Archive - Apr 21, 2011

Okay, if you have anything in a close vicinity to you that you wouldn’t want broken, move it away before you watch this clip…

Yesterday we reported news that has so far received almost no media exposure, namely that thousands of striking truck drivers had poured into Shanghai's Waigaoqiao zone, one of the city's busiest container ports, protesting over "rising fuel prices and low wages." Today, via Reuters, we learn that this situation has escalated materially, and progressed into violence: "A two-day strike over rising fuel prices turned violent in Shanghai on Thursday as thousands of truck drivers clashed with police, drivers said, in the latest example of simmering discontent over inflation. About 2,000 truck drivers battled baton-wielding police at an
intersection near Waigaoqiao port, Shanghai's biggest, two drivers who
were at the protest told Reuters. The drivers, who blocked roads with their trucks, had stopped work on Wednesday demanding the government do something about rising fuel costs, workers said." And while we have violent uprisings over austerity in Europe, now we have violent strikes over inflation in China? The question thus now is just how much longer will China continue to take massively ineffective steps such as RRR and rate hikes, both of which have been a tremendous failure in reining in inflation, instead of picking the nuclear option of revaluing the currency. And while many believe China may announce something along those lines over the weekend, Win Thin, global head of emerging market strategy at Brown Brothers Harriman, is not so sure and put the odds of a yuan revaluation at 25%. "With regards to currency policy, we are putting forth the following three possibilities along with odds: 1) keep current pace of appreciation (10%), 2) do one off revaluation (25%), and 3) speed up pace of appreciation (65%)." Either way, with more people joining the populist movement against inflation, China is now between a rock and a hard place: will it continue happily importing Bernanke's inflation exports or finally retaliate. Unfortunately for its economy, the appropriately called "nuclear option" of revaluation, will leave it export economy flailing. So the real question: is China ready to migrate from an export-led to a consumer-led model. Alas, the answer is a resounding no.

Never mind the auditor resignation and other myriad indications of severe accounting fraud...

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 21/04/11

And in exclusively silly, but oh so symbolic news, the race track crowd bursts into a frenzy following the ultimate comeback story, as One Ounce Of Silver has now taken a full length lead over One Share Of JPM Stock into the final stretch.

For a stunning reminder of just how much of a haircut the market is expecting on Greek debt in actual cash terms, look no further than the country's 30 Year bonds. These are now trading just above 50 cents on the euro. That's a "50% off" blue light special and roughly comparable to the recovery the market is expecting on the paper. Alternatively any "liability management exercise" price on these notably above 50 will result in a Greek revolution.

The question of centralization versus decentralization might be even more important than fossil fuels versus nuclear versus alternative energy …

There are two economies--the real one, which is in decline, and the "let's pretend" one touted by the State and corporate propaganda machines. Children love to play "let's pretend." Let's pretend the economy is "recovering." Why does this "recovery" remind me of an addict who's conning his caseworker? (Yes, I'm really in recovery--those aren't tracks, they're insect bites....) Let's play pretend that jobs are really really coming back...Let's pretend that households, corporations and government are reducing their debt...Let's pretend that wages are rising...Let's pretend your purchasing power isn't in a free-fall...Let's pretend unemployment is falling...Let's pretend corporate profits are the most important metric of our financial well-being...Let's pretend those great profits trickle down to the greater good...Let's pretend the corporate profits trickle down via the "wealth effect" to pension funds that benefit workers everywhere...How much longer are we willing to play "let's pretend"? Eventually we'll have to return to the grown-up world and deal with reality.

Whereas in restructurings one has fulcrum securities (just ask an equity committee, and valuation fight counsel what that is), in lemmingoloy one has fulcrum Wall Street economists. As always, the only one that matters in this regard is Jan Hatzius, whose every word is assayed with a fine toothed comb by the Wall Street econoshortbus: all it takes is for Hatzius to issue some unkind words about a GDP component and the downgrade avalanche begins. Which is why reading his comments following less than flattering data is always very informative (after all it was Goldman with their disastrous in retrospect call in December to upgrade the economy that forced everyone, except us, to have an overebulient outlook for Q1 GDP, subsequently friendo'ed). Below is his take on the Philly Fed which according to us is the first salvo that will confirm Q2 GDP is about to be whacked, leading to a full year GDP reduction, and setting the stage for QE3, as we have been claiming since January.

Earlier today, the Treasury announced its auction schedule for next week consisting of $99 billion in new bond issuance (2 Year, 5 Year, and 7 Year). There may be a slight problem with that actually being legally allowed. Here's why...

And here comes the first indicator that Q2 GDP is about to be mass revised by everyone, courtesy of Japan, and ongoing inflation pressures: the Philadelphia Fed collapsed from a revised 43.4 (a 27 year high) to 18.5. And here is why even the Philly Fed admits "indicators suggest slower growth" - "The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, decreased from 43.4 in March to 18.5 this month (see Chart). The demand for manufactured goods, as measured by the current new orders index, showed a similar slowing: The index fell 22 points, following seven consecutive months of increase. The shipments index declined 6 points and remained at a relatively high level....A majority of firms continue to cite price pressures, and a significant share of firms reported higher prices for their own manufactured goods again this month." Translation: Wall Street Q2 GDP revisions coming en masse: the podium is yours Jan Hatzius.

If the US were a company, it’d be spending more in salaries than it makes in sales. Aside from being unprofitable, it’s also got a MASSIVE debt load. And it’s current policy of paying out more than it makes only increases this debt load… which begs the question… who’s going to pay the interest payments on the debt? Now, about those payments…More than half of all Americans (59%) receive a Government payout in one form or another. This is not a sliver of the population… it is endemic to the system.

As if insane FX vol (has anyone looked at the EURUSD chart recently) and failed LCH.Clearnet margin hikes to prevent surging vol in Irish and Portuguese bond was not enough, the CME is doing its best to make sure developed world sovereign bonds, which had for the time being been recently stable, follow in the footsteps of all other assets that actually trade (read: not stocks) and see volatility surge (perhaps so the Fed can sell more of it). The CME has just announced it is launching cash-settled Sovereign Yield Spread futures beginning May 22 for a trade date of May 23. What this means simply said, is that after discussions with Dealers, the CME has realized that its biggest clients are all too willing to hedge sovereign risk (pocketing wide bid/ask spreads in the process). It also means that the market for sovereign bonds is about to be opened up to all Mrs Watanabes in the world who are willing to express a direction bias in the 10 Year bonds of France, Germany, Italy, Netherlands, UK and, of course, the US. Now on the surface there is nothing wrong with that, however it does open the Treasury market to two traditional risk factors always seen when an otherwise ration market is opened up to everyone: 1) the herd, which tends to be always wrong, steps in and exacerbates prices moves in either direction and 2) here comes HFT: very soon the spread arbs will be trading the living daylights out of Treasury bonds, which courtesy of market reflexivity, where the derivative actually sets the price of the underlying, means that a bunch of computers will soon be the reason for why 10 Years trade at 0 or 10%. Coming next: circuit breakers in the Treasury market. At least this means that CDS traders will no longer be scapegoated for sovereign insolvency.

Recently, the silver futures curve "normalized" for a while. Well, the "while" is over. It's backwardation deja vu, all over again. Or not quite...