Author: admin

Among other things, the month of November was memorable because for the first time, Caterpillar – that bellwether of the old industrial economy in which “stuff” was actually made, dug out of the ground, erected, or otherwise processed instead of merely hosted ad impressions – posted declining retail sales in every region around the globe. This was the first time of uniform declining retail sales since February 2010. To say that this data conflicts massively with all the rumors, fairytales and lies about a global recovery, is an understatement which is why it has not been mentioned anywhere, in hopes the subsequent month would demonstrate some improvement and perhaps an upward inflection point. That did not happen.

Moments ago CAT released its November dealer retail sales: for the second time in a row CAT posted negative retail sales across the world, with total retail sales down a whopping 12%, the lowest since February 2013, and then, going back all the way to 2010. But at least the Fed is tapering because it is convinced the global economy is finally recovering…

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Russia's MICEX jumped almost 1% this morning on news that Vladimir Putin had asked for clemency in the jailing of vocal Kremlin critic, Yukos founder Mikhail Khodorkovsky. Khodorkovsky has been jailed since 2003 on a variety of tax-evasion, fraid and embezzlement charges though being among the nation's wealthiest men, the jailing was seen as politically-motivated (because of his political ambitions). The WSJ reports that Putin said this morning, "He asked for a pardon for humanitarian reasons, his mother is sick, and I believe that we can make a decision and will soon sign a decree to pardon him." The twist in this tale is that Khodorkovsky's people deny the pardon request, since Putin's spin would be the pardon request implies an admission of guilt…

 

 

Via WSJ,

…

 

"Mikhail Khodorkovsky…recently wrote to me and asked me for a pardon. He has already been deprived of his liberty for more than 10 years. It is a severe punishment," Mr. Putin said. "He asked for a pardon for humanitarian reasons, his mother is sick, and I believe that we can make a decision and will soon sign a decree to pardon him."

 

…

 

Mr. Khodorkovsky—a vocal Kremlin critic—and his business partner Platon Lebedev have been jailed since 2003 on a variety of tax-evasion, fraud and embezzlement charges.

 

Once among Russia's wealthiest people, the two men were imprisoned in a proceeding viewed by many as politically motivated because of Mr. Khodorkovsky's political ambitions. As the original sentences for fraud and tax evasion wound down, a second trial for embezzlement and money-laundering was held in 2010 that initially resulted in their prison terms being extended until late 2016.

 

…

However, the plot thickens

Until the legal team can meet with Mikhail Khodorkovsky, all previously given statements by his lawyers regarding him asking for a pardon should be considered invalid.

Of course, the reason being that any pardon request by Khodorkovsky would imply an admission of guilt…

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Despite yesterday’s somewhat lackluster response, treasury bond yields are breaking bad this morning with 5Y up 13bps from the Fed taper (and 10Y at 2.94%). But it is gold (and silver) prices that have been monkey-hammered with the former trading below $1200 briefly – its lowest in 6 months.

Gold is tapering…

 

and interest rates are displeased…

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Today’s AM fix was USD 1,205.25, EUR 881.16 and GBP 736.35 per ounce.
Yesterday’s AM fix was USD 1,233.25, EUR 896.97 and GBP 754.05 per ounce.

Gold fell $12.20 or 0.99% yesterday, closing at $1,218.50/oz. Silver slid $0.11 or 055% closing at $19.79/oz. Platinum dropped $10.99, or 0.8%, to $1,334.74 /oz and palladium edged down $1.28 or 0.2%, to $695.97/oz.

Gold in U.S. Dollars, 4 Day – (Bloomberg)

Yesterday, the U.S. Federal Reserve tinkered with a small taper as was largely expected. The Fed said it will reduce its monthly debt purchases by $10 billion per month, citing a better outlook for the U.S. jobs market. The taper reduces the $85 billion per month in bond buying marginally to $75 billion per month or from $19.6 billion per week to $17.3 billion per week.

The move was not unexpected and therefore pretty much priced into markets. However, risk assets reacted surprisingly well to the taper decision and continued to outperform with  Wall Street stocks at record highs and Asian and European shares rallying.

Some traders were surprised that risk assets such as equities rallied on the reduction in quantitative easing while gold came under pressure again which is counter intuitive. Gold’s sell was again due to paper gold selling by traders speculators as there was little increase in selling by owners of bullion.

