Archive - May 11, 2011

Just released from Jeremy Grantham, who has gone, for all intents and purposes, "balls to wall" bearish. "I do not feel the same degree of confidence that I did, which was considerable, that the Fed could carry all before it until October 1 of this year. A third round of quantitative easing would very probably keep the speculative game going. But without a QE3, there seem to be too many unexpected (indeed unexpectable) special factors weighing against risk-taking in these overpriced times. I had recommended taking a little more risk than was justified by value alone in honor of Year 3, QE2, and the Fed in general. Risk now should be more reflective of an investment world that has stocks selling at 40% over fair value (about 920 on the S&P 500) and fixed income, manipulated by the Fed, also badly overpriced. Although the taking of some “extra” risk by riding the Fed’s coattails has been profitable for six months, I admit to being a bit disappointed: I really felt the market had the Fed’s wind in its sails and would move up deep into the 1400 to 1600 range by October 1, where it would be, once again, over a 2-sigma 1-in-44-year event, or, officially, a bubble. (At least in a world where GMO is the official.) At such a level, I was ready to be a real hero and absolutely batten down the hatches, become extremely conservative, and be prepared to tough out any further market advance (which, with my record, would be highly likely!). The market may still get to, say, 1500 before October, but I doubt it, especially without a QE3, although the chance of going up a little more by October 1 is probably still better than even. And whether it will reach 1500 or not, the environment has simply become too risky to justify prudent investors hanging around, hoping to get lucky. So now is not the time to float along with the Fed, but to fight it. Investors should take a hard-nosed value approach, which at GMO means having substantial cash reserves around a base of high quality blue chips and emerging market equities, both of which have semi-respectable real imputed returns of over 4% real on our 7-year forecast. The GMO position has also taken a few more percentage points of equity risk off the table."

The fundamental dynamics of the U.S.-China trade partnership--certainly the biggest economic story of this generation--boil down to "capital exploits labor." I am well aware that this sort of quasi-Marxist analysis is supposed to be passe in the era where young nerds can start billion-dollar enterprises in a garage or dorm room. Capitalism is a priori "win-win," as all those workers in China are getting ahead while our youth launch $50 million IPOs of social networking Web 2.0 companies. But if you scrape away the high-gloss propaganda and myth-making, then the fundamental dynamic is definitely Marxist: American capital jettisoned American labor as a costly hassle in favor of cheap, no-hassle Chinese labor. Since Capital's best buddy in the whole world is the Central State and its proxies, i.e. the Federal Reserve, then the Central State and the central bank (the Fed) smoothed over the exploitation and furthered the consumer economy by inflating a credit-housing bubble. Since 60% of American households own a home, this enabled the increasingly impoverished "middle class" to borrow trillions of dollars in "free" money that could be spent--surprise!--on the new imports from China that filled the shelves of big box global retailers everywhere. Allow me to illustrate this dynamic by deconstructing two recent stories in the Mainstream Financial Media...

Justice, this time, is served. Raj found guilty on all charges. Next up: up to 20 years in federal pound me in the ass penitentiary (20 years on each of 9 counts, and 5 years on the remaining 5 so a total of 205 years possible). But that's ok, Raj Raj certainly frontran that verdict and is most likely prepared as necessary.

And following the overnight set of news which confirms our January assumption that the keyword of 2011 will be "stagflation" the entire commodity complex once again slides. It is unclear if the move is predicated more by fears of inflation or of economic contraction. After hitting almost $40 overnight, Silver has once again taken the daily tumble back to the sub $37 level. The catalyst today is crude, following the DOE announcement that crude inventories surged to 3,871K barrels on expectations of 1,500K, and Cushing inventory hitting 1,124K compared to 102K previously. WTI slides to sub $101, even with the latest series of margin hikes which purportedly is supposed to mitigate volatility. So much for that.

