Archive - Jun 2010 - Story

Well, at least Ben Bernanke will never be able to conduct sworn testimony claiming nobody warned him about the adverse side-effects of ZIRP. As part of its 80th annual report, the BIS has dedicated an entire chapter to diagnosing Ben Bernanke's terminal Keynesianism, entitled: "Low interest rates: do the risks outweigh the rewards?" The openly negative, and borderline critical narrative, coming from the central banks' central bank, adds yet more fuel to the rumor that there is an open schism developing between the BIS and the Fed, with the IMF's increasingly fiat-y SDR likely to suffer as a result. Whether the BIS is planning the creation of some non-fiat currency, as some have speculated, is unknown at this point.

It's not even funny any more: "Trade Update: Last Monday we opened a short $/KRW trade on the back of the currency reform in China and consequent anticipation of CNY appreciation into the G20.  In the event, while the $/CNY fix moved lower by 0.5% on the week, this was less than anticipated and the volatility of the $/CNY intraday trading generated uncertainty in the market.  While the KRW initially appreciated on the news, less than anticipated CNY appreciation and risk off jitters associated with financial reform in the US ultimately caused $/KRW to trade above our stop leading to a potential loss of 2.2%.  The KRW has underperformed the rest of the region since late August, however we continue to expect the currency to strengthen going forward and will look for further opportunities to take advantage of this view."

In the tug of war between the U.S. urging the European nations to buy more stuff, and the EU insisting it was that very behavior that got us into the problem in the first place, score one for the Continent. It is clear that the U.S. does not carry as much weight as it used to internationally. While the Krugman-Geithener-Bernanke troika scratch their heads as to why the EU can be so stupid on this, let us remind the KGB that while U.S. memories may carry the scars of the Great Depression, theirs is a different reality, one heavy with the Weimar Republic and inflationary collapse. But let’s be practical. Any austerity measure imposed by a government only becomes tolerable to a people when that government has the ability to print its own money. So, whether the Germans admit it or not, there will be money, and lots of it. What other way is there to quell the civil unrest that will accompany a spoiled populace having its candy taken away? Believe me, the only countries that will abide by strict austerity measures will be those with printing presses.

The BEA's May Personal Income and Spending data is out - as expected, with gizmos like the iPad out there, Americans once again outspent themselves: May Income came in at 0.4%, below expectations of 0.5%, flat with a revised April reading of 0.5%; Spending on the other hand was greater than expectations of 0.1%, coming in at 0.2%, compared to a previous reading of 0.0%. Yet despite the excess spending, the Personal Savings rate climbed to 4.0% - an increase from last month's revised 3.8%, and the highest since September 2009.

"We know that Tony Hayward is leaving his position and he will introduce his successor," Igor Sechin told reporters ahead of a meeting with Hayward. Sechin, who is deputy prime minister and board chairman at Russia's biggest oil company, Rosneft, was responding to a question asking about the subject matter of the meeting.

And an immediate refutation from BP: "BP spokeswoman Carolyn Copland in London said the report 'is definitely not correct.'"

Some Fed economist (with a hard-earned Ph.D mind you) named Kartik Athreya (who lasted at Citigroup as an associate Vice President for a whopping 7 months before getting sacked in 1998 only to find solace for his expiring unemployment benefits in the public sector) has written the most idiotic "research" piece to come out of the Federal Reserve since 1913, and the Fed has written a lot of idiotic research since then - after all you don't destroy 98% of the dollar's purchasing power in 97 years with non-idiotic research. But this just takes the cake. In "Economics is Hard. Don’t Let Bloggers Tell You Otherwise" Kartik says: "I argue that neither non-economist bloggers, nor economists who portray economics —especially macroeconomic policy— as a simple enterprise with clear conclusions, are likely to contribute any insight to discussion of economics and, as a result, should be ignored by an open-minded lay public." Alas, all Kartik achieves is to convince the general public that feeding Fed "economists" alcohol after midnight and letting them directly upload their resultant gibberish to the Fed's broad RSS feed the second they think they have a coherent thought , is generally a disastrous idea. In his piece, which has no other intention than to discredit and outright malign bloggers such as Matt Yglesias, John Stossel, Robert Samuelson, and Robert Reich, Athreya says: "In what follows I will argue that it is exceedingly unlikely that these authors have anything interesting to say about economic policy. This sounds mean-spirited, but it’s not meant to be, and I’ll explain why." Instead in what follows, the Fed presents 4 pages of thoughts so meandering, that the author's blood alcohol level must have certainly been well above the legal norm for the duration of the writing of this ad hominem pamphlet.

