Profitsee – Future Economic Surivival

Divinations in Forex, Commodities and Economic Patterns

From Scotia – Gold – Safe Haven “Panic” selling

Commodities Gold ($959.05) • Gold significantly trimmed some of its recent gains by falling almost 3% yesterday, with selling continuing today to push the metal to just above $950. This reinforces the degree to which gold is being driven by panicked “safe-haven” sentiment as the losses can be traced to the strong equity rally yesterday.

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EUR/USD, Citibank, banking, Eastern Europe

From Scotia Capital Global Reasearch 2/23/09

Gains in European equities are helping to keep the momentum moving against the USD in early trading. GBP is the top performer with the aussie and kiwi not too far behind. Only the franc and yen have fallen behind the USD today, reflecting the increased willingness of markets to make more aggressive bets, though it seems that volatility is a bit more elevated within today’s trading ranges for a number of currencies (EUR, CAD, JPY). The news that Citi is in talks with the government for more capital in return for an increased equity stake is helping to provide a bit of a sentiment boost, though it seems a little bit premature as it is unclear whether any such move would leave the bank a private sector entity or whether the government could eventually move to take a greater than 50% stake. The precondition for a US (and global) economic recovery is a return to certainty in banking sector stability, which would be a definite positive market driver. However today’s sentiment boost is based on the assumption that Citi gets more capital without nationalization. Given that incremental steps have repeatedly proven to be a failure in the markets eyes, we’d view the current rally (and USD selling) with at least a little bit of skepticism, and keep in mind that it was last week that equities were taking a throttling due to the notion that the banking sector would indeed need to be temporarily nationalized. More capital for a large US bank doesn’t erase the possibility of a return of the nationalization threat down the road as policy makers may grow tired of steps that run the risk of continued failure (though nationalization is not the desired route in the US). Nevertheless, it is still the financial sector that is driving the market as we begin the week, and positivity runs a little higher than last week. Another major currency market driver in recent sessions, the worries over banking exposures of Western Europe to Central and Eastern Europe, seem to have gone away for the time being as EMEA currencies have all rallied against the USD and EUR, moving away from recent (and in some cases record) peak levels of weakness (most notably HUF and PLN). The easing in the degree of pressure on these currencies is definitely a welcomed event, though again we wonder how long this will last, as all the market received from the larger European economies last week is reassurance over the stability of the Eurozone and some hint that support would be available through certain facilities for struggling EU member states not in the Eurozone. Talk is cheap however, and the proof is in the pudding. While the market is taking its focus off of this problem for the time being, a resurgence in pressure on EMEA currencies will show just how willing Europe is to act and with what kind of firepower. We’d note that the failure to act to help a struggling EU economy that is a prospective Eurozone member would definitely do little for general euro sentiment. Also, the knock-on impact on the Eurozone (and EU) of such a failure could be something very much like allowing another large US banking institutions fail, filled with unpredictable and unintended negative consequences.CAD is quite resilient today, though has given back some of its earlier gains which saw USDCAD trade down to near the 1.2355 level before retracing to around 100 points higher as North America comes online. There is currently a down trend in play for USDCAD over the past four sessions, as last week’s early USD gains are in danger of being completely unwound. Outside of large one day equity driven strengthening moves in USDCAD, consolidation dominated by a

Filed under: Forex, Research, Scotia, , , ,

Eastern European Insolvency Risk & Treasury Purchases

From Scotia Capital Global Research

The signs of easing tensions in markets yesterday have followed through today and shown an even greater propensity in that direction as the USD is being sold against not only the European currencies, but all majors. Equities are firmer and we should get a good positive open once North America comes online. The worry over Eastern European financial stability has constituted the major force driving trading patterns of late, and yesterday’s rebound has continued into today, bolstered by the increased sentiment in the market that support from either the West, international organizations, or both will come should it be required. This has provided
the backdrop justification for the across the board USD selling, however, the cost of insuring against the sovereign default of Hungary, the Czech Republic, Poland or Slovakia still remain extremely elevated. This shows that even though we see some definite improvement in sentiment, we still remain in a high risk period for these countries (and currencies) and an event driven reversal in the easing of market
pressures on HUF, CZK and PLN could easily ensue before the West has an opportunity to put in place emergency support mechanisms for their Eastern neighbours.
In the US, President Obama’s aid to struggling homeowners is also helping market sentiment via announced measures to lighten the burden of mortgages through reductions in monthly payments and more favourable refinancing opportunities.
This should help to put a floor under prices somewhat as it eases the amount of liquidations of foreclosed properties, and the lighter burden of monthly costs may also help to do something to prevent consumption from slipping into a worst case scenario.

