Media slut watch (Nadler, Roubini)

Media exposure is not a bad contrary indicator. Indeed, a pundit’s prescience is, plus or minus, inversely proportional to his/her proximity to the nearest reporter.

In this light, first up, John Nadler at Kitco, the scrap gold recycler. Nadler’s bandwidth to content ratio might be seen as amongst the highest on the net. A typical comment might run: “Gold could trade lower today where it may find some physical interest. But if something happens, it may trade higher.” Extreme vigilance is undertaken to distance himself from the “radical goldbugs” (who happen to constitute a large swath of his customer base) and whom he, presumably, fears may one day be right. He is well covered by wires on the gold beat.

His year-end wrap-up reads in part as follows:

The "You Couldn't Have Been More Wrong, But You're Forgiven" award goes to … those … who awarded the "Moron of the Year" award to our 12/31/07 projections for 2008 gold prices ("from $640 (off by $80) to $940 (off by $93) and a chart pattern which might see the highs being made well ahead of the lows" it was March to October).

Not quite right. Here is, in fact, what you said a year ago:

Our price projections indicate a likely channel of from $640 to $940 and a pattern which might see the highs being made well ahead of the lows. The average price for bullion in the coming year is still seen as rising, possibly to $730 per ounce…[Emph added.]

Nadler omitted, if you missed it, magnanimity re the award giving and all that perhaps getting the better of him, his key projection for the year. As we can see from the original clip (yet omitted in his re-cap), he called for $730/oz gold, on average. In fact, the average price for 2008 was about $872/oz (London AM fix), or about 18% higher than Nadler’s prediction. Indeed, Nadler’s average price call for 2008 was only $20 higher than the lows of the year, and a whopping $300 lower than the highs of the year. Put differently, gold traded higher than his predicted average price 97% of the time.


This oversight may be understandable in light of his busy schedule, as per:

My own, "Infinite Gratitude" award goes to all those who clicked on my humble musings 4,580,745 times (up to this day) during this past year and gave their time to read what I had to relay on a given day. With special mention to all of my friends in the media, who had their hands extremely full this year. [Emphasis in the original.]

Isn’t the media supposed to be thanking you, Jon? For all your cogent thoughts throughout the year? What am I missing?

Next we have Nouriel Roubini, who takes time out from interviews to do some economics now and then (and, apparently, much else.) More ink in the FT over the week-end, this time a fawning profile.

In the buzzy, scruffy warren of offices in New York from which Nouriel Roubini runs his economics aggregration and commentary website, one of the young cyber-serfs has taped a New York Post story about the boss to the chalky wall. “NYU Playboy Warns: Econ Party’s Over”, the sub-heading declares, next to a photograph of a smiling, open-shirted Mr Roubini, sandwiched between two attractive young women.

Not so long ago, the phrase “playboy economist” would have been a joky oxymoron, likely to feature in satirical lists alongside “selfless hedge fund manager” and (at least before the US surge in Iraq) “military intelligence”. But, in a sign that practitioners of the dismal science are among the few beneficiaries of the global economic meltdown, this crisis has transformed the 50-year-old New York University professor from a respected academic economist into a minor celebrity.

Mr Roubini, who offered one of the first and most nuanced predictions of the financial and economic crash, is ambivalent about the personal scrutiny his fame has attracted. After Nick Denton, founder of the Gawker website, first pointed to the contrast between the economist’s “Dr Doom” public persona and his party-going private life, Mr Roubini sent Mr Denton a Facebook message in which he declared: “I work very, very hard and I also enjoy life . . . To paraphrase Seinfeld: anything wrong with that?”

But sitting at his modest desk in the corner of an open-plan office, Mr Roubini tells me the “playboy” tag was “a gross mischaracterisation”. He said he was sometimes recognised on the street, but mostly by “geeks and wonks”. “There are not paparazzi yet,” Mr Roubini, wearing jeans, a black jacket and a deep tan that belies the miserable New York weather, says with a self-deprecating chuckle. “No one has said, ‘You have a brilliant mind’, and asked me out.”

