Archive - Mar 2011

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 02/03/11

“There is no room for a king or guardian or President to replace Banksta power.”

The conclusions of our "2011 Thesis - Beggar-thy-Neighbor" was that the world is on a glide path towards a global Fiat Currency Failure and the emergence of a New World Order. We are unclear whether it is planned or happenstance, but what the regularly conducted abstraction mapping process clearly indicates is that it is presently a high probability outcome. The paper uses the Process of Abstraction to avoid the media noise, abstract the facts, synthesis key macro drivers and then arrive at the highest probability outcomes. In the recent article "2011 Tipping Points" we laid out the 37 major Tipping Points we are presently tracking. These Tipping Points are show on the left hand side of the two charts below, which are the basis upon which our ongoing analysis process is conducted. These highly simplified representations of the process gives the reader a graphical perspective on what leads us to our conclusions.

The must watch 5 minutes from today's second day of Bernanke hearings before congress is the following interaction between the Chairman and his archnemesis: Ron Paul. The first brilliant rebuttal by Ron Paul has to do with the ongoing "Federal Reserve lecturing" on why Congress should not allow out of control deficits to escalate. As Paul so correctly put its, "the Congress and the Fed are symbiotic because the Congress spends and they know there is a moral hazard involved because they know that if interest rates go up, the Fed accommodates them. So the Fed really facilitates this spending, and until we realize this I think the Fed is involved with our deficit and encourages it as well as the Congress." This is an absolutely smack on point which goes to the whole heart of the real premise behind QE2: keeping rates low so there is no prohibitive lever against runaway deficits. That, and of course, ending up the primary holder of US debt so that the Treasury can convert "interest expense" into "revenue." And if the 10% of the public that benefits from a Dow 36,000 believes the false "wealth effect" myth in the process (nominal, not real) so much the better. It did, after all, work for a while in Weimar Germany. And while Paul touches on other key topics such as purported price stability (there recently was a scientific paper proving there has been no real change in price stability before and after 1913, which we will track down shortly), real plunging employment and the definition of the dollar (to which Bernanke's repartee that "Consumer don't want to buy gold" should probably be reevaluated in light of today's all time record high price). Yet one exchange that was missing, which was not between Paul and Bernanke had to do with Bernanke's reasoning why in his view it was not possible to get back to the gold standard: "there is not enough gold." That, unfortunately, is the most patently absurd claim ever and coming from a Fed Chairman we are pretty confused by its implications. Surely Ben realizes that all that matters is the price equivalent ratio of conversion. There will be more than enough gold if gold is converted instead at $2,000/oz at $20,000, or failing that, $200,000 and so forth. There will be more than enough gold if one ounce is equivalent to a million piece of linen or more, or more realistically, at $6,300 as Dylan Grice quantified previously. We guarantee it. And after all, that is the whole point of a gold standard: not to dilute the currency infinitely.

This is where the teaser goes. It's all teaser like.

Wonder why nobody really cared about the Libyan regime until two weeks ago, when it suddenly became cool to hate on Muammar, especially by his former head of state "best friends"? Simple: weapon sales. While Libya was happily exporting oil, and using the proceeds to reinvest the money in the form of €62 billion or so of deposits in European (and apparently US) banks, bypassing Money-Laundering Provisions freely, it also used a fair portion of the proceeds to procure weapons. The amount, at just under €1 billion between 2005 and 2009 is not nominal, and certainly led to some very appreciated top and bottom line beats for a variety of arms makers. And while the data was not previously available, the Guardian now makes it public for the entire world to realize that while Italy relied on Libya for a great portion of its oil imports, it was also the biggest maker of Libyan weapons (which makes sense: the country needed to protect its investment) in 2009 and 2007, and was just behind France in 2008.

Must read observations from Merrill's Harley Bassman, formerly head of the RateLab: "Maybe I am showing my age, but I can assure you that as World Political events go, what is happening in the Middle East is actually the BIG ONE...The reason there is no "Flight to Quality" bid for USTreasuries is that USTs are no longer the "Quality" asset. Since the FED has turned on the printing presses, the "value" of the dollar has steadily declined. This is why the "Flight to Quality" is happening in Gold, Oil, Copper, Cotton, etc...Attention all you non-inflationists (and you know who you are), what more evidence do you need that the Govt's Plan "A" (inflation) is well underway?"

The key highlights, in which we read that yes, the margin squeeze is here.

• Non-wage input costs increased for manufacturers and retailers in most Districts.
• Retailers in some Districts mentioned they had implemented price increases or were anticipating such action in the next few months
  
• Manufacturers, in a number of Districts reported having greater ability to pass through higher input costs to customers. (oh really, good luck)
• Most reporting Districts noted continued strong agricultural commodity prices.
• Wage pressures remained minimal across all Districts; although Philadelphia, Dallas, and San Francisco noted that most wage increases were for workers with specialized skills.
  

