Archive - Jan 21, 2011

At midnight I took down the servers for approximately 54 minutes to do some delicate work on the database. If anyone sees any errors over the weekend, I urge you to email me at my username @ zerohedge.org.

In Sweden, pension problems are so 1989...

To be clear, China has proven itself EXTREMELY adept at matters of international finance/ trade. With that in mind, it won’t openly challenge the US regarding monetary policy or diplomatic matters until it holds ALL the trump cards and can openly challenge the US without exposing its economy to a massive downturn (much as it did with Japan during the fishing boat scuffle).

Most folks talk about inflation and think of the images of Weimar Germany where people literally burned money for fuel. They don’t think of starvation and food riots. But that’s exactly what’s occurring in the world right now as a result of Bernanke and his cronies attempts to keep the big banks (all of which are insolvent) in business and cranking out the bonuses.

Random thoughts

The US and China as the two current real world powers, have a push and shove relationship. This does not mean that it is directly combative, but it does mean that these two nations are bumping into each other, on all of the world’s stages, especially of late.

After in the past week, the blogosphere had been hobbled by one after another mindless oped claiming that the US can easily avoid default by just paying the interest on its obligations, and thus does not have to worry about the debt ceiling, we decided to put some sense to this debate when we pointed out that the "US Debt-to-Deficit Difference Hits Fresh Record, As Treasury Continues To Issue 50% More Debt Than Needed To Fund Deficit" meaning that i) it is not a debt ceiling, it is a debt target (© Lizzie363), and ii) the hundreds of billions of monthly obligations that are funded through debt, are "legal" obligations of the US government that have to be paid in full every month or a default will occur regardless. Neal Wolin, Deputy Secretary of the Treasury, has just released a statement on the Treasury's blog saying pretty much just that. Which, however is certainly not a good thing, as it merely confirms just how totally screwed this country is, and that absent a hike in the ceiling to $15.5 trillion (which we believe is where the debt ceiling will be through March of 2012 when it will be raised to $17 trillion), the dollar will be backed by several trillion in insolvent Federal Reserve Notes, er, assets (that should quickly end all debate about EUR-USD parity). It also confirms that Bernanke has no choice but to continue monetizing debt, through QE and to do that, he needs to make it palatable to the general public, which in turn will mean either a material economic deterioration, or, as the two are apparently identical in the Chairbeast's mind, the Russell 2000.

Lately the biggest action in stocks is coming not out of the US, where the 4 month old melt up is on its last fumes, but out of China, where the marginal liquidity has now dried up, leading to such explosions of concern as 7 day SHIBOR going asymptotic (a topic discussed earlier). Some readers have expressed a concern as to just how credible RRR and interest rate hike actions are as relating to the performance of the Chinese stock market. Well, a look at the recent action in the SHCOMP for one should serve as a good basis for a starting opinion. A far better one, and stretching back a decade, was recently conducted by Nomura, which presents the following must see chart which shows how toothless the PBoC is when it has to deal with already latent massive liquidity excess. Specifically, during the 2006-2007 bull market, the PBOC had to hike interest rates 7 times in a row, and increase the RRR over 10 times before the market topped out in late 2007. Which begs the question: just how impotent is the PBoC in sequestering excess liquidity (remember: Bernanke can do it in 15 minutes), and are its tangential actions of boosting liquidity far more relevant when it comes to the MSCI China Index? Last but not least, the PBoC can merely control domestic liquidity directly: it is well known that foreign inflows into China refuse to abate. It is precisely this that the Chinese central bank should be (and probably is) dead set on intercepting if it wants to prevent food price riots (recall our prediction for a rice bubble).