Self-deprecating?! Consider what Nick Denton at Gawker.com actually turned up. Here is an email sent by Roubini to a female “facebook friend”, which was in turn passed on to the gossip site:

Ciao bella. How are you fashionista glitterata glamorata?

I am in decadent St Trop now vacationing with Arab Sheiks, Russian oligarchs and assorted aristocratic Euro trash. More silicon here than in Silicon Valley...lol

I had to escape NYC as my Barron's interview (http://www.rgemonitor.com/roubini-monitor/253240/) on $2 trillion of losses made the markets swoon last week and angry mobs of investors were chasing me.

So life is a beach here and am studying Beach Economics and the IELs (International Elites of Leisure) with a grant from the Institute for Advanced Vacations; hard job but somebody gotta do it.

This coming Sunday August 17th the New York Times Magazine (http://www.nytimes.com/pages/magazine/index.html) will publish a long profile article (4 pages and 3000 words) about me. So beware of markets shivering the next day.
Want to come visit here in St Trop? I would be too lucky.

I will be back this weekend to NYC but off then to Brazil, UK and Sweden. But I will have parties over the coming weekends.

I hope to see you in nyc if not in St Trop. A drink some time too?
xoxo

Nouriel [Emph added.]

Self-deprecating? In the least, it is clear Roubini reads his own press. Lol.

The spat was apparently sparked by Denton’s “calling out” of the economist as per:

It's time to call bullshit. The image of Dr. Doom may satisfy the needs of the media and partygoers this Halloween—but Roubini is anything but dour. The 50-year-old Iranian-Jewish economist is a promiscuous Facebook friend who draws a cosmopolitan crowd to the frequent parties at his Tribeca loft—an apartment with walls indented with plaster vulvas, incidentally. As this party photograph shows (right), the professor's gloomy public image is entirely at odds with his playboy lifestyle.

This did not go down well and Roubini went nutso (or, in Denton’s words, Roubini suffered a “personal meltdown – as dramatic as the economic disintegration he’s so long predicted”) on Denton’s facebook wall:

“You [Denton] are a loser and an intellectual dwarf who cannot engage me on my widely respected views on the economy and financial markets; too bad I was the first one that early on predicted in minute and precise details this most severe financial crisis. So which financial institution – that cannot stand my intellectually independent and correct views – paid you for this hatchet job? And how much have you been paid for it you little loser anti-Semitic jerk?”

Umm, Roubini was the first to sound alarms about the dangers of near infinite credit expansion? Really? This will come as a shock to many.

At any rate, it certainly appears we are reaching some sort of high water mark, in Roubini’s mind, if nowhere else.

When "radical gold bugs", tin foil hats and all, start to bask in this sort of fawning media attention, someone please sound the alarm, for a secular change will clearly be at hand.

Ours don't smell

From an op/ed in Korea:

If a nation’s economy teeters on the brink of collapse, the value of its currency will inevitably fall.

No truer words were ever put to to page. Why isn't this obvious on this side of the pond? Time after time after time after we see this pattern of failed currencies following failed economies into the ditch, yet the rockstars of the punditry class still there remain shills, for example here and here and here, for lending their money to a bankrupt institution, namely, the US government. It seems one needs some critical distance away from the echo chamber of professional finance types to gain proper persepctive. Here is the entire article:

If a nation’s economy teeters on the brink of collapse, the value of its currency will inevitably fall. The U.S. dollar faces a devastating crisis due to the nation’s huge trade deficit, financial losses and zero-level interest rates. It plays a much smaller role than it used to in foreign currency reserves worldwide. The share of euro-denominated bonds in the international bond market has risen substantially, overwhelming dollar-denominated bonds.

Money naturally flows toward a safer currency. It is unreasonable to expect global funds to continue to be poorly distributed toward the U.S. dollar despite low interest rates and losses from foreign currency exchanges. If recent trends persist, a global currency war is inevitable.

