Flight to Safety

Living In 'The Day Before'

Markets, you see, always live in this “day before” where the bend in the highway never comes, where the path is always straight and fixed and where it is generally thought that nothing of consequence will happen. Then some event takes place, something magical or wonderful or awful occurs and the world is turned on its axis and nothing is ever the same again. We are in danger, “clear and present danger” and the strategy of the “day before” is no longer appropriate. $400 billion has poured into bond funds this year, an all-time record, with yields at depressed levels indicating a quite real flight to safety. The United States lost thirty-six percent of its wealth during the American Financial Crisis and, people or institutions, the song rolls across the landscape, “We won’t get fooled again!”

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30yr UST Auction Preview

Today is the 2nd of the long-end UST auctions for the month of November.  16bln 30yrs will be sold to the market at 1pm...largest single DV01 event of the monthly cycle.  Can we game the US Govt??

Where European Banks Store Their Cash: Foreign Banks Domiciled In US See Cash Hoard Spike Back To Record Highs

Anyone looking at the broad headline data from the weekly commercial bank asset (H.8) release could rush to the superficial conclusion that cash assets at US-based financial institutions is approaching all time highs, which, again superficially, it is, at $1.9 trillion, the highest in 2012, and just shy of the all time highs of $1.936 trillion from July 2011. Further superficial analysis would lead one to believe that there is a notable divergence between total US bank cash (the bulk of its procured via repoing of previously purchased securities) and the weekly excess reserve balance indicated by the Fed. All these would be useful, if completely, wrong observations. The only relevant and accurate observation in this week's H.8 data is that foreign banks domiciled in the US have taken their cash balance back to all time highs, which at $918 billion is in the ballpark of the highest it has ever been, and merely confirms what everyone has known: the only reason the US market has benefited in the last several months is due to flight to safety into what, for whatever reason, is perceived as the safety of the US capital markets. At some point, this record cash balance will once again flow out, even as US bank cash holdings remain as flat as they have been for the past 3 years.

Aaaand It's Gone: This Is Why You Always Demand Physical

We have said it over and over, we'll say it again. For all those who for one reason or another would like to boycott the broken markets, yet trade gold in paper form, please understand that all the invested capital is at risk of total loss and can and will be lost, commingled and rehypothecated, not necessarily in that order, with little to zero recourse and the residual claim on liquidating assets pushed to the very end of the queue. Because if Lehman, MF Global, Peregrine, and countless other examples were not enough, here comes Amber Gold: a gold-based investment ponzi scheme out of Poland, in which it is likely needless to say that the gullible investors never had actual possession of the gold. And when they tried, it was gone. All gone.

Eric Sprott: The Solution…Is The Problem, Part II

When we wrote Part I of this paper in June 2009, the total U.S. public debt was just north of $10 trillion. Since then, that figure has increased by more than 50% to almost $16 trillion, thanks largely to unprecedented levels of government intervention. Once the exclusive domain of central bankers and policy makers, acronyms such as QE, LTRO, SMP, TWIST, TARP, TALF have found their way into the mainstream. With the aim of providing stimulus to the economy, central planners of all stripes have both increased spending and reduced taxes in most rich countries. But do these fiscal and monetary measures really increase economic activity or do they have other perverse effects?...  The politically favoured option of financial repression and negative real interest rates has important implications. Negative real interest rates are basically a thinly disguised tax on savers and a subsidy to profligate borrowers. By definition, taxes distort incentives and, as discussed earlier, discourage savings.... The current misconception that our economic salvation lies with more stimulus is both treacherous and self-defeating. As long as we continue down this path, the “solution” will continue to be the problem. There is no miracle cure to our current woes and recent proposals by central planners risk worsening the economic outlook for decades to come.

What Do Swiss Bonds Know That Nobody Else Does?

On the surface all is well, stocks are soaring, the EURUSD is up solidly, and euphoria is back, or that is at least what is being telegraphed. So why is the single biggest unmanipulated flight to safety flag (defined by us) currently available - the Swiss 2 Year - screaming to run for cover? The bond is currently at an all time nominal low, as none of the peripheral euphoria has had any impact on Europe's true remaining risk free asset, and instead it just hit a new all time record low yield moments ago. Just what does it know that nobody else does, or wishes to acknowledge? Or is today merely the latest iteration of the Copperfield market: keep the algos distracted with flashing red headlines and bright green S&P numbers, which the real money is quietly running away into the safety of Geneva bank vaults...

