Archive - Aug 16, 2011

Bloomberg's Mike McDonough has put together the simplest, and thus best, chart of the latest epic collapse in the BOJ's attempt to intervene and keep the Yen from appreciating. The chart needs no explanation, and shows that the half life of BOJ interventions is not only exponentially shorter but now, outright laughable. What does need an explanation, however, is the prevailing quandary of just what sleeping medications Noda and Shirakawa will have to take once USDJPY touches on 75, then 70, then 65, then 60 and so on, and they watch, watch, watch, the "one-sided" moves in the USDJPY, helpless to do absolutely anything as the Chairman drop kicks yet another monetary opponent into a permanent knock out.

Every time someone mentions fiscal stimulus (and specifically the failure thereof), the conversation, after repeated empirical demonstrations that said stimulus virtually always ends in tears, will veer to the Economics 101 textbook definition of the savings-investment identity, in which Investment = Private Saving + Government Saving + Current Account (the simplistic argument goes that a surge in Government Savings, i.e. austerity, means a plunge in net investment as the private sector is unable to step up), which more than anything, seeks to provide the last possible goalseeked explanation of why Keynesian assumptions still work in post-modern monetary environments, in which monetary policy has passed into the twilight zone of global central planning (i.e., money printing is rampant and thus textbook definitions of "savings" in a ZIRP environment are completely irrelevant). The irony, as so often happens, is that those who invoke this identity (which John Hussman has done a very admirable explanation of here) mix apples and oranges, and use, incorrectly, a monetary flow concept to explain what is fundamentally a production efficiency and labor (and post facto: consumption) phenomenon. That many of said proponents also make the gross mistake in assuming that in some perverse post-Keynesian universe a reserve currency issuer (however temporary, because there is no such thing as permanent reserve) can issue an infinite amount of debt, which by implication would result in the grotesque lim interest rate=0 as debt issuance ->infinity is inconsequential: this may work in a black box vacuum, but most certainly does not work in a globalized world in which currency, and yes, binary reserve status (consisting of 1s and 0s), is fungible with a keystroke (ref: the historic August 22 start of Renminbi futures trading which the CME today disclosed the margin requirements for). What this lengthy preamble tries to say is that feeding the government monster is, contrary to what Krugman and other Keynesians will tell you, in the current regime of coincident monetary irrigation, an exercise in futility. Perhaps nobody does a better job to explain said futility than Bill Buckler in his latest edition of The Privateer, which we urge everyone, and most certainly the POTUS who just requested more fiscal stimulus, to read in order to take a step back from theoretical, and wrong, textbook formulations and to see the stimulus forest for the burning trees.

Winston Churchill defined appeasement as “feeding the dragon hoping he will eat you last.” As the eurozone banking crisis has morphed into a sovereign debt crisis, it is worth reconsidering the wisdom of appeasing the bond market in an attempt to stave off the possibility of default.

What a show Perry is putting on. Did Bernanke see this coming? Maybe

Proving once again that when it comes to the definition of Banana Republic, America really has no equal, we first read in China Business News that according to PBOC adviser Li Daokui, China will "basically" maintain its existing monetary policy direction, and won't likely introduce stimulus measures as it did in 2008. Sorry "Rest of the World", you are on your own: China will no longer act as the last recourse economic (confidence) dynamo (because who the hell knows just what is going on in the mainland aside from building empty cities and grounding its entire monorail fleet, an action that was accompanied by so-called objective rating agency Dagong giving the rail ministry a rating higher than that of China itself!... once a rating agency...). However, this action of glaring sobriety does not stop our own fiscal monkeys from throwing feces at the stimulus wall in hopes something sticks. Just as last year the payroll tax was supposed to be the $100 billion gift that keeps on giving, yet crashed and burned miserable within months if not weeks, so this year we find that Obama is once again "recommending that the congressional deficit supercommittee back new measures to stimulate the lagging economy, people familiar with White House discussions said Tuesday." But that's not the funny part! No, the funny part is that even as he demands more alms, our munificent president would also "recommend the committee come up with a package that reduces the federal budget deficit by much more that its mandate of $1.5 trillion over the next decade, a senior administration official said, through changes in the tax code and social safety-net programs." So let us get this straight: more stimulus in the short-term, offset by quadrillions...nay... sextillions of savings at some point in the far future, long after the current administration is at the very bottom of the history books. Brilliant! But an even better idea: Obama should pull a Bryan Gardner and forge a money order from Hank Paulson, making Citi hand out a +/-$1 million check to every American, paid out of petty unaccounted for cash, as was the case before. Obviously, nobody noticed then; it is only Banana Republican that nobody will notice now.

