Archive - May 26, 2011

"Goldman Sachs and HSBC together held $335 million of the Libyan oil fund's assets, while Societe Generale held $1 billion in structured products for the fund, Global Witness said on Thursday." Thank you Reuters for confirming that a crazy conspiracy blog (although with 3MM/mo uniques that may need redefinition) occasionally ends up being proven right. Of course, there is nothing wrong with that. Oh wait, there is. Perhaps it is time to inquire not only into Goldman's alleged perjury (Your honor, St.OMO is not the Discount Window, we swear), but also into the firm's (don't laugh) anti-money laundering "rules" (a topic also discussed here).

Before we move on from today's atrocious GDP number, we are presenting the one firm whose macroeconomic opinion we truly respect: Stone McCarthy, and yes we will make an exception for Goldman's comments because we are delighted to recall how Jan Hatzius predicted a new golden age for the US economy as recently as December 1 (read at: "Goldman Jumps Shark, "Fundamentally" Shifts Its "Bearish" Outlook On Economy: Goes Bullish, Hikes Outlook"). Because every documented incident of failed "shark jumping" deserves the proper amount of gloating.

Because we all need a laugh after the latest confirmation that the Fed has completely failed at restoring economic growth. Incidentally this anecdote also explains why the S&P doubled in the last two years.

Contrary to expectations by the endlessly wrong Wall Street crew, the second revision of Q1 GDP came not as expected at 2.2% (up from 1.8% in the first estimate), but far, far lower at 1.8%. And while the number is largely irrelevant for the future and even current economy, it shows that the contraction is far more pronounced. More troubling is the shift in various GDP components contributing to the number: the biggest delta was Personal Consumption Expenditures which missed by a whopping 21%, plunging from 2.7% to 2.2%, on expectations of a rise to 2.8%. As a result as the chart below shows, the "growth" in Q1 was based on even shakier grounds: the contribution from PCE plunged from 1.91% to 1.16%, with Fixed Investment plunging from 0.93% to 0.26%. The plug: why old faithful of course - Inventories, which "added" 1.19% to growth, up from 0.09% in the first revision. Ex the now traditional inventory build, Q1 GDP growth was sub 1%. Which means that once the inevitable liquidations commence, the US will go into all out contraction. And confirming the keyword of 2011 "stagflation" is now firmly entrenched, was the BLS advising us that initial claims surged from 404K to 424K. So much for no QE3. Next up, as we have said ever since January, Jan Hatzius and Bill Dudley start having tete-a-tetes. Everyone knows what follows...

• Merkel-Sarkozy Bond Frays Heading Into Deauville G-8 (Bloomberg)
• China's Cabinet May Impose Temporary Price Controls to Counter Inflation (Bloomberg)
• No Retreat on Medicare (WSJ)
• Goldman Sachs Needs a New Audit Committee (Bloomberg)
• Republicans to roll out new tax-cut proposal (MarketWatch)
• GATA urges Paul to probe Fed's gold swaps; he tells CNBC he will (GATA)
• Civil war looms as dozens killed in Yemen capital (Reuters)
• Foreclosure Drop in Florida and California Do Not Show Recovery (ForeclosureWarehouse)

Engage in “constructive paranoia” and structure your portfolio to take advantage of the changes sweeping through the economy, rather than fall victim to them. A bumpy journey to a “new normal”. Developed countries will see sluggish economic growth, high structural unemployment, increased regulation, and constant pressure for private sector deleveraging.

