Archive - Feb 3, 2011

Every now and then, Standard Chartered has a knack for coming up with that one report that is miles ahead of the competition and promptly becomes the definitive guidebook for the industry. Its most recent one: "Inflation: illusionary, inflammatory" is arguably one of the most detailed and comprehensive reports to come out from an institutional entity in a long time, dealing with the ever so sensitive topic of, you guessed it, inflation. And while it is guaranteed that the Fed will read neither this report, nor today's earlier announcement that food prices hit another all time high in January, we urge all readers to at least familiarize themselves with the contents herein. In addition to providing a case by case geographic atlas of which the next riskiest Tunisia-like countries are, the report includes a unifying thematic overview that explains not only why the global liquidity glut is long overdue to be pulled back, but what the next (and last) steps available to central bankers are before a wave of global unrest undoes 100 years of failed Federal Reserve policies. An absolute must read.

Markopolos went on to say, “The banks that are doing it, it's 25-33% of their bottom line net income per year, so it's like being addicted to heroin, they can't afford to pull the needle out because their share prices will collapse."

The recovery bugs are out again even after the GDP report for Q4 2010 showed significant structural weakness. Inflation is spreading quickly and has already impacted businesses and households. The Fed will not do anything about it because its models say it isn’t there. We show why those models are so confident (why you should be much less so), why inflation is a problem now, and why this latest bubble will not last six years like the last.

So much for quant trading being an innocent program that can never do any harm. After a year ago AXA Rosenberg disclosed that it had kept its clients in the dark about a massive error in the computer code of its "quantitative investment model", today the SEC fined the  one time asset manager of over $70 billion with a record for its kind fine of $242 million. As a reminder the immediate effect of the error when first reported was the major underperformance of the fund compared to its peers: "A number of the funds managed wholly or partly by AXA Rosenberg performed poorly last year." Yet what supposedly did not alert the firm that anything was wrong was that the system was performing in line with other comparable models: ""It wasn't obvious if there were any problems or
any impact from this error on our fund because it followed a similar
trend to other quant managers," Vanguard spokeswoman Rebecca Katz told
Reuters on Saturday." In other words, it is safe to assume that other AXA peers have or had been operating with comparable system flaws, yet due to the SEC's preoccupation with porn, had never been caught, and as a result investors in such funds may have well been fleeced of millions due to comparable uncaught computer glitches. So much for robotic efficiency, especially when coupled with a human's eagerness to engage in willful securities fraud...

Just out from the NYT:

The Obama administration is discussing with Egyptian officials a
proposal for President Hosni Mubarak to resign immediately, turning over
power to a transitional government headed by Vice President Omar
Suleiman with the support of the Egyptian military, administration
officials and Arab diplomats said Thursday.

In other words, the formerly biggest spook of the Middle East, and quite possibly a former CIA asset, is about to become president, under the auspices of a US-endorsed "democratic" transition, which does nothing but replace one crony regime with another. It is disturbing that the US administration does not comprehend that the Egyptian people are sufficiently intelligent to see just how superficial this proposed "regime change" is.

Five years ago, when I showed up on the doorstep of Nouriel Roubini’s RGE Monitor, I was in the minority of macro economists who saw a financial tidal wave coming. For the rest of the world, including Wall Street’s financial analysts, Fed bankers, Politicians, or even Moses himself, none of them could see how the contagion from subprime loans could cascade into a systemic crisis. A crisis that would then expose larger problems that would eventually lead to a complete financial meltdown. Similar to the subprime loans and the subsequent credit crisis, we face a new tsunami of what on the surface appears to be of minor financial relevance, but what will be the final straw that breaks the camel’s back if not politically achieved. What it is is ownership and accountability, from a political standpoint, for ALL of the politically fueled economic decisions being made as well as their side effects. For investors, it would be a catastrophic misjudgment to not escalate these macro political views into the analysis of economic work. (This is starkly different then a political debate, but rather a true non-partisan skyview of policies and rhetoric and their overall effects on the psyche of the economy.) For a financial system that is running on the fumes of confidence, we need to properly analyze this new dynamic.

