Thiel: Still heading toward deflationary endgame

http://www.businessinsider.com/peter-thiel-clarium-on-deflation-2010-8

Around the markets in 6 charts or less

Markets have been moving so fast and long standing relationships and correlations are being called into questions, but we’ll try to highlight a few of the areas we think are worth watching

CHART 1 SPX

Today intraday, the S&P broke 1185 support and fell directly to the top of our target area. The euro is driving the global markets on an absolute level, but the S&P continues to OP most global mkts. It’s now testing 50dma, while volume and $$ traded are inline from yesterday. The good news (so far) is that we held ABOVE panic opening lows. Rotations were clearly evident from the opening print – XLU XLV XLP were all positive out of the opening gate.

CHART 2 IWM

Meanwhile, the Russell 2000 intraday broke 72 support level and touched first target at 70.  This “SHOULD” act as a support area. If we bounce towards the 72-73 range, it will provide a great shorting opportunity. We believe that if global markets bounce (and that’s a big IF), EU may be the receiver of investable funds and the EZU/IWM spread should close up.

CHART 3 TNX

The 10-year yield closed below the 3.6% support level. We believe that the UST is no longer a safe haven on an absolute basis. In a world of competitive devaluations, we expect the US government to issue debt at unprecedented levels, yet, interestingly enough, they announced that they’ll be cutting issuance. We believe this will be temporary. Should the euro bounce on new bailout talk, we expect UST will weaken.  For the time being, safe haven bid remains.

CHART 4 DXY

The US dollar index is up 3.7% QTD and 8% YTD. Simultaneously,  secondary FX starting to get thrown out as EU problems spread. Safe haven bid in USD remains – Target seems to be 85-87 area – its anyones guess. Should we get to those levels I would recommend buying AUD, CAD, and the other resource based FX, but only after the euro has a bounce toward 1.32-1.35 area.

CHART 5 Gold: S&P

Bounced off the lows and continues to move north: Gold is THE safe haven in a global. Resistance in spread 1.5% away. GLD above 116 – 120 would signal new highs with a 135 tgt.

CHART 6 SPX vs IWM

YTD, we see IWM strengthening vs SPX (big) – rotations within SPX are starting to favor lagging sectors. Still, we have time before the all clear signal. We believe any rally in the EUR which causes Europe to rally will most likely come at the expense of IWM.

This market has absolute moves that are making headlines, but it is the RELATIVE moves that are the keys to understanding the markets. Rotations between regions, rotations between laggards/leaders, and rotations between large and small continue to drive turbulent moves. The Keynesians running the show didn’t account for sovereign defaults, but the CDS markets continue to offer clues. Tomorrow, Spain and Britain may be in the crosshairs. Again, the questions are no longer whether one is short or long, but what one is short or long.

Quotable

Hanging on the wall above my office credenza is a portrait of Bernard Baruch, who authored the quotation, “Two plus two equals four and no one has ever invented a way of getting something for nothing.” Well, we’ve been there recently, with Dot Coms and subprimes and the financed-based prosperity of the past several decades. He also said, “Two plus two equals four, and you can’t keep mankind down for long.” Been there too, it seems, and the last 12 months are an apt example. Whatever the future holds, remember that a tablespoon is larger than a teaspoon, and that CQ beats IQ most of the time in the investment world. “Two plus two equals four” needs a lot of CQ, but requires only a second grader’s IQ.

Bill GrossPIMCO

Quoteable

Small debt produces a debtor; a large one, an enemy.
Publilius Syrus

Pimco Warns of Deflation Risk as Central Banks to Cool Stimulus

April 13 (Bloomberg) — Developed economies face the risk of deflation as central banks end programs to revive their financial systems, according to Pacific Investment Management Co., the biggest holder of inflation-linked Treasuries.

