Archive - May 28, 2010

Openeurope.org.uk has put together a paper of the most blatant half-truths, propaganda, and outright lies, abused by Europe not only over the past month, but also over the past 10 years, for the entire duration of the now rapidly collapsing eurozone experiment. As the paper notes: "More than ten years since the euro was launched, and with the single currency facing its greatest ever crisis, the parameters have radically changed. Amid all the uncertainty, one thing has become painfully clear: the EU elite simply got it wrong on the euro." The authors demand for "a call for greater honesty about the future of European cooperation and a reminder of the urgent need to find a new model that is both politically and economically sustainable" is just as valid in Europe as it is in the US: any system based on lies and opacity is doomed to failure. Europe found this out the hard way. We will too unless somehow we restore the basic truths like transparency, honesty and integrity, instead of merely campaign promises and teleprompter soundbites.

Asia is one of the more interesting gas markets in the world. Places like Thailand and its southeast Asian neighbors have seen phenomenal demand growth over the last several years. Total has said they're in Thailand for gas. (Part of the reason I believe Thai shale gas may become an interesting play over the coming years.) Asian LNG demand has also been strong. Japan, China and Korea have helped pick up (a little of) the slack in the LNG market created by booming U.S. shale gas production displacing LNG imports. But a developing gas market brings challenges. Especially when it comes to pricing.

We apologize in advance for harping back on this issue, but it is pretty damn hilarious. In the BBC Newsnight interview with Hendry, Tett and Sachs, the esteemed Columbia professor, at 4:50 into the clip, asks "How long has this Greek question been on the table. Ablout 10 weeks maybe?" A rather violent explosion from Sachs follows when Hendry calls him out on his tenured stupidity. All this was discussed yesterday. However, we wanted to provide a response to the Ivy League professor, as he did pose a legitimate question. In the following FT interview from January 2009, Hugh Hendry discussed the future of the eurozone and the PIIGS, and at 24 seconds into it, he provides the response Sachs is seeking: "I fear [the collapse of the Eurozone] is becoming more likely." He follows "If we saw parity with the euro, my goodness, that would be deemed to be unthinkable." And concludes, "There is a shortage of dollars. People think I'm crazy - they are printing billions, trillions of dollars. But keep in mind America has $50 trillion of debt outstanding. And that was fine because they thought it had $50 trillion of assets. And what we are discovering is these asset prices deflate - it's vaporization..." Dear Mr. Sachs - the very person you were sitting across the table from foresaw everything to the dot, just as it would happen 16 months later, even as you were calling up old buddies to get that Teacher of the Year award, or get that extra fellowship (in demagoguery?). Our advice to you is do what your parents did, get (an honest) job sire.... which will never happen - pouring the Kool Aid is easy and pays well. So here is our second bit of advice: watch all Hendry appearances, and listen to what he says. He will always ends up right, and you will always be wrong, since you defend a broken system which is fated for implosion. And just as Hendry sees deflation first, then hyperinflation (and watch this clip for some more brilliant insight), so it shall be. And for some reason people like Sachs will once again be invited to roundtables, in which they will goundlessly claim that nobody foresaw any of ensuing Keynesian collapse... So now that we have answered your question, we have one of our own - how does Columbia allow this level of mediocrity to be publicized on national television?

There is so much misinformation being flung around, that - as a public service - I will continue broadcasting the real scoop ...

There’s nothing wrong with throwing a little money at a problem to make it go away. There’s equally nothing wrong with throwing a little borrowed money at a problem to make it disappear, as long as you have the means to pay that borrowed money back. But what happens if you throw a lot of borrowed money at a problem, and the problem doesn’t go away? If you’ve ever experienced a situation like that you can probably understand how Europe feels right now. It just unleashed a magnificent $1 trillion euro bailout and the market responded with a selloff by the end of the week! So what happened? That money was supposed to make the problem go away, after all. And it was a lot of money. Why did the market respond to it with such disdain? We believe the market’s reaction is confirming what we have long suspected: that these bailouts provide next to no long-term value. They don’t produce real jobs. They don’t improve productivity. They just prolong the precarious leverage game played by the financial sector, and do so at tremendous cost to taxpayers. "Bailout and Stimulate" has been the rallying call for governments and central banks since the beginning of this financial crisis – and it has certainly had its impact over the last two years, but not the type of impact we need to propel real, sustainable growth. - Eric Sprott

From Expected Returns Blog

The attached chart demonstrates conclusively (and hilariously) just how impotent stocks are, especially on days when even the Liberty 33 crew is in Long Island, in every attempt to break the magnetic EUR correlation. The attempted decoupling that started around 2 hours prior to the close, in which stocks were praying that the EUR correlation desks would follow into the close and just melt up following Atari's cavalry charge into the weekend, broke with 5 minutes to go, as stocks ended exactly where the EURUSD said they would, and very much the opposite of where Michelle Caruso-Cabrera and Bob Pisani were hoping they would (which would be relevant if the pair actually had any credibility still left to be torn down).

