the trader
GATA’s Chris Powell on the Silver Manipulation Probe & the Fed Gold Audit!
Laureen Lyster interviews Chris Powell on gold and silver manipulation, the Fed and much more.
Much watch video below.
Is Draghi dragging Spain and Italy down?
With the Spanish yield curve at extreme levels, the relevant question is whether Draghi has made things worse going forward? From Bloomberg.
European Central Bank President Mario Draghi’s bid to bring down Spanish and Italian yields may spur the nations to sell more short-dated notes, swelling the debt pile that needs refinancing in the coming years.
Yields on Italian and Spanish two-year notes plunged after Draghi said on Aug. 2 the ECB may buy debt on the “short-end of the yield curve” as part of a broader crisis-fighting plan. The gap between Spain’s two-year and 10-year yields rose on Aug. 6 to the widest in at least two decades, while the spread between similar Italian securities also approached a record.
The average maturity of Spanish debt is the shortest since 2004 as Spain, like Italy, hasn’t issued 15- or 30-year bonds all year. As Prime Ministers Mario Monti and Mariano Rajoy fight to avoid bailouts that may threaten the euro’s survival, the ECB’s plan risks adding to pressure on the two nations’ treasuries.
The inverted crash
Just a reminder.
Prior to the start of the summer, many were writing about another perfect carbon copy of last year. If investing was only that easy.
In this inverted summer crash of 2012, the Eurostoxx is up 18% over the past two months. Last year we saw a loss of 18% over the same period.
The three latest days, Eurostoxx is up app 8%. During the same three days yesterday, Eurostoxx was down 10%. Market poetry at its best, and yes, this time was different.
Another Way to Play Short EUR/USD: Travel!
Guest post by Vix and more.
There are many ways to translate an opinion about the financial markets into a particular trade. Recently, I decided to act upon my belief that the eurowould weaken against the dollar by booking a couple of weeks in Europe. The trader/VIXologist itinerary would have probably run something likeIreland > Portugal > Greece > Spain > Italy, but instead I elected to steer to the north, vising the Netherlands, Belgium, Luxembourg, Germany and the Czech Republic.
For the first time in many moons, parliamentary votes, etc., the markets were reasonably well behaved during my vacation and the VIX didn’t even make it into the 30s.
As someone who spends a great deal of time nine time zones away from the events behind the European headlines, I was somewhat surprised to see the relative calmness and lack of concern in the people I spoke with about the European sovereign debt crisis. This is not to say that the consensus was that the most difficult phases of the crisis were in the rear-view mirror, only that in due time, all would be sorted out and life would go on in a manner similar to the way it was prior to 2008.
Hope Springs Eternal & Boosts Global Stocks
Biderman on the markets.
Spain’s Prime Minister Mariano Rajoy said he is willing to consider asking for a bailout and the markets respond by buying two year Spanish debt and European stocks. Reality is that Rajoy’s statement means nothing because Spain is already de facto bankrupt. Bankrupt means that that Spanish banks, provinces and the government not repay debts. Tax collections are lower than government spending. Rajoy knows help really means that Germany would control Spain’s purse strings. Is that likely to happen? Spain will leave the Euro before that happens. More over if Spain accepts German help, would that happen anytime soon? No way that happens in less than a year. By which time Spain’s economy is in the same condition as the Midwest cornfields. (full reading here and video below.)
Gold, Price Stability & Credit Bubbles
Guest post by Azizonomics.
John Cochrane thinks that central banks can attain the price-stability of the gold standard without actually having a gold standard:
While many people believe the United States should adopt a gold standard to guard against inflation or deflation, and stabilize the economy, there are several reasons why this reform would not work. However, there is a modern adaptation of the gold standard that could achieve a stable price level and avoid the many disruptions brought upon the economy by monetary instability.
The solution is pretty simple. A gold standard is ultimately a commitment to exchange each dollar for something real. An inflation-indexed bond also has a constant, real value. If the Consumer Price Index (CPI) rises to 120 from 100, the bond pays 20% more, so your real purchasing power is protected. CPI futures work in much the same way. In place of gold, the Fed or the Treasury could freely buy and sell such inflation-linked securities at fixed prices. This policy would protect against deflation as well as inflation, automatically providing more money when there is a true demand for it, as in the financial crisis.
The obvious point is that the CPI is a relatively poor indicator of inflation and bubbles. During Greenspan’s tenure in charge of the Federal Reserve, huge quantities of new liquidity were created, much of which poured into housing and stock bubbles. CPI doesn’t include stock prices, and it doesn’t include housing prices; a monetary policy that is fixed to CPI wouldn’t be able to respond to growing bubbles in either sector. Cochrane is not really advocating for anything like the gold standard, just another form of Greenspanesque (mis)management.
