Real estate

Margin Calls Coming On US Too-Big-To-Fail Banks

This week's biggest news is not the Non-Farm Payrolls, or the European Central Bank or even Portugal's government falling. No - this week's big deal is the openness with which the Federal Reserve is preparing a major margin call on the too-big-to-fail banks in the US. This has been a long time coming since the introduction of the Dodd-Frank law back in 2010 but it is a game changer. Remember all macro paradigm shifts come from policy impulses, often mistakes. Is the Fed about to given the whole banking industry a major margin call?

The Currency Wars Reignite

Our reality has changed in the last twenty-four hours. The Bank of England and the European Central Bank have re-affirmed their old positions since the Fed has changed tacks. It may well be, as Europe is in much worse financial condition than the United States, that there is a policy reason for the European positions but it may well also be a calculated move to devalue the major European currencies. Whatever the actual reasons, the European statements have certainly sounded the trumpet that the “Currency Wars” have reignited.  It is a dangerous game when the world’s central banks that have been working for the last five years in unison and now they head down different paths.

Frontrunning: July 5

  • Egypt Girds for Muslim Brotherhood Protests (WSJ)
  • SAC Capital's Steven Cohen Expected to Avoid Criminal Charges (WSJ)
  • SAC insider-trading probe could last years (Reuters)
  • RBI seen selling dollars around 60.59 levels: dealers (Reuters)
  • China signals will cut off credit to rebalance economy (Reuters)
  • Egypt army arrests key Muslim Brotherhood figures (BBC)
  • Rise in Steel Prices Alarms Buyers (WSJ)
  • Draghi-Carney Seek Independence Day Break From Bernanke (BBG)
  • Samsung Warns Results Will Miss Forecasts (WSJ)
  • Russia Prosecutor Seeks 6 Years in Jail for Putin Critic Navalny (BBG)

Kyle Bass Hunkers Down: "We Dramatically Reduce Portfolio Risk"

"China’s direct contribution to global growth is enormous, but perhaps equally as important is its role in generating growth in developed and emerging economies. A slowdown, whether significant or extreme, in the Chinese economy heralds very bad news for asset prices around the world. A growth crisis centered in Asia will further exacerbate the instability and volatility in Japan and have a devastating impact on second derivative marketplaces such as Australia, Brazil and developing markets in South East Asia. The combination of rich valuations and further threats to growth has led us to dramatically reduce risk in the portfolio and actively position ourselves to withstand the uncertainty and instability ahead"

The Diminishing Effects Of QE Programs

There has been much angst over Bernanke's recent comments regarding an "improving economic environment" and the need to begin reducing ("taper") the current monetary interventions in the future.  What is interesting, however, is the mainstream analysis which continues to focus on one data point, to the next, to determine if the Fed is going to continue its interventions.   Why is this so important?  Because, as we have addressed in the past, the sole driver for the markets, and the majority of economic growth, has been derived solely from the Federal Reserve's programs.   The reality is that such analysis is completely useless when considering the volatility that exists in the monthly data already but then compounding that issue with rather subjective "seasonal adjustments." The question, however, is whether such "QE" programs have actually sparked any type of substantive, organic, growth or simply inflated asset prices, and pulled forward future consumption, for a short term positive effect with negative long term consequences? The recent increases in interest rates, combined with still very weak wage growth, higher costs of living and still elevated unemployment is likely to keep the Fed engaged for the foreseeable future as any attempt to remove its "invisible hand" is likely to result in unexpected instability in the financial markets and economy.

Europe In Turmoil: Spreads Explode On Portulitical Crisis; Egypt Ultimatum Nears

And just like that things are going bump in the night once more. First, as previously reported, the $100+ WTI surge continues on fears over how the Egyptian coup will unfold, now that Mursi has a few short hours left until his army-given ultimatum runs out. But it is Europe where things are crashing fast and furious, with the EURUSD tumbling to under 1.2925 overnight and stocks sliding on renewed political risk, with particular underperformance observed over in Portugal, closely followed by its Iberian neighbor Spain, amid concerns that developments in Portugal, where according to some media reports all CDS-PP ministers will resign forcing early elections, will undermine country's ability to continue implementing the agreed bailout measures. As a result, Portuguese bond yields have spiked higher and the 10y bond yield spread are wider by over a whopping 100bps as austerity's "poster child" has rapidly become Europe's forgotten "dunce." The portu-litical crisis has finally arrived.

Guest Post: Gold – Has The ‘Narrative’ Failed?

Barry Ritholtz is convinced that once the current short-term bounce is over with, the recent cyclical bear market in gold will resume. The reality is of course that neither Mr. Ritholtz, nor anyone else actually knows the future. Therefore, he cannot know whether the bear market is or isn't over. However, judging from the remainder of his post, he actually seems to think that the secular bull market in gold is over. In our opinion there is no evidence for that, and we will explain below why we think that he and others in the  long term bear camp are wrong. Further below is the evidence marshaled by Mr. Ritholtz (actually, apart from the technical analysis he provides, it isn't really evidence at all – it reads like an unsupported opinion). Sure enough, gold has no yield, no conference calls, and no income statements (paraphrasing Jim Grant). That is actually the beauty of it. But that does not mean it 'has no fundamentals', nor does it means that it 'cannot be an investment'. We comment on his article (and its errors) further below.

