In a world in which one bank after another has scrambled to downgrade its outlook on gold, both before the recent bank CEO huddle with Obama last Thursday - the day the bottom fell out of the gold market - but especially after, when the real onslaught on gold truly started, it has been an outright blasphemy for the sellside to even hint at having a bullish outlook on gold. After all, how dare someone allocate capital to the barbaric metal at a time when the US is recovering nicely (it's not), and when the US currency is one again deemed safe (with the Fed diluting its monetary base by 3% per month every month until the end of 2014 and likely forever, it isn't), any deviation from this latest script which desperately attempts to push savers out of the safety of gold into the fiat paper, where the proceeds are invested into stocks or simply spent (a la what happened in Cyprus and the latent fear of deposit confiscation everywhere in Europe), is not permitted. Yet this is precisely what CLSA's Chris Wood, author of the famous Greed & Fear, which is never afraid to be contrarian or to break the lemming mold, has done. His brief take on the recent gold plunge? "This is a buying opportunity too good for investors to miss." Buyers of physical gold everywhere in the world agree.
The high cost of living is a direct contributor to chronic stress. While there are numerous explanations for the rising cost of living--Baumol's Cost Disease ( Productivity, Baumol's Disease and the Cliff Just Ahead December 8, 2010) and the rising cost of energy, to name but two--the one key driver that nobody dares discuss is the state-cartel (crony capitalism) structure of our economy: cartels (defense, energy, sickcare, education, etc.) avoid competition, enabled and enforced by the State (government). This explains why sickcare and education costs have skyrocketed far above the rate of inflation. Apologists try to invoke Baumol to explain the lack of productivity in sickcare and education, but the primary cause is the cartel structure of these industries which ruthlessly eliminates any real competition. Another factor few dare mention is debt-serfdom. By the time the brainwashed consumer has loaded up on the "absolutely necessary" debts--$100,000+ for college, $200,000 for a home mortgage, $20,000 for a vehicle loan, and whatever he/she can swing in credit card debt--the options to escape stress shrivel. Bankruptcy and opting out is one option, but that requires sacrificing all the signifiers of identity and success--the very factors in a consumerist society that establish not just identity but self-worth and personhood.
In other words: eliminate the real sources of stress and you bring down the entire economic, political and social order.
Demand for Japanese goods in China have plunged across the board since the Senkaku Islands dispute has led to widespread Chinese boycottts of Japanese products. As the FT reports, the last 12 months have seen shipments to China plunge over 9% to JPY11.3tn. But have no fear, the credit-loving, all-consuming US citizen stepped up to the plate (though we note not enough since Japan's trade balance has crashed anyway) buying cars, car parts, and electrical machinery. Exports to the US have risen over 10% in the last year to JPY11.4tn - now larger than China. This is the first time since May 2009. Clearly the slowdown in the Chinese economy is also exacerbating the problems for Japan but one analyst warns, "this weakness is structural, not cyclical." The IMF's chief economist was hardly optimistic, noting that the US overtaking China was a "big change" in light of a longer-term trend to deeper intra-Asia integration - "I hope the clouds clear soon." We are sure Abe is watching closely as the US economy also rolls over.
Following yesterday's most recent Europe-led rout, the market is attempting a modest rebound, driven by the usual carry funding currency pair (EURUSD and USDJPY) levitation, although so far succeeding only modestly with not nearly enough overnight ramp to offset the bulk of yesterday's losses. In a centrally-planned, currency war-waging world, it is sad that only two key FX pairs matter in setting risk levels. But it is beyond hypocritical and highly ironic that according to a draft, the G-20 will affirm a commitment to "avoid weakening their currencies to gain an advantage for their exports." So the G-20 issues a statement saying nobody is doing it, when everyone is, thus making it ok to cheapen your exports into "competitiveness"? In other words, if everyone lies, nobody lies. Of course, also when everyone eases, nobody eases, and the world is back to square one. But that will only become clear eventually.
