Timeframes of bulls/bears from hussman

http://pragcap.com/cyclical-bulls-within-secular-bears-their-short-duration

John Burbank on QE/Gold,etc from ZH

So Much For John Burbank Turning Bearish On Gold

Submitted by Tyler Durden on 05/09/2011 13:27 -0400

• Central Banks
• Greece
• Japan
• John Burbank
• Portugal
• Precious Metals
• Quantitative Easing

One of the key catalysts that precipitated the perfect storm in precious metals selling last week was the WSJ article that John Burbank, among others, had sold off some or all of his holdings. Today, in a Bloomberg TV interview, Burbank refutes all the skeptics who think the top of gold is here, and makes it clear that while his offloading of the precious metal was merely a temporary trade to lock in profits, the long term fundamentals for gold are as strong as they have every been. So here it is: “The biggest reason to stay in gold is because central banks around the world can see the writing on the wall long term, which is that the dollar will be devalued one way or another and that Congress has no appetite for hard decisions which would be deflationary in nature, and therefore, make the dollar higher than gold and not as much of a necessary holding. You also have the Chinese consumer, who has become a very large buyer, matching almost the Indian consumer and I think quite clearly, will exceed the Indian consumer. I think ultimately, physical gold is the story. It is a scarcity story. The more the U.S. dithers and the more the Fed is willing to print money, as opposed to dealing with inflation properly, the more this trend will happen. That is the biggest reason to stay in gold right now. Otherwise, most of the beneficiaries of quantitative easing will be backing off as most investors get back to neutral.”… “I think that long-term it is clear sovereign yields will be weak and commodities will be strong. It just a question of when we get there and when we price that in.” As for risk assets heading toward June 30: “I think risk assets sell off.  I think they sell off now into it and we bottom again in commodities this summer.” And there you have it, straight from the horse’s mouth, instead of from some FRBNY pre-cleared journalist.

Burbank on if he’s exiting the gold market or just trimming holdings:

“We have hedged ourselves across all commodities, we’re invested in many different commodity equities, including energy, base materials, gold, and agriculture. We feel the repositioning of investors, looking at the end of QE2, is responsible for risk coming off. Gold is one of those things that investors bought to not be devalued against the dollar. The dollar is getting stronger against the euro. We think this is a temporary correction. Gold also typically bottoms seasonally in August. I can’t imagine it not being strong until then.”

On if this is a temporary pause:

“Unfortunately, we are having to watch the Fed and the governments around the world, whether it is China, the U.S., or Europe and then follow. It is like we’re watching the last table at the world series of poker. All of these huge players with these huge amounts of chips, and we have to play how we perceive them to be playing. I think the Fed will end QE2, then it’s going to see what happens. I think risk assets sell off.  I think they sell off now into it and we bottom again in commodities this summer. I think the better bet is to be cautious and just have some perspective about where things traded when QE2 started. Gold was $1350. Oil was $85. Silver was $25. I am not predicting it will go back to these levels, but the better bet, unless there is some other kind of liquidity coming from governments, is that they trend back those levels.”

On if credit will freeze up again at the end of QE2:

“No, I do not think so. Markets and credits that have been provided to markets have done well. The oddity of all this is, likely, sovereign U.S. yields will tighten. The U.S. 10-year was trading around 2.61% at the beginning of November. There is a long way to go down actually to get back there. I think that long term is different than the short term. Short-term risk aversion will lead more money into the dollar probably than into sovereign bonds. But long term is a different story.”

On pulling back on some of his other commodity bets:

“Hedge funds need to make money on a near-term basis, just like a mutual funds need to try keep up with their benchmarks. The Fed, by doing what it did with quantitative easing, forced a repositioning almost unwillingly by many investors to make inflationary bets, as well as to avoid being devalued as the dollar fell and fell and fell. So now you have a reversion to that trade and then things settle out. Then we will see what is strong, what is weak. I think that long-term it is clear sovereign yields will be weak and commodities will be strong. It just a question of when we get there and when we price that in.” 

