PIMCO

According to the plethora of long-only managers willing to trot out on the public stage and beg for more commissions, the US has been (and will remain) the cleanest-dirty-shirt in the global risk asset laundry basket; but as David Rosenberg of Gluskin Sheff points out not only has the S&P 500 hit a new record high in its total return index but it also possesses a rather 'ebullient' valuation premium (2012E P/E) of 13.8x relative to China 9.8x and Europe 11.4x. However, while this is more than enough to slow some investors from backing up the long-truck, Rosie goes on to highlight a very worrisome indicator - that favored by ex-PIMCO's Paul McCulley. The YoY trend in the three-month moving average of core capex orders (which was updated last Friday) has just cracked negative, crushing the hopes of US growth prospects and we assume equity superlatives. However, since the market no longer reflects anything; certainly not the economy, but merely who will ease more when and how, one really can't short much if anything, even if McCulley is 100% spot on.

Industrial unrest hobbling the South African platinum industry deepened yesterday, prompting fears of a broader mining crisis in one of the main platinum and gold producing countries. Platinum and gold prices continued to soar partly due to real concerns of supply disruptions after 44 people died during strikes at a pit owned by  Lonmin. About a fifth of global platinum production capacity is idled in South Africa today as the nation holds a day of mourning for 44 miners and policemen killed in the deadliest police violence since apartheid ended (see Newswire). Massive discontent has spread to two other important platinum mines. Amplats, the world’s largest platinum producer that is 80% owned by Anglo American, disclosed it had received demands for pay rises at its Thembelani mine. Meanwhile, another miner, Royal Bafokeng, said about 500 people were protesting outside its Rasimone mine, and preventing others from going to work. It seems likely that the protests will spread from the platinum sector, to other sectors, including the gold mining sector.

Moments ago, the FOMC members formalized their opinion on where inflation is heading: "Most members continued to anticipate that, with longer-term inflation expectations stable and the existing slack in resource utilization being taken up very gradually, inflation would run over the medium term at a rate at or below the Committee’s objective of 2 percent." The only conclusion one can derive from this is that since the perpetually wrong FOMC committee, which has never accurately predicted any one thing in its entire history, sees little to no inflation, inflation is most likely about to soar. A convenient independent confirmation of this assumption comes from none other than bond manager PIMCO which moments ago announce that it was adding to its gold holdings "on inflation concerns...as it bets that global inflation rates will pick up over the next three to five years." Specifically, "The Pimco Commodity Real Return Strategy Fund, which has about $20 billion in assets, has increased its gold holdings to 11.5% of total assets recently, from 10.5% two months ago, and has been adding to the position when gold prices dipped toward $1,500 a troy ounce, says Nic Johnson, the fund's co-portfolio manager." And with global asset managers allocating about 1% of their AUM to the precious metal, should the majority of them copycat PIMCO in this move, then gold would cross the psychological $2,000 barrier in minutes. The irony is that for a bond manager, which Pimco just happens to be the biggest in the world, inflation is your worst friend. So acknowledging its imminent creep, is hardly "talking one's book."

A week ago we brought you Elliott Management's summary opinion on US paper: "We Make This Recommendation To Our Friends: If You Own US Debt Sell It Now." Today, Bill Gross doubles down.

Gross: The #Fed is where bad bonds go to die. Today it was 10-years. Tomorrow 30-years. Stay short my friends.

— PIMCO (@PIMCO) August 14, 2012

GROSS: Do bond markets take heart from Ryan selection? Not me. He talks lower deficits but really believes in lower taxes – exact opposite.

— PIMCO (@PIMCO) August 13, 2012

What a difference a revisionist market rally makes. Remember when everyone was involved in Libor manipulation? No? Curious what a few hundred DJIA points will do especially when the corporate revenues and supporting them simply are not there, and one goes all in on multiple expansion. One entity which, however, has not forgotten about Lieborgate is Pimco parent and Europe's largest insurance firm, Allianz. And they are not happy: "Europe's biggest insurer, Allianz, is worried about the role central banks may have played in an interest rate rigging scandal that has enveloped some leading international lenders, the insurer's chief financial officer said on Friday. "We do not find it funny, what has happened, in particular the arising implication that it is not just the banks but central banks being involved in this," Oliver Baete told a conference call with analysts. "That really gives us cause for concern," Baete added." Of course, neither the ECB nor the FED could care much, considering that Allianz would be immediately insolvent if the same central banks who manipulated Libor stopped manipulating interest rates... which is implicitly what Allianz is unhappy about.

While the attached interview between the Casey Report and HFT expert Garrett from CalibratedConfidence will not reveal much unknown new to those who have been following the high frequency trading topic ever since ZH made it a mainstream issue in April of 2009, it will serve as a great foundation for all those new to the topic who are looking for an honest, unbiased introduction to what is otherwise a nebulous and complicated matter. We urge everyone who is even remotely interested in market structure, broken markets and the future of trading to read the observations presented below.