French President Nicolas Sarkozy said, “The U.S. dollar can no longer claim to be the only currency in the world,” calling for a transition to a multilateral currency system that includes the euro. His comments came as the euro surged to a record high against the dollar.

China poses the biggest threat to the U.S. dollar. China has the world’s largest currency reserves, which are poised to top $2 trillion. The country has said it will not continue to buy more U.S. Treasuries in the future.

In addition, China has started the internationalization process of the yuan by allowing the currency to be used in deals with 10 Southeast Asian countries, as well as in Hong Kong and Macao.

Japan is also not sitting idly by. The idea of an Asian yen used to be Japan’s dream. However, it has not yet taken any official measures because of the U.S.-Japan alliance.

The global currency war may have an impact on Korea. The weak dollar may lead to the re-emergence of hyperinflation by stimulating raw materials prices. There is a need to diversify foreign reserves in order to stabilize the Korean won, in case the new key currency faces difficulty.

However, Korea can create new opportunities. It is undeniable that our success in concluding currency swap deals with the U.S., China and Japan was mainly due to strong nerve. The change of the key currency will cause a dramatic shift in the world economy. We need to pay more attention to forging closer ties with China and Japan for a rainy day. We need to accelerate the creation of the Asian Monetary Fund. However, the only way to survive in the age of the global financial turmoil is by further promoting the development of strong manufacturers and establish a sound financial system.

If we don't think our farts smell, clearly others, at greater distance, feel somewhat differently.

But where is Krugman on US devaluation?

Here is Krugman ("Latvia is the new Argentina"), with reference to this piece, discussing how devaluation is the only way out of Lativa's problems:

I’ve been saying this for a couple of weeks, but Edward Hugh has the goods.

Hugh puts his finger, in particular, on one gaping hole in the logic of the opponents of devaluation. We can’t devalue, they say, because the Latvian private sector has a lot of debts in euros, and a devaluation would make it very hard for borrowers to service those debts. As Hugh points out, the proposed alternative — sharp wage cuts, and basically a major domestic deflation — will also make it hard to service those debts. In fact, I’d be a bit more specific than Hugh: other things equal, a nominal devaluation and a real depreciation achieved through deflation should have exactly the same effect on debt service (unless some of the debt is in lats rather than euros, in which case devaluation would do less damage.)

This looks like events repeating themselves, the first time as tragedy, the second time as another tragedy.

Latvia is, of course, a mini-US -- too much debt spending plowed into rampant consumption -- yet we hear no calls from this quarter for devaluation state-side. How come? Goose. Gander. What am I missing?

Rather, Krugman has become the poster boy for massive fiscal efforts, as though filling potholes is in and of itself a road to salvation. Or is Krugman being too coy by half? That is, is his fiscal program merely a means to an end? If so, he should say so.

Holiday Dogerel

This has been making the rounds:

'Twas the night before Christmas in hostel downtown
Curled a certain proud goldbug of former renown
His suit was dishevelled, His eyes? Dare discuss!
The po’ bastard looked like he’d been hit by a bus.

“What the hell happened?” he’d say if he could.
But market conditions had turned him to wood.
Though speech was beyond him, mouth parched an’ dry,
Why not be morbid and peer through mind’s eye?

“For year upon year now, through Greenspan excess
Or Nixon before him: The Great Acquiesce.
The market did party, on whisps of champagne,
And one upon other of products arcane.”

“The driver at root was a Fed run amok
Issuing paper to the quack of a duck.
‘Don’t worry, be happy, in the end we’re all dead’
Refusing to see the wall straight ahead.”

“Paribus’ hiccup, cued beginning of end,
And Lehman’s demise? We could not pretend!
The music had stopped, the end of the dance.
The Prince’s grand world, pricked by a lance!”

“The instinct, of course, in blink of an eye,
Was to turn on the spigots and print for the sky.
The TARP, the FIRP, the four-letter disaster.
Let’s damn the torpedoes and print more more faster.”

