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Tuesday, September 14, 2010

Gold World News Flash

Gold World News Flash

Crude Oil Down in Holiday Trade, Gold Attempts to Resume its Rally

Posted: 13 Sep 2010 07:44 PM PDT

courtesy of DailyFX.com September 05, 2010 10:51 PM Will economic optimism from last week carry over into the coming holiday-shortened week? Regardless, the direction of markets will be extremely telling with regard to whether the latest move was merely an oversold bounce or the start of a new trend. Commodities – Energy Crude Oil Down in Holiday Trade Crude Oil (WTI) - $74.27 // $0.33 // 0.44% Commentary: Crude oil is currently down after falling on Friday despite a better-than-expected U.S. nonfarm payrolls report and rallying equity markets. Surging U.S. inventories continue to put pressure on the commodity, which typically rallies strongly on global growth optimism. It is worth repeating that inventories in the U.S. are at multi-decade highs and that U.S. crude oil production is at 6-year highs. In such an environment, the DOE inventory report becomes much more important, thus that is a key event in the coming week. The report will be released on Thursday at 10:3...


Strong Growth and Sentiment Cues Rally Oil, Keep Gold Stationary

Posted: 13 Sep 2010 07:44 PM PDT

courtesy of DailyFX.com September 13, 2010 04:08 PM In a welcomed turn for speculators, the capital markets were showing signs of life through volatility Monday morning as a number of off-the-docket event risk spurred risk taking. For crude, the bid was clear; but gold would once again deviate from the current. North American Commodity Update Commodities - Energy Supply Disruptions and Investor Confidence Carry Oil to a Fresh Monthly High Crude Oil (LS Nymex) - $77.19 // $0.74 // 0.97% There was no doubting the improved level of investor sentiment Friday which drove equities, commodities and bond yields higher in equal measure. For oil, the taste for risk was obvious as the US-based crude futures contracts put in for very blatant follow through on this past Friday’s remarkable breakout from congestion. The performance on the day was good enough a new monthly high and the market actually climbed as far as $78. It should be noted that while the market was up nearl...


In The News Today

Posted: 13 Sep 2010 07:44 PM PDT

View the original post at jsmineset.com... September 13, 2010 03:08 PM Questions and Observations Did the global financial meltdown come as a result of banks operating on too little capital or did the meltdown result in the evaporating of bank capital therein leaving the banking industry undercapitalized? The airwaves would have you believe that OTC derivatives are innocent of causing any problems, but more so is the banking industry for operating on too little capital. What a crock. How do you define a class one asset for a bank when the viability of the instrument defined as market value can be assigned by the bank with no relation to any market anywhere? If you up value a legacy asset (broken OTC derivative) then it can no longer be a legacy asset. It might well be a class one asset based on the bank’s legal but arbitrary valuation. Note the great news today on banking reserves. It possesses "discretion" and "country to country" consideration as well as taking the greate...


Hourly Action In Gold From Trader Dan

Posted: 13 Sep 2010 07:44 PM PDT

View the original post at jsmineset.com... September 13, 2010 09:49 AM Dear CIGAs, Click chart to enlarge today's hourly action in Gold in PDF format with commentary from Trader Dan Norcini ...


Scott Koyich: Keen on South American Stories

Posted: 13 Sep 2010 07:44 PM PDT

Source: Karen Roche and Gordon Holmes of The Gold Report 09/13/2010 A long-time fan of gold, Scott Koyich prides himself on finding hidden jewels the Street might want to see. The founder of Calgary-based DSK Consulting Ltd. and Brisco Capital Partners, Scott also sees a bright future for copper. Scott recently sat down with The Gold Report to share his industry insights as well as his top picks for these metals. The Gold Report: Why don't we start with your macro overview on the mining and metals arena and which companies you like? Scott Koyich: As I have been the investor relations counsel for Canadian producer Kirkland Lake Gold Inc. (TSX:KGI) for eight years, I have always been a goldbug and believe in gold on a go-forward basis. As the world economy becomes more volatile, we uncover more uncertainties around countries like Greece, Spain, Italy, Japan and Portugal. Also, as the U.S. goes through its quantitative easing (QE) program—affectionately known as "QE ...


The Western Media Ignores Asian Precious Metal Interest

Posted: 13 Sep 2010 07:43 PM PDT

While all eyes are on India for its annual gold festivals, its neighbor to the northwest is quietly stockpiling millions upon millions of investment grade gold and silver. Chinese gold and silver buyers are out in force, and they want physical metals. Chinese newspapers and financial media are reporting that buyers are primarily wealthier investors. Prior to the gold and silver rush, buyers were primarily lower income and purchased only one ounce silver rounds or one gram gold pieces. However, today's buyers are reaching out for heavier bars and coins of both gold and silver. Newer buyers are moving towards silver as a value play. While the traditional silver to gold ratio is anywhere from 15-25:1, today's prices show a discrepancy, as silver trades at a more than 60 times less an equal weight in gold. Chinese Currency History Perhaps more than any other nation on the world, China appreciates the value of physical gold and silver as not only an investm...


Commodities Soar as Investment Banks Shutter Prop Desks

Posted: 13 Sep 2010 07:43 PM PDT

News that JP Morgan, along with other investment banks, would shut down their proprietary trading desks hardly earned a mention in the press, despite their enormous impact on pricing in the commodities market. Now, about a week after 20 commodity traders were laid off, commodity prices have been edging higher than ever, lending credence to claims that gold and silver prices were depressed by international banking institutions. The Shining Truth JP Morgan expects the move will be completed in less than two months and has already notified its traders that they'll have to seek new jobs at a different firm. Other companies, including Citi and Bank of America, are moving their prop trading desks to a different branch of the company. In those institutions, previous prop traders will work to trade for the bank's clients, not the bank itself, distancing themselves from the goals of the global banking system. Rather than work to suppress prices on the macro level, pr...


We Have a New Gold Standard: Marc Faber

Posted: 13 Sep 2010 07:43 PM PDT

I wouldn't read a thing into yesterdays price action in gold. It spent the entire day range-bound between $1,120 and $1,130. The highs and lows aren't worth mentioning. Nothing to see here, folks! It was the same for silver. There's nothing to talk about in this chart. The dollar has been an interesting case study over the last couple of days. A rally started about 2:00 a.m. Eastern time on Wednesday morning... and, in fits and starts, added about 80 basis points to its price over the next 36 hours... yet the precious metals prices barely reacted at all. In times past, a dollar rally of this magnitude would have resulted in a rather significant sell-off in both gold and silver. It certainly didn't happen this time... and as I mentioned in my column yesterday... we've see a lot more of that kind of action recently, where the gold price is not necessarily tied to the dollar action. As other commentators have pointed out... the precious metals are now bac...


