Reality

It’s in their blood.

Year-to-date, Gold is up an impressive 9.4%, significantly outpacing the S&P 500 at +5.6% and the disappointing 2% loss (in price) for the 30Y bond.

Treasuries sold back off initial knee-jerk rally low yields into the close but the EUR kept going (holding above 1.3100) as Gold and Silver were the big winners on the day (+2.9% and 3.4% on the week now). Stocks and credit roared higher after an initial stumble post FOMC. Financials lagged among all the S&P sectors (and Utilities outperformed post FOMC statement +0.75% vs financials -0.25%). Right up until the close, credit and equity markets were on a tear but very soon after cash closed, futures limped back and HY credit snapped lower (quite dramatically) which makes some sense given just how ridiculously rich it had become to fair-value.

Our discussions (here, here, and here) of the dispersion of deleveraging efforts across developed nations, from the McKinsey report last week, raised a number of questions on the timeliness of the deflationary deleveraging process. David Rosenberg, of Gluskin Sheff, notes that the multi-decade debt boom will take years to mean revert and agrees with our views that we are still in the early stages of the global deleveraging cycle. He adds that while many believe last year's extreme volatility was an aberration, he wonders if in fact the opposite is true and that what we saw in 2009-2010 - a double in the S&P 500 from the low to nearby high - was the aberration and market's demands for more and more QE/easing becomes the volatility-inducing swings of dysphoric reality mixed with euphoric money printing salvation. In his words, perhaps the entire three years of angst turned to euphoria turned to angst (and back to euphoria in the first three weeks of 2012?) is the new normal. After all we had angst from 1929 to 1932 then ebullience from 1933 to 1936 and then back to despair in 1937-1938. Without the central banks of the world constantly teasing markets with more and more liquidity, the new baseline normal is dramatically lower than many believe and as such the former's impacts will need to be greater and greater to maintain the mirage of the old normal.

This is just getting better and better:

• FOMC: 2012 GROWTH AT 2.2%-2.7% VS 2.5%-2.9% IN NOV. FORECAST
• ELEVEN OF 17 FED OFFICIALS SEE MAIN RATE ABOVE 0.25% IN 2014
• SIX OF 17 FED OFFICIALS SEE NO RATE INCREASE BEFORE 2015
• FOMC DOESN'T SET SPECIFIC LONG-RUN GOAL FOR EMPLOYMENT LEVEL

Japan is now seriously blushing. As for the reality of the Fed's forecasts, they are absolutely worthless, so no point in even spending one minute on them.

If we learn nothing, then we deserve to lose. This is not a popular concept in America at this point in its history, when monumental errors are denied, excused, rationalized or quickly absolved by those who committed them. As a small-fry investor, when I veer away from my discipline and system, I predictably lose money. As I sift the ashes of the trade, I always remind myself: if I learn nothing from my studies and experience, then I deserve to lose. What exactly has America learned since January 1, 1999, 13 years that included two stupendous financial/credit bubbles, two hot wars and an explosion in public and private debt? If we examine the policy changes and institutional changes since the 2008 global financial meltdown, then we have to conclude that we've learned a very few things...

In all, the President's speech was reminiscent of George Clooney’s in Ides of March. We’ve heard it all before, maybe with slightly different words: America lost 4 million jobs before I got here, and another 4 million before our policies went into effect, but in the last 12 months, we added 3 million job. We must reduce tax loopholes, and provide tax incentives to businesses that hire in America. We must reform taxes for the wealthy (though he signed an extension of Bush’s tax cuts.) We must train people for an apparent abundance of expert jobs. We need more clean energy initiatives.  We created regulations (big sigh of relief he didn’t use the word ‘sweeping’) to avoid fraudulent financial practices. We will help homeowners. Wall Street must ‘make up a trust deficit.”   Like Jamie Dimon cares. In other words, Obama gave Wall Street a pass, while waxing populace. Don’t get me wrong. I expected nothing different. I will continue to expect nothing different, when he gets a second term, given the lame field of contenders all around.

Humans are a flawed species. Our minds are easily manipulated. We don’t like pain. We prefer instant gratification. We are susceptible to mass delusion. We will often choose hope over critical thought. Those with higher IQs will regularly attempt to take advantage of those with lower IQs. Fear and greed are the two motivations used by the minority in power to control and manipulate the majority. The American people have been led astray by a small group of powerful men. We were herded through a door in the wall of perception that promised an American dream of material goods, entitlements and pleasure with no obligations or responsibility to future generations. There is only one choice that can save this country from ruin. Each individual must make a choice to either to continue supporting the manipulative, corrupt status quo or coming back through the Door in the Wall.