On central banks becoming more of a player in the central market and how that changes the trade:

“The biggest reason to stay in gold is because central banks around the world can see the writing on the wall long term, which is that the dollar will be devalued one way or another and that Congress has no appetite for hard decisions which would be deflationary in nature, and therefore, make the dollar higher than gold and not as much of a necessary holding. You also have the Chinese consumer, who has become a very large buyer, matching almost the Indian consumer and I think quite clearly, will exceed the Indian consumer. I think ultimately, physical gold is the story. It is a scarcity story. The more the U.S. dithers and the more the Fed is willing to print money, as opposed to dealing with inflation properly, the more this trend will happen. That is the biggest reason to stay in gold right now. Otherwise, most of the beneficiaries of quantitative easing will be backing off as most investors get back to neutral.” 

Burbank on if he’s looking to get back into physical gold:

“Our preference is in two areas. Physical gold and smaller cap common junior minors. We have two geologists based in Vancouver, and we think we have a good edge on which explorers are the right ones to own. We are buying, even now, and will continue to be to accumulate stakes there. Barrick and Newmont have come off at least 10% in the past couple of weeks. I think the gold stocks are discounting a further fall in gold and we don’t know if it was going to happen. If there was another government intervention that provided a lot of liquidity in the world, then we would be quicker to come back in.” 

“After the earthquake, Japan put a lot of liquidity into the market, which held up risk assets longer than they would have. Europe dealing with its issues with Portugal, Greece, etc. We do not know how they may change their posture. Europe has the belief that there will be some change in stance by the central bank as well as potentially by the euro community. We don’t know. Also, the end of QE2, is so heavily understood, that will happen, but not understood what will happen after that. It is possible the Fed has something up its sleeve. It knows risk assets will be selling off at the end of this. At least I hope it knows that.”

GS’s Take on Obamas Debt Reduction Plan

from zh:

BOTTOM LINE: The president has released a budget proposal that goes beyond his budget proposal for fiscal year (FY) 2012.  The most important new items are a “debt trigger” that would result in across-the-board cuts in spending and tax credits/deductions if debt/GDP goals are not reached, additional reduction in defense and non-defense discretionary spending and an endorsement of additional entitlement reductions. In most cases, the proposal outlines savings only at a high level.

Key points:

Process changes:  A new “debt trigger proposal”. The president proposes to reduce the deficit by a cumulative $4 trillion over twelve years (through 2023), though it is not entirely clear what baseline this savings number is relative to. The president also proposes to establish a debt trigger that would enforce across the board cuts in spending and “tax expenditures” if by 2014 “the projected ratio of debt-to-GDP is not stabilized and declining toward the end of the decade.”  For example, the current CBO baseline assumes an increase in the debt to GDP ratio from 2018 to 2020 of 75.3 to 76.2, so if this policy were to apply today (rather than 2014 as proposed), it would imply additional fiscal tightening as we understand the proposal.

Discretionary spending:  More discretionary cuts reflect recent congressional debate. President Obama’s new proposal would reduce non-defense discretionary spending by an additional $200 billion over ten years compared with the freeze proposed in his FY2012 budget, released in February.  To some extent this probably reflects the fact that any freeze over future years would start at a lower level, and thus presumably generates additional cumulative savings. The president indicates that additional savings would also be found in defense discretionary spending; the White House fact sheet identifies $400bn in savings over twelve years (through 2023) beyond the savings from ramping down overseas military operations. Some of this reduction appears to be new, but it isn’t clear how much it overlaps with existing proposals to reduce defense spending.

