Archive - Jul 9, 2011

Mexican wrestling featuring...

Statement by Speaker Boehner on Debt Limit Discussions

House Speaker John Boehner (R-OH) released the following statement today regarding ongoing debt limit discussions with the White House:

"Despite good-faith efforts to find common ground, the White House will not pursue a bigger debt reduction agreement without tax hikes. I believe the best approach may be to focus on producing a smaller measure, based on the cuts identified in the Biden-led negotiations, that still meets our call for spending reforms and cuts greater than the amount of any debt limit increase."

Zero Hedge translation: in two weeks we get news of no tax hikes, and no deficit reduction, which will be spun by the great diversionary media machine as the great compromise, and, of course, leading to a $2.5 trillion debt ceiling hike. Win, win for everyone. Except America's people of course, but who gives a rat's ass about them: certainly not their "elected" muppets, all of which are for sale to the highest Wall Street bidder.

Proving once again that i) there is no idea on the Hill that is so stupid that it can't be recycled again... and again, and that ii) the last thing politicos care about is deficit reduction (yes $4 trillion cut over the next century works... too bad by then the deficit will be measured in quintillions) is the news from Bloomberg that following the "stunning" news from the BLS that "nobody", and certainly not Joe LaVorgna could predict (odd, we do recall saying on Thursday night that anything out of the ADP is and always has been complete garbage, and that the only definite pink slips should be those handed out to its employees) democrats are now demanding more of the same (failed medicine) that did nothing at all to boost Q1 GDP, namely an extension to the payroll-tax cut, which humiliated none other than Goldman's Jan Hatzius into believing it would do something to boost the economy (first see: Goldman Jumps Shark from December 1, 2010 then Goldman Apologizes For Its Horrendous December "US Economic Renaissance" Call, Begins QE3 Discussion). Hint: it won't. It will merely cost another $100 billion in incremental debt that will never be repaid, and a few dollars boost to Apple's EPS, but aside from the few non-edible iPads being bought, that will be about it. Yet that won't stop the screeching parrots from repeating the only word they know: more, more, more: "Senator Charles Schumer of New York, the chamber’s third- ranking Democrat, called for an “immediate jolt” to the economy by extending and enlarging a one-year payroll-tax cut that’s set to expire Dec. 31. He asked for action “as quickly as possible by including it in the final debt-limit agreement.” Jared Bernstein, until recently Vice President Joe Biden’s chief economic adviser, predicted the White House would step up efforts to include in the debt deal additional infrastructure spending or a new temporary payroll tax reduction." Yeah, good luck with that.

What happens if Sovereign Debt blows up?

There has been much speculation recently about whether or not China is or isn't dumping its holdings of US Treasurys. Spoiler alert: it isn't. At least not outright. After all, it still is not a self-sustaining economy and as such relies on what's left of the US middle class to purchase its production. In fact, according to the latest TIC data, after 5 months of declines, Chinese UST holdings increased in April 2011. The problem with TIC is that it is woefully late. It is also terribly unpredictable and subject to annual adjustments which see hundreds of billions adds or subtracted from estimated holdings. Furthermore much has happened in the period between April and the first week of July. Namely the end of QE2. Furthermore many will note that there has been little if any change in market sentiment to Treasury paper now that QE2 is over (which is actually very much untrue after last week we saw the biggest percentage blow out in the 5 Year in history). But for the best indication of what non-US based buyers of Uncle Sam's paper think about the desirability of said paper, we went to the source, and compiled all Auction issuance data since the June 2009 bidder reclassification rules. The result is quite striking. Over the past 2 years, foreign demand, expressed by the final take down as a percentage of total auction size across the entire curve (2,3,5,7,10, and 30 Year) has plummeted from 55% to just below 35% as of the last auction.

With each passing day bringing us closer to the end of the world's reserve currency, and everyone coming up with their soapbox theories about what happens tomorrow and the day after, perhaps the best way to analyze the future is by looking at the past, which is what Grant Williams has done in his latest TTMYGH letter.  It begins: "What exactly IS ‘The Dollar’? There are currently 47 countries or territories that use the ‘dollar’ as their currency, from the obvious names such as the United States, Australia and Canada to the more esoteric such as Suriname, Tuvalu and Guyana, but where did the word ‘dollar’ come from?" Williams proceeds to analyze the full history of the greenback, and its primary function, to provide an alternative to gold, as the defacto world currency. The truth is that every time the dollar appeared like it was on the verge of irrelevance, a gold standard of some form was reestablished, however briefly. We are now at one such crossroads. Yet only fools know for a fact what will happen hours from now, let alone years. Which is why as Williams concludes, " Whatever happens from here, there are a few of things of which we can be quite certain" :

• To paraphrase Winston Churchill’s quote about America: Governments will always do the right thing - after they’ve run out of every possible way to avoid doing so
• The can will be kicked down the road until we run out of road - and into a brick wall
• The ultimate judge of the success (or otherwise) of every political decision made since Lehman Brothers went to the wall is shiny, yellow and costs about $1,500/oz

"So what exactly IS the dollar?" Read on form some answers.

