Markets..

Everything running surprisingly smoothly at present.. long may it last. We know the consensus was very negative on the recent lows. We also know fund redemptions have been severe and that companies are sitting on cash heavy balance sheets. These positive factors seem to be holding up and the market and the momentum is to the upside for the moment.

The fundamental picture, earnings aside, continue to look ominous with rates persistently rising for Italy in spite of the lowering of rates by the ECB and ongoing 40bn euro monetization by the ECB of euro bonds. The EFSF bond issue of 3bn was suspended. No third party backers have emerged for the EFSF. The back stop of the IMF SDR monetization was knocked back by the g20 last weekend. The ECB is refusing to back the EFSF. And Germany is refusing to asset back the EFSF. We are at a euro impasse once again. I get a strong sense we are in the process of walking to the edge of a cliff in terms of equity markets.. The issue is how long that walk might last? but also whether that ‘cliff’ will evaporate entirely once nuclear monetization occurs via ECB or IMF etc.

My personal feeling is that, for financial repression to have any chance of working, the system needs much more forward stimulus that we currently have. We need a ‘final solution’ to the euro problems. Until we get this solution capital markets will be held hostage to the issues in Europe and beyond. The US has plenty of problems to come inc the $1trn  student loan issue and many others beside. If financial repression is what policy makers truely desire they had better step on the monetary gas soon to ensure it occurs. They cannot be timid in implementing this strategy. If they are timid we will experience a Japanese scenario rather than a Zimbabwe scenario. Neither are particularly appealing, i confess, but assuming they can partially contain the African model, for asset holders rather than cash and fixed income holders,  its not an entirely bad option.

Where as the US and UK are at the forefront of implementing the financial repression model the Europeans seem very keen on the Japanese approach. The difference, that the Europeans don’t seem to get, is  the weakness of the European public balance sheets. Japan’s post 80s balance sheet was strong as was their people’s. Their banks were weak and so they gradually nationalized the bank’s problems to the state’s problem. Minimal  growth for two decades has been the Japanese experience. Europe seeks to follow this model but without the strong public balance sheet of the 1989 Japanese state. The consequence is an impossible situation for Europe caught between the desire for partially sound money from the Bundesbank and the necessity of debt monetization by the dire situation in the euro area. The IMF is a possible/probable way out but its my view that we would need a world wide crash for the IMF to really come into effect in a meaningful way.. ie with a multi trillion dollar SDR program.

So.. where we are and what do we do as capital holders here? For my mind we have the traditional q4 rally as per UBS technical comments and many others inc Faber and John H at Amalgamator etc, etc.. Of course all technical views can be over come by events. No technical model can predict the future, ever. They simply provide the probable direction. Events can and do change this so in spite of the positive q4 technical picture. I would therefore tread carefully and will short on particularly worrying news flow. Option puts are also an excellent choice at this point in events.

Post q4 i’m very concerned that we have more of the Japanese model of drip feeding stimulus than any ‘bazooka’ stimulus. We will continue not to have any ‘final solution’ to the Euro problems. Only the taste of blood and the whiff of chaos will provoke the monetary reaction required is my view. This sets up for a messy q1 imo. It will be a V but it may be a V very similar to the 2008/09 V that we remember all too well. All in my opinion..

All these events continue to be hugely positive for precious metals and their miners. The HUI is close to breaking out again having dramatically failed a month or so ago. This looks significant but lets see. It has all the feelings of 1997/1998 Nasdaq to me.

Below are two charts.. The first shows the clear run up from 96 to early 99. The 18 months period from mid 2007 to the end of 1999 saw the index return zero whilst the wider market added weight confounding almost all commentators. (I remember these events all too well as i was involved as an investor and in the industry at the time). Importantly to remember, participants saw a horrid 40% correction, pre the real bull run in these assets. Post the 40% correction.. Boom. A nearly 400% upside in the following 16 months. But again.. all in my opinion. We have worked hard to accumulate our capital we must all, ultimately, make our own decisions as to how we distribute it across asset classes. 




Rich

Weekly Fundamental Indicators..

