This morning we were treated, once again, to confirmation that Europe is still in the middle of a deepening crisis. No, this was not a reflection of the terrible data, it was Mr. Hollande's insistence that "the crisis is behind us." Luckily we have a foil for this idiocy. Bernard Connolly, author of 'The Rotten Heart of Europe' explains to CNBC's Rick Santelli, "the point is that the union has produced this disaster; and the people who put the disaster in place hail it as a success. are they crazy? If they are, that's pretty disturbing! If they're not crazy, then the question of why they have done it is more disturbing." In a few brief minutes, uninterrupted by an anchor desperate for silver linings, Connolly explains to Santelli when asked of the future, that nothing will change in the short-term, "the potential ways of getting out of the mess are simply unthinkable," to both beggar and chooser, adding that "you have a cycle of deflation, depression, default, more banking crisis, more sovereign debt crisis, and social and political crisis." Simply put, Connolly concludes on social unrest, "I don't see any way of avoiding it."

 

    

It is only logical that when one of the smarter people in finance warns that he "sees bubbles everywhere" that he should be roundly ignored by those who have no choice but to dance. Because Bernanke and company are still playing the music with the volume on Max, and if not for POMO there is always FOMO. However, if there is any doubt why this "rally is the most hated ever", here are some insights from the Bond King from an interview with Bloomberg TV earlier today: "We see bubbles everywhere, and that is not to be dramatic and not to suggest they will pop immediately. I just suggested in the bond market with a bubble in treasuries and bubble in narrow credit spreads and high-yield prices, that perhaps there is a significant distortion there. Having said that, it suggests that as long as the FED and Bank of Japan and other Central Banks keep writing checks and do not withdraw, then the bubble can be supported as in blowing bubbles. They are blowing bubbles. When that stops there will be repercussions. It doesn't mean something like 2008 but the potential end of the bull markets everywhere. Not just in the bond market but in the stock market as well and a developing one in the house market as well."

As a gentle reminder, the reason why nobody anywhere trusts this particular bubble - the biggest in history - is not because speculators are not greedy (they are), or because everyone knows the market is always one central planner wrong move away from a collapse which would make the 2009 lows seem like amateur hour (it is), but because, as Seth Klarman explained two weeks ago, it is the Fed itself which by pushing on a string and the economy constantly deteriorating, proves it has no idea how to make things better: "When you tell the populace that we can all enjoy a free lunch of extremely low interest rates, massive Fed purchases of mounting treasury issuance, trillions of dollars of expansion in the Fed's balance sheet, and huge deficits far into the future, they are highly skeptical not because they know precisely what will happen but because they are sure that no one else--even, or perhaps especially, the  policymakers—does either."

And today from Bill, on the reason why QE is not working as intended, and why the Fed's channels are not only clogged but never worked as intended in the past four years: "Does it mean it is a good thing that capitalism should thrive under this quantitative easing posture on the part of central banks that distorts markets and this court's capitalism and promotes a zombie corporations and lowers net interest margins and destroys business model? All of that is the negative aspects of quantitative easing. Can we live with? I do not think this will be with us for a long time."

One can hope.

Some other observations from Gross:

On how distorted the bond marker is:

"It is easy on the bond side. We speak to an epical bond/bull market, not the beginning of a bear market but the ending of an epical bond/bull market show it in terms of a smiley face. It has been the investment committee. The bright side of the smile is the thirty year bull market in which prices rose exceeded what rationally could have been expected. We are at the bottom basically of this smiley face and our opinion on a long-term basis. That means with treasury yields and credit spreads, importantly and here is the key to the bond market statement: treasuries are 80 basis points, credit spreads are 70 basis points, put them together, 150 basis points in combination. In our opinion, absent of an additional amount of quantitative easing treasuries will go down in yield because of slowing economy, but that will make spreads go up. This suggests a 20-Month time ahead in which treasury, corporate, and high yields do not move much. The end of the smiley face all market run in terms of higher yields and lower prices is over.

On whether the conditions today are reminiscent of what we saw in 1992 and 1993:

"I do not think so, because in 1994 the FED raised funds dramatically to 200 basis points to basically slow things down. If the FED did that this time, I think they know with this amount of leverage there is two to three times more leverage in this economy this time than in 1994, the FED does not dare move in 200 basis point increments. That kind of market to our way of thinking is not in store for us. Does it mean it is a good thing that capitalism should thrive under this quantitative easing posture on the part of central banks that distorts markets and this court's capitalism and promotes a zombie corporations and lowers net interest margins and destroys business model? All of that is the negative aspects of quantitative easing. Can we live with? I do not think this will be with us for a long time. For the next 12-24, perhaps.

On when the Federal Reserve will start to taper the billions of dollars in bond purchases:

"It is almost a day-to-day thing in terms of the market but certainly not in the terms of the FED. They had objectives in terms of 6.5% unemployment and importantly, 2.5% inflation. We're down to 1 percent inflation in terms of the PCE which is their target for inflationary measure. To think the fed would begin to pull back in terms of tapering when inflation is approaching the Japanese levels of the lost decade is a big stretch. I do not think they change much. I think they have to be concerned about what happens in asset markets. Up until this point the chairman has done an Alan Greenspan and said cannot really relieve him as such but will monitor them in terms of potential regulation. However, having said that, I think the FED basically is on hold for a long time until unemployment and more certainly, inflation moves higher to the 2.5% target.