LGMR: Gold Down, Silver Up on "Risk-Friendly" Chinese & Basel News

Posted: 13 Sep 2010 07:43 PM PDT

London Gold Market Report from Adrian Ash BullionVault 11:15 ET, Mon 13 Sept. Gold Down, Silver Up as "Risk-Friendly" Chinese & Basel News Outweighs Ongoing Double-Dip & Q.E. Fears THE PRICE OF GOLD in professional, wholesale dealing reversed an earlier 0.4% drop for Dollar investors as London trade drew to a close on Monday, rising back above $1247 an ounce – but staying lower vs. non-US currencies – as world stock markets rose and government bonds slipped. Crude oil rose through $77 per barrel, while the Euro jumped almost 2¢ to a one-week high above $1.2865. That pushed the gold price in Euros down to a one-week low beneath €31,150 per kilo. Silver prices meantime leapt to fresh 30-month highs above $20.25 per ounce "Risk appetite's back on after the Chinese data and banking reg's news," said one London bullion dealer this morning. Beijing today reported stronger-than-expected money supply, retail sales and industrial output growth. The Basel ...


Gold forms Overbought Rising Wedge at Resistance

Posted: 13 Sep 2010 07:43 PM PDT

Precious metals soar as investors flock to gold and silver. But are they looking deep enough to truly understand the current trends at hand? When reviewing the metals sector I like to look at it from different angles to get a solid understanding of the patterns and trend forming. I follow multiple time frames along with monitoring the gold mining stocks. Gold stocks tend to lead the price of gold bullion and when its out performing the price of gold substantially by 10% or more you should be expecting a pause or pullback in both gold stocks and gold bullion prices temporarily. Below are a few charts showing the long and short term trends for gold. Gold Bullion Price – Weekly Trend Chart Gold continues to be in a strong up trend. The occasional test of support at the major moving averages can provide great long term points for adding to a position. The 50 period average is one which is tested frequently. Looking at the weekly chart does give me a red flag for ...


Gold Consolidates Losses

Posted: 13 Sep 2010 07:43 PM PDT

courtesy of DailyFX.com September 13, 2010 06:56 AM Daily Bars Prepared by Jamie Saettele Gold is closing in on its all-time high. A move to a new high would negate the bearish implications from the impulsive decline and set sights on round figures such as 1300, 1400, 1500, etc. Daily RSI has rolled over from overbought territory and gold did break below its channel (albeit just intraday at this point), so this might be the top....


What Happened to My Day Off?

Posted: 13 Sep 2010 07:43 PM PDT

The following is automatically syndicated from Grandich's blog. You can view the original post here. Stay up to date on his model portfolio! September 13, 2010 07:31 AM I was hoping to extend my football weekend through tonight but find myself at my desk under siege from emailers and phone callers regarding Grandich client Silver Quest Resources (I don’t know why the wife doesn’t just speak to me face to face-lol). It’s funny (only at times) that I* received a half dozen inquiries all the way up but an avalanche of inquiries last week and especially this morning. This actually helps explain the retreat as these are weak holders and obviously are being shaken out. I’m unaware of any material changes since my last update. I assume this is a continuation of the profit-taking mode, lack of fresh news and some weakness in gold (although it’s trying to turn and silver is clearly the stronger of the two at the moment). While I don’t give much weight to ...


The Truth About Gold and Silver ETFs

Posted: 13 Sep 2010 07:43 PM PDT

The following is automatically syndicated from Grandich's blog. You can view the original post here. Stay up to date on his model portfolio! September 13, 2010 04:03 AM Read [url]http://www.grandich.com/[/url] grandich.com...


Crude Oil Boosted by Chinese Growth, Gold Resilient in the Face of Rising Risk Appeti

Posted: 13 Sep 2010 07:43 PM PDT

courtesy of DailyFX.com September 12, 2010 10:51 PM Strong Chinese growth figures and supply worries following a pipeline leak are supporting crude oil. Gold is displaying notable relative strength in the face of increasing risk appetite. Commodities – Energy Crude Oil Boosted by Chinese Growth Crude Oil (WTI) - $77.22 // $0.74 // 0.97% Commentary: Crude oil is up $0.74, or 0.97%, in overnight trade, as traders grow more optimistic about the outlook for global growth. Chinese economic data released late last week showed stronger-than-expected performance in industrial production and retail sales. Also supporting crude oil prices is concern surrounding supply after an Enbridge pipeline carrying oil from Canada to the Midwest was shut down last week following a leak. The pipeline has capacity of 670,000 barrels per day, which is certainly significant, but the extent of supply disruption is unknown and likely much less than that figure, as often times output can be div...


Tuesday's Economic Calendar: All About Retail

Posted: 13 Sep 2010 07:43 PM PDT

optionMONSTER submits:

By Bryan McCormick

The economic calendar today will focus on retail, with three reports from the sector on tap. Traders have been concerned about a slackening in the pace of retail sales as consumers retrench and cut debt. Positive reports would therefore be the outlier bullish surprise.


Complete Story »


3 'ETF' Signs That the Stock Market Bull Wants to Run

Posted: 13 Sep 2010 07:32 PM PDT

gary gordonGary Gordon submits:

Several countries in Europe are on unsustainable paths, leading to debt burdens that they won’t be able to service. Japanese companies can’t sell products at a profit with the yen at a 15-year high. And shortly after the mid-term elections swing Republican (shortly after the “boost” is priced into the markets) too-big-to-fail states like California will obtain bailout dollars from the U.S. federal government.

Perma-bears will continue pressing these points and a half a dozen others, as they look to gain Nouriel Roubini-like fame. However, they may have to wait beyond 2010 for their “I-told-you-so” moment.


Complete Story »


Inflation? What Inflation?

Posted: 13 Sep 2010 07:31 PM PDT

Cullen Roche submits:

The latest outlook from the San Francisco Fed is less than rosy. And they are certainly not worried about inflation any time soon despite continuous fear mongering from the inflationistas. They are currently forecasting sub 1% PCE inflation over the coming few years due to very weak macro trends:

With enormous slack in labor markets, wage pressures have been low. Compensation per hour, a broad but relatively volatile measure, registered growth of only 1% in the second quarter from a year earlier. Growth in the employment cost index, which includes health and other benefit costs, but excludes bonuses, also remains subdued relative to history. By any of these measures, business labor costs haven’t been growing rapidly.


Complete Story »


Bringing Down the Unemployment Rate: How Hard Will It Be?

Posted: 13 Sep 2010 07:23 PM PDT

Tom Lindmark submits:

Here’s a really good, short paper from the San Francisco Fed about labor force participation rates. I know that probably is inducing glaze in your eyes, but stay with me. It helps put in perspective all of the conflicting claims that you hear about how many jobs we need to create to get to a given level of unemployment.

To get a sense of how small changes in labor force participation can have large impacts on the unemployment rate, it is helpful to do a little accounting. U.S. population growth averages about 1% per year. Assuming no change in labor force participation, the economy would need to create about 100,000 jobs per month on net to keep the unemployment rate at its August 2010 value of 9.6%.