The Real 'Bifurcated' Flight To Safety

In the last four days much has been made of Swiss and German short-dated bonds moving negative as investors seek the preservationist path of least resistance but perhaps even more critically, the real flight to safety globally has been from Europe to the US. The spread between 10Y US Treasuries and 10Y German Bunds has collapsed the most in over 3 months in the last few days as the world and their pet rabbit jump to front-run Bernanke and seek the safety of the most print-worthy currency in the world. Notably though, 2Y Treasuries are at their cheapest (widest spread relative) to German 2Y since Q3 2007! It appears domestic European capital is flooding into short-dated Bunds and any foreign money is being repatriated back to longer-dated US Treasuries.

The "American Exceptionalism" Paradigm Is Broken

The revaluation that is underway now is beyond the simple scope of corporate earnings valuations, going to the very core of the system itself.  Just like the equity pricing regime (and investor expectations for equity assets) needs to adjust to the twelve-year-old bear market reality, pricing within the global banking system as a whole needs to adjust to the reality that the artificial growth of the economic textbook is not replicable.  The economic truth of 2012 is that much of the science of economics, and the foundation that gives to finance and financial pricing, was a temporal anomaly befitting only those specific conditions of that bygone era.  In other words, the entire financial world needs to reset itself outside the paradigm of pre-2008.  The secular bear market in US equities is one strand of this changing landscape, perhaps the first stirring of the collapse of the activist central bank experiment. In the end, the potential selling pressure of the dollar shortage is irresistible, no matter how “cheap” stock prices are to earnings, but none of it may matter in the grander scheme of a dramatic reset to the global system.  The inability of that global system to escape this critical state, to simply move beyond crisis and function “normally” again, demonstrates conclusively, in my opinion, the foundational transformation that is still taking place well beyond the stock bear.  Everything is a locked feedback loop of negative pressures in this age, no matter how much we want to see “value” where and how it used to exist. 

Paradigm shifts are rarely orderly, but there are warning signs.

Frontrunning: June 20

  • Prepare for Lehmans (sic) re-run, Bank official warns (Telegraph)
  • Fed Seen Extending Operation Twist While Avoiding Bond Buying (Bloomberg)
  • US Watchdog Hits at ‘Risky’ London (FT)
  • G20 Bid to Cut Cost of Euro Borrowing (FT)
  • Romney Says Rubio Being Examined as Possible Running Mate (Bloomberg)
  • Hollande Says Worth Exploring ESM Bond Buys (Reuters)
  • US Upbeat After Eurozone Debt Crisis Talks (FT)
  • BOJ Members Say Japan Could Be ‘Adversely Affected’ by Europe (Bloomberg)
  • China Steps Said to Grow Bond Market, Add Issuer Scrutiny (Bloomberg)
  • How Asia Will Fare if Europe Cracks (WSJ)

The Diminishing Returns Of Central Planning, And Why More Printing Would Have No Impact

Now that all the rage is now just the NEW QE, but global coordinated NEW QE, it would make sense to observe the impact the last three episodes of quantitative easing, QE1, QE2 and Twist, have had on the market. And more importantly, whether such impact is rising, dropping, or staying the same. Well, as the following chart from BofA shows, we may be lucky if there is any favorable impact on risk assets following the announcement of more easing, and incidentally perhaps global easing is what is necessary (if not sufficient) now that the devaluation of the US dollar has become an exercise in futility. Because it now appears that only an absolute currency devaluation would work, not a relative one. What is another way of saying this: a global devaluation of all currencies relative to some benchmark... say gold. Most importantly, the only question now is how long before the entire "global intervention rumor" is faded, and what happens when the market realizes that suddenly, Syriza not winning the Greek elections is the downside case as it would mean no coordinated central bank intervention. Great job central planners - you have just shot yourself in the foot once again.

David Rosenberg Channels Felix Zulauf

"We are witnessing the biggest financial-market manipulation of all time. The authorities have intervened more and more, and thereby created this monster. They might change the rules when the game goes against their own interests. We are in a severe credit crunch. It starts when the weakest links in the system can't finance their activities. Then you have a flight to safety into Treasuries and German bunds, compounded by a quasi-shortage of good collateral. That's why bond yields have fallen so low. This isn't an inflationary environment but a deflationary one."