Archive - Jul 28, 2010

While I tremendously respect David Rosenberg, his article on Wednesday on inflation and deflation is a confusing mishmash of Keynesian ideas which are clearly wrong. But in the end, despite his struggle with concepts, he may have the market timing right.

While some industry participants are heralding the recovery in commercial real estate, other experts warn that this is a false recovery and it's too early for such proclamations...

In the latest two-part interview with Jim Rickards by Eric King, the former LTCM General Counsel goes on a lengthy compare and contrast between the Roman Empire (and especially the critical part where it collapses) and the U.S. in it current form. And while we say contrast, there are few actual contrasts to observe: alas, the similarities are just far too many, starting with the debasement of the currencies, whereby Rome's silver dinarius started out pure and eventually barely had a 5% content, and the ever increasing taxation of the population, and especially the most productive segment - the farmers, by the emperors, to the point where the downfall of empire was actually greeted by the bulk of the people as the barbarians were welcomed at the gate with open arms. The one key difference highlighted by Rickards: that Rome was not as indebted to the gills as is the US. Accordingly, the US is in fact in a far worse shape than Rome, as the ever increasing cost of funding the debt can only come from further currency debasement, which in turn merely stimulates greater taxation, and more printing of debt, accelerating the downward loop of social disintegration. Furthermore, Rickards points out that unlike the Romans, we are way beyond the point of diminishing marginal utility, and the amount of money that must be printed, borrowed, taxed and spent for marginal improvements in the way of life, from a sociological standpoint, is exponentially greater than those during Roman times. As such, once the collapse begins it will feed on itself until America is no more. Rickards believes that this particular moment may not be too far off...

One thing that is of particular interest to me today is the Move Index. Basically we are at levels for Fixed Income volatility that have been the low for every cycle top except twice in history: the first time was when LTCM basically shorted volatility through spread compressors leveraged 40 to 1, and the second was when AIG, German landesbanks, and a lot of other ill-advised fools, sold protection on just about everything that was priced riskless but wasn't. In each case the large sellers of vol below those levels required government bailout! Now that's exciting. It doesn't mean we are going to have a spike in volatility tomorrow morning, but it means we are in the danger zone. Besides, I wonder who now is left to sell risk other than the Fed and Fannie/Freddie still busy insuring every loan on over-valued real estate. Maybe we don't find as low a bottom as those two exceptions this time. The flip side would be to argue that with rates lower than ever, volatility should indeed be lower than ever in basis points and so we still have ways to go. I would not want to be the one left holding the bag though, seller beware! - Nic Lenoir

A little while back, a Fed Economist by the name of Kartik Athreya, wrote a piece urging the public to only listen to economists who have PhDs from top level universities when searching for economic insights. Obviously this paper was a lot of fun for me to read. So I thought I’d present some thoughts on Mr. Athreya and the group of “experts” he represents

Back in April investor bullishness was at extremes. Consequently, Wall Street ramped stocks first upwards (the usual predilection) to shank the puts… only to swiftly reverse the action in the middle of the week to shake out the calls. This whole system occurs courtesy of the Federal Reserve which openly and blatantly pumps the market on options expiration week. I’ve shown the below chart before. It’s staggering that no one in Congress or any of the regulators actually bother following up on this. How much more obvious does Bernanke need to get?

For today's dose of "he really said it" hypocrisy, we turn to recent PIMCO addition, former bearded outdoorsman, Hank Paulson whipping boy, and creator of the TARP abortion, Neel Kashkari, who apparently felt it was his duty to join his colleagues in validating the New Normal (buy our BAB bonds pleeeez) and conforming to the firm's policy of bashing deficit and entitlement spending. In a brief oped likely written by his 2nd year analyst or executive assistant, titled "The Cultural Challenges of Entitlement Reform" the bald one says "bailing out the financial system went directly against our shared beliefs in free markets and fair play." Yes, you read that right. This is the same person who singlehandedly devised the biggest taxpayer blank check bailout to banks in history (until of course Europe had to bail out its own banking system two months ago, where incidentally, everything is peachykeen once again) as captured by the following email: "We have $11 trillion residential mortgages, $3 trillion commercial mortgages. Total $14 trillion. Five percent of that is $700 billion. A nice round number." In fact, let's continue: "Seven hundred billion was a number out of the air,” Kashkari recalls….”It was a political calculus. I said, ‘We don’t know how much is enough. We need as much as we can get [from Congress]. What about a trillion?’ ‘No way,’ Hank shook his head. I said, ‘Okay, what about 700 billion?’ We didn’t know if it would work. We had to project confidence, hold up the world. We couldn’t admit how scared we were, or how uncertain." Ah yes, an uncertain and scared then-35 year old bailing out the world... And now, a grizzled and veteran Kashkari, who certainly recalls his wood chopping days with joy at the PIMCO campfires, in which Build America Bond receipts are used for kindling, is encouraging the administration to cut the benefits of the same taxpayers whose money was used to prevent the insolvency of, among others, his current employer? Yes, ladies and gentlemen, we bring you today's unbridled hypocrisy courtesy of the latest and most worthless addition to the Pimco team.

