Archive - Sep 22, 2010

With the euro surging, it was only a matter of time before the rickety house of European cards was put on full display once again. Sure enough, not 24 hours after the EURUSD hit a "German export industry suicidal" 1.34, here comes Germany's FinMin Schaeuble, who has said that if the IMF/EU hope to extend the duration of the European Bail Out Facility beyond 2013, they have another thing coming. As a reminder, Reuters reported a few days ago that "Greece's international lenders assured investors this week that they would not abandon Athens at the end of a 3-year bailout plan if it fulfilled tough reforms but failed to regain market trust." Additionally, Greek newspaper Ta Nea reported over the weekend that EU officials are considering an extension of the aid package for Greece beyond the agreed three years, due to fears that the country’s economy will not have sufficiently recovered by 2013. The reason - in 2013 Greek public debt is expected to hit its peak of 150% of GDP, a level far higher than where it is now. Regardless, it seems that Germany is once again sowing the seeds for the next crisis, as the ECB is unable to go "full retard" with QE.X right now as that would destroy the credibility of recent lies that Europe was doing oh so well (and as we are expecting a tide of European GDP revisions lower, Italy just announced a few hours back that its GDP would not meet a previous target of 1.5% as previously disclosed). In other words, the next step in the devaluation race will be out of Europe, possibly accompanied by the provisional semi-ejection of the PIIGS from the Eurozone just to make the point that not only Bernanke is a middle-class destroyer.

The topic of hyperinflation vs deflation has gotten much prominent attention in the fringe media in recent weeks (and judging by the surge in gold, this attention is shifting to the broader population). Below we provide another perspective on what the phenomenon of "hyperinflation" signifies. The conclusion is not all that surprising to the Zero Hedge community: "As long as our politicians and the federal reserve continue on their quest to debase our currency, the threat of a hyper-depression remains. I personally do not believe this will happen, as there would eventually be enough opposition to quantitative easing to cease it, due to fear that it may result in destroying the savings or our baby boomer population and the financially prudent (the people who are actually important towards having a healthy and sustainable economy). However, we may very well be in a situation where Fed officials don’t realize what they’re doing until it’s too late."

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 22/09/10

"About 11 p.m. customers start to come in and shop, fill their grocery basket with basic items – baby formula, milk, bread, eggs – and continue to shop and mill about the store until midnight when government electronic benefits cards get activated, and then the checkout starts and occurs. And our sales for those first few hours on the first of the month are substantially and significantly higher." Wal-Mart CEO

Today's POMO has come and gone, the Fed has monetized $2 billion of 3 Year bonds, the money has been funded to the PDs who have already executed their daily purchases of SPY, Amazon and Apple. The ratio of Submitted to Accepted bids was a whopping 10x. Most desired CUSIP was 912828NY2. The market can now resume its decline. Move along.

Did you know?

The erosion of the profitability of the U.S. banking industry over the past two years under the glorious Summers-Geithner-Bernanke rescue scheme is the proverbial fly in the ointment for both major political parties. Democrats and republicans alike are going to be fed into the meat grinder over the next several years as the banking sector deals with literally hundreds of billions of dollars in direct and indirect expenses from the deflation of the mortgage bubble. For the economy, this slow process of muddle along championed by Summers and Geithner will ensure that Barack Obama becomes the Herbert Hoover of the Democratic Party. The economic carnage that will causes these losses, as we described in a recent post in Reuters, "Double Dip or Global Deflation?," is going to represent the worst economic contraction since WWI. Forget WWII. Think "shrinkage" to use the Gilded Age description for economic deflation. - Chris Whalen

When a central bank says it is effectively LBOing Keynesianism, you know it is over. Which is precisely what Guido Mantega, Brazil's finance minister has promised to do. The Latin American country which has been caught in the crossfire of developed world central bank wars, in which it is every last man for himself and he who defects first wins, has just stated it is about to defect (and just in case it is unclear, Mantega clarified that "Brazil's would act on the currency, not just a promise"). And to confirm he means business, Mantega also added that the Brazil Central Bank has no limit to buy dollars. But here's the twist - as reported by Bloomberg, Mantega, speaking to reporters in Brasilia, said the Treasury can sell more debt to increase liquidity to buy dollars.  You heard that right: debt-financed currency intervention. At least the trade surplus countries use capital generated from excess exports. Brazil is threatening to do something never before seen, which is to lever up in its FX intervention. Surely, this has to be the last boundary of Keynesian insanity.