WF weekly review.. The data is ok. Things are very weak. So weak that the data on jobs is barely positive. The manufacturing ISM reading was 0.8 over zero growth. Ie sub 50 would infer a contraction of economic activity..  The ISM has come down to 50.8. Is this good news.. not really.. Although it is better than Germany whose ISM has turned sub 50 this month.

http://www.crossingwallstreet.com/wp-content/uploads/2011/11/fredgraph110111.png

Here the WF report:

WeeklyEconomicIndicators-11042011 

Rich

The World’s Super Central Bank, The IMF, moves to Monetize ‘without limits’ via SDRs.

The G20 sessions have ended without specific agreement. The conclusion of the G-20 meeting granted Internaciona Monetary Fund (IMF) the ‘possibility’ of expanding its resources “without limits”.

“I leave here with a permit to expand my resources without ground, without shelter, without limits. The G-20 members have told us they will do everything possible so that the IMF is fully equipped with resources to act in case of crisis’.

Nov 4th 2011, Christine Lagarde.

The only issue here is when this massive imf monetization will occur? How deep does the crisis have to go to result in the IMF’s world wide monetization of debt? It was telling that no specific agreement was reached on Friday. The UK was pressing hard for an immediate increase in the IMF’s special drawing rights but emerging market states blocked the deal. (It is worth noting that the UK has become one of the leading proponents of monetization of debt). The next g20 meeting is in June 2012 in Mexico, g8 plus 5 in may 2012.

The ‘SDR’ powers of the IMF are being widely reported as being the method to enable the IMF to inflate nominal prices world wide.

The Special Drawing Right (SDR) was created by the IMF in 1969 to support the Bretton Woods fixed exchange rate system. The international community decided to create a new international reserve asset under the auspices of the IMF. The SDR is neither a currency, nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members.

So an SDR is a piece of paper created by the IMF which immediately creates the fiat money on the balance sheets of the local central banks that domestically issue this currency.  It is a claim on newly created fiat pieces of paper. It neated removes the issuance of new paper outside of national issues and control.

In a world populated by debt laden balance sheets nominal price rises are urgently needed.  In this situation even bogus liquidity, ie further debasement of world currencies, in the form of dodgy IMF manovers will be applauded by all.

http://www.imf.org/external/np/exr/facts/sdr.htm

Rich

Euro Farce… cont.. (Update – ECB Lowers Rates & Greece Cancels Referendum)

ECB has just announced it is lowering interest rates.. This is almost entirely due to the ever increasing spread to German bunds we are witnessing in the debt markets. The measure will assist but its no where near enough.. And, better than a soap opera, 48hrs after announcing a Greek referendum on the bailout, its canceled. Democracy is not always the best policy it seems. (You notice, again and again issues around European political and financial integration are kept outside of the democratic process but its all done in the name of ‘progression’ for the greater good).

We must keep watching these debt spread rates.. explosive, to the upside, are France and Italy..

Portugal

http://www.bloomberg.com/apps/quote?ticker=.PORGER10:IND

Spain

http://www.bloomberg.com/apps/quote?ticker=.SPAGER10:IND

Italy

http://www.bloomberg.com/apps/quote?ticker=.ITAGER10:IND

France

http://www.bloomberg.com/apps/quote?ticker=.FRAGER10:IND

Every day the spread to german bunds is widening.. the screws are being turned.. The cost of borrowing for all these states rises every day.. and remember Italy must roll over a huge amount of public debt in the next 15 months. Another 50bn or so this year and somewhere around 250bn next year. The euro banks must also roll over vast amounts of debt in the near future. Without ECB monetization its surely an impossible task. A brief glimpse of the numbers is worrying. Here a quick overview of the next 12 months:

  • French banks need to roll over 30% of their total debt.
  • Spanish banks and Italian banks need to rollover more than 33% of their total debt.
  • German banks need to roll over nearly 40% of their total debt.
  • Irish banks need to roll over almost half (50%) of their total debt. (Irish bank debt is held by UK banks, note. Circa 140bn euros in loans by UK banks to Irish banks. 10% of uk GDP).

This is not a ‘sell’ indicator in itself as many ‘deflationists’ would claim. This is simply a huge set of indicators that time line the limit whereby nominal prices can be allowed to fall. Nominal prices must rise in order for the fiat system to survive. If nominal prices are allowed to fall just ahead of this huge re-issuance of debt the game will be up. The roll overs will not occur at a sufficiently low cost of money and the whole system will implode. This implosion is mathematically inevitable if the monetary base does not perpetually expand. Without the government, consumer and or corporations increasing debts to expand the monetary base the central banks will have to print to sustain the ponzi scheme. Without this the destruction of the post war social welfare model will be complete.

