Archive - Apr 5, 2011

In other market-shaking news, The Bernank says the Fed WILL act if inflation is "more than transitory." Apparently, he finally had to pick up the check at a restaurant this week or perhaps he pumped his own gas over the weekend.

Just after dawn, hedge fund manager Michael Steinhardt appeared on CNBC as the token contrarian in the Titans of Groupthink series. After some pleasantries we hit the 6 minutes mark where the formerly trite narrative experienced a flash crash. In the most candid discussion of the truth in America, Steinhardt said that “we live in an inland sea of calm waters while surrounding us are turbulent, horrible places,” to which everyone nodded soberly in agreement, unaware of what was coming next. “America seems almost as insular as it has in times past,” He continued. “America is not the wonderful place it used to be... Look at the rest of the world compared to America, look what’s happening all over and then here the biggest thing we have to worry about is how long it will take Buffett to come down to earth…how long until people like you begin to realize his reality and get off some…cloud.” Yet the smackdown of the Becky Quick/Joe Kernen Buffett-sycophant brigade was the prime attraction by far.

The alleged scandal surrounding once-presumed Warren Buffett heir apparent David Sokol has quite predictably generated all manner of breathy headlines about a Teflon-coated Berkshire Hathaway suffering a besmirched reputation. As if often the case, the supposed ill deed in no way measures up to the hype.

Key Highlights:

• GDP revised modestly lower from January meeting on surging commodity prices
• FOMC sees stronger recovery, higher inflation
• Fed officials divided over tighter policy
• Almost all Fed officials saw no need to taper QE2 buying

"So Rick Ackerman posted a piece that I spotted on Zero Hedge—which surprised the hell out of me. Either Tyler and his gang of merry pranksters are losing their nerve about the downward trajectory they think the U.S. economy and monetary policy is headed in—or they ran the piece for shits and giggles. Ackerman’s piece said, in effect, that dollar hyperinflation was impossible. His post was titled “Big Gap in Logic Weakens Hyperinflation Argument”. The cause of hyperinflation is always the same: Spiralling prices that cannot be reigned in with traditional monetary policies of interest rate hikes. But Ackerman doesn’t see this: In his piece, it’s clear he doesn’t realize hyperinflation is an effect of rising prices. Eventually people realize the money itself is to blame—but only eventually, at the end. That’s why Ackerman’s first sentence sort-of makes sense, but not really. But although Ackerman is partly right in the first sentence, his second sentence? That it’s “highly unlikely that this will happen in the United States”? Brother, a panic in the dollar that leads people to exit it for commodities has happened already—and not that long ago: In 1979-’80, when inflation crossed the double digits but before Volcker slammed the brakes via interest rate hikes, people were beginning to get out of the dollar and into anything else, especially commodities, especially gold and silver." Gonzalo Lira

By now everybody knows that only a last ditch intervention by the G7 prevented the financial system from imploding three weeks ago, when the Yen carry trades blew up in the face of all those who had been short yen, long high yielding currencies. The result would have been a pervasive trading desk annihilation, possibly on par with that experienced after the Lehman collapse had the world's central banks not stepped in to sell Yen in droves. Yet what fewer know is that when it comes to funding cheap carry-type trades, the FX carry trade is merely one. A possibly far bigger one has been the one established courtesy of the Fed's generous Interest on Overnight Reserves (IOER) rate which being far higher than General Collateral (GC) Repo, presents banks with Fed deposit access, what was a sure way to earn guaranteed money on an interest rate arbitrage spread. For nearly two years banks collected the proverbial pennies in front of the rollercoaster... until last Friday, when the FDIC decided to spoil the party. What happened as a result of the FDIC's decision to establish an assessment rate which spoiled the arb, was a blow out for most institutions playing the IOER-GC carry trade leading to a major disruption in this funding market, possibly far more serious than the FX carry trade unwind, and a plunge in overnight GC repo rates on Monday (see chart) by over 75%! Does this mean banks have lost one key carry funding source? So it would appear. And it only means that the FX carry trade will be that much more a critical source of "risk-free" income for banks... At least until the next major earthquake above the ring of fire. In the meantime, as the Fed scrambles to restore normality to the repo market, will the Fed be forced to do Reverse Repos, which while fixing the carry trade, will withdraw far more liquidity form the market. Which as we all know is grounds for immediate incarceration in a Centrally Planned kleptocracy such as the USSA.

The man with the Midas touch...

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 05/04/11

There is nothing remotely ideological or personal in my prediction that President Obama will lose the 2012 election. Both parties are equally out of touch with reality in my view, and both suppport the same things: a global Empire, an increasingly intrusive Savior State, a shadow banking system which is no longer under the control of State institutions (rather, the banks control the institutions), and various crony-capitalist cartels which fund political campaigns and partner with the Central State's bloated, unaccountable fiefdoms. The only visible difference between the two parties is slight variations in the relative growth rates of the most-favored cartels and fiefdoms. President Obama seems like a nice guy. Many people said the same thing about George W. Bush. While a likeable personality is a plus in a media-obsessed society, American elections boil down to this: Americans vote their pocketbook, and their pocketbooks will be a lot lighter by November 2012.

Good news: at least it is not in backwardation. We wonder how long before Bernanke uses that excuse in a public tribunal.

Nobody could have foreseen this. Nobody. In other news, Ben Bernanke has just ordered an extra absorbent set of Huggies.

We have now gotten to the very limits of the market, where any even modestly bad news (Services ISM) even if of a secondary importance nature, sends the market surging higher as expectations that QE3 is inevitable, hit 100%. Then when good news comes, and QE3 is deemed to be impossible, the market plunges. Bizarro world, where bad news is good news and vice versa, has won. Thank you central planning. And for all those who jettisoned gold on expectations the economy was actually, chuckle, improving, here is your chart.

A thought on a hot stock.

Contrarian, yet common sense, perspectives on Apple that so few seem able to see.

Time for some more theater: at 10:30 am Eastern Paul Ryan will reveal his budget proposal which sees the US government cutting $650 billion each year over the next 10 years. This simply means that even more stimulus will reside with the Fed, and with monetary policy, which also means that not only is QE3 guaranteed, but so is QE33. Watch Ryan live at the below C-Span link.