Is The Fed TRYING To Force A Surge In Commodity Prices And Input Costs? Diapason Explains Why Hyperinflation Is Blackhawk Ben's End GoalSubmitted by Tyler Durden on 10/30/2010 - 18:29
A Fed paper released in September, which we luckily missed as otherwise it would have led to the collective death through uncontrollable foaming in the mouth of the entire Zero Hedge staff, was "Oil Shocks and the Zero Bound on Nominal Interest Rates", in which author Martin Bodenstein (an econ Ph.D.) argues that oil price shocks (i.e., surges in the price of oil such as the one we are about to experience courtesy of a fresh trillion in liquidity about to be unleashed by the Fed) are... wait for it... beneficial to GDP and stimulative to the interest-rate sensitive parts of the economy. To wit: "In fact, if the increase in oil prices is gradual, the persistent rise in inflation can cause a GDP expansion.". Yes you read that right. The Fed is stealthily floating the idea that a surge in oil prices will be for the greater good. In essence, the Fed is telegraphing that while it acknowledges that oil is about to jump to over $100, it won't be as bad as those with a functioning brain dare to claim. And, as we show below, it will actually be a very good thing! While we would probably get a massive lethal subdural hemorrhage if told to argue a view so blatantly and stupefyingly demented, insane and, simply said, wrong, as that espoused by Bodenstein, we are glad that Sean Corrigan of Diapason has gone the extra mile to not only expose the Fed charlatans for their voodoo gimmickry in this narrow topic, and brings up an even more critical idea, which is that the Fed "actually welcomes the current surge in the prices of many of the staples of everyday life; that it actually exults in the drain being exerted on family budgets; that it revels in the squeeze on profit margins being suffered by already-struggling small businesses, because it imagines this will serve to lower the reckoning of the ethereal construct of a generalized, future real interest rate and that this alone will serve to shower riches upon all who are presently suffering, in comparison for the present woes." That nobody has reached this conclusion before is explainable - it is something only the brain of an illogical, demented, perverted genocidal madman's brain can come up with. Which is why we are now convinced the Fed is hoping for not only mild inflation, but an outright surge in prices.
TV Pricing Bloodbath Threatens Already Razor-Thin Retailer Margins, Will Send Japanese FX Interventions Into OverdriveSubmitted by Tyler Durden on 10/30/2010 - 14:16
So much for the 3D TV craze... and for overestimating the indiscriminate purchasing power of the US consumer. After much fanfare, and visions for record sales, TV makers such as Sony, Samsung and LG have gotten reacquainted with gravity, and are now gearing up for a "miserable" Christmas as an all out price war confirms the US consumer, even if not paying mortgage bills, refuses to purchase indiscriminately. The result: price drops of over 25% for the upcoming holiday season, huge margin cuts for already margin lite retailers (read Amazon), and an increasing reliance on corporate sales to pick up for the sudden and dramatic consumer slack. But the biggest hit will be to Japanese and Korean exporters, who will soon need to add to a dramatic decline in end demand, such factors as a ramp in Rare Earth Minerals: a key component to flat screen TV production, and, of course, record expensive currencies. All in all, it is shaping up for a miserable existence for the Japanese export economy, and we are very confident that a tsunami of export-led anger is about to be unleashed on Kan's government, demanding to at least moderate the one variable that is under Japanese control: the FX rate. Which means that many more USDJPY interventions are coming as soon as next week, when the Fed's QE2 announcement is sure to send the FX pair far below 80. In other words, QE2, in addition to confirming that the Fed cares little about the dollar's purchasing power, is about to set the FX, and trade wars, into overdrive.
This is the Death Spiral of Democracy. The way to increase the concentration of wealth is to partner with the State so the Central State functionaries and agencies funnel ever-larger shares of the national income to your cartel or quasi-monopoly while the State suppresses or marginalizes potential competitors. The more wealth you concentrate, then the more political power you can purchase. Indeed, the involvement of the super-wealthy causes the costs of campaigns to rise to levels where politicos have no choice but to become dependent on Power Elites to fund their campaigns. You see how the feedback works: greater concentrations of wealth creates greater concentrations of political power, and just as importantly, increases the dependence of the political class on the Financial Power Elites and fiefdoms for their very survival.
