Archive - Mar 1, 2011

Fed Kansas President Honeig recently uttered a series of absolutely INCREDIBLE remarks concerning the US Federal Reserve. He said the US has “deeply” undermined free-market capitalism and that the TBTF banks pose the “greatest” risk to the economy. This kind of aggressive is a clear indication that Hoenig has seen the writing on the wall and is distancing himself from Bernanke in order to present himself as a potential future Hawk Fed Chairman.

The total farce that is US diffusion index data continues, with the manufacturing ISM printing at 61.4 on expectations of 61.0, and compared to 60.8 previously. Contrary to what the respondents actually said (see below) there was not one adverse thing to be gleaned from the ISM data. In fact, the data is now so unbelievably ridiculous that the Employment Index came at 64.5, the highest since 1973! And this as the country sees roughly 17% in U-6 underemployment, and the number of Americans on food stamps, well over 40 million, is at an all time record. This lunatic number inspired the ISM's Ore to say that "Employment looks fantastic" even though in the next sentence he confirms that "many US companies are in a margin squeeze." Um, psychotic medications much? The US Department of Truth has now gone full retard.

Ben Bernanke, who is expected to appear before the Senate for his biannual Humphrey Hawkins presentation any second, has just released his latest Monetary Policy Report to the Congress. Some of the highlights from the report: i) Bernanke says longer-term inflation expectations will remain stable, and risk of deflation has become negligible; ii) The Fed has tools needed to withdraw stimulus, and reiterates rates will remain low for extended period; iii) A sustained oil price rise would be a threat to growth, price stability, particularly if it unmoors inflation expectations; iv) The recent rise in commodity prices likely will lead to only temporary and modest increase in US inflation; The live CSPAN webcast can be watched here.

How about an S&P 500 down to 666? The Saudi regime falls, and 12 million barrels a day disappears from the market for the indefinite future. Unemployment hits 15%. Obama is toast. Your broker turns bearish and tells you to sell everything. Welcome to the Great Depression II. It starts raining frogs.

No missing tank rumors were disseminated in the copy and pasting of this latest Reuters blurb on what is happening in Iran now. Incidentally, if the reports from Bahrain are even remotely true, it is all downhill from here as the religious aspect of the food revolutions comes out front and center. "Iran's security forces have been deployed to the streets on Tuesday ahead of a planed opposition rally calling for lifting house arrests imposed on opposition leaders, an opposition website reported. "A large number of security forces have been stationed at main streets and some squares of Tehran since noon to prevent gathering of opposition supporters," said the Sahamnews website. It is unclear if any Bloomberg reports were beaten with broomsticks as a result of this latest crackdown on demonstrations.

Yesterday we reported that as part of the brave US crackdown on Libya, up to $30 billion in Libyan assets have been frozen (and as noted yesterday, we still look forward to finding out just which US banks were the biggest recipients of Libyan recycled capital, whose source was naturally mostly the US and Europe... and actually European too, but more on that in a second). According to the latest BIS deposit data, however, this is merely half of the deposits held by all Libyan residents aborad as of September 2010. Incidentally this makes Libya the third "richest" country in MENA when looked at the amount of foreign deposits, just behind Saudi Arabia with $156 billion and the UAE with $75 billion (although both of these countries have massively more assets compared to Libya's nominal $1.6 billion). Bloomberg digs deeper into the number: "Most deposits were from banks in Libya, including branches of foreign institutions, while $8.2 billion was from non-bank Libyan residents, according to quarterly banking statistics compiled by the BIS and last released on Jan. 28." And now that Libya's seized assets are in the no man's land of international judicial limbo, and Libyan depositors likely to start a wholesale scramble to recoup whatever capital is still unlocked, how long before every nation in the revolutionary region decided to do the prudent thing and convert their deposits into tangible assets before some politicians decides to do the same asset freeze with their money. Lastly, just which European banks are the recipients of these hundreds of billions in deposits between the region's three biggest oil exporters?

All those naively hoping that Saudi Arabia has suddenly developed some altruistic bent and will act against its own interest by increasing excess production (which according to Jim Rogers it simply does not have), to keep oil prices lower, are advised to reevaluate. According to CBS, citing "the conclusion of an internal report prepared by a major investment firm based on information from its extensive and knowledgeable contacts within OPEC" Saudi Arabia won’t take "significant steps to bring down the price of crude oil until Brent, the grade traded most on the open market, reaches $120 a barrel, about 8 percent above current levels." More from CBS: "In the report, which was made available to MoneyWatch on the condition that the firm not be named because briefings with its contacts are off the record, the OPEC sources reiterate their earlier analysis of the oil market, which has proven to be on the nose. They contend that the delicate political situation  across the Middle East and North Africa - including the fragile state of affairs within Saudi borders - is preventing the kingdom from doing the sensible economic thing and increasing production to keep prices under control." Which simply means that Rogers and all those doubting the veracity of Saudi's motives, not to mention the kingdom's rhetoric that it has boosted output to over 9 million bbls/day, have been correct, and the supply/demand dynamics of the stock market have been largely unchanged since Libya took over 1.6 million barrels of oil from the market.

That didn't take long. From Reuters: "A Saudi Arabian official denied a report on Tuesday in an Egyptian newspaper that the kingdom had sent tanks to Bahrain to try to quell protests there. Brent crude oil hit a session high of $113.15 a barrel on the report before easing to $112.96 by 1337 GMT. The official at the Saudi defence ministry said no tanks had crossed the causeway to Bahrain. The official requested anonymity." Obviously, should a picture or two appear shortly confirming the original rumor, the "anonymous" source's credibility may be jeopardized...

