From The SEC To Goldman Sachs In One Easy Step: The Revolving Door Farce Full Frontal

This particular news from Goldman and the SEC needs absolutely no introduction, explanation, or conclusion. It is, as Homer J. Simpson would say, "a tidy little package."

  • GOLDMAN HIRES EX-SEC INVESTMENT MGMT CHIEF BUDDY DONOHUE: MEMO
  • GOLDMAN NAMES DONOHUE GENERAL COUNSEL OF GSAM INVESTMENT COS

Shocking. Absolutely shocking. Elsewhere, completely unfounded rumors that various DOJ staffers are planning to join assorted Mexican drug cartels shortly.

As Online Retailers Launch Vendor Financing, Is Apple Credit Corp Imminent?

As we have been saying for over a year now, there are two key issues (one of which follows logically from the other) that central bankers are banging their heads against: the increasing scarcity of money good-assets, i.e., credible collateral, that can be pledged in exchange for debt at both the private and public level, and the collapsing cash flows at the corporate and household level (both incidentally direct artifacts of ubiquitous central planning and central banker intervention). This, among various other reasons chief among which is the parallel collapse in CapEx and R&D spending at the corporate level, is the main reason for the now secular decline in corporate revenues, which in turn will impact corporate profitability for years to come (now that the easy cost cuts have been made and firms have no choice but to cut into the muscle), and why any expectations that currency dilution will transform into higher profits in a time when input costs rise far more aggressively than revenues, are merely pipe dreams, as is the market's obsession with expanding PE multiples. Perhaps the best confirmation that the much needed cash flows continue to not materialize, is the news that first Amazon, and now Google, are slowly migrating to a model of vendor financing, whereby they provide credit to their product and service vendors to stimulate top line growth. And while this may boost AMZN and GOOG stock price briefly, all it indicates is what we have all know for a long time: the US consumer is once again tapped out, and is unwilling and/or unable to spend money at the rate needed to justify either the forecast S&P earnings or the applied multiple, confirming fundamentals are even more disjointed from market surreality than previously expected.

China Sums Up US Financial Innovation: "Smart Kids Picking People's Pockets Is Not Very Good"

When fringe-blogs highlight the reality of the US banking system and its financial engineering as nothing but overly complex three-card-Monte, it can be shrugged off; but when the head of China's sovereign wealth fund (yes the same one that will bail the world out) notes that the JPMorgan loss highlights a system that has become too complex, perhaps some should listen. As Bloomberg BusinessWeek reports, Gao Xiqing of CIC stated that "I think we do need to slow down a little bit instead of rushing up to all these fancy derivatives." The fact that the 'whale' loss was not a rogue trader but a systemic decision gone wrong on weak risk management of an overly-complex position was "the single most revealing thing" to Gao as he expressed concern about a society in which "all the best engineers are engineering financial products." Summing up the entire ethos of US financial innovation he concluded: "You have all the smartest kids to design these products, the only purpose of which is to get money out of other people’s pockets, that is not very good."

Keep Your Eyes Off The European Cash-Flow Ball

The biggest headlines (and refutations) have been saved for the struggling nations of Europe's periphery. Top-down, this makes sense as PPP-weighted PMIs show Europe notably decoupling (badly) from the rest of the world - with periphery and eurozone-ex-periphery having resynced at these lower levels. This convergence (down) of the core with the periphery is not good news but what is more concerning is that while many investors have assumed the 'pricing' of risk assets in the periphery relative to the core is due mostly to 'contagion', there is in fact a massive fundamental divide between the core and periphery's corporate debt credit quality. With ECB's OMT apparently removing much of the systemic risk premium (though we are clear on our views of this short-term LTRO-esque reaction), the idiosyncratic risk differential between Core and Periphery credit quality is large and getting larger. It seems the need for simultaneous private and public deleveraging in the periphery - especially in Spain - is as critical as ever.

