Archive - Mar 2010

In a recently declassified report by the CIA, the agency focuses on some of the core observations from the Iraq-Iran War. While still largely redacted and dated (the original memo came out in 1982), it does provide some incremental data that may be of significance should the recently disclosed bomb shipment, be put into use. Some key points: "Iran's most vulnerable choke point is the Kharg Island oil export terminal. The terminal, designed to export more than 6 million b/d, consists of an oil-loading jetty on one side of the island, a sea island off the other side, and a conventional buoy-mooring system. Approximately 25 million barrels of storage capacity are also located on the island... Other important petroleum facilities in Iran include three mainland booster stations that pump crude from the oilfields to Kharg Island. Iran has more than sufficient capacity to enable it to bypass damage to Gurreh and still maintain export levels."The CIA's views on imminent conflict driven market disruptions: "The oil market has reacted relatively calmly to the Iranian invasion because fighting has inflicted no major new damage to oil facilities or seriously threatened supply routes. The risk to the market is that the conflict will escalate to neighboring regions and disrupt the flow of oil. Surplus capacity, including inventories outside the Gulf, is insufficient to handle the potential loss of supplies if the conflict spreads. Excess oil production capacity outside the Gulf now amounts to about 3 million b/d."

"Amidst continued financial crisis, the question of the global trade imbalances is back high on the international agenda. A procession of prominent economists, editorialists and politicians have taken it upon themselves to “remind” the surplus countries, and in particular the country with the biggest surplus, China, of their responsibility for a sound and balanced global recovery. The generally shared view is that this means permitting the value of the renminbi to be set freely by the “markets”, so that the country will export less and import and consume more, hence allowing the rest of the world to do the opposite. But is it reasonable to put the burden of rebalancing the global economy on a single country and its currency? This policy brief contends that the decision to leave currencies to the vagaries of the market will not help rebalance the global economy. It argues that the problem lies in systemic failures, and as such, requires comprehensive and inclusive multilateral action." - United Nations Conference On Trade And Development

We present a detailed analysis of international capital flows as disclosed by yesterday's most recent TIC data. Among the key observations we note that while foreign buying of Long Term Treasuries came at a healthy $61.4 billion in total net long-term treasuries, this was coupled by record selling of corporate debt, to the tune of ($24.6) billion. January also saw a net sale of over $5 billion in agency securities, offset by $4.3 billion in stock purchases.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. Voting against the policy action was Thomas M. Hoenig, who believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to the buildup of financial imbalances and increase risks to longer-run macroeconomic and financial stability.

As the attached chart demonstrates, Bloomberg interpolates that there is not even a 1% probability of Fed hike today. The earliest possible hike date is April 28, and even then the probability of a raise to 0.5% is 4.8%. The subsequent date, June 23, has a 14.8% probability of a 14.8% increase, and 0.7% to 0.75%. And even as all is quiet on the Fund Futures side, something is stirring in the Libor market, where 1 week LIBOR has moved to October 2009 levels overnight (in absolute terms, the move from 0.2% to 0.221% is of course a joke; massively leveraged, however, is a different story).

How do YOU spell deflation (followed by runaway inflation)?

House of Cards author William Cohan is buying Fuld 2015 correctional facility calls with (with a a 5 year strike). In an interview given earlier to Bloomberg TV, Cohan notes that the "chance of seeing Dick Fuld on a Stand at this point is an eight on a scale of one to ten." The reason: quite simply, as we pointed out first - blatant contradictions between facts and Fuld's version of reality: "Bart McDade, the former president of Lehman, says he told Dick Fuld about [Repo 105] and Dick Fuld was aware of it. By the way Dick Fuld was the biggest cheerleader for this kind of off balance sheet activity. And now Fuld is coming out saying he didn't know anything about it. Seems very hard for me to believe that. The interview also brings up the very pertinent question of how on earth it is possible that not only Bart McDade is currently working as a financial advisor (to Altman's Evercore of all places), but also Dick Fuld is running a comparable gig. "These guys keep moving forward like sharks until they stop. I think they just keep going until someone says 'no more'." Yesterday, Ted Kaufman was the first and so far only person to do that. Will anybody else in this ridiculously corrupt country refuse the bribes, grow a conscience, and follow in Kaufman's example? SEC? FRBNY? District Attorneys? FBI? If you are out there... if anyone is out there... You are alone.

