Author: The Mad Hedge Fund Trader

(This guest post comes courtesy of The Mad Hedge Fund Trader)

Make no mistake. The shot has been fired across the bow, the chink has appeared in the armor, and the crack has opened up in the dike. The Fed’s move to raise the discount rate on Thursday from 0.5% to 0.75% may have been technical, widely telegraphed by the Fed minutes, and an unwind of an artificial spike down in rates the economy no longer needs. Sure there was only $15 billion in loans outstanding at the Fed window, against $1 trillion in excess bank reserves. But it was definitely an UP move for rates.

The liquidity tide that has been floating all asset boats has reversed and is starting to recede. We’re about to find out who has been swimming without a swimming suit. The train is leaving the station. Next week the TALF expires, eventually sucking another $1.5 trillion out of the system. The Fed is reverting from its role as the lender of first resort back to its traditional role as the lender of last resort. Inflationary expectations are going to rise.

While overnight rates are going to remain minuscule, probably for the rest of the year, the long end is going to take this less well. That means that one of the steepest yield curves in history is about to become a lot steeper. I’m thinking the face of Half Dome. Now I know that I have been predicting that a short in 30 year Treasury bonds will be THE great trade of 2010. But don’t pop the champagne bottles just yet. Without more aggressive Fed action, the rise in long rates is unlikely to be a sudden, panicky spike. 

So while you can comfortably sit with non leveraged short play like the TBF, you are going to have to nimbly trade the leveraged ones like a demon, such  as the TBT, to keep the cost of carry from eating you alive. You are still sailing upwind against a 4.7% yield, and you can multiply that with leverage.

Think of it more as a slow ground offensive, than a lightning fast aerial assault. But it will grind us inevitably closer towards a major triggering event that will bring real fireworks, my favorite being a failed Treasury auction. If your spouse has a divorce lawyer pounding on your door unless you buy a house tomorrow, make sure you do so with a 30 year fixed. It will be the last time you see sub 5% mortgages rates in your lifetime. Better yet, dump the spouse.

 

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• This Week, Bernanke Will Remind Congress That He’s Not Independent, And Won’t Do Anything Do Jeopardize All Their Spending
• Gold Laughs In Bernanke’s Face, Shorts Freaking Out
• 10 Ways To Profit From Bernanke’s Big Move

(This guest post comes courtesy of The Mad Hedge Fund Trader)

If you missed the great run up in silver last year that saw prices run up 95%, you are being offered a second bite at the apple. The latest round of risk reduction by global hedge fund has bashed the white metal, knocking $5 off of the $19.50 high seen in the heady days of November.

Geologically, silver is 17 times more common than the yellow metal. All of the gold ever mined is still around, from King Solomon’s mine, to Nazi gold bars in Swiss bank vaults, and would fill two Olympic sized swimming pools. But most of the silver mined has been consumed in various industrial processes, and is sitting at the bottom of toxic waste dumps. Silver did take a multiyear hit when the world shifted from silver based films to digital photography during the nineties.

Now rising standards of living in emerging countries are increasing the demand for silver, especially in areas where there is a strong cultural preference for the jewelry, as in Latin America. That means we are setting up for a classic supply demand squeeze. I think we could run to the old high of $50/ounce in the next economic cycle, if another monetary crisis doesn’t get us there first. Since silver can trade with double the volatility of gold, this forecast could prove conservative.  You can buy the futures, where a 5,000 ounce contract worth $80,700 on the COMEX carries a margin requirement of only $6,750. You can also buy one ounce American silver eagle .9993% pure coins, but make sure you have a big safe to accumulate a serious position.

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See Also:

• Howard Ruff: Gold’s Great, But Silver And Uranium Are Where It’s At
• Wanna Hedge? Think Silver Not Gold
• Indians Sell Gold, Buy Silver

(This post comes courtesy of the author’s site)

Obama officially went nuclear with his announcement of $8.8 billion in loan guarantees for Atlanta based Southern Company to build two nuclear power reactors. The President has been hinting he was moving in this direction since the early days of his campaign, and now he is putting his money where his mouth is, no doubt egged on by Energy Secretary Steven Chu. Furthermore, Obama has included more nuclear loan guarantees in his 2011 budget.

