Archive - Feb 2, 2011

They were not trying to be ... cough ... subtle

One of the consequences of Meredith Whitney's recent prognostications that we could be facing hundreds of billions worth of municipal defaults, is that after tens of billions of investor capital have been pulled out of municipal funds, with last week seen record $5.8 billion in redemptions alone, virtually the bulk of this money has been recycled in the form of inflows into equity instruments. As such, it is surprising why so much energy is wasted to attempt to debunk Whitney's thesis: after all, she has done more to stimulate equity inflows than years of government/CNBC propaganda ever could. Yet one firm which certainly stands to lose should the ongoing muni redemption wave not moderate, is everybody's favorite PIMCO, which is oh so good at bashing the Fed and Satan Bernanke with one half of its mouth, while with the other investing tens if not hundreds of billions in federally subsidized Build America Bonds, which for the past month have been in free fall. It is therefore not surprising that as Charlie Gasparino points out, Bill Gross "has launched an all-out war to discredit Whitney’s research in an attempt to restore confidence in the $3 trillion municipal-bond market." Of course, this is nothing more than a good old-fashioned book talking campaign: Meredith, who after have failed to predict anything notable at her new venture, needs to return to her shock factor roots, and Gross, whose TRF fund, after seeing nearly two years of AUM increases in his flagship TRF, has been having a bit of a hard time recently, all due to the firm's huge municipal exposure.

Once again the famous hedge hog Punxatawdry Ben...

Not all debt is the same, so it would seem. Expect runs on Ireland, Greece and Portugal way before Japan despite the fact Japan has twice the debt as a proportion of GDP!

Whereas yesterday Zero Hedge looked at the relationship between the ISM Price Paid index and the broad inflation CPI (coming to the conclusion that 12 months from today the CPI may be increasing by a massive 6%+), today we look at a correlation with the metric that should be even dearer to investor hearts: operating margins. The chart below shows the PMI Price Paid index compared to an inverted scale of of the S&P margin. It appears that margins follow the PPI with a four quarter delay, and while the period between 2003 and 2007 did not see a major contraction in margins, this can be attributed to massive abundance of liquidity available to the common man which allowed companies to pass through costs for more aggressively than before. Alas, and as confirmed by Whirlpool and Electrolux' results today, such an outcome this time around is impossible. One thing is certain: should February's Price Paid index continue to rise, margins will, intuitively, have no choice but to plunge. Which is why we anticipate a dramatic 15-20% drop in margins, an outcome which will have material consequences on S&P 500 EPS forecast.

Whereas two days we presented what the Treasury's options are to extend the inevitable moment before the debt ceiling is hit (which , today Goldman's Alec Phillips analyzes another angle of the ceiling hike: what the congressional debate on the debt ceiling rise may look like. While everyone is certain that the ultimate fate of the debt target, pardon, ceiling issue is a given, and that the UST will end up hiking it by another $1.5 trillion, little has been said about just how we get there. From Goldman: "Split control of Congress is apt to lead to a longer-than-usual debate over increasing the statutory debt limit, and could result in at least one failed attempt at an increase before the limit is raised. It also looks possible if not likely that Congress could approve at least one short-term increase in the limit as the debate unfolds, the first such stopgap since 1996." Yet no matter what how heated any debates, the final outcome is certain, and at least according to Goldman, should be priced in: "Although the debate over the debt limit is likely to capture the market’s attention from time to time, the overall effect of the debt limit debate is apt to be modest. Looking back to the 1995-1996 episode, there is little evidence that the most important legislative developments in that period had an effect on Treasury yields." In other words, the US will continue issuing $125 billion in debt per month, while US GDP grows at one sixth this rate, confirming that the hyperinflationary toxic loop of failed monetary policy is beyond repair. That said, we agree with Goldman - the debt ceiling will be raised as the alternative will be another round of mutual assured destruction from everyone. The same thing is true for 2012, when the next debt ceiling hike will need to take place. Then in 2013, then in 2014, and after that the debt ceiling will be raised on a daily basis.

"A possible outcome could be that California, NY and Illinois band together and invade Texas. Texas will prove to be the balance of power as the “beggar my neighbor’s state” policies unfold."

That's right folks - MORE FREE MONEY! This is just what Egypt needs, I guess. Europe too

So here's what it will look like of the Tunisian/Egyptian/Yemen parade skips across to the EU. Can you spell U-G-L-Y?

No matter how hard the ECB is trying to mask the fact that the only way to rescue Europe is through yet another ponzi scheme, which has a CDO in its foundation no less, depositors refuse to be fooled. According to the ECB, in December Irish banks lost deposits worth €40.3 billion, over 50% more than November, when €26.7 billion evacuated the banking system. The brings the total deposit flight from Ireland's 15 retail banks to a massive €110 billion, a number which if indexed to the US, would be well in the trillions. And as the Independent points out, "The most dramatic element of the latest data, however, is the sharp
acceleration in the fight of deposits from the so-called 'domestic
group' of banks." In other words, Irish banks are likely operating on liquidity fumes, and all of their operations continue to be funded on a day to day basis by the ECB and possible the IMF. And what is even worse, is that just like in the US, Irish consumer refuse to relever: "Yesterday's figures also show another contraction in banks' lending, as loans to households fell by 5.2pc and loans to non-financial companies fell 1.2pc in the year to December."

Now that yo have read the Financial Crisis Inquiry Commission's fascinating report, are you ready to play the real game...

The bottom line is that by the time the Fed becomes institutionally aware that inflation is raging across the globe - and I often wonder when they'll finally awake to the threat - it will be too late. Inflation will have the momentum, and it will take a vast overreaction on the part of the Fed to restrain it. They'll have to drain enormous amounts of liquidity and tolerate vastly higher interest rates to be able to do that, and I doubt they have the courage for such bold action. I think they will hesitate, equivocate, and ultimately be late. History suggests that inflation is best tamed early, but the Fed is already late and demonstrating a remarkable callousness by doing the exact opposite of fighting inflation. While we cannot know what it is that the Fed sees, or which demons it is fighting that provide the internal rationalization for risking a hyperinflationary outcome, we can only conclude that these threats are more spectacular than the alternatives.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 02/02/11

Marc Faber is on a roll these days. The Gloom, Doom and Boom report author, who recently made headlines after calling Obama a whore minutes ahead of the president's SOTU address, proceeds to go on a truthiness rampage, and with his now traditional grin, proceeds to call Satan Bernanke a "liar" to the entire CNBC Europe audience. In addition to making his thoughts clear on the topic of inflation (5-8%), he also observes where the Egyptian riots will strike next: "You may not have a problem in Saudi Arabia and in the Emirates, in Kuwait and Qatar, because there the governments can heavily subsidize food if they want to. But I am worried that what has happened in Egypt will happen in Pakistan... I think Egypt is a reminder to people that politics, and social events, and geopolitics have a meaningful effect on asset markets. The developed markets have way outperformed, and now I think that it may be a wake up call that the US outperforms emerging economies for a while." As for inflation "The annual cost of living increases are more than 5% today and the BLS is continuously lying about the inflation rate, including Mr Bernanke, he's a liar. Inflation is much higher than what they publish. I think that inflation is between 5% and 8% per annum in the US, and in Western Europe, a little bit lower, also 4-5% per annum." Oh yeah, Pakistan has nukes.

There's no comparison between the Land of the Free and Egypt ... or is there?