“The market reaction? It beggars belief.
Someone must have slipped it wrong brief.
Ignoring history, drunk on wild oats,
They hammer the metal and run to T-Notes!”

“We were the first to see this mess for a bubble
Yet our savings now stand, turned to dust rubble.”
Oh cruel irony and fate – our goldbug now foetal ,
Sweat from his brow, traversed by red beetle.

The matron of house had seen this whole scene
No stranger to misery or venting of spleen.
A buxom young gal from somewhere afar
She wandered on over and sat by pee jar.

“I’ve seen this before”, eyes blue an’ dart-quick
As she parted his hair and gave beetle quick-flick.
“A spat with the margin clerk, snarling and burly?
Prescience’ a curse, your type’s always too early.”

“Those schoolmarm-ish types who sing of deflation
And wag their stern fingers, and warn of damnation:
‘Let’s nuke the economy until we’re in clover,
Let’s purge all our sins, ’til nothing left over.’”

“Son fret you not, this won’t come to pass.
For no banker on earth has testes of brass.
On selective case basis, it’s been readily tried
A Lehman experiment, economy-wide?”

“Far better to use the one trick in bag
It’s a time-tested measure – we’ll give cash a good shag.
Should we decide on less pain and more pleasure
We’ll take out our pens an’ change unit of measure.”

“With a stroke such as this, the debt burden will lift
And from financial shenanigans our focus will shift
To productive endeavours, a better foundation
All with the help of a little inflation.”

“I tell you no tales, nor fancy blue fiction.
But hold up a portal to real-time addiction.”
The goldbug looked up, a glimmer of hope,
The two then turned to slippery slide slope:

“Behold the Fed’s ledgers, after buying spree pink.
The blotter now shows the coffee room sink!
And stop the print presses! A Latin cliché!
We’ve just learned from the wires the whole curve’s a buffet.”

“We see there’s a coupon: it’s purely deceit.
(In a ZIRP scenario even gold might compete!)
The money base soaked to soggy foundation;
A cash wave be triggered on smallest vibration.”

“An’ when time comes to pass, to mop up the flood,
The Fed will be helpless, its sponge soiled with crud.
The dollar’s demise is thus baked in the cake
Its anchor bank status will crumble and flake.”

“That is the backdrop, now turning ahead
Your hard asset names should rise from the dead.
So worry sweet not, in the end you’ll be right
Stick to your vision, notwithstanding this fright.”

“(And with nod to the T-Notes, I think you’ll agree
Before God doth destroy, He first fills with glee.
Roubini et al, those Blodget’s of paper
Exposed for shame truth: blind peddlers of vapour!)”

“History is quirky, it eschews a straight line
A lesson we learned from brutal decline.
But stage is now set, sprung from the fetter.
Merry Christmas to all – next year should be better!”

Somene says "Weimar" in print.

Rarely do I agree with someone about just about everything. This piece, by Liam Halligan of the Telegraph, comes close. Prize snippets follow; no colour needed.

The danger isn't deflation, but a surge of Weimar Republic-style inflation. The US authorities aren't lubricating the system, as they claim. They're flooding – drowning – their economy with cash. And they'll carry on doing so – pandering to Wall Street – until something forces them to stop.

That something could be the dollar – and even a US gilts strike. The yield on the 30-year US bond is now 2.6pc – the lowest for 50 years. Traders aren't buying those bonds because they think it's a good deal to collect 2.6pc on their money each year. They're buying them because, under intense pressure from bosses and regulators to "go safe", they're scared for their jobs.

Such forced buying and related low yields suggest the US Treasuries market is now a bubble. And bubbles always burst. The Fed is committed to buying long-term US government debt itself in huge quantities. But, as America's liabilities rise and the printing presses keep rolling, the dollar must surely keep falling. And as it does, the argument for holding US Treasuries collapses.