Today, instead of the traditional, and sometimes boring, weekly balance sheet format (no surprises: another week, another record) we want to focus on one particular aspect of the Fed's balance sheet: namely the unprecedented differential between bank excess reserves and Fed asset purchases since the start of the latest round of quantitative easing (since the launch of QE Lite in August 2010). Since this cumulative number has now hit $170 billion, it can no longer be qualified as pocket change, even by the Chairman's standards.

When markets turn on you, you become a short timer.

As the Greater Depression continues along a parallel pathway with the Great Depression of the 1930s, Congress is about to commit the same blunder it made in 1930. The rocket scientists in the House of Representatives in September passed the Currency Reform for Fair Trade Act, which aims to crack down on Chinese currency manipulation by targeting imports from China and other countries with currencies that are perceived to be undervalued. The vote was 348 to 79, with more than 100 Republicans voting in favor of the bill. It died in the Senate before the mid-term elections, but Representative Sander Levin, Representative Tim Ryan and Representative Tim Murphy are expected to reintroduce the bill when the House returns in February from a congressional district work break. Senators Shumer and Casey are also planning legislation to punish the Chinese for unfair trade practices.

If indeed as Credit Suisse speculated gold's move was predicated by concerns that the Muslim Brotherhood may end the peace treaty with Israel, then the relationship between Egypt and the country's largest Islamist movement, the Muslim Brotherhood, deserves a special focus. Below we publish a special report by Stratfor focusing precisely on this relationship, and what the future may hold for either. "With Egypt’s nearly 60-year-old order seemingly collapsing, many are asking whether the world’s single-largest Islamist movement, the Muslim Brotherhood (MB), is on the verge of benefiting from demands for democracy in Egypt, the most pivotal Arab state. Western fears to the contrary, the MB is probably incapable of dominating Egypt. At best, it can realistically hope to be the largest political force in a future government, one in which the military would have a huge say."

Love them or hate them, only the most self-deluded can claim that the NIA, and its predictions, have been incorrect so far in this monetary 'printing' cycle. Sure they may have an agenda, and yes, Gen Ben may one day pull his money (if he is willing to see the S&P plunge to 666 and well below, so not really), which would kill all commodities, and certainly gold, in their tracks, but focusing solely on their message will have spared many massive real (not nominal) losses as surging commodity prices dwarf the modest pick up in stocks. Today's note from the NIA, while unpleasant, looks at the disastrous long-term consequences of the Chairman's monetary policy, and concludes rightfully so, that absent a diametric shift, which after today's press meeting may well require a revolution as the creature appears to be well on its way to QE3, 4 and so on, what is happening in Egypt is a preview of what will happen in the US in a few short year. Furthermore, the NIA's prediction that rice is up, up and away is in line with what Zero Hedge has been claiming since October (link). Also as a reminder, and as David Tepper just confirmed today, the realization that Rubber is the third and last R-bubble is starting to percolate...

We are officially in the middle of the worst housing collapse in U.S. history - and unfortunately it is going to get even worse.

If you don't know the stories of LTCM, Enron, Tyco, Worldcom, Adelphia, Global Crossing, the S&L Crisis, how portfolio insurance contributed to the 1987 crash, or countless other investing lessons going back centuries, then you have no business investing your or anyone else's money. Now, it looks like China MediaExpress Holdings is about to become another one of these lessons.

A killer play ("655321 QE Triple fake)" freshly inked in Quarterback Benny Inkjet's playbook...

According to Charlie Gasparino, the intifada between Meredith Whitney and the rest of the world just got uglier. According to the former CNBCer, the one-time Citi scourge has been called in to testify before the House TARP committee and explain her less than favorable position on munis.