Merrill over Matter

Observation of the day: Greeks are not Germans

2012-01-23T15:44:00.000-08:00

It may appear an obvious observation but to the euro and (for a while at least) the bonds markets Greeks and Germans were the almost exactly the same. Twins.

Two recent pieces on public radio highlight how very different from the Germans the Greeks can really be.

The first radio spot describes the failed efforts of a Greek computer scientist to make the revenue system (the tax man) more efficient in Greece. All he thought they needed was a little technological help to point them in the right direction. Heh, not quite.
http://www.npr.org/blogs/money/2012/01/05/144747663/how-a-computer-scientist-tried-to-save-greece?ft=1&f=100

This longer piece (nearly an hour) aired this weekend and I caught it on Saturday. It goes into the desire to create the euro and how Greece basically lied to get into the eurozone and the epic borrowing binge Greeks went on after 'easy money' appeared after the Euro was introduced. While its long it is a good overview of how Europe got into this mess.
http://www.thisamericanlife.org/radio-archives/episode/455/continental-breakup

Greece's credit history is not the best. Since their independence in the early 1800's they have spent more than 50% of their time in default. (This time is different, 2008, Reinhart & Rogoff, page 99) Do you really think they would adopt the fiscal discipline of Germany after being handed their unlimited gold card?

ht @BarbarianCap

Baltic Dry Index falls off a cliff

2012-01-19T10:31:00.000-08:00

The Baltic Dry Index (spot shipping rate for bulk commodities like iron ore, grain, coal, etc) recently fell off a cliff and has not seen these levels since the dark days of early 2009.

While one can say there are legitimate supply problems (a huge overhang of new ships coming online from the order surge pre financial crisis of 2009); to see such a dramatic drop is impressive and deserving of attention. I have been quite bearish on China for quite a while on this blog (although now that their market has been thrashed and policy changes appear to be taking place I may have to alter that opinion) and the sudden fall in the index may be due to a lack of import volume into China. We'll see in a little bit if this drop in the Baltic Dry foretells a real slowdown in China...

Source: Stockcharts

Obama shuts down Keystone pipeline. The oil must flow!

2012-01-18T10:46:00.000-08:00

It appears the Obama administration will block approval of the Keystone pipeline.

Your political leanings aside, this will not stop 'dirty oil sands' oil from getting out. I was going to work up a nice post about how Canada can ship the oil east or west but NPR beat me to it:

Philip Verleger, an economist who specializes in oil markets, says even if environmentalists convince Obama to block the Keystone XL pipeline, it won't stop the growth of production in the Canadian oil sands.
"With prices around a hundred dollars a barrel globally, that oil is going to make it to the market somehow," Verleger says. "The development may be slowed for a year or two. But one can move the oil west on the existing Kinder Morgan pipeline. They could expand pipelines east. Those pipelines already exist, and they can be expanded."
In fact, Enbridge, a Canadian energy company, recently asked Canadian regulators for permission to reverse the direction of one of its pipelines in Ontario, which many see as the first step to move more Canadian oil to the American East Coast — and relieve some of the Canadian oil glut in the upper Midwest.

Not only is the oil going to flow east but the article mentions Kinder Morgan planning to increase the flow westward to British Columbia and then down to the Pacific Northwest and out to Asia as well.

The NPR article continues...

But demand is the key, say most economists. If you can get American drivers to buy less gas — by raising fuel efficiency standards, as the Obama administration recently did — then, they say, you stand a much better chance of slowing production in the oil sands.

Sorry but these are economists? American drivers are just one user of energy, don't forget all of Asia, India, South America, etc.

All is not lost
For those of you worried the end is nigh and we will run out of oil soon and that will be the end of us all I would like to point you to this graph and article from the Economist

Energy used per unit of GDP has been declining in America since the 1920's. For nearly a century America has become more efficient at extracting more value out of each barrel/btu/pound of energy and the trend is to greater and greater efficiency.

Furthermore oil is not the only form of energy we have available in America. Through new techniques the amount of natural gas in America is at all time highs and current prices are extremely low and production continues to rise. From Sober Look

But I digress from the Keystone pipeline. Obama may feel the need to stop this project for political purposes but all he will succeed in doing is building more pipelines in Canada going east and west and sending that oil to Asia. Would it not be better to have the cheaper oil captive in America and depressing our prices relative to the rest of the world? Believe it or not but oil has been cheaper in America than the rest of the world for nearly a year, and some of that is due to the increased production up north in Canada.

For those of you concerned about the risk of the Keystone pipeline, there are already skads of them all over America

The Keystone pipeline would not have reduced our energy 'dependence' from external sources but would you rather buy our oil from next door Canada or Saudi Arabia and Venezuela?

Additional Reading

http://soberlook.com/2011/12/us-net-oil-imports-lowest-since-1996.html

http://soberlook.com/2011/12/sober-look-at-us-natural-gas.html

http://soberlook.com/2012/01/whats-driving-brent-wti-spread-wider.html

http://soberlook.com/2011/12/six-common-myths-about-us-and-global.html

Hugh Hendry as the Plasticine Trader

2012-01-17T12:55:00.000-08:00

Late last year I highlighted a 5 part video series on Hugh Hendry in one of his steadily declining public appearances. In it he used a key term to describe his trading aspirations; the 'Plasticine Trader'

Here's a few excerpts from that series, completely lifted from a new blog called Chasing the vig. I guess I have a new book to put on my reading queue and a new blog to follow.

I have clipped the blog post down quite a bit so I suggest you click on over and read the entire entry. I have also highlighted and bolded some sections I found interesting

Steve Drobny's book The Invisible Hands includes one of the best interviews of a fund manager/trader. Ever. The chapter is called The Plasticine Macro Trader and it is none other than Hugh Hendry, manager of the hedge fund Eclectica Asset Management. This is how we should be thinking and trading. Also, he's highly entertaining. Read the entire thing, but here's some snippets:

Today’s long-only stars operated during a period of time where investors did not require a macro compass. Today your average long-only guy does not spend much time looking at interest rates, currencies, debt levels, and other key macro variables. I have even been to conferences where fund managers have boasted, “I don’t know where oil prices are going; I don’t know where interest rates are going; I don’t know anything about the government.” . . . For the last 30 years they could get away with that nonsense, but now at a historic turning point they are being found out.

Again, remember, I believe there is a degree of predictability to what has been happening in markets for the last 10 years. I believe that our generation is embarking upon a long period of unwinding financial excesses. Stock market returns could be terrible for the foreseeable future. If you believe people like Niall Ferguson, debt deflation eliminates all of the gains from the preceding boom, it purges everything. By 1974, we had eliminated all of the real gains from the American stock market since 1906. If we consider Japan as an example, the Topix would have to trade at 300 (or one third its present level) to be comparable with the lows reached during the 1970s on Wall Street. At this point, all of the real gains since the index was reconfigured in 1969 would have been eliminated. . . .

Have the courage to be different, the courage to risk the ire of others for the sake of being right; to fight rather than embrace compromises everywhere. We have to encourage rebellious notions such as playfulness and curiosity. There is no one correct way of doing things that is set in stone. Periodically managers should be open to trying different approaches.

George Soros explains a version of this phenomenon when he says, “Invest first, and investigate later.” But this is heresy in the institutional money world. When I suggest stuff like that, the number crunchers and the box tickers write down, “crazy guy” and make their polite goodbyes. But every so often a heretic turns out to be a genius.

. . .
Even a true contrarian is only really contrarian about 20 percent of the time; it’s all about choosing the right moment to fight convention. The rest of the time is spent trend following. So I guess I am a trend-following contrarian. I come back to describing myself as a disciplined deviant. But every description that I have for myself is an oxymoron, and when I present my views, most people just think I’m a moron.

I have Tourette’s syndrome—I say “fuck” at all at the wrong times. One of my mentors taught me how to articulate that Tourette’s and then play the odds, become trend following and recognize when the elasticity becomes so extreme that your Tourette’s becomes valid and has the possibility of profits.

I jokingly claim that my best investment decisions come from being a paranoid schizophrenic. I hear voices in my head. Subconsciously and explicitly I seek to create a macro prejudice. And so there’s an ongoing debate by those voices in my head. But the scary thing is that I make investment decisions based on these voices. And so does everyone else. I just talk about it openly and honestly. When I make such decisions I become very fearful, paranoid like a schizophrenic, that these decisions may jeopardize my investors and my portfolio. I would contend that this fear makes me a better investor.
. . .
That’s the hook; it is one thing to create the intellectual color but it doesn’t go into the portfolio until it starts to gain the attraction of relative momentum. I need the legitimacy of other curious strangers before I get involved.

Last summer I was on CNBC talking up Potash [Corporation of Saskatchewan], saying it was the best positioned company in the world when I suddenly realized everyone was agreeing with me. So I got out. Thank God I can reject my own advice because from July to October of 2008 its performance was diabolical.

The thing that I’m most fearful of is a focused fund, or a portfolio of 20 best ideas, which is a concept that marketed well a few years ago. The reason this idea can prove disastrous is that “best” is an emotionally charged word. Giving up on your best idea is the same as admitting that you’re wrong, something crucially important but very difficult to do.

I don’t believe that there is any real diversification left in the world today, at least not the kind of diversification to which you refer. And the shocking nature of the results in 2008 demonstrates this fact. We live in a world of binary events. Over the last 10 years, markets have oscillated between inflation and deflation, and people are either all in or all out. What we’re trying to do is make sure that we’re leaning at the right time, correctly anticipating the oscillation.
. . .
The same “upside down” logic prevailed in 1979 when Volcker became chairman of the Fed. You had this new sheriff in town who was honest and tough. He was going to raise interest rates to make the economy very weak in order to parch the system of its inflation. He was a dream come true for a bond bull, and yet bonds got destroyed whilst gold doubled to $800 in three months. (See Figure 13.8.) The problem was that Volcker had to come clean on the Fed’s dirty little secret. In order to have the legitimacy to be so hawkish, he had to admit that the problem was inflation; investors panicked and scrambled to protect themselves with gold. A hawk produced a melt-up in gold. Could the dovish Bernanke produce a similar melt-up at the long end of the bond market?
. . .
We are spending all of our time looking for inflation because the Fed will be slow in raising interest rates while the roof is caving in. The private sector’s desire to unburden itself of debt is so great that debt deflation seems much more likely. And if it rolls over with everyone loaded up on risk again, playing commodities and inflation expectations, bonds could go parabolic. The bull market in government bonds is one of the greatest bull markets of all time, and bull markets of that magnitude do not end with a whimper.

Typically my work is all about creating context to establish an environment where I might want to take risk. The challenge with risk management is finding the appropriate moment to expose yourself to that risk. I don’t think the right moment has come to pass for Japan just yet, but this is an idea that I have fermented for five years. Back then, I said that for the trade to work, we would need an extraneous economic shock which pushes dollar/yen down to around the 80s, and we have essentially been there. I am always in danger of wanting too much, but I am looking for those levels again in any subsequent round of global risk aversion. If that happens, I fear the Japanese will debauch their currency in an attempt to generate inflation to monetize their considerable public sector debts. With the majority of the private sector still invested in post office savings, such a step would cause a panic to buy equities and the Nikkei could go back to 40,000. Typically it requires 25 years to break a previous nominal price high in an asset class that has suffered a bubble. So who knows, maybe this is the trade for next decade? They have covered the place with kerosene, now all they have to do is light the match.

I live an interesting life. I made 50 percent in October 2008 and my biggest investor fired me. He said he had a manager that was down 30 percent on the year, but that manager “gets it,” so he was going to stay invested with him. Meanwhile, I made 30 percent on the year and I get fired because I don’t get it? This is the curse of my life. I seem to collect all sorts of witty dinner party anecdotes from my experiences, but I pray for a less interesting life.

Markets are irrational but they are right at every moment. They are right until they are wrong. You have to marry the notion of being right or wrong with being right with the timing of a given proposition. This is not a business that indulges intellectual prejudice.

Seasonality and initial unemployment claims

2012-01-12T11:31:00.000-08:00

Weekly initial unemployment claims were released today and they showed an increase to 399,000, countering the recent downward trend. Details can be found at the DOL

I would not make much of the current gyrations, up and down. As the graph below shows, right now we are at the highest seasonal peak of layoffs/firings. Each year you can see a massive increase in initial claims just around the new year. This makes estimating the trend very difficult. (Translation, put very large error bars on data around the new year)

I wonder how many financial models out there reduce the weight of this data (and other series) when they are less accurate?

Here's the two data series on a year over year basis. While initial claims are still declining the rate of decline appears to have leveled off.

Source: Federal Reserve

The military intelligence non-event and non-failure of Kim Jong Il's death

2011-12-28T13:37:00.000-08:00

Most of the world knows by now of the death of North Korea's dictator, Kim Jong Il. You may also know it took more than 48 hours before the information was publicly announced to the world and the announcement came from the North Koreans themselves and not from any western intelligence services.

The New York Times recently ran an article claiming this is a failure of western intelligence services:

For South Korean and American intelligence services to have failed to pick up any clues to this momentous development — panicked phone calls between government officials, say, or soldiers massing around Mr. Kim’s train — attests to the secretive nature of North Korea, a country not only at odds with most of the world but also sealed off from it in a way that defies spies or satellites.

My question to the New York Times and everyone else is how do you know we didn't know about it? IF our intelligence agencies had picked up the information and then broadcast this news to the world do you think this would have been a good use of that intelligence gathering method? News and information coming out of North Korea is challenging at best so IF our spooks had a channel to this sort of high level information why should we let the North Koreans know we have the information ourselves?

During the Clinton administration it was leaked that our CIA was spying on the Japanese during trade negotiations. Talk about short sighted. If you are successfully gathering information why go public with your success? From the LA Times:

Among the successes, sources say, is strong intelligence information the CIA provided on the Japanese during this spring's heated auto trade negotiations between the Clinton Administration and Japan. "We've done really well with the Japanese," one source said.

Now of course it is entirely possible our spooks did not find out about Kim Jong Il's death until the public release. I hope not but it is entirely possible. If so there is hope on the horizon. In 2008 Orascom was granted a monopoly license to provide cell phone service in North Korea.

Orascom Telecom Holding was awarded a Greenfield license to establish and operate a WCDMA (3G) network in DPRK in January 2008. koryolink was launched in December 15th 2008 as a joint venture between OTH (75%) and Korea Posts and Telecomm Corp. (KPTC) (25%). koryolink has deployed its 3G network to initially cover the capital Pyongyang - which has a population of more than 2 million - with an ambitious plan, already under implementation, to extend coverage to the entire country. OTH has over 431 thousand subscribers and 100% market share as of December 2010.

All it would take is a few well placed bits of hardware and software installed onto that network to provide a flood of data for our intelligence services to chew through. Furthermore cell phone transmissions can be remotely detected and analyzed if a physical connection to the network cannot be obtained. As the North Koreans discover the convenience of cell phones the challenges of intelligence gathering will lessen.

