Au Nearly On Par With Worst Quarterly Performance Since Bretton Woods Meltdown

“FORTUNE — Gold is down more than 25% from its recent highs, leading some observers to declare it on track for its biggest one-quarter decline since the Bretton Woods system collapsed in 1971.

This is a bit misleading: the average price of gold in 1971 was around $40 an ounce. The following year it was $58. By 1974, the year of the Arab oil embargo, gold averaged $154 an ounce. By taking the dollar off the gold standard in 1971, President Nixon kicked off one of the great risk markets in history, allowing speculators to flee from the occasionally useless (currency) to the utterly useless (gold) whenever the prices of really useful things (oil, food) went up.

The dollar collapsed after Nixon took it off the gold standard. Treasury Secretary John Connally cheered, saying the U.S. “took charge,” precipitating the dismembering of the Bretton Woods exchange rate system. Nixon went on national TV and said closing the gold window would stabilize and strengthen the dollar. The following day — a Monday — the Dow had its biggest one-day gain ever (33 points — those were the days!).

Fast-forward to today as the price of gold fades, even as global turmoil continues. Here are four news items to consider in evaluating gold’s decline…”

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“Federal Reserve Bank of San Francisco President John Williams, who has never dissented from a Fed decision, said critics of the central bank including Nobel Prize-winning economist Paul Krugman disregard how bond buying by the Fed is an untested tool with an ambiguous impact.

“The claim that the Fed is responding insufficiently to the shocks hitting the economy rests on the assumption that policy is made with complete certainty about the effects of policy on the economy,” Williams said in a paper posted Tuesday on the San Francisco Fed’s website. “Nothing could be further from the truth.”

The 29-page paper by Williams is an academic response to critics such as Krugman who have said high unemployment and low inflation show the Fed hasn’t done enough to fuel economic growth. The central bank is currently considering reducing its $85 billion in monthly bond purchases even with unemployment at 7.6 percent and the Fed’s preferred inflation index showing prices rising 1 percent from a year earlier, below the central bank’s 2 percent goal.

“Policymakers are unsure of the future course of the economy and uncertain about the effects of their policy actions,” Williams said. “Uncertainty about the effects of policies is especially acute in the case of unconventional policy instruments such as using the Fed’s balance sheet to influence financial and economic conditions.”

Williams cited Krugman, a Princeton University economist, by name in his paper. Krugman didn’t immediately respond to a request for comment in a phone message and an e-mail.

Moderation ‘Defense’

Williams, who titled his paper “A Defense of Moderation in Monetary Policy,” told reporters on June 28 that he supported the timetable for winding down purchases that Fed Chairman Ben S. Bernanke outlined in his June 19 press conference. Bernanke said the Fed could start shrinking the pace of purchases later this year and end them around mid-2014 if the economy performs in line with the central bank’s forecast….”

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“BRUSSELS—The European Commission will propose itself as the single authority for winding down banks in the euro zone, a step that will set the European Union’s executive on a collision course with the bloc’s most powerful member, Germany.

Berlin insists that such an authority—whose actions could force national governments to spend money to help rescue failed banks—would breach EU treaties. That, it says, could lead to legal challenges over bank restructurings and create uncertainty for financial markets at a sensitive time.

Michel Barnier, the EU commissioner responsible for financial-market regulation, was to lay out his final proposal Wednesday for a so-called single resolution mechanism, giving it the authority to restructure or close any of the 6,000 banks in the 17-nation euro zone that hit financial problems.

Bank restructurings currently take place under a patchwork of national rules, which also hinder the winding down of cross-border banks.

The euro-zone’s ambitious banking union project—a cornerstone of efforts to end the three-year-old debt crisis—aims to break the vicious link between struggling euro-zone banks and their governments.

The first pillar is a single supervisor for euro-zone banks, a task the European Central Bank is expected to assume in the fall of 2014. The single resolution mechanism is meant to form the second pillar.

The commission calls for a so-called “single resolution board” to prepare and carry out bank restructurings, backed by a shared fund that would be financed by contributions from banks….”

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“WASHINGTON: The International Monetary Fund trimmed its global growth forecast on Tuesday for the fifth time since early last year due to a slowdown in emerging economies and the woes in recession-struck Europe.

In its mid-year health check of the world economy, the Washington-based lender also warned global growth could slow further if the pull-back from massive monetary stimulus in the United States triggers reversals in capital flows and crimps growth in developing countries.

The IMF shaved its 2013 forecast for global growth to 3.1%, as fast as the economy expanded last year and below the Fund’s 3.3% projection in April. It also lowered its forecast for 2014 to 3.8% after earlier predicting a 4% expansion….”

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“I have been very vocal since the beginning of June that now is a great time to be adding bonds to portfolios.  (See here and here)  There are several fundamental reasons for my belief that the recent rise in interest rates was more related to a short term liquidation cycle rather than a shift in global economic sentiment.

