Archive - Apr 12, 2011

The IMF has just released its latest "Fiscal Monitor" report which, not surprisingly, is as usual full of pretty charts that alas amount to pretty much nothing. What was surprising is the increasingly more antagonistic tone the IMF has taken with regard to the developed economies. In what could be a first, the IMF is starting to get increasingly realistic, and in the report notes that of all budget deficits in "selected countries", the US will hit the highest at 10.8%, the same as Ireland, and just ahead of Japan at 10%. And a direct stab at the US: "The United States needs to accelerate the adoption of credible measures to reduce debt ratios....Market concerns about sustainability remain subdued in the United States, but a further delay of action could be fiscally costly, with deficit increases exacerbated by rising yields." Other observations by the IMF: deficits in the Middle East could widen as governments increase subsidies to ease social tensions; higher food, fuel prices are likely to slow the pace of spending in emerging markets; US fiscal adjustments in 2012 are needed to put fiscal consolidation back on track. Oddly enough, the IMF which yesterday decided to trim GDP estimates very modestly even as it activated its SDR500 billion New Arrangements to Borrow line of credit, is Cottarelli's statement that the US still has a "lot of credibility." For now the rating agencies still seem to buy this load of BS.

Not like Goldman did not telegraph their intention to crush crude yesterday. Alas, the market which now has a 24 hour real time delay function, only managed to digest the news today. The result: a plunge in Euro Brent from an intraday high of over $126 to about $122. And courtesy of everything being correlated once again to the inflation trade, asset prices everywhere are plunging.

Cesium half life--Radioactive swimming--Waves of Prussian Blue

As part of Goldman's second hit piece in oil which the cynically inclined could interpret as merely providing Goldman with an attractive entry point to being long crude, David Greely cites supply-demand fundamentals which supposedly are "less tight." This is great. It would be even greater if it was based on fact. Because according to the IEA "crude output fell by around 890,000 b/d in March as other member states failed to make up for a sharp drop in production from conflict-riven Libya." For those unfamiliar with the lingo, this translates as follows: i) supply fell (which anyone who has taken Econ 101 is aware what it means to equilibrium price, especially ahead of Japan's imminent massive oil restocking to replace nuclear power plant capacity), and ii) Saudi Arabia was lying about its spare potential capacity. "The IEA estimated production from Saudi Arabia in March at 8.9 million b/d, unchanged from February." Yes, this is the country that was screaming from the rooftops that it would hike oil output immediately if not yesterday (since buying the eternal adoration of our citizens does not come cheap). So, we ask Mr. Greely, does he care to revise his thesis about relative "tightness" - perhaps he could phrase his point alternatively: "some of our traders would love to buy up Brent on the cheap so please sell to us post haste?"

Yesterday Goldman launched the first salvo in the crude correction trade, telling clients to take premature profits on its CCCP (crude among others) basket as we reported previously. Today, Goldman sell-side energy analyst, once again completely unconflicted and ignorant of what is happening across the Chinese wall where all those former prop traders and now better known as "client facing associates" buy on behalf of Goldman's multi-billion balance sheet, has released his latest hit piece on oil. "We expect the oil market will experience a substantial pullback toward our $105/bbl near-term Brent crude oil price target." And for those wondering, when is the last time Goldman ever dropped their oil price forecast? Well, usually a month or so before the firm hikes it to $150 (see 2008).

Recently Jan Hatzius cut his Q1 GDP as was reported first on Zero Hedge, to 2.5%, even as the Goldman chief economist is still (we give it 2 weeks) keeping his FYE GDP outlook constant (who says bulge brackets don't believe in hockeysticks). Following the just released ugly trade data which as we suspected would lead to even more GDP downgrades, Dudley's successor is out with yet another warning that should come as manna from heaven to those who continue to believe in non-dilutable assets: "Through February, the trade data suggest a large drag on GDP growth in the first quarter and suggest downside risk to our 2.5% forecast." Gee whiz, Jan, if Q1 when the bulk of the tax stimulus is concentrated (which was the reason for Goldman's December bullish 180 on the economy) is unable to post an economic improvement, what is left for the rest of the year, when no more fiscal stimulus is projected, and when, gulp, QE3 is ending? We can't wait to hear your explanation for this.

Earlier today Leon Cooperman, founder of Omega Advisors, took some time from his busy schedule of buying stocks, to bash Mike Stinhardt's moment of truth from last week, and to reaffirm his praise at the altar of crony capitalism by defending Warren Buffett. There is little we can add here, suffice to remind readers that the Omega Advisors' "hedge" fund was down by a whopping 36% in 2008 and was one of the worst performing hedge funds in the Great Financial Crisis (GFC), surely knows all about government funded rescues of the economy and those who ride on its coattails... not to mention the ensuing career risk in the absence of one.

