• Sprott Money
    01/26/2015 - 08:30
    Making New Year “predictions” used to be an automatic, beginning-of-the-year exercise, to the point where readers generally expected such pieces from the pundits they follow. However, it is an...

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Mark Spitznagel On The Value Of Tail-Hedged Equities

Due to the principal-agent problem in the asset management industry, most money managers rationally have a propensity to use a negatively skewed payoff distribution. This kind of behavior, in aggregate, is also evidenced in the historical data, which shows significant losses for professional investors during the largest market downturns. Most investors and asset allocators, in addition to these negatively skewed positions, further view the returns of hedging strategies in a vacuum, rather than as a holistic part of their broader portfolio. Thus, they are likely to consider portfolio hedging programs to be a drag on their performance numbers and further undervalue them. We believe these factors, among others, contribute to a market segmentation that creates an undervaluation in tail-risk hedges.



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RANsquawk - Weekly Wrap - 23rd January 2015



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No More "Dog Dung Vacuums" As SkyMall Files For Bankruptcy

In what will likely end the hopes and dreams of many air travellers hoping to pick up the latest crystal-encrusted iphone cufflinks, upright sleeper, hiccup stick, or dog dung vacuum; Commercial Bankruptcy Investor reports that the companies behind the SkyMall catalogs has filed for Chapter 11 bankruptcy protection. This news comes as Xhibit - SkyMall's parent company - sees its stock price collapse and December's news that Southwest Airlines (which accounted for at least 7% of SkyMall's sales) would no longer distribute the catalogs. On the bright side, any liquidation is great for those looking to pick up a Diamond Jubilee Queen and Corgi statuette or a Doll-House styled cat litter...



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The Lunatics Are Running the Asylum: Draghi’s Money Printing Bazooka

There is no reason to assume that this time will be different. These boom-bust sequences will continue until the economy is structurally undermined to such an extent that monetary intervention cannot even create the illusory prosperity of a capital-consuming boom anymore. The bankers applauding Draghi’s actions today will come to rue them tomorrow.



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US Rig Count Craters To Lowest Since August 2010

With oil prices down another 6% this week (despite Saudi leadership uncertainty and ECB QE), widespread layoffs announced in Shale states, and despite Lew's comments that he doesn't see US oil production declining, it is perhaps no surprise that the US rig count cratered further to its lowest level since August 2010. The US rig count is now down over 15% from the highs, with its biggest 10-week drop since May 2009 (and down 8% YoY). The pace of collapse in the rig count has now accelerated for 7 weeks in a row, and judging by lagged oil prices, there is a lot more room to drop yet. The oil rig count standalone is now down 7% YoY - its biggest drop sicne Nov 2009. As T.Boone Pickens so rightly noted, watch the US rig count (and suggested it will need to drop 500 rigs or more before any stability returns).



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How The Swiss National Bank Almost Crushed George Soros

Minutes after last week's Swiss National Bank shocker, jokingly we mused: "Will be ironic if Soros was long EURCHF." As it turns out, we were almost correct, and according to the WSJ, Soros Fund Management, which manages more than $25 billion for investor George Soros, was betting against the Swiss franc in the fall before it removed those bearish positions.  Why did the Soros so conveniently take off a bet which, with leverage, could have resulted in massive losses for his hedge fund? The WSJ says he did so after "viewing the risk as too high relative to potential gains, said people close to the matter." Well as long as "people close" think Soros did not have input directly from the Swiss central bank, or perhaps the occasional hint from Kashya Hildebrand, then one can't help but marvel at the octogenarian's impeccable timing.



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Our Money Is On This Guy

If we had to put all our money on one trader, just one individual trader, we would do it without hesitation. The recipient? This guy.



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Did Treasury Secretary Lew Just Call Draghi A Currency Manipulator?

Having already put his foot in his mouth about the US oil production industry, it appears Treasury Secretary Lew has done it again:

*LEW SAYS UNFAIR FX MOVES TO DRAW SCRUTINY FROM U.S.

His barbed comment can only be pointed at Draghi and his crush-the-Euro at all costs plan. But ironically, while he is 'scrutinizing' Europe's collapsing currency he opines that "a stronger dollar is good for America" - despite Europe proclaiming the exact opposite is good for them and seeming to miss the report after report blaming weak earnings on currency moves.



