Archive - Mar 2011

That chart from Tyler's article is reason enough by itself to get back to our BBB strategy (bullets, beans and bullion) and head for the fallout shelter - even without the fact that there is ACTUAL FALLOUT spreading across the globe from the STILL NOT FIXED nuclear reactor in Japan.

The no confidence vote in Prime Minister Stephen Harper's Canadian government is expected to start momentarily. Just like two days ago when Portugal fell, this event will likely be seen as a buying opportunity of both the USDCAD and the CADUSD. After all - there are trillions in excess liquidity sloshing around which must be put to use even if in mutually offsetting trades. Follow the event live at the following webcast from CTV.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 25/03/11

The bears are back, discussing the usual topics du jour, which in this case is a rather humorous listing of the most recent 99 black swans year to date in 2011, and their impact on silver. Funny stuff.

Highlights from the just released speech by Philly Fed hawk Charles Plosser:

• Fed's Plosser says would want to make explicit the Fed's commitment to a numerical inflation objective
  
• Says important to communicate a systemic plan that describes where Fed is going, how it will get there
• Says his proposed strategy would tie pace of asset sales to size of interest rate increases
• Says his preferred exit strategy would raise rates, shrink balance sheet concurrently
• Says failure to exit in timely manner will have serious consequences on inflation, economic stability in future
• Says monetary policy will have to reverse course in the not too distant future
• Says consumer spending continues to expand at reasonably robust rate
• Says US economy seems to be on much firmer foundation
• Says labor market conditions are improving

In other words, an attempt to return confusion over the fate of QE3. As for the Fed existing anything.... good luck. As part of his exit proposals, Plosser proposes two exit plans (12 and 18 months) both of which sees a dramatic reduction in reserves, a hike in IOER, and asset sell offs. Should the Fed indeed proceed to do this, the market will prolapse.

The latest news from Fukushima continue progressing from bad to worse. Which of course means that the (physical) silver lining around the mushroom cloud will be that much more potent: after all, the greater the destruction, the higher the Russell 2000. Just ask the Keynesians.

• FUKUSHIMA REACTOR VESSEL MAY HAVE STUCK VALVE, UCS SAYS
• TEPCO FINDS POOLED WATER AT ALL FOUR TROUBLED REACTORS: KYODO
• INCREASED RADIATION RELEASE FROM FUKUSHIMA POSSIBLE, UCS SAYS

This in turn has prompted the Japanese government to increase the "voluntary" evacuation radius frmo 20 to 30 kms, finally. Shortly, this will be 80. But not before many more innocent people are irradiated and sacrificed at the altar of Nikkei 10,000 (and RUT 36,000).

While today's consumer confidence index missing expectations (at 67.5 or the lowest since April 2009) was not a big surprise following our prediction of just that happening when we reported that the Bloomberg Consuemr Comfort index hit a 7 month low, what was very disappointing was that the Expectations component had its fifth largest drop in history, plunging from 72 to 58. This is a lower reading than that recorded when the "recession", according to the NBER at least, was still raging. As a reminder the recession ended with "expectations" at 70.

And there goes Syria.

An evil plan to raise the prices of Thin Mints while no one is looking. If you can’t trust the Girl Scouts, who can you trust? In this deflationary environment, companies are loathe to raise prices. Food companies are especially hard hit, with many commodities like wheat, corn, sugar, soybeans, and coffee up 50%-300% in a year. Any attempt to pass these costs on to consumers is punished severely. Who will betray me next? The US government? The Department of the Treasury? The Federal Reserve?

Three months ago, there was some confusion when SocGen's Dylan Grice, one of the brightest big picture strategists out there, released a report profiling the long-term real return on commodities (which was zero), leading some to speculate he was bearish on gold and/or other precious  metals. Today, Grice puts the matter to rest with his latest Popular Delusions piece: "Why this commodity specific value investor likes gold." To wit: "In the hard sciences knowledge builds cumulatively. It propels the relentless growth in man’s ability to do more with less, which makes commodities such a lousy investment in the long term. Yet in the realm of social decision-making mankind is a fool, unable to learn the wisdom of posterity and doomed to repeat its mistakes: the first credit crunch occurred in the Rome of 33AD and the ancient Greeks lived with high inflation. Confidence in central bankers’ ability to learn from past inflation is as likely to be misplaced as it was in their ability to learn from past credit booms. Gold remains the cleanest insurance against such overconfidence." And confirming gold's very unique position in the investment pyramid, Grice's conclusion borders on the ontological: "Shorting mankind’s ingenuity isn’t a smart thing to do. But ingenuity isn’t wisdom. And shorting mankind’s ability to absorb wisdom … well, aren’t you silly if you don’t? With less of the technological risk you’re taking when you buy any other part of the commodities complex, gold is the oldest, purest and simplest way." It appears ever more are starting to agree with this perspective.

