As expected... and this is just the beginning. More tomorrow.
Just like QE is nothing new in the monetary arena, and has seen some incarnation at least since the early 80's primarily in Japan, so parabolic commodity price surges have occurred periodically, most notably in 1980, when Bunker Hunt brought the price of silver to over $50. However, unlike any time before, never in the history of the world have we seen a coordinated worldwide monetary stimulus via relentless credit money "printing" courtesy of global central banks. In that regard, this time really is different, as there is no other remaining backstop to the world financial system: the global banking cartel has used up all its bullets and now can only double down in the most nightmarish Martingale system ever conceived, where each iteration means further fiat absolute value destruction (on a relative basis it simply means a race to the currency bottom, whereby definition only one can be in the lead at any given moment: usually the one with the biggest printing press, and greatest deflationary threat). And while many still believe that QE2 will be the last of domestic US monetary easing episodes, as Bill Gross noted earlier, it is very possible that the US may be headed into a triple-dip recession, for which the only prescription will be another QE round (with political gridlock in DC at unseen levels no fiscal stimulus is even remotely possible). If this happens, precious metals will once again surge. The only question is what will the exchanges do after the next gold and silver spike? Indeed, as we suggest, margin hikes are just the beginning. For a complete playbook of how the CME may proceed after the margin hike approach fails, we once again go back to the curious case of Bunker Hunt. Below, from the Playbook biopic of the Texas billionaire we posted yesterday, we present the walk through of how the CBOT, Comex and CFTC tried to break silver's back. Back in 1980 they succeeded. Have they, and will they succeed this time?
Just as expected:
- EU'S JUNCKER SAYS `STUPID' TO TALK OF GREECE EURO EXIT
- EU'S JUNCKER SAYS `NO WAY' GREECE WILL LEAVE EURO AREA
- EU MINISTERS TO DISCUSS NEW `ADJUSTMENT PROGRAM' FOR GREECE
But yes, the EURUSD will open at 1.43 on Monday, not 1.45. FX ping pong game mission accomplished.
And meanwhile, the repulsion to silver as exhibited by both the Comex (where as we predicted yesterday we see the first 32MM ounce handle in registered silver - a new record low), and Scotia Mocatta indicates that the silver paper and physical markets are in perfect unison. Or not. But yes, the feedback loop mechanism of SLV unwinds will likely have a greater impact on the paper market until such time as it once again reverses and aligns paper and physical interests yet again.
Looks like this one time the Greeks may actually be telling the truth. But who cares: by Monday, when every nation in the eurozone will be right where it was on Friday, the EURUSD will be 200 pips lower. Mission accomplished. Although unlike in 2010, we are absolutely certain no investigation will ever be launched to discover who instigated this EUR hit piece which just end up benefitting both Greece, German and... the eurozone. And yet, should it be uncovered one day that none other than Greece initiated this process to weaken the euro we would be almost as surprised as learning that Greek banks had bought CDS on Greek debt.
Had enough of neverending BLS inflation data manipulation? You may be in luck. Hot on the heels of the MIT Billion Prices Project (which we were delighted to see recently came back on line), there now is... PriceStats, potentially the most revolutionary concept to come to the fielf of econometrics, and thus fiscal and monetary policy in ages.
Earlier today the Fed announced that consumer credit increased by $6 billion in March, $1 billion greater than expectations, with seasonally adjusted revolving credit increasing by $1.9 billion, only the second time it has grown in the past 31 months (as shown below). Non-revolving credit also increased by $4.1 billion, both number to be trumpeted in the mainstream media, as it means that in March US consumers we using the credit cards once again to lever up. Yet two things that will not be discussed is that non-seasonally adjusted credit declined for the third month in a row to $2,407.5, an $8.9 billion drop M/M, following a $16.5 billion drop in February. But probably more importantly, the question of where all this credit comes from is once again perhaps best answered graphically: second chart below. As usual, thank you Uncle Sam... Which simply means that no banks wish to lend yet again. And yes, the government is and continues to be the only major source of credit (primarily for student and car loans).
And once again, those seeking a reason why the EURUSD has plunged 600 pips in two days need look no further than this chart. As of Tuesday, per the CFTC net non-commercial long contracts in EUR rose to 99,516, a massive 45% rise in one week and by far the highest in years, following Bernanke's dovish statements from last week, all of which were wrong footed yesterday when Trichet announced no rate hikes for a while, just as Zero Hedge anticipated courtesy of a global economic downturn. As a result of this surge in exposure, we have seen a one way trade as the specs exit the trade en masse. And while the DXY has seen some move higher, the primary reason why its has not surged faster yet is that over the past 5 weeks USD shorts have covered. And just as notable, net Yen short positions declined in half, from -37k to -18.8k. This mean that the G7 will soon have to intervene all over again to keep the Japanese currency weak.
