Archive - Sep 2010

The only significance in the FOMC report for September is that there is no change and they are still clueless and scared. They do see a glass half empty. Here's a brief report.

Tony Boeckh has issued his most recent investment letter, which, at 15 pages, discusses an outlook that can be summarized best as "we really have no clue what will happen" and may have been about 14.5 pages too long. On the other hand, with everyone having surefire money making schemes up their sleeve, and peddling a guaranteed economic outcome, perhaps some outlook humility is precisely what is needed. "Some believe the bull market in gold has just begun. Others believe we are headed for a deflationary depression in which high quality bonds would continue to thrive. Another view is that we are heading into high inflation and a dollar collapse. Yet others believe there will be a return to the good old days of stability and growth. In the time frame of most investors, we are in none of those camps. With bonds significantly overvalued, investors hardly have an edge in that area, except perhaps to go short. High yield bonds are fair value but the weak economic picture suggests growing risk for those companies with poor balance sheets and poor cash flow prospects. Gold as insurance at 5-10% of the portfolio makes sense but only for the long run and only if volatility can be ignored." All in all, some good observations.

If you think algos gone wild in stocks is bad, just wait until you see what happens when the same feedback-loop generating robots start frontrunning and churning all cotton, sugar, and other commodity contracts. According to this trader, this has already happened. Next up: plunging liquidity, and surging volatility, just in time for commodity prices to find that extra computerized "oomph" as they explode in expectation of Bernanke's reflation experiment gone wild to blow all fair value concepts to smithereens.

Some disturbingly insightful observations from UBS Macro Sales' John Clemmow: "Risk On - Risk Off is caused by the Chinese government alternatively pressing the accelerator before slamming on the brake of the only part of the economy they can directly control. Fear of unemployment cause the government to step on the gas - dread of cost-push inflation the need to apply the break."

Regardless, the primary point is that the US credit bubble has not deleveraged in any meaningful way. The system remains debt saturated to the gills on a personal, corporate, state, and Federal level.

In plain terms, the entire US system is one giant debt bubble. And there are only three ways to deal with a debt problem:

1) Pay it back
2) Default/ restructure
3) Hyper-inflate it away

The US has no chance of #1, which leaves either #2 or #3. Both involve the Dollar taking a sizable hit, which might explain why Gold has begun breaking out while Treasuries are dipping.

For the last two years internet veteran James Barksdale has been working in secrecy, digging a gopher hole from Chicago to New York, and setting up the fastest trading system ever built. Spread Networks’ one inch thick fiber optic cable can execute orders between Chicago and New York in 13.33 milliseconds. It is today’s ultimate trading weapon.

The oil complex was under selling pressure from the start yesterday, dropping in trading overnight and early Tuesday morning despite stronger equities prices in Asia. Asian investors were following the DJIA’s lead from Monday, and they were higher Monday night and then again Tuesday morning. The euro, which was stronger overnight and through the morning, was not able to help, and this placed additional distance between the euro and oil prices, which have been separating from each other over the last two weeks or so. While it is not certain that the two markets will go their separate ways, it is starting to look more and more likely. Yesterday placed another wedge in the separation process. And, when equities turned lower, oil prices really started to unravel. - Cameron Hanover

The recent intervention by the BOJ has quickly become the most contentious decision in global economic circles, with many wondering now that the world economy is off on a course of radical currency devaluation, who will be next, and how far will this game continue? If Albert Edwards, whose latest piece rhetorically asks (and answers) "what do devaluation, high unemployment, inequality and food prices spell? C-H-A-O-S" is correct, this could be the beginning of a rapid descent in which central banks around the world are all forced to use the nuclear option: ceaseless FX devaluation, but one coupled with an endless increase in the money supply a process which can only have one outcome - that predicted recently by Eric Sprott when he said that "we are now paying for the funeral of Keynesian theory." However, the biggest threat is that this most recent invocation of the nuclear option is coming at a time when the world is least prepared to handle it - social imbalances are at unprecedented levels, and if, as many predict, the price of key food products is about to surge (courtesy precisely of these failed central bank policies) to a point where the great unwashed end up on the wrong side of hungry, from there, to armed conflict, the line is very, very thin.

Two warships of the People’s Republic of China (PRC) People’s Liberation Army-Navy (PLAN) docked at a port in Myanmar on August 29, 2010, in the first publicized PLAN ship visit — but not the first actual PLAN visit — to Myanmar. It was a move designed to help pre-position the PRC in its relations with Myanmar in the lead up to that country’s upcoming national elections. The move also ended two decades of discreet PRC approaches to its naval presence in the Indian Ocean. It also follows the open PLAN task force presence in anti-piracy operations off the Horn of Africa, and the now open commitment to use of the Pakistani Baluchistan port of Gwadar, at the entrance to the Persian Gulf.

Some funny quotes in the latest weekly ABC Consumer Comfort Index poll, which incidentally dropped from -43 to -46, just inches away from the 2010 lows, but more importantly, just inches away from the lows seen throughout the entire depression, as consumer sentiment has gone nowhere fast in the past two years: "Recession Ends, Nobody Notices." Indeed, as the chart below shows, ABC's weekly poll of about 1,000 random people shows nothing at all good for the economy, which, oh yes, is now out of the recession, but not the depression. And for technicians out there, the reading of 46 dropped just below the 52 week average of -45.98. Joking aside, the report found that: "This week 89 percent of Americans rate the economy
negatively, 75 percent say it’s a bad time to spend money and 55 percent
rate their own finances negatively." Surely these are the Green shoots that forced Larry Summers to realize that destroying the Harvard endowment is a far less dangerous job than continuing to bring ruin and pestilence to all of America.

Jan Hatzius was spot on in his menu selection for the Fed's a la carte menu. What comes next? "We continue to expect that a sizable asset purchase program will be implemented in coming months." Most likely date: November 3, smack in the middle of the midterm elections. Alas, it will thus be either a case of sell on the news, or outright selling into the event. The one asset likely to benefit the most from ongoing dollar devaluation, is likely the same as the one that benefitted the most today: precious metals and other commodities.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 21/09/10

Ave Shalom, those who are above to create their own gold standard, spit in the face of central bankers worldwide, burn linen "money" and laugh all the way to the post US-restructuring bank salute you. Everyone else - there is QE 3 through 3 trillion. Stocks end the day at the lows when priced in the one true currency.

And then there was one, even if it was a TurboTax One. Bloomberg headlines flashing that Larry Summers is dunzo in November. He follows such other economic failures as Romer and Orszag, both of whom left the economy in a far more horrendous state than they found it. We wish godspeed to Larry, and hope he managed to get thick windows in the limo that will take him to his next private sector job, presumably somewhere above the 40th floor in 200 West.

Cassandra has become the archetype for many prophetic characters who are either ignored or cannot be comprehended until after an event has occurred. Our catastrophic failure to heed caution has much to do with our preference to look at the surface rather than what underlies appearances. Sometimes illusions are far more comfortable than reality. That may explain the unchecked investor optimism and the market’s deluded state of mind. Make no mistake - the current rally is a myth. From the standpoint of the Greek philosopher Solon: ‘Observing the numerous misfortunes that attend all conditions forbids us to grow insolent upon our present enjoyments. For the uncertain future has yet to come, with every possible variety of fortune.