Archive - Dec 2010 - Story

The European / IMF bail-out package for Ireland – announced one week ago – was somewhat smaller than expected at €85 bn and failed to calm market jitters spreading to other Euro zone periphery countries early in the week, most alarmingly to Spain and Italy. It was only with the ECB’s announcement that full allotment liquidity operations would continue through Q1 2011 and with a jump in ECB purchases of Portuguese government bonds on Thursday that stress in the Euro zone periphery abated somewhat...Following last week’s turbulence on the periphery, this week’s key event will be the Irish parliament vote on the 2011 budget, which is scheduled for Dec 7. A failure to pass the budget could quickly exacerbate tensions across the Euro zone periphery, by highlighting the political costs of needed budget cuts.

Without money, there can be little in the way of economic specialization, or what is commonly known as the division of labor. And without the division of labor, there can be little in the way of civilization. In pre-agricultural hunter-gatherer society, labor is primarily limited to these two endeavors, the hunting generally done by men and the gathering by women. So, too, is labor limited in early agricultural society, the men generally doing the farming and women the domestic work. And while proto-money might be involved, economic exchange is generally limited to barter, which requires a coincidence of wants that is far too inelastic to allow for the manifold exchange of goods and services that is the lifeblood of civil society.

We are approximately five years into The Fourth Turning Crisis. Every previous Fourth Turning had an economic dimension that eventually led to a do or die all out war. The mainstream linear thinkers see a recovery and a return to their concept of normality. They will be shocked and flabbergasted when they realize that this is only the beginning of a 20 year period of turmoil, chaos and war. It seems that some study of history would benefit the mainstream talking media heads pretending to know what is happening and political hacks in Washington D.C. who pretend to administer the affairs of state. The cycles of history are not identical, but the alignment of generations is always the same. The cycles are consistent because a long human life is always between 80 and 100 years. The previous Fourth Turnings in U.S. history were the American Revolution, the Civil War and the Great Depression/World War II.

By now the infamous Minneapolis Fed "change from pre-recession employment" jobs chart (all too often misattributed to other sources) has made popular folkore. Naturally, that's the chart which shows that 36 months after the start of the depression the change from peak employment pre-recession is just in a parallel universe of its own. Yet what few if any have done is to extend and project what this chart may look like in the future. We have on several occasions attempted to predict how the "change from peak employment" chart will appear over the next several years. Below is our most recent attempt at predicting how many more months of recession we have assuming a gradual pick up in the economy (assumptions are presented in the chart). The chart shows that based on conservative economic pick up estimates, the depression starting in December 2007 will have 96 months to run before we reach the precession level in jobs.

It appears that one way or another, the IMF will provide a lot more American money to the European rescue. Reuters reports that according to the IMF the euro zone should have a bigger rescue fund and the European Central Bank should boost its bond buying to prevent the sovereign debt crisis from derailing economic recovery. "International Monetary Fund chief Dominique Strauss-Kahn
will present the report on the economy of the 16 countries using
the euro at a meeting of euro zone finance ministers and
European Central Bank President Jean-Claude Trichet on Monday." And presumably, and we are speculating here, if the Euro zone can not afford it, the IMF will be more than happy to step in. After all recall that on August 30, the IMF extended the duration of the Flexible Credit Line (FCL), "concurrently removing the borrowing cap on this facility, which previously stood at 1000 percent of a member’s IMF quota, in essence making the FCL a limitless credit facility, to be used to rescue whomever, at the sole discretion of the IMF's overlords." We would think that an infinite amount of money should be enough to rescue even Spain when the time comes. Which begs the question: with everyone expecting muni bonds to be the purchasing target of QE3, will Bernanke again fool everyone and instead opt for direct European bond monetization? After all, the destruction of dollar value is and always has been the Fed's primary imperative, and what better way to achieve this than to collateralize the greenback with Greek bonds?

