Archive - Jan 2011

You won't see these images on the TV. After all we haven't even anniversaried Waddell & Reed's sudden and dramatic selling of ES into a bidless market that caused the world's most "liquid" stock market to lose 1,000 points. In the meantime, what is going on in Egypt is promptly deteriorating. Our only question is: who's next?

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 26/01/11

By now everyone is aware that following tremendous pressure by the banker lobby, which knows too well the Ponzi jig will be immediately up if Quantitative Easing's TBTF Madoffs are forced to disclose the true value of their worthless assets (yes, true value comes from asset cash flow generation, not from diluting money), the FASB decided to stop its push for a return to MTM. From the WSJ: "Accounting rule makers, bowing to an intense lobbying campaign, took a key step Tuesday to reverse a controversial proposal that would have required banks to use market prices rather than cost in order to value the loans they hold on their balance sheets." Transparency? What moron would propose that in an economy that is so obviously healthy and surging. After all, the only way to validate a surging stock market, er, economic recovery, is through bullshit numbers pulled out of the ass. That way they can pretend to tell us the truth, we can pretend to believe them, and everyone will frontrun the Fed who pretends not to be buying stocks. And it would have been great if it ended there. Alas no. Following the announcement, none other than Bill Isaac, current Chairman of LECG, but far more importantly, former Chairman of the FDIC under Ronald Reagan decided to send out a gloating email to his entire address book explaining what a moral victory it is to kill the MTM monster that is the sole reason for the near collapse of capitalism in 2008, and how truly wonderful it is for everyone to live in perpetual lack of knowledge of what the true value of any company's assets really is. Unfortunately, this just goes to show what the existing, extremely bribed, leaders of the nation's most vital organizations really think.

Odds and ends.

First, Wal Mart's primary gimmick for masking inflation was confined to using smaller packages sold at the same price. Now, it has devolved to outright fraud and misrepresentation. Top global discount stores Wal-Mart and Carrefour have both been fined in China for "misleading pricing at some of their stores in the nation, as the government works to rein in rising prices for consumer goods." Presumably outright lies (and being caught) are the last bastion before even such ultra low price point retailers are finally forced to hike their prices. Bloomberg explains further: "Authorities in cities including Shanghai, Chongqing, and Kunming discovered incidents at local Wal-Mart and Carrefour outlets that included labeling on products with prices that didn’t match what shoppers were charged at payment, exaggeration of discounts and labeling that led to confusion about how much a product cost. The stores may be fined five times the revenue they earned using such methods, the National Development and Reform Commission said today on its website." Our only advice on this news: get a channel checker for rice prices in China...

The SIGTARP, Neil Barofsky, is currently testifying at the House Oversight and Government Reform Committee. Amusingly, during the Q&A, Carolyn Maloney just referenced the passage of Dow 12,000, which is supposed to indicate that the economy is healthy, instead of indicating (correctly) that every single asset class is now bid up by the Fed, but who cares about details. But anyway, Neil has nothing good to say about the Treasury and its handling of Bailouts, as well as its cause for the Foreclosure crisis. Worth a watch.

No surprise: the projected deficit just went up by another half a trillion: "For 2011, the Congressional Budget Office (CBO) projects that if current laws remain unchanged, the federal budget will show a deficit of close to $1.5 trillion, or 9.8 percent of GDP." This is up from $1.07 trillion: a very small margin of error there. But don't worry - like true Keynesians the CBO expects that future deficits will have no choice but to go down: "The deficits in CBO's baseline projections drop markedly over the next few years as a share of output and average 3.1 percent of GDP from 2014 to 2021. Those projections, however, are based on the assumption that tax and spending policies unfold as specified in current law. Consequently, they understate the budget deficits that would occur if many policies currently in place were continued, rather than allowed to expire as scheduled under current law." So between 2010's $1.3 trillion, 2011 $1.5 trillion, and 2012's revised $1.1 trillion, we have $3.9 trillion just in deficit costs to plug. And as Zero Hedge has repeatedly demonstrated the actual debt to be issued is usually about 33% higher than the deficit funding need, meaning that over the next 3 years the US will need to issue about $5 trillion in debt. Which means further debt monetization is guaranteed as foreign investors have now fully withdrawn and the Fed is all alone in gobbling up every dollar in gross issuance. QE3 is guaranteed and we are stunned that the market continues not to realize this.

Nic Lenoir throws down the gauntlet and takes on Goldman Sachs directly following their recent upgrade of the EURUSD target to 1.40: "Not that many layups or exciting trades in the G10 out there with equities in a slow melt up and the long end in Fixed Income stuck in a range for the last month. If you missed out on the sell-off in metals or did not have the UK GDP data ahead of the market don't despair just yet, we have a very interesting set-up to sell EURUSD here...We stand below the 61.8% of the sell-off since the November highs, the hourly divergence is staggering also. I strongly favor shorts here. Less convinced traders traders can wait for the break of the trend support which comes around 1.3640. Given the recent advance I think we should see a retracement back to at least 1.34 even if we are to utlimately advance further. I am bearish EUR as I don't believe this currency has a place in this world anymore, but even raging bulls should be cautious here."

