Institutional Investors

There is the slow realisation that the complacency of recent months was again misplaced. It remains obvious that the euro zone debt crisis is far from over and this will support gold in the coming months – especially in euro terms. 

Gold in euro terms has been consolidating above €1,200/oz for six months now. With the eurozone crisis set to deepen and the continuing risk of contagion, we could see gold break out in euro terms prior to doing so in dollars, pounds and other currencies.

All you need to read and some more.

From Morgan Stanley: "In our mind, many of the approaches to algorithmic execution were developed in an environment that is substantially, structurally different from today’s environment. In particular, the early part of the last decade saw households as significant natural liquidity providers as they sold their single stock positions over time to exchange them for institutionally managed products... While the time horizon over which liquidity is provided can range from microseconds to months, it is particularly shorter-term liquidity provisioning that has become more common." Translation: as retail investors retrench more and more, which they will due to previously discussed secular themes as well as demographics, and HFT becomes and ever more dominant force, which it has no choice but to, liquidity and investment horizons will get ever shorter and shorter and shorter, until eventually by simple limit expansion, they hit zero, or some investing singularity, for those who are thought experiment inclined. That is when the currently unsustainable course of market de-evolution will, to use a symbolic 100 year anniversary allegory, finally hit the iceberg head one one final time.

The Apple trade, it works very well... util it doesn't. What happens when ALL of those funds change course???

• Subprime bubble is back: Lenders Again Dealing Credit to Risky Clients (NYT)
• Housing bubble is also back: AIG Is Planning a Return to U.S. Property Investing (WSJ)
• Spain and EU Reject Talk of Bailout (FT)
• Coeure Suggests ECB Could Restart Bond Purchases for Spain (Bloomberg)
• IMF Set to Recognise Shrinking Chinese Surplus (FT)
• Government to Propose New Mortgage Servicing Rules (AP)
• Japan Currency Chief Warns Against Delay Over Finances (Bloomberg)
• The 'Michael Corleone' of Libya (Reuters)
• North Korea Says Fuel Being Injected Into Rocket (Reuters)
• SNB Reaffirms Vow to Cap Swiss Franc (FT)

Imagine the world economy as an armada of ships passing through a narrow and dangerous strait leading to the sea of prosperity. Navigating the channel is treacherous for to err too far to one side and your ship plunges off the waterfall of deflation but too close to the other and it burns in the hellfire of inflation. The global fleet is tethered by chains of trade and investment so if one ship veers perilously off course it pulls the others with it. Our only salvation is to hoist our economic sails and harness the winds of innovation and productivity. It is said that de-leveraging is a perilous journey and beneath these dark waters are many a sunken economy of lore. Print too little money and we cascade off the waterfall like the Great Depression of the 1930s... print too much and we burn like the Weimar Republic Germany in the 1920s... fail to harness the trade winds and we sink like Japan in the 1990s. On cold nights when the moon is full you can watch these ghost ships making their journey back to hell... they appear to warn us that our resolution to avoid one fate may damn us to the other.

On Thursday morning, President Hu Jintao of China, President Dmitry Medvedev of Russia , President Dilma Rousseff of Brazil, President Jacob Zuma of South Africa and Prime Minister Manmohan Singh of India shook hands at the start of the one day meeting in New Delhi. Top of the agenda was the creation of the grouping's first institution, a so-called "BRICS Bank" that would fund development projects and infrastructure in developing nations. Less noticed and commented upon is the aspirations of the BRIC nations to become less dependent on the global reserve currency, the dollar and to position their own currencies as internationally traded currencies. The leaders of BRIC nations and other emerging market nations have adopted the idea of conducting trade between the five nations in their own currencies. Two agreements, signed among the development banks of Brazil, Russia, India, China and South Africa, say that local currency loans will be made available for trade between these countries. The five fast growing nations participating in local currency trade will allow participants to diversify their foreign exchange reserves, hedging against the growing risk of a euro or dollar crisis. The BRICS want to have easy convertibility of currency to make it easier to use the real, ruble, rupee, renminbi and rand amongst themselves without having to always use the US dollar. Higher intra-Brics trade, conducted in their own currencies would shield their economies from economic dislocations in the west. Left unsaid so far is the possibility that one of the BRICs or the BRICs in unison might peg the value of their respective currencies to the ultimate store of value and money - gold.

