FX Concepts' John Taylor On The Equity Endgame: "Extension Of Equity And Economic Strength Beyond June Unlikely"Submitted by Tyler Durden on 02/17/2011 09:51 -0500
We had seen the financial wreckage and losses from the events of 2007 and 2008 as too severe to allow this growth cycle to continue. We were wrong — or at least 75% wrong. What makes us still 25% right is that the next recession, coming sooner than most pundits think, will be precipitated without a significant increase in interest rates, which is totally different than any other post-war cycle. Despite decent economic growth and extreme market optimism, this cycle is crippled as the banking and government issues supporting the monetary expansion necessary for GDP growth have either no capital base or no taxing ability and no further deficit spending power...The strong commodity markets and continuing QE2 should keep the dollar under pressure into June, except possibly in Europe where the shorter cycles are arguing for a euro high in March. As the Republican House of Representatives and the fiscal gridlock in Washington will keep Bernanke and Obama in check, an extension of equity and economic strength beyond June looks very unlikely.
Just in case someone fell for Van Rompuy's earlier joke that "the euro is a stable currency with strong fundamentals", and/or was wondering what the reason for repeating this particular lie once again was (now if we was talking about the CHF, we would certainly believe him), look no further than Portugal. The one story that nobody continues to talk about, and which will come to a head in less than 2 weeks, as Knight Capital made clear previously, continues to get little coverage, and despite hopes and dreams of some miraculous EFSF rescue mechanism (which will prove woefully inadequate once the chips start falling), spreads are leaking. Oddly enough, the ECB has not stepped in yet to shovel another €1 billion worth of decomposing sovereign bonds under the European rug. Perhaps it is time to refresh on that huge surge in borrowings under the Marginal Lending Facility, and for someone at the ECB to explain just why and how this happened.
Markets down this morning today. Yesterday saw several significant releases, with housing starts at 596K, well ahead of consensus estimates at 539K. PPI rose 0.8% MoM, in line with expectations while industrial production decreased 0.1% v 0.5%E. Fed minutes from the January 25-26 meeting expressed continued disappointment in labor market conditions. FOMC reaffirmed QE2 despite dissent, but did not comment on future actions after the purchases. Overall, the Fed was more optimistic citing an increase in household spending late in 2010. Fed Policymakers also noted that long-term inflation expectations are stable as they had at the December meeting although this month they acknowledged rising commodity prices. Today’s CPI release is expected to show weak inflation numbers with consensus estimates at +0.3% MoM.
After hitting an overnight high of 1.36, the Euro has steadily declined overnight. The reason: a dramatic and unexpected spike in borrowings under the ECB's Marginal (and Punitive) Lending Facility. Over €15.8 billion was borrowed under the facility, the highest since June 2009, and a surge from yesterday's €1.2 billion. With a rate of 1.75%, there is nothing cool or fun about borrowing from the MLF, which is seen just as stigmatizing as borrowing from the Discount Window back when US banks didn't have trillions in excess reserves, and discount window borrowings actually mattered. The WSJ provides some perspectives for the surge: "The ECB declined to give any explanation for the high figure, which generally reflects acute, if mostly short-lived, liquidity problems at one or more banks. Use of the facility had been minimal at the start of the year, but had risen to around a daily average of over €700 million in the past week. The rise in the use of marginal lending by the ECB is all the more surprising as there were no generalized signs of stress in the money market Wednesday. The benchmark overnight rate for euros, Eonia, eased to 0.7% from 0.749% on Tuesday, its lowest fixing in more than a week." According to some traders the spike has to do with a technical error, or the failure of a bank to request enough cash during normal liquidity providing operation, but a €15 billion oversight is just too big. Perhaps one should look at the fresh all time record Portuguese 10 year bond yield for clues why this has happened. Should the MLF lending spike tomorrow as well, someone will have to answer questions.
Is the stock market rally coming to an end, or is there more to go? Should we be buying dips or selling rallies in gold and precious metals? Is the commodities boom a yearlong or decade long phenomenon? Which sectors on the international landscape will be the winners or losers? Are the agricultural plays getting tired, or is it time for a second helping? Will the collapse of the bond market or a spike in oil prices bring the party to an end? Get the answers by attending this free webinar.
When George Bush first was informed about the 9/11 attacks, he was reading a children’s story to second graders. The attacks caught him off guard and interrupted his reading of My Pet Goat, and he sat perplexed as to how he should respond. Ben Bernanke was similarly blinded by the crisis even though lawmakers on capitol hill had on many occasions asked him about the possibility of a housing bubble caused by subprime mortgages. Bernanke had his My Pet Goat moment in 2008, where in a panic, he lowered rates all the way down to zero. At least George had a military that he could send out to fight for him. Poor Ben’s options were limited, lower rates and print more money, which he did with the same sense of panic and righteous rage. If we can agree that the 0% short term rate put out by the Fed, is not a market rate, then what should it be? At 1%, the real rates are still not positive. An honest rate would have to be well above 1%. Increasing the rate would push up rates on your mortgage and car loans, but it would also allow you to not lose money in real terms by placing it in the bank. The Fed reduces borrowing costs, but only by screwing savers and investors. Again we see the bailout mentality of having the righteous pay for the wicked’s sins.
Hope you like the 12% markups on the CMO's your broker sold you...
