McAlvany Weekly Commentary

New Twists on the Bond Market

Posted on 14 March 2012.

About This Week’s Show:
-Chinese and Japanese trade surpluses turn to deficits
-US creditors may now also compete with us for loans
-Shift in global trade may jeopardize treasury market. . . will oil rich countries fund our needs?

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Buy the Banks?

Richard Ross, Auerbach Grayson, explains what the KBW Bank Index says about the banking industry right now.

Richard Russell: More QE After 40 Year Monster Bubble

from King World News:

With gold trading near the $1,700 level, today the Godfather of newsletter writers, Richard Russell, had this to say in his latest commentaries: “I have been writing my ‘stuff’ for about 54 years. They say that you can’t teach old dogs new tricks, but I’m an old dog and I’m still learning. Many people in this line of work ask me how in the world I stay in business. I tell them, I really don’t know, I write about what’s on my mind, and most subscribers evidently like it.”

Richard Russell continues: Read More @ KingWorldNews.com

Platinum regains its premium to Gold

Dan Norcini,
For the last six months or so, platinum has been trading at a discount to gold. This is a rare occurrence as one can see from a glance at the monthly chart going back to 1990. Only in 1991 did platinum trade at a discount to the price of gold. Late last year and early into this year, an ounce of the white metal was over $200 cheaper than an ounce of gold!

This came about due to fears that the global economy would slow down as European sovereign debt woes sent out a type of contagion rippling across the planet. Auto sales especially would be hit and since platinum is heavily used in catalytic converters, ideas spread that demand for the metal would falter.

If you notice however, platinum has been steadily gaining ground against gold as investors began anticipating Central Bank liquidity injections to deal with the pesky debt issues plaguing Europe, not to mention an ultra low interest rate environment which was intended to spur both borrowing and lending and by consequence, growth.

It also did not hurt that a major strike in an important platinum mine popped up cutting off supply from the world market.

This is another one of those combination indicators that can be used to gauge investor sentiment towards the global economy in general. As long as traders feel that there is little to fear as impediements to growth, they will bid this spread higher in favor of platinum.

Spain Has ‘Worse Problems Than Greece’: Analyst

Spain’s eye-wateringly high unemployment and the collapse of its real estate market mean that Spain has significantly worse problems than Greece and could threaten the euro zone’s new-found, albeit fragile stability, an analyst told CNBC.com Tuesday.

CNBC.com

“Spain has very large downside risks and it needs to tread very carefully – Spain is in a very fragile situation. Its problems are significantly worse than Greece’s,” Sony Kapoor, managing director at international think tank Re-Define said.

He added that a “huge danger” was posed to the macroeoconomic situation and the social fabric of the country by the current austerity program and an expected 5 percent deficit adjustment.

“The financial panic is temporarily over but 2012 will be the year of austerity across Europe and Spain is a microcosm for the euro zone as a whole,” he said.

Earlier this month the Spanish premier Mariano Rajoy, publicly defied Brussels-imposed targets, which were 4.4 percent of gross domestic product, saying that the targets were based on forecasts of economic growth when in fact the government expects the Spanish economy to contract this year.

The country has the euro zones highest rate of unemployment - now over 22 percent.

Euro zone finance ministers rebuked the country – the euro zone’s fourth largest economy - at the ECOFIN meeting Monday urging it to make new cuts to its 2012 budget to reduce its deficit by a further 0.5 percent, agreeing a new target of 5.3 percent.

Wolfgang Schaeuble, German finance minister, speaking at the meeting dismissed any comparisons with Greece describing it as a “completely unique case” adding that Spain “had made great progress but we’re all still on a tough path.”

Ben May, European economist at Capital Economics, told CNBC.com that underlying issues in Spain could derail any attempts to curb the budget deficit.