On the implications of the end of the 30-year bull market in treasury:

"It is not just treasuries. Treasuries, corporates, high-yield. We actually saw the end of the treasury market about six months ago. I think only a few weeks ago when you put the whole enchilada together, what does it mean going forward? It means as interest rates eventually go up, we do not think they are going up for 12 months or so, that the cost of interest for them move forward. And the portly, households will increase as well. Because of the lag effect in terms of the average cost of debt for corporations, and even government, there is a fair amount of room in terms of timing, even as interest rates move back up. Treasury yields on average are above 2%. In terms of what they're issuing it is closer to 1%. Same thing in terms of relative magnitude on the front of corporatations and households. It will be a while until this "smiley face" where higher interest rates begin to affect corporations and the credit sector as well as the government sector in terms of the cost of leverage in the cost of borrowing. Eventually, a net interest margins narrow on the part of corporations because they will hire in terms of interest. Same things for households they pay higher for mortgage loans. That is two to three, four years out. We don't have to worry about it yet, but we have to worry about it.

On the great experiment and what is happening in Japan right now in the shift:

"We want to be able to monitor in the Tokyo office. They are in touch with the institutions in Tokyo. We want to be able to monitor where the money is going. Our sense is not much of it, some of it, is going outside the country. The metaphor for the Japanese small investor, Mr or Mrs. Watanabe, when she or he begins to sense there are more attractive yields outside of Japan and the Japanese Yen moving lower in the yields and lower in price that they can capture a higher total return by moving outside that is where they will go. We want to get in front of them so to speak. Where will they go? Typically they went to the Euro and bought a lot of France and Germany. Those markets we think our extended close to zero. Italy and Spain perhaps at the periphery. And back to the good ol' United States. We think it will buy treasury bonds at 80 basis points above the five-year and close to 1.90 or so for the 10-year treasury. It does not sound like a deal, but a much better field in Japan. 

* * *

So to summarize: the great bond bull market is over, but Japan will buy everything about 1.90% on the 10 Year. Perhaps this is why, somewhat counterinuitively, Pimco has been buying up every Treasury it could find in the past 6 months, or around the time Pimco "saw the end of the treasury market about six months ago." Just in case someone takes Bill a little too literally.

    

 

Bill Gross, who manages the world’s largest bond fund, has indicated that the 30+ year old super cycle bull market in bonds has ended. This is very bad news for the markets.

 

First and foremost, if bonds fall, rates will increase. With higher rates, it will be harder to meet debt obligations. This will be the case for corporations as well as sovereign nations.

 

For the former, this means that more money going towards paying off debt and less going to shareholders. For the latter, sovereigns, this means default. Most sovereign nations in the developed world are sporting Debt to GDP ratios above 100%. These levels are just manageable with interest rates at record lows. When interest rates rise, default becomes a very real possibility.

 

In the case of the US, a 1% rise in interest rates means more than $100 billion more in interest payments. That money has to come from somewhere… which means either taxes going up, or the Government spending less on various programs.

 

For Europe, a 1% rise in rates can be almost deadly. Italy and Spain were both thought to be rock solid members of the EU. Once their ten year rates rose to 7%, they were suddenly on the verge of default.

 

And for Japan, if rates rise just a few percentage points, the entire system collapses.

 

For investors trying to navigate this market, it’s critical to note that the last bear market in bonds ended over 31 years ago.

 

This means that there is an entire generation of investment professionals and money managers who have never invested during a bear market in bonds. So many of these folks will be in a totally new environment.

 

For more market commentary and investment insights, visit us at www.gainspainscapital.com

 

Best Regards,

 

Graham Summers

 

 

 

 

 

 

 

 

    

Wolf Richter   www.testosteronepit.com   www.amazon.com/author/wolfrichter

At first blush, the German economy appears to be ailing – at first blush because the stock market, in its omniscient manner, is predicting wondrous developments as it hop-scotches from one all-time high to the next. This relentless optimism has morphed into a breeding ground for projections into outright magnificence. But inconvenient data is getting in the way.

Consulting firm McKinsey, in an exclusive study for Manager Magazin, predicted 2.1% annual economic growth until 2025, a period the report called the “Golden Twenties.” Germany would rack up 80% more exports and create millions of jobs. “The Federal Republic stands before a second Economic Miracle,” Manager Magazin summarized it, the first one having been the multi-decade rise from the ashes after World War II.

There were some ifs and buts in the report. The biggest one: the euro would have to be saved at all cost. So the report proposes a public investment fund that would suck up €20 billion per year from taxpayers in northern Europe – €10 billion a year from those in Germany. It would form the foundation for a €140 billion-a-year investment stream into the Eurozone periphery, a slick transfer from taxpayers to corporations, bypassing governments and their shenanigans altogether, leaving behind austerity disputes, alphabet-soup bailout funds, and stubborn sovereignty-transfer issues. And it wouldn’t be polluted by votes or parliamentary procedures.

Jörg Asmussen, member of the executive board of the ECB and ex-Deputy Finance Minister of Germany, was roped in to endorse the idea. He liked it but added that the additional pot of subsidies alone would hardly be enough for the euro to make it to 2025. “The Eurozone cannot function the way it has been conceptualized,” he admitted. “That’s why we have to systematically develop it further over the next few years.” Hence total integration. The Banking Union would just be the next step, he said.

