Archive - Nov 8, 2010 - Story

Fitting in perfectly with the previous article by Ron Paul suggesting the dissolution of the US welfare state, we now read that insolvent California is borrowing $40 million each day from the Federal government to pay for unemployment insurance. And while we won't comment on the ethics of all of America paying for one insolvent state's unemployment problems, what does need to be highlighted is that California, which already owes $8.6 billion to the government will have to cut a check for $362-million to Washington by the end of next September. As California, as pointed out earlier, is insolvent, it will never make this payment. Which means that we now have a timeline of when the Fed will start bailing out bankrupt states, and that QE3 will next focus monetizing on municipal debt.

In addition to calling for the abolishing of America's insolvent "welfare state" regime (and not to mention the Fed), Ron Paul floats the idea of allowing Americans to opt out of payroll tax in exchange for never receiving Social Security benefits. As the SSA will be pretty much insolvent in a few years, and not provide any benefit to anyone soon thereafter, this seems like a reasonable trade off.

Today's $32 billion 3 Year auction priced at 0.575%, a slight uptick from October's record 0.569% as the Fed's implicit support of the short end is declining, and the bulk of monetization focused around the 5-7 Y segment. Alas, judging by the recent collapse in indirect interest this may be a premature contention. Indirect take down in the auction was just 35%, a slight improvement on last month's abysmal 29% (which saw a whopping 59% in Primary Dealer take down), it was still the second lowest foreign bidding since January 2009. And with direct bidders purchasing 13.9%, and primary dealers 51.1%, the Fed complex once again monetized nearly two thirds of the auction. Look for the PD/Direct take down to increasingly grow ever larger as Fed monetization becomes increasingly obvious in the auction market.

Steve Keen has long been one of the most accurate economic prognosticators. This, and the fact that he does not conform to the prevalent mold of economic thinking, has made him, and his blog Debt Watch, one of Zero Hedge's must reads. Today, as part of Chris Martenson's recently launched "Straight Talk" series, Keen answers a variety of questions on the economy, and demonstrates why at the end of the day it is "all about the debt" and why deleveraging is the primary force that the Fed has to battle, and the only important outcome for the future of capital markets is whether the Fed's response will be too much (hyperinflation), or too little (deflationary crunch).

As the LBMA is finally caught in a toxic gold and silver short covering death spiral, we present a recent piece by Canada money manager Dundee Wealth which lists 9 detailed reasons why the bull market in gold will go on and on. Among these are: 1. Global fiscal and monetary reflation: PIIGS, US, etc.; 2. Global imbalances: the dollar must decline; 3. Global FX reserves are “excessive”: diversification; 4. Central bank attitudes to gold: now positive; 5. Gold is not in a bubble: room to rise; 6. Mine supply is flat: “peak” gold?; 7. Investment demand: long-run uptrend; 8. Commodity price cycle: many years to run; 9. Geopolitical environment: positive

While nominal stocks will soon be reaching for new all time highs, very much in the spirit of the Zimbabwe stock market, all of these so-called price levels (and the associated "wealth effect") are increasingly irrelevant as they continue to come at the expense solely of ongoing global currency devaluation, whose only alternative is the purchasing of hard currencies such as gold and silver. Which is why when expressed in terms of gold, it may be surprising to some that the stock market has barely moved from its generational lows recorded in March 2009. In other words, over the past two years there has been no real growth in asset values, as it has all come at the expense of every central bank's ongoing, and accelerating, debasement of its currency.

We were 24 hours off with our estimate for $1,400 gold by EOD Friday. Nonetheless, the level has just been breached. It won't stop there.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 08/11/10

Some potentially troubling news out of ATM land: "I work with a business partner in the [region redacted] . We have combined between us 180 ATM machines that we service, Cash Load. In order to do this we NEED to order the money, 20's only from several banks on a weekly basis. This is a considerable amount weekly, 380k plus. Here is the interesting piece that is developing: In the past several weeks 4 of the MAJOR banks have informed us that they can no longer provide us with the cash for our business."