Additional reading:
http://www.foreignpolicy.com/articles/2011/12/28/kim_jong_il_funeral_photos
http://news.yahoo.com/funeral-north-korean-leader-amid-worry-future-000414786.html
http://www.orascomtelecom.com/regional_Presence/default.aspx
http://g.co/maps/jw6kg

Twitter Linkage roundup

2011-12-05T11:03:00.000-08:00

Some good links and tweets from my twitter stream:

RT @QuoteJunkie: "To Avoid Criticism, Do Nothing, Say Nothing, And Do Nothing." - Elbert Hubbard #Quotes
Stunning @BrazilFinance: Anyone who has doubts EU is a failure should read this: http://t.co/KLCoVjjk
RT @ForexLive: ForexLive: Fed swaps with ECB nearly $900 mln http://t.co/3n9xBqzT
I know I'm repeating myself, but these charts are going the wrong way if you are bullish: http://t.co/Mz0UM73y http://t.co/uIGD6kVb
Skullcandy's Groupons are creeping up to higher and higher priced inventory http://t.co/0N8VKSPU First $59 deal $SKUL %SKUL
RT @tomkeene: Europe's shrinking money supply flashes slump warning - Telegraph http://t.co/J9z8nbWa ...money supply doesn't matter...right.
RT @OpenSecretsDC: What companies have your lawmakers personally invested in? Find out in our congressional wealth database: http://t.co/fTWkmsBV #tcot #ows
RT @relevantorgans: How can 23 yr old son of a lifelong public servant drive a red Ferrari? The magic of socialism! Now shut up and dig. http://t.co/MoDsIQTM
RT @Uldis_Zelmenis: Hit of the day by Citi: For 35 years post WW2 real returns on debt were negative. The negative returns in th (cont) http://t.co/IfcqeNhs
Falling Chinese home prices http://t.co/FEtKhpIg
A snippet on Hugh Hendry's recent trading strategy http://t.co/IaWq45cG
RT @theanalyst_hk: Seriously, how could I be bullish? http://t.co/YnPoztie
LED bulb benefit/cost at inflection point http://t.co/Qpz8qu7x #yesiamageek
@BadassoftheWeek swimming lessons http://t.co/hJRhyhdH

How much better can it all get? http://t.co/yyRRYdfv ---- Looking at whether all the good/bad news is out
RT @jennyandteets: Guys, know who likes to hear about your fantasy football team? Your fantasy girlfriend #yourekillingme -- I have enough problems with the real world, I don't need to stress about my fantasy life as well.

China's lending in context -- Time to pay the bill

2011-11-22T13:03:00.000-08:00

Earlier this month I highlighted the continued deceleration in Chinese lending growth from it's peak in late 2009. Just how massive their credit growth was unknown to me until this recent post and chart by Global Macro Monitor

The growth in lending right after the 2008/09 credit crisis is truly spectacular, even compared to other high growth Asian economies. I'll snicker even more when I hear talking heads gush about how the Chinese mandarins were able to 'navigate' their way through the economic crisis and their ability to manage such a large economy.
Bunk.
They just called up the bankers and said LEND.
The bankers asked, "How much?"
It was not some Chinese mastery of the economic cycle or superior technocratic skill; it was simply an ability to throw lots of money at the problem. Unfortunately for China the bill is now coming due.

Linkage roundup

2011-11-18T08:35:00.000-08:00

Some reading material for you from my twitter stream:

Italian default scenarios by Credit Writedowns http://t.co/XZ1feKq5 -- The situation in Italy is getting worse.
Doubline Emerging Markets Income Fund Presentation. Good emerging market review http://t.co/x5OicI8J
RT @BrazilFinance: m'fer... RT @zerohedge: Presenting Europe's Remaining 2011 Bond And Bill Auctions... All 104 Of Them http://t.co/jjJOxRPi
RT @thenewstribune: Crystal plans to open Friday, but #WhitePass and The Summit at #Snoqualmie in wait-and-see mode: http://t.co/bok5eeQz -- ski season opens early in the Pacific Northwest. Go global warming!
Social media decision tree http://t.co/tZ4nxDuZ
Interbank credit stress examples #2,346 and 47 http://t.co/Mz0UM73y http://t.co/uIGD6kVb -- Until these stop rising I'm not getting bullish.
Spain/Germany spreads at fresh highs http://t.co/Q8tuP3eB -- not good
RT @AlephBlog: Europes liquidity crisis http://t.co/deWTyNf8 The spread on senior unsecured bank debt measures EZone financial credit stress: high now $$
RT @EpicureanDeal: Spot on: "The hiring of Chelsea Clinton doesnt so much debase... TV news... as reveal its true value." http://t.co/rV9rTGB8
RT @niubi: A Desperate Apartment Seller In Beijing | Sinocism http://t.co/DuDojIWZ
RT @PragCapitalist: OECD: LEADING INDICATORS POINT TO SLOWING GLOBAL GROWTH: Just in case Europe didnt have you feeling uncertain e... http://t.co/V1yAL4Pu
Chinese ghost cities get really wierd: http://t.co/Q4B4UeS5
Now the WSJ gets bullish on munis: http://t.co/V4VX0xgR I've been bullish a while, still holding $MUB http://t.co/Z2xoDWcv
RT @creditplumber: Great little 18min TED video about lie spotting by Pamela Meyer. http://t.co/wbW1GT3w via @Ritholtz
RT @pdacosta: Big Obama donor got no-bid $433 mln contract to supply experimental drug for threat that may not exist http://t.co/qkGMXD6A h/t @AdamPSharp
RT @BergenCapital: $MSG - a lost NBA season is about 100mm of EBITDA off of $MSG (40% of FY 2012 EBITDA)
Skullcandy $SKUL keeps unloading inventory via Groupon. The latest: http://t.co/DNDCLhaE
Time lapse video of Earth from space station. Very beautiful! http://t.co/hrdDsA2m
RT @stlouisfed: New data available on FRED: Indexes on housing affordability from the National Association of Realtors http://t.co/z4APddru
RT @thetailchaser: USD 3m Libor fixings. It seems some institutions r getting squeezd out of the market. Takin other institutions w/ them http://t.co/WPzOVMDH
How much more can the ECB buy? http://t.co/z2m5L0R7
RT @ritholtz: Joke of the day: The Italian debt crisis is now being renamed Lehmancello $$
RT @izakaminska: Another brilliant blog from Lew Spellman http://t.co/bgmQdipu
How you fail is important and continually praising kids for 'being smart' can backfire. http://t.co/ycfOUekP
RT @PragCapitalist: IS THE CHINESE PROPERTY MARKET COLLAPSING?: Despite all the clamoring over a new recession, it looks like the U.... http://t.co/Rhl9Rmww
Motivation -> http://t.co/74a0c1yL

Inflation expectations in the bond market

2011-11-17T13:22:00.000-08:00

Here's an update on inflation expectations as expressed by the bond market. As the nominal 10 year yield continues to drop it has pushed the TIPS real yield to nearly zero. Some investors may grouse at the option of buying a security that guarantees a zero real return for the next 10 years and I agree with their sentiments.

As to why this situation exists I would suggest it is a result of the Fed's desire to reflate the economy by numerous unconventional means (zero short rates, all the various flavors of QE)

The spread between nominal and real yields has remains remarkably stable near the 2% mark with some noise on either side. If we have another financial crisis, this time in Europe, I wonder if we'll see another drop in the implied breakeven rate....

Linkage roundup

2011-11-08T08:17:00.000-08:00

Some reading material for you from my twitter stream:

http://t.co/vXWLZxuV - Italy near tipping point of increased margin requirements. I'm not the only one talking about this
RT @zerohedge: Hugh Hendry says he has made bets that will deliver a 40-to-1 return if the ECB cuts rates below 1% next year http://t.co/PAv4msUK
RT @edwardnh: The fact Greece's exit from euro has been discussed openly is seismic shift http://t.co/QVaWF7si
I'll get bullish when this stops going up. http://t.co/6vmUhc60
97% of family businesses don't make it past the 3rd generation http://t.co/MZAwrwRK
RT @FGoria: MT @M_McDonough: Italian CDS implying, country may be at risk of losing its investment grade status: http://t.co/mIVWCwkk
RT @mbusigin: Note that we did work on this in August, which gave us a different (bullish) signal: http://t.co/ivxLrhzB
RT @mbusigin: The few times realised volatility has eclipsed implied volatility, it presaged large declines: http://t.co/zTRw4ZDE
RT @edwardnh: Greece gets ultimatum: accept austerity plan or forgo extra bailout cash | Business | The Guardian http://t.co/DZSOBkDY -- Greece later backed down.
RT @edwardnh: France and Germany to withhold aid, Greece to be ejected http://t.co/WtNwsF6M #in $$
Greek referendum provides political cover http://t.co/MFDzDUCk
RT @PragCapitalist: THE GREEK REFERENDUM AND THE ROLE OF DEMOCRACY: I set off a bit of a firestorm on Twitter this afternoon when I ... http://t.co/O8GZFHvQ
New international bond etf's for Germany, Canada, and Australia $aud $cad $bund http://t.co/OemicVIk
Balestra Capitals Matthew Lucket Talks Gold, Deleveraging Story, and China Credit Problem http://t.co/9vGl387V @historysquared

China lending stats update -- The decline continues.

2011-11-07T12:51:00.000-08:00

It has been over a year since I last highlighted the slow decline in official lending statistics out of China. Since then not much has happened regarding the direction of Chinese lending growth; a slow decline continues.

I point you to Steve Keen's debtwatch for why the rate of growth in lending is important.

The rate of lending growth peaked in October 2009 and has been declining ever since. Compare this to the Chinese equity markets and you'll see how Chinese stocks haven't gone anywhere since October '09 either.

Unofficial lending is naturally harder to track but there are anecdotal signs of stress in this sector as well. http://historysquared.com/ and http://www.alsosprachanalyst.com/ are two good sites to follow the 'underground' lending market.

Hugh Hendry watch -- 5 part YouTube series from earlier this year

2011-11-03T11:29:00.000-07:00

I find this episode of Hendry publicity a little different as he discusses his trading style and aspriations of what he wishes he could be as an investor. If you cannot watch the entire series I suggest you at least watch episodes 4 and 5. Realizing you don't know the future and how having too much knowledge can be detrimental really struck home with me. If you study a company too much you can fall in love with the security, even as it goes down, down, down, and .... down. Someday I may gather up enough courage to relate my failures in this category.

Thanks to Zerohedge

Mr. Bond (Market) is not impressed

2011-11-01T15:18:00.000-07:00

Do I look impressed?

Even before the Greek referendum drama of the last 24 hours the bond market was not impressed with the latest Euro crisis 'solution'.

With Portugal, Ireland and Greece all tipping over the edge the next domino to watch is Italy.

Last week's news of a 50% 'voluntary' haircut for some Greek debt vaulted world equity and currency markets higher in a massive relief and short covering rally. Mr. Bond market was not so impressed.

While both the absolute and relative yield of Italy's 10 year bond did fall a bit late last week on the news of the news of a new solution to the Greek debt situation announced Thursday morning by Friday afternoon Italian yields were creeping upwards again.

Germany - Italy spread

The German/Italian 10 year spread has blown out to new highs

Italy 10 year

Very close to breaking recent highs

The news of a Greek referendum on the latest round of negotiations shocked the markets and drove almost every risk asset downward with only the dollar and US Treasuries rallying. Italian yields are not looking good from a technical perspective and if they break 7% it could be the final domino to fall before the real euro crisis starts. I'll be watching these metrics closely.

Linkage roundup

2011-11-01T09:15:00.000-07:00

Some reading material for you from my twitter stream:

RT @edwardnh: Why the latest eurozone bail-out is destined to fail within weeks - Telegraph http://t.co/sgj8HQcn
RT @credittrader: GReader: The Global Moral Hazard Dawns: Merkel Says "It Must Be Prevented That Others Come Seeking A Haircut" As... http://t.co/Tjd22kbQ
RT @theanalyst_hk: $$ Jim Chanos: Not Impressed By The Europeans, And Still Shorting #China http://t.co/OvdXeWIr #economy #europe
RT @JackHBarnes: Chart of the Day: North Dakota Annual Oil Production: http://t.co/lUWOqWst -- need to do more research myself on shale oil
Transfer payments over time in US http://t.co/sxiw6sF8
RT @zerohedge: And Now, For Some Semblance Of Sanity, Here Is One Hour Of Hugh Hendry http://t.co/5A5Jwgxu -- separate post on this soon(tm)
CITI: Failure To Trigger Greek CDS Could Cause The Whole Euro Bailout To Fall Apart http://t.co/TLDjUF7L -- be careful what you wish for
Meanwhile in China a swan finally takes flight... http://t.co/Z8w40PKd -- Condo prices are falling hard.
RT @AlephBlog: Fannie Squeezing Banks Makes 4% Mortgage a Mirage, Hinders Housing Rebound http://t.co/BKikceRX Higher lending standards fight lower rates
RT @AlephBlog: Money managers and commodities, the case against http://t.co/ynsn1qT3 Graph shows $$ managers drove commodity prices http://t.co/eNKE3nFA
RT @andrewyorks: *EU LEADERS CALL FOR BANKS TO HAVE 9% CORE CAPITAL LEVEL ok move that dial on the upper left to 9 http://t.co/WHLMk6Dm -- should be interesting when taking haircuts on Greek debt.
Skyscraper taller than any in London or Tokyo opens in Chinese village of 2000. http://t.co/IvHoRw4j #thiswillnotendwell
Underground bank lending in China - NPR - http://t.co/677IPKYK
RT @historysquared: $$ The cash commodity trading firms that account for 1 trillion in annual revenue 50% of all transactions http://t.co/TqTvhHM1
RT @ftasia: Iron ore plummets to 15-month low: As Chinese steel mills cut production, the price of iron ore dropped 7.2 per ... http://t.co/RVfC48zy
Blackberry outage made roads safer. http://t.co/agSNxNGX

Linkage roundup

2011-10-26T09:15:00.000-07:00

Some reading material for you from my twitter stream:

RT @zerohedge: "It was grim. The worst mood I have ever seen, a complete mess," said one eurozone finance minister. http://t.co/NnHreVRK

RT @TBPInvictus: My fave homemade chart on labor market slack and why inflation's a long way off: http://t.co/BKBGjFeO #FRED

RT @FactSet: What do yield curves tell us about the outlook for the world #economy? We take a look: http://t.co/r4ucgUfl -- Inverted Yield Curves are bad....

RT @simonsinek: Blow Up Your Business Before Someone Else Does http://t.co/rqdZ8GEW

TED spread going the wrong way -- http://t.co/6vmUhc60

RT @EpicureanDeal: This Switchblade drone is scary as hell: http://t.co/buFmf6BF Long-distance, remote-controlled , tightly targeted antipersonnel munitions.

Good commentary by GaveKal on the current european situation. http://t.co/9zYX6Wgj

RT @BreakingNews: Biographer says Steve Jobs refused early and potentially life-saving surgery on his pancreatic cancer - @CBSNews http://t.co/YFX7AJOo

RT @NicTrades: FT: French banks curbing credit lines for commodities trading http://t.co/62sZhIkB -- What do you think will happen to all the base metals when Greece goes POP! ??

#copper getting crushed today. Will it completely break down or bounce off the bottom again? http://t.co/2h0LKT31 -- looks like it bounced.

Italian bond yields going wrong direction. http://t.co/6TP2ixgp

RT @lessig: Ben Smith is brilliant: An Occupy Wall Street/Tea Party Venn diagram http://t.co/AWNNhlBg #rootstrikers #tpp

Ray Dalio on the challenges in front of us

2011-10-25T16:52:00.000-07:00

Ray Dalio of Bridgewater Associates has recently appeared on the Charlie Rose show as well as written a piece for the Financial Times. I think he does a good job of describing how we got here (continually borrowing money to improve our standard of living) and the tenuous situation we find ourselves in (Greece, falling home prices, etc.)

