Monthly Archives: June 2015
Quiet crisis in Puerto Rico
Puerto Rico poses a ‘substantial threat’: Strategist/CNBC/6-30-2015
MK note: With the world’s attention on Greece, what is going on in little Puerto Rico has gone unnoticed. That is until yesterday’s announcement of Puerto Rico’s intention to declare a “moratorium” on its debt payments. Two bond insurers, Assured Guarantee and MBIA, had their stock prices hammered yesterday due to their exposure in Puerto Rico. Assured Guarantee shares were down 13% and MBIA shares down 23%.
“It’s a substantial threat,” bond expert Larry McDonald said Monday on CNBC’s Power Lunch. “The problem we’re seeing around the world is that political officials that are borrowing money in the capital markets have not been completely forthcoming about their financials.”
We recall the AIG collapse in 2008 – a centerpiece of the financial crisis. AIG was a major seller of credit-default swaps, a form of insurance against default on assets tied to corporate debt and mortgage securities. In the end, the federal government bailed out AIG to the tune of $85 billion. Yesterday’s reports had exposure at Assured Guarantee and MBIA at a mere $10.3 billion, but we are talking about their exposure in Puerto Rico only. If McDonald is right, this “quiet” and developing problem could go much deeper.
Puerto Rico’s total sovereign debt is $72 billion and, as declared by its governor, “unpayable.”
Gold as a mathematical construct
For those who take the technical approach to market problems, here’s a mathematical construct on using gold as a portfolio hedge:
“We look at [gold] purely from a risk management perspective and not just a return generating investment instrument. An analysis of the correlation between returns generated by gold and those generated by equities and bonds over various time periods brings out the lack of correlation between gold returns and those generated by both debt and equity. And even though this negative correlation increases with time, our research shows that it reaches a maximum of -0.27 over a 5 year period which is an extremely low level. Therefore, gold becomes the ideal diversification tool which based on empirical analysis reduces volatility without hampering returns. This results in a sharply higher risk adjusted return, which can only be good news for long term investors.”
– Amit Nigam of Peerless Fund Management
MK note: Funny. Using empirical analysis he comes to the same place I do via an attempted understanding of economic history. Something for all the engineers out there who read these pages. . . . . . . It still comes down to viewing gold as a long-term savings alternative detached from the currency (whatever currency you happen to use in your financial accounts).
BubbleTalk
For Robert Shiller, the prominent Yale University behavorial economist and Nobel Prize laureate, mathematics and historical example play a key role in predicting market bubbles.
“I think that compared with history,” he says, “US stocks are overvalued. One way to assess this is by looking at the CAPE (cyclically adjusted P/E) ratio that I created with John Campbell, now at Harvard, 25 years ago. The ratio is defined as the real stock price (using the S&P Composite Stock Price Index deflated by the CPI) divided by the ten-year average of real earnings per share. We have found this ratio to be a good predictor of subsequent stock market returns, especially over the long run. The CAPE ratio has recently been around 27, which is quite high by US historical standards. The only other times it has been that high or higher were in 1929, 2000, and 2007—all moments before market crashes. . . This time around, bonds and, increasingly, real estate also look overvalued. This is different from other over-valuation periods such as 1929, when the stock market was very overvalued, but the bond and housing markets for the most part weren’t. It’s an interesting phenomenon.”
Stop. Look. Listen.
MK
Closer to home. . .
Puerto Rico is broke. Seeks moratorium on debt payments. Governor says “$72 billion public debt is unpayable.”
MK note: Caribbean’s Greece looking to Prexit? Issue its own currency. Repudiate debts. Maybe Varoufakis can head up the negotiating team in his spare time.
Donald Trump tells it like it is. . .
“We’re at $18 trillion now. We’re soon going to be at $20 trillion. At $24 trillion, that’s the point of no return. We will be there soon. That’s when we become Greece! That’s when we become a country that’s unsalvageable.”
MK note: Of course he’s talking about the U.S. national debt. Politicians talk about the political deficit. Businessmen talk about the reality of the uncontrollable national debt and the potential interest payments that stand in the way of raising interest rates to historic norms.
Talk about bad timing. . . .