European Sovereign Debt Crisis Deepening - Risk of Contagion And Bond Market Crash, And Why Rising Rates Mean Gold StrengthSubmitted by Tyler Durden on 02/16/2011 09:26 -0500
There is a real sense of the “calm before the storm” in markets globally. Complacency reigns, despite signs that the sovereign debt crisis in Europe is deepening and that Japanese and US bond markets also look very vulnerable due to rising inflation, very large deficits and massive public debt. US Treasuries have been sold by some of the largest investors (both private and sovereign) in the world recently (see news). These include large creditor nations Russia and China but also PIMCO, the largest bond fund in the world. A global sovereign debt crisis is now quite possible. At the very least, we are likely to have a long period of rising interest rates which will depress economic growth. Contrary to some misguided commentary, rising interest rates will benefit gold as was seen when interest rates rose sharply in the 1970s. It was only towards the end of the interest rate tightening cycle in 1980, when interest rates were higher than inflation, that gold prices began to fall.
Markets positive this morning. Treasuries experienced a bullish move yesterday as economic numbers managed to disappoint lofty expectations. Advance retail sales released yesterday showed a weaker than expected increase at 0.3% v 0.5%E. Today will see the release of housing starts, PPI, and industrial production. An increase in the latter would represent a third straight month of growth.
Bernanke is kidding himself, the House Budget Committee and the entire 60 Minutes audience when he says that he can raise interest rates in 15 minutes. He can raise rates but it would be the INSTANT end of the economy. I’ve read the book: “Temple of Secrets: How the Federal Reserve Runs the Country”, and a large portion of the book was dedicated to Paul Volcker’s 21.5% rate hike. The adverse effects on the economy were disastrous. Businesses stopped borrowing, or went broke borrowing, unemployment went through the roof, housing was crushed, large purchases of automobiles crumbled.
Today's Headlines Show Interest Rate Volatility, Sovereign Contagion, Geo-political Unrest & Double-Dip Recessions Coming: What's The Answer To Valuing Global Real Estate Through This Mess?Submitted by Reggie Middleton on 02/15/2011 12:36 -0500
I'm putting together what I see as solutions for the many pricing and valuation problems that I see coming down the pike. If you think real asset markets are a little soft now, wait until rates are controlled more by market forces than by concerted central planning cartels.
The wheels fall off the global "recovery," the emerging market equity bubbles, oil, China's equities and its property bubble, and most if not all commodities. Gold and silver swoon as per late 2008 as raising cash become paramount. Oil retraces to the $40/barrel level, and then drops further as exporters ramp up their exports to generate desperately needed cash. Interest rates rise sharply, risk assets tank, borrowing dries up, housing prices "slip" to new lows (the stick-slip phenomenon), and the hated/loathed U.S. dollar confounds almost everyone by breaking out of technical resistance levels. Civil disorder spreads along with recession and lower energy prices, which devastate oil exporters' primary source of government revenues. With better grain harvests stemming from improved weather, declining meat consumption in 2012 due to recession and the implosion of the market for corn ethanol, grain prices plummet, wiping out all the speculators who reckoned 2010 had set the trend for the decade. All of this starts slowly in Q3 2011 but gathers momentum in 2012.
There is little that can be said about the December TIC data, as all the same (troubling) trends continue. In summary, net foreign purchases of long-term U.S. securities were $76.8 billion.
Of this, net purchases by private foreign investors were $66.3 billion,
and net purchases by foreign official institutions were $10.5 billion. The bulk of purchases was Treasurys at $54.6 billion, and $10.2 billion in corporte stocks (a fourth straight monthly decline), with token purchases of both Mortgages and Corporate bonds. Net foreign acquisition of long-term securities, taking into account adjustments, is estimated to have been $41.8 billion. Yet the most notable data continues to be the interplay between the formerly largest holder of debt (soon to be third), and that locus for bond laundering- the UK. Total Chinese holdings declined by $4 billion, as a result of $9.4 billion in Short-Term debt declines, offset by Long-Term purchases. China continues to dump agency securities like there is no tomorrow, and December is the 6th month in a row in which China has seen its agency holdings decline, but that should come as no surprise to anyone: after all they made it somewhat clear they are on the verge of liquidating the bulk of their GSE holdings recently. On the other hand, the "UK", which is either the Fed's "direct bidder" bond bonzi scheme, Chinese indirect purchases, or recycled petrodollars, just can't get enough of US debt: in December UK holdings increased by $30 billion. It has gotten so bad, that at $541 billion the "UK" is now just $350 billion away from China's total holdings ($892 billion). And Japan is now just $8 billion behind China in total US debt holdings! Of course none of this matters: The Fed will soon be more than double the next two holders (China and Japan) combined, with all the interest collected on the Fed's debt to be promptly converted to Treasury "revenues."
Silver and particularly gold rose sharply on the release of the higher than expected UK inflation data. It showed that UK inflation quickened to 26 month highs at 4.0%. Currency debasement and higher food and energy prices are leading to an inflation surge in both developed and emerging markets. The Chinese inflation data appears to be even more misleading and manipulated than that in western economies. Many governments are attempting to manage consumers perceptions regarding the significant increase in the cost of living as fiat currencies are debased. Silver is now less than 2% from its 30 year nominal high of $31.25/oz seen at the start of the year and looks set to challenge and surpass this level in the coming days due to continued robust physical demand (both investment and industrial) and the fact that the futures market is seeing some big money go long again after the recent correction. Silver remains in backwardation with spot trading at $30.68/oz while the July 11 contract trades at $30.55/oz and the December 14 at $30.40/oz.
No, snow was not blamed in this latest, and certainly not last, broke state snafu. But wait until you read the official excuse...