Archive - Oct 2010 - Story

Whoooosh... or just another DXY flash crash? If this was indeed a BoJ intervention, it is the worst money spent by a central bank in the history of Keynesianism, with a half life of less than 30 minutes. Elsewhere, gold is predictably nearing its all time highs.

As of today, one of the world's top oil exporters disclosed that it has exchanged about $15 billion of its FX reserves into gold. Earlier, Iran announced that the country has converted about 15% of its foreign exchange reserves into gold, and "will not need to import the metal for the next ten years." There is your mystery buyer to all that gold the IMF was selling in Q3... And since Ahmadinejad said that Iran's total FX reserves exceed $100 billion, the amount of gold in stock held by Iran is more than $15 billion. Which is equivalent more than 345 tonnes at a closing price of about $1350. Which also means that the WGC's official gold holdings are in dire need of an update, as Iran does not appear anywhere on the IMF's listing of official gold holders, and with over 345 tonnes, it would make Iran a top 15 holder of the yellow metal.

Overall, whether or not the FOMC outcome is seen as dovish enough relative to market expectations will dictate the immediate price action. But if global cyclical indicators show further signs of global decoupling, the backdrop of Fed easing plus the expected political buy-in for burden sharing in adjusting global imbalances means the underlying dominant macro theme that will persist after the dust settles is likely one of broad USD weakness still.

"Americans today are constantly watching their speedometers and trying to conform to every little rule yet there are so many rules that it's impossible for even the most honest and hard-working Americans not to be breaking some type of law on a daily basis. We are slaves in a criminal monetary system, where the Federal Reserve steals from the middle class through inflation and transfers this wealth to their banker friends on Wall Street. We are forced to accept pieces of paper of money while the US constitution defined only gold and silver as legal tender...We are now seeing countless signs on a daily basis that the US is headed for a complete societal collapse as we know it, forever."

The rise in oil and grain prices over the last several months will be reaching Main Street by this winter. Gonzalo Lira argues that those price rises, coupled with the Federal Reserve's Quantitative Easing 2—scheduled for announcement in the coming two weeks—as well as the escalating Currency War with China will inevitably lead to runaway inflation: And he is prediciting it will start this March of 2011. —Gonzalo Lira

It appears that the one topic pundits have the most problems grasping is the spread between the segregation of traditional and shadow monetary aggregates, overall economic deleveraging and aggregate monetary velocity, and how all that impacts GDP. A summary which confirms just how prevalent the confusion is, is this terrific post by the Kalafia Beach Pundit, terrific not because it is even remotely correct (the post is so blatantly wrong - one wonders if Western Asset Management even expects its current and former asset managers to count beyond 2... M2 that is), but because it demonstrates how self-professed "pundits", whether of the beach variety or not, don't have the faintest grasp of more than merely trivial monetary topics.

A Fed paper released in September, which we luckily missed as otherwise it would have led to the collective death through uncontrollable foaming in the mouth of the entire Zero Hedge staff, was "Oil Shocks and the Zero Bound on Nominal Interest Rates", in which author Martin Bodenstein (an econ Ph.D.) argues that oil price shocks (i.e., surges in the price of oil such as the one we are about to experience courtesy of a fresh trillion in liquidity about to be unleashed by the Fed) are... wait for it... beneficial to GDP and stimulative to the interest-rate sensitive parts of the economy. To wit: "In fact, if the increase in oil prices is gradual, the persistent rise in inflation can cause a GDP expansion.". Yes you read that right. The Fed is stealthily floating the idea that a surge in oil prices will be for the greater good. In essence, the Fed is telegraphing that while it acknowledges that oil is about to jump to over $100, it won't be as bad as those with a functioning brain dare to claim. And, as we show below, it will actually be a very good thing! While we would probably get a massive lethal subdural hemorrhage if told to argue a view so blatantly and stupefyingly demented, insane and, simply said, wrong, as that espoused by Bodenstein, we are glad that Sean Corrigan of Diapason has gone the extra mile to not only expose the Fed charlatans for their voodoo gimmickry in this narrow topic, and brings up an even more critical idea, which is that the Fed "actually welcomes the current surge in the prices of many of the staples of everyday life; that it actually exults in the drain being exerted on family budgets; that it revels in the squeeze on profit margins being suffered by already-struggling small businesses, because it imagines this will serve to lower the reckoning of the ethereal construct of a generalized, future real interest rate and that this alone will serve to shower riches upon all who are presently suffering, in comparison for the present woes." That nobody has reached this conclusion before is explainable - it is something only the brain of an illogical, demented, perverted genocidal madman's brain can come up with. Which is why we are now convinced the Fed is hoping for not only mild inflation, but an outright surge in prices.

So much for the 3D TV craze... and for overestimating the indiscriminate purchasing power of the US consumer. After much fanfare, and visions for record sales, TV makers such as Sony, Samsung and LG have gotten reacquainted with gravity, and are now gearing up for a "miserable" Christmas as an all out price war confirms the US consumer, even if not paying mortgage bills, refuses to purchase indiscriminately. The result: price drops of over 25% for the upcoming holiday season, huge margin cuts for already margin lite retailers (read Amazon), and an increasing reliance on corporate sales to pick up for the sudden and dramatic consumer slack. But the biggest hit will be to Japanese and Korean exporters, who will soon need to add to a dramatic decline in end demand, such factors as a ramp in Rare Earth Minerals: a key component to flat screen TV production, and, of course, record expensive currencies. All in all, it is shaping up for a miserable existence for the Japanese export economy, and we are very confident that a tsunami of export-led anger is about to be unleashed on Kan's government, demanding to at least moderate the one variable that is under Japanese control: the FX rate. Which means that many more USDJPY interventions are coming as soon as next week, when the Fed's QE2 announcement is sure to send the FX pair far below 80. In other words, QE2, in addition to confirming that the Fed cares little about the dollar's purchasing power, is about to set the FX, and trade wars, into overdrive.

