Archive - Aug 29, 2011

While Ben Bernanke has tried to exude confidence, he is now clearly discouraged. As well he should, since none of the Fed's "suite of tools" have worked as intended and almost every forecast the Fed has given since the Crash has been wrong. We are forecasting a stagnant economy and come the elections it is likely that unemployment will remain high. Like all Fed Chairmen, it will be hard for Dr. Bernanke to resist calls from politicians to "do something." He will earn his moniker as "Helicopter Ben" and unleash more quantitative easing, a dangerous and regressive policy.

Every year, at about this time (roughly just before the Fed launches on yet another monetary easing crusade) we get requests to decompose current events into their constituent pieces and present these in parallel with the period in time between 1929 and 1939 better known as the Great Depression. Obviously, doing so in its entirety would require at least a fat paperback, and considering that the average Zero Hedge reader has an attention span that is very stretched when presented with a lengthy bullet point, we fear such efforts may be lost on most. Furthermore, why reconstruct the wheel when it was precisely a year ago (and remember: 2011 is a carbon copy of 2010, so it is effectively yesterday) that Guggenheim's Scott Minerd did just that and in a far more politically and grammatically correct way than we ever could, not to mention with that many more pretty charts. So without further ado, here is Scott Minerd's compare and contrast of the Second Great Depression (the one we are now debating whether or not it has become a recession or not once again) to the original source.

While the key market moving event from last Friday may have been Bernanke's Jackson Hole speech which merely left the door open to future QE episodes, the most important event from an economic standpoint was the first GDP revision Q2, which dropped from preliminary 1.3% to a sub stall speed, in real terms, 1.0%. What is just as important is that as the following chart from Bloomberg demonstrates, the YoY change in real GDP, which is now at 1.5%, is a slam dunk indicator of recession: "Since 1948, every time the four-quarter change has fallen below 2 percent, the economy has entered a recession. It’s hard to argue against an indicator with such a long history of accuracy." Bernanke agreed that "growth has for the most part been at rates insufficient to achieve sustained reductions in unemployment." And while Bernanke is shifting dangerously into Greenspan territory with the open-ended interpretation of his statement, another thing that is more actionable is the observation that virtually every time real YoY GDP has dropped below 1.5%, this has led to a negative nonfarm payroll number. Granted, the result may not be as shocking as what the Philly Fed implied vis-a-vis this Friday's NFP, but we believe a subzero print in the August labor report will convince the three Fed holdouts that the time for yet another monetary intervention is here (Arab Spring part deux consequences be damned).

In light of last week's surprise announcement of Buffett's bailout redux of Bank of America (the first one being Goldman back in 2008), and following today's even more surprising objection by the FDIC which threatens to scuttle the Bank of Ameria settlement and force Bank of Countrywide Lynch to raise far more capital, pushing Warren to double down on his investment throwin more good money after bad, especially if the legal case moves from an Article 77-friendly NY state court to Federal, here are the philosophical thoughts from the Berkshire's oracles contained, in his "Collected Writings", on his desire to put money into banks.

Oops:

• FDIC OBJECTS TO BANK OF AMERICA MORTGAGE-BOND ACCORD
• THE REASON FOR THE OBJECTION IS THAT THE FDIC DOES NOT HAVE ENOUGH INFORMATION TO EVALUATE THE SETTLEMENT

Time to sell the other half of that China Constricution Bank stake... And Merrill... and Countrywide (goodluck), and pretty much anything else that is not nailed down. But don't worry: it's a liquidity, not a capital issue, or something. In other news, the Buffett "Eureka alert" is on BathCon 1.

Over the past decade China has been stuck in an inventory stockpiling and mercantilist process tolling mode, even as it has been posturing about expanding its middle class. Well, the Chinese empire may be finally hinting at what the "next steps" may be. FT reports that Chinese real estate tycoon and former Chinese Central Propaganda Department official Huang Nubo, has struck a deal to acquire 300 square kilometers of "wilderness in north-east Iceland where he plans to build an eco-tourism resort and golf course." That, at least, is the party line. Nobody however is buying it: "Opponents have questioned why such a large amount of land – equal to about 0.3 per cent of Iceland’s total area – is needed to build a hotel. They warned that the project could provide cover for China’s geopolitical interests in the Atlantic island nation and Nato member." And after securing a landing area equidistant from Europe and the US, China will next proceed to purchase bits and pieces of Greece, Spain, Ireland, Portugal, etc. After all, the nouveau-IMF piper ultimately always demands his price for keeping the western world ponzi alive and running for a few more months.

A snapshot of the US Afternoon Briefing covering Stocks, Bonds, FX, etc.

Market Recaps to help improve your Trading and Global knowledge

Quick answer, "Nothing!" Pros are just wrong, plain and simple. When you're long only, you only have to lose less than the next guy. You don't necessarily have to make any money. Remember that.

