Archive - Feb 2011

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?

When a week ago we noted that ScotiaMocatta sold out of the Valcambi 1 kg block, yet once again showed the 100 oz silver bar as back in stock, we said: "We will keep tabs on how long before this also becomes "sold out."" We have the answer and it is 7 days. As of today, Canada 's biggest bullion bank is out of not only the 100 oz silver bar, but all silver bars! This follows yesterday's news that in January the US mint sold 50% more silver than in any month before.

This is a warning to prepare for potential stealth bank runs cascading from North Africa and Ireland through to EU regional banking centers. Stealth bank runs are the unrecognized and perilous serpent lurking presently below the European financial surface. They prey on slower moving archaic bond vigilantes and anyone else swimming in these dangerous uncharted waters. Investors need to fully appreciate that a modern bank run looks and operates differently than what is depicted in the movies and what we most likely expect to occur! For starters, it isn't the individual depositor lining up, it's now Corporate CFOs or Treasurers at their terminal en masse! Secondly, it isn't driven by local depositors; it is now driven internationally by Corporate Finance committees! Thirdly, there are no telltale line-ups at bank doors. It is stealth, which will happen in an unexpected electronic 'flash crash' panic blur! Today, a triggering event will initiate global 'key strokes' that will move unprecedented amounts of money within hours.

Our expectations for not only a gross profit percentage plunge due to increasing input costs, but for downward EPS revisions for the S&P is slowly starting to materialize. Today, we received the first official validation courtesy of Whirlpool and Electrolux, both of which were slammed by surging input prices and an inability to offset these in the top line. Furthermore, with SG&A already trimmed to the bone, companies are now unable to lay anymore workers off to preserve net income numbers whispered lovingly to sell side analysts. Whirlpool is down big today after the company beat earnings but entirely due to accounting gimmicks: from the WSJ: "Whirlpool Corp.'s fourth-quarter earnings increased 80%, but that was almost entirely because of changes in tax benefits and other nonoperating items. Whirlpool, based in Benton Harbor, Mich., said Wednesday that operating profit increased 1.5% to $202 million from $199 million a year earlier." All good, yet judging by the stock price in WHR today, not even robotic investors were dumb enough to be fooled by this. Here is the punchline: "Raw material inflation is driving costs higher and we expect to mitigate these costs with improvements in cost productivity, innovation and recently announced price increases," Whirlpool Chairman and Chief Executive Jeff Fettig said.  Revenue from Whirlpool's North American segment fell 1% amid a 61% drop in operating profit caused by a lower production volume and higher materials costs." We can't wait to discover just what "innovation" improvements will offset 100% increases in virtually all input goods...

The amount of loans being provided by our banking system is a good reflector of the strength of our economy. Below is a big-picture view that shows the total loans in the U.S. as the Fed reports in its H.8 each week. We can see that loans outstanding declined at a rapid rate at the beginning of the current great recession, but there seems to be a recovery in the little jump at the end of the chart, as highlighted by the two small black arrows. A little closer look shows that the Consumer Loans segment is the source of the optimism that we see in the total.

AUD pairs (and the ES, as a result) are not doing too hot today: the primary reason - Cyclone Yasi, which is now projected to be a category 5 storm according to the Australian Weather Bureau, is making landfall in Queensland and will add to the continent's flooding misery, which has already incurred over $20 billion of damages to eastern states. Yet in a case of supreme irony, the West of the continent, unlike the East which has been having flood after flood, and which is the source of Australia's bread basket and where the bulk of the grains come from, is wrapped in a drought that threatens to impair an already week wheat harvest. From Bloomberg: "At stake is the output of the country’s biggest wheat- growing state at a time when global food shortages have pushed prices to records. The drought has already prompted the government of Western Australian state Premier Colin Barnett to cut its economic growth forecast for the year to June 30 to 4 percent, from 4.5 percent."

