Archive - May 27, 2010

We are entering the Age of Rage.

It is presently most visible in Europe as austerity programs that potentially could shred a half century of social entitlement advances are met with increasingly violent street demonstrations. It is seen in the US Tea Party rallies with their fury that the very fabric which the US capitalist system is based on is being destroyed and discarded. Unfortunately these demonstrations of rage are focusing on the effects and not the cause. The cause is a systemic plaque of unenforced financial control fraud.

Retail investors have pretty much given up on the market according to the latest ICI fund flow data. In the week Ended May 19, domestic equity mutual funds saw a third consecutive outflow, this time for $4.8 billion, as mutual fund cash levels, already depleted, are starting to hit critical level and forcing liquidations (ignore today's EOM rebalancing - just a close out of short positions ahead of a traderless Friday). At this point there have been almost $15 billion in mutual fund outflows from domestic stocks year to date, a staggering number considering the market is unchanged for the year, and once again begging the question how long investors will allow primary dealer Fed proxies to continue to speculate with each other and permit HFT programs to derive liquidity rebates as they push the market higher on no volume and no good news. Also notable is that in the past week taxable bond funds also saw an outflow, with the only inflows seen in hybrid and municipal funds. We will provide the Lipper fund flow data later today.

If anybody thinks there are any plain vanilla FX traders left alive in the world, you are mistaken. At this point it is all Central Bank to Central Bank warfare. The one with the fastest printer wins. And since today's economic news was all negative we fully expect the S&P to close well over 3% higher for the day.

Matt Taibbi coined the phrase of 2009 with Great Vampire Squid Wrapped Around The Face Of Humanity

Here is his submission for 2010: Ben Bernanke = The Fed's Goblin-in-chief

Now that the Gulf of Mexico has been (presumably) plugged up, pressure in the earth's core is rising once again, and thus it may be time to refocus on the imminent explosion of Iceland's second and much larger volcano Katla. Why? Because, as MSNBC reports, the Icelandic president Ólafur Grímsson has warned governments around Europe "that a significant eruption at the volcano is close." Seeing how his credibility has not been destroyed by associating with the other Eurozone and IMF idiots, we tend to think he knows what he is talking about. Also disclosed were the findings of a paper by the University College of London which concludes that "given the high frequency of Katla activity, an eruption in the short term is a strong possibility." And just like with the GOM debacle, scientists say that the response by Europe to the first volcanic eruption has been atrocious, as none of the events that have transpired were not unexpected. Of course, when Katla blows up too, there will be terror and panic, as airlines are cut once again, and trade in Europe, already lethargic, crawls to a halt, when as usual, all this could be prevented by spending just a little extra money not on bank bail outs but on prevention measures. Of course, that would mean record European bank bonuses may be lower by a few euros. And that is simply unacceptable.

And so another $120+ billion in coupons are gobbled up this week by the primary dealers, the Fed's UK Operating companies, and a few rich Chinese and Greenwich individuals.

• Yield of 2.815%, on expectations of 2.802%, previous was 3.21%
• Bid To Cover 2.88, highest since February's 2.98
• Direct Bidders 11.4%
• Indirect Bidders 51.1%
• Primary dealer hit ratio 19.92%

In arguably the most ridiculous news of the day, Reuters quotes Italian PM Silvio Berlusconi as saying that the "unified EU response has defeated speculative attack on the EUR." That's odd - the last time we checked, the euro was trading about 1 basis point away from the lowest level seen in half a decade. We are curious just what the PM's definition of "victory" is? Interestingly enough, Zero Hedge's disclosure that European banks are the primary shorters of the euro currency (also remember that whole story about the incentives of European countries to blow themselves up?) has forced Deutsche Bank CEO Josef Ackermann to publicly announce that his bank has not shorted the euro. We eagerly await all other European banks, especially French and Italian ones, to follow in DB's footsteps and make it all too clear that it is not them 1) shorting their currency and 2) attempting to blow out their govvie spreads by all means necessary.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 27/05/10

In a rogue email blast sent out to its clients, UBS committed the rather unfortunate goof of telling the entire world that on June 1 it "will have published on Tuesday June 1 morning a strategy update going less cautious in mining and commodities." Obviously nobody is supposed to know what a sellside desk will do ahead of time. Only that in this case, everyone now does. The attempt to subsequently recall the email was met with disaster as every trading desk in the US now knows that the bailed out Swiss bank will be going bullish on this critical sector, likely leading to the increased buying in everything commodity related, which in keeping with the US tradition of frontloading everything that is not nailed down, is occurring today instead of Tuesday for those in the know. And since public information is by definition, public, it is now the right of the entire world to know just what UBS will be doing next week.