From FT.com

We are in the midst of a deleveraging, we are nearly out of ammunition and we are at each other’s throats. Being in a deleveraging and nearly out of ammunition is a very difficult position to be in. But, being at each other’s throats is our biggest problem.
Our character and our political and social systems are now being tested in ways that have typically been tested in past deleveragings. In deleveragings bad economic conditions typically lead to emotional reactions, social and political fragmentation, poor decision-making and increased conflict. When this occurs in democracies, the checks and balance system, which is intended to yield the best decisions for the whole, can stand in the way of thoughtful leadership and lead to ineffective “mob” rule. This dynamic can lead to a self-reinforcing downward spiral.

The video goes into a little more detail of his philosophy of knowing what you don't know and being willing to have your ideas and conclusions challenged throughout the corporate structure. I suggest you read both the article and watch the interview.

Thanks to The Intrigued Trader and Also Sprach Analyst

Linkage roundup

2011-10-20T11:24:00.000-07:00

Some reading material for you from my twitter stream:

RT @pdacosta: World's first malaria vaccine works in major trial http://t.co/XLq02ns1

Custody of your assets is ALWAYS important, no matter what... http://t.co/ynICJv56

RT @planetmoney: New podcast: The price of default. Argentina's default in 2001 offers a cautionary tale for Greece. | http://t.co/levA26eW

RT @niubi: China reveals size of copper inventory - http://t.co/qUyGrZgW http://t.co/LdEoxqtr huge news $$

RT @NicTrades: Japan 'offers 10,000 free trips to foreigners' in an attempt to boost tourism - Telegraph http://t.co/9nJb9dxo

Paging radioactive swan, paging radioactive swan... http://t.co/jRDpJ4Ug

From @ProfSteveKeen We are still screwed and the Doctors have no clue what's wrong http://t.co/G55dEaCJ HT @stacyherbert

Worried about radiation? There's an app for that. http://t.co/3zSl9mut

Prehistoric kids left marks in caves. http://t.co/0uyyp620

You don't buy the last bounce, especially when Mars Attacks

2011-10-01T14:06:00.000-07:00

I don't usually comment on the price of the equity markets but considering what I'm seeing I thought I'd bend one of my self imposed guidelines. Remember you are hearing this from someone who does not see any positive forces influencing the market right now.

The markets have been pretty much stuck in a rut since early August and seems to be driven by the constant stream of contradictory rumors coming out of Europe. Will they save Greece? (no, they can't) Will the European banks be nationalized? (no idea, but I'm not hanging out to find out) Meanwhile China's negative real rate maneuver and excessive credit creation is coming back to haunt them. And America is slowing down.

Stuck in a rut for the last two months.

Here are some of the indicators I look at to assess financial market risk and as you can see all of them are going the wrong way.

Ted Spread

Notice how the TED (Treasury - Eurodollar spread, an indicator of banking stress) peaked and started healing before the market bottomed in early July 2010; showing a positive divergence.

Emerging market bond spreads, dollar denominated

The spread for emerging market bonds also shot up before the correction in 2010 and also showed a similar positive divergence. Right now spreads continue to widen.

My own proprietary indicators are not showing any sort of improvement either, again the opposite of 2010.

Note how in 2010 risk stopped going up.

Compare to 2011 where the RiskMeter keeps going up.

Do I think the market is going to crash? I can't answer that question. If the European situation looks like it can be truly resolved we could get a serious rally. I'm waiting to see what my fundamental indicators of market health tell me before I get back into the stock market.

Right now they are saying wait.

Remember, no matter what happens there's someone out there who'll be trying to convince you to buy stocks right now.

Video scene from Mars Attacks

Additional Reading:

http://www.businesscycle.com/news_events/event_details/1476/4 - He's been calling for a slowdown for a while and he just upgraded to calling for a recession this week.

Humble Student of the Market - Germany engaging in expensive can kicking. We may get a bounce but it does not fix the fact Greece has too much debt. Who owns it is immaterial.

Linkage roundup

2011-09-30T09:59:00.000-07:00

Some links I found interesting today:

Gillem Tulloch video on Chinese money supply, lending, and housing problems. As I mentioned previously negative real rates in a growing economy create massive distortions:
http://video.ft.com/v/1186054970001/Bubble-in-Chinese-property

ECRI calls for another recession in the US:
http://www.bloomberg.com/news/2011-09-30/u-s-is-heading-toward-another-recession-ecri-s-achuthan-says-tom-keene.html

Can the long bond go further?

2011-09-28T12:02:00.000-07:00

The recent drop in long term yields is impressive and historic. While the 30 year treasury yield has backed up a bit it is still very low, currently in the range seen during the depth of the financial crisis of 2008.

I'm not trying to convince you of whether it can go lower in this post even though I currently own long term treasuries. I'm considering selling of some of my position and this blog post is part of me thinking aloud about the situation.

What is interesting about this current phase of declining interest rates is how the 10 year has broken new lows while the 30 year, while low, is not in record territory yet. (Note the 30 year was not issued for part of the 2000's. You'll see gaps in the data during that period)

30 and 10 year yields

Looking at the difference between 30 and 10 year yields provides a very different picture.

30 year less 10 year yield

While the spread has declined recently we are still in rare territory when the difference between the 30 and 10 is greater than 1%. What this all means I honestly don't know yet but I thought I'd share with you yet another example of how our unique our current situation is.

The author owns long term treasuries and is considering paring back his position.

Kicking Copper while its down

2011-09-27T12:55:00.000-07:00

A little more than six months ago I laid out a bearish case for the red metal, also known as Dr. Copper by those in the markets for its ability to predict future economic change. With the recent thrashing copper and many other risk assets have taken I thought revisiting the topic would be a good idea.

While China is a large factor in all base metals prices let's start with the Old World and the seemingly mundane issue of actually counting how much copper inventory is on hand. While this would appear to be as simple as looking up the LME (London Metal Exchange) and COMEX (US futures) inventory numbers it really isn't. The BBC ran a three part series on rising commodity prices in late May and spent nearly a third of the program on copper.

BBC Radio - Bubble Trouble - Part 1 - May 28,2011
BBC Radio - Bubble Trouble - Part 2 and 3
Ft.com blog highlighting the inventory issue
In part 2 around the seven minute mark the presenter takes a tour of a well known base metals warehouse in which the warehouse representative reveals only about 40% of the copper in the warehouse is registered as LME inventory. When I heard the words I had to replay it several times to ensure I understood that correctly; my brain almost rebelled at the concept of anyone just coming out and publicly stating such a figure. Now I'm not suggesting the LME reported amount is under counting European stocks by 40%, just that this one warehouse has a lot more copper inside its walls that is reported to LME. Please listen to at least part 2 of the radio series to get the full details. If it can happen in one warehouse in Rotterdam what is preventing it from happening elsewhere in the world?

So why is the copper 'hiding'? Some of it is because costs are cheaper to store it in a non registered warehouse versus an official LME warehouse. Another factor may be what is suspected to be going on in China. FT Alphaville has discussed import/export trading firms there are using copper as a credit funding vehicle because other more official forms of credit are drying up.

From ft.com blog

Here’s the gist of it.In the first instance, our source says, the strategy is not exclusive to copper markets but goes on across most commodity markets.
The banks call it “inventory financing”. And of course, we should stress, it is completely legal. The practice mainly involves pledging an asset in return for an exchange warrant or cash.
According to our source, traders can deposit copper in an exchange warehouse in order to receive a warrant which can then be used to gain financing, usually via a broker, and less a 15 or 20 per cent haircut needed to cover futures margin deposits (sometimes called margin or warrant financing).

Read the whole article to get the full weight of what they are doing. This copper-as-financing would help explain why copper continues to be imported even though for most of 2011 it has been cheaper on the domestic Shanghai exchange. For the credit focused copper trader the money created by the transaction has greater value than the actual copper, it is just a funding mechanism.

LME vs Shanghai premium/discount

While the discount has been steadily falling one must understand China is a net importer of Copper; so why has it been cheaper to buy copper inside China?

Izabella Kaminska followed up a few weeks later with more details on the same copper-as-collateral trade

More worryingly however is that the primary use of copper in bonded warehouse appears to be as a financing mechanism to provide cheap working capital for various types of business often unrelated to the metallic industry.

Another copper financing entry at ft.com

Simon Hunt, of Simon Hunt strategic services actually goes to China and tries to see what is happening on the ground and his opinion is not bullish. An audio interview from March 29 is very interesting.

Having just come back from China my impression is that more and more people are beginning to understand that a lot of copper that has been imported has not gone into furnaces, that it is held by both foreign and Chinese financial institutions and others and I do think that even at the top level in government there is now starting to be a concern of the impact of this speculation on China's economy. Because it is not just copper - it goes much deeper than that. With money which has been so freely available in recent years, and with negative deposit rates, any company or individual is very reluctant to hold funds on deposit. So they are looking for other means of investment and it goes into commodity markets generally - the stock market, it goes into manufacturing investment and so on so forth. Whether government does anything to stop this game going on I've no idea, but there is at least a realisation at a pretty senior level that these developments are ongoing.

Mr. Hunt also brings up the insidious problem of negative real interest rates in a growing economy. Empty cities such as Ordos are an example of what happens when people respond to the obvious distortion of losing money when you put it in a bank account.

Even the Chileans are publicly talking about the excess inventory in China

The world No.1 copper producer, Chile's state-ownedCodelco, sounded a warning shot at the CESCO copper industrygathering in Santiago on Monday, saying copper stocks in China were abnormally high and needed to be watched carefully.

Figures are tossed about regarding how much inventory has been tied up in these financing deals but one never really knows how much until the real washout hits and people are forced to dump their positions.

That being said, some analysts are putting out huge numbers as to the extent of hidden inventory, again from ft.com blog

The ICSG data shows an increase in Chinese demand of 99% for the four years between 2005 and 2009 when Chinese GDP probably rose by about a third. Obviously, there cannot possibly have been such a massive rise in copper’s intensity of use in China. You can look through all the intensity of use curves for every commodity for every economy in history and you will never find a doubling in consumption against a one third increase in GDP over so short a period of time.

The numbers are large, around 4 million tonnes since the end of 2006. This dates from when global fabricators and others started to understand that a new paradigm in the copper market had begun. It was the involvement of the financial community by buying copper directly from producers and others and warehousing the metal outside the reporting system.

Standard Chartered puts the amount of hidden inventory lower, but still extensive, April 28

High inventories in bonded warehouses point to the possibility of destocking, which could hit copper prices on the London Metal Exchange (LME). As of this week, we estimate that total copper stocks in bonded warehouses in Shanghai (usually 80% of the national total) have hit 650 thousand tonnes (kt) – equivalent to roughly four weeks of China's domestic use, a record-high level (Chart 2). This is significantly higher than 550kt in late February and the 200kt average over the past three years.

Who's the sucker? If you don't know, its probably you.

ETFs have been a useful tool to allow banks to move risk off balance sheet. When a bank takes on risk through lending to or financing a big commodity player, say for an acquisition, there is a need to hedge potentially huge commodity exposure — so as sell to lock in the commodity price, and you couldn’t sell that volume easily into the terminal market; although you could transfer a large amount of exposure to investors through an ETF more easily. The only way this used to be done is by the bank taking proprietary risk, but they now have other risk issues and aren’t prepared to carry that sort of exposure.
Using ETFs becomes a mutuality of interest, with everyone moving to launch products to investors – retail and institutional – so that they can carry the risk instead. It’s all about de-risking your book. And you saw it in the dot com bust when investment banks pushed dotcoms, but offloaded the risk to investors. When the NASDAQ crashed the investors carried the bulk of the exposure.It all has similarities to the Abacus CDO. If you want to short the market you have to create the demand, like Paulson did. If you are an institutional advisor you can do that by hyping the commodity.

The actual import numbers going into China for both refined and scrap do not mesh well with the meme of voracious demand. On a year over year basis both are falling.

Furthermore the reported inventory numbers have been wandering around the 600k number for a while. Ironically the last time year over year inventory numbers dipped into negative territory for a while was 2008.

I'm not the only one who is not a copper bull. The Reformed Broker sums it nicely while debating a copper bull:

I will admit some of my thesis is based upon information that is not reported as cut and dried numbers that can easily be looked up on a computer screen but what I do find does not add up to the template of China hoovering up all known copper deposits in the universe:

Copper is cheaper in Shanghai than in London
Copper imports of all kinds are dropping
Public reports of a LOT of hidden copper stocks, in the Old Word as well as China and confirmed by Chileans

I could go on but you need to put in some work as well. Read over the links below. I saved a few bombshells for your discovery...

Additional reading:

http://ftalphaville.ft.com/blog/2011/05/11/565696/chinese-commodity-imports-are-falling/
http://macro-man.blogspot.com/2011/05/commodities-are-crap.html
http://ftalphaville.ft.com/blog/2011/05/16/569436/chinas-copper-collateral-and-covert-credit/
http://www.bloomberg.com/news/2011-06-15/copper-users-in-china-plunder-stockpiles-as-goldman-forecasts-record-rally.html
http://ftalphaville.ft.com/blog/2011/05/24/576131/and-now-goldman-says-the-commodities-correction-is-over/
http://pragcap.com/on-the-conflict-of-interest-that-exists-between-research-and-commodity-traders
http://traderightuk.wordpress.com/2011/06/01/guest-blog-david-threlkeld-on-copper/
http://ftalphaville.ft.com/blog/2011/06/21/601061/coppers-inventory-inconsistency-charted/
https://customers.reuters.com/community/newsletters/metals/MetalsInsider20110729.pdf -- Page 2 -- If the warehouses are about to be empty of any metal, why buy them?
http://ineteconomics.org/blog/money-view/copper-standard
http://ftalphaville.ft.com/blog/2011/08/31/665791/a-new-development-in-chinas-copper-collateral-trade/
http://ftalphaville.ft.com/blog/2011/09/07/671416/more-than-2-8m-tonnes-of-hidden-copper-stocks/ - another estimate in an SEC filing guessing there's 2.8 million metric tons in hidden copper stocks.
http://traderightuk.wordpress.com/2011/09/07/guest-blog-simon-hunt-on-copper/ - More on the 2.8 million ton question.
http://blogs.wsj.com/chinarealtime/2011/09/19/dr-copper-gets-a-check-up-in-shanghai/
http://www.economist.com/node/21530107?frsc=dg|a

The Author is long precious metals and short base metals

Ordos -- Time to double down

2011-09-27T11:34:00.000-07:00

Nearly two years ago I highlighted the city of Ordos, China and how it appeared local municipalities and investors were building an empty city with no hope of a positive return on investment.

Fast forward to present day and the same reporter made a return visit to see what has changed. While there have been a few people moving in, residential construction continues at the usual Chinese breakneck pace. The new video show the same empty boulevards but with more skyscrapers being built in the background.

(direct link to Youtube video)

Melissa Chan provides more details in here blog entry

She interviewed the same person, Mr. Chovanec, as last time and he provides the reasons why supposedly rational people would invest in an empty city and expect a positive return. Mr. Chovanec provides more examples of bubble behavior in China in a recent blog entry titled This is What a Bubble Looks Like

China's response to the Great Financial Crisis of 2008 was to tell the banks to lend, and they did. The resulting excessive credit growth just exacerbated the already imbalanced situation brewing in their country. When the next monetary event comes with Greece's default I will not be around (metaphorically) to see if they will be able to 'fix' the problem again.

Google maps link to Ordos

Money Money + Money -- Money supply update

2011-09-21T10:03:00.000-07:00

The broadest money supply figures available (M2 + institutional money market funds) continues to trend higher.

