Archive - Sep 23, 2013 - Story

Back in October of 2012, Hugh Hendry proposed a very simple investment thesis: '"I am long gold and I am short gold mining equities. There is no rationale for owning gold mining equities. It is as close as you get to insanity. The risk premium goes up when the gold price goes up. Societies are more envious of your gold at $3000 than at $300. And there is no valuation argument that protects you against the risk of confiscation. And if you are bullish gold why don’t you buy gold ETFs, gold futures or gold bullion." Since then, anyone who listened to Hendry has made a substantial double digit return (yes, one can make double digits returns on gold even when gold is sliding: such is the "magic" of long gold, short GDX pair trades). However, following a massive, 50%+ selloff, there comes a time when even gold miner stocks become attractive to those with deep pockets filled with reserve fiat. For someone like China, that time may be now. The WSJ reports that China's largest gold company, China National Gold Group Corp., has talked to Ivanhoe Mines "about buying a stake in or asset from the company."

Only a few years back, the majority of people were saying that the dollar was as good as gold. Today, even those who insist that fiat currencies are not only safe, but the only means by which commerce can reasonably occur, are admitting that they are getting a bit nervous regarding the assurance that their own currency will not be either somehow confiscated or grossly devaluated. But there is a new currency arising - Bitcoin - and it promises, like banknotes before it, to solve all the problems of currencies. Just as paper gold is proving not to truly exist, except as a promise by financial institutions, and fiat currencies are also teetering on the edge, there is every reason to believe that the latest in “theoretical” currencies may disappear at some point in the future. However, as they have throughout millennia, precious metals will continue to shine in all corners of the globe.

After a surprisingly manic election night the focus in Germany now shifts to the tricky task of forming a government. As Open Europe explains, many options remain possible. Merkel looks unlikely to gain a majority on her own while the FDP and AfD are certainly out of the Bundestag. This leaves a Grand Coalition, a CDU/CSU and Greens coalition or (as a very, very longshot) some form of SPD-Greens-Die Linke (Red-Red-Green) coalition or alliance which could still mathematically have a majority. Little progress is expected before the end of the week, with the SPD holding a small party conference on Friday where it will determine its strategy for the negotiations. SPD Chancellor Candidate Peer Steinbrück has already said that the “ball is now in Merkel’s court”, suggesting he expects her to propose the terms of any Grand Coalition. Meanwhile, Greens leader Jürgen Trittin has said that, while open to negotiations over a coalition with Merkel, the chances of finding an agreement are “extremely limited”.

With WTI crude oil prices hovering at record levels for this time of year, the spread to Brent crude has bounced from zero as Syria started up to around $4.50. At the time time we noted the plunge in the spread was as much related to US infrastructure and technical issues as the war premium and now Pierre Andurand, manager of one of this year's most successful commodity hedge funds, believes US crude will trade at a premium to the Brent benchmark within weeks, counter to the expectations of many in the market. As The FT reports, the ex-Goldman trader is known for taking bold positions, and while not commenting in specific trades, he noted "In order for Cushing inventories to stop drawing and start building, I think WTI [the US benchmark] should be at a premium to Brent [the global benchmark]," within weeks.

Och-Ziff were perhaps a little early but used the last 10 months to unwind their real estate and exit the landlord business as the hedge-fund sponsored echo-bubble in housing rolled over into the mainstream. "American-Homes-4-Rent"'s IPO suggested a scramble to exit. With 60% of home purchases now being cash-only (explains the ongoing and massive layoffs in the mortgage business not just due to rate-driven weakening of demand), it is therefore a concern when one of the biggest funds playing in this space - OakTree Capital - announces plan to exit the buy-to-rent trade - selling roughly 500 fully-leased homes. As Reuters notes, it is yet another indication that early investors are looking to cash-out on the "recovery" in U.S. housing prices. Who will be left holding the bag this time?

There is a reason why every fiat currency in the history of the world has eventually failed. At some point, those issuing fiat currencies always find themselves giving in to the temptation to wildly print more money. Today, the Fed finds itself faced with a scenario that is very similar to what the Weimar Republic was facing nearly 100 years ago. Like then, the U.S. economy is struggling and like the Weimar Republic, the U.S. government is absolutely drowning in debt.  Unfortunately, the Fed has decided to adopt the same solution that the Weimar Republic chose. The Fed is recklessly printing money out of thin air, and in the short-term some 'positive things' have come out of it. But quantitative easing worked for the Weimar Republic for a little while too.

The younger generation will ask of us, "what were you thinking?"