The world has officially gone insane. After making a mortal enemy out of Mark to Market and halting it pretty much everywhere as an indicator of true asset value, Italian banks are now aggressively urging to implement Mark to Market to take advantage of surging prices in, get this, gold! From the FT: "Italian banks, which by a quirk of law are shareholders in the country’s central bank, are lobbying to have their stakes in the Bank of Italy marked-to-market on the back of surging gold prices in an attempt to ease regulatory pressure on them to raise capital in advance of this summer’s stress tests." You can't make this up: basically the world financial mafia says Mark to Myth when prices are low, and Mark to Market (on selected assets) when prices surge to a record.

Silver has risen another 1.4% today to a high of $34.44/oz and above the 31-year interday high of $34.33/oz reached last Tuesday (February 22nd). Silver is higher in all currencies this morning, especially the Japanese yen. The news that Saudi Arabia may be sending tanks to crush anti-government protests in Bahrain saw buying of silver, gold and oil. The backwardation and news regarding delays and difficulty of securing silver bullion in volume including the Royal Canadian Mint having difficulty sourcing physical bullion from bullion banks suggest that silver could soon break out and move sharply higher. The moves in silver have been greeted with the usual silence by mainstream financial media with little or no coverage or fanfare about the record highs. Indeed, only those who peruse the specialist press and make it their business to inform themselves about silver, would even be aware of the record highs.

While US stock futures continue to be obstinately high capitalizing on the last remaining shreds of a confirmation bias out of formerly strong European economy from the time when the EUR was still low, and with the US economy failing to pick up the world slack even with the dollar at 4 month high the hangover sure to set in any minute (and the oil price certainly not helping), perhaps the only true indication of risk is being represented by the local MENA stock markets, of which the Saudi is currently the best example (after Egypt's stock market opening planned for today, was once again delayed). At last check the TADAWUL was down over 7% and the trend is certainly not your friend, while Saudi CDS was the biggest widener this morning per CMA, hitting 140 bps. The wildcards at this point are Iran and Syria, the first of which will see any push into Bahrain as a religious provocation, while the latter is a host to a brand spanking new Russian navy base. If any of these two see some media prominence in the next 48 hours, look for today's slide to continue.

• China says media must 'cooperate' after clampdown (AFP)
• Shirakawa Says Current Yen Level 'Not Working As An Additional Risk Factor' (WSJ)
• China Sees Drop in New Bank Loans (WSJ)
• EU Raises 2011 Growth Forecast, Sees Inflation Accelerating (Bloomberg)
• Europe Wary of Rethink Over Irish Bail-Out (FT)
• Charlie Sheen v Muammar Gaddafi: whose line is it anyway? (Guardian)
• BOE's King Says Raising Rate to Make a Gesture Is Self-Defeating (Bloomberg)
• Cameron Says UK Could Arm Rebels (FT)
• Bill Gross Gets `A' for Effort on Trader Greed (Bloomberg)

• Australia's central bank keeps benchmark interest rate steady, as expected.
• China Treasury Holdings rise to $1.16 trillion in December, US data show.
• China’s PMI fell to 52.2 from 52.9 in Jan - slowest pace in six months.
• European economy recovers; joblessness below 10% but inflation still above target.
• Oil trades near one-week low after Saudi Arabia offers to cover supplies.
• US approves first deepwater drilling in Gulf since BP oil spill.

Markets in positive territory this morning. NY Fed President William Dudley said yesterday that unless inflation expectations are significantly surpassed, short-term interest rates will remain low, while also adding that no change in current monetary policy is likely. In contrast, St. Louis Fed President James Bullard said yesterday in an interview that the Fed will finish QE2 without full dispensation. The statements reflect the heating debate over the future of the current stimulus program. Economic events today include ISM, which by all preliminary indicators should print ahead of the 61.0E. Such a high print might well set the stage for a front end selloff, which we would use as an entry point as we do not believe the historical relationship between ISM and overall GDP growth will hold owing to the fact that ISM will be more bolstered by large sized exporters that are neither the trough of the economy, nor the path it will take back. Additionally today features Fed Chairman Bernanke’s Humphrey Hawkins testimony. Today’s Senate Banking Committee portion is usually calmer than tomorrow’s House Financial Services Committee schedule, but we expect the usual grandstanding from legislators and for Bernanke to be cautiously optimistic regarding the economy, but defensive about monetary policy. The market has in the past interpreted commentary regarding potential exit strategies as being indicative that those strategies are about to be employed, therefore we think Bernanke will avoid that discussion as best he can. If he does not, however, we believe that as with the ISM above, the front end should be bought up on a selloff.

As oil (read Brent) looks set to take out interim highs following news of a rapid escalation in Bahrain and Saudi Arabia, it will be interesting if Ben Bernanke, in his first of two semi-annual Humphrey Hawkins reports before Congress and the Senate, will actually discuss what is relevant: namely the inflationary surge in every single commodity, and plunge in the dollars, and the Fed's continuing preposterous policy of only caring about the Russell 2000 instead of actually doing anything to improve the economy. Reuters' advance look of today's presentation before the Senate Banking Committee at 10:00 am which will be webcast on Zero Hedge is quite amusing: "Federal Reserve Chairman Ben Bernanke will likely remain skeptical about the strength of the economic recovery in testimony on Tuesday, despite recent data pointing to improvement, signaling the central bank is unlikely to cut short its $600 billion stimulus plan." Why skeptical? Has he not been listening to the endless stream of permabulls on TeeVee every day, not to mention the teleprompter, all of whom have invested their entire reserve of credibility in lying to the public that we are in a V-shaped recovery and what not. Or is the economic recovery only and always merely a function of the Fed's ongoing injection of $100+ billion directly into the banking system (and the Russell 2000)? Because oddly the "pundits" always continue to ignore that one minor point.