Archive - Jan 2011

One of the hottest topics over the past two weeks in Europe has been whether or not the EFSF, or the multi-billion, AAA-rated synthetic CDO that is affectionately called the "rescue fund" (and which we are confident Goldman is somehow betting against as we type), should be allowed to buy back debt of insolvent countries trading at less than par (obviously). Allowing this process to go ahead is nothing less than a wholesale ponzi pyramid, whereby everyone chips in to make everyone that little richer, while in reality the fundamental problem remains, and the only thing achieved is eliminating the need to have a market interest for any country's sovereign debt (something Portugal recently did when it placed a billion or so in debt with China), and completely eliminating market discovery. And while Germany has, as usual, been very much against this proposal, which it sees as one step short of a federal Euro debt issuance authority, it will sooner or later have to cave in to the chorus of demands by everyone who is insolvent, if it wants to keep the Euro, which it does since it is the European equivalent of the Dollar-Yuan peg, and keeps the country's export strength supremacy to the rest of the continent. To that point, earlier today, Eurogroup Chief Jean-Claude Juncker told Spiegel that European leaders should not shy away from a proposal to buy back the bonds of troubled euro member states but should not rely too much on rich countries. "It would be wrong to create taboos but we cannot overstretch the strong countries," Juncker said in an interview with German magazine Der Spiegel seen by Reuters on Saturday ahead of publication. We wonder who they should rely on then: why themselves of course - let everyone chip in a little so they can grab from the rescue fund with both hands, all the while pretending this is a fair and equitable treatment.

Bash on GE/Immelt day.

The first casualty of the great Irish "pension funded banker bail out" is the man responsible, Brian Cowen, himself. The Taoiseach has stepped down as the Fianna Fáil party leader, but says he will continue to remain in office as Taoiseach. According to The Journal, "Speaking at a 2pm press conference, Cowen began his announcement in
Irish, saying he was proud to have been elected party leader in April
2008. He said at that time, he saw the role the party had in the
development and growth of the country, but now he believes Fianna Fáil’s
role in the public is in doubt. He said that he understood the membership of Fianna Fáil is concerned
about the party’s prospects on 11 March and he believes the focus
should be on the policies each party is offering." In other words: the Olli Rehn protectorate now is leaderless two months ahead of a key election that may well overturn the recent bailout of the country's senior debtholders. Which of course ties in rather well with our theory that in April and May there may well be an "unexpected event" to quote Fed's Plosser, which will serve as the springboard for the QE2+ extension. And since this year has been a complete rerun of 2010 so far, we expect the source of such market "contagion" to naturally be in Europe once again.

The plan is to theorize a process that is the product of two underlying processes: one that describes the time evolution of the fundamentals of a name, and an accompanying one that describes the time evolution of trading momentum of a name. This price process states the problem in terms of potential theory, which interplays with probabilistic models. At the same time it avoids overplayed assumptions that plague conventional probability modeling. Also, for exposition purposes, potential theory is more efficient and less hellacious in notation.

As if that's not bad enough, high-level figures are recommending adding LITHIUM and STATINS to the water ...

A big fucking yawn today as less happened in US macro news than in an MBA strategy class...

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.