In his weekly "kickstart" piece, Goldman's David Kostin shares a glimpse of how portfolio strategists view the impact of QE2 on UW equity market fundamentals. In a nutshell, per Goldman bulls cite 20% upside to Fed model and a lower equity risk premium. Goldman is far less optimistic: "We believe QE2 is unlikely to change our sales or margin forecasts, so return prospects become a valuation debate. Our targets imply less upside, given 13.5x P/E is consistent with prior 1-2% real rate regimes." Furthermore, Goldman's economic team has already priced in $1 trillion of QE2 in its 2011 GDP forecast of 1.8% (below consensus of 2.5%), meaning at worst the overall economy will continue to operate at negative growth rates, once Q3 GDP is revised lower and Q4 GDP found to be negative following the inventory crunch. As Kostin puts it: "The US has a demand, not a supply, problem." Alas, the Fed is completely unable to grasp this. And the more it tinkers with the market, and the more fundamentals are disconnected from reality, the less Americans will trust the economic situation and retrench even more, leading to an even more pronounced demand "problem." As for markets, AJ Cohen's successor hits it right on the head: "We believe the forward path of stocks will be determined by potential asset allocation shifts by owners of 70% of the US equity market. Individuals own in aggregate 53% and pension funds own 17%. Shares will trade sustainably higher if these investor groups decide to re-risk from bonds to stocks. Any shifts most likely will be gradual." In other words, unless investors regain their faith and confidence in stocks, the market will merely trade on Fed liquidity and not on anything resembling fundamentals... or reality.
I hereby would like to announce the appointment of the False Fl.., er, Terrorism Czar...
Today's CFTC Commitment of Trader data confirms that the dollar strengthening trend from last week continues: net spec commercial positions in the USD are now well off their lows from three weeks ago and are up to 5,850, after hitting a 2010 low of -1,580. At the same time, both JPY and EUR spec positions declined (by -2,727 and -6,243 positions, respectively) as the rotation into the dollar, as brief as it may end up being, accelerated. Whether this was merely momentum chasing or an expectation of a less efficient QE2 can be answered by looking at select commodity positions. A quick glance at wheat, soybeans, coffee, corn and oats shows that pretty much all 5 representative commodities saw their net long spec positions increase again. So QE2 is definitely going to manifest itself in more inflation, or so at least claim the speculators. Yet not is as it seems: a look at Treasury specs shows a combined drop across the 2, 5 and 10Y space of 123,835 contracts to 186,892, only the second largest drop in 2010, which occurred after the cumulative total hit a 2010 record of 310,727 the week prior! In other words, even as specs were discounting an increase in inflation and a potential increase in the value of the dollar, the bond bubble officially popped.
Oh yeah, those banks sure are making a killing on the sudden and dramatic resurgence in trading. If one looks carefully, one can almost, but not quite, see that crazy DeMarkian formation that predicts that in 10 years someone may actually trade stocks again.
An avalanche is not an “event”, it is an epic; a series of smaller events drifting and compacting one after another until the contained potential energy reaches an apex, a point at which it can no longer be managed or inhibited. A single tremor, an inopportune echo, an unexpected shift in the winds, and the entire icy edifice, the product of countless layered storms, is sent crashing down the valley like a great and terrible hand. In this way, avalanches in nature are quite similar to avalanches in economies; both events accumulate over the long span of seasons, and finally end in the bewildering flash of a single moment. The problem that most people have today is being unable to tell the difference between a smaller storm in our economy, and an avalanche. Very few Americans have ever personally witnessed a financial collapse, and so, when confronted with an initiating event, like the stock market plunge of 2008, they have no point of reference with which to compare the experience. They misinterpret the crash as a finale. Untouched, they breathe a sigh of relief, unaware that this is merely the beginning of something much more complex and threatening. So, without personal experience on our side to help us recognize a trigger point incident; the catalyst that brings down our meticulously constructed house of cards, how will we stand watch? Will we miss the danger parading right in front of our faces? Will we be caught completely off-guard?
Technically, the USDJPY still has about an hour left of trading, but we will call it early: the dollar yen has closed at the all time lowest level in history. Next week the USDJPY will likely be well beneath 80, especially after the QE2 announcement on Wednesday. At least Japanese exporters are happy that in FX adjusted terms US importers now have the least incentive to buy Japanese TVs and other irrelevant stuff soon to be found all over US landfills.