1) Domestic economic strength remains very weak (growing at just 1.8% annually since 2000)

2) Four years into the current “recovery” the economy is already past the average length of most growth cycles.  Interest rates fall during down cycles.

3) Geopolitical unrest makes U.S. Treasuries an attractive “safe haven” for foreign capital flows.

4) Global economic weakness (China, Euro-zone and Japan) will likely drive buying of U.S. Treasuries.

5) Upcoming “debt ceiling” and budget debate in September likely to drive inflows into the safety of bonds as we saw in 2011.

6) If the Federal Reserve begins to extract liquidity by slowing bond purchases – financial markets are likely to come under selling pressure pushing money flows from equities into bonds.

7) Declining rates of inflation which are representative of economic weakness.

8) Ultra-low interest rate policies by the Fed continue to push investors to seek yield over cash.   The recent rise in rates makes bond yields much more attractive.

However, even if you disagree with the fundamental arguments, it is hard to argue against one of the most compelling reasons for buying bonds which has 35 years of history supporting it.   I discussed this particular reason during a Fox Business interview recently stating that:

“Interest rates are now 4-standard deviations above their long term moving average.”

As shown in the chart below….”

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“….since Friday’s jobs report, Rosenberg’s tone has turned decidedly bullish.

Indeed, he has already published his “Ten Reasons To Love The U.S. Employment Report.”

In his latest Breakfast With Dave note, Rosenberg goes even further:

JOBS DATA A GAME CHANGER

First came the healing in the credit markets in 2009-2010.

Then came the healing in the housing market from 2011 to now.

And now we have the third act in full swing, which is the healing of the labour market….”

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“Chinese exports fell 3.1% year-over-year (YoY) in June, missing expectations for a 3.7% rise.

Meanwhile, imports fell 0.7% YoY, missing expectations for a 6% rise.

Trade balance also came in shy of expectations, widening to $27.1 billion.

This compares with a 1% rise in exports and 0.3% fall in imports in May.

Export growth was expected to stay muted because of a weak global economic environment….”
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“Corporate earnings are expected to be poor for the second quarter, perhaps the worst in three years, or the worst since the end of the recession. Each of these predictions has been made with conviction. However, the bottom line buffer for many companies may be ongoing layoffs or, at least, the unwillingness to add jobs.

While the economy added 195,000 jobs last month, the rate is nowhere near enough to replace jobs lost in the recession. Many targets for healthy unemployment put a signal of a full recovery at below 6%. Corporate job additions are not near a pace to bring the joblessness number down that far.

One of the most commonly used actions to keep labor costs down is to retain workers on a part-time basis. Bureau of Labor Statistics data for June showed that trend ongoing:

The number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) increased by 322,000 to 8.2 million in June. These individuals were working part time because their hours had been cut back or because they were unable to find a full-time job.

Companies that absolutely must have workers for productivity can get them at below the market costs that existed before the recession. There is no end in sight for that practice. As a matter of fact, it seems to work very well….”

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“…we are revising up our 10-year yield forecasts for the US by 25bp across the forecast horizon out to end-2016. We now see yields entering 2014 at 2.75-3.00%, roughly in line with the forwards and our model estimates, and climbing to 4.00% by 2016 – above the forwards.  At this point, we are not making changes to forecasts for other markets relative to those published in the June issue of our Fixed Income Monthly. This implies wider yield differentials between the US and the European and Japanese bond markets. …”

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“The big show this week will be a speech on Wednesday from Fed Chair Ben Bernanke.

It’s titled: “The First 100 Years of the Federal Reserve: The Policy Record, Lessons Learned, and Prospects for the Future” and there’s going to be a Q&A.

So he could really talk about anything, including, perhaps, his own future (fingers crossed).

Fedspeak is always a market obsession, but lately that obsession has been turned to 11, given all of the concern about slowing the pace of QE, and how far we are from the first rate hike. Lately the “ZIRP4EVA” crowd has gone pretty silent, and markets are pricing in the possibility of a rate hike sometime in late 2014, in part due to shifts in the Fed’s language, and in part because the pace of job creation has accelerated. In recent months, the economy has been averaging nearly 200K jobs created, which is a nice step up from the approximately 150K pace from months’ previous.

So Bernanke’s speech on Wednesday will be watched ultra-closely.

What will he say?…”

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“(Reuters) – At least 42 people were killed on Monday when Islamist demonstrators enraged by the military overthrow of Egypt’s elected President Mohamed Mursi said the army opened fire during morning prayers at the Cairo barracks where he is being held.

But the military said “a terrorist group” tried to storm the Republican Guard compound and one army officer had been killed and 40 wounded. Soldiers returned fire when they were attacked by armed assailants, a military source said.

The emergency services said more than 320 were wounded in a sharp escalation of Egypt’s political crisis, and Mursi’s Muslim Brotherhood urged people to rise up against the army, which they accuse of a military coup to remove the elected leader.

