Archive - Mar 10, 2011

Nonunion Georgia’s public pensions are, in fact, three times as generous as those of labor-friendly Vermont, where more than half the public work force has collective bargaining...

That China's February inflation just came out at a consensus-beating 4.9% is no surprise. After all, the country miraculous slipped just below the consensus so the Department of Truth had to keep things somewhat symmetric. And yes, while this is the 5th consecutive month that Chinese inflation is higher than the official target of 4%, this is not the news of the evening: a press release just issued by the PBoC however is...

The chart that answers all pent up QE2-related questions: whether one wants to know the summary purchase statistics during the life of QE2, the cumulative market reaction, the monetary aggregate response, or seeks an answer to more occult topics such as variance around the Submitted-Accepted ratio, or weighted age of purchases, it can all be found here.

Shortly Zero Hedge will present our quarterly analysis of the liabilities held by the shadow banking system. It's quite a doozy, and cements our belief that whether immediately following or shortly after June 30 (a day, a week, a month), the Fed will have no choice but to proceed with further monetization of public debt issuance, as the private sector debt retrenchment continues at truly alarming levels, leaving just one source of debt money available - the US central bank itself. And with the Fed's desire to stimulate inflationary expectations, it will be forced to do what it is doing precisely as shown below. In the last fortnight period, the Adjusted Monetary Base increased by the second biggest amount in the past year, or $80 billion, following the previous increase of $142 billion as of February 23, or a $222 billion increase in a month. This is due to a surge in excess reserves following the winddown of the SFP program which in the past week increased by $82.6 billion (full Fed Balance sheet breakdown to follow). We continue to expect that Excess Reserves will hit $1.7 trillion by July, or over $300 billion higher from the current level of $1.380 trillion. In the meantime, observe what happens when the Fed goes hog wild with inflationary expectations. A few more days like today in the S&P, and expect Jon Hilsenrath to start the QE3 leaks. And never forget - to the Fed, the Economy and the Russell 2000 are equivalent.

Earlier Lear Capital presented their view on what the basis for Chinese gold accumulation may be. Next we present a comparable analysis by SmartMoney.eu which takes a deeper dive into the demand mechanics originating in China. To wit: "In some parts of Asia, inflation is rampant. Especially in India, food prices and other staples are going through the roof. The prices of some vegetables and spices has risen more than 100%... In China, the prime goal of the communist party is to maintain social stability and to avoid unrest. Targeting inflation is key. Therefore, many Asians are investing their hard-earned money into precious metals. The latest news from China corroborates this: in the first two months of 2011, the Chinese have imported 200 tonnes of gold, which is as much as in the entire year 2010! This is just individual investor demand, we are not even speaking about central bank demand, accounting for the entire Chinese mainland gold production! Chinese gold fever has caused gold demand to triple in the past 10 years, according to the World Gold Council. The Chinese are about to overtake the Indians as the world’s biggest gold consumers." For short-term market timers, as we predicted a week ago, continued pressure on risk assets, such as that today, will most certainly result in forced liquidation in precious metals such as gold and silver. This is absolutely guaranteed as margin calls pile in, and hedge funds, already levered to the hilt have no choice but to sell all outperforming assets, among which gold is at the top. Once liquidations are completed, the question will then be: does the Fed resume its inflationary path (and as a just completed analysis by Zero Hedge confirms, the shadow banking system is once again declining leaving few options for Bernanke). If that is the case, then the long-term fundamentals from a speculative standpoint revert. Add to that the discussed organic demand, and increasingly loud calls for $2,000 gold may materialize sooner rather than later.

It's no secret that China's gold demand is soaring. They are buying mines, concentrates from which to extract gold and as much physical gold as they can secretly buy in world markets.

Reports also indicate, the people of China are being encouraged to buy some gold with every paycheck as the future of the world economy is uncertain at best. As world debt expands, currencies are debased and gold prices rise as a result.

I see trees of green, red roses too...and I think to myself what a wonderful world--Louis Armstrong

First and foremost, the bearish rising wedge pattern in the S&P 500 has broken to the downside. These patterns have a nasty habit of dropping to their base, so we could see stocks at 1100 in a hurry. Indeed, not only have we broken the lower trendline that supported stocks since September, but we’ve also taken out major support at 1,300:

When a bankrupt zombie company offers to purchase from the Fed the very instruments that put it in bankruptcy in the first place, and which the Fed was forced to put on US taxpayers in order to perpetuate the status quo farce, you know the words Banana republic don't even start to begin to express the describe the lunacy we live in.

From Reuters:

• Submits offer to buy all of rmbs owned by Maiden lane II for $15.7 billion
  in
  cash
• 
  If accepted, this offer will substantially reduce the amount of
  outstanding
  government assistance to AIG
  
• If accepted, offer will guarantee frbny earns a profit on its interest in
  Maiden lane II
  
• Says total outstanding assistance from U.S. government will be reduced by
  about $13 billion to total of about $26 billion
  
• Says conditions that necessitated Maiden lane II have been resolved

Hmmm...

Reader Nick Ricciardi submits a rather controversial view on the future of Japan: "Over the past few weeks there has been a new round of articles and commentaries predicting doom for Japan’s economy. Yet, as usual, Japan’s bond markets have shrugged off these fears. Japan’s capital markets and its macro-economy are replete with confounding puzzles. But they are all rooted in two basic misconceptions that Japanese hold concerning their debt. Moreover they are understandable if analyzed from a perspective of both the public and private sectors. Doing so gives us insight into why Japan’s public debt offers the lowest yields of any nation when its debt/GDP ratio is the highest, why Japan’s corporate credit spreads are so narrow and its yield curve almost flat, why Japan’s bond prices are less volatile than those of other industrialized nations when its economy and stock market is “leveraged” to global growth, and why the yen tends to strengthen when Japan’s economy turns down."

After yesterday the Wisconsin Senate passed the controversial Union Bargaining Bill, using a surprising loophole, resulting in a Union occupation of the Capitol building, the next formality before its enactment has just taken place: the Wisconsin Assembly has just given final passage to the bill, meaning just the signature of Governor Walker is all that is needed at this point, something which will surely happen in the next few hours. And after earlier the Obama administration expressed its disappointment that Wisconsin managed to find this legislative loophole, thereby making the farcical taxpayer funded self-exile of the state democrats all for naught, we are confident the president will be making the teleprompted rounds imminently.

What is coming will hit every person. Rich, poor, young, old, healthy or sick.

How can the SEC's Office of Risk, Strategy, and Financial Innovation "provide the Commission with sophisticated analysis..." when there's no one running the Office of Data & Data Analysis?

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 10/03/11