Archive - Aug 2, 2011

Unsurprisingly CAC had a plunge yesterday, one of the worst performers in all of the European markets - exactly as we have warned... Leading the way down were the institutions that we explicitly warned about... When one reads about DB drastically cutting its BTP exposure and French banks having done [relatively] NOTHING its quite scary... Ready! Set! Bank Run!

With everyone and their mother now expecting the BOJ to do absolutely nothing courtesy of Noda's now hourly announcements that he is watching the JPY like a hawk, or simply a confirmation that the Japanese central bank is as toothless as the SNB (EURCHF at 1.0952 at last check) to do much if anything, here is Citi's Osamu Takashima, who writes that the BOJ will intervene at a level of 76 on the USDJPY or about 9500 on the Nikkei. Bloomberg All News summarizes the highlights of his note.

This week's interview is one of the most important discussions we've had to-date on energy, its supply/demand dynamics, and the tremendous impact it has on our economic and social identity. It is clear now that we are staring at a future of declining output at a time the world is demanding an ever-increasing amount. Nate Hagens, former editor of the respected energy blog, The Oil Drum, gives a fact-packed update on where we are on the peak oil timeline. But interestingly, he explains how he sees the core issue as less about the actual amount of energy available to the world, and more about our assumptions about how much we really need: "We’re not really facing a shortage of energy, we’re facing a longage of expectations. And the sooner that we as individuals or a nation recognize that the future is going to see much lower consumption than today and prepare for that, psychological resilience is going to be really important; because if no one is psychologically prepared, people are going to freak out when some of these freedoms start to go away.

Eric Sprott writes: "We believe a growing number of European depositors are transferring their money out of EU banks, and many of them are reinvesting their capital into gold and silver for safety. It does not surprise us to see gold hitting all-time highs in euros and dollars. It’s worthwhile to acknowledge that those investors in Iceland and Ireland who had the foresight to convert their cash to gold before their countries’ respective bank runs have all fared extremely well in both nominal and real terms. We believe that gold and silver are the ultimate alternative for a chequing account in a vulnerable banking jurisdiction, and whether the ECB prints more euros or eventually defaults, both outcomes will continue to support a robust demand for precious metals as an alternative currency."

Goldman FX, whose core thesis over the past quarter has been an increase in USD weakness, and which has so far proven correct against most pairs (and certainly gold) except for the EUR, which is in the same boat as the dollar (and both are sinking fast after hitting an iceberg), looks at the risk of upside dangers to the USD, which would likely materialize in the event of a global Risk Off event, and finds that the currencies most exposed to a surge in the USD are the Yen, once upon a time the carry funding currency and now the opposite, the AUD and the NZD. That said, Goldman concludes "beyond the risk of a short squeeze near term, our expectation is for USD to continue weakening on a broad basis." Naturally, Goldman's thesis will be very facilitated should Bernanke go ahead and make QE3, in some form, a reality as soon as the end of August.... just like last year.

The surprises of SEC's infinite revolving door conflicts of interest never cease to amaze (or, for that matter end). Andrew Ross Sorkin has taken some time from his busy media whirlwind tour schedule and conducted some actual investigative reporting for a change, discovering that the SEC's co-chief counsel in charge of helping write derivative rules, Adam Glass, who previously testified about Goldman's Abacus, the culprit for the biggest SEC settlement in history against a Wall Street firm, had some very specific inside knowledge vis-a-vis Abacus. He signed off on it. Writes Sorkin: "Before working on the financial crisis cleanup, he helped create the opaque securities that contributed to the mess...For many years, Mr. Glass served as the outside counsel to Paulson & Company...And yes, Mr. Glass, in that role, signed off on Abacus, which was created specifically for the hedge fund to short subprime mortgages. Mr. Paulson handpicked some of the underlying investments in the derivative...The government, in its complaint, claimed that Goldman had "misstated and omitted key facts regarding" Abacus, including disclosing Mr. Paulson's role in its creation. The firm paid $550 million to settle the case, without admitting or denying guilt...his role once again raises questions about the revolving door between Washington and Wall Street at a time when public distrust about the agency and its lack of enforcement action against the culprits of the crisis is running high..."If he was involved in Abacus, how is he supposed to police it?" We are not sure if we are more confused by the fact that Sorkin has actually done some actual research or that yet another SEC crony is exposed to be in the pocket of Wall Street's rich and powerful. Actually, the former. Certainly the former.

Make no mistake, something big is afoot behind the rhetoric and political talking points being thrown around by the White House and the GOP. That something will be some means of letting the banks get through this period without getting crushed.