...Just live in Spain. With millions of Option ARM mortgages still coming due in the next two years in the US, the Fed's ongoing push to drop mortgage rates has only made the problem worse, and instead of people refinancing out of adjustable rate mortgages into fixed, with the opportunity cost being so little, if any, the whammy of rising interest rates on home values upon Option ARM expiration will only exacerbate the triple dip in home prices once the ARM cliff hits some time in 2012/2013. Yet it seems that this final recourse to extend and pretend the housing bubble is only now coming (a tad too little too late) to those European countries which are already bankrupt and will do anything and everything to prevent reality from appearing. Behold the BBK Euribor+0.35% 5 Year Option ARM 50 year mortgage with an LTV of up to 100% (but only if you can be enslaved early on: the mortgage is only open for people 18-35). And just in case you can't actually afford Euribor+ 0.35%, that's factored in too: you have the option of not paying for years.

Goldman's Erik Nielsen looks at the immediate European future, is flummoxed by all the end of world calls (bank runs, Ireland rejecting budget, austerity riots everywhere), and sees a future so bright he just has to wear the kind of shades that only a multi-million dollar bonus can buy (especially after Goldman upgrades all banks and its own bonuses by about 10%). After all his colleague Hatzius, despite all the facts and data, just upgraded US GDP. It now appears that just like Moody's 5 years ago, Goldman's excel spreadsheets crash when one input a negative growth assumption. Arguably these are the same spreadsheets that Tim Geithner used to prepare his taxes.

With Julian Assange's arrest now seen by many to be a matter of days if not hours, it seems that the Wikileaks founder has taken some modest retaliation precautions, primarily along the lines of the infamous "letter in the mail should something happen to me." Using Bit Torrent, Wikileaks has distributed an "insurance" file, which however is encrypted, and the contents of which are unknown, although may possibly contain at least some of the infamous BofA incriminating selection. It is very possible that Wikileaks will release the encryption code upon Assange's arrest. That said, the insurance file, which can be downloaded from Pirate Bay at the following link, is merely 1.4 GB, and far less than the expected 5 GB which the BofA data issupposed to contain. Since Zero Hedge is read by quite a few hackers, we would like to extend the challenge to all to find the proper key to decrypt the insurance file and spill its contents to the general public.

Since Zero Hedge posted (unsolicited and uncompensated) the "Crash The JP Morgue" now-viral video late last night , it appears that among the tens of thousands of viewers who have subsequently gone to the goldsilvergold.com website, there have been quite a few conversions. So much so that as of today, the company is not taking any orders and is sold out of all products. The company goes on to say that it will not be accepting any new orders until December 6. We can only hope that the profits JPM will make in its copper market manipulation will be sufficient to offset the ever increasing pain it will experience courtesy of what is gearing up to be a massive margin call.

There is propaganda, and there are facts. For anyone seeking just one concise, definitive and completely true (as in fact-, not hope- based) explanation of what has happened to the American economy in the past 2 years, we suggest this presentation by former OMB director David Stockman, whose 10 minute appearance on the CNBC's strategy session left the hosts with absolutely nothing to retort. Among his observations: the government sector for the first time in history is shrinking: "the reason is that governments are broke... we are going to have to cut back government employment." And it gets scarier: "if you take core government plus the middle class economy (65 million jobs), that's the breadwinning economy, if we take some numbers - how many jobs in the "core economy" in November - zero; how many jobs since last December: net zero; how many jobs since the bottom of the recession in June 2009: still a million behind from when the recession ended." As to whether the economy can grow without employment growth: "I can't imagine how it can because employment growth generates income growth which is the basis for spending and saving ultimately and we are not getting income growth out of the middle class." And the stunner: the job "growth" has come almost exclusively from the part-time economy (two-thirds). Why is this a major problem: "there is 35 million jobs in that sector, with an average wage of $20,000 a year: that is not a breadwinning job, you can't support a family on that, you can't save on that. Those jobs will not generate income that will become self-feeding into spending." As for the biggest condemnation, it is reserved to what Zero Hedge has been claiming for two years now is a completely broken market: "I can't explain the market... I don't know what it is pricing today, I don't think the market discounts anything anymore, it is purely a daytraders' market that is trading off the Fed, trading off the headlines. One day it is manic, the next day it is depressive, and we can't draw any conclusions." And scene.

It tooks us a few minutes to realize this was from The Onion. Ah, the benefits of living in a hybrid, hyperbolic, tragicomic reality.