Complete Story »


GoldSeek.com Radio Gold Nugget: Bob Hoye & Chris Waltzek

Posted: 13 Sep 2010 07:00 PM PDT

GoldSeek.com Radio Gold Nugget: Bob Hoye & Chris Waltzek


Does the Fed Ultimately Control Interest Rates?

Posted: 13 Sep 2010 06:49 PM PDT

In forecasting the consequences of current economic policy, many pundits are downplaying the risks associated with the surging national debt and the rapid expansion of marketable Treasury securities. Their comfort stems from the belief that a staggering debt burden will be manageable as long as interest rates remain extremely low; and, as they believe the Fed is in complete control of setting rates across the yield curve, they see no danger of rates ever rising past the point of comfort. Those who subscribe to this fairy tale forget that, in real life, there are many more hands on the interest rate steering wheel.

The Congressional Budget Office estimates that the 2010 deficit will exceed $1.3 trillion and total US debt now stands at $13.4 trillion (92% of GDP). That's a lot of debt that needs floating. Yet, the 10-year note is yielding 2.8% -- which is 4.5 points below its 40-year average of 7.3%! Experience teaches that even moderately long-term investors should be expecting rising rates. Regardless of the extreme and obvious misalignment of fundamentals and bond prices, the mantra from the dollar shills remains firm: "The US dollar will always be the world's reserve currency, and the US bond market will always be regarded as the safe-haven depository for global savings."


Complete Story »


Bond Bubble or Inverse Bubble?

Posted: 13 Sep 2010 06:39 PM PDT

Steve Hassett submits:

Are long-term bonds, especially the 10-year Treasury, in a bubble?

There have been a number of articles and talk of a bond bubble -- meaning that the current yield on long-term government bonds is unsustainably low and so the price of these bonds is too high. For example, Jeremy Siegel wrote, “The Great American Bond Bubble.”


Complete Story »


Enjoy the 'Sigh of Relief' Market Rally

Posted: 13 Sep 2010 06:38 PM PDT

Jason Schwarz submits:

I don’t know about you, but it feels like it’s been three years since I’ve been able to breathe easy in the stock market. The plague of panic goes a little something like this: systematic bank failure, billions in writedowns, threat of economic depression, euro collapse, sovereign debt contagion, health care reform, financial reform, tax increases, double dip, tight lending, credit contraction, de-leveraging, and even a bout of swine flu mixed in. Can’t we have a few months without the fear of crisis keeping us up at night? Don’t we deserve to have a few good market months through year end? I think we do and here’s why:

1-In the grand scheme of things, we will look back at mid year 2010 and view it as a brief pause in the cyclical recovery. A pause that compelled the U.S. to fix its anti-growth government policy, a pause that compelled the Eurozone to pass austerity measures, and a pause that established a new baseline from which the economy could resume its upward trajectory. I really believe that the flat market performance of August was hugely bullish for the rest of the year as it showed us the bad news is already priced in. If the market didn’t go down in that environment of low volume, bad economic news, terrible housing news, and lackluster leadership from stocks like Apple (AAPL) and Bank of America (BAC); then it is done going down. August action shifted the path of least resistance from the downside to the upside.


Complete Story »


Is the Bond Market Changing Direction?

Posted: 13 Sep 2010 06:32 PM PDT

Investment Directions submits:

Whether you call it a bubble or not, investors’ love affair with bonds may be ending. Longer-term bond losses in the last three weeks have been about one-half year’s interest income.

It may not seem possible. After all, corporate bond yields rose only 0.22% from their 3.74% historic low on August 24 to 3.96% last Friday (see Bloomberg article below). Such is the “magic” of long-term bond arithmetic: Small interest rate changes produce large price moves.


Complete Story »


8 Breakout Stocks With High Dividend Yields

Posted: 13 Sep 2010 06:26 PM PDT

Kapitall submits:

The following is a list of high yield stocks that have seen a bullish 50-day SMA / 200-day SMA crossover over the last session.

When these two moving averages cross, it often represents a shift in investor sentiment. If the 50-day MA moves above the 200-day MA (bullish), it's called a "Golden Cross" signal.


Complete Story »


Gold As Money

Posted: 13 Sep 2010 06:08 PM PDT

Money is the economic good against which almost all other goods are traded, or, to put it more simply, money is the general medium of exchange within an economy. The corollary is that if something is the general medium of exchange within an economy, then that 'thing' is money.


August Market Review - The Woody Hayes Economy

Posted: 13 Sep 2010 05:53 PM PDT

Value Expectations submits:

The Woody Hayes Economy

With one economist after another cutting GDP forecasts, August was a busy month in regards to the heated debate of a possible Double Dip for the US economy. Economist Robert Schiller, a bear’s bear, predicted that the U.S. economy has a better than 50/50 chance of entering a double-dip recession if the government doesn't step in to help the unemployed. Federal Reserve monetary-policy makers decided the economic recovery wasn't as strong as it had previously anticipated, and announced that they would reinvest maturing mortgage-backed securities in government debt so that its balance sheet does not shrink – a moved dubbed as the beginning of QE II.


Complete Story »


Put 10% of your assets in gold and pray it doesnt work.

Posted: 13 Sep 2010 05:30 PM PDT

Gold Down, Silver Up as "Risk-Friendly" Chinese…

Posted: 13 Sep 2010 05:29 PM PDT

Gold Down, Silver Up as "Risk-Friendly" Chinese…

Posted: 13 Sep 2010 05:29 PM PDT

Learn How Butterflies Can Create Profits When Trading GLD

Posted: 13 Sep 2010 05:23 PM PDT

In recent articles, we discussed that Theta (Time Decay) has the potential to cause option prices to decline dramatically, particularly in the final weeks leading up to option expiration. As it turns out, we are now in that very period of time and option strategies that utilize Theta (time) decay as their profit engine can [...]


Hinde Capital On Gold Wars And A Golden Renaissance

Posted: 13 Sep 2010 05:13 PM PDT


The Gold Wars: A Golden Renaissance, by Hinde Capital

 

h/t Konrad

Will the Basel III Bank Regulations Change Anything?

Posted: 13 Sep 2010 05:03 PM PDT


→ Washington’s Blog

The much-trumpeted Basel III increase in capital requirements will not be fully phased in until 2019.

Many are criticizing the slow pace of implementation, including Joseph Stiglitz:

“While it’s understandable given the weaknesses and the failings of the banking system that one would want to be slow in introducing these increased capital requirements, delay is exposing the public to continued risk,” said Nobel laureate Joseph Stiglitz, a former chief economist at the World Bank and now a professor of economics at Columbia University in New York. “Given the high levels of payouts in bonuses and dividends, it seems a little unconscionable to continue putting the public at risk with an argument that they cannot more rapidly increase their own capital.”

And Pimco's Mohamed El-Erian:

“The phasing-in period for the new capital requirements is surprisingly long, which will add to the skepticism about the robustness of the bank capital enhancement efforts.”

The former chief economist for BIS - William White - says that banks aren't lending because consumers are tapped out, not because of capital requirements, and therefore:

Tightening regulation and capital requirements will not hurt the economy as much as might otherwise have been expected…

In other words, White debunks the idea that raising capital requirements too quickly will curtail lending and hurt the economy.

