Archive - Dec 6, 2010

Update: Second Independent Irish lawmaker Healy-Rae to back budget, essentially guaranteeing budget passage.

Reuters reports that the Irish Independent MP Lowry says he will support the 2011 budget. Presumably this means that the Irish budget tomorrow should pass, which is likely good news for the euro as it means the eurozone has bought itself a few more months of breathing room. Or not. Who cares anymore. At this point just one more independent vote is needed to pass the Irish budget vote.

Bernanke looks like he's terrified ...

Since it is now all too obvious that few if any Americans read (one wonders what the prospects for the Kindle really are), the one mitigating revelation is that cartoons (we recently called the Xtranormal bubble) and comedies are springing up like mushrooms, explaining all the fraud that occurs on Wall Street courtesy of tens if not hundreds of millions of unemployed Americans who suddenly have a lot of free time on their hands. The latest and greatest one takes on Jamie as Hitler (who has been very busy recently, having to deal with both MBS fraud and the Irish collapse) who we find is not too happy to learn that the Argentum line was just taken by the Asian banks and the millions of US coin purchasers, and the resultant squeeze is about to force his bank to come begging at the front door of the FRBNY for capital to fund the world's biggest collateral call ever.

$30 is now history, as spot touches $30.03. Thirty year history in the making and this time no Hunt Brothers were harmed in the making of this price surge.

As silver attempts to break $30/oz yet again after the LBMA woke up and rejected an earlier attempt to take out the critical barrier, it is appropriate to present the most recent interview with Eric Sprott (by the Globe and Mail): the man who one of few, and very much against the conventional wisdom grain, called the move in precious metals many years ago, and so far, has been spot on. The summary on why the much maligned PM bubble is not even close yet: "I think gold is the reserve currency today. There is not a currency in the world that it hasn’t appreciated against by at least 300 per cent. And it has beaten every stock market. You can’t even rent a safety deposit box in Germany because they are all full of gold and silver … I am pretty convinced that gold will go a lot higher because it is under-owned as only 1 per cent of people’s money is in it. It could go to $2,000 an ounce. I could imagine it at $5,000. I am not giving a time frame on that, but I could certainly see that happening. But the real story now is silver." And on silver: "Gold has traded at a ratio of 16-to-1 to silver in terms of price, but today it trades in the range of 50 to 1. I think the gold-to-silver ratio is going to go back to 16 to 1 given the passage of time, say three to five years. And I bet you that silver overshoots. The gold-to-silver ratio may even get down to 10 to 1. I believe that the price of silver has been suppressed."

The only thing less surprising than the knowledge that China is cooking its books, would be that the back office of the BLS is populated by a bunch of meth snorting, ecstasy crunching, dart (and occasionally feces) throwing, data manipulative simians. And while we have to wait for confirmation on the latter, it appears that among the thousands of Wikileaks disclosures is definitive proof that even China does not trust its own Department of Truth. The Telegraph reports that "China's economic figures are unreliable and not to be trusted, according to Li Keqiang, one of the country's most senior officials." And so we get yet more proof that the data behind the marginal bubble driving the global credit bubble to unprecedented stratospheric heights is complete garbage. But somehow the David Kostins of the world have the temerity to appear on CNBC, parade in their newly found Goldman Sachs partner status, and claim they know to the dot not only what will happen to a global economy, but where the S&P will close +/- 50 points....based on numbers which both far and near, are nothing but a complete and total fabrication.

Benron got run over by a reindeer--walkin' home from Lloyd's house Christmas eve...

Something big is afoot: Bloomberg has just announced that The Justice Department today will announce arrests in a crackdown on investment frauds including Ponzi schemes and stock market manipulations, according to a U.S. law enforcement official familiar with the matter. It is unclear how much if any of this will be related to the recent investigation into SAC, aka expert networks. But it appears the sting will be one of the biggest in history: "The law enforcement operation, which began in August, involves more than 300 criminal defendants and 180 civil defendants, according to the official, who wasn’t authorized to speak publicly and spoke on condition of anonymity." We will closely follow and report as we see any news.

