Cold, Crimea & China: Transient supports to gold prices
The 2014 gold rally brought prices to their highest level since September before a more hawkish-than-expected March FOMC pushed prices sharply lower. Three distinct and in our view transient catalysts have driven this rally: (1) a sharp slowdown in US economic activity which we believe was weather driven, (2) high Chinese credit concerns, although ultimately bearish for gold demand through lower financing deals if realized, and (3) escalating tensions over Ukraine. While further escalation in tensions could support gold prices, we expect a sequential acceleration in both US and Chinese activity, and hence for gold prices to decline, although it may take several weeks to lift uncertainty around this acceleration. Importantly, it would require a significant sustained slowdown in US growth for us to revisit our expectation for lower US gold prices over the next two years.
Re-acceleration in US activity will push gold prices lower
While we see clear catalysts for the recent rally in gold prices, this move has been large relative to US real rates which are a key input into our forecasts and benchmarking of gold prices. As a result, we see potential for a meaningful decline in gold prices towards the level implied by 10-year TIPS yields, which our rates strategists expect to rise further this year, and reiterate our year-end $1,050/toz gold price forecast. More broadly, we believe that with tapering of the Fed’s QE, US economic releases are back the decline in gold prices will likely be data dependent, in contrast to our 2013 bearish gold view which was driven by the disconnect between stretched long gold speculative positioning and stabilizing US growth.
Indian and Chinese gold demand unlikely to surprise to the upside
Weak Indian gold imports and surging Chinese imports were the most important shifts in EM gold demand last year, although these trade statistics likely overestimated shifts in local gold demand given reported gold smuggling into India and the use of gold in Chinese financing deals. While we see potential for these shifts to reverse in 2014, we estimate the net impact will not be meaningful to our gold outlook as: (1) India’s potential easing of gold import tariffs will likely remain modest given how much lower gold imports have contributed to its improved trade balance, (2) we expect a gradual unwind of gold backed financing deals.
Former New London, Connecticut, police
officer Thomas Northup was fired by the city’s mayor in 2012 for a
2011 incident in which Northup shot Curtis Cunningham, the unarmed
driver of a stolen ice truck. An internal police investigation
found that Northup used force prematurely and hadn’t been
authorized to do so. Northup was, nevertheless not charged with any
crime, so the firing should have been the end of it. But as a cop,
Northup isn’t just any employee. Northup, entrusted by the
government with a gun, is also granted by the government the broad
ability to appeal any decisions regarding his employment, so he
appealed his termination. As The Day of Connecticut reports:
The state Board of Mediation and Arbitration said the
city did not present credible evidence to establish that Northup’s
use of force was “not objectively reasonable or that it was
excessive,” or prove that Northup knew that the suspect did not
have a gun. Not only did the board order Northup’s reinstatement
but said he should be compensated for lost pay.
[New London Mayor Daryl] Finizio maintains the board’s decision was
“terrible … and fundamentally and legally
flawed.”
At Finizio’s behest, the city appealed the decision by the state
arbitrator, but earlier this week the city council stepped in and
voted 4-3 to drop the city’s appeal. At least one councilman,
Michael Passero, insisted the city was violating its contractual
obligations to the fired Northup by appealing the order to rehire
him, the kind of logic that only makes sense in a politician’s
head.
While the mayor said it was “imperative an office found to have
violated department policies on the use of deadly force” be
terminated, he admitted the decision wasn’t just his or the police
department’s to make, and that he had to “respect the decision” the
City Council made.
Of all the bizarre government social media
campaigns—and there have been a lot lately—I think the weirdest
must be “Think Again Turn Away.” If we’re judging solely on
WTF-factor, this U.S. Department of State (DOS) initiative blows
Pajama Boy and
Leather Jacket Boy and
Obamacare’s gifgasm out of the water. The main premise seems to
be trolling jihadis on Twitter, with taunts aimed at knocking the
bravery, intelligence, etc. of al Qaeda and other anti-West
religious warriors. If it all seems a little “Uncle Sam tells
terrorists ‘your mama’ jokes,” it is.