Now that silver continues hitting nominal high after high (except of course for the record price hit during the Hunt Bros period), and there is a very distinct possibility we may see an unprecedented melt up in the price of silver to over triple digits for a variety of previously discussed factors, here is a post we produced a year earlier, courtesy of a "deep insider" which dissects with exquisite detail the nuances of silver market manipulation, which in retrospect may have been just a little early. Considering that every single trope mentioned is now in play (even the unmasking of Buffett's unbelievable PM bashing hypocrisy when he himself was one of the people who utilized blatant silver market manipulation for his own purposes when it suited him back in 1997 to send silver soaring), we believe readers should re-read this post in its entirety as it presents a walk-thru for the mechanics, and strategy, of the ongoing unprecedented move higher in the shiny metal.

Those looking for alternatives to middle eastern oil, might look to Russia, the world’s largest oil producer, and the Market Vectors Russia Fund (RSX) with 37% of net assets invested in the oil and gas sector.

The U.S. is now on a similiar trajectory to decline, as its financial Elites have abandoned investing in productive enterprises and trade for the more profitable trade in financial duplicity and fraud, a.k.a. "financial innovative instruments" which arbitrage risk to the immense gain by the financial houses originating the arbritrage. The game is simple: create instruments which supposedly lower risk, but which really only mask risk behind complexity. Then, when the trade blows up, the traders transfer the stupendous private losses to the taxpaying public via sovereign debt. Once their debts and losses have been cleared, then they start the game over again. Why bother with risky productive assets when this financial gaming is so profitable and risk-free? Indeed. And there you have the dynamics of decline: the immutable math of a slow-growing economy and fast-rising costs of promises, anda financial Elite which has abandoned productive enterprise in favor of financial manipulation and illusory "products." You can't consumer more than you produce for long, and that's the "promise" that will be broken: that we can heedlessly consume more than we produce forever, with no consequences.

One of the most critical questions that has to be asked in light of yesterday's revelation that among the banks providing banking and asset amangement services for Libya were Goldman Sachs, JP Morgan and Citigroup, is just how did Libya get an exemption for anti-money laundering provisions both in Europe and the US. Oddly enough, this future mainstream debate arises not in the US, where any form of critical thinking appears to be immediately curbed by SEC Rule 201 (for all those calling for a hike in the SEC's budget, we suggest the following contrarian thought experiment: let's cut its budget to zero and see how long before anyone notices) , but out of the UK, where a reader writes in to the FT (oddly enough, partially owned by the Libyan Investment Authority) with the following very simple question: "It seems to me entirely implausible that Col Gaddafi could have earned
billions of dollars through legal means. And yet if the AML procedures,
to which we are all subjected, have not been applied rigorously to the
likes of Col Gaddafi and his family, one is forced to ask what purpose
they really serve." Or what purpose any regulation serves in general when fraud results in surging stock prices, and companies that adhere to the rules are promptly wiped out in this bizarro capitalist world.

And for today's most radical and ingenious resolution of how a country deals with an energy crunch we go to Chile, where courtesy of Reuters, we read that the government has just decided to extend summer by three more week to avoid a spike in energy usage. "Chile will delay the end of its summer time for three weeks as the country faces an energy squeeze because of drought and high demand, the government said Wednesday. Chile relies heavily on hydroelectric power to meet energy needs in the world's top copper producer, and rain shortages force generators to rely on costly fuel-driven plants, compounding inflation risks in the country's fast-growing economy." In other words, in addition to starting revolutions around the world, the Chairman is now forcing governments to rise up defiantly against the rotation of the earth around the sun.

I erred...

Earlier we said: "In advance of the completion of today's POMO we have just one question: will the Fed do its taxpayer fiduciary duty and
monetize the cheapest bond (PM6 or the 2.125% of 12/31/2015), which
trades 0.7 bps cheap to the sector, or, instead, bend over to Jamie
Dimon et al again and instead buy the bond most profitable to flip by the Primary Dealers the just issued QJ2 (2.125% of 2/29/2016), which is actually 0.2 bps rich. Tune in at 11 am to find out." The results are in. As expected, the two bonds monetized the most by the Fed in today's $6.7 billion POMO are QJ2 to the mount of $4,891,000,000 and PM6 for $1,196,000,000. In other words, the Fed's "fiduciary" allegience is to the Primary Dealers over taxpayers in a ratio of 4 to 1. Thank you Sack-Frost for making it all too clear who you really work for.