The genie is clearly out of the bottle. The nuclear industry has been in hibernation since the accident at Three Mile Island in 1979. There is absolutely no way we can deal with our energy crunch without a huge expansion of our nuclear capacity, which sits at a lowly 20% of our power generation. France has already achieved 85%, followed by Sweden at 60% and Belgium at 54%. Unless you’re a nuclear engineer, you are probably unaware how far the technology has moved ahead in the last 30 years.

The first generation produced the aging behemoths we now see on coasts and rivers, which used high grade fuel that would melt down if someone forgot to flip a switch. Think Chernobyl. Generations two and three never got off the drawing board. Generation four is known as a pebble reactor,  which relies on a new form of fuel embedded in graphite tennis balls that is just hot enough to generate electricity, but too weak to allow a disaster.

There are new modular designs, like those found in nuclear submarines, and new fuels, like thorium. Low grade waste can be stored on site, not shipped to Nevada or France. The permitting process is being shortened from 15 years to four by confining new construction to existing facilities instead of green fields, urged on by a less fearful public and even some CO2 conscious environmentalists.

At least 30 new reactors are expected to start construction in the US over the next five years, and over 100 in China. There is a great equity play here, and I would use any substantial dip in the market to scale in.  The Market Vectors Nuclear Energy ETF (NLR), which has jumped an impressive 78% to $25 since March, is the easiest way in. You can also buy its largest components, like Cameco (CCJ), the world’s largest uranium producer, which saw its stock clock a nice double last year.

 

Read more market analysis and commentary at Diary of A Mad Hedge Fund Trader >

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• New Invention Using Spent Nuclear Fuel Rods Could Unlock U.S. Oil Reserves Three Times Larger Than Saudi Arabia’s
• A Nuclear Critic Draws a Lesson from France’s Success
• Forget Becoming An Oil Power, Iraq Is Actually A Toxic Nuclear Wasteland

(This post originally appeared at the author’s blog)

The Chinese Yuan is just begging for a home run. Any doubts that it is a huge screaming buy should have been dispelled last week when news came out that China had displaced Germany as the world’s largest exporter.

The Middle Kingdom shipped $1.2 trillion in goods in 2009, compared to only $1.1 trillion for Deutschland. The US has not held the top spot since 2003. China’s surging exports of electrical machinery, power generation equipment, clothes, and steel were a major contributor. German exports were mired down by lackluster economic recovery in the EC, which has also been a major factor behind the weak euro. Sales of luxury Mercedes and BMW cars, machinery, and chemicals have cratered. Two back to back interest rate rises for the Yuan, and a snugging of bank reserve requirements to 16% by the People’s Bank of China, have stiffened the backbone of the Yuan even further. That is the price of allowing the Federal Reserve to set China’s monetary policy via a fixed Yuan exchange rate. Is it possible that Obama’s stimulus program is reviving China’s economy more than our own?

The last really big currency realignment was a series of devaluations that took the Yuan down from a high of 1.50 to the dollar in 1980. By the mid nineties it had depreciated by 84%. The goal was to make exports more competitive. The Chinese succeeded beyond their wildest dreams. There is absolutely no way that the fixed rate regime can continue.

There are only two possible outcomes. An artificially low Yuan has to eventually cause the country’s inflation rate to explode. Or a global economic recovery causes Chinese exports to balloon to politically intolerable levels. Either case forces a major revaluation. Of course timing is everything. It’s tough to know how many sticks it takes to break a camel’s back. Talk to senior officials at the People’s Bank of China, and they’ll tell you they still need a weak currency to develop their impoverished economy.

Per capita income is still at only $5,000, a tenth of that of the US. But that is up a lot from $100 in 1978. Talk to senior US Treasury officials, and they’ll tell you they are amazed that the Chinese peg has lasted this long. How many exports will it take to break it? $1.5 trillion, $2 trillion, $2.5 trillion? It’s anyone’s guess. One thing is certain. A free floating Yuan would be at least 50% higher than it is today, and possibly 100%. In fact, the desire to prevent foreign hedge funds from making a killing in the market is a not a small element in Beijing’s thinking.

