Archive - Nov 2009 - Story

As Zero Hedge speculated recently, the latest participant on the gold bandwagon is now officially Russia, which last month was said to be considering a sale of up to 25 tons of gold. That posturing did not last too long. Not only that, but Russia is now also actively participating in the dollar intervention market, buying more than $1 billion of dollars to keep the ruble low. Due to moderating inflation and arapidly appreciating ruble, the country is now considering diversification in the same way that India and China presumable are: by shifting into dollars. Look for much more upside pressure on Gold as more and more countries become disgusted with the way Bernanke is treating both American's citizens and the country's currency.

"If the USA were to go back to a 40% ratio of gold reserves to money supply (using the monetary base), where it was a century ago when the Fed was first created, from 17% currently, that would equate to three years’ supply of bullion, and alone take the gold price up to $2,750/ounce, based again on our research on price sensitivities to central bank buying activity." - David Rosenberg

The famous contrarian shares his thoughts on what we (should) have learned from the most recent financial collapse, yet have promptly already forgotten. Something tells us Chanos will be forced to pull out this exact same presentation in one or two years and just change the date. And nobody will listen then either.

Look for the next batch of CRE numbers to be the worst ever as Tishman and BlackRock move the loan backing Stuyvesant Town to special servicing, in essence throwing in the towel, and pushing the affordable home complex into default. According to Fitch the property's worth has plunged from $3 to $1.8 billion. This means that not only Tishman and BlackRock have lost all their value, but Fortress and SL Green who own a $1.4 billion mezz loan in the property are also wiped out. Also, as Fannie and Freddie are the largest holders of the securitized mortgage, look for another set of requests for governmental bailouts out of the nationalized GSE's.

Even as China loses 1% of the value of its dollar foreign reserves overnight, the real question is whether Geithner feels lucky. The problem: the ability to push the price of gold lower is now completely lost as gold hits all time high after all time high - at last read gold is at $1,110 and rising.

• Rosenberg: unemployment to hit 13% (Bloomberg)
• Wall Street record bonuses return as Big 3 may pay $30 billion (Bloomberg)
• Tackling the US economic data manipulation: Economists seek to fix a defect in data that overstates that nation's vigot (NYTimes)
• Kraft makes new, lowered bid for Cadbury (AP)
• Citigroup asset guarantees may cost US taxpayers, panel says (Bloomberg)
• Geithner saying "be like Buffett" can't make JPMorgan lend more (Bloomberg)

• Asian stocks gain on G-20 stimulus, Axa takeover; treasuries, dollar fall.
• China may “soon” issue measures to limit the use of debt in real-estate purchases.
• Crude oil rises above $78/bbl as Hurricane Ida entered the Gulf of Mexico.
• Gold surged to records (hits $1,105.11/oz) on a weakening dollar.
• House health bill unacceptable to many in Senate
• India will pull back on its easy fiscal stance next year, sees 7+% growth next year:PM
• Treasuries fall as Asian stocks rose, US prepares to sell record $81B of debt this week.

Another representation of what will likely become a prevalent topic in upcoming days: the Exter pyramid. When the system works, the various layers are in equilibrium. When the system is broken, like it is now, the Fed and all Central Banks try to refill the pyramid from the bottom-up with every single dollar they print. The current temporary calm is all Bernanke can hope to achieve before $2 quadrillion of liquidity collapses onto whatever truly tangible assets exist. They don't call it a pyramid scheme for nothing. And by assets, we are not talking about the crap that the Fed collateralizes against in its Discount Window and Primary Dealer Lending Facility taxpayer handouts. And for the goldbugs: $2 quadrillion (mythical liquidity) collapsing into $2 trillion (hard assets): can you spell $1 million an ounce of gold?

With the dollar preparing for another day of Uncle Ben inspired self-flagellation, gold is already enjoying a flying start at north of $1,100. The complete multiasset melt up appears to be at most days away.

In what may end up being one of the best things for CNBC, if not for many of its anchors, the WSJ reports that the Comcast-GE deal for NBC Universal is practically complete. Next stop for the Englewood Cliffs brigade: 15th and Market. Fear not: the Walt Whitman rush our traffic is much more manageable than that of the George Washington. Also, Smokes has a 3 for 1 special for 40 year old anchorettes who will do anything to adjust the weighted average age of their bodies by 5 to 10 years lower.