A note to all of you who are fearful of hyperinflation, this figure would be skyrocketing upwards instead of being in the ~+6% year over year range if we were entering a phase of very high inflation. Yes, the narrower measures of money supply are growing but they aren't being transmitted to the rest of the economy (see Japan, deleveraging) as there is still a reluctance to borrow by the US consumer. See my recent previous posts on mortgage rates and total mortgage loans outstanding for examples of how the Fed's pumping money into the financial system is not being transmitted into higher lending (and thus higher prices)

Verleger on high oil prices and demand destruction

2011-09-20T10:35:00.000-07:00

I don't quite agree with the prediction towards a hydrogen economy but it is interesting to hear about the demand destruction of gasoline usage. Mind you this conversation is about US demand. Add in emerging demand and you may see a different picture in total

Video of Verleger on gasoline consumption, heavy versus sweet crude, diesel versus gas costs --
(I would embed the video but it autoplays)
September 7 on Bloomberg

End Date Bond ETF's followup -- More options on the menu

2011-09-19T12:37:00.000-07:00

More than a year ago I highlighted a new twist on bond etfs called the end date bond etf. Since then Ishare's end date muni etfs have grown to manage over 185 million in total through the 2012-2017 maturity spectrum. Not bad.

Guggenheim also rolled out both a corporate bond and high yield end date etf series, providing a wider menu of risk. Guggenheim's corp etf's run from 2011 to 2017 while the high yield field provides a 2012 to 2015 maturity spectrum. While the high yield etf's have gathered 144 million, the corporate funds have pulled in over 430 million with one fund, the 2013 Corporates (symbol BCSD) about to break 100 million.

Hopefully someone will introduce an end date bond etf series on US Treasuries and US Tips (Inflation protected) to round out the risk profiles available. (hint hint, nudge nudge)

A few caveats are needed regarding buying and selling these etfs

They are still illiquid and the price can vary dramatically from the NAV of the underlying assets. Check the fund description page and make sure you are not overpaying.
Diversification does not eliminate risk. The 2017 Guggenheim Corp fund contains a large slug of financial bonds. If we have another credit event like 2008 due to a European sovereign default you could see losses on these corporate bonds (and possibly junk bonds and muni bonds) The price the market will give you will also fluctuate.
Check when the bond etf actually 'matures'. Each fund complex has their own procedures and nuances as to when the funds will be distributed to shareholders.

While there are disadvantages to these (currently) illiquid etfs I find their introduction into the investing universe promising. Building a bond ladder will be much easier and cheaper with greater liquidity for smaller dollar amounts versus finding, researching and purchasing individual bonds.

End date etfs will also allow one to take advantage of rolldown in the bond market. With short rates at zero, as the maturity date approaches for a bond the yield will drop (setting credit risk aside) and thus the price rises and yield drops. Econompic explains the dynamics in greater detail.

Ishares highlights a few of these advantages in a video:

Additional reading:
Seeking Alpha guide to end date etfs
Ishares muni bond end date etf
Guggenheim menu of corp and junk end date etfs - (scroll down to bottom)

Disclsosure: The author does not own any end date etf's but is examining the muni bond etfs for purchase shortly.

The Swiss choose inflation, but the Chinese do not?

2011-09-07T15:48:00.000-07:00

The Swiss central bank recently announced it would print any amount of francs required to maintain a peg of 1.20 Swiss francs to one euro. The response was... massive

Euro / Swiss Franc

A multi percent move in currency markets is exceedingly rare. I'm not going to spill many electrons going over why the Swiss decided it was time to fix their currency as it has been a hot topic over the last 48 hours. The WSJ and Economist have already written about it at length.

So why bring up the topic? Because the Chinese have been doing it for years and the dots need to be connected. I recently commented on the threat of China 'dumping' US Treasuries and how this was not the problem everyone thought it would be.

In both the Swiss and Chinese case you have a country forcibly keeping their currency away from the market clearing price for differing reasons; the Swiss exporters are getting killed while the Chinese desire to keep their workshops fully staffed by forcibly underpricing their currency.

Whatever the reason the result will be the same -- an explosion of domestic currency and loan demand eventually forcing up demand and inflation. The WSJ's title on the Franc peg is The Swiss Choose Inflation Why does one not think the same will happen in China? Chovanec has highlighted the constant struggle to contain inflation in China from both a massive increase in lending and an artificially underpriced currency.

In both cases the Swiss Franc and the Chinese Yuan will eventually find their market clearing prices regardless of central bank manipulation, either by currency price appreciation or by domestic inflation.

edit: FT links China and Switzerland as well:
http://ftalphaville.ft.com/blog/2011/09/07/671121/what-will-switzerland-do-with-all-those-euros/

Time to refinance your home (again?)

2011-09-01T17:03:00.000-07:00

One year ago I stated it would be a good time to refinance your home. Once again the opportunity presents itself. The 30 year conventional home loan rate is near historic lows.

Conventional 30 year home loan rates

Theoretically the vast majority of home loans out there could be refinanced but there are a few unfortunate facts which may prevent many from refinancing: Negative equity, conservative valuations and high unemployment.

CNN Money has a good article detailing the these 3 challenges.

If you are wondering how monetary policy can have limits this is a good example of how and why. In an effort to continually re-stimulated the economy and encourage society to take on more debt over time we have reached a point where historic low interest rates will just not do much for the US consumer. They are already too tapped out and low interest rates will not encourage them to borrow more let alone take advantage of the lower interest rates and buy a home; they just can't. People 'trapped' in their homes due to negative equity also hinders future home sales as it inhibits consumers from being able to move or trade up.

Consumer home debt / GDP

The ratio of consumer mortgage debt to gdp (both nominal) was at data series highs at the beginning of the great financial crisis. Yes I know I'm comparing home debt to national GDP and not home prices but it's yet another reminder of how much debt our society has taken on.

If you are in the position to refinance and have questions give me a ring and we can talk about some of the options / pitfalls when looking for a new mortgage.

Thanks: David Merkel

Long term treasury rates in a bubble? Maybe not?

2011-08-16T12:30:00.000-07:00

Talk of a bubble in long term treasury rates has been careening around the financial markets for a while now and considering the rate on the 10 year T note is approximately 2.22% right now I went looking for some perspective.

10 year versus nominal GDP:

Econompic has a great series relating nominal GDP growth versus the 10 year and the long term patterns are impressive.

Note how during the rise in nominal gdp growth rates from the 60's to the 80's interest rates were below nominal gdp and this pattern flipped as nominal gdp growth rates declined.

90 day tbill rates versus 10 year:

Rarely does the spread between the 90 day tbill and 10 year rates go beyond 4% and with short rates at zero this puts a cap on interest rates further out the curve. With 10 year rates at 2.22 this does provide some upside to the range of interest rates, but those recently calling for 10 year rates higher than 4% were calling for something truly exceptional.

Until we see nominal GDP growth really perk up and/or the Fed start raising interest rates I find the possibility of the 10 year going above 4% unlikely.

Disclosure: I own long term treasuries in personal and client accounts.

Risk: As described by Chanos, Hendry and Gundlach

2011-08-08T18:22:00.000-07:00

Some videos new and old which may provide some perspective on the recent downgrade of America by Standard and Poors and the current market thrashing.
I could attempt to write something eloquent but I'm busy right now. Instead I'll refer you to some successful investors voicing their opinions.

Chanos talking about credit ratings versus CDS rates
http://youtu.be/kRxAMM7UU_k

Gundlach on how the US will never not pay its debt, it just may pay its debt back with devalued currency
http://video.cnbc.com/gallery/?video=3000037858

A series by Hugh Hendry from late last year which I don't believe I have published before. Considering the current market thrashing I think the discussion is important.
part 1: http://youtu.be/zvzKgjaVnlE
part 2: http://youtu.be/MJSO3H4GLqw

ht: HistorySquared

Home prices going up? Not until you show me the money.

2011-08-02T11:28:00.000-07:00

Are home prices going up in a sustained manner anytime soon? No

A recent presentation by Australian Professor Steve Keen inspired me to search for a similar American data series. One exists and it does not predict any sort of sustained bounce in American home prices. (I am simplifying Mr. Keen's presentation as he looks primarily at the 2nd derivative of loan levels but the level of destruction in American mortgages outstanding is epic)

As Mr. Keen states, it is not people who buy homes, it's people with money who buy homes. Just to show you the magnitude of the home devastation we are experiencing here's the entire home loan series:

For the entire data series, going back to the mid 50's we've never seen a year over year decline in the total value of home loans outstanding. Yes, some of this decline is due to homes being foreclosed and the loans vaporizing as a result, but that also eliminates yet another person who cannot trade up from their current home to something larger as their equity and credit score head towards zero.

Until we see year over year growth in mortgages outstanding we will not see a sustained nationwide rise in home prices. We will of course see localized variation in this with some pockets of growth but nothings happening until You show me the money.

Disclosure: The author is short some housing related stocks.

Italian and Spanish yields keep climbing

2011-07-18T11:22:00.000-07:00

I recently highlighted the rise in Spanish and Italian government bonds yields. Today they are shooting higher yet again and I'm certain this is a contributing factor to the equity market's weakness, US budgetary problems notwithstanding.

I usually don't mention my trading activity but I sold off an equity ETF position Friday due to this European contagion situation.

The challenge of Google+ and entering my circle of trust

2011-07-15T15:08:00.000-07:00

I recently signed up for Google+ and in typical Google style its somewhat spartan in style and instruction on how to use it. I'm slowly stumbling around trying to figure the system out.

There are some improvements over Facebook in my opinion, most specifically the 'circle' system where you can place individuals in multiple different groups so as to filter and direct your comments, pictures and information to specific groups.

Even if Google+ is 'superior', will it eventually exceed Facebook in popularity? Not necessarily. Part of the challenge Google+ faces is the size of their network is MUCH smaller than Facebook's (which is currently over 750 million people!) Network size is very critical as a social network with very few 'nodes' provides a much lower utility even if it's 'better' [See Metcalfe's law] Google+'s strategy of slowly rolling out the system via invites from current members mitigates this problem as people are automatically creating more connected 'nodes' in the network instead of random additions you don't personally know.

Right now my plan is to use Google+ as a social media outpost/gateway for my twitter and virtual friends versus Facebook for my 'in the flesh' friends. It will be curious to see how the two competing social media platforms evolve.

Many thanks to downtown Josh Brown for being the first person to put me in one of his circles. Hopefully I'm not in the deranged fanboy category but in the circle of trust...

Club Med Hangover -- Bond yields climbing in Spain and Italy

2011-07-12T15:46:00.000-07:00

Nearly a month ago I mentioned rising yields in Spain possibly causing problems. I underestimated the number of countries. Both Italy and Spain's treasury yields have spiked higher.

Italy 10 year

Spain 10 year

Spain 10 year versus German 10 year

None of the charts are pretty. While Italy was getting most of the headlines for the rate of yield increase please note how Spain's yields are higher. Any EU country bordering the Mediterranean is having serious problems right now.

North Korea watch -- look out for some sabre rattling?

2011-07-07T08:38:00.000-07:00

North Korea is rumored to have recently closed all universities and put the students to work:

From North Korea Econ Watch

The reports said the students would be put to work on construction projects in major cities and on other works in a bid to rebuild the economy. This could indicate that the country’s food crisis and economic problems are worse than previously thought.

Combined with reports of additional EU aid it appears the speculation of severe stress in the Hermit Kingdom appear to be correct.

From the Guardian

The European commission is to give €10m (£9m) in urgent food aid to North Koreans on the brink of starvation, after negotiating for "unprecedented access" to ensure that the food goes straight to those most in need.

With North Korea on the ropes I wouldn't be surprised to see some sabre rattling and more than your usual number of threats and provocations in the near future. South Korea recently winning the 2018 Winter Olympics bid provides North Korean a new 'delicate' target to threaten as well.

Economics for the post MTV Generation -- It's the debt stupid

2011-07-06T12:32:00.000-07:00

I previously mentioned an entertaining video regarding the competing economic theories of Keynes and Hayek. Here is round two, and while its a few months old it deserves attention.

When watching the video pay close attention to the assistants to each boxer, you may recognize some other names as well as what appears to be Chairman Ben Bernanke in the first row of the meeting.

While the debate over monetary and fiscal stimulus continues (most recently as the wrangling over the federal debt limit) I'd like to repeat a graph I've shown before.

Total US debt (private, corp, government) to GDP rose for this entire data series until the great financial crisis of 2008. Since then its been dropping and this is one reason our recovery has felt so sluggish as corporations and individuals continue to delever.

I have mentioned before how even with a very steep yield curve we are not seeing a rebounding economy and others have noticed this as well; the steep yield curve mechanism appears broken.

From Bonddad:

for virtually the entire period beginning in late 1929 and continuing right through the Great Depression and into the 1950s, the yield curve was resolutely positive. And yet that period coincided with the two worst downturns in the last 100 years, as well as three other recessions.

Until the private sector deleverages monetary policy levers will be less effective. I have suspicions as to how Mr. Bernanke will 'fix' this problem but I'll leave that to a later post with evidence.

So what explains the current crisis and malaise? I think Steve Keen is on to something. I strongly suggest you watch this video and examine his theories.

edit: sorry about the autoplay. Hit the pause button to stop it.

http://www.ritholtz.com/blog/2010/01/steve-keen-on-the-modern-economy-and-the-outlook/
http://www.debtdeflation.com/blogs/2010/07/07/naked-capitalism-and-my-scary-minsky-model/
http://www.debtdeflation.com/blogs/2009/12/01/debtwatch-no-41-december-2009-4-years-of-calling-the-gfc/

Hedge fund watch - Hugh Hendry and Jim Chanos

2011-07-05T12:42:00.000-07:00

Here's some recent news from a few hedge fund managers:

A short video from Hugh Hendry (thanks Creditwritedowns)

Some notes from Jim Chanos' presentation at the Vail value conference. (thanks Katsenelson) Provides more detail on Chanos' bearish position in China. Note Chanos is a short seller so he is always bearish on something.

Sino Forest even ripped off the scam

2011-06-22T15:52:00.000-07:00

As more information comes to light regarding accusations of Sino-Forest fraud it appears even their technique was stolen from someone else:

From IndiaExpress -- March 2003

Dream plantations that never bore fruit

The brochure said the company would develop the land for agro-forestry farms and after expiry of the plan period, trees and cash crops would be cut and money from the sale would be guaranteed by post-dated cheques.... The Income Tax Department sniffed out a trail of bribes the company had paid buying real estate. The department says it has evidence that the palms of the registering authorities were greased while purchasing land at Jharmari for Chandigarh Extension 22 Project.

I should do a forensic study to see if the income statement and balance sheet could have alerted people to the possible fraud. A rogues gallery of failures / frauds could me most instructive.

Greece and Ireland are not the only European problems.

2011-06-16T05:32:00.000-07:00

While Greece is dominating the news (again) there are other rumblings in Euroland you should be watching. Below is the spread between German and Spanish 10 year yields. The trend is not going the right way.

Furthermore yesterday Spanish 10 year yields went up on a 'risk off' day. No longer does the market consider the government debt of Spain a safe haven when the equity and other risk markets go down. I'm closely watching the relative and absolute levels of Spanish debt As the Greece situation develops keep an eye on this to see if the panic spreads to Spain.

Housing update -- Build it and they will come?

2011-06-15T10:29:00.000-07:00

Does supply lead demand or the other way round?

Attached is the year over year change in the Case-Shiller home price index and new housing permits. The year over year rise in 2010 was most likely due to the one time tax credit provided by the Federal Government.

One may notice it appears new home permits lead the rise and fall of home prices. Regardless both prices and new home permits are negative on a year over year basis which does not bode well for future employment or home price appreciation.

