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Frontrunning: April 15





  • Venezuela Says Chávez Successor Wins Vote (WSJ)
  • China growth risks in focus as first quarter data falls short (Reuters)
  • Japan Gets Calls From U.S. to Europe Not to Drive Down Yen (BBG)
  • EU Set to Clash on Bank Deal as Germany Sees Treaty Limit (BBG)
  • Dish Launches $25.5 Billion Bid for Sprint (WSJ)
  • Commodities Tumble, Stocks Slide as China Growth Slows (BBG)
  • Top fund managers take home $8bn less (FT)
  • Obama Programs Derided by Republicans as Pejorative Entitlements (BBG)
  • Gene swapping makes new China bird flu a moving target (Reuters)
  • McDonald's Cranks Up The Volume on 'Value' (WSJ)
  • UK pension deficits set to rise by £100bn (FT)
 
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All Eyes On The Gold Rout, Most Oversold In 14 Years





While China's trifecta miss of GDP, Retail Sales and Industrial Production all coming lower than expected was likely a factor in the overnight rout of gold, the initial burst of selling started well before the Chinese data hit the tape, or as soon as Japan opened for trading with forced financial institution selling to prefund cash for any and all future JGB VaR-driven margin calls. It was all downhill from there, literally, with overnight selling of gold punctured by brief burst of targeted stop hunting, sending the metal down $116 per ounce, as spot touches $1385 after trading nearly at $1500 yesterday and down $200 in 4 days. End result, whether due to a re-collapsing global economy, margin calls, fears forced Cyprus gold selling will be imposed on all other insolvent European countries, coordinated central bank slams, hedge fund positioning, long unwinds, liquidations, fears about future demand, or whatever the usual selling suspects are, is that gold tumbles an unprecedented 7.8% on 230,000 contracts in one day, and well over 10% in two days, pushing the yellow metal 14 day RSI band to 18, meaning it is now most oversold since 1999. In brief, it is an all out panic, with Goldman still telling clients to sell, i.e., buying every shiny ounce all the way down (not to mention India, where accordingto UBS Friday demand was double the average).

 
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Gold, Silver In Asian Liquidation Mode As China Growth Slows More





UPDATE: Spot Gold $1426 (from $1564 highs Friday)

As Asia opens to the bloodbath that occurred in precious metals on Friday in the US, it would appear that more than a few traders got the 'tap on the shoulder'. Shanghai futures are limit-down and spot gold and silver prices are plunging once again as we suspect forced margin-calls and the raising of cash (to cover extreme variation margin - or capital reserves) needed in JGB positions, as we explained here. Liquidation is certainly the theme of the evening - investors are selling JGBs (6th day in a row of multiple-sigma moves in long-dated Japanese bonds 30Y +56bps off its post-BoJ lows at 1.60%!), selling Japanese stocks (Nikkei -128 pts, second biggest down day post-BoJ), selling US Treasuries (futures down), selling gold and silver (gold spot down over $100 from Friday's highs), and despite selling JPY early (retracing 30% of the weakness post-BoJ), JPY is practically unchanged (jerking lower only on the US futures open and Asian equity open) - it seems Mrs.Watanabe is struggling and unwinding some her excessively short JPY and long NKY positions... and post the China data (4-for-4 misses), everything is red - JGBs down, Japanese stocks down, US Stocks down, US Treasuries down, Gold and Silver down, Copper down, Oil down, Rubber futures limit down.

 
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Germany's 'Five-Wise-Men' Confirm Wealth Tax Is Coming





As we have vociferously warned since September 2011, and most recently as the Cyprus debacle exploded explained why it is just beginning, Germany's Council of Economic Experts (or so-called 'Five Wise Men') just confirmed a wealth tax is coming. As the Telegraph reports, confirming our expectations, Germany warns that states in trouble must pay more for their own salvation, arguing that there is enough wealth in homes and private assets across the Mediterranean to cover bail-out costs. They further added that targeting deposit-holders is also a mistake, since the "resourceful rich just move their money to banks in northern Europe and avoid paying," preferring instead taxes on property or other less-mobile assets, "for example, over the next 10 years, the rich should give up a portion of their assets." As we noted here and here, the differences between mean and median wealth in the peripheral nations suggest that people in the bailed-out countries are often better-off than those in Germany - - "this shows that Germany has been right to take a tough line of euro rescue loans." However, the implications of a wealth tax - implicitly impacting the pro-euro Southern European uber-rich - raises the specter of EU breakup once again.

