Archive - Nov 9, 2012 - Story

Economists the world over can take comfort that the laws of supply and demand still largely rule the marketplace. However, we believe there is a noted exception for a yellow, largely useless metal. A metal that just happens to have shaped the world’s monetary systems for the last several thousand years. Gold’s “supply” traditionally defined as global mining production is virtually meaningless in determining its’ price. How can this be? Gold, even when viewed as a commodity, is unique in that it is not consumed. Rather than supply in the traditional sense, what drives the gold price is the percentage of the existing stock (170,000 tons) that is available for sale on any given day. Gold, in our opinion is what is often referred to as a Giffen good. We believe that a massive revaluation of gold denominated in dollars can happen quite suddenly, almost overnight. But not because of any sustained long term demand for gold, but simply because owners of metal simply withdraw it from sale, sending the stock to flow ratio to infinity. This is why understanding gold’s stock to flow ratio is so vital. What happens to the “price” of gold when it ceases bidding for dollars? Zero. Or infinity. Take your pick.

Sometimes, it just pays to keep it simple stupid. At some point, the dismal economic reality of our post-credit-creation-miracle boom world will reassert itself in asset prices. The catalyst may not be obvious (like a close-election reminding a nation of sheep just how divided we are as a people and implicitly as a political class - and what that means for our future fiscal probity); but it is coming. 'Cycles' cycle; the Fed has fired its bazooka; and OMT omnipotence is in doubt;and the only way we get 'moar money' from our central planners is if their hand is forced by a reversion to reality...

While Mr. Panos has often been used as the poster boy for the Greek people, his shortened premise is - we will keep taking the Europeans money until they no longer want to give it to us. In the meantime, the Greek people have suffered due to the previous largesse of their government and need for a 'reversion' to the mean of their relative wealth. The following brief clip offers some insight (or defense) of who the real man-on-the-street is in Greece. Not the media's interpretation of a lazy, cheating, ungrateful, helpless, corrupt, violent, rude, racist, tax-evading, trouble-making thieving vandal - that lives with his mother; but a scapegoat for all that is wrong in Europe and remains shocked, confused, frustrated, and upset. It's someone's fault, right? Why not Alex?

"Recently, Johnson Matthey have put 172 “bad delivery” U.S. Assay Office bars into good delivery form for account of the Deutsche Bundesbank. These bars formed part of recent shipments by the Federal Reserve Bank to provide gold in London in repayment of swaps with the Bundesbank. The out-turn of the re-melting showed a loss in fine ounces terms four times greater than the gross weight loss... No indication should, of course, be given to the Bundesbank, or any other central bank holder of U.S. bars, as to the refiner’s views on them."

May 1968

Cash equity markets closed the day very marginally in the green - ending the worst week in over five months. S&P 500 futures are bleeding red after-hours as we note significant volume came in after the President began speaking - from which we closed down 1%. Cross-asset correlations were extremely high today as it seemed all about equities (and equities were all about AAPL). Credit markets (and volatility) were not enjoying the morning party as much as stocks but by the close equities reverted back down to reality. Gold remains the week's big winner (post-election) but we note that 10Y yields fell from over 1.75% into the election to under 1.60% at their lows today. The USD ended the week +0.6% and Treasury yields down 10-15bps. AAPL gained 1.75% (phew) but traded extremely technically with heavy volume around VWAP into the close which helped Tech slightly outperform Financials on the week (-2.5% vs -3.1%). A day of technical bounces and all eyes on stocks...

Update, in which we find the true reason for the affair: Petraeus Won’t Testify on Benghazi Next Week, Senate Aide Says.  In other words, next time one is called to testify before a panel over the deaths of 4 people including one US ambassador, one just pulls the infidelity "get out of testimony" card and all is well.

A mere few days after the re-election of our president, CIA Director David Petraeus annoucnes his resignation:

• *CIA DIRECTOR DAVID PETRAEUS RESIGNS
• *PETRAEUS SAYS HE ASKED OBAMA TO BE ALLOWED TO RESIGN: NBC NEWS

The reason - an extra-marital affair...

• *PETRAEUS SAYS HE ENGAGED IN AN EXTRAMARITAL AFFAIR: NBC NEWS 
• *PETRAEUS 'SUCH BEHAVIOR IS UNACCEPTABLE' IN A LEADER: CNN

Of course, the defense is already known: Petreaus did not commit that affair... the government did it for him

In mid 2008, when macro data surprises were very weak, equity markets continued to push inexorably higher; happily ignorant of reality as The Fed has your back, 'bad is good', and the impossible was still impossible. This rally front-ran the economic surprise data - as economists had (in their ubiquitously extrapolant manner) over-cooked the downside and a reflexive bounce and rate cuts swung us into the green economically and market-wise. That surge in macro surprise data proved fleeting and we crashed a few short months after. Four years later and once again we are told that 'bad is good', every central bank is just dying to add more liquidity fuel to the fire, and macro data is 'surprising' to the upside. However, instead of following the 2009, 2010, and 2011 patterns, we are mimicking that 2008 pattern as 3-month S&P return turns red while ECO data is still rising. We suspect the hope-driven 'magic' in that ECO data will rapidly fall to the bottom-up-biased earnings data we discussed earlier and while 'expecting' a 30% plunge in stocks is a little much - we've seen this kind of hopeful optimism dashed before on the rocks of reality.

