Archive - Oct 23, 2010

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

Some scary developments in Iceland including a 41% inflation in the past three years, 63% of mortgage is underwater, and 40% of homeowners are insolvent make me wonder how far behind is the United States?

Mission accomplished ... wait, WHAT???

Your costume is stupider than Tim Geithner's.  Learn to live with it.

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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.

Let A = America, B = Banking System, and C = the Crony System. Then, given a heavily subsidized and corrupt financial system in the U.S., we can infer that A + B = C. Since we know that C must fail due to its poor design and widespread moral hazard, and that B is too big to fail, where does that leave A?

Paul Krugman doesn't know anything about Austrian economic theory but he feels competent to criticize it. He has refused to debate the topic in the past. Now a top notch Austrian theory economist is challenging him to a debate. The lure: $100,000. Will he do it?

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!

If you are worried about the potential systemic risks caused by the developing mortgage fraudclosure story, you better view this important announcement immediately.

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.

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.

The painful cost cutting, layoffs, and downsizing that has swept the corporate area for the past 30 years is now being jammed down the throat of the public sector. The financial crisis afflicting states and municipalities is going to make the school teacher join the sorry ranks of the service station attendant, the elevator operator, and the telephone operators. A profession that has been rendered useless by technology. High schools are about to move online. Anyone for a student teacher ratio of 250:1? (BBBB).

This is coming our way.

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.