Archive - Jun 2010

Last week, we pointed out that the ECRI Leading Index dipped to negative for the first time in over a year, which on a historical basis tends to predict a recession with surprising regularity. Today, David Rosenberg takes this data and expands on his views of the probability of a double dip.An interesting observation: when the ECRI drops to -10 (from the current -3.5, and plunging at the fastest rate in history), the economy has gone into a recession 100% of the time, based on 42 years of data. At the current rate of collapse, this means in two months we should know with certainty if the double dip has now arrived.

Even as the increasingly more unreliable UMichigan consumer confidence index surged more than expected in June, to the highest reading in two years, in yet another doctored attempt to stimulate consumers to buy assorted trinkets they don't need and max out their credit cards, a comparable, and traditionally much more comprehensive Gallup polls, paints a vastly different picture. As the chart below demonstrates, the spread between those who see the economy as getting better (32%) and worse (63%) has hit 31, and is threatening to break out the highest reading recorded in the past year. It is no surprise that with nobody trading at all, US stocks are back to their old trickey of spiking ever higher on no volume and on increasingly worse news out of Europe, and not to mention on an atrocious NFP and retail saels report for May, both of which are now promptly forgotten.

The ECB has announced that new bond purchases that settled in the past week amount to €6.5 billion, bringing the total to €47 billion. This amount likely accounts for the various "successful" auctions in Spain, Portugal and Italy. The €6.5 billion is higher than the €5.5 billion in incremental bonds that had settled in the prior week. As a result, the ECB will now conduct another fresh (and "quick") term deposit tender on Tuesday at 9:30 GMT, to drain the incremental liquidity from all the recent bond purchases, thus continuing the path of acute schizophrenia as the bank is worried as being seen too easy in its monetization ways by a hawkish (but increasingly less so) Germany. Lastly, "The ECB intends to carry out another liquidity-absorbing operation next week" - after all there are ongoing sovereign auctions in Europe that have no other bids aside from the ECB.

We are currently in the midst of a Fourth Turning. This twenty year Crisis began during the 2005 – 2008 timeframe with the collapse of the housing bubble and subsequent repercussions on the worldwide financial system. It is progressing as expected, with the financial crisis deepening and leading to tensions across the world. It will eventually morph into military conflict, as all prior Fourth Turnings have. The progression from High to Awakening through the Unraveling took from 1946 until 2006. The most treacherous period of the Saeculm is upon us. The intensity of a Crisis is very much dependent upon how a country and its citizens prepare for the Crisis during the final years of the Unraveling. The last Unraveling period in U.S. history from 1984 through 2005 was symbolized by Boomer greed, materialism, debt and selfishness. When Michael Lewis graduated from Princeton University in 1985 and joined Salomon Brothers, I’m sure he didn’t realize that he would end up book-ending the Unraveling period in his two best-selling books about Wall Street.

Last week in an appearance before the House Budget Committee Federal Reserve Chairman Ben Bernanke was asked what he thought about the recent highs in gold. Bernanke replied that he didn’t really know but suggested it wasn’t from inflation, noting “the spread between and nominal and inflation-indexed bonds, the break even, remains quite low, suggesting the markets expect about 2 percent inflation over the next 10 years.”
He further elaborated that “Other commodity prices have fallen recently quite severely, including oil prices and food prices. So gold is out there doing something different from the rest of the commodity group.” Which we think is silly. First, as a rule, Bernanke rarely says he “doesn’t know” unless he knows and doesn’t want to say. Second, Gold is not a commodity (at least lately); it is a competing currency. I thought Ben looked like he was swallowing a canary when he answered that question. To quote Jim Rickards, of LTCM bailout fame, one of many who feel the same way, “This will help end confusion: Gold's not a commodity. Gold's not an investment. Gold is money. If you'll need money in future, get gold.”

As Institutional Investor points out, "forget the Dow 30 - the 25 companies listed here are the favorites of high frequency traders in the US." In other words, here is where you get the best beta bang for your buck (what is this eahlfa?) as computer tries to outsmart computer in just these 25 shares, where the bulk of the market volume is focused. Can you spell churn? And, not surprisingly, this is where the bulk of the liquidity rebates provided by the exchanges if focused. Soon this list will be 5, and soon thereafter: SKN (DarkPool: SKYNET, share price: infinity).

• Kyrgyz crisis tops Russian headlines for four days, rest of world couldn't care less (Russian Scoop)
• America's municipal debt racket (WSJ) - Notable as the household sector's holdings in munis surpass $1 trillion for first time ever (Z1, p.64)
• Fed to conduct first test auction of bank CDs (WaPo)
• Carry-on charging Spirit Airlines grounds all flights through June 15 as pilots go on strike(Bloomberg)
• BP stock lower as the firm faces containment deadline as Obama seeks escrow (Bloomberg)
• Cost of fixing Fannie, Freddie at $140 billion, $1 trillion worst case (Bloomberg)
• Morgan Stanley: Just say no to double dip (Morgan Stanley)
• John Paulson takes ex-SEC bigs on board (Post)
• Liquid assets: Bordeaux 2009 futures sell 700 cases and hour, freeze computer (Bloomberg)

