Developing China’s M2 money supply has been rising by a large 20% and Russia’s by a very large 30%. Even developed countries such as Switzerland have seen money supply growth of 25%. Japan’s M2 is gradually moving higher after the ‘Lost Decade’ and after recent events exacerbating an already fragile situation. Global money supply growth is increasing by 8%-9% per annum. Meanwhile annual gold production is less than 1.5% per annum. We looked at money supply growth and charts regarding global money supply, debt levels etc in a comprehensive article in early August (‘Is Gold a Bubble? 14 Charts, the Facts and the Data Suggest Not’ - http://www.goldcore.com/goldcore_blog/gold-bubble-14-charts-facts-and-da... ) when gold was trading at $1,670/oz or much the same price level as today. The charts and conclusions remain apposite. In order to fight economic problems brought about due to too much debt, debt based paper and electronic currency has been created at historically high levels. There is no sign of this abating any time soon given the scale of the global financial and economic crisis.
A quick look at the JPM earnings this morning would indicate all is well and that the company beat on the top and the bottom line: after all the company generated $23.76 billion in revenue on expectations of $23.26 and EPS of $1.02 relative to an expectation of $0.92. So far so good. The only problem is that unlike in previous quarter, when the primary driver of the bottom line was releasing reserves, this quarter, when everything blew out and blew up, that would have been seen as massively disingenuous, even by such permaclown as Dick Bove (which nonetheless did not stop the bank regardless, and JPM did take a $170 million reserve release, granted less than the $1.2 billion in Q2). So what does JPM do? Why it pulls the "Fair Value Option" card, discussed recently in the context of Morgan Stanley when we speculated whether the bank's biggest asset was their debt. Turns out we had the concept right, but the bank wrong, because $0.29 of EPS Net Income, or $1.9 billion pretax, was a "benefit from debit valuation adjustment (“DVA”) gains in the Investment Bank, resulting from widening of the Firm’s credit spreads." That's right: the fact that JPM spreads blew out in the quarter, and its default risk soared, for one reason or another actually served to "generate" not only net income but also revenue! And now you see why American banks can never lose - in a good quarter, they release reserves; in a bad quarter they take FVO benefits in the form of Debit Valuation Adjustments, or in this case both! Winner, winner, always a chicken dinner for Jamie Dimon. Expect every other bank to do the same accounting BS this quarter to pad their numbers.
The People's Bank of China set the yuan's central parity rate against the U.S. dollar at 6.3737 on Thursday, a second sequential major drop and down from Wednesday's 6.3598. This follows a weakened fixing of 6.3598 on Wednesday, down from the record high fixing of 6.3483 on Tuesday, just before the Senate decided to launch the first salvo in the Sino-US trade wars. Surely news of the collapse in Chinese exports will merely reinforce the theme that the USDCNY is in sudden need of devaluation and be a loud slap in the face of the Senate which will now come face to face with its utter worthlessness. In Hong Kong, the offshore yuan spot rate was fixed at 6.4407 against the greenback on Thursday, compared with Wednesday's 6.4923. The fixing is based on an average of bids from 15 participating banks and is calculated by the Treasury Markets Association, a Hong Kong-based industry group. We are hardly the only ones who noticed the escalation in spot USDCNY wars by the PBOC, which now appears hell bent on showing the US its peg can go lower in addition to higher (inflationary consequences be damned) - from the WSJ: "The yuan fell sharply against the U.S. dollar in early Thursday trade, after the Chinese central bank surprised the market by guiding its currency weaker for the second consecutive day despite the dollar's global weakness." So even as the USD is plunging against the hope-driven Euro, which has soared 600 pips in the past week on nothing, the USD is now jumping against the CNY for no other reason than mere demagogic policy. And this environment in which central bank decisions are all that matter is the one in which traders hope to make a living based on rational market decisions (as otherwise one can flip a coin in Vegas)? Good luck.
- The Greek January – September budget deficit was EUR 19.16bn versus 16.65bn same period last year (+15%). This only includes the central government.