Guest Post: The World's Largest Money-Laundering Machine: The Federal Reserve

The essence of money-laundering is that fraudulent or illegally derived assets and income are recycled into legitimate enterprises. That is the entire Federal Reserve project in a nutshell. Dodgy mortgages, phantom claims and phantom assets, are recycled via Fed purchase and "retired" to its opaque balance sheet. In exchange, the Fed gives cash to the owners of the phantom assets, cash which is fundamentally a claim on the future earnings and productivity of American citizens. Some might argue that the global drug mafia are the largest money-launderers in the world, and this might be correct. But $1.1 trillion is seriously monumental laundering, and now the Fed will be laundering another $480 billion a year in perpetuity, until it has laundered the entire portfolio of phantom mortgages and claims. The rule of law is dead in the U.S. It "cost too much" to the financial sector that rules the State, the Central Bank and thus the nation. Once the Fed has laundered all the phantom assets into cash assets and driven wages down another notch, then the process of transforming a nation of owners into a nation of serfs can be completed.

Here's the Fed's policy in plain English: Debt-serfdom is good because it enriches the banks. All hail debt-serfdom, our goal and our god!

California Wakes Up To Another Record High Gas Price

Gas stations across California - from San Diego to San Francisco - are seeing increasing price-sensitivity by drivers with lines at the 'cheapest' and empty lots at the priciest. It seems yet another weekend of hyperinflating gas prices has pushed the until-now seemingly uncaring-at-the-margin gasoline-'user' to seek out rationally lowest prices. Credit card caps at pumps are also causing problems as the typical SUV-driving soccer-mom needs multiple lines to fill up the family people-mover. Gas prices rose 5c on average over the weekend alone to an all-time record high price of $4.668 (for Regular) - up 86c (or 22%) in a year and 12% in a week.

Double, Double, Toil And Trouble

As we all await the next, next, next meeting of the European Finance Ministers and our eyes are turned to Spain and what machinations are going to be brought to our attention,  we wonder if actual decisions are going to actually be forthcoming. These people “applaud and hail and congratulate” each other on various non-accomplishments and they tap dance on the world’s stage as if each and every problem is not only solved but light years behind them while there are giant dificulties to their forefront that are largely ignored in the continuing attempt to obscure everyone’s field of vision. We remain skeptical however; we can see just fine thank you and it is not the poppy fields of Oz at which we stare.

Chart Of The Day: The "New Normal" Trade Off - Debt vs Jobs

In the last few weeks much has been said about how the US economy, after nearly collapsing in the Lehman aftermath has staged a gradual, if painful and very slow improvement in the last 3 years. Sure enough, After jobs peaked at an all time high of 138 million in January 2008, they then tumbled to a depression low of 129.2 million in February 2010 and beginning in September 2010 have posted 24 consecutive months of growth, rising to 133.5 million last month: a 4.25 million trough to, so far peak.  Not bad. What, however, has received little discussion by either presidential candidate, primarily because it is largely a byproduct of both Republican and Democratic action, is what can be seen on the chart below courtesy of Diapason Securities, namely the New Normal angle of debt increase, which from merely steep, has mutated into beyond acute. What one can see is that the public cost of "normalization", aka the Trade Off of the new normal is an additional $4.25 trilion in debt over and above where the previous historic trendline would put total US debt, just under $12 trillion. Instead total debt is now $16.2 trillion. Oddly enough, this translates to precisely $1,000,000 per job gained or saved from the first (and certainly not last) post-crisis trough: yet another fact that will not be mentioned in either the mainstream press or any presidential debate, as sadly trading off record amounts of public debt for new jobs is the only game left in town for either party. 

Daily US Opening News And Market Re-Cap: October 8

Risk averse sentiment dominate the session, as market participants looked forward to the latest European finance ministers meeting who are due to discuss Spain’s finances, as well as Greece, which is yet to formalise spending cuts in order to receive the next aid tranche. Reports that China's economic growth is expected to have slowed to 7.5% in Q3 from 7.6% in Q2 weighed on basic materials and industrials stocks. The World Bank cut its 2012 GDP forecast for China to 7.7% from 8.2%; 2013 to 8.1% from 8.6%. Uncertainty surrounding the never-ending sovereign debt crisis in Europe weighed on financials, and in turn translated into lower 3m EURUSD cross currency basis. Peripheral bond yields rose, with Italy underperforming, ahead of the supply later on in the week. Going forward, given the Columbus Day holiday across the pond, trade volumes are expected to be below the average.