The danger looms that, pretty soon, the only net buyer of US Treasuries could be the Fed itself. Very serious questions would then be asked about America's ability to service its debt. Foreign creditors could start calling in the money they're owed by the States.

This scenario is alarming, but far from impossible. And the reason the world is flirting with this danger is because the Fed needs to fight deflation.

But the Fed's argument doesn't stack up. US inflation – as measured by the pre-Clinton methodology, before the politicians started messing with the numbers – stands at 4.5pc.

Deflation is being used as an excuse for the US authorities to print money like crazy, attempting to bury their mistakes and bail out their Wall Street friends. [Emph added].

Alright, a little bit of colour. Most of the above has been said before (although the mastheads are getting more respectable with time). What is more rarely expressed is the observation that managers are buying treasuries for ass-covering reasons. Amen to all that. It's quite true, especially around year-end. Fact is, no one has ever been fired for owning treasuries. The intermediation of real-estate lending was the root cause of the clusterf-ck. The intermediation of financial asset stewardship will make the mortgage fiasco seem like LTCM. And that's with Madoff already in the history books. You can argue that treasuries are not a bubble, but you can't argue they're not a crowded trade. PM's are drawn to crowded trades, I suppose, by definition (again, no one has every been fired for being center of the pack). Individuals? Less so. There is daylight between a professional's motivations and the motivations of those whose money the professional manages. When the money bubble turns, this will become more apparent and "riskless" will become a term laden with irony.

"The Age of Obligation"

A thoughtful article by Niall Ferguson in the week-end FT (subscription only). The piece covers the various ways society has dealt with excessive debt in the past. And when I say 'the past', I mean the way past:

In the Old Testament Book of Leviticus, God commands the children if Israel to observe a Jubilee every 50 years. Nowadays, we tend to associate the word with celebrations of royal anniversaries such as Queen Elizabeth's golden jubilee in 2002. But the biblical conception of a jubilee was more precise: that of a general cancellation of debts.

Much of the article walks through what we know -- we took on too much debt and now we are screwed: "Excessive debt is the key to this crisis; it is the reason we are confronting no ordinary recession." The numbers are familiar, tedious even, if comprehensive. What to do about it? He doesn't know, and suggests no one else does either. "What makes this crisis of burning interest to financial historians is the knowledge that we are witnessing a real-time experiment with not one but two theories about the Depression." Bernanke is doing a Friedman while Paulson's channeling Keynes. The bulk of the article drives us to this question: "Is it really plausible that the cure for excessive leverage in the private sector is excessive leverage in the public sector?" He lays it out:

The alternative must surely be a more radical reduction of debt. Historically, such reductions have been done in one of four ways: outright default, restructuring (for instance, bankruptcy) inflation or conversion.

Mass defaults and bankruptcy "are not a pretty prospect." Agreed, especially when the collateral damage to the real economy, the very sectors of the economy we'll need when we reach the far shore and start to rebuild, will be catastrophic. Ferguson's preferred option is then "conversion" whereby mortgage debts are converted into longer-term low interest rate loans. It is here where he loses me: isn't this a form of restructuring? And additionally, the logistics of piecemeal restructuring would be a nightmare. And why stop at mortgage debt? What about credit card debt? What about the debt at all those autoparts suppliers? Who's going to play God in all this?

His treatment of inflation as a solution is disappointing:

Inflation, ..., is hard to worry about in the short term, not least because the Fed's expansion of the monetary base is leading to no commensurate expansion of the broad money supply;

Fair enough, but it is just as fair to ask why he doesn't look how most countries induce inflation: via devaluation. That's how non-reserve currency countries do it (and thereby cut their debt burden) and that's how FDR did in the 30's. In this regard, the problem isn't "new" (as he insinuates); rather, what is new is the fact that we now live in a world of fiat currencies backed by nothing and therefore there is no reference system against which the US can now easily devalue. A paradigm gap plagues the debate. This too, in time, shall pass.

Roubini Speaks! (On Currencies...)