- The initial deficit target for 2011 was EUR 17bn. We blew past that after only 8 months. The revised target (July) is now 22bn (9.5% of GDP).
- Latest estimate from the Greek government: 8.5% deficit (19.5bn) for 2011 (instead of 7.6% or 17bn).
- While 2011 revenues are trending below 2010, expenses are trending higher.
- Despite all the austerity measures, Greece is still spending 150% of its revenues.
- Of course, the Ministry of Finance sees a reduction of the deficit to a miniscule 2.6% of GDP by 2014 as revenues rise and expenses come down.
- How is that possible? Somehow, after spending four consecutive years in recession (2009-2012), the economy will rise like a phoenix and grow by 5.8% in 2014.
Last month, now-retired Chairman of the Joint Chiefs of Staff Admiral Mike Mullen testified to a U.S. Senate panel that Pakistan’s Inter-services Intelligence Agency backed the terrorist group Haqqani in its attack on the U.S. embassy in Kabul, Afghanistan. Never heard of Haqqani? Don’t worry, you probably never heard of Al-Qaeda prior to 9/11 either. According to Mullen, “the Haqqani network…acts as a veritable arm of Pakistan’s Inter-Services Intelligence Agency.” The Haqqani network was founded and is lead by the newly dubbed public enemy No. 1; Jalaluddin Haqqani.
America, meet your new boogeyman.
For the Van Hoisington fans out there, his latest quarterly letter is short and sweet, and as often happens, rather realistic. The long bond afficionado cuts to the chase: he says the economy “is worse off today than it was prior to the onset of the previous recession" and predicts that "negative economic growth will probably be registered in the U.S. during the fourth quarter of 2011, and in subsequent quarters in 2012." Incidentally this matches our call, and we expect that when Q4 GDP is re-revised some time in April it will have been found to be a decline. As for the reasons: "Though partially caused by monetary and fiscal actions and excessive indebtedness, this contraction has been further aggravated by three current cyclical developments: a) declining productivity, b) elevated inventory investment, and c) contracting real wage income."
Without a doubt one common similarity between the current market and the fall of 2008 is heightened investor emotions. There are plenty of other similarities from bank nationalizations, a deteriorating global economy and government intervention. There were wild swings and volatility that whipsawed traders out of positions and saw paper profits appear and disappear in very short order. Traders then as they are today were simply exhausted and decisions were more influenced by emotions than macro data, technical analysis or convictions. I strongly believe in Jesse Livermore's theory about human emotion forming patterns and since humans never change patterns will often repeat. I've been trying to find a pattern that compares to the current market. A roadmap if you will of how this emotional roller coaster finally plays out. I think I may have found it. Below are two charts. The first shows a rounded top pattern that appeared twice in the fall of 2008. The next chart shows the current markets (SPY 60 day 4 hour chart) versus the fall 2008 (SPY daily chart). There are six points of reference, five are tops Point A, B, C, D and E and one bottom Point F. In both cases the behavior of all six points are identical.
Buffett Discloses $62,855,038 In 2010 Gross Income, $39,814,784 In Taxable Income, And $6,923,494 In Federal TaxesSubmitted by Tyler Durden on 10/12/2011 - 16:57
Following a back and forth between Kansas Congressman Tim Huelskamp, we have now discovered what, according to Buffett, were the precise amounts of the Octogenarian Crony Capitalist of Omaha's 2010 gross income, taxable income and Federal tax respectively. These are as follows: $62,855,038, $39,814,784 and 6,923,494. This, apparently, was not enough for Huelskamp. The debate continues below.