Quite possibly having something to do with the fact that Arnie just had a very vivid Total Recall from the future in which California had filed Chapter 66 (a brand new invention in honor of the famous route), mere months after he had decided to institute the latest round of furloughs and once again paying using IOUs.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 28/07/10

Yesterday we reported that it was recently disclosed that the bleeding Chinese sovereign wealth fund CIC had sold 5.1 million shares in the prior week - speculation was rife that this was merely a rebalancing trade to keep the firm's total holding under 10%. Dow Jones now reports that CIC sold another 4.625 million shares of the bank holdings the fund responsible for the single biggest loss in Wall Street history. After this most recent transaction, CIC now owns 9.5% of the common in Morgan Stanley. It now appears that the selling will continue due to the overhang of several convertible issues which will continue to add to CIC's share ownership, thus placing further downward pressure on the stock over the next several weeks as the size of the sales will be material: "CIC may need to continue selling shares to keep its share of Morgan Stanley less than 10% of the investment bank's shares. That's because the Mitsubishi UFJ preferred shares won't have converted before CIC's units convert, so CIC would technically own a larger percentage of Morgan Stanley's outstanding stock." Of course, this could simply be good old fashioned unwinding. Keep an eye out on the total MS holdings by CIC, and also keep an eye out for when (hopefully sometime over the next decade) the Chinese US Treasury recycling outfit will finally issue its next 13F.

We may have missed the official 8-K, but we are fairly confident that sell orders were made illegal over the past three weeks. That is the only way to explain that out of 30 economic data points in the past month, roughly 3 beat expectations, everything else was a miserable miss, and still the market is 10% higher. Either way, someone is clearly about to be charged with a felony stock selling offense in the first degree, and Eric Holder will personally make sure that vile individual rots in Guantanamo Bay with a daily portion of algorithmic waterboarding for the rest of their miserable lives, for having the temerity to show to others that, yes, even illegal, selling can and will be the right trade in this market which is roughly 70%-100% overvalued. And in other news the 10 Year is back below 3%. Too bad there is no 8 Year point on the curve, or else stocks would be about to reprise the role of Jesus Quintana.

The Senate (Bought By) Banking Committee has spoken (the bribes finally cleared): say hello to your three brand new permadovish Keynesian kritters: Yellen, Raskin and Diamond. All three now have direct access to the Goldman Sachs emergency red telephone, the suitcase carrying the printer launch codes, and a lifetime supply of How to Lie With Impunity and to Fuck With The American People for Dummies. All three will also be shortly sworn to defraud, steal and rob the US middle class blind until the failed economic experiment is over and done with.

Unbelievable ...

Another well timed report from the CBO. This time they crap on those who have been advocating sustaining the Bush tax cuts. Funny thing is, if we do eliminate those tax cuts we are in for a hell of a recession come January. Is that a no win?

Just in case you needed that one final proof that Moody's is finished, here is a report by Moody's head of economic propaganda (at least that is our loose interpretation of the official title "Chief Economist" who also happens to be a permanent fixture on that other permaganda TV channel) Mark Zandi, in collaboration with Princeton's (yes, that Princeton) very own Alan Blinder, have come up with something akin to a research paper (we say akin because it surely lies in some abominable gray area inbetween coherent thought and logical discourse and a Las Vegas Ether-binge straight out of Dr. Gonzo) in which the intellectual titans confirm that not only the Great Recession is over, but here are the precise steps (a, b, c) in which it was defeated and forced to return slouching and grovelling to the vile communist, fascist, what have you, from whence it's sprung, unwept, unhonored and unsung, after president Obama came to the rescue (not to mention, literally, the $20 trillion of new debt in process of being incurred in the next 10 years). And just in case the administration needs an Assistant Head Of Money Printing, once Moody's is liquidated, Mark Zandi would be more than happy to proffer his Keynesian credentials to the administration, even as it itself goes down in flames courtesy of a general public of which 70%+ have said no more stimulus. Feel free to read this or to use it as a TP substitute. We are not sure what any self-respecting administration can do with Messrs. Zandi and Blinder but are open to suggestions.