Somehow I caught the bug that "I am not really worth very much unless I have something more."

"I'm not going to sit on my laurels and say I was an executive making six figures and traveling the world,” 77-year-old Tom Palome says, "I tell people I demonstrate food and I do short-order cooking. I don’t mind saying it. What's important is that I can work today." As Bloomberg reports, the former vice president of marketing for Oral-B juggles two part-time jobs: one as a $10-an-hour food demonstrator at Sam’s Club, the other flipping burgers and serving drinks at a golf club grill for slightly more than minimum wage; a sad but all too real reflection of the new normal 'job' gains that our economists and politicians love to crow about. Why is he still working? Like most Americans, he didn't save enough for retirement (despite working hard his entire career). About 7.2 million Americans over 65 were employed last year, a 67% increase from a decade ago as 59% of households headed by people over 65 have no retirement assets.

As Wall Street, CNBC, and feckless politicians tout American energy independence from the miracle of shale oil, reality is already rearing its ugly head. Production grew by 24% over the first six months of 2012. Production has grown by only 7% over the first six months of 2013. That is a dramatic slowdown. The fact is that these wells deplete at an extremely rapid rate. Oil companies will always seek out the easiest to access oil first. They have already accessed the easy stuff. This explains the dramatic slowdown. Peak Bakken oil production will be below 1 million barrels per day. The last time we checked, we consumed 18 million barrels per day. We wonder when that energy independence will be achieved?

With some politicians arguing private prisons help states save money and other politicians arguing the system is rife with corruption, there can be no debate about this basic fact: The private prison system has surged in size since the U.S. began experimenting with private prisons in 1984. Between 1990 and 2009, the inmate population housed in private prisons grew by more than 1,600 percent. As the following infographic suggests the trends are not your friend in this case.

The hullabaloo over the Fed’s communications should be the least of our concerns. It’s outranked by actual policies, which seem to be once again destabilizing markets, encouraging reckless behaviors, perpetuating global imbalances and enriching the parasitic practitioners of so-called financial innovation at the expense of the middle class. On the other hand, Chairman Bernanke claims that clear communications are a key part of his approach, forward guidance being one example of how he manipulates the economy by telling us what to expect. And yet, it sure seems like the more he and his colleagues talk, the less we know about what they’ll do next. In light of this, the best explanation for the Fed’s surprising untaper last week appears to be from Vince Reinhart’s musings and inside information about the Fed. He offers a short but interesting history on the FOMC’s attempts to increase transparency, and then goes on to share some thoughts on how the decision making has evolved and why it tends to confuse us.

Four years after it filed for Chapter 11 bankruptcy protection, and was purchased from the depths of bankruptcy court hell by Fiat S.p.A., the circle (jerk) is complete, and thanks to lead underwriter JPM, the second coming of Chrysler, this time for sale to a whole new batch of gullible ROI chasers, is now a fact with the S-1 statement filing moments ago, in which the only cash transfer will be from the VEBA Trust to new shareholders and no new cash will go to the actual company. In other words, the UAW is selling to the general public.

UPDATE: Kenyan interior ministry tweets that authorities are in control of Westgate mall

As the dreadful Nairobi Mall attack/siege enters its third night with at least 69 dead, the Kenyan foreign minister has clarified one point:

BREAKING: Kenyan foreign minister tells Al Jazeera Nairobi mall attack the work of al-Qaeda, not al-Shabab

— Jared Keller (@jaredbkeller) September 23, 2013

Despite earlier reported condemnations from Al-Qaeda and an assumption that Al-Shabaab (who claimed responsibility), it appears the terrorists who just lost their Syria/Iraq leader are responsible.

Despite the best efforts to squeeze shorts from the European close (end of POMO), the afternoon session punctuated by Fed's Fisher notable comments pushed stocks back lower with the S&P joining the Dow in the all-FOMC-gains-gone club. Financials and Materials  (-1.5% from FOMC) are the worst performers since Bernanke did not say "Taper" and while stocks have given it all back, bonds remain at their highs (in price) and lows (in yield) from that un-announcement. Treasury yields dropped 2-3bps more today (still down 15-20bps depending on maturity) as growth hopes fade. JPY strength was trumped by EUR weakness today which pushed the USD higher from overnight opening lows (from China PMI and Merkel) but by the close the USD was unch. Gold and silver were holding positive until Fisher's comments and they slid to -0.5% or so. WTI dropped 1.2% to $103.50. The S&P had its 3rd down day in a row for the first time in 5 weeks (as momo names join the financials among the leaders lagging).