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Where will gold end 2015?
 
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October 13, 2015 -- Market Facing Hurdles PDF Print E-mail
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Tuesday, 13 October 2015 22:38
  • Inventory to sales ratio at recession levels.The Commerce Department reported wholesale inventories rose 0.1% in August, while sales fell a full 1%. The dip in sales follows a general year-long trend, with the number dropping 4.7% over the past 12 months. Meanwhile, inventories have increased 4.1% over the last year. This inventory-to-sales ratio is particularly troubling. It represents a new cycle high, and according to Zero Hedge, the absolute dollar spread between inventories and sales has never been higher. Reuters admits, "An inventory-to-sales ratio that high usually means an unwanted inventory build-up, which would require businesses to liquidate stocks. That in turn could weigh on manufacturing and economic growth.”
  • Goldman Sachs analysts, led by David Kostin, outlined the top three hurdles facing the market in the near term:
    1. We expect a combination of disappointing sales growth and weak margins coupled with negative fourth-quarter guidance and reduced prospects for 2016.
    2. Negotiations to lift the debt ceiling may be contentious and may not be resolved until the last moment.
    3. We forecast the first tightening in nine years will take place in December, however, the market only assigns a 39% probability that the Fed will raise rates by year-end.
  • Fredrik Nerbrand, global head of asset allocation for HSBC, has cut his weight in the S&P 500 index to 0% from 5%. He's all out. “Financial markets face a tricky trinity of slower growth and limited ability for central banks to moderate cyclical downturns at a time when risk premia is relatively limited in key markets. Hence, our asset allocation is highly conservative going forward,” explains Nerbrand in a strategy note to clients. For one, he says, we are already in a global U.S. dollar recession, which is worse than the 2001 recession. "In the long growth asset universe we find more value in copper and zinc than the S&P 500," Nerbrand says. "Going into year-end and looking at the financial landscape for 2016, we cannot help but remain highly risk averse," says Nerbrand.
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October 12, 2015 -- Accepting the Inevitable PDF Print E-mail
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Monday, 12 October 2015 17:40
  • In a detailed 80-page report by the Group of Thirty (G30), central bankers warned that ZIRP and money printing were not sufficient to revive economic growth and risked becoming semi-permanent measures. As Reuters reports, the flow of easy money has inflated asset prices like stocks and housing in many countries but have failed to stimulate economic growth; and with growth estimates trending lower and easy money increasing company leverage, the specter of a debt trap is now haunting advanced economies. "Central banks have described their actions as 'buying time' for governments to finally resolve the crisis... But time is wearing on," sending a message of "you're on your own" to governments around the world. "At present, much remains to be done by governments, parliaments, public authorities, and the private sector to tackle policy, economic, and structural weaknesses that originate outside the control or influence of central banks," they said. "Central bank policies since the outbreak of the crisis have made a crucial contribution to restoring the appearance of financial stability. Nevertheless, for this appearance to become a reality, underlying problems rooted in very high debt levels must be resolved if global growth is to be more sustainably restored," they warned. "Central banks alone cannot be relied upon to deliver all the policies necessary to achieve macroeconomic goals. Governments must also act and use the policy-making space provided by conventional and unconventional monetary policy measures. Failure to do so would be a serious error and would risk setting the stage for further economic disturbances and imbalances in the future." Failing to get their fiscal houses in order while relying on monetary policy, "governments would also be faced with chronic revenue shortfalls. This could lead to a worst-case situation where deflation would actually sow the seeds for an uncontrolled inflationary outcome. Governments with both large deficits and large debts must borrow to survive, but worries about debt accumulation might imply an increasing reluctance on the part of the private sector to lend to them at sustainable rates. In that case, recourse to the central bank is inevitable, and hyperinflation often the final result."
  • Australia's Macquarie bank described the next potential monetary can-kicking game as follows: "We maintain our view that it is highly unlikely that [central banks] would be prepared to accept the inevitable and stop 'managing business cycles'. If nothing else the consequences of re-setting the cycle (either demand or supply) are perceived to be socially and politically unacceptable. We believe that the path of least resistance would be to effectively ban capitalism and by-pass banking and capital markets altogether. We gave this policy change several names (such as 'Cuba alternative', 'British Leyland') but the essence of the new form of QE would be using central banks and public instrumentalities to directly inject 'heroin into blood stream' rather than relying on system of incentives to drive investor behaviour. Instead of capital markets, it would be governments that would decide on capital allocation, its direction and cost (hence reference to British Leyland and policies of the 1960s). It could involve a variety of policy tools, with wholesome titles (i.e. 'Giving the economy a competitive edge', 'Helping hard working American families' or indeed recent ideas from the British Labour party of 'People’s QE'). Who can possibly object to helping hard working families or improving productivity? However as the title of our previous note suggested ('Back to the Future'), most of these policies have already been tried before... Whilst these policies would ultimately further misallocate resources, they could initially result in a significant boost to nominal GDP and given that capital markets are now populated by highly leveraged financial instruments, the impact on various financial asset classes would be immediate and considerable. In other words, neither China nor Eurozone need to spend one dime for copper prices to potentially surge 30%+." In other words, a long way toward the G30's "worst case" described above!