"As the Fed seeks to blow up the global monetary system, I take comfort in the fact that gold cannot fight a currency war because it is not a currency. Gold is money. Currencies used to be backed by money until the global fiat system was introduced under President Nixon. Fiat currency can be printed at will until the economy collapses, as has happened many times in history. Money is impossible to devalue at the whim of politicians because it is naturally scarce. Even in the ruins of Europe after the Second World War, when there was no central authority and chaos reigned, an ounce of gold was worth what it always had been." - Peter Schiff

As of 11 am the last QE Lite POMO ended, resulting in a resumption in a sell off in risk right on schedule, as even today's $6.3 billion in monetized notes due between 2016 and 2020 is insufficient to keep stocks higher with a jumping dollar. The submitted to accepted ratio was 4.38, up from 3.49 previously. The market is now looking to November 10 when the brand new, and much larger QE2 POMO schedule is announced by the FRBNY.

Today's fraudclosure (remember that?) court ruling of the day comes once again from Florida, where in the case of Merrill Lynch Credit Corp vs Karin Lenz (Southern Florida case 09-60633) courtesy of yet another massive fumbled mortgage note discovery process, Judge Marcia Cooke has found that Merrill was not allowed to foreclose on a property that had an IRS tax lien on it, that a tax lien is found to have priority over a mortgage, and that in a nutshell the (presumed) mortgage servicer does not have standing to foreclose when the IRS is involved and demands its pound of flesh. This will be the latest cog rammed right up the wheels of the foreclosure process, as another hundred thousand or so mortgage will now likely be derailed as the IRS seeks to recoup tax revenues in a way that implicitly impairs banks, and further delay  foreclosures, now that there is affirmative case law precedent.

There were few surprises in today's commentary by Ron Paul on QE2: the only man in Congress (with Grayson now gone) who is sufficiently intelligent to realize that the primary culprit behind the US economy's boom-bust cycle is the Federal Reserve, continues to press for the termination of Ben Bernanke's public "service" which has resulted in a collapse in American purchasing power in the 100 years since the first Jekyll Island meeting. Yet Paul takes a 'John Lennon' approach to the problem, believing that active intervention may not even be needed, as the Fed ends up cannibalizing itself: "I think the Fed will self-destruct. People will desert the dollar. I think the Chinese are hinting that already. They are not wanting our dollars as much as raw materials. This is a deeply flawed monetary system. Here we have a small group of people who can create $600 billion with the stroke of a pen... I don't know where people are coming from to think that this can work. What really astounds me me is how tolerant the people are, the people in Congress and the financial market, where did this authority come from? Now somebody outside of the government can spend trillions of dollars and not think anything about it. It doesn't work, it's a failure. And next year it will be more. Bernanke is very clear on what he is going to do - he is going to create money until he gets economic growth and there is no evidence to show that just creating money causes economic growth." All logical and expected. Which is why nobody will endorse the Paul stance, it as it means an end to the trillion dollar wealth transfer system from the middle class to the kleptocracy.

Not even a week has passed since it was disclosed that FrontPoint was one of the main funds benefitting from a biotech insider trading scandal (for another possible beneficiary, see here), and the former Morgan Stanley fund is on the ropes, battling for its survival: the reason, per Reuters, is that LPs have decided to pull half the fund's assets, roughly $750 million. Which means that as the fund struggles to liquidate holdings, many of which in less than liquid names which will likely need to be internalized by investment bank prime brokers, various biotech stocks are about to see some notable selling pressure. One wonders why Morgan Stanley was rushing to spin off the soon to be defunct asset manager...

Given that interest rates are already quite depressed, Bernanke seems to be grasping at straws in justifying QE2 on the basis further slight reductions in yields. As for Bernanke's case for creating wealth effects via the stock market, one might look at this logic and conclude that while it may or may not be valid, the argument is at least the subject of reasonable debate. But that would not be true. Rather, these are undoubtedly among the most ignorant remarks ever made by a central banker. - John Hussman