Consumers used to have discretionary income which they would use or not use depending on their mood. Beginning in 2008, consumers had less money but the price of commodities shot up and that has kept consumer spending high – but that doesn’t mean they are happy about it.

Hi GW, It’s been so long! I’ve been skiing like a madman down here in Chile—but I did catch something you wrote, which I’d like to comment on, now that a blizzard has hit the slopes and I’m stuck inside with not much to do. You wrote a post yesterday, picked up by Zero Hedge and others, pointing out that Paul Krugman is advocating war as a fiscal stimulus solution. You pointed out that this position he holds is not only blatantly immoral, it is a position Krugman seems to have no problem openly pushing—your unspoken implication being that this is disastrous, considering how influential Krugman is in major policy circles. With regards to K. pushing for war as the ultimate Keynesian economic solution: I hate to say “I told you so”—but in this case—I told you so! (Cheers, mate.)

Somehow even as all that deflation in home prices continues, like perfectly joined communicating vessels, countervailing inflation continues seeping into pretty much every other aspect of society. But don't take our word for it, (or even gold's, which is just under all time record notional highs): according to Rasmussen, "Americans nationwide continue to lose faith in the Federal Reserve Board to keep inflation under control, with the number who say they are paying more for groceries now at an all-time high." Specifically, "93% of adults report paying more for groceries now than they did a year ago, the highest finding to date. Only four percent (4%) say they’re not paying more for groceries now compared to a year ago.  Prior to the latest results, the number that said they are paying more for groceries ranged from low of 75% in April 2010 to a high of 91% in May of this year." However, since many of these same adults are transferring intangible "savings" from their non-payable mortgage check courtesy of a home market that has now ground to a halt for over 6 months, aka squatters rent, to pay for staples, few really mind. They just like to bitch and moan about it because it means fewer Apps downloaded for the iPad.

Good thing the whole debt ceiling fiasco taught Tim Geithner a thing or two about being frugal, or else today's $28 billion increase in total debt to a new all time high of $14,615,567,348,203.71 may have been far, far worse. At least congress still has $127 billion in dry powder before it has to authorize the extension of the interim debt ceiling cap of $14.694 trillion. At this rate, total debt and US GDP will achieved parity in 4 months, and if the US actually contracts (negative GDP in Q2 and Q3) and enters recession, that will be one divergence spread we will never want to be on the compression side of.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 16/08/11

Perhaps the most surreal fact about the case of 35 year old Bryan Gardner who back in 2009 sent CitiMortgage a $353,000 money order "drawn on the account of the 'Secretary of the Treasury Hank M. Paulson, Jr." in order to satisfy the final payment for a property in Bowie, Md, is that.... he succeeded. Fox Biz has more: "CitiMortgage erroneously accepted the document and credited Gardner's mortgage account in full," according to a Secret Service affidavit. Within months, Gardner sold the property for $254,900 and then "distributed the proceeds to others," according to public records and the Secret Service affidavit. Investigators believe Gardner may have initially secured the mortgage under false pretenses. Through a spokesman, an FBI agent who investigates mortgage fraud said he was surprised the scheme succeeded, and a former Justice Department official who helped lead fraud enforcement efforts in the wake of the financial meltdown agreed, calling the approval of the money order "bizarre." Perhaps what is more bizarre is just how a plan like this, which a 3 year old could concoct, but not even a 3 year old would be dumb enough to believe it would fly, actually succeeded. Just how big is the pool of "unclaimed" cash on deposit at CitiMortgage is there was i) no actual account was debited for the full amount and ii) nobody noticed that the Treasury department was paying off a private mortgage.

