Archive - Nov 2010 - Story

Everyone recognizes that, despite our status as a reserve currency, the U.S. cannot sustainably spend far in excess of its means. But when it seems as if we all want the other guy to make the necessary sacrifices we reveal, in the process, our own, although more mature, sense of entitlement. This is, of course, not a uniquely American problem. One doesn’t know whether to laugh or cry at the spectacle of 17-year old French students protesting the fact that their retirement age needs to be extended from 60 to 62 in a country in which the average life expectancy is nearly 81 years old. But without political leadership designed to do the right thing regardless of the electoral consequences, it’s hard not to feel that the correlation between the West’s sense of entitlement and the price of gold will only grow. - Startegas Research

October advance retail sales came in at 1.2%, higher than expected 0.7%, and higher than a previously revised 0.7%. The bulk of the beat came from auto sales. Stripping for those, yields retail sales of 0.4%, right in line with expectations. Furthermore, the ever critical General Merchandise stores category in its Non-seasonally adjusted form, dropped from 50,010 to 46,189, hardly the SA beat that was reported. Elsewhere, the Empire Manufacturing Index was clobbered missing expectations by over 25 points, printing at -11.14, on expectations of 14, and a previous read of 15.73. The new orders index plummeted 37 points to -24.4, its sharpest drop since September 2001.

As if the rest of the world telling Ben Bernanke he has finally flipped, was not enough, here comes the opposition from within, after 23 public figures, among which economists, financiers, hedge fund managers and Dick Bove (not sure what he is) have sent an open letter to the Bernank demanding QE2 be immediately pulled. With the imminent market collapse that would follow such an action we are not surprised to see Jim Chanos among the list of signatories, although that long-biased Paul Singer of Elliott Associates would endorse such a contrary to his interests letter, is interesting to say the least.

• G-20, APEC Yield Little to Fix Imbalances, Stem Inflow Concerns (Bloomberg)
• Ireland Talks With EU as Germany Pushes It to Take Bailout (Bloomberg)
• Europe stumbles blindly towards its 1931 moment (Telegraph)
• Portugal Faces Investor Scrutiny (WSJ)
• Greece Expects Budget Pressure From EU, IMF (WSJ)
• Lacker Says Fed's New Easing Push Too Risky (Reuters)
• Banks escaping big foreclosure class actions, because borrowers cannot demonstrate economic harm, according to plaintiff lawyers (Reuters)
• Who Will Stand Up to the Superrich? (NYT)
  
• Dollar boosted by higher Treasury yields (Reuters)
  

Quiet day: Retail sales, Empire manufacturing, and business inventories. New $7-9 billion POMO launches, hopefully without glitches this time, at 10:15 am.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 15/11/10

After recently the market took all calls of a flattening in the 10s30s to task, one would think that those anticipating a curve flattening (Zero Hedge included) would finally have learned their lesson. This has not happened so far, especially since a continued sell-off in the long-end will soon move from being a boon to the curve carry trade, to a flashing red signal of inflation expectations which will likely wreak further havoc across all asset classes. Also, quant models are already on the edge of refusing to bid up the 7 and 10 Y even as they are forced to sell 30Y, no matter what the Fed is telegraphing it will do. In his attempt to anchor the curve around the belly, Brian Sack has let the 30Y flail in the gusts of increasing inflationary expectations, and quite soon the plan will backfire. Which is why we believe that with future POMO schedules, the FRBNY will disclose an ever greater portion of monetization in the 17-30 Y segment, over and above the 4% disclosed originally on November 3. One analyst who refuses to give up on the flattener trade is Morgan Staney's Igor Cashyn, who as of Friday, has reiterated a call for imminent de-steepening, although unlike before where the flattener was to be traded via nominals, this time the Russian goes straight into Real Yields.

The week ahead is reasonably light in terms of data. In the US the key releases to watch include retail sales, IP and the Philly Fed. As European tremors escalate the ongoing positive momentum in US data is unlikely to be EUR friendly in the near term. The Philly Fed will also give us a forward looking signal with respect to broader PMI trends in the US. More importantly, there will be a POMO every single day of the upcoming week, which will add ~$30 billion to the Fed's total UST/TIPS holdings. Traders will be nervous to confirm whether the new POMO regime will be a dud after Friday's inaugural POMO ended up being a disaster for POMO-bulls.

Not a good way to end the weekend for hundreds of merger arbs, who had been betting that the BHP-Potash deal would close one way or another. Bloomberg reports, just before 4:20pm central time that, "BHP Billiton Ltd., the world’s largest mining company, abandoned its $40 billion cash offer for Potash Corp. of Saskatchewan Inc. after Canada rejected the proposal. BHP reactivated its buy-back program." Still, POT will be $350MM richer, courtesy of the break up fee, but it will be small cold comfort as the stock's fate at current elevated levels now depends almost exclusively on a Chinese white knight emerging.

