Archive - Feb 20, 2011

Silver takes out $33.10, hitting a fresh 31 year high, as the relentless short squeeze leads to more body bags, and the only flight to safety currency is now the non-dilutable one (with gold on the verge of $1,400). Only $20 more to go until the all time Hunt Brother record is smashed - one/two more revolutions should do it; even better: hopefully the CME hikes margins next week: that would bring $40 silver 24 hours later. And on a more somber note, please join us for a moment of silence in remembrance of the great, the legendary, the soon to be departed Blythe Masters whose most recent zero margin, infinite PM short contraption has just sang its swan song.

The middle class in America is being ripped to shreds right in front of our eyes and very little is being done to stop it.

If you’re like me, you’ve probably looked at the US recently and wondered what has happened to your country. I’m not talking about the GOP/ Obama situation nor am I referring to capitalism vs. socialism... I’m simply talking about basic common sense items like: stay out of debt, don’t do anything if it doesn’t make sense, do you homework before signing a contract, etc.

WTI’s premium disappeared about a year ago and in recent days it has been trading at more than a $10/bbl discount to Brent mainly due to rising inventory levels at Cushing OK. Some believe WTI may be undervalued by at least $12.

As part of GATA's ongoing crusade against the Fed's gold price manipulation efforts, the organization recently succeeded in extracting some novel clues on how and why the Fed views its sworn duty as keeping the price of gold low. While much of the requested documents demanded by GATA in a lawsuit with the Fed have been exempt from disclosure under the law, one that was made public consists of the minutes of a private meeting of the G-10 Gold and Foreign Exchange Committee in April 1997. And while we will leave it up to our readers to parse through the bulk of the comments (attached below), we would like to draw attention to one, attributed to Peter R. Fisher, head of open market operations and foreign exchange trading for the Federal Reserve Bank of New York, or in other words the equivalent of our very own Brian Sack. Fisher's comment relates to what would happen to the Fed's securities portfolio should there be a sudden or gradual revaluation in the price of gold. His conclusion is that in order to keep the Fed's balance sheet stable, an (acknowledged) surge in the price of gold would lead to a forced selling in Treasurys. Of course, that would mean that the Fed would have to actually value gold at its actual market price, instead of that relic price of $42.22 per ounce. Which means that valuing gold at fair market value would result in dumping over $300 billion in Treasurys, something the Fed can not afford to do at a time when it is engaged in purchasing $100+ billion each month.

“Intellectual activity is a danger to the building of character”--Joseph Goebbels

As the results of the first of seven German regional elections hits the wire, the German people are heard loud and clear: "no more bail outs." The outcome of the Hamburg election is nothing short of a disaster for Angela Merkel and her ruling (for now) CDU party. Bloomberg reports that "Chancellor Angela Merkel’s party lost control of Hamburg, Germany’s richest state, in the first of seven state votes this year that threaten to limit her scope to respond to Europe’s debt crisis, television projections show." Merkel’s Christian Democratic Union took 20.8 percent in today’s election, its worst result in the port city since at least World War II, ARD television projections showed. The Social Democrats, the main national opposition party, took 49.8 percent, enough to end the CDU’s 10-year rule in Hamburg and form a majority government without need of a coalition partner. The CDU suffered “a massive collapse of support in this
booming city that must set off hand-wringing in Berlin,” said
Hans-Juergen Hoffmann, managing director of Hamburg-based
pollster Psephos. “Merkel will surely be concerned now that
this disaster won’t be repeated in upcoming state elections.” To their great chagrin, the young participants on the FRBNY's OMO desk will have to be absent from their President's Day NYU mixers overnight as they are urgently needed by JC Trichet: the reason - buying up every single Portuguese bond as soon as the market opens tomorrow: "There’s a risk to peripheral bonds if Germany is seen not to be displaying support for the countries that are in trouble,” said Orlando Green, assistant director of capital- markets strategy at Credit Agricole Corporate & Investment bank in London. “The market would have been hoping that a deal would have been struck already” before the elections." And while German people are just modestly more civilized than their North African peers, what has happened in Germany is nothing short of a revolution to the existing status quo. The attempt to cover up European bail outs with endless rhetoric is over. If Merkel continues the course she is on, she is history... and she knows it too well. Time to be less than bullish on the EUR's prospects.

The week ahead is light on data releases with probably the key prints at the start and the end of the week. On Monday, the focus will be on the flash PMIs out of Euroland and the German IFO. Japanese CPI will be important and the US Q4 GDP print will be watched for revisions. Otherwise, attention will continue to be paid to the DM/EM rotation theme, the events in the Middle East and the European Sovereign issue. Also, lots and lots of POMOs.

