A ZeroHedge reader who goes by the handle “Kito” took me to task last week for straddling the fence. On the one hand, he observed, I have been predicting a huge Dow rally to 14969. More recently, though, in a commentary published last week and rightly seized on by Kito, I said to hell with the bullish target; with Apple, IBM and Google shares getting bludgeoned, it’s only a matter of time before the bloodshed spreads to the broad averages. So which is it, Kito has asked?
Och-Ziff Calls Top Of "REO-To-Rental", And Distressed Housing Demand, With Exit Of Landlord BusinessSubmitted by Tyler Durden on 10/17/2012 19:25 -0400
The primary, if not only, reason there has been a brief spike in subsidized demand for housing in recent months, has been the GSE/FHFA endorsed REO-To-Rental plan, and associated securitization conduits, in which large asset managers have been encouraged to take advantage of government funded, risk-free financing (and entirely bypassing banks who have given up on loan origination due to legacy liability issues which have every bank tied up in litigation from now until Feddom come - just see today's Bank of America results) and purchase foreclosed properties in bulk, with the intention of converting them into rental properties. Needless to say, the subsidization of this wholesale purchasing of foreclosures, coupled with the ongoing "foreclosure stuffing" pursued by the big banks (as a reminder days to foreclose in New York just hit a record 1,072 per RealtyTrac as banks simply refuse to clear housing inventory faster knowing full well withheld inventory is an additional clearing price subsidy) is the main reason why the punditry has been confused into believing there is a housing rebound. That this "rebound" is merely a subsidized demand pull phenomenon a la the "cash for clunkers" auto sales program is patently clear to most. Nonetheless what little confusion is left, is finally coming to an end, thanks to none other than one of the first entrants in the REO-To-Rental space, $31 billion hedge fund Och Ziff, which a year after entering the program with hopes of quick riches, is now looking to cash out.
We are now five years into the Great Fiat Money Endgame and our freedom is increasingly under attack from the state, liberty’s eternal enemy. It is true that by any realistic measure most states today are heading for bankruptcy. But it would be wrong to assume that ‘austerity’ policies must now lead to a diminishing of government influence and a shrinking of state power. The opposite is true: the state asserts itself more forcefully in the economy, and the political class feels licensed by the crisis to abandon whatever restraint it may have adhered to in the past. Ever more prices in financial markets are manipulated by the central banks, either directly or indirectly; and through legislation, regulation, and taxation the state takes more control of the employment of scarce means. An anti-wealth rhetoric is seeping back into political discourse everywhere and is setting the stage for more confiscation of wealth and income in the future. This will end badly.
Economists, market analysts, journalists and investors alike are all talking about it quite openly, generally in a calm and reserved tone that suggests that - to borrow a phrase from Bill Gross – it represents the 'new normal'. Something that simply needs to be acknowledged and analyzed in the same way we e.g. analyze the supply/demand balance of the copper market. It is the new buzzword du jour: 'Financial Repression'. The term certainly sounds ominous, but it is always mentioned in an off-hand manner that seems to say: 'yes, it is bad, but what can you do? We've got to live with it.' But what does it actually mean? The simplest, most encompassing explanation is this: it describes various insidious and underhanded methods by which the State intends to rob its citizens of their wealth and income over the coming years (and perhaps even decades) above and beyond the already onerous burden of taxation and regulatory costs that is crushing them at present. One cannot possibly "print one's way to prosperity". The exact opposite is in fact true: the policy diminishes the economy's ability to generate true wealth. If anything, “we” are printing ourselves into the poorhouse.
Our analysis of the physical gold market shows that central banks have most likely been a massive unreported supplier of physical gold, and strongly implies that their gold reserves are negligible today. If Frank Veneroso’s conclusions were even close to accurate back in 1998 (and we believe they were), when coupled with the 2,300 tonne net change in annual demand we can easily identify above, it can only lead to the conclusion that a large portion of the Western central banks’ stated 23,000 tonnes of gold reserves are merely a paper entry on their balance sheets – completely un-backed by anything tangible other than an IOU from whatever counterparty leased it from them in years past. At this stage of the game, we don’t believe these central banks will be able to get their gold back without extreme difficulty, especially if it turns out the gold has left their countries entirely. We can also only wonder how much gold within the central bank system has been ‘rehypothecated’ in the process, since the central banks in question seem so reluctant to divulge any meaningful details on their reserves in a way that would shed light on the various “swaps” and “loans” they imply to be participating in. We might also suggest that if a proper audit of Western central bank gold reserves was ever launched, as per Ron Paul’s recent proposal to audit the US Federal Reserve, the proverbial cat would be let out of the bag – with explosive implications for the gold price.... We realize that some readers may scoff at any analysis of the gold market that hints at “conspiracy”. We’re not talking about conspiracy here however, we’re talking about stupidity. After all, Western central banks are probably under the impression that the gold they’ve swapped and/or lent out is still legally theirs, which technically it may be. But if what we are proposing turns out to be true, and those reserves are not physically theirs; not physically in their possession… then all bets are off regarding the future of our monetary system.
