Archive - Jun 20, 2010

This is just getting far too surreal: Robert Mundell, the "intellectual" creator of the currently most despised monetary experiment in the history of the world, i.e., the euro, told reporters in Hong Kong, that "China’s pledge to return to a more flexible exchange-rate policy may erode stability in the global and Chinese economies." According to Bloomberg "keeping the yuan pegged to the dollar has been “a great source of stability” for China and the world, the Columbia University professor told reporters in Hong Kong today before giving a speech." Presumably, we should believe Mundell- he knows all about "monetary stability" - just look at Europe to see what happens when you have a monetary union without a political one. It is precisely the inability to adjust relative monetary strength between Europe's countries, thereby providing only a fiscal mechanism to adjust busted economies, that has led the continent to the brink of insolvency and illiquidity. Yet somehow Mundell suggests that "exchange-rate swings were a cause of the global financial crisis." Which in turn leads us to just one question - how long before America's universities stop teaching economics and expose it for the sham science it is and always has been, and out its professors, as nothing more than hollow charlatans preaching a gospel of Keynesian lies.

The direct correlation between the 30 (and 7) Day repo we pointed out on Friday, may have broken... At least on the surface. Whether the point of the depegging was to loosen tight interbank lending, via CNY/USD funding imbalances, or just to shut our worthless SecTres up for a few months, it is unclear. What is clear, is that at least for now, there is no knee jerk improvement in 1 month interbank rates, which at 3.9%, have just hit a fresh 52 week high. The direct conclusion:at least Chinese banks, if not idiot futures traders, are seeing beyond the PBoC's little scam - the depegging is ultimately devaluationary. Everything else is just smoke and mirrors ahead of the G-20.

The market just added one more bank to its daily intervention watch. The PBoC, which left the CNY fixing unchanged from Friday at 6.8275, is now being tested by the market, which is trying to determine what the real trading band is. At last check, the USDCNY was at 6.8125. So far the daily band has been pushed beyond 0.002% and the PBoC has not yet intervened, or at least not in a manner comparable to that we have grown to love and disrespect from the SNB. In the meantime, just so there is no confusion, Former Chief Executive of the Hong Kong Monetary Authority, Joseph Yam says the "Yuan may appreciate or depreciate in short-term." Well, that now makes it all clear.

The world’s financial press, in which leading economists and analysts publish their work, never examines the relationship between the abandonment of the gold standard and unemployment, de-industrialization, and the huge chronic export deficits of the Western world powers. Yes, Dorothy, the bankers really are responsible for the world's financial problems today so get your head out of Oz!

Don Coxe of Coxe Advisors is out with his latest monthly newsletter, a must read report on why the Loonie may be a better investment than both the CNY and the USD combined, why investors should beware of Greeks baring facts, the BP disaster, and, most importantly, quotes Browning, in an extensive analysis of gold: "Leave the fire ashes. What survives is gold."

On Sunday, the People's Bank of China (PBOC) has ruled out the one-off revaluation that US politicians had sought. For now, analysts still expect the yuan to slowly rise. Meanwhile, the decision by China should not have come as a surprise as there are several major risks should China implement a faster yuan move as favored by many.

Somebody forgot to give the PBoC the memo about that whole "PBoC eliminating the dollar peg" thing. According to the just released fixing by the Chinese Central bank, the USDCNY today was at 6.8275, the exact same as Monday. And adding just a little insult to injury, the PBoC devalued the CNY against the EUR by juar under 300 pips: from 8.4538 to 8.4825. That's ok though, the HFT brigade already has its wax on, er, risk on, no volume marching orders.

We continue to hear pundits describe gold as a bubble. Certainly it will turn into a bubble before this is all over but we are hardly in the bubble stage yet. In order for a bubble to form you need the public to come into an asset class. The public is pretty dim and it can take 15-20 years before they "catch on". It took 18 before they noticed the tech bubble. Once they do start to "get it" we will have about a year to a year and a half as gold enters the parabolic stage before the bubble pops. See the Nasdaq chart below from late 98 to March of 2000. At gold's top, half of your neighbors will be buying gold (not selling like they are doing now). At the top there will be lines outside the the local coin dealer waiting for the next shipment of gold to come in. At the top 7 of 10 billboards you see driving down the highway will have something to do with precious metals. At the top the guy standing next to you in the grocery store will tell you how many thousands of dollars he made last month off his gold coins. At the top everyone will have become convinced the dollar is toilet paper and will only continue to decline until it has become worthless.

Some additional info came forward since I last quoted a Belgian newspaper that the Jones Act may have caused a delay in the oil spill rescue by forbidding foreign vessels and personnel to work in the U.S. Gulf.
As it has turned out, the Belgian companies shouldn't feel too bad, the U.S. also turned down an official offer by the Dutch government as well.

Short covering is unlikely to be the fuel that propels prices higher.

A picture is worth a thousand words ...

The Euro is gapping up in Asia tonight, no doubt celebrating the de-pegging of the Yuan. Looks like "Risk On" is possible on Monday.

There are some, like Pimco and Whitney Tilson's T2, who enjoy talking their book, and demonstrating they just love to live dangerously by buying the stock of a company which has an Upside/Downside ratio of 1 (or 100% on both sides, with the government dead set on pushing the "equation" solidly to the D side). Then, there are those, who would rather go to Vegas, breathe in deeply some beta radiation courtesy of the Us DoD and DoE, play some serious blackjack, get the presidential suite and all the Grey Goose comped, and have the very same wining odds as a BP investment, even as the house is gamed to win in the long run (thank you HFT).For those in the first camp, below, courtesy of My Investing Notebook, is Whitney Tilson's case on why BP's stock price belongs tens of dollars higher. For the sake of Blackrock and every pensioner in the UK, we hope Tilson is correct. For now, he has a ways to get above hist cost basis.

An internal BP document released by the chairman of the Energy and Environment Subcommittee in the House Energy and Commerce Committee, Ed Markey, discloses what the vast majority already know - that a "worst case" gusher scenario could be as high as 100,000 barrels of oil per day. According to an exhibit discussing flow rate probabilities, BP says that "If BOP and wellhead are removed and if we have incorrectly modeled the
restrictions – the rate could be as high as ~ 100,000 barrels per day
up the casing or 55,000 barrels per day up the annulus (low probability
worst cases)." This is getting very close to the estimate presented previously by Matt Simmons that the flow rate could be as high as 120,000 bpd. As Markey notes, "This number is in sharp contrast to BP’s initial claim that the leak
was just 1,000 barrels a day. At the time this document was made
available to Congress, BP claimed the leak was 5,000 barrels a day, and
told Members of the House Energy and Commerce Committee that the worst
case scenario was be 60,000 barrels a day. This document tells a
different story." It is stunning to discover that a major multi-national corporation could be so daring as to lie to shareholders, Congress and taxpayers. The next question that Congress may want to look into is why the Obama administration swallowed BP's lies hook line and collapsing GoM floor bed, without using an independent 3rd party verification, and what the liability to the firm would be if the official flow rate is revised to be twice higher than the current worse case scenario. We are confident that as more of the structural integrity of the seabed collapses, that even Simmons' estimate will prove to be conservative.

All you need to know about how the world looks through the eyes of everyone's favorite Chiswick resident: "I am sorry to sound like a broken record here in my opening paragraph, but – alas – we are through yet another week of pretty good real-economy data in Europe, further positive signs on the policy front, and stabilising markets." (and yes, that's Erik Nielsen from GS). The decoupling from reality is now complete: what is it about "decoupled" London tap water? First O'Neill and now Nielsen...