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| Richard Koo (BloombergTV) |
"When the private sector is deleveraging and government deleverages too, the whole thing collapses. That's what happened during the great depression. We made the same mistake in Japan in 1997 and 2001, and I see Europeans making the same mistake right now. And if the U.S. congress makes a move towards fiscal consolidation, the U.S. will be making the same mistake next year; and I don't want to see that happen."
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| SILVER SPOT USD/OZ (source: Kitco.com) |
![[Most Recent Quotes from www.kitco.com]](http://www.kitconet.com/charts/metals/silver/t24_ag_en_usoz_2.gif)
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| GMO Commodity Index (Source: GMO April 2011 Letter) |
"Time to Wake Up: Days of Abundant Resources and Falling Prices Are Over Forever
Jeremy Grantham
Summary of the Summary
The world is using up its natural resources at an alarming rate, and this has caused a permanent shift in their value. We all need to adjust our behavior to this new environment. It would help if we did it quickly.
Summary
- Until about 1800, our species had no safety margin and lived, like other animals, up to the limit of the food supply, ebbing and flowing in population.
- From about 1800 on the use of hydrocarbons allowed for an explosion in energy use, in food supply, and, through the creation of surpluses, a dramatic increase in wealth and scientific progress.
- Since 1800, the population has surged from 800 million to 7 billion, on its way to an estimated 8 billion, at minimum.
- The rise in population, the ten-fold increase in wealth in developed countries, and the current explosive growth in developing countries have eaten rapidly into our finite resources of hydrocarbons and metals, fertilizer, available land, and water.
- Now, despite a massive increase in fertilizer use, the growth in crop yields per acre has declined from 3.5% in the 1960s to 1.2% today. There is little productive new land to bring on and, as people get richer, they eat more grain-intensive meat. Because the population continues to grow at over 1%, there is little safety margin.
- The problems of compounding growth in the face of finite resources are not easily understood by optimistic, short-term-oriented, and relatively innumerate humans (especially the political variety).
- The fact is that no compound growth is sustainable. If we maintain our desperate focus on growth, we will run out of everything and crash. We must substitute qualitative growth for quantitative growth.
- But Mrs. Market is helping, and right now she is sending us the Mother of all price signals. The prices of all important commodities except oil declined for 100 years until 2002, by an average of 70%. From 2002 until now, this entire decline was erased by a bigger price surge than occurred during World War II.
- Statistically, most commodities are now so far away from their former downward trend that it makes it very probable that the old trend has changed – that there is in fact a Paradigm Shift – perhaps the most important economic event since the Industrial Revolution.
- Climate change is associated with weather instability, but the last year was exceptionally bad. Near term it will surely get less bad.
- Excellent long-term investment opportunities in resources and resource efficiency are compromised by the high chance of an improvement in weather next year and by the possibility that China may stumble.
- From now on, price pressure and shortages of resources will be a permanent feature of our lives. This will increasingly slow down the growth rate of the developed and developing world and put a severe burden on poor countries.
- We all need to develop serious resource plans, particularly energy policies. There is little time to waste."
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| 10y Shanghai Property Index (000006.SS) - Yahoo Finance |
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| 4y Shanghai Properties Index |
"at this point, China’s monetary-policy makers are too far behind the curve. Inflation is entering crisis territory, as consumer prices for many products and services rise at double-digit rates. Signs of panic have appeared along with hoarding which, when it spreads, could trigger a social crisis."
"To change course, policy tightening must shift away from credit rationing and toward market mechanisms. Moreover, the interest rate must be lifted out of the negative column: It should be raised at least three percentage points to allay public fears. These changes are needed as soon as possible."
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| NYSE (Source: Wikimedia) |
'AAA/A-1+' Rating On United States of America Affirmed; Outlook Revised To Negative
Publication date: 18-Apr-2011 09:01:33 EST
- We have affirmed our 'AAA/A-1+' sovereign credit ratings on the United States of America.
- The economy of the U.S. is flexible and highly diversified, the country's effective monetary policies have supported output growth while containing inflationary pressures, and a consistent global preference for the U.S. dollar over all other currencies gives the country unique external liquidity.
