CHINA BUYING GOLD ??

The IMF wants to sell Gold & the Chinese are buying Gold.
Gold Rises to 3-Week High in London as China Increases Reserves‎
Doubling of China gold reserves

'''China has added to its gold reserves and now holds 1,054 metric tons of the yellow metal, according to a Friday report by the Xinhua News Agency, which cited comment by Hu Xiaolian, head of the State Administration of Foreign Exchange. ''''

China is shifting away from GSE debt to US Treasury debt (and that too -- US Treasuries of shorter term maturities). Also, China is stocking up on Hard Assets ( stakes in mining assets and mining companies) around the world.

Meanwhile the FED continues to buy long term US Treasuries, in order to keep the cost of borrowing low ( a tactic that I do not believe is sustainable in the long run).

'You have only to find a way to multiply your creditors by the cube and pay them by the square, out of their own money. The fatal weakness of the scheme is that you cannot stop. When new creditors fail to present themselves faster than the old creditors demand to be paid off, the bubble bursts.'

--Garet Garrett

The Chinese are thinking long term, while most western governments are focussed on short term fire fighting!

China's Sovereign Wealth Fund investments in Blackstone and the investment banks have taught them to look past the 'smoke and mirrors' analysis of bankers and focus on a sustainable long term investment plan.

COPPER - Recovery in sight ? ?

Copper prices have rebounded from recent lows. Is it Chinese buying? is this a turnaround ? or just a bear market rally?
Source: www.lme.co.uk/copper.asp
The fundamental outlook remains weak, given the downturn in housing and industrial sectors.

As existing momentum of ongoing projects slows, rising inventories could result in downward pressure on copper prices.

It's important to remember that although prices have corrected sharply from their 2008 highs, they have still risen substantially since early 2003!!!

Industrial commodities (read: base metals and steel) could face strong headwinds in the second half of 2008 as companies in this sector struggle with debt servicing and weak product prices as their customers in vital industries like housing and autos face slowdowns of their own.

Can Chinese copper buying continue, given rapidly slowing consumer consumption numbers in their export markets (US and Europe)?

We're not out of the woods yet!!

US UNEMPLOYMENT - MARCH 2009.

Hat tip to Mish's Global Economic Trend Analysis blog for the link.

Welcome To the Fed California "You Can Check Out But Never Leave"

As I've said in recent posts, unemployment is going to severly impact the ability of individuals and firms to service their debt.

TRACKING BEAR MARKETS

Here are some charts from the http://dshort.com/ website.

Do visit the site for some excellent analysis.

I've heard that markets bottom 6-9 months before an economic recovery. Thing is, going into 2007-08, the markets had no clue of the 'financial tsunami' that was around the corner; so much for the efficiency of markets.

Main street continues to struggle with debt, consumer consumption is weak, corporate profitability is set to drop still further and the banks could have more bad news on the way.

Are the banks really as solvent as they claim they are?

Will they able to absorb further shocks from credit card defaults, commercial real estate defaults and home foreclosures that may increase as unemployment numbers rise?

As Nouriel Roubini recently pointed out

--- The markets 'growth estimates' may be too optimistic given slowing growth and rising unemployment numbers

--- Firms are trying to deleverage by selling illiquid assets in an illiquid market.

--- The economic recovery everywhere will be weaker and take longer than people expect, and the same goes for a sustained market recovery.

Black Swan author : Nassim Nicholas Taleb

Hat tip to Jim Sinclair's website for this one!


Ten principles for a Black Swan-proof world
--By Nassim Nicholas Taleb
http://www.ft.com/cms/s/0/5d5aa24e-23a4-11de-996a-00144feabdc0.html

GOLDMAN SACHS & THE FINANCIAL MEDIA

The Goldman Sachs Q1 results really showed how totally incompetent the financial media is.

Instead of clarifying the change to a December ending accounting year (previously November ending), the media went overboard proclaiming how Goldman Sachs had blown away estimates.

To be fair to Goldman Sachs, their Q1 press release clearly shows a separate account for the ‘missing month’ of 2009 on page 10. This fact was jut totally ignored in the financial media!!

Q1 press release: http://www2.goldmansachs.com/our-firm/press/press-releases/current/pdfs/2009-q1-earnings.pdf

I’ve highlighted some relevant parts from the Q1 Press Release below:
















Strangely enough, the media doesn’t seem to be interested in delving further into the ‘large’ compensation and benefits section in the Q1 results.