Once again Goldman confirms that its sellside analysts either bat 1.000 or 0.000. While Themistoklis Fiotakis' view, which we published yesterday, warned very prudently that the EUR surge is coming to an end, just as the European currency was about to take a 600+ pip tumble in under 48 hours, the other FX expert at bat (and that would be of the 0.000), Thomas Stolper, continues to be as steadfast as old faithful in his betting average. After we were almost resigned to be shocked by Stolper actually gettng an FX call right for once, when the EURUSD got to within 50 pips of 1.50 earlier this week and pass the Goldman profit target of $1.50 on the EURUSD, instead the trade is now in danger of collapsing on itself and being closed out at a loss. Goldman's explanation? "Ooops."
As many recall, Morgan Stanley's always cheerful, and unfortunately always wrong on the first try, Jim Caron had a target of 4.5% on the 10 Year for 2010 only to see the bond trade at half the yield at year end (a call for which he later apologized). Today, following another comparable bullish call on yields (and thus inflation, and the economy) Caron has done it all over again. "We see the key risk to the market as a downgrade in growth expectations for the quarters ahead. This could happen as early as this month if the data does not materially improve after a big miss in 1Q growth and keep us on track for reaching 3.4% consensus 4Q/4Q growth in 2011. And despite today’s stronger headline release of NFP, the Household Survey, which we saw as a leading indicator of jobs, fell 190K and the unemployment rate rose 0.2% to 9%. This keeps us wary of growth prospects in the months ahead. As a result, we recently turned neutral from bearish bonds. We also see risk for curves to flatten as yield forecasts may also get downgraded along with growth." Gee, and it was only on April 7, that this strategist wrote: "Overall there is little doubt that policy in the US continues to be very easy, which presents a risk that markets may tighten those conditions well ahead of the Fed, especially if Q2 growth is back on track. This is why we think that the risks are skewed toward higher rates." What a difference month makes. But that's ok, just like when Caron turned bearish on bonds in 2010, promptly followed by Goldman going all out in its QE2 demands, so this time the very same action, now that 2011 is a carbon copy of 2010, we fully expect Wall Street demands for QE3 to hit a fever pitch within 3 months tops.
And so the margin hike rumor mill shifts from silver to crude. Pretty soon nobody will dare to invest any capital in commodities (or FX) for fear of an imminent 100% margin spike by the exchanges, causing the S&P to trade at 100x P/E, and letting China buy up every commodity at a 50% off. Another brilliant ploy to preserve the wealth effect while not accounting for any possible side effects of Printocchio's actions.
For those wondering which bank domino drops first if Greece files tomorrow, Sunday, in one month, or in one year, here is the market providing the answer: Deutsche Bank put volume surges to 7,353, 11 times normal.
From Reuters, quoting Bill Gross, who previously did not believe in another round of QE:
PIMCO'S GROSS SAYS WILL CHANGE HIS MIND ON SHORTING US TREASURIES IF THERE IS POTENTIAL FOR ANOTHER RECESSION
And of course, another recession will mean more QE, which means more debt monetization, which means that naturally, the first and last buyer for Treasury bonds, the Fed, will be there for ever and ever, which means more fiat printing, which means $5+ trillion in Fed "assets", which means more inflation expectations, etc, etc.
While on one hand nobody can predict what the downstream effects on the European financial system will be from a Greek restructuring, and if Lehman is any indication, they would be quite dramatic to say the least, the biggest reason why Greece would likely never voluntarily initiate a pull out of the eurozone (which would mean an immediate default for all EUR-denominated Greek debt, which is all of it), comes courtesy of Credit Sights: "The reality from Greece's perspective is that if it unclear why restructuring would be a politically astute option. More than a quarter of Greek debt is held domestically - primarily social security (€28 billion) and banks (€31 billion), but even Greek households are holding €6 billion in short-dated securities. While those are relatively small amounts, we don't believe that asking those sectors to accept losses on their holdings of government securities would be a vote winner. What's more, Greece has the liquidity it needs until some time in 2013 thanks to the EU and IMF loan facility. There is €83 billion within Greece' EU-IMF facility that has not yet been drawn."
For all those lamenting the sad fate of "commodity" guys, we suggest you save your tears for the FX brigade. Levered between 10 and 100 times more, the recent 560 pip move in the EURUSD means that at least one macro fund, who has not hedged FX exposure, has gone under. Oh, and this whole move is nothing but a EUR hit job. There is no chance that Greece will leave the eurozone (at least not for a long time and not voluntarily).