Thursday, June 16, 2011

Does Really Smart Money Smell A Really Big Problem?

By now everyone has seen the horrible economic statistics released today and yesterday.  Today's Philly Fed Index has confirmed the other regional Fed indices released earlier, showing an economy going into a tailspin.  The Philly Fed index printed at -7.7 vs. overpaid Wall Street Einstein economists' forecast of +9.  Talk about not being about to hit the broad side of a barn with a sawed-off 12-gage from 10 paces...As points out, this index drop "is the biggest three month collapse in the history of the series, plunging from 43.4 in March to -7.7 in June, or an over 50 point drop in three months."

And don't think that the slight increase in housing starts is a good signal.  The positive reading occurred because of an increase in the start of apartment construction.  Why is this bad news?  Because the biggest demographic trend in housing right now is a big shift from home ownership to apartment renting.  That just means that more homes are likely coming on the market from homeowners who want to bail and rent.

In terms of what could be a big QE3 (of some sort) signal, I started thinking about systemic liquidity after observing the most recent developments in Europe.  We know that the Fed has been liquifying the European banking system with $100's of billions in currency swaps, largely with French banks.  Based on various metrics which you can access from posts yesterday at, it would appear that there's a massive liquidity crisis that's developed in Europe.  Please note, that this is not primarily because of Greece.  Greece may be that proverbial "straw/camel's back" event, but it's small compared to the big picture there and here.

Anyway, I started thinking about short term rates in the U.S. and recalled that back in the late spring/early summer of 2008, the rate on 1 month Treasuries in the U.S. went negative.  What this means is that big money would rather pay to park cash in very short term Treasuries rather than get paid to leave big chunks of cash in the banking system.  The idea here is that because the U.S. can just print money at will, there's less risk of losing large sums of money in short-term Treasuries than there is in funds left at banks in excess of the $250k FDIC/Taxpayer guarantee (of course, money would have to be printed to honor that as well but the amount is capped).  So big money would rather be guaranteed of getting back slightly less than invested over a 30-day period (negative interest rate) than risk 30 days in the banking system.  That is one of the purest signals of a massive banking system liquidity crisis.

To cut to the chase, take a look at this 1-month Treasury interest rate chart, which I put together today - it goes back June 2008:
Yield On One-Month U.S. Treasury Securities

You see where the interest rate is at the upper range is when the liquidity crisis developed and the rates trended toward zero (the flight to safety).  Then QE was rolled out and the rate snapped back to the .2% area.  Right now we are in the flight to safety/liquidity fear range.  Is QE of some sort next?

It is even more interesting to me, based on everything I read and observe/trade in the markets, specifically the big drain of physical metal from the Comex and recently, of silver from SLV, that it would appear that very smart money is starting to rush into physical gold and silver.  I have always thought that the next systemic puke would entail a big rush into the physical gold/silver.  We may just be seeing the beginnings of that.

And let me end with this quote from the First Deputy of the Russian Central Bank: 
When it comes to hedging against risks, however, gold is one of the safest bets, Ulukayev said, reflecting a view increasingly shared by other central banks seeking an alternative to currencies and protection from the debt crisis in Europe. "Increasing monetary gold in our reserves is an important element," Ulyukayev said.
Here's the LINK


  1. Dave: only differ on one point-the biggest demographic shift in housing may just be adult kids moving back home.

    I have friends whose daughter got married recently and the newlyweds are living with the in-laws.

    My Daughter is moving back from out of town and i encouraged her to live with us rather than rush out and buy a condo since we both feel from her perspective better prices are ahead and also she can save a motherload if she stays with us for even less than a year.

    Selfishly, she can babysit the house next winter while we spend the winter in AZ.

  2. (Dave)

    Yup there's that trend too. And it takes demand away from housing.

  3. Has anyone watched the ESF video...?

    The ESF: Headquarters of gold rigging -- and all U.S. covert operations too?

  4. Audit the fed and more...

    The Shadow Government

    The shadow government has created so much momentum it has become unstoppable.. However a leader who understands the Shadow Government could assert and control it. These kinds of leaders are not currently present in the two party political system. This is a function of unchecked bureaucracy now moving us into global war.

  5. Do you understand?

    Jim Sinclair

  6. Great chart Dave, will have to link it tonight.

  7. (Quinn)

    Yes, thank you.

  8. There you go Gross tweets QE3.

  9. ...and where do you think this is going?hmmm...think assets.

    Billionaire Cisneros to Team With Chinese Banks in Latin America Oil, Gold

    Venezuelan billionaire Gustavo Cisneros is setting up joint ventures with Chinese banks to carry out investment in Latin American commodities industries.

    The chairman of Cisneros Group of Companies, who is relinquishing operations of the firm to his youngest daughter Adriana, said he aims to push through projects delayed by state inefficiencies through partnerships in energy, agriculture and metals. Deals may take place in countries including Brazil, Colombia, Mexico and Panama, Cisneros said.

    “You’ll probably see in the next year or two a lot of Cisneros China or China Cisneros in Latin America and it’s going to be whatever comes, whether it’s oil, gold or big cattle operations,” Cisneros, 66, said yesterday in an interview at Bloomberg’s headquarters in New York. “They understand they don’t have the knowledge to run these businesses. They need results now and we can provide results.”

  10. hmmm....wonder if its a ratio trade?

    Warehouse ownership by Wall Street banks raises market manipulation suspicions

    The transformation has raised questions about whether the investment banks, which also have big commodity-trading arms, are able to use their position as owners of warehouses to manipulate prices to their advantage.