Archive - Aug 2011 - Story

• Inflation May Embolden Foes of Fed Stimulus (Bloomberg)
• July inflation spike won’t stop QE3 (Reuters)
• Clamour for amendments to Italian austerity (FT)
• Biden seeks to reassure China on U.S. debt (Reuters)... fails
• Japan Forex Chief Meets BOJ Officials to Talk Yen (WSJ)
• BofA’s Moynihan Says to Expect 3,500 Job Cuts (Bloomberg)
• France Eases Ban on Short Selling Before Index Futures Expire (Bloomberg)

• European equities remained under pressure during the session weighed upon by growing signs of a faltering global economic growth together with August options expiry in the European indices
• CHF and JPY remained the major beneficiaries of risk-aversion, whereas commodity-linked currencies generally traded lower
• After breaching the key USD 1,800 per ounce level yesterday, spot Gold continued its ascent towards the USD 1,900 technical level amid risk-aversion
• EU's Rehn said the EU may draft legislation for joint Eurobonds, however gave no timetable for the draft legislation
• EU Commission said collateral agreement between Finland and Greece is being examined by the Eurozone, adding that Finland is the only country to request Greece collateral. Meanwhile, Austrian finance minister said the Finnish deal to get a 20% cash collateral on Greek loans is unacceptable

There is a small degree of backwardation developing in the gold market with certain near term futures contracts now trading at higher prices than longer term contracts. The near term August ’11 contract was trading at $1871.40/oz while June ’12 contract is trading at $1,870/oz (1216 GMT). The spread between spot and longer term contracts has fallen suggesting that gold may soon join silver in backwardation. The possibility of backwardation in gold suggests that major investors are concerned about the supply of physical gold. Buyers are concerned about securing supply in the future and are willing to pay a premium for spot or immediate delivery. It could indicate that the short squeeze anticipated by many is taking place and we could see a sharp upward move in gold prices. This would not be surprising considering the very small size of the physical bullion markets versus the size of the overall financial and currency markets and considering the high demand coming from investors and central banks globally. It is worth remembering what happened when silver went into backwardation some months ago. It led to a price surge from $30/oz to over $50/oz in 10 weeks. Backwardation rarely happens in the gold and silver bullion markets. Since gold futures first started to be traded in 1972 (on the Winnipeg Commodity Exchange), there have only been momentary backwardations of a few hours. It suggests that larger gold bars are difficult to acquire in volume and that the physical market is becoming stressed and less liquid.

When all breaks, the food shall still remain:

• STROMBOLI +7
• PAELLA +2
• COZIDO +6
• GUINESS +6
• TZATZIKI   +2
• FRIES +10
• SNAILS+3
• WIENER SCHNITZEL+3
• FISH AND CHIPS +4
• SPAETZLE+4

...Is waking up in the morning. The pain trade is making decisions in a market where moves that should take days or weeks to play out, occur in hours. Going for a coffee at the wrong time can cost you to miss a 2% move. Leaving a stop while going for coffee can get you triggered out in a move that completely reverses in a few minutes. The markets are broken. That is the pain trade. Trying to treat the markets as normal is the pain trade.

When we first presented yesterday that the SNB had used $200 million in FX swaps with the New York Fed, we speculated that this "means that it is not some usual PIIGS suspect, but one of the two "big ones." Obviously by this we meant Credit Suisse or UBS. It took the banks about 12 hours to come out and deny officially that it had been either of them. Well, it simply it is someone else, and hence someone with far less in deposit-based capital buffers. And then, of course, you know what they say about official denials... Anyway, whoever it was, Europe is not waiting to find out: this morning most European bourses are down between 2 and 4%, Dax down 3.7%, CAC down 2.8% and the FTSE down 2.8% at last check, as the specter of a pan-European bank run is back. The net result: spam continues to be a drag in the gold-canned food pair trade, hitting a new old time high of $1878 in the spot market minutes ago, and just $122 away from $2000. Should the market rout persist, we may well see $2000 in the next 48 market hours.

A snapshot of the European Morning Briefing covering Stocks, Bonds, FX, etc.

Welcome to the New ZH Servers. Due to recent traffic surges (courtesy of what we believe is a permanent transition to market efficiency) which resulted in numerous server crashes over the past 3 weeks, courtesy of 1.5 - 2 million page views per day, we have had to upgrade once again, a move that was funded thanks to your donation generosity, dear readers. We are now at a state where even a 500 point drop in the S&P will hopefully not bring us down. We will also gradually return all the recent UI improvements such as comment ranking, and contributor blogs that we had to eliminate due to processor capacity limitations. We hope you enjoy the experience.

As those who have studied some history know all too well, any mention of the Maginot Line usually does not have a Hollywood ending. Alas, the same can be said for the highly unique analysis by JPM's Michael Cembalest who looks at Europe's latest "Maginot Line", this time however for the insolvent, 21st century, generation. "Rather than focus on what EU politicians said at yet another summit this week, let’s look at the lines of defense they may eventually have to rely on to defend the European Monetary Union. For illustration’s sake, we have superimposed these defenses on a map of the Maginot Line constructed by France in the early 1930’s to defend against an attack from the East." The 8 steps outlined present, from start to finish, the flow chart of what will happen in the next few months as Europe scrambles to avert one crisis after another, which as we pointed out months ago, ends with the "last resort" federalization of Europe, via the Eurobond paradigm. Alas, the response to that is (or isn't) revolution, in which the people finally tell their treasonous (there, we also used that word) governments they have had enough of funding other people's greed, gluttony, and overall mistakes. Just as the idiotic Maginot line, praised back in its day as a work of genius, was circumvented in one simple move when the German army simply invaded France through the Ardennes forest and took over in hours, so this latest Maginot line will do absolutely nothing to prevent the final outcome which even Europe's deranged bureaucrats know is coming: the end of the most flawed generational experiment in globalization history.