Rich

45.8m Americans Recieving Food Stamps – A New Record Aug 2011

GDP apparently increasing as unemployment rises and incomes fall. The latest food stamp data shows an 8.1% increase yoy in the number of Americans receiving food benefits as their incomes are insufficient to feed themselves. Its an interesting two tier system where over half the American population pay no income taxes at all now.

http://www.bloomberg.com/news/2011-11-01/u-s-food-stamp-use-reaches-record-45-8-million-usda-says.html

http://www.nytimes.com/interactive/2011/09/13/us/income-poverty-rate-at-1990s-levels.html?ref=us

Doubtless the Neo-Keynesians will take this data as being supportive of yet more money printing as well as governmental deficit spending.

Rich

Weekly Technical Update.. & Comments..

UBS still insisting the bounce is intact and to buy the dips so long as sp500 cash stays above 1220 on a closing basis.

Weekly01-11

Well, we are at 1218 on the sp500 cash now and below this on futures. We are therefore at a key level now which is repeating across currencies and other instruments. They remain bearish on gold on the short term, in spite of the recent moves. These are purely technical comments of course.

As we know, macro events can and often do overwhelm the most clear technical signals. My take is that i wouldn’t chase this recent sell move. If you are net long with hedging shorts i would personally retain some shorts and let price take you out at even, assuming you have the profit to allow this. Better safe than sorry in this respect. I’m running some QM oil shorts at present on this basis. Im not booking the profit im retaining them and will be very happy to see price take me out as im still very much net long and expecting the monetary debasement fueled rally to sustain. Currencies wise im as i was. I’m fairly convinced that the pro risk will not translate into a much higher euro. The dx could gain a little as risk asset markets add weight. A long or long-ish US$, CAD$, SGD, SEK and NOK strategy is probably the way to play this coming period.

Super highly volatile markets.. I don’t know about you but i could do with some peace and quiet for a while to recharge batteries.. alas i’m not so sure things are about to get any calmer. Capital holders stay in fairly liquid assets and get paid to wait for the monetary inflation that seems to be inevitably heading our way.

Luck to all

Rich

Euro Farse.. Update.. inc Portuguese, Spanish, Italian & French Spreads to Bunds

The eurocrat’s off balance sheet final solution mIII is rapidly unraveling before our eyes. The implications are unimaginable. There is no off balance sheet financial repression solution without the ECB monetizing debt. The implications of the Chinese offer to lend only yuan to the troubled euro area (EFSF) is clear.. Ie translated ‘we don’t want to lend you money in euros as we are concerned you will do as the Americans have done and print to pay us back in worthless euros. We would prefer to lend you a currency you cannot print.. ie our own’. This is serious. As no external support means no new capital.

Monetizing debt via the ECB printing presses is the only viable solution therefore. Unfortunately the German constitution forbids such a move due to Germany’s 1920s hyper inflationary experience to escape her excessive debts from WWI. The UK and USA have no such experience of hyper inflation and so it is that their central banks are so quick to monetize their debts as inflation continues to rise.  Tomorrow is another day but the central issue of the ECB monetization is rapidly moving into the cross hairs of asset markets. This central issue needs to be answered. More debt as a solution within a fiat currency framework works until the debt burden goes beyond all realms of confidence. Fiat currencies only exist through confidence of its users. As the euro teeters on the brink this confidence is coming under severe question. The tipping not far away now.. The ECB owns a printing press use it or the euro must surely be dissolved.

http://www.bloomberg.com/news/2011-10-31/papandreou-says-new-greek-loan-plans-must-be-put-to-referendum.html

http://uk.reuters.com/article/2011/11/01/uk-france-germany-greece-idUKTRE7A02QA20111101

http://www.ft.com/intl/cms/s/0/cc377942-0472-11e1-ac2a-00144feabdc0.html?ftcamp=rss#axzz1cTHLn6HE

These are monetarily historic times indeed. We cannot know how events will unfold but we can be sure the pressure on the new president of the ECB (Draghi) will be immense to monetize at will.

http://www.ft.com/intl/cms/s/0/7dc4ecc8-03e5-11e1-864e-00144feabdc0.html#axzz1cTHLn6HE

Rich

p.s. I’ve looked at a few of the indicators for euro insolvency inc the piig spread to bund yields.. these are indeed soaring upwards today though have not broken to new highs as yet.