“There are some reports that suggest that public debt might be higher than the official statistics show and there’s a concern that it might end up worryingly high over the next couple of years. The banking system is also fragile and the fact that there’s a housing overhang means we could see a situation like that in Ireland,” May told CNBC.com.

He added that talk of bailouts and defaults would then be ramped up but with far worse consequences than Greece.

“Spain is so much larger than Greece, so even if there is a small risk of a default or a bailout then it has much bigger implications for the euro zone than Greece had,” May added.

A VIX of 15!?! Meet the New Reality

When the VIX recently slid below 20.00 for an extended period, I sensed a noticeable unease about the state of the market in many traders and investors. Clearly a sub-20 VIX was underestimating the risks in the current and future market environment, they thought. When the VIX dipped below 18.00 that unease intensified and now with the VIX hovering around the 15.00 range and I can sense that quite a few are ready to grab the nearest pitchfork and riot about the inhumanity of the wayward VIX.

I will be the first to admit that there are a number of perplexing geopolitical, macroeconomic and other factors that pose real threats to the economy and to stocks, but I also believe that investors have become so fixated on some of the past problems that availability bias and disaster imprinting has clouded their judgment to the extent that they cannot separate the current market environment from the ghosts of markets past.

With this in mind, I created a chart to show what happened the last time we had a sharp market selloff and a subsequent bounce that lasted three years. The graphic below shows the percentage change in the SPX as well as the absolute VIX level in the three years following the October 2002 lows in the SPX as well as the three years following the March 2009 lows. Note that from 2002-2005, the SPX rallied about 53%; the current rally in the SPX from the March 2009 close is over 100%.

Turning to the VIX, it starts the sequence in the 42s in 2002 and in the 49s in 2009. Note that in both instances, the VIX had made it into the teens within one year of the beginning of the bull move. As the 2002 bull bounce continued, however, the VIX plummeted, spending a great deal of time in the 10-13 range, with a median value of 15.30 in the first three years of that bull market. The rally off of the 2009 bottom has been a different animal altogether, however, with forays down to the 15s being extremely rare (though it did happen on occasion in 2010 and 2011) and a median VIX of 22.84 during that same initial three years of the bull market.

Of course not all bull markets are the same (and there are many that will not concede that the current rally is a bone fide bull market) and every wall of worry is made of different types of stones, but at some point investors need to come to terms with the reality of a VIX of 15, particularly when we are looking at realized volatility that has been sub-10 for the last two months.

Pensions All Over America Are Being Savagely Cut Or Are Vanishing Completely

How would you feel if you worked for a state or local government for 20 or 30 years only to have your pension slashed dramatically or taken away entirely? Well, this exact scenario is playing out from coast to coast and in the years ahead millions of elderly Americans are going to be affected by broken promises and vanishing pensions. In the old days, things were much different. You would get hired by a big company or a government institution and you knew that the retirement benefits that they were promising you would be there when you retired in a few decades. Unfortunately, we have now arrived at a time when government institutions and big companies have promised far more than they are able to deliver, and "pension reform" has become one of the hot button issues all over the nation. Many Americans that have been basing their financial futures on their pensions are waking up one day and finding that their pensions are either gone or have been cut back dramatically. According to Northwestern University Professor John Rauh, the latest estimate of the total amount of unfunded pension and healthcare obligations for state and local governments across the United States is 4.4 trillion dollars. America is continually becoming a poorer nation and all of that money is simply not going to magically materialize somehow. So where is that 4.4 trillion dollars going to come from? Well, either pension benefits are going to have to be cut a lot more all over America or taxes will need to be raised dramatically. Either way, we are all going to feel the pain of these broken promises.

There simply is not enough money out there to keep all of the pension commitments that have been made. Something has got to give. In the end, millions of elderly Americans will likely be plunged into poverty as pensions disappear.

Some local governments around the nation are already declaring bankruptcy and are either eliminating pensions or are cutting them very deeply. Just check out what just happened in Central Falls, Rhode Island.... (more)