Phillip Hilderbrand, Chairman of the Swiss National Bank, points out that Basel III doesn't address the too big to fails:

While the reform package is far-reaching, it does not yet comprehensively address the TBTF ("too big to fail") problem. Further efforts will be required in that area at the international and at the national level.

Yves Smith notes:

Valuation: the capital ratios mean nothing if the assets are overvalued. Waldman is always going on about this. It ends up as quite a radical critique: capital ratios without valuation reform = cart before horse.

 

Accounting: there is still no harmonization of accounting practices on all the shadow banking apparatus: for instance, special purpose vehicles, derivative netting and repos. Actually, of course, when you come across things like Repo 105, or BoA’s quarter end balance sheet manipulations, there don’t seem to be any relevant reputable accounting practices at all; even if you think Lehman’s liquidity pool probably is an outlier, some of this stuff really, really needs fixing. And do we think that under Basel III there will be more accounting dodges that will cross the line from ‘asset sweating’ to ‘accounting manipulation’? Not Basel III’s fault, but I rather think we do expect exactly that.

 

Regulatory risk weightings are still a mess, with the ratings agencies still ensconced as the arbiters of credit quality.

Then of course there is shadow banking, which Basel III largely dances around. One particularly glaring example is the whole custody/client money/asset segregation/rehypothecation/title mess in London. There’s not a peep, burble or whisper here in the UK about the sort of legal reforms (somewhat in the manner of the US’s 1934 Securities Act, perhaps, plus a UK version of SIPC) that would sort this out. Recent Lehman-related rulings on Client Money actually mess the situation up even more.

 

***

 

I have nothing to say about enforcement; it’s been such a long time since I’ve seen any that I’ve forgotten what it is.

 

In the end, these and other regulatory arbs are all consequences of politics. Pending some unimaginable transformation there, in which regulators somehow acquire the discretion to pick fights with banks, [things won't look very different from how they did before the last crisis].

Karl Denninger writes:

In absolute terms....

 

1 / 0.045 = 22:1 absolute maximum leverage.

 

1 / 0.07 = 14.3% leverage beyond which no dividends may be paid.

 

Sounds rather reasonable, doesn't it?

 

Well, the latter is. Indeed, it's about what the former legal limit was before Henry Paulson, as head of Goldman, got the SEC to lift it from the investment banks.

 

An act that, as I have repeatedly pointed out for three years, made possible the blow-off top in both housing and the debt markets, and materially increased the amount of damage done by the financial crisis.

 

But none of these figures matter a bit unless banks are forced to value assets fairly. And until we see the FDIC stop coming in and taking losses on banks that according to their alleged "call reports" are perfectly solvent, we will not have seen the end of the lies.

 

I'm sorry folks, but this is all political theater and BS so long as institutions like Wells Fargo (WFC), Bank of America (BAC), Citibank (C) and others can hold hundreds of billions or even more than a trillion - each - off balance sheet without no clean accounting for the value of the alleged "assets", and they both are and do.

 

By some figures many European banks are running actual leverage ratios closer to 50:1, mostly for the same sort of reasons. The so-called "stress tests" ignored anything not held in a trading book, which was dramatically more than the "trading" amount, and leaves open to question whether there was some hinky re-shuffling ahead of the so-called "test" as well.

The committee has yet to agree on revised calculations of risk-weighted assets, which form the denominator of the capital ratios to be determined this weekend. The implementation details of a short-term liquidity ratio will also be decided by the time G-20 leaders meet, members say. A separate long-term liquidity rule will likely be left to next year.

Yeah, that's one of the scams that has been run too - so-called "liquid assets" that aren't really liquid.

 

Hint: Only short-term (say, 26 week and less) government bonds and cash are truly liquid assets, as only debt instruments without material duration risk and actual vault cash can be counted on to be turned into cash during a liquidity squeeze. Don't hold your breath on the Basel Clowns restricting the definition to these instruments - in fact, I'll bet anyone a case of Scotch they won't.

Even CNBC is skeptical:

The historic banking reforms agreed in Basel over the weekend are pointless and won't stop the next crisis destined to hit the markets, Alpesh Patel, principal at Praefinium Partners, told CNBC Monday.

 

"In so many ways, it's so irrelevant," Patel said. "Crashes tend not to repeat themselves in the same manor, so we're fighting the last battle."

 

***

Patel also criticized the longer-than-expected lead time that financial firms are allowed in which to implement the changes.

 

"The other problem with this is that the regulators have shown quite a degree of leniency time and time again… they don't to make the really tough decisions because they're too afraid of spooking the markets," he said.

The bottom line: capital requirements might be helpful if other - more fundamental - reforms are implemented. But unless core reforms are implemented, nothing will change.

How Student Debt Wrecks Marriages, Inhibits Family Formation, and Delays the Housing Recovery

Posted: 13 Sep 2010 05:00 PM PDT

Morgan Stanley Expects QE2 Announcement Next Week, Takes Other Side Of Goldman's "Variance Swap" Trade

Posted: 13 Sep 2010 04:52 PM PDT


Exactly a week from today, the FOMC will meet on September 21, to decide whether or not to go from QE Lite to a full-blown QE 2 regime. And while most pundits had previously lost hope that the Fed will go full retard in its dollar destruction ways as early as next week, instead opting for the November 2 meeting if not wait for 2011 entirely, Morgan Stanley (specifically Jim Caron) came along: "We see considerable risk that the Fed may open the door to QE2 at this September 21 meeting despite the stronger-than-expected August payroll results and even if upcoming economic data stabilize. We believe that QE2 may come in the form of a vague outline for a plan to buy assets, expand its balance sheet and keep interest rates low conditioned upon economic data." Why the sudden change in opinion?  "We believe that the Fed may be reluctant to act aggressively after September 21 so as not to influence the election outcome. However, if deterioration in economic conditions warranted it, then the Fed may uncharacteristically act close to the election date. Acting sooner rather than later would be consistent with Bernanke’s plan to stave off deflation risks before they arise." Right or wrong about the Fed's choice (and with Caron's recent track record, one may be tempted to choose the latter), Morgan Stanley does correctly observe that volatility will likely jump in the weeks and months ahead, even as its has been moving progressively higher lately: "Interest rates have been subject to big daily swings." Curiously, as a hedge to surging rates vol, Morgan Stanley proposes the opposite Variance Swap trade that caused a massive loss for Goldman in Q2, and was Goldman's Top trade of 2010. Let's see who blows up first: Goldman, which still expects a decline in vol, or Morgan Stanley who is on the other side. Perhaps the two firms can just trade with each other (that wouldn't be that much of a change from the current regime).