At a hospital near the Rabaa Adawia mosque where Islamists have camped out since Mursi was toppled on Wednesday, rooms were crammed with people wounded in the violence, sheets were stained with blood and medics rushed to attend to the wounded.

As an immediate consequence, the ultra-conservative Islamist Nour party, which initially backed the military intervention, said it was withdrawing from stalled negotiations to form an interim government for the transition to fresh elections.

The military has said that the overthrow was not a coup, and it was enforcing the will of the people after millions took to the streets on June 30 to call for his resignation….”

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“(Reuters) – The deadly train derailment in Quebec this weekend is set to bring intense scrutiny to the dramatic growth in North America of shipping crude oil by rail, a century-old practice unexpectedly revived by the surge in shale oil production.

At least five people were killed, and another 40 are missing, after a train carrying 73 tank cars of North Dakota crude rolled driverless down a hill into the heart of Lac-Megantic, Quebec, where it derailed and exploded, leveling the town center.

It was the latest and most deadly in a series of high-profile accidents involving crude oil shipments on North America’s rail network. Oil by rail – at least until now – has widely been expected to continue growing as shale oil output races ahead far faster than new pipelines can be built.

Hauling some 50,000 barrels of crude, the train was one of around 10 such shipments a month now crossing Maine, a route that allows oil producers in North Dakota to get cheaper domestic crude to coastal refiners. Across North America, oil by rail traffic has more than doubled since 2011; in Maine, such shipments were unheard of two years ago.

“The frequency of the number of incidents that have occurred raises legitimate questions that the industry and government need to look at,” said Jim Hall, managing partner of consultants Hall & Associates LLC, and a former chairman of the U.S. National Transportation Safety Board….”

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“(Reuters) – The pilot of the crashed Asiana plane at San Francisco airport was still “in training” for theBoeing 777 when he attempted to land the aircraft under supervision on Saturday, the South Korean airline said.

Lee Kang-kuk, whose anglicized name was released for the first time on Monday and differed slightly from earlier usage, was the second most junior pilot of four on board the Asiana Airlines aircraft. He had 43 hours of experience flying the long-range jet, the airline said on Monday.

The plane’s crew tried to abort the descent less than two seconds before it hit a seawall on the landing approach to the airport, bounced along the tarmac and burst into flames.

It was Lee’s first attempt to land a 777 at San Francisco airport, although he had flown there 29 times previously on other types of aircraft, said South Korean transport ministry official Choi Seung-youn. Earlier, the ministry said he had accumulated almost 10,000 flying hours, including 43 at the controls of the 777….”

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“The same equity analysts who lowered second-quarter profit growth predictions to almost nothing in 2013 are raising price forecasts, convinced the economy is growing fast enough to lure more investors and boost valuations.

Standard & Poor’s 500 Index earnings rose 1.8 percent last quarter, down from a projection of 8.7 percent six months ago, according to more than 11,000 analyst estimates compiled by Bloomberg. At the same time, share-price targets for companies from GameStop Corp. (GME)to Goldman Sachs Group Inc. are rising at the fastest rate in two years. The U.S. equity gauge will increase 8.9 percent to a record 1,777.91 should the forecasts prove accurate….”

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“Investment-research firm Morningstar said personal information, including credit-card details, of about 2,300 users of its Morningstar Document Research service may have been compromised due to a security breach last year.

The incident on April 3, 2012 may also have led to the leakage of names, addresses, email addresses and passwords, the company said in a filing on Friday.

Morningstar Document Research, formerly 10-K Wizard, provides a global database and search tool for company filings.

An additional 182,000 clients who had email addresses and user-generated passwords on the system may also have been affected, Morningstar added…”

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“Whole Foods is recalling Crave Brothers Les Freres cheese in response to an outbreak of a bacterial infection that has sickened people in several states and killed at least one person.

Whole Foods says the cheese may be contaminated with Listeria monocytogenes. It was sold in 30 states and Washington DC under names including Les Freres and Crave Brothers Les Freres. The cheese was cut and packaged in clear plastic wrap and sold with Whole Foods Market scale labels. The company is posting signs in its stores to inform customers about the recall.

Officials said cases have been identified in at least three states…”

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“Thomson Reuters said it would suspend its early provision to a small group of clients of the widely watched Thomson Reuters/University of Michigan consumer sentiment data at the request of the New York Attorney General.

The news and information company has an agreement with the University of Michigan to allow some of its clients to receive the data 2 seconds before its other clients.

But the arrangement is the subject of a review by the office of New York Attorney General Eric Schneiderman, Thomson Reuters said in a statement on Sunday.

The review follows a series of media reports about the early release of the twice-monthly data and a lawsuit by a former Thomson Reuters employee, who says he was fired for whistle-blowing activity.

Thomson Reuters did not disclose how much clients paid for the data or how much it payed the University of Michigan.

The New York Times said on Sunday that some clients paid more than $6,000 a month for the 2-second advantage….”

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