Central Banks Favour Gold and AAA Rated Government Debt – Reserve Currencies of EUR and USD QuestionedSubmitted by Tyler Durden on 04/13/2011 08:07 -0400
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
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.
From Reuters: "NY Fed delays release of latest treasury purchase schedule due to technical problems." And this from the people who run the world and monetize a trillion+ in debt per year? Why doesn't the Fed tell us the true reason for the delay: Primary Dealer Bank Holding Company Hedge Fund XYZ is holding up the release of data until the exclusive of bond allocations to said bailed out hedge fund is ironed out in exchange for various recent commodity downgrade research reports?
- Japan Sees Greater Hit to Economy as Its Nuclear Crisis Deepens (Bloomberg)
- President Open to Deal on Debt Cap (WSJ)
- Democrats Allow Trims to Favored Programs (NYT)
- Libya Rebels and West Dismiss Peace Plan (FT)
- France and Britain say NATO must step up Libya bombing (Reuters)
- Toyota Tells U.S. Dealers to Brace for Reduced Car Supplies (Bloomberg)
- U.S. Lawmakers Reach Agreement on $38 Billion in Budget Cuts (Bloomberg)
- Yemen's Saleh Exit Plan Held up by Opposition Dispute (FT)
- U.S. probes A380 taxiway collision in New York (Reuters)
Zero Hedge predicted from the very beginning that unfortunately Fukushima would end up being an as serious, if not more so (just consider the extremely high concentration of human and other capital in proximity to Fukushima: unlike the USSR there is little to none displacement capacity) catastrophe than Chernobyl. Yesterday's final hike in the incident severity level, which started at 4 and hit the highest , 7, is simply yet another confirmation of this although in absolute terms Fukushima still has a ways to go before surpassing the Soviet accident:
Choernobyl leaked a total of 5.2 million terabecquerels of radioactivity, Fukushima has so far leaked 500,000 terabecquerels. In the meantime what little progress is being made is promptly shadowed by all the incremental bad news that keep being disclosed (the most recent debacle is the discovery of extremely radioactive strontium just off the plant). Yet to be sure, there are differences between the two situation. Courtesy of Reuters, here are the key comparisons and differences between the two.
China Holds €25 Billion In Spanish Debt, Will Continue To Purchase Bonds, To Take Part In Cajas RestructuringSubmitted by Tyler Durden on 04/12/2011 07:32 -0400
And so we get the latest confirmation that China is now very invested in the Euro, ostensibly at the expense of the US Dollar. According to the Spanish government, China already holds €25 billion in Spanish debt, which explains where Chinese foreign buying interest has gone (most certainly not to US Treasurys) in 2011 (certainly not toward purchasing US Debt, where Chinese holdings have barely moved recently). Additionally, China, as Spain's soon to be largest creditor, has said it will help fund a restructuring of the Cajas debt: after all there is nothing better than consensual pre-petition arrangement between creditor and insolvent debtor.
Tepco comes clean ...
Time to upgrade Fukushima from 7 to 7¼? From Reuters: "A fire broke out at Japan's crippled Fukushima Daiichi nuclear power plant, operator Tokyo Electric and Power (TEPCO) said on Tuesday, although flames and smoke were no longer visible. A worker saw fire at a building near the No.4 reactor at around 6:38 a.m. (21:38 GMT) and a fire fighting unit of the Self Defence Forces was sent to fight the blaze, a TEPCO spokesman said. "Flames and smoke are no longer visible but we are awaiting further details regarding whether the fire has been extinguished completely," he said. Japan has been battling to bring under control the plant damaged severely by last month's devastating earthquake and tsunami."
Update: TEPCO says fire out at battery storage bldg near Fukushim-1 reactors 1-4. No effect to reactors, water cooling continues.
First we had FRBNY Dove Bill Dudley talking up the Goldman party line that QE3 may, just may, be necessary (recall Goldman initially asked for $2 trillion in QE), and now the dove from the west coast makes news as San Fran Fed (also known as the Captain Obvious academy) president Janet Yellen basically says that rising commodity prices don't warrant policy shift. And by policy shift she means a change to the current easing regime. Some other dovish statements: "it would be difficult to get a sustained increase in inflation as long as growth in nominal wages remains low" which is wrong - how many billions do American consumers "save" by not paying their mortgages; "structural explanations cannot account for bulk of rise in unemployment during the recessions" ... so why do we need economic "explanations"? "structural explanations cannot account for bulk of rise in unemployment during the recessions" - yup: Captain Obvious class 101; "long-term inflation expectations remain well-anchored despite jump in short term expectations" - anchored to what - the Rudy von Havenstein inflation projection wall chart? "decline in jobless rate reflects in part drop in labor force participation" - advance topics In Captain Obviousness; "real consumer spending slowed around turn of the year after brisk gains in autumn, consumer sentiment weaker in March" - but CNBC just spent all of last week telling us how strong the consumer was in March; and most importantly: "accommodative monetary policy stance still appropriate because unemployment too high, underlying inflation too low" and "inflation effects from higher commodity prices likely to be transitory but must watch inflation expectations" uhh, what happened to well-anchored? To rephrase: the QE lunacy will continue until morale (and hyperinflation) improves.
