The Financial Times reported on Saturday that “the sharp drop in gold and silver prices has stimulated a surge in buying from India in a sign that consumers in the world’s largest gold-buying country retain faith in the decade-long bull story for precious metals.” Chhabil Jain, a Mumbai silver trader told the Financial Times that “demand for silver bars was going through the roof” and that “many vendors were starting to run low on stocks”. “People are booking incredible amounts of silver as they see the current drop in prices as a great opportunity to buy more ... most are buying for pure investment,” he added. Bloomberg reports this morning that silver was the most traded commodity in April.
Lots of data with Empire Index, Capital Flows and the Housing market index on deck, but the biggest news everyone will be waiting for is the predicted debt ceiling breach, which should be formalized at 4:00 pm today.
"But alas, a minor problem looms. The Treasury will issue $68 billion in net new debt on Monday that the market must pay for."
NIA's long anticipated "College Conspiracy", or "why the college bubble is next to burst" video by the NIA is finally out.
All around the world, the bodies and countries with the most power keep screwing people (some like IMF head, Dominique Strauss-Kahn, literally) and entire nations, while supporting their banking systems. Last week, S&P announced it would downgrade Portugal if it didn’t play ball with the IMF and EU over its 4-year 78E billion-bailout program in return for hacking public programs. Echoing our own Congressional goons spewing spending cuts in the face of inadequate revenues and for-bank-manufactured mega-debt, the S&P noted, “Two-thirds of the projected savings in [Portugal’s] 2012 budget will likely come from spending cuts.” On a roll, the IMF also declared Italy needs ‘structural reform’, meaning labor market reform, less public ownership and more private investment to “unlock its growth potential.” (aka invite more speculative capital at its earliest convenience.) Meanwhile, thousands of people are again striking in Greece, as the IMF and EU discuss more austerity measures, following the bank bailout that provoked public outrage a year ago, and a rating downgrade by S&P. The EU remains more concerned with investors regaining confidence in Greece than economic stability of its citizens. Then, there’s Ireland, for whom its last bailout didn’t dent its 14.5% unemployment rate, or fill in the gaping holes its banks dug. In short, the global ‘remedy’ for depressed economies and debt-bloated banking sectors remains to do – more of the same - and pretend this will beget a different outcome. Yet, there is no way this strategy will result in more stable economies. What we can expect instead is further widespread deterioration.
Don't blame the specs. Look what's drawing the specs to the fire.
Druckenmiller Calls Out The Treasury Ponzi Scheme: "It's Not A Free Market, It's Not A Clean Market", Identifies The Real Bond ThreatSubmitted by Tyler Durden on 05/14/2011 09:28 -0500
We hadn't heard much from legendary investor Stanley Druckenmiller since last August when he decided to shut down his Duquesne Capital hedge fund. Until today. In a must read interview, the man who took on the Bank of England in 1992 and won, says that he join the camp of Bill Gross et al, making it all too clear that all the recent fearmongering about the lack of a debt ceiling hike by the likes of Tim Geithner, Ben Bernanke and, of course, all of Wall Street, is misplaced, and that the real threat to the country is the continuation of the current profligate pathway of endless spending. From the WSJ: "Mr. Druckenmiller had already recognized that the government had
embarked on a long-term march to financial ruin. So he publicly opposed
the hysterical warnings from financial eminences, similar to those we
hear today. He recalls that then-Secretary of the Treasury Robert Rubin
warned that if the political stand-off forced the government to delay a
debt payment, the Treasury bond market would be impaired for 20 years. "Excuse me? Russia had a real
default and two or three years later they had all-time low interest
rates," says Mr. Druckenmiller. In the future, he says, "People aren't
going to wonder whether 20 years ago we delayed an interest payment for
six days. They're going to wonder whether we got our house in order." Which begs the question: if interest rates are so low today, is the market not appreciating the current path of "financial ruin"? And here is where Druckenmiller joins the Grosses and the Granthams of the world. Asked if the future is not so bad judging by today's low bond rates he says, "Complete nonsense. It's not a free market. It's not a clean market." The Federal Reserve is doing much of the buying of Treasury bonds lately through its "quantitative easing" (QE) program, he points out. "The market isn't saying anything about the future. It's saying there's a phony buyer of $19 billion of Treasurys a week." Of course, there is another name for this type of arrangement and so far only Bill Gross has used it: Ponzi Scheme.
Wondering where the volatility went? Just look below. Countries now trade like microcap, 3x beta stocks. Thank you Federal Reserve. Oh, and while you are at it, please sell some FX vol Brian Sack. Below is a chart of the DXY constituents: everything getting creamed except for the JPY, showing the only currency not used to short the dollar against. We can't wait for today's CFTC Committment of Traders update to see how many specs got blown up by this move.
