Archive - Jan 19, 2011

Headlines from Sky News for now. Swiss police arrest ex-banker Rudolf Elmer on new charges relating to handover of bank client data to WikiLeaks. Just justice being served.

Sorry but this is really worth a post. The last time the market actually dipped more than 0.001% was on November 26, as such this is a historic event (in a country whose attention span is +/- about 15 minutes). The Russell 2000, which his Chairness indicated is the only metric tracked by the Fed's third mandate, is down. And since the Fed controls (insert best Tepper voice) everything, this can only indicate that the Bernank is finally starting to get concerned about those food riots he has been reading all about in assorted fringe blogs.

Since by now it is all too clear that none of the rating agencies will dare to downgrade the US until well after its creditors realize they have all been taken for the proverbial ride, and even longer after the Fed owns a vast majority of US treasury bonds, which according to CNBC is great, but according to Weimar Germany is sucky to quite sucky, one is forced to pay attention to the fine print and carefully worded nuances in all public statements to see just how they really feel. Today provided just such an opportunity. According to Market News, "Fitch Ratings Wednesday said it believes “the U.S. fiscal metrics will be the worst of any ‘AAA’-rated sovereign,” due to the higher-than-expected deficits and debt levels expected following the extension of the Bush era tax cuts." That's about as diplomatic as it gets without getting (nearly) fired for telling the truth (see NJ governor Christie). The punchline: "Absent a credible plan, the rating on the U.S. federal government will come under pressure." Too bad the US has not had a credible plan for about 30 years now aside from "...print?"

Austerity has arrived in America. At this point, it is not a formal, mandated austerity like we have seen in Europe, but the results are just the same.

The higher the market goes without a correction, the more nervous we get that the correction will come.

A few months after David Tepper told everyone that "everything" is going up as a result of the second round of monetary insanity (with the resulting surge in stocks affording him good exit points to dump 20% of his financial investments), the Appaloosa stallion is coming back this Friday, presumably for much more of the same, which likely means he has decided to offload his complete fin holding. As a reminder, as we disclosed in November, Tepper "sold 18% of his BofA holdings (his largest holding both at June 30 and September 30), 11% of Citi, 19% of Wells Fargo, 19% of Fifth Third, 19% of Capital One, 75% of his then $157 million Hartford Financial position, and lighten up on pretty much all of his other financial positions." That said, we still have to see his holdings for Q4, which will be available by February 15, when we are certain to find much more asset dispositions. The balance of his holdings will likely be liquidated following this most recent appearance.

• *DJ ECB's Stark: "The Casino Is Still Open" - this comes from one of Europe's top central bankers!
• *DJ ECB's Stark: "No Sign Of Necessary Change In Banker Mentality" - that's becasue we are aiding and abetting
• *DJ ECB's Stark: "Inflation in emerging markets is a serious problem" - Bernanke has it 100% under control
• *DJ ECB's Stark: "increase in Euro region inflation due to energy prices"
• *DJ ECB's Stark: "ECB's inflation assessment has not changed in mid term" - But naturally
• *DJ ECB's Stark: "Is very vigilant on possible inflation risks" - so was Tunisian president Ben Ali
• *DJ ECB's Stark: "Global economy and Euro region recovered faster than thought"
• *DJ ECB's Stark: "US, UK Deficits Worse Than Euro Zone's" - Don't tell Tiny Timmah
• *DJ ECB's Stark: "Greece, Ireland Need U-Turn In Economic Policy"

Read between the lines and you will see the "R" word (restructuring), clearly and plainly.