Silver is now trading at a 30 year high, is overbought, and bumping up against key technical resistance. Mean reversion can be a bitch. Making 13% in a zero return world. For those who hold physical bars and coins, just keep it locked up and throw away the key. Waiting for $50 an ounce. You can always use your silver dollars to bribe the border guards.

The TRS offers additional answers to the hard questions posed in the media, but are they good answers? I drill in a little deeper, and hope not to piss anybody off. I'm pretty sure I failed.

All those who were observing the pounding in futures overnight, and are stunned once again by how stocks can be higher with horrendous data out of the FHFA on the home price index which plunged to -0.5% on expectations of -0.2% and a prior print of 0.3%, need look no further than the FRBNY, where Brian Sack is warming up the Bloomberg Terminals. Up on deck: anywhere between $3 and $5 billion in repurchases of bonds maturing between 3/15/2013 – 8/31/2014, with the money immediately going to the Primary Dealers, who bid up Amazon, Apple, etc, etc, perpetuating the myth that the American economy is not dead. Expect a run up in stocks into the 11 AM close of today's POMO.

For nearly twenty years, we haven’t flinched from our prediction that the massive debt build-up of the last generation would precipitate out as a deflationary bust. That is what we still expect, although we now believe there is likely to be a hyperinflationary phase at some point as the financial system implodes. But the bottom line is that no matter how things play out, America’s standard of living will fall more steeply than at any other time since the Great Depression.

I’d like to reiterate that the point of these primers is to explain the big-picture factors that have shaped my opinion on the direction of the economy in general, and housing in particular. So far we have seen that deflation and not inflation will be the dominant force over the next several years as we have reached a point of peak credit and peak consumption in the Western world. Beyond that is anyone’s guess, and the inflationists and hyperinflationists may yet be proven right. But it won’t be in the next few years, at least not in Canada. We’ve seen that real estate in Canada absolutely is in bubble territory when the data is considered rationally and compared to widely accepted measures of fundamental value. We’ve seen that the two big drivers of this bubble growth have been mass psychology (how many times have you heard, “real estate only goes up,” despite all the contrary evidence just south of our border) and also by the erroneous and self-defeating policies of CMHC. We’re once again looking at one of the macro factors that will exert significant downward pressure on real estate prices over the next several years: demographics.

Jefferies shares have swooned today as one of the last remaining true broker dealers released Q3 results which missed massively on both the top and the bottom line. And if these are an indication of what most of Wall Street has to look forward to, Q3 will be a bloodbath for banks. As Barron's Tiernan Ray reports, citing CEO Dick Handler (talk about mean parents) that "trading volumes across the board were painfully slow during the months
of June, July and August,” said CEO Richard Handler — quite a contrast
from Q2’s results, when Handler said the firm was “pleased with solid
quarterly results.” Putting this number in context (from the 8-K), Q3 net revenues were $520 million, versus $700 million last year, a whopping 25% decline primarily as a result in the complete collapse in principal trading revenues to $74.3MM from $338,6MM, an 80% decline in this main profit center for Wall Street firms, which have recently all become nothing but glorified hedge funds.

In two recent articles "The Gold Market is not "Fixed", it's Rigged" and “The Failure of the Second London Gold Pool” I showed how the gold trading between the London AM Fix and the PM Fix was unnaturally related in an inverse way to the trading between the PM Fix and the following AM Fix. I calculated that the probability of such a counter-intuitive correlation existing by happenstance was one in 2.6 times ten raised to the power 31. This is almost irrefutable evidence that some one is continually and deliberately dumping gold into the PM Fix to suppress the price of gold. In this article I have unearthed even more forensic evidence in the form of a correlation between the gold and the silver price which again could not happen by random chance. It is necessarily a result of deliberate market intervention and what’s more it occurs on a continuous basis. - Adrian Douglas