Archive - Dec 2, 2009 - Story

Gold is now the primary beneficiary of any and all dollar weakness (much more so than stocks or any other asset class) and any and all incremental excess liquidity. We hope members of Senate who read this post present the charts below and ask the Fed Chairman at what point will his debasement of America end.

Matt Taibbi gives an in-depth presentation unmasking the Wall Street crony advisors that whisper in the President's ear daily, the political push-pull that ended up gifting Tim Geithner his current job, as well as an analysis of the brains behind it all- former Goldmanite, Robert Rubin.

Tomorrow's Bernanke reconfirmation hearing just got more interesting, courtesy of Vermont Senator Bernie Sanders who has stated he will put a "hold" on the Bernanke confirmation process, meaning the Senate will need to amass 60 votes in order to override and proceed with the confirmation process. Yet as the NYT notes: "though the Senate has been paralyzed by similar blocking tactics on countless other issues, Mr. Bernanke probably has enough support in both parties to clear the 60-vote hurdle." It is time to call your Senators and remind them that at best only 21% of Americans favor Bernanke's reappointment.

In addition to paying back its $45 billion portion of TARP, the Bank, in what will be Ken Lewis' last act, will also raise incremental capital. $18.8 billion of new "common equivalent securities" to be issued, or the equivalent of 1.2 billion shares. And even as the firm is set to payout humongous bonuses ala Goldman, the firm will not touch its $44.5 billion in TLGP backed issues.

Rosie makes the case for double gold, emphasizing foreign CB purchases and peak gold. And as the race for the currency bottom accelerates, Rosie discloses the production of global fiat currency "up by 150%" coupled with no incremental dollar production, he expects gold to explode. Also is somewhat skeptical on the dollar carry trade, which due to being the most crowded trade in the room, will likely not see an orderly unwind when such unwind finally occurs.

A while back in on our subscriber site, we penned a discussion trying to put the whole “mountain of money” thesis into perspective. The bottom line is that there is less than meets the eye, especially as that applies to households and corporations. Simply put, the private sector does not appear to have meaningful cash resources when the data is looked at relative to both current asset values (of equities) and relative to historical behavior of households and corporations to be a hugely powerful force in terms of moving financial asset prices. Yes, this is the same US private sector now engaged in deleveraging of a magnitude whereby the year over year change in private sector credit balances has entered negative territory - a first in the sixty years of available data! Of course we all know that at the moment, the mountain of money that is influencing markets and the economy is coming from none other than the Fed/Treasury/Administration. And quite the mountain it is.

Only one little problem though. Once you’ve “taught” investors you’ll provide the money, and keep on providing it in spades at even the first sign of trouble, how do you stop doing that at ever increasing rates without risking market values themselves in big way? Start to take away the money candy and the terrorist banks (commercial and investment) will tell the Fed the world is about to come to an end. They’ll pull the pin on themselves and supposedly take everyone else with them unless the Fed comes across. It will be fascinating to watch the Fed ultimately be forced to stop the free money game. But that’s a story for “tomorrow”. Unfortunately, at least as per the numbers we see, there will be no mountain of money at the household or corporate level to pick up the slack when that day arrives.

Another side effect of excess liquidity and computerized stock markets has been the divergence between stock and credit indices. As the chart attached demonstrates, since the beginning of August we have seen a very rangebound market in roll-adjusted Investment Grade spreads, represented by the CDX IG (inverted axis to keep it apples to apples with stock moves), while the equity market in turn has been on a unstoppable tear ever higher, as captured by the SPY. In fact, even as the IG has been making higher "lows", the SPY has gotten completely detached from the underlying economic reality of which credit seems to be at least partially cognizant, and ploughs ever higher on nothing else than goodwill and excess liquidity. Now, not only has the S&P bubble diverged with the Nikkei as presented earlier, but with underlying US credit metrics themselves.

Everyone knows how traders have been chasing or selling stocks based exclusively on the action in the EUR/USD. Today, banks and oils were selling off most of the day as the EUR/USD was grinding back down to 1.50. However, there were a lot of greyhounds running today chasing the momentum meatball, signaling a slight "glitch" in The Matrix, meaning that we might be on the verge of breaking out to new highs, which may force many to jump back into the pool for the year end print.

Reading anything by Krugman these days is all about getting an understanding of why drowning in infinite debt within a decade to finance stimulus after stimulus is really a pretty swell thing. Well, today the Nobel-prize winner has decided to go on pro-stimulus hiatus and instead is focusing on providing asset allocation advice. According to Bloomberg, "Nobel Prize-winning economist Paul Krugman said he plans to sell some of his investments in Brazil, Latin America’s biggest economy, on concerns that asset prices are over-valued."