Dominique Strauss-Kahn, the IMF's chief, bluntly called for worsening conditions worldwide and a deepening global economic crisis: "We could see rising social and political instability within nations – even war," he said. As the chief of one of the "world banks", when does identifying a problem you helped create absolve you from blame and its eventual repercussions?

Claims that total defaults in the municipal bond market could reach $100 billion are vastly exaggerated. Teachers will starve, police and firemen will go on strike, and there will be rioting in the streets before a single interest payment is missed to bond holders. Defaults will rise, but it will be from two to only 20, not the hundreds that Whitney is forecasting. Have I seen This movie before?

• In 2010, total compensation and benefits at publicly traded Wall Street banks and securities firms hit a record of $135 billion (WSJ)
• The FT just a few months behind Zero hedge: Fed passes China in Treasury holdings (FT)
• Cyclone Yasi Nears Coast of Australia Packing Winds Stronger Than Katrina (Bloomberg)
• China's Wen vows to control inflation in new year (Reuters)
• Germany Rules Out Bond Buybacks by Bailout Fund, Official Says (Bloomberg)
• Bank of Japan's Kamezaki Says Economic Slowdown Is Temporary (Bloomberg)
• Florida governor may stall Obama healthcare law (Reuters)
• Much of nation's recent growth may have been a mirage (WaPo)

The completely worthless and thoroughly discredited ADP number came in at 187,000 (who can forget last month's 297K which got the Barclays experts to predict a 600K NFP number for January) on expectations of 140K. Of course, the ridiculous print from last month was cut by 50K, just as this one will be in March. Someone should inform ADP (which doesn't count government jobs) that there was snow in January and thus the NFP will come in well below expectations (ref: eternal bad number apologist Joe LaVorgna).

According to Al Jazeera, pro-Mubarak forces have clashed with the revolutionaries, in a sign that the "counter-revolution" has begun, and an Al Arabiya reporter has been stabbed by those who prefer Mubarak. It also appears that the pro-Mubarak forces are arriving on horseback, camelback and in chariots. Elsewhere, Egypt's armed forces on Wednesday told protesters that their demands had been heard and they must clear the streets: we are confident that everyone will disperse promptly and quietly... Another indication of how powerless the regime is, was that curfew hours were shortened even though nobody had been following the original curfew to begin with. Most importantly, the revolutionary concerns spread to Yemen, where president Ali Saleh followed in Mubarak's footsteps and vowed not to extend his term in 2013. Alas, his term will most likely be cut off well short of that optimistic estimate.

"To rebalance debt loads and re-equitize financial institutions that should have known better, central banks and policymakers are taking money from one class of asset holders and giving it to another. A low or negative real interest rate for an “extended period of time” is the most devilish of all policy tools. And the asset class holder that it affects, or better yet, “infects,” is the small saver and institutions such as insurance companies and pension funds that hold long-term fixed income assets. It is anyone who holds bonds with coupons that cannot keep up with inflation or the depositor in a local bank who cumulatively holds trillions of dollars in time deposits that don’t earn a real rate of interest. This is the framework that has been created by modern-day policymakers who have innovated far beyond their biblical counterparts. To put it bluntly, they are robbing savers and taking money surreptitiously from longer-term asset holders who are incorrectly measuring future inflation." - Bill Gross

I am not an economist, but as a strategist I believe there is a case for a multi-year period of weak growth in the US, which could be magnified by an EM slowdown as the EM bloc diverges policy to deal with its own domestic positive output gaps, domestic inflation problems and domestic asset bubbles. The obvious problem is that the US has an excess debt problem and a central bank that seeks to solve asset bubbles that burst by creating new asset bubbles. This policy has been proved a failure. Remember that debt does not equal wealth, that asset bubbles do not equal wealth, that more liquidity does not equal money but instead equals more debt, and that liquidity does not equal capital.

After this morning’s news of a bounce in mortgage applications, we have two labor market indicators—layoff announcements and ADP—and the Treasury’s quarterly refunding announcement. Small POMO in the 10-17 year range of $1.5-$2.5 billion.