• RAJARATNAM JURY SAYS IT HAS A VERDICT IN INSIDER CASE
• RAJARATNAM FACES AS LONG AS 20 YEARS IN PRISON IF CONVICTED

If he walks, it is time to scrap insider trading laws for good.

More as we get it.

A hearing that is sure to spark a lot of controversy and debate will be held today at 10 am EDT, by the Domestic Monetary Policy Subcommittee, chaired by presidential candidate Ron Paul. As noted, "The hearing will explore the fundamental role that U.S. government debt
plays in the monetary system; the use of Treasury debt by the Federal
Reserve in conducting monetary policy; and the troubling reliance of
Congress on the Fed to print money to facilitate deficit spending." Alas, there will be no Fed members testifying at the hearing, instead we will hear from Dr. Richard Ebeling, Professor of Economics, Northwood University, Bert Ely, Ely & Company, Inc., and Dr. Matthew J. Slaughter, Associate Dean, Tuck School of Business, Dartmouth College.

And another advocate for the only logical outcome out of the disastrous monetary and fiscal catastrophe the US finds itself in emerges in the face of billionaire, and open administration critic, Steve Forbes. From Human Events: "A return to the gold standard by the United States within the next five years now seems likely, because that move would help the nation solve a variety of economic, fiscal, and monetary ills. “What seems astonishing today could become conventional wisdom in a short period of time,” Forbes said. Such a move would help to stabilize the value of the dollar, restore confidence among foreign investors in U.S. government bonds, and discourage reckless federal spending, the media mogul and former presidential candidate said. The United States used gold as the basis for valuing the U.S. dollar successfully for roughly 180 years before President Richard Nixon embarked upon an experiment to end the practice in the 1970s that has contributed to a number of woes that the country is suffering from now, Forbes added." Of course, for this to happen the US would first need to allow a full public audit of its gold 8,000+ ton reserves held at Fort Knox and elsewhere. And that may be problematic.

It was only a matter of time before the combination of a suddenly alienated Pakistan and a top secret stealth helicopter crashed deep in its territory, would raise the specter of China, and specifically its military complex hinting it would be delighted to peek under the dress of said crashed chopper to fortify its expanding stealth program. ABC reports: "Pakistani officials said today they're interested in studying the remains of the U.S.'s secret stealth-modified helicopter abandoned during the Navy SEAL raid of Osama bin Laden's compound, and suggested the Chinese are as well. The U.S. has already asked the Pakistanis for the helicopter wreckage back, but one Pakistani official told ABC News the Chinese were also "very interested" in seeing the remains. Another official said, "We might let them [the Chinese] take a look." Gee, following two weeks of demonization did anyone possibly consider that Pakistan would now scramble to reallign itself with China? Surely not the Clinton stepford wife (or is that husband).

And just as Citigroup predicted, US imports surge even as US exports jump to a record $172.7 billion. But the story is once again in the GDP reducing imports which jump by a whopping $220.8 billion, a $10.4 billion jump M/M. The total deficit of $48.2 billion is the highest since the June 2010 spike which hit $49.9 billion. From the release: "Exports increased to $172.7 billion in March from $165.0 billion in February. Goods were $124.9 billion in March, up from $117.8 billion in February, and services were $47.7 billion in March, up from $47.2 billion in February. Imports increased to $220.8 billion in March from $210.4 billion in February. Goods were $187.0 billion in March, up from $176.9 billion in February, and services were $33.8 billion in March, up from $33.5 billion in February. For goods, the deficit was $62.1 billion in March, up from $59.1 billion in February. For services, the surplus was $13.9 billion, up from $13.7 billion in February." Ah, financial innovation being exported as per usual. Look for another round of Q1 GDP downgrades as this number takes out a few basis points in growth. As we know from China that April exports to the US jumped even more, this import surge will likely carry over into Q2 and result in more GDP cuts.