A brand new study released by the World Economic Forum (WEF) in collaboration with McKinsey (which is a must read if only for its plethora of charts which we are certain will be used and reused in thousands of posts and articles over the next year), finds that while global credit stock doubled from $57 trillion to $109 trillion in just 10 years (from 2000 to 2010), it will need to double again to an incredible $210 trillion by 2020 in order to provide the necessary credit-driven growth (in a recursive way, whereby credit feeds growth, and growth requires additional credit issuance) for world GDP to retain its current growth rate. And while the goal seeked conclusion is obviously nothing but propaganda for the banking syndicate meant to facilitate the need for endless credit issuance spin (after all how on earth can world GDP growth occur based on something productive like manufacturing when there is only $100 trillion of free cash chasing worthless and rapidly amortizing assets), the study did warn (timidly) that leaders must be wary of new credit "hotspots" of excess lending, as the world emerges from a financial
catastrophe blamed in large part "to the failure of the financial
system to detect and constrain" these areas of unsustainable debt. In other words: credit doubling blew up the world financial system, but if you promise to behave this time, go ahead and double the world debt again.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 19/01/11

My entire focus right now is on the commodity complex. The reason why is simply because I believe the post-dotcom economy is completely unsustainable, and this is not only starting to be very much apparent to the general public but also fiscally very expensive to maintain. However, governments are inventing all sorts of accounting trickery, legal vehicles, and running the printing presses overtime in order to preserve the status quo. Maintaining this situation, which is quite the opposite of an equilibrium (consumers don't produce, structural deficits, unfunded liabilities, pegged currencies preventing the markets to rebalance trade etc...), will lead to bubbles and complete mispricing of financial assets. Only when financial markets are taken to extremes that provoke public anger turning into violence will politicians be forced to actually think of the structural issues without having the luxury of hoping that the next one in the seat will be the one facing the task. If bonds sell-off riskier assets will be repriced lowed to reflect higher rates in turn provoking greater demand for bonds. So the most likely culprit for the end game will be commodity prices since nobody will ever complain if stocks rise 400% (a 10% drop is a national emergency). Only when commodity prices are high enough that they put the entire system at risk will we be forced to let nature take its course, companies and governments default, and experience the deflationary shock that we cannot ultimately avoid. This reflection became much more concrete than theoretical when I watched on the news cops dressed as civilians being lynched by the Tunisian mob over the weekend. - Nic Lenoir

Social Security is unraveling, and aligning its outlays to its income requires a new understanding of tough truths. There is no mystery why the system's revenues are collapsing: 9 million jobs have vanished, and millions more have slipped from full-time to part-time or temporary. The Social Security payroll tax (including the Medicare sliver) is 15.3% of payroll. So as total payroll plummets, so does Social Security's revenue. Meanwhile, an aging populace is flooding into the system at an unprecedented rate. As noted yesterday, millions of financially crimped Boomers are applying for Social Security benefits the moment they qualify at 62 years of age rather than wait another 5 years for their full benefits. Many can't afford the luxury of waiting 5 years, while others anticipate the system's insolvency and are prudently extracting something before it runs aground.

Read this, take a deep breath, read it again....then feel free to start ranting...

Ok this is it. Someone (preferably of the less than multi-millionaire Wall Street marionette variety) in Congress has to look into the blatant bond churn-cum-flip (that was happening behind the scenes a few months ago and is now so blatantly in your face it is a slap to all US taxpayers) which has the Fed paying Primary Dealers billions in commissions for a trade that has absolutely no value added. And while we have been complaining about this for months, today just takes the cake. Below we present the entire list of permitted issues to be monetized by Frosty-Sack. Note that there were 29 CUSIP eligible for buybacks. What happened - the Primary Dealers flipped virtually the entire operation in the form of the just auctioned off 3 Year PQ7! This is half the entire Primary Dealer allocation in the bond auction that was completed on January 11 (whose technical original issue date was yesterday). One more 3 Year POMO, the next of which is on January 31, in which PDs flip a like amount, and the Fed will have monetized the entire auction, but in the process having paid at least a few hundred million of taxpayer capital to the PDs for absolutely no value added! This is a daylight robbery and has to stop.

In silver, the contango was hit hard about 3 AM this morning with 2 year futures coming in as much as 15 cents relative to spot. The Z11/Z12 futures spread settled 21.40 yesterday and the market today is 13/15. The H/Z futures spread settled 19.2 The market today is 9/11. What could cause this? Factually speaking, 2 reasons cause contango to collapse. The first is interest rates and interest rates would have to decrease a large amount for this type of move in the spreads. The second is delivery concerns. When a producer, bullion dealer, or speculator is short the front month, come expiration, it has a a choice: make delivery or don’t make delivery.