Archive - Oct 3, 2010 - Story

As the recent Pentagon scandal makes all too clear, truth is treason in the empire of lies. Which is why attempting to shoot the messenger – by imprisoning the whistleblower and/or slandering the publisher – makes perfect sense for an arm – indeed, the very arms – of the United States government. So if we are to understand its logic (as all of its actions, however insane, are perfectly logical to it), we must understand the pathology that lies at its core. For unless and until we do, we cannot understand why government per se – i.e., the state, defined as “a monopoly on the use of force within its borders” – does what it does; why its functionaries lie so shamelessly on its behalf; and, most importantly, why its presumed masters – We the People – put up with it. We begin by amending Friedrich Nietzsche’s blunt statement – “Everything the State says is a lie, and everything it has it has stolen” – with a simple substitution of one word with another – i.e., “Everything the State says is a lie because everything it has it has stolen.” Being no less blunt, let us examine this statement to determine its verity.

The key actor in the LBMA precious metal price-suppression scheme, JPMorgan, is now getting directly involved in physical gold sequestering: the FT reports that JPM has reopened its underground gold vault in New York that was mothballed in the 1990s. The timing is just a little peculiar: not ten days earlier, Jamie Dimon's bank, which has long been alleged to be the biggest shorter of the precious metal in the world via synthetic positions to the tune of 100x leverage, JPM opened a precious metals vaulting facility in Asia: "The facility, located in the Freeport area of Singapore, will provide
gold and precious metal storage capabilities for corporate,
institutional and retail clients in Asia-Pacific." Is JPM just seeing a terrific business opportunity in warehousing gold... or is the firm, which also happens to be gold custodian for Blackrock's IAU ETF with its 4+ tons of the metal, merely looking to find a way to transfer metal from the US to Asia, or vice versa. Or is JPM suddenly in dire need of actual physical now that gold is at all time highs, and clients are demanding delivery. What better way to unwind the ponzi than to transfer from one physical storage client who is depositing gold to one who is demanding it? Alternatively, the firm could be merely preparing the biggest mouse trap ever for when Executive Order number 6102.5 comes into play. Of course, all conspiracy theory conjecture aside, the most likely reason is simply that there is all that physical out there, which people have bought up and now are more than happy to give it to the one LBMA bank which is notorious for having a solitary purpose in life which is merely to decimate the price of gold... After all, Gordian's Knot and all that.

With demographics playing an ever more important role in economic outlooks and debate, one of the topics that (luckily) has not had need of much mention, is the role of crime in society, and especially in a society gripped by the worst recession in 70 years. The logical expectation would be that crime would have surged in a replica of what happened to New York (and the broader country) in the mid-70s. Oddly enough, and perhaps a main reason why this is not discussed as much, is because this particular recession has not seen the traditional pick up in the crime rate (doubly curious, considering that unlike Wall Street, police departments, and their staffing levels, are usually among the first to get the funding axe). As BNY's Nicholas Colas points out: "Given the severity of the recession, you might be rightfully inclined to think there’s been a least a slight uptick in crime, but surprisingly enough, you’d be wrong. With national crime statistics from the FBI now available through 2009 – which includes the worst of the recession so far – we point out that not only has crime not gotten worse, but it’s actually continued improve quite nicely (in most states, at least). Moreover, those surprisingly positive trends are part of an overall structural decrease in crime that began in the early 1990s.The structural decline in crime that began in the early 1990s explains why the crime spike during the aftermath of the dot-com bubble and 9/11 was less pronounced than previous  recessions, but it’s quite surprising that even given the severity of the financial crisis, crime rates expanded on previous declines. Yes,  there are many theories (outlined below) that partially explain this, but the results are as puzzling as they are welcome. Not even theft and burglary, which have historically increased during recessions (see Charts 2 and 3) showed the slightest uptick." Yet with those behind bars not counted in the unemployment rate equation, is a violent (pardon the pun) surge in crime precisely what the administration is hoping for?...

Investors around the globe are concerned with the economic outlook, not only with the United States but with virtually every country. This has caused not only investors but banks and countries to start buying gold & silver in order to be protected incase of a currency melt down in the coming years. While the majority is concerned about the eroding economy, we have seen the opposite in the financial market. Gold and equities have risen… That being said the volume in the market remains light simply because the average investor is no longer putting money into the market for long term growth. Instead individuals are now focusing on saving and paying down debt. That being said we all know light volume market conditions allow Wall Street powerhouses to bid the market up. Not to mention with quantitative easing taking place I’m sure that has also helped the market of late. While we don’t know for sure that QE is taking place as we speak, the sharp drop in the dollar and strong move up in gold are pricing this into the market.

The key event in the coming week will be nonfarm payrolls on Friday as it will likely have a big influence on the ongoing debate over the likelihood of additional QE by the Fed. Goldman's forecast is for additional job losses on the headline figure (-50k vs consensus of flat) while the firm only expects slight private sector job gains (+25k vs consensus of +77k). It also expects the unemployment rate to tick up another 0.1 point to 9.7%, in line with consensus. A more cautious labour market outlook is consistent with expectations of additional QE, probably at the November meeting.