Taxes: Few specifics.  The president endorses the concepts behind the fiscal commission’s proposal, namely to reform the tax code and reduce tax expenditures. Note that the fiscal commission recommendations included multiple reform scenarios. He also indicates that increased revenue should make up only one quarter of total budgetary savings (including interest savings), in line with the fiscal commission’s approach.  Note that the president’s budget in February already assumed expiration of upper-income tax cuts after 2012 as well as a limitation on itemized deduction by higher-income taxpayers; we assume the discussion of those issues in his speech relates to those proposals, as there were

Mandatory spending: Less deficit reduction than the House proposal.  President Obama proposes $340bn in savings from additional health reforms over the next ten years. This does not appear to involve the fiscal commission’s recommendations. Instead, it assumes savings from setting an even lower spending growth goal of GDP + 0.5% for the Independent Payment Advisory Board (IPAB) set up under last year’s health reform law, as well as $100bn in Medicaid savings and $200bn in Medicare savings.  This is a much lower aggregate defcit reduction amount from this segment of the budget than included in the House Republican budget resolution, which proposes $1.1 trillion in savings compared with the President’s FY2012 budget. The President proposes $360bn in savings through 2023 (i.e. over twelve years) in “other mandatory” spending, compared with the House proposal to reduce spending by $1.8 trillion through 2021 (i.e. over ten years).

Social Security: No near term changes.  Like congressional proposals, the president does not propose any near term savings from the Social Security program, though he endorses long-term reform.

The process from here:  A major debate over revenue vs. spending levels, with discretionary spending caps still the most likely near-term action.  It appears very unlikely that the House of Representatives will be willing to consider a meaningful increase in tax revenues, and although both parties have proposed mandatory spending reduction, the House budget proposal would generate much greater savings in this area. This takes the debate back to discretionary spending, where cuts are likely to be approved this week as part of the FY2011 process, and where it appears likely additional cuts or caps, as well as budget process reforms, will be proposed as part of the upcoming debt limit debate as well as the FY2012 budget process that is now getting underway.

 

2010 worries vs 2011 worries and the market is even higher

From Rosie:

TABLE 1: EVENT RISK – 2011 VERSUS 2010

2010                                                 2011

1. Europe                                      1. Middle East/North Africa

2. End of QE1?                            2. Japan

3. Midterm elections                 3. Europe

4. Bush tax cuts                           4. Food & fuel inflation

5. Policy tightening in EM (and ECB policy mistake?)

6. End of QE2?

7. U.S. debt ceiling

8. State governments versus public sector unions

9. Federal/Ontario elections

10.Payroll tax cuts/bonus depreciation allowance (ended                                                                on December 31)

Black Swan Events

Black Swan events over the past decade

• Sept. 11, 2001, attacks on the World Trade Center and Pentagon;
• 78% decline in the Nasdaq;
• 2003 European heat wave (40,000 deaths);
• 2004 Tsunami in Sumatra, Indonesia (230,000 deaths);
• 2005 Kashmir, Pakistan, earthquake (80,000 deaths)
• 2008 Myanmar cyclone (140,000 deaths);
• 2008 Sichuan, China, earthquake ( 68,000 deaths);
• Derivatives roil the world’s banking system and financial markets;
• Failure of Lehman Brothers and the sale/liquidation of Bear Stearns;
• 30% drop in U.S. home prices;
•  2010 Port-Au-Prince, Haiti, earthquake (315,000 deaths);
• 2010 Russian heat wave (56,000 deaths);
• 2010 BP’s Gulf of Mexico oil spill;
• 2010 market flash crash (a 1,000-point drop in the DJIA);
• Surge of unrest in the Middle East; and
• Thursday’s earthquake and tsunami in Japan.

 

Its always something from left field that clocks you

We all talk about sovereign debt woes, banks filled with toxic assets,etc but this time the big selloff came from japans mighty 9.0 earthquake and tsunami that is reportedly to have killed over 10,000 people.  Japan is in trouble and the money printing and monitization of debt will hit warp speed now so short the yen into this repatriation panic as the worlds most overvalued currency will get more overvalued before it really cracks from QE to infinity

 

From the New York Times we read…

An explosion early Tuesday morning damaged the No. 2 reactor at Japan’s Fukushima Daiichi Nuclear Power Station, the third in a series of blasts that have now hit each of the three crippled reactors at the plant, plant officials said.