Frontrunning: October 8

  • Italy rejects need for EU control (FT)
  • ‘Worst US quarterly earnings since 2009’ (FT)
  • Chinese firm helps Iran spy on citizens (Reuters)
  • World Bank cuts East Asia GDP outlook, flags China risks (Reuters)
  • Foxconn factory rolls on in spite of strike (China Daily)
  • Economic recovery ‘on the ropes’ (FT)
  • Japan Tries Cars That Make the Mini Look Maxi (Businessweek)
  • Euro Finance Chiefs to Give Positive Greece Statement, Rehn Says (Bloomberg)
  • Romney attacks drones policy (FT)
  • Euro zone mulls 20 billion euro separate budget (Reuters)
  • Hong Kong’s Leung Seeks Turnaround With Economy Focus (Bloomberg)
  • RBA Keeps Some Documents Private in Securency Bribe Probe (Bloomberg)
  • India Inflation to Remain at 7.5%-8% Till Early 2013 (WSJ)

Overnight Sentiment: European Grumbles With US Semi-Closed

Usually on semi-US holidays such as today, when bonds are closed but equities left to the whims of vacuum tubes, equities do their mysterious ramp and never look back. So far today, however, this has failed to happen with futures at lows, driven by a noticeably weak EURUSD, which has traded down nearly 100 pips from the Friday late day ramp close, currently at 1.2940. It is unclear what has spooked the Euro so far, although all signs point to, as they did 2 months ago, the Spanish lack of willingness to throw in the towel and demand a bailout, thus easing conditions for everyone else if not for Spain PM Rajoy. Today's main event will be European finance ministers meeting in Luxembourg to discuss the recent Spanish economic transformation efforts as well as an attempt to accelerate banking cooperation and implement a banking regulator - something which is needed for the ESM to monetize bank debt, and something which Germany has been firmly against from day one. Additionally, a day ahead of Merkel's visit to German (where she will be protected by 6-7,000 cops), the ministers are likely to make a positive statement on Greece’s progress toward austerity targets, according to European viceroy Olli Rehn said. In other overnight news, German Industrial Production saw a -0.5% decline, which was modestly better than the -0.6% expected. Over in Asia, China reopened from its 1 week Golden Week hibernation with the SHCOMP down -0.56% to 20.76.42 following a small bounce in the China HSBC Services PMI to 54.3 from 52 in August, and with average house prices rising for a 4th month in a row, and even more repo operations by the PBOC, the result is that the market's ungrounded hopium for an immediate PBOC liquidity injection was taken away pushing regional markets lower.

As Hugo Chavez Wins Presidential Re-election Someone Makes Absolute Killing On InTrade

Moments ago the Venezuelan Electoral Council (one wonders if the term 'Hanging Chad' has a different meaning down there?), announced that with 90% of the votes counted, and an 80.4% turnout, the winner of 54.4% of the vote, and still reigning presidential champion, is Venezuela's Hugo Chaved. This is not surprising. What is quite stunning however, is that someone made an absolute killing in the Chavez reelection contract, which after trading in the 80s range (indicating an 80% probability of reelection), dipped moments ago to the low 20s, following speculation Chavez may be on the way out, only to soar to 99.9 as of the last trade. In other words, someone just made 5x their money on the Chavez vote in minutes, money which has most likely been well spent on Cuban Cohibas by now. Congrats.

As World Awaits Venezuela Presidential Results, Tanks Enter Caracas

Update: HUGO CHAVEZ WINS VENEZUELA RE-ELECTION, ELECTORAL COUNCIL SAYS. Contrary to exit polls as noted earlier, Chavez won 54.4% of the vote, with 90% of the votes counted, and a 80.4% turnout, according to the Electoral Council. At least the local APCs are fully stocked on Whoppers for the next few days.

While the world awaits with bated breath to find out if Hugo Chavez has lost the first "presidential" election in 14 years (an outcome with major implications for the crude market), which according to the latest exit polls he was trailing 48.1% to 51.3% to challenger Henrique Capriles, Diebold post-processing and hanging chad pro forma-ing notwithstanding, the question is what happens if there is a peaceful overthrow at the helm of the Latin American commodities powerhouse. And we use the term "peaceful" loosely: because the twitter stream is currently abuzz with a picture of tanks in Venezuela's capital as seen below. Hopefully they are merely waiting in line at the drive thru for the latest BK value meal and nothing more.