A slowdown in economic growth is adding to deflation pressures, said Mihir Worah, who oversees the $18 billion Pimco Real Return Fund. Pimco, which runs the world’s biggest bond fund, is “underweight” inflation-linked bonds in portfolios that focus on the debt, he wrote in a report.

“There is a near-term risk of flipping to deflation given our view that developed economies have not fully healed and consumers are not yet ready to stand on their own two feet,” Worah wrote on the Newport Beach, California-based company’s Web site.

http://www.businessweek.com/news/2010-04-13/pimco-warns-of-deflation-risk-as-central-banks-to-cool-stimulus.html

Grant vs Greenspan

http://www.businessinsider.com/jim-grant-alan-greenspan-2010-4

Quoteable

Consider the sequence of events going into the fall or 1987.  CRB prices had turned sharply higher, fueling fears of renewed inflation.  At the same time interest rates began to soar to double digits.  The USD which was attempting to end its 2yr bear market, suddenly went into a freefall of its own (fueling even more inflation fears).  Is it any wonder, then, that the stock market finally ran into trouble?  Given all of the bearish activity in the surrounding markets, its amazing the stock market held up as well as it did for so long.  There were plenty of reasons why stocks should have sold off in late 1987.  Most of those reasons, however, were visible in the action of the surrounding markets and not necessarily in the stock market itself.

John Murphy – Intermarket Analysis – 1991

The mother of all front running

India just did a MASSIVE front run against the rest of the world.  The next country that tries to acquire 200T [of gold] is going to be a bid in a rising mkt. 

IMF sells gold to India’s Reserve Bank

By John Letzing

SAN FRANCISCO (MarketWatch) — The International Monetary Fund said Monday it’s selling 200 metric tons of gold to the Reserve Bank of India, to help shore up the fund’s finances. The sale is part of a total of 403.3 metric tons of gold approved for sale in September, the IMF said. The sale will “help put the Fund’s finances on a sound long-term footing and enable us to step up much-needed concessional lending to the poorest countries,” IMF Managing Director Dominique Strauss-Kahn said in a statement. The sale, which is in the process of being settled, occurred over two weeks ending Oct. 30. According to published reports, the IMF is currently the third-largest official holder of gold, after the U.S. and Germany.

GOLD vs WORLD

With all the talk of GOLD being in a bubble I found this to be an interesting view.  GOLD has outperformed most if not ALL asset classes in the YOY catagory and has held its own on most time increments for the past 10yrs and longer.  Below is a monitor of  GOLD vs the SPX and a random FX sampling on a daily and QTD view.

FDIC Considers Borrowing From Treasury to Shore Up Deposit Insurance

Why do they need to tap the treasury seeing that all the banks are all flush.  No?

WASHINGTON — Federal Deposit Insurance Corp. Chairman Sheila Bair said her agency is considering borrowing from the U.S. Treasury to replenish its deposit insurance fund.

“We are carefully considering all options” including borrowing from the Treasury, Ms. Bair said Friday after a speech in Washington.

http://online.wsj.com/article/SB125328162000123101.html#mod=WSJ_hps_LEFTWhatsNews

Yellen on the Economy

Please consider these excerpts from Janet Yellen’s recent speech.
Key Quotes

• As painful as this recession has been, I believe that we succeeded in avoiding the second Great Depression that seemed to be a real possibility.
• I regret to say that I expect the recovery to be tepid.
• Even if the economy grows as I expect, things won’t feel very good for some time to come. In particular, the unemployment rate will remain elevated for a few more years, meaning hardship for millions of workers.
• My own forecast envisions a far less robust recovery, one that would look more like the letter U than V. A large body of evidence supports this guarded outlook.
• Unfortunately, more credit losses are in store even as the economy improves and overall financial conditions ease.
• Certainly, households remain stressed. In the face of high and rising unemployment, delinquencies and foreclosures are showing no sign of turning around. Even recent-vintage loans are experiencing rising delinquency rates.
• The chances are slim for a robust rebound in consumer spending, which represents around 70 percent of economic activity. Consumers are getting a boost from the fiscal stimulus package. But this program is temporary.
• It may well be that we are witnessing the start of a new era for consumers following the traumatic financial blows they have endured. While certainly sensible from the standpoint of individual households, this retreat from debt-fueled consumption could reduce the growth rate of consumer spending for years.
• My business contacts indicate that they will be very reluctant to hire again until they see clear evidence of a sustained recovery, and that suggests we could see another so-called jobless recovery in which employment growth lags the improvement in overall output.

