VIDEO: Quants - The Alchemists of Wall Street

Sunday, September 26, 2010

You are recommended to watch this 47-minute video from a Dutch TV station which attempts an explanatory look into the world of Quants who base their investment decisions on complex mathematical formulas trying to outguess human behaviour.
Quotes like
"you can use formulas to hide the risk"
"people always wanted to think that everything was going up. I think they were blinded by their compensation"
should be enough of a primer for this docu with Wall Streets top quant gurus who pair their mathematical genius with a lot of intriguing common sense understanding of markets and humans.

In The Home Country Of Beer, Oktoberfest Prices Tell A Different Inflation Story

Wednesday, September 22, 2010

Here is one more proof that deflation (of asset prices) and inflation (in all the stuff you buy in everyday life) can exist at the same time and that official inflation figures are probably more of a kind of crapshoot than any economist wants to admit.
Hat tip goes to @fiatcurrency who published this chart via Twitter.

GRAPH: In the last 25 years the German consumer price index rose by 58.1% but a visit to the world famous Oktoberfest costs you now 152.2% more than in 1985. The calculation is based on following expenses: local public transport, 1/2 grilled chicken and 2 litres of beer (IMHO a very frugal Oktoberfest visit;-)
As I put a lot more trust into the business sense of Oktoberfest caterers than into funny official inflation data that gets contradicted every time I stop at the gas pump, eat in a restaurant or need state services I presume this Oktoberfest data reflects the true cost of living i.e. the true davaluation speed of fiat currencies much better than the data we are being fed by authorities.

Citibank Favors Euros - Escape Into Gold!
Exactly for this reason I am not buying in Citibank's Wednesday FX alert by John Englander that states 9 reasons to go long Euros (my opinion in bold italics).

Austrian Banks Carry €2.6 Trillion in Derivatives - Risk Unknown To Central Bank

Monday, September 20, 2010

Austrian banks may be sitting on a €2.6 Trillion off balance sheet derivatives time bomb and the central bank does not know how much risk is involved in these trades.
Oesterreichische Nationalbank (OeNB) governor Ewald Nowotny said in a live chat of Austrian daily "Der Standard", he could not provide a material ad hoc figure for the actual net risk of these trades.
According to a (German language only) press release from last Thursday off balance sheet derivatives volume grew a stunning 13% to a record volume of €2.586 Trillion at the end of H2 2010 in Austria. This is roughly 2.5 times as much as the nationwide balance sum of all banks which stood barely unchanged at €1.037 Trillion in the same period.
It also has to be noted that this growth comes at a time of global de-leveraging and may indicate that Austrian banks try to make up for loan losses in Central Eastern Europe with bets on interest rates and currencies.

GUEST POST - Whichever Way You Look At It, Silver Is Underpriced

-- by Lorimer Wilson --
More than 95 respected economists, academics, analysts and market commentators are of the firm opinion that gold will go to $2,500 and beyond before the parabolic peak is reached. In fact, the majority (55) think a price of $5,000 or more - even as high as $15,000 – is actually more likely! As such, just imagine what is in store for silver given its historical price relationship with gold!

Precious metal bull markets have 3 distinct demand-driven stages and we are now quickly approaching or perhaps even in the very early part of the last stage which occurs when the general public around the world starts investing in gold and this deluge of capital into gold causes it to escalate dramatically (i.e. go parabolic) in price.

Gold went up 24% in 2009 and is up 16% YTD and, as such, there are no shortage of prognosticators who see gold going parabolic reminiscent of 1979 when gold rose 289.3% in the course of just over a year (from a $216.55 closing price on Jan. 1, 1979 to a closing price of $843 per ounce barely a year later on Jan. 21, 1980) and 128% higher in a late-1979 parabolic blow-off of just under 11 weeks! A 289% increase in the price of gold from $1275 would put gold at $4,960. (More on what that might mean for the future price of silver is analyzed below.) That being the case what appear on the surface to be rather outlandish projections of what the bull market in gold will top out at don’t seem quite so far-fetched.