Report issued today of all days. . .
Bank for International Settlements blasts world’s central banks on “persistent exceptionally low rates reflect the central banks’ and market participants’ response to the unusually weak post-crisis recovery as they fumble in the dark in search of new certainties.”
London’s Telegraph says, “The world will be unable to fight the next global financial crash as central banks have used up their ammunition trying to tackle the last crises, the Bank of International Settlements has warned.”
MK note: On second thought, maybe their timing could not have been better. Many inquiries and purchases past few days at USAGOLD offices. Pent-up demand unleashed. . . .
Global stocks take a hit on Greece bank, bourse holiday
DJIA – 350.33 (-1.95%)
NASDAQ -122.04 (-2.4%)
Germany DAX -409.23 (-3.56%!!)
France CAC -189.35 (-3.74%)
UK FTSE -133.22 (-1.97%)
Best analysis we see is that no one knows for certain the fallout from Greece in the rest of Europe. General perception is that others on EU’s periphery with weak sovereign finances, i.e. Italy, Spain, Portugal might see fit to follow suit if Greece opts for exit/monetary sovereignty – or to use it as a cudgel with respect to their own dismal financial picture. Such concerns send ripples through financial markets everywhere, hence the big drops per above particularly in Germany and France.
Bank holiday in Greece Monday
Where there’s smoke. . . . .there’s (ahem) smoke. (We haven’t gotten to the fire stage yet.)
“Greek leaders planned to shutter their banks on Monday amid last-ditch discussions about their nation’s economic future, as panicked citizens tried to pull their money from their accounts while they still were able.”
Gold up $10.50 . . . .at $1186 late Sunday.
P.S. They are also closing the stock exchange Monday.
Shanghai Gold Exchange in talks to list products on CME
26-Jun (Reuters) — The Shanghai Gold Exchange (SGE) is in talks to list its bullion products on CME Group’s trading platform and launch yuan-denominated bullion contracts in Dubai, an exchange official said.
China, the top producer and a leading consumer of gold, is seeking to boost its global presence in the bullion market and increase the use of its currency, while also opening up its own markets to foreign players.
State-run SGE, the world’s biggest physical bullion exchange, will initially list its products and prices on CME, whose members and clients will be allowed to trade the Chinese exchange’s products, SGE Vice-President Shen Gang told an industry conference on Thursday.
In the next phase, SGE members will be able to trade CME products via SGE, Shen said, according to presentation slides, adding the bourse was also in talks to list yuan-denominated gold contracts on the Dubai Gold and Commodities Exchange.
[source]
The Daily Market Report: Gold Consolidates Amid Hope for Last-Minute Greek Deal
26-Jun (USAGOLD) — Gold eked out a new low for the week in early New York trading, but quickly rebounded intraday. The yellow metal remains well contained within the recent range as the market awaits an outcome on the Greek crisis.
Greece was offered a €15 bln deal earlier today that would have kicked the can until November. However, the offer was quickly rejected by Greek PM Tsipras, who categorized it as “blackmail”.
Earlier in the week German chancellor Merkel declared that she would not allow Greece to blackmail Germany. She went on to warn that if a deal is not struck before markets open on Monday, capital controls would be likely in Greece and default would be increasingly likely.
The rhetoric is certainly not reflective of negotiations that are achieving any kind of success. Nonetheless, markets seem to be holding out hope for a last-minute deal, as we’ve seen numerous times in the past.
After all, the policymakers and technocrats of Europe have summer holidays to plan. A Greek default will ruin the rest of summer! So, they have to kick the can beyond August at a minimum.
The Chinese stock market tanked on Friday, dropping 7.4%. It was the biggest one-day point drop in 7-years. That puts the Shanghai composite index down 19% from its mid-June peak. The swing from raging bull market, to the cusp of a bear market, has taken just 2-weeks.
As noted on this page in recent months, we’ve seen a lot of clients buying gold with funds they’ve taken out of the stock market. They have expressed concerns that shares are overvalued and they are taking money off that table and bolstering their hedge positions. They typically view gold as being undervalued at these levels.