Despite a well-placed Nikkei headline (at 3am Japan time) that spooked JPY lower in an effort to ramp stocks, S&P futures closed down around 22 points to cap the worst 4-day high-low swing swince December - unable to break VWAP. Protection was well bid everywhere with VIX once again spiking up to over 17.5% before ending the day up 2.5 vols around 16.5% (implying notably more weakness to come for stocks). The S&P sell-off stalled at the 50DMA - its closest to the mythical Maginot line since the post-fiscal cliff rally began. Treasury yields dropped to 4-month lows at 1.67% before bouncing modestly higher into the close. The USD strengthened as EUR had its worst day in months. Copper and Oil suffered the most as growth fears spread (both pinned together -7.2% from last Thursday). Gold and Silver practically flatlined today (with gold a slight outperformer). Tech and energy struggled on the day but homebuilders are the week's biggest losers for now. S&P volume was 2nd highest of the year as Nasdaq and Trannies plunge back to recent lows.
We noted here that the plunge in the paper price of gold (and silver) had prompted considerable renewed demand for physical and now it seems the scramble among the "more stable investor base" is increasing. The shake out of ETFs and futures has left the Australian mint short of deliverables and Japanese and Chinese gold retailers seeing a "frenzied" surge in demand. The customers are not just the 'rich' or 'elderly'; in China "they tend to wear water shoes and come directly from the market...;" in Australia, "the volume of business... is way in excess of double what we did last week,... there’s been people running through the gate," and Japanese individual investors doubled gold purchases yesterday at Tokuriki Honten, the country’s second-largest retailer of the precious metal. The panic selling by a weaker 'imminent inflation-based' investor base has sparked physical shortages - "there’s been significant sales made as people see this as great value." It seems our previous discussions of a rotation from paper to physical were correct and this physical demand will eventually leak back into the paper markets.
Mistrust claims of knowledge of contemporaneous activity by Japanese investors. The most recent country specific data is from February. In this context net flows are more important than gross flows. In addition, many observers have ignored/forgotten the high currency hedge ratios on purchases of foreign bonds.
- Boston bomb probe looking at pressure cooker, backpacks (Reuters), Boston Bomb Clues Surface (WSJ) Forensic Investigators Discover Clues to Boston Bombing (BBG)
- China local authority debt ‘out of control’ (FT)
- Gold Wipes $560 Billion From Central Banks as Equities Rally (BBG)... or the same impact a 2% rise in rates would have on the Fed's balance sheet
- More Wall Street leakage: Stock Surge Linked to Lobbyist (WSJ)
- China's bird flu death toll rises to 16, government warns of spread (Reuters)
- Chinese official endorses monetary easing (FT)
- As global price slumps, "Abenomics" risks drive Japan gold bugs (Reuters)
- North Korea rejects US call for talks (FT)
- IMF Renews Push Against Austerity (WSJ)
- India Gains as Gold Plunge Boosts Scope for Rate Cuts (BBG)
- Germany set to approve Cyprus aid (FT)
- Easing Is an Issue as G-20 Meets (WSJ)
In what may be a first in at least 3-4 months, instead of the usual levitating grind higher on no news and merely ongoing USD carry, tonight for the first time in a long time, futures have drifted downward, pushed partially by declining funding carry pairs EURUSD and USDJPY without a clear catalyst. There was no explicit macro news to prompt the overnight weakness, although a German 10 year auction pricing at a record low yield of 1.28% about an hour ago did not help. Perhaps the catalyst was a statement by the Chinese sovereign wealth fund's Jin who said that the "CIC is worried about US, EU and Japan quantitative easing" - although despite this and despite the reported default of yet another corporate bond by LDK Solar, the second such default after Suntech Power which means the Chinese corporate bond bubble is set to burst, the SHCOMP was down only 1 point. The Nikkei rebounded after strong losses on Monday but that was only in sympathy with the US price action even as the USDJPY declined throughout the session.