Not content with holding the biggest paper short position in silver, JP Morgan is now intent on cornering the copper market, as the monopolist firm stretches its FRBNY-facilitated muscles in an attempt to stem the massive losses incurred via its silver short. As the Telegraph reports, following up on a story of a "rogue" purchaser who bought up $1.5 billion in copper on the LME, "the American investment bank JP Morgan is the mystery trader that grabbed more than half the copper on the London Metal Exchange." This is a huge copper purchase, and represents between 50% and 80% of the 350,000 tonnes in reserves, confirming that JPM is now the dominant manipulator in yet another commodity market. The purchase also pushed the price for immediate delivery to $8,700, the highest since October 2008. It is unclear how China, which is the biggest non-speculative end user, will react to this development, nor whether the CFTC will (ever) take any action against such blatant market manipulation. One thing is certain: the LME will do absolutely nothing: "Diarmuid O'Hegarty, head of compliance, said: "The LME has noted recent
comments about the current circumstances in the copper market. Such
circumstances are not unusual and the exchange is exercising its well
established procedures for maintaining an orderly market." He added that large trades were not a cause for concern because the market's
rules dictate that holders have to lend out a proportion of their stock to
ensure a smooth supply of the metal." And who would possibly assume that JPM may not follow the rules...

The recent passage of the middle class tax cut extension by Congress was roundly refuted by the Senate today as republicans and even some democrats voted against the proposal. This was expected, and means the bluff will come down to the wire, with some form of compromise required in the next week, involving an unemployment insurance-for-tax cut extension quid pro quo. It better come quick though: as Zero Hedge has been saying for the past 4 months, the biggest overhang on the market currently is the threat that the capital gains extension does not pass forcing a sell off as those in profitable position rush to lock in profits at lower rates (which is priced in to assume it will happen). This was finally made all too clear in a recent Strategas report that gained prominent recognition a few days ago. However, instead of this issue requiring resolution by the end of the month, the D-Day is actually December 15, at which point numerous option expiration/rolling decisions are made, impacting asset decisions on the underlying securities.  As to the tax cut extension, it is now more than obvious that Obama will be forced to soon renege on some of his key campaign promises, thereby making his presidential bid in 2012 even more of a non-starter, but more importantly, requiring the Treasury to fund even more government revenue shortfalls through bond printing, thereby making a new QE round (this time focusing on the 30 Year) all but guaranteed.

We have already had our share of laughs at Jan Hatzius selling out his credibility to Goldman's bigger picture order flow creation agenda, whereby his Wednesday upgrade of the economy ended up being (certainly at least in the short term) a complete mockery, after disappointing Case Shiller results, a declining ISM, whose Inventory less New Orders differential virtually guarantees a double dip, a worse than expected Initial Jobless Claims (which next week will be revised to an even worse number), a further downward revised already disappointing Durable Goods number, and last but not least, the worst miss to Non Farm Payroll expectations in years, indicated that his "revolutionary" forecast couldn't be further from the truth, is driven entirely by some secondary motivation, and that even the supreme chancellor of the Inkjet Federation is now threatening to print more linen yet again as the economy deterioration worsens. Luckily, the Goldman strategist has a sense of humor, and he himself admits the irony associated with his very untimely flip: "It had to be: in a week when we upgraded our forecast, the data have been somewhat soft. The two biggies? the Institute for Supply Management's (ISM's) index of manufacturing and the employment report? were both weaker than expected in November." Actually, it wasn't "somewhat" and there were many more than two (see above). Yet what is inexcusable is that Hatzius now has become a version of CNBC-lite, advising clients to focus on the facts that support his view and discard those that detract from the optimistic outlook: "Forecasters dismiss data at their peril, but there are good reasons not to worry...So not to worry-pay attention to the data, but don't let a report or two derail the forecast." As this is Jan's first foray into what is now open media propaganda we will give him some advice: please stick to what you are good at - providing objective advice. Else, CNBC's ratings are a brilliant case in point of what happens when one loses all credibility and become nothing but a mouthpiece for the establishment. Then again, there are certainly third vacation home, second yacht, Netjets timeshare, and last but not least, Ponzi perpetuation considerations at hand, so who are we to give Jan any advice...

Financial markets are about optimism, forward thinking and the peddling of hope. They are fodder for our great strength and great weakness: to be positive in spite of Pandora’s miseries, and in the next moment believing that things are fine as the canoe goes over the waterfall. The huge difference between how humans think and machine compute deserves some thought.