More flashing red recessionary indicators are coming courtesy of the largely ignored High Yield market, which following a 5.3% decline is, as Bank of America (itself ironically contributing substantially to the blow out) says, is shaping up to be "among the worst months in the HY market's 25 year history, in a bad company of post-Lehman, post-WorldCom, post-9/11, and post-Russia sell-offs. The difference of course is that we did not have the largest bankruptcy in history taking place (LEH or WCOM shared that title at a time), no terror attack, and no outright sovereign default (Russia in Aug ’98). What we did have however, is a global risk-off trade, sparked by concerns that this fragile environment could slip into a double-dip recession as consumer and business confidence fails to sustain repeated beating from sovereign and financial systemic risk issues." What we also did have is the near end of the modern ponzi economic model, whose viability was once again extended courtesy of a variety of sticky objects thrown at the wall with hopes one sticks. For now the obliteration has been halted, although one thing is undeniable - central planner intervention buys increasingly less and less time. We are confident that August is just the beggining of pain for not only HY, but all other asset classes. And some more ammo for those who like comparing 2011 to 2008: "Parallels are being drawn between today’s environment and that of 2008, given the degree of equity destruction that has taken place across the financial space. Financial CDS – the epitome of ’08 systemic risk – are trading at an average of 190bp in the US, within reach of Oct ’08 levels, and 240bp in Europe, well north of their ’08 wides." What do spreads imply? Nothing short of recession: "The HY index, in the meantime, has widened to 739bp as of close on Thursday, its widest level since Nov 2009. With the spread normally peaking at 1,000bps in full recessionary periods2 (1991 and 2001-02) and bottoming at 250bp in times of strong economic growth, the current level is pricing in an 80% probability of a fullblown contraction in GDP, and a 100% chance of a mild recession."

14:00 CDS update:

• MER 355/375 +25
• BAC  310/320  +25
• MS  260/275 +15
• GS 190/205   +10
• JPM 112/120 +5
• WFC 110/120  +5

With the only debate consuming the broader investing public these days (and for the past several years) being whether or not entity/bank/country X will receive a taxpayer bailout or not, some forget that there are actual fundamental, cash flow-based drivers to making economic decisions. Key among these has always been whether to rent or buy that most capital intensive purchase (for most): a residence. Courtesy of Trulia we bring you the definitive interactive guide on whether it is currently cheaper to buy or rent in various metro areas around the country. It is immediately evident that real estate in New York continues to be massively overpriced, with the option to rent the only economical one, although that will surely not prevent this year's batch of Wall Street bonus heroes from purchasing multi-million Soho lofts, especially if the Chairman decides to lend a helping hand. How about everywhere else? "Trulia looked at housing prices, foreclosure activity and job opportunities, and found that it’s cheaper to buy a home than to rent in 74% of America’s 50 largest cities." This probably means that the days of rent-based inflation are numbered as at some point the rental herd will once again resume buying. Of course, for that to happen, the Fed will have to give an indication that the current ZIRP "blue light special" well eventually end and thus inspire a sense of urgency within the consumer class. Too bad that the Fed just made sure virtually no bidside interest will exist for at least two more years, or until the previously given mid-2013 target. As such, we expect renting to continue being the dominant form of real estate procurement, which just like the farming bubble, will soon make even living in a 300 sq foot box in Midtown impossible for most.

After a brief lull, Alfred Little, whose track record in slaying Chinese fraudcaps is comparable to that of Muddy Waters (just recall the DEER in headlights), has released a report on what he believes is the latest Chinese publicly traded fraud: Sinotech Energy Limited (Nasdaq: CTE), where the catalyst is that its "largest customers and suppliers are likely nothing more than empty shells with little or no sales or income." Notably, this company breaks the mold of the surefire reverse merger frauds, and was actually taken public in an IPO by UBS, Citi and Lazard. Little's price target: somewhere between $0.00 and $0.63, a notable discount from the current price in the mid $3s. Below are the key highlights from the just released report as well as the full 30 page research report in its entirety.