It was not immediately clear if the blast was caused by the buildup of hydrogen, as occurred at the two other reactors at Daiichi — one on Saturday and the most recent one on Monday, when there was also a large explosion at the No. 3 reactor. Some early reports in the Japanese press suggested the latest explosion amounted to a different and more critical problem than the previous two.

This explosion, reported to have occurred at 6:14 a.m., happened in the “pressure suppression room” in the cooling area of the reactor and inflicted some degree of damage on the pool of water used to cool the reactor, officials of Tokyo Electric Power said. But they did not say whether or not the incident had impacted the integrity of the steel containment structure that shields the nuclear fuel.

Any damage to the steel containment vessel of a nuclear reactor is considered critical because it raises the prospect of an uncontrolled release of radioactive material and full meltdown of the nuclear fuel inside. To date, even during the four-day crisis in Japan that amounts to the worst nuclear accident since Chernobyl, workers had managed to avoid a breach of a containment vessel and had limited releases of radioactive steam to relatively low levels.

Details of what happened remain unclear, with executives of Tokyo Electric Power, the plant’s operator, giving only preliminary reports and declining to answer questions from reporters pressing for more information, while repeatedly apologizing “for causing concern and inconvenience.”

The US market tried mightily to ignore the Japanese situation, the worsening banking problems in Europe, and the growing Saudi-Bahraini problems on Monday and faired well considering.  However, it seems implausible that these problems can be ignored indefinitely.  Watch for weakness soon.

food costs

 

Inflation Heat Map from ZH

http://graphicsweb.wsj.com/documents/INFLATION1101/INFLATION1101.html#view=ecSizeDESC

Here comes the Feds latest market melt-up strategy

From ZH:

Earlier this week we predicted that the US Treasury would wind down its SFP program, unleashing $200 billion in 56-day non-rollable “Fed bonds” on the market. We predicted this would occur by mid-February. As of a few minutes ago, the Treasury has just confirmed that starting February 3, this will be precisely the case. Per the Treasury, supplementary financing account to fall to USD 5bln, with the reason being the traditional explanation: decreasing funds in account as country nears debt ceiling.

As the revised table below shows, each Thursday beginning February 3 we will now see an incremental $25 billion in extra liquidity as the maturing 56-Day CMB is not rolled.

From the US Treasury:

Treasury Issues Debt Management Guidance on the Supplementary Financing Program

1/27/2011

WASHINGTON – The U.S. Department of the Treasury’s Assistant Secretary for Financial Markets, Mary Miller, today issued the following statement on the Supplementary Financing Program:

“Beginning on February 3, 2011, the balance in the Treasury’s Supplementary Financing Account will gradually decrease to $5 billion, as outstanding Supplementary Financing Program bills mature and are not rolled over. This action is being taken to preserve flexibility in the conduct of debt management policy.”?

Here is what we predicted on January 24:

Here Comes Another $25 Billion In Excess Weekly Liquidity To Ramp Up Stocks

Frequent readers may recall that 11 months ago, when the economy was falsely rumored to be doing better, and the Fed was expected to take baby steps in withdrawing liquidity (only to end up having to inject another $900 billion shortly… and probably much more soon), one of the key mechanisms used was the Treasury’s Supplementary Financing Program, whereby the Treasury would issue 56-Day Cash Management Bills each week with a $200 billion ceiling. In addition to funding the Treasury with a $200 billion debt ceiling buffer, the program was supposed to extract a fifth of a trillion in liquidity which would be locked into the rolling of each 56 day bill (each one amounting to $25 billion) up to a total of $200 billion, as disclosed each day in the Treasury’s DTS SFP Table 1 open cash balance. Well, not even 11 full months later, it is now time to unwind the program. The immediate catalyst for the unwind of the SFP is that the Treasury will most certainly breach the debt ceiling by the end of March unless it gets the benefit of the $200 billion buffer, which counts toward the total debt issued by the UST. However, what that also means is that the US stock market is about to become awash with another $25 billion in suddenly free cash every single week, until the entire $200 billion SFP buffer is depleted. In other words, take the liquidity impact of POMO, which is roughly $25-30 billion a week, and double it! We are confident the US Treasury will announce that beginning with the week of February 14, it will no longer roll maturing 56-Day Cash Management Bills, which means that for the ensuing 8 weeks, one on every single Thursday, there will be a total of $200 billion in incremental liquidity flooding the market, and probably sending stocks, commodities, and everything else that is not nailed down into the stratosphere all over again.

