Copper

An over-indebted, overcapacity economy cannot generate real expansion. It can only generate speculative asset bubbles that will implode, destroying the latest round of phantom collateral. For those seeking a summary, here is the global endgame in fourteen points.

Hard assets are gaining momentum once again as market participants digest the potential impact of central bank printing initiatives. After last year's record level of central bank intervention, 2013 is gearing up to be an even more prolific year on the money-printing front. Japanese Prime Minister Shinzo Abe recently unveiled Japan's tenth Quantitative Easing program to follow the country's current $224 billion stimulus announced on January 11th. The US Federal Reserve is steadily printing US$85 billion a month under its QE3 & QE4 programs, and reports indicate that the European Central Bank is close to launching its much-awaited Open Market Transaction (OMT) program to purchase European sovereign debt. It's a money-printing party and everyone's invited. Even the new Bank of England head, Mark Carney, has hinted of plans to launch more monetary stimulus. Professional investors have noticed and are expressing concern over the consequences of concerted currency devaluation and the continuation of zero-percent interest rates. Despite being long-time precious metals enthusiasts and active investors in gold and silver, we did not focus on "the other precious metals", platinum or palladium, until very recently.

The great trade, capital flow and debt imbalances that were built up over the preceding two decades must reverse themselves. Michael Pettis notes, however, that these imbalances can continue for many years, but at some point they become unsustainable and the world must adjust by reversing those imbalances. One way or the other, in other words, the world will rebalance. But there are worse ways and better ways it can do so. Pettis adds that, any policy that does not clearly result in a reversal of the deep debt, trade and capital imbalances of the past decade is a policy that cannot be sustained. It is likely to be political considerations that determine how quickly the rebalancing processes take place and whether they do so in ways that set the stages for future growth or future stagnation. Pettis' guess is that we have ended the first stage of the global crisis, and most of the deepest problems have been identified. In 2013 we will begin to see how policymakers respond and what the future outlook is likely to be. The following 10 themes are what he will be watching this year in order to figure out where we are likely to end up.

We are far enough and deep enough into the most heroic monetary and fiscal efforts ever undertaken to finally ask, why aren't these measures working? Or at least we should be.  Oddly, many in DC, on Wall Street, and the Federal Reserve continue to steadfastly refuse to include anything in their approaches and frameworks other than "more of the same." So we are treated to an endless parade of news items that seek to convince us that a bottom is in and that we've 'turned the corner' – often on the flimsy basis that in the past things have always gotten better by now. Oil is the primary lubricant of economic growth and that it is not just the amount of oil one has to burn but also the quality, or net energy, of the oil that matters. If we want to understand why all of the tried-and-true monetary and fiscal efforts have failed, we have to appreciate the headwinds that are offered by both a condition of too-much-debt and expensive energy.  Neither alone can account for the economic malaise that stalks the world.

It seems that to exclusively focus on one side of the equation can be human nature at times, and with regard to inflation concerns humans never see the other side of the equation, i.e., areas where they are actually experiencing deflation in their lives.

After having less than half the total US deposits back in 2005, China has pumped enough cash into the economy using various public and private conduits to make even Ben Bernanke blush: between January 2005 and January 2013, Chinese bank deposits have soared by a whopping $11 trillion, rising from $4 trillion to $15 trillion! We have no idea what the real Chinese GDP number is but this expansion alone is anywhere between 200 and 300% of the real GDP as it stands now. And more: between January 2012 and January 2013 Chinese deposits rose by just over $2 trillion. In other words, while everyone focuses on Uncle Ben and his measly $1 trillion in base money creation in 2013 (while loan creation at commercial banks continues to decline), China will have created well more than double this amount of money in the current year alone!

Back in December, as always happens every year for the past 3, a margin call driven liquidation wave pushed the price of the gold to multi-month lows, providing merely yet another lowball buying opportunity (for which let's all thank John Paulson, again). One buyer who certainly would love to thank whichever marginal seller was liquidating their gold, is none other than China, which as was reported a few hours ago, imported an all time record 114.4 tons of gold in the month of December, or more than all the gold held by the Greek central bank (assuming it hasn't been confiscated by ze Germans or the ECB, or deposited in G-Pap or Venizelos' private HSBC safe in Geneva yet: a very aggressive assumption).

Analysts who’ve only started paying attention to the country in the last decade often seem convinced that China has no real business cycle, or a very mild one, that because its economy is centrally planned, it’s free from the fluctuations in investment that cause booms and recessions in countries that lack the scientific guidance of a Leninist single-party state. This convenient belief, however, is mostly an artifact of the period over which they’ve been observing its economy. The boom of the early 1990’s wasn’t followed by the usual bust. Instead, after a fairly mild slowdown, another boom period began towards the end of the decade, without the usual deep cyclical trough between expansions. However, this anomaly suggests that it is unlikely to be repeated. We’re probably living, now, with a China that’s back to the sort of violent swings in economic activity, and repeated struggles with inflation, that have been characteristic of most of its recent history. To understand why, it’s necessary to understand DeWeaver's explanation of the nature of the cycle itself.