PIMCO's Tony Crescenzi is out with his latest summary of US monetary conditions. Nothing revolutionary, just a good solid theoretical summary of what to look for in anticipation of the "massive monetary madness" turn. Crescenzi likens the trillion in excess reserves to a "Yucca Mountain" of toxic, hyperinflationary "nuclear waste" storage, and suggests the following approach for tracking the inflection point: "when banks begin to utilize their excess reserves to make new loans and create new money rather than store the reserves in “Yucca Mountain,” the case will then grow for the Fed to begin removing the reserves. This has not happened yet, but when the process begins it will be evident from the Fed’s weekly H.8 report on the assets and liabilities of commercial banks." None of this is new for Fed watchers. As usual what we enjoy the most are the historical anecdotes of hyperinflation, the same way in ten years, historians will put America in the same case study: "History is laden with failed attempts at creating new money to shed debt. Greek tyrant Dionysius of Syracuse, now Sicily, at around 400 B.C. resorted to coinage debasement when his fortunes declined. Germany, of course, debased its currency before World War II, leading to hyperinflation. More recently, Zimbabwe printed massive amounts of currency, also leading to hyperinflation – I purchased trillions of Zimbabwe dollars on eBay for a few U.S. dollars! Such are the ravages of excessive use of the printing press." Certainly worth the read.

Following the now extremely well documented surge in short-term SHIBOR and Chinese repo rates, it appears that banks have begun attempting to extract the missing liquidity from end consumers. Various Chinese commercial banks raised lending rates between 10 and 45% over the benchmark rate because of a shortage of
funds, the China Securities Journal reported today, citing an
unidentified bank official. In the meantime, SHIBOR refuses to pull back, hitting an unsustainable 8.05%, which is worse than Portuguese 10 year rates. Will this sustain? Unclear - the Chinese new year must pass and the recent surge in snowfalls will have to recede before a steady state evaluation can be made, however as we have been warning since December, in a country having one of the biggest asset-liability mismatches, the negative curve convexity on tightening fears, will blow up the near end, isolating bank liquidity. To say that this is bad news if it persists is an understatement.  On the other hand, for the news to matter, news will have to matter period: Bernanke has managed to indoctrinate the Pavlovian Dogs, as described by Grantham yesterday, with a sense that every action, no matter how bad only leads to rewards. Which, itself, is of course also very much unsustainable.

The heavy price of a “head and shoulders top”. Competition from rising interest rates in emerging markets and record scrapage rates are eating into the prospects for the barbarous relic. So are higher margin rates for traders. Moving out of hard assets into paper ones. Exiting from a one sided trade. (DGZ), (GLL). (GLD).

• Mandatory Prison in Securities Frauds Sought by New York's District Attorney Cyrus Vance (Bloomberg)
• Financial Meltdown Was ‘Avoidable,’ Inquiry Concludes (NYT)
• Default worry sees US muni bond sales dry up (FT)
• Greece Default With Ireland Breaks Euro by 2016 in Global Poll (Bloomberg)
• Lehman Brothers amends bankruptcy plan (Reuters)
• Davos Moguls Adjust to Fast, Slow, Reverse: Mohamed El-Erian (Bloomberg)
• Bernanke Gets 66% Approval From Investors Disliking QE2....all of whom can afford a Bloomberg terminal (Bloomberg)
• Fed warns banks to be weary of expensive CDS: Impact of High-Cost Credit Protection Transactions on the Assessment of Capital Adequacy (Fed)
• China Is No White Knight in Euro's Debt Crisis (Bloomberg)

A look back at China 2010 econ measures and indices, plus some of my observations.

Even as the situation in Tunisia continues deteriorating broadly, the country realizes that it needs its shiny assets back, and needs them fast, regardless of edibility or recent market corrections. As such it has just issued an international arrest warrant for deposed president Ben Ali. From the BBC: "Mr Chebbi said Mr Ben Ali should be tried for property theft and transferring foreign currency." We can't repeat enough: any dictatorial or Hewlett Packardian banana republic should make sure all of its gold is secure. In fact, since we are positive all of the gold, pardon, tungsten held at Ft. Knox is right there, it may be a good idea to put tracker beacons in the fake material. We are confident that sooner or later it will lead the broader population to not only the Textron vehicle used for one way transit, but to which non-extradition countries will soon be hosting our very own versions of the Tunisian President.

When a few weeks ago we predicted that while contagion was the word of 2010, stagflation will define the current year, we had no idea how fast there would be glimmers validating our outlook. Yesterday's UK GDP data was the first datapoint that showed a decline in GDP even as the BOE's Posen infamously announced a day before that that UK inflation was surging. That, ladies and gentlemen, is the definition of stagflation. Coming soon to a banana republic near you.