Linkage roundup

2011-06-14T14:30:00.000-07:00

Some stuff I've been reading:

Saudi's ready to pump more oil after OPEC disagreements. Could get interesting if Saudi Arabia decides to burn the other OPEC nations and pump all out. They have done this before to let everyone know who's boss.
If you are looking for a good historical book regarding oil and politics I'd suggest
The Prize: The Epic Quest for Oil, Money & Power

Central banks are culpable for cycle of boom / bust -- I have been meaning to write a longish entry regarding how specifically emerging market central banks have contributed to the cycle of boom and bust but this will have to do until then

US structural problems remain -- We are not out of the woods. It is going to take a while.

One reason for high yield falloff ? -- The Fed is selling into an illiquid market it appears, driving down prices.

I know, cheery stuff! Here's some good news:
Industrial jobs coming back to America? -- China's inflation and a declining dollar may help induce an improvement in domestic production. This macro idea has been something I've been considering for a while.

Hugh Hendry April commentary

2011-06-06T08:29:00.000-07:00

The April monthly report for the Ecletica Fund managed by Hugh Hendry recently escaped to the internet and as usual Mr. Hendry weaves disparate topics into his commentary.

Accepting absurdity?

I was reading something recently about the Nobel Prize winner Richard Feynman that made me think that money management was perhaps similar to physics in that you advance by accepting absurdities. The history of physics, he claimed, is one of unbelievable ideas proving to be true. "Our imagination is stretched to the utmost not, as in fiction, to imagine things which are not really there, but just to comprehend those which are".

This one comment really struck me as I have a scientific degree and the idea of the absurd eventually becoming accepted wisdom rings true with me. While studying various bodies of scientific knowledge it's always interesting to see how sometimes the observational data was not yet supported by theory (and thus absurd) while at other times it was the chalkboard crowd who's absurd theories were dismissed as impossible until observational data caught up to the theory.

Unfortunately the intellectual framework of truth is truth, I just can't prove it yet can get you into serious trouble in the markets. There's your opinion, the truth, and the market. I have had to struggle at times with the experience of my opinion of a securities' worth varying from the market's opinion, and even worse diverging in opposite directions. Remember, you can be right and still lose money.

edit: Sorry but my source for this had his Scribd account closed. I'm looking for another copy out there in internetland.

edit 2: Found another copy of the report, here it is:
http://www.offshore-rebates.com/pdf/TEF.pdf

ht TheTailchaser

Weekend linkage

2011-06-03T14:00:00.000-07:00

Here's some weekend reading/listening for you. I really should do this more often so you can see what I'm looking at:

Saudi Arabia going ahead with building 16 nukes: Even after Fukushima they have decided to go ahead.

Why didn't Fukushima #2 (Daini) meltdown as well? Very interesting ideas as to why the second power plant complex did not have the problems #1 (Daiichi) experienced. It may be merely luck and location or it may be the newer powerplant designs.

Nuclear regulatory issues. Obviously a very large problem as a 'captured' regulator can allow serious problems to develop.

Carmen Reinhart discusses financial repression in developed economies. If you think short term rates will rise shortly I think you are wrong. Financial repression is a broad term but a clear example is keeping short term interest rates below inflation (a negative real rate) This slowly inflates away the debt problem. Will America and Western Europe be able to pull it off?

China's empty cities, again -- A more recent article on Ordos' empty new city

China's debt writeoffs are just the beginning -- The opera of excessive credit growth and very lax underwriting standards is starting to get to the good part.

Goodbye mega huge conglomerate bank

2011-05-27T08:17:00.000-07:00

My current mega huge conglomerate bank finally pissed me for the last time. I just got back from setting up my own personal checking account at a local credit union and I am shedding no tears for leaving US Bank. I will not regale you with my list of annoyances designed to extract the maximum amount of money from my banking 'relationship' with them.

A typical mega huge bank manager? Perhaps.

Lest you think I'm just harping on US Bank for this rant I previously banked at Bank of America until they annoyed me too many times. Long ago when getting my first home loan Washington Mutual backed out of a locked and approved home loan via a technicality. I'm not playing favorites in my ever increasing disdain for the mega-huge-conglomerate banks here.

My wife has been a member of a local credit union for several years and after the Bank of America separation I opened our joint account there. What a difference. The credit union people go out of their way to actually help you solve your problem instead of directing you to the courtesy phone for support somewhere in the world. No activity fees, no minimum balance requirements, no waiting for you to screw up to hit you with a massive fine fee. I'm not against being charged for items but it appears the current trend in large publicly traded banks is to extract as much as possible from their customers without having them leave in frustration. I'm sure getting the fee/annoyance balance just right occupies the time of several legions of up and coming bank executives.

If your current mega bank pisses you off, take a look at your local credit union. I'm pretty sure the ethos of treating your customers fairly and in a respectful manner is much more common at your local credit union than at the very large banks.

For those of you training for a bank manager position here's the Ferengi rules of acquisition.

Muni bond redux

2011-05-20T12:16:00.000-07:00

Late last year I mentioned the relative thrashing muni bonds had experienced. Fast forward to today and the mass defaults as predicted by Meredith Whitney are not occurring and muni bonds have experienced a nice rebound. Let's look at some charts:

The ETF's MUB and IEF are great for comparing the two sectors as they have almost the same duration of 7.43 vs. 7.24. While they are not precisely the same (MUB's bonds are more smeared out along the maturity curve while IEF's are very compact) it is good enough for this discussion.

As you can see MUB is now outperforming IEF on a relative basis and the yield one receives from MUB remains higher than IEF with an estimated yield to maturity of 3.30% versus 2.86% Usually municipals bonds yield less than treasuries due to their tax free income but not right now. Assuming a return to 'normal' with muni bonds yielding 80% of treasuries you'd need MUB to increase by approximately 7.5%

[The math: 80% of IEF's ytm = 2.29%
MUB yield change (3.30 - 2.29) * duration of 7.43 = 7.50 ]

This does not include the tax free coupon one would receive while you wait for the trade to complete and also assumes treasury rates remain stable. I'm of the opinion treasury rates will also drop in the near future so you'd gain there as well. All in all a relatively low risk / low reward trade but considering the equity markets have been going nowhere for a couple months I'll take it. MUB is also starting to outperform SPY on a relative basis as well, go figure...

Reminder: I don't manage your money and this is not a complete part of my investment portfolio. I may not tell you when I close out the position. This should not be construed as investment advice as I do not know your tolerance for risk, tax situation, need for income, etc.

Disclosure: Long MUB in both personal and client accounts.

Additional reading:
Ishares MUB etf detail
Ishares IEF etf detail
Business Insider
JPMorgan's comments

Note: Another possible reason why MUB is outperforming is the light issuance schedule for muni bonds right now. This may be due to the previous rush to market while Build America Bonds were still possible before the 12/31/10 deadline or the current high relative yield environment for muni bonds.
Bond Buyer article #1 & Article #2 (ht MuniLass)

Initial unemployment claims are going the wrong way

2011-05-17T06:07:00.000-07:00

Initial unemployment claims are starting to creep back upwards on an absolute and year over year basis. The standard seasonally adjusted 4 week moving average of initial claims (that's a mouthful!) has recently bounced back up to 440k from 400k.

While this does not look so bad if one looks at the data on an absolute level, one can see the trend clearly deteriorating on a year over basis [2nd chart]

Now this is only a few weeks but the trend is not going in the 'right' direction. My previous post on initial claims data provided two different theoretical outcomes merely by torturing the data via different means.

Some have posited the rise in initial clams is due to automotive factories laying off people because of supply chain problems stemming from the earthquake in Japan a few months back. Another possibility is the increase in oil prices is finally starting to really bite into the consumers pocketbook and layoffs are ensuing in consumer sensitive sectors of the economy. Regardless we will know soon if this is a short term blip in unemployment claims or a longer term trend.

The politics of oil

2011-05-15T22:04:00.000-07:00

Yesterday President Obama announced new measures to increase drilling. From Reuters

U.S. President Barack Obama, under pressure from Republicans and the public to bring down gasoline prices, announced new measures on Saturday to expand domestic oil production in Alaska and the Gulf of Mexico.

Elections are hard to win with high gas prices:

High fuel prices have dented Obama's ratings in opinion polls and threaten to dampen the economic recovery that is critical to his re-election in 2012.

Considering the lead time required to get oil to market from a new find this will ironically help whomever is in office after the elections of 2012.

I seriously doubt the President would have increased leases available to oil companies if gasoline prices were $2.00 a gallon versus the current $4.00.

There's a reason alternative energies are called alternative and its because they are much more expensive per unit of energy than gasoline. Until new forms of portable energy become cheaper than gasoline a President's politics will bend to the reality of high gas prices.

edit: if you are wondering why we are attacking Libya and not Syria, this is one reason.

Bank lending update

2011-04-27T06:57:00.000-07:00

It's been a few months since I last highlighted total bank lending but not much has changed since late October. Just to make sure you don't think I forgot here's an update.

Total bank loans and leases as per the Fed continues its steady decline economic recovery notwithstanding. As you can see there was a large recent spike but this was due to an accounting change in bank's loans and not a sudden increase in lending. This lack of new lending may be one reason broad money supply is so sluggish of late.

Like last update the banks are buying US Treasuries instead of lending. If you wondering who is buying those hated T bonds look to your corner mega-huge bank. Considering their funding costs and capital requirements are pretty much zero you could say banks would rather just play golf and clip Treasury coupons.

Money Money + Money -- Money supply update

2011-04-26T06:39:00.000-07:00

The broadest money supply figures available (M2 + institutional money market funds) turned positive a few months ago but is only growing slowly. Furthermore this money measure has not exceeded its pre crisis peaks.

Looking back in the mid 2000's you can see broad money supply was also very sluggish. With QE 2 ending in June we'll see if this data series can keep expanding.

Inflation expectations in the bond market

2011-04-14T06:29:00.000-07:00

Here's an update on inflation expectations as expressed by the bond market. While much is being said right now about inflation expectations becoming unglued the 10 year [Treasury - TIP] difference is not showing anything exceptional yet. As you can see from the chart inflation expectations (as expressed by nominal yields - 'real' TIPS yields) are getting back to their 'normal' range of around 2.5 percent.

10 year TIP yields are near the low end of the range but some of that is due to nominal yields slowly dropping over time, pushing the TIPS yields down so the difference remains relatively constant. With QE2 slated to end and oil prices (as well as other base commodities) rising it will be interesting to see if the implied breakeven inflation rate rises above long term resistance of ~2.6 percent.

Japan Nuclear Update: Fear and Loathing about Fukushima

2011-03-31T09:50:00.000-07:00

It hasn't taken very long for the charlatans and plain fear mongers to try to capitalize on the situation in Japan. I recently saw a banner ad on my web site for a company shilling a supplement to prevent radiation injury to Americans. I am not going to link to the company and give them free publicity.

To be very clear:
YOU ARE IN NO DANGER IF YOU LIVE IN ALASKA, HAWAII OR THE CONTINENTAL US.
The EPA agrees with me without using all caps.
A professor from Berkeley agrees with me.

Those who have a memory longer than a year may recall two nuclear weapons detonated OVER Japan a few decades ago. The amount of nuclear radiation emitted from those events were several orders of magnitude higher than the current situation yet we didn't have anyone dying in America did we?

This chart from http://xkcd.com/radiation/ has been floating about showing the relative levels of radiation and I think one should really take a look at it to put some of the news reports in context. One problem is our instruments are so sensitive that its very possible in America to detect the slightly elevated levels of radiation that have made it to our shores. Then again, getting on an airplane would provide a much higher dose but that doesn't seem to be mentioned at the same time the TV breathlessly tells you the clouds of nuclear radiation are coming this way.

Plutonium:
There's been reports plutonium has been found on the grounds of the Fukushima power plants and we should all hit the panic button Plutonium is a natural by product of the normal fission cycle which occurs in a power plant. What they didn't mention in the first reports is the scale of the plutonium concentration and that matters a lot. For some sanity I suggest you listen to this interview:
http://georneys.blogspot.com/2011/03/14th-interview-with-my-dad-nuclear.html

Tepco came out with some clarification of the Plutonium and it's not something to worry about
http://www.tepco.co.jp/en/press/corp-com/release/11032812-e.html

Finding people in Japan:
The red cross has another site for finding people in Japan here:
http://www.familylinks.icrc.org/web/doc/siterfl0.nsf/htmlall/familylinks-japon-eng
I mentioned another site run by Google a couple days ago.

Predictions for cleanup taking 30 years:
I ran across a Bloomberg article predicting it will take 30 years and billions to clean this mess up. I link to it so we can see how accurate they are. I find it odd to make such predictions when the smoke hasn't even settled.

There's an interesting presentation by Arevea floating around which appears to give a good timeline of what has happened. Of course this is a theory regarding the damage of the cooling torus but it does look like a possible reason for the elevated radiation readings in the water.
https://docs.google.com/present/view?id=dg4hcz37_289dr9g62f6

I'm not trying to sugar coat the issue in Japan which is still volatile and dangerous but please respond to any positive or negative news reports with a healthy dose of skepticism.

More on China's empty cities

2011-03-22T06:26:00.000-07:00

One problem with satellite photos is you don't know what has happened since taken. One may legitimately posit an apartment complex that looks empty in the image may now be filled to capacity and teeming with life. A recent expose by a journalist on the ground demolishes those theories.

http://www.sbs.com.au/dateline/story/about/id/601007/n/China-s-Ghost-Cities
Watch the video and see the numerous empty towers of apartments. It's a pre-made ghost town.

Here's one insta-city I found a few weeks ago: Chenggong aka Kunming

What is most impressive about the apartment complex shown is how they built the entire place without adding any roads yet. Hopefully they'll get around to it. Zoom out and look around (both north and east) and you can see the scale of this new city. Like the video above almost all of this new Chenggong appears unused.

Take a look at the photos from this area. (Panoramio link) and see all the buildings going up and completely empty roads. There's just too many completely empty homes and roads devoid of life.

ht: Also Sprach Analyst

An amazing rescue story from Japan

2011-03-20T21:39:00.000-07:00

The tragic stories coming from Japan keep piling up and the death toll climbs every day as the Japanese try to dig themselves out of the rubble. The humanitarian challenge of caring for a couple hundred thousand homeless is straining even the organized Japanese.

Amongst the despair and rubble there are amazing stories of bravery and determination emerging.

Here is one of them.
Hideaki Akaiwa escaped the earthquake and tsunami, but after being unable to find his wife, scrounged up some SCUBA gear and went back into the waters to find his wife! He succeeded and later pulled the same technique to find his mother. A somewhat embellished but great read of the story goes something like this (from Badassoftheweek 03/18/11)

Regardless of how he came across this equipment (borrowing, stealing, buying, beating up a Yakuza SCUBA diving demolitions expert, etc.) Hideaki threw on his underwater survival gear, rushed into the goddamned tsunami, and dove beneath the rushing waves, determined to rescue his wife or die trying. I'm not exactly sure whether or not the dude even knew how to operate SCUBA equipment, but according to one version of his story he met his wife while he was surfing (which is awesome, by the way), so it doesn't seem like that much of a stretch to say that he already had a little experience SCUBA diving under a more controlled situation. Of course, even if this dude didn't know how to work the gear I'm certain that wouldn't have stopped him either – Hideaki wasn't going to let a pair of soul-crushing natural disasters deter him from doing awesome shit and saving his family. He dove down into the water, completely submerged in the freezing cold, pitch black rushing current on all sides, and started swimming through the underwater ruins of his former hometown.
Surrounded by incredible hazards on all sides, ranging from obscene currents capable of dislodging houses from their moorings, sharp twisted metal that could easily have punctured his oxygen line (at best) or impaled him (at worst), and with giant fucking cars careening through the water like toys, he pressed on. Past broken glass, past destroyed houses, past downed power lines arcing with electrical current, through undertow that could have dragged him out to sea never to be heard from again, he searched.
Hideaki maintained his composure and navigated his way through the submerged city, finally tracking down his old house. He quickly swam through to find his totally-freaked-out wife, alone and stranded on the upper level of their house, barely keeping her head above water. He grabbed her tight, and presumably sharing his rebreather with her, dragged her out of the wreckage to safety. She survived.

