Archive - Aug 2011

Hey man, take a look out the window and see what's happening...Yeah, I see what you mean brother...

Some perspectives on the one event that has consumed everyone on the East Coast from CNN: "Hurricane Irene continues to crawl north after making landfall Saturday morning in North Carolina. The storm is expected to head up the East Coast from Virginia to Maine, bringing hurricane-force winds, heavy rain, flooding and widespread power outages. President Barack Obama warned that Irene could be a "hurricane of historic proportions."

Placing one’s chips on the “Don’t Pass” line when Warren Buffett holds the dice may seem ill-advised, but we’re not so sure about that $5 billion bet he just made on Bank of America.  The news media inferred with all its might that it was a vote of confidence — not only in B of A, but in the U.S. banking system. Yeah, well, maybe. 

More data on the big storm.

Bernanke said QE 3.0, without really saying it. The markets, seeing the enlarged schedule for the September meeting and interpreting the likelihood of heavy discussions, have gotten the message. Stocks threw off the daily mortal struggle that is life as Bank of America and bid for the QE future that is now September (good riddance to August apparently). Gold prices followed on those expectations of a resumption to the willful and wanton dollar destruction that QE purely represents. If the Chairman can influence a major market rally without ever having to face the growing dissent within the FOMC ranks, then his speech has proven to be a stroke of genius. That is the essence of rational expectations, making others believe you have magical powers so that they do your bidding without any actual work or direct engagement on your part. But there is a huge downside to waiting, and Bernanke knows it.  The financial crisis grows while the economy is sliding further into contraction.  Time is not on his side. So why does he wait? Simple, Bernanke and QE is in a box – conditions currently in the wholesale money markets, especially the repo market, will not suffer more QE.  As the unsecured Fed funds and eurodollar markets have effectively frozen for banks outside the primary dealer network, wholesale funding has been left to repos.  However, there is already a shortage of treasury bills, the prime, vital collateral of nearly all post-2008 repo funding arrangements. 

While we have no information as to who or why (we do know when and where) engaged in a transfer of 9,173 ounces of eligible gold (for a total of about $16.5 million) from HSBC's gold depository into that of JP Morgan, according to today's closing CME Group Metal Depository Statistics, we can merely point out that it happened. One back of the envelope hypothesis: we have counterparty risk at the bank level (which is currently manifesting itself at both the CDS, the stock price, and the Li(E)bor level) are we going to start seeing counterparty concerns at the gold depository level next? What next: a run on the [    ] gold depository in a self-fulfilling prophecy? The second hypothesis is by now well known- JPM needs all the gold it can get. But a paltry 9,173 ounces? Of course, the last hypothesis is that the two precisely 9,173 ounce transactions are in no way related.

A set from I Am Legend, or a picture from a Queens supermarket taken minutes ago. You decide.

The reward for lending money to various sovereign governments around the world is ridiculous based on the amount of risk involved in doing so. At one end of the scale you have the juicy 44% yield for lending money to Greece which, let’s face it, is done. At the other end of the scale you can get basically nothing for lending money to the governments with the poorest balance sheets on the face of the planet. Your choices? Japan with its 200% debt-to-GDP and dying economy? Europe, which will likely no longer exist in its present form come the end of 2012 and which has broadened it’s accumulation of debt from the worthless kind issued by Greece to the severely dubious varieties issued by Spain and Italy (with France just waiting to be put into the game)? Or how about the United States? With its $14 trillion (and rising) deficit, it’s bloated balance sheet of toxic assets, its inestimable unfunded liabilities and its paralyzed political process? Some choice. And yet, people continue to flock to these perceived safe havens largely because, over the years, they have become used to doing so. At some point they will figure out that the ‘safety’ offered by government bonds is now a phantasm and when they do, you can be sure their awakening will be felt across the world. As fire and ash billowed into the skies over Pompeii and Herclaneum all those years ago, the terrified citizens below poured into the safety of their cellars where they had always sought protection previously. Only this time it WAS different and the cellars that had always offered them shelter from the storm became their tombs; proving conclusively that what may well have afforded protection in the past, may not do so in the future. Sadly, the 20,000 people living at the foot of Mount Vesuvius found that out the hard way. 1932 years after arguably the most storied of volcanic eruptions in history, at the foot of a volcano that still smoulders but, despite an eruption in 1944, hasn’t had a major eruption since 1631, 700,000 people now reside.

First read this humorus lesson on TEOTWAWKI preparation. Then turn on The Weather Channel and watch Hurricane Irene Rototill the East Coast for a primer of what’s to come.

It's not what he said. It's what comes next. Some clues.

Tangible stores of wealth are indeed seductive, and apocalyptic overtones add to their allure. But what is tangible can be taken. Trading in apocalyptic settings has minimal gain and even the most tangible things carry risk: there is no profit in an unshakable faith in them. The only unshakable faith should be in one’s capacity to foster a world worthy of wonderful and useful ideas, avoiding religious matters. It is here that the rules themselves change in unpredictable ways. Bureaucracies collapse: the largest predators in the food chain become extinct. The best hope is to rise out of it and rise quickly and the smaller, nimbler, and more cunning can live to see brighter days. There is no science to living in such circumstances. But perhaps there is an art in it. If the world does melt under the unlaboring stars, one should not despair of it.

Two interactive maps, the same disturbing message.

The one stop summary of the key positive and negative events in the past week.

The spam standard is ending. In news that is likely about to throw the mouth-foaming Keynesians in for a perpetual loop, the Russian Central Bank has quietly announced the sneakiest gold confiscation ploy in history. Reuters reports: "Russia's central bank will offer gold-backed loans for up to 90 days at an interest rate of 7 percent, it said in a statement on Friday, expanding its lending facilities for dealing with any future liquidity crunch in the banking system." So let's get this straight: Russia, which has been dumping US bonds with unseen vigor, and which has been buying gold at a record pace, has just offered its citizen the once in a lifetime opportunity to trade in their hard assets for paper in an imploding fiat system, but with promises to make 7% worthless percent. Oh, and when the "liquidity crunch in the banking system" goes away and one hopes to reclaim title to their gold, one will just find that the title certificate was signed by one Linda Greenova, and said title is perpetually lost in Siberian limbo. And while one waits to reclaim said title from robosigning transgressor #1, Bank of USSR, those heavily armed gentlemen in camouflage attire who just broke into your apartment will not wait to reclaim what now rightfully belongs to mother Russia.