“The man who comes back through the Door in the Wall will never be quite the same as the man who went out. He will be wiser but less sure, happier but less self-satisfied, humbler in acknowledging his ignorance yet better equipped to understand the relationship of words to things, of systematic reasoning to the unfathomable mystery which it tries, forever vainly, to comprehend” – Aldous Huxley

At some point, the market will force the issue of whether or not the ECB is going to be monetizing everything or not. Germany, having already seen the ultimate outcome of monetization (Weimar) has already made it clear that it will not tolerate this.

Much has been said about the secretive vault situated 80 feet below ground level at 33 Liberty street, which contains over 20% of the world's gold (allegedly*), currently estimated at over $350 billion. Some have even robbed it: with the barrier between fantasy and reality a blur, courtesy of the total farce we live in which has rendered the IPO of TheOnion impossible, there is nothing wrong with actually believing Die Hard With A Vengeance did in fact happen. But if your knowledge of the vault is limited to the perspective of one John McClane, you are missing our on a lot. Which is why the new York Fed, in those rare occasions when it is not monetizing debt, and/or telling Citadel which securities to buy, has been courteous enough to put together "The Key To The Gold Vault" - the official brochure of the warehouse where more gold is stored than at any other place in the world.

Just Smile ... It Will Protect You from All Radiation!

Successive plans to restore confidence in the euro area have failed. Proposals currently on the table also seem likely to fail. The market cost of borrowing is at unsustainable levels for many banks and a significant number of governments that share the euro. In three short sentences, the Peterson Institute for International Economics' (PIIE) Simon Johnson introduces the clear and present danger that Europe has become in a comprehensive article on the deepening European crisis. The circular nature of the realization of sovereign credit risk realities and the subsequent effective insolvency of banks exacerbates a credit crunch and exaggerates problems in the real economy - most specifically in the periphery. Johnson outlines five measures that are needed to enable the euro area to survive but the big bazooka of up to EUR5tn just for the PIIGS is what the PIIE senior fellow fears as the ECB is pushed down a dangerous path. The coordination of 17 disaparate nations leaves the former IMF man greatly concerned as the unique nature of this crisis leaves "four economic, social, and political events as possible causes of systemic collapse with each at risk of occurring in the next weeks, months, or years and these risks will not disappear quickly." As European sovereign bonds are now deeply subordinated claims on recessionary economies, it is no surprise that Johnson ends by noting that Europe's economy remains in a dangerous state.

This is the scariest chart out of the IMF's World Economic Outlook report released today. Naturally it was purely included in there to emphasize the IMF's Mutual Assured Destruction point that Europe has to immediately proceed with fiscal easing (something which Germany will not agree to until it is too late, if then), or else this is what happens. And since this is Europe, and no fiscal resolution will come (but many, many, many summits are in store before the world figures this out), this is precisely the sad reality in store for Europe, and thus for the US and China, as 2012 will be the first year since the Second Great Depression in which official statistics will represent a global economic contraction. As for Europe's 4% decline relative to baseline: good luck.

Where did all the bears go?  We cannot find more than one person willing to be outright bearish.  What is particularly strange is that the reasons most people are bullish seem to have little, if anything to do with fundamentals – either macro or micro.  The reason for being long that is closest to being “fundamental” is that Europe is muddling through.  We're not sure Europe is muddling through, but in any case, wasn’t the bullish case for US stocks that we were decoupling?  Conspicuously absent as a reason to be long is earnings. It seems as though everyone is reasonably long (though not fully committed), but thinks everyone else is underweight.  It really feels like the “consensus” is that everyone else is underweight so you better be long for when that money comes into the market. The conversations are far more bearish than the positioning.

By his own admission in an interview today with Bloomberg TV, Barton Biggs is "elderly and not as sprite as he used to be" but for our purpose he is perfectly placed. As the almost-perfect contrarian call (bullish into August here and bearish in September here for example) notorious flip-flopper Biggs is now both "terrified he is not long enough" and yet "fears that an apocalyptic end to the Euro could occur within the next 3-6 months". According to Bloomberg, Biggs is net-long around 65% equities and noted he is "terrified I'm too long if the apocalypse is coming in Europe." Yet another canary in the seemingly 'ever-more-full-of-canaries' coal-mine (but now perhaps post OPEX and facing IMF/Greece/IIF reality we will see contrarianism at its best).