Newest Stock World Weekly: "The Fed has no means to fix the problem of joblessness, besides trying to stimulate the economy by flooding it with liquidity, or “printing money,” thereby devaluing the Dollar. Devaluing the Dollar is contrary to the Fed’s mandate for price stability."

After trading in nearly perfect unison and with an R² of about 0.8 for over half a year, in the last week the speculative pattern in the GBP-JPY correlation had a dramatic breakdown. Whether this is due to expectations that the BOE will have to hike rates to deal with 4% inflation, or continuing massive quant deleveraging behind the scenes of residual positions as traditional factors now blow up daily in the faces of quants, is unclear. What is clear is that suddenly one of the more long-lived spec FX correlations has whipsawed to the point where it has left many FX traders nursing critical wounds.

Note the surge in GBP bullish bets, and the plunge in JPY. Those willing to bet that the spec crowd is always one step behind the curve may be well advised to take the other side of the trade. All this and the latest Charts that Matter from Goldman's John Noyce inside...

SEO, meta-tagging, Demand Media, etc. These media trends are scary, and unfortunately only seem to be picking up steam. If allowed to continue unabated, these trends will only put us on a quicker path towards a seemingly inevitable Idiocracy.

Today, appearing on Meet The Press, in addition to Susan Rice, Dick Durbin, Lindsey Graham, Jennifer Granholm, Harold Ford, and Ed Gillespie was CNBC's uber contrarian voice, Rick Santelli. The topic: reigning in government spending, a topic which will be with America until its last bond issuance, sometime in the next 5 years. And while Rick was quite subdued this time around (it seems the CBOT voice only sees red when confronted with the likes of Steve Liesman), he did compare the crisis facing America now to the events from 9/11... "I think this is an issue that needs to be put out into the air and
see--many, many other states, ultimately, might have--not have the same
balance sheet as Wisconsin, but I think, ultimately, collective
bargaining, even from a federal level, these are big issues, and these
costs need to be put under control.  If the country is ever attacked
like it was in 9/11, we all respond with a sense of urgency. What's
going on on balance sheets throughout the country is the same type of
attack." He also noted the critical Illinois muni situation whose alternative is a forced austerity plan (and considering that various Wisconsin politicans received death threats over what is finally being perceived a loss in some entitlement benefits, the outcome of inevitable austerity in America will not be pretty): "Senator Durbin is from my state:  $3.7 billion muni issuance that they need to bring to the market.  They
haven't paid vendors.  You know, it has come to the crossroads where if
we don't start to make the changes that the governor and the congressman
know are going to take time, we will have austerity forced on us, and
that type of austerity is going to be much messier.  There really isn't
much opportunity for debate here.  We do need action." But most importantly is the realization that nobody has any idea what to do, and as an article just penned by the Global and Mail screams, "Wake up, Americans. Your economic dream is a nightmare." Luckily, with everyone's head in the sand, nobody really minds.

Investment banking as an industry runs almost completely contrary to wealth creation since it thrives on fees rather that capital appreciation. Investment banking is about making DEALS (any deals) regardless of whether the deals make sense or benefit both parties (after all, the advisors to the deals, the investment bankers, get paid based on commission and free stock).

Now that Jeff Gundlach is out there making big residual waves (with Barron's as usual just 3-6 months behind the curve), here is, once again for those who missed it the first time around, Gundlach's latest presentation. The next update from Gundlach will be on March 15. We will present it to readers as soon as it hits.

Refuting reports that the two Iranian warships had passed the Suez Canal into the Mediterranean, Suez Canal officials said that the ships are not to sail through until... tomorrow (when international FX markets are open at half volume mast). Previous reports on Iran's Arabic language state television channel Al Alam TV reported that the ships had passed through the Suez Canal (as, of course, had Debka). Although in reality a 24 hour difference will likely not matter much. The key aspect is that Egypt has indicated that it will not bend to international pressure when it comes to "canal neutrality" rules - something that will likely not inspire confidence in Egypt. As for the warships, we doubt anyone will to take a real defensive posture - after all as we pointed out previously both of these are over 30 years old, and any escalation would be purely symbolic to further mobilize middle eastern forces, based on "provocation" rhetoric. Look for some fireworks in FX trading overnight and tomorrow when already subdued volumes exagerate the impact of any potentially troubling news headline.