In the nearly two weeks since the rescue of the 33 trapped miners, there has been a collective afterglow in Chile: Everyone feels happy. Everyone feels confident. Everyone feels as if any and every problem—no matter how big—can be taken in hand, and solved successfully. There is none of that feeling in the United States. America hasn’t felt success in a long, long time—at least a decade. Ever since 9/11, Americans have been living in a state of constant panic—constant fear—an irrational fear egged on by the leadership classes. This constant state of panic has exhausted America. —Gonzalo Lira
For some reason there are those who still believe today's G-20 meeting was relevant. For them, we provide the following summary from Goldman's Thomas Stolper which confirms that this weekend's theater is over, and nothing has changed. "Bottom line: The overall outcome and statement is about what we expected. Slow but steady progress in the right direction, mainly driven by the fact that individual countries come to the conclusion that they have no real alternative to accepting appreciation." Of course, the alternative to this Goldman desired "real alternative" now that the play is over and real life can resume, is currency and trade war. Which is precisely what is on the docket next.
After months of US bitching and moaning about China's so called unfair exchange policies, when it is the US Fed which is the biggest currency manipulator in the world by orders of magnitude, one country finally had the guts to stand up and call out Tim Geithner on his endless bullshit. At the G-20 meeting, German
Economic Minister Rainer Bruederle said that the Fed's "push
toward easier monetary policy is the “wrong way” to stimulate
growth and may amount to a manipulation of the dollar. Excessive, permanent money creation in my opinion is an
indirect manipulation of an exchange rate." The fact that China was smart enough to peg its currency to the most rapidly devaluing currency in the world is a different story altogether, and merely confirms that they are leap and bounds more sophisticated in their monetary policy than anyone gives them credit for. If Geithner wants to prevent a relative depreciation of the Yuan versus all other currencies in the world (especially the EUR, against which it continues to be in freefall), the answer is simple: stop bloody printing!
CFTC Weekly Options Update: Total Treasury Spec Longs Surge By 40% To 2010 Record, Dollar Inflection Point Reached?Submitted by Tyler Durden on 10/23/2010 - 14:43
This week's CFTC Commitment of Traders confirms that market momentum schizophrenia is persisting: in the past week Treasury net non-commercial spec long positions across the curve (2s, 5s and 10s) surged from 221k to 311k, a 41% increase. In other words the momo crowd is betting the farm that treasury prices not only won't stop going higher, but that the entire curve with be transposed lower with a slight preference for the belly (as Morgan Stanley now expects). The Combined total is more than half a million contracts compared to early April when the 10 year was threatening to break out of the 4% range (dashed line Chart 1). Yet this is in contradiction to the options activity within selected commodities, which after taking a slight breathers have continued to see increasing spec demand to the upside (Chart 2). Lastly, and probably most importantly, looking at currencies shows that the unprecedented surge in bearish bets in the dollar may be over: for the first time since the end of August, dollar net spec bets have actually gotten marginally bullish.
When financial markets have become riddled with fraud, embezzlement and corruption that goes unpunished, then institutional players will avoid that market as crooked: the well has been poisoned. The full consequences of what I termed The Rot Within: Our Culture of Financial Fraud and the Anger of the Honest are now unfolding: the well has been poisoned. One of my most astute correspondents made a critical observation that I've seen nowhere else: once a market has been poisoned by fraud which goes unpunished, then institutional players will avoid that market as untrustworthy. Without institutional trust and participation, the market then withers on the vine-- exactly what has happened to the U.S. mortgage securities market. The market for mortgage-backed securities has vanished, except for one player: the Federal Reserve, which has bought a staggering $1.2 trillion in the past 18 months to create the facsimile of an active market.
