What ailed the markets yesterday seems to have moved to the back pages and the equity markets recovered most of their losses. Gold and silver staged very tepid rallies considering the massive selling that took place during the past week. The global equity markets are still comfortable with central bank policy and even a terrorist attack on U.S. soil cannot shake of confidence of investors seeing high profits, low inflation and no alternative to the returns on equity. It is an old theme but when a market continues to discount unfavorable data and news the power of momentum is in full bloom.
The most interesting aspect of yesterday’s market was how the bonds reacted as there was little movement either on a 3 percent break or a 2 percent rally. It almost seems that the debt markets are looking at the selloff in commodities as a harbinger of disinflation or as others have opined, the onset of deflation. The market’s belief that Chairman Bernanke will do all he can to prevent deflation taking hold of the U.S. economy propels the equities but crushes the metals. This is too great a disconnect and in my mind reinforces the view that the precious metals have lost upward momentum and therefore were subject to a massive bout of profit taking. Those who only watch published open interest numbers to craft their opinions are missing a large part of the picture.
The metals trade is populated with arbitragers who are always simultaneously buying and selling different instruments in different locales. FOR EXAMPLE, if I am trading the GLD ETF and the cascading market is presenting me with a buying opportunity, I may find my best sell is in the futures contract at the COMEX, thus I am long GLD and short the COMEX until I get an opportunity to unwind the arbitrage. My ETF buy results in a COMEX SHORT POSITION, thus distorting the full open interest picture. The more influence the ETF market has the more significant the need to lay off the position at the COMEX. This is a very important element to understand in reading the open interest. Then toss in the physical gold investors and the gold option traders and the result is an amalgamation of information never aggregated because of locale and reporting regulations. I am a firm believer in simple is beautiful, but the proliferation of various financial products that mimic each other makes the financial landscape difficult to traverse. Can’t tell the players without a scorecard.
***Tomorrow the Bank of Canada will announce its interest rate intentions. Mark Carney, the present Governor of the BOC, is leaving to head the Bank of England so it is doubtful that the Canadians will move from the present overnight rate of 1%. Recent economic data from Ottawa has been weaker so it is important to see if Governor Carney mentions a slowing global economy as a reason to stay the course. Recently, the BOC has been making hawkish noises about the need to raise rates but with the employment data becoming uncertain, it is steady as she goes. The release time is 9:00 a.m. CST.
***The Bundesbank President Jens Weidmann answered George Soros in a weekend news item on MNI. Last week, Philosopher King Soros warned Germany that the continued effort to enforce austerity on the peripheral European nations would result in Germany entering recession by the fall. Weidmann did not mention Soros by name but responded to a reporter that he “doesn’t share pessimism regarding German economy.” Soros was reported by the U.K. Telegraph to have said: “Germany itself remains relatively unaffected by the deepening depression that is enveloping the eurozone. I expect, however, that by the time of the elections, Germany will also be in recession.”
It should again be noted that George Soros has been pushing European leaders to institute a eurobond as a way to resolve the issue of fragmented interest rates that is causing so much pain for the European periphery nations. The Germans want more austerity and the rest of the world wants fiscal and monetary stimulus. Mario Draghi is the most frightened man in the financial world and can’t wait for the German elections to be over. The G-20 meets in Washington this week and the cry will be for more fiscal stimulus for the eurozone.
***The Chinese GDP that was released on Sunday night was weaker than expected and came in at 7.7%. My readers know that I distrust Chinese data and believe it is as manipulated as GE‘s earnings under Jack Welch. My reasoning is simple: If a nation blocks Google from operating freely, why should I accept any of its data as fact. In the recent case of the 7.7% GDP, I believe that China is trying to tell the world that it will not be the major source of global growth and stimulus. It is time for the Europeans to step up.
***In another round of book selling: Rotten Heart of Europe author Bernard Connolly will be interviewed by Rick Santelli on Thursday during Rick’s mid-morning session. I implore you to watch for Bernard is a major source of info on the global macro economy. It is his book that has provided me with so much knowledge.
Now, in my IRREVERENT MANNER I AM PUSHING SALES OF THE ROTTEN HEART OF EUROPE. We still have 8,000 to sell so if everybody buys five books and gifts them to friends or enemies I can stop the selling effort. In the height of IRREVERENCE I AM USING AN OLD NATIONAL LAMPOON MAGAZINE COVER TO REVEAL THE SERIOUSNESS OF MY SELLING EFFORTS. (No animals have been harmed in this irreverence as I am a dog lover and have two.)
(Click on the image to buy the book from me on Amazon)