 
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Ex-Soros Advisor Sells "Almost All" Japan Holdings, Shorts Bonds; Sees Market Crash, Default And Hyperinflation





Former Soros' Japan advisor Fujimaki takes center stage: “The volatility in the JGB market as well as the fact that there is large selling represent fear among investors,” Fujimaki said. “They are early signs of a larger selloff and we should continue to monitor the moves in the long-term bonds.” Fujimaki said he recently bought put options for Japanese government bonds of various maturities, without elaborating. He continues to hold real estate in Japan and options granting the right to sell the yen against the greenback expiring in less than five years. He also holds assets in U.S. dollars and currencies of other developed nations. "Japan’s finance is sinking into the ocean,” Fujimaki said. “There’s no escape from a market crash in the future when you have such enormous debt.”  By expanding the monetary base to 270 trillion yen, the BOJ is making a huge bet which I think it will ultimately lose,” Fujimaki said in an interview in Tokyo on April 11. “Kuroda’s QE announcement is declaring double suicide with the government. The BOJ will have to share the country’s fate and default together. Shirakawa did more than enough and he had good reasons to not do any more,” said Fujimaki. “There will be tremendous side effects from monetary stimulus. QE doesn’t work and has no exit... Things may look rosy for now as stocks rise, but should we see hyper-inflation, JGBs will see a huge selloff, leading to a stock market crash,” said Fujimaki, adding that he sold “almost all” of his Japanese stock holdings some time ago.

 
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Priced For Perfection - A Return To 'Normal' Won't Be Enough





The equity rally over the past 18 months has been driven by multiple expansion. As Morgan Stanley's Gerard Minack notes, equity markets have been highly correlated with macro surprises – whether economic data have been exceeding, or falling short of, consensus forecasts – through this expansion. However, we note that the potential for a market setback is extreme; as the gap between what seems increasingly needed to sustain the rally – better growth and earnings news – versus the prospect of weaker US growth is as wide as it has been in five years. The macro news flow is now disappointing in the major developed economies. Moreover, there’s been a pseudo-seasonal pattern to the ebb and flow of surprises, with weakness typical in the middle quarters of the year. The very recent weakness in the US is more troubling though as it is set against the backdrop of already-sluggish global growth, which is most pronounced in the developed markets; and reflecting the sag in global growth (and earnings), global equities have already stalled outside the US. The out-performance of equities versus bonds over the past year is consistent with solid macro improvement and as the chart below indicates, that hope is fading fast.

 
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Which Nations Are Next? The Credit Market Answers





The debate about the usefulness of sovereign credit default swaps (SCDS) intensified with the outbreak of sovereign debt stress in the euro area. SCDS can be used to protect investors against losses on sovereign debt arising from so-called credit events such as default or debt restructuring. With the growing influence of SCDS, questions arose about whether speculative use of SCDS contracts could be destabilizing - and this caused regulators to ban non-hedge-related protection buying. The prohibition is based on the view that, in extreme market conditions, such short selling could push sovereign bond prices into a downward spiral, which would lead to disorderly markets and systemic risks, and hence sharply raise the issuance costs of the underlying sovereigns. The IMF's empirical results do not support many of the negative perceptions about SCDS. In particular, spreads of both SCDS and sovereign bonds reflect economic fundamentals, and other relevant market factors, in a similar fashion. Relative to bond spreads, SCDS spreads tend to reveal new information more rapidly during periods of stress, admittedly with overshoots one way or the other. Given the current apparent 'stability' in many nations' bond market spreads, the chart below suggests an alternative way of judging what the credit market thinks - the volume of protection bid - and in this case some interesting names emerge.

 
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Mike Maloney: Today's Low Gold & Silver Prices Are Not Realistic





Mike believes that the monetary system will collapse under the weight of too many claims on a limited pool of sound money; and that we will witness the birth of a new monetary regime within the next ten years. What makes this moment in history unique is that all past monetary regime collapses have happened regionally. This is the first time in human history in which all the world's major currencies are collapsing together. Which is why he is so passionate about owning gold and silver. In his opinion, we will soon witness the greatest transfer of wealth ever seen, as countries worldwide realize they need to revert to monetary systems backed by sound money (i.e., the precious metals). Those acquiring gold and silver beforehand will not only preserve their wealth as existing fiat currencies are extinguished, but will see staggering increases in their purchasing power.