Rising Volatility in the Months Ahead – Consider the Source

Let's start with policy and economic uncertainty – the Fed may open the door to QE2 at the September 21 FOMC meeting. The September 21 FOMC meeting will be the last Fed meeting until the next meeting on November 3 after the mid-term elections on November 2. Based on Bernanke’s Jackson Hole speech, many investors thought this would be the opportune time for the Fed to introduce QE2, a proposition for the Fed to buy more assets and drive interest rates lower. That is until the stronger-than-expected release of the August payrolls caused investors to reassess their thinking and postpone their expectations for QE2 until a later date. We see considerable risk that the Fed may open the door to QE2 at this September 21 meeting despite the stronger-than-expected August payroll results and even if upcoming economic data stabilize. We believe that QE2 may come in the form of a vague outline for a plan to buy assets, expand its balance sheet and keep interest rates low conditioned upon economic data. Why the rush? We believe that the Fed may be reluctant to act aggressively after September 21 so as not to influence the election outcome. However, if deterioration in economic conditions warranted it, then the Fed may uncharacteristically act close to the election date. Acting sooner rather than later would be consistent with Bernanke’s plan to stave off deflation risks before they arise. We believe this to be a considerable risk which supports our view for higher volatility in the weeks and months ahead.

Finally, political uncertainty. The gridlock in Washington over the appropriate fiscal response and stimulus to boost the economy creates a wide range of outcomes for the path of interest rates. For example, our economics team has a bimodal and asymmetric outlook for yields (see Will 'Sunset' Darken the Outlook, September 3, 2010, Berner and Greenlaw). Specifically, if the Bush tax cuts are not extended, then it would cause a fiscal drag on growth that could shave off 3/4% of 2011 growth, according to our US economists. Under such circumstances, we could see UST 10y yields falling to 2% or lower. However, if the tax cuts are extended and there is a break in the fiscal policy logjam, as our base case suggests, then this may encourage economic stability that could push UST 10y yields well north of 3%. As a result, we expect many wide swings in interest rates as we head into the politically charged period of mid-term elections on November 2 and the December 31 sunset of the Bush tax cuts. In our view, the wide bimodal path of rates, due to political and economic uncertainty, is the reason for vol to move higher in the months ahead.

Here is how MS suggests positioning for the gradual increase in Vol.

Expressing a Long Volatility Position


Thus, we expect volatility to rise during this period and recommend that investors manage their volatility exposure while investing in carry products. We re-iterate our favored ways to own volatility is through variance swaps and forward-volatility agreements (FVAs). The risk to these trades is that vol remains low.


Variance swap: A variance swap gives investors exposure to realized volatility over the life of the swap. Investors are taking a view on current implied volatility versus future realized volatility. As Exhibit 1 illustrates, the low level of rates does not tell the whole story; the market is rife with debate that is producing a high frequency of double-digit basis point moves in 10y rates, which is contributing to the rise in volatility. In a variance swap one gets the square of the move in rates, which is beneficial when the market is frequently having big swings.

  • Buy 3-month variance swap on 10y CMS struck at 131 variance points. This is equivalent to 114bp normal vol, or 7.2bp/day breakeven. Over the past month, realized vol has outperformed implied vol, and we believe that may be the case going forward, given the policy, economic and political uncertainty.

Forward-volatility agreement (FVA): An FVA gives investors exposure to the level of implied volatility at a set forward date. Investors are taking a view on future implied volatility versus what is priced in by the market. We expect realized volatility to rise over the coming months as it typically leads implied vol, which we think is at an attractive entry point. An FVA enables one to cleanly express a rise in implied volatility that is independent of the level of rates and strike.

  • Our preferred expression of this trade is to buy a 3-month forward 3m10y FVA for 380bp. This means that the investor has agreed to buy an ATM 3m10y straddle in 3 months for 107bp (see Exhibit 2, LHS).

Heavy Supply and High Correlations to Interest Rates May Increase Volatility in the Rates Market

The heavy supply calendar for September may act to exacerbate movements in the interest rate markets. In addition to the $127 billion UST supply, we also have estimated investment grade corporate issuance at close to $100 billion this month with only about $25 billion maturing, which puts net issuance at ~$75 billion for IG corporates (see Exhibit 2, RHS). Issuance matters more in terms of interest rate risk because the duration of issuance has been increasingly making the heavy bond supply more sensitive to changes in the level of interest rates. This is a point we have made in the past, but the interest rate risk is exacerbated today due to the spike in issuance. For example, in August, 39% of corporate issuance had maturities greater than 10 years, the most since December 2007 based on Bloomberg data. Also, Bank of America Merrill Lynch indices show that the duration of corporate bonds reached a record high of 5.69 years. As investors reach for yield further out the yield curve, they are also upping the ante on their interest rate risk exposure. It seems that many asset classes, whether bonds or stocks, are highly correlated to the level of interest rates. This makes the volatility we expect in the interest rate markets in the next few months all the more worrisome.

Conclusion: Policy, economic and political uncertainty may cause rate volatility to rise in the months ahead. Much hinges upon the extension of the Bush tax cuts by the end of the year. Failure to extend these tax cuts might shave ¾% off of 2011 growth and alter its path (see Exhibit 3). This will have a meaningful impact on the path of interest rates as well. A failure to extend the Bush tax cuts could create fiscal drag and cause UST 10y yields to drop below 2%, while an extension of the tax cuts could push yields well north of 3%. This produces a bimodal distribution of rates that is causing interest rates to fluctuate greatly in the interim period. Managing this rise in volatility while earning carry will be the key to adding alpha. In this report we will discuss various ways to gain exposure to volatility.

Losing Faith in the Zombie-Run Government

Posted: 13 Sep 2010 04:31 PM PDT

Zombies run wild!

Yesterday's market trends were nothing to talk about. Dow up 47. Gold down $4. No real landmark news. So let's go back to the zombies.

Yes, the zombies are taking over. But you knew that. They're everywhere, of course. In the big banks. In the big companies. In the universities. In the military. In line for food stamps. In line for bailouts. In line for promotions. And in line to be elected to high public office.

And the government? Heck, Washington is wall-to-wall zombies.

"Bill, aren't you going a little overboard...maybe even losing it a little?" writes an earnest Dear Reader. "I mean, this zombie thing... Don't you think you're taking it a little too far?"

Bill answers: No... Zombies represent a major threat to the republic and everything for which it stands. Zombies are a much bigger menace than, say, terrorists. Much bigger than obesity or smoking. Much bigger than littering. Much bigger than music in public places or public education. You name it, zombies are a bigger danger. And we're not alone in this. Here's the publisher of US News and World Report, telling it like it is...in The Financial Times:

America's public servants are now its masters
By Mort Zuckerman

There really are two Americas, but they are not captured by the standard class warfare speeches that dramatise the gulf between the rich and the poor. Of the new divisions, one is the gap between employed and unemployed that President Barack Obama seeks to close with yet another $50bn stimulus programme. Another is between workers in the private and public sectors. No guesses which are the more protected. A recent study by the Mayo Research Institute found that "private-sector workers were nearly three times more likely to be jobless than public- sector workers".