Silver has proven itself, time and again, to be a safe haven for investors during times of economic uncertainty and, as such, with the current economy in difficulty the silver market has become a flight to quality investment vehicle along with gold. The 49% increase in silver in 2009 (and 23% YTD) attests to that in spades. During the last parabolic phase for silver in 1979/80 it went from a low of $5.94 on January 2nd, 1979 to a close of $49.45 in early January, 1980 which represented an increase of 732.5% in just over one year. Such a percentage increase from the current price of almost $21 would represent a future parabolic top price of $175. (For what that might mean for the future price of gold see the analysis below.) Frankly, such prices seem impossible in practical terms but that is what the numbers tell us.

Gold:Silver Ratio
The current gold:silver ratio has been range-bound between 70:1 and 60:1 for quite some time which is way out of whack with the historical relationship between the two precious metals. It begs the question: “Is now the perfect time to buy silver instead of the much more expensive gold metal?”

How both gold and silver perform, in and of themselves, does not tell the complete picture by a long shot, however. More important is the price relationship – the correlation – of one to the other over time which is called the gold:silver ratio. Based on silver’s historical correlation r-square with gold of approximately 90 – 95% silver’s daily trading action almost always mirrors, and usually amplifies, underlying moves in gold. With significant increases in the price of gold expected over the next few years even greater increases are anticipated in silver’s price movement in the months and years to come because silver is currently seriously undervalued relative to gold as the following historical relationships attest.

Let’s look at the gold:silver ratio from several different perspectives:
  • Over the past 125 years the mean gold:silver ratio (i.e. 50% above and 50% below) has been 45.69 ounces of silver to 1 ounce of gold.
  • In the last 25 years (since 1985) the mean gold:silver ratio has increased to 45.69:1
  • The present gold:silver ratio has been range-bound between 60:1 and 70:1 (61.3:1 as of September 17/10).
  • Interestingly, during the build-up to the parabolic blow-off in 1979/80 silver outpaced gold going up 732.5% vs. gold’s 289.3% causing the ratio to drop from 38:1 in January 1979 to 13.99:1 at the parabolic peak for both metals in January, 1980. 
Let’s now look at the various price levels for gold and the various silver:gold ratios mentioned above one by one and see what conclusions we can draw.

Gold Chart Book

Friday, September 17, 2010

Dundee Wealth Economics has produced an extensive gold monitor chart book, looking at the yellow metal from all angles, but its price forecasts may actually be overtaken by current price action. Comex Gold hit a new ATH at $1,284.40 before retreating on stable US inflation data.
Dundee has nine bullish arguments
  1. Global fiscal and monetary reflation: PIIGS, US, etc.
  2. Global imbalances: the dollar must decline
  3. Global FX reserves are “excessive”: diversification
  4. Central bank attitudes to gold: now positive
  5. Gold is not in a bubble: room to rise
  6. Mine supply is flat: “peak” gold? 
  7. Investment demand: long-run uptrend
  8. Commodity price cycle: many years to run
  9. Geopolitical environment: positive
and six reasons for caution.
  1. Policy “exit strategies”: in US, Asia, Europe
  2. Strong dollar: gold correlation will turn negative again
  3. Deflation: government debt more attractive
  4. Liquidity of last resort: for Greece, Italy, ...?
  5. Dehedging finished: hedging to recommence? 
  6. A Chinese recession: commodity demand will decline, possibly gold demand too
Enjoy this handy compendium of gold data.
Dundee Gold Monitor Chart Book

CHART OF THE DAY: Rocketing US Consumer Loans Indicate a Double Dip

Tuesday, September 14, 2010

The US economy may be in for the dreaded double dip, consumer loan data indicates. Recording the sharpest spike since data collection began, consumers extended their credit by almost 36% YOY by August 2010.
While the absolute growth of almost $400 billion YOY looks astounding by itself in the context of consumers tightening their belts the annual rate of change signals another recession ahead based on historical observations in the chart below.

GRAPH: US consumer loans expanded more than 42% since the beginning of 2010 and 36% YOY.