It has been a while since we have presented Chinese fraudcap candidates. Today, courtesy of Glaucus Research we bring you the latest entrant to the alleged reverse merger fraudcap group: L&L Energy, Inc, (Nasdaq: LLEN). Is this company nothing but yet another Chinese fraud and poised to plunge by over 75%? Read the full report (Price Target <$1.00) and find out.

The H2 economic grwoth hockeystick is rapidly becoming Kansas. To wit from Jan Hatzius: "While quarterly results for consumer spending were already known-they were published in last Friday's GDP report-the monthly pattern means that consumption heads into Q3 on a weak trend. The report therefore points to additional downside risks to our 2.5% forecast for Q3 GDP growth." As we predicted last Friday, Goldman will cut Q3 GDP to sub-2% within a few weeks and the QE3 onslaught avalanche will commence.

In his latest letter, Kings of the Wild Frontier, crushes the optimism of all those, roughly 4 altogether in the entire world whose combined IQ barely breaks into triple digit territory, who believe that the debt ceiling "compromise" does anything at all for US spending patterns, weather it is for total marketable debt, or the $66 trillion in NPV of future liabilities. Gross, however, does show us the 5 ways (well, 4 plus default) that the "debt man walking", aka Uncle Sam and his tens of trillions of future liabilities, plans to rob from you: dear taxpayer, in order to minimize the present value of these unmanageable future liabilities. To wit:

1. Balance the budget and/or grow out of it
2. Unexpected inflation
3. Currency depreciation
4. Financial repression via low/negative real interest rates

All of these guarantee that investor pocketbooks will be dramatically affected... Adversely. Let's dig in...

Nobody could have foreseen the "tradition" being a safe haven escape to all the other "traditional" fiat-based garbage available to investors. Nobody. Next stop: $1950.

And another ugly economic data point. June personal income was just released at 0.1%, on expectations of 0.2%, and down from a revised 0.2% (previously 0.3%). Personal spending was far worse than expected, coming at -0.2%, down from a revised 0.1%, and missing expectations of 0.0%. PCE Core was the last metric missing, coming at 0.1%, down from 0.2%, down from a downwardly revised 0.2%. Just as importantly, as in the case of GDP, there were major downward historical revisions: "Personal income was revised up $69.1 billion, or 0.6 percent, for 2008; was revised down $244.7 billion, or 2.0 percent, for 2009; and was revised down $167.5 billion, or 1.3 percent, for 2010. .. For 2009, downward revisions to personal interest income, to personal dividend income, and to nonfarm proprietors’ income were partly offset by upward revisions to rental income of persons and to farm proprietors’ income.  For 2010, downward revisions to personal   interest income, to nonfarm proprietors’ income, to supplements to wages and salaries, and to personal current transfer receipts were partly offset by upward revisions to rental income of persons, to wages and salaries, and to farm proprietors’ income." In other words, the "rental income" that offset downward income revisions came exclusively from the $50-100 billion squatters' rent annually "generated" from homeowners not paying their mortgages. End result: a surge in the savings rate to 5.4% from 5.0%, the highest since March 2011, as consumers retrench across the board.

Relevant News by www.thetrader.se

Debt Deal Puts U.S. on Austerity Path as Economy Falters (Bloomberg)
Short-term US Funding Highly Restricted (FT)
China Halts Offshore Yuan Borrowing to Tighten Policy (Reuters)
Fed Confronts Limited Tools to Stir Economy (Hilsenrath)
Australia Leaves Key Rate Unchanged (WSJ)
N.Z. Second-Quarter Wages Rise at Faster Pace, Adding to Inflation Signs (Bloomberg)
China’s Expanding Naval Reach Worries Japan Over Routing Warship Presence (Bloomberg)
Geithner Says Debt-Limit Deal Good for Economy in the Long Term (BusinessWeek)
UK borrowing costs brush close to record low (FT)

Markets witnessed a risk-averse sentiment today on the back of contagion fears in the Eurozone, with particular focus on Italy, together with growing signs of a faltering global economic recovery. This resulted in weakness in European equities, led by peripheral indices, which provided support to Bunds and Gilts, whereas a general widening was observed in the Eurozone peripheral 10-year government bond yield spreads. The USD-Index traded higher throughout the session, which in turn weighed on EUR/USD and GBP/USD, however GBP/USD did receive some strength following higher than expected construction PMI data from the UK. In other forex news, some market players mentioned the possibility of a JPY intervention, although Japanese officials declined to comment. Moving into the North American open, markets look ahead to a slew of economic data from the US in the form of personal income/spending, PCE report, as well vehicle sales figures. Today is also the deadline for the US to raise its debt ceiling, and following an approval of the bill from the House last night, the Senate is expected to vote at 1700BST, and if successful, it will be signed by President Obama.