Read the whole article.

Tool for finding people in Japan via Google

2011-03-16T16:39:00.000-07:00

Google has a service for people looking those lost or missing in Japan. The url is:
http://japan.person-finder.appspot.com/?lang=en
They currently have over 250 thousand records. One word of caution however, some cruel people are posting entries stating some people have died and these entries are entirely false so while I don't want to encourage false hope be cautious of such entries.
From metro.uk

One family were crushed when a message posted on the Google people finder by Lucas. A said that Brian Hickebottom had died in the disaster. However, it emerged that the information was wrong, and he had found refuge in the school where he and his wife work, much to his relatives' relief . . . Responding to a post about US marine Justan Browning, which said he had died when a building collapsed, someone going by the name Canadian Friend wrote: 'I have seen several false reports that people are deceased. It is disgusting. Do not give up hope. Call your government to verify the above report.'

Real time radiation data?

2011-03-15T16:41:00.000-07:00

Internet trolling pays off again. I think I've found some (semi real time) radiation data sites. My Japanese is limited to the auto translate function in Google Chrome but it appears there are some locations still publishing radiation data. I'm not quite certain of the units due to the translator but you can see peaks and valleys in the data and the peaks are not too much worse than the valleys. It also appears they liken 50,000 to a chest xray, or at least that's how Google Chrome is translating it....

Google map with locations (The locations near the plant are offline it appears)
Ibaraki Prefecture page (southwest of powerplants)
Recent Data

Japanese nuclear situation interviews

2011-03-15T12:41:00.000-07:00

Again the power of social media reveals itself. There is a multi part interview series here
http://georneys.blogspot.com/2011/03/third-follow-up-interview-with-my-dad.html
of a retired Navy and civilian nuclear engineer which I highly recommend you listen to. He does an excellent job laying out the facts of what we know and don't know as time has progressed through this emergency.

I'm not going to comment/report/speculate on the current news of the moment regarding the nuclear situation in Japan as its changing so often and right now the news flow from Japan is sparse as it is night time over there. In a few hours we'll have another update on what is going on. If you listen to the interviews above you can get a sense of the unfolding situation and how Mr. Mervine predicted the fuel rod storage problem. Hopefully the 3 active plants will be successfully cooled down and the fuel rod storage situation in the 3 (#4,#5,#6) non active plants will be contained.

You can follow the blog's author on Twitter at:
http://twitter.com/#!/GeoEvelyn

Real time Geiger counter in Tokyo

2011-03-15T01:44:00.000-07:00

While trolling around the internet attempting to find hard data on what sort of radiation levels we are seeing in Japan I found this site where someone is graphing radiation levels in real time in Tokyo.
http://park18.wakwak.com/~weather/geiger_index.html

The site is in Japanese but you can translate it using google translate or other services available on the web. While the graph shown does show an increase in radiation levels it is only ~4 times the background level which is very minimal. This is good news compared to the other reports coming out of Japan regarding the radiation leaking from the stricken nuclear plants. It is important to get factual data about what sort of radiation levels are being detected and where and unfortunately it has been hard to find so far.

If you can pass along any quantitative data I'd appreciate it.

ht: http://bravenewclimate.com/2011/03/15/fukushima-15-march-summary/#comment-115804

News and Photos of Japanese destruction

2011-03-13T21:51:00.000-07:00

The news and photos out of Japan are incredibly powerful. Here's a bit of what I've found:

http://totallycoolpix.com/2011/03/japan-hit-by-massive-earthquake-and-tsunami/
http://totallycoolpix.com/2011/03/the-japan-earthquake-and-tsunami-aftermath/

The site fades in and out and I'm guessing it is due to massive traffic to the site. The photos are stunning. Here's a few samples:

While I have not heard anyone separate the damage between the two events it appears the tsunami did more damage. I was watching CNN a few minutes ago and the official body count is approximately 1,600 but they have just found another 2,000 bodies so I'm certain the toll will rise as the days progress.

Video:

Keeping up to date: There are some English based news sources in Japan

http://www3.nhk.or.jp/daily/english/index.html

On Twitter:

https://twitter.com/W7VOA - Voice of America reporter on the ground.

Nuclear power plant situation: This is an ongoing event and so separating the facts from rumor or speculation is a challenge. What we know right now is there have been explosions at Fukushima Daiichi plants #1 & #3. Before you panic it appears this was due to the venting of hydrogen from the inner core which mixed with oxygen and exploded. When the earthquake hit the nuclear power plants immediately shut down by dropping their control rods. The problems started when the backup generators failed due to the tsunami and could no longer run the pumps cooling the reactor cores. (Even after a shutdown there is a massive amount of residual heat which must be shunted away from the core) In an attempt to prevent the central core from breaching they vented gas to bring the pressure down and release heat which then released the hydrogen and it blew off the exterior structure.

So far it appears the main central core which actually holds the fissable material is still intact. Fortunately the prevailing winds are blowing any radioactive gas east offshore and into the ocean. Right now they are flooding #1 reactor with seawater and boric acid to cool the reactor.

I have simplified this description a bit but if you want the technical details I suggest you go to:

http://bravenewclimate.com/2011/03/12/japan-nuclear-earthquake

which has quite a bit of technical information and a continuing discussion of the ramifications.

I'm not making any predictions as to what happens but the central core appears to be still intact and considering what is has been through is actually pretty impressive. They still need to cool both cores and keep them from breaching. I'll be watching this closely over the next few days.

Update: Here's a video of plant #3 exploding

Copper roundup

2011-03-11T06:45:00.000-08:00

To follow up on my previous copper post here is some additional articles:

One trader (suspected to be JP Morgan) held nearly 90% of the outstanding copper on the LME in late 2010
WSJ December 21, 2010

As commodity prices soar to new records, the ability of a few traders to hold huge swaths of the world's stockpiles is coming under scrutiny.
The latest example is in the copper market, where a single trader has reported it owns 80%-90% of the copper sitting in London Metal Exchange warehouses, equal to about half of the world's exchange-registered copper stockpile and worth about $3 billion.

As is implied in the article, having just one party hold such a huge portion of the outstanding asset is just an invitation for manipulation. For some reason the LME states controls are in place to prevent abuse but I'm a bit skeptical.

I am not the first one to comment on China and their bonded warehouses' providing a convenient 'hiding spot' for excess copper. Ft.com December 21,2010

As Reuters noted, the London/China arbitrage window was after all firmly shut during the period:

The November inflow was a surprise to many market watchers given that the arbitrage window — buying from the London Metal Exchange and selling to Shanghai — was shut for much of last month, Beijing Capital Futures analyst Xiao Jing said.

And, as they also noted:

But trade and warehousing sources in China said the London Metal Exchange and Shanghai arbitrage had stayed closed last month and thatshould have prompted importers to store some arrivals of refined copper in bonded warehouses.
Bonded material can be shipped out to the international market easily or imported into China after the 17 percent value added tax is paid.

Finally, something I suspected but had no 'proof''. Chinese traders may be using copper and other base metals as a cheap funding source as well as a currency play.
From Ft.com March 9,2011

To reiterate: that’s Chinese companies using copper as collateral for financing deals — also known as a somewhat ingenious nationwide inflation hedge (in the event copper prices continue to rise).Let’s just say it’s a bit like living off a loan taken out against your house. The loan won’t be a problem because you believe the price of your house will only go up.
And while that remains your view, there’s no reason not to double up. Buy even morehouses for the sole purpose of transforming cold hard cash — not inflation proof — into an asset which can continue to be monetised via ever depreciating bank loans.
Magic.
That is, of course, until copper prices stop rising.

It's all fun and games until the party stops and the margin calls start. Just think about how much chicanery occurred during the US housing boom. You don't think games like that are being played in China?

Some news on Libya

2011-03-10T10:42:00.000-08:00

Here's a video on the Libyan situation. France also officially recognized the Libyan rebels which could set up a situation where the frozen Libyan assets are released to the rebels. This would allows the rebels to arm themselves and get on with winning the civil war.

From UPI

France recognized the Libyan opposition movement Thursday as the representative of the Libyan people, a former Libyan envoy said from Paris.Ali al-Issawi, the former Libyan envoy to India, announced in Paris that France recognized "the (Interim Transitional) National Council as the legitimate representative of the Libyan people," reports French news agency France 24.

This is not the copper you are looking for

2011-03-08T06:29:00.000-08:00

Edit: A followup to my bearish copper case was posted on 09/27/11

Copper has had quite a run, but is it legit? Numerous experts are calling for continued strength in the commodity as well as continued supply deficits. I offer a contrary opinion.

There are several fundamental reasons for this alternate opinion and we'll go over them. From a technical standpoint copper as well almost all other commodities has been on a tear upwards ever since the announcement of QE 2. Recent events in the Middle East have slowed the rise in prices and higher oil prices may dent future economic growth worldwide so forces may be aligned to drive copper down in the near future.

Chinese Copper Demand
Copper is traded worldwide on several exchanges and as such provides an opportunity to see where prices (and by implication demand) are higher.

China is commonly cited as a source of continued copper demand. If this is so one would think copper sells at a premium to elsewhere in the world. This is not the case and copper has been selling at a discount to the LME (London Metal Exchange) for several months. As you can see here the last time couple times Chinese copper was cheaper worldwide prices stopped going up. (ht news-to-use.com )

One can see the real time arbitrage price difference on Bloomberg. While the arbitrage values do swing between positive and negative, since mid July the arbitrage price has been negative. Take a look at the long term trends and you'll see periods of negative arbitrage have coincided in the past with lower future prices as well as increasing inventory levels.

Inventories

One of the common bullish themes is how copper has been in a deficit for several years and will continue to be so in the future. A long term inventory chart provides some clarity. Longer term copper inventories have been both lower and higher than today. While right now copper inventories are dropping on a year over year basis the last inventory peak was in early February 2010 and as you can see inventories tend to trend in one direction or another for a period of several months. Right now we are on an upswing. Copper inventories (LME, SHFE, Comex) bottomed mid December and have risen nearly 130,000 thousand tonnes since then and are rising at over one thousand tonnes a day right now.

Furthermore the number of cancelled warrants continues to drop and has remained well below 20,000 for several weeks now. A low cancelled warrant number is an indication of fewer lots of copper coming out of inventory for delivery.

The dog that did not bark
A most interesting news article ran across Bloomberg late last year regarding Shanghai and bonded warehouses.

http://www.bloomberg.com/news/2010-12-08/copper-trading-in-shanghai-may-reverse-drop-on-bonded-inventory-tax-waiver.html

Why provide this option of delivering copper from 'non official inventory' warehouses if it did not already exist? While getting hard numbers about how much hidden inventory exists is nearly impossible, this rule change leads one to believe there is significant supply available, otherwise why provide the option?

Furthermore the 'movement' of inventories into and out of the official stockpiles occurs rather easily. In January aluminum inventories went up 100,000 tonnes in one day.
http://traderightuk.wordpress.com/2011/01/10/now-you-dont-now-you-see-it/ 100 thousand tonnes is a LOT of material. The largest ships in the world move 150 thousand tonnes of cargo to give you a sense of the mass involved.

Just because you can't see the copper (or aluminum) doesn't mean it is not there. There are other quantitative numbers showing us there is a lack of demand in China such as the the lower relative price as well as a lack of imports.

Both refined and scrap copper imports have leveled off over the last few years and do not show a sustained rise in imports as one would expect if China is truly the voracious eater of copper as people have posited.

Four dollar copper does wonders for encouraging more supply. Heck, there's even supply developing underwater. Nautilus minerals is currently building an underwater 'mine' and if they can pull it off the potential is huge.

Furthermore a little corruption goes a long way. There's a 17% VAT tax on copper in China. Does one honestly believe there is no skirting of the law? A truckload of copper would be an easy thing to 'misplace' at a large import facility.

Betting against the house
Looking at copper futures over the past several years one can see (green line) how commercial traders have never been this short as they have been during this recent run up in price. Remember when you are buying copper right now the person selling probably has more information about copper prices than you do.

Avoiding Imperial Entanglements and Bernankflation
Almost all commodities have been on an tear upwards since Ben Bernanke announced QE 2 in late 2010. The results have come home to roost however as higher food prices may have been the spark that set off the political unrest in the Middle East. Higher oil prices from the riots and regime change in Tunisia, Egypt, and Libya have people wondering who is next and what will that do to oil supplies. Oil prices are now well above $100 a barrel and that price shock has yet to be fully realized throughout the world economy. To hedge my short base metals position I'm also long precious metals and this combination has worked out well recently. Continued tension in the oil producing nations will most likely keep gold rising and depress copper prices as people grow concerned about future economic growth.

Alternative learning annex
For those of you who can't stand looking at data and trying to understand the nuances of localized supply and demand I have created a short video explaining the high points of this post.

http://www.xtranormal.com/watch/11071592
http://www.youtube.com/watch?v=OoFQQlBWcOk (YouTube version)

Further reading:
Bearish calls:
http://finance.fortune.cnn.com/2010/11/17/chanos-vs-china/?iid=EAL

More supply on the way:
http://in.reuters.com/article/2011/02/11/idINIndia-54814820110211
http://www.reuters.com/article/2011/01/13/chile-codelco-investment-idUSN1328075420110113?feedType=RSS&feedName=everything&virtualBrandChannel=11563 -- 16 Billion for Codelco alone

Other base metals not doing so hot on a fundamental or technical level.
http://agmetalminer.com/2011/01/10/zinc-outlook-2011-part-one/

Financialization of commodities and correlation to equity markets.
http://macromon.wordpress.com/2011/02/10/sarkozy-and-g20-to-crackdown-on-food-specs/
http://agmetalminer.com/2011/02/28/copper-in-a-dip-or-on-the-slide/

Data:
http://www.cochilco.cl/english/productos/estadisticas.asp - Long term copper stats from Chile

Chinese copper imports:
http://www.bloomberg.com/apps/quote?ticker=CURIIQTL:IND
http://www.bloomberg.com/apps/quote?ticker=CNIVCOPP:IND

The author is short base metals and long precious metals.

All oil is not created equal

2011-03-01T07:02:00.000-08:00

NPR recently spoke about how oil is not created equal. There are differing types of oil, with some having higher sulpher content as well as other parameters making it easier or harder to refine into the higher quality fuels.

http://www.npr.org/2011/02/25/134056647/ripple-in-libyan-oil-markets-make-waves-worldwide

"It happens that Libyan crude has almost no sulfur and produces a great deal of diesel fuel per barrel of crude, which means it is very valued," he says. "One can think of it as fat-free milk."
Libyan oil is light and sweet — it's the kind that refineries want for making low-sulfur diesel, which is widely desired in Europe, and jet fuel, of which the U.S. makes a lot. Both markets require low-sulfur fuel because it pollutes less.

It's a short (<4 minute) introduction to some of the intricacies of the energy markets and I suggest you listen to it.