When companies are unproductive and destroying wealth, management teams should not be looking to grow that business. Instead, management needs to improve profitability by either divesting it unprofitable units and/or restructuring the units to make them profitable before they earn the right to expand. The alternative is also true, just as investors do not like to see management grow a unprofitable business, investors do like to see management grow a profitable business (generating positive EMs) to maximize its profitability

John Taylor appeared earlier on the 2011 Reuters Investment Outlook Summit, and among various interesting things (namely another call for EUR-USD parity, and that he would "love to be owning gold right here"), he said that the US is imminently headed for another recession, a development that will boost the USD and weigh on commodities. Yet what is more interesting is that in his latest "Chairman's View", Taylor put down a specific date for the end of the recent recovery in European currencies: the date is tomorrow, the day of the Irish Budget decision, and also the day when Europe may see a coordinated effort for a bank run. Taylor also notes that "the narrowing of credit spreads between these countries and Germany is unlikely to persist for very long without further action by the European leaders." Hopefully the Eurozone meeting taking place right now will result in something more than just more hot air. For those who trade FX, Euro sov bonds, or are just generally interested in the views of the manager of the world's biggest FX hedge fund, we recreate his latest thoughts below.

As Zero Hedge demonstrated last week, comprising the list of international banks rescued by the Fed's Commercial Paper Funding Facility were at least 35 foreign financial corporations. Among these, Barclays was near the very top in terms of capital funded from US taxpayers to preserve the bank's solvency. Which is why we were not at all surprised to read that Barclays' chief rates strategist Joseph Abate had a very sour view of the Fed's release of CPFF details "ironically, the same legislation that forced to [sic] the Fed to disgorge details about these 21,000 transactions makes it much harder for the Fed to recreate these facilities by limiting its ability to use the "exigent circumstances" clause of the Federal Reserve Act." Actually, what we find ironic is that Joseph Abate, formerly a major shareholder of Lehman Brothers, and subsequently assimilated by the British Bank, would be a defender of ongoing Fed secrecy: we have the sinking suspicion that Abate's share losses in his Lehman stake were sizable (as in wiped out), and had he had some transparency into what the true state of affairs of his then bank was, he may have had a chance to actually recoup or mitigate some of his catastrophic losses... But such is life for the sufferer of Stockholm Syndrome, whereby each and every one of us has been kidnapped and held hostage by the banking system. The only question is how friendly (and compensated) we decide to be with our captors.

As readers will recall, just after the abbreviated Thanksgiving session, there were some pretty dramatic afterhours fireworks, both in stocks, and in a variety of volatility indices, that of gold (^GVZ)most notably. As the charts below capture, the drop in the futures had offset basically the entire day's upside in the span of milliseconds, leaving many wondering just what had caused this. Luckily, courtesy of the Tabb Group's Paul Rowady we now know that this was yet another glitch borne out of the hyper-technological sophistication of the current marketplace, in which the smallest error can and will propagate through the system uncontrolled resulting in major losses for those who are aligned on the same side as the ponzi. In other words: it was yet another flash crash which luckily did not have a major impact as virtually no volume was being transacted in the market. All this merely means that Ben Bernanke, who is doing everything in his power to boost asset values, has increasingly more variables working against him as the system continues being pushed ever further away from its natural equilibrium, until one day it all just burns down.

I posted this before Mr. Bernanke's interview on 60 Minutes was aired on CBS. However, it provides a different perspective about the dynamics among inflaion, jobs, and QE to counter views from the ivory tower of Mr. Bernanke's. RBOB went up 45 cents since Aug., is the fear of inflation really overstated?

• Reuters 2011 Investment Outlook Summit LIVE (Link) John Taylor speaking now.
• Irish Vote Likely To Pressure Euro (WSJ)
• Bernanke Says Fed May Take More Action to Curb Joblessness (Bloomberg)
• Jobless Report Is Death of Keynesianism (IBD)
• European Officials Split Over Bailout Fund Increase, EU Bond (Bloomberg)
• WikiLeaks' Swedish servers may be under attack (AP)

Moody's Investors Service has today downgraded Hungary's foreign- and local-currency government bond ratings by two notches to Baa3 from Baa1. The key drivers for the downgrades are: 1. Increased concerns about the country's medium- to long-term fiscal sustainability; and 2. Higher external vulnerabilities than most of Hungary's rated peers. "Today's downgrade is primarily driven by the Hungarian government's gradual but significant loss of financial strength, as the government's strategy largely relies on temporary measures rather than sustainable fiscal consolidation policies," says Dietmar Hornung, a Moody's Vice President -- Senior Credit Officer and lead analyst for Hungary. "As a consequence, the country's structural budget deficit is set to deteriorate." Next up: Austria