Guest Post: America’s Hijackers – Where Are They Now?

Spoiler Alert: They’re mostly still in office  (so much for building suspense).

On October 3, 2008, 338 elected officials (263 House reps, 74 Senators and 1 President) took it upon themselves to save America from certain financial doom by passing the Emergency Economic Stabilization Act of 2008, completely ignoring the will of the American people,  opting instead to fulfill a Thomas Jefferson prophesy:

“The end of democracy and the defeat of the American Revolution will occur when government falls into the hands of lending institutions and moneyed incorporations.” 
~ Thomas Jefferson

Paris Luxury Apartment Prices Slide As French "1%"ers Dump Real Estate To Avoid Soaring Taxes

Back in July, when the news of the French foray into the "fairness doctrine" hit, and we learned of Hollande's plan to tax all those making over €1 million at a 75% tax rate, we said that "we are rotating our secular long thesis away from Belgian caterers and into tax offshoring advisors, now that nobody in the 1% will pay any taxes ever again." We should have also added that we are buying all the available long-dated call options in French real estate firms, with the imminent surge in luxury real estate dumping, once the French "1%" decide they want nothing to do with a regime that is hell bent on confiscating 75% of their annual cash flow at first, and slowly moving toward pocketing the balance of their assets (remember what we said in September 2011: that 30% global tax on all financial assets in a New Normal insolvent, and wealth redistributive world, is inevitable, and it is coming). Sure enough, the wholesale dump of luxury properties has now begun. AFP writes: "A flood of top-end properties are hitting the market as businessmen seek to leave France before stiff tax hikes hit, real estate agents and financial advisors say. "It's nearly a general panic. Some 400 to 500 residences worth more than one million euros ($1.3 million) have come onto the Paris market," said managers at Daniel Feau, a real-estate broker that specialises in high-end property." But that would mean that in the New Normal real estate is once again merely a credit-bubble dependent, flippable asset: not a long-term housing investment, but merely one in which the pursuit of the greater fool is all that matters (not news to anyone here, but certainly news to all those who actually believe that 'housing has bottomed').

The Three Toughest Questions For China Bulls

Whether you believe China is an economic miracle - or a government-sponsored fraud; and can ignore the broken growth model or believe that the CCP can bailout the world; Michael Pettis, of China Financial Markets, provides a much-needed dose of reality for bulls and bears when it comes to the future of the global growth engine. After summing up (and laying-waste to) the three mainstays of China bulls' arguments: he asks the three toughest questions any China bull must be able to answer. Analogizing China's position perfectly he cites Mills: "Panics do not destroy capital; they merely reveal the extent to which it has been previously destroyed by its betrayal into hopelessly unproductive works." Simply put, the bull argument cannot ignore the hidden bad debt.

Five Fun 'Pre-Earnings' Facts For The "Buy-The-F$$$ing-Dream"ers

With the S&P 500 once again testing multi-year highs, forward P/Es over 14 in a real-rate environment which suggests single-digit P/Es, abnormal micro-structure (mega-caps outperforming and high-beta fading in an up-tape), and a buy-the-f$$king-'dream' mentality soaking in everywhere, we take a close-up view of the earnings season reality that is about to come crashing down on multiple-expansion hopes. Following on from the five most ridiculous charts in US equity markets, these five 'facts' will be assuaged by every long-only manager as 'priced-in' - we suspect otherwise.

Enter Detroit At Your Own Risk!

"Detroit is America's most violent city; its homicide rate is the highest in the country." Detroit Police department's "Enter At Your Own Risk" warning to citizens came at a rally yesterday as they fear under-staffing in the midst of what CBS reports as "the explosion in violent crime" leaves police in "deplorable, dangerous, and war-like conditions." While the union presses for more staff - or higher wages to compensate for the risk - we are sure Snake Plissken can be relied upon to rescue GM's CEO if he needs it.