Below are a few recent tweets from the (verified) Twitter
account @ThinkAgain_DoS. As you
can see, DOS seeks out pro al Qaeda tweets and then responds,
engaging directly with individual users. To me, it all seems like a
strategy wayyyyy more likely to inspire animosity among jihadis
than to make them suddenly “think again” and “turn away.” When’s
the last time you changed any minor opinion, let alone your entire
value and belief system, because of a random Internet troll? And
make no mistake about it, the DOS is definitely trolling.
Modern day psy-ops, ladies and gents! According to Mother
Jones, the DOS Think Again Turn Away
campaign is only costing us a couple of million dollars
annually.
Submitted by Lance Roberts of STA Wealth Management,
The biggest news this past week was Janet Yellen's first post-FOMC meeting speech and press conference as the Federal Reserve Chairwoman. While I have the utmost respect for her accomplishments, every time I hear her speak all I can think of is my white haired, 75-year old grandmother baking cookies in her kitchen. This week's "Things To Ponder" covers several disparate takes on what she said, didn't say and the direction of the Federal Reserve from here.
In order to give these views context, I have included Yellen's post-meeting news conference. This is best viewed with a glass of milk and some warm, fresh chocolate-chip cookies…."just like Grandma used to make."
Quote Of The Day: "Bull Markets Are Just Like Sex, It Feels Best Just Before It Ends."by Barton Biggs
I have written many times in the past, most recently here, that the 6.5% unemployment target for the Federal Reserve was not a good measure of the true state of employment in the U.S. Specifically I stated:
"The difference between today, and 1978, is that in 1978 the LFPR was on the rise versus a sharp decline today. However, as I stated previously in 'Fed's Economic Projections – Myth vs Reality' this leaves the Federal Reserve in a bit of a predicament.
'The problem that the Fed will eventually face, with respect to their monetary policy decisions, is that effectively the economy could be running at 'full rates' of employment but with a very large pool of individuals excluded from the labor force. Of course, this also explains the continued rise in the number of individuals claiming disability and participating in the nutritional assistance programs. While the Fed could very well achieve its goal of fostering a 'full employment' rate of 6.5%, it certainly does not mean that 93.5% of working age Americans will be gainfully employed. It could well just be a victory in name only"
This is particularly the case when roughly 1 out of 3 people are no longer counted as part of the work force, 1-out-of-3 individuals are dependent on some sort of social support program, and over 17% of personal incomes are comprised of government transfers."
Howard points to the Federal Open Market Committee dropping its 6.5% unemployment rate threshold for raising the federal funds rate, a target originally set in December 2012.
"Instead it would look at some 'qualitative' measures, 'including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments,' the FOMC’s statement said."
This move shouldn’t have surprised anyone. The official unemployment rate was 6.7% in February and keeping that 6.5% target would have tied the Fed’s hands before it’s even finished tapering.
Yellen must deal with an economy that’s slowly recovering, but leaving a lot of people behind."
This is a very interesting take on a change in how the Fed presents its decisions and is worth reading in its entirety.
"Unless you have a crystal ball that tells you what will happen with wages, this possible new target tells you almost nothing about when rates will be raised.
These developments suggest a desire to turn the clock back to a time when traders had to make bets without Fed hand-holding — even if the Fed still does release its economic projections. A shift toward opacity might be wise. The economy is a complex system that no one fully understands, so it would be foolish to commit to any unbending numerical rule that limits policy makers’ flexibility to react to unforeseen events. That was why former Chairman Alan Greenspan was opposed to formal inflation targets.
An additional benefit of opacity is reduced predictability. Scholars have found that financiers take too much riskwhen they think they know what will happen in the future, so muddying the waters may be just what’s needed to promote a safer financial system."
"In reality, the Fed will keep manufacturing excuses as to why rates can't be raised. Whether it's a cold winter or a hot summer, a geopolitical crisis, or an unexpected sell off in stocks or real estate, the Fed will always find a convenient excuse to postpone tightening. That's because it has built an economy completely dependent on zero % interest rates. Even the smallest rate shock could be enough to push us into recession. The Fed knows that, and it is hoping to keep the ugly truth hidden.