China and the threat of 'dumping Treasuries'

2011-02-28T07:18:00.000-08:00

A recent Wikileaks article has exposed the Chinese mentioning their large holdings of US Treasuries while in conversation with the US as a not so subtle hint to back off on various international activites by the US, specifically selling arms to Taiwan.
From AFP (2011, Feb 21)

China's clout -- gleaned from its nearly $900 billion stack of US debt -- has been widely commented on in the United States, but sensitive cables show just how much influence Beijing has and how keen Washington is to address its rival's concerns. An October 2008 cable, released by WikiLeaks, showed a senior Chinese official linking questions about much-needed Chinese investment to sensitive military sales to Taiwan.
"In that regard, the recent announcement that the United States intends to sell another arms package to Taiwan increases the difficulty the Chinese government faces in explaining any supporting policies to the Chinese public."
His comments came days after the Pentagon notified Congress it was poised to sell $6.5 billion worth of arms to China's arch rival Taiwan.

China's massive holdings of US debt have not escaped the public's notice either. Even Saturday Night Live spoofed the relationship. (email readers may need to click through to see the video)

Link to SNL video

My response to China:
Bring It.
I dare you.
I double dog dare you.

One must ask how the Chinese have amassed such a huge wad of our currency and thus our debt when considering my dare to the Chinese. In short, the Chinese forcibly keep their currency undervalued by constantly intervening in the exchange markets. They are doing so to keep their exports 'cheap' and their export factories busy. They need invest all those US dollars in something so they end up in our Treasury bonds and bills. Their huge holdings of our debt is a direct result of their mercantilist trade policies.

If the Chinese do not want to keep buying our debt the can very easily do so by not intervening in the currency markets, but I doubt they will do so in a dramatic fashion. Their low skill low wage factories cannot compete without an under priced currency. The Chinese are slowly raising the Yuan but it is a challenge for them to wean themselves off the Faustian bargain they created.

Paul Tudor Jones of Tudor investments dedicates 14 pages to a discussion as to how the undervalued Chinese Yuan has created severe imbalances worldwide. I suggest you read the whole letter Mr. Jones' letter (2011 Feb 14)

Failure to address this issue - as one of the primary causes of the intractable unemployment currently plaguing the US -- has led to a series of second-best policy options . . . Indirectly, the peg has exacerbated the United States' large fiscal deficit while enabling our elected officials to delay the difficult spending adjustments that are inevitable.

So China, yes, you can threaten to stop buying our Tbonds. We would pay a little more for our home mortgages but it would also staunch the flow of manufacturing jobs out of America. You however would see a massive number of people thrown into unemployment and most likely a repeat of Tiananmen Square.

Your move.

Inside North Korea's propaganda machine

2011-02-23T13:31:00.000-08:00

Here's a documentary on North Korea's propaganda machine and the people trained to fill it. Remember the kids you see are some of the elite. Unfortunately I doubt the current wave of revolutions will break the bulkheads on this repressive country.

There are small scale operations attempting to tell the citizens of North Korea what really going on but I doubt it will amount to much at this level of intensity.

ht:
@limlouisa
@marykissel

Rising Risks Roundup

2011-02-21T15:19:00.000-08:00

This weekend has been an eventful one for the world geopolitically and this week will see further events which shape the stage. The riots in Libya and continued unrest throughout the Middle East had a dramatic affect on futures markets today as the regular markets were closed.

Libya News - NYTimes

Middle East news - Al Jazeera

The events in Libya are obviously in flux and getting hard news out of the country is difficult so the rumors and actual news will be mixed together and hard to clarify.

The affect on the markets today (Monday) was dramatic:

Crude oil up 6+% to 91

Silver up 7+% to 33.86

SP 500 down -0.64% to 1329.25 (Futures price)

While the rioting is getting the headlines the trouble in the Eurozone continues its slow burn. Ireland is holding elections this week and the party currently in power is predicted to be handily spanked in the polls. The mood in Ireland is not good and there is some talk of repudiating the guarantee of the government honoring all senior bank.

Meanwhile Portugal debt continues to drop in price. The 10 year is at 7.45% tonight

This cannot go on forever. The recent German elections sent a clear message that Germans are tired of paying for other people's problems.

Tomorrows markets will be very interesting to watch. Oil prices are getting to a point where they are seriously hitting the consumer's pocketbook and another spike in oil (like the one in 2008) could seriously stress the already weak US consumer. I'm not evening mentioning China and their continued raising of interest rates / reserve ratios. That's for another time.

Torturing the initial claims data

2011-02-03T14:54:00.000-08:00

Initial unemployment claims data came out today and weekly unemployment claims decreased to 415,000. The number has bounced around quite a bit recently causing some gyrations in the market and I thought it would be instructive to dig down a little further into the data.

One item to note from this first graph is how volatile the raw data is. Note how around year end the unemployment claims spike up dramatically. Compare the raw data to the 4 week moving average seasonally adjusted data and you can understand why the claims data has bounced around so much recently; we are in the post holiday layoff period.

Next let us examine the year over year change in initial claims. What is actually impressive to me is how close the raw data and 4 week seasonal data track each other. (Note these two graphs do not show today's data) I have drawn in some black lines showing the rise starting in 2008, a peak in early March 2009 and then a bottom and rebound in early 2010. Note this is the change in claims and as you can see we are still dropping on a year over year basis but the rapid fall in initial claims has ended and we are trending back towards zero. You can also see the most recent raw claims data is bouncing around quite a bit, again due to seasonal affects and possibly the weather.

Is the glass half empty or half full?

We can torture the data a bit further and just for fun and see what models predict will happen next. Using March 27, 2010 as the baseline (the peak in the rate of decline in initial claims) I let excel extrapolate the data out another 15 weeks. Bottom line is you can come up with either a positive or negative prediction depending upon how may polynomials you use.

Using a 2 polynomial regression predicts (R2 of .9712) claims are near their deceleration point and will then continue to keep dropping over time.

You want a bearish case? No problem! Using a 5 polynomial (R2 of .9763) regression initial unemployment claims will eventually reverse their fall in 12 weeks or so and start to rise on a year over year basis

Please note I'm not making economic predictions here, I'm just looking at the shape of a graph. Going forward we have several cross currents pulling claims in opposite directions. ISM data has been quite positive which may bode well for fewer layoffs in the future. On the negative side we have higher food and energy prices as well as continues austerity by the states and municipalities. As always stay tuned and I'll keep you informed.

HT creditwritedowns
He has done some great work on this data series and his articles were the genesis of this post:
http://www.creditwritedowns.com/2011/01/is-the-government-data-fudging-jobless-claims.html
http://www.creditwritedowns.com/2010/09/jobless-claims-still-not-pointing-to-imminent-double-dip-recession.html

China's reserve ratio raising is finally starting to bite

2011-01-19T11:01:00.000-08:00

China recently raised the bank reserve ratio requirement again and it looks like this time it's really starting to bite. 7 day repo rates (what banks charge each other for a 7 day loan) spiked up just before year end but they aren't falling back down as I had alluded to in my previous post.

7 day Chinese repo rate
3 month Chinese repo rate

As you can see from the 7 day repo rate chart the spikes have been getting larger at the end of each quarter, hinting at banks scrambling to find enough cash for their books at quarter close. While the rate has dropped in the 7 day, the 3 month has u-turned and is going back up near its pre-12/31 closings. The Chinese stock market has been going down recently and this removal of cash from the system may be the reason. If one continues to observe high bank repo rates it does not bode well for the Chinese stock market or the whole commodity/reflation/Australia trade in general.

Reading list

2011-01-14T13:03:00.000-08:00

Some stuff I've been reading / watching

David Einhorn video
http://wealthtrack-appletv.blip.tv/file/4406653/
ht: http://www.eurosharelab.com/

http://pragcap.com/three-things-i-think-i-think-20

http://www.creditwritedowns.com/2011/01/european-debt-dynamics.html
European debt dynamics. Borrowing at 5% and growing at 3% just digs a deeper hole.

http://www.creditwritedowns.com/2011/01/cautiously-optimistic-into-2011.html
Address says it all.

http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100009218/the-dam-breaks-in-portugal/
Has Portugal already asked for IMF help and no-one noticed? Would be ironic if this episode of Euroland bailout occurs quietly. Long term the trend is NOT Portugal's friend:
http://www.bloomberg.com/apps/quote?ticker=GSPT10YR:IND
(Look at the 5 year history)

Portuguese recycling & Iceland recovery -- Why the Chinese and Japanese are buying EU debt

2011-01-11T11:22:00.000-08:00

The recent news of both China and Japan buying EU debt provides a very interesting window into the various motivations of investors. While most investors are leaving the PIIGS debt markets, China and Japan appear very willing to invest. Why? It appears the Asian nations' motivations are different than return of principal. Both are exporting nations and if more European trading partners are forced into austerity measures of higher taxes and lower government spending their own export industries will suffer.

American policy makers should be mindful of this when negotiating with China. It may appear they have the upper hand when looking at their massive foreign exchange reserves, but China also needs our markets to keep their factories running.

Unfortunately Portugal looks to be the next domino to fall, Asian assistance notwithstanding. FT's blog lays out the timeline I have previously alluded to: It appears once a PIIGS' bond yield pierces the 7% level a bailout eventually follows.

However even with these 'bailouts' and Euro Central Bank assistance the problem has not been solved. As austerity measures and budget cuts drag GDP down the burden of debt grows ever higher in a nasty feedback loop.
From Satyajit Das:

Cuts in government spending and higher taxes have mired the economy in recession. Falls in tax revenue necessitate increasingly deeper cuts in spending to try to stabilise public finances. In 2010, the budget deficit was forecast at 12% of GDP, even after spending cuts and tax rises worth Euro 14.5 billion The problems of the banking sector are increasing due to the poor economic conditions. Hitherto largely confined to commercial property, problems are now spreading to the broader economy. Unemployment and lower incomes mean that householders are unable to meet payment obligations on mortgages and other loans. Weak economic conditions have affected businesses, increasing default levels. In the absence of strong economic growth, inflation and a massive devaluation, the peripheral economies, such as Ireland and Greece, may be unable to shrink themselves to solvency. A simple relationship demonstrates the unsustainable position:

Changes In Government Debt = Budget Deficit + [(Interest Rate – GDP Growth) X Debt]

In order to restore solvency, overburdened borrowers must stabilise debt and begin to reduce the level of borrowing. This requires GDP Growth exceeding interest rates, a budget surplus (through spending cuts and/or tax cuts) or a combination of these. EU/ IMF assistance to Ireland was designed to address the high yields on Irish bonds, which curtailed the State’s ability to borrow. But the 5.80% cost of the bailout debt requires an equivalent growth rate and a balanced budget simply to stabilise debt at current very high levels.

Meanwhile the recovery in Iceland provides contrast to the current austerity and higher tax drudgery in the weaker European countries:

The Nordic economy grew at 1.2pc in the third quarter and looks poised to rebound next year. It ends a gruelling slump caused largely by the "New Viking" antics of Landsbanki, Glitnir and Kaupthing, the trio of lenders that brought down Iceland's financial system in September 2008. . .

This has led to vastly different debt dynamics as they enter Year III of the drama. Iceland's budget deficit will be 6.3pc this year, and soon in surplus: Ireland's will be 12pc (32pc with bank bail-outs) and not much better next year . . .

The pain has been distributed very differently. Irish unemployment has reached 14.1pc, and is still rising. Iceland's peaked at 9.7pc and has since fallen to 7.3pc.

Housing -- Been down so long, it looks like up to me

2010-12-30T06:59:00.000-08:00

The home market appears to be taking another leg down after the tax rebate induced spike earlier this year.

More details on home prices can be found here:

http://paper-money.blogspot.com/2010/12/s-october-2010.html

http://paper-money.blogspot.com/2010/11/more-pain-less-gain-s-preview-for.html

Paper-economy tracks (2nd link) the Radar Logic index which appears to lead the more well known Case/Shiller index.

Unfortunately if home prices fall further this may set up a feedback loop as more households with negative equity decided to strategically default. Furthermore the recent rise in long term interest rates will not help affordability either

Housing permits are falling again and coming very close to putting in an all time low for the time series (The all time low was hit just a few months ago) Looking at the graph you will also notice how in previous recoveries housing permits quickly rebounded. Not this time. Considering home values are falling this puts pressure on new home construction. Lumber prices are also going up.

Eventually home prices will fall enough for demand and supply to finally balance but it doesn't look like we are there yet. For now the downward trend appears it will continue.

Disclosure: Short housing related stocks

Ahead of schedule PIIGS bond yields make new highs

2010-12-29T11:45:00.000-08:00

Ahead of schedule bond yields in the PIIGS of Europe have reached new highs. 'Risk Free' interest rates have risen as well since November so the relative spread may not be at a new maximum yet but the trend is going the wrong way.

Taking away the punchbowl one way or another, Chinese version

2010-12-27T14:14:00.000-08:00

The Chinese sense of humor was evident as they raised short term interest rates on Christmas Day by 25 basis points. (Bloomberg) What is interesting about this Saturday surprise is what happened a few days before with their failed treasury bill auction.

The ministry sold 16.76 billion yuan ($2.53 billion) of 91- day securities, falling short of the planned 20 billion yuan target, according to traders at the lead underwriters of government debt, who asked not to be identified. The average winning yield was 3.6769 percent, according to the traders. That compared with 3.22 percent on the debt of similar maturity in the secondary market yesterday.

Since the Chinese central bank was not able to drain enough cash out of the markets via Tbill sales, they raised interest rates instead. One possible reason why the Tbill auction was not well received is there appears to be other demands on short term money in the Chinese banking system. Short term bank repo rates are spiking higher as the year comes to a close. Why buy 3 month Tbills at 3.7% when you can lend out at 5.60% in the 3 month repo market?

As you can see there were spikes in the repo rates just before the end of previous quarter ends and I wonder how much of this current rise is due to squaring the books before year end. We'll know soon. . .

Something to watch in the new year

2010-12-23T09:54:00.000-08:00

The year is wrapping up and the US stock market continues to grind higher in a Christmas rally. While the US is in a much calmer state as compared to a year ago, not all is well across the pond in Europe.

The fiscal crisis in the PIIGS of Europe (Portugal, Ireland, Italy, Greece, Spain) has not been 'fixed' in my opinion and will most likely move up to the headlines in America very shortly.

Here you can see a chart of the PIIGS bond yields (Bloomberg) and they are not going in the right direction. The spike and fall in May 2010 was due to Greek financial difficulties and the spike in November was from Ireland. Note how much faster the fall in yields after the Ireland event has been retraced as compared to the Greek event.

As this chart shows the absolute yields and not the relative 'risk' of the PIIGS regions looking at the combined CDS for the PIIGS (Bloomberg) provides a clearer view of perceived risk. It too is almost at new highs and could very well exceed previous peaks before the new year. I suggest you keep an eye on both of these indicators and if you see them shooting higher you will most likely see weakness in the equity markets as well.

Hugh Hendry December Commentary

2010-12-10T11:23:00.000-08:00

Mr. Hugh Hendry's December commentary has been floating around the internet for a few days and I thought I'd share it with my loyal readers. As always his letters are an interesting read, seamlessly combining the literary and financial.

Hugh Hendry / Ecletica Fund December 2010 commentary

His main thrust is the monetary stimulus by central bankers is not enough to outweigh the massive consumer deleveraging going on right now. It is an epic tug of war and Hugh Hendry is on the side of further deleveraging and deflation (for now) Please read.

ht: ZeroHedge

Inflation update

2010-12-09T14:49:00.000-08:00

With the recent rise in interest rates I thought revisiting inflation rates would be helpful.

3 data series on this graph [click to enlarge]:
Blue for total Consumer Price Index (CPI) aka 'inflation'
Red for inflation minus (food and energy)
Green for housing subset

Notice how overall inflation tends to peak at the onset of a recession.
Headline inflation is still very low overall at near 1%
Housing inflation is still negative.
Inflation less food and energy is at a low for this timeline and is trending down. Yes, we all need to eat and consume energy but both of those items are extremely volatile and stripping them out of the data series can provide additional useful information.

