Archive - May 10, 2010

Our European central bank friends went and borrowed a trillion dollar bailout from us, and all we got was this lousy 6 hour bounce and rolling head and shoulder formation? Goldman Sachs is now red as the bears smell fear again, and as goes Goldman so does the market (even if it means a Warren Buffett MBO/LBO of every public stock). Look for a fun close or the announcement of another trillion dollar bailout from JCT who is now and forever the butt of every joke of bureaucratic incompetence.

"Here’s what I have in mind. Suppose that, for every relevant financial institution, the government issues a “rescue bond.” The rescue bond pays a variable coupon equal to 1/1000 of the transfers made from the taxpayer to the institution or its stakeholders. (I pick 1/1000 out of the air; any fixed fraction will do.) Much of the time, this coupon will be zero, because bailouts aren’t necessary and so the firm will not receive transfers. However, just like the institution’s stakeholders, the owners of the rescue bond will occasionally receive a large payment. In a well-functioning market, the price of this bond is exactly equal to the 1/1000 of the expected discounted value of the transfers to the firm and its stakeholders. Thus, the government should charge the financial firm a tax equal to 1000 times the price of the bond." Minneapolis Fed President Kocherlakota

Nothing to say on this really, except that Bernanke will be more than happy to oblige every and all requests which will further his goal of destroying the dollar and bring the dollar down to 1.0000 ER against its Zimbabwean brother from another mother.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 10/05/10

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 10/05/10

It is important to note that in the near term, the contraction in private sector credit combined with the threat of fresh credit concerns ahead, will likely keep a lid on inflation pressures. This view is perhaps where we differ most from today’s consensus thinking, where many expect an immediate and permanent increase in inflation levels.

Jim Rickards, who recently has gotten massive media exposure on everything from the JPM Silver manipulation scandal, to the Greek default, was back on CNBC earlier with one of the most fascinating insights we have yet heard from anyone, which demonstrates beyond a doubt why any attempt by Europe to print its way out of its current default is doomed: "Look at what Soros did to the Bank of England in 1992 - he went after them, they had a finite amount of dollars, he was selling sterling and taking the dollars, and they were buying the sterling and selling the dollars to defend the peg. All he had to do was sell more than they had and he wins. But he needed real money to do that. Today you can break a country, you don't need money you just need synthetic euroshorts or CDS. A trillion dollar bailout: Goldman can create 10 trillion of euroshorts. So it just dominates whatever governments can do. So basically Goldman can create shorts faster than Europe can create money." Just wait until Europe finally realizes that the CDS "speculators" had all the cards in the poker game all along. And we hope Europe listens to the man: being LTCM's GC he knows all about failed bail outs.

"We expect to conclude our review in the coming four weeks. The migration will most likely be substantial, probably within the Baa range; but an adjustment to below investment grade is also possible. This will depend on developments in the Greek economy once the fog of financial panic, support-mobilisation and street demonstrations dissipates. The country’s debt is large but not unbearable; however, the required adjustment is obviously very painful, and short-term economic prospects are clearly dismal – though not out of proportion with developments already seen in several European economies last year. Once we have concluded our review, we will publish a detailed explanation of our rationale for re-positioning the rating." Moody's

Morgan Stanley's Stephen Roach spoke with Bloomberg's Tom Keene earlier, pointing out the most troubling statistic about recent market activity, which has to do with both the frequency and amplitude of catastrophes: "The crises are coming with greater frequency. Over the last 25 years we have had an average of one crisis every 3 years. The gap this time is 18 months. The scale is bigger. This is a much more serious problem in the eurozone than the Asian financial crisis." So intercrisis half-life continues to decline as the severity jumps exponentially. In other words, in nine months we will need a combined Fed-ECB-BOE-PBoC-BOJ effort for about $10 trillion just to calm the markets. 4.5 months after that, $100 trillion more... And so forth. Enjoy.

Developing story, but it appears the reign of Gordon Brown is over. Now he only has to explain why he sold all that gold at the all time lows.

I would like to make clear how dangerous this bailout game is for those in the confines of the EMU. Suppose…. Just suppose, as with the Greek Bailout(s) announced just weeks ago, the markets call the bailers’ bluff? Exactly what ammunition will be left to move forward? The ECB/EU had better hope that this rally will hold up (and recent history shows that it will probably have an ever decreasing half-life), for if it doesn’t the member countries are in a world of hurt.

Over the past month, gold has quietly become the only true flight to safety. Forget the dollar: the dollar is "safe" just as long as Bernanke does not decide to pull a Sunday night comparable to what the ECB did last night and strangle the greenback with one press release: frankly it is just not worth the imminent currency debasement risk, especially with the inversion in the EURUSD as the trading day has proceeded. But don't take our word for it: even with today's last bail out which is supposed to scare all shorts into covering, and unload all risk-free trades, Gold is still at $1,200. And for a far more material indication of what the market thinks of not just gold, but ofrepresentations of gold holdings by ETF's with "imaginary" unaudited stashes all over the world, take a look at the Sprott PHYS physical gold ETF, and specifically the premium over its NAV. Today it hit an all time record of 31%. The NAV differential has steadily crept higher since the launch of PHYS. Investors are willing to pay 30% more than the real value of holdings just for the knowledge that the gold backing their "assets" actually exists.

It is almost impossible to comment with more drama than the basic facts of this story.  Almost.  One hopes that eventually enough will become enough and (rather than rioting) subjects of hopelessly bankrupt sovereigns unable to put down the country's American Express will simply... leave.  Of course, taxation on one's worldwide income complicates the more buoyant aspects of this particular lifeboat.

In times of great uncertainty it is often informative to seek the wisdom of one's elders. This past week at the Wesco Annual Meeting, 86 year old Charlie Munger provided a number of memorable nuggets of insight. The following is the 8500 word transcript.

Preliminary ratings for Q1 2010 for US banking institutions from the professional version of The IRA Bank Monitor are rolling in at a good pace. With 7,240 bank units reporting, the preliminary aggregate Bank Stress Index (BSI) rating is currently just 5 vs. 21.5 in Q4 2009. The benchmark year is 1995 which equals "1" on the BSI. This suggests that the US banking industry is officially on the mend in terms of building reserves, but the credit cleanup continues even as new events climb over the horizon.