Europe has mapped its monetary exit

Exceptional times call for exceptional measures. The European Central Bank, like other central banks, has introduced non-standard measures to tackle the financial crisis and cushion its impact on the economy – what I call “enhanced credit support”. These have contained the threats to the stability of the euro area’s financial system and supported the flow of credit to companies and households over and above what could be achieved through interest rate cuts alone.

Because of their exceptional nature, these measures will have to be unwound once economic and financial conditions normalise. We at the ECB designed the non-standard measures with our exit strategy in mind, and we are ready to implement this strategy when the appropriate time comes. Stressing the importance of the exit strategy should not be confused with its activation: it is premature to declare the financial crisis over. Today is not the time to exit.

The writer is president of the ECB

http://www.ft.com/cms/s/0/c50df098-98b7-11de-aa1b-00144feabdc0.html

Viewpoint: Lessons to be learnt

We need some more Lehmans so we can get out of this. Over the past 20 years Messrs Greenspan and Bernanke introduced crony capitalism to the West which is leading to a lost decade[s]. Market fundamentals are that failures should collapse and be replaced by creative new forces rather than being propped up as zombies. Financial institutions have been failing for centuries and the world has survived. Had the central bank allowed the failure of Long Term Capital Management to run its course, Lehman, Bear Stearns, et al would still be here. Everyone would have lost so much capital and fired so many incompetents that the madness of serial bubbles (dotcoms, housing, consumption etc) would never have occurred. Consider the alternative had they propped up the bankrupt Lehman. There would be even more of the same insanity in our central banks and governments than we have now. The idea that a problem of too much debt and too much consumption can be solved by more gigantic debt and consumption is ludicrous.Would that governments stop interfering with fundamental principles and let the market clean out mistakes! Marx is singing in his grave there in London as the US government now controls the auto, mortgage, insurance, banking, et al industries and he has not fired a shot. Letting Lehman fail was perhaps the only thing governments have done right during this whole drama.

http://www.ft.com/cms/s/0/15030bea-9d6a-11de-9f4a-00144feabdc0.html

Warren Buffett Recalculates His Bets

Mr. Buffett declined to predict the short-run course of the stock market. But corporate data from Berkshire shows his company was selling more stocks than it was buying by the end of the second quarter, according to Bloomberg News. Its spending on stocks fell to the lowest level in more than five years, although the company is still deftly picking up shares in some companies and buying corporate and government debt.

Among the stocks Mr. Buffett has been selling lately is Moody’s, the granddaddy of the much-maligned credit ratings industry. Berkshire, Moody’s largest shareholder, said last week that it had reduced its stake by 2 percent.

http://dealbook.blogs.nytimes.com/2009/09/08/closely-watched-buffett-recalculating-his-bets/

Making Sweet Water From (Almost) Perpetual Motion

In 1986 Leif Hauge’s brother had a farm in Norway near the sea and wanted to keep his vegetables cool by circulating water from deep in an adjacent fjord that would flow through pipes and surround a storage area. It takes a lot of energy to pump water uphill 100 feet, and if you let the water run back down you waste the energy. Was there a way to recover some of the energy? Have the water running down lift the water going up? Leif Hauge set about building a device to do just that. He eventually gave up after figuring his brother didn’t have quite enough water pressure to harvest. But he learned a lot about energy recovery.

http://www.forbes.com/forbes/2009/0907/people-ideas-desalination-making-sweet-water-from-motion.html