zondag 30 juni 2013

Croatia To Join European Union

Today, Croatia joined the European Union, time to celebrate! But should we really celebrate?

What we took in the European Union is a bunch of problems.

First off, the unemployment rate of Croatia is a staggering 20%, rivalling with Spain and Greece.

Second, its balance of trade is negative and has always posted a trade deficit.

To make matters worse, since 2008, the country was in recession and is still in a recession. Added to this, there is an almost 5% inflation in the country (which has come down to 2% just recently), which makes real GDP decline even more rapidly. As we have seen recently in this correlation, it doesn't bode well for the unemployment rate, which will keep rising.

This decline in GDP quickly added to the government's debt. A positive point is that the government debt to GDP is still at 54%, which is good. But it is worsening. External debt though, is higher at around 90% of GDP.

As debt goes up, the country's bonds had been downgraded to junk status last year. This creates the possibility of a bail out of the country by the IMF once it joins the Eurozone.

What a gift.

Unemployment Vs. Real GDP

The inverted Unemployment Rate is correlated to Real GDP and is also known as Okun's Law named after Arthur Melvin Okun.

Zero Hedge featured Okun's Law in this article.

Red curve: inverted yoy% change in unemployment rate
Blue curve: yoy% change in real GDP

Never in history has the unemployment rate been so artificially low (red graph artificially high) as today. The red curve has never been higher than the blue curve, which implies that the unemployment rate is much higher than officially reported.

We already know what the cause is: a lot of discouraged and part-time workers.

Moreover, the chart suggests that Real GDP (blue chart) is a leading indicator for the unemployment rate (inverted red chart).

As a final note, notice that we are talking about real GDP, which is inflation adjusted. This means that inflation negatively impacts real GDP and therefore inflation will in turn create higher unemployment rates at a constant GDP rate.

About Delivery Ratio and Cover Ratio at the COMEX

Interesting article by Jan Skoyles.

The summary says to us that the amount of gold bullion backing COMEX obligations is at an all time low (Cover Ratio). Meaning, there is very little gold backing at the COMEX.

If the delivery ratio (amount of delivered gold against contracts) ever spikes upwards, the COMEX could get under stress. Today, we are still fine, because people aren't really taking delivery as much as they should be.

Also notable is that registered stock is declining at a much faster pace than open interest (which is actually still very high). Such things cannot last, as this huge amount of leverage will blow up one day. You just can't trade contracts at this level without any physical backing of gold.

donderdag 27 juni 2013

PIIGS Bank Deposits Outflow Accelerating

As I noted a month earlier, Spain's bank deposits posted an outflow and this outflow is accelerating for the month of May 2013. This time, Italy is posting outflows too.

Greece, Cyprus are of course still in a decline. I expect bail-ins to come if this trend continues. Europeans should be worried about their deposits.

Case Study on the Housing Market of Belgium and The Netherlands

With the newly discovered correlation between building permits and housing prices, I wanted to put this correlation into practice more at home. Let's see how The Netherlands is doing. On Chart 1 we see that since 2006, the amount of building permits has dropped and is continuing to drop.
Chart 1: Building Permits in The Netherlands
A similar case is found in Belgium, where we see that the amount of building permits dropped since the top of 2006 (Chart 2). But the decline isn't as bad as in The Netherlands. 
Chart 2: Building Permits Belgium

If we then look at the housing prices in Belgium and The Netherlands we do see a lag. 2006 marked the top in building permits, while 2008 marked the top in the housing market index in The Netherlands. This suggests that the correlation is true. 

In Belgium though, the housing market is still rising, while building permits are declining. So something is not right here. Considering that building permits are dropping in Belgium, I expect that the Belgium housing market will go lower in the future.

Chart 3: Housing market in Belgium and The Netherlands

Building Permits Vs. Housing Market

The authorization of building permits is a leading indicator for the housing market. As you can see on this chart, the new private housing units authorized by building permits move first, while the house price index moves several months later. 

This way, you can predict the direction of the real estate market. 

On June 2013, the direction of the housing market is clearly upwards.

Correlation: Lumber Vs. Housing

Apparently the lumber price is a leading indicator and a proxy for the housing market. (Zero Hedge)

If the lumber price goes up, 2 months later, the housing market goes up. The same happens the other way round.

So it's very important to watch the lumber price, which can be found here.

And even more important, if this correlation is real, then you can just predict the market and earn money by betting on the direction of the market.

woensdag 26 juni 2013

What is Open Interest?