We salute Jim Grant for joining the ever greater chorus demanding a return to the gold standard: "Let the economists gasp: The classical gold standard, the one that was in place from 1880 to 1914, is what the world needs now. In its utility, economy and elegance, there has never been a monetary system like it." And no, as Jim Rickards among others claim, a return to the gold standard would not be deflationary...if gold were to be converted to the USD at between $5,000 and $35,000/oz.

While America is entertained by a rather realistic cartoon of what happens when the Fed (semantics aside) prints money with which to buy up whatever assets it so chooses, and launders the cash for the Primary Dealers (a topic discussed ad nauseam on Zero Hedge), we present a rather more somber and serious look at the modern financial system, courtesy of Bill Still, creator of the movie: "The Secret of Oz" which explains in a far more nuanced manner the interconnectedness in the vicious square of power, politics, money creation and debt formation, and Wall Street, the Fed, and the Political forces in DC are intertwined to a degree that essentially makes the whole concept of democracy moot (a topic touched upon earlier by Bill Buckler). As Still says: "The world economy is doomed to spiral downwards until we do 2 things: outlaw government borrowing; 2. outlaw fractional reserve lending. Banks should only be allowed to lend out money they actually have and nations do not have to run up a "National Debt". Remember: It's not what backs the money, it's who controls its quantity." As more and more Americans are finally expressing an interest in what is really happening behind the scenes, but seem to not have the patience for simple algebra, we hope the following movie answers most of the pent up questions.

In the past few weeks, there have been tomes of disjointed literature written on why the final days of the modern financial system may be approaching. Disjointed, as it goes against everything that existing economists believe in, and thus are forced to forget all they have learned from Ive League professor-written textbooks and start from scratch, i.e., acknowledge their religion has been flawed all along. Bill Buckler (author of the Privateer newsletter), who has seen this for ages, shares some of the most comprehensive views on the upcoming great financial unwind, first analyzing the case study of the aftermath of Volcker's 1979 Belgrade meeting, which was everything that Bernanke's "easy way out" QE choice was not. Buckler then analyzes the broken fabric of financial reality, and explains why at its very core, money is incompatible with everything that modern finance stands for. Lastly, Buckler looks at the aftermath of the failed G20 meetings, and concludes that: "Now that the LAST hope of an international agreement to solve an insoluble problem has been lost, it is just a matter of time before talk is followed by action." We may in fact see the first "action" today if, as some rumors are swirling Portugal or Greece may escalate to the "next level" of bailout action.

Who would have thought it only takes for PIIGS spreads to go back to all time records, and for Ireland and Portugal to be hours away from joining Greece in the bailout corner, for Goldman's Erik Nielsen to turn bearish again. To wit: "if investors are running for the door out of fear of being the last one left behind, then there’ll be a liquidity crisis (as there would be for anyone with a financing need), and they’ll need help." Way to stay ahead of the curve Erik. The problem is that while the economic reality below the surface cracks and collapses, investors are largely ignoring the perpetual words of optimism from Europe's politicians, and sellside cheerleaders (which begs the question - is it time to take this Goldman acknowledgment of reality as a buying opportunity?). What happened in Greece may have been brushed under the carpet for a few months, but the policy response there, which is identical to what is happening in Ireland and Portgula now, i.e., blatant lies, has left those holding relevant securities with a bitter taste in the mouth. And now, unlike before, the possibility of holder haircuts is distinctly on the table. Which is why we expect that before the Asian open, there well may be some key news out of Ireland (and/or Portugal)- no matter how much Nielsen believes that Ireland is not in a solvency crisis, with Bund spreads in the 700 range, no matter how much prefunding the government has, it will be irrelevant and will create yet another toxic debt spiral. The biggest threat is not so much to Ireland, which supposedly has its cash needs met through mid 2011, but contagion hitting other European countries, which do have solvency issues, yet have been spared the liquidity hammer so far. And with Italy CDS also hitting record highs, look for the core to start crumbling as everyone, especially Chiswick's perpetual optimist, to appreciate the gorgeous mushroom cloud over the European periphery.

The main reason why in a recent Zero Hedge poll the bulk of respondents believed that the next asset class to be purchased by the Fed are municipals, is that the market appears to have finally relented to what pretty much everyone with half a working brain has realized for over almost two years: the very soon, only the Fed's endless bid will be able to withstand the state and city default onslaught. Two main catalysts over the past week, as Zero Hedge highlighted last week, were the now imminent bankruptcy of Harrisburg, and the dramatic deterioration in California's fiscal situation. However, there are other far more important considerations that suddenly have led to a massive blow out in the muni curve, that made even the highly volatile action in the UST curve seem tame in comparison. Citigroup's George Friedlander summarizes the biggest risks to the muni space, of which the number one is the least surprising: what happens when the government removes its crutches... With the entire economy now expressly reliant on constant and endless support of every branch of the US government, as more and more austerity is priced in, assorted asset classes will start feeling the wrath of this long-forgotten concept known as risk. Munis are just the beginning.

From BNO: French Prime Minister François Fillon has offered the government's
resignation, which President Sarkozy has accepted, palace says. Pursuant to Article 8 of the Constitution, Mr. Fillon presented to the president the resignation of the government

In other news, GM IPO - meet "market conditions."