- Because the U.S. has, relative to its 'AAA' peers, what we consider to be very large budget deficits and rising government indebtedness and the path to addressing these is not clear to us, we have revised our outlook on the long-term rating to negative from stable.
- We believe there is a material risk that U.S. policymakers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013; if an agreement is not reached and meaningful implementation is not begun by then, this would in our view render the U.S. fiscal profile meaningfully weaker than that of peer 'AAA' sovereigns.
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| BHAC/FGIC Collaboration (MSRB) |
"The majority of FGIC Co.-insured bonds were reinsured in January 2009 by National Public Finance Guarantee Corp., the investment-grade, muni-only insurer owned by MBIA Inc." (Bond Buyer)
"May 1 (Bloomberg) -- Detroit sold about $383 million of bonds carrying insurance from Berkshire Hathaway Assurance Corp., marking the first foray by Warren Buffett's four-month- old guarantor into the primary market for U.S. municipal debt."
"Detroit sold Berkshire-backed bonds at yields ranging from 2 percent on debt due in July to 4.75 percent on bonds set to mature in 2027. The largest single series of bonds -- $136 million of debt paying a 5.75 percent rate and due in 2031 -- were priced to yield 4.67 percent, 13 basis points less than Municipal Market Advisors' index of top-rated debt at similar maturities. A basis point is 0.01 percentage point."
"As the finance team crafted the transaction, they met with several monoline bond insurers with the hope of leaving the FGIC policy in place and bringing in a secondary insurer for additional protection. Officials considered Financial Security Assurance - which insures a remaining piece of the water and sewer bonds - but the insurer backed off because of its heavy coverage of much of the city's outstanding debt.
Only Berkshire Hathaway was interested in acting as a secondary insurer with FGIC, according to a source. "They didn't have the same idea about FGIC being in place on the bonds as the other insurers had," he said. "The Berkshire insurance really gilds the lily [on the bonds]." It will mark the first time that BHAC will act as insurer on a primary market transaction, officials said."
"Insuring tax-exempts, therefore, has the look today of a dangerous business – one with similarities, in fact, to the insuring of natural catastrophes. In both cases, a string of loss-free years can be followed by a devastating experience that more than wipes out all earlier profits. We will try, therefore, to proceed carefully in this business, eschewing many classes of bonds that other monolines regularly embrace."
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| JOE May 24 Call (CBOE.com) |
"The Board intends to consider the full range of available options including a revised business plan, operating partnerships, joint ventures, strategic alliances, asset sales, strategic acquisitions and a merger or sale of the Company. The Board of Directors has retained Morgan Stanley & Co. Incorporated to assist it in the evaluation of these alternatives." (source)
JOE 3yr chart - Stockcharts.com
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| Source: Youtube via Vanderbilt |
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| Detroit, Michigan - Source: Wikimedia |
"Good morning Honorable City Council. My budget presentation today marks the next step on the City of Detroitʼs path back to financial stability. We face challenges unlike any the city has ever seen, challenges that demand bold action and a business approach that this administration is prepared to take. We do not have the luxury of waiting for someone else to solve our problems.
• We must find savings of $200 million in this fiscal year to present a balanced budget.
Mayor Dave Bing
• If we do nothing, our deficit which today stands at $155 million will grow to approximately $1.2 billion by Fiscal Year 2015.
• Pension and medical costs are rising at an uncontrollable and unsustainable rate. From 2008 through 2011, the City of Detroit cut $40 million from service delivery to offset the rising cost of benefits.
• Without action, benefit costs will consume a larger and larger portion of our operating funds, potentially growing to 50% by 2015.
• Since 2000, revenue is down from $1.1 billion to $753 million. Our population is down more than 200,000 according to the recent U.S. Census report.