The Fed does it again. Following consistent allegations that the Federal Reserve operates in an opaque world, whose each and every action has only had a purpose of serving its Wall Street masters, led to repeated lawsuits which went so far as to get the Chairsatan to promise he would be more transparent, Bloomberg's Bob Ivry breaks news that between March and December 2008 the Fed operated a previously undisclosed lending program, whose terms were nothing short of a subsidy to banks. Says Ivry: "The $80 billion initiative, called single-tranche open- market
operations, or ST OMO, made 28-day loans from March through December
2008, a period in which confidence in global credit markets collapsed
after the Sept. 15 bankruptcy of Lehman Brothers Holdings Inc. Units of 20 banks were required to bid at auctions for the cash. They
paid interest rates as low as 0.01 percent that December, when the Fed’s
main lending facility charged 0.5 percent." 0.01% interest is also known by one other name: "outright subsidy." It doesn't get any freer than that: 0.01% interest on one month cash. Just how close to a complete implosion was the financial system if 0.5% interest seemed too high? Not surprisingly, this program was widely used: "Credit Suisse Group AG, Goldman Sachs Group Inc. and Royal Bank of Scotland Group Plc each borrowed at least $30 billion in 2008 from a Federal Reserve emergency lending program whose details weren’t revealed to shareholders, members of Congress or the public...Goldman Sachs, led by Chief Executive Officer Lloyd C. Blankfein,
tapped the program most in December 2008, when data on the New York Fed
website show the loans were least expensive. The lowest winning
bid at an ST OMO auction declined to 0.01 percent on Dec. 30, 2008, New
York Fed data show. At the time, the rate charged at the discount
window was 0.5 percent."  Yes, that Goldman Sachs. The same one that perjured itself when it said before the FCIC that it only used de minimis emergency borrowings. Just how many more top secret taxpayer subsidies will emerge were being used by the Fed to keep the kleptocratic status quo in charge?

A rehash of an old story. Answer this question and you seal the fate of the Fed.

Today we get the second estimate of Q1 GDP and jobless claims for last week. Somehow a claims number over 400,000 is once again considered a good thing. Elsewhere the Fed buys $5-7 billion in 05/31/2015-11/15/2016 bonds, even as the Treasury gets even deeper into net debt ceiling breach courtesy of the last bond in the scheduled series this week which saw total US marketable debt increase by $110 billion gross and $49 billion net.

A month ago, when Goldman, just as we predicted, cut its GDP outlook for Q1 (to be followed by downgrades to both H2 and Q2) we said: "Some other things nobody will be able to predict: Hatzius dropping full
year GDP from 4% to 2.25%; Goldman's downgrade of precious metals,
Kostin's 2011 S&P 500 price target reduction by 20%, and Goldman
getting its New York Fed branch to commence monetizing $1.5 trillion in
debt some time in October." One by one all of the predictions are starting to come true: this morning Goldman head market strategist just cut his S&P 500 outlook from 1,500 to 1,450 (granted it is not 20%...yet. There is, however, over 7 more months left in the year). In the meantime, look for the thunderous Wall Street lemmings herd to do the same. Just as we have been predicting on both. Time for CNBC to trot out Laszlo Ultrasound and to advise him to angle the predictive instrument known as a ruler a littler lower: the S&P 2,854 call in 2 years suddenly appears in jeopardy (absent QE7 of course).

Gold and silver are lower today with profit taking, Chinese bond buying and increased risk appetite being cited for the price falls. Reports of China buying Eurozone government debt may have led to a rise in the euro and equities. However, the scale of sovereign debt risk internationally is such that even significant and ongoing Chinese buying would be unlikely to contain the crisis. While most of the focus has been on Greece and Eurozone sovereign debt issues, the not insignificant risk posed by a U.S. sovereign debt crisis increases by the day. The risk of a US default continues to rise which can be seen in the sharply increased cost to insure U.S. sovereign debt. The squabbling between Democrats and Republicans last week as the U.S. debt ceiling of $14.3 trillion was being reached did not help sentiment towards U.S. debt. Nor did former Soros’ partner Stanley Druckenmiller, the billionaire former-hedge fund manager and legendary investor, comment in the Wall Street Journal that the Federal Reserve’s bond purchases are a fraud and a “Ponzi scheme”. He advocated a U.S. default or a technical default, saying “"technical default would be horrible, but I don't think it's going to be the end of the world. It's not going to be catastrophic."

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This is not entirely surprising given that governments have been covering up nuclear meltdowns for fifty years to protect the nuclear industry