Archive - Mar 7, 2012 - Story

It would appear, given the actions and rhetoric of the last week or so, that global central bank printing presses have been switched to 'pause' mode and allowed to cool as implicit inflation 'energy' rears its economic-growth-dragging head around the world (as the bears told us earlier). Whether this leads to a slow grind higher or a tactical correction is the question Morgan Stanley considers in a recent note and their answer is that bullish sentiment, 'under-appreciated' risks, and 'tranquil' markets justify a cautious asset allocation. The focus has switched much more to growth, likely why we have not seen a greater deterioration post-printing yet, but this leaves the market much more sensitive to data surprises (as the backstop of QE has been removed for now). Simply put, we tend to agree with MS' view (given our previous discussions of the volatility surface) that as event and growth risks linger, and with valuations no longer cheap in most cases, expectations of a continued grind higher without a tactical correction are overly confident.

Perhaps not so shockingly, AP is reporting tonight that satellite images of Iranian military facilities show trucks and other earth moving vehicles. Diplomats, accredited to the IAEA, suggest this indicates attempted cleanup of radioactive traces possibly left by tests of a nuclear-weapon trigger. As sanctions grow more burdensome and Israel's pre-emptive rhetoric rises, the discovery of this sanitization effort only raises the stakes as the images are said to be very recent and updated constantly and suggest evidence of tests of a small experimental neutron device. This wouldn't be the first time a site has been 'sanitized' prior to IAEA inspector visits but as The Boston Globe reports IAEA expert teams have tried twice - and failed - in recent weeks to get Iranian permission to visit this area and now (following the apparent clean-up) they have finally been granted access. As the US, Britain, France, Germany, Russia, and China postpone their meeting, in an effort to find more moderate language to criticize Iran, it seems to us that actions may just start having more impact than words very soon.

As the global warming debate increases in its intensity we find both sides deeply entrenched, hurling accusations and lies at one another in an attempt to gain the upper hand. This divide within the scientific community has left the public wondering who can be trusted to provide them with accurate information and answers. The IPCC, the onetime unquestioned champion of climate change, has had its credibility questioned over the years, firstly with the climategate scandal, then with a number of high profile resignations, and now with the new “Gleickgate” scandal (1) (2) – One has to wonder where climate science goes from here?

Earlier today, we reported that Germans are increasingly concerned that their gold, at over 3,400 tons a majority of which is likely stored in the vault 80 feet below street level of 33 Liberty (recently purchased by the Fed with freshly printed money at far higher than prevailing commercial real estate rates for the Downtown NY area), may be in jeopardy,and will likely soon formally inquire just how much of said gold is really held by the Fed. As it turns out, Germany is not alone: as part of the "Rettet Unser Schweizer Gold", or the “Gold Initiative”: A Swiss Initiative to Secure the Swiss National Bank’s Gold Reserves initiative, launched recently by four members of the Swiss parliament, the Swiss people should have a right to vote on 3 simple things: i) keeping the Swiss gold physically in Switzerland; ii) forbidding the SNB from selling any more of its gold reserves, and iii) the SNB has to hold at least 20% of its assets in gold. Needless the say the implications of this vote actually succeeding are comparable to the Greeks holding a referendum on whether or not to be in the Eurozone. And everyone saw how quickly G-Pap was "eliminated" within hours of making that particular threat. Yet it begs the question: how many more international grassroots outcries for if not repatriation, then at least an audit of foreign gold held by the New York Fed have to take place, before Goldman's (and New York Fed's) Bill Dudley relents? And why are the international central banks not disclosing what their people demand, if only to confirm that the gold is present and accounted for, even if it is at the Federal Reserve?

