Archive - Jun 2010 - Story

For a while now I have been making for the great deflationary wave that is upon us. We have argued that for demographic reasons, because of the unprecedented productivity gains of the last 30 years, and last but not least due to the bursting of the credit bubble, deflation is inevitable . This is compounded by the fact that the phenomenon is generalized in the western world, China with excess capacity both in terms of production and workers, and with its huge credit bubble in the bursting, will absolutely not be our savior. This is why despite government officials forecasting 3/3.5% growth over the next 5 years (which is both wishful thinking, an attempt to get the consumer to spend more money he doesn't have, and a way not to have to remark all the unfunded liabilities out there) Federal Reserve officials are worried that we are caught in a liquidity trap. Central banks are in a race to try to reinflate the system using monetary largesse and currency debasement, but that only works when everybody is not in the same boat... For now their liquidity has made its way straight to the stock market and increasingly to hard assets and precious metals. That just means whatever central banks are doing is relatively useless. The core fabric of our economy remains feeble and it's bubble or bust.- Nic Lenoir

Philly Fed drops from 21.4 to 8, worst since August of 2009. Expected at 20.Why is the market down on this? This means that the Fed will soon have its Congress OpCo legalize a) negative interest rates and b) make holding any cash in deposit or money market funds treason.

Seriously, does anyone even pretend to believe these Tim Geithner-inspired lies? What can one do but laugh.

All you need to know about today's market

Another fantastic interview and some typically outspoken observations from everyone's favorite Doom and Gloomer:"I think that governments have become like a cancer, they have expanded in the financial system...The biggest problem is too much intervention. Whatever the government touches is usually done worse than in the private sector. I think any government intervention has unintended consequences and is negative. Eventually the market will break the intervention and things will blow out...People who tell me about the big deflation in Japan, why don't they spend a day in Tokyo? It's still the most expensive city in the world. At this level I'm not particularly interested in buying anything. I buy gold, I don't know what else to buy." Faber expects another worse crisis to happen in five to ten years, "when the whole financial system collapses" - the reason: the debt problem has been kicked down the road without actually being sold. "I think US Fed, ECB and other central banks have no other option, they will continue to monetize and buy bad paper, period. The central bankers are precisely the ones that don't know that excessive money creation and excessive debt creation leads to a crisis down the road. The ECB will talk hawkishly, but act dovish, like the Fed in the US." Must watch 20 minutes.

It’s beginning to look like markets are finally pricing in QE2 (quantitative easing). Many believe the deflationary genie is out of the bottle and the conventional wisdom says it’s a long process to put it back in. President Obama will hit major political headwinds trying to push through a 2nd stimulus program but it’s looking more and more like a necessity with unemployment hovering just below the double digit (and that’s only the official measure). There can be no other explanation for the fact that gold has recoupled in its relationship to the dollar. Today the dollar is down, equities are mostly flat, oil is down slightly and bonds are unchanged for the moment. The aggressive move higher this morning in gold (up $15 currently) tells us that more people are being converted and the market is going secular. Point of interest, there are those who believe we are running out of gold. We don’t necessarily disagree but as long as bars are gettable there is a lot of gold out there to be had. Moving forward, Comex vaults and lease rates will be the next indicator of intrinsic demand.

• Swiss parliament approves UBS-US tax deal (Reuters)
• Hello deflation my old friend: May consumer prices post biggest drop in 1.5 years (Reuters)
• Weil: Bailout nation will thrive as long as AIG lives (Bloomberg)
• China warns finger-pointing could derail G-20 (Reuters)
• More Spanish propaganda: Spain may use €30 billion euros for bank restructuring (Reuters)
• Why a second Enron/Skilling trial is a great idea (Post)
• Pimco's secular outlook for the UK (Pimco)

Can we stop all discussion that we have avoided a double dip already? Initial claims came in at 472,000, up 12,000, compared to an expectation of 450,000. Last week was revised from 456,000 to 460,000. Dear Joe Biden - was the economic recovery in unemployment pushed back to 2011? Did companies receive the memo to fire, yet miss the other one, with the much more critical rhyming verb? Never fear - the BLS has an explanation for everything, and the surge in claims was presumably not only predictable, it was expected, and was blamed on the fact that there was a federal holiday in the prior week:yet somehow the consensus totally ignored this oh so obvious tidbit. Elsewhere the CPI was once again deflationary: CPI came in at -0.2%, and CPI ex-food and energy barely posted a heartbeat at 0.1%. Futures now retracing pretty much all EUR-driven gains. But not gold.

The Telegraph's Ambrose Evans-Pritchard points to a letter signed by 100 Italian economists (technically Keynesianites, but in the great Ponzi, the two have become synonymous) in which they note that "the austerity strategy imposed by Brussels/Frankfurt risks tipping Europe into a self-feeding downward spiral. Far from holding the eurozone together, it will cause weaker countries to be catapulted out of EMU. Others will leave in order to restore sovereign control over their central banks and unemployment policies." Not to mention that Italian university budgets will be slashed. These 100 establishmentarians would be wise to do the whole "look to your left, then to your right, in one year two of those people will be out on the street." While the core of the complaint has to do with the core premise of austerity, arguing that a fiscal injection is much more needed than a haircut, AEP does have a great point, that while conducting fiscal contraction is possible, it needs to be at least offset by monetary loosening. And the still relatively hawkish ECB has very little room in that regard. Evans- Pritchard's conclusion is well known in advance: "EMU has become an infernal machine. This will not be the last letter by angry economists."

