Archive - Oct 2010

One of the more devious consequences of QE2, is that it carries the seeds of its own destruction with it. Namely, if after flooding bank basements with another $2 trillion in excess reserves, and if bank lending picks up, suddenly the amount of currency in circulation will explode by over 300% from under $1 trillion to around $4 trillion. And while a comparable increase in wages is certainly not guaranteed to occur concurrently, what this explosion in the free money will do is lead to a very rapid and drastic destabilization in the concept of a dollar-based reserve currency. The only thing that could prevent this are the Fed's mechanisms to extract liquidity from the system. Alas, the IOER process is very much unproven, and should animal spirits kindle at the peak of the biggest liquidity tsunami in history, that money will inevitably make its way to Main Street, not Liberty 33. All this has made Goldman's Ed McKelvey warn that should increased bank lending be the end result of QE2 (and ultimately that is precisely what it should be, as that would be indicative of a healthy economy), then, to put it so everyone will get it, "this would cause too much money to chase too few goods." And, as liquidity extraction then would likely be impossible, it would be the beginning of the end: "The obvious risk to this last point is if inflation expectations surge. In a stronger growth environment than now prevails, such a surge could prove difficult to control. It would require Fed officials to remove the liquidity quickly, which is why they will concentrate on purchases of Treasuries (easier to sell back into the market) and remind us continually of the tools they have developed to withdraw the liquidity (by periodically using them in small size)." Too bad the Fed will soon be forced to buy MBS (again), REITs, ETFs and pretty much everything else.

• Must read for all those who still don't get the Sino-US monetary/FX dynamics: PBOC's `Vicious Cycle' Worsened by Fed, Yu Yongding Says (BusinessWeek)
• And, apparently, this guy should read it - IMF Head Cautions on Money Flows to Asia (WSJ)
• Time to panic: Geithner vows U.S. will not devalue dollar (Reuters)
• China Daily:Appreciation Must Proceed 'Gradually' (China Daily)
• Instinet joins the Flash Crash voices of reason: SEC "flash crash" study draws another skeptic (Reuters)
• Sarkozy Stands Firm Against Pension Protests (FT)
• Japan Says Economy at Standstill (Reuters)
• EU Deal Opens Treaties for Renegotiation (FT)

19 Oct 2010 13:40 BST *DJ Trichet: Warns Not All EU Govt Finance Statistics Are Reliable
19 Oct 2010 13:40 BST *DJ Trichet: Must Close Information Gaps In Global Statistics

What's that, Trichet? The EUR is too high you say? Must kill the EUR you say? It was all a lie you say?

Read you 5x5 partner.

Zero Hedge has been approached by an individual who participated directly in the various aspects of what is now broadly known as Fraudclosure. The below narrative recounts his experience in the due diligence process of selecting loans for the MBS pipeline. And far more than just legalese "technicalities" or a broad abrogation of property rights, as he points out there is a far more palpable issue for all those who hold Mortgage Backed Securities or other pool aggregations of mortgage loans: "we have no idea what is in those packages." This coming from the person who helped pick, diligence and sort through the various loans...

Following yesterday's market observation, the USD has moved relatively convincingly and is now sitting on the resistances we indicated would be tested. AUDSD is sitting on the hourly channel support as well as on the neckline of the H&S. EURUSD is on the 76.4% retracement from yesterday's rally. The dollar index is on the neckline of the inverted H&S. Acceleration from here will mean this move is for real and there will be significant follow through (I see the next target in AUDUSD at 0.9560, at least 2%). However yesterday's rally can be broken down as an impulse in terms of Elliott structure and the EURUSD in particular does not look impulsive on the way down, so we would advise trailing stops to protect P&L and watch for a break to confirm the market has turned and last Friday's hammer on the Dollar Index has sealed the lows for now. - Nic Lenoir

Goldman announced Q3 results, in which revenue beat recently dramatically reduced estimates, coming at $8.9bln vs. Exp. $8.03bln, as the earnings print at $2.98 was markedly better than consensus of $2.29. Yet aside from the pig lipstick, results were a material deterioration from the prior year period: Net revenues in the catch all Trading and Principal Investments were $6.38 billion, 36% lower than the third quarter of 2009 and 3% lower than the second quarter of 2010. And revenues in the all important Fixed Income, Currency and Commodities (FICC), aka "whatever we want OTC spreads group" were
$3.77 billion, 37% lower than a strong third quarter of 2009, "reflecting
a challenging environment during the quarter, as activity levels were
significantly lower compared with the third quarter of 2009. The
decrease in net revenues compared with the third quarter of 2009
reflected lower results in each of FICC’s major businesses, including
significantly lower net revenues in interest rate products and credit
products." And for all those looking for the direct impact of the Goldman reputational damage, look no further than here: "Net revenues in Equities were $1.86 billion, 33% lower than a strong
third quarter of 2009. This decrease primarily reflected significantly
lower net revenues in the client franchise businesses, principally due
to lower activity levels compared with the third quarter of 2009." Lastly, some bad news for Goldman employees seeking a record bonus.

After the housing starts, we have the Fed executing multiple tranche open mouth operations as no fewer (and hopefully no more!) than seven members of the FOMC (not all voting) are on the docket...

• Brazil hikes tax on incoming fixed income investment to 6% from 4%.
• China remained a net buyer of US Treasurys in Aug. China's hldgs jumped $21.7B.
• Euro zone's current account deficit widened in August to €7.5B ($10.49B).
• German investor confidence may decline to 21-month low as economy cools.
• IMF advocates capital controls as a way to handle vast flows of capital into Asia.
• Oil falls from two-week high as US crude stockpiles forecast to increase.
• World Bank cuts China, East Asia growth outlook, cautions on 'bubble'.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 19/10/10

China has raised its key interest rate by 25 bps, marking only the first time it has done so since announcing it has recovered from the global crisis. Undoubtedly, this is its response to not being labeled a currency manipulator. However, as the US will most likely never raise rates again, and with the Yuan still pegged to the dollar, unlike in a typical recovery, where this would signal the elimination of excess liquidity in an attempt to prevent inflation, this time it is a largely symbolic move. Nonetheless, this will put some serious pressure on Chinese stock markets, on the US futures, and will be very "positive" for the dollar, which ironically defeats the whole point of the exercise.

Banking and fraud were born into our global word as Siamese brothers, inseparable since birth. And just like Siamese brothers, if ever separated, they would likely die together as well. But how well do we really understand the illusory empire of the banker-influenced commodity world, where bankers often create artificial supply and artificial demand numbers to set real prices? Here, we take an inside look into this complex, often-misunderstood Empire of Illusion.

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This daily report is designed to help traders find opportunities to trade against this group. The premise is very simple we are looking for 66% of retail traders to be trading either long or short a currency pair, we then look for opportunities to fade (trade against) this group. For example if 72.99% of traders are long the USD/CHF we look for opportunities to short that pair. The pairs that we feel offer the highest opportunity for success are described in the Short and Long Zones.

Still more shenanigans ...

Those who were too clever by half and traded out of the yellow metal early are now trying to buy it back on any dip, driving it relentlessly higher. The gold industry is in a supply/demand sweet spot now, as supplies have been ex-growth for a decade in the face of a rising tide of demand. Peak gold is upon us, and unexploited deposits are getting farther and fewer between. (INIVX), (AEM), (KGC), (GOLD).