Although Yellen followed the script on the QE tapering, by decreasing monthly purchases by an additional $10 billion to $55 billion, look for her to abandon her commitment to wind it down to zero just as easily as she has walked back the Fed's commitment to raise rates once unemployment hits 6.5%. Any additional weaknesses in economic data, or dips in stock or real estate prices, will cause the Fed to call a time out on its tapering plan."
"Higher uncertainty premiums: The Fed is in the midst of not one but two policy transitions. It is pivoting from reliance on a direct instrument (QE purchases of securities in the marketplace) to an indirect one (forward policy guidance to convince others to devote their balance sheets) — thereby raising effectiveness questions. It is also moving from a readily-observable unemployment threshold to a set of indicators that include qualitative judgments — thereby raising less predictable interpretation questions.
Technical market conditions: Given the impressive multi-year rally, it doesn't take much these days to convince equity traders to book profits (and it hasn't taken long for buyers to buy on the dip). Similarly, over-extended front end rates positions can be destabilized in the immediate term even if the Fed is committed to maintaining low rates for long.
Reaction to the interest-rate selloff: With a significant part of the economy sensitive to short and intermediate interest rates, including housing, and with the economic recovery yet to broaden sufficiently, it is not surprising that the stock market would be concerned with a sharp selloff in the shorter-dated rates.
What about the longer-term?
Here, much depends on your assessment of the first factor — namely, Fed policy effectiveness during its policy transition. Unfortunately, there are no tested models, policy playbooks or historical data to confidently guide investors. What is clear, however, is that they will require quite a bit of evidence of ineffectiveness before abandoning their faith in an institution that has significantly supported markets in recent years."
Jason's articles are always worth reading and this is no exception. The "madness of crowds" is always relevant and prevalent. With the financial markets tied to the Federal Reserve, like a "fetus to its mother," these words of wisdom are worth remembering.
"In a guest essay published in the New York Times on Oct. 29, 1989, called 'Fear of a Crash Caused the Crash,' future Nobel Prize-winning economist Robert Shiller described a survey he had done of 101 market professionals the Monday and Tuesday after the tumble. Asked whether the drop was driven by 'a change in the stock market fundamentals' or 'psychology and emotion,' only 19% cited fundamentals; 77% blamed psychology and emotion. Shiller and his colleague William Feltus also asked the professionals if they thought the latest drop could turn into a replay of the 1987 crash; 35% thought it could, while 41% thought other investors thought so.
So, when KAL poked fun at traders overreacting to what others say, he was right on the money.
To this day, says KAL, brokers buying copies of the cartoon (featured above) 'inevitably' tell him, 'It was so funny because it was so true.'"
EXTRA! The Mysterious Disappearance Of Aircraft Since 1948via Zero Hedge
The ongoing search for Malaysian Airline Flight 370 has the conspiracy world abuzz with theories ranging from terrorism, government experiments, black holes to alien abduction. However, what is interesting is that this is not the first time a plane has mysteriously disappeared. The following info graphic details the last known position of lost large aircraft since 1948.
In a recent piece
in Politico titled “Why Are Asian Americans
Democrats?” professors Alexander Kuo, Neil Malhotra, and Cecilia
Hyunjung Mo make the contention that “microaggressions” and social
exclusion have pushed the entire Asian-American community to vote
for the Democratic Party. Microaggressions, according to Fordham
University, “are common verbal, behavioral, and environmental
indignities, whether intentional or unintentional, that communicate
hostile or negative slights to marginalized groups.”
But David Harsanyi finds it difficult to believe that Asian
Americans, as the professors maintain, believe half the country is
out to marginalize them with a bunch of subtle insinuations. In our
real-world interactions, we’re just not that sensitive. We
shouldn’t be that sensitive in our politics, either, Harsanyi
says.
President Obama was scheduled to meet with tech
company executives at the
White House this afternoon, reportedly to talk about “issues of
privacy, technology, and intelligence” pinned to surveillance
reform. The meeting was closed to the press, but Mark Zuckerberg,
CEO of Facebook, and Eric Schmidt, executive chairman of Google,
were reported to be attending.
