Archive - Aug 2011 - Story

In his latest letter, Kings of the Wild Frontier, crushes the optimism of all those, roughly 4 altogether in the entire world whose combined IQ barely breaks into triple digit territory, who believe that the debt ceiling "compromise" does anything at all for US spending patterns, weather it is for total marketable debt, or the $66 trillion in NPV of future liabilities. Gross, however, does show us the 5 ways (well, 4 plus default) that the "debt man walking", aka Uncle Sam and his tens of trillions of future liabilities, plans to rob from you: dear taxpayer, in order to minimize the present value of these unmanageable future liabilities. To wit:

1. Balance the budget and/or grow out of it
2. Unexpected inflation
3. Currency depreciation
4. Financial repression via low/negative real interest rates

All of these guarantee that investor pocketbooks will be dramatically affected... Adversely. Let's dig in...

Nobody could have foreseen the "tradition" being a safe haven escape to all the other "traditional" fiat-based garbage available to investors. Nobody. Next stop: $1950.

And another ugly economic data point. June personal income was just released at 0.1%, on expectations of 0.2%, and down from a revised 0.2% (previously 0.3%). Personal spending was far worse than expected, coming at -0.2%, down from a revised 0.1%, and missing expectations of 0.0%. PCE Core was the last metric missing, coming at 0.1%, down from 0.2%, down from a downwardly revised 0.2%. Just as importantly, as in the case of GDP, there were major downward historical revisions: "Personal income was revised up $69.1 billion, or 0.6 percent, for 2008; was revised down $244.7 billion, or 2.0 percent, for 2009; and was revised down $167.5 billion, or 1.3 percent, for 2010. .. For 2009, downward revisions to personal interest income, to personal dividend income, and to nonfarm proprietors’ income were partly offset by upward revisions to rental income of persons and to farm proprietors’ income.  For 2010, downward revisions to personal   interest income, to nonfarm proprietors’ income, to supplements to wages and salaries, and to personal current transfer receipts were partly offset by upward revisions to rental income of persons, to wages and salaries, and to farm proprietors’ income." In other words, the "rental income" that offset downward income revisions came exclusively from the $50-100 billion squatters' rent annually "generated" from homeowners not paying their mortgages. End result: a surge in the savings rate to 5.4% from 5.0%, the highest since March 2011, as consumers retrench across the board.

Debt Deal Puts U.S. on Austerity Path as Economy Falters (Bloomberg)
Short-term US Funding Highly Restricted (FT)
China Halts Offshore Yuan Borrowing to Tighten Policy (Reuters)
Fed Confronts Limited Tools to Stir Economy (Hilsenrath)
Australia Leaves Key Rate Unchanged (WSJ)
N.Z. Second-Quarter Wages Rise at Faster Pace, Adding to Inflation Signs (Bloomberg)
China’s Expanding Naval Reach Worries Japan Over Routing Warship Presence (Bloomberg)
Geithner Says Debt-Limit Deal Good for Economy in the Long Term (BusinessWeek)
UK borrowing costs brush close to record low (FT)

Markets witnessed a risk-averse sentiment today on the back of contagion fears in the Eurozone, with particular focus on Italy, together with growing signs of a faltering global economic recovery. This resulted in weakness in European equities, led by peripheral indices, which provided support to Bunds and Gilts, whereas a general widening was observed in the Eurozone peripheral 10-year government bond yield spreads. The USD-Index traded higher throughout the session, which in turn weighed on EUR/USD and GBP/USD, however GBP/USD did receive some strength following higher than expected construction PMI data from the UK. In other forex news, some market players mentioned the possibility of a JPY intervention, although Japanese officials declined to comment. Moving into the North American open, markets look ahead to a slew of economic data from the US in the form of personal income/spending, PCE report, as well vehicle sales figures. Today is also the deadline for the US to raise its debt ceiling, and following an approval of the bill from the House last night, the Senate is expected to vote at 1700BST, and if successful, it will be signed by President Obama.

Today we get Personal Income and Outlays, i.e., the savings rate, car sales (watch for GM dealer inventory), and the debt ceiling drama concludes in the Senate.

The last time we checked on the top 5 portfolio holdings of Mr. Pink's Third Point, we noticed that gold had surprisingly dropped to third position, behind Delphi and El Paso. Less surprising is that the fund, which has outperformed the S&P in July, returning 0.3%, and which increased in AUM by a whopping $800 million or well over 10%, has followed gold's surge to fresh all time highs, by once again making gold its top position. So in addition to the Bank of Korea, it appears that one of the key members of the hedge fund "think tank" is once again back and buying. If all of the $800 million in new capital went into gold, it tells you all you need to know about the ability to generate stock alpha in this market. Incidentally, how long before China, and its paltry gold reserves, finally gets the memo?

