Archive - Mar 3, 2011

Should the US approach June 30 and end up with the highly improbable scenario where there is no follow through monetization, which following Bill Gross' commentary from yesterday (which in turn piggy backs on what we have been saying for months - monetizing of gross issuance and all that) appears unlikely, what would happen to risk, and other, assets? Providing empirical color to that eventuality, which with every passing day is ever more urgent, is David Rosenberg who answers the question: "What happens if there is no QE3?"

John Williams says: "If you look at the government’s latest statistics - the poverty survey of 2009, which is the most recent release, with average and median household income adjusted for inflation (and they use a really gimmick low inflation rate with that one) - it shows that not only has household income been falling the last year or two, but it’s below its near-term peak before the 2001 recession. Household income has not recovered above that, and if you use the CPI-U (the usual inflation rate to deflate that by instead of the gimmick one) it shows that household income today is below where it was in 1973. Again, the average household has not been able to keep up here. If income growth is not keeping ahead of inflation, very simply you can’t have consumption growing faster than inflation on a sustainable basis." Government statistics guru John Williams believes the most important economic indicators used by our political leaders in their decison-making - the Consumer Price Index, the unemployment rate, the Gross Domestic Product - are deeply flawed in how they're calculated. Whether these flaws result from letting theory trump reality or by machinating politicians, the result is the same: we are fooling ourselves at our peril.

Following this morning's near terminal posturing by JC Trichet, who almost, but not quite, is about to hike rates any minutes now, we promise, which saw the EUR surging to near 1.40, a far more troubling side effect is the accelerating flattening of the Bund yield curve. As can be seen below, the German 2s10s has dropped from a high of 210 bps in December to 156 bps, a nearly 25% contraction. Luckily, it has another whopping 14 points to take out the September lows, which back then resulted in deplorable European data, indicating how much more sensitive the continent is to the fluctuations in the yield curve. Furthermore, as March is when the calendar festivities in Europe start for real, German banks are rightfully cursing JCT to hell following his failed attempt to secure his ECB legacy as a hawk on the way out. Should the ECB indeed follow through with an April tightening, look for the iTraxx Senior Financials index to start the slow grind wider as risk in European banks come back with a vengeance.

Food prices will skyrocket, and billions could die. Global warming is leading to significant changes in world weather patterns that will cause droughts in some of the largest food producing areas, causing massive famines. Pack your portfolios with agricultural plays like Potash (POT), Mosaic (MOS), and Agrium (AGU). An exclusive interview with Dr. Paul Ehrlich of “The “Population Bomb.”

Another glorified confidence index based on surveys comes in, and prints not surprisingly at a better than expected 59.7, on expectations of 59.3, and an improvement from last month's 59.4. From the report: " "The NMI registered 59.7 percent in February, 0.3 percentage point higher than the 59.4 percent registered in January, and indicating continued growth in the non-manufacturing sector. The Non-Manufacturing Business Activity Index increased 2.3 percentage points to 66.9 percent, reflecting growth for the 19th consecutive month and at a faster rate than in January. The New Orders Index decreased 0.5 percentage point to 64.4 percent, and the Employment Index increased 1.1 percentage points to 55.6 percent, indicating growth in employment for the sixth consecutive month and at a faster rate. The Prices Index increased 1.2 percentage points to 73.3 percent, indicating that prices increased at a faster rate in February. According to the NMI, 13 non-manufacturing industries reported growth in February. Respondents' comments overall are mostly positive about business conditions and the direction of the economy." And while employment was up modestly to 55.6 from 54.5, the only two trendlines that matter were Prices (inflation) and Inventories (lack of demand), both at multi year highs. The charts speak for themselves.

Is today day three of the Bernanke testimony? Because the dollar just plunged as if the Chairsatan was out there somewhere, lurking, once again, guaranteeing the death of the US currency any minute now. In the meantime stocks are going absolutely insane, even though with oil over $100, GDP estimates and EPS forecasts will have no choice but to be whacked. That said, news of any nature are irrelevant: all that matters is momentum. Remember: momentum inducing "market bandits" are vital to efficient markets. Lastly, the USS Enterprise is slowly making its way to Libya.