• Asian stocks fluctuate; Japanese banks decline on Mizuho's share-sale plan.
• Caribbean storms strengthen, may head for oil spill.
• China sets the exchange rate for the yuan at its highest in five years.
• China shares fall on concerns Agricultural Bank of China’s IPO might depress market.
• China, as part of fuel efficiency measure, to shut down small thermal power units totaling 10 million kilowatts in capacity this year.
• Consumer spending in US probably little changed in May as incomes rose: Survey.
• Dubai port operator DP World cancels plans for London stock listing until at next year.
• Group of 20 Nations agree on higher bank capital to avert financial crisis.
• Romania said it would raise taxes to shore up state finances.

Last week we pointed out that the CHF could be quickly becoming at least a figurative reserve currency. With it promptly approaching parity with the USD (1.0840), and hitting new all time highs against the Euro, the market may have just taken such musings seriously. Regardless of where this slide ends, all it shows is that ever more deposits from across Europe keep getting shoved into Swiss banks - can you spell ongoing, behind-the-scenes, European bank run?

As for the forced return to the gold standard, that is continuing as planned: gold is back to just off all time highs.

We have already had our say about Denmark's World Cup performance. It was not lost on Erik Nielsen. It has not had as much of a dire impact on his outlook, as his European round up is summarized: "that’s the way Europe looks from my unbelievably green garden on this gorgeous afternoon. I shall now pour myself some sort of chilled and lovely summer drink and turn to my favourite book." Something tells us this is not Hayek. More importantly Erik points out why Wednesday will be a very important "micro event" day for Europe: the ECB's 12 month LTRO, whose impact on Libor and Euribor we discussed previously, matures on the 1st, and also on Wednesday "Greece formally falls out of the indices because of their downgrade. How much selling will that cause? I have no clue, but I would fail to understand why investors would have waited till the last day to get rid of their Greek bonds when they have known about the issue since June 15." Yet Erik points out something curious: "the Greek governments intends to roll over 3, 6 and 12 month treasury bills maturing in July; a total of about €3.5bn. Auctions are expected on Tuesday 13th and on Tuesday 20th July." And he wonders:"Why are they doing it? Could it be that they are responding to demand from banks and other investors who have started to appreciate that a debt restructuring the next 12 months is very unlikely and therefore looking for high-yielding assets? If so, this would be a mis-guided move, in my opinion, and – frankly – I hope the IMF and EU would tell them to back off." Looks like yet another shoe in the European collapse may be due to drop this week.

At least back in 2009 the most promising targets for damaging the Iranian nuclear program, specifically the weapons related development, were Plutonium production facilities (characterized primarily by the Plutonium Production Heavy Water Nuclear Reactor in Arak) and facilities critical to the "Nuclear Fuel Cycle" (most obviously the Uranium Enrichment Facility in Natanz and the Uranium Conversion Facility in Esfahan).  The Center for Strategic and International Studies' Abdullah Toucan released a detailed report comparing the mission requirements of strikes on these (and other) facilities with Israel's capabilities and concluded the mission was within Israel's grasp operationally.1  Normally we would call this report a "must read," but instead we've read it so you don't have to, as well as added some of our own research and secondary sources.  The report also examined the ballistic missile strike option and delved into some of the political and instability costs that an attack would extract (which we ignore for the purposes of this discussion).  Those sections are well worth reading, even if the political reality on the ground has changed since early 2009.

