International Monetary Fund

Two days ago John Paulson had an extended interview with Les Echos which however received little coverage in the US, supposedly since the interview was in French, and also because it was behind a paywall. Since the interview does provide some incremental perspectives by Paulson, it is useful to recreate it in its entirety. Specifically, Paulson is now far more bearish on US housing, blaming it on FrankenDodd, and he continues to be as bullish as ever on gold. To wit: "Over time, the price of gold will rise in proportion to the creation of paper dollars. In an inflationary environment where the demand for protection increases, the price of gold can rise even further. Historically, gold has always been a safe haven against inflation and a safe haven in times of political instability. Today we face both risks." As for whether or not we will have QE3: Paulson is not the guy to ask. He is as confused as the Fed presidents.

The deflating Dollar is the World's Reserve currency at 62% of all the money in the World and growing fast as Ben buys 'em as fast as Timmy can print them and then loans them out to the Banksters, who promptly lever that money 10:1 to buy commodities.

As if holding $36 billion (€25 billion) in Spanish sovereign debt wasn't enough, China now appears to be going all in as Spain's white knight. Reuters reports that in addition to keep the government solvent, China is now going direct to Spain's troubled banking system. "Chinese investors including the country's sovereign wealth fund may inject $13 billion into Spanish banks, a government source said on Wednesday after Spain's premier met financial authorities in Beijing." Then again, recall that it was Portugal which relied last exclusively on China as a last chance rescuer. Which is why we disagree completely with this statement: ""If this is true it is positive for the market. If CITIC or another Chinese vehicle invests 9 billion euros that would represent around 5 percent of the equity in the Spanish banking system," said a London-based analyst who asked not to be named." Uh, no. It means that the market, like a good Pavlovian dog, will now start dumping Spanish paper in expectations of yet another bailout. And the more Spain is forced to buy to preserve it cross-linked investments in the PIIGS, the more dumping. After all such is life in centrally planned bizarro world.

GFMS, arguably the most respected precious metals consulting company, has just released its much anticipated 2011 Gold Survey. While the rather expensive 128 page report is not available for public consumption (yet), the gist is as follows: GFMS sees gold prices averaging $1,455 an ounce this year and sticking to a range of $1,319-1,620 an ounce, executive chairman Philip Klapwijk told delegates at the launch of its Gold Survey 2011. Klapwijk said the market had probably already seen the lows for this year, after prices slipped towards $1,300 an ounce in late January during a broad-based sell-off of commodities.Quoting Klapwijk: "Overall, we would not be surprised, therefore, to see gold break through $1,600 before the end of the year." Neither would Goldman, which needs to buy some more, thus expect a downgrade shortly.

The IMF has released its 2011 Global Financial Stability Report which summarizes the fund's view on the causes for ongoing market instability and proposes some solutions on how to continue. Not surprisingly, the IMF sees the key threat as follows: "The main task facing policymakers in advanced economies is to shift the balance of policies away from reliance on macroeconomic and liquidity support to more structural policies—less “leaning” and more “cleaning” of the financial system. This will entail reducing leverage and restoring market discipline, while avoiding financial or economic disruption during the transition. Thus, ongoing policy efforts to withdraw (implicit) public guarantees and ensure bondholder liability for future losses must build on more rapid progress toward stronger bank balance sheets, ensuring medium-term fiscal sustainability and addressing excessive debt burdens in the private sector."  The key issue here is that as the IMF correctly observes household leverage, still at unsustainable levels, continues to be a threat to the financial system (despite aggressive attempts to transfer leverage from the private to the public sector) and may further weaken banks (but not if one listens to JPM - it's all unicorns and rainbows there). Yet the scariest news: "Global banks face a wall of maturing debt, with $3.6 trillion due to mature over the next two years." But that's ok- these banks will focus on funding US Treasury issuance first, ergo no need for more QE...

The FBI and the Secret Service showed their willingness today to utilize the expanded definitions of “counterfeit currency” and “domestic terrorism” brought about by the recent conviction of Bernard von NotHaus of the alternative currency outlet “Liberty Dollar” when the agencies initiated a surprise raid on an unsuspecting Chuck E. Cheese establishment in Des Moines, Iowa. “Haven’t you ever been at the laundry mat with a pocket of change thinking you have plenty of quarters, only to discover that most of them are Chuck E. Cheese tokens?!” railed Anne Tompkins, Department of Justice prosecutor in the Liberty Dollar case, as she read from a carefully prepared DHS script. “That is close enough to counterfeiting for me! It is a blatant destabilization of our democratic economy! What are you supposed to do, let your underpants wallow in filth while Chuck E. Cheese makes a profit? I say no to these financial terrorists!”

• Obama Said to Call for Entitlement Cuts, Higher Taxes (Bloomberg)
• Banks Face Sovereign Debt Scrutiny in EU Stress Tests (Bloomberg)
• ECB: Ireland’s Taxpayers Must Share the Pain (FT)
• BRICS Push Resource-Hungry China to Buy Finished Goods (Bloomberg)
• China’s Nuclear Freeze to Last Until 2012 (FT)
• TEPCO still working on plan to end Japan nuclear crisis (Reuters)
• Schneider Says Currently No Talks With Tyco About Alliance (Bloomberg)
• Portugal's Leaders Bicker Over Bailout (WSJ)
• Chinese Companies Go on Global Bond Spree (FT)