And so the McKinsey study and Asmussen agreed: total Eurozone integration would be required for the euro to make it; and the euro would be required for Germany to reach the “Golden Twenties” and experience a second Economic Miracle.

Reality is even less rosy. First quarter GDP rose an imperceptible 0.1% from the fourth quarter of 2012, when it had swooned by 0.7%. The lousiness of both quarters surprisingly surprised the pundits, who’d been drinking too much of their own Kool-Aid. Compared to the first quarter of 2012, the economy contracted 1.4%.

They blamed Easter that had wandered into the first quarter, dragging some vacation days along with it. They blamed the winter weather – though in effect, winter weather is a normal occurrence in Germany’s first quarter. And they blamed the leap day in 2012, which gave February an extra day. By now, I can’t remember the excuses for the “surprising” fourth-quarter debacle.

Beyond excuses, there was a reason: while household spending, which had collapsed in December, revived a little, and while the drop in exports was roughly neutralized by a drop in imports, investments, as they’d done in all of 2012, skidded downhill. It had nothing to do with Easter or the weather. It was an ongoing corporate phenomenon: retrenching.

Companies had their reasons: the 30 largest companies in the DAX stock index reported a combined €308.4 billion in first-quarter revenues, down 0.8% from last year – the first revenue decline since the fourth quarter 2009. Another one of those data points with parallels to the financial crisis.

Despite ceaseless emphasis on operating efficiencies and cost cutting, combined operating profits fell 3%. There were some winners, such as E.ON, the world largest non-state-owned utility, and insurer Allianz. But the biggest revenue sinners were the automakers, an industry that has been clobbered half to death in Europe. Daimler, BMW, VW, and tire maker Continental combined surrendered 4% in revenues; their operating profit plunged 26%. Only the booming auto market in China and growth in the US had prevented an outright fiasco.

The report blamed the debt crisis that was worming itself into the income statements of Germany’s corporate crown jewels – for the first time, they could no longer “decouple” from it, explained Ernst & Young Partner Thomas Harms. Because of high unemployment in Eurozone periphery countries, governmental austerity measures, and corporate unwillingness to invest, a recovery appeared very unlikely, he said. Some parts of Europe were still in a downward spiral, and an “end of the crisis is still not in view, let alone a significant upturn.”

Unperturbed, German stocks closed at yet another all-time high. Bubble mentality has set in, focused on central-bank money-printing and asset-buying binges around the world. While they have produced, at best, dubious economic benefits, they have accomplished a fascinating, almost psychedelic feat: overpowering the bad breath of reality and allowing stock markets to float weightlessly in a dream world. At least temporarily.

The last time Vladimir Putin was president, he laid the foundation to pull Russia from economic chaos and elevate it once again to a world power. This time, he’s ready to extend that influence to counter the West. His tools: Russia’s abundant resources of energy, including uranium. Read....  Vladimir Putin’s Power Play.

    

Presented with no comment...

 

US Macro data is its worst in 8 months...

(note - the US Macro index is Bloomberg economic surprise index which not only tracks absolute performance but relative to consensus - so we missing expectations and macro data is dropping...)

 

and the markets are just as stunned by equity exuberance...

 

Charts: Bloomberg

    

Confirming what we explained recently, Morgan Stanley explains that among its equity long-short fund activity, the short activity (the net of shorts added and shorts covered) reached a minus-2 z-score indicating massive covering over the past 20 days. The last 3 times this occurred were April 2010 (S&P then fell 13% in 8 days), July 2011 (S&P then fell 19% in 23 days), and Oct 2011 (S&P then fell 10.5% in 20 days). Across sectors, Consumer Discretionary has been the most covered over the past week and month. Due to heavy covering, Discretionary short activity fell below a minus-3 z?score as of yesterday (now the highest long/short ratio of all sectors). It is worth keeping in mind, MS add, that historically speaking, the sector with the highest long/short ratio has often gone on to underperform over the following 6?12 months. This covering has driven median net leverage up to 64% (its 97th percentile of post crisis levels).

Money-on-the-sidelines!! not so much... Massive short-covering rally - yes...

Quoting from MS' John Schlegel:

L/S funds have been consistently covering over the past month, which has driven gross lower and net higher.

 

One way we measure long and short activity is by looking at the activity z-scores on a rolling basis where the past 20 days’ cumulative activity is compared to all 20-day rolling periods over the past 12 months. On this basis, the short activity z-score reached -2 as of this week, indicating significant covering by L/S funds. Other times we’ve seen a minus 2 z-score: late April 2010, early July 2011, and late Oct 2011.

 

Looking at the long activity, it had been relatively paired off (i.e. longs bought approximately equal to longs sold), prior to a small increase very recently. This illustrates that most of the buying has come from shorts covered rather than longs bought

Mystery solved.

And visually:

 

 

and the last three times short activity was this extreme...

 

as Consumer Discretionary shorts were crushed... (but now are at the most extreme net long fo all sectors - suggesting the fun is over)...

 

which has driven up net leverage to near post crisis record levels...

 

Charts: Morgan Stanley and Bloomberg

    

We have long discussed the problem that the Japanese government faces if interest rates in the troubled nation rise (cost of debt financing will swamp revenues in a vicious circle); but now it seems there is another - just as vicious - problem (that the BoJ is set to discuss according to Nikkei). The inability of the BoJ to 'control' Japanese interest rates (JGB rates spiking unprecedentedly day after day) has put the banking system in a lot of trouble. As we explained recently the banks appeared to initially 'hedge' their huge JGB positions but now appear to recognize that first out wins and are reducing exposure overall (YTD -3.7% according to local data). The reason - simple - as the IMF explains via the BoJ - according to BOJ estimates (footnote 4), a 100bp (parallel) rise in market yields would lead to mark-to-market (MTM) losses of 20% of Tier-1 capital for regional banks and 10% for the major banks. He who sells first wins...