Weekly Chartology: Goldman On Earnings - "Good, But Not Good Enough" A/K/A The Calm Before The November StormSubmitted by Tyler Durden on 10/23/2010 - 13:14
While everyone knows that the broader economy is now largely slipping back into re-recession, so far corporate America had been relatively insulated courtesy of the low-cost of credit wealth transfer from taxpayers (whose saving potential is getting destroyed) to blue chip CEOs. Yet in Q3 even this trend is starting to gradually come to an end. As Goldman's David Kostin says: "3Q earnings are off to a good start, particularly relative to the modest expectations that we detailed in our earnings preview. 159 S&P 500 firms accounting for 45% of the total equity cap have reported 3Q 2010 earnings so far and 52% of reporting companies have beat consensus EPS estimates by at least one standard deviation, above the historical average of 41%. However, two points of caution have emerged: (1) 20% of firms have missed revenue estimates; and (2) large positive EPS surprises have been required for a stock to outperform the market." Also, it appears investors now only reward 3 std dev EPS beats: "Stocks beating consensus EPS by three standard deviations have a median outperformance of 211 bp while firms beating by between one and three standard deviations have underperformed by a median of 17 bp. Notable positive surprises include Google, Parker-Hannifin, Oracle, Carmax, and Best Buy. Each of these stocks beat consensus estimates by at least three standard deviations and outperformed the market by at least 500 bp." Is this sustainable? Of course not.
Today’s Keynesian economists have convinced boobus Americanus that the Great Depression was caused by the Federal Reserve being too tight with monetary policy and the Hoover administration not providing enough fiscal stimulus. Ben Bernanke and Barack Obama used this line of reasoning to ram through an $850 billion pork-laden stimulus package, as well as the purchase of $1.2 trillion of toxic mortgages by the Federal Reserve. The only trouble is that this storyline is a complete sham. The fact that colossal stimulus spending, zero interest rates, the purchase of over a trillion in toxic assets by the Fed, and the loosest monetary policy in history have done absolutely nothing to revitalize the economy, has proven that Keynesian policies have been a wretched failure. This is not a surprise to Austrian school economists.
And now, for that Friday night bomb, when nuking stocks has a tad too much of a Waddell and Reed 'amateur hour' aftertaste, the only alternative - destroy the entire currency market. If this crash in the DXY (seen below) had happened during regular hours, apparently driven not by the dollar but by DXY component EUR (there was no comparable move in other USD pairs), it would have created a complete market collapse. Luckily it happened an hour after close. Weekend collapse averted. And a quick glance at the other pairs shows that the GBP and CHF were solidly impacted as well.
Arguably nothing can ever be quite as amusing as the Michael Pento-Simon Hobbs incident from July in which the now brainwashed Brit told the recent EuroPac addition that he was just "peddling the power of nightmares" (not even Pento getting booted off by Erin Burnett, although the fact that some idiot uttered the now legendary phrase "nothing is in a bubble when people want to buy it" certainly gives the clip brownie points for retention in the annals of CNBC's worst all time bloopers) when all the outspoken critic of the Fed said was the truth. Alas, today's interview of Gary Schilling by the same British H1-B/Green card holder comes nowhere close, however it certainly should be highlighted. Following up on Diana Olick's presentation of Clear Capital surprising announcement that home prices had dipped 6% in just two months (we can't wait for Cramer's take on this development even as housing "bottomed" last June), and warning that fraudclosure will certainly cause prices to dip even more, it is Gary's turn to "peddle some nightmare powers" to Hobbs. To wit: the CEO of Gary Shilling & Co. sees home prices tumbling another 20% over the next few years, and the number of underwater mortgages nearly doubling from 23% to 40% (meaning nearly half of America will likely strategically default as nobody has any initiative to pay down their mortgage when they know there is no equity value left). And even when Hobbs tries to pull the old Pento one-two, and tells Shilling that "you do admit in your own writing that very few people would agree with you" to which the old fox answers: "what forecast is really worth much if everybody agrees with a consensus: it doesn't add much value..." Sorry, Gary, you are preaching to the wrong propaganda station: this is easily the first time they have ever encountered such a radical and subversive idea.