 
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Gold And 5 Years Of Global Central Bank 'Temporary And Emergency' Monetary Policy Actions





When all this began, we were reassured that extraordinary balance sheet expansion and the ZIRP environment were merely temporary and only to get us through the short-term emergency. The following chart and table covering the monetary-policy-on-steroids of the Fed, ECB, BoE, and BoJ suggests this is a long-emergency indeed... and the current disconnect between the 'planned' expansion of central bank balance sheets and gold suggests that Cyprus' central bank head may just replace UK's Gordon Brown as the worst market-timer ever.

 
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Cyprus Mail: "Exiting The Euro Is A Debate We Must Have"





Last week we laid out the apparent 'blueprint' from the EU Commission for every other country with a banking system in which non-performing loans are soaring. With Mario Draghi's patsy in place at the Cypriot Central Bank, happy to hand over the nation's gold at the beck-and-call of the EU leaders - despite the Cypriot President's disgust at the 'coercion' of the new deal chiding the central bank for "catching the government by surprise," it now seems, as this Cyprus Mail op-ed explains, that the people of this nation are ready for change - real change, , otherwise, "we may wake up one morning and find the country has completely shut down, crushed under the weight of its mounting, unserviceable debts with no banks, businesses or services able to operate."

 
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Five Fund Flow Charts Every Japanese Stock Investor Should See





We recently detailed the critical charts on the progression of 'Abenomics' but perhaps more important than the total lack of positive economic 'change'  - due, we are sure, to not-enough-time or not-enough-money - is the drastic change in investor positioning in Japanese equities.

 
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"My Savings Account Was Confiscated And All I Got Was This Cyprus Passport"





While the supposedly-coercive decision to hand over most of the nation's gold to the European Union was surprising to some, the latest policy decision from Cyprus' President Anastasiades looks set to dilute the nation's sovereignty also. Foreign depositors who lost at least EUR3 million will be given EU passports (and Cypriot citizenship), "in an effort to 'mitigate' to some extent the damage the Russian business community has suffered." As France24 reports, these measures are expected to be enacted Monday "in a fast-track manner," as Anastasiades readies himself for a 'begging' trip to meet Putin in Russia. Coincidentally, Cyprus issued the 8th decree on capital controls today (for seven more days) increasing the monthly transfer cap (for companies) to EUR50,000 and raising transfer caps outside the Republic to a huge EUR2,000. We suspect the 'been there, got the passport' messaging will do little to stave off the Russian retaliation.

 
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Guest Post: The Return Of The Money Cranks





The lesson from the events of 2007-2008 should have been clear: Boosting GDP with loose money can only lead to short term booms followed by severe busts. A policy of artificially cheapened credit cannot but cause mispricing of risk, misallocation of capital and a deeply dislocated financial infrastructure, all of which will ultimately conspire to bring the fake boom to a screeching halt. The ‘good times’ of the cheap money expansion, largely characterized by windfall profits for the financial industry and the faux prosperity of propped-up financial assets and real estate (largely to be enjoyed by the ‘1 percent’), necessarily end in an almighty hangover. The crisis that commenced in 2007 was therefore a massive opportunity: An opportunity to allow the market to liquidate the accumulated dislocations and to bring the economy back into balance. That opportunity was not taken and is now lost – maybe until the next crisis comes along, which won’t be long. It has become clear in recent years – and even more so in recent months and weeks – that we are moving with increasing speed in the opposite direction: ever more money, cheaper credit, and manipulated markets (there is one notable exception to which I come later). Policy makers have learned nothing. The same mistakes are being repeated and the consequences are going to make 2007/8 look like a picnic.

 
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Peak Recovery?





The strength of the recovery of US equity prices since the 'end' of the recession is equalled only by the post-1982 recovery. The path of recovery so far is eerily similar also. The chart below shows just what happens next - an insance melt-up followed by a purge unlike any other. 1987 deja-vu can't happen all over again? It's different this time.

 
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Bird Flu Spreads To Beijing, Province Of Henan; Death Toll Rises To 13





If China needed a deflationary boost (if only for chicken prices which will certainly result in inflation for all other food products, especially after the recent floating pig fiasco fades from memory), it certainly got it with the constantly escalating Bird Flu scare, which has resulted in 13 casualties of the 60 total infections reported so far, a mortality rate which at least to date is double that of the 2003 SARS epidemic, which claimed one in ten of the 8000 people it infected worldwide. What is most disturbing is that after being largely confined to the Yangtze River Delta, and primarily China's Shanghai business hub, the H7N9 epidemic spread to Beijing on Friday when the China Centre for Disease Control and Prevention confirmed that a seven year-old child in the capital of Beijing had been infected by the H7N9 bird flu virus, while on Sunday two people in the central Chinese province of Henan were reported infected - the first cases found in the region.

 
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