Perhaps you might not expect to find much interesting in data published by the Central Bank of Iraq.  In fact, it is a treasure trove of interesting mysteries right smack in the middle of the nexus between international economic relations and nation building.  For example: Between October 22nd and October 29th of this year Iraq's central bank appears to have acquired IQD 1.874 trillion ($1.6 billion) in "Gold and SDRs," adding to their existing stash of IQD 726 billion (or about $620.5 million).  This wouldn't normally be unusual.  SDR's are often the unit of choice for countries accepting loans from the IMF, for example.  But after just a little bit of digging, one thing seems pretty apparent: they ain't SDRs.  Around this time gold peaked at $1061 an ounce.  If it was, in fact, gold that Iraq bought, that's around 1.5 million ounces (or more depending on the actual clearing price).

Yesterday it was Philly Fed's Plossner, today it is Richmond Fed's Jeff Lacker who joins the chorus demanding an end to Bernanke's insane monetary policy of drowning the market with unprecedented liquidity which is not getting to consumers but merely propping Amazon stock at a bubblelicious 100x P/E. In a speech before the Charlotte Chamber of Commerce, Lacker stated: "The perception of inflation risk could be particularly pertinent to the current recovery, given the massive and unprecedented expansion in bank reserves that has occurred, and the widespread market commentary expressing uncertainty over whether the Federal Reserve is willing and able to promptly reverse that expansion... If we hope to keep inflation in check, we cannot be paralyzed by patches of lingering weakness, which could persist well into the recovery. In assessing when we will need to begin taking monetary stimulus out, I will be looking for the time at which economic growth is strong enough and well-enough established, even if it is not yet especially vigorous. Although it is hard to predict when that will occur, I can confidently predict that monetary policy will remain particularly challenging for some time to come." Then again, the stock market does not seem to share Mr. Lacker's concerns.

As Zero Hedge presented previously, the sharp divergence between the Nikkei and the S&P indexed in gold continues. The two reindexed indexes, which have correlated 0.91 since March, have diverged sharply in the past three weeks, and now stand at an over 11% divergence in performance since the year lows. Whether this is due to the "shocking" recent realization that Japan is caught in an ever increasing deflationary vortex (which the US likely will not avoid, at least not in the near term), or simply due to momo quants deciding that the Nikkei is no longer fun to chase, a convergence trade on the two broad indexes (long Nikkei, short S&P) seems like a rather painless way to pick 10%. Then again, ask Boaz Weinstein about "surething" convergence trades.

Goldman's latest bull market propaganda makes CNBC looks like champions, and provides data that contradicts that presented by none other than Goldman Sachs itself: GDP growth for 2010 is somehow going to be both 4.4% and 2.1%, claims Goldman. And idiots keep on buying stocks based on Goldman's "hedged" recommendations.

Update: it appears Mr. O'Neill is in fact referencing world GDP, whereby the divergence in GDPs of course makes sense. Nonetheless, we would still like a swig of his Kool Aid, and we still would expect him to present a counterpoint to the numerous bearish points highlighted by Mr. Hatzius previously. We believe it is only fair if one is presenting top picks in an overly optimistic environment, while Goldman's head economist has recently been refuting just these ebullient observations.

John McDonald at Bernstein is concerned that the impact from upcoming derivative reform on JPMorgan may be substantial - to the tune of $0.20/share. McDonald points out that based on a conversation with Steve Black, the Exec. Chairman of JPM's Investment Bank, JPM's blockbuster FICC revenues "will be difficult to repeat in 2010" and that the firm could be on the hook for up to a $3 billion current revenue loss as derivatives move to exchange-based trading, as proposed by the current regulatory overhaul bill. It is likely that the impact on another derivative Fixed Income trading powerhouse, Goldman Sachs, will also be profound as a result of comparable analyses.

A new report by VoxEU provides some detailed perspectives on just how bad the collapse in world trade has been as a result of the last year's events. In a nutshell: the current Great Recession/Depression has plunged the world into an unprecedented collapse of global trade, with the resultant blowing of liquidity bubbles having been the only way for individual governments to respond to this massive loss of GDP. And while drops in world trade are nothing new, with a 5% drop in the 1982 and 2001 periods, as well as a more severe 11% contraction in the 1970s, the current plunge of over 15% YoY is truly unprecedented and demonstrates the fragile nature of "globalization." What the outcome of this fact will be, depends entirely on the traditional dynamo of world economic growth - the US consumer, and unfortunately he is still down for the count.