Adjusted for the month of December 2008, the results may not have been that spectacular.
Also the Goldman Sachs management doesn’t seem to want to discuss the AIG payout issue!!
Lastly, I hope that the Goldman results weren’t the result of ‘dangerous or uncalculated risk taking’.
We all know where that got us in 2008!

Relevant Links:

Goldman Sachs Buries Losses to Beat the ...
Goldman CFO Doesn't Get The Obsession With AIG
So What's the Story Morning Glory?
How to Puff Up Earnings, Goldman Sachs Style
Is Goldman Sachs really this stupid?

THE MARGINAL PRODUCTIVITY OF DEBT

Over the last few years many individuals, firms and governments took on massive amounts of debt. Incomes and profits were rising and leveraged players appeared to significantly outperform their conservative counterparts.

And then the party ended! With falling incomes (job losses etc) and crashing profitability, how exactly are these debts going to be serviced?

While researching this topic I came across the concept of ‘The Marginal Productivity of debt’

Here is an excerpt from a recent article by Professor Antal E. Fekete. http://www.professorfekete.com/
Its really incredible how the Financial Media and government really ignores anyone who is opposed to taking on unsustainably high levels of debt.
http://www.gold-eagle.com/gold_digest_08/fekete041309.html


"""""The concept of marginal productivity of debt is curiously missing from the vocabulary of mainstream economists. They are watching the wrong ratio, that of the GDP to total debt, and take comfort in the thought that by that indicator 'there is lots more room' to pile on more debt. As a consequence, the marginal productivity of debt went into further decline. This was a danger sign showing that additional debt had no economic justification. The volume of debt was rising faster than national income, and capital supporting production was eroding fast. If, as in the worst-case scenario, the ratio fell into negative territory, the message would be that the economy was on a collision course with the iceberg of total debt and crash was imminent. Not only does more debt add nothing to the GDP, in fact, it necessarily causes economic contraction, including greater unemployment. Immediate action is absolutely necessary to avoid collision that would make the 'unsinkable' economy sink.

Negative marginal productivity
Why is a negative marginal productivity of debt a sign of an imminent economic catastrophe? Because it indicates that any further increase in indebtedness would inevitably cause further economic contraction. Capital is gone; production is no longer supported by the prerequisite quantity and quality of tools and equipment. The economy is literally devouring itself through debt. The earlier message, that unbridled breeding of debt through the serial cutting of the rate of interest to zero was destroying society's capital, has been ignored. The budding financial crisis was explained away through ad hoc reasoning, such as blaming it on loose credit standards, subprime mortgages, and the like. Nothing was done to stop the real cause of the disaster, the fast-breeder of debt. On the contrary, debt-breeding was further accelerated through bailouts and stimulus packages.
In view of the fact that the marginal productivity of debt is now negative, we can see that the damage-control measures of the Obama administration which are financed through creating unprecedented amounts of new debt, are counter-productive. Nay, they are the direct cause of further economic contraction of an already prostrate economy, including unemployment.”””""

A lot of leveraged players are going to struggle to service their debts.

Real Estate Moguls, Casion Moguls, Car Companies, Home Builders, Failed LBO deals, indebted and now jobless home owners and creditcard holders, Governments in Eastern Europe needing bailouts etc etc.

Even if none of the above wants to go into default --- just how are they going to service their debts ?

In many cases the current market price of an asset previously acquired is so far below its price of purchase - that it may make more sense to default! ( Think overvalued property deals and underwater home and commercial real estate mortgages)

As Professor Fekete says, focus on the marginal productivity of debt and not just GDP to total debt.

While we may be all set for a deflationary collapse, the only way out may be to trigger a tidal wave of massive inflation.

WATCH THIS SPACE!

DERIVATIVES ---- IT'S NOT OVER YET !

Source: http://www.occ.treas.gov/ftp/release/2009-34a.pdf

The Equity markets have rebounded from panic lows, but the derivative WMD maze remains!

Just take a look at the Top 5 !

Kind of puts the G-20 -> IMF's $1Trillion package into perspective. The proposed IMF gold sale of approximately $12Bn is just a drop in the ocean.