On the two year anniversary of the original New Wall Street Reality list, it is time for a long overdue update.

According to my research, last week's stock market rally was the sharpest such surge since 1644, just before the Ming Dynasty collapsed and Europe was decimated by an epidemic of plague. Perhaps that is coincidence, perhaps not. The Status Quo always tries to brighten the outlook just before things fall apart, and nothing cheers flagging spirits more than a sudden rise in wealth. The rally in barley in Babylon during the last week of December 1748 BCE was almost as robust, a peculiar coincidence given the next sharpest rally on record was the rebound in Dutch tulip bulb contracts which also occurred in the month of December, 1636. Shares in the South Seas Company recovered much of their initial losses in a similar rebound in London, September, 1720, a welcome respite for all the investors who were about to be wiped out by the 80% decline in share value when that bubble popped. More recently, condos in Florida saw a sharp uptick of sales and prices fetched in August, 2007, just before that market collapsed in a great heap. You see the pattern: the sharper the rally, the closer the market is to the bubble's end-game.

EU Debt Crisis, Wall Street and IMF. How do they cooperate in stealing the assets of Europe? Welcome to Neofeudalism.
Keiser reports, and please check Hudson starting 14 minutes into the interview.

It had been widely expected that Chinese CPI would come in smoldering in June, with some predicting a print of 6% or just over. Few, however, expected 6.4%, a blistering spike compared to May's 5.5%, which is the highest inflation recorded in China in 3 years, and depending on how one looks at GDP (and the government's way is certainly modestly flawed to say the least), China may well be approaching the revolutionary point where real interest rates turn negative, and purchasing gold becomes a costless opportunity, which in turn would send the price of gold well north of $2,000. China Daily, the government's official mouthpiece comes with the usual Douglas Adams advice: "We don't have to panic about the June CPI figure," said Zhang Liqun, a macroeconomic analyst with the State Council Development Research Center, China's top government think-tank....Of the 6.4-percent CPI growth in June, 3.7 percentage points were contributed by the carryover effect of price increases last year, the NBS said in a statement on its website. "A CPI growth above 6 percent doesn't mean the inflation situation is worsening in China, because 3.7 percentage points of the increase were contributed by the carryover effect," Zhang said." See: inflation is transitory. First in the US now everywhere. Elsewhere, expect more RRR hikes to follow in the coming weeks in the aftermath of the just announced general interest rate hike as the PBoC, contrary to its own advice, starts panicking.

Today for the first time, Iran's IRNA news agency reported that the country had fired two missiles with a range of 1,900 km, coupled with TV coverage, into the mouth of the Indian Ocean. As PressTV reports, "Commander of the Aerospace Division of Iran's Islamic Revolution Guards Corps (IRGC) Brigadier General Ali Hajizadeh said that the long-range missiles were fired in the Iranian calendar month of Bahman (January 21 to February 20). He said that the missiles, fired from central Iran towards the Indian Ocean, successfully hit its designated targets, IRNA reported Saturday. Hajizadeh said that Iran's missiles have a range of up to 2,000 kilometers, adding that “Iran has the ability to produce longer-ranged ones (missiles) but presently there is no need to produce them." The purpose of the test firing was all too clear: "Our desired targets and the country's threatening us are located well within the reach [of our missiles]," he said. In other words: any US-based invasion of Iran will most certainly see prompt retaliation against US national-interests in the region. This is especially concerning since the US currently has two aircraft carriers, amusingly the Bush and the Reagan, both sitting side by side at the straits of Hormuz, with LHD 4 boxer backing up the rear in a zone that is now quite explosive. Had these test firings been perceived by a provocation, and lately it appears that the US is actively seeking one, it may have been quite a mess.

While it is by now clear that despite a few headfakes, the economy largely sputtered in the second quarter, with the only positive data point coming from a major inventory build up that led to a better than expected manufacturing ISM, the question now is how did the global weakness over the past 3 months translate into corporate earnings. Next week we will start finding out as 4% of the S&P500 companies report, but the peak of reporting will hit in the 3 weeks following when 83% of all companies hits the tape. Oddly enough, while there has been a material number of downgrades, especially in the financials sector, preannouncements have once again been largely missing, especially in the industrials space. As Dylan Grice pointed out, the game whereby analysts lower EPS forecasts for companies only so hey can beat by about a cent has started in earnest. The biggest question is whether the "farce that is reporting season" will simply be a modest drop in EPS even as the government resumes its corprate friendly approach, or, with advance indicators now tumbling, is this the inflection point? Recall that corporate margins have now peaked: the only saving grace for the corporate sector will be if companies are once again laying off people in droves and cutting overhead (an event which should lead to massive layoffs at ADP for example). Anyway, here are some observations from JPM and Goldman on what to expect and how to fade the big banks' calls on what is coming.

Systemic Risk: In one of his serio-comic sequences, Charlie Chaplin’s little tramp starts pulling a thread from his crumpled suit. Before long, his whole miserable costume dissolves. Is there that kind of loose thread here?

Yes it sucked. But what does that mean?

Enough bullshit, it's time to expose the real unemployment scandal...