  • Dollar Bearish Flag FormationAnyone chasing stock prices here is setting up to get burned, says Michael Lewitt, who is editor of The Credit Strategist newsletter and known as one of the few strategists to predict the 2008 financial crisis. He believes the mini crash in August was just a foretaste of the beginning of the “Super Crash” that’s still to come. In a blog post, Lewitt says much of last week’s gains can be chalked up to short covering. On the surface they look great, but “do not be fooled.” He says cap-weighted indexes are showing a pulse, but most of the rest of the market is dead, with losses of 20% or more for anything linked to commodities. Sure, markets are right in thinking the Fed isn’t going to hike rates by the end of the year, but no one should be under the illusion that this will keep stock prices rising. “There are a lot of fund managers and pundits who have been 100% wrong about the market this year and are desperately praying for a huge fourth-quarter rally to bail out their reputations,” he says. He expects gloomy fourth-quarter growth.
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October 9, 2015 PDF Print E-mail
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Monday, 12 October 2015 17:40
  • “Some of the experiences [in Europe] suggest maybe we can use negative interest rates and the costs aren’t as great as you anticipate,” said William Dudley, the president of the New York Fed, in an interview on CNBC on Friday. “We decided [during the 2008 crisis] -- even during the period where the economy was doing the poorest and we were pretty far from our objectives -- not to move to negative interest rates because of some concern that the costs might outweigh the benefits,” said Dudley. Bernanke told Bloomberg Radio last week he didn’t deploy negative rates because he was “afraid” zero interest rates would have adverse effects on money markets funds -- a concern they wouldn’t be able to recover management fees -- and the federal-funds market might not work. Staff work told him the benefits were not great. But events in Europe over the past few years have changed his mind. In Europe, the European Central Bank, the Swiss National Bank and the central banks of Denmark and Sweden have deployed negative rates to some small degree. “We see now in the past few years that it has been made to work in some European countries,” he said. “So I would think that in a future episode that the Fed would consider it,” he said.
  • The Dollar finished Friday with a weekly loss against almost every other currency as rising crude-oil prices and lingering doubts about a 2015 Federal Reserve interest-rate hike boosted its rivals. Emerging-market currencies recorded the most pronounced gains. The notion that the Fed would raise interest rates this year has been the primary driver behind the Dollar’s rally since the summer of 2014. That idea has been soundly abandoned by most analysts.

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October 8, 2015 PDF Print E-mail
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Thursday, 08 October 2015 18:19
  • Presidential hopeful Hillary Clinton unveiled a plan that aims to tackle excessive risk-taking in the financial sector, calling for the break-up of so-called "too big to fail" banks. Where have we heard this before? Methinks maybe Hillary got a briefing about the imminent demise of Deutsche Bank. "To prevent irresponsible behavior on Wall Street from ever again devastating Main Street, we need more accountability, tougher rules and stronger enforcement," Clinton said, as if that was remotely the solution to the problems mostly created by fiscal and monetary policy and the revolving door between DC and Wall Street.
  • Alcoa reported a smaller-than-expected quarterly profit, hurt by a slide in aluminum prices that has prompted the company to separate the smelting operations from the faster-growing plane and car parts business. Benchmark London Metal Exchange prices fell to six-year lows towards the end of September, a nearly 20% drop from a year earlier. Alcoa sales fell 10.7% to $5.57 billion, providing 7 cents per share earnings, down from 12 cents a year earlier. Analysts on average were expecting Alcoa to earn 13 cents per share on sales of $5.65 billion. Alcoa's shares fell 4.3% in extended trading.
  • Fed Funds RateA decidedly dovish FOMC Minutes released today, warning that the economy is not ready for rate-hikes, has driven rate-hike odds to their lows once again. December and January odds are now below 50% and markets are reacting with bond, crude, and bullion buying, Dollar selling and stocks uncertainty.
