Archive - Jul 11, 2011

From the ancient cradle of pure debt genius...

This is what the market expects out of Alcoa, naturally guided lower in the past week. And here are the full results...

In other words, as Dow Jones reports, negotiations over participation of European banks in the Greek bailout at Eurofin meeting have broken down. That is all.

There was a time when countries would use Goldman's "innovative" currency swaps to hide billions of debt off the books. Those days are gone. Now governments, at both the state and regional level, just outright lie about what their deficit and debt is. Case in point, Spain's Castilla La Mancha region, best known for being the stomping ground for one Don Quixote, where the cities of Toledo and Albacete are located, has just announced that it has "a budget deficit more than twice as large as previously thought, raising new concerns over the true state of regional finances and helping to send Spain's risk premium to new historic highs. Castilla La Mancha President Maria Dolores de Cospedal said her government will present Tuesday the first results of the audit she announced after being elected in nationwide regional and municipal elections on May 22." What? Politicians lying about the state of their finances only for it to be uncovered that things are 100% worse? Say it isn't so. And why on earth couldn't Spain just open a local branch of the BLS: it would have absolutely no problem hiding its manipulated economic data. Too late now...

I have to tell you some terrible things.

Predicting the future in general is a fool's game, while anticipating inflection points, we have often said, is for market oracles and dummies. That said, one can easily anticipate general themes. The inevitable implosion of an unsustainable economic model is one of them. The only question is how does one hedge best for an event like this. In the past 3 years, precious metals, primarily gold, have served as arguably the best hedge to the absolute loss of purchasing power of the global fiat system. And with increasing global instability, the prominence of gold will only rise. A just released must read analysis by Oxford Economics titled "The impact of inflation and deflation on the case for gold" finds just that, and culminates with the dramatic conclusion that "gold's optimum share of a portfolio to be around 5% in a base long-term case for the UK featuring 2.25% growth and 2% annual inflation. This is higher than levels found in typical mainstream investment portfolios, although this may be in part because the analysis does not include other assets such as index-linked bonds, foreign securities and other commodities." Based on anecdotal analyses, gold holdings on average at the institutional level are about 1% or less. Which means that a qunitupling in buying interest will have dramatic implications on the future price of gold (it is no secret that we have been and continue to be very bullish on gold). And just like "nobody could have predicted" the implosion of Italy, so soon nobody will have been able to predict gold rising to $2,000, $3,000 and other multiples of $1,000. Which is precisely what will happen as the next and possibly final lap in the global currency devaluation game is nearly upon us. The only beneficiary will be the one instrument that retains its absolute value as fiat around the world is relatively devalued against one another. Regardless, while the attached study does not break any undiscovered secrets, it is a must read for everyone who is still on the fence, or is considering taking profits with gold once again just shy of its all time nominal price.

It's that time again when almost half a year after his first 2011 presentation to Congress and Senate in the semi-annual Humphrey-Hawkins, Bernanke will update the Hill with his latest outlook on monetary policy. And while the first such testimony earlier in the year was uneventful as it occurred at a time when the flawed belief that the US economy was growing was still prevalent, there is a peculiar sense of deja vu'ness. As JPM's Michael Feroli observes: " it may be helpful to recall last July's Humphrey-Hawkins testimony when, like now, the growth data had been seriously disappointing. Bernanke's testimony fell flat: the Chairman sounded tone-deaf, discussing plans for exit strategies, and markets rolled over, with stocks off over 1% on the day." Feroli continues: "The Chairman does seem to learn from his miscues -- there haven't been any further Maria Bartiromo incidents -- and we expect he will be more mindful of the downward momentum of the recent data." Does this mean that the Chairman may hint at a change in monetary strategy, especially if July regional Fed updates confirm the ugly NFP data? Most say no, but not Bill Gross, who as is well known, expects the first QE3 hints to be dropped in August. Perhaps Bernanke will decide to surprise the market again and pull that forward by one month? Read the full Feroli note below.

