Hinde Capital On China, Gold, AndThe Continuing Unravelling Of Our Monetary Order

The global crisis is a financial crisis driven primarily by global trade and capital imbalances; and Hinde Capital believes the crisis is in full swing again and asset prices are in danger of falling globally. Money is less effective at catching the falling knife. Investors and policymakers do not believe this is the beginning of a major EM contagion crisis. They are lulling themselves into a false sense of security. They see the EM market tremors, and do not fear a re-run of the EM crises of old. They are right. This is not (just) going to be an EM crisis. The disproportionate reaction of central bankers and policymakers alike has merely succeeded in compounding and exacerbating the error of this highly imbalanced monetary system. Recent events in emerging countries are a manifestation of the continuing unravelling of our monetary order.

Via Hinde Capital,

Over the past four decades the global economy has largely experienced prolonged imbalances, with countries running large current account deficits in symbiotic relationships with those running large surpluses. In our recent HindeSight Investor Letter – Top of the BoPs (below) – we revisit our long held belief that the current monetary order as defined by a constellation of exchange rate arrangements between the major global currencies, and which maintained these imbalances artificially, has led to excessive global liquidity and credit creation. This in turn drove a litany of asset price bubbles.

The bursting of these asset bubbles has continued in a series these past two decades, each one’s demise leading to more disruptive policy responses which have only succeeded in igniting yet more bubbles, only for those too to fail.

Finally in 2008 we witnessed the finale of decades of credit creation, rising in what appeared to be a crescendo of credit excess and widespread asset booms. We saw this event as the death throes of an unstable monetary regime, only then to see an unprecedented global reaction by policymakers in a coordinated fashion to keep the global system alive. For a moment here today, there are those who dare to believe they have succeeded, with rising equity markets a testimony to a reviving global economy. Nothing could be further from reality.

We stand by our assessment that the disproportionate reaction of central bankers and policymakers alike has merely succeeded in compounding and exacerbating the error of this highly imbalanced monetary system. Recent events in emerging countries are a manifestation of the continuing unravelling of our monetary order.

In the 1980s it was a hike by the US Fed that triggered the LatAm crisis. Today, the mere whisper of tighter monetary conditions in the US, vis-a-vis a tapering of QE has led to higher bond rates globally. Note tapering is not the same as hiking interest rates.

The consequences of multiple rounds of QE have heightened global risks as it has both exacerbated ‘currency competition’ and hot capital flows into countries seeking desperately for a return both from income and capital growth. This has created major distortions in term rates, equity and bond values, driving them artificially high in price.

These distortions have created risks far greater than the fragilities of EM countries of yesterday years. The system of credit creation has produced unstable growth underpinned with collateral which is both mobile and suspect in its integrity.

Investors have nowhere to turn, emerging market countries growth is faltering in response to export disadvantages brought about by rampant G10 currency devaluations. China is finally succumbing to its side of the global imbalance excesses. First it was the deficit nations now it’s the turn of the creditor nations to falter, primarily China.

Trade flow reversals are leading to massive capital outflows out of EMs and the question remains: will the central banks of these countries sell their FX reserves, UST- bonds and euro government bonds (bunds) to finance this surge in outflows?

It is not clear that renewed global central bank liquidity provision will even stabilise a situation we see as growing dire by the day. China is the driver. All eyes on china.

We believe the bursting of the ‘Great Bond Bubble’ will lead to a formative and substantial rise in gold as official money, institutional and investor money seeks an asset that can protect us all from a global default and resetting of the monetary order. The time to buy gold is fast approaching, if that time is not already upon us.

HindeSight Investor Letter June 2013 – Top of the BoPs

Source: http://www.zerohedge.com/news/2013-07-15/hinde-capital-china-gold-andthe-continuing-unravelling-our-monetary-order

Physical Gold Market In Disconnect As Premiums Hit Record

With gold and silver getting smashed, today John Hathaway told King World News that premiums for gold have now hit all-time record levels as the physical market has completely disconnected from the paper market in gold.  Hathaway also spoke about the gold and silver smash and provided an incredible chart as well.  Hathaway, of Tocqueville Asset Management L.P., is one of the most respected institutional minds in the world today regarding gold, and his fund was awarded a coveted 5-star rating.  