Want to buy stocks on anything than a greater fool theory, or hope and prayer that someone with "other people's money" will bail you out of a losing position when the market goes bidless? That may change after reading the latest monthly letter from Pimco's Bill Gross whose crusade against risk hits a crescendo. Yes, he is talking his book (and talking down his equity asset allocation), but his reasons are all too valid: "The cult of equity is dying. Like a once bright green aspen turning to subtle shades of yellow then red in the Colorado fall, investors’ impressions of “stocks for the long run” or any run have mellowed as well. I “tweeted” last month that the souring attitude might be a generational thing: “Boomers can’t take risk. Gen X and Y believe in Facebook but not its stock. Gen Z has no money.”.... So what is a cult chasing figure supposed to do? Well, the cult of equities may be over. But the cult of reflating inflation is just beginning: "The primary magic potion that policymakers have always applied in such a predicament is to inflate their way out of the corner. The easiest way to produce 7–8% yields for bonds over the next 30 years is to inflate them as quickly as possible to 7–8%! Woe to the holder of long-term bonds in the process!... Unfair though it may be, an investor should continue to expect an attempted inflationary solution in almost all developed economies over the next few years and even decades. Financial repression, QEs of all sorts and sizes, and even negative nominal interest rates now experienced in Switzerland and five other Euroland countries may dominate the timescape. The cult of equity may be dying, but the cult of inflation may only have just begun."

• U.S drought wilts crops as officials pray for rain (Reuters)
• Obama backs aid for drought farmers (FT)
• Greek leaders identify two-thirds of spending cuts (FT)
• Central bankers eyeing whether Libor needs scrapping (Reuters)
• Markets Face a Life Sentence of Hard Libor (WSJ)
• World Bank chief warns no region immune to Europe crisis (Reuters)
• China big four banks' new loans double in early July (Reuters)
• Nokia Loss Widens as Smartphone Sales Slump (WSJ)
• Bundesbank Expected To Buy Australian Dollars In 3Q (WSJ)

Macroeconomic issues currently playing out in Europe, Asia, and the United States may be linked by the same dynamic: over-leveraged banking systems concerned about repayment from public- and private-sector borrowers, and the implication that curtailment or non-payment would have on their balance sheets. Global banks are linked or segregated by the currencies in which they lend. Given the currencies in which their loan assets are denominated, market handicapping of the timing of relative bank vulnerability is directly impacting the relative value of currencies in the foreign exchange market, which makes it appear that the US dollar (and economy?) is, as Pimco notes, “the cleanest dirty shirt”. Is there a clean shirt anywhere – creased, pressed and folded? QBAMCO's Paul Brodsky (in a deep dramatic voice-over) sets the scene: In a world where time series stand still... and real purchasing power value has no meaning... a few monetary bodies stand between economic death and destruction... between commercial hope and financial despair... between risk-free returns and return-free risk. Amid this set of conditions it seems entirely prudent to position purchasing power in vehicles that would benefit as the nominal stock of base money grows at a rate far in excess of the gold stock growth rate.

A lack of transparency, a lack of enforcement of law and a compliant media which failed to ask the hard questions and do basic investigative journalism led to the price fixing continuing and the manipulation continuing unchecked on such a wide scale for so long - until it was exposed recently. Similarly, the gold market has the appearance of a market that is a victim of “financial repression”. Given the degree of risk in the world – it is arguable that gold prices should have surged in recent months and should be at much higher levels today. The gold market has all the hallmarks of Libor manipulation but as usual all evidence is ignored until official sources acknowlege the truth. However, like LIBOR the gold manipulation 'conspiracy theory' is likely to soon become conspiracy fact.  It will then – belatedly - become accepted wisdom among 'experts.'  Experts who had never acknowledged it, failed to research and comment on it or had simply dismissed it as a “goldbug accusation.”  Financial repression means that most markets are manipulated today - especially bond and foreign exchange markets.

It seems that governmental efforts to save the underwater and ineligible homeowner from his own fate are reaching fever pitch. Not only do we hear today of the up to $300mm in Agriculture Department Rural Housing Service loans that may have financed ineligible projects or borrowers with a high potential inability to repay the loans; but yesterday's WSJ reports on the growing call for 'eminent-domain' powers to be used by local government officials in California to stop the "housing bust's public blight on their city". In yet another get-out-of-jail-free card, the officials (helped by a friendly local hedge-fund / mortgage-provider) want to use the government's ability to forcibly acquire property to remove underwater homes, restructure the mortgage (cut principal), and hand back the home to the previously unable to pay dilemma-ridden homeowner. As PIMCO's Scott Simon puts it: "I don't see how you could find it anything other than appalling", as this would crush property prices further and drive up borrowing costs. As we noted earlier, until these mal-investments are marked to market, there will be no useful growth in our credit-bound economy but transferring wealth to the 'mal'-investor seems like a terrible idea.

The middle class has a gut feeling they are being screwed by somebody, they just can’t figure out who to blame. The ultra-wealthy elite keep up an endless cacophony of propaganda and misinformation designed to confuse an increasingly uneducated and willfully ignorant public while blurring the facts for those educated few capable of understanding the truth. They have been able to keep the masses dumbed down through government run education; distracted by sports, reality TV, Facebook, internet porn, and igadgets; lured by mass media messages of materialism; and shackled with the chains of debt used to acquire the goods sold by mega-corporations. We’ve become a society oppressed by a small faction of ultra-wealthy masters served by millions of impoverished, uneducated, sedated slaves. But the slaves are getting restless and angry. The illegally generated wealth disparity chasm is growing so large that even the ideologue talking head representatives of the elite are having difficulty spinning it. Even uneducated rubes understand when they are getting pissed on.

XAU/USD Currency Chart – (Bloomberg)

Gold dipped today despite Wall Street hopes that the US Fed will embark on more QE. As we have said for some time QE3, or a new term for electronic and paper money creation, is a certainty and this will lead to inflation hedging and safe haven demand for gold. 

All you can read.