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 28/05/10

The endlessly entertaining Hugh Hendry, who gave Jeffrey Sachs a royal beatdown yesterday and pretty much discredited the Columbia professor for life, is back in this interview with Money Week's Merryn Webb, in which he once again is not afraid to make "bold" statements. Such as that hyperinflation is pretty much inevitable, that China is the functional equivalent of the Next fashion chain in the 1980s, that instead of listening to idiots on TV who just talk their high beta books, investors should buy the largest and safest stocks. Interestingly, Hendry actually suggests a viable way to fix America's problems, which would require China to write off its US debt, thus "securing the health and vitality of China's biggest customer." Alas, we don't think it would be sufficient, as China holds about $1 trillion of US debt (at least officially). For the Hendry plan to work, debt repudiation would have to go viral, with all banks, US and European, writing down foreign debts as well. Of course, this would bring about the crash of the financial system overnight which is why it won't happen. And yes, it still will crash, as the financed assets are bled of all their cash flows, but at least the grind into systemic bankruptcy will be slow, painful (for the middle class) and very drawn out. As for hyperinflation, Hendry's view coincides with that of Zero Hedge: "the current deflationary shock will deepen and then create "political legitimacy to go nuclear with hyperinflation" via the printing press."

In the current environment, where the market's Advance/Decline line is swinging with greater daily amplitude than ever before, the only thing glaringly obvious is that nobody has any clue how to trade pretty much any asset class. Which is why the following presentation by Morgan Stanley's Jim Caron does a great job at summarizing at least some of the core fundamentals in this new, "new normal" where corporate risk no longer exists, only to be replaced with unprecedented sovereign risk and pervasive moral hazard. It is a must read for anyone who dabbles in any market even remotely connected to credit (which implies everyone): 112 pages of no-nonsense (if somewhat biased) goodiness.

It must have been at least a week without the US government announcing some stimulus, subsidy, tariff or other protectionist measure, because today the government just passed yet another$79 billion stimulus bill, extending unemployment benefits and restoring expired tax breaks. The net cost to the deficit: around $30 billion. This really is a drop in the bucket: so far in fiscal 2010, the US budget has already spent over $ 107 billion on unemployment benefits, and $30 billion is less than the government raises in one of its three biweekly coupon auctions. On the other hand, when Obama next wonders why nobody in America works any more, he may want to reevaluate that 6 million unemployed people in the US are now encouraged to be on government payrolls for two years.

The German Economics Minister Rainer Bruederle has just confirmed precisely what many have known and said for years, namely that the US Federal Reserve is active in the secondary markets, in this particular case in FX. While not so much of a secret for some of the fringe players such as a the SNB, BOE and BOJ, the Fed has never had a formal statement on currency intervention, as, of course, it would have been seen as a sign of weakness (and allegedly could be considered an unconstitutional activity). And why would anybody dream of manipulating the world's strongest currency. Of course, if Bernanke manipulates currencies, as has now been confirmed, it is more than clear that he directly buys and sells stocks in the secondary market, and/or Treasuries in the primary. We wonder what other juicy disclosure Bernanke's trans-Atlantic CB colleagues will announce once they are cornered about their recent market manipulative conduct.

CDOs guaranteed by Spain? These must be underwritten by Goldman Sachs.

Fitch Ratings has today downgraded 10 classes of CDO notes and affirmed 14 classes of CDO notes following the agency's downgrade of Spain's Long-term foreign and local currency Issuer Default Ratings (IDR) to 'AA+' from 'AAA'."The sovereign downgrade reflects Fitch's assessment that the process of adjustment to a lower level of private sector and external indebtedness will materially reduce the rate of growth of the Spanish economy over the medium-term."

And so it begins. But the Bank of Spain said all is fine..."Despite government debt and associated interest costs remaining within the AAA range, Fitch anticipates that the economic adjustment process will be more difficult and prolonged than for other economies with AAA rated sovereign governments, which is why the agency has downgraded Spain's rating to AA+."

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 28/05/10