Archive - Sep 2011

For anyone still confused what Operation Twist is (covered here first about 4 months ago), here is SocGen's Aneta Markovska, charting just what the flawed duration extension will look like (as a reminder, unless the 2s10s is steepened, and at that substantially, we may as well bury the banks: nobody is taking on new mortgages now regardless of where the 10 year is, just look at weekly MBA numbers. However, to make sure the US banking system expires, just flatten the curve completely, and it is game over for NIM). In a nutshell, SocGen believes that the Fed will dump $420 billion worth of 1.5-4 year USTs and use them to purchase bonds with a maturity longer than 4 years - ideally, this would be 20 Years (yes, they would need to be reinstated, and this is our view, not SocGen's) and 30 Years, and sell the 10 years. But since the Fed has zero practical world experience, one can only hope, knowing full well the end result will be yet another TARP to bail out the banks. From SocGen: "The next step from the Fed will almost certainly be for more easing and it will almost certainly be duration extension. The only question is September or November? Prior to the August employment report, the market was split 50/50 on the timing of the announcement. The report pushed the odds in favour of September which is our central scenario.We estimate that at the upper limit, the extension could amount to as much as $420bn in duration purchases, which would make it comparable in size to QE2. However, the Fed may not announce the full amount up front but instead give a monthly run rate and reevaluate at each meeting. Matching the previous run rate, we would expect the Fed to do roughly $55bn per month. This could take the Fed as far as April 2012, at which point inflation should have receded enough to put QE3 back on the table." We are not too sure just who will buy the 1.5-4 year bonds at current yields, but certainly some greater fool than us does and always will exist. What is important, is that dry powder for about $55 billion in POMO recycling will suddenly allow the banks to flip assets to greater fools yet again. As to whether this will work, like last year, we very much doubt it, especially since everyone will be buying gold and crude.

Harbin Electric is no stranger to controversy, and its stockholders over the past two years can be forgiven if they believe that jumping on a Six Flags rollercoaster may have been a little more fun, and potentially far more profitable. Well, to keep it interesting, here comes famed Chinese fraudcap hunter Alfred Little with its latest piece, this time alleging that not only long-time target DEER, but also HRBN, "committed multi-million dollar land fraud." Specifically, "In the case of HRBN, management claims they paid $23 million cash as of June 30th, 2011 as a deposit on $38 million of land use rights priced at 500,000 RMB per Mu, double the government’s offering price." Little continues: "Our report today provides concrete evidence consisting of multiple recorded phone calls, on site visits and emails with government officials proving beyond any doubt that HRBN and DEER are both guilty of conducting very similar fraudulent land use rights purchase schemes to steal money from their shareholders. HRBN’s auditor, Frazer Frost, failed to respond to our attempt to share our findings last week." And now is the time for the porn addicts to finally stand up and do something proactive instead of letting to blogosphere do their work for them: "This morning we handed over all our evidence to officials at NASDAQ and the SEC prior to publishing this report. We are hopeful regulators will halt HRBN and DEER until their financials are restated to reflect reality, in the same manner as PUDA and CTE were immediately halted after we published our findings (here) and (here)." The final nail: "In this report we prove that HRBN and DEER’s land frauds are just as brazen as the fraud conducted by PUDA and CTE and thus deserve the same fate." Longs have been warned.

We have now wiped out almost all of the gains of the last week and a half and it looks as though we are heading rapidly into the 2008-type Collapse I've been warning about for weeks.

When it comes to a simply horrible FX forecast track record, nobody beats Goldman's Thomas Stolper, who for the longest time was beating a drum that the EURCHF is fairly valued at 1.44 (and still does). It only took a massive central bank intervention (and one which will fail shortly, just as it did a year ago), to get the pair halfway to his target, and by the looks of things, even the 1.20 support will be breached quite soon, once the SNB's balance sheet loads up with a few hundred billion worthless EURs and Switzerland realizes that the trade off of exports for German dominance (and US the year before) is not worth it. That will take place in a few days to weeks. In the meantime, here are two opposite takes on what will happen in the meantime: the first, appropriately enough, from Stolper, who again beats the 1.44 EURCHF drum, and the second, a cartoon from Alex Gloy of Lighthouse Investment, which summarizes the "downside" case.