WikiLeaks Releases Iraq War Logs Which Detail Over 100,000 Deaths, Show US Ignored Torture, Expose Routine Friendly FireSubmitted by Tyler Durden on 10/22/2010 - 17:17
Wikileaks has lifted the embargo on what it dubs the biggest leak of American documents in history. The Guardian, which is the primary nexus of data collection, notes that almost "400,000 secret US army field reports have been passed to the
Guardian and a number of other international media organisations via the
whistleblowing website WikiLeaks. The electronic archive is believed to emanate from the same dissident US
army intelligence analyst who earlier this year is alleged to have
leaked a smaller tranche of 90,000 logs chronicling bloody encounters
and civilian killings in the Afghan war." The reports will likely do little to raise the US' standing in the eyes of the international community: "The numerous reports of detainee abuse, often supported by medical
evidence, describe prisoners shackled, blindfolded and hung by wrists or
ankles, and subjected to whipping, punching, kicking or electric
shocks. Six reports end with a detainee's apparent death."Additionally, the reports detail how friendly fire from US troops became routine: Americans have shot at their own troops or allies so often that in at least one case a strafed British vehicle didn't even stop. Since this will apparnetly now be the main story this weekend, might as well get a head start.
And guess what, he ain't exactly optimistic either: "So, the world looks to be a better place for now. But it seems to us that rather than solving the underlying final demand issues in the leveraged western economies, this approach just moves the dénouement down the road. And there are, to use the polite economics word, externalities to the Fed’s action which at the very least increase the political tensions around a genuine attempt to rebalance. We think on balance that this sets us up for a bigger fall than otherwise six months out. " Kevin Gaynor, Nomura
Bob Janjuah, the only man who had anything remotely interesting to say at RBS, and luckily left, is now back at Nomura, and is a leaner, meaner, kool-aid debunking machine. His inaugural letter is attached below. One complaint: what happened to all the abrvtns? Bob, that was ur sgntre style. The English here is just 2... krct. The pipl dmnd abrvtns.
In his piece today, Dylan Grice returns to his favorite topic: hedging tail risk. That said, he also compares one Ben Shalom Bernanke to Rudolf von Havenstein who singlehandedly increased the German money supply by a few hundred million percent in a few weeks. Yet that is not Grice's focal topic (for those who wish to read Grice's extended thoughts on the von Havenstein-Bernanke comparison, click here), and instead the SocGen strategist goes a few steps ahead and looks at the possibility that if indeed there is a massive bubble being blown, nowhere is it more obvious than in the Emerging Market world. And taking that idea, Dylan, who lately has been very much on a tail risk hedging wave, provides one idea of how to protect against cheap inflation risk originating in the Emerging Markets (or where-ever).
A few days ago, we penned The BlackRock - Bank Of America Ownership Catch 22, in which we discussed the incestuous cross-onwership relationship between the two companies. Then we said: "It is well known that Bank of America owns 34% of BlackRock via a legacy
position inherited from Merrill Lynch, arguably the most valuable part
of the business. As of today, the stake is worth around $11.5 billion.
Yet what may be a little less known is that BlackRock has also returned
the favor, and is now the largest holder of Bank of America, owning 5.35% of the outstanding BAC shares, for a total value of $6.6 billion. Does
that mean that there is a wash in there somewhere? Who cares. But one
thing that certainly is involved, is a massive conflict of interest,
especially in the context of litigation. And a big question mark - to
claim that BlackRock is willing to impair a nearly $7 billion investment
is naive. Instead, due to the incestuous nature of Wall Street, and the
cross pollination of MBS holders, is today's action merely a ploy to
get some of the more "impacted" parties to promptly settle and eliminate
any possible future litigation? PIMCO, for one, and the FRBNY fir
another, have the most to lose if the MBS crisis escalates, and if all
MBS are unwound. Which means that somehow this is simply another
diversion, with the real action taking place somewhere." The action is indeed "elsewhere" - Charlie Gasparino has just reported that Larry Fink is seeking a partner to buy 35% of Bank of America. What better way to sweep all the problems underneath the rug than to just buy them all up...