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Archive for January, 2011

Markets say: “Peaceful transfer of Power in Egypt, no contagion”

January 31, 2011 Comments off

The number of people in the streets vs. the amount of violence is astounding.  I don’t have much to say on the future path of the protests because I am not a expert in the Middle East. I do know that Gold is down this morning despite the protests and what appears to be the end game for an overthrow.  Treasuries are down too.  If people thought that Egypt was going to end up as a failed nation for a few years, and that Iran would face a violent revolution, Gold and Tresuries would be much higher.  Using the recent market action as a gauge, people expect a largely peaceful transition of power.

In the video above, you can see that there is a significant component of people who think that the worst things have been orchestrated by the government as an excuse to use violence against the protestors.  Notice the word “rioters” has been nearly fully replaced by “protestors” in all of the coverage.  It is clear these people are not destroying much property. In any random interview with people on the street they seem quite “regular joe”, just normal (mostly young) people looking for a representative government.

Go for it!   People of Egypt, I walk with you.  Democracy is messy and worth the mess.

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Blowout GDP Number

January 28, 2011 Comments off

Way, way better than I expected: Top line sales up 7.1%  That is one of the best readings ever for this number.  The fact that inventories could only add $7bn and therefore subtracted 3.7% (!) from GDP is actually good news. This is the biggest since the late 1980’s. To me, this means that businesses couldn’t stock the shelves fast enough. So businesses couldn’t build inventory at all. I am surprised the inventory number was so close to being negative.

1 year from today this will be marked as a huge blowout report. In any case, not a great headline number, but the largest final sales number in several generations.

 

 

 

 

 

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Look for a Knockout GDP number today

January 28, 2011 Comments off

Obama spending started in Q3 of 2009.   High government spending means high corporate profits one year later.  It is difficult to have high corporate profits without lots of economic activity.  I need to pull the data out of this chart and run a regression between change in RGDP and change in Real Corporate profits, but just eyeballing it tells me there is a decent relationship.

The gap between change in corporate profts and change in GDP is the greatest its been in the FRED data.  I expect a huge upside surprise in GDP – perhaps as high as 5.5%.

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Will the Rout in Gold Kick-Start a Rout in Commodities?

January 28, 2011 Comments off

Something very, very strange is going on in the markets.  The falloff in gold is a big deal – far bigger than most people want to admit.  The “Massive Inflation Soon Scenario”, or “MISS”, has been supported by Gold’s march higher.

While we’ve been short the Barbaric relic since 1,400, others have remained wildly bullish.

When you point out to these people that we don’t have any real inflation in the U.S. or in Europe, then people rightly point out that gold is climbing higher.  Higher gold means that people fear inflation- at least that is the reason they are giving now.  Since markets are forward looking, higher gold means people think we’re going to have inflation sometime soon. The high price of Gold gives credence to the fears of inflation –

It is sound reasoning, really – but it requires either:

  1. inflation to materialize at some point to justify the price of Gold today; or
  2. gold to stay near its highs to justify the MISS scenario

What happens to the case for inflation if gold takes a 30% hit?  A major supporting wall gets knocked out of the house of “MISS”.  Without any current inflation, and inflation expectations remaining low, AND Gold losing 30% of its value, how can inflation trades in other markets be justified?

I consider the rest of the Commodities to be “me toos” in this case.  Corn, Soybeans, Wheat – all of these commodities are in bull markets.  These bull markets partly depend on the inflation scenario – which has been strongly supported by the run up in the price of Gold.  Those markets are small.  But we spend nearly 7% of GDP on oil and energy products.

A Rout in Yellow Gold could start a rout in Black Gold.

The dominant meme over the last few years has been “We’re on the edge of a crisis.”  Gold’s rally has been the “proof” that people need to “justify” that a horrible scenario was just about to happen.

First,  the complete meltdown of the financial world that propelled gold much higher. The reaction to get long gold was justified here. Next, the world experienced an ongoing fingertip wall climb out of the debt crisis abyss.  Again, a strong case can be made for gold in that environment.

The reasons given for going long gold have changed in the last 6 months.  The reason people are giving for going long gold now is “MISS”.  Of course, we’re still at risk of melting down in Europe.  It seems like both the “out of control inflation” idea and the “all Euro sovereign debts are bad” idea have run out of gas – at least for the next few months.

The meme would need to change if Gold falls from its highs.  It would have to be something like: “All Clear, smooth sailing ahead”.  This kicks the ladder out from under the grains complex, and makes some of the softs awful suspect as well.

But most importantly, oil has been rallying with a significant component of inflation fears as the fuel for the rally

If gold continues to fall, I look for a washout in some of the commodities, and oil in particular.  And if we get oil back down to $70 a barrel, the entire economy will be in a boom.

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Bloomberg: Treasuries rallied because the Fed bought a truckload

January 28, 2011 2 comments

Check out this article from Bloomberg that says Treasuries rallied because the Fed bought billions of Treasuries. The Bloomberg reporter didn’t think of this idea – he just wrote down what his buddies on trading desks told him.*

That’s exactly what I said would happen. I thought this would be common knowledge by now, but people still seem to be surprised when it happens.  The fed just confirmed that they will go through with the entire QE II no matter what happens – and people were shocked by that too.

This shows that the idea of the Fed buying a ton of Treasuries over 6 months is beginning to get traction on trading desks.  This has the potential to be a big, big move.

From this handy chart from the Fed, we can see that next week, there will be a few more days of large purchases. And then they will release information and dates for even more purchases on Feb 1oth.