We said previously:

This is what is going on in JGBs... JGBs were able to rally since smart money was hedging significantly (and not selling) but once the initial clusterfuck exploded after the BoJ meeting (and protection costs soared), it seems clear that JGBs just became far too expensive to hold given their risk and so protection was unwound and positions were reduced... which is why we are now seeing JGB yields jumping...

 

 

and as the IMF explains:

JGB market exposures represent one of the central macrofinancial risk factors. This risk reflects the possible impact on public debt sustainability of changes in yields and related effects on investor confidence; the increased role of the private financial sector in covering government borrowing needs; the prospect that ongoing demographic shifts will reduce private saving; and growing household interest in investing abroad.

 

Interest rate risk sensitivity is especially prevalent in regional banks and insurance companies (JGBs representing about 70 percent of life insurers' securities holdings and 90 percent of insurance cooperatives’ securities holdings). In addition, the main public pension scheme, as well as Japan Post and Norinchukin bank, also have large JGB exposures.

 

4According to BOJ estimates, a 100 basis point (parallel) rise in market yields would lead to mark-to-market (MTM) losses of 20 percent of Tier-1 capital for regional banks (not taking into account net unrealized gains on securities), against 10 percent for the major banks.

Surely all this has been provisioned for somehow. Or not?

    

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We are sure every effort has been undertaken to ensure Mr. Erdogan's visit (Iran Gold or not) was a success but just in case there was any confusion if the administration has learned anything as a result of the scandals in the past week, the following tweet from CBS' White House correspondent Mark Knoller should add insight on just how much more transparent the administration is and how seriously it takes the freedom of the press...

 

Questioners pre-chosen and I'm not one of them. Again.

— Mark Knoller (@markknoller) May 16, 2013

 

 

 

    

Submitted by Lance Roberts of Street Talk Live blog,

Today's chart looks at the market from a technical perspective.  While there are a plethora of Wall Street analysts calling for much higher levels for the S&P 500; most of these calls are based simply on the belief that the current trajectory must continue indefinitely.  While you certainly cannot "fight the Fed" the underlying fundamentals and economics that support the markets long term are not present for the party.  What is very important to understand, and can be clearly seen in the chart below, is that despite repeated calls for "ever rising" stock markets in the past eventually left investors devastated.  Markets do not, and cannot, continue indefinitely in one direction. 

Market prices are subject to gravity (the long term moving average) and the longer the duration of the moving average the greater the "gravitational pull" that exists.  One way to measure extremes of price movement is through the use of standard deviation.   One standard deviation from the mean (average) encompasses 68.2% of potential outcomes within a given distribution of data which, in this case, are market prices.  Two standard deviations encompass 95.8% of all potential outcomes while three standard deviations encompass 99.8% of all potential outcomes.

The chart below shows a MONTHLY chart, which is a very slow moving analysis, of the S&P 500 overlaid with Bollinger Bands which represent 2 and 3 standard deviations of a very long term (34 month) moving average. 

At the peaks of the "Internet Bubble" and the "Credit/Housing Bubble" the market never got significantly above 2-standard deviations.  Today, we are encroaching well into 3-standard deviation territory.  Standard deviation analysis tells us that roughly 99% of the potential movement in prices, from the bottom of the correction in 2011, has been achieved.  Furthermore, the extension of the market above the long term moving average is also at levels that have previously been associated with major market tops.

The top graph is a very long term (150 month) measure of overbought and oversold conditions.  It is also warning that the current market environment is stretched very far and that further gains are likely to be limited without a correction first. 

However, therein lies the potential problem.  Looking back at the markets during a bullish trend the market is usually contained between the long term moving average and 2-standard deviations above the mean.  However, when the extension is above the long term mean subsequent corrections are generally more associated with mean reversions.  A mean reversion is where prices fall an equal distance in the opposite direction or well below the long term moving average. 

The current level of overbought conditions combined with extreme complacency in the market leave unwitting investors in danger of a more severe correction than currently anticipated.  A correction to the long term moving average (currently around 1350) would entail an 18.5% correction.  A correction to 2-standard deviations below the long term moving average (which is most common within a mean reversion process) would slap investors with 33% loss.

If you don't think a 33% loss is possible you should be aware that that is about the average draw down of the markets during a normal recessionary cycle.  Not only is such an event possible - it is probable when, not if, the economy slips into an eventual recession. 

IMPORTANT:  We are currently invested in the market and I am not suggesting that you sell everything and move to cash.  What I am saying is that the market is very extended and the risk of a correction of some magnitude has increased significantly this year.   Therefore, if you are close to retirement, or simply just can't afford the risk of a major market correction, then you may want to start reducing some of your portfolio risk and begin to build in some hedges against an unexpected event.  Whatever eventually trips up the market will be "unexpected."

