Central Banks

South Africa's gold output fell again in January and was down a very large 11.3% in volume terms in January.  Annual gold production is set to be close to 220 tonnes which is a level of gold production not seen since 1922 (see chart below). The falls were seen only in the gold market with production of other minerals holding up with total mineral production down only 2.5% compared with the same month last year. South Africa as recently as two decades ago was the world's largest producer of gold by a huge margin. Only 40 years ago South Africa produced more than 1,000 tonnes of gold per annum but will only produce some 220 tonnes in 2012. Production peaked in 1970 and has been falling steadily and sharply since. The nearly 80% fall in South African gold production has led to it being recently overtaken by China, Australia and the U.S.  It is now even at risk of being overtaken by Russia. The massive 11.3% decline in South Africa was more than even that seen in December when gold output fell by 8.2%. The continuing output decline is due to many of the country's biggest gold mining operations having reached the ends of their lives and having closed down.

In an update of our post from a week ago, the ECB has increased its margin calls on European banks by EUR162 million this week to another record high of over EUR17.3 billion. While our pointing out of this huge jump from 'average' historical margin calls last week was met with - it's temporary/transitory due to temporary/transitory ineligibility of defaulted (and since undefaulted) Greek bonds (which given the rise this week has now been proven incorrect) or the more prosaic "don't worry, be happy", we remain concerned at both the velocity and now sustained size of these margin calls (as clearly collateral quality has dropped rapidly and remained weak). This is concerning since it would appear we had a good week for collateral (risk assets) in general, so we can only imagine what garbage is clogging the ECB's balance sheet. The side-effect of this appears to be (as we pointed out here) that Gold (the banks' remaining quality collateral) is being sold to cover these margin calls just as it was in September 2011 (though lease rates have not squeezed as much this time). We can only imagine the size of these margin calls should we happen to have a week where AAPL stock drops or BTPs don't rally (broad collateral actually loses value), but that seems impossible anyway.

And how can it not be? As Banco de Espana just released earlier today, Spanish banks have borrowed a record €152 billion in February, a €19 billion increase from January. At least we now know what the capital shortfall was in Spain since pre-LTRO days, when total borrowings were €98 billion: "LTRO is for carry trade purposes"... right. So thank you European tax payers, and the 'bad bank' hedge fund formerly known as the ECB - you just bought Spain a few more months, however with your actions you guaranteed that nobody will change any part of their destructive behavior, and merely enable even more solvency crises in the future, which will be band-aided with even more trillions in free money, and so on, until the global central banks need to show their expansion not on a weekly but millisecond basis. And oh yes, this explains why Blackrock is tripping over itself this morning recommending Spanish bonds, which "may offer opportunities for long-term investors" - perhaps the same profit opportunity that the ECB had on its Greek bond holdings purchased at 80 cents of par and collapsed at about 20.

The actual numbers were blockbusters.

Sean Corrigan presents an interesting chart for everyone who still believes that, contrary to millennia of evidence otherwise, money is not fungible. Such as the Lerry Meyers of the world, who in a CNBC interview earlier said the following: "I’m sorry, I’m sorry, you think he doesn't have the right model of inflation, he would allow hyperinflation. Not a prayer. Not a prayer.  If you wanted to forecast inflation three or four years out and you don't have it close to 2%, I don't know why. Balance sheet, no impact. Level of reserves, no impact, so you have a different model of inflation, hey, you like the hawk on the committee, you got good company." (coupled with a stunning pronouncement by Steve Liesman: "I think the Fed is going to be dead wrong on inflation. I think inflation is going up." - yes, quite curious for a man who for the longest time has been arguing just the opposite: 5 minutes into the clip). Because despite what monetary theorists say, monetary practitioners know that money always finds a way to go from point A (even, or especially if, said point is defined as "excess reserves" which in a stationary phase generate a ridiculously low cash yield) to point B, where point B are risk assets that generate the highest returns. Such as high beta stocks (and of course crude and other hard commodities). And the following chart of Inside vs Outside Money from Sean Corrigan shows precisely how this is accomplished.

In the Spring of 2011, when Libyan oil production -- over 1 million barrels a day (mpd) -- was suddenly taken offline, the world received its first real-time test of the global pricing system for oil since the crash lows of 2009. Oil prices, already at the $85 level for WTIC, bolted above $100, and eventually hit a high near $115 over the following two months. More importantly, however, is that -- save for a brief eight week period in the autumn -- oil prices have stubbornly remained over the $85 pre-Libya level ever since. Even as the debt crisis in Europe has flared. As usual, the mainstream view on the world’s ability to make up for the loss has been wrong. How could the removal of “only” 1.3% of total global production affect the oil price in any prolonged way?, was the universal view of “experts.” Answering that question requires that we modernize, effectively, our understanding of how oil's numerous price discovery mechanisms now operate. The past decade has seen a number of enormous shifts, not only in supply and demand, but in market perceptions about spare capacity. All these were very much at play last year. And, they are at play right now as oil prices rise once again as the global economy tries to strengthen.

