Archive - Apr 14, 2011

Michael Burry's ironic plight against pervasive lemming groupthink (such as the one gripping the nation currently) has been well documented in Michael Lewis' "The Big Short." It is thus not surprising that the topic of his speech to the Vanderbilt University (of which he is an alum) Chancellor's Lecture series is the current flawed conventional thought paradigm: that of central planning, of quantitative easing and of dollar debasement by the Fed, which are far more dangerous than anything experienced during the credit bubble as when the current regime finally fails, and it will fail, there will be nobody to bail out the US. From Burry's speech: "I am worried about a future of a nation that refuses to acknowledge the true causes for the crisis. A historic opportunity was lost. America has instead chosen its poison as its cure... Today I expect the US government to attempt to continue easy money policies into the next presidential term, past the foreclosure crisis, and past the corporate and public refinancing humps that are forthcoming. Junk bonds incredibly are again at all time highs. Quantitative Easing seems to be working for now. Buit this is an invalid validation of what America is doing. This is in fact a Pyrrhic gamble. As we continue to debase our currency, Bernanke says he is not printing money, again I disagree. As it stands I get an email from the Fed saying we bought another X billion in Treasurys. I don't know - that's pretty clear to me. In fact this program QE2 its scope and breadth raises the severe question of the Treasury's needs. The government's borrowing of money for the purposes of injecting cash into society, bailing out banks, brokers and consumers, is a short-sighted easy decoision for a population that has not yet learned that short-sighted, easy strategies are the route to long-term ruin. We never quite achieved the catharsis necessary to stoke the reevaluation of our wants, need, and feers. Importantly, the toxic twins: fiat currency and an activist Fed remain firmly entrenched, even more so with the financial reforms last year." Burry's practical advice: open a bank account in Canada. 

Land of the Free, Home of the Zapped?

The 2s10s30s butterfly - ES correlation trade proves its mettle once again. After hitting a low of 162 bps at the same time as the market dropped, the butterfly spread has jumped aggressively on the very successful 30 Year auction, with stock lagging substantially. Not for long though. As the market just demonstrated when it woke up to this divergence, ES ramped rapidly higher on no news but merely a substantial divergence from this latest carry trade (correlating better with stock than FX carry ever since the GC-IOER carry collapsed). Any time this trade diverges by 5 bps or roughly 10 ES point, the correct trade here is to put on a compression between the two, at least until banks, with the Fed's help, succeed in regaining control of general collateral rates. In the meantime, for those with a more macro focus, as Credit Trader points out: "flatteners, flatteners, flatteners."

Lately everyone and their kitchen sink is coming up with one after another grandiloquent deficit cutting plan, one more unbelievable than the next. At this point nobody believes that either administration can cut $4 million let alone $4 trillion, which seems to be the bogey targeted by both the Obama and the Ryan budget proposals. Too bad no one can explain just how we get from point A to point B. But the show must go on until America finally depletes the good will of the once-reserve currency which now has become a bigger funding currency than the Yen, and pulls the plug. Until then, here is a comparison of the two most recent plan proposed to get America from its current deplorable state, which for those paying attention is located some $27 billion dollars away from the official debt ceiling following today's $13 billion auction. Courtesy of Reuters, we present a compare and contrast of the Obama and the Ryan plans. Feel free to heckle at will.

Every major country is experiencing price inflation as a result of monetary inflation and it is starting to impact their economies. US Ex-Im prices and trade indicate that we are experiencing price inflation, regardless what the CPI says, and that it is weakening the economy.

Two weeks ago the precious metals space was closely following the fate of Sumitomo's San Cristobal mine, where a long strike had paralyzed work at the world's third largest producer of silver and sixth-largest producer of zinc. While the strike was eventually resolved with concession to the domestic workers, a far more troubling report from Bolivian daily La-Razon states that Bolivia's president Evo Morales is now planning on expropriating zinc, silver and tin mines sold off by previous governments. Bloomberg reports that "Morales will announce a decree May 1 to “dismantle the privatization model,” said Nicolas Fernandez, a spokesman for state mining company Corp. Minera de Bolivia, known as Comibol. "The government is recovering all the privatized companies,” Fernandez said today in a telephone interview from La Paz. “When the decision is taken, Comibol will be ready to manage these mines.”" Among the contracts to be affected are those with Glencore International AG, Pan American Silver Corp., and most importantly, Coeur d’Alene Mines Corp., which is operator of the San Bartolome mine: the world's largest pure silver mine. Notably San Bartolome and Sumitomo's San Cristobal "account for about 83% of the nearly 1.1M tons of fine silver Bolivia produced in 2009, according to Mining Ministry data" according to The Gold Report. If indeed this news is proven true, and we will know for sure in 16 days, looks for the price of silver to spike considering about 1.33 million kilograms of silver was produced in Bolivia 2009, according to the U.S. Geological Survey: an amount which will likely fall off a cliff following the utter chaos that is unexpected nationalization.