Market Slumps After European Banks Admit They Can't/Won't Raise Capital; Will Proceed With Asset Liquidations InsteadSubmitted by Tyler Durden on 10/12/2011 - 16:29
It was about an hour before the market close, which means it was time for the latest FT rumor. Only this time, unlike the 3 or so times before, the bazooka was not only a dud, it caused the inverse reaction of that intended, and led to a broad market selloff. The reason: according to the FT (and certainly take this with a salt shaker if previous experience is any indication) is that European banks have balked at the prospect of recapitalizing at current levels ("Why should we raise capital at these [depressed share price] levels?” said one eurozone bank boss. The average European bank’s equity is trading at only about 60 per cent of its book value.) and instead will opt for asset liquidations. Now, whether they won't, or, as we have claimed since the first day we heard of the ludicrous "recap" rumors, they can't, simply because absent a massively dilutive rights offering, nobody in their right mind would lend to an industry which continues to be locked out of short-term funding markets for the 4th month in a row, is largely irrelevant. As a result no new money can come in: a key prerequisite to any European recapitalization plans. Of course, it is one for a "blog" to say that, it is something else for the FT to confirm it, even if it is a rumor. So what will banks do instead: why proceed with all out asset liquidation, and sell anything that is not nailed down. The strawman is that this is capital needed to fund the banks' requirements for higher capital ratios per Basel III and what not. The truth is that banks desperately need any capital just to operate as a going concern, forget some Basel Tier 1 ratio that will only be relevant in 2016. So yes: the bitter truth comes out - recap out; liquidations in, especially of USD-denominated assets. Next step: the realization that he who sells first, sells best. So yes, the "hope, idiocy and #mathfail" induced rally was fun while it lasted. And now it is back to reality.
Yes, outflows in domestic equities may be traditionally perceived as a contrarian signal, but when they hit 23 out of 24 weeks for a total of $106 billion (and the one weekly inflow was $715 million) one has to start getting concerned about the cash levels of the broader mutual fund space which as had been pointed out recently are already at all time lows. In the week ended October 5, domestic equity funds saw an outflow of $4.3 billion, which brings total 2011 outflows to a total of $93 billion. What was just as notable about the week is that while traditionally we have seen rotation from equity assets into fixed income, in the past week a whopping $6.2 billion was withdrawn from taxable bond funds as well, implying that the ever increasing volatility not only means retail has thrown in the towel on stocks but that the already painfully low yields in bonds are forcing the long-term investors to get out of the market in its entirety.
There are few opinions in the middle regarding the China story. People are either convinced China is a juggernaut that can’t be stopped and will become the dominant world power (a recent, global Pew Poll found that 47% of respondents think China is or will be the dominant global power), or they see a colossal bubble that will burst and cause worldwide mayhem. While some might think my world-view has a negative slant, I tend toward what I think is healthy skepticism that causes me to view things in a more realistic manner. Based on the facts as I understand them, the Chinese government has created a commercial and residential real estate bubble in an effort to keep peasants employed and not rioting in the streets. In the case of the US subprime mortgage bubble, critical thinkers like Steve Eisman and Michael Burry figured out it was a bubble three years before it burst. Jim Chanos and Andy Xei have been warning about this Chinese bubble for over a year. They have been scorned by the same Wall Street shills who denied the US housing bubble. As Eisman and Burry proved (reaping billions), just because you are early doesn’t mean you are wrong.
In a piece of news that can not be taken well by students of Dr. Copper, the FT reveals for the first time that China's estimated copper inventories, based on numbers from the China Non-Ferrous Metals Industry Association, were 1.9 million tonnes at the end of 2010 which is almost double the lower end of the consensus estimate of 1.0-1.5 MM tonnes (and, as the FT points out, "more than the US consumes in a year). So while copper is doing its high beta thing on the nth short squeeze day in stocks, the smart money is starting to bail for very obvious reasons. And if the reasons are not obvious, this means that "The estimates, which were announced at a recent meeting of the International Copper Study Group but have not been made public, imply that real Chinese copper demand may have been lower than thought in recent years." In other words, and to all who are still confused by why Zero Hedge jokes at each and every iteration of economic growth driven by "inventory stockpiling", this is nothing other than trying to do at the national level, what Goldman and JPM do at the LME level each and every day: hoard and sell, only in China's case it is more hoard and forget. Alas, when China itself is the only real marginal buyer (not to mention that millions of domestic businesses operate using Letters of Credit backed by copper), things get very, very ugly, and explains why China has been so secretive about this number.