Archive - Nov 4, 2010 - Story

When the crisis began in the US in 2007, many commentators called it a “Minsky moment” or even “Minsky crisis”, after the late economist Hyman Minsky who had developed what he called a “financial instability hypothesis” over the years after 1960 and to his death in 1996. Minsky was my PhD dissertation advisor and I had already used his approach to analyze the Saving and Loan crisis. Unlike the typical explanation that invokes Minsky's theories, I recognized that Minsky did not simply provide a “euphoric bubble” approach. Rather he argued that the transformation of the economy and especially its financial system from “robust” toward “fragility” took place over a very long span of time, indeed, over the entire postwar period. The increasingly frequent and severe crises, as well as the growth of fraud as practically normal business practice were a consequence of that transformation. Hence, we should not call this a Minsky moment or crisis but rather a Minsky half-century.

Contrary to conventional wisdom the SocGen duo of Edwards and Grice has not turned bullish (despite Dylan's "call" for a 63 million Nikkei). In the following note, Edwards debunks this recent fallacy. More importantly, Albert provides a geographic locus of where the next bubble pop will come from, which is no surprise as it is the focus of all capital flows - Emerging Markets. As he says: "The simple fact is that if, as I expect, QE2 fails and fiscal tightening sends the fragile western economies back into recession, we will see the unfolding liquidity driven EM and commodity bubble burst just as violently as it did in the second half of 2008." Sorry Albert, with every central bank now all in, and ammo for additional operations now gone, the next blow up with make the H2 2008 implosion seem like a walk in the park. This will be infinitely worse than Japan. Which is why the last ditch to preserve the Ponzi will be unlike what anyone has ever seen before.

The breathless pursuit of stocks has now led to a complete dislocation of all correlation pairs. The ES is about 7 points rich to AUDJPY and the historical correlation with the 2s10s30s butterfly is now a long memory. That said, if anyone wishes to take a non-direction bet on the market, contrary to what Batmanke is telling the entire US population to do, a convergence pair trade in ES and AUDJPY is the only thing that may make sense. In other news, hedge fund analysts are now obsolete, as long-short stock pair trades are now irrelevant: as of today, traditional high beta short names will outperform long positions until the end of the QE regime, some time in the 2020s.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 04/11/10

What the Fed is clearly trying to do is reflate asset values in order to generate a more positive wealth effect on personal spending and pull the cost of debt and equity capital down in order to re-ignite business “animal spirits” and hence corporate investment and hiring. In a balance sheet or deleveraging cycle, success is not always guaranteed even by the most aggressive of monetary policies.

PIMCO selling more 126/129 strangles in tyz0 @ 30...10k all day

Today's preemptive currency war salvo comes courtesy of Brazil's finance minister Guido Mantega.

• BRAZIL'S MANTEGA CALLS ON U.S. TO CHANGE ITS POLICY STANCE

Hey Guido, join 99% of America. Worst case you can put your Playboy-posing daughter on prime time TV to tell the idiot American public that the Fed is destroying it.

Today's POMO has closed, as the Fed injects $4.8 billion of still legacy QE Lite money in the market. The Submitted to Accepted ratio is at 3.9, well below the average, and thus confirming that today's stock market will likely close about 2%+ higher, as predicted earlier. There is one more POMO remaining under the current QE Lite regime, and then it's off to the races, as the Fed commences buying about $15-20 billion worth of Apple each POMO day. The next POMO schedule will be released at 2 pm on November 10. It will be a doozy.

Two weeks ago, the FHFA, using Moody's assumptions and modelling, said that a worst case scenario for Fannie and Freddie could result in total costs to taxpayers of $363 billion, an incremental $220 billion to the $148 billion already spent to keep the nationalized housing branch of the US government. Today, S&P has released a stunner which says that actually fixing the GSEs, and "resolving and relaunching" the bankrupt entities, would actually cost as much as $685 billion, or over another half a trillion in taxpayer costs. And as for the reason why the market is surging, and will be until the US annexes Zimbabwe, now that it is pricing in QE 7, S&P says that according to its estimates, the backlog of shadow inventory is 40 months! Tomorrow: another trillion dollar capital defficiency hole, uncovered somewhere in the ponzi that is the US economy, will cause QE 8 to be priced in. And so on.

"Since 1987, conspiracy theorists have maintained that the government operates a secret “plunge protection team” (PPT). Like most conspiracy theories, the PPT is hogwash and not much different from the guy who screams “the race was fixed” when his horse lost. I have listed the many reasons why the PPT is all smoke and mirrors over the years. So to save space, I won’t repeat. That having been said, QE2 is beginning to look like an open-air multi-month version of the PPT." Art Cashin

Some new perspectives on gold, and its very special relationship with Goldman Sachs, courtesy of a London-based King World News source. And some were wondering where Paulson got the long gold trade idea from: King World News source out of London has confirmed that Goldman Sachs has been long gold for years. The source stated, “Goldman Sachs has been getting long the metals for years. Goldman Sachs has essentially been acting as their own central bank, buying on dips for years to hedge their currency positions which are being eroded through coordinated global money printing or currency debasement which they knew would take place. They are long the metals as a hedge and as I said have been for many years.”

Only known prescription is infinite amounts of soon to be defunct paper currency. Side effects include WSJ rumor leakage, frontrunning, mass corruption, trade wars, protectionism, crony capitalism, hyperinflation and revolution.

Alan Greenspan did get a little heat for admitting that higher stocks is the best way to drive economic growth, though in my opinion not nearly enough, but he was retired when he said it. That is in my opinion the one mistake made by Bernanke in the implementation of his evil plan. Coming out and making that unnecessary statement will draw political backlash from all those who criticize his policies precisely for their very direct consequence: boosting asset prices while having little impact on the economy. Doctor Bernanke goes to extrapolate that higher stock prices will lead to second hand spending... so as I said the other day high-end hair salons will offer free manicures while you get your hair done so you can drop a nice $20 tip to your hand-massage therapist on your way out. Meanwhile the next sign of trouble in the economy all those jobs disappear and we will revert to the structural unemployment rate which keeps getting higher by the minute. Amusingly the Fed Chairman does mention that the Fed alone cannot control the economy. I can't wait for the tea-party fanatics to put a bounty on him slapshot-style. - Nic Lenoir

While markets across the world have been crashing, the Zimbabwe Stock Exchange has being seeing record gains as citizens turn to equities to protect their money from the country's hyperinflation. The benchmark Industrial Index soared 257 percent on Tuesday up from a previous one day record of 241 percent on Monday with some companies seeing share prices increase by up to 3,500 percent. But before Wall Street traders start packing their bags and heading south, they should bear in mind that these figures are just another representation of Zimbabwe's collapsing economy and are almost meaningless in real terms. Zimbabwe, once a regional breadbasket, is staggering amid the world's worst inflation, a looming humanitarian emergency and worsening shortages of food, gasoline and most basic goods. Inflation is at 231 million percent, but some experts put it more at about 20 trillion percent.

An auspicious start to today's melt up in... cue Tepper... EVERYTHING. Hatzius, first seeing trillions more in POMOs, now reduces his economic growth forecast: "With all the data now in hand, we are reducing slightly our call on total nonfarm payrolls in October to +25k from +50k. Our estimate of the private-sector change remains at +75k. Most of the 50k difference is due to an expected additional loss of state and local jobs."