Here Portugal’s spread at 1000 basis points to German 10yr yields.

http://www.bloomberg.com/apps/quote?ticker=.PORGER10:IND

Here Spain’s spread at nearly 400 basis points ie spain’s primary dealer new issuance of 10yr debt would require a yield of around 6% p.a. vs Germany’s 2% p.a.

http://www.bloomberg.com/apps/quote?ticker=.SPAGER10:IND

Here Italy breaking out to a new euro high of 450 basis point spread.

http://www.bloomberg.com/apps/quote?ticker=.ITAGER10:IND

Here France close to breakout but still at 120 basis points over Germany.

http://www.bloomberg.com/apps/quote?ticker=.FRAGER10:IND

Remember this at a time when ‘safe’ assets like bonds are generally have a good day.

Interestingly the CDS market is not showing the same issues and are no where near breakouts.. is this a clear indication that cds as in instrument is being questioned here ie due to authorities forcing financial cos to accept voluntary hair cuts rendering the cds insurances worthless. Here the Portuguese cds rates which, as you can see, are basically unchanged in spite of the euro problems.

http://www.bloomberg.com/apps/quote?ticker=CPGB1U5:IND

As i say, this is more a reflection of the problems with cds as effective instruments rather than anything else. The german bund spread is a better indicator therefore, imo.

 

 

 

Weekly Economic Data.. 28th Oct..

An excellent report from WF this week.. the data in the US is mixed but the latest GDP forecasts improved.. (GDP always rises in a positive inflation environment as governments understate inflation and therefore over state GDP growth. The oldest trick in the book of course). Wonderfully WF picks up on the ‘financial repression’ strategy. Operation ‘twist’ seems to have done the reverse of what was intended with MBS rates rising not falling. This has some macro policy implications but is also very interesting in terms of the markets mis pricing of mortgage reit assets. The market has anticipated lower margins. The report picks up on Argentina’s recovery. A huge land mass and rich in commodity resources at a time when the world is short of commodities. Like Canada and Australia. Given such dynamics the most negligent political leaders in these countries can look wise.

weekly econ data 28102011

Interestingly I spent some time yesterday with an Argentinean entrepreneur now living in Barcelona. He described the post 1991 breakdown of Buenos Aires. Crime doubled and trebled yoy. He described how the debasement of the current destroyed his society over the next decade and that even the most ignorant of taxi drivers could provide a lecturer on inflation and its destructive qualities on a society. During this period Argentinean people used the US dollar to retain their purchasing power. The USD debasement process had begun but it was not in full motion as it is now. The world offered several sound currencies at this time. Contrast this with today where almost every currency in the world offers negative interest rates or has an explicit debasement strategy. In such an environment when capital holders seek refuge from inflation they will have little alternative than stocks and precious metals. Clearly this is bullish for both asset classes.

Have a great weekend all.. Rich

‘Equities The Only Show in Town’.. Due to Unlimited Monetary Expansion

Further to the post from a month ago..

http://www.capitalsynthesis.tech/international-equities-the-only-show-in-town/

Today was not about the European news flow. Today was simply a tiny portion of the wall of capital that is resting in cash and bonds entering the equity markets. Participants in cash are beginning to see the future and that future is all about a significant monetary expansion via debt monetization. Financial repression is the order of the day. Government and bank balance sheets are too weak to sustain any nominal downward pressure. Prices will rise and rise considerably as cash hoarding by corporates and individuals is at extreme levels. Bond yields are at the end of their three decade bull run. Equities markets have been thin and the asset class very unloved.

The developed world middle class’s expropriation will continue and increase its depth and velocity. Capital controls are to come.. The dollar, as the most liquid currency, fell the most today. But note, the pound took second spot as the worst currency to own in the world. International equities hedge these currency moves whilst also hedging a proportion of the monetary inflation. Many companies are at pe ratios of sub 5. Their earnings grow in line with the ‘real’ rate of nominal inflation which is always much greater than GDP growth or the ‘official’ inflation numbers.