The United States of America (and the rest of the world for that matter) has not fundamentally grown much at all over the last 40 years. We have instead replaced fundamental growth with the illusion of growth brought on by constantly increasing the monetary supply, aka, inflation. But like any good Ponzi scheme, even this one has a limit and investors briefly approached it in 2008.  When it looked like our global banking system was going to collapse, investors started dumping everything in site, essentially a de facto rejection of dollar based assets.  Alas, this terrible 'fiat' system is finally coming to its' inevitable end.  And good riddance at that. The death of fiat money will be the best thing to happen to human freedom and liberty in over 100 years.  However, you must realize that the deflation associated with the collapse of the dollar-based fiat monetary system will wipe out decades worth of false asset price growth in a very short time.  Think days or months.

For every seller there is a buyer. Which conversely means that for every robotic HFT, central bank or Primary Dealing buyer there is a seller. We present who that seller is...

With the first quarter of 2012 just about in the books, Nic Colas (of ConvergEx) looks at how the Exchange Traded Fund 'Class of 2012' has done in terms of asset raising to date. There have been 82 new ETFs listed thus far for the year and they have collectively gathered $1.1 billion in new assets through Wednesday’s close of business. While 63% of those funds have been equity-focused, fully 67% of the asset growth for the year has flowed into fixed income products. Just over half the total money invested in these new funds has had two destinations: the iShares Barclays U.S. Treasury Bond Fund (symbol GOVT, with $297 million in flows) and Pimco’s Total Return ETF (symbol TRXT, with $267 million in flows). The standout new equity funds of 2012 in terms of flows are all iShares products – Global Gold Miners (symbol: RING), India Index (symbol: INDA) and World Index (symbol: URTH). Bottom line: even with the continuous innovations of the ETF space, investors are still targeting international and fixed income exposure, a continuation of last year’s risk-averse trends and while 'ETFs destabilize markets' might be the prevailing group-think, this quarter’s money flows into newly launched exchange traded products reveals a strong 'Risk Off' investment bias. Interestingly, the correlation between inception-to-date performance and money flows is essentially zero.

We have discussed the money-on-the-sidelines fallacy a few times recently in the context of the circular money-flows (clear misunderstanding of the idea of a buyer and a seller) as well as mutual fund cash levels, retail sentiment, demographic shifts, and insider transactions. There is mounting evidence, as Morgan Stanley's Michael Wilson notes, that 'make no mistake...institutional investors are all-in' as the rolling beta of mutual funds relative to the S&P 500 tops 1.10x at multi-year highs, institutional investors are most exposed to high beta sectors since MS data began, and long/shorts funds are near their most levered long since MS records began. Combine this with the massive surge in Insider Selling transactions in the last few weeks (apropos Charles Biderman's comments on the rally's support by Insider buying til now) and perhaps bearish retail sentiment will lead this market down as we hope that finally 'money-on-the-sidelines' fades from the parlance of all but the most aged and incompetent of market prognosticators.

All you need to read and some more.

All you need to read.

The Fed is not a “dealer” giving “hits” of monetary morphine to an “addict”… the Fed has permitted cancerous beliefs to spread throughout the financial system. And the end result is going to be the same as that of a patient who ignores cancer and simply acts as though everything is fine. That patient is now past the point of no return. There can be no return to health. Instead the system will eventually collapse and then be replaced by a new one.

In the aftermath of the "Greg Smith" phenomenon, where now a variety of sources (for now of the terminated kind, but soon likely from those still on the payroll) have stepped up against the Wall Street and D.C. omerta, it is assured that we will see many more such pieces before the coolness factor of public employer humiliation. It is our hope that these lead to an actual improvement in America's criminal corporate culture (such as in "How a Whistleblower Halted JPMorgan Chase's Card Collections"), which is nowhere more prevalent than in the corner offices of Wall Street, long a place where "obfuscation" and "complexity" (recall that it was none other than the Fed telling us that "Liquidity requires symmetric information, which is easiest to achieve when everyone is ignorant") have been synonymous with legalized wealth transfer (after all, we now know that nobody ever read the fine print, and when the chips fell it was all the rating agencies' fault). Alas we are skeptical. But while we wait, here is a slightly lighter piece from the Globae and Mail's Tim Kiladze, who while not exposing anything new, shares with his readers just what the transition from "soulless banker" to a "less demanding, more fulfilling life" entails, and that it does, in the end, pay off. As Tim says - "The latter is a real option: I’m proof of it." Here is his story for all those 'wannabe Greg Smiths' who are on the fence about burning that bridge in perpetuity.