Bond

Guest Post: Why Oil Could Move Higher... Much Higher

The conventional wisdom of the moment is that a weakening global economy will push the cost of commodities such as oil down as demand stagnates. This makes perfect sense in terms of physical supply and demand, but this ignores the consequences of financial demand and capital flows. The total financial wealth sloshing around the world is approximately $160 trillion. If some relatively modest percentage of this money enters the commodity sector (and more specifically, oil) as a low-risk opportunity, this flow would drive the price of oil higher on its own, regardless of end-user demand and deflationary forces. If we grasp that financial demand is equivalent to end-user demand, we understand why oil could climb to $125/barrel or even higher despite a physical surplus.

Overnight Levitation Is Back On Hopes Of Draghi Hopium Salvage

Crashing Australian and a miss in South Korean PMIs, following days of weak Japanese data, and a divergence in the official and HSBC Chinese manufacturing indicators to a 15 month high (HSBC PMI sliding to 11 month low) was just the bad news Asian market needed to break out higher from the recent range and thanks to the return of overnight USDJPY levitation as well as a modest reverse repo liquidity injection by the PBOC overnight, not only did the Nikkei and Shanghai rise 3% and 1.8% respectively, but US futures are right back to where they were before yesterday's dramatic turnaround in the market following a strongly dovish FOMC statement and just shy of the 1700 once more. As for Europe, while there a smattering of noise following the release of final PMIs which did not change the preliminary picture much (Spain 49.8, vs 50.6 exp; Italy 50.4 vs 49.8 exp; France 49.7 vs 49.8 exp; Germany 50.7 vs 50.3 exp) it is all up to the ECB today to preserve the myth of a European improvement coupled with a EUR currency at or near multi-month highs.

Elliott Management: "The Entire Developed World Is On A Slippery Slope"

Elliott Management's 22-page letter to investors has something for everyone as Paul Singer ascribes his uniquely independent wisdom. From the fragility of the financial system to the hubris of academic pretenders; from inflation's various devious impacts on assets and reality to the floundering of the world's bankers; from America's "cooked data" to the pending social unrest in Europe and the perils of centralized power, Singers stresses "the temptation to debase fiat currencies... means owning claims on paper money is an act of either faith or denial." Recent market movements, Singer warns "indicate a world on life-support," and "for every day, month and year that policymakers try to substitute failed, inappropriate and risky QE policies for pro-growth policies, the debt mounts, as does resentment among middle-income families that their situation is not improving." The fact of the matter is that "no government has ever reached fiscal 'nirvana,' yet our central bank (and its peers) continues to push the envelope of risk, confidence and inflation." Despite the confident and brave words in which they are wrapped, central bank actions currently seem underscored by quiet panic.

Financial Sense And Nonsense

“…the best way to get interest rates up is to have low interest rates" —Fed Chairman Bernanke responding to a Congressional testimony question

“We all know it’s going to end badly, but in the meantime we can make some money.”  —Jim Cramer, CNBC

“Thank God for the Fed.” —Australian Treasurer Wayne Swan

“Let’s be clear. We’ve intentionally blown the biggest government bond bubble in history.” —Andy Haldane, Bank of England director of financial stability

Bonds Face Worst July In 10 Years

As liquidity-slurpers the world over wait for the written words from the FOMC this afternoon, it seems the bond market has sold-first-asked-questions-later on its 'Taper' expectations (with 30Y yields now at 23-month highs). It is little surprise (given the real reasons for a Taper as we discussed here and here) but today's ADP and GDP data provide more 'headline' ammo for the Fed to cover the reality that they are cornered. It seems it is better to project the 'fallacy' that the economy is strong enough to withstand a 'tapering' of monetary policy than to admit that there is a technical limit to the extent by which the Fed can print money before it breaks the market and shifts sentiment to a realization that it's nothing but monetization. The US bond market has suffered losses for 3 months in a row now, and this is the first July loss in 10 years - or will the FOMC save them?

Frontrunning: July 31

  • Ackman Says Pershing Square Takes 9.8% Stake in Air Products (BBG) - So is APD Carl Icahn's biggest ever short yet
  • Latest Hilsenplant: Summers Hedges His Doubts on Fed's Bond Buying (WSJ)
  • China Stocks World’s Worst Losing $748 Billion on Slump (BBG)
  • U.S. Spy Program Lifts Veil in Court (WSJ)
  • Abenomics on the rock again: Japan July manufacturing PMI shows growth at 4-month low (Reuters)
  • EADS to be renamed Airbus in shake-up (FT)
  • Goldman's GSAM has significantly increased its exposure to European equities (FT) - there is a reason why this is Goldman's worst division
  • Japanese Megabanks Post Mega Profit Gains (WSJ) - when one excludes MTM impact from rate surge of course
  • Ex-workers sue Apple, seek overtime for daily bag searches (Reuters)
  • Hong Kong Yuan Deposits Snap Eight-Month Increase on Cash Crunch (BBG)
  • Downtown NYC Landlords Remake Offices in Shift From Banks (BBG)
GoldCore's picture

Lump this into the mix with the challenges around energy, the instability of the global banking system, the high unemployment rates, particularly among the youth and interest rates at unsustainably low levels, it would be reckless to report that the world economy is either on the brink of or on the road to recovery. Gold is a finite resource, the Chinese central bank continues to acquire gold quietly and without declaring.....for now.