Currently, it seems that most of the world's concerns have been put behind us due to the massive injections of liquidity being injected by the Federal Reserve, BOJ, ECB and China.  The Eurozone crisis has disappeared, recessions in the Eurozone and weak US economic data are of little concern, declining revenue and earnings are readily dismissed as the primary driving force for investors is Fed interventions.  However, it is within this complacency, that an unexpected turn of events can pull the rug from beneath the markets and send money racing for the sidelines.  Unfortunately, for most individuals, by the time they realize what is happening it will likely be far too late to act.

 

Some additional color from Lance on the Taper...(via Bloomberg)

"If I was Ben Bernanke, there would be two things I've got to be concerned about," Roberts said in phone interview today "One is creating asset bubbles: If you look at yields on junk bonds, they are at historic lows. The other is the margin on NYSE stocks, which is the amount of leverage investors have taken on. Markets have gone virtually parabolic"

 

"What the Fed has got to figure out is if it's solely because of what it is doing or because of the economy and underlying fundamentals"

 

"At the next meeting, I would start to put out language that says, 'At some point in the future we're going to see some tapering,' and see how the market reacts. If the market reaction is fine, I would start doing that behind the scenes and announce it later"

 

"It's very possible we'll see hints come before the next meeting. It wouldn't surprise me to see more articles and more Fed officials talking about Fed tapering before June so there won't be a shock to markets"

 

"If you look at financial markets, they are extremely susceptible to a sharp, rapid correction. It would kill everything the Fed has put together. Bernanke will condition markets long before he takes action. We may see tapering occur prior to the Sept. meeting"

 

"I'm predicting nothing specific in the next few months. But in Sept., around the Fed's Jackson Hole event, we could get specific numbers"

 

Roberts said he expects Fed to announce in Sept. tapering of QE to ~$65b/mo. from $85b/mo., with $10b taken off MBS and Treasuries each, followed by another similar reduction later.

 

"Here's the problem. Some of the economic data is not improving. If you taper off now and we don't have economic strength, the economy is likely to start to slip into a recession quickly. There are also questions of whether the Fed has reached the limit of its abilities to purchase bonds, and why the boost to asset prices hasn't translated into the real economy. Clearly, there's a broken transmission system."

    

The US is moving to broaden its 'blockade' efforts of Iran to the movement of pure gold into the Islamic Republic. The US-led embargo of Iranian crude succeeded in slowing the flow of petrodollars into the nation but as Foreign Affairs committee chairman Edward Cohen remarked, there is "no question that there is gold going from Turkey to Iran." While the official line from US elite such as Bernanke remains that 'gold is not money' it appears that increasingly other nations would disagree, as Cohen admitted, "in large measure what we're seeing is private Iranian citizens buying gold as a protection against the falling value of Iran's currency." It would seem somewhat self-evident that the US is admitting, by attempting to embargo this gold flow, that outside the US, the Dollar is becoming increasingly irrelevant (see China's gold demand); and that for many countries the petrodollar no longer exists, having been replaced by 'Petrogold'.

 

Via Trend,

...

 

With Iran's currency already hit hard by European and Asian participation in the U.S.-led embargo of Iranian crude, Mr. Cohen asserted that his staff is broadening its efforts to include blocking the movement of pure gold into the Islamic republic.

 

"I can assure you that we are looking very, very carefully at any evidence that anyone outside Iran is selling gold to Iran," he said.

 

The remark came after Rep. Edward R. Royce, California Republican and the Foreign Affairs Committee's chairman, asked whether the administration was aware of recent reports indicating an uptick in the flow of gold into Iran.

 

"With its currency now in free fall, the Iranians desperately need gold," said Mr. Royce, who noted that a U.S. law authorizing the Obama administration to sanction anyone selling gold to citizens inside Iran does not take effect until July 1.

 

With existing U.S. law only allowing sanctions on the sale of gold directly to the Iranian government, Mr. Cohen told lawmakers the administration is keeping a close eye on the situation.

 

While Mr. Cohen acknowledged that U.S. authorities have "no question that there is gold going from Turkey to Iran," he said that "in large measure what we're seeing is private Iranian citizens buying gold as a protection to the falling value" of Iran's currency, the rial.

 

...

    

After an almost non-stop decompression in yields post-NFP, Treasuries are ripping today on the back of dismal economic data. After testing up to the 2.00% Maginot Line for 10Y, today's 6.8bps yield drop is the largest since mid-February. Taper or no Taper, bonds 'want' to reflect the real economy it seems... of course, as Treasury yields surge to the lows of the day so stocks - in their inimitable manner - are pushing to new all-time highs...

10Y yield dropped its most since Feb...

 

as bonds appear to want to correct back to macro reality...

 

Charts: Bloomberg

    

Earlier we reported that the US has now officially landed a Marine force in Israel as well as an assault ship, in a visit that the US Navy promptly assured "is not associated with, nor a reaction to, any world events." It seems we were not the only ones who read this justification somewhat skeptically: so did Russia. And in a historic event, the Russian Pacific fleet, for the first time in decades, crossed the Suez Canal and entered the Mediterranean, direction Cyprus' port of Limasol (hi Cyprus - Russia will be arriving shortly) in what is now the loudest implied warning to the US and Israel amassing military units across Syria's border that Russia will not stand idly by as Syria is used by the Israeli "Defense" Forces for target practice. “The task force has successfully passed through the Suez Channel and entered the Mediterranean. It is the first time in decades that Pacific Fleet warships enter this region,” Capt. First Rank Roman Martov said. This is what is also known as dropping hints, loud and clear.