Bullish Data Says No Q.E. Coming
Guest post by Lance Roberts of Streettalklive.
The markets have been rallying over the last month, due not to expectations of a recovering economy but“hope”, yet unfulfilled, of further balance sheet expansion programs from the Fed and the ECB. While each Central Bank meeting and EU Summit has come and gone with “no action”, market participants have ramped up the “risk on” trade, expecting action at the next meeting. During this time, as the markets salivate in anticipation of the next round of “globally injected goodness,” the bullish arguments for the market and the economy have continued to grow.
“Developments over the past few weeks have reinforced our view that US growth will improve modestly. First, the temporary negatives—the inventory cycle, the weather unwind, and the potential seasonal adjustment distortions—are now clearly behind us. Second, the housing recovery is picking up steam, with a sharp increase in the NAHB homebuilders index (the best short-term leading indicator of housing activity) and ongoing improvement in house prices. Third, real disposable income has continued to recover and is now up 4% on a 6-month annualized basis; this pace is unlikely to be sustained as the stabilization in oil prices feeds through into retail energy prices, but the gains do provide a basis for somewhat better consumer spending. And fourth, financial conditions as measured by our GSFCI have reversed all of the tightening that took place in the spring and now stands at the easiest level since August 2011.”
Vanishing Spanish Yields and Resistance
Guest post by Peter Tchir.
Mind Boggling Performance in Spanish and Italian Bonds
Spanish 2 year yields are at 3.39%, or 50 bps better on the day. There is ZERO liquidity, but even then it is almost unbelievable that on July 24th, these bonds were yielding 6.77%. That is a massive change. It is completely dependent on Draghi supporting them. Without clear indications that Spain will ask for help and the ECB will provide the help, this won’t last. But so far, all indications are that Europe has had a change of heart. Even in Germany, the dissent, while still there, is coming more and more from second and third tier players, rather than key figures.
Even the 5 year point is interesting. Italy and Ireland (yes Ireland is back) have stopped gapping tighter, but are grinding away and now yield 4.87% and 5.50% respectively. Spain remains a star with the yield down to 5.39% which is 36 bps better on the day, and Portugal, of all places, is now yielding “only” 9.4%.
Outright shorts ARE getting killed. Whether you are short bonds or CDS the pain is palpable. The “smart trade” which was allegedly to play the curve from a flattener is also getting crushed as the rally is definitely steepening the curves.
Hemingway, Draghi, Fed and other things that make you go hmmmm
Another must read “hmmm” piece by Grant Williams.
Legend tells of one such lunch at which Heming- way was present along with several writers of the day during which a discussion on the skill of concise story-writing evolved to the point that a wager was made. Hemingway bet $10 of his own against each $10 stake of his companions that he could write a six-word-long short story. six words that would contain a beginning, a middle and an end. the wager was duly accepted by all and one of the more junior members dispatched to fetch drinks for the bon vivants gathered at the Round table. Hemingway took a napkin and scribbled six words upon it which he then presented to the group. It read simply:
“For sale: Baby shoes. Never worn.”
Wager won. Brilliantly.
I was reminded of this tale a few days ago as I listened to the words of Mario Draghi and the immense amount of speculation surrounding his incendiary words last week at a nondescript event in London. Draghi was making unpre- pared remarks—which is always dangerous in a position such as his—and yet markets, bereft of optimism, ripped the words from his lips and clutched them feverishly to their collective bo- som in the hope that this, finally, was the water- shed Europe had been waiting for.
Erasers
With the markets in bull mood over the past week, accompanied with crazy Algos, many investors are feeling rather confused. The Euromess is still in play, but with major players, except the algos, we are not expecting a break out either way that will last for long. Here is latest by Hussman of Hussman funds.
I’ve never been very popular in late-stage bull markets. Defending against major losses and achieving our investment objectives over the complete bull-bear market cycle (bull-peak to bull-peak, or bear-trough to bear-trough) requires us to maintain an investment exposure that is essentially proportional to the expected return/risk ratio that is associated with each given set of market conditions. When prevailing market conditions are associated with a sharply negative expected return/risk ratio, as they are at present, and either trend-following measures are negative or several hostile indicator syndromes are in place (what we call Aunt Minnies), we will typically be fully-hedged, and will raise the strike prices of our put options toward the level of the market, in order to defend against steep market losses and indiscriminate selling. At present, we expect an average 10-year total return on the S&P 500 of about 4.7% annually in nominal terms, on the basis of rich normalized valuations. Based on a much broader ensemble of evidence, and considering horizons between 2-weeks and 18-months, we estimate the prospective return/risk ratio of the S&P 500 to be in the most negative 0.6% of all historical observations.
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