In his just released piece, Bob Janjuah's partner at Nomura, Kevin Gaynor, makes some quite profound and very contrarian observations on correlations, a topic discussed extensively on Zero Hedge in the past year. While the prevailing thought is that recently cross-asset correlations have actually dropped (in some cases to record levels), the truth is quite different: "While our colleagues in the Macro Strategy team have made a cogent case that price action in several markets reveals a more discerning behaviour and reduction in observed correlations, Bob and I have been coming around to a slightly different view. Many clients with whom we have spoken over recent weeks are becoming aware of the rather narrow sources of market drivers (two we would argue) and consequent similarities in terms of themes that have driven individual asset classes. It logically follows that anything changing the actual or expected state of those market drivers will have an impact on market returns across a range of risk types and geographies. More to the point, given the nature of those themes (mostly one way), we must be aware of the possibility for a non-linear response to linear changes in those market drivers. That's a fancy way of saying that correlation risk is actually rising in our opinion, as two themes appear to be dominating markets – western liquidity injections without leverage or EM FX appreciation and EM as the source of marginal final demand. These two potent forces have come to dominate the return environment. Consider leadership in DM equity indices since March 2009; it is basic materials and industrials and more lately oil and gas. Ex those sectors, western stock market returns would look rather more threadbare. But perhaps more the point in terms of the non-linearity issue is that the beta of the major indices to these sectors has naturally risen over the past 2 years. Whereas in the past, one had to broadly get financials correct to have a decent stab at calling equity returns (a gross oversimplification I know), it now seems to be the CRB sectors you need to get right." The follow through of all this, and it can be read below, is that the 30 year "great moderation" is rapidly ending and the inflationary threat is now very close, and would be EM driven. At that point none of the Fed's emergency tightening policies, no matter what Alan Blinder's textbook says, would have any impact whatsoever.
A little under a year ago Moody's Mark Zandi and Princeton economist and former Fed vice chairman Alan Blinder penned a paper titled "How we Ended the Great Recession" which did nothing but extoll the virtues of spending trillions in both fiscal and monetary stimuli and preventing U3 from hitting 16% (of course how one proves a counterfactual is irrelevant: just remember - if the Fed disclosed its top secret bailout plans the world would end. Same thing here - accept it - after all the guy is a professor at Princeton). In a nutshell Blinder is nothing but Paul Krugman on steroids: a man who believes that there is nothing worse in this world than establishing fiscal (and monetary) discipline now. Well, in an interview with Tom Keene earlier, Blinder fired the first shot across the QE3 bow, telling his Bloomberg host that the US needs "somewhat more" fiscal stimulus once again in order to boost employment (hold on: didn't we end the Great Recession, and certainly the normal one in the summer of 2009 according to the NBER?). How this would be accomplished in the current climate is not explained. Instead what Blinder says makes one wonder just who is on the tenure committee at Princeton - when asked how we bring the deficit in without austerity, the Princetonian responds: "Unfortunately I think it is very subtle for most political processes especially for the political process in the US. What we should be doing is somewhat more fiscal expansion but at the same time legislating into law fiscal consolidation for the future. Starting 2 years from now, 3 years from now, 18 months from now. But not now." Of course never now: why bite the bullet now when it can be kicked to some other administration in the indefinite future? Especially when tenure money and/or Wall Street bribes are at stake...
Save yourself the $1,000 bottle service at Tryst (not to mention the always failing Martingale strategy (unless you are the Fed or a Primary Dealer with discount window access of course) at the high rollers table), and cut right to the chase with this summary of the key points by Stevie Cohen, Jamie Dinan, Lee Ainslie, Izzy Englander and Jeremy Siegel.
The end of the second round of quantitative easing (QE II) is going to be a complete disaster for the paper markets -- specifically commodities, stocks, and then finally bonds, in that order, with losses of 20% to 50% by the end of October. The only thing that will arrest the plunge will be QE III, although we should remain alert to the likelihood that it will be named something else in an attempt to obscure what it really is. Perhaps it will be known as the "Muni Asset Trust Term Liquidity Facility" or the "American Prime Purchase Program," but whatever it is called, it will involve hundreds of billions of thin-air dollars being printed and dumped into the financial system.
Every regulator in the universe will be present at Senate Banking Committee hearing discussing Dodd-Frank (Do-nk) Monitoring Systemic Risk and Promoting Financial Stability. Which means there will be nobody to greenlight a margin hike for at least 2-3 hours, as supposedly even Blackberries are not allowed. Which means crude may even lift a few offers before today's take down brings it to $80 by EOD courtesy of Obama's E*trade account.
Following last week's surge to 474,000, everyone will be seeking confirmation of whether the dramatic deterioration in labor conditions is permanent or merely "seasonally adjusted." We also get PPI and retail sales data, and the last of three auctions ($16 billion in 30 Year notes) which effectively puts the US over the ceiling. Lastly, Bernanke talks to the Senate Banking Committee on regulatory issues.
The recent correction in the commodities markets may be providing Bernake, Geithner and their easy money acolytes with a sense of relief given the relentless run up in prices of raw materials since the announcement of QE back in 2008, but they should not sleep tight just yet. As anyone in the markets will tell you, when any underlying has a price move so vertical in its trajectory it’s bound to face a correction as the smart money, having gotten in for fundamental reasons much earlier along the trend line now wait for the panic buyers or the Johnny-come-lately’s to give the rally that last unsustainable spike to unload their longs and leave the suckers holding $40.00 silver in their purses. So one must step back and take a long view. Although it would appear that those of us who warn that inflation is not just a threat but very much a fact of life now were knee-jerk pontificators jumping on the commodities rally trend for political (read: Fed/Obama bashing) reasons, the analysis is quite sound. Most important, it is methodical not emotional as price surges tend to make investors and analysts from time to time. Here are some facts: even with the inevitable correction in commodities, as of this writing crude oil is 35% more expensive than it was a year ago…advancing with ups and downs along the way from as low as $17.50/bbl in November of 2001 to its current level of over $100/bbl or around a 19% annual appreciation in a decade since the Fed started giving away dollars. Silver 93% Wheat 84% Cotton 100% Coffee 55% Cattle 10% etc etc. Gold is up 22% for the year. More revealing, it is up an astonishing 450% since 2001. In that same decade the USD index against all currencies shed 40% of its value.