Today we look at long term charts of some key commodities and investigate means by which we might gain insight into the dynamics of their price movements. The charts are most commonly studied as a plot of price vs time. However, the dynamical evolution of a complex system is described by a succession of states through which the system has evolved. Even though gold and silver have been in a bull market for over ten years, the real regime change only happened about three years ago. What was evident was the separation of the precious metals (which still includes silver) from the industrial metals and agricultural commodities. What happened?

The honey badger ramp continues, once more driven entirely by the USD carry as both the EURUSD and USDJPY hit new highs (14 month and 3 year, respectively). The EUR took another major leg higher following today's second ECB refinancing operation in two days, a 3 month LTRO, in which just €3.71 billion was allotted to some 46 bidders, far less than the €10 billion expected particularly in the context of the €6 billion the matured, leading to further Euribor curve steepening, more non-expansion of the ECB balance sheet, and a surge in the EURUSD to new post-2011 highs of 1.3560. But if it wasn't this it would be something else. Elsewhere we got the final official Spanish GDP number, which as previously reported once again came worse than expected at -0.7%, compared to expectations of -0.6%, and -1.8% Y/Y vs Exp. -1.7%. But once again we are told to ignore current reality and look with optimism to the future as various European confidence indices posted higher than expected prints. This seems logical: when the ugly fundamentals don't matter, one must at least pretend there is hope they will improve in the future to serve as a buying catalyst. Finally, and what the surging EUR and crushed exports are all about, Italy sold some €6.5 billion in 5 and 10 year BTPs at yields of 2.94% and 4.17%, both respectively lower than the prior auctions of 3.26% and 4.48%.

The quest for cheap energy and cheap labor is a conquering human urge, one that has played out with notable ferocity starting with the Industrial Revolution. The introduction of coal into British manufacturing, and the more recent outsourcing of Western manufacturing to Asia, have marked key thresholds in this ongoing progression. But despite the harvesting of additional productivity gains from the more recent revolution in information technology, the suite of macro data suggests that the rate of advancement in physical production has slowed, notably, in the past thirty years. Seen in this light, the greatest gains to global industrial production were probably enjoyed from the late 18th century (when coal extraction and use began in earnest) into the mid-20th century (when oil reached broad distribution). In contrast, computers, the Internet, and the leveraging of developing world labor might eventually be seen as the finishing touches on this great industrial wave.

Department of Energy Wants to Let Radioactive Scrap Metal Back into Consumer Products

• CAT beats ex-Chinese fraud: $1.91, Exp. $1.70; Warns 2013 could be a "tough year"; sees 2013 EPS in $7.00-$9.00 range, Exp. $8.54, sees Q1 sales well below Q1, 2012
• Yi Warns on Currency Wars as Yuan Close to ‘Equilibrium’ (BBG)
• Monte Paschi seeks new investor as scandal deepens (Reuters)
• Assault Weapons Ban Lacks Democratic Votes to Pass Senate (BBG)
• Toyota Again World's Largest Auto Maker (WSJ)
• Curious why all those Geneva Libor manipulators moved to Singapore? Bank probes find manipulation in Singapore's offshore FX market  (Reuters)
• Japan eased safety standards ahead of Boeing 787 rollout (Reuters) - so like Fukushima?
• Goldman is about to be un charge: Osborne cools on changing inflation target (Telegraph)
• Abe Predicts Bump in Revenue as Japan Emerges From Recession (BBG) - actually, "hopes" is the correct verb here
• Toxic Smog in Beijing Fueling Auto Sales for GM, VW (BBG)
• Fed waits for job market to perk up (Reuters) ... any minute now that S&P to BLS trickle down will hit, promise
• BofA shifts derivatives to UK (FT)

This objective report concisely summarizes important macro events over the past week.  It is not geared to push an agenda.  Impartiality is necessary to avoid costly psychological traps, which all investors are prone to, such as confirmation, conservatism, and endowment biases. 

A close above 1500, and the last time the S&P 500 managed 8 close-to-close gains in a row was November 2004 (with the 9th higher close marking the end of the run that time). The rise of the Dow Industrials is the best January since 1994 - which saw a rather painful 10% decline in Febuary. Today saw bonds monkey-hammered to catch up (yields) to equity's strength on the week. FX markets saw more JPY weakness (-1% on the week) as EUR strength from this morning's LTRO news followed on - dragging the USD down 0.3% on the week. Commodities were mixed with Oil unch on the week, Copper down (but global growth?), and Gold and Silver slammed on what looks like AAPL collateral calls. AAPL spent the day wiggling up to VWAP and getting dumped to new 52-week lows unable to get any bid and once again we saw VIX totally ignoring the equity exuberance. Builders outperformed (+3.2%), Tech underperformed (-0.4%), as trade-size and volume were relatively low. The close with AAPL smashing lower on huge volume and ES ripping to new highs confirms the pairs-trade unwind we have been banging on about.