BrotherJohnF explains open interest here:

The Housing Bubble is Deflating

With the recent surge in the mortgage yields, let's see how the housing market is doing. The two key metrics to look at are mortgage rates and household income. Let's analyze the mortgage rates first.

Historically, there is a high correlation between 30 year U.S. treasuries and 30 year mortgage rates (Chart 1). The chart shows that the 30 year treasury yield has spiked upwards starting in 2013, so I expect that the 30 year mortgage rates will spike upwards too. 30 year mortgage rates have already gone up from 3% to 4.9%, which had negative consequences for the real estate market, which is not priced in yet in the housing index.
Chart 1: Correlation between 30 year treasury yield and 30 year mortgage yield

As Zero Hedge reports, the affordability of housing is declining rapidly with rising mortgage yields. Every percentage increase in yields on 30 year mortgages will result in a 10% decline in affordability as the chart shows. If yields continue to go up to 6%, affordability would have declined about 40% since 2013.

Chart 2: House Purchasing Power
The question is, will mortgage rates go up further? And what about the savings rate of the average citizen?

The answer is that real estate should be sold out of. Kyle Bass for example sold out of three of his real estate holdings: Newcastle Investment Corp (NCT), Hyatt Hotels Corporation (H) and Realogy Holdings Corp. (RLG ) - Real Estate Services.

=> Read it here.

GDP revised lower

As I suspected here, declining PMI will always result in lower GDP forecasts and "unexpected" revisions downward.

GDP growth was going to be 2.4% on an annual rate, now it is only 1.8% in Q1 2013.

This also means that the Zero Hour Debt chart is on track to go to zero.

More weakness is coming ahead of us as interest rates and mortgage rates go up. 

Follow Up on Eric Sprott's Bullish Call on Gold

As a follow up on Eric Sprott's bullish call on gold here, let's see what has happened ever since.

His premise was that hedge funds take possession of their physical gold of the GLD trust, because there isn't any other gold available. As they take possession of this physical gold, they are going to sell it to China who give huge premiums on this physical gold (around 3%).

Following chart indeed says to us that hedge funds are still taking possession of their GLD trust units. The GLD now only has 969 tonnes of physical gold left. The question is now, how much physical gold does GLD really have? If someone knows, please tell me. But we have another way we can look at it, by just looking at how much registered gold there is on the COMEX.

Chart 1: GLD

If we look at the COMEX warehouses, registered gold (which represents 40 tonnes physical gold) is declining (blue chart on Chart 2). Total stock is declining too (around 200 tonnes). When these charts hit zero, there is no gold anymore at the COMEX and we will see defaults. The gold exchange will become a cash exchange.

Once the blue line intersects with zero, bad things will happen because no physical gold is available at the COMEX. I guess that when the blue line intersects, there is a chance GLD could blow up as people scramble to get physical gold at the GLD trust.

Chart 2: COMEX

Jim Sinclair confirms:
As long as physical gold remains at a premium above future that is above the cost of insurance and transportation, the lower the inventory of gold at the COMEX goes. A futures exchange without a warehouse inventory becomes a cash exchange. This is the emancipation of physical gold from the manipulative capacity of No-Gold, Paper - Gold

Now let's see how this translates into the premiums on the Shanghai Gold Exchange.
Chart 3: Shanghai Gold Premium
As you can see on Chart 3, the premium has never been as high since I monitored it. We are at 2.8% now.
So investors are taking the opportunity to make arbitrage profits by buying gold from GLD and selling it to China at a premium.

Let's see how long this can go on.

On the silver front, premiums have almost skyrocketed to 40% for some miners.

Chart 4: First Majestic Silver premium

maandag 24 juni 2013

The Onion Report: The cost of a dollar

There might be some truth behind this. One day the cost to print a dollar bill will be higher than the dollar itself. 

Or in Gerald Celente's wording: 
"The U.S. Dollar Isn't Worth The Paper It's Printed on".

Michael Pento's Outlook

Michael Pento's view on the market and Ben Bernanke's "Tapering".

Marc Faber's Outlook

Adding this to my Marc Faber Blog Library.

zondag 23 juni 2013

Gold/Silver Premiums Going through the Roof Again

Following the smash in gold and silver this week, premiums are soaring all over again.

Chart 1: First Majestic Silver Premium
Chart 2: APMEX Junk Silver Premium
Chart 3: Gold Premium Shanghai to London

vrijdag 21 juni 2013

Ben Bernanke: "Our debt is in great demand"

Ben Bernanke (2013): "Our debt is in great demand". (at 06:40)

Not anymore...


