Archive - Jan 2011

Our friends at GATA report an interesting development in its multi-year confrontation with the Fed, namely that the organization has "scored a small but perhaps auspicious victory over the Federal Reserve in our lawsuit seeking access to the Fed's secret gold files. The judge presiding over GATA's federal freedom-of-information lawsuit in U.S. District Court for the District of Columbia, Ellen Segal Huvelle, granted GATA's motion to order the Fed to produce in complete form for the judge's private review 20 gold-related documents the Fed has sought to keep secret. The judge ordered the Fed to deliver the documents by Friday." While this does not mean that the Fed will actually publicly announce that its gold vaults are in fact filled with GLD stock certificates, it does put the Fed in an unpleasant position to have to escalate its defense of its secrecy in an increasingly more sensitive topic, i.e., precious metals price manipulation with or without JP Morgan, and is a definite setback for Bernanke in his pretend push to make the Fed appear more transparent.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 10/01/11

• EPS reports adjusted $0.21 on expectation of $0.19
• Revenues of $5.65 billion miss expectations of $5.75 billion.
• Sees global aluminium growth rate 12% for 2011
• Sees global aluminium demand doubling by 2020
• Q4 Adjusted EBITDA of $782 million, 13.8% margin
• Q4 CapEx: $365 million
• Cash on hand of USD 1.5bln at quarter end
• Improved earnings were driven by higher pricing and continued strengthening in most markets and improved productivity
• Quarterly results were offset somewhat by a weaker USD and higher energy and raw material costs
• CEO says expects Chinese demand to slow.

The Bank of Portugal adds that foreign aid would cushion adjustment. And so bailout #3 is virtually in the books. Which means another country is now going to rely exclusively on the ECB. The half life between bailouts is collapsing. Next up Spain.

This country has not reached the level of control and fear seen in Orwell’s 1984 and V For Vendetta, yet. We are moving relentlessly in that direction. Surveillance, monitoring, spying, censorship, secret prisons, predator drones, and conforming to state rules and regulations put citizens further under the thumb of an all powerful state. The freedom to dissent, the freedom to be left alone, the freedom to speak out against injustice, the freedom to disagree with your government, and the freedom to present your ideas without fear of retribution or penalty are essential in a democratic society. The next phase of this Fourth Turning will surely include another downward spiral in financial markets as un-payable debts accumulate to a tipping point level. When ATM machines stop spitting out twenties, food shelves are bare and gas stations are shuttered, social chaos will ensue. The government will react with further command and control measures. In V For Vendetta, the government creates a terrorist incident in order to gain unquestioned control over the population. Americans will need to be more vigilant than they have been over the last ten years in keeping an eye on their government.

In short, the Banks’ authority to act as trustees under federal law does not insulate the assets the Banks hold in trust for the benefit of investors from state law requirements otherwise applicable to those assets.

In her weekly HF positional analysis, BofA' Mary Ann Bartels (whose recent technical predictions did not quite pan out) finds that Long Short hedge fund exposure has declined from 25% to 18% as of January 10, well below the 40% average, market neutrals are -3% net short (explaining the ongoing bloodbath in the space), and that macro HFs are long commodities and short US equities and 10 year Treasuries. All in all, exposure continues to be below average bullish levels, yet the market continues to go up. Cue in TrimTabs...

Those oberstabsfeldwebels of the unobvious from the San Fran Fed are back at it, issuing another blisteringly original, taxpayer funded, masterpiece which finds that "in the years leading up to the financial crisis of 2008–2009, a combination of factors including low interest rates, lax lending standards, the proliferation of exotic mortgage products, and the growth of a global market for securitized loans promoted increased household borrowing." In other words, easy credit led to an increase in household leverage... How truly unbelievable. But hark, it continues: "Homebuyers with access to easy credit helped bid up U.S. house prices to unprecedented levels relative to rents and disposable income...U.S. household leverage, as measured by the ratio of debt to disposable income, reached an all-time high of 130% in 2007." You don't say- the Fed's easy credit legacy led to the biggest credit bubble in history? Wow, and it was Alan Greenspan saying just a few days ago that the Fed had nothing to do with the credit bubble... But wait, there's more: " Going forward, households may keep trying to reduce excessive debt loads by increasing their saving." In other words, broke Americans who have no access to credit, will be forced to save. Thank god for such insightful, uber-brains as Reuven Glick and Kevin J. Lansing who were able write such a brilliant research paper, with such profoundly powerful conclusions.

