Archive - Jul 5, 2010

Why the G20 meets I don't know. They say lofty things, make empty promises, and go home and do what they were going to do anyway. But wait. There seems to be a huge rift between the U.S. and Europe and I'm not talking about the Atlantic ocean. Merkel vs. Obama. Deficit Reduction vs. Spend. What is happening? Is fiscal sanity breaking out in Europe?

There is no doubt momentum is fading, and that there is a downshift in private sector hiring underway. The BP oil spill is having an immeasurable effect, as thousands of oil workers, fishermen, and tourist industry staff were sent to the dole queue. A drop to a 9.5% unemployment rate was only achieved because 650,000 workers abandoned the labor force. At the current rate, it will take six years to recover the 8 million jobs that vanished during the Great Recession.

Tomorrow morning Bloomberg TV conducted an interview with Ken Rogoff in Hong Kong (the same way you land in New York before you take off in London via the now defunct Concorde) in which the Harvard professor recently made famous for his words of caution that overlevering sovereigns always eventually leads to economic slow down, financial collapse, and ultimately bankruptcy, warned, when discussing China real estate, that "you’re starting to see that collapse in property and it’s
going to hit the banking system." With this coming days ahead of the massive Agri Bank of China IPO, it is interesting just how much influence the person who has been warning all along that the world is headed on an unsustainable path will finally have, now that the permabullish cackle of the MSM punditry has finally been discredited as futures are about to reenter triple digit reality. Oh yes, and score one for Jim Chanos, and all those who have long been warning about the inevitable Chinese bubble pop. Additionally, in discussing the suddenly prevalent topic of perpetual
stimulus, and particularly envisioning Paul Krugman's thesis that the
world will end unless another couple of trillion are thrown into the
fire of irresponsible deficit spending, Rogoff says "I couldn't disagree more... Just to keep drinking bottles of aspirin because you are worried you are going to get a headache, or it is going to turn into a migraine, it's too much prophylaxis."

One of last year's key pieces of financial reporting was Jon Hilsenrath's disclosure that then-Goldman Sachs and FRBNY director Stephen Friedman was in possession of Goldman Sachs shares while holding inside information that the Fed was willing to bailout Goldman et al forever and ever, even as a waiver to allow Friedman to buy was still in process with no formal outcome, and the Goldman/FRBNY director was loading up on even more shares. As the WSJ's Hilsenrath and Kate Kelly reported, "while it was weighing the request, Mr. Friedman bought 37,300 more
Goldman shares in December. They’ve since risen $1.7 million in value." Not a shabby profit for someone who knew the system would never put him at risk of having to disgorge ill-obtained profits while in a position so conflicted, even a Chrysler-addled supreme court justice would have no problem figuring out just how blatant the systemic abuse was. Sure enough, the reporting was of sufficiently high caliber that it garnered a finalist place in this year's Gerald Loeb Awards (and seeing how ARS' "Too Big To Fail" chronology-of-events-from-the-perspective-of-Wall Street won a Loeb, it tells all you all you need to know about this particular award, and we'll leave it at that). Yet going through some of the recently made public e-mails produced on behalf of Stephen Friedman, we had a few questions as to the full independence of the WSJ when it comes to "editorial" suggestions from the Federal Reserve Board Of New York. As the below email from Fed EVP of the Communications Group, ala media liaison, Calvin Mitchell to the WSJ's Kate Kelly demonstrates, and as the final product confirms, the Fed was quite instrumental in what quotes, tangents, implications, and story lines the WSJ was allowed and not allowed to use and pursue in framing the problem of not only Friedman's conflict of interest, but that of the FRBNY board of directors itself. And seeing how Kelly and Hilsenrath caved in to every FRBNY editorial demand, one wonders just what the (s)quid-pro-quo for this particular form of alleged media capture may have been.

An American geologist-- Xue Feng--was sentenced to eight years in prison for gathering data on China's oil industry.

According to the NHC, a weather formation, centered about 50 miles south-southeast of Morgan City, Louisiana, is packing sustained winds near tropical storm force. As the map below indicates, this is above the Macondo blowout. According to Reuters, "there was a "high chance" it will become the second named storm of the 2010 Atlantic hurricane season before it makes landfall in the Terrebonne Parish area near Caillou Bay early Monday evening, the Miami-based hurricane center said." Tomorrow, the news of yet another 60% probability cyclone ramming the cleanup effort will be digested alongside the WSJ report that Libya is allegedly looking to make a staple British company part-owned by the Khadafi regime. And just in case one was not enough, it appears a second Hurricane is forming further south: "Forecasters at the hurricane center were also keeping close watch over an area of disturbed weather in the southeastern Gulf that could strengthen into a tropical depression later this week, potentially hampering oil spill clean-up efforts."

