Notes From Underground: It is May Day and the Markets are Truly International

Elections are tomorrow in Canada. The polls are tight as the surprise is coming from the gains in the polls for the  New Democratic Party (NDP), a party led by Jack Layton and is further left than the Liberal party that moved to start the NO-CONFIDENCE VOTE, which forced the early election. It seems that the TORIES will hold their numbers but the desire by Prime Minister Harper to become an outright majority party will not be realized. The political situation in Canada can become very confused as the LIBERALS/NDP may be able to forge a government if the most current polls are accurate. The markets have paid little attention to the polls as the Canadian Dollar closed the week and month out almost on its recent highs–another statement about the U.S. DOLLAR.

Friday’s GDP number, which showed the Canadian coming in with negative growth, won’t help Prime Minister Harper and the TORIES’ quest for a majority. The taste in the voters mouths voting on Monday will be of a slowing economy. It is always fascinating that the electorate will potentially cast aside a government that has successfully steered a country through the most horrific economic environment in 75 years.

In the U.S., Congress and the Obama administration should be attuned to the simmering discontent that underlies the populace in a country that has suffered far more than its NORTHERN NEIGHBOR. If the Canadians turn left in favor of the NDP versus all the other parties it is important to watch the Canadian dollar on all the crosses. The Canada has been a source of stability for the haven crowd looking for alternatives to the eroding U.S. DOLLAR. Any real weakness in the LOONIE will be more apt to be found in the relative action to the other commodity/haven currencies.As always, I advise getting your technicals in order to measure the impact of potential political uncertainty in what a been an oasis of stability. OH CANADA, WHAT SAY YOU?

The metals markets are proving volatile as all-time highs were made in GOLD and the SILVER last week, testing its previous highs in 1980 only to fail. Gold has gained against silver during the last 72 hours, as SILVER has corrected and GOLD has held its all-time high levels. Tonight , the SILVER has dropped $5 as Asia has sold off the “POOR MAN’S PRECIOUS METAL” following some late weakness in New York. It seems that the selloff in Asia is being attributed to the CME raising margins on the Silver contract by more than 10 percent.

I find this argument somewhat suspect for back in 1980 when the silver went to $50 an ounce the margins on the front contract were set at 100 percent, which forced the Hunts to raise capital to support their speculative positions, which foreshadowed that their attempt to corner the market was over, especially because short-term interest rates were rising dramatically making the cost of carrying the positions more difficult to say the least. The current margin of $14,500 to control a value of nearly $230,000 in a zero interest rate environment is not very onerous to the contemporary hedge funds who are far better capitalized than the Hunts.

Remember that the FED FUNDS RATE was on its way to 17 percent in the early months of 1980, a far different canvas than the present situation. I advise caution because corrections can be painful but can provide opportunities for those prepared.  More importantly, I aim to arm the readers of NOTES with enough information to be able to fend off the shrillness of the commentaries that fills the airwaves. AT THE PRESENT TIME, CME’S MARGIN INCREASE IS THE PROVERBIAL MOSQUITO ON AN ELEPHANTS ASS. If the markets are correcting, it is merely price action in a market that may have raced too high too fast and that is the normal course of action for all markets.

An interesting aside from Europe, which continues to see its currency rally versus the DOLLAR. Spanish unemployment reached 21 percent last month and this is certainly an important indicator for the impact of the DEBT CRISIS and the move to further austerity. How much more stress can the Spanish Polity take as it attempts to resolve its terrible budget situation? Will Spanish voters continue to support the government’s efforts and what will it mean for a potential bailout for the Spanish sovereign? The Spanish would have certainly moved to devalue its previous PESETA to help its situation but now it is saddled with an appreciating currency, which is creating even more economic stress.

The problems in GREECE continue and last week the Greek 2-year note reached an incredible 25 percent. More significantly, the Greek 2/10 spread closed at an INVERTED 8.36 percent, or 836 basis points, a sign of  a coming DEPRESSION in Greece. What then will its budget look like as the NEGATIVE FEEDBACK LOOP sucks in all growth like a BLACK HOLE? It is certainly something to be aware of but for the moment the world’s focus is on the FED‘s CREDIBILITY as the driving force of the world’s financial investments.

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8 Responses to “Notes From Underground: It is May Day and the Markets are Truly International”

  1. Fred E. Says:

    Actually the Fed Funds rate reached 20% in June 1981 by Paul Volcker which broke the back of inflation. Little Ben is following the theory of “inflate or die” which ultimately will force the Fed at some point to follow the route of 30 years ago to prevent the total collapse of the Greenback and lead to the bitter medecine that has to be taken sooner or later. Deleveraging is a necessary process with the only alternative being bankruptcy.

  2. yra Says:

    Yes Fred—but when the Silver made its highs in early 1980 the Fed funds I believe was about 12-13% which is what helped do the Hunts in .The main point was/is that it is much easier to finance today’s commodities then it was then

  3. tw Says:

    Yra.

    well its election day and I don’t know too many that aren’t shocked by the advance of the NDP (a long time fringe party federally). I was my assumption that it’s leader, after a long fight with cancer decided to go out with a bang, assuming that political life might at this juncture be too rigorous and demanding.

    There are 3 things that have worked in his favor. The first is that he was the only opposition leader that appeared to be doing anything. By making himself the effective swing vote against the minority government he provided the appearance of power. The second thing was during the last two elections Layton along with the Liberal leader decided to call on voters to vote for either party as long as they did not vote conservative, effectively providing voters with viable alternatives. the last thing was the liberal leaders poor campaign with a message that is perhaps 30 years too late. He culminated with his “rise up speech” in which he did his best Baptist preacher impression. It was a cringe worthy performance. I asked myself whether Iggy was running for Prime Minister…or President. I think this did him in.

    I am anticipating that like me, anyone who abhors the idea of an NDP government, considering their dismal provincial track record, will be sure to vote in this one. Until the polls close no one will know, but voter participation will be an interesting metric.

    I guess like everyone else, I’m about to learn something new about our country. Hopefully, it’s that the NDP surged and failed.

  4. yra Says:

    TW–great post .Thanks for adding your thoughts and it is important to hear from our northern cousins—post more as soon as you learn of the results–I await—Regards,Yra

  5. Arthur Says:

    As always very interesting. According to the FT, “Cartepillar bullish on global economy”.

  6. Tw Says:

    As of now the blackout in the west has been lifted with the closing of the polls. Harper looks very close to a majority , final results pending. Ndp made substantial gains at the expense of the liberals but nowhere near 24 Sussex as of this writing.

    As mark steyn has pointed out, the liberals in Canada are the most successful party in the history of the western world. Their defeat, and it’s extent tonight are stunning.

    • Tw Says:

      165ish conservative. 105ish ndp. 34ish liberal. The separatists look at 2 give or take. 155 is for a majority.

      This is a fantastic result for the country.

  7. yra Says:

    TW—beautiful thanks.It proves out that Ignatieff is one of th emost arrogant politicians and the Canadian voters really punished him–he needn’t have forced the vote –rolled the dice for his own aggrandizement and paid the price.I just watched his resignation speech and it would have been better posted on Craig’s List as it appears he was making a job request.Thanks for your input and your view on the election.Now the Canadians have a great deal of work ahead and have to make sure that private-credit does not become a problem.If I was harper I would go for a low tax–higher intererest rate environment and make Canada the Singapore of NAFTA

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