Further confirmation in the continuing stealth accumulation of bullion by central banks came overnight with confirmation that South Korea's central bank bought 25 tonnes of gold over the past two months. The gold is worth $1.24 billion and resulted in a 17 fold increase in their gold reserves. Thailand’s gold reserves rose by 15.5% in the two months and rose to about 4.07 million ounces in June, from about 3.523 million ounces in May, according to figures on the Bank of Thailand’s website accessed by Bloomberg this morning. South Korea is the world’s seventh-biggest foreign-exchange reserve holder and 64% of its reserves are in U.S. dollars. The bank said that it also holds euros and other assets and the move was about achieving diversification. The BOK’s reserves, stored in London in the vaults of the Bank of England, increased 25 tonnes to 39.4 tonnes (from 14.4 tonnes) but remain meager when compared to the size of their foreign exchange reserves. BOK's gold holdings, at today’s market prices, account for 0.7% of its reserves, up from 0.2% prior to the purchase. The BOK reserves were at a record high of $311.03 billion at the end of July which puts this $1.25 billion gold purchase in perspective. Their gold reserves and those of other Asian central banks, particularly the People’s Bank of China, remain meager when compared to those of western central banks and the U.S.

Despite Congress passing the debt ceiling hike, the market's reaction has been swift, brutal and vicious as ever more attention is being paid to Italy and the unforgiving European crisis. As both Spanish and Italian spreads hit new all time records, while CDS are at all time wides for the two countries plus France, the vigilantes are once again preparing to attack and test the ECB's resolve to keep the Euro alive: at this point it is obviously a losing game although expanding the EFSFS to $2 trillion is inevitable (at which point the reaction to German spreads will be swift). In the meantime the scramble for safety is at 2011 highs, with gold on the verge of another record, while the 10 Year US Treasury touching a low of 2.685%, and UK Gilts touching record lows: remember - this is all to make QE3 more palatable when it does begin. Lastly, Bloomberg's TJ Marta summarizes all the market indicators of a day in which sentiment has truly crumbled and in which we expect Italian bank stocks to be halted at least 3 times before market close.

A snapshot of the European Morning Briefing covering Stocks, Bonds, FX, etc.
Market Recaps to help improve your Trading and Global knowledge.

While Washington is baffling everyone with male cow manure, presenting 7-slide powerpoints full of talking points and empty of actual actionable cost-cutting proposals, while draping the melodrama in ever more evanescent haute couture of "emperor's clothing" du jour, the one true solution to all our problems is so simple that it is perfectly logical that it would have been avoided like the plague by D.C. In a nutshell: do to the government, what the privates sector has done to itself in the past 3 years, and fire 15% of the federal government workforce. After all everyone, even the government, complains about the bloat in the system. Here is the chance to fix it. And the benefits, unlike the back-end loaded and extremely loose "bipartisan plan", which happens to invoke such pseudo-totalitarian constructs as the "Super Congress", can be quantified immediately, with the applicable savings made abundantly clear to all from day one. In this case - slimming the US government ever so modestly, by just 15%, would generate savings of $117.4 billion a year, of $1.4 trillion over the next 10 years. And no, these are not reductions in future spendings: these are real actionable cuts from the day they are enacted, with fungible cash able to be used for any other, much more needed purposes, up to and including economically stimulative projects, which actually generate jobs for the private sector.

The debt debate has been going on all summer, a 2 months and running theatrical experience of court jesters parading about while the United States economy teeters on the edge. On both sides of the aisle have been ridiculous solutions that are showing the world daily, America is willing to sacrifice its citizens for the profits of the corporations. The problem is, why will the rest of the world continue to support American multi-nationals, when they have their own. As dollar supremacy begins to wane, and oil prices rise as the dollar’s value descends, maybe it is time to talk about the horrendous policy decisions of these politicians in hopes it opens up a way to point us in the correct direction. Otherwise, when August 2nd comes and the deal is passed anyway, cause it has all just been a “watch this hand” moment, we might find ourselves not understanding why the Social Security check seems meager compared to before.

Not one but two letters today (link to prior here) from a very digusted Ron Paul, in which he once again dissects the complete farce that is the "spending" cut bill (if by spending one means slightly lowering the angle of attack on future government expenditures well over and above the revenue slope) and also adds his thoughts on the farce that is the "Super Congress."

And like that the Congressional circus is over 269 to 161. Market reaction? ES sells off 5, then rallies 3, and now is selling off again. Next up - the Senate but that is a given. So now that we know that America is not going to file for bankruptcy tomorrow on we go to the economic collapse.

It is of course the case that so deeply engrained are statistics such as these in the vocabulary of both the market and the voodoo of Maynardian macro-economics that it is unrealistic to expect any practitioner to avoid any reference to them whatsoever. What is absolutely crucial, however, is (a) constantly to bear in mind that these are nothing but examples of a convenient shorthand which often conceal as much as they reveal - in the same way a mean height above sea level or an average annual temperature tells us little about the topography or climate of a region, much less about how those features may be changing – and (b) that the generation of a positive change in the metric is not an end in itself (as far too many policy jockeys and talking heads seem to believe). An amphetamine junkie getting his next fix by spending the contents of the old woman’s purse he just snatched generates more instant GDP than an engineer sitting quietly at his desk, trying to puzzle out a radical new way to create more useful output with less input, but it should be fairly obvious which man is likely to do more to improve both his own material comforts and those of the people around him.