As an analogy on this post, we can do the same analysis in China. The key is that SHIBOR affects Chinese adjustable mortgage rates.

Following site gives us the Shanghai LIBOR rates, namely: SHIBOR.

As you can see, we had a pretty big spike in SHIBOR (Chart 1), which also means a surge in China interest rates/funds rate.
Chart 1: SHIBOR

As you know a rise in interest rates means a rise in bond yields too, because there is this correlation between the funds rate, the mortgage rates and the bond yields.

Chart 2: 10 year China Bonds

As SHIBOR increases, so does the Chinese funds rate increase together with rising adjustable mortgage rates. And that has negative implications on the Chinese real estate market as you can see below.

So watching SHIBOR is a must, if you are invested in Chinese government bonds and Chinese real estate.
If SHIBOR goes up, Chinese bonds and real estate go down.

Correlation: LIBOR Vs. Fed Funds Rate

The LIBOR rate at which the banks lend each other money, is an important element in calculating the gold lease rate. Obviously, this LIBOR rate is influenced by the Federal Reserve via the Fed Funds Rate.

As you can see on this chart, there is an almost 100% correlation between LIBOR and the Fed Funds Rate.

As the Federal Reserve said that they will keep interest rates at zero until 2015, LIBOR rates will keep floating around the 0% level.

This also means that the gold lease rate (LIBOR minus GOFO (Gold Forward Rate)) is entirely dependent on the GOFO rate as long as the Federal Reserve keeps interest rates near zero.

Once inflation begins to pick up though, the Federal Reserve will have to raise the Fed Funds Rate (contractionary monetary policy), which will increase LIBOR rates and this will tend to raise the gold lease rates. In turn, high gold lease rates are a bullish environment for gold prices.

Note that there is one power that will force the Federal Reserve to increase its Fed Funds Rate and that is the yields on the bond market and the mortgage market.

As you can see on this graph below, the adjustable mortgage rates are starting to edge upwards even with a zero interest rate policy. Government bond yields are also edging upwards. So eventually, the Federal Reserve will be pressured to increase interest rates to keep up with the rise in bond and mortgage yields.

Investors who are still invested in the U.S. bond market, are taking a huge risk at this stage, especially when Ben Bernanke is forced to implement contractionary monetary policies at some point. Who will buy these U.S. government bonds... As a matter of fact, foreign investors are already dumping U.S. bonds as shown in the foreign U.S. bond investors report of April 2013.

donderdag 20 juni 2013

Goldman Sachs Was Right!

Remember I bookmarked this post?

I hate to say it, but Goldman Sach's call for gold going below $1300/ounce has become reality. Oh well...

Initial Jobless Claims starting to rise, S&P in for a correction

This week's initial jobless claims were rising again as reported by Zero Hedge and based on the obvious correlation between the S&P and initial jobless claims here, I expect that the S&P will come down eventually.

On top of that, the capacity utilization for the previous month was edging down (blue chart going up), which confirms that the unemployment rate will start going upwards (red chart going up).

 While deflation sets in with a lower CPI (red chart going down).

Warning: Deflation is on the horizon

As we know, Ben Bernanke sinked the markets yesterday and this has consequences.

As the premium on silver of some silver miners soars to 30%, we are getting to a point where mining companies are actually losing money, especially when they have mining projects in development. At these prices, nobody is going to invest in exploration companies as they would lose money in doing so.

On the other front, namely bonds, we see the U.S. treasury market decline in price while yields rise.

These high yields in bonds and mortgage yields will in turn crash the stock market and the housing market respectively, if the Federal Reserve stops its monetary easing.

These events are very deflationary, if Ben Bernanke doesn't up its QE, we will need to position ourselves in deflationary assets like cash and bonds.

Michael Pento warns for deflation in this status update.

donderdag 13 juni 2013

Shanghai Gold Market Opens With a Boom

Shanghai Gold Market opens with a boom after the Dragon Boat Festival.

The gold premium jumped to 1.2%. 

For silver, Shanghai premiums shot up to 2.24%.

woensdag 12 juni 2013

COMEX gold another huge drop

Interesting article by Zerohedge:

As I indicated here, COMEX will run out of gold in August 2013.

The drop in gold stock is getting worse. Hold on to your belt. Once COMEX has a force majeure, the manipulation is over and the banks know this, as they are now net long in gold for the first time in history (since I monitored it).