Recently the dollar has become the carry currency of choice for virtually anyone who breathes, let alone manages even one dollar in assets, courtesy of unprecedented Wall Street-Fed complicity. And while there is no longer any speculation about the carry trade's prevalence, it is interesting to observe how the topic of DXY-SPX -1:1 correlation has developed over the past two years. While digging through the annals of the Internet, we came across this essay by Brad Setser, in which the current Administration think-tanker is proven not exactly correct: "In my view, it will be hard for the dollar to emerge as major funding currency." Right.

Zero Hedge's Inkmaster in Residence John Redmann with tomorrow's cartoon, today.

From Goldman Sachs, primary unfolding Q3 themes:

• Theme 1: Consumer Outlook remains weak; “End demand” in question. In a marked change from last earnings season, when companies discussed a “stabilizing” economy, this quarter’s conference calls focused on the continued challenging environment for the US consumer, a slow economic recovery in 2010, and the lack of underlying “end demand”.
• Theme 2: Pricing Power remains weak due to low Capacity Utilization. Most management teams cited weak pricing power in the current environment. A few even expressed deflationary concerns. Firms tied to commodities-related businesses tended to have a slightly more favorable
  outlook on pricing power. Several calls referenced low capacity utilization rates and the probable lack of pricing power until utilization rates rise.
• Theme 3: Cost Cutting: Still at rapid pace, expect more in 4Q and 2010. Management teams pointed proudly to their ability to cut costs faster than expected in recent quarters and alluded to further expense reductions ahead. Only a few firms mentioned a willingness to re-hire staff into their company. Rather, companies tended to emphasize the permanence of expense reductions.
• Theme 4: Use of Cash: Appetite for capital spending slowly growing. In contrast with earnings seasons during the past year when companies emphasized the importance of cash positions on the balance sheet, management’s 3Q comments expressed a growing tolerance for capital
  spending. Although not all companies had ramped up spending plans, most teams mentioned some sort of revitalization in spending via dividends, share repurchases and/or capital expenditures.

• "I'm doing God's work." Meet Mr. Goldman Sachs (TimesOnline) [Goldman getting trading tips from the big guy himself explains their Q3 P&L]
• Obama's failure in his core mission: curbing unemployment, which is now 50% higher than a year ago (NYT) Expect several dozen TV appearances on Monday to explain what really happened
• House passes $1 trillion U.S. healthcare overhaul legislation (Bloomberg)
• Why can't the Fed just buy Yuan? (Worthwhile Canadian Initiative)
• What rebalancing of Chinese and American consumption (China Financial Markets)
• Gordon Brown joins call for Tobin Tax, denied by Turbo Tim, Canada and IMF (FT, Telegraph)

The earlier discussion of CDS, Einhorn, and the US UST-CDS basis trade, sparked a flurry of queries on the topic of "really big numbers." Therefore, even as ZH staff awaits the most recent data out of the BIS, we present for your numeric (in)comprehension pleasure lots and lots of zeroes. The chart below summarizes the biggest relevant numbers currently out there, appearing as pixels occasionally on every single computer in the financial world. And what does it say? That the total notional value of all OTC derivative contracts as of the most recent count (sucks to be on the recount committee), was $592,000,000,000,000.00 at the end of 2008. Fear not: this number is actually a reduction from the most recent previous read of $683,700,000,000,000.00 in June of 2008. Well wait, that thing we said about fear not, ignore that: because the net notional, or the market value of all OTC contracts, i.e. what someone (cough taxpayer cough) would be on the hook for when the Fed's plans go astray, increased by 66.5% over the same period, to $33,900,000,000,000.00. Like we said, big numbers - and this is just OTC. The real number includes regulated exchanges, and to estimate that, double the numbers above. In totality, the "sidebets" on everything from interest rates, to F/X to corporate default risk, amount to about $1.3-$1.4 quadrillion (that's 15 zeroes before the decimal comma) in terms of uncollateralized liquidity (think inflation buffer): take all those zeroes away and the value of the dollar would go down by 1E10-15: you listening yet American middle class? And the actual exposure, or "money at risk" is roughly $60 trillion: a number which is about the same as the world GDP if one were to remove all the various stimulus programs. Take away Goldman, JP Morgan, and all the other wannabe BSD's, and this is what you end up with: the heart and soul of the Too Big To Fail monster itself. And there is no way on earth to stop that mangled, mutated heartbeat without destroying the very fabric of both our capital markets and societal system. Please give the FederalReserve a golf clap for this truly amazing accomplishment.