The markets can be cruel and the volatility immense. It is irony not lost on those involved in monetary history that this volatility has driven private western participation in equities to the lowest levels since ww2.

http://www.capitalsynthesis.tech/households-increasingly-allocate-capital-to-bonds-cash/

But over time these monetary issues will drive much higher equity prices. There are very good fundamental reasons why this is so and will continue to be so. Ignore the market noise and stick, like glue, to the solvency issues and monetary issues that are in front of our noses.

Night guys.. im off for a well earnt dinner and drinks.. but i’ll leave you with a quote from Emmanuel Munyuki, CEO of the Zimbabwe stock exchange:

‘Negative interest rates and inflation has caused a stampede for assets, which had driven share prices to record highs, even in real terms.

It’s quite embarrassing because the exchange is supposed to mirror the reality of the economy. We have benefited from the distortion of the market’.

Rich

Debt vs Guarantee – The Latest ‘Off Balance Sheet’ Euro Ponzi Scheme..

Throughout our history it is said that the most effective ponzi schemes are the ones that no one can understand. If you can present a complex ponzi scheme to an investor that is near panic with fear or greed you will be able to run your ponzi scheme. The scheme works as the goal of the investor, either greed or fear, is sufficiently strong to blind him to all but the most obvious of flaws within the scheme presented.

So as we inspect the latest offering from the euro area to resolve the simple problem of insolvency you can’t help but be impressed by the complexity of the jargon encoded solution they are proposing. We still need some detail and the implementation may well disappoint or even collapse but as above this depends on complexity and degree of motivation of the investor.. the investors in this case are soverign wealth funds and solvent banks.

Ill update this note with press and specialist press reports as they emerge. At present the reports are so vague its pretty worthless placing them up..

Here a few press comments:

http://www.ft.com/intl/cms/s/0/b4f9d128-004c-11e1-8441-00144feabdc0.html#axzz1byLugzlX

http://www.spiegel.de/international/europe/0,1518,794288,00.html

http://www.reuters.com/article/2011/10/27/us-eurozone-idUSTRE79I0IC20111027

http://www.bloomberg.com/news/2011-10-27/europe-leaders-set-50-greek-writedown-1-4-trillion-in-debt-crisis-fight.html

My brief summary as per the news flow at present is:

1) Bank haircuts on Greece 50% – voluntary and so no cds melt down of an over exposed issuer.

Problem – Italy, Ireland, Portugal?  Hair cuts or not..? Portugal has been shut out of debt markets for a year or so now. The market isn’t lending to Portugal so the EFSF must but in reality isnt Portugal another hair cut issue and isn’t Ireland and soon Italy as well?

2) EFSF most likely to be a bond insurance entity. Ie they underwrite a slice of the debt being issued eg by Portugal. They guarante the first 25% of Portugese debt being issued. This way they hope to create liquidity for Portugal’s debt and lower rates paid by Portugal in the primar market.

Problem – 1st if the EFSF is to act as guarantor on a trillion euros of bank and soverign debt wont this exposure need to be on balance sheet of the various underwriting states ie inc Italy and Spain and France, Belgium, etc? Or is a guarantee different to debt? Thus far it seems the balance sheet exposures via guarantees of soverign states (inc the UK through its nationalization program of RBS, LTSB etc) are off balance sheet. The annual loses are booked but the total exposure is not added to national debt. Its note worthy that private citizens and corporates are not given this luxury. One accounting rule for the soverigns and one for the rest of us it seems. Accounting smoke and mirrors. How long will the rating agencies ignore this issue i wonder!!!

2nd problem here on the EFSF is in the implementation of this element of the plan.. will soverign step forward to buy the bonds? Will they want more than 25%? Even if liquidity comes will rates fall or rise? what will the market price these bonds at? Nobody can know as this is the market so there are all sorts of assumptions that this will work here. Keynesians love to assume they can predict and design the future. As recent history perfectly demonstrates their immense arrogance is always proved unfounded.