Politicians who have all been bought out by the banks have fallen for this charade so far. But it won’t last much longer. Banks may get you elected… but they can’t keep you safe from a populace that is rioting outside your door. So the banks will all be taking a BIG hit in the future. This in turn will kick off another 2008 episode along with food shortages, civil unrest, outbreaks in crime, bank holidays, and the like. It will, in short, be like what’s going on in the Middle East today (though NATO won’t be bombing us).

Now it could be time to look at charts on the EUR again. the natural fundamental trade is not EUR against USD or JPY, but to find a currency in a country will little or no debt. despite their own real estate bubble, from what i read, CAD or much better AUD and NZD might be candidates. CHF despite UBS and CSFB should be as well. notice how the Swiss authorities have tightened the management of these 2 institutions, pressing them to recapitalize as much as possible and targetting higher capital ratios than Basel III.

First, it was the president's turn to waste a few hundred million in deficit dollars by doing nothing to help the country (though certainly talk about it). Now it is Boehner's time for a retort. We anticipate, with about 100% certainty, that about $150 million in deficit funding debt will be added for the duration of this latest spectacle. And since, debt is not actually being added per se while the US in breach of the ceiling, this is simply the amount that will be plundered "transitorily" from government pension funds until the debt target is finally lifted. Watch the top GOPer's response live here at 1:30 pm EDT.

In the US, the government now requires all citizens to have a passport in order to pass the border, even when driving into Mexico or Canada. Obtaining a passport, however, is neither free nor guaranteed. You must apply, pay an ever-increasing fee, and wait for weeks to be approved and receive it. Naturally, the privacy statement on the application also acknowledges that the responses can be shared with other departments in the government, including Homeland Security. If this proposal passes, then US citizens will have a nearly insurmountable hurdle to obtain a passport and be able to leave the country at will. Even if it doesn’t pass, it’s a clear demonstration of what the people who run the country are thinking. Have you reached your breaking point yet, comrades? Let me know what you think.

I love Italy. Bondholders don't.

China's inflation battle would be a vertical battle climb for Beijing, and is nowhere close to "have peaked in June" as many analysts have predicted.

After last month, many funds got wiped out after the Brent-WTI spread collapsed from about $20 back to $14 in the span of days following the mid-June market swoon, the subsequent unprecedented rally driven purely by the ISM's inventory build up (which was massacred when last week's NFP confirmed aspirations about the end of the soft patch were proven to be simply naive if not outright moronic) has once again sent crude traders, who had now recalibrated their models to expect a spread in the mid-teens, upchucking (and in many cases negotiating margin calls with their prime brokers) after it just hit a fresh all time wide of $22.14, a nearly 100% move in just two weeks. The last time the max pain trade hit it caused such industry titans as John Arnold's Centaurus to gate, and do everything in their power to not lose LPs. What happens after the last two days move, will be seen shortly. Expect another spike in crude (and commodity) vol when the next big player throws in the towel.

We haven't commented extensively on the recently announced Bank of America $8.5 billion RMBS "non-settlement" settlement because frankly, it is a total travesty, ripe with so many conflicts of interest, it has no chance in hell of being final, and will likely see numerous revisions before it is complete, in the process costing BAC many more billions in legal fees and charge offs. We also expected that it was only a matter of time before politicians swarmed like a flock of crows on this rotting carcass of a deal, which will only make the life of BAC worse (we did share our amazement that BofA's stock rose on the news). Sure enough, here comes the first Congressman to contest that the proposed settlement is not an "arm's length transaction." And while our opinion of politicians is well-known, Miller's conclusion is spot on: "it is important that the American people know that their government is acting on their behalf, not on behalf of powerful financial institutions. It is important that the public and Congress be able to assess whether the enterprises settled claims that would limit taxpayer losses on a tough, arm's length basis, rather than providing another indirect subsidy to the banking industry." Alas, nobody even remotely believes that the government represents anything but the interests of the banks. But a bold effort. One thing is certain: the final BAC settlement, if one even comes to fruition, will not be $8.5 billion.