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| HRB Oct 17 Puts (Yahoo Finance) |
"H&R Block- $HRB January 12.50 and Jan 17 puts active on 36K contracts into April 18 tax deadline" (source)
"9,000 Oct 17 puts were purchased for $1.73, 9,000 Jan 12 puts were sold for $0.66, 7,500 Jan 15 puts were purchased for an average premium of $1.425 and 7,500 Jan 10 puts were sold for $0.35. Total of 33557 puts traded compared to the 10 day average volume of 3030." (courtesy of CrimsonMind.com)
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| HRB Jan 15-12.5-10 |
The stock is trading inside of a 3-year descending channel which started in 2008. Since the "RAL" scare in October, HRB is up 80% off of its low. You can see the two near-term trend lines HRB must hold in order to test descending channel resistance ($18.50-19.30). The yellow circle shows where the put spreads would profit, whether as a hedge against shares or a play on downside volatility. HRB implied volatility is at 35 and historical volatility is at 24.65 on the ISE. I don't know the exact nature of these trades if they were based solely on implied volatility. Please comment if you do. Interesting trades."H&R Block Inc said it would take a charge in the fourth quarter, as it lost some clients due to its inability to offer refund anticipation loans, sending its shares down 2 percent in extended trade.
HRB (FreeStockCharts.com)
The top U.S. tax preparer will incur a charge of about 5 cents a share in the quarter ending April 30."
"Keep that in mind as you read this recent market sentiment news from CNBC (4/6) about the latest Investors Intelligence survey:
"The number of investors with a bearish outlook plunged by more than a third in one week according to a widely followed investor survey released Wednesday, the largest amount of bears to throw in the towel in this poll since 2003."
The bears in that survey dropped from 23.1 percent to 15.7 percent in just one week. Apparently, the market's two-year rally has survey respondents feeling more optimistic -- not more cautious.
Many other groups also feel exceptionally bullish. The latest Elliott Wave Theorist reports that a "bullish consensus" has also crystallized among a wide range of investors and financial professionals:
Individual investors (AAII poll)—most bullish in six years(continue reading at ElliottWave.com)
Newsletter advisors (I.I. poll 20-week average)—most bullish in seven years
Futures traders (trade-futures.com poll)—most bullish in four years
Mutual fund managers (% cash)—most bullish ever
Hedge fund managers (BoAML survey)—most bullish ever
Economists (news-org polls)—unanimously bullish
Top global strategists (three national year-ahead panels)—unanimously bullish
Even most 'bears' on the economy are bullish on stocks because of inflation!"
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| Chart 1: DXY0 (U.S. Dollar Index) - FreeStockCharts.com |
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| MarkMobius (Twitter) |
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| George Soros via Wikimedia |
"Embargoed until 8am GMT Thursday 7th April 2011
Sovereign CDS (CMA Datavision)
Greece named as riskiest sovereign debt for the second quarter in succession
CMA today published its Sovereign Debt Credit Risk Report for the first quarter in 2011, click here to read.
No change at the top
The report found no change in the six riskiest sovereign debts, with Greece retaining its position as the world’s most risky for the second quarter in succession, with a 58% chance of a debt restructuring occurring within five years. Despite a rally in January, Greece widened to reach a high of 1100bp following downgrades by Moody’s in early March. Egypt and Lebanon have replaced Spain and Hungary in the top 10, with unrest in the Middle East making it a testing quarter for the region. Scandinavian countries again dominate the least risky sovereign debts. The Netherlands is a new entry at five, and Chile has ousted Australia from the top 10, a result of the lower market recovery assumption for emerging markets. The best performers of the quarter all came from Western Europe.
Sharp rises in the Middle East and North Africa flatten out
It was an eventful quarter for the Middle East and North Africa, with sharp rises in CDS prices occurring in Egypt, Tunisia, Saudi Arabia, Morocco, Bahrain and Israel at the end of January, triggered by the Egyptian people’s call for democratic elections. Except for Bahrain, the initial rise was followed by a relatively stable period in March, albeit at higher levels from the start of the quarter, perhaps signalling that markets believe that the unrest will not affect the economies in the longer term.
Japan shows resilience
Japan CDS showed remarkable resilience first to a downgrade by Standard and Poors to AA- at the end of January in the face of concerns over the $12trillion debt, and then to the devastating earthquake where the cost of protection initially jumped 40bp. Despite these events, the CDS ended only 27bp wider on the quarter at 99bp."
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| Jeffrey Gundlach on CNBC |
"The problem with high yield bonds is that their volatility is so high and they are priced for the reality of low defaults. For the last 12 months defaults on high yield bonds are under 1%; they were back in double digits just 2 years ago.."