The key paragraph from the just released speech being delivered by Fed faux hawk Charles Plosser at the 20th Annual Hyman Minsky conference is the following: "It is no secret that I have long advocated that the Fed make explicit
its commitment to a numerical inflation objective. It is consistent with
the view of central bankers and monetary economists around the world
and widely viewed as a best practice of central banking.... These advantages persuade me that the Fed should adopt an explicit
numerical inflation objective. Moreover, in my view, now is an opportune
time to do so. The apparent strengthening of the U.S. economy suggests
that, in the not-too-distant future, monetary policy will have to begin
reversing course from a very accommodative policy stance. As we
choreograph that exit, I believe that the Fed should do all it can to
underscore its commitment to maintaining price stability." Key word here being "apparent" as yet another economist confused cause (loose monetary policy impact on the Russell 2000) and effect (equating the stock market with the economy). Perhaps the Fed economists should observe the dramatic paring of economic outlooks by all sellside analysts, in line with our expectations from January 2011. Take away the trillions in free money and everyone knows, but nobody wants to say, what will happen. We, for one, can not wait to listen to Fed president speeches following a 20% drop in the stock market...

The Treasury just priced the last of its three auctions (for a total of $66 billion) in the current week, in the form of a $13 billion in 30 Year Bond reopening. The auction came in strong compared to a when issued trading 3 bps wide, although the Bid To Cover did see a dip from last month's record 3.02, with $2.83 in bids tendered for every dollar allotted. More importantly, the dramatic drop in Indirect takedown seen yesterday in the 10 Year reopening, was not repeated with 47.2% of the auction granted to foreign investors. This was the second highest Indirect take down in almost two years, with just December 2010's 49.5% higher. Primary Dealers took a respite with 42% of orders allotted to the banks (which will flip a bulk of this bond back to the Fed shortly) , and Direct taking the rest or 10.8%. With this auction, and following $19.19 billion in maturities when all of this week's action settles over the weekend, will bring total debt subject to the ceiling to just $27.2 billion away from breaching the constitutional maximum. Prepare for that to be big news on Monday when the Mainstream Media finds the batteries for its calculator.

Our recent discussion of whether deflation or hyperinflation will lay waste to the economy elicited hundreds of responses. Two of particular interest are featured below. The first, from blogger Charles Hugh Smith, explains why it may be impossible to know with any certainty which of the two forces will prevail. The second, the thoughts of a Wyoming rancher, suggests that in a crisis, we may discover that our need for protein trumps concerns over gold, silver, Treasury paper and the dollar.

To all who panicked following the programatic Goldman downgrade of Brent two days ago and dumped their holdings right into gaping maw of Goldman's overeager prop desk (which has once again seen some notoriety today although few actually care as everyone is now aware of the 200 West M.O.), our condolences. Crude has now recouped over 60% of the drop following that downgrade. In the meantime QE3 is today pegged to ON, as the inflation trade comes back again with a vengeance. Except Goldman to pull all punches and proceed with downgrading all the other commodities it is still bullish on, including gold and silver.

TEPCO continues to be stuck between a rock and a liquid place. Following recent efforts to stop the spillage of radioactive water into the ocean, the pseudo-nationalized utility is now experiencing the aftermath of radioactive water retention. From Kyodo: "The concentration levels of radioactive iodine and cesium in groundwater
near the troubled Nos. 1 and 2 reactors at the Fukushima Daiichi
nuclear power plant have increased up to several dozen times in one
week, suggesting that toxic water has seeped from nearby reactor turbine
buildings or elsewhere, Tokyo Electric Power Co. said Thursday. According to the latest findings, a groundwater sample taken April 6
near the No. 1 reactor turbine building showed radioactive iodine-131 of
72 becquerels per cubic meter, with the concentration level growing to
400 becquerels as of Wednesday. The concentration level of cesium-134
increased from 1.4 becquerels to 53 becquerels." Conventional thought is that this is due to contaminated water used to cool down overheating reactors: "A total of around 60,000 tons of contaminated water is believed to be flooding the basements of the Nos. 1 to 3 reactor turbine buildings as well as trenches connected to them, and the water is hampering work to restore the cooling functions of the reactors lost since the March 11 earthquake and ensuing tsunami." Yet the most troubling news once again comes from the plutonium containing Reactor 3 where the temperature rose suddenly. Not to worry though: "TEPCO officials said the data were likely due to a glitch in a measuring instrument." And with that we have another data reader which indicates unpleasant information being thrown away (this follows the halt of readings from the Drywell radiation counter in Reactor 1 following a reported surge).

Announcing the findings of a Senate panel investigating the financial crisis, Senator Carl Levin (D-MI) called Goldman Sachs “a financial snake pit rife with greed, conflicts of interest, and wrongdoing,” adding that C.E.O. Lloyd Blankfein should possibly face perjury charges...This must be yet another job for...

Today has been a busy day for central planners around the world: the IMF and the World Bank are holding their spring meetings which has resulted in an avalanche of Bloomberg excerpts. Courtesy of Reuters, here is a full summary of the key statements by various high level officials. As usual anything that is being denied is about to hit us head on. Of particular note are the statements by TeflonTurboTaxTim Geithner.

And so Olli Rehn, piggybacking on all the recent nuclear hysteria, takes Mutual Assured Destruction to a whole new mushroom cloud level:

• REHN SAYS A DEBT RESTRUCTURING COULD CAUSE A 'CHAIN REACTION'

This is better known as "MAD - Fission" Fusion