• 1. Abdullah Toukan, "Study on a Possible Israeli Strike on Iran's Nuclear Development Facilities," Center for Strategic and International Studies (March 16, 2009).

As with any Nimitz class carrier, the USS Dwight D. Eisenhower (CVN 69) doesn't deploy alone.  Instead she sails with a number of other support vessels composing a "Carrier Strike Group."  Within the Eisenhower's traditional strike group (Carrier Strike Group Eight) are:

Command Destroyer Squadron Two Eight, composed of 8300 ton Arleigh Burke class guided missile destroyers focused on antiair, antisubmarine, antisurface, and strike operations using the AN/SPY-1D Phased Array Radar, an AEGIS upgrade, and the best-in-class AN/SQQ-89 integrated ASW Suite.  Originally designed to deal with former Soviet air threats (like Iran's Su-25, MiG-29A (Fulcrum) and MiG-29UB aircraft?):

The USS Bainbridge (DDG 96)
The USS Barry (DDG 52)
The USS Laboon (DDG 58)
The USS Mitscher (DDG 57)
The USS Ramage (DDG 61)

The G20 meeting has revealed two important things that tell us something about our combined economic future. First we learned that the US lost the battle to try to get everyone back on the Keynesian print-a-thon bandwagon. This tells us something about US leadership in these troubled times. Once-upon-a-time, the US could dictate such things, and those days are apparently over which deserves to be noted. The second thing we learned is that, despite these differences in how to fund future growth, there is nothing yet to indicate that any the world leaders are aware that the very concept of perpetual growth is an unworkable fallacy. It’s obvious, hopefully to even the most casual of thinkers, that someday, sooner or later, whatever growth one is engaged in will have to stop. Nothing grows forever; everything has a limit.

In his latest analysis, Goldman credit strategist Charles Himmelberg resumes the firm's party line of claiming the market is overestimating the risk impact of "fat tail" events, because presumably, as Goldman's Javier Pérez de Azpillaga showed previously, even though Spain is insolvent, is facing a massive budget deficit, has a huge debt-rolling problem, and has a banking system that is locked out of capital markets, all is good (full report here) and all those who are betting on Europe's demise are about to lose money (how this Eurozone optimism jives with Goldman's recent downgrade of the EURUSD to 1.15 is beyond non-lobotomized comprehension, so we'll just leave it be as yet another fully expected Goldman inconsistency). Yet, as ever so often, inbetween the conflicts of interest, Goldman does tend to provide that occasional piece of useful, actionable information. In this case, Himmelberg has done a very relevant analysis comparing Jump to Default costs for CDS and for out-of-the-money equity puts on distressed public names, and concludes that purchasing CDS provides a far better, lower-costing entry point to hedge against default. As he notes: "Our results show that pricing in the two markets follows the same trend, but that credit protection may be cheaper in many cases." Specifically, anyone wishing to arb the mispricing of credit and equity downside protection would be wise to put on a pair trade basket where one buys CDS/sells OTM Puts in SFI, LIZ, BC, MIR, NYT, and DDS and the inverse (sells CDS/buys OTM Puts) in F, AMR, MGM, TSO, SFD and LEN on a DV01 neutral basis, and wait for risk normalization between equity and credit to lead to a recoupling in the spreads.

As we first reported last week, in an article that was met with much original skepticism, the Pentagon has now confirmed that a fleet of 12 warships has passed the Suez Canal, and is now likely awaiting orders to support the escalation in the Persian Gulf. The attached image from Stratfor shows the latest positioning of US aircraft carrier groups as of June 23: the USS Harry Truman (CVN-75) is now right next to USS Eisenhower (CVN 69), both