If there is anyone watching this video of what happens to a banana republic when its ponzi stock market plunges, it is Ben Bernanke. The Princeton-educated depression era expert is certainly learning from the mistakes of the Bangladesh stock exchange (flash crashing 9.25% at last check before being halted), which despite US investment bank pitches to the contrary, never instituted its own plunge (and subsequent riot) protection team. And this is despite an identical situtation happening just three weeks earlier. Take home message: every ponzi scheme-based banana republic needs its own President's Working Group on Flash Crash prevention.

After the Fed bought over $1 trillion of US Treasury bonds in the past 2 years, it is now reverse payback time, in which the Fed gives the Treasury just a little more cash. The FRB announced that per "unaudited" 2010 results (obviously), the Fed is provisioning to pay the Treasury $78.4 billion, a 50%+ increase from the $47 billion paid to the Treasury in 2009. What is the basis of this payment? Why the Fed's charter of course: "Under the Board's policy, the residual earnings of each Federal Reserve Bank, after providing for the costs of operations, payment of dividends, and the amount necessary to equate surplus with capital paid-in, are distributed to the U.S. Treasury." Which means that as the Fed buys up ever more Treasurys, and as rates continue their inexorable rise higher, the Fed will continue to receive interest payments from the US Treasury, which, at the end of every year, it will promptly remit back to whoever the current incarnation of Tim Geithner is, in essence nullifying the "checks and balances" impact of cash out interest expense on Treasury, and thus government, deficit decisions. In fact, the greater the amount of debt issued, and therefore monetized, the less the Treasury actually has to pay in interest. And in the meantime, the higher interest rates go, the greater the duration-adjusted loss on Fed holdings. But who cares about those: after all, results are all "unaudited" and the Fed will hold all securities to the earlier of "maturity" or default - as if anyone doubts which will happen first.

Those who think this will not, better yet... has not metastasized into a very significant problem has overdosed on the Sell Side Kool Aid once too often. The banking industry is soon to be the new tobacco industry.

It appears that gold isn't really a currency... until it is. The Economic Times reports that India is attempting to ensure steady crude oil supplies from Iran. In doing so it is doing everything it can to pay Iran in a way that avoid loopholes associated with recent US sanctions. And the stunner: "India could settle crude oil import transaction using gold in the short term, while efforts to resolve the deadlock continue." But does Iran realize they can't possibly eat all that gold? Or that The Fed has no way of diluting to oblivion? Or that, unlike the dollar, it is currently not involved in a global race to bottom in which every central bank will have no choice but to print ever more of its linen-infused currencies? Something tells us that the answer to all three is yes.

Hendry is now focusing his rhetoric -- and investing strategy -- on the bigger target: China. He’s betting that growth in the world’s No. 2 economy will collapse because of rampant real-estate speculation, sending shock waves through Asia and beyond.

Simon Black, whose first person observations of the world outside America have made his website Sovereign Man truly an entertaining and informative read, and who has been anticipating the encroaching transition of America to a control state, shares his two cents on this weekend's tragic shooting in Florida. "With one of their own victimized, however, I'm concerned that politicians will close ranks, capitalize on the social mood to generate a renewed faith in government, and pass a host of reactionary policies... all after sanitizing their Twitter feeds for any reference to violence, of course. Perhaps some form of gun control is in the works... though with a Republican controlled Congress, I'd think new legislation targeting suspected 'Anti-American subversives' could be on the table, or something that gives sweeping new powers to government agents and police forces." And as always, Simon's suggestion is a logical one: "I would suggest that if your ideals and beliefs make you increasingly isolated from your neighbors, maybe it's time to find new neighbors." We are sure this will anger Mike Krieger who advocates an attempt to regain control back from the kleptocratic corporatocracy (by peaceful means of course), although at some point one has to ask: when is enough, enough...

The fundamentals of the last PIG country, which has so far avoided the bond carnage of its peripheral peers, reported that while broad unemployment was 8.7%, the "highest since the beginning of the beginning of the time series in 2004" it is youth unemployment which, like in Spain, is becoming a few bigger issues. Corriere Della Sera announced that youth unemployment has hit a record of 28.9%: "Youth unemployment, however, did rise as the rate climbed to 28.9%, up 0.9 percentage points on October and 2.4 points higher than in November 2009. This, too, is the highest level since time series were introduced in January 2004." Yet even at these levels, this is still modest compared to countries like Spain, where the same metric was trending around 40% and is expected to remain there through 2011.