The group, including the destroyer Admiral Panteleyev, the amphibious warfare ships Peresvet and Admiral Nevelskoi, the tanker Pechenga and the salvage/rescue tug Fotiy Krylov left the port of Vladivostok on March 19 to join Russia’s Mediterranean task force.

Admiral Panteleyev destroyer

Admiral Nevelskoi

The task force currently includes the large anti-submarine ship Severomorsk, the frigate Yaroslav Mudry, the salvage/rescue tugs Altai and SB-921 and the tanker Lena from the Northern and Baltic Fleets, as well as the Ropucha-II Class landing ship Azov from the Black Sea Fleet. The task force may be enlarged to include nuclear submarines, Navy Commander Admiral Viktor Chirkov said last Sunday.

Shore leave for a whole lot of submarines just a few hundred kilometers from Syria? Surely. From Rian.

“The task force has successfully passed through the Suez Channel and entered the Mediterranean. It is the first time in decades that Pacific Fleet warships enter this region,” Capt. First Rank Roman Martov said.

 

The Defense Ministry said in April Russia has begun setting up a naval task force in the Mediterranean, sending several warships from the Pacific Fleet to the region. Russian Defense Minister Sergei Shoigu said in March a permanent naval task force in the Mediterranean was needed to defend Russia’s interests in the region.

 

A senior Defense Ministry official said the Mediterranean task force's command and control agencies will be based either in Novorossiysk, Russia, or in Sevastopol, Ukraine.

 

Admiral Vladimir Komoyedov, head of the parliamentary defense committee, previously told RIA Novosti that the Mediterranean task force should be comprised of 10 warships and support vessels as part of several tactical groups tasked with attack, antisubmarine warfare and minesweeping.

 

The Soviet Union maintained its 5th Mediterranean Squadron from 1967 until 1992. It was formed to counter the US Navy's 6th Fleet during the Cold War, and consisted of 30-50 warships and auxiliary vessels.

It appears that the squadron is being reincarnated and quite rapidly at that.

It also appears that the two key naval forces in the Mediterranean are finally starting to position themselves for what may soon be a face off.

Hopefully Europe's "anti-manipulation" task force can spook enough majors to push the price of Brent much lower before the moment such an escalation becomes reality.

    

Gross: AP, IRS? Ask not what you can do for your country, ask what your country can do TO you.

— PIMCO (@PIMCO) May 16, 2013

    

 

Today’s AM fix was USD 1,377.00, EUR 1,070.01 and GBP 904.32 per ounce.  
Yesterday’s AM fix was USD 1,412.25, EUR 1,094.51 and GBP 926.67 per ounce. 

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Cross Currency Table – (Bloomberg)

Gold fell $32.70 or -2.29% yesterday to $1,392.70/oz and silver slid to $22.50 and finished - 3.55%. 

There are no surprises in the latest World Gold Council Gold Demand Trends report other than the fact that statistics show global demand for gold in Q1 2013 was on the increase before the COMEX raid on April 15th. This is a clear indication that the fundamentals supporting a strong price for gold in the long term remain and also helps to explain why there was such a shortage of gold bars and coins in the weeks after April 15th.

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Gold in USD, 16 May 2013 – (Bloomberg)

The statistics speak for themselves: 

1. Jewellery demand was up 12% year-on-year; China returned a 19% increase on the same period last year, India and Middle East at 15%, and interestingly the US at 6%, its first increase since 2005.

2. Demand for gold bars and coins were up in all markets; 22% year-on-year in China and 52% in India and 43% in the US.

3. Central Banks continued their gold purchasing programme for the seventh consecutive quarter purchasing over 100 tons. The sector accounted for 11% of demand worth $5.7bn with volumes concentrated in emerging markets.

4. Though it was 4% down the previous year, demand in the technology sector once again surpassed 100t for the quarter demand in Q1 2013.

Marcus Grubb, Managing Director of Investments at the World Gold Council commented: “The price drop in April, fuelled by non-physical moves in the market, proved to be the catalyst for a surge of buying that has left many retailers short of stock and refineries introducing waiting lists for deliveries. Putting this into context, sales of bars and coins, jewellery and consumption in the technology sector still make up 81% of the market.

Grubb added: “What these figures show is that even before the events of April, the fundamentals of the gold market remain robust with; growing demand in India and China, central banks consistently adding gold to their reserves and strong buying of investment products such as gold bars and coins.”

Key gold demand and supply statistics for Q1 2013
• First quarter gold demand of 963t was down 13% compared with Q1 2012.

• The value measure of gold demand in Q1 2013 was US$51bn, down 16% on the year before.

• The Q1 2013 average gold price was US$1,632 down 3% on the year before.

• The net outflow from ETFs was 177t in the quarter. That fall pushed the sum of ETF and total bar and coin demand to just below 201t. Total investment demand was 320t in Q1 2013, flat compared with a year ago.

• Demand in the jewellery sector was up 12% to 551t. Jewellery demand in China was 185t while demand in India was 160t.

• Demand in the technology sector once again surpassed 100t for the quarter.  Demand in Q1 2013 was 102t, down 4% on the previous year.

• The Q1 2013 total mine production was up 4% on last year at 688t. Recycling fell 4% resulting in a total supply that is 1% higher than a year ago.

• Net central bank purchases totalled 109t, 5% lower than a year ago, making this the ninth consecutive quarter in which central banks have been net purchasers of gold.