Stocks are higher in Europe after gains in Asia despite losses on Wall Street yesterday. Gold and silver are showing tentative gains after 1% declines yesterday. With America set to have the largest budget deficit of any of the developed economies, a whopping budget deficit of 10.8pc of GDP this year alone, gold and silver’s medium term prospects remain positive. The IMF has warned that the U.S. lacks credibility regarding its debt and must implement stringent austerity measures. This is one of the primary factors which strongly suggests that, contrary to the consensus, a double dip recession looks increasingly likely in the U.S. This would be negative for the dollar and US treasuries and lead to higher gold and silver prices due to safe haven buying. Central banks are questioning the dollar and the euro as reserve currencies due to the massive liabilities and debt levels confronting the US and the Eurozone (see News below). This is set to lead to central banks continuing to be net buyers of gold for the foreseeable future

• Chinese cos go on global bond spree; Mainland groups have borrowed $12.2B this yr.
• Japan cuts its economic assessment as earthquake damage mounts.
• Obama said to call for cuts in entitlements, higher taxes.
• Oil hovers above $106 in Asia as investors eye crude demand amid 2-month rally.
• OPEC sees higher demand for its oil in 2011 at 29.9M barrels/day, up 400,000 bbls YoY.
• Swedish government expects public finance surplus in 2011, tax cuts in 2012.
• Taiwan halts plans to build atomic reactors after Japan crisis.
• US Import prices increased 2.7% in March on crude oil, food.
• US lacks credibility on debt, says IMF. Stringent austerity measures needed.

Part 2 of the Great Beltway Soap Opera promises to be quite entertaining. According to Reuters, even though the US desperately needs to get a debt ceiling resolution immediately (we are at a point when any debt auction could be the last, depending on how many refunds the Treasury has to issue at any given point), Republicans are resolved to "stretch out negotiations on raising the U.S. debt limit until July....Prolonging negotiations past mid-May when Washington will hit its debt limit could give Republicans more leverage to secure big spending cuts, but it could worry investors as the country runs up against a possible default. The Republicans said they would act before that happened." The only question is whether bond investors (no matter how deflationary attuned) will stay in bonds before any possible compromise. Of course, should yields surge as a result of political "instability" it will merely reinforce the continuation of an easing regime, especially since Goldman is now obviously in a faux-disinflationary regime (more thoughts on that imminently, together with how to trade the unwind of Goldman remaining "Top Trades for 2011" following purported Bill Dudley instructions). And if the debt ceiling debate is in any way comparable to the grotesque farce that was the $38.5 billion, pardon $14.7 billion spending cut, then America is certainly buggered.

Contextually, today was interesting bottom-up with only 53% of names agreeing in terms of direction for credit and equity risk (dominated by 50% agreement that conditions deteriorated). 27% saw credit widen as equity rallied while 20% saw credit compress as equities sold off but at the sector level the picture was much more stable with most agreeing systemically worse today. Leisure, healthcare, and Consumer Cyclicals were the only divergent sectors with credit underperformance as equity managed gains (only just in the latter we note). While we saw a clear up-in-quality shift in single-name credit today ( a theme we have been suggesting recently), that was not the story in equities where higher quality names (BBB and above) actually underperformed on average those in the spec grade cohorts. Vol movements were in line with CDS once again with vol rising less for the better quality names and rising dramatically more for the lower quality names (with a particular emphasis on the crossover names in fact).

We've been seeing all year that higher input costs are not being passed on to the consumer - that's a margin squeeze! Do you think the people buying the market up to it's 100% levels didn't know this?

The IMF has just released its latest "Fiscal Monitor" report which, not surprisingly, is as usual full of pretty charts that alas amount to pretty much nothing. What was surprising is the increasingly more antagonistic tone the IMF has taken with regard to the developed economies. In what could be a first, the IMF is starting to get increasingly realistic, and in the report notes that of all budget deficits in "selected countries", the US will hit the highest at 10.8%, the same as Ireland, and just ahead of Japan at 10%. And a direct stab at the US: "The United States needs to accelerate the adoption of credible measures to reduce debt ratios....Market concerns about sustainability remain subdued in the United States, but a further delay of action could be fiscally costly, with deficit increases exacerbated by rising yields." Other observations by the IMF: deficits in the Middle East could widen as governments increase subsidies to ease social tensions; higher food, fuel prices are likely to slow the pace of spending in emerging markets; US fiscal adjustments in 2012 are needed to put fiscal consolidation back on track. Oddly enough, the IMF which yesterday decided to trim GDP estimates very modestly even as it activated its SDR500 billion New Arrangements to Borrow line of credit, is Cottarelli's statement that the US still has a "lot of credibility." For now the rating agencies still seem to buy this load of BS.

The market was down on Monday as there was little news to keep the momo of the ponzeconomy™ going as investors await earnings reports...

Silver's nearly 3% surge in trading in Asia may indicate that the long expected short squeeze may be underway. Bullion banks with very large concentrated short positions may be being forced to buy back their short positions – propelling silver higher. This could see silver surge over the record nominal high of $50.35/oz in short order. At the same time caution is merited as silver has risen nearly 10% in April so far and over 33% year to date. Speculators need to be very cautious as margin requirements may be increased again and profit taking could lead to sharp falls in price. Leveraged speculation is extremely high risk and should be avoided by investors and savers. Proof of the lack of animal spirits in the silver marker is seen in the data which shows that speculative sentiment on the COMEX (as seen in the Commitment of Traders/ COT data – see chart below) is subdued. While the total silver ETF holdings increased to a record, they are not far above the levels seen in December 2010 (see chart above). Importantly, even at $41.30/oz the dollar value of the total silver ETF holdings remains very small at just over $20.5 billion. To put that number in perspective, today bankers put a prospective value of around $60 billion on Glencore, one of the world’s largest commodity trading companies. BP has set up a fund worth $20 billion to cover legal claims from the oil spill disaster.