Speaking at a conference of community health centers in
New York, Vice President Joe Biden admitted problems with the
Obamacare website after its launch made it difficult to enroll, but
said he wanted to recommend President Obama for “sainthood” for how
patient he was about the issues that made it difficult to use the
website.
The credit ratings agency Fitch has withdrawn its “negative”
outlook on the United
States’ triple-A credit rating. All the major ratings agencies
now consider the U.S.’s outlook “stable.”
First Lady Michelle Obama is making her first visit to
China, focusing her trip on education, something China seems to
have a handle on, unlike, say, free speech or other civil and human
rights.
A feminist studies professor at the University of California at
Santa Barbara who allegedly assaulted a pro-life activist
on campus insisted she did nothing wrong because the activists’
material “triggered” her. She said her behavior “set a good example
for her students.”
83 percent of March Madness brackets submitted for Warren
Buffett’s billion dollar challenge were already eliminated before
#3 Duke lost to #14
Mercer.
Quad-witching only added to an extremely volatile week as the entire bond, stock, FX complex pumped and dumped on the basis of whether a "considerable period" was really six months and whether "quite some time" was more or less than six months. The S&P hit record highs early on this morning thanks to a ramp in AUDJPY (but once again bonds didn't blink). All that ended when Europe closed and the Biotech sector's weakness spread, leaving the Nasdaq -1.4% post-FOMC (and all other indices in the red post-FOMC). The range of moves in bonds, FX, commodities, and vol this week were impressive as we noted below…
Year-to-date, gold remains the winner (and HY credit the loser)…
Year-to-date, the Dow is back in the red and Russell outperforming…
To summarise this week's carnage…
2Y Yield +8bps – the worst week in 9 months
5Y Yield +17bps – the worst week in 7 months
30Y Yield unchanged
5s30s -16bps – 2nd biggest flattening in 21 months
2s10s unchanged
Silver -5.2% – the worst week in 6 months
Gold -3.3% – the worst week in 4 months
Copper ~unchanged (down 4 weeks in a row)
USD Index +0.83% – best week in 2 months
EUR -0.82% – broke 6-week win streak
VIX -2.8vols – 2nd biggest drop in 14 months
Nasdaq Biotech Index -2.8% – worst week in 5 months
Financials unchanged on the week
When the bottom fell out… as Europe closed…
Post-FOMC, all indices are now in the red…
With only financials holding any gains…
Notably, "most shorted" names have been very weak since the FOMC – even as the broad market is pumped on the heels of financials…
On the week 30Y is practically unchanged while 5Y is +17bps!
FX markets were also volatile with EUR and JPY weakness (but AUD relatively outperforming)…
Gold has been limping higher thelast 2 days but on the week PMs remain under pressure with oil and copper around unch…
Charts: Bloomberg
Bonus Chart: The MoMos no likey Ms. Yellen…
Bonus Bonus Chart: Biotechs battered…by most in almost 3 years today
U.S. lawmakers have asked Gilead Sciences Inc to explain the $84,000 price tag of its new hepatitis C drug Sovaldi, which is encountering resistance from health insurers and state Medicaid programs – spraking concerns they may have a harder time pricing new medicines.
It seems like the government is basically going after externalities from yet another bubble sector likely bursting the bubble
First the Fed screws up the “dots” – on one hand telling HFT algos not to worry about rate hikes, on the other saying the FF rate in 2016 will be a scroching 2.25%, then Yellen flubs the “6 month” statement sending stock into a tailspin and Hilsenrath and Liesman explaining in overdrive that she didn’t mean what she said, and now, we learn with the traditional Friday afternoon “shove under the carpet” bomb, that the Fed also flubbed its stress test results. Sounds about par for the world’s most powerful, and clueless, monetary institution.