The release of yesterday’s minutes from the last FOMC meeting proved to be interesting but not all that market moving as the details were revealed in the lead up to the release. The Fed lowered its growth outlook, with the “central tendency” for real GDP growth now at -1.3% to -0.5% this year and rebounding to 2.5% to 3.3% in 2010. Employment is expected to peak out around somewhere just south of 8%, but not return to 5% until at least 2012. As we know, the Fed is concerned with the potential that inflation stays subdued for much longer than is consistent with their goals (hence the extensive and extreme monetary policy measures up to this point), which may be why Mr. Bernanke has decided to introduce longer
run forecasts for inflation (as well as growth and unemployment). This is to be interpreted as the FOMC’s views on the longer term rate of price increase that is consistent with the Fed’s dual mandate and is something of a substitute for an official inflation target. These forecasts should serve to help anchor inflation expectations in the economy, and fight deflationary expectations as well, though being
somewhat weaker than an official target because they remain only forecasts and not an official goal. This is evident as we see the variation on the central tendency for the longer run inflation forecast running from 1.7% to 2.0%, with the lowest forecast at 1.5%. This will however help to ease worries that the Fed is not concerned with the longer term monetary implications of their measures, a worry amongst the market
that could eventually spur significant USD selling. As expected, the potential for purchases of Treasury securities still remains a debated topic at the Fed and we will have to wait and see what future communications bring as to the ultimate likelihood of this policy being enacted.USDCAD is moving to the downside as general USD selling has helped the Canadian dollar gain ground, up 0.8% at the moment. However, outside of JPY and CHF, CAD is behind the rest of the majors, despite its gain against the dollar. The price action has turned much more neutral on the pair, but some downward pressure is becoming evident after a failure to break January highs. Still, one may suspect that in the absence of the current general USD selling, we would see more sideways price action in the pair, rather than the stronger downward tendency being exhibited over the past 24 hours. While we see Canadian leading indicators today, more focus will be on tomorrow’s January CPI data as expectations are for monthly declines in core and headline, to bring the y/y pace of decline to 2.2% and 1.1% respectively. Unless we see some kind of strong upside surprise (which is pretty unthinkable at this point), it is likely that Mr. Carney’s focus for monetary policy is going to be much more geared to the dim unemployment and growth outlook.

Filed under: Research, Scotia,

Systemic Collapse: A Theory of Crisis

From: Systemic Collapse: A Theory of Crisis (abbreviated overlay)

BOLD-important points
Cross-Outs – insignificant observations
Italics – The Economyth’s observations

This article on the current economic crisis is a summary of notes I have made from David Harvey’s lectures on Marx’s Capital Vol. 1 and an exploration of his book Limits To Capital (1982). It is also a summary of explanations from various sources regarding different ways of examining the crisis, in order to get myself thinking about the applications of theory about the operations of capital to current events.

The current economic crisis is a combination of structural design and the inherent contradictions between the limitless search for profit, through speculation, and an interest-based economy in which production is dwindling, harbouring an excess of credit. The logic of the market, combined with neo-liberal doctrines, have brought it to the point where it is buoyed up on faith alone: capitalism is form of monotheism with its own attendant myths. The danger then comes then not when the fictitious bubbles burst, but when the very real infrastructure is sold off and dismantled. The threat is no longer fictitious, but historically realised through privatisation – a degradation of the social sphere and dispossession of people’s rightful common assets. (end para 1)

This is systemic, due to various documentable factors, not so much greed, as a naivety and faith in partially understood market processes. What has changed between now and since the mid-seventies is that risks are more evenly spread so that devaluations are visited on the poorest and least able to bear them. The middle-classes, co-opted by conservative rhetoric and in cahoots with finance, divested the working-classes during previous profit squeezes. In effect, they saw them as the principle barrier to profitability during previous contractions and in effect abetted a return of power to the ruling-classes, rather than see a more horizontal distribution of wealth end of para 2

