Archive - Oct 2010

According to a new survey, more than three-quarters of Canadians support increasing Canada Pension Plan benefits. Is Canada on the right track?

In today's interview with King World News, Art Cashin confirms that through its endless meddling, intervention and manipulation over the past two years, the Fed has essentially broken the market: "You used to have markets that were not particularly correlated. The asset classes now seem to be so heavily dominated and in inverse relationship to the dollar, and in direct relationship to the euro... It's frustrating having honed my skills over 50 years to be able to interpret news, and look at a piece of economic data, and try and outwit the rest of the world by figuring out how it would work, and now all you have to do is look and see how the dollar is reacting and know how everything else works. And that huge correlation is not good for people because if everything is correlated in a basket like that, it is very difficult for people to hedge and protect themselves, and therefore when assets move they tend to move altogether." In other words, step aside Value Investor Congress - meet Lack of Value Dollar Correlation Congress. But readers have known that for over three months. Just as they know that lately the biggest concern on Cashin's mind is hyperinflation "the difficulty is while you can get what appears to be nominal benefit out of [hyperinflation], when you try to convert to a hard asset, or even use it to try to buy a needed good, and the perfect example is Zimbabwe. If you were from out of space, and just could get the records of the Zimbabwe stock market you would say, "wow, they are having a pretty good time down there." But they are going up because the assets they hold are going higher and higher in a debased currency." And Cashin on his hyperinflationaty musings from earlier in the week: "My hope is that we don't get anything like that - hyperinflation would be destructive to civilization... But you are right, not only Zero Hedge, I think that was the most emailed comment that day all over the country." He may well be right. And he is certainly right about the Shazam moment: "Money only gets velocity when you lend it or spend it. The difficulty with studying things like the Weimar republic, is that the money supply growing drastically the initial reaction was small. There was very little doing, and it went slowly, until it went suddenly, and when it went suddenly, it went parabolic."

In a stunning turn of honesty, Goldman's David Kostin does a 180 and renounces everything that the Fed wishes the gullible public would swallow hook line and sinker. But first the facts: while the strategist has no choice but to raise his 12 month S&P forecast (this is a new development for all the headline chasers) from 1,250 to 1,275, which is a token nothing compared to the recent 12 month gold price boost from $1,365 to 1,650. This merely reinforces the Zero Hedge view that gold has now become the natural, higher beta, and unlimited upside short hedge to stocks. Indeed, a 1% boost in the S&P PT, is meager compared to the 20% expected gold appreciation. And digging between the facts, we encounter this stunning admission, that would force all current and former Fed chairmen to spin in their graves, assuming a deceased state is attributed them all: "The economy is not the market and QE2 is not a panacea." Read that again, because this is only the first time in history a sellside advisor, especially one who works for Goldman Sachs, has said this truth so fundamental, that nobody actually dares to admit it, least of all the public or the Fed. Below, we present the latest strategy piece by David Kostin which is probably about the most bearish note released by the traditionally permabullish successor to Abby Cohen.

All the gasoline I want at 24 cents a gallon. That is the de facto price that PG&E is billing me for a full charge on the all-electric Nissan Leaf. Thumbing my nose at OPEC. The new electric cars will be total game changers.

The critical issues in America stem from minimally a blatantly ineffective public policy, but overridingly a failed and destructive Economic Policy. These policy errors are directly responsible for the opening salvos of the Currency War clouds now looming overhead. Don’t be fooled for a minute. The issue of Yuan devaluation is a political distraction from the real issue – a failure of US policy leadership. In my opinion the US Fiscal and Monetary policies are misguided. They are wrong! Now after the charade of Extend & Pretend has run out of momentum and more money printing is again required through Quantitative Easing (we predicted QE II was inevitable in March), the responsible US politicos have cleverly ignited the markets with QE II money printing euphoria in the run-up to the mid-term elections. Craftily they are taking political camouflage behind an “undervalued Yuan” as the culprit for US problems. Remember, patriotism is the last bastion of scoundrels. - Gordon T. Long

I would love to know the answer to this one. A little help?

Volatility is King in the Cotton Market where the market trades Limit Up and Limit Down More Frequently than Interest Rates are Lowered.

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Looming losses from the mortgage scandal dubbed “foreclosuregate” may qualify as the sort of systemic risk that, under the new financial reform bill, warrants the breakup of the too-big-to-fail banks. The Kanjorski amendment allows federal regulators to pre-emptively break up large financial institutions that—for any reason—pose a threat to U.S. financial or economic stability.

In 1931 Capone was indicted for income tax evasion. Attempting to bribe and intimidate the potential jurors, his plan was discovered by Ness's men. Following a long trial, he was found guilty on income tax evasion. In Alcatraz, where tight security and an uncompromising warden ensured that Capone had no contact with the outside world, Capone's control and interests within organized crime diminished rapidly...

As observant readers will recall, the one proximal catalyst that brought down the financial system last time around was something as innocuous as a rating agency downgrade of AIG, which precipitated a waterfall of margin calls and liquidity deficiencies, resulting in the near collapse of capitalism. This in itself was not surprising: it is always the least expected events (i.e., Moody's performing its function honestly and ethically) that tend to have the most adverse impact in a precarious scenario. Which is why when Moody's put MetLife's Home Loan Servicer ratings on downgrade watch it resulted in a chorus of fear and incredulity: after all Wall Street had seen this scenario all too recently. One person whose phone line off the hook was Morgan Stanley's Nigel Dally who sent out a letter to clients today trying to calm everyone down that this was not the apocalyptic event many are fearing it could be. True, as Nigel pointed out, MetLife only has $1.5 billion in mortgages serviced for others per SNL (whose data we presented yesterday when discussing exposure at JPM, WFC and BofA), but the fact that this is sufficient for Moody's to look at the company vis-a-vis its foreclosure practices should set red light everywhere. After all, in all the talk of gloom and doom, has anyone actually done any work to find out just what a home loan servicer downgrade means for the system? We didn't think so. And while MetLife is just $1.5 billion, recall that the Big Three share a quarter of a trillion among them. And yes, they are also about to be downgraded. Here is Morgan Stanley's unsuccessful attempt to make uber-nervous investor feel safe. Alas, it can only get worse from here, and what's worst, with consequences that nobody can really anticipate (ref: AIG).

Looks like Mercer's little Alaska problem had a big impact on its US DB investment consulting business...

Aww yeah, QE2 is finally on the way in news less surprising than learning another politician is a hypocrite, banks may have forged documents and been untruthful about disclosures, and Bar Refaeli is hot. QE2 became official when Ben Bernanke got in front of a room of top economists at their annual coven and clam bake in Boston (where Money McBags hears both the incantations and the soup were delicious)...

The Federal Reserve is pulling out all the stops in attempting to invigorate the American economy. The stock market is surging. Everything is surging. The optimists are crowing that all is well. Deficits don’t matter. We can borrow our way to prosperity. Cutting taxes will not add $4 trillion to the National Debt if not paid for with spending cuts. All is well. So, the question remains. Was David Walker wrong? Are we actually on a perfectly sturdy solid platform? Or, are we on the Deepwater Horizon as it burns and crumbles into the sea? Let’s examine both storylines and decide which is true.

Krugman weighs in on the side of the rule of law in the mortgage crisis