• StalingradandPoorski
    03/04/2015 - 16:46
    What people and central bankers do not understand, is that you can't devalue your way to prosperity. Absolutely nothing has changed since the last crisis. The same too big too fail banks have only...

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A Natural Gas Reality Check

While T.Boone talks sense and gets to vent his frustration regularly on air, the sad reality is that although the obstacles for substitution to NatGas are not insurmountable, as Michael Cembalest notes we do not get the sense that an NGV fleet is imminent, even with very high gasoline prices. The best shale gas plays are the ones that involve finding liquids in addtion to (or instead of) dry gas. Given the price for coal, natural gas and crude oil per unit of heat/energy humans would stop using oil and gasoline and use more natural gas instead. But in the real world, in which Michael and you and I live oil and natural gas are not frictionless substitutes. As the EIA shows, oil is primarily used for transportation whereas natural gas is used mostly by industry and to create electricity. As a result, there is no substitution effect pulling up natural gas prices, particularly as more natural gas is being found in shale plays. But for shale investors, there are liquids that can be found in shale plays that are worth a lot more than dry gas: shale oil, and natural gas liquids. Shale oil obviously is valued based on oil prices, and natural gas liquids are valued close to oil prices as well. Whether over time natural gas can displace coal or be exported successfully to 'correct' the demand-supply equation is the question that remains but for now it seems a long way off and along with the normal operating risks, there is of course a broader issues of fracking - and what operation safeguards will need to be put in place to allay concerns in the future. The point is that demand possibilities are there but seem far off and while broadly the energy sector has been on a positive ride the last few years, we remember the lost two decades of underperformance during the 80s and 90s but it would seem should we 'dip' again in the global economy that integrated oils, drilling/services will underperform from their elevated levels.

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Bernanke Lecture II Decrypted, Inflation 79: Deflation 0

The word 'inflation' dominated the words and thoughts of the propagandist-in-chief as he described the Fed's role in the global economy post World War II this afternoon. The 11,400 word speech contained a record-breaking 79 uses of the term 'Inflation' and exactly Zero uses of the word' Deflation'. Subliminally, we notice that the word 'might' is randomized in between the words 'Prices' and 'Inflation' and the words 'War' and 'Risks' are uncommonly tangential. We know in our hearts that the 8 uses of the word 'Paul' was Volcker-related but its proximity to the word ' bit' and 'inflation' leaves us questioning the deus-ex-machina that is Wordle and Bernanke. 'Monetary policy' and 'crisis' pop up a lot and it is evident that we have a 'financial economy' with the word 'Stable' only appearing 0.0015% during the speech.

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The TVIX Debacle

UPDATE: TVIX has now perfectly recoupled with its underlying index (TVIXIV) after a week of HTB dislocation.

With the double-levered long Vol ETF TVIX down 30% in the face of a falling equity market and rising VIX, reality appears to have been suspended. The crushing divide seems driven by the fact that Credit Suisse halted share creation forcing the ETF to behave more like a closed-end fund and with its massive premium to NAV (thanks to extreme hard-to-borrow-ness), this compression makes some 'technical' sense. While the Vol ETFs are designed to track VIX futures not spot, we remain skeptical of these instruments (or the options on them in their wonderfully compound manner) and although CS has said this cessation of share creation is temporary, it definitely brings up significant operational risks for anyone considering trading these vol plays. The TVIX premium to NAV was huge at over 80% as it became hard-to-borrow and with today's action that premium is cut in half (and we assume NAV will rise given the pop in risk).