I like the idea that people are getting out of Notes and Bonds because they have someone to sell them to, and that this pushes people into risky assets so might defeat the purpose of the QE entirely.

But who cares? The Fed is just buying and buying Treasuries left and right.  Why fight the Fed?

*(Every Bloomberg employee I’ve met is sharp and works their ass off. This isn’t a slam on the reporter – he was reporting what the people on the trading desk told him as is his job.)

Links 1-27-2011

January 27, 2011 1 comment
  1. Moody’s Assumed 4% Annual Home Price Rises in Bond Rating Model – Bloomberg
  2. In Norway, Start-ups Say Ja to Socialism:
  3. Stagflation: BoE cheers | money supply | News, data and opinions on market-moving economics from the Financial Times – FT.com
  4. The German consumer mood | money supply | News, data and opinions on market-moving economics from the Financial Times – FT.com
  5. America’s Middle Eastern Puppet Regimes Are Falling Like Dominoes → Washington’s Blog
  6. A Physicist Turns the City Into an Equation – NYTimes.com
  7. Apple
  8. Fed Likely to Press On With QE Even as Business Lending Rises – Bloomberg
  9. Businessmen Regret Leaving Merkel in Peril Over Euro’s Benefits – Bloomberg
  10. Obama Spending Drive Will Suffocate Job Growth: Amity Shlaes – Bloomberg Yeah right.
  11. U.K. Economy Unexpectedly Shrinks as Cold Hits Services – Bloomberg
  12. Wall Street Partying in Davos as Bankers Overcome Crisis – Bloomberg
  13. And Now, For The Real Sh$% Show… Life Insurance Companies v Countrywide, Mozilo, Bank of America, et al « Foreclosure Fraud – Fighting Foreclosure Fraud by Sharing the Knowledge.  Thesis of “BAC exposed to massive charges due to fraud” getting more proof everyday.
  14. Drunk scientists pour wine on superconductors and make an incredible discovery: Hell yeah!
  15. BUSTED: Texas Was The #1 Stimulus Moocher
  16. A gentler and more logical economics « Blog Archive « Dan Ariely
  17. Italian scientists claim to have demonstrated cold fusion (w/ Video):  Color me skeptical. only proof is on free energy sites.  I loved these magazines and then sites back in the day – pseudoscience, ufos, cults, and fringe beliefs always got my attention, and this stinks of pseudoscience.  Freaky, true story: I made a call to a very strange free energy guy, and that night the strangest car I’ve ever seen – ALL black, huge, brand new, without any model or make identifiers, weird federal government license plates, and a freaky bumper sticker that said something like “I kill people” parked outside my apartment!  It looked like the move bad guy cars.  This cold fusion could be true, most likely isn’t true.
  18. China Financial Markets » The real cost of Chinese NPLs
  19. Super-Cycle Leaves No Economy Behind Before Davos Summit – Bloomberg Wow!  We’re gonna be rich!
  20. Faulty Foreclosure May Mean Massachusetts Buyer Isn’t Owner – Bloomberg
  21. World needs $100 trillion more credit, says World Economic Forum – Telegraph
  22. Banks Halting Foreclosures in Parts of Florida « naked capitalism
  23. The New Federal Reserve 1-10-11 | Institute for New Economic Thinking
  24. BMW, Audi Expand Factories as Record Sales Constrain Capacity – Bloomberg
  25. IAS 107: Reading: Jared Diamond’s Provocation: The Invention of Agriculture as a Big Mistake – Grasping Reality with Both Hands
  26. Robert Skidelsky – The relevance of Keynes:  This guy is great.  I am going to start reviewing Keynes General theory along side of Mises Human action.
  27. interfluidity » Endogenize ideology:

 

Why do I get the feeling that if Mises was an engineer, he would refuse to build bridges because gravity is a strong force, and steel eventually rusts if you don’t take care of it?

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Gold just closed below the lows of a Massive Bearish Formation

January 27, 2011 Comments off

It remains to be seen if this will result in further selling.  This formation took months to create, and the play out might take months to unwind as well.  Last time there was a large pullback in Gold, it lost 30% in total – it took a year, but 30% from the highs.  Gold bottomed in 2008 when Lehman collapsed, and since then has proceeded to double in value in just over 2 years.

That’s a big bull run, and with this recent news that someone huge got taken out of the market, well, I wonder if there is anyone else out there with huge gold positions that might like to protect some profits.  A few different fund managers bought tons of gold.  Tons.  A ton is 2000*16 = 36,000 oz, or 3,600 futures. That isn’t that many futures really, but when you are talking multiple tons, it can add up even if you have deep pockets.   Lets see, $100 * 36,000 is only $3.6M, so it cannot hurt that badly if you have a few tons.

I haven’t been checking on John Paulson, but at one point, he had 96 tons of gold.  $3.6M * 96 = $356M.  That’s a big swing in anyones account.  But Paulson isn’t the only one with huge stakes.  There are many, many funds out there with huge stakes in GLD.   And these funds really do not care what they are long or short, they just want to make money.  These are smart people who are used to buying and selling large postions.

Some of these funds might feel the need to put some money in the bank.  They will want to take profits, especially if this is a huge payday for them.  I expect there are a few other funds that will want to bail, now that gold has broken out of a huge topping formation that took months to make.

Not only that, the trend in Gold is now clearly down.  You can expect some trendfollowers to start piling into gold on the short side.  The close today will be very, very negative.  I expect a lot more capitulation very quickly.

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