China comes to mind when people speak about energy and food inflation and like almost every other basic commodity the Middle Kingdom overshadows other negative factors such as Europe's continuing austerity drive and our own tepid domestic growth. To me it appears whichever way China goes the energy, food, metals, etc. complex will follow.

Consumer credit update

2010-12-08T11:04:00.000-08:00

Consumer credit data was recently released and the deleveraging continues. This time I've shown the change in consumer credit over the entire data series so one can see how infrequently consumer credit declines.

The rate of decline is turning around, or so it seems.

This next graph shows a slightly different story (Thanks to @dafowc of declineandfallofwesterncivilization.blogspot.com)

Remove lending by Sallie Mae and the Federal government and the rate of decline has not been arrested. Furthermore you can see this is a new phenomenon.

Very curious . . .

More thoughts on the muni market

2010-11-19T10:21:00.000-08:00

My previous post on the muni market needed some more information. (Ready, Fire, Aim)
Bond Girl over at self-evident.org highlights some recent events which most likely were the catalyst for the most recent downdraft in the muni market.

The pending expiration of the Build America Bond (BAB) program has pulled supply forward, and this is going to seesaw over the next several weeks. Since the BAB program was initiated, most issuers have structured their new issues with the sense that they will go to either the tax-exempt or taxable market, whichever is more advantageous at the time. . .

What is going on now is that muni issuers are scrambling to get deals done to take advantage of the program before it expires, and this is pulling the number of new issues that would ordinarily be coming to market forward. So the looming expiration of the BAB program is creating the very conditions it was created to alleviate.

I suggest reading the entire article for some additional info on the current situation. As I mentioned in my previous post it is unusual for muni bonds to trade at a higher yield to treasuries as the muni's have a tax benefit. The current situation is unusual and bears further attention.

Some perspective on the muni bond market

2010-11-18T14:52:00.000-08:00

There's been some recent news regarding how municipal bond prices are dropping and California is having some problems selling new muni debt. Looking back one can see the relative drop in municipal bond prices is not new and its been going on since May.

Observing the ratio of the etf's MUB (nationwide muni bond fund) to IEF (7-10 year US Treasury bond fund) can be instructive as it shows the relative value of two bond funds with almost the same duration (7.58 vs 7.26)

The relative decline in MUB is more dramatic when observed in this fashion versus an absolute basis. Furthermore looking at each etf's yield is interesting:
MUB 12 month yield: 3.71%
IEF 12 month yield: 3.00%
In other words a tax free bond fund is yielding 71 basis points more than a treasury fund with the same interest rate risk. This 'shouldn't be' as muni bonds are tax free and a safe investment, right? The markets are telling you something here; the perceived credit risk of muni bonds is increasing.

Source:
Stockcharts MUB:IEF
etf MUB home page
etf IEF home page

edit: I have a followup post to this entry which you should read as well.

The flogging will continue until morale improves

2010-11-12T13:07:00.000-08:00

The Federal Reserve recently announced they will purchase another 600 Billion in US Treasury bonds (commonly called Quantitative Easing 2 or QE2) I am working on a longer email regarding how our current financial situation is very different from previous recessions and recoveries but the Federal Reserve's QE 2 announcement deserved some commentary.

The markets did not really respond until after reading Fed Chairman Ben Bernanke's article in the Washington Post on November 4:

For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending.

In short Fed Chairman Ben Bernanke wants higher stock prices so you'll feel better about yourself and go buy more stuff.
Will it work?
I have my serious doubts (as I'll expand upon in later emails).   The banks already have so much unused money they deposit the excess at the Federal Reserve. (973 billion as of October 10) How is another 600 billion going to change the situation?

So why is the Fed printing? Because they can and they feel like they can't do anything else. It looks like an easy painless solution but in the long term it will not fix the problem of too much debt in America.

The problem with QE2 is the money being created is not going where Mr. Bernanke would like it to, the real US economy. If you look at the market's reaction before and after the announcement one sees the money shifting into commodities and emerging economies while simultaneously weakening the US dollar. The Fed is taking the easy way out by attempting to prop up and paper over our structural problems.

Lest you think this is merely the ranting of a crazed financial advisor former Federal Reserve Chairman Paul Volcker stated the QE2 plan won't help much as well: (Yahoo, November 5, 2010)

Volcker told a business audience in Seoul that the Fed's bond plan is obviously an attempt to spur the U.S. economy but "is not the kind of action that's likely to change the general picture that I've described as slow and labored recovery over a period of time."

The Wall Street Journal (November 4, 2010) expresses caution as well:

The Fed is essentially lending enough money to the government to fund its operations for several months, something called "monetizing the debt."
In normal times, this is one of the great taboos of central banking because it is seen as a step toward spiraling inflation and because it risks encouraging reckless government spending.
Financial markets Thursday responded warmly to the Fed move, but outspoken critics of the policy issued full-throated critiques.
"It is doubtful the Fed decision will produce any results," Brazilian Finance Minister Guido Mantega told reporters following a cabinet meeting with Brazilian President Luiz Inacio Lula da Silva. Officials in Brazil, which averaged 850% annual inflation in the 1990s, have been critical of the Fed's easy-money policies because they are spurring price pressures abroad and could encourage new asset bubbles outside the U.S.

If all else fails, keep doing what you did before seems to be the rule at the Federal Reserve. By his actions Ben Bernanke is attempting to artificially raise asset prices and reduce the value of the dollar. We shall see if he is sucessful, but what happens when the crutch of QE money is removed?

Hugh Hendry Watch -- October 28 on BBC

2010-10-28T21:46:00.000-07:00

Hedge fund manager Hugh Hendry was recently on the BBC. While his comments are directed towards the British economic situation they are very relevant to the situation in America. Watch the entire clip.

Youtube link

ht InfectiousGreed

Bank lending update

2010-10-26T12:15:00.000-07:00

The data initially looks good but a change in accounting rules is the reason and not more lending by the banks.

In Chart #1 you can see the recent large spike in total loans and leases at commercial banks. New accounting rules forced the banks to place off balance sheet items back on their books. (I thought the Enron scandal fixed all that? Guess not)

This really throws off the year over year data so don't get excited if you hear bank lending has recently surged.

Just to show you how this decline in lending is unusual Chart #2 shows the series longer term on a year over year change. As you can see until recently serious declines in lending never happened.

In case you are wondering what the banks are buying instead of lending... they are buying US government securities.

In my opinion this lack of lending by the banks is just one reason the Fed is freaked out and is prepping the markets for QE 2.0. They are going to flood the market with money to try to get more people to borrow money and buy stuff. Unfortunately I don't think it will work and I'll be writing about that soon(tm)

Money Money + Money -- Money supply update

2010-10-18T13:10:00.000-07:00

The broadest measure of money supply still reported by the Federal Reserve continues falling albeit at a decelerating pace.

While the pace of decline is moderating, broad money (M2 + Institutional Money Market Funds) continues dropping. I wonder if QE 2.0 will put a floor in the decline?

As you can see money supply growth is negative, something not seen during this entire data series. As a growing money supply implies a growing (real) economy this does not bode well.

Consumers and Credit -- Behaviors may not be changing

2010-10-15T11:45:00.000-07:00

One item I follow are aggregate debt levels as well as additional focus on the consumer as they are a large portion of GDP.

A WSJ blog entry from Sept 18 caught my eye and the results of their analysis are very interesting.

Their conclusion is the consumer is not voluntarily deleveraging, rather it is from charge-off and defaults. This information does synch with how retail sales continue slowly rising even in the face of declining credit.

From the WSJ:

There are two ways, though, that the debts can decline: People can pay off existing loans, or they can renege on the loans, forcing the lender to charge them off. As it happens, the latter accounted for almost all the decline. Our own analysis of data from the Fed and the Federal Deposit Insurance Corp. suggests that over the two years ending June 2010, banks and other lenders charged off a total of about $588 billion in mortgage and consumer loans.

That means consumers managed to shave off only $22 billion in debt through the kind of belt-tightening we typically envision. In other words, in the absence of defaults, they would have achieved an annualized decline of only 0.08%.

Interesting data providing for very different conclusions. People will shop until their credit cards are pried from their cold dead fingers.

Latest Chinese Lending Stats: Ignore these numbers!

2010-10-13T13:12:00.000-07:00

An odd way to start a post but as mentioned in my previous entry it is hard to know how much lending is truly going on in China these days. The official data shows a decline in the rate of growth in lending and the government appears to be reigning in credit growth by raising reserve ratios.

This does not tell the entire story. There is a boatload of off balance sheet lending but there are no 'official' numbers for that.
The WSJ (Sept 28,2010 ) recently commented:

A report from Standard Chartered economist Stephen Green estimates that by the end of August between 2 trillion yuan and 3 trillion yuan worth of loans (the banks don’t formally disclose the amounts) were moved off balance sheets–and outside the PBOC’s formal loan data–in this way. Over the same period, PBOC data showed the banks lending out 5.6 trillion yuan, suggesting the banking system has already passed the central bank’s 2010 target for new credit creation. It also means that the tightening signaled by the loan quota never happened.

Standard Chartered is guessing an additional 50+% of unofficial lending this year. Not a small number. If the bank regulators crack down on this unofficial lending the rate of true loan growth would fall dramatically.

Foreclosure mess update: Why this is important

2010-10-12T13:30:00.000-07:00

Barry Ritholtz clearly explains why this foreclosure mess is so important and how all the cutting of corners by the loan servicing organization has gotten completely out of control.

http://www.ritholtz.com/blog/2010/10/why-foreclosure-fraud-is-so-dangerous-to-property-rights/

I could try to paraphrase it but you really must read it ALL to understand why this scandal is more than just some 'goofed up paperwork'

http://www.marketwatch.com/story/bank-of-america-halts-all-foreclosure-wsj-2010-10-08?siteid=bnbh
Bank of America halts all foreclosures. This is a few days old but just the latest in a long march of banks who are calling a full halt to foreclosures.

BofA's sterling efficiency is demonstrated by them foreclosing on a house with no mortgage. Whoops!
http://www.businessweek.com/news/2010-10-07/man-who-had-no-mortgage-faced-foreclosure-anyway-ann-woolner.html

This is going to get worse before it gets better . . .

Inflation expectations

2010-10-12T11:15:00.000-07:00

The recent rumors of an imminent second round of quantitative easing (QE 2.0) by the US Federal Reserve has sent ripples throughout the entire financial market. One series I occasionally check in on is the implied breakeven inflation rate by looking at nominal versus inflation protected rates in the treasury market. The threat of QE 2.0 can be seen here as well.

Source: Federal Reserve

10 year inflation protected rates (TIPS) have fallen to levels not seen for this entire data series. In other words people are bidding up the value of inflation protection. However in the context of comparing TIPS rates to nominal the spread is trending downwards but is not out of the ordinary.

Interesting.
Of course the Fed threatening to buy up outstanding T bonds (instead of just buying more at auction) also creates a supply demand issue but this trending divergence bears watching.

Volatility measure goes bonkers

2010-10-11T12:32:00.000-07:00

One of the indicators I follow just hit multi year lows and that's not a positive sign for the equity markets. (Stockcharts link)

Scroll back through history and notice when this ratio of short term volatiliy to longer term volatility was so low . . .

Another sign of money market stress

2010-10-11T11:24:00.000-07:00

Short term lending rates in Europe are creeping upwards, showing a measure of bank stress. Here's the Bloomberg link

I'd be concerned if this keeps going upwards . . .

Initial unemployment claims - Treading water

2010-10-11T06:45:00.000-07:00

While I touched on initial unemployement claims before in an attempt to see if Google Trends could accurately predict changes, (failure!) other people have shown the change in initial unemployment claims provides some predictive value. Creditwritedowns writes about how looking at the year over year change in unemployement claims provides insight into changes in consumer spending in America. In short, a year over year decline in initial unemployment claims forebodes postive growth in the economy.

Let us take a look at the data (Source: Federal Reserve)

Looking at the year over year percent change in initial unemployement claims all appears well. The year over year number is negative meaning fewer people are getting laid off each week.

There is a problem with this prognosis however and you can see it looking at the absolute numbers in the second graph. In chart two initial unemployment claims have remained quite stubborn for 2010, refusing to drop below the ~440k number for the entire year. In a couple months if unemployment claims don't start falling our year over year metric will flatten out. Right now the employement situation is treading water and this meshes well with the general sluggish feel to the economy.

Right now this economic indicator is flashing Yellow.

Foreclosure mess roundup

2010-10-06T13:21:00.000-07:00

I have not commented on the foreclosure mess but considering how it may impact you, gentle reader, I thought it worthwhile to repeat.

In short, the mortgage processors and servicers did not keep a proper chain of custody and MBS Pool 'C' which believes they own the mortgage does not have the paperwork proving they purchased it from Loan Company 'A' which sold it to 'B', who packaged it up into MBS (Mortgage backed security) 'C', and Bank 'D' now owns said MBS.

Some people along that chain over ownership have been caught forging paperwork. It's a long and nasty tale that will remain stuck in the courts for a while.

If you know of someone who is going through foreclosure and they want to keep the house this is something to keep in mind. Talk to a lawyer about ensuring the bank has all the proper paperwork.

From the WSJ, October 4

First, the affidavits IndyMac used to file the foreclosure were signed by a so-called robo-signer named Erica A. Johnson-Seck, who routinely signed 6,000 documents a week related to foreclosures and bankruptcy. That volume, the court decided, meant Ms. Johnson-Seck couldn't possibly have thoroughly reviewed the facts of Mr. Machado's case, as required by law.

Secondly, IndyMac (now called OneWest Bank) no longer owned the loan—a group of investors in a securitized trust managed by Deutsche Bank did. Determining that IndyMac didn't really have standing to foreclose, a judge threw out the case and ordered IndyMac to pay Mr. Machado's $30,000 legal bill.

From Bloomberg, October 4

Citigroup Inc. and Ally Financial Inc. units were sued by homeowners in Kentucky for allegedly conspiring with Mortgage Electronic Registration Systems Inc. to falsely foreclose on loans. The homeowners claim the defendants filed or caused to be filed mortgages with forged signatures, filed foreclosure actions months before they acquired any legal interest in the properties and falsely claimed to own notes executed with mortgages.

Video from NBC Nightly News, October 1
http://www.mefeedia.com/video/33073666

Calculatedrisk blog:
http://www.calculatedriskblog.com/2010/10/nightly-mortgage-mess.html

Nakedcapitalism has posted several entries regarding this topic. Here's just one entry:

Lender Processing Services, a crucial player in the residential mortgage servicing arena, has been hit with two suits seeking national class action status (see here and here for the court filings). If the plaintiffs prevail, the disgorgement of fees by LPS could easily run into the billions of dollars (we have received a more precise estimate from plaintiffs’ counsel). To give a sense of proportion, LPS’s 2009 revenues were $2.4 billion and its net income that year was $276 million.

Here's one MSNBC Video on the mess:

I don't do this nasty tale of cutting corners and deception any justice with this overview. Read all the links above for a fuller story.

Hugh Hendry watch - September 21, 2010 on BBC

2010-09-22T08:06:00.000-07:00

Hedge fund manager Hugh Hendry has a long conversation on BBC Hardtalk regarding taking risk and the public bailouts. It is refreshing to see a 25+ minute discussion regarding taking risk and losses, unlike the nanosecond blipverts so common in American business TV.

Part 1

Part 2

Part 3