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Guest Post: A Primer For Those Considering Expatriation

A growing number of Americans are frustrated with the way in which their economy has been managed and are becoming increasingly concerned about future measures the government may take to keep its coffers full. A question that is arising with increasing frequency is: does expatriation offer a viable protection to those concerned about a more financially-intrusive US system? The short answer is 'yes' but while it does offer a solution to ending one's obligations to pay US taxes - it's important to understand that it's not suitable for everyone. Mark Nestmann gives a great nuts and bolts breakdown of what's involved and what the benefits and risks are

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China, Russia Voice "US In Iran" Ire

In a number of stories in China's top newspapers today, the US has been slammed for its moves to restrict Iran's oil trade which could see Chinese banks sanctioned. As The People's Daily noted, Hong Lei (a Foreign Ministry spokesperson) warned such unilateral action was not only wrong but could exacerbate the stand-off over Iran's nuclear program. Arguing that China 'imports oil based on its economic development needs' without violating relevant resolutions of the UN Security Council and undermining the third party's and international community's interests, he noted China will not accept the practice of saddling unilateral sanctions on the third country. Adding to this, China Daily notes the typical UN blah-dom of Wang Min's comments of the "more pragmatic importance to be firmly committed to dialogue and negotiations in order to properly solve the Iranian nuclear issue". While China is clearly 'disappointed' in the US efforts, Russia turns the dial to 11 with its comments that the US efforts are inflaming, as Russia's Foreign Minister Sergei Lavrov said Tuesday, "Scientists in nearly all countries....are convinced that strikes may slow down the Iranian nuclear program. But they will never cancel it, close it down or eliminate it" warning that Iran will have no option but to develop nuclear weapons should the US strike. Well you can't please all the people all the time eh? Just ask Ben.

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HFT Has Disconnected Commodities From Fundamentals

High-frequency traders have caused U.S. commodity futures prices to disconnect from market fundamentals of supply and demand since the 2008 financial crisis. An extensive and detailed analysis by the United Nations Conference on Trade and Development just confirms what we have shown again and again (most recently here in Silver) that HFT's impact on the world is not all unicorn-tears and liquidity-providing. Markets are more exposed to 'sudden and sharp' corrections, and as Reuters notes "The strategy of those involved in high-frequency trading tends to reinforce the correlation between equities and commodities". In a somewhat stunning conclusion from an academic treatise, the authors find "We are not saying that it's all about speculators and (that) fundamentals don't matter. But we are saying that they tend to matter less, except in extreme cases,". Unlike other studies on the linkages, the UNCTAD study uses tick-data and finds correlations rising and trade size dropping as frequency increased dramatically since the crisis in 2008. Critically, one final consequence is that investors seeking to diversify or hedge against other investments in their portfolio are often disappointed as the increased HFT creates a destabilizing effect on commodities (increasing volatility) and can often create bubbles.

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Guest Post: What Is President Obama So Afraid Of?

Quietly, and with little fanfare, President Obama signed a “National Defense Resources Preparedness” Executive Order on Friday. As the name suggests, the order intends to shore up the country’s national defense resources in advance of a national emergency. To be fair, this is not the first time that such an order has been written. President Obama’s order, however, takes things much, much further.This is all playing out with nearly perfect historical precision. Time and time again throughout history as once great empires accelerated their declines, governments have taken steps to protect their interests against the people. In the past, they have imposed curfews, disarmed the population, curtailed civil liberties, and declared national emergencies, usually against some great faceless enemy from abroad who threatens their way of life. As it turns out, though, our great faceless enemy is not some mythical boogeyman living in a cave, nor some angry brown person who hates us for our freedoms… but the very people within the system who’ve taken an oath to ‘support and defend the Constitution of the United States against all enemies, foreign and domestic.’ Have you hit your breaking point yet?

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Two Charts On Why The LTRO Is A 'Real' Failure

While financial and sovereign spreads in the most optically sensitive entities has rallied magnificently for the last few months – helped and extended by LTRO 1 and LTRO 2 – the weakness of the last week or so in both of these critical systemic risk indicators (Sovereign spreads in Spain and Italy and the LTRO Stigma that we noted earlier) should be worrisome for many of the leaders who are using market action as a corollary for their actions. What is most worrisome however is the absolute and utter lack of impact to the ‘real economy’ of Europe as PMIs have continued to slip and sentiment stumbles – nowhere is this more evident than in charts of Corporate Credit Demand and Corporate Credit Availability, which as Morgan Stanley notes today, suggest the deleveraging balance sheet recessionary impacts felt in Japan and the US are now writ large in European minds as minimizing debt dominates maximizing profits (or living standards). Demand for credit is sliding for both large and small firms and bank lending standards continue to tighten aggressively for both large and small firms. As austerity continues and credit contracts, it seems apparent that the much-hoped for shallow recession in Europe will be deeper and longer than most currently believe.