The Federal Reserve on Friday issued corrected results for the 2014 Dodd-Frank Act stress test. For 26 of the 30 firms, the correction led to either no change or at most a 0.1 percentage point change in the firms’ minimum, post-stress tier 1 common capital ratios in the severely adverse scenario. The change led to a 0.3 percentage point increase at two firms, a 0.2 percentage point decrease at one firm, and a 0.5 percentage point decline at another.
The capital ratios were adjusted to address inconsistencies in the treatment of the fourth quarter 2013 actual capital actions and assumptions about preferred and employee compensation-related issuance over the course of the planning horizon.
The attachment reflects the updated minimum tier 1 common capital ratios and the changes from the prior release. The Federal Reserve will reissue a full result paper on Monday with corrections as they affect all capital ratios.
This is almost as sad, if entertaining, as the Treasury releasing a complete set of TIC data, then hours later admitting it had the goalseek formula set incorrectly, and revising the entire thing.
For those who still care about anything the megalomaniacal, if somewhat confused, central planners at Marriner Eccles have to say, here are the revised results.
British Prime Minister David Cameron has said
that he would like to see London Mayor Boris Johnson back in
parliament.
Johnson, who once described his ideal society as something
similar to “rules-based
anarchy,” has been discussed as a possible future prime
minister, although Johnson rejected such talk in 2012,
saying that the chances of him becoming prime minister are
thin:
My realistic chances of becoming Prime Minister are
only slightly better than my chances of being decapitated by a
Frisbee, blinded by a champagne cork, locked in a disused fridge,
or reincarnated as a olive.
However, last year
Johnson used a rugby analogy to point out that he wouldn’t be
opposed to the idea of pursuing Cameron’s job under the right
circumstances.
Last year, an article in the Economist suggested than Johnson was a mainstream
British politician that could “tap into” the “passive libertarian
sentiment among the disengaged.” The same article had the following
to say about young Britons:
Young Britons are classical liberals: as well as prizing social
freedom, they believe in low taxes, limited welfare and personal
responsibility. In America they would be called libertarians.
The self-described fan of “rules-based anarchy” may indeed be
able to speak to a young classically liberal generation, but
assuming Johnson is open to the idea of one day living in 10
Downing Street he still needs to re-enter parliament and win the
leadership of the Conservative Party before that can become a
realistic prospect.
Watch Channel 4’s docudrama, “When Boris Met Dave,” below. It is
an interesting and entertaining look at the
Johnson-Cameron relationship, which began when they were both
students at Oxford University.
At 10:27:21 ET, the Nasdaq 100 e-mini futures contract suddenly dropped on extreme activity as someone decided it was an opportune time to dump 3000 contracts or around $220 million notional. As Nanex notes, the ETF – QQQ – also collapsed (with over 1200 trades in 1 second) as bids and offers were crossed and markets went flash-crashy for a few tenths of a second. The questions is – who was it? Waddell & Reed?
1. QQQ Trades (cicles) and NBBO shaded red when crossed (bid > ask), yellow when locked (bid = ask), or gray when normal (bid < ask). Note how the trades print way ahead of quotes. Chart shows about 140 milliseconds of time.
2. June 2014 Nasdaq 100 (NQ) Futures trades and quote spread. NQ trades in Chicago – comparing the activity to the QQQ's traded in NY, we see that NQ futures initiated the drop. QQQ's reacted about 4 milliseconds later – the time it takes light to travel between the two cities.
3. Nasdaq non-ISO trades (dots) and quote spread (shading). ISO trades can appear slightly ahead of quotes, so we only show non-ISO trades. These trades should appear after quotes: the dots should be on or to the right of the gray shading.
4. Nasdaq and BATS non-ISO trades and quotes. We can see that Nasdaq quotes are lagging BATS quotes: the gray shading (Nasdaq quote spread) appears offset to the right of the pink shading (BATS quote spread). This tells us that some of the delay was caused BEFORE Nasdaq quotes reached the SIP. Because Nasdaq trades appear ahead of Nasdaq quotes (and BATS trades), we know direct feeds got that information faster than the SIP did. We call this condition fantaseconds.
5. Zooming out on QQQ trades and NBBO.
6. Zooming out on the June 2014 Nasdaq 100 (NQ) futures trades and quote spread.