If the U.S. Federal Reserve were a hedge fund, its phones would be ringing off the hook with prospective investors wanting fresh allocations and Ben Bernanke would be zipping around the French Riviera in a gold-plated helicopter. The Fed’s multibillion-dollar position in Treasuries is nicely in the money with the recent moves to record lows risk-free yields, after all. But it’s policy outcomes, not returns, that the Fed is after. By that measure, the current record low payouts in “Safe Haven” bonds (U.S., Germany, U.K, for example) are troublesome. There is, of course, the worry that they portend a global recession. This concern cannot be waved away with the notion that a worldwide flight to quality totally upends the bond market’s historical function as a weather-vane of economic expansion and contraction. Beyond this concern, however, Nic Colas of ConvergEx sees two further worries. The first is that the Fed has needlessly compromised its independence by pursuing bond purchases that, in hindsight, were unnecessary in the face of the current economic outlook and investment environment. The second is that interest rates have been demoted to a supporting role in kick starting any global economic recovery. As with unfriendly aliens unpacking their bags at a landing site, the move to record low rates around the world is a truly menacing development. Historically, low interest rates have generally sparked economic recovery. In the current environment, this gas-down-the-carb approach seems to have simply flooded the engine of growth. Other factors are at play, as I have outlined here. The real answer is simply more time.
In a perfectly succinct follow-up to Last Friday's Santelli-Kaminsky CNBC-aberration discussion of the now status quo financial repression (low interest rate / QE environment), this two-and-a-half minute clip asks and answers the seemingly simple question of whether low interest rates are good. Borrowing and saving are really about whether to consume more now or later (or more later and less now) and we agree with Professor Antony Davies that these decisions are best left to individuals - and not the nanny-state/Fed. Each person's judgment of what is best for them is replaced by the Federal reserve's judgment and the free market interest has become a thing of the past (for now). Lower rates don't mean more spending; they mean more spending now and less in the future.
While the Dow Jones Industrial Average crossed into negative territory for the year on Friday, E-Mini and the S&P are still "off the lows" of the year (low print was 1259.75 on January 5th). However, if the rapid sell off in the premarket session accelerates, it is possible that we will wipe out all of the 2012 gains in hours if not minutes: December 30, 2011 close was 1252.50. We are now 10 just points higher and closing fast.
Two weeks of utter confusion by most market participants out there, when the complete deja vu scenario is so very clear. To help out those banging their heads over what is happening, here, once again, is the full playbook as it was laid out here for eveyone to read and prepare, because it explained to the dot precisely what will happen, and has been happening since May 19. And yes, that 1000 bps on XO is still about 25% away... Do the math.
Deflation has effectively been abolished by central banking. But is it sustainable? The endless post-Keynesian outgrowth of debt suggests not. In fact, what is ultimately suggested is that the abolition of small-scale deflationary liquidations has just primed the system for a much, much larger liquidation later on. Central bankers have shirked the historical growth cycle consisting both of periods of growth and expansion, as well as periods of contraction and liquidation. They have certainly had a good run. Those warning of impending hyperinflation following 2008 were proven wrong; deflationary forces offset the inflationary impact of bailouts and monetary expansion, even as food prices hit records, and revolutions spread throughout emerging markets. And Japan — the prototypical unliquidated zombie economy — has been stuck in a depressive rut for most of the last twenty years. These interventions, it seems, have pernicious negative side-effects. Those twin delusions central bankers have sought to cater to — for creditors, that debt is wealth and should never be liquidated, and for debtors that debt is an easy or free lunch — have been smashed by the juggernaut of history many times before. While we cannot know exactly when, or exactly how — and in spite of the best efforts of central bankers — we think they will soon be smashed again.
Confused by the latest developments, headlines, stories, counterstories, denials, counterdenials and rumors, but mostly prayers out of Europe? Here is your one stop shop of everything that has transpired in the Eurocrisis most recently.
In the aftermath of the recent spike in Zombie Apocalypse outlier (soon to be inlier) events, which correlate nearly perfectly with the soaring expiration of unemployment extended benefits (recall: "Your EBT Card Has Been Denied": 700,000 Are About To Lose Their Extended Jobless Claims Benefits" - after all people's got to eat), it was only a matter of time before we went from a real-time zombie incidence tracker, to the "ZOMBIE ATTACK: Disaster Preparedness Simulation Exercise #5 (DR5)" Courtesy of the University of Florda.