The global consumer society funded by credit is in its end-game, and is the "Central State as guarantor of private consumption" model in which governments borrow/print vast sums of fiat currency to distribute to their citizenry to prop up consumption. Once exports go away, then domestic economies the world over implode. Ironically, perhaps, the one nation which doesn't depend on exporting its surplus production for its stability is the U.S. This is one reason why the Swiss pegging their fiat franc to the Euro will fail to hold back the ceaseless tide eroding the Euro. You can play games with currency pegs for awhile, but ultimately the value and utility of a fiat currency is established by trade, energy and the geopolitical issues outlined above. If we don't understand trade flows, surplus production, the surplus in labor and the resultant decline in its share of national income, credit and currencies in this Marxist-inspired historical perspective, we cannot make sense of the financial/political crises which are sweeping over the global economy. The end-game is at hand, and we need models that are up to the task of explaining the vast forces now in play.

Miller has repeatedly called on Edward DeMarco, Acting Director of FHFA, to do everything in his power to recover these funds. The Congressman is available for a media briefing at 2 p.m. today to discuss what happened to prompt the lawsuits; what needs to happen next to fix the problem; and what it all means for the taxpayer.

When: Tuesday, September 6, 2011
Start time: 2:00pm (EST)
Dial-in number: 1-308-344-6400
Access Code: 150881#

After Berlusconi was scolded by everyone, but most importantly by backstop solvency provider ECB, for his bull in a China shop maneuver of the first, now defunct, Italian Austerity plan, here are the details from the next, soon to be gutted "Austerity", which readers may be forgiven, if they take it with just a grain of salt. According to Bloomberg, the details are as follows:

• Plan to to include higher retirement age for women from 2014
• To add 3% tax on income over 500k euros
• Italy to approve constitutional law for budget balance Sept
• To increase VAT from 20% to 21%.

Will anyone take this latest attempt to appease the ECB seriously? Of course not.In the meantime, Italy, as predicted - remember Piazza Navona strikecam and all that, and especially its workers, are not happy as protests proceed to engulf the country:

Just like last week's ISM beat on ugly core data was boosted by hollow peripheral components such as inventories, so today's Non-Manufacturing ISM was an exercise in pure desperation. While the August print did beat expectations of 51, coming at 53.3, up from 52.7 previously, the biggest increase was in... Prices and Export Orders (rising at 7.6 and 7.5): i.e. margin squeeze resumes. The important stuff: Business Activity and Employment? Both down (-0.5 and -0.9). Also up? Imports. In other words, Exports offset Imports, margins cuts, and less workers. But at least backlogs are up.... Until backlogged orders get cancelled. From the report: " The NMI registered 53.3 percent in August, 0.6 percentage point higher than the 52.7 percent registered in July, and indicating continued growth at a slightly faster rate in the non-manufacturing sector. The Non-Manufacturing Business Activity Index decreased 0.5 percentage point to 55.6 percent, reflecting growth for the 25th consecutive month, but at a slower rate than in July. The New Orders Index increased by 1.1 percentage points to 52.8 percent. The Employment Index decreased 0.9 percentage point to 51.6 percent, indicating growth in employment for the 12th consecutive month, but at a slower rate than in July. The Prices Index increased 7.6 percentage points to 64.2 percent, indicating that prices increased at a faster rate in August when compared to July. According to the NMI, 10 non-manufacturing industries reported growth in August. Respondents' comments remain mixed. There is a degree of uncertainty concerning business conditions for the balance of the year."

This will end badly. All manipulation ends the same way.

With bankers and politicians arguing over their mandates and who should move first fiscally or monetarily, we thought a look at the success of 'price stability' as the 'backbone' of European central bankers day-to-day work would be useful.

I think it is worth repeating that we have entered a new phase of risk aversion. Banks that had been complacent are now hedging so they can show no exposure to PIIGS, or to European Banks, etc. The implications are that we see credit curves flatten, or invert. We will get fewer short squeezes, at least until October, and there will be more rumors of banks having difficulty securing short term funding. Yesterday's write-up talks about it more. Europe was wider again early this morning, had a nice relief rally, and has since sold off again. Main went to 188, back to 178 and is back to 187. Needless to say liquidity is virtually non existent.

Just a headline for now but Reuters is citing sources that EU officials are set to discuss how to recapitalize weak banks today. Just a week after fuming over Christine Lagarde's brutal honesty, it seems once again that the market has pushed the ignorant into action.

Yes, equity markets in Europa and the US are getting the Axe treatment, but the event that is most forboding is still being overlooked by the media. At the end of the day, this will be the cause of continuation of the 2009 global market collapse... CONTAGION!!!