Venture capital (VC) has delivered poor returns for more than a decade. VC returns haven’t significantly outperformed the public market since the late 1990s, and, since 1997, less cash has been returned to investors than has been invested in VC. Speculation among industry insiders is that the VC model is broken, despite occasional high-profile successes like Groupon, Zynga, LinkedIn, and Facebook in recent years. As The Kauffman Foundations finds, from its 20-year history, investment committees and trustees should shoulder blame for the broken LP investment model, as they have created the conditions for the chronic misallocation of capital (no doubt driven by the failure of 'hope' over experience). All is not lost to the money-pumping narrative-followers though as five myths are destroyed and five recommendations made that may help LPs allocate and follow-through more effectively.
It appears that JPM and HSBC's monopoly in the warehousing of tungsten gold is coming to an end. Just two weeks after QEternity was announced, it has become obvious that the only things, literally, that will matter in the future are the ABCDs: Anything Bernanke Can't Destroy. And as a result of a surge in physical purchases, buyers need to store their metal somewhere. Sure enough, one of the the UK's most insolvent banks - Barclays - is more than happy to provide its brand spanking new warehousing services, with the opening of what will be on of Europe's largest PM vaults. From Dow Jones: "Barclays has opened its first precious metals vault in London in a bid to satisfy growing client demand for bullion as a store of value, the bank said Thursday. The vault, which houses gold, silver, platinum, palladium and rhodium and began operating earlier this month, is one of the largest in Europe. While the bank already has extensive trading and clearing capabilities, this is the first time that Barclays has been able to offer its own precious metals storage facility to its customers, having previously relied on third-party storage." Of course, if and when the scramble comes and everyone demands their gold from the vault located in an unknown location, but somewhere in the inner loop of London's M25, Barclays will just say "Ooops." But we will cross that bridge when we get to it.
With global growth slowing, global trade tumbling, and earnings revisions falling rapidly, equity market outperformance has been (as we noted earlier) based on the Fed/ECB's largesse. The unanswered question is - how much is now priced in? Given recent 'stability' post-FOMC, it seems the follow-through is not there (especially if we look at sectoral performance) and based on David Rosenberg's estimate of Fed QE's impact on stocks, we think we know why. In the last three months, the S&P 500 has 'outperformed' the Fed balance sheet by around 220 points - which equates to a pricing-in of around 11 months of additional QEternity.
Ray Dalio, founder and co-chief investment officer of Bridgewater Associates, L.P. and one of the most successful hedge fund managers of all time told Maria Bartiromo last week that he owns gold and that he sees no “sensible reason not to own gold”. The interview was part of the Council on Foreign Relations (CFR) Corporate Program's CEO Speaker Series, which provides a forum for leading global CEOs to share their priorities and insights before a high-level audience of wealthy and influential CFR members. The respected hedge fund manager suggested that a depression and not a recession was likely and warned of social unrest and the risk of radical politics as was seen with Hitler and the Nazis in the Depression of the 1930’s. Dalio spoke about how “gold is a currency” and when asked by Bartiromo “do you own gold?”, he smiled and said “Oh yeah, I do.” The admission elicited a laugh from the CFR audience. Dalio’s interview is important as it again indicates how slowly but surely gold is moving from a fringe asset of a few hard money advocates and risk averse individuals to a mainstream asset. Wealthier people and some of the wealthiest and most influential people in the world are slowly realising the importance of gold as financial insurance in an investment portfolio and as money. This will result in sizeable flows into the gold market in the coming months which should push prices above the inflation adjusted high of 1980 - $2,500/oz. The interview section where Dalio is asked about gold by an audience member begins in the 43rd minute and can be seen here.
The seemingly inexorable rise of corporate bond ETFs (most specifically HYG and JNK is the high-yield market, and LQD in investment grade) have been discussed at length here as both a 'new' factor in the underlying bond market's technicals (flow) as well as their correlated impact on equity and volatility markets. Goldman Sachs' credit team delve deep into the impact of these relatively new (and rapidly growing) structures with their greater transparency but considerably higher sensitivities and conclude that not only are they here to stay but the consequences of ETF-inclusion (dramatic outperformance bias relative to non-ETF bonds) are deepening the liquidity divide (and relative-value) of what is already a somewhat sparsely-traded market. Our concern is that, as the divide grows (and liquidity is concentrated in ETF bonds), given the crowding tendency we have witnessed, (even with call constraints at extremes thanks to low interest rates), this is yet another crowded 'hot potato' trade hanging like a sword of Damocles over our markets (courtesy of Bernanke's repression).