Another month, and another confirmation that the US export segment is non-existent. In February the US posted a $45.8 billion trade deficit compared to $47 billion in January, but worse than expectations of $44 billion. Importing our way to prosperity and #Winning_the_Future continues. Comparing the Chinese reported trade surplus with the US and the US reported trade deficit with China we get just a 100%+ difference: $7.8 billion versus $18.8 billion. Gotta love two administrations that just make up numbers trying to reconcile their fraud. This number also means that Q1 GDP will see another major revision lower. And so will Q2, Q3 and so forth, leading to QE3. And while we are at it, let's just make it stagflation: the US import price index surged from 1.4% to 2.7% on expectations of 2.1%: the largest rise since June 2009.

• Japan Sees Greater Hit to Economy as Its Nuclear Crisis Deepens (Bloomberg)
• President Open to Deal on Debt Cap (WSJ)
• Democrats Allow Trims to Favored Programs (NYT)
• Libya Rebels and West Dismiss Peace Plan (FT)
• France and Britain say NATO must step up Libya bombing (Reuters)
• Toyota Tells U.S. Dealers to Brace for Reduced Car Supplies (Bloomberg)
• U.S. Lawmakers Reach Agreement on $38 Billion in Budget Cuts (Bloomberg)
• Yemen's Saleh Exit Plan Held up by Opposition Dispute (FT)
• U.S. probes A380 taxiway collision in New York (Reuters)

A bunch of big deficit numbers today (trade and budget, the latter expected to confirm that the Treasury is in desperate need of cutting spending), and even more Fed speeches signifying nothing but attempting to confuse even more. Most importantly, the Fed will announce the latest POMO schedule at 2:00PM EST.

Zero Hedge predicted from the very beginning that unfortunately Fukushima would end up being an as serious, if not more so (just consider the extremely high concentration of human and other capital in proximity to Fukushima: unlike the USSR there is little to none displacement capacity) catastrophe than Chernobyl. Yesterday's final hike in the incident severity level, which started at 4 and hit the highest , 7, is simply yet another confirmation of this although in absolute terms Fukushima still has a ways to go before surpassing the Soviet accident:
Choernobyl leaked a total of 5.2 million terabecquerels of radioactivity, Fukushima has so far leaked 500,000 terabecquerels. In the meantime what little progress is being made is promptly shadowed by all the incremental bad news that keep being disclosed (the most recent debacle is the discovery of extremely radioactive strontium just off the plant). Yet to be sure, there are differences between the two situation. Courtesy of Reuters, here are the key comparisons and differences between the two.

All cynics who think DB plans are "dead," should read about how Canada's Healthcare of Ontario Pension Plan (HOOPP) protected assets during the 2007-2008 financial crisis and has successfully run one of the best fully funded pension plans in the world...

And so we get the latest confirmation that China is now very invested in the Euro, ostensibly at the expense of the US Dollar. According to the Spanish government, China already holds €25 billion in Spanish debt, which explains where Chinese foreign buying interest has gone (most certainly not to US Treasurys) in 2011 (certainly not toward purchasing US Debt, where Chinese holdings have barely moved recently). Additionally, China, as Spain's soon to be largest creditor, has said it will help fund a restructuring of the Cajas debt: after all there is nothing better than consensual pre-petition arrangement between creditor and insolvent debtor.

Earlier today UK economic data confirmed that the recent hike by the ECB may well have been the dumbest decision taken in Europe in 2011 (aside from continuing to bail out continental bankers with impunity). Consumer prices rose 4 percent from a year earlier after a 4.4 percent increase in February, the Office for National Statistics said today in London. The cost of food fell the most in almost four years. Consensus inflation was for another 4.4% rise. The reason why inflation plunged - a complete obliteration in retail sales, which fell by a record in March, the British Retail Consortium said today, removing any pricing power by retailers. Of course, in America where the government is doing all it can to prevent deadbeats from paying their mortgage, we still have a long ways to go before retail sales actually drop to the point where inflation is constrained by actual real "pro forma" wages. Most importantly, this outcome confirms that the BOE was lucky enough not to rush and hike ahead, leaving the ECB as the only central bank with a tightening regime and one which will soon bring Spain to the brink of insolvency.

Gold is marginally lower in all currencies today except sterling after UK retail sales plunged the most on record in March due to deepening inflation. Consumer’s finances in the UK and internationally are being negatively impacted by food and energy inflation showing the UK’s vulnerability to a double dip recession and stagflation. Gold rose 0.5% in sterling over the £900/oz mark again. Silver has recovered somewhat from yesterdays sell off and is nearly 1% up against major currencies and 1.5% higher against the pound. Yesterday’s selling was likely primarily due to speculators taking profits and locking in recent gains. Households in the UK are seeing their spending power eroded at the fastest rate in more than 60 years as food and energy costs soar and the faltering recovery restrains wage increases. Concerns about the tentative economic recovery as well as the government’s VAT increase and the deepest spending cuts since World War II are undermining consumer confidence.