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Russell Napier: "Central Banks Are Now Powerless To Prevent A Steep Rise In Real Rates"

Central bank policy is creating liquidity.  Wrong --- the growth in broad money is slowing across the world.
Central bank policy is allowing a frictionless de-gearing.
Wrong --- debt to GDP levels of almost every country in the world are rising.
Central bank policy is creating inflation.   Wrong --- inflation in most jurisdictions is now back to, or below, the levels recorded in late 2009.
Central bank policy is fixing key exchange rates and securing growth.  Wrong --- in numerous jurisdictions this exchange rate intervention is slowing the growth in liquidity and thus the growth in the economy.
Central bank policy is keeping real interest rates low and stimulating demand. Wrong --- the decline in inflation from peak levels in 2011 means that real rates of interest are rising.
Central bank policy is driving up asset prices and creating a positive wealth impact which is bolstering consumption. Wrong --- savings rates have not declined materially.
Central bank policy is creating greater financial stability. Wrong --- whatever positives impact central banks are having on bank capital etc they have failed to prevent the biggest emerging market debt boom in history.



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3 Things - The Fed, Rig Counts And Employment, ECB

The real concern for investors and individuals is the actual economy. There is clearly something amiss within the economic landscape, and the ongoing decline of inflationary pressures longer term is likely telling us just that. The big question for the Fed is how to get themselves out of the potential trap they have gotten themselves into without cratering the economy, and the financial markets, in the process. It is my expectation, unless these deflationary trends reverse course in very short order, the Fed will likely postpone raising interest rates until at least the end of the year if not potentially longer.  However, the Fed understands clearly that we are closer to the next economic recession than not and that they can not be caught with rates at the "zero bound" when that occurs.



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30 Hours After Unleashing ECB QE, Coeure Suggests QE2

With US equities down 0.5% this morning and European inflation expectations having given back all their ECB QE gains, it was only a matter of time before some half-witted central-planner felt the need to speak...

*COEURE SAYS IF QE IMPACT ISN'T ENOUGH, "WE'LL HAVE TO DO MORE"
*COEURE SAYS ECB WILL ASSESS IF QE MUST GO BEYOND SEPTEMBER 2016

Sure enough - just as The BIS warned "the markets' buoyancy hinges on central banks' every word and deed," stocks picked back up on his comments.



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Has The ECB QE Already Failed? 5 Year Inflation Expectations Decline Since Draghi's Announcement

Just as we pointed out explicitly yesterday, ECBQE will 'not' provide the inflation-expectation-lifting hope that every talking head proclaims as its raison d'etre... just as FedQE did not. We noted previously that Draghi's actions would likely send the most deflationary signal ever to the world's policymakers, and sure enough European 5Y5Y inflation expectations have dropped 10bps from yesterday's highs and round-tripped to the levels seen before Draghi unleashed the money printing machine.



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$43 Hot Dogs; $47 Burgers And $55 Caesar Salads: A Look At The Davos Menu

Billionaires may live in a world untroubled by such petty concerns as rising costs of living and declining real wages, but like everyone else they have to eat. And pay. The picture below shows what the menu prices, in Swiss Francs, are for various meals offered for sale to the billionaires and other upper class "luminaries" currently congregating in Davos.  Some examples converted to USD: Hot Dog: $43; Burger: $47; Caesar salad: $55.



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Gold & Silver Suddenly Shellacked

Because nothing says sell precious metals in huge size like another central bank printing a trillion dollars... No apparent catalyst is clear though we note Treasury yields also started to tumble and EURCHF jumped 60 pips at the same time.



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Existing Home Sales Drop Year-Over-Year For First Time Since 2010

Despite surges in mortgage applications juxtaposed with notably downbeat commentary from KB Home and Lennar, existing home sales rose modestly in December (+2.4%) but missed expectations for the 2nd month in a row (+3.0%) for a SAAR of 5.04mm sales. Only the Southern region saw sales improve. However, for all of 2014, there were 4.93 million sales, a 3.1% decline from 2013 (5.09 million) - the first drop since 2010. This should be no surprise as NAR finally admits the problem (instead of blaming weather) - “Housing costs – both rents and home prices – continue to outpace wages and are burdensome for potential buyers trying to save for a downpayment while looking for available homes in their price range.” It's the price, stupid!



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