Firstly, we should understand the system as an organic one, that mutates spasmodically to circumvent crises brought about by its own internal contradictions. It is a process of motion and fluidity and moreover it’s a system of relations. Capital is no longer capital if it is not moving; it becomes inert. And when things stop, value disappears. Money, most importantly, is the lubricant of this exchange (liquidity). end of para 3

It is not a lack of money that causes a crisis, but on the contrary, it is the crisis that causes a lack of money. Liquidity and capital are not the same thing. There is a crisis in the overaccumulation of capital (as represented by the habouring of an excess of bad credit in the system, and as we know: bad money drives out good). It is exactly because of the ‘flood’ of finance capital of unknown quality that there is a crisis of liquidity. The crisis of overaccumulation brings about limits to the flow of capital, i.e. stasis in the money markets.

The liquidity crisis is very real and is causing, or about to cause, a huge shortage in the means of payment. All loans and debts are being called in, in return for money. The next phase — as banks refuse to extend lines of credit to businesses in the real economy and the demand for loanable funds drives up interest is that ordinary working people get sacrificed on the altar of capitalist irrationality. Then comes inflation as a form of devaluation and the subsequent wage struggles that precede a rise in class consciousness.

This crisis will not remain in the world of finance for very much longer.

Filed under: Research

Frothy USD; Equity Level Tests; CAD 1.25 Play (From Scotia)

(Following from Scotia Capital Global Research for 2/13/09)

Yesterday’s strong USD buying was reversed by a late day equity rally that helped US equities cut losses and generally get back to even on the day. The USD still ended the day up but saw large gains against most of the majors cut significantly. The rally was explained by news that the government was working on a plan to ease the burden of mortgage payments to homeowners, however we suspect that it may have had more to do with the fact that indices were testing (and some breaking) two and a half month lows with the market looking for any reason to rally away from these levels. The optimism has continued into today’s Asian and European sessions as buoyant equities have helped to induce strong USD selling. This kind of currency market action reiterates how keyed to equities and the ebb and flow of pessimism that the USD remains.

CAD has had its general movements continue to be dictated by the USD, as has most of the major currency universe this week. We’d remain of the opinion that in a perfectly functioning world where everything is decided by economic fundamentals, that USDCAD should be trading somewhere north of 1.25. However it would be foolish to not recognize that, yet again, fundamentals take a back seat to risk driven flows and the gyration of market sentiment between a thirst for risk or safety.

Filed under: Research, Scotia,

Treasuries Drop as Dealers Digest $67 Billion in Notes, Bonds

By Susanne Walker – Bloomberg.com

Feb. 13 (Bloomberg) — Treasuries fell, pushing yields on 10- and 30-year securities up the most in two weeks, as bond dealers sought to find buyers for the record $67 billion in notes and bonds the government sold this week.

The losses, led by 30-year bonds, pared U.S. securities’ first weekly gain in almost a month. A private report showed consumer sentiment plunged in February. Treasury Secretary Timothy Geithner urged leading industrial nations to take “exceptional” steps to resolve the deepening global financial crisis even as he faced challenges about his own rescue plan.

“What’s really driving the market today is the digestion of the Treasury supply,” said David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors. “It’s more than offsetting the news on the economic-data front with the drop in consumer confidence.”

The yield on the benchmark 10-year note climbed 11 basis points, or 0.11 percentage point, the most since Feb. 3, to 2.90 percent at 2:56 p.m. in New York, according to BGCantor Market Data. The price of the 2.75 percent security maturing in February 2019 fell 31/32, or $9.69 per $1,000 face amount, to 98 23/32. Thirty-year bond yields surged 16 basis points, also the most since Feb. 3, to 3.69 percent.

The 10-year yield dropped 10 basis points this week. The yield, which tumbled to a record low of 2.04 percent on Dec. 18, averaged 4.55 percent this decade. The 30-year yield was down two basis points for the week.