"People compare high yield to Treasuries and they say Treasury bonds yield about 2%, and they use the whole basket of Treasuries; and then they say high yield to no losses, the way they quote it, yields about 6.75%. So it's a spread of almost 5 points; and they say, hey, that's historically average, so what's wrong with that? I point out that the volatility of high yield bonds is a lot more like the 20-year Treasury. It has a standard deviation persistently of 12. The Treasuries that they are comparing it to have a standard deviation persistently of 5. So you really can't compare high yield to the total basket of Treasuries, you need to compare it to the long Treasuries... The actual spread is only about 225 basis points, which is about as low as it's been in history"
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| Source: Wikimedia |
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| Portugal 10y Bond 8.76% (Bloomberg) |
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| EUR/USD (freestockcharts.com) |
"Clearinghouses and Financial Reform
Broadly speaking, the recent financial reform legislation bears on the future structure and role of clearinghouses in two different ways. First, it aims to increase the resilience of these critical institutions against severe financial shocks, the issue that I have emphasized thus far. Second, it also encourages the greater development and use of clearinghouses to address weaknesses identified in other parts of the financial system. Of course, increased reliance on clearinghouses to address problems in other parts of the system increases further the need to ensure the safety of clearinghouses themselves. As Mark Twain's character Pudd'nhead Wilson once opined, if you put all your eggs in one basket, you better watch that basket.
The theme of expanded use of clearinghouses as a tool to address other problems in the system is perhaps best illustrated by the derivatives provisions of the Dodd-Frank Act. Prior to the crisis, some of the same economic forces that had led to the development of clearinghouses for other instruments were already pushing industry participants toward greater use of clearinghouses for OTC derivatives transactions. For example, as one response to the growth of the market for interest rate swaps in the early 1990s, a clearinghouse was created in London in 1999 that, by the onset of the financial crisis, was handling a major portion of interdealer activity in those swaps. Also, in the years leading up to the crisis, the Federal Reserve Bank of New York initiated joint efforts with other regulators and market participants to improve clearing arrangements for credit default swaps. However, for several reasons, the willingness of market participants to move all derivatives transactions to clearinghouses was limited. Notably, many believed that the standardization of derivatives contracts that is needed for multilateral clearing imposed too high a cost on end users with needs for customized arrangements. Market participants also were concerned that the establishment of clearinghouse guarantees might require implicit subsidies from clearinghouse members with stronger credit to those with weaker credit.
These calculations, however, were substantially changed by the galvanizing events of 2008, notably the development of large and uncertain counterparty credit risks in many bilateral derivatives agreements. On the heels of the crisis, the Group of Twenty countries endorsed a policy of mandatory central clearing for standardized OTC derivatives. The aim was to reduce systemic risk in the financial system more broadly as well as to improve the transparency of the OTC derivatives markets. In the United States, title 7 of the Dodd-Frank Act incorporated a mandatory clearing policy for standardized derivatives. Other major countries are following suit. In the spirit of keeping a close eye on the basket, as dependence on clearinghouses grows, private-sector participants and regulators will need to review risk-management and member-default procedures for financial market utilities to ensure that they meet high standards of safety."
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| NIKKEI Volatility Index (Source: Bloomberg) |
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| Greece 5Y CDS - Bloomberg.com |
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| Greece 10Y Bond Yield - Bloomberg |
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| INETeconomics (Youtube) |
"Anyhow, rational expectations theory was pretty conclusively falsified by the crash of 2008 which caught most participants and most regulators unawares. The crash of 2008 also falsified the Efficient Market Hypothesis because it was generated by internal developments within the financial markets, not by external shocks, as the hypothesis postulates.Theory of Reflexivity:
The failure of these theories brings the entire edifice of economic theory into question. Can economic phenomena be predicted by universally valid laws? I contend that they can’t be, because the phenomena studied have a fundamentally different structure from natural phenomena."
"In human affairs thinking serves two functions: a cognitive one and a causal one. The two functions interfere with each other: the independent variable of one function is the dependent variable of the other. And when the two functions operate simultaneously, neither function has a truly independent variable. I call this interference reflexivity.
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| David Sokol on CNBC 3/30/2011 |
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| Lubrizol/LZ - Stockcharts.com |
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| NYSE - via CarmelBuds |