Will The $426 Billion "Second Lien Monster" Require A New Marshall Plan For Housing? Reuters Special Report On FraudclosureSubmitted by Tyler Durden on 10/29/2010 - 16:40
Reuters' Matt Goldstein has completed a special report on foreclosure fraud, asking rhetorically: "foreclosures are rising; lawsuits are flying; banks are beleaguered; there has to be a better way?" Goldstein looks at fraudclosure from the perspective of the fight between junior and senior liens, a topic Zero Hedge discussed a month ago (The Foreclosure Mess MBS Hate Triangle Emerges: Junior Versus Senior Bondholders Versus Servicers) highlighting that $426 billion in loans are second lien, and, as highlighted previously, sit on the balance sheets of BofA, JPM, Wells and Citi in the biggest circle jerk in this whole mortgage crisis fiasco (always remember: one TBTF's mismarked assets always end up being another TBTF's unfudgeable liabilities). As the chart below shows, the banks have no choice but to come up with a compromise: obstinately keeping their heads in the sand is a guaranteed way for the entire financial system to blow up.
John Taylor, who has not made any friends at the administration with his recent comparison of Ben Bernanke to Hitler, has released his latest letter whose purpose is to disabuse what Traxis flip flopper extraordinaire Barton Biggs (or rather is praying, due to his high single digit negative YTD P&L), as well as many others believe, will be a 10% boom in stocks prices following November 3. Wrong. As this whole rally has been liquidity driven, all that will take to reverse it, is for someone to step between the Chairman and his favorite Hewlett Packard. That someone: anti-Fed crusader Ron Paul, who will see this as his last mandate (and chance) to leave a memorable mark on the Fed's modus operandi: "After the Republican victory things will change. The Fed will be
hamstrung, as Ron Paul, a conservative standard-bearer and harsh critic
of the Fed, will head the sub-committee overseeing its actions.
Liquidity expansion or new programs will probably drop sharply under his
watch. Paul would argue that the Fed’s unfettered ability to “debase” the currency is about to come to an end" Which is why all those who believe "more of the same" will continue indefinitely, may be wise to hedge their bets. Taylor also looks at the game theory between the Fed and the ECB: "As the US authorities turn to a tighter monetary and fiscal policy,
driving the country into a recession, causing the US and its banking
system to withdraw liquidity forcing the dollar higher, the ECB will be
forced to be more accommodative. Our analysis argues that the month of
November will see the flash point that begins to reverse the markets’
Somehow, CLSA's Chris Wood is always correct in the end. The only prediction where he has been wrong, for now, is in his $3,400 gold price target by the end of 2010 (which was set back in 2002). But have no fear: as he explains "There is some surprise here that gold has not already gone higher given
everything that has been going on and given Billyboy’s evident
willingness to keep interest rates at zero for a long period. That gold
is not higher shows that the consensus has not yet appreciated that the
real reason to own gold is not “inflation” but rather the growing risk
that the endgame of the present policy response is the collapse of the
Western fiat paper system." And considering that there is a trader meme going around that every fake bomb is equal to $100 billion in QE, and we are up to something like 8 or 9, not to mention that the T(eleprompter)OTUS is about to make a speech post market close, the dollar is almost certainly about to get the Friendo treatment by the chairman.
One of Goldman's better technical analysts, John Noyce, has released his latest edition of the Charts that Matter. Among these, the most interesting one is that of the 10 Year, which is relevant since in about 48 hours the entire treasury curve could either flatten and tighten by 50+ bps... or widen by double that. Noyce's prediction that based on the break in the 10 Year yield channel, one could "make a case for significantly higher levels", will certainly be put to the test next week. It is Zero Hedge's conviction that the 10 Year will, unfortunately, tighten aggressively post any QE overtures, once it is made clear that the Fed will not allow rates to go up... ever... dollar be damned.
The President was notified of a potential terrorist threat on Thursday night at 10:35, by John Brennan, Assistant to the President for Homeland Security and Counter-terrorism. The President directed U.S. intelligence and law enforcement agencies, and the Department of Homeland Security, to take steps to ensure the safety and security of the American people, and to determine whether these threats are a part of any additional terrorist plotting. The President has received regular updates from his national security team since he was alerted to the threat.
Months of total quiet on the geopolitical front, and then we have bomb threats, a French aircraft carrier joining the US fleet in the Persian Gulf (we have no idea where it will fit), evacuated cars, and now Korean gunfire. Only thing missing is a mushroom cloud (either real or holographic) emanating from one of Iran's nuclear power plants.