  • HSBC's Steven Major is out with a bold new forecast in a client note on Thursday, saying that bond yields would be much lower than the markets expected because central banks including the Federal Reserve were reluctant to raise interest rates. Major sees the benchmark U.S. 10-year yield, now at 2.05%, tumbling to 1.5% by the third quarter of 2016. He also lowered projections for European bond yields. According to Bloomberg, the median strategist's forecast is for the 10-year yield to rally to 2.9% by Q3 2016 and 3.0% by Q4 2016. Of 65 published forecasts, Major's 1.5% call is the only one below 1.65%. He wrote, "Much of the shift lower in our yield forecasts derives from the view that the ECB [European Central Bank] will continue to buy bonds in its QE [Quantitative Easing] program. The forecast for a 'bowing-in' of curves reflects our opinion that a long period of unconventional policy will create an unconventional outcome. Central banks did not forecast the persistently weak growth or recent decline in inflation. So data dependency does not easily justify lifting rates from the zero-bound -- it might suggest the opposite." Major was one of the few forecasters to correctly predict that in 2014 bond yields would fall and end the year lower. Others had predicted that yields would rise as the Fed wound down its massive bond-buying program known as Quantitative Easing (QE). "The conventional view has been that a normalization of monetary policy would be led by the Federal Reserve, involve a rise in short rates and a flatter curve," Major wrote. "This has already been proven completely wrong." Major is in the small minority, with others including Komal Sri-Kumar, president of Sri-Kumar Global Strategies, and DoubleLine Capital's Jeff Gundlach.
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October 7, 2015 -- Global Financial System Precipice PDF Print E-mail
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Wednesday, 07 October 2015 17:39
  • Deutsche Bank expects to report, according to their press release, a third quarter income before taxes loss of approximately €6.0 billion and a net loss of €6.2 billion. Moreover, management is recommending a reduction or elimination of the common share dividend. S&P cut DB's credit rating to BBB+ in June, a lower rating than Lehman Brothers had when it declared bankruptcy. DB has been ensared in the fallout from the Greek troubles, its role in the LIBOR manipulation, its Hua Xia Bank stake, the Volkswagen scandal, among other issues. Deutsche Bank has a total derivatives exposure of over €54.7 TRILLION ($62 TRILLION), which is more than 5 times the entire Eurozone GDP and more than 20 times the German GDP. Even very small moves in underlying assets can precipitate catastrophic derivatives losses. Recall that Warren Buffet called derivatives "financial weapons of mass destruction". Well, since the time he said that and now, those weapons have been refined from kiloton weapons into 100 megaton weapons. Deutsche Bank could be the first domino to fall in another massive global financial collapse. As reported Monday, bank revenues are likely to collapse on the back of Fixed Income, Currency and Commodity (FICC) losses in the range of 10-25%. That kind of shock could be what generates bankruptcy-level derivatives losses and the cross-contamination of those losses with any counterparties, causing a chain reaction global catastrophe not unlike -- but BIGGER than -- 2008 since the banking system has been significantly consolidated since then.
  • Evolution of Credit Default SwapsAnother potential domino which may start that cascade is commodities trading giant, Glencore, with a debt and derivatives position of around $100 billion. While this may seem like small fries compared to Deutsche Bank, the fall of Glencore could nonetheless send big ripples through its counterparties. Bank of America noted, "We estimate the financial system's exposure to Glencore at over US$100bn, and believe a significant majority is unsecured. The group's strong reputation meant that the buildup of these exposures went largely without comment. However, the recent widening in GLEN debt spreads indicates the exposure is now coming into investor focus... For the banks, of course, Glencore may not be their only exposure in the commodity trading space. We consider that other vehicles such as Trafigura, Vitol and Gunvor may feature on bank balance sheets as well ($100 bn x 4?)." In other words, this sounds a whole lot like the subprime mortgage market in 2008. AIG's notional credit default swap (CDS) exposure was about $440 billion, and when AIG couldn't produce the $100 billion to collateralize those CDS contracts when its credit rating was downgraded, the financial stalwart went bankrupt and was taken over by the government. That could be in the cards now for Glencore and other institutions with a large commodities exposure.
  • The Fed, in my mind, has a bit of a credibility issue,” said Brian Rehling, co-head of Global Fixed-Income Strategy at Wells Fargo Investment Institute. “They've kind of communicated to the market that it's likely they're going to raise so I do think we'll get a raise in December. Even if the data doesn't necessarily warrant it,” he said. Meanwhile, stocks have been climbing steeply in the last few sessions on anticipation that a Fed rate hike isn’t likely, so this sets up the market for volatility no matter what happens.
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