Jim Grant is simply brilliant in this must watch interview with CNBC's Bartiromo, which we won't spoil with commentary, suffice to provide the following pearl of an exchange:Maria Bartiromo: "What are the alternatives?" Jim Grant: "Capitalism is an alternative for what we have now. I highly recommend it." Maria: "We all do." Grant: "No we don't." Maria: "The Federal Reserve may not." Grant: "We ought to be discussing an intelligent move to a sound currency by which i mean a currency that is based on a standard and not at the whim and the discretion of a bunch of mandarins sitting around Washington D.C." In other news, Joseph Stalin is now delighted that Ben Bernanke has decided to shoulder the legacy of central planning and is firmly committed to proving that where Vissarionovich failed, the ChairSatan will succeed.

Last night we noted the very concerning rise in margin calls for European banks thanks to collateral degradation at the ECB. This story has become very popular as traders try to figure out which assets were deteriorating rapidly and which banks face immediate cash calls. One thing that came to mind for us was - what about Gold? Coincidentally or not, the last time we saw a big surge in collateral margin calls by the ECB (in September of last year), not only did Gold lease rates explode (implode) but Gold prices fell off a cliff as the squeeze came on from gold liquidity providers pushing prices down to exacerbate the negative lease rates on the gold collateral. The point here is that as margin calls come in from the ECB, we wonder whether banks will be forced to liquidate their gold (last quality collateral standing) to meet the ECB's risk standards. The key will be to watch gold lease rates (as we explained here and here) and ECB Margin calls to see if Gold is merely suffering a short-term dip from USD strength derisking or if this is  a more broad based meeting of collateral desperation need that might have legs - only to be bought back later. MtM losses combined with collateral calls (as we noted earlier) was never a recipe for success and we will be watching closely.

In what should come as no surprise to anyone who has a frontal lobe, yet will come as a total shock to the central planners of the world and their media marionettes, the latest attempt to sucker in retail investors courtesy of a completely artificial 20% stock market ramp over the past 4 months driven entirely by the global liquidity tsunami discussed extensively here in past weeks and months, has suffered a massive failure. Exhibit 1 and only: as ICI shows today, following what is now a 20% ramp in the stock market, not only have retail investors continued to pull out cash from domestic equity mutual funds (about $66 billion since the recent lows in October, the bulk of which has gone into bonds and hard commodities), but the week of February 29, when the market peaked so far in 2012, saw the biggest weekly outflow of 2012 to date, at -$3 billion. Alas, this means that the traditional happy ending for the authoritarian regime, whereby stocks get offloaded from Primary Dealers, and GETCO's subsidiaries, to the retail investor, is not coming, and soon the scramble for the exits among the so-called "smart money" will be a sight to behold.

Today we observed how as the US is considering releasing crude from its Political, pardon Strategic Petroleum Reserve, China was doing just the opposite. Now, in a further step confirming that China is acting as a much more rational capitalist power, and is rapidly encroaching on the "reserve" status of the sacrosanct USD, the FT writes that China intends to extend renminbi loans to other BRIC nations in "another step toward the internationalisation of its currency." To those following the stealthy Chinese incursion into currency markets as a dollar alternative, this is not news: already we know that China and Japan have bypassed the dollar entirely and now engage in direct bilateral trade using JPY and CNY (even as most other nations in Asia have developed bilateral agreements to transact in a non dollar basis). This is merely the latest incremental step which will see China become the dominant player in the currency arena, and further puts to doubt the fate of the US Dollar as the default currency. Of course, the market will not acknowledge any of this until the developing (i.e., non-insolvent world) is transacting entirely with US intermediation. And at that point, the US will be merely another Zimbabwe case study, where it can print all the money it wants to fund its deficit, and the only ones who care will be wheelbarrow manufacturers.