Last month, the world's biggest hedge fund, Bridgewater, issued a fascinating analysis of deleveraging case studies through the history of the world, grouped by final outcome (good, bad and ugly). As Dalio's analysts note: "the differences between deleveragings depend on the amounts and paces of 1) debt reduction, 2) austerity, 3) transferring wealth from the haves to the have-nots, and 4) debt  monetization. Each one of these four paths reduces debt/income ratios, but they have different effects on inflation and growth. Debt reduction (i.e., defaults and restructurings) and austerity are both deflationary and depressing while debt monetization is inflationary and stimulative. Ugly deleveragings get these out of balance while beautiful ones properly balance them. In other words, the key is in getting the mix right." Of these the most interesting one always has been that of the Weimar republic, as it certainly got the mix wrong.

Yesterday we presented the view of JPM's Michael Feroli of what today's FOMC statement may say (one word: inflation). Here is what Goldman believes: "Today's FOMC statement should be relatively uneventful. The committee is likely to acknowledge the stronger labor market data and the upward pressure on headline inflation, which will undoubtedly be characterized as temporary. We also expect a softening of the phrase that “[s]trains in global financial markets continue to pose significant downside risks to the economic outlook,” although we do not expect it to disappear entirely. At the meeting, the staff is likely to give a presentation on additional easing options, followed by an extensive committee discussion. (This will not show up in the statement and will only become visible to the outside world when the FOMC minutes are released three weeks later.) We still think that the committee will announce further easing before the end of the second quarter, when Operation Twist concludes. However, our confidence in this view has fallen on net, partly because of the stronger labor market and slightly higher inflation data and partly because Chairman Bernanke chose not to repeat his very dovish comments from the January 25 FOMC press conference at the February 29 Monetary Policy Testimony." Remember: admitting inflation means no QE any time soon (and also admission that all the other central banks have succeeded in staving off deflation for a few more months courtesy of $2.5 trillion in excess liquidity injections in under 2 quarters).

European equity markets are trading higher across the board ahead of the US open, with the financials sector outstripping others and Health Care lagging behind, although still in positive territory. The main news from yesterday’s finance minister’s meeting was instruction to reduce their deficit by a further 0.5% of GDP; this is having an effect on the Spanish spread against the German bund today, underperforming against other European spreads. The main data of the European session so far comes from Germany, with the ZEW survey for Economic sentiment beating expectations for March, as well as the UK trade balance figures showing a record high in the UK’s non-EU exports. As the session progresses, participants will be looking towards the US retail sales data and the latest FOMC rate decision.

Today, almost every financial journalist that is published in the mainstream media prefers to be steered by their controlling interests into being a “cleaner”, scrubbing clean the facts and hard evidence of every financial crime scene and of inherent risks that lurk everywhere, and instead, opting to present a rosy, unrealistic, fantasy outlook of stock markets and the global economy.

An economic fiasco, a political football ... and (quietly) a growing export product in a declining market.

The jump in yield from 0.347% to 0.456% may not sound like much, but that is what just happened following the pricing of the latest $32 billion in 3 Year paper, which came at the highest rate since October's 0.544%. And considering that anything under 3 years is virtually risk free courtesy of ZIRP, this move is actually far more pronounced than it appears on the surface. Also, that the auction closed with a 0.1 bps tail is hardly too notable, although it does show that gradually interest for short-term paper may be decreasing as the Fed may be forced to not only not do QE if inflation courtesy of all the other central banks persists, but have to shorten its ZIRP through 2014 forecast. Auction internals were broadly in line, with a 3.436 Bid to Cover coming in slightly above the LTM average of 3.356. Dealers took down 56.5% of the auction, with Indirects holding 34.6% and Directs left with 8.9%. So the questions begin: is this the auction that heralds concerns of imminent inflation through the bond market (sending the 10 Year lower), and is this ultimately the market negative event, because while stocks may be pushing higher on the rotation out of bonds, all this means is that there will be no more easing for a long time. 

Following the unleashing of $2.5 trillion in central bank liquidity, market shorts have predictably gone into hibernation, and as the just released NYSE short interest update confirms, the total number of outstanding shorts is at the lowest it has been in the past 4 years for the second month running, at 12.6 billion. Once the realization that central banks are limited from pumping incremental liquidity in the market is strictly limited by $9/gallon gas in Europe, and the inflection point in risk is reached, look for there to be almost no natural buying buffer to the downside. Then again with central planners out there with their CTRL+P willing to micromanage every downtick of the stock market, does anyone even care any more? Certainly not the retail investor.

Over the weekend, the BIS released its latest quarterly review of financial organizations, which despite being chock full of assorted data, merely summarizes what banks already report. As such, it completely avoids the potentially black swan areas, such as derivative, off-balance sheet and shadow banking exposure. In other words, it is largely a waste of time. One section, however, that is useful,is the analysis by Morten Bech on "FX volume during the financial crisis and now" which has created a constant time series to evaluate FX trading volumes all the way through October 2011, as opposed to the traditional BIS Triennial survey, the next of which is due in April 2013. Morten's finding: "I estimate that in October 2011 daily average turnover was roughly $4.7 trillion based on the latest round of FX committee surveys."

While usually prepared to rant and rave about how misleading the SA numbers, this month, Lee can't.