Two-year note yields rose four basis points to 0.96 percent. The difference, or spread, between them and yields on 10-year notes widened to 192 basis points from 145 basis points at the start of the year.

Primary Dealers

The Treasury auctioned $32 billion of three-, $21 billion of 10- and $14 billion of 30-year debt this week. Thirty-year bonds yielded 3.54 percent at yesterday’s sale, the lowest on record, yet higher than the 3.514 percent yield traders anticipated in a Bloomberg News survey before the auction.

Primary dealers’ shares of two of the U.S. securities that were sold slipped amid the steady increase in supply, Bloomberg data showed. They purchased 54.1 percent of the three-year notes, compared with an average of 81.6 percent at auctions of the security over the past three years, and 49.6 percent of the 30- year bonds, compared with an average of 68.2 percent at auctions since February 2006.

The 74.9 percent share primary dealers took of the $21 billion of 10-year notes was just above the average of 74.2 percent at sales over the past three years.

Net Positive Holdings

Bond dealers had a net positive holding in Treasury notes and bonds for the first time in 10 years in the seven days ending Feb. 4, Fed data show. Their holdings of Treasuries have increased as they pare positions in assets with greater risk profiles.

Dealers now hold $114 billion of corporate bonds, compared with $251.4 billion a year ago. They hold $29.3 billion of Treasuries, the most since 2001. Excluding bills, dealers hold $3.2 billion in government debt, the most since 1998, the data show. Dealers usually place a bet against Treasuries to hedge the interest-rate risk of their holdings in corporate bonds or other fixed-income products with higher risk.

Record amounts of U.S. notes will be sold later this month, according to a forecast by Wrightson ICAP, a Jersey City, New Jersey-based research firm that specializes in U.S. government finance.

Supply Overhang’

The Treasury will auction $41 billion in two-year notes on Feb. 24, $31 billion in five-year notes on Feb. 25, and $25 billion in its reintroduction of seven-year notes on Feb. 26, according to Wrightson. The department is set to announce the amount of the sales on Feb. 19.

“The market continues to adjust because of the supply we got,” said Michael Pond, an interest-rate strategist in New York at Barclays Capital Inc., one of the 16 primary dealers that trade with the Federal Reserve and are required to bid in Treasury auctions. “There is still supply overhang from the $67 billion, and a recognition that there will be more supply in two weeks, and two weeks later, we’ll get more again.”

The U.S. will probably borrow $2.5 trillion during the fiscal year ending Sept. 30 as the budget deficit swells amid programs to thaw credit markets and revive the economy, according to primary dealer Goldman Sachs Group Inc. That’s almost triple the $892 billion in notes and bonds the government sold in the prior 12 months.

The so-called real yield on 10-year notes, or the yield after inflation is taken into account, was 2.79 percent, compared with 2.11 percent at the end of last year. Consumer prices rose 0.1 percent last year, after increasing 4.1 percent in 2007.

To contact the reporter on this story: Susanne Walker in New York at swalker33@bloomberg.net

Last Updated: February 13, 2009 15:01 EST

Filed under: Research,

Geithner’s lack of detail deflate overly-optimistic markets.

This report was prepared by The Bank of Nova Scotia
While many attributed the unfavourable reaction to a lack of detail in Secretary Geithner’s speech, especially as it related to the newly proposed public-private asset purchase scheme, we’d view this reaction as a welcomed and delayed adjustment from the past two sessions of somewhat unfounded optimism. It was strange that, after an absolutely horrible nonfarm payrolls print on Friday, that markets still managed to rally and stay positive on Monday in the hopes that the announcement would bring some sort of game-changing miracle. While we agree that the announcement would have been much better received had it possessed a greater measure of detail, the impact on sentiment would still likely have been short lived as it would have not changed the fact that the proposed measures would not only have taken time to implement, but would have also taken an even greater amount of time before having an impact. Thus we can say that current equity and currency trading levels better reflect economic reality, at least as an adjustment to the high degree of post-nonfarm optimism that has existed over the past couple of sessions. Of course yesterday’s fall would not have seemed so pronounced had expectations been properly aligned. If anyone is to shoulder the blame for this, it would more likely have to fall on the government as the delay in the announcement of the financial stability plan helped to stoke expectations that it was in order to fine tune what would be sweeping and immediate measures. The details given (or lack thereof) suggest that a judgment on how sweeping these measures are will have to be suspended until greater clarity is provided, and it is obvious that there is a great deal less “immediacy” than hoped for. The USD, though surging yesterday, may not see as much support as on previous bouts of risk aversion as this one is more directly tied to factors that impact the health of the US economy. However, equities may once again help to decide the dollar’s ultimate short term performance, and the lack of strong selling today in Europe and the positive (though rapidly deteriorating) open indicated by North American futures may point to the reason why the USD is not better bid at the moment.