This is the Death Spiral of Democracy. The way to increase the concentration of wealth is to partner with the State so the Central State functionaries and agencies funnel ever-larger shares of the national income to your cartel or quasi-monopoly while the State suppresses or marginalizes potential competitors. The more wealth you concentrate, then the more political power you can purchase. Indeed, the involvement of the super-wealthy causes the costs of campaigns to rise to levels where politicos have no choice but to become dependent on Power Elites to fund their campaigns. You see how the feedback works: greater concentrations of wealth creates greater concentrations of political power, and just as importantly, increases the dependence of the political class on the Financial Power Elites and fiefdoms for their very survival.

In his weekly "kickstart" piece, Goldman's David Kostin shares a glimpse of how portfolio strategists view the impact of QE2 on UW equity market fundamentals. In a nutshell, per Goldman bulls cite 20% upside to Fed model and a lower equity risk premium. Goldman is far less optimistic: "We believe QE2 is unlikely to change our sales or margin forecasts, so return prospects become a valuation debate. Our targets imply less upside, given 13.5x P/E is consistent with prior 1-2% real rate regimes." Furthermore, Goldman's economic team has already priced in $1 trillion of QE2 in its 2011 GDP forecast of 1.8% (below consensus of 2.5%), meaning at worst the overall economy will continue to operate at negative growth rates, once Q3 GDP is revised lower and Q4 GDP found to be negative following the inventory crunch. As Kostin puts it: "The US has a demand, not a supply, problem." Alas, the Fed is completely unable to grasp this. And the more it tinkers with the market, and the more fundamentals are disconnected from reality, the less Americans will trust the economic situation and retrench even more, leading to an even more pronounced demand "problem." As for markets, AJ Cohen's successor hits it right on the head: "We believe the forward path of stocks will be determined by potential asset allocation shifts by owners of 70% of the US equity market. Individuals own in aggregate 53% and pension funds own 17%. Shares will trade sustainably higher if these investor groups decide to re-risk from bonds to stocks. Any shifts most likely will be gradual." In other words, unless investors regain their faith and confidence in stocks, the market will merely trade on Fed liquidity and not on anything resembling fundamentals... or reality.

I hereby would like to announce the appointment of the False Fl.., er, Terrorism Czar...

Today's CFTC Commitment of Trader data confirms that the dollar strengthening trend from last week continues: net spec commercial positions in the USD are now well off their lows from three weeks ago and are up to 5,850, after hitting a 2010 low of -1,580. At the same time, both JPY and EUR spec positions declined (by -2,727 and -6,243 positions, respectively) as the rotation into the dollar, as brief as it may end up being, accelerated. Whether this was merely momentum chasing or an expectation of a less efficient QE2 can be answered by looking at select commodity positions. A quick glance at wheat, soybeans, coffee, corn and oats shows that pretty much all 5 representative commodities saw their net long spec positions increase again. So QE2 is definitely going to manifest itself in more inflation, or so at least claim the speculators. Yet not is as it seems: a look at Treasury specs shows a combined drop across the 2, 5 and 10Y space of 123,835 contracts to 186,892, only the second largest drop in 2010, which occurred after the cumulative total hit a 2010 record of 310,727 the week prior! In other words, even as specs were discounting an increase in inflation and a potential increase in the value of the dollar, the bond bubble officially popped.

Oh yeah, those banks sure are making a killing on the sudden and dramatic resurgence in trading. If one looks carefully, one can almost, but not quite, see that crazy DeMarkian formation that predicts that in 10 years someone may actually trade stocks again.

An avalanche is not an “event”, it is an epic; a series of smaller events drifting and compacting one after another until the contained potential energy reaches an apex, a point at which it can no longer be managed or inhibited. A single tremor, an inopportune echo, an unexpected shift in the winds, and the entire icy edifice, the product of countless layered storms, is sent crashing down the valley like a great and terrible hand. In this way, avalanches in nature are quite similar to avalanches in economies; both events accumulate over the long span of seasons, and finally end in the bewildering flash of a single moment. The problem that most people have today is being unable to tell the difference between a smaller storm in our economy, and an avalanche. Very few Americans have ever personally witnessed a financial collapse, and so, when confronted with an initiating event, like the stock market plunge of 2008, they have no point of reference with which to compare the experience. They misinterpret the crash as a finale. Untouched, they breathe a sigh of relief, unaware that this is merely the beginning of something much more complex and threatening. So, without personal experience on our side to help us recognize a trigger point incident; the catalyst that brings down our meticulously constructed house of cards, how will we stand watch? Will we miss the danger parading right in front of our faces? Will we be caught completely off-guard?

Technically, the USDJPY still has about an hour left of trading, but we will call it early: the dollar yen has closed at the all time lowest level in history. Next week the USDJPY will likely be well beneath 80, especially after the QE2 announcement on Wednesday. At least Japanese exporters are happy that in FX adjusted terms US importers now have the least incentive to buy Japanese TVs and other irrelevant stuff soon to be found all over US landfills.