Newmont Mining currently trades near a 52-week low and has a dividend of just over 3%. Newmont’s dividend is indexed each quarter to the average price of the gold it sells in that quarter with step-up provisions of a further 7.5c if the average gold price exceeds $1,700 in a given quarter and a further 2.5c should those sales average in excess of $2,000. The company has a cash cost of gold mined of around $650/oz and is working hard to lower that figure. Analysts figure that earnings will hit an all-time high this year of close to $5 per share. The P/E ratio? That would be 11x. The same metric in 2008? 30x. Newmont Mining is currently trading roughly $20, or 40% below the average analyst target price of $67.23 with a yield 50% higher than that of the S&P500 and a P/E ratio 30% low er, while its price-to-book ratio, at 1.8x, is also extremely close to the 2008 lows. If we revisit the performance of NEM, GDX and GDXJ when priced in ounces of gold, it becomes apparent just how beaten up this particular sector has become.
In his latest note, Jefferies' David Zervos observes something that has been troubling us for the past few weeks as well: namely, whether the relentless plunge in the EURUSD, now down nearly 600 pips from when we said the next EURUSD target could be 1.20, coupled with a far tamer drop in various US equity risk indicators, such as the S&P, means that the EURUSD/SPOO correlation, so well known to most traders, has finally broken down. We doubt it. In fact, we believe that being LONG EURUSD (potentially with an offseting SPOO short for a less balance sheet intensive pair trade) which will easily rip 400-500 pips in the current environment, could well be the ABX trade of 2012 for some lucky trader. There is just the minor matter of timing...
Ten days ago when presenting the live Reuters polling tracker we said, "just as the most actively watched live update on June 17 will be the Greek parliament seat map as voting is tallied, so each and every day from now until then, everyone's attention will be glued to daily update from Greek election polls." Well, as of end of day Friday, a moratorium to publish polls come into effect which means that for the next 2 weeks Europe will be officially in the dark, clueless as to how the political winds in Greece are blowing.
We have reached a point where the shepherd has shouted “wolf” one too many times, where the theatre goer has shouted “fire” one too many times and the crowd no longer believes the jargon and is standing pat. From one politician to the next in Europe the words are strikingly the same; “bold actions, courageous decisions, decisive plans” which are meant to stoke the propaganda machine and assure the world that all is well. We have had the bank stress tests; the first pockmarked by inaccurate data checked by no one and the second humiliated by an inaccurate construct which discredited it by its own shameless manipulation. We face a world where contingent liabilities, promises to pay and guarantees of debts are NOT counted and where asset guarantees, illusionary firewalls and unfunded rescue programs ARE counted and in some cases counted more than once. Europe has, in fact, provided a complex system of hoaxes, inaccurate data and false financial reports that have been for the most part believed but that belief system is now crumbling as every quarter presents new data that proves the inaccuracy of what we have been told.
What would the weekend be without at least one rumor that Europe is on the verge of fixing everything, or failing that, planning for a master fix, OR failing that, planning for a master plan to fix everything. Sure enough, we just got the latter, which considering nobody really believes anything out of Europe anymore, especially not something that has not been signed, stamped and approved by Merkel herself, is rather ballsy. Nonetheless, one can't blame them for trying: "The chiefs of four European institutions are in the process of creating a master plan for the euro zone, the daily Die Welt reports Saturday, in an advance release of an article to be published Sunday. Suggestions targeting a fiscal, banking, and political union, as well as structural reforms, are being worked out..." Less than credible sources report that Spiderman towels (which are now trading at negative repo rates) and cross-rehypothecated kitchen sinks are also key components of all future "master plans" which sadly are absolutely meaningless since the signature of Europe's paymaster - the Bundesrepublik - is as usual lacking. Which is why, "the plan may well mean that the euro zone adopts measures not immediately accepted by the whole of the European Union, the article adds." So... European sub-union? Hardly strange is that just as this latest desperate attempt at distraction from the complete chaos in Europe (which will only find a resolution once XO crosses 1000 as we and Citi suggested two weeks ago and when the world is truly on the verge of the abyss), none other than George Soros has just started a 3-month countdown to European the European D(oom)-Day.