recovery

Copper and crude oil are both base essentials heavily reliant upon by economies globally for everyday usage, with no meaningful substitution options. Gold, on the other hand, is not as essential to keep the everyday world running seamlessly, and could conceivably be substituted by other commodities with a change in global monetary standard or people’s perception. From that perspective, I think there are a few recent trends pertaining to crude and copper that are being misinterpreted.

The mirage of economic recovery conjured up by our political leaders and a credulous news media dimmed and flickered in the harsh light of reality on Friday, when grim employment figures for May sent stocks into one of their steepest dives of the year. We would caution bears against becoming overly confident, however, since there are several technical factors coming into alignment that augur a potentially sharp reversal in the broad averages and some important trading vehicles that we track.

So the employment report disappointed, but was it really as bad as evidenced by such a disproportionate selloff?

Post G-20 rant on our boy Tim.

As a reminder, for anyone considering this a buying opportunity (other than for a swing trade) based on rebalancing or mean-reversion should note two things: fund outflows are picking up for risk assets, and, even more importantly in our view, risk budgets will mean that allocations will be materially lower (in their wondrously pro-cyclical manner) as we note IG's three-month realized vol is its highest since NOV08 and HY's three-month realized vol is its highest since OCT07 (higher still if we adjust for intraday vol)!

After today's NFP number, even the most rosy-eyed optimists know that the jobs situation in the US is if not openly reverting into a double dip yet, then certainly scraping the bottom. What many are confused about is just why Obama and Biden were touting today's NFP so aggressively: the massive disappointment in the market post the announcement leaves only two possible explanations: 1) the president's advisors are all truly incompetent and have no idea what the market perceives as good or bad news, or 2) this was a calculated move to send markets lower, which in turn would hit the euro. If the latter is indeed the case, the question remains whether this is a benevolent (assist European exporters) or malevolent (throw Europe into unfixable turmoil) move. The response should be made clear long before the mid-term elections. Yet even with all these open items, the bottom line is that today's BLS report was very much irrelevant. As David Rosenberg highlights, it is not the actual employment, it's the income that this employment generates, that is important. And as he observes: "real organic income is still not growing and down nearly $500 billion from pre-recession levels."

So this is all $887 billion in stimulus gets you? There are now more than 15 million unemployed, including 6.8 million who have been jobless for more than six months. Until today’s number, our nine month long recovery produced a net loss of 133,000 jobs! At this stage of the 2003 recovery, we were regularly clocking 200,000-300,000 a month in job gains. Is Michele Obama already secretly scoping out new private elementary schools in Chicago?

President Obama has now become a professional economist, because like most professional economists his unemployment forecast was wrong. The May unemployment data clearly reveals a flattening of the economy.

In continuing my data intense, hardcore, uber-objective dissection of the stuff that is proffered through the mainstream media (MSM), I bring you...

Goldman Sachs: "Nothing is f*$&ed here dude, those CDS traders are just a bunch of f*$&ing amateurs"

• ADP reported 55,000 gain in private sector jobs and a fall in weekly jobless claims in US.
• Asian stocks fall led by commodities on fears China’s plans will curb growth will lower demand.
• China shares flat on worries Europe debt woes might hurt exports, end week down by 3.8 percent.
• Dollar trades near four-year high against Euro; Won falls on war concern.
• EU threatens Suez Environnement with fine for interfering with antitrust probe.
• Eurozone Q1 economic growth confirmed at 0.2 percent despite big drop in debt-laden Greece.
• Hungary has solvency issues.

In a speech before the SW Graduate School of Banking, Dallas Fed's Richard Fisher comes out swinging, blasting his boss Ben Bernanke and his policy of globalized moral hazard: "Let me make my sentiments clear: It is my view that, by propping up deeply troubled big banks, authorities have eroded market discipline in the financial system. It is not difficult to see where this dynamic leads—to more pronounced financial cycles and repeated crises." And just in case listeners missed the point, he followed up: "Just this morning, the Washington Post summarized the impasse that inevitably blocks treatment of the TBTF pathology. In an article on preparation for this weekend’s Group of 20 talks on bank reform, it was noted that “some” participants “remain hesitant to lean too hard on banks they consider vital to their national economies.” This hesitancy only perpetuates the problem: The longer authorities delay the process, the more engrained behemoth financial institutions become; the more engrained they become, the less extricable they are. And so the debilitating disease of TBTF spreads. What appears “vital” becomes “viral” and grows ever more threatening to financial stability and economic stability."

This article is a look at the US's recovery, Europe's recovery, Asia's (China) recovery, and how they all tie together. While US manufacturing has been improving, mainly because of exports, it is also flattening out. Ditto almost everywhere else. This is a sign of what's coming.

Reuters reports that the Kansas City hawk says Fed should hike to 1% by the end of the summer, and should sell MBS immediately and certainly by the time the hike at the end of the summer. Not stopping there he says the Fed should promptly proceed to raise rates from 1% to 3% thereafter. Hoenig also noted that the low inflation over the next year would increase as the economic recovery picks up. Of course, a raise in rates, would kill stocks, and promptly push the EURUSD to parity, also killing US exports, which is why we are confident Bernanke will completely ignore this most recent bout of deranged sanity from Hoenig.

Today's activity will continue to be influenced by the "risk-on" crowd. Sell bonds, buy stocks, buy oil, sell gold, rinse repeat. But we see less and less people selling what they buy in the gold market. Sell side activity is more dominated by hot money liquidation than ever before. PIMCO's El Arian said their fund cut its gold holdings in half, citing the liquidation deflation drivers at play. That will not help today's activity either. We can only hope he is right. Our order underneath remains unfilled.