Barton "AUM Smalls" Biggs, who is now very obviously floating in a geritol-free pink cloud of his own, and who back on August 4 predicted a 7-9% rally in the next 3 weeks, only to realize subsequently he forgot a minus sign (and potentially his incontinence protection), confirms he has now totally lost all grasp with reality. As in an absolute psychotic breakdown, per the following statement given to Bloomberg TV: "I don't see all the bad news that you keep citing." We urgently demand that the DSM IV do some creative adjustments to their definition of schizounipolarpermaclowndementia and apply the appropriate image of this now uber-ridiculed example of a the lost beta chasing generation (and one with some very serious flaws in thawing from the cryogenic sleep state). Forget late night comedy, the following 8 minutes are nothing short of the most grotesque-cum-slow-motion-train-crash-rubbernecking entertainment one can get for free tonight.

Following last week's near record surge in M2, which was merely the result of a complete panic in markets resulting in a scramble for deposit accounts out of money markets (these tumbled by $82.5 billion in the week to $1688.5 billion, the lowest since September 2007) and other "unsafe" venues, amounting to $159.1 billion, this week M2 has risen by a far more modest (though still abnormally high by historic standards) $42.2 billion. What is disturbing is that unlike in the past when record surges in commercial bank savings deposits have seen a prompt unwind in the following week, this time around last week's $58.4 billion spike in such money was followed by another massive $51.7 billion, as cash ran to the "safety" of FDIC insurance. And just as disturbing, the huge $99.3 billion in additions to plain vanilla demand deposits did not see any unwind, with just $8.3 billion leaving bank teller windows in the past week. End result: M2 has just hit another new all time high of just over $9.5 trillion (which helped today's LEI number beat expectations). And if QE3 proceeds as planned, and it US consumers actually start borrowing, this number is going much, much higher. Which will be bullish, for makers of wheelbarrows.

Now that even Joe LaSagna is no longer imbibing the Kool Aid, and is scrambling to regain some credibility by enunciating such occult (for his mouth) words like "recession" and "downturn", it has become all too obvious, that just like in August of 2010, right before Jackson Hole 1.0, the scramble for who can downgrade the US in the most unique, bizarre and sadomasochistic fashion is on - these people need to get paid after all, and without the Fed cutting checks, they may all have to face comp committees that demand to see performance. Alas with everyone on Wall Street missing today's Philly Fed by eight unbelievable standard deviations, base comp is all said economists can hope for. In other words, and as predicted over and over and over, the scramble to make the baseline case a recessionary one, is here. And since it is now cool to be pessimistic again, here is JPM's Michael "Fonzarelli" Feroli who just projectile vomited all over the US' growth prospects...two short weeks after he did precisely the same: "Growth in the current quarter looks only moderately softer than our previous projection, however the risks to our previous projection for 2.5% growth in Q4 are now very clearly to the downside and we are lowering forecasted growth in that quarter to 1.0%. We are also lowering 12Q1 growth to 0.5% from 1.5%. In sum, over the next four quarters we don't see growth that is much faster than the growth that took place in the first half of this year." Translation: "help us Obi Ben Bernanke, you are our only hope."

The "panic" trade had a few hours to eat dinner, and now it's back to business. As Asia opened, the kneejerk reaction to Europe closing is that, naturally, Europe will open in a few short hours, this time however with fresh fears of what the SNB might be cooking if it needs Fed assistance to sustain its local banks' dollar margin calls. The result: gold hits new all time record highs, bonds drop to intraday lows, crude is about to reenter the critical 70's, so very necessary for QE3, and ES, well, you get the picture.

Now I believe it is time to fast forward to the fall of 2008. Once again the 2008 market is a road map of how human emotion reacts when credit events happen. When economic data deteriorates at an exponential pace. When the unthinkable becomes reality. The volatility skew relative to the vix captures market sentiment very well. Overlay any such chart with the SPX and the similarities are without question. So for all those pundits who say this is not 2008 I present the following chart. Once again markets are pricing in the unthinkable. In 2008 history witnessed the failure of Lehman, AIG and the GSEs. Today history is bearing witness to sovereign nations on the brink of failure. In 2008 there was the threat of bank runs. Today there is the threat of currency runs. In 2008 there were government bailouts. Today there are central bank bailouts.

We said ¹ for a reason, because while indeed homes have never been more affordable... one must pay for them in constant gold. Yes, holding gold over the past century has as of this point effectively defeated any of the accumulated home price inflation over the years, and when expressing home prices in terms of gold, the average home is now more affordable than ever before. We said gold. Not dollars, not yen, not spam, not Nobel economics prizes. So for everyone who wants to exchange some of that shiny metal into the most valuable and capital intensive investment the average American will do in their lifetimes, this is your moment.