If you want more info on the COT report, the slingshot effect and how banks are getting long, don't miss this Got Gold Report:

dinsdag 11 juni 2013

Copper Contango Report Shows Weakness to Come

We thought that the contango was going back to backwardation, but lately we see a reversal again.

This is a not so positive development for commodities and stocks.

Silver ETF Vs. Silver Price

As demand is now being dictated for a part by the ETF's, we need to pay attention to what is happening in the trusts.

If you see the hedge funds buying (red chart goes up), you should become bullish.

You can monitor this chart daily at the iShares Silver trust site:

Chart 1: Silver Ounces in SLV Vs. SLV Price

Jim Rickards' Currency War

I like this video.

donderdag 6 juni 2013

U.S. Debt Flattening Out

I don't know if you've noticed, but this is the first time in more than a decade where total public debt has actually dropped...

I'm wondering what is happening. (of course, it's the debt ceiling of $16.7 trillion)

COMEX to run out of gold in August 2013

At this rate, the COMEX will run out of deliverable gold on 14 August 2013.

Yes, that's only 2 months from now!

You decide what will happen when people can't redeem their physical gold and instead get a paper settlement.

David Morgan explains how little physical gold there is in the COMEX (scroll to 12:00).

woensdag 5 juni 2013

China Gold Imports from Hong Kong in April 2013: Disappointing

The China Gold Imports from Hong Kong in April 2013 came in lower than expected, but still very high. I had hoped for a higher number with the decline in gold price...

dinsdag 4 juni 2013

COMEX not to be trusted?

While updating my COMEX charts I found something odd.

"The information in this report is taken from sources believed to be reliable; however, the Commodity Exchange, Inc. disclaims all liability whatsoever with regard to its accuracy or completeness. This report is produced for information purposes only.

For questions regarding this report please email Registrar@cmegroup.com or call (312) 341-3370."

I wonder why they put that in their reports...

Correlation: S&P Revenues Vs. PMI

Dr. Ed Yardeni's blog is a pool full of critical information and one of them is a newly discovered correlation which I will add to my collection.

Apparently the PMI is a leading indicator for the S&P revenues, which also means the PMI is a leading indicator for the overall direction of the stock market. This is consistent with the correlation between the PMI and the GDP, which is correlated to the total stock market index on itself via the Warren Buffet Rule.

So if you want to know the direction of the earnings of the financials, just look at the PMI and you can predict the trend, which is certainly down after the miss in PMI reported the previous week.
Chart 1: S&P 500 Revenues Vs. PMI

When will inflation in Japan show up?

People are wondering if the money printing experiment in Japan is actually going to be inflationary or not. As we all know, the inflation rate is measured by the CPI (consumer price index). If the CPI goes up, we have inflation.

The CPI of Japan consists of the items given in Chart 1. The items with the most weight in it are food, housing, transportation and fuel. Therefore, it is important to watch food and energy costs as well as housing prices in Japan.

Chart 1: Items in CPI of Japan (2010)
First, let's look at food prices. Zero Hedge reports that McDonald's has hiked the price of a burger in Japan by 20%. If we consider this price hike as a proxy for the overall food price in Japan, we could see a significant increase in the CPI coming.

Second, we take a look at the Japanese housing market. The Japanese housing market has always been in a decline for the last 15 years, but now we see signs of stabilization. Housing prices are about to rise in the coming years. In the metropolitan areas for example, we have seen land prices go up at an annual rate of 11.5% in 2012.

Third, fuel and energy costs are going through the roof. With the Fukushima disaster, a part of the nuclear energy had to be diverted to fuel. In fact, LNG imports soared to 86.9 million tonnes. Added to this disaster, the yen weakened considerably in 2013 which led to rising fuel and energy costs. We can witness this in the rising LNG prices in Japan. These events are a very good example of why a weaker yen is not a good thing, instead it creates an environment where people's purchasing power declines. In this case the price of the imports of fuel are going up and this will add to the trade deficit of the country. The statistics bureau of Japan recently put out the latest numbers on the CPI. Fuel was contributing the most to the rising costs of living.
Table 1: Consumer Prices: Change from the Previous Year in 2012

So basically, we see that the 3 biggest components of the CPI are going up in Japan. It would surprise me if the CPI would decline in the coming months.

Continue reading here.

maandag 3 juni 2013

Manufacturing PMI goes into Recession/Depression Territory

Look at that => Blue Chart. 

Yes, we crossed below zero for the PMI. Do you really think GDP growth will still go up?

Three words: Not A Chance...