Gold Bug Bashing, 1976 Edition

The New York Times had the definitive take on the vicious sell off in gold. The analysis provides a good representation of the current conventional wisdom. The only twist here is that the article from which this summary is derived appeared in the August 29, 1976 edition of The New York Times. At that time gold was preparing to embark on an historic rally that would push it up more than 700% a little over three years later. Is it possible that the history is about to repeat itself?

Argentina Legitimizes Black-Market Currency With New Dollar-Backed CDs

Just over a month ago we noted that the black-market (blue-dollar) currency that existed in hyper-inflation-prone Argentina had reached epic proportions of disconnect from the official rate of exchange to the USD. It seems the government did not like this and so has decided to take control of this 'shadow economy' by creating a new payment method. As the FT reports, As of today, Argentines can pay with so-called Cedins (Certificates of Deposit for Investment), which unlike the peso, can be (legally) swapped for much-coveted dollars. Originally designed for real-estate purchases, they are set to be accepted for anything as long as buyer and seller agree. Argentina has a history of resorting to 'funny money' and Cedins will "operate like a national currency... [since] the peso has stooped serving as a savings instrument." While officials dismiss the blue-dollar market, this move clearly signifies there recognition of an un-official exchange dramatically devalued from the the official rates.

Frontrunning: July 1

  • Pretty much as expected from George W. Bush: Edward Snowden ‘damaged’ security (Politico)
  • Gotta love the Keynesian-Monetarist religion: True 'Bullievers' Are Still Sweet on Japan (WSJ)
  • Canadian Takes Reins at Bank of England (WSJ)
  • Egypt streets quiet, political standoff goes on (Reuters)
  • Private Banks Leave Switzerland as End of Secrecy Hurts (BBG)
  • How Next Debt-Ceiling Fight Could Play Out (WSJ)
  • Easy Money Is Still Central (WSJ)
  • Lew Says China Needs Market Policies and Stop Spying (BBG) - China replies with the same
  • Ireland Preparing Plan to Tap Euro-Area Rescue Fund, Noonan Says (BBG)
  • Poll shows strong shift to Australian PM Rudd, new ministry named (Reuters)

When Milton Friedman Opened Pandora's Box...

At the end of the day, Friedman jettisoned the gold standard for a remarkable statist reason. Just as Keynes had been, he was afflicted with the economist’s ambition to prescribe the route to higher national income and prosperity and the intervention tools and recipes that would deliver it. The only difference was that Keynes was originally and primarily a fiscalist, whereas Friedman had seized upon open market operations by the central bank as the route to optimum aggregate demand and national income. The greatest untoward consequence of the closet statism implicit in Friedman’s monetary theories, however, is that it put him squarely in opposition to the vision of the Fed’s founders. As has been seen, Carter Glass and Professor Willis assigned to the Federal Reserve System the humble mission of passively liquefying the good collateral of commercial banks when they presented it. Consequently, the difference between a “banker’s bank” running a discount window service and a central bank engaged in continuous open market operations was fundamental and monumental. In short, the committee of twelve wise men and women unshackled by Friedman’s plan for floating paper dollars would always find reasons to buy government debt, thereby laying the foundation for fiscal deficits without tears.

The Days Of The Super-Powered Chinese Economy Are Over

Last week's liquidity crunch and market panic is a reminder that Beijing is playing a difficult game. Regardless of what happens next, the consensus expectations that China's economy will grow at roughly 7 percent over the next few years can be safely ignored. Growth driven by consumption, instead of trade and investment, is alone sufficient to grow China's GDP by 3 to 4 percent annually. But it is not clear that consumption can be sustained if investment growth levels are sharply reduced. If Beijing can successfully manage the employment consequences of decreased investment growth, perhaps it can keep consumption growing at current levels. But that's a tricky proposition. It's likely that the days of the super-powered Chinese economy are over. Instead, Beijing must content itself with grinding its way through the debt that has accumulated over the past decade.

Frontrunning: June 28

  • Fashionable 'Risk Parity' Funds Hit Hard (WSJ)
  • No 1997 Asian Crisis Return as China Trembles (BBG)
  • Greece Faces Collapse of Second Key Privatization (FT)
  • China Bad-Loan Alarm Sounded by Record Bank Spread Jump (BBG)
  • Iranian official signals no scaling back in nuclear activity (Reuters)
  • Asmussen Says Any QE Discussions at ECB Not Policy Relevant (BBG)
  • Flat Japanese consumer prices aid Kuroda (FT)
  • Vietnam Devalues Dong for First Time Since ’11 to Boost Reserves (BBG)
  • World Bank Sees ‘Vulnerable’ Food System on Climate Change (BBG)
  • Fed big-hitters seek to quash QE fears (FT)
  • EU Leaders Set to Slow Support for Ailing Banks (BBG)
Pivotfarm's picture

Gold Plunges!

Gold has gone down Friday to under $1, 200 an ounce and that means it’s reached its lowest point for the past three years. Worse than that: it’s been the worst quarterly performance for gold for 45 years!