The People’s Bank of China are very positive on gold in their just released annual Financial Markets Report. They remain concerned about risks posed to fiat currencies such as the dollar and euro, about asset price bubbles internationally and the risk competitive currency devaluations poses to fiat currencies. The report is much more positive than last year when they appeared to talk down gold’s prospects somewhat. Skeptics suggested that this was in order to allow them to continue accumulating gold without the price running away from them. The Chinese central bank said that inflation risks in economies internationally will support demand for gold, with prices for the precious metal likely to continue to make record highs. While the risks of falling gold prices shouldn’t be ignored, political conflict is likely to support higher gold prices. Inflation risks mean demand for gold will remain strong and investment demand from a 'value preservation' angle will be very strong supporting gold at higher levels. It said it is considering allowing more foreign financial institutions and companies to participate in China's interbank bond market, beyond international development agencies, and it is studying gradually opening the country's gold and futures markets to overseas yuan holders.

Today's final Q4 GDP revision indicated a 3.1% annualized rate of pick up in the economy, modestly higher from the previous print of 2.8% and in line with expectations of a 3.0% reading. Of course, it being almost April 2011, this number is by now completely irrelevant. Nonetheless, here are the components that contributed to the difference: "The increase in real GDP in the fourth quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, and nonresidential fixed investment that were partly offset by negative contributions from private inventory investment and state and local government spending. Imports, which are a subtraction in the calculation of GDP, decreased." As the chart below shows, once again Inventories was the swing factor, which detracted 3.42% from Q4 GDP as opposed to 3.7% in the prior two GDP estimates. As Q1 2011 GDP data starts coming out, we are confident inventories will once again be a contributor to GDP "growth" as this most hollow indicator of economic improvement needs to pick up the slack for declining PCE and trade balance contributions.

And another major hit for all those still unlucky enough to own Portuguese bonds: "Following S&P's lowering of its sovereign credit ratings on Portugal to BBB on Friday 25 March 2011, RepoClear participants are advised that with effect from Monday 27 March 2011 Portuguese Government bonds will no longer be eligible for delivery in any of the RepoClear €GC Baskets. Until today’s downgrade Portugal had been eligible for the single A €GC Basket." Luckily, Portuguese bonds are still eligible for trading on OTC/Bulletin Boards, where the bid/ask will soon be greater than the actual bonds price.

Markets positive again this morning amid better than expected corporate profits while the debt crisis in Europe intensifies. The Fed announced yesterday that Bernanke will hold four press briefings a year to improve transparency and explain its decisions to the public. The first two sessions will be in April and June and will likely focus on providing clarity on QE2. Today will see the release of GDP estimated at 3.0% QoQ v 2.8% prior. German pressure pushed EU leaders to cut the amount of initial startup capital for the EFSF/ESM in 2013 from €40B to €16B, reducing Germany’s burden in the rescue mechanism. S&P downgraded Portugal two notches to BBB and left the country on negative watch. Fitch downgraded two notches to A- also leaving the rating on negative watch.

In today's NYT, in a surprising critique of the company that is the right arm of Obama's administration, there is finally an extensive focus piece on how GE, which made $14.2 billion in 2010 ($5.1 billion of which came from the US), paid, wait for it, zero taxes in 2010. NYT summarizes this odd quandary as follows: "Its extraordinary success is based on an aggressive strategy that mixes fierce lobbying for tax breaks and innovative accounting that enables it to concentrate its profits offshore. G.E.’s giant tax department, led by a bow-tied former Treasury  official named John Samuels, is often referred to as the world’s best tax law firm. Indeed, the company’s slogan “Imagination at Work” fits this department well. The team includes former officials not just from the Treasury, but also from the I.R.S. and virtually all the tax-writing committees in Congress." In fact, it is far, far worse. As Zero Hedge disclosed, when we looked at GE's tax allergy six months ahead of the NYT, or as early as October 2010, we observed that "between 2002 and 2009, during which timeframe the firm made a generous
$164.4 billion in pretax net income (not to mention $639 billion in domestic revenue, just over half of total revenues of $1.2 trillion) it paid only $5 billion in domestic current taxes, or a 3.17% tax rate!" In other words, GE has now made over $700 billion in domestic revenues, and has paid $5 billion in the period 2002-2010. Truly tax evasion Imagination at Work.