Apparently the same thing is happening in China. Chinese imports of the yellow metal via Hong Kong surged 36% in May.
The heightened volatility in Chinese stocks seen in June is likely to help underpin gold, driving safe-haven demand. Continued uncertainty about Greece, even if some sort of agreement is reached, should also be supportive.
The time to own your safe-haven is before you actually need it. The May surge in Chinese gold imports suggest some Chinese investors were ahead of the curve. Certainly some of our clients have been ahead of the curve as well.
China Stocks Plunge to the Brink of a Bear Market
26-Jun (Wall Street Journal) — A Chinese stock market slump that began two weeks ago deepened, with the main index tumbling on concerns the government is seeking to cool a yearlong debt-fueled rally.
The Shanghai Composite Index fell 7.4% Friday to 4192.87. The index is off 19% since a June 12 high, a decline that has wiped off $1.25 trillion in market capitalization, an amount roughly equal to the size of Mexico’s economy.
…“There’s widespread panic today and some of my friends got margin calls and were forced to sell their stocks at deep losses. There was too much leverage in this market and it’s crazy,” said Yunfeng Wu, an investor in Shanghai.
[source]
China’s Gold Demand Seen Getting a Boost If Stock Rally Fades
24-Jun (Bloomberg) — China’s gold demand may rise if the country’s stock market reverses its rally, according to the World Gold Council.
Demand in the world’s largest user may rise as high as 1,000 metric tons, a nearly 3 percent increase from last year, Roland Wang, China director of the London-based group, told reporters in Shanghai on Wednesday. Consumption sank in the first quarter as investors flocked to the Shanghai Composite Index’s 16 percent gain while bullion prices stalled.
“We will be more confident to say China’s demand in 2015 will beat 2014 if we see an end of the stock market rally and a start of a gold price surge,” Wang said. “Chinese investors usually seek asset tools to prevent risks in stock markets and chase rallies in gold.”
[source]
PG View: The surge in June imports, amid recent stock market volatility, suggests the shift from shares to gold may already be underway. The Shanghai Composite Index fell 7.4% today, it’s biggest drop in 7-years. The index is now down 19% and on the verge of a bear market in just 2-weeks.
Jittery Chinese investors park their cash here
26-Jun (CNBC) — A rise in Chinese gold imports suggests that investors seeking a safe haven from the turbulence in stock markets may be parking their cash in the precious metal.
China’s gold imports via Hong Kong rose 36 percent month-on-month and 35 percent year-on-year to the highest level since January, Capital Economics said in a note on Friday, citing data from the Hong Kong Census and Statistics Department. Net gold imports from gold dipped to 52.204 tonnes in April from 66.363 tonnes in March.
“We think investors are becoming increasingly worried about a more pronounced correction in China’s stock market and will return to gold to diversify their portfolios,” Simona Gambarini, commodities economist at Capital Economics said in a note.
…”The sharp rise in the local equity market in China is likely to have weighed on gold demand in the past few months. However, investors might be seeking once again the safety of gold, as recent gains in the stock market are deemed unsustainable” Gambarini said.
[source]
Greece’s Tsipras Rejects EU Debt Deal `Blackmail’
26-Jun (Bloomberg) — Greek Prime Minister Alexis Tsipras used strong language in rejecting offers from the nation’s creditors to unlock as much as $17.3 billion in aid for the country, saying they won’t accept blackmail.
[source]
Greece offered six-month extension and €15bn; Tsipras calls it ‘blackmail’
26-Jun (Irish Examiner) — It is reported Greece has been offered a six-month bailout extension in return for agreeing to more austerity measures.
The package is said to be worth €15bn and would prevent a so-called Grexit.
Greece needs to make a €1.6m repayment to the IMF by Tuesday, or risk a default.
The Irish Examiner’s European Correspondent Anne Cahill believes a deal is very close.
“They have told the Greeks they will give them €15bn over the next five months if they accept the deal now,” she said.
“Everybody expects that (between now and the end of that six-month period) they will talk about a third bailout, because of course (the Greeks) are not at the end of their woes yet.”
However, the plan seems to have been rejected by the Greek prime minister Alexis Tsipras, who says his counterparts are ignoring the very principles of a European Union.