Oh my! From Brain Surgeon Roubini:

Does the U.S. dollar’s December slide mean the USD has passed its peak? Most likely not. The turn-of-the-year profit-taking on long USD positions creates a near-term blip in the dollar's uptrend...

It was profit taking that caused the "blip"? Really? Or maybe it has something to with the Fed saying it would rain money from heaven until Wall Street (and Main Street) looked like a ticker tape parade? He continues:

More aggressive policy response in the U.S. compared to Europe, could bring the U.S. out of a recession faster than the Eurozone (though growth will most likely remain subdued for some years to come), supporting the dollar against the euro. In the longer term, however, once risk appetite revives, the greenback might lose its defenses in wake of worries surrounding U.S. public debt expansion and the potential inflationary effect of quantitative easing. [Emph added.]

Well, at least, in the emphasized passage, he acknowledges the existence of history, even as he doubts its veracity. "Potentially inflationary effect"? This is what he said in the FT some two weeks ago:

But with governments and central banks bringing private sector losses on to their balance sheets, fiscal deficits will top $1,000bn for the US in the next two years. The Fed and the Treasury are taking a massive amount of credit risk, endangering the long-term solvency of the US government.

So sure, go buy the dollar!! I mean, if the issuer goes bankrupt, we'll let you know ahead of time. We'll send you the word. Wink, wink, touch nose. In the meantime, we see nothing wrong with driving on the wrong side on the highway. Less traffic there, see?

Why isn't there deflation in Iceland?

The finacial sector goes crunch when spree of bad lending meets inevitable end and, well, isn't that a sign of impending deflation? The latest from Iceland:

The decline of the krona, which has lost half of its value since the start of 2008, has resulted in rampant inflation, which is now over 20 percent. Many people are seeing costs skyrocket, particularly on imported goods. Due to the high interest rates in Iceland, many people took out loans in foreign currencies where interest was lower. For them, costs have doubled.

The economy is set to suffer a severe contraction in the coming year. Lars Christensen, an economist from Dansk bank commented, "Given the base now, GDP will then fall at least 10 percent, or even 15 to 20 percent."

The crippling level of debt from the collapsed banks will exacerbate this problem. Recent analyses indicate that in total the banks' liabilities will cost Iceland 80 percent of its GDP.

What happened in Western economies is fundamentally no different than what happened in Iceland; indeed, Iceland is our lab bench experiment, our trial run. Eyes peeled.

Cat sighting

It will be instructive to track folks' acceptance of an inflationary resolution to the debt hole the global economy now finds itself in. It is, of course, the only way out, but at the same time it remains the forbidden fruit of policy options, the solution that dare not speak its name, etc. and it is easy to see why: the monetary system as we know it is based on credit, from credere - to believe - and the moment creditors stop believing, things can unravel quite quickly. It remains though that the benefits of such measures will seep into the public debate as other approaches fail and options become increasingly limited. Whether it will proceed along the classic stages of grief -- denial, anger, bargaining, depression, acceptance -- remains to be seen. But expect more mentions, and expect these to become more supportive over time. Necessity being the mother of invention, of some variant thereof. A first posting to this effect is here.

The clip below falls very clearly into the "acceptance" stage of inflation as the cure for excessive debt. Released in 1933, just after FDR revalued the dollar, the grandfatherly narrator walks the viewer though the wonderful tonic that is inflation and how it will better their lives. And surely, to the average viewer, the narrator is right. (The creditors were another story...) What is particularly telling is how inflation had to be explained, as though it were a foreign concept, which it surely was. (That's the gold standard for ya.) Nowadays, the phenomenon is the object of scorn and ridicule, and it is in this light that the clip, which has gone viral, is now treated. This too will change...

Bastille Day!

Wow, how's that for luck? You start a blog called "Weimar Watch" and not two weeks later the Fed coughs up Tuesday's FOMC statement. That's kinda like deciding to get into ponies and seeing your horse win a stakes race on its fifth start. (I've been slow on getting this out due to associated festivities.) For the record, here it is:

For immediate release

The Federal Open Market Committee decided today to establish a target range for the federal funds rate of 0 to 1/4 percent.