There has been some ridiculous moves in overnight FX: as the chart below shows, those trading the CHF have had to consume several times the RDA of Dramamine to stay on this particular ride. The whopping move was due to comments out of the SNB that the bank is "preparing for an exit." The bank softened its intervention language, noting that "deflationary" risks have largely disappeared (see note from Goldman below on full SNB implications). Ironically, this was the least of the night's highlights. As pointed out last night, the EURUSD was initially dropping on comments that the ECB will continue devaluing the EUR by buying bonds (and potentially commercial paper) until the situationstabilizes. But then Tim Geithner's idiocy v2 kicked in as all of a sudden everyone in Europe started touting the ridiculous straw-man that are Stress Tests: France's minister of economics noted that the "sooner banks publish results the better." And as we saw domestically a year ago, there is nothing more honest than the administration imposed stress tests (especially accompanied by a complete suspension of accounting rules). Hilariously, the vice chairman of one of the most insolvent companies in the world, the infamous STD, or Banco Santander, said he was convinced the stress tests will show the "extraordinary strength of Spain's banks." You just can't make this up. Then Germany also touted what a great thing stress tests would be. Somehow all this doctored propaganda managed to raise the EURUSD by over 150 pips, bringing the pair to almost 1.24. Lastly, Spain's horrendous auction, where the 30 Year closed at 5.908% compared to 4.758% previously, even with the ECB directly involved, was supposed to be seen as good news. All in all, EURUSD should be testing 1.22 support. Instead it is back to 1.24 resistance. Well played, Tim Geithner.

• Asian shares were solidly higher Wednesday after Wall Street rallied Tuesday.
• China boosts holdings of US Treasury debt by $5 billion.
• Euro zone May inflation confirmed at 1.6 pct y/y.
• France may raise retirement age from 60 to 62 in 2018.
• Obama says oil spill shows US must cut oil 'addiction’.
• OECD recommends Dutch workers stay on the job longer, accept less when they retire.
• Russia preparing to buy Canadian, Australian dollars to diversify reserves.
• Yen trades near 1-week low on improving global economic outlook.
• Best Buy Co.'s Q1 profit rose a disappointing 1.3% to $155M despite 6.9% rise in revs.
• Brazilian meatpacker Marfrig to acquire distributor Keystone Foods for $1.26B.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 17/06/10

The EURJPY, and its immediate computerized secondary derivative, the general market, its taking a nosedive. The reason, as HuffPo's Ryan Grim reports, is that the Senate has now accepted an expanded Fed audit. As usual, we will believe it when we see the full list of banks bailed out by the Fed, the collateral they pledged, the cash they received, the amount of bonus paid out, the Fed credit facilities involved, the total taxpayer money lost and never to be recovered, etc. Which is why we don't buy it for a bit, and we are fairly confident that Chris Dodd is blatantly misrepresenting reality, when he tells the House panel that "the Senate will accept an expanded Federal Reserve audit proposal from the House as part of Wall Street conference committee deliberations."

Ok, this is getting scary: first, Cramer bashes the entire market yesterday, saying it is a stupid, rapacious, capricious and a bunch of other words we would butcher absent spellcheckurrrr. Then, the CNBC frontman goes out on a full blown tirade against High Frequency Trading, against ongoing flash crashes (melt downs and ups) in names such as the ones we discussed earlier like Diebold and Washington Post, against the whole concept that the market is sane and stable, and lastly, Cramer agrees with us that the only senator worth listening to is Ted Kaufman, who also happens to be a guest on this particular Cramer show. Are we now mainstream or is Cramer too much of a fan? Is it time to switch our motto to "on a long enough timeline we all succeed and prosper courtesy of a neverending Keynesian ponzi pyramid." Is this the market bottom? Being on the same side of the trade as Cramer is...never good.

These are the kinds of stories that just make one's blood boil: the WaPo reports that the Office of Congressional Ethics (find the 10 oxymorons) is investigating either allegedly violently corrupt congressmen who held fundraisers within 48 hours of the House vote on Wall Street reform. This is not only pathetic, this is stupidity on a gargantuan scale: America deserves its manifest despotism for allowing such cretins to be voted in. And who leads this particular parade of 8 dunces? Why our old friend, North Carolina Democrat, Mel Watt, whom we have written extensively about before, specifically in his capacity of Fed advocate #1, who repeatedly tried to kill the Paul-Grayson bill to audit the fed (we refuse to capitalize this institution any longer). For previous stories on Watt's BofA/Wachovia/American Express/ABA-facilitated escapades, read here and here. And just in case the purpose of the probe was not quite clear to our less than cynical readers, here is the WaPo explaining why these are 8 Congressmen who have hopefully just waved all their chances to reelection goodbye, and hopefully will find a job at their Wall Street-based sponsors: "The probe is focused on whether the timing of accepting the campaign checks created an unacceptable appearance of a conflict, according to sources familiar with the investigation and letters sent by the OCE to lobbyists requesting information. The OCE's spokesman declined to comment for this article, citing the ongoing nature of the investigation."