EC "Non-Paper" Sheds First Light On Financial Transaction Tax

Tuesday, September 07, 2010

An internal "non-paper" (sic!) of the European Commission Services detailing proposed measures to introduce a financial transaction tax in the EU shows how torn apart Europe is over this issue.
As the document lists only 5 coutries where ideas have developed beyond the headline stage we can expect to see long term discussions.
5 different approaches in 5 countries - France, Germany, Hungary, Sweden, UK - also spotlight the fact that tax harmonization has still a long way to go.
The paper - obtained by Euractiv - stresses that this point is tantamount in order to avoid "distortions" in markets and also calls for speedy multilateral talks to eliminate double or multiple taxation for multinational banks.

Checking the table and especially the targetted revenues from the bank tax in countries as diverse as Germany and Hungary bulldozers will be needed to create a playing field.

Barroso's Word Cloud In His "State of the European Union"

Jon Worth produced this word cloud from European Commission (EC) President Jose Manuel Barroso's "State of the European Union." Listening to Barroso his proposal for EU project bonds for infrastructure projects stuck out in financial terms. The rest? See the word cloud.
Barroso, a non-publicly elected EC official with wide-ranging powers who directs extensive behind-the-curtain policy-making, ran into immediate opposition although the more emotional statements came in local language without subtitles or translation options; so I was not able to follow.
His main points are summarized in this letter to all MEPs.

Next Step Down: From the European Union To The Transfer Union

Emerging plans to install a EU Treasury that can issue supranational debt among plans for stronger economic cohesion in the EU are met with heavy flak from many sides while the Union faces continuing strong headwinds from a languishing economy and persistently high unemployment.
The planned debt issuing agency also strives for higher fiscal reintegration, an issue destined to fill many heated discussions among the EU strongmen France, Germany and the UK.
From the Telegraph:
Yves Leterme, the Belgian prime minister and current holder of the rotating EU presidency, plans to propose a new machinery to prevent a repeat of Europe's sovereign bond crisis.
"This should evolve into a European debt agency able to issue debt for all member states. Everybody will gain from the mechanism," he said at the annual Ambrosetti conference of global policymakers at Lake Como, Italy. The idea would be the next logical step beyond the eurozone's €440bn bail-out fund agreed in May.
"This will be a very effective tool to harmonise budget policies, but the way ahead may be very tough," he said. Germany is likely to balk at talk of an EU debt union, or "Transferunion" as it is described in Gothic terms by Germany's tabloid press.
While the dear European leader did not mention where the money for this EU Treasury will come from - even a debt issuing agency needs some - readers may be reminded that the EU has begun to ask for new taxes to raise money for its budget plans. So far the EU is primarily financed from a share of member states VAT income.
One idea for direct EU taxes is the hotly discussed banking tax and I can remember that carbon taxes may become a viability too. We can expect politicians to be most creative when levying new taxes on an already heavily strained populace.
Leterme is not the ideal person to talk about further European integration plans anyway. Over the weekend Belgium officially abandoned coalition talks, renewing calls for a division of the country along ethnic lines.
This integration stuff does not even work at the the very heart of the EU in times when countries find out that future financing needs will evolve into an interest rate competition among member states.
A EU Treasury will not help either.

Another Housing Bubble Goes Bust

Monday, September 06, 2010

If all this sounds like a Deja-vu to you, relax. It is a different country.
From a media report (source disclosed below):
No to 80% Mortage Cap On Housing 
Several groups are up in arms over a proposal to cut housing loans by 10% from the current cap of 90%, saying that the move will only discourage Xxxxxans (NOTE: redacted -:) from buying houses.
National House Buyer’s Association (HBA) and Federation of Xxxxxian Consumers Associations (Fomca) cautioned that the proposed home loan reduction to 80% would only be a burden to potential house buyers.
HBA honorary secretary-general Chang Kim Loong said the proposal would go against the Government’s plans to encourage home ownership.

VIDEO: Bank Run in Kabul

Hundreds of Afghans have been trying to withdraw money from the country's largest bank, amid concerns that it could collapse.
The panic was sparked by reports that Kabul Bank has lent millions of dollars to members of the political elite, who used the money to make risky investments. A slew of reports has come up with allegations that relatives of Afghanistan's leader Karzai and executives of the bank have sunk 100s of millions of Federal Reserve Notes (FRN) into Dubai and other property investments before prices took a sharp dive.

According to a BBC report,

Wikinvest Wire