Since the Committee's last meeting, labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined. Financial markets remain quite strained and credit conditions tight. Overall, the outlook for economic activity has weakened further.

Meanwhile, inflationary pressures have diminished appreciably. In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate further in coming quarters.

The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.

The focus of the Committee's policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve's balance sheet at a high level. As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant. The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities. Early next year, the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Christine M. Cumming; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh.

In a related action, the Board of Governors unanimously approved a 75-basis-point decrease in the discount rate to 1/2 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Cleveland, Richmond, Atlanta, Minneapolis, and San Francisco. The Board also established interest rates on required and excess reserve balances of 1/4 percent.

The new carry

From Across the Curve's closing comments today:

For the moment inflation is quiescent. That and the allure of nearly 300 basis points per day of carry make the 30 year bond appear to be an attractive investment. So, as the Federal Reserve places that funds rate at zero it will compel more and more investors to climb out the yield curve to capture some performance. (A stable well defined trajectory for funding and lots of positive carry. That was one of the main ingredients for the sub prime debacle.) [Emph added.]

So we lurch from one carry trade to the next. For this reason and this reason alone we can take comfort that the euphoria in the bond pit is based not on fundamentals (3% for 30 years!!) but rather on (more) performance chasing. And insofar that this is so, the move in treasuries is not terminal and will, like all the other carry trades passim, have to be unwound.

Those in glass houses...

I have no views on Ecuador's default one way or another -- I don't know why they did it and don't know where they are going with it. But Felix Salmon sure has views. Check it out:

In the annals of idiotic political decisions, today's default by Ecuador has to rank pretty high. The country failed to pay a $30.6 million interest payment on its 2012 global bonds, despite the fact that it has $5.65 billion in cash reserves and debt service accounts for less than 1% of Ecuador's GDP.

As a result, Ecuador's economy will suffer greatly. The country is a major exporter, not only of oil, but also of such things as shrimp, bananas, and cut flowers; trying to get trade finance for any of that will now be all but impossible.

...

[Ecuador] has no chance [of winning the resulting legal dispute] for one big reason: Ecuador has dollarized. The dollar is the legal currency of Ecuador; there is no other. As a result, all of Ecuador's assets, ultimately, are US assets.

Ecuador's bondholders will vote to accelerate its debt very quickly. As a result, Ecuador won't have to just pay its $30 million coupon payment any more: it will have to pay the full $510 million principal amount. And the chances are that the 2015s and 2030s will be accelerated too. What's more, if it doesn't pay up in full, its creditors will surely find a way to take the money anyway.

...

If this default isn't cured in a matter of days, Ecuador is going to lose billions of dollars it can ill afford to see go. Surely Correa knows this -- and surely he knows, too, that whenever Latin American presidents announce a debt default, they rarely last long in office. Which makes this decision even more inexplicable. But there's Ecuador for you: always bet against the country taking the logical and sensible course of action, and you're likely to make a lot of money. [Emph added.]

Salmon seems bewildered as to why the country would do something like this. Here's a hint: Ecuadorians resent US power, resent the influence it has exercised over the country's internal affairs and resent the condescending manner in which it has been treated by American politicians, military officials and, I guess, financial columnists.

And it's not surprising, given the sheer arrogance exhibited right here. "The dollar is the legal currency of Ecuador; there is no other. As a result, all of Ecuador's assets, ultimately, are US assets." Huh? Really? I mean, wow. And: "if it doesn't pay up in full, its creditors will surely find a way to take the money anyway." By hook or crook, no doubt.

