perfect equilibrium. After Dr. Greenspan’s introduction of artificial complacency, however, things began to change..."

The most memorable scene from the movie Boiler Room is when the character of Ben Afleck tells the room full of wannabe brokers to "Act As If" (and in the tangent regarding male genitalia, the head of the IMF would have been wise to take the advice instead of opening his fly and disproving it). Who would have thought that a few short years later, it would be none other than insolvent countries taking this advice: specifically, America acting as if it wasn't insolvent, and Greece acting as if it was beyond saving. The irony, as William Buckler observes in his latest edition of the Privateer, is that while US debt continues to trade (if no longer be accepted) as the "Rock of Gibraltar" and Greek paper is trading with a certainty of bankruptcy, it is Greece that has taken proactive steps in taxing and spending policy, while the US has merely retrenched its profligate ways, and while much political theater takes place, nothing ever really changes. For some of the more perverse consequences of this bizarro world inversion, read below.

As the Nakba protests continue late in the night across the Middle East, things in Egypt have taken a turn for the worse after Reuters reports that Egyptian police have fired teargas to force back pro-Palestinian demonstrators who had broken through a barricade in front of the Israeli embassy in Cairo, according to witnesses. Additionally, according to the twitter stream, at least one person has been killed during the protest after being shot in the head. Those who wish to follow the latest on the ground updates from Egypt and Israel may do so by searching the #May 15 hash tag. Judging by the early drop in the EURUSD, the sentiment is definitely risk averse.

Topping off a weekend of surreal news is the announcement from the Central Bank of Zimbabwe that the country is now evaluating introducing a gold-backed Zimbabwean dollar, and, in keeping with the Salvador Dali feel to the past 48 hours, that the "days of the US dollar as the world's reserve currency are numbered." Yes. Zimbabwe, the same place that two years ago sported a brand new crisp Z$100 trillion bill. What is just as odd is that this news comes less than a week after Iran's President Mahmoud Ahmadinejad criticized US economic policies, saying that the paper currency created by the American government is taking a heavy toll on the global economy. While Zimbabwe, which now transacts almost exclusively in foreign currencies such as the USD and the South African Rand, is actively considering ways to return its own currency into circulation, the man who has up to now served as an inspiration and a role model to Ben Bernanke, Gideon Gono, said the country should consider adopting a gold-backed currency. “There is a need for us to begin thinking seriously and urgently about introducing a Gold-backed Zimbabwe currency which will not only stable but internationally acceptable,” he said in an interview with state media... That giant ripping noise you hear is the Chairsatan tearing down each and every 20x10 poster of Gideon Gono, lining the hallways of the Princeton Economics department.