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Gold in USD, 5 Year – (Bloomberg)

The current gold price continues to appeal to investors and demand for all types of gold remains robust. There is no doubt that the next World Gold Council Gold Demand Trends report will surpass all the key benchmarks set above. Buying records will continue to tumble which augurs well for the long term price of gold.

NEWS
Gold Near 1-Month Low as Soros, Blackrock Reduce ETP Holdings - Bloomberg

Gold hits 1-month low, eyes longest downturn since 2009- Reuters 

Soros Joins Gold-Stake Cuts Before Bear Market Drop - Bloomberg

Global demand for gold jewellery up 12% in Q1 2013 driven by significant increases in India and China – The World Gold Council

COMMENTARY
James Turk: Gold and Bitcoin; The Currencies of The Future – ETF Daily News

Gold and Silver Hit 3-Week Lows, ETFs "Could Sell Another 250 Tonnes of Gold" - The Market Oracle

Gold Demand Drops By 13% In First Quarter Due to ETF Outflows – Gold & Silver Blog

#333333; font-size: 12px; line-height: 1.6em;">For breaking news and commentary on financial markets and gold, follow us onTwitter. 

    

It's just getting plain stupid out there. Just as stocks were exploding into the green (perhaps on expectations of an epic Philly Fed miss), the Philly Fed did not disappoint, printing at -5.2, down from 1.3, and crushing expectations of an increase to +2.0 (coming below the lowest forecast), the biggest miss since February and confirming that the Empire Fed index plunge was not a fluke. Virtually every components in the Philly Fed was red except for Inventories (up to 4.1 from -22.2 in March) and Prices Paid (up to 6.9 from 3.1 in March). Among the plungers, the key New Orders tumbled from -1.0 to -7.9, Shipments crashed from 9.1 to -8.5, Average Workweek slide from -2.1 to -12.4, and the Number of Employees imploded from -6.8 to -8.7, the lowest print since September 2009. And if all of this doesn't send the Stalingrad & Poor 500 to new historic highs, we don't know what will. All one can do now is just laugh at this "market."

From the report:

The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, decreased from 1.3 in April to -5.2 this month. The current activity index has shown no pattern of sustained growth over the past seven months, generally alternating between positive and negative readings (see Chart). The number of firms reporting decreased activity this month (29 percent) edged out those reporting increased activity (24 percent). Other current indicators showed similar weakness this month. The demand for manufactured goods remained weak, with the current new orders index declining from -1.0 to -7.9. The shipments index also indicated weakness, decreasing more sharply from 9.1 to -8.5. Firms reported a notable increase in inventories this month: The current inventories index increased from -22.2 to 4.1.

 

Labor market conditions showed continued weakness, with indexes suggesting lower employment overall. The employment index decreased 2 points to -8.7, its second consecutive negative reading. The percentage of firms reporting employment decreases (22 percent) exceeded the percentage reporting increases (14 percent). The workweek index declined 10 points to -12.4, remaining negative for the fifth consecutive month.

 

Summary

 

The May Business Outlook Survey indicates some weakening of activity this month, with all of the broad indicators recording nega-tive diffusion indexes. The survey’s indica-tors have failed to exhibit any sustained pat-tern of growth in recent months. The indica-tors for general activity, new orders, and shipments suggest weaker conditions this month, and firms reported employment reductions. Price pressures continue to be modest. Despite weaker current indicators, firms continue to expect positive growth over the next six months.

Visually:

In summary: four out of four economic indicators disappoint (as does WalMart): truly a testament to the effectiveness of Ben Bernanke's "Wealth Effect" in full force.

And now we wait for the only indicator that actually matters: POMO.

    

The S&P 500 has managed to get back into the green; VIX is back above 13; and 10Y yields are down 4bps... 'new normal'

 

    

China's demand for gold jumped 20% to 294 tonnes in the first quarter of 2013, while global gold demand overall slid 13% thanks to the dramatic rotation of demand from paper to physical. Chinese demand in gold bars and coins grew to 109.5 tonnes - more than double the five-year quarterly average of 43.8 tonnes. Central banks added 109.2 tonnes of gold to their reserves in Q1 2013, the ninth consecutive quarter of net purchases. But it was the Q1 ETF outflows of 176.9 tonnes, equating to a 7% decline in total gold ETF holdings that obscured the strong rise in investment for gold bars and coins at the retail level. In the face of the huge 'paper' gold ETF outflows, 'physical' gold demand surged to its highest in 18 months...

 

And direct from the WGC showing Q1 demand breakdown:

More from the WGC:

Overall total global demand for gold in Q1 2013 was 963t, down 19% from Q4 2012.

 

Marcus Grubb, Managing Director, Investment at the World Gold Council commented:

 

“The price drop in April, fuelled by non-physical moves in the market, proved to be the catalyst for a surge of buying that has left many retailers short of stock and refineries introducing waiting lists for deliveries. Putting this into context, sales of bars and coins, jewellery and consumption in the technology sector still make up 81% of the market.

 

“What these figures show is that even before the events of April, the fundamentals of the gold market remain robust with growing demand in India and China, central banks consistently adding gold to their reserves and strong buying of investment products such as gold bars and coins.”

 

The key findings from the report are as follows:

 

• Total demand in China totalled 294t in the first quarter, a rise of 20% on the same quarter last year, as the economy continued to pick up from the downturn experienced in the second half of 2012. Of that figure, jewellery demand in the quarter was a record 185t, up 19% on last year, while bar and coin investment was 110t, rising by 22% from last year.