Marc Faber, one of the few analysts, to have predicted the current crisis correctly and to have protected his clients in the process, remains very bullish on gold. In another excellent Bloomberg interview, Faber said that “the trend for gold prices will be steady but the trend for the dollar and other currencies will be down. So in other words gold in dollar terms will trend higher.” “How high it will go, you will have to call Mr Bernanke and at the Fed there are other people who actually make Mr Bernanke look like a hawk and so they are going to print money.” Faber is on record as to the importance of owning physical gold and he again warned about the importance of owning gold but not storing it in the U.S. “You ought to own some gold but don’t store it in the U.S., the Fed will take it away from you one day,” Faber astutely noted. He said that Bernanke is a money printer and this could lead to massive inflation and the Dow Jones at 20,000, 50,000 or 10 million. Faber cheerily predicted that the “the Federal Reserve’s monetary policy will destroy the world” and “eventually we will have a systemic crisis and everything will collapse.”
- Anti-Japan demonstrators protest in New York City (China Daily) ...and the propaganda: Younger generation feels wave of emotions (CD)
- And the retaliation: Obama to launch auto trade case against China (Reuters)
- Spanish Banks Bleeding Cash Cloud Bailout Debate (Bloomberg)
- Chicago teachers extend strike (Reuters); Emanuel Promises He’ll Sue to End Chicago Teacher Strike (Bloomberg)
- China hurts own credibility with Xi's vanishing act (Reuters)
- European Squabbling on Euro Crisis Solution May Test Rally (Bloomberg)
- Two South Africa mines reopen, most don't (Reuters)
- Finance Industry Warns of ‘Cliff Effect’ in ECB’s Bond Plan (Bloomberg)
- China struggles to cure the violent ills of health system (Reuters)
- QE3 is for Main Street, except... it isn't: QE3 hit by mortgage processing delays (FT)
- Probe focuses on JPMorgan's monitoring of suspect transactions (Reuters)
- As explained here before: Spanish Bonds Decline as EU Policy Makers Clash on Bank Plan (Bloomberg)
Under widespread NIRP, pensions, annuities, insurers, banks and ultimately all savers will suffer a slow but steady decline in real wealth over time. Just as ZIRP has stuck around since the early 2000’s, NIRP may be here to stay for many years to come. Looking back at how much widespread damage ZIRP has caused since its introduction back in 2002, it’s hard not to expect that negative interest rates will cause even more harm, and at a faster clip. In our view, NIRP represents the death knell for the financial system as we know it today. There are simply too many working parts of the financial industry that are directly impacted by negative rates, and as long as NIRP persists, they will be helplessly stuck suffering from its ill-effects.
Moments ago, the FOMC members formalized their opinion on where inflation is heading: "Most members continued to anticipate that, with longer-term inflation expectations stable and the existing slack in resource utilization being taken up very gradually, inflation would run over the medium term at a rate at or below the Committee’s objective of 2 percent." The only conclusion one can derive from this is that since the perpetually wrong FOMC committee, which has never accurately predicted any one thing in its entire history, sees little to no inflation, inflation is most likely about to soar. A convenient independent confirmation of this assumption comes from none other than bond manager PIMCO which moments ago announce that it was adding to its gold holdings "on inflation concerns...as it bets that global inflation rates will pick up over the next three to five years." Specifically, "The Pimco Commodity Real Return Strategy Fund, which has about $20 billion in assets, has increased its gold holdings to 11.5% of total assets recently, from 10.5% two months ago, and has been adding to the position when gold prices dipped toward $1,500 a troy ounce, says Nic Johnson, the fund's co-portfolio manager." And with global asset managers allocating about 1% of their AUM to the precious metal, should the majority of them copycat PIMCO in this move, then gold would cross the psychological $2,000 barrier in minutes. The irony is that for a bond manager, which Pimco just happens to be the biggest in the world, inflation is your worst friend. So acknowledging its imminent creep, is hardly "talking one's book."
Silver, wine, art and gold – or SWAG – may be the solution for investors looking to protect their wealth in the coming years according to perceptive Reuters Columnist, James Saft. In an interesting article and an interesting video for Reuters, Saft coins the term “Investing 201” which means having SWAG in your portfolio in order to protect investors from “a grim decade of money printing and financial repression.” SWAG, as in silver, wine, art and gold, are real assets that might just outperform if official policy causes the money supply to surge according to Saft. This is the idea of Joe Roseman, who says SWAG will do very well over what could be a very troubled next decade. "These assets effectively act as a money supply index tracker," said Roseman, who for 16 years was a money manager and economist at Moore Capital, run by the legendary Louis Bacon. "If the authorities are going to bail themselves out, money supply will expand. Every single time governments have been here, this is exactly what they have done."