No wonder these guys are all for suspending MTM rules or avoiding marking anything to market ( if the market really does exist!)

James Galbraith on Geithner's Plan

James Galbraith is spot on. Here is an excerpt from the article at yahoo finance.
http://finance.yahoo.com/tech-ticker/article/216311/Part-I-Geithner%27s-Plan-%22Extremely-Dangerous%22-Economist-Galbraith-Says?tickers=%5Egspc,%5Edji,c,bac,jpm,WFC?sec=topStories&pos=2&asset=TBD&ccode=TBD

We think Geithner is suffering from five fundamental misconceptions about what is wrong with the economy. Here they are:
The trouble with the economy is that the banks aren't lending. The reality: The economy is in trouble because American consumers and businesses took on way too much debt and are now collapsing under the weight of it. As consumers retrench, companies that sell to them are retrenching, thus exacerbating the problem. The banks, meanwhile, are lending. They just aren't lending as much as they used to. Also the shadow banking system (securitization markets), which actually provided more funding to the economy than the banks, has collapsed.

The banks aren't lending because their balance sheets are loaded with "bad assets" that the market has temporarily mispriced. The reality: The banks aren't lending (much) because they have decided to stop making loans to people and companies who can't pay them back. And because the banks are scared that future writedowns on their old loans will lead to future losses that will wipe out their equity.

Bad assets are "bad" because the market doesn't understand how much they are really worth. The reality: The bad assets are bad because they are worth less than the banks say they are. House prices have dropped by nearly 30% nationwide. That has created something in the neighborhood of $5+ trillion of losses in residential real estate alone (off a peak market value of housing about $20+ trillion). The banks don't want to take their share of those losses because doing so will wipe them out. So they, and Geithner, are doing everything they can to pawn the losses off on the taxpayer.

Once we get the "bad assets" off bank balance sheets, the banks will start lending again. The reality: The banks will remain cautious about lending, because the housing market and economy are still deteriorating. So they'll sit there and say they are lending while waiting for the economy to bottom.

Once the banks start lending, the economy will recover. The reality: American consumers still have debt coming out of their ears, and they'll be working it off for years. House prices are still falling. Retirement savings have been crushed. Americans need to increase their savings rate from today's 5% (a vast improvement from the 0% rate of two years ago) to the 10% long-term average. Consumers don't have room to take on more debt, even if the banks are willing to give it to them.

BUYING THE BOUNCE!

The markets have rallied swiftly since early March. Lack of clarity on the mega bailouts does not appear to concern the markets at the moment; and everyone seems optimistic ahead of the upcoming G20 meeting.









Speculators, Traders and Investors:
Bear Market rallies can be quite convincing as they can occur without any fundamental change for the better. The markets were oversold with the S&P500 well under 700 and panic stricken traders were forecasting the DJIA at 5000 levels.
The current market volatility is almost impossible to trade, with huge intraday directional changes, as hopes and dashed hopes (read: bailouts and failing instant fixes and solutions) keep traders on their toes.
Some make money buy buying markets when the sell off sharply, others get stuck in losing positions when the markets resume their decline.
For now, this market appears to be a traders market - where only the extremely lucky and nimble traders stand a chance of coming out ahead.
Longer term investors would do well to watch out for the coming earnings season and signs of further stress in the economy before jumping in right away.
It's painful to watch a market rallying away without reason ( especially when you are not in it - & the fundamentals don't justify a rally !), but its more painful to jump in too early; only to get stuck in a losing position in a chaotic market.
The market can stay irrational a lot longer than you can stay solvent!
It important to remember that bear markets can be irrational at times and last longer than people expect. As an Indian analyst Ramesh Damani recently commented : Equity returns are never linear - i.e. a stock can stay undervalued for an extended perid of time before suddenly turning into a multi bagger.
Good companies and solid balance sheets are not immune to bear market declines.

My caution at this stage is mainly due to worries that market regulators and the authorities are busy with just stabilizing the market and averting a near term 'panic collapse' rather than solving long term fundamental flaws that caused this mess in the first place.

As someone recently said; a recession is part and parcel of the economic cycle, but a depression is a collapse of the system of debt.
At this stage though, its all about stabilizing the ship, so as the Fed and US Treasury say - take on more credit, go out and spend it and hope that we can get the party started again.