Archive - Oct 9, 2010

The conservatives are trying to brand Obama as the devil. Dinesh D'Souza has concocted a silly theory about Obama's anti-colonialist rage. But it's a lot simpler than that. He, like his fellow leftist liberals, are just working off the progressive playbook. No big conspiracy needed because that's what a lot of kids are learning every day in mainstream academia.

Rick Santelli was on King World News today, discussing the distinction between deflation and deleveraging, or what some have dubbed the phenomenon of surging prices in things that one can buy without leverage (Friday's limit up open in various commodities being one example), and plunging prices in everything that requires debt (i.e., one's house). And while the Fed can game the CPI as much as it wants, once middle America see the cost of basic foodstuffs double (and it will once producers hit negative profit margins and are forced to pass input cost inflation to end consumers) they will realize just how serious this problem will be. Of course, the only way to offset this localized inflation is by returning to the time when America could use its houses as piggybanks in the form of taking out equity lines of credit. The problem with that, of course, is that the Fed will be forced to increase home prices at all costs, even as speculators take basic commodity prices up in anticipation of the coming hyperinflation. Which means that the Fed will be behind the ball, and will be forced to increasingly devalue the dollar as it is now obvious that no matter how cheap credit becomes, and how pervasive free money is, the last thing to go up are home prices which make up the bulk of US consumer "wealth." As such, today's collapse in the ceasefire in monetary talk is no surprise: every central bank is fully aware that with the monetary component to intervention, via cheap credit, now priced in, but priced in in terms of equities and commodities, the only way to create equity value in housing (of which per some estimates, 25% of all homes (and rapidly rising) are underwater to the underlying mortgage) is to broadly debase the currency. This is now a virtual certainty, and the higher gold (and soybeans, and corn, and what) goes, the faster the Fed will need to destroy the dollar, making the vicious loop of hyperinflation spin faster and faster...

The rush back into commodities after the jobs report indicates that this inflation trade still has some major support and legs by investors.

• Russia Makes Major Headway with South Stream Pipeline
• Pakistani Supply Route Blockade Puts ISAF Forces at Risk
• US Drones Kill Five German Nationals, Amid Europe-Wide Terror Alert
• Bosnian Elections See Moderate Gains, but Little Hope for Change
• Nigeria Attacks May Show Dangerous Rift in MEND
• UK Diplomats Targeted in Yemen Attack

The Treasury Department has asked NASA to redesign their standard message henceforth to be sent on all unmanned space vehicles. Here is an exclusive sneak preview for your consideration.

True story: A retired couple I know, Brian and Ilsa, own a home in the Southwest. It’s a pretty house, right on the manicured golf course of their gated community (they’re crazy about golf). The only problem is, they bought the house near the top of the market in 2005, and now find themselves underwater. They’ve never missed a mortgage payment—Brian and Ilsa are the kind upright, not to say uptight 60-ish white semi-upper-middle-class couple who follow every rule, fill out every form, comply with every norm. In short, they are the backbone of America. Even after the Global Financial Crisis had seriously hurt their retirement nest egg—and therefore their monthly income—and even fully aware that they would probably not live to see their house regain the value it has lost since they bought it, they kept up the mortgage payments. The idea of them strategically defaulting is as absurd as them sprouting wings. When HAMP—the Home Affordable Modification Program—was unveiled, they applied, because they qualified: Every single one of the conditions applied to them, so there was no question that they would be approved—at least in theory. - Gonzalo Lira

Next week 78% of the S&P companies will announce their Q3 results, (even as the the ratio of insider selling to buying hits the 5 digit range.) All cynicism aside, here is David Kostin's advance look at numbers and this week's complete charts that's fit to post. In a nutshell from Goldman: "Consensus expects 3Q earnings to be below 2Q actual results for six of ten sectors despite the US economy expanding during the quarter, albeit at a weak pace. We expect positive EPS surprises in 3Q but a restrained market reaction given the strong September rally and uncertainty surrounding the upcoming election and prospects for a second round of QE."

Here is another diagram which depicts subprime mortgage processing after the mortgages have been originated in the pipeline.
A basic recycling plant is used for visualization.