 

• The Indian market also demonstrated a continued appetite for gold. Total demand was 257t, up 27% on the same quarter last year. Retail investment was up 52% while jewellery was up 15% on Q1 last year.

 

• Q1 2013 was the seventh consecutive quarter in which central banks acquired more than 100t of gold, and the ninth consecutive quarter in which central banks have been net purchasers as they diversify their portfolios. Central bank net purchases were 109t in Q1 2013, although the figure was 5% lower than the purchases a year ago.

 

• ETFs saw a net outflow of 177t in the quarter. By contrast there were strong inflows into other forms of investment: bar and coin demand was 378t, 10% higher than last year.

 

Marcus Grubb, Managing Director, Investment, at the World Gold Council commented further:

 

“Gold-backed ETFs, which made up 6% of gold demand in 2012, have seen some holders, primarily in the US, collect profits and move into equities. While gold ETF holdings are down, this has been balanced by 378t of investment in bars and coins, an increase of 10% on the same period last year, and up 12% on Q4 2012.

 

“Overall, the long-term appetite for investment remains strong, demonstrated by the continued demand for bars and coins.”

Source: World Gold Council

    

It is no secret that in addition to the well-known phenomenon of "foreclosure stuffing", one of the primary drivers of the artificial housing "recovery" has been the surge of hedge funds and asset managers into purchases of rental units courtesy of near-zero cost REO-to-rent federal lending facilities, which have taken out distressed inventory from the market in hopes of converting it into rental. This has manifested in a surge in multi-family starts which have been the primary driver behind the rise of housing starts in the past several years, even with single-family units barely moving higher. All this despite Och Ziff making the case loud and clear late last year, that the days of profitability of this strategy have come and gone. Today we got the first confirmation that other asset managers may have finally given up on the rental conversion strategy, following the observed collapse in multi-family housing starts which crashed from 376K to 234K in April (the lowest since last summer), a drop of 142K and the worst monthly drop since 2006 when the housing market had once again peaked and was about to undergo a very serious correction.

So does the above plunge indicate that this most important, if very much artificial legs of the housing (non) recovery stool, was just broken? And if so, does this mean that the US consumer is indeed so tapped out that hedge funds can no longer arb the rent-to-own cap-to-mortage rate conversion? If so, this is very bad news for all those who have been, incorrectly, proclaiming a housing recovery.

    

Recently in the United States we’ve heard news that the IRS (Internal Revenue Service) is guilty of discriminating against conservative “non-profit” or not-for-profit entities.  Any group with the name “Patriot” or “Tea Party” in their name was immediately held as suspect and the IRS in essence dragged their feet in terms of granting them a non-profit status.  The reason why these groups did this?  Simple; for taxation purposes.  Liken to a religious entity, they wouldn’t be taxed.  If the group owned property in their name they would receive a tax exempt status and as anyone in the United States knows, that’s music to the ears of a conservative.
According to the media, this went on for 18 months and ended in May, 2012.  The Acting Director of the IRS, Steven Miller was asked to resign by current Secretary of the Treasury Jacob Lew.  President Obama has vowed change and is “shocked” that such discrimination has taken place.  Speaker of the House Boehner has demanded jail time for those involved.  It reminds me of actor Claude Raines in Casablanca; “I’m shocked, shocked, shocked there’s gambling going on in this nightclub.”  So it appears the President has had his “Casablanca” moment.
But I wonder what would happen if the situation were reversed?  Well, truth be told the situation was reversed.  In November, 2004 certain voting stations in Southeastern Ohio were shut down due to an impending terrorist attack.  Why Ohio and why the southeastern part of the state?  Because Ohio was a key battleground state in the presidential election of that year and the southeastern part of that state was a heavily Democratic region.  Then Ohio Secretary of State Blackwell declared Ohio for the GOP even before the votes were tallied.  By the way; Secretary Blackwell was also the head of the Republican Party in Ohio. 
So once again, this President offers the GOP a “dove” in terms of an accommodation but does he really think that the GOP would be so generous?  Nothing ever became of the election issue in 2004.  No investigation, no Senate or Congressional Hearings, nothing.  John Kerry and the Democrats were quick to concede and hence the Democrats to this day are noted for being spineless.  What the Democrats still do not understand is that each time they offer the opposition an accommodation, the other side is thinking “gutless” because they wouldn’t do it.  The GOP is not known for being appeasers and that’s exactly how they view the liberals:  gutless, spineless and not willing to fight for their principles.  We have a multitude of issues in the United States that has still not been resolved.  We have a fiscal budget that is yet to be determined, a debt ceiling battle that will start in the August timeframe and an ongoing sequestration issue that will have an effect on the US economy.  Yet, what do we have coming out of DC?  More gridlock, more indecision and a blatant lack of leadership. 
Instead of being ‘shocked” this “CEO” should have the fortitude to stand up to those critizing his administration.  I think he might find that not only would that inspire more loyalty from his own people but even the opposition might respect him more.  Wall Street is treating this as if it’s a sideshow.  The economy is not reporting good economic news and yet the markets advance.  There’s no oversight from DC on issues that affect the ordinary investors or traders.  No one is steering the ship and usually when that happens the ship crashes into the shore.
Originally Posted on http://www.tothetick.com/leadership-or-lack-thereof