As we discussed extensively last week, the Repo-Excess Reserve is now officially dead: the O/N GC rate just printed at a ludicrously low rate of 2 bps confirming that the Fed's future attempts to normalize the short end will be very entertaining to watch. A bigger problem is that now banks which previously had this "free money" trade to rely on for guaranteed Fed-funded profits are now straight out of luck. Which means that the only carry trade is the tried and true FX funding trade: short crap currencies where there is no chance of a rate hike for years (such as the dollar and Yen) and go long currencies of growing developing countries whose central banks are tightening.
Community Health Plummets, Repeatedly Hits Circuit Breakers Following Lawsuit From Tenet Claiming Patient OverbillingSubmitted by Tyler Durden on 04/11/2011 10:43 -0400
Another day, another circuit breaker triggered. But this time not in some cheap Chinese fraud, but in "legit" hospital company Community Health Services, which is plummeting following the announcement of a lawsuit filed by Tenet "claiming the rival hospital operator improperly admitted patients to overbill insurers including Medicare." The stock has now been halted not once... not twice... but three times. And every time it is opened, freefall resumes. The chart says it all: and yes, not even the brilliant SEC contraption of circuit breakers can't do much if anything to prevent reality finally meeting anti-gravity.
And like that, we now have one less conflict. From Reuters "French special forces have detained Ivory Coast's Laurent Gbagbo and handed him to leaders of the rebel opposition, after French tanks forced their way into his residence, a Gbagbo adviser in France said. "Gbagbo has been arrested by French special forces in his residence and has been handed over to the rebel leaders," Toussaint Alain told Reuters." We would prefer not to visualize what happens to Gbagbo in the hands of his news captors. Importantly, considering the primary determinant in cocoa prices YTD has been the ongoing civil war in the African country, the promise of an end to hostilities sends Cocoa prices plunging, dropping the 10 metric ton contract by nearly $100 in the span of seconds.
According to the latest Lundberg survey the average price for a gallon of gasoline in the United States has moved closer to $4, jumping more than 19 cents since mid-March to a level less than 10 percent below its all-time high. And it's not even peak driving season, which typically sees a seasonal jump of at least 15-20% from early spring levels. Per Reuters: " The Lundberg Survey said the national average price of self-serve, regular unleaded gas was $3.765 on Friday, up from $3.573 on March 18, and up 91.3 cents from $2.852 a year ago. Prices in several western U.S. cities are already above $4 per gallon, led by San Francisco at $4.13. Chicago was close behind at $4.11 a gallon, the survey said." What is not surprising is that demand saturation is starting to set in, meaning refinery margins are now going through the window: " The national average would have been higher had refiners and retailers not resisted passing on rising crude oil prices as customers grow less willing to pay what it takes to fill their gas tanks, analyst Trilby Lundberg said in an interview. "Demand has been falling at these prices," she said."
As had been anticipated for weeks, and frankly is criminally overdue, Japan has announced that it will expand the evacuation zone around Fukushima to areas beyond a 20 km (12.4 mile) radius to include villages and towns that have had more accumulated radiation, Japan's chief cabinet secretary said on Monday. "These regions could accumulate 20 millisieverts or more radiation over a period of a year," Yukio Edano told a news conference, naming Iitate village, 40km from the plant, part of the city of Kawamata and other areas. The news preceded the latest major 6.6 magnitude aftershock which shook buildings in Tokyo and a wide swathe of eastern Japan on Monday evening, knocking out power to 220,000 households and causing a halt to water pumping to cool three damaged reactors at Fukushima. " The epicentre of the latest quake was 88 km (56 miles) east of the plant and stopped power supply for pumping water to cool reactors No. 1, No. 2 and No. 3. The aftershock also forced engineers to postpone plans to remove highly contaminated water from a trench at reactor No. 2." Also spotted was the now disgraced TEPCO president who had fallen "sick" early on in the crisis and completely disappeared from view. Per Reuters "TEPCO President Masataka Shimizu visited the area on Monday for the first time the disaster. He had all but vanished from public view apart from a brief apology shortly after the crisis began and has spent some of the time since in hospital. "I would like to deeply apologise again for causing physical and psychological hardships to people of Fukushima prefecture and near the nuclear plant," said a grim-faced Shimizu. Dressed in a blue work jacket, he bowed his head for a moment of silence with other TEPCO officials at 2:46 p.m. (0546 GMT), exactly a month after the earthquake hit." But the biggest loser is surely Prime Minister Naoto Kan who saw a landslide drubbing in local elections over the weekend, leaving Japan once again leaderless precisely at a time when it needs focused leadership more than ever.
The barrage of Fed commentary in the coming week could keep the debate over the future of Fed policy in the spotlight, as will the US PPI and CPI data that will be out toward the end of the week. Meanwhile, oil prices continue to climb, with Brent sitting firmly above $120/bbl. Elsewhere, there is a deluge of China macro data on Friday, where we expect inflation to pick-up a touch and activity to remain reasonably solid. The trade data out on Sunday posted a tiny surplus. Import and export growth both improved substantially and were stronger than expected; however, we must be mindful of Chinese New Year effects. On the monetary policy front, we and the consensus expect BoK, BI, and BoC to keep rates unchanged, though the MAS is likely to re-center the SGD NEER.