But the fact is, American interests haven't needed the pretext of a bond default to assume such an attitude all along. For example, the US built a military base on Ecuadorian soil some ten years ago, in a deal signed with a lackey president on his knees to the IMF, and saw fit to pay rent of $0/year. The base was allegedly used to coordinate a recent attack by Columbia on Ecuadorian soil. (Can Salmon imagine an Ecuadorian military base in, say, Oregon? Especially if it were to be used to help the Mexicans attack California?) Correa quipped in the last election campaign that the foreign oil companies were in fact charities, for the tax returns of their local subsidiaries have never shown a profit and therefore never paid any tax. There is an "oil bar" in Quito where the industry ex-pats hang out and where darts is a popular past time. Salmon should spend an evening there, hoist a couple, and shoot the shit with these guys. Ecuador and Ecuadorians exist to be fleeced, don't ya know?

Or how about this for a good deal:

From a list of donations to be made by Agip Oil Ecuador to the Huaorani tribe in eastern Ecuador, in return for releasing Agip from any liabilities when carrying out oil exploration on Huaorani land. The contract dates from 2001 and was obtained last year from Bolivar Beltran, an Ecuadorian lawyer, by journalist Kelly Hearn. Translated from the Spanish by Dan Keane.

Two (2) buckets of lard
One (1) sack of salt
100 pounds rice
100 pounds sugar
One (1) chalkboard
One (1) Ecuadorian flag
Fifteen (15) plates
Fifteen (15) cups
Fifteen (15) spoons
Two (2) pots
Two (2) ladles
Two (2) soccer balls
One (1) stopwatch
One (1) referee whistle

The US stands as the world's biggest debtor by far. One day it might find itself in tough times and in need of refinancing. Or, in the least, in might find itself in need of oil, as it has burned through most of its own. Is it really in the long term interests of the country to continue to exercise a heavy hand in relations with its neighbours, as is seemingly being advocated here?

My homies

We have this from Gata and Bill Murphy, the plaid shirts of the gold community:

I received a call this morning from a commodities broker who told me that the Comex is alerting various futures firms about the potential of a squeeze on the December contract and is advising the $840 December shorts to exit their positions. That is the remaining open position.

There have been 12,636 notices of delivery. The shorts have until December 31 to make delivery. Normally they deliver early to take in cash and earn the interest. They must be delaying. As I understand the situation, that represents about 40 percent of the gold available at the Comex, and of course someone could enter the scene late, buy February gold, and then spread into December, which would stun the shorts.

My broker friend said his back office said this sort of alert is highly unusual and that the concern is real, not only for gold, but for other commodities too, like copper and palladium, as there is a good deal of talk of taking deliveries there too. But gold is the one for which the advice to cover went out.

This is an extremely productive development and could spur the price of gold up quickly as word spreads. As we all know, buying Comex gold and silver (the cheapest way to buy precious metals) makes all the sense in the world in this financial environment.

1. The only way you can issue a delivery notice is if you have the metal and the metal satisfies delivery requirements. That is, issuing a devliery notice amounts to delivering the gold. A 'large number' of notices, then, is only indication of 'large supplies' of gold available for delivery. Certainly, the number of delivery notices issued is no gage whatsoever as to the presence or likelihood of a squeeze. 2. Twelve thousand plus notices for gold is at any rate not abnormal. So, there is no squeeze on for the Dec contract. The Dec contract is, barring any last minute fireworks, and past experience suggests this is highly, highly unlikely, dead.

And if there were to be a squeeze, it wouldn't look like this. Rather, you'd see persistent high open interest into the delivery period and near-month spreads in severe backwardation. This is simply not happening.

A friend writes: "I read [Murphy's above dispatch] 3 times and thought either he's dangerously stupid or he's purposefully lying."

Then there's this guy, howling up another tree: "Backwardation that shook the world." I don't even know where to begin. The gold market is not in backwardation right now. It's flat, it's tight, it's somewhat strange times. But it's not in backwardation, and certainly not in a term structure that would "shake the world." The author is quite simply on drugs.

There are in fact reasons to think the flattening of gold forward rates is a positive development and it is, there's no doubt. (See here.) Then your cousins from Thunder Bay show up with a half bag and cooler.