Eric King:  “John, we have this smash continuing in gold and silver, your thoughts here?”

Hathaway:  “Right now it’s just piling on by momentum players.  Remember, it’s also the end of the quarter so this is window dressing in reverse.  People want to show big profits in short positions.

All along this has just been naked shorting by the usual suspects — trading desks, the big banks, and hedge funds.  There is very little physical gold that’s being sold.  The mechanics (of shorting) are basically you post margin, and you short X amount of gold….

“Some of these (down) days you have seen volume that equals more than the annual mine production of the global (gold mining) industry.  That’s ridiculous to think that much gold could be acquired, positioned, and then shorted in such a short space of time.

It (the manipulation) is being done by the same guys who were messing around with LIBOR and are now being prosecuted.  There are allegations they are doing the same thing in FX (currency trading).  You know gold is a big, liquid market, so the capacity for a lot of players get into it and exploit technical weakness, which is what they are doing, is great.  So that’s what appeals to these same people.

Source: http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2013/6/26_Physical_Gold_Market_In_Disconnect_As_Premiums_Hit_Record.html

Gold Has Biggest Week In 18 Months; Bonds Ignore Stock Surge

Despite CAT explaining to the world that things are nothing like as good as they have said in the past and that their ability to forecast is gone given monetary policy hindrance (paraphrasing), the stock oscillated from pre-open gains to a big drop out of the gate, to a squeeze higher gapping as shorts covered to end the day up 2.75%. We explain this because it perfectly summarizes the market today. Overnight JPY weakness supported risk assets, Italy’s Napolitano helped, and into the open we were comfortably green; but the moment the bell wrung the sellers appeared and pushed the S&P down (coincidentally) to last Monday’s crash lows. Once Europe closed, the bulls got the green light and stocks surged on light volume running stops above overnight highs; stocks leaked back off their highs though ended comfortably green – a mere 20 S&P points off the intraday lows! While all this tom-foolery was occurring, Treasury yields plunged from their overnight highs and flatlined 1-2bps lower (ignoring equity’s after noon exuberance). Commodities were similarly unimpressed as gold and silver held overnight strength but flatlined in the US afternoon as stocks popped. FX was in charge of the rally today as AUDJPY ruled pre-European close and EURUSD ruled the afternoon. VIX compression as protection was unwound helped support risk, but high-yield credit slammed lower into the close.

Bonds ignored stocks today…

What was driving the ship today… S&P followed JPY-carry into the European close, and EUR all afternoon…

VIX compressed notably as protection was clearly unwound – with the S&P 500 cash index ending at last Wednesday’s gap down open…

The unwind of index protection has the smell once again of managers reducing size as market breadth was very weak (especially in the post EU Close) – as we noted last week, VIX was bid last week as the fastest most liquid overlay that can be slammed on a long book of stocks. Uncertainty remains high – as does realized vol recently – but today saw the selling pressure out of the gate matched by market breadth (real reduction) and then the afternoon saw the indices soar even as relative volume buying was very weak – this suggests that the VIX compression above was unwinding the macro hedge and unwinding underlying positions into that strength – as opposed a full risk-on lift…

Gold had its best day in 3 weeks ending back above $1425 and its best 5-day run in 18 months…

But it was FX that dominated cross asset class correlation today and drove stocks but the afternoon saw stocks off in their own world once again…

So it seems once again – today was a game of two halves with US equities bid after the European close and offered before… makes perfect sense if you forget that Europe re-opens in 8 hours…

Charts: Bloomberg and Capital Context

Bonus Chart: CAT… seemed to enjoy the European close too…

Source: http://www.zerohedge.com/news/2013-04-22/gold-has-biggest-week-18-months-bonds-ignore-stocks-surge