The Chinese Central bank governor, Zhou Xiaochuan, says he won’t entertain a revaluation for the foreseeable future. The Americans say they need it tomorrow. To me, that means about six months.

Buy the Yuan ETF, the (CYB). Just think of it as an ETF with an attached lottery ticket. If the Chinese continue to stonewall, you will get the token 2.2% annual revaluation the swaps have been discounting. Since the chance of the Chinese devaluing is nil, that beats the hell out of the zero interest rates you now get with T-bills. If they cave, then you could be in for a home run.

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See Also:

• Goldman: We Sense A Yuan Hike Coming
• Geithner: We’re All Good Because China Will Save Us And Let The Yuan Strengthen
• China’s Credit Tightening Pipedream Bursts As Yuan Loans Are Set To Jump 18% In 2010

(This post previously appeared at the author’s site)

Brace yourself for the impending gold shortage. Gold shortage? Yup. With the launch of a flurry of dedicated gold ETF’s last year, total ETF holdings of the barbaric relic, now exceed total world production. South Africa suffered its steepest decline in gold production since 1901, falling 14%, to a mere 232tons. It now ranks only third in global production of the yellow metal, after China and the US. Severe electricity rationing, a shortage of skilled workers,and more stringent mine safety regulations have been blamed.

Choked off credit has frozen the development of new capital intensive deep mines, and existing mines are easily flooding. Rising production costs have driven the global breakeven cost of new gold production up to $500 an ounce. It takes a lot of labor,fuel, and heavy machinery to rip gold out of the ground, and none of these are getting any cheaper. Political risks are heating up. In the meantime, the financial crisis has driven flight to safety demand for gold bars and coins to all time highs.

Last year, the US Treasury ran out of blanks for one ounce $50 American Gold Eagle coins, now worth about $1,160. Competitive devaluations by almost every central bank, except Japan, mean that currencies are not performing as the hedge that many had hoped. It all has the makings of serious gold shortage for the future. The current downturn has to be just a blipin the long term bull market. Now that we are solidly over $1,000, and recently kissed $1,225, the match could hit the fuel dump at any time. Just let thiscurrent risk reversal burn out before you load the boat

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See Also:

• Gold’s Move Has Been PATHETIC
• You Know It’s Over When Esquire Magazine Is Telling Its Readers How To Invest In Gold Funds
• Almost Nobody Wants To Invest In John Paulson’s Gold Fund

(This post originally appeared at the author's blog)

The first 300 foot, 6,800 ton segment of the new approach to the San Francisco Bay Bridge was delivered this week. This massive wing shaped piece of steel is the first of 28 to be delivered that will be used to rebuild the 73 year old symbol of the Foggy City. Out of towners may recognize this as the bridge that terrified motorists by partially collapsing during the 1989 Loma Prieta earthquake, paving the way for a ground up seismic retrofit.

Where was it built? You guessed it, China, where inferior steel, shoddy welds, and poorly translated plans caused a 15 month delay in the fabrication, pushing completion of the new structure off to 2014.

Despite delays caused by an El Nino winter, the new component made it over from Shanghai on a specially designed ship in only 22 days. Local unions bitterly opposed the offshoring of the project to the Middle Kingdom, even though a wholly American made bridge would have more than doubled the anticipated $6.3 billion cost. Looks like I'll still have to hold my breath while driving over to San Francisco, even after it's finished. It says a lot that the Chinese can rebuild one of America's greatest engineering icons, ship it across the Pacific Ocean piecemeal like a giant Lego set, and erect it here at half the cost of the local help. It's another ominous "tell" on the future of the global economy.

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See Also:

• Inside China's Tightening: Banks Literally Tearing Up Letters Of Credit, Importers In Disarray, Orders Cancelled
• The Case For Metals: China, India, And City Living
• Jim Chanos: Actually, We're Not Betting Against China