BBC Newsnight held another great financial round table discussion (why do these occur only in Canada and across the Atlantic? Is it so difficult to have 20 minutes of commercial free debate here in the US where people can actually tell the truth?) which brought together Hugh Hendry, Gillian Tett and Jeffrey Sachs. As usual, Hendry takes it odd with a bang: "I would recommend you panic. The European banking system is in a crisis." He continues: "Let's purge this system of its rottenness. Let's take on a recession. It's going to be tough, people are gonna lose their jobs. They are going to lose their jobs anyway. We can spread this over 20 years, or we can get rid of it over 3 years." Of course, the Columbia professor, is completely against purging the system: how else can US higher "educators" continue to indoctrinate generation after generation with the flawed principles of a bankrupt ideology, and continue getting getting paid handsomely if there is an global reset? Even funnier, Jeffrey Sachs loses it when Hendry calls him out on his BS at 5 minutes into the clip. The ensuing smackdown is worth the price of admission alone.

If u know u have only 1 bullet left in the rifle - and unless you are amazingly stupid - u don't try to shoot the charging grizzly bear when its 50 yards away. No, you wait till its 5/10yards away...WHEN we get this final bullet out of the rifle it had BETTER not miss, as if it 'misses' we would then have the mother of stagflationnary busts in history where bonds get crushed due to debasement, taking risk assets out with them too. If this is the outcome - and this is really I think a late 2010/2011 story - then trust me, 2008 really will seem like the Good Old Days.....lets hope Uncle Ben not only has the rifle ready, but also that his scope is well lined up and that he has been practising hard... - Bob Janjuah

The U.S. Securities and Exchange Commission said it sued Connecticut-based hedge fund manager Pequot Capital Management Inc., and its Chairman and Chief Executive Officer Arthur Samberg for insider trading in Microsoft Corp. securities.

By now everyone has read Ambrose Evans-Pritchard's article discussing the historic plunge in the M3, which speculates that due to the failure of attempts so far to reflate the economy, Obama is likely considering a renewed stimulus. To validate his point, Evans-Pritchard quotes Tim Congdon of International Monetary Research": "The plunge in M3 has no precedent since the Great Depression. The dominant reason for this is that regulators across the world are pressing banks to raise capital asset ratios and to shrink their risk assets. This is why the US is not recovering properly. Fiscal policy does not work. The US has just tried the biggest fiscal experiment in history and it has failed. What matters is the quantity of money and in extremis that can be increased easily by quantitative easing. If the Fed doesn’t act, a double-dip recession is a virtual certainty." SocGen's Albert Edwards chimes in with an observation from a slightly different angle, namely that the collapse of global FX reserves, whose explosion until 2007 "fuelled both global GDP growth and the credit bubble," which are simply indicative of global imbalances and are a very useful measure of total liquidity, are now plunging. This merely reinforces the deflationary pressures of the plunge in money supply, and forces the Fed into a corner from which there is no escape except by activating another multi-trillion QE program. Yet away from the US, Edwards argues that the huge imbalances within the Eurozone will serve as the seeds of its own destruction.

The Freddie Mac 30 year Fixed Rate Mortgage rate for the May 27 week was announced, and, in tried and true "let no crisis go to waste" fashion, it has dropped to a fresh 2010 low of 4.78%. So to recap: stocks are where they were at the beginning of the year, the US federal debt is over $13 trillion, QE is over, Europe is imploding, China is tightening, North and South Korea are blasting The Eagles at each other at over 200 dB in clear violation of the Geneva convention, there is no oil left in the GOM, US double dip is accelerating, Marsian global rescue swaps are being considered by the Fed, yet mortgages are cheaper than they ever have been, as the government goes double all in in its attempt to reflate the housing bubble. Well played, Ben, well played.

Jim O'Neill "Anyhow, dear grizzlies....bet your [sic] worried about today’s rally? See u later." Not sure this type of smugness by god's firm should be surprising, or even deserve to be pointed out, but we just wanted to store this for posterity, as we are confident we will return to this quote on many occasions in the future.