The world’s largest oil skimmer vessel arrived in the Gulf and has docked in Louisiana since June 30 awaiting U.S. official review and approval.
In addition to EPA's blessing, the Taiwanese-flagged vessel could have another hurdle. It may need a waiver of the Jones Act from the Administration.

This history of the Macondo well blowout has been assembled using information from the Oil & Gas Journal and the Houston Chronicle, two of the more reliable sources of information on the oil and gas industry. The information released to the public on the cause of the blowout has been insufficient. BP is unwilling to release information due to the liability issues. The federal government has much information that it is not releasing. I have assembled as much reliable information as I could and tried to make a reasonable guess as to the cause of the blowout. My opinion on the cause differs from the views of the popular press.

"We saw in 2008/09 that the endowment approach is not immune to downturns, but these are some of the smartest minds in the investment industry and the high value of their investment proposition is obvious over the long term."

My recent article, "Inflation, Deflation, or Hyperinflation?" apparently missed another weapon in the Fed's arsenal for creating quantitative easing. And it's rather ingenious.

Even with Spain's Cajas, or savings banks, completing the country's most aggressive sector restructuring in history, after nearly 90%, or 39 out of 45 merged or participated in some form of "cold fusion" and benefiting from the financial assistance of the Spanish central bank, there has been precious little written about the actual holdings of this most aggressive lender of mortgage to Spain's 20% unemployed population. Until today: a new report by CreditSights' David Watts indicates that investor worries about the Spanish banking system are very well founded and likely underestimate just how bad the true situation actually is. In "Spanish RMBS: Insider Caja Loan Books", Watts concludes that the Cajas are likely hiding losses on home loans by taking
non-performing mortgages out of securitized pools. Absent this unsymmetrical onboarding of risk, the overall deterioration of the broader pool would have become ineligible as collateral in ECB refi operations. In essence, Watts says, "by buying the loans out of the mortgage pool, the cajas would be taking those weaker loans onto their own books." This implies that the 3.7% serious delinquency rate reported by the cajas is in reality far higher, and likely "underestimates their potential losses." And what's worst: as ever more delinquencies mount courtesy of austerity, and the Cajas run out of cash to constantly buy up the weakest performing loans, all of Spain is about to lose ECB collateral access to its hundreds of billions in securitized RMBS, completely locking the country out of any access to liquidity, even that of the ultimate backstop, the European Central Bank.

Should we be tightening our seat belts?

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 05/07/10

Internecine civil wars are underway almost everywhere within the West, and most virulently in the United States of America. They are not yet kinetic wars, but wars of grinding prepositioning, the kind which lead to foregone conclusions without a shot being fired. They are wars of survival, nonetheless, because the basic architecture for national strength is being altered incrementally or dramatically. And, in many cases, consciously.

Almost all of the strategic restructuring of states is occurring in large part as a result of an accumulation of wealth; an accumulation and value of which is seen as permanent. This has resulted in the hubris — expressed by those who did not earn it — of triumph in the Cold War. This is a Western phenomenon because the widespread growth of wealth, the creation of freedoms classically associated with democracy, resulted — as it must inevitably result — in complacencies which in turn led to a “vote too far”: the extension of the democratic franchise to those who do not help in the creation of wealth.

Once the voting franchise of the West reached the point where those who sought benefits outweighed those who created benefits, the tipping point was reached. The situation of de facto “class warfare” thus emerges automatically under such circumstances, and the envy of those who take against those who provide erupts into “rights” and “entitlement”. By deifying “democracy” above justice, the enfranchised non-producers could always outvote the producers. We are at this point. The result can only be collapse, or restructuring around a Cæsar or a Bonaparte until, eventually, a productive hierarchy reappears, usually after considerable pain.

Last week, the ECB had a failed QE "sterilization" operation, when it was unable to cover the full €55 billion in previously purchased government debt via a Fixed Term Deposit operation, better known as a liquidity reacharound. That particular auction, which occurs every Tuesday, generated only €31.9 billion in bid side interest, or 0.6x BTC. The failure was largely attributed to the massive LTRO maturity the next day. Which is why everyone will be closely following tomorrow's most recent FTD operation. Even more so, since as the ECB just announced, in the prior weak the central bank bought an additional €4 billion in sovereign bonds as part of the Securities Markets Programme which is now at €59 billion. As the chart below shows, this indicates a steady buying interest of €4 billion per week for each of the past 4 weeks. On the other hand, as we have been expecting for a long time, with total bidding interest declining, while the total FTD amount rising each weak, the likelihood of ongoing failed auctions, and continued loss in European liquidity conference keeps going higher.