Archive - May 28, 2013 - Story

The following chart represents the all-time record-low household confidence of a European nation (which, in the last month, fell at the second fastest rate in 20 years). This nation's equity market is near pre-crisis highs having rallied over 37% in the last 11 months. This nation's bond market risk is near post-crisis lows with its spread having halved in the last year. Name this Nation whose households have never been more depressed, economically speaking...

What states were the primary drivers of the 2006 housing bubble, at least right before the "subprime is contained" pop that is? Those who said Phoenix, California and Nevada you are in the right direction. We bring it up because according to the just released Case-Shiller data for March, these three same states, indicated by the representative MSAs of Phoenix, San Francisco and Las Vegas, are once again heading the charge in the latest bubble fed by Bernanke's cheap credit. What do they have in common: they were the three to post a greater than 20% increase in home prices compared to last year. Where was Detroit? Sadly it just barely missed the cut off with a far less bubbly 18% increase in home prices.

"Gold premiums have tumbled in India and Hong Kong, signaling that the buying frenzy that followed bullion’s biggest slump in three decades last month has weakened in the largest consumers." - Bloomberg

"With the drop in gold prices, jewellery stores are reporting a heavy demand for gold coins in Hyderabad. In fact, many say that gold coin denominations of 2, 5 and 10 grams have fast dwindled ever since prices of gold came down globally. The huge demand has triggered such a mad rush for gold coins that jewellers in Abids' said they were asking customers to come back later." - Times of India

Spanish and Italian stocks are up 3% this week, European sovereign bond spreads are compressing like there's no tomorrow, and Europe's VIX is dropping rapidly. Why? Aside from being a 'Tuesday, we suspect two reasons. First, Hungary's decision to cut rates this morning is the 15th central bank rate cut in May so far which appears to be providing a very visible hand lift to risk assets globally (especially the most junky)' and second, Spain's deficit missed expectations this morning (surprise), worsening still from 2012 and looking set for a significant miss versus both EU expectations (and the phantasm of EU Treaty requirements). As the following chart shows, Spain is not Greece, it is considerably worse, and the worse it gets the closer the market believes we get to Draghi firing his albeit somewhat impotent OMT bazooka and reversing the ECB's balance sheet drag. Of course, direct monetization is all but present via the ECB collateral route and now the chatter is that ABS will see haircuts slashed to keep the spice flowing. What could possibly go wrong?

The Belgian Central Bank said yesterday that about 25 tons of the European nation’s gold reserves have been lent to bullion banks according to Bloomberg. Nearly 10% or about 25 metric tons of the National Bank of Belgium’s remaining 227.5 tons of gold reserves are currently lent to bullion banks, Director and Treasurer Jean Hilgers told the central bank’s annual meeting in Brussels. The proportion of gold reserves on loan declined from 84.3 tons on December 31, 2011, and averaged 48.1 tons in 2012 as loans matured and some gold loans were reimbursed early. Hilgers said that the Belgian central bank sees gold lending decreasing further this year. During the 1990’s, Belgium sold some 1,000 tons of gold into the market - more than three quarters of its remaining holdings. The Belgian gold reserves, which had already seen sizeable liquidation in late 1978, fell from 33.7 million ounces on 12/31/88, to just 5.7 million ounces on 03/31/98, or a fall of 83% in less than 10 year.

How does the future look? The following several charts should summarize it quickly and painlessly.

It doesn't take an Econ Ph.D to realize that what Japan is trying to do: which is to recreate the US monetary experiment of the past four years, which has had rising stocks and bonds at the same time, the first due to the Fed's endless monetary injections (and pent up inflation expectations) and the second due to quality collateral mismatch and scarcity and shadow bank system funding via reserve currency "deposit-like" instruments such as TSYs, is a problem. After all, those who understand that the BOJ is merely taking hints from the Fed all along the way, have been warning about just that, and also warning that once the dam breaks, and if (or when) there is a massive rotation out of bonds into stocks, it is the Japanese banks - levered to the gills with trillions of JGBs - that will crack first. Apparently, this elementary finance 101 logic has finally trickled down to the BOJ, whose minutes over the weekend revealed that members are pointing out "contradictions" in the Kuroda-stated intent of doubling the monetary base in two years, unleashing inflation, sending the stock market soaring, all the while pressuring bondholders to not sell their bonds. As the FT reports, "According to the minutes of the April 26 policy meeting, released on Monday, a “few” board members said the BoJ’s original stance “might initially have been perceived by market participants as contradictory”, causing “fluctuations in financial markets”.

• ‘Cov-lite’ loans soar in dash for yield (FT)
• Cambodian police clash with thousands of garment workers, 23 hurt (Reuters)
• Obama Accepting Sequestration as Deficit Shrinks (BBG)
• Having done nothing to restore confidence in a fragmented market, the SEC turns back to main street fraud (WSJ)
• Europe's austerity-to-growth shift largely semantic (Reuters)
• Germany thwarts EU in China solar fight (FT)
• In EU-China dispute, Beijing warns of trade  (FT)
• U.S. Oil Boom Divides OPEC (WSJ)
• Record Cash Sent to Balanced Funds (BBG)
• Hilsenrath: Fed Wrestles With Market Expectations About Pace of QE (WSJ)
• Worse-Than-Cyprus Debt Load Means Caribbean Defaults to Moody’s (BBG)
• States Raise College Budgets After Years of Deep Cuts (WSJ)
• U.K. Banks Cut 189,000 With Employment at Nine-Year Low (BBG)

First, the important news: in a few hours the Fed will inject between $1.25-$1.75 billion into the stock market. More importantly, it is a Tuesday, which means that in order to not disturb a very technical pattern that will have held for 20 out of 20 Tuesdays in a row, the Dow Jones will close higher. Judging by the futures, this has been telegraphed far and wide: it is a Ben Bernanke risk-managed market, and everyone is a momentum monkey in it. In less relevant news, the underlying catalyst for the overnight rip higher in risk was the surge in the USDJPY, which left the gate at precisely Japan open time, and after languishing at the round number 101 support for several days, did not look back facilitated by what rumors said was a direct BOJ intervention via a Price Keeping Operation in which banks bought ETFs directly. This was catalyzed by the usual barrage of BOJ and FinMin individuals engaging in post-crash damage control and chattering from the usual script.