Political tension is bound to grow when jobs disappear faster in the private than the public sector, just as compensation in the former is squeezed more. There was a time when government work offered lower salaries than comparable jobs in the private sector, a difference for which the public sector compensated by providing more security and better benefits. No longer. These days, government employees are better off in almost every area: pay, benefits, time off and security, on top of working fewer hours. Public workers have become a privileged class - an elite who live better than their private-sector counterparts. Public servants have become the public's masters.

Take federal employees. For nine years in a row, they have been awarded bigger average pay and benefit increases than private-sector workers. In 2008, the average wage for 1.9m federal civilian workers was more than $79,000, against an average of about $50,000 for the nation's 108m private-sector workers, measured in full-time equivalents. Ninety per cent of government employees receive lifetime pension benefits versus 18 per cent of private employees. Public service employees continue to gain annual salary increases; they retire earlier with instant, guaranteed benefits paid for with the taxes of those very same private- sector workers.

More troubling still is the inherent political corruption. Elected officials tend to be accommodating when confronted by powerful constituencies such as the public service unions that agitate for plush benefits and often provide (or deny) a steady flow of cash to election campaign funds. Their successors will have to cope with the inherited debt burden - and ultimately the nation's taxpayers are stuck with the bill.

As Governor Arnold Schwarzenegger has pointed out, spending on retirement benefits for California's state employees is growing at three times the rate of state revenues, now exceeding $6bn annually and growing at the rate of 15 per cent a year. In other states, however, the politics of public pensions appear to be changing. In Michigan, Governor Jennifer Granholm, a Democrat, recently enacted a teacher pension reform that should save about $3bn over 10 years by increasing the amount workers must contribute. Illinois raised its retirement age for newly hired public workers from as low as 55 to 67. Chris Christie, the Republican governor of New Jersey, decided that even if it took bruising clashes with public worker unions, public service compensation reform was essential for the fiscal health of the state. His stance surprised many, but it made him a national figure.

There is no quick fix to deal with the billions in unfunded liabilities. Public service employees are almost impossible to fire, except after a long process and only for the most grievous offences. What is more, the courts have ruled in many states that pension increases granted by elected bodies are vested benefits that must be paid no matter what, precluding politicians from going back and changing past agreements.

A fundamental rethinking of the public workforce is necessary. Americans cannot maintain their essential faith in government if there are two Americas, in which the private sector subsidises the disproportionate benefits of this new public sector elite.

He's got that right. Faith in the government is on the wane. And as faith declines so should the dollar and the US government's debt.

But wait. You say US bonds are selling near record highs? You say yields are at record lows? You say there were never so many people so eager to trade their money for a promise from the feds?

Well, I guess we were wrong...

And more thoughts...

But hold on. What's this? Here's another news item: The capital of Pennsylvania has gone broke. Yes, it's official. The city fathers told their lenders not to bother going to the mailbox. The check that doesn't show up is the one from them.

We have a suggestion for Governor Ed Rendell. Think Gerald Ford to New York City. Tell Harrisburg to drop dead.

Instead, poor Rendell is playing the part of Barack Obama. He's coming to the rescue. Bloomberg tells the story:

"They have a chance to dig themselves out of this without going into bankruptcy, and that's something I'd like to see," he said today. "Harrisburg has some assets they can sell."

Harrisburg Mayor Linda Thompson, who took office in January, yesterday proposed closing one of the city's four firehouses, furloughing senior staff members, raising parking fees and negotiating pay cuts with public employee unions to address a deficit in this year's $118 million city budget. Tax revenue is coming in about $9 million below projections, a June 30 report from Thompson shows.

City Council members balked at tax increases and the sale of parking garages and other assets that Thompson proposed in January. Bankruptcy is a "real option" for the city of 47,000, Council Vice President Patty Kim said Sept. 1, after the city notified the trustee of its 1997 D and 1997 F zero-coupon bonds that it wouldn't make the Sept. 15 payments.

The city also has skipped $8 million in payments it guaranteed this year on bonds issued by the Harrisburg Authority for a trash-to-energy incinerator built in the 1960s. Rendell said the debt the city faces from that project makes Harrisburg's situation "an aberration."

There, we suspect the poor governor is delusional. Debt is no aberration. It's the norm.

We can't lay our hands on the research report right this minute...but we'll find it. And what it tells us is that states and municipalities are up to their eyeballs in debt. Harrisburg may be the first. But it won't be the last.

Got municipal debt, dear reader? You should get rid of it.

And you know why? Zombies. The zombies know where the soup is. And they're bankrupting state, local, and federal governments.

Zombies join government because it's a good place to work if you're brain dead and all you can do is slouch and shuffle. The feds can earn a living without actually doing very much. Well, no one knows whether they are doing anything or not. That's the beauty of government. It doesn't have to turn a profit. So, there's no pressure to show a profit or hold down salaries.

In fact, just the opposite. The people who are on the payroll are also on the voter registration lists. And they're also the people with the time on their hands - and the self-interest - to lobby for more government spending, higher salaries, more perks for government employees, and generally less control over public spending.

When the economy is bubbly hot nobody cares anyway...everybody is getting rich; why not share the wealth with the people who patrol the streets and pick up the trash? And then, when the bubble pops and the economy goes into a slump, they have the cheek to call for even more public spending as a stimulus measure.

Zombies. Gotta luv 'em.

Regards,

Bill Bonner
for The Daily Reckoning Australia

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Just Another Hyperinflation Post - Part 3

Posted: 13 Sep 2010 04:21 PM PDT

Let's try this one more time. Let's look at it from a purely conceptual angle. Most of the following discussion will not be a proof of the inevitability of hyperinflation, but merely the proper way to view the flow of capital in a panic while analyzing the probability that it will be called "hyperinflation" in hindsight, after the fact. This is what seems to be most lacking in the descriptions I


"In Your Face" Market

Posted: 13 Sep 2010 04:13 PM PDT


Think about it. We have a gagiillion of money going into fixed income over the past three months. A big chunk of that comes from equity mutual fund redemptions. Seventeen weeks of outflows. What happens? Stocks catch a bid and bonds take a tumble. Two observations come to mind. (1) Retail is dumb money and (2) the buy and hold is just a dead concept.

The “Risk On” trade was a convergence of a number of forces. Stocks were oversold, bonds overbought and as it turns out the economy was doing a tad better in August than was expected on a number of fronts. So once again the market flushes out weak hands. It must be tough on the folks managing their own 401k’s. No sooner than they get invested in long term fixed income (at the lowest yield in 40 years) it starts to look like a bad idea. A lot of money is now tied up in yields that after taxes and inflation are just going to produce losses. Oh well. That is the ‘In your face’ market (AKA the FU market) we have.

For me this could be just a head fake. So what if the odds for a double dip have fallen from 40% to 30% in the last month? That whole debate has been a waste of time. That may be a good excuse for a snap back reaction to an oversold/bought market. But it is a dumb reason to get excited that stocks will never have another down day for the rest of the year. There are plenty of down days in front of us.

