Gold miners hedged by selling their production forward during the bear market. Later, when the price was rising, they bought back their hedges at great expense (Barick alone wasted $6B). There is a better way.
"This year we have pursued five macro themes: long the US dollar, short China, long Japanese equities, long low variance equities and long interest rate contracts at the short end of G10 fixed income markets... The invisible regime of low volatility and low correlations that had been so supportive of risk markets for at least the last year started to become unhinged."
It is easy to get the impression that the naysayers are wrong on Europe. After all the predictions of Armageddon, ten-year government bond yields for Spain and Italy fell to the 4% level, France which is retreating into old-fashioned socialism was able to borrow at about 2%, and one of the best performing bond investments has been until recently – wait for it – Greek government bonds! Admittedly, bond yields have risen from those lows, but so have they everywhere. It is clear when one stands back from all the usual euro-rhetoric that as a threat to the global financial system it is a case of panic over. Well, no. Europe has not recapitalized its banking system the way the US has (at great taxpayer expense, of course). Therefore, it is much more vulnerable. Where European governments and regulators have failed to make their banks more secure it is because they tied their strategy to growth arising from an economic recovery that has failed to materialize. The reality is that the Eurozone GDP levels are only being supported at the moment by the consumption of savings; in orther words, the consumption of personal wealth. Wealth that is not infinite; and held by those not likely to tolerate footing the bill for much longer.
Once again it is all about central banks, with early negative sentiment heading into Asian trading - following the disappointing announcement from the PBOC about "ample liquidity" leading to the 6th consecutive drop in the Shanghai Composite while the PenNikkeiStock index tumbled yet again - completely erased and flipped as Mario Draghi spoke, although not to explain his involvement with the latest European derivative window-dressing scandal, but to announce that he is, once again, "ready to act" (supposedly through the OMT, which despite the best hopes to the contrary, still DOES NOT OFFICIALLY EXIST) and that while it is up to government to raise growth potentials, growth would "partly come from accommodative policy." In other words, ignore all BIS warnings, for Europe's unaccountable Goldmanite overlord Mario Draghi continues to promise more morphined Koolaid (read record Goldman bonuses) to any banker that comes knocking.
Reuters reports that Japan's public pension fund, the world's largest with a pool of $1.1 trillion, and which until recently was the mystery buyer ex machina that was supposed to buy up the Nikkei past 16,000 and on its way to 20,000, 30,000 and more (a dream that fizzled as quickly as it appeared following our explanation that buying stocks means selling bonds), may start buying real estate to boost returns in a move that could involve tens of billions pouring into cities such as London and Paris. Or New York.
Jean-Claude Trichet, the former head of the European Central Bank, in an interview with CNBC stated that there was only so much that central banks could do to save the economic situation at the present time.
The global Central Banks are in damage control mode. The big story here is China, then Japan then the US. But all of them are losing control of the markets.
The market deals extremely poorly with paradigm shifts or cycle changes. One reason for this is that there has been no need for any strategy except for the just-buy-the-dip mantra. This may have ended and that could be the best signal to the markets since the global financial crisis started. Sorry to be the messenger, but the only way for investors to understand risk and leverage is by having them lose money. Essentially then, the balance of this year could be an exercise in re-educating the market to long-lost concepts such as loss, risk, inter-market correlations and price discovery. We even predict that high-frequency trading systems will suffer, as will momentum-based trading and, most interestingly, long-only funds. Why? Because, at the end of the day, they are all built on the same premise: predictable policy actions, financial oppression and no true price discovery. We could be in for a summer of discontent as policy measures and markets return to try to search out a new paradigm. This will be good news for all us.
With the spigot about to be turned down there will be a marked effect on earnings and profits in American corporations as borrowing costs rise and as all of the gains that could be taken were utilized from our very low interest rate environment. Much of the corporate earnings gains during the last two years did not result from growth but from financial management which was to be anticipated and expected. Those schemes, however, have been brought to an end by the rise in interest rates. In the meantime the Fed, in every manner possible, will try to downplay what Mr. Bernanke has done. The Governors will make speeches. Tidbit swill be handed to the Press. Calming remarks will come from every corner of the great machine and every stock guru on the planet will focus on the Bernanke's remark that the overall economy is improving. Fortunately I have seen this game before exorcised by every Fed during the last forty years. The correct response is, "Bah Humbug" and the correct viewpoint is to watch what they do and not what they say. They will say what suits them. What they do will be a different story.
- Stocks Fall With China in Bear Market as Bonds Decline (BBG)
- Russia defiant as U.S. raises pressure over Snowden (Reuters) ...