As everyone knows all too well by now, High Frequency Trading is arguably among the key culprits for all that is wrong with our broken equity market, culminating naturally with the events of May 6, 2010. Therefore, it is not surprising that regulators in Europe, which now has a much more fair and efficient overall capital market than the US, "plan next year to introduce new rules to restrict the trading activities of these traders -- tech-savvy hedge funds that generate huge volumes of orders -- to prevent a repeat of last year's U.S. "flash crash"." However, since HFT is nothing but a cheap way to promote vapor-volume momentum, while frontrunning everyone in the process, it is only natural that Europe's banks would come out kicking and screaming in its defense: "Europe's top banks are warning global regulators against curbs on high-frequency trading firms (HFTs), insisting that so-called "market bandits" are vital for efficient markets...A panel of managing directors from major European investment banks told the Reuters Future Face of Finance  Summit on Wednesday that punishing these traders was risky because they were a key source of liquidity that benefits all trading firms." Ah, "providing liquidity" - that universal euphemism for frontrunning, quote stuffing, inducing flash crashes and for pretty much every possible illegal activity, except for... providing liquidity. As for the fact that "market bandits" are "vital for efficient markets"... we'll just leave that one alone.

The lack of animal spirits in the gold and silver bullion markets is also seen in the decline of the gold ETF holdings (see chart above) and the Commitment of Traders open interest (see below). Neither show any signs of speculative fever whatsoever. This would suggest that the recent record prices are due to short covering on the COMEX (possibly by Wall Street banks with concentrated short positions as alleged by the Gold Anti-Trust Action Committee or GATA and being investigated by the CFTC) and buying of bullion in the Middle East and Asia, particularly in China. While all the focus is on the geopolitical risk in the Mediterranean, the not insignificant risks posed by the European sovereign crisis, the possibility of a US municipal and sovereign debt crisis and continuing currency debasement internationally are the prime drivers of gold today. Quantitative easing, debt monetisation and competitive currency devaluations have not gone away and are leading to deepening inflation which will likely result in much higher prices in 2011 and 2012.

At least one central bank refuses to drink the Kool Aid: following today's announcement by the ECB which kept its interest rate as expected at 1%, JC Trichet is now making waves in the FX market after announcing, or rather not announcing, that "rates are appropriate" in his opening statement line, a traditional opener to the press conference that follows. Just as notable is that the ECB staff has now hiked the low-end of its inflation expectations for 2011 by about 40%, from a range of 1.3% -2.3% to 2.0%-2.6%, and 2012 from 0.7%-2.3% to 1%-2.4%. Trichet also adds that now very strong vigilance is now warranted and it is paramount to avoid second round effects. Most troubling is Trichet's admission that the latest staff forecasts exclude the impact of the most recent oil jump. And while it is very clear that Trichet is dying to hike rates, the reason he won't is, that's right, Europe's insolvent banks, about which he said that they "should retain earnings, turn to market to strengthened capital bases, and take full advantage of govt. support measures." In other words, it is once again the banks fault that in the inflationary cycle people will be forced to pay more, as the alternative would see the bankruptcy of numerous financial institutions.

The BLS has announced a surprising drop in initial claims, which plunged from a downward revised 388K to 368K, on expectations of 395K. This was the lowest number since May of 2008. "In the week ending Feb. 26, the advance figure for seasonally adjusted initial claims was 368,000, a decrease of 20,000 from the previous week's revised figure of 388,000. The 4-week moving average was 388,500, a decrease of 12,750 from the previous week's revised average of 401,250. The advance seasonally adjusted insured unemployment rate was 3.0 percent for the week ending Feb. 19, a decrease of 0.1 percentage point from the prior week's revised rate of 3.1 percent." The non-seasonally adjusted number came at 351K, a number which if contained means that the so called slack in the economy is evaporating, and that the inflationary picture is far worse than the Chairman expects. These numbers further conform to rumors for a blowout NFP tomorrow, spread yesterday, which says that based on Birth-Death adjustments, the NFP could be well over 300,000. In other news, continuing claims hit 3,774K on expectations of 3,815K, compared to 3,833K previously, and those added to EUC and extended claims were roughly 55K.