One simple flowchart describes today's action: If Low Volume => Levitation, the same we had seen repeated over and over and over between August 2010 and March 2011. And to think that the combination of two insolvent Greek banks into one insolvent Greek bank was sufficient to catalyze this move, despite yet another day of bad economic news confirming that the economy is now in a recession. Fear not: the worse it gets, the likelier Bernanke is to announce QE3 on September 21. And if not then, there is November 2. And if not then, there is December 13, and so on. Bernanke may never have to announced QE3 - he just has to keep dangling the carrot before the market that one day, soon, he just may follow through on his promise/threat. In other news, expect CNBC to trot out David Tepper soon to explain the logic of it all yet again.

Zero Hedge has been among the most vocal critics of Keynesian economics, and specifically the misinterpretation by modern governments of the core approach of the "Keynesian revolution", which essentially gave them a carte blanche to drown society in preemptively failed stimulus after stimulus, funded with a relentless tsunami of public debt, which, while some believe will never be "called", others, who actually base their opinions on real world empirical evidence and not textbooks, realize all too well that such debt is ultimately unsustainable, reserve currency or not. Which is why we were amused to read today in a letter by Pimco's Tony Crescenzi, the core gist of our argument, repeated so often through the years, namely finally "Saying no to Keynes and fiscal folly." The key paragraph from Pimco: "Politicians and the beneficiaries of their fiscal illusions for the past 80 years abused the Keynesian philosophy, relentlessly and dangerously pursuing the use of debt for self-aggrandizement. Today, the citizens of indebted nations bear a heavy burden and must begin repaying the debts. It is a herculean task, because the debts are mountainous. Yet, there is no choice, because investors have become intolerant of fiscal follies. They are saying no to Keynes, in other words." This also explains why during Bernanke's Jackson Hole speech the Chairman basically threw the ball back in Congress' court. Unfortunately he will soon realize that absolutely nothing will come out of this, and it will be up to him to once again guarantee that Wall Street generates yet another year of record bonuses.

With ZIRP, real interest rate on fixed income investment gives a negative return after inflation...

Ron Paul has released the following extended rhetorical inquiry on what the utility of the recent expansion (through very military means) of US and European interests in Libya has been, which more than anything exposes US hypocricy when it comes to foreign national interests. To wit: "Gaddafi may well have been a tyrant, but as such he was no worse than many others that we support and count as allies. Disturbingly, we see a pattern of relatively secular leaders in the Arab world being targeted for regime change with the resulting power vacuum being filled by much more radical elements.  Iraq, post-Saddam, is certainly far closer to Iran than before the US invasion.  Will Libya be any different?" And he follows up: " With the big Western scramble to grab Libya's oil reserves amid domestic political chaos and violence, does anyone doubt that NATO ground troops are not being prepared for yet another occupation?" Unfortunately, we will get the answer to this question quite soon, especially if a counter revolution in Libya, as many expect, does occur.

With today's market session merely a continuation of what happened on Friday, here is David Rosenberg's explanation of the market move seen following the initial dip on Friday, followed by the latest surge in stocks. Rosie's summary on what has been driving stocks higher over the past 48 trading hours? Simple - " the markets were responding to something and they were. It's called hope, and Ben gave them some." If indeed stocks are correct about QE3, look for Brent, WTI, Gold, and everything else to resume the upward climb, completely ignoring anything and everything that the CME decides to do with "speculative" margins levels.

The ES to Contextual Risk spread presented on Friday, at which point the ES was 15 rich to "underlying" fair value (first red circle from the left on the chart) continues to make new wides. After collapsing to 30% of the original spread level shortly after presenting, (first green circle) the spread returned to almost inception levels, and has since continued to blow out wider. At last check, ES appears to be nearly 25 points rich to fair value. Whether this means that correlation traders have taken an extended vacation, or that once again the purchasing capacity of those who "wag the dog" of actual underlying risk expression is impaired due to lack of actual capital, is unclear. It is also unclear how much wider the last 24 hours of irrational exuberance can send this spread before it reverts to fair levels. If the recent move in ES is predicated by self-fulfilling expectations of the Fed announcing QE3 on September 21, it is quite likely this may blow out to historic wides as the Bernanke Put, as presented here and which impacts primarily stocks in the early part of the easing regime, continues to be priced in over the next 3 weeks.

The Euro could be in the final stages of intervention/ bailouts. On September 8, a German court will be ruling whether it is constitutional for Germany to participate in EU bailouts. Consider that 6% of Germans feel the Euro has brought economic disadvantages and that the German elections are scheduled for just a few weeks later, and we could very well see the court rule to end Germany’s participation in the bailouts.