3)  The EFSF also guarantees bank bonds and injects ‘fresh’ capital into the banks.
Problems – 1st we cannot know how much capital will be needed as yet and secondly therefore if the EFSF has sufficient cash to cover this re capitalization. The eurocrats are assuming the cash (debt actually through EFSF bonds – only a few of which have been issued to date) will be enough to cover the banks capital requirements. The note regarding the ‘solution’ leaves the door open to using the EFSF as a guarantor for bank capital raising issues. Ie in the same way as the EFSF can guarantee euro debt they can guarantee bank debt and or slices of equity. This creates the same issue as above re off or on balance sheet.

Summary. The eurocrats have devised a complex scheme to exploit accounting loop holes and regulatory blind spots in an attempt to kick the can for a period longer. The hope is that world wide inflation will eventually erode the debt relative to nominal GDP. ‘Kicking the can’ can be a solution so long as nominal inflation is sufficiently strong and new debt issuance is sub this nominal level. The implementation of this scheme will be very interesting. The rating agencies view will be crucial and equally important how the soverign funds chose to participate or not in this scheme.

The ECB has not participated in the scheme but i cannot believe it will be long before the ECB is forced to monetize debt in the same way the BOE and FED have already done. The anglosaxon printing solutions have taken the pain up front but the euro solution leaves the pain to come. Clearly both solutions are a disaster for the middle classes of these societies but of the two,  i suspect, the anglosaxon one is preferable.

Much more to come as news comes forward..

Rich

 

 

Precious Metal Break their Ranges.. Another HUI False Dawn?


Gold and silver both scored parabolic moves in 2011, have the parabolic moves finished or are we about to see a dramatic leg up? We shall soon see guys.

http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2011/10/25_Stephen_Leeb_-_China_Will_Send_Gold_%26_Silver_to_the_Moon.html

Today may or may not be the long promised dawn for the pm miners but there have been interesting price moves as the pm metals have both broken out of their recent 6 week range. This is particularly interesting as to how this new moves affects the HUI. The HUI broke out of her 15 month range 8 weeks ago just as the correction in gold and silver crushed the breakout and the whole sector fell once again, dramatically so in some cases. From ‘failed moves come fast moves’ and so the HUI collapsed down to the bottom of her range. As she had scored a failed break out a range break was the money bet. But with the metals bouncing back due to the horrific monetary events unfolding across the developed world the HUI is starting to offer a technical glimmer of life that should not be ignored given her all historic ratio lows to gold and silver metal prices.

For those hardened fundamental and technical buyers of the pm miners i hesitate to even mention the technical flag that is process of occurring here. The cynic would rightly cry..

‘How many times have i seen this sort of technical flag before only to be smashed by the reversal that will doubtless occur just as capital enters the pm miners’.

The cynic would be correct to state this but the fundamentals improve every day. To become complacent of the pm miners would truely be a foolish thing to do. The price disparity between the precious metal miners and their underlying has been widening every day during this recent pm weakness. History tells us that the ‘snap’ back to fair valuation won’t be sedate. No, much more likely, it will be extremely swift and eventually produce an over valuation in the opposite direction. The opposite of what went before always occurs in the market but only when that market reaches an extreme. If the technical flag forms into a significant trend up and then the technical breakout of the 15 month range is rejoined hang on because fire works are almost certain to occur for monetary and technical reasons.

All the best Rich

Weekly Technical Comments.. Buy The Dips..

The UBS team retain their bullishness with the recent ‘melt up’ being consistent with a short squeeze and therefore highly likely that a retrace comes now given the short covering that has occurred as the levels got blown over. This fits with the bearish sentiment in the market we saw before the melt. I also expect some sort of violent retrace here given the short capitulation, which we seem to have had given the sp500 hit 1255 or so but whats more many instruments stepped into breakout zones.. ie therefore everyone (& their dog’s stops were hit).. Consistent with this would be a retrace now and given the newsflow a ‘violent’ retrace at that. We had breakouts apparently hit on oil, audusd, gbpusd, etc etc.. Note the CRB did not break her down trend but the move up hasn’t been very convincing as yet and no resistances broken to the upside, yet.

Personally, I’m expecting a surprise to the downside move up to 50% retrace of this leg but who knows.. If i see this i would be a buyer.. for the moment im retaining some leverage to the upside with the ym shorts running. Im keeping the new gold additions which are running and well in the money for the moment. Im weighted at around 115 cash leverage with the shorts netting this down to 90% or so.. The fx position remains weighted to USDs which is a hedge of sorts to the equity position.

Weekly25-10