The U.S. trade balance in September improved, largely on petroleum, with a rebound in exports.  This was good news for a single economic data point and it sent mainstream economists to mistakenly begin boosting third quarter GDP estimates to 2.9% from the 1st estimate of 2.0% that we saw last month. The important point is that the trend of exports, and imports, has been negative as the recession in Europe, and slowdown in China, have reduced end demand. There are a numer of reasons that the recent positive boosts to the trade deficit data are more likely temporary in nature and will be revised away in the months ahead.  "Regardless of when the NBER officially announces the start date of the next recession - the damage will have already been done to investors."

It's been a mere seven weeks since the CNBC'ers announced to the world that every widow, orphan, and pet-monkey should buy the market with both hands and feet as Bernanke just opened the gates. The exact phrase on the evening of QEternity was:

"Buy everything that's not nailed down... as bearish as I want to be, you cannot fight the Fed. You buy everything. Buy copper, which i did today, FCX which i mentioned last night. Anything else? Emerging markets! everything! Just buy it. Buy it all. You never have to short again. Buy it. I had a guy call me today trying to sell me research on the short side, and I said I'm sorry, I think you're going to go out of business. You shouldn't short anymore."

Things haven't quite gone as planned...

One of the great faults with paying attention to Europe is to take what they tell you as factual. The media trumpets what they are given by the various sources of information in Europe but a quite skeptical eye is what is needed. They claim that they do not have the “Final Troika Report” on Greece because they have not stamped it “Final” yet and so they blame their indecision on the magic trick that they are performing. Everyone on the Continent has the report but since they can agree on almost nothing they have blamed the lack of the rubber stamp as the culprit. They should just come out and say that, “It is the rubber stamp’s fault” and be done with it. Every easy trick has now been exhausted when it comes to Greece. You may feel worn out and tired by the length of time this process has taken but that is a remarkably short-sighted viewpoint. It is going to be either “debt forgiveness” or “more money” or “brute force” and there are quite serious consequences for many nations and many governments whichever path is chosen. Any of these three paths will lead to extensive pain and a lot of contagion and so I conclude that the Greeks will get forced out by increasing European demands.  “Blame it on the Greeks” will be the secret password while the Greeks will call Berlin every name in the book.

Technical bounces off 200DMAs; Fed lifting constraints from next year's stress tests; Basel III implementation deadlines rumored to be extended; and now we get the 'compromise' chatter to ensure we do not plunge and close at the lows of the day/week/month/quarter during the President's first few days of re-election. We are sure the market will hear what the market needs to hear and a history of divisive political backstabbing will be thrown away in rounds of group-hugs and exchanges of ponies...

With the varied interests of constituents very much in mind, finding a compromise over taxation will be worse than Sisyphean in nature we suspect. CNBC's Rick Santelli offers a strawman, that gets around Norquist's 'pledge' and perhaps provides cover for both parties. The Chicagoan recognizes that what seems like a high-salary to some is very much not to others and suggests instead of focusing on the income, we should focus on the wealth. This is not the first time such a proposition was suggested (as we noted 14 months ago that 'muddle-through' was over and "we are confident, that one way or another, sooner or later, it will be implemented. Namely a one-time wealth tax: in other words, instead of stealth inflation, the government will be forced to proceed with over transfer of wealth") Strawman or not, the fact that Santelli is discussing it (and demurs on whether he has been contacted) means it is on the table...

The query in question? "Renounce Citizenship"

Most European equity and sovereign bond markets suffered their biggest loss this week in the last six. Thanks to a somewhat notable rally from the US open today into the European close (seemingly driven by AAPL's bounce off its 55-week average and S&P 500's bounce off 200DMA), things don't look like the 'worst week in six months' that we had been expecting. European credit markets moved tick for tick with stocks - though we note risk appetite does not seem to be following through in high-yield credit. Spanish bond spreads rose 27bps on the week (and Portugal 45bps) as Europe's VIX closed up 2 vols on the week at 22.35% (well off its highs of the day at 24.75% which are two-month highs). EURUSD slid below 1.2700 into the European close (down ~200pips from the highs) - its lowest in two months.