Absent something very big from DC the economy is going to slow. We are going to see GDP in Q3 at around 1.5% it will be lower than that in Q4. That is a given folks. And that is the good news. All of 2011 will be a struggle to get GDP over 1.5% on average. That forecast assumes there are no downside shocks or upside surprises. As it stacks up I think the bet is better for downside news than upside. We shall see.

I look at a number of barometers for evaluating where we are in the risk on/risk off cycle. I like the DLR/YEN and the EUR/CHF. When they are trading lower I am very suspicious of the Risk On trade. Both those rates are down big from Friday’s close.

As I write the DLR/YEN is breaking down based on some political news. If Mr. Kan is the winner tonight then the Yen has to be stronger. The EUR/CHF is going to take a dip should the Yen break to new to new highs.

My secondary sources to confirm Risk Off are the DLR/CHF, Gold and of course the bonds. To me it looks like a sure thing that $/Swissie is going to break par some day soon. That will make for negative headlines. Gold swooned a bit as the Risk On appetite rose. But have you noticed that for all of the “noise” from the pundits we are only $10 bucks under an all time high? That is nothing if we get a hiccup in DLR/YEN. More headlines.

I am not sure that watching the bond market for correlation trades is such a wise thing to do any longer. The question I have been pondering is, “When does the current correlation (Weak Bonds – Strong Equities) change to Weak Bonds – Weak Equities?” If the pendulum of the correlation is to swing, it is likely to produce some bad “reads” along the way. “Old Reliable” may not be so relevant.

So If you believe in the FU market theory watch for the next leg to be ‘risk off’ for equities for a bit and we could still see bonds pushing against the critical 2.85 level. DLR/CHF could break below parity. We could see new lows for DLR/YEN and EUR/CHF. The one thing I would not expect? That the market(s) close where they were in NY today on this Friday. Vol up, belts on.

Gold Seeker Closing Report: Gold Gains Slightly While Silver Surges Over 1% to Above $20

Posted: 13 Sep 2010 04:00 PM PDT

Gold saw a modest gain at as high as $1248.00 in Asia before it fell back off in London to as low as $1240.92 by about 8:30AM EST and then rose to a new session high of $1248.88 in midmorning New York trade, but it then chopped back lower into the close and ended with a gain of just 0.06%. Silver soared to as high as $20.21 by about 10:30AM EST before it also fell back off a bit in the last few hours of trade, but it still ended at a new 30-month high with a gain of 1.51%.


Is Bank of Thailand buying gold on the sly?

Posted: 13 Sep 2010 03:38 PM PDT

Thailand: Who's Buying Gold?

By Tim Johnston
Financial Times, London
Monday, September 13, 2010

http://blogs.ft.com/beyond-brics/2010/09/13/thailand-whos-buying-gold/

Gold demand is volatile, especially in Asia, but what on earth is happening in Thailand?

According to some numbers buried in the Thai customs website, gold imports in July, the latest month for which data is available, hit 55.4 billion baht ($1.8 billion), which is equivalent to a bit less than 45 tonnes and more than 13 times June imports of 4.1 billion baht ($130 million).

There are a few possible explanations. Thailand is a global jewellery hub -- the world's biggest cutting centre for coloured stones -- but jewellery demand was significantly down in June and July.

... Dispatch continues below ...


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Previous months had seen significant exports, but restocking doesn't seem to account for the rise either. Nor does leakage into Vietnam, whose demand for the glittery stuff is immense but fairly constant.

So the numbers have got tongues wagging in Bangkok -- and one player keeps being mentioned: the central bank, the Bank of Thailand.

The Thai baht is running at 13-year highs, up 8.4 per cent against dollar so far this year, which is not only worrying for exporters, but also for the bank, which holds $157 billion in foreign reserves.

The Bank of Thailand won't say how much of that is held in dollars, but a straw poll of Bangkok economists suggests that it is somewhere between 60 and 85 per cent, and they've already said they are trending away from the US dollar.

But if that 60-85 per cent estimate is right, every 1 per cent of appreciation in the baht is costing between $940 million and $1.33 billion in reserve losses on dollar holdings alone. At the top end, that's close to 0.5 per cent of GDP, or a little more than 2 per cent of the 2010/11 budget passed last month.

So has the Bank of Thailand been in the market? They aren't saying, but the Thai Customs website might be getting a few more hits than usual in the coming weeks.

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Sona Resources Expects Positive Cash Flow from Blackdome,
Plans Aggressive Exploration of Elizabeth Gold Property

On May 18, 2010, Sona Resources Corp. (TSXV: SYS, Frankfurt: QS7) announced the release of a preliminary economic assessment for gold production at its flagship Blackdome and Elizabeth properties in British Columbia.

Sona Executive Chairman Nick Ferris says: "We view this as a baseline scenario for gold production. The project is highly sensitive to the price of gold. A conservative valuation of gold at $1,093 per ounce would result in a pre-tax cash flow of $54 million. The assessment indicates that underground mining at the two sites would recover 183,600 ounces of gold and 62,500 ounces of silver. Permitting and infrastructure are already in place for processing ore at the Blackdome mill, with a 200-tonne per day throughput over an eight-year mine life. Our near-term goal is to continue aggressive exploration at Elizabeth and develop a million-plus-ounce gold resource, commencing production in 2013."

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Guest Post: How Options Should Be Valued

Posted: 13 Sep 2010 03:23 PM PDT


Submitted by Daniel Cloud

How options should be valued (pdf)

 

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This posting includes an audio/video/photo media file: Download Now

Presenting Jim O'Neill's Farewell Letter

Posted: 13 Sep 2010 02:58 PM PDT


As everyone knows by now, Goldman's (now former) top economist (and creator of such K-11 magic as BRIC and N-11) Jim O'Neill has auspiciously found a new role at Goldman Sachs, as Chairman of Goldman Sachs Asset Management (proverbially, the place which will house all remaining 99.9% of the firm's prop traders, and which with $802 billion in AUM should have enough money to pay all of the Goldman hedge funders' salaries no matter how badly they perform), even as in a completely unrelated departure, Eileen Rominger, the global chief investment officer of Goldman Sachs Asset Management is planning on retiring at the end of the year. The two are obviously completely unrelated. What can we say: on behalf of the bear (or is that realist?) community we will miss Mr. O'Neill taunts, just as he will sorely miss the "few incoming hostile emails in response, and references to some weird blog sites who apparently opine on my views." All in good humor, Jim. That said: after succeeding in (at least on the surface) eliminating Goldman Prop, Zero Hedge will next focus its attention on all the juicy gossip, innuendo, and endless fun emanating out of Goldman Sachs Asset Management. We are sure that Jim will find our continued interest in his activities almost as delightful as a ManU come back victory from 3+ goals down. And now, without further ado, here is Jim O'Neill's farewell letter...

As you might have seen, I am moving into a different role for the firm, and am very excited about the prospects. I will still publish my views and thoughts, although not lead the wonderful department I have done for many years. Many thanks to the staggering number of well wishes I have received from so many of  you all over the world. I am very flattered.