Leaving the summit, Tsipras accused others of trying to “blackmail” him.
[source]
Greek Bank Deposits Fall to Eleven-Year Low
26-Jun (Bloomberg) — Greece’s bank deposits hit an 11-year low in May.
Official data from the Bank of Greece today showed deposits fell €3.8 billion to €129.9 billion at the end of last month, marking a 21 percent plunge since November. That was just before then-Prime Minister Antonis Samaras brought forward a vote for a new president that led to his government’s downfall.
With Greece’s continued presence in the euro hanging in the balance, and the threat of capital controls looming if Prime Minister Alexis Tsipras fails to reach a bailout deal with creditors, the outflow has continued in June.
[source]
Greece’s Creditors Propose $17.3 Billion Package to End Standoff
26-Jun (Bloomberg) — Greece’s creditors are proposing a five-month program extension and 15.5 billion euros ($17.3 billion) of funding to resolve a standoff with Prime Minister Alexis Tsipras’s government, said a European official.
The proposal by Greece’s three creditor institutions — the International Monetary Fund, the European Central Bank and the European Commission — would extend Greece’s bailout program through November, the official told reporters in Brussels, asking not to named because negotiations are ongoing.
[source]
PG View: A third bailout? This solves nothing unless there are significant fiscal reforms required; something Greece has been loathe to implement.
Gold easier at 1172.96 (-1.45). Silver 15.81 (-0.075). Dollar & euro consolidate. Stocks called higher. US 10yr 2.42% (+1 bp).
China readies to launch yuan gold fix before year-end
25-Jun (MINING.com) — China, the world’s top gold producer and one of the biggest consumers, is in talks with the Chicago Mercantile Exchange Group to set a deal that would see the Shanghai Gold Exchange (SGE) and CME listing each other’s contracts on their respective exchanges.
The move comes as China readies to launch its own yuan-based bullion fix later this year via the SGE, the world’s biggest physical gold exchange, according to Shen Gang, vice president of the SGE, as reported by Bloomberg.
…The goal for China is to boost its influence in global commodities and currency markets while trying to make the yuan a viable competitor to the U.S. dollar.
[source]
For The First Time Ever, QE Has Officially Failed
25-Jun (ZeroHedge) — Over two years ago in “Desperately Seeking $11.2 Trillion In Collateral”, Zero Hedge first warned that as a result of relentless central bank monetization of debt, liquidity in bond markets would decline at an ever faster pace even as, paradoxically, these same central banks added “phantom liquidity” (the topic of another post from two years ago) to equity markets in their attempt to artificially inflate stock prices to record levels without fundamental justification.
Sure enough, with the usual 2-5 year delay, in 2015 the primary financial topic sweeping the mainstream financial media and all the “serious” pundits, is the collapse in bond market liquidity.
Some, the more naive ones, blame regulation. Others, such as iconic Citigroup credit strategist Matt King strategist explained – once again – that Dodd Frank is a negligible reason for the total plunge in bond market liquidity which is the result of, just as we warned, central bank intervention and the relentless ascent of algorithmic trading.
But even as everyone is finally arguing about the cause of the plunging bond market liquidity and has no clue how to resolve this biggest nightmare for what once used to be the deepest and most liquidity of markets (at least not without forcing central banks to sell the trillions in bonds they hold, a step which would free up collateral but also result in the biggest market crash ever), a far more ominous question has reappeared. One which, as usual, we asked nearly three years ago: what happens when central banks soak up too much liquidity.
Our answer, at that point, QE will have officially failed, because instead of lowering bond yields – which as a reminder is the primary QE transmission mechanism, one which forces investor to reach not only for yield but also for risk in other asset classes such as equities – any incremental bond purchases will start raising yields as the adverse impact from the illiquidity “premium” surpasses the price appreciation benefit from frontrun central bank buying.
[source]
PG View: When Fed governor Tarullo said earlier today expressed concerns about liquidity in the bond market drying up, he added tat it was unclear why it was happening. “I don’t think there is at this point a very precise and convincing explanation for exactly what has happened,” said Tarulla. Seems pretty obvious to me . . .