Even as Goldman is urgently forcing a EURUSD squeeze following its last week target revision lower to 1.15 (just as predicted on Zero Hedge), in an attempt to shake out the latest batch of weak hands (aka clients) in the second highest EURUSD net short position last week, forcing all correlation desks to bid up all risky assets and pretend all is good, Europe liquidity is now even more frozen than ever before. While earlier reports from the FAZ that Spain is next in line for the EU/IMF rescue facility may or may not be true (very likely the former, but no confirmation will be provided until after the fact), looking at the ECB's deposit facility usage paints a grim picture: usage increased by $18.4 billion through the weekend, and was at an all time high €384 billion: European banks have put aside nearly half a trillion dollars away due to concerns about counterparty risk. For those still confused why this data series indicates that the FV of the EURUSD is likely close to or at parity, the topic of the ECB's deposit facility usage was covered exhaustively by Bloomberg overnight in "Europe's Banks May Face Second Funding Squeeze Amid Sovereign-Debt Crisis."

• Asian shares were mostly higher Monday, lifted by Friday's mild gains on Wall Street.
• ECB governor said interest rates in the euro zone will remain on hold for many months.
• Euro concerns put plan to introduce a single currency for GCC nations on hold.
• Euro volatility signalling weakness as traders lose confidence in currency.
• French, German banks continued to hold the greatest exposure to euro-zone countries.
• South Korea's Won advances on tighter forwards curbs, risk of intervention.
• Taiwan, China say they reach a basic agreement on reducing trade tariffs.

A potentially destabilizing report appeared earlier today in the Frankfurter Allgemeine Zeitung (FAZ), according to which countries in the EU are preparing to bail out Spain, which has immediately prompted denials out of both the EU Commission, which claimed that the "report on aid for Spain is completely untrue." Of course, in January Joaquin Almunia almost ate that Bloomberg reporter who, for the first time ever, suggested that the EU would need to bail out Greece. Four months later Greece was bankrupt and the EU was on hook for a cool trillion. And in adding to the ongoing contradictions, Spain's Treasury Secretary has said Spain has no problem financing its debt, even as it was reported that Spanish banks have raised a record €85.6 billion in ECB funding, and Spain's Ocana understated that the "liquidity freeze in Spain in foreign markets is a problem." On the other hand, of course Spain has no problem in "financing" its debt - the ECB is gladly monetizing it all. Lastly, the fact that Spanish unions have called for a general strike is likely going to shift the balance of power to the truth instead of the baseless propaganda, and within a week or so, Spain will be another raging Greece.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 14/06/10

Even as the UN is formalizing its response to Iran, the Persian Gulf country is preparing to set sail three ships with aid for the Gaza Strip, AFP reported earlier and was cited by the Jerusalem Post. The ships are only awaiting for final permission from the Iranian Foreign Ministry, without regard for Israel's potential retaliation should Iranian ships approach Israel territorial waters. And with over 100,000 Iranians having volunteered to sail onboard, this will unlikely be diffused with mere diplomacy. At least some of the escalation rhetoric this weekend was slightly moderated after Haaretz refuted an earlier report by the Times of London that Saudi Arabia has opened up an air corridor for an Israel strike is false: "Prince Mohammed bin Nawaf, the Saudi envoy to the U.K. speaking to the London-based Arab daily Asharq al-Awsat, denied that report, saying such a move "would be against the policy adopted and followed by the Kingdom." As for the Iranian overture, the piece de resistance is that Iran will also send a plane to Egypt, carrying 30 tons of medical aid, and forcing the involvement of even more third party actors who would certainly prefer to be impartial in this very unstable time. Once again, Gulf (the other Gulf) tensions are escalating, and there seems nothing on the horizon to set anyone's mind at ease. But somehow headlines about the return of the global recovery are once again making the rounds.

Canada is moving in the right direction on pensions. Expanding the Canada Pension Plan is definitely a step in the right direction.

And there are those who wonder why the US has spent countless dollars and thousands of dead soldiers protecting a few desolate mountain passes in Afghanistan. And no, it turns out it is not just the opium trade. The NYT reports that "The United States has discovered nearly $1 trillion in untapped mineral deposits in Afghanistan, far beyond any previously known reserves and enough to fundamentally alter the Afghan economy and perhaps the Afghan war itself, according to senior American government officials." The article continues, "The previously unknown deposits — including huge veins of iron, copper, cobalt, gold and critical industrial metals like lithium — are so big and include so many minerals that are essential to modern industry that Afghanistan could eventually be transformed into one of the most important mining centers in the world, the United States officials believe." Ah yes - "previously unknown." Yet the punchline of the piece : "The vast scale of Afghanistan’s mineral wealth was discovered by a small team of Pentagon officials and American geologists." Because $1 trillion worth of minerals just lie there waiting to be discovered almost 10 years after the initial incursion. Next thing you know FCX already had an entire mining infrastructure in place just in case a contingency like this miraculously occurred. In the meantime, look for gold prices to plunge as the newly uncovered gold deposits are rumored to be "large" enough to once again refill Fort Knox and to push the supply curve three miles to the right.

The crisis in Europe is causing concerns about deflation in the U.S. and other developed economies. However, looking further up the supply chain, an entirely different picture emerges.