Below is a table laying out our estimated weekly liquidity boost. We believe the starting date for the SFP winddown will be the week of February 14, although we could be off by one week in either direction. (Zero Hedge update: February 3 seem just about right).

This makes sense, especially when considering of our expectation that the Fed will force the market to do a repeat performance of 2010, whereby it goes parabolic through mid-April and then it is smashed in another flash crash like event due to some exogenous variable, opening up the path for further Quantitative Easing. That said, it is likely that the PDs and the Fed’s OMO will now orchestrate the perfect market boil up over the next 2 months as more than ample liquidity chases stocks at increasingly ridiculous multiples until the point where everything goes bidless just like on May 6.

 

FCIC on what caused the financial crisis

FCIC report:

• Alan Greenspan’s malfeasance — his refusal to perform his regulatory duties because he did not believe in them — allowed the credit bubble to expand, driving housing prices to dangerously unsustainable levels; Greenspan’s advocacy for financial deregulation was a “pivotal failure to stem the flow of toxic mortgages” and “the prime example” of government negligence;

• Ben S. Bernanke failed to foresee the crisis;

• The Bush administration’s “inconsistent response” — saving Bear, but allowing Lehman to crater — “added to the uncertainty and panic in the financial markets.”

• Bush Treasury secretary Henry M. Paulson Jr. wrongly predicted in 2007 that subprime meltdown would be contained.

• The Clinton White House, including then Treasury Secretary Lawrence Summers, made a crucial error in “shielding over-the-counter derivatives from regulation [CFMA]. This was “a key turning point in the march toward the financial crisis.”

• Then NY Fed President, now Treasury secretary Timothy F. Geithner failed to “clamp down on excesses by Citigroup in the lead-up to the crisis;” Further, a month before Lehman’s collapse, Geithner was still in the dark about Lehman’s derivative exposure;

• Low interest rates brought about by the Fed after the 2001 recession “created increased risks” but were not chiefly to blame, according to the FCIC (I place some more weight on Ultra-low rates than they do);

• The financial sector spent $2.7 billion on lobbying from 1999 to 2008, while individuals and committees affiliated with the industry made more than $1 billion in campaign contributions. The impact of which an incestuous relationship between bankers and regulators, Congress and bankers, and classic regulatory capture by the industry.

• The credit-rating agencies “cogs in the wheel of financial destruction.”

• The Securities and Exchange Commission allowed the 5 biggest banks to ramp up their leverage, hold insufficient capital, and engage in risky practices.

• Leverage at the nation’s five largest investment banks was wildly excessive: They kept only $1 in capital to cover losses for about every $40 in assets;

• The Office of the Comptroller of the Currency along with the Office of Thrift Supervision, “federally pre-empted” (blocked) state regulators from reining in lending abuses;

• The report documents “questionable practices by mortgage lenders and careless betting by banks;”

• The report portrays the “bumbling incompetence among corporate chieftains” as to the risk and operations of their own firms:

-Citigroup executives admitting that they paid little attention to the risks associated with mortgage securities.
-AIG executives were blind to its $79 billion exposure to credit default swaps;
-Merrill Lynch top managers were surprised when mortgage investments suddenly resulted in billions of dollars in losses;

• Fannie Mae and Freddie Mac “contributed to the crisis but were not a primary cause.” (Or as I called them, they were just two more crappy banks) The various home ownership goals set by the government were not culprits either.