- and sure enough: Kerry Warns Hong Kong and Russia on Snowden (WSJ)
- Slow-Motion U.S. Recovery Searches for Second Gear (WSJ)
- PBOC Sees ‘Reasonable’ Liquidity in China’s Financial System (BBG)
- Italy's Berlusconi faces verdict in underage sex trial (Reuters)
- Fed Monetary Course Difficult for a Bernanke Successor to Alter (BBG)
- Another China central bank worry; companies push into lending (Reuters)
- Gold Miner Writedowns at $17 Billion After Newcrest Fallout (BBG)
- Snowden Faces Often-Posed U.S. Fugitive Question: Where to Run? (BBG)
In the final section of this five-part series (Part 1, Part 2, Part 3, and Part 4) on the dismal reality behind the non-recovery, David Stockman explains what lies ahead. He details in his new book 'The Great Deformation', that the mainstream notion that there is a choice between fiscal austerity and fiscal stimulus is wishful thinking. It does not recognize that owing to the triumph of crony capitalism and printing-press money America has become a failed state fiscally. What lies ahead is a continuous, mad-cap cycling back and forth - virtually on an odd-even day basis - between deficit cutting and fiscal stimulus to the GDP. As Stockman notes, the proximate cause of this recession waiting to happen is the federal government’s unfolding encounter with Peak Debt. The latter is not a magical statistical point such as a federal debt ratio of 100 percent of GDP, but a condition of permanent crisis - "no viable economy can survive on chronic fiscal deficits nor can it fail to save at a sufficient rate to fund a healthy level of investment in productive capital assets. The blithe assumption to the contrary which animates current policy rests on self-serving clichés such as “deficits don’t matter” and the Chinese savings glut." So the American economy faces a long twilight of no growth, rising taxes, and brutally intensifying fiscal conflict. These are the wages of five decades of Keynesian sin - the price of abandoning financial discipline.
"Can central banks now really do “whatever it takes”? As each day goes by, it seems less and less likely... Six years have passed since the eruption of the global financial crisis, yet robust, self-sustaining, well balanced growth still eludes the global economy. If there were an easy path to that goal, we would have found it by now. Monetary stimulus alone cannot provide the answer because the roots of the problem are not monetary. Many large corporations are using cheap bond funding to lengthen the duration of their liabilities instead of investing in new production capacity...Continued low interest rates and unconventional policies have made it easy for the government to finance deficits, and easy for the authorities to delay needed reforms in the real economy and in the financial system... Overindebtedness is one of the major barriers on the path to growth after a financial crisis. Borrowing more year after year is not the cure...in some places it may be difficult to avoid an overall reduction in accommodation because some policies have clearly hit their limits." - Bank of International Settlements
China's Mea Culpa: "It Is Not That There Is No Money, But The Money Has Been Put In The Wrong Place"Submitted by Tyler Durden on 06/23/2013 11:36 -0500
Ten days ago, we penned "Chinese Liquidity Shortage Hits All Time High", in which we predicted ridiculous moves in the Chinese interbank market as a result of short-term funding literally evaporating as a result of the PBOC's stern refusal to step in and bail out its banking sector (despite the occasional rumor of this bank bailed out or that) by injecting trillions in low-powered money. A few days later this prediction was confirmed when the overnight repo and SHIBOR market for all intents and purposes broke down as was also reported here previously. Now, for the first time, China, via the Politburo's Chinese Hilsenrath-equivalent, Xinhua, has provided its own version of events which is as follows: "It is not that there is no money, but the money has been put in the wrong place."
Global financial markets are now in a very perilous state, and there is a much higher than normal chance of a crash. Bernanke's recent statement revealed just how large a role speculation had played in the prices of nearly everything, and now there is a mad dash for cash taking place all over the world. Collectively, the move away from commodities, bonds, and equities in all markets globally tells us that there's nowhere to hide and that this is a 2008-style dash for cash. Everything is being sold, as it must, to meet margin calls, pay down leverage, and get out of positions; all are signs of the end of a speculative phase.
- Turmoil Exposes Global Risks (WSJ)
- China Money Rates Retreat After PBOC Said to Inject Cash (BBG)
- Fed Seen by Economists Trimming QE in September, 2014 End (BBG)
- Booz Allen, the World's Most Profitable Spy Organization (BBG)
- Abe’s Arrows of Growth Dulled by Japan’s Three Principles (BBG)
- China steps back from severe cash crunch (FT)
- Smog at Hazardous as Singapore, Jakarta Spar Over Fires (BBG)
- U.S. Weighs Doubling Leverage Standard for Biggest Banks (BBG)