VIX, the market's measure of forward-looking expectations of equity volatility has been hovering at decade lows (and even after yesterday's spike has plunged back once again today). MOVE, the bond market's measure of forward-looking uncertainty is at all-time record lows. As one infamous rates trader said recently, maybe it's early Alzheimers, but we are fairly certain that that last time Implied Volatility was scraping the lows, we did not experience:
- Gold moving almost $250 or over 15% in less than 48 hours;
- A G-3 currency moving over 25% in less than six months;
- A G-3 bond yield moving by 35% in two months;
- The Dow leaping by almost 20% in five months;
- A joint monetary policy as impactful as Volker or the Paris accords.
We can't help but agree.
Investors take note, the global economy appears to be contracting again. China’s recent GDP miss is the just the latest in a series of economic surprises to the downside. And stocks are always the last asset class to realize this.
While expectations for global GDP growth are now expected to be +3.3% for 2013 against +3.2% for 2012, the IMF has just slashed the previously rosy 3.6% expectation as the global economy stalls. The US and Europe had significant cuts to their 2013 GDP growth expectations (though of course, this dip recovers hockey-stick-like in 2014). It will perhaps be surprising to learn that Japan had its growth expectation raised the most of all the major advanced and emerging nations. World Trade volume growth has also been cut notably - driven by a fall in the previously supposed driver of growth - emerging markets. The IMF's less sanguine forecasts, however, are caveated with hope-driven perspective such as expectations that Debt-to-GDP will drop for all nations from 2013 to 2018 and while energy remains a major downside risk to global growth, we were stunned to read that they cite S&P 500 option prices as an indicator of upside potential. It seems, even at the IMF, that the market is all that matters (oh and the Japanese printing press).
Long experience in the markets will inform you that this kind of massive sell-off in gold is indicative of someone or perhaps a numbers of someones with serious problems. It may be ETF's, it may be some hedge fund or it may be central banks who have pledged their gold as collateral with the ECB but somebody is in trouble. The world is a fragile place these days. World-wide Quantitative Easing has buoyed all of the markets. The backdrop though is economies that cannot support current prices. Europe and Japan are both in tatters, China is slowing down and America is in what I would call a "sputter." Yesterday was a stark reminder of what can happen when the discrepancy between the results of the flood of newly minted cash comes into conflict with underlying fundamentals. The markets can turn on a dime and the move can be severe and painful.
JPY was its strongest at the start of October - and then the new Abenomics plan began. Very quickly the "long of gold in JPY terms" trade became extremely popular. After an impressive 16.4% rise into mid-February, gold-in-JPY corrected modestly; but the BoJ-inspired action smashed gold-in-JPY back up to its recent highs (helped by the seeming capitulation is JPY longs on the bigger-than-expected QQE). This appears to be the last straw on this trade. With JPY shorts so extremely positioned, the small rally on Thursday/Friday in JPY sent many scrambling to cover and, along with the need to unwind any and every asset to cover cash needs for JGB volatility, the avalanche began in gold-in-JPY. In 2 days, the entire Abe-inspired 'rally' in gold-in-JPY has been undone and all post-Abe buyers are now underwater. Whether this marks a short-term capitulation of these positions is unclear but CTFC CoT this week will be intriguing - and further JGB vol will not help. The rally in JPY of the last two days is the largest in 35 months - so someone clearly broke something...
The problem with cutting the links between risk and consequence and the real economy and the stock market is that a market deprived of feedback from reality is prone to disorderly disruption. Why is this so? Participants make decisions based on the information made available to them. If the information from the real world is suppressed or limited, then the decisions made by participants will necessarily be misinformed, i.e. wrong. If feedback from the real world is suppressed, then decisions will necessarily be bad. The only choice for participants who have lost faith in central planning's promise of permanently higher markets will be to abandon the manipulated markets entirely.