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China – From sester’s RGE blog

I’ve been working on my networking technology degree in lieu of concentrating on Binaries for the past 6 months. However, I’m still fascinated with how risk is managed in today’s world: in particular the effect of China’s vast holdings of US debt to about 1 trillion US. The following comment is from Brad Sester from his blog, on this issue:

“gillies — i actually disagree with what we all agree on (that china shoots itself in the pocket book if it starts to sell dollars) … since i argued (note the post above) that china shoots itself in the pocketbook every time it adds a dollar to its portfolio. sure, ending the status quo (and the status quo is dollar buying, not holding on to china’s existing $) means taking losses — but china would face far smaller financial losses by changing policy now than by changing policy later, when it has far more dollars. where china hurts is on the export side.  
 
of course, everybody may be right and i may be wrong, but i have a lot of convinction on this one: to avoid losses now, china has to add to its future losses. 
 
curious guest: China may have hedged v move sin eur/$ — i.e. it coudl have swappped some of on balance sheet $ for euros through an off balance sheet transaction. my guess tho is that china couldn’t do this in a big way without the market getting wind of it, and if it did it in a big way, it would move the eur/$ market (someone else has to take the $ for China to get rid of it). macroman is alas on vacation, but he would have a better sense of this than me. 
 
the main risk that china is taking tho is not the risk that the $ tanks v the eur, but rather that the RMB appreciates against both the EUR and the USD. and china cannot hedge that risk away — no one else wants to hold $ when they can hold RMB, which is why the PBoC is building up its dollars in the first place. basically, that risk is an unhedgeable risk — and it is a risk the pboc has to take so long as it wants to keep the rmb stable v the $ in the face of market pressure for appreciation. 
 
guest with a banker friend who doesn’t like stupid blogs …  
 
well, on this issue at least, i think i am reasonably credible — i used to work at the US treasury, i testify before congressional commitees, and the like. I have my point of view, of course, but i hope I rise above the average level of a “Stupid blog” from time to time. Your banker friend is right in the sense that china’s dollars ultimately have to be spent on us goods (or traded for something else), tho i guess they also coudl be sold to domestic chinese investors who want to buy US assets (if such demand materialized; right now, chinese savers prefer to keep their funds at home). He also is right that the growth in china’s dollar reserves is fueling rapid money and lending growth in china, tho china could achieve the same thing by “monetizing” domestic Chinese bonds without taking on the $ risk it now is taking on. Your banker friend should understand that — basically, a central bank can print cash against either domestic bonds (what the US does) or foreign assets (what china does) and if you print cash against assets denominated in your own currency, you have less currency risk. I think your banker friend misses one key point though: to keep the game going, china has to not just hold on to its existing dollars, but to buy every more dollars to provide the US with the ongoing financing needed to cover the uninted states cash flow deficit. the scale of financing that china is providing to the us is rising strongly over time as well — so the real question is whether china will continue to do so indefinately, and then what happens when china becomes a bit less willing to make up for a shortfall in market financing for the us deficit. part of the answer is that china itself will take losses. but part of the answer is that the us economy also would need to adjust — i personally think we would be better off if that adjustment started sooner not later. 
 
in any case, the views of your banker friend are fairly common. my view is more of a minority view. but it isn’t that far — i suspect — from the views of Dr. Summers, so it isn’t an entirely crazy minority view. you might want to print out Summers’ per jackobsen lecture (i am sure i misspelled the lecture name)and give it to your banker friend — it discusses these very issues (it is the second link in the blog).”

Filed under: Research,

Akmos sentiment indicator in GMT

Akmos

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