This is getting plain moronic. First, in July 2008 we were hearing all sorts of idiocy, spewed by Paulson about some loaded bazooka that the Treasury had but would never use. Well, the Treasury not only ended up having to use it but it turned out to be the biggest dud in the history of capitalism, Paulson' tendentious blatherings in his publicistic memoir notwithstanding. And now we have the Greeks using precisely the same line. Today in an interview before CNBC, Greek Finance Minister G-Pap II (not to be confused with G-Pap JR, the Prime Minister, or G-Pap 0, the guy who started it all) said he was looking to the EU to put a "loaded gun on the table to defend Greece's financial markets." We were expecting a laugh, a cackle, a snicker, or some indication the man was joking. We all recall that the system started collapsing about a month after the famous Paulson loaded weapon reference. We expect the same this time.

RANsquawk 16th March US Afternoon Briefing - Stocks, Bonds, FX etc.

Looks like this is going to get done.

SCHUMER: CHINA FX'ONE OF THE CAUSES' OF GLOBAL RECESSION
SCHUMER: CHINA CONTINUES TO 'GAME THE SYS' ON CURRENCY
SCHUMER: CHINA FX'HAMPERING'GLOBAL ECONOMIC RECOVERY
SCHUMER: 'GROWING CONSENSUS'ON CAP HILL RE CHINA FX MANIPULATION
SCHUMER: WILL TRY TO ADD CHINA FX BILL TO'MUST PASS' LEG

We are now taking bets what China's re-re-retaliation to this next step will be.

Today's $31 billion 4 week auction produced another record. The indirect take down was a disappointing, and all time low, 13.2%, compared to a YTD average of 28.5%, while directs surged once again, hitting a new record high take down of 21.7%, with average YTD take down of 9.6%. The indirect hit ratio was 82.8%, with Indirect tenders to bid only $4.9 billion, with a $4.1 billion award. Most notably, for the first time in what appears history, the Direct take down was greater than the Indirects. At this point it is meritless to speculate who the directs are which now control nearly a third of every auction. Otherwise, the Bid To Cover was 3.79, down from 3.90 previously, and the lowest BTC Year To Date. This was accentuated by the High Rate of 0.135%, which was the highest since August of 2009. In a nutshell, the market is starting to look at tightening as a real threat. Next stop: flattening.

Just reading between the headlines:

ROMER: STATE,LOCAL BUDGETS TO REMAIN 'VERY VERY BAD'
GEITHNER: V.STRONG CASE FOR ASSISTING STATES ON SIGNIF SCALE
GEITHNER: NEED REFORMS FOR STRONGER ECONOMY IN THE FUTURE
GEITHNER: NEED TO CONTINUE TO REINFORCE ECONOMIC EXPANSION

And on the threat of a US downgrade Geithner adds: "There is no way that's going to happen," he replied. "There's not a chance that's going to happen to this country."

Ultimately, as my colleague Dylan Grice writes, I think we head back to double-digit inflation rates as governments opt to default. I certainly again expect to see CPI inflation above 25% in the UK and indeed in most developed nations in my lifetime ? I have happy memories of the three-day week and doing my homework by candlelight. In the near term, however, the deflationary quicksand will suck us ever lower until we suffocate. A key driver for underlying inflation remains unit labour costs. While unit labour costs decline at an unprecedented rate, they are sucking us inevitably into a Fisherian, debt-deflation spiral. Only then will we see how far policymakers are willing to go to debauch the currency. Last year saw them cross the Rubicon. Monetisation is now the policy lever of first resort.

- Albert Edwards, Soc Gen

In case you were wondering what just sent the market and commodities higher, and killed the dollar, look no further: S&P just released a note confirming Greece at BBB+, and removing the country from CreditWatch negative, presumably a major euro positive, a major dollar negative, and today's nitrous boost to stocks... Here is the forest for the trees: the market is again dependent on the moronic filth spewed forth by rating agencies. As to what turbo austerity will do to Greek GDP, ah, who cares. S&P will cross that bridge when Greek GDP plummets 10%.

One of the more vocal economic skeptics (as pertains to the developed world at least, China not so much), CLSA's Chris Wood, chimes in with his latest weekly observations on the economy, which are not for the faint of heart, in the latest edition of GREED and fear. Digging in.