April 21. New highs gold, silver, stocks…
New high gold. New high silver. Crude surged by $3 bbl. New high stocks, new low dollar. Implied vol getting crushed. New low VIX.
–The eurodollar curve edged to new recent high. Red/green pack spread rose 3.375 bps to 118. Still quite low for one year spreads…
–From ZH post, Texas Teachers Pension fund needs 21% annual return to maintain adequate funding. This is just a small example of the enormous institutional bias to boost paper assets. All sorts of public pensions are under water, several have bitten the bullet and actually lowered their assumptions about forward investment returns, but when they do, the bill for the shortfall gets handed to the taxpayers. Which in turn puts more strain on public finances. It becomes a vicious cycle. But if stocks can somehow return 10% or more per year many such problems recede into the background. Wealth managers, pension funds, municipal gov’ts, 401K plans…they all want and all NEED stocks to go higher, so of course the institutional support reaches to the highest levels, i.e. the Fed, as Bernanke has intimated already. However, this same bias has the effect of weakening the dollar, as was seen yesterday. Now, the institutional leaning toward the dollar is ambivalent…your given “wealth manager” says I don’t give a **** …as long as I can show return of 10% and take my fee out. Barely anyone wants a stronger dollar, except perhaps ironically the Chinese (so their dollar assets hold value), and domestic savers. As you know, we are a country of debtors, not savers. So again, the domestic institutional bias is for higher paper assets/lower dollar. The Fed knows that route is fraught with danger, but it’s the lesser of many evils. In the current case, that evil is higher energy bills, which sap the consumer. Nothing has changed…just like the middle of the last decade, the US mistakes paper values for economic health.
(But the real estate market isn’t really buying it).
–In europe, the same ills are faced, with the same temptation to devalue the currency as a way to “solve” problems. But the fight over a weaker currency is more evenly balanced with the Germans standing for a stable currency. Given this framework, logic argues for long gold. I am not saying that the institutional bias will win the game…just that positioning the other way is like being long premium…there tends to be a constant drip of time decay.