With Goldman's economic team having been subsumed by the Koolaid borg, lately we have been largely ignoring their once must read critical pieces, as the all out onslaught to prevent the ponzi collapse was started in November (we expect Hatzius to pull another 180 in April, just ahead of the May market crash which will lead right into QE 2+, but that is another story). This is a shame, because the team of Hatzius et al used to have insightful things to say. Alas, now all they do is cheerlead every single data point no matter how superficial or ugly the behind the headlines story is. Which is why we were pleasantly surprised to read the following research report by Goldman's Robin Brooks which discussed the consequence of the now seemingly inevitable tax holiday allowing multinationals to repatriate their cash without paying taxes. Following Obama's latest Wall Street corporatocratic hiring spree, we are now convinced that it is merely a matter of months if not weeks before this is announced. As such it will be a replay of the Homeland Investment Act of 2005. Oddly, this event has not be actively priced by the market. Goldman is correct that in all likelihood this will have a very dollar positive result, which likely explains precisely why the dollar has been allowed to drop so much against the euro, as the next leg will likely push the greenback well into the 1.20 range, if not lower. That this will happen just as the second round of European stress tests will only feed the flames of the EUR's collapse. The below piece examines Goldman's thinking of how this event will influence the EURUSD. Goldman, which is very client bullish on the EURUSD (and is therefore selling selling EURs in droves) states that it believes the likelihood of a HIA part 2 is very small, even as it frames the major strength the dollar would experience as a result. We agree with the latter and disagree with the former: one way or another, the Obama administration will need to get the $1+ trillion currently offshore. When that happens, watch as the EURUSD plunges to multi-year lows.

The markets are already pricing in the near certainty of a quarter-point rise from the Bank of England by May with another increase expected before October. But perhaps not wanting to be left out, the zealous guardians of Europe’s monetary system, who measure inflation rates across the 17-country bloc to the second decimal point, have recently raised their rhetoric to such an extent that investors are openly speculating that in spite of the continent’s tight fiscal policy European rates are now likely to rise before the end of summer. As they say in the land of macro investing, the cycle isn’t over until the Europeans lift rates. Just don’t bet on money staying tight for long. - Hugh Hendry

Abigail Doolittle of Peak Theories shares her latest technical observations on the EURUSD. Coming at a convenient timing, following after the CFTC COT data, her outlook is diametrically opposite from that of Goldman whose LT and tactical targets are 1.55 and 1.37 respecitvely. Specifically, "I think we could see the euro hit about $1.225 between now and the end of the second quarter of this year while the dollar index may crest to between 86 and 88 in the same time period." The charts attached explain her reasoning.

Last Friday, following the disclosure that net commercial EUR short positions has surged to -45,182, nearly a double from the -24,201 the week before, we expected a massive short covering squeeze, which would bring the EURUSD far higher. Today, the CFTC released its weekly update of non-commercial futures exposure. As expected, the covering rally was fierce and intense, and is likely still ongoing: net non-speculative long positions surged by 49,291, in line with the highest one week move in recent years, the biggest of which was recorded in June 2010 when net shorts collapsed by 49,585. The net result pushed net spec positions from -45,182 to 4,109, and resulted in a move in the EURUSD from 1.33 last Friday to 1.3621 at last check. We believe the short covering rally is now over. This is further corroborated by the drop in USD longs in the past week from 10,057 to 5,210. Other currencies were not surprisingly quiet in the past week, with little notable action in either CHF, GBP or JPY net spec exposure.

Thousands upon thousands of hedge fund managers starting the New Year with eyeballs glued to the screen, watching and waiting for a market turn. Most have made New Year's resolutions to "Make Their Year" in 2011 by catching every single turn or wiggle in the tape.

So the key question is: Has the market topped and should many of these guys go ahead and pile on shorts?

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 21/01/11

A few days ago, in "Hands down, the cheapest place in the world to buy gold coins" we presented Simon Black's thoughts on an interesting physical gold arbitrage (buy cheap physical in Hong Kong, sell it where it is expensive) which created quite a stir. Today, the "Sovereign Man" provides some additional information, and answers some of the most frequent questions he received in response to his article, with a particular focus on the question of whether taking gold out of Hong Kong or bringing it into the US is considered smuggling. The answers may surprise you...