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CTRL+SPIN 2: The Fed Propaganda Tour Live (Again)

A mere two days ago we were enlightened on the glory of the central banking system and the general denigration of sound money and the gold standard as Part 1 of Bernanke's re-education lecture series. Today we are treated to Part 2 - a historical perspective of how the Fed has saved the world since World War II. As we watch the stream below, we suspect the word 'inflation' will outpace 'deflation' and 'monetary policy' will dominate 'intervention' or 'picking-winners' as the Chairsatan presents his view of the world-according-to-central-planners. Some early headlines of note:


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Guest Post: Temporary Backwardation: The Path Forward From 2008

The March silver futures contract first entered backwardation on Mar 9 and with a few zigs and zags has not only remained there but has gone deeper and deeper in. The April gold future just entered backwardation today. We shall see what the coming days bring for the April gold future, but the fact that backwardation has occurred at all is significant. The fact that it is now a “normal” occurrence since fall 2008 indicates a deep pathology. Backwardation means that anyone who has gold or silver could simultaneously sell the metal and buy futures contracts to recover their position, and make a profit. The market is tight. The metal is out there, but obviously those who have it in an unencumbered form are not able (retail) or willing (others?) to take this backwardation bait.

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Ugly European Sovereign CDS Rerack

An ugly day all around as European sovereign CDS jump the most in three weeks...

                    5Y                       10Y             5/10's
ITALY           374/382  +15      365/385         -10/0
SPAIN          432/440  +15      426/446          -5/5

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12 Charts On China's Chagrin

While some believe we can decouple from the primary and secondary impacts of a China slowdown (jst what happens if we all decouple from the world?), it seems like wishful thinking that the growth engine of the world can now be waved aside on the back of "well, they will just re-stimulate and will be well" especially given where oil prices are currently. Michael Cembalest is little more sanguine that us on China's growth  (expecting 7-8% GDP growth to fuel Asian economic activity) but given the 'easing' that has already occurred in China: Chinese government has injected more liquidity; expanded the quota for foreign equity investment; cut bank reserve requirements; delayed tighter capital adequacy rules; created a program through which municipalities can issue bonds with government guarantees (rather than having to borrow from banks); eased first time homebuyer restrictions; and injected capital into its biggest banks; and yet still the macro data is leaking weaker as these 12 charts highlight only too harshly.

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WTI Drops Most In 3 Months

Commodities are broadly under significant pressure but nowhere is it more noteworthy than in Crude (even though the USD is only modestly higher on the day). Brent is falling but WTI is underperforming as it trades down on the day at the biggest drop in over three months. Brent-WTI is leaking higher though as the focus shifts increasingly to Brent. WTI and Brent are trading down close to the SPR-rumor spike-low levels as China and Russia both raise the rhetoric against the US on Iran.

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Guest Post: The One Chart That Says It All

Depending on debt to fuel nominal growth leads to an economic death spiral. Sometimes one chart says it all. Charted against consumer credit, the S&P 500 (SPX) collapsed after the 2000 dot-com bubble burst and has been tracing out a descending channel since then. The Fed's injections of liquidity via trillion-dollar purchases of toxic mortgages and Treasury bonds does not funnel money into productive investments--all it accomplished was to further incentivize speculative churning and financialization to enriched the few at the expense of the many. So sit back, tighten your seatbelts and enjoy the death spiral ride, brought to you by the Federal Reserve and your elected servants of the financial Elite.

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