It’s worth repeating: In the shadow of this game, gold looks like a solid investment.

The Fed, The Ponies, And Sunk Costs

Accounting for “Sunk costs”money already spent that cannot be retrieved – is likely both the best understood and most widely ignored bit of wisdom on Wall Street and beyond.  As ConvergEx's Nick Colas notes, whether you buy a stock or make a corporate investment or purchase a theater ticket, that money is gone forever.  If the investment doesn’t pan out or you hear that the play stinks, you are better off cutting your losses or, in the case of the ticket, just going out to dinner.  But, Colas quickly reminds us, that is way easier said than done, as apparently humans are generally hard wired to fall further in love with whatever they have already chosen.  The single largest sunk investment of recent decades is the Federal Reserve’s bond buying program, with $2.4 trillion in QE 1, 2, and 3 on the line. Tomorrow, we’ll get a another glimpse of how well the Federal Open Market Committee knows its sunk cost theory – and what they know about Friday’s jobs number.

Here We Go Again: Step Aside RMBS, Rent-Backed Securities Are Here, And With Them The Beginning Of The End

Earlier today, when we reported that median asking rents in the US had just hit an all time high, we had a thought: how long until the hedge funds that also double down as landlords decide to bypass the simple collection the rental cash flows, and instead collateralize the actual underlying "securities"? One look at the chart below - which compares the median asking "for sale" price in black and the median rent in red - shows why. The last time there was a great divergence (to the benefit of housing), Wall Street spawned an entire Residential Mortgage-Backed Securities industry where Paulson, Goldman willing sellers would package mortgages, often-times synthetically, slice them up in tranches of assorted riskiness, and sell them to willing idiots yield-starved buyers. As everyone knows, that particular securitization bubble ended with the bankruptcy of Lehman, the bailout of AIG and the near collapse of the financial system. As it turns out, the answer to our original question was "a few hours" because securitizations are back, baby, and this time they are scarier and riskier than ever.

Guest Post: Counterfeiting Trust

The heart of any con is winning the trust of the mark, and the heart of counterfeiting is persuading the mark that a facsimile of value is real. What happens when trust in the counterfeiters is lost? What happens when the assets presented as zero-risk lose value? What happens when "the Fed has our back" doesn't stop the stock market from careening off the cliff of a global credit crisis, which is another term for a crisis of faith that the system is as stable and resilient as it is presented? Trust is a fragile creature. It is a most ephemeral yet powerful force. Once lost, it can never be fully regained; it can only be earned back, one step at a time. We are fast approaching the moment when the value of the counterfeit trust, the counterfeit assets and the counterfeit promises are revealed as fakes.

JPMorgan: $7 Billion In "Fines" In Just The Past Two Years

There was a time when Jamie Dimon liked everyone to believe that his JPMorgan had a "fortress balance sheet", that he was disgusted when the US government "forced" a bailout on it, and that no matter what the market threw its way it would be just fine, thanks. Then the London Whale came, saw, and promptly blew up the "fortress" lie. But while JPM's precarious balance sheet was no surprise to anyone (holding over $50 trillion in gross notional derivatives will make fragile fools of the best of us), what has become a bigger problem for Dimon is that slowly but surely JPM has not only become a bigger litigation magnet than Bank of America, but questions are now emerging if all of the firm's recent success wasn't merely due to crime. Crime of the kind that "nobody accept or denies guilt" of course - i.e., completely victimless. Except for all the fines and settlements. Here is a summary of JPM's recent exorbitant and seemingly endless fines.

Spain: Fiesta or Siesta?

At a time when Spain is back in the limelight on account of its ever-sprouting corruption scandals, the government is trying to switch public attention to the prospect of impending economic recovery. Last Thursday, when the National Statistics Institute (INE) reported a 0.90 percent drop in the active population unemployment rate (down to 26.26 percent from the previous quarter’s 27.16 percent), Economy Minister Luis de Guindos assured: “Despite all the difficulties, today I am convinced that the worst is over and that the Spanish economy will leave behind the negative growth rates.” Mariano Rajoy’s government may, as its predecessor did, announce “around the corner” recovery to keep the population’s hope alive and dodge uncomfortable matters such as corruption scandals, but in reality the country’s trend is quite worrying.

Overnight News Not Terrible Enough To Assure New All Time Highs

While the market's eyes were fixed on the near record slide in Japanese Industrial Production (even as its ears glazed over the latest commentary rerun from Aso) which did however lead to a 1.53% jump in the PenNikkeiStock market on hope of more stimulus to get floundering Abenomics back on track, the most important news from the overnight session is that the PBOC's love affair with its own tapering may have come and gone after the central bank came, looked at the surge in 7 day market repo rates, and unwilling to risk another mid-June episode where SHIBOR exploded to the mid-25% range, for the first first time since February injected RMB17 billion through a 7-day reverse repo. The PBOC also announced it would cut the RRR in the earthquake-hit Lushan area. And with that the illusion of a firm and resolute PBOC is shattered, however it did result in a tiny 0.7% bounce in the SHCOMP.