At least Bank of America is honest as to why it continues to recommend investors pursue risk assets: "Liquidity-friendly global central bank policies remain the lynchpin of our constructive view on risk assets...Our economics team believes that QE2 will come in the form of purchases of Treasury securities of $500bn - $750bn every six months until the economy reaccelerates." In other words, this is precisely what Morgan Stanley's Jim Caron said on Friday when he confirmed that in this market nothing else matters, except what side of the bed Ben Bernanke wakes up on: "Investment decisions across many asset classes today are tantamount to an educated guess on what the Fed decides to do regarding QE. In the near-term this trumps fundamentals, valuations and almost everything else. Thus the risk in the market is man-made, not freely determined by the market. In general, this is not a good thing because it may invite greater risks in the future." To be sure, the market is now trading nothing less than QE news, but with that comes the added uncertainty of how the world's central banks will react to this latest dollar debasement episode: while QE1 was crucial and needed by the entire world to prevent the collapse of the system, things this time around are far less clear cut. Yet it is so difficult to fight the tape: as the attached chart demonstrates, for the duration of QE1 (3/5/2009 through 3/31/2010), global equities surged 80.5% while since April 2010, and without the benefit of the Fed's generosity, global equities have only generated 0.8% in returns. Furthermore, Jim Caron points out that unlike QE1, there is a very distinct possibility QE2 will fail miserably (all fans of buying what David Tepper is selling would be wise to be very weary). Luckily, just like in the Morgan Stanley case, BofA now highlights that there is a distinct possibility of "fat tail" risks and advises clients how best to position against these.

A pair of very conflicting news articles over the weekend about secret currency talks caps yet another week full of central bank interventions in the FX arena (and, as Bruce Krasting points out, many more to come). Yesterday, the FT reported that France and China had been in secret talks over "heightened co-ordination of exchange rates" which is another way of saying finding alternatives to the rapidly debasing US Dollar. "The talks and their content have been kept secret, in an attempt to draw China into a discussion on global currency co-ordination, a subject that Beijing has been reluctant to countenance in the past. In an ambitious move reminiscent of the currency accords of the 1980s, President Nicolas Sarkozy hopes to open a debate on the subject when France takes over the presidency of the G20 group of leading nations in November, according to people familiar with the matter." Yet China's desire to engage in a currency axis away from the US is no secret, and many have alleged that Beijing has approached both Russia and Germany in the past about a USD substitute. The timing of the latest escalation of the battle to the currency bottom is not surprising: "The move comes against the background of rising concern over exchange-rate interventions by a host of countries, most notably China but also Japan and South Korea, to prevent their currencies from rising against the dollar." Perhaps China, which has been reticent in exposing its CNY domination plans in the past, was just waiting for the correct provocation to go public with its plans. And last week's move by Congress to retaliate against China and impose duties on imports because of undervaluation may be just that provocation.

The SEC's "definitive"(ly worthless) report on what happened on May 6th was a dud, and was nothing more than a distraction-based smear campaign against Waddell and Reed (an experiment in which we can only hope W&R participated involuntarily): a firm which did something that was completely in its right to do. But is this unexpected? After all had the SEC confirmed that it is indeed HFT who is responsible for a broken market structure, it would have effectively destroyed itself: if and when the SEC does indeed confirm that the entire market topology over the past 5 years has been hijacked by young and pustular math Ph.D.'s with fast computers, the implications to fair markets would be orders of magnitude worse than the fallout associated with the Madoff scandal, and could serve as grounds for the unwind of the SEC itself, which would have to explain why it has been avoiding calls against HFT impropriety for years. So in a sense Mary Schapiro's conclusion is nothing less than a lass desperate act of self preservation. Which however means nothing in the grand scheme of things. Tomorrow, as the WSJ reported a week ago, the Investment Company Institute, better known to Zero Hedge readers as the guys who track the now permanent weekly outflows from capital markets, is holding a secret meeting in which some of the participants "are determined to push for a plan to restrict high-frequency trading" (furthermore, the ICI was rather pissed about this particular leak, implying that things are really serious). While the SEC may have declared a market structure truce, and is peddling its usual worthless solution of circuit breakers (more on this below), actual market participants have had enough of seeing their profits plunge and seeing HFT extract more capital out of the market than the much maligned ten years ago market makers and specialists ever did.

Throughout recorded human history, legions of "experts" have developed and propounded scientific paradigms that, once objectively analyzed by a critical outsider, have proven to be nothing more than false and ritualistic. Galileo's view of the universe, Einstein's conceptions of gravity and general relativity, and Darwin's theories of evolution are but a few of the great 'Eureka' moments of scientific discovery that have revolutionized the way the world's experts think. In this context, it should not come as much of a surprise to learn that the Keynesian Aggregate Supply Aggregate Demand (AS-AD) model, the core model used by today's mainstream economists and central bankers to explain the dynamics of the modern economy, is patently misunderstood.