Gold (Black) and the Federal Reserve Balance Sheet (Red) – October 2008 to December, 2013

Arguably, the Fed’s small taper and statement is bullish for gold as the Fed confirmed that ultra loose monetary policies and the unprecedented zero percent interest policies are set to continue. Also, the Federal Reserve’s balance sheet continues to deteriorate as we pointed out yesterday.

Short positions by speculators on U.S. gold futures and options remain close to 7 and a  ½ year highs and the risk of a short squeeze remains.

 

Physical buying in Asia will support gold.  China will see continued strong demand in its Lunar New Year in January and February. Gifts of gold jewellery and gold bars are typical in China during this time.

Gold has had strong support at the $1,200/oz level. Spot gold has only breached that level once this year, hitting $1,180.20/oz very briefly intra day on June 28 and $1,180/oz and $1,200/oz remain support.

Download Protecting your Savings From Bail-Ins and Deposit Confiscation (11 pages)

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For everyone who shrugged off last week's enormous spike in initial jobless claims as "can't be real", the BLS has another "holiday volatility"-blamed statistical anomaly for traders to ignore. Initial claims rose 10k to 379k – dramatically worse than the 336k expectation – and the worst since March. Though the BLS says no states estimated jobless claims last week, they would suggest, ever so humbly, that we ignore this data and focus on the trend of the 4-week moving average. Total benefit rolls also rose to 3 month highs, up 94k to 2.88 million. The piece de resistance – non-seasonally-adjusted initial claims were down 48.2k (against the seasonally-adjusted 10k), yet both are up exactly 13k from a year ago (seems the Sandy-based YoY adjustments are playing havoc).

 

 

 

Lastly, 1,374,031 American on Emergency Unemployment Compensation (ie. extended benefits) – which are about to run out thanks to Congress…

which will implicitly send the unemployment rate plunging….

With even the Fed somewhat challenging the credibility of the official unemployment rate – as labor force participation collapses structurally – the possibility that if Congress does not act by Dec 28th, a further 1.3 million people will lose emergency aid and may be deemed 'out' of the labor force merely exaggerates an already farcical situation. As JPM's Mike Feroli notes, the "official" unemployment rate may drop up to 0.8 percentage points, but it won't mean the economy is any better. Is this the 'excuse' the Fed needs to transition from QE to forward guidance (with the public seeing only a rapidly collapsing unemployment rate as evidence of their success) even as the data that they are so "dependent" on becomes worse than useless?

 

As we warned in November, the only two charts that matter ahead of Friday's likely distorted nonfarm payrolls report.

First, the labor force participation rate, which plunged from 63.2% to 62.8% – the lowest since 1978!

 

But more importantly, the number of people not in the labor force exploded by nearly 1 million, or 932,000 to be exact, in just the month of October, to a record 91.5 million Americans! This was the third highest monthly increase in people falling out of the labor force in US history.

At this pace the people out of the labor force will surpass the working Americans in about 4 years.

 

And if the Congress does not pass the bill to extend emergency aid – set to expire Dec 28th – then up to 1.3 million more people will be added to that list of 91.5 million already our of the labor force (and another 800,000 more to come in further months)…

This has profound implications for the oh-so-important unemployment rate that  the Fed is so dependent upon…

JPM's Feroli: One observation that could set an upper bound on thinking about a participation effect is to hypothesize that all 1.3 million EUC claimants exit the labor force after benefits expire in 1Q (again, should Congress allow that to happen). In that case, the unemployment rate would fall by 0.8%-pt, obviously an extreme example. Some of the Fed studies can help to narrow the range of outcomes.

 

One of the more recent works (Farber and Valletta from the San Francisco Fed) indicates that about a fifth of long-term unemployment is due to extended benefits. With just over 4 million long-term unemployed recently, this would imply that the absence of extended UI benefits could lower the unemployment rate by 0.5%-pt.

This will directly impact the Fed's credibility to manage the economt in a "data-dependent" manner:

JPM's Feroli: Setting aside the normative aspect of whether from a public policy perspective this is a desirable or undesirable outcome, such a fall in the unemployment and participation rates could create some tricky choices for Fed policymakers as they assess the health of the labor market.

 

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