Volumes were above average today but well below yesterday's blockbuster as average trade size also pushed higher as we levitated in stocks (ignoring the afternoon rollover in credit markets - which closed at their lows of the day). ES (the e-mini S&P 500 futures contract) rallied (initially on 'expected' jobs data then a veiled QE-reference from the WSJ) to recover the wondrously mystical 38.2% of the last few days sell-off before limping slightly lower into the close. Financials wentr from worst (yesterday) to first (today) but oinly recovered a fraction of their losses as all sectors ended in the green today. Broadly speaking riskj assets drifted up with stocks (led by stocks) but closed in almost perfect CONTEXT by the end of the US day session as Treasuries limped begrudgingly higher in yield (though the curve flattened modestly), FX majors were relatively stable but JPY weakness pushed FX carry up supporting risk overall, and commodities leaked gently higher (outperforming USD's modest weakness on the day) as Silver and Oil outperformed on the day (with the latter back above $106). Gold limped back up to $1685 (juiced by the WSJ QE story) but Silver's high beta exuberance dominated that. Ahead of NFP and PSI the next 2 days it seems like little real rerisking occurred today and the fact that credit underperformed and implied correlation diverged from VIX tells us that under-the-covers, protection was more bid than embracing risk.

We know how AIG and MF ended, as of yet we don't know how LTRO will end. Lots of "carry" trades have worked out well, but when they don't, the result is pretty ugly. Now we are seeing margin calls from the ECB starting to occur and we noted yesterday that MtM losses will start to evolve in some of the carry trades as risk is unwound very recently - perhaps we are getting a sneak peek at the cause of the next vicious cycle crisis.

One look at the just released consumer credit data would make one believe that the US consumer is getting back into it and the velocity of money is finally starting to ramp up: after all the headline January number came at a whopping +$17.8 billion on expectations of +10.5 billion. Nothing could be further from the truth.  As the first chart below demonstrates, January revolving credit, as in that used on one's credit card, actually declined by $2.9 billion compared to December, and was back to $800.9 billion: the first decline in 4 months as consumers spend less following an already weak holiday season. Yet offsetting this was an absolutely massive surge in Non-revolving credit, i.e., mostly student debt, which soared by $20.7 billion in the month, the highest sequential jump in this category in history, leading to a very misleading print of a major increase in credit. For earlier observations on the soaring student loan bubble see here. And it gets worse: when spread by sources of credit, the only place where credit came from was the US government, which funded a near record $28 billion, all of it going into student loans, even as every other source of credit declined in the month! If this is not the most blatant gaming of headlines, we don't know what is. But yes, America's lucky students get ever deeper into debt slavery, only to realize upon graduation that there are no jobs that pay high enough to allow them to pay off this debt. Thank you uncle Sam - may we have another bubble.

An engineer, a biologist and an economist are washed ashore on a desert island. After a few days without food they are starving. Eventually, they stumble on a can of beans on the beach. They spend a few minutes considering how they might feed themselves. The engineer is the first to speak: "We could hit the can with a rock until it opens." The biologist counters, "We could suspend the can in a seawater solution and wait for erosion to work its magic." The economist is last to contribute: "Let's just assume we have a can-opener." OK, so it's not the funniest joke in the universe. But it has the ring of truth.

In their own inimitable manner, the two bears are back to take on gas prices. Dismissing the higher demand thesis, concerns of the lack of supply, instability in the Middle East, and of course speculators (the same ones who were blamed for financial stocks' deterioration), our favorite speakers-of-the-truth point to what is the only relevant factor - the falling dollar. The Bernank once again stars for his schizophrenic perspective of asset price rises. Enjoy.

Unfortunately it is not a EURUSD recommendation to be faded and generate 10 out of 10 anti-Stolper trades. However, the Goldman strategist, who has likely taken to following new FX glory boy Alex Hope, takes a look at recent strength (and weakness) in FX carry strategies and finds (rather correctly) that this strength seems driven by little more than a broader rally across risk assets in general. As we have been pointing out, the correlation across our CONTEXT basket (which includes FX carry) has been relatively high both up this year and down very recently, and Stolper discusses whether to fade or follow FX carry strategies and when they do and don't work. His unsurprising conclusion being that FX carry can only continue to rise if broad risk assets rise (and vice versa). Somewhat ironically he remains light on tactical recommendations, preferring to watch - nice way to earn a bonus if you can get it.