• U.S. post has $2.2 billion loss, warns of Sept insolvency (Reuters)
• Partisan Divides Harden on Debt Accord as Options Are Rejected (Bloomberg)
• EU Slows Drive for More Greek Aid as Merkel Seeks ‘Proven’ Steps (Bloomberg)
• AIG sets $9 billion stock offer, half of expected (Reuters)
• China Inflation Signals More Tightening to Come (Bloomberg)
• Japan Aims for Tepco Compensation Scheme this Week (Reuters)
• U.N.Chief BanCalls forCeasefire in Libya (Reuters)
• Syria Extends Armed Push; EU Sanctions Begin (WSJ)

RAB Capital, once the poster child of the London credit bubble, whose assets peaked at $7 billion in 2007, has seen its shares tumble over 30% in afternoon trading, following an announcement that the firm will delist after a terminal surge in redemption requests. From the FT: "RAB, which at the beginning of the year oversaw assets of just over $1bn – a far cry from its peak of $7bn in 2007 – has seen its remaining assets evaporate in recent weeks. Investors pulled $370m from RAB’s flagship $470m Special Situations fund last month when a three-year moratorium on withdrawals finally expired....Since then, clients – fearful of the RAB’s viability – have abandoned the company’s other strategies. The firm’s $120m Cross Europe fund has been swamped by redemption requests, say people familiar with the company. In addition, one of RAB’s remaining star money managers, Gavin Wilson, is to retire from the firm. Mr Wilson’s $250m Energy fund has been one of RAB’s best performing offerings of late." Well, if other, much better managed hedge funds are any indication, Mr. Wilson's Energy Fund likely got annihilated last week, putting the final nail in the 4 year public stint of this vehicle to bring leverage to leverage.

Today, we get the March trade balance and JOLTS reports. Also, the Treasury continues its exercises in debt ceiling breach by issuing another $24 billion in 10 Year notes, while the Fed explains its monetization intentions for the next month as it releases the latest POMO schedule at 2 pm EDT.

S&P 500, Dow Jones, Nasdaq, Russell 2000, Nymex Crude Oil, Comex Gold, EURUSD, GBPUSD, USDJPY

On the one year anniversary of its first bailout, things in Europe's basket case are getting much worse once again. Even as senior EU and IMF inspectors arrived in Athens on Wednesday to press Greece to shore up its finances, workers walked off the job to protest against austerity-induced recession, culminating in a 24 hour strike which sees both airports and journalists taking a break from hard work. Oddly ironic this: the "bankers" arrive to make austerity even more aggressive (so there is more value left over to senior bondholders when the bankruptcy commences), just as the country experiences a deja vu moment of strikers on one side and teargas lobbing policemen on the other. Those who wish to follow the protests live, which so far the mainstream media has refused to show, can do so here.

Gold and silver have extended their recovery and may be headed for the fourth day of gains due to the continuing European sovereign debt crisis, Chinese inflation (+5.3%) and the real risk that rising oil and commodity prices are leading to an inflation spiral internationally and stagflation. German inflation data this morning was worse than expected jumping to 2.7% from 2.3% due to surging energy costs and despite recent strength in the euro. This has led to the euro falling against all currencies and especially against gold. The precious metals are likely to be supported later today when US trade deficit data is expected to be poor with still high oil prices leading to a very large expected deficit of $47.7 billion. This should see the dollar come under pressure and support gold. Stagflation or low economic growth, high unemployment and rising inflation is a clear and present danger to the UK, EU and U.S. economies and other economies internationally. This is especially the case in the UK where house prices have begun to fall again and may be set for sharp falls. Internationally, we are seeing significant debt deflation where the value of goods and assets bought with debt are falling (cars, property etc) while the value of finite, essential goods such as food and energy are rising. Safe haven and inflation hedging diversification into gold is likely to continue as inflation is deepening and there is a distinct whiff of stagflation in the air. It is too early to tell whether the recent sell off is over and a further correction is possible however global macroeconomic conditions suggest that gold and silver bull markets are very much intact. This is especially the case due to continuing Asian demand with gold again being bought on all dips in China, India and the rest of Asia.