Markets positive this morning as the rise in oil simmered and emerging markets posted gains. World food prices met a new high in the latest U.N. report as it seems that the U.S. continues to export inflation. The Fed’s Beige Book released yesterday was optimistic and similar to January’s, with nearly all of the reporting regional banks citing growth in retail and manufacturing despite evidence of rising pressure on prices. Initial jobless claims data today 395K Expected and given last week’s large drop and fairly consistent weather, the release should be on par with last week’s 391K. Fed Chairman Bernanke spoke to House of Representatives yesterday in day two of his Humphrey Hawkins speech, again expressing dissatisfaction with the labor market, confidence in the battle against inflation and concern for America’s fiscal policy. Bernanke’s two days of speeches to Congress showed a conviction to keep short term interest rates low until unemployment levels recovered. Although recent releases show a modest rebound in labor, it may not be enough to push interest rates up as current estimates for 2012 unemployment reach 7.5 to 8.0%.

• Why the Dollar's Reign Is Near an End (WSJ)
• Take a bow Hatzius: John Taylor takes apart Goldman's economic "achemists and quacks" (Bloomberg) - This is what happens when you sellout to the propaganda machine
• William Cohan joins the tinfoil hat brigade - A Conspiracy With a Silver Lining (NYT)
• Gaddafi strikes oil areas, Arabs weigh peace plan (Reuters)
• No criminal charges ever: Officials Disagree on Penalties for Mortgage Mess (NYT)
• Bernanke Sees 200,000 Hit to Jobs from Budget Cuts (Reuters)
• It's Taps For the Still Weakening Dollar (RCM)
• Asia Moves to Shore Up Strategic Oil Reserves (FT)
• Beijing home sales slump in February (China Daily)

When two months ago, in the first week of January, we observed that the U.N. Food and Agriculture Organisation's Food Price Index had hit a record we said: "The last time food prices hit ridiculous levels, the immediate outcome
was global food riots in places such as Haiti and Bangladesh. Which is
why distributors of riot equipment in the world's poorest countries may
be in for a bumper crop as the Food and Agriculture Organization has
just announced that world food prices have just surpassed the previous
record last seen in 2007-2008." Little did we know just how prophetic this statement would turn out to be. Well, the FAO has just released its latest food price update and as expected, it is a new all time high. The U.N. Food and Agriculture Organisation's Food Price Index hit its second straight record last month, further passing peaks seen in 2008 when prices sparked riots in several countries, driven by rising grain costs and tighter supply." And with oil now joining food, which means that the inflationary vicious spiral is now on, it is only a matter of time before ever more hungry countries join the wave of revolutions, now that Tunisia and Egypt have shown it can be done. On the other hand, our expectation is that the IMF will promptly seek to put out any fires before they become infernos, with the US taxpayer reeling from the double whammy of Bernanke's inflationary policy consequences: once at home, and once by subsidizing foreigners.

The main story overnight, which has cut gains in precious metals and oil, and set futures surging is a bizarre rumor that Venezuelan dictator Hugo Chavez has proposed a Libyan peace plan which is being considered by the Arab League. "Oil prices were lower on Thursday as speculation a peace deal may be brokered for Libya prompted some investors to cash in gains, but the market remained elevated on concerns over ongoing unrest in the region. A report the Arab League was considering a peace plan for Libya proposed by Venezuelan President Hugo Chavez led some players who had bet on rising prices to close their positions overnight." In terms of credibility and actual practicality, this story has about the same weight as the false rumor spread last week that Gaddafi was shot. But the desperate market will take any myth that sends it surging and run with it. "As for the proposed peace plan, Arab League Secretary-General Amr Moussa told Reuters, "We have been informed of President Chavez's plan, but it is still under consideration." Analysts were sceptical the plan would lead to peace. "It is doubtful that the protesters in Libya will agree to enter negotiations with Gaddafi as the plan of Venezuelan President Chavez suggests," Commerzbank said in a note." So while a US aircraft carrier is happily swimming toward Libya (fact), stocks once again bury their head in the sand on the smallest amount of misinformation with the hope that central planning has once again regained control.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 03/03/11