Anyhow, at this juncture of my career, and reflecting on times moving on, not least as today is the 9th anniversary of the most awful act of terror I can remember from my life, a few thoughts;

1.       9/11 and the state of the world. As many of you will probably know, the atrocity of that day was one of the key forces that led to me  to conceive of the BRIC theme. Through its horror, it suggested to me that for globalization and the world economy to thrive, we all needed to accept a world in which different social and political philosophies could sit side by side, and happily all trade with each other for all our benefit.  Luckily, and despite the staggering challenges we have been through since, by and large, that seems to be the case. Of course, as much as many negatively inclined commentators allude to the poor performance of the major economies and major markets, since 9 years ago, many emerging markets, led by the BRIC nations, have enjoyed spectacular rallies.

In this regard, Tim Moe, our Chief Asian Strategist has just published a “must read” paper , Global Paper 204, on the future size of global equity market capitalization, showing the remarkable likely developments ahead.

In the same vein, last weekend , someone emailed me a copy of a highly relevant paper published back in the American Economic Review, 2007, entitled “ Demography and Industry Returns”. It shows that demographic changes, however known beyond 5 years or so, are rarely “ discounted” in financial markets. If China and India carry on urbanizing, Brazil ‘s youthful population multiplies as expected, and if it is true as some signs are starting to show, Russia’s doesn’t drop as widely expected, then the BRIC and N11 story has a long long way to go.

In the memory of 9/11, is also interesting to see fresh talks opening between Israel and Palestine, which appear to be more serious than for some time.

2.       China at the forefront. The past couple of days has seen China publish all its latest monthly data, for August. China is undoubtedly the star BRIC, and as I have shown in many recent presentations, “ you haven’t seen nothing yet”. Having overtaken Japan about 6 years earlier than we originally envisaged, this decade, the real US$ value of China’s GDP may double again, and contribute twice that of the US between now and 2019.

The past two days data suggest that , firstly, last months perceptions of significant slowing were exaggerated, and secondly, China is in a good position to be regarded as having achieved some sort of soft landing. In terms of its ongoing performance and contribution to the world, two monthly numbers I  keep special track of, are both looking encouraging. Firstly, in terms of the trade numbers, the latest data shows in the 8 months year to date, China’s imports have increased by $ 440bn, a bit slower than at their peak rate close to $ 500bn, but still huge. As I am fond of saying, especially to Greek problem obsessed observers, China was importing another Greece every 8 months. It has slipped to every 9. Remarkable. Secondly, I track the relationship between monthly retail sales and monthly industrial production, within the context of overall growth. This month, while IP surprised a bit on the upside, retail sales surprised even more. If China can grow close to trend ( somewhere between 8-12pct) and within that, the ratio of retail sales to industrial production rise, then this is a great sign for the world and for life without the US consumer. At the reported 18pct plus rate-if this were representative of broader consumer spending, this would represent more than $300 bn per annum. By the middle of the decade, it will be above $500bn at the same rate.

3.       The other 3 BRICs are , in aggregate, currently, about as economically important as China to the world, both in terms of overall size, and their consumers. Each of them keeps demonstrating that they are coping pretty well with the challenges of the US and the West, as they have done again this week, Russia included. Following their 8.8pct Q2 GDP, India reported an extremely impressive 13.8pct year on year increase in IP. Brazil exceeded expectations with a 8pct plus Q2 GDP also. As for Russia, they came through at 5.2pct. Lots of focus on policy reform across the board, especially Russia in recent days.

4.       The “ Next 11” are generally coping reasonably well with the developed nations challenges, with one or two notable exceptions, and as we have shown on many occasions, some of these countries are also becoming more and more important in their own right. As I remarked recently, 9 of the 10 that have equity markets are all positive this year, 5 of them in a major way. A reader corrected me about this statement by informing me, that actually, the 11th, Iran, does have a stock market, and it is also having a very strong year. It is of course, one that many cant really access.  I hear from some sources, that a  Next 11 fund is about to be launched, perhaps not surprisingly.

5.       The Adjusting/Adjusted Developed World. It remains a bit of a myth in the minds of many in the more challenged parts of the West that we are all in the same boat. A number of developed countries are , actually doing rather well. Australia, Canada, New Zealand and Sweden are just four, and perhaps Germany is a 5th. There are probably more.

I spent 24 hours in Stockholm this week, coincidentally the day that their Q2 GDP report was revised from 1.2 to 1.9pct, a pretty      remarkable revision. Since then , another extremely strong Swedish IP report has been printed. Our own optimistic Kevin Daly continues to believe that the Riksbank will have to think about more rate hikes than expected by the market. After thinking about it more than I have done for a while, due simply to my visit, the SEK seems exceptionally well placed for finally returning somewhere close to its “ fair value” after many years being somewhat unexplainably weak. A move towards 8.50 against the Euro would seem not especially odd to me, especially given the challenges for many of the major currencies.

6.       Currencies more broadly. It really does seem so often these days that the battle between the $, Euro, Yen and Pound has become the dance of the ”least ugly” , which adds to the attraction of the likes of the SEK. It is also of course, why Gold, and within true currencies, probably, why the CHF are both so strong. Gold’s strength as our own team often show, can essentially be seen as pure function of the remarkably low level of G7 real interest rates. As for the CHF, the Euro’s particular structural challenges perhaps add to its allure. Despite this, I saw a major warning sign for all budding CHF fans this week. Wednesday’s FT carried the following headline , “Resurgent Swiss franc appears unstoppable”. Nothing is that obvious in foreign exchange.

7.       The US. We just ended the 2nd consecutive week of positive data releases, which after the widespread gloom of July and August evidence is only too welcome. Of the data, both the drop in jobless claims and the sizeable reverse in the trade balance were especially welcome. Thinking 9 years on from 9/11, and more specifically, life 2008 post crisis, the challenge ahead , remains for the US is to replace the impetus to GDP from consumption with exports and private investment spending. Without strong contributions here, then the US is set for years of subdued growth.  I suspect it might not be as impossible as many think, given the ongoing flexibility of the US, including the ability of policymakers to turn on a dime. While some of it might have been for the theatre of Congress ahead of the mid term elections, this week’s Obama investment tax holiday proposals are a sign of the possible twists and turns ahead, especially after November.

Shifting to monetary issues, anyone who thinks the US is inevitably slipping down the Japanese path should read the interviews of outgoing Fed Vice Chair Don Kohn from early this week. From someone who has been close to the centre of monetary policy for decades , his thoughts are rather relevant to anyone trying to follow the Fed. He made it rather clear, and this is literally days after he formally left, that if the economy does not pickup in line with the Fed’s hopes, then they will undertake more “ QE” to achieve easier financial conditions.

Anyhow, as my beloved football just showed a couple of hours ago, anything can happen in life ( 3-1 up at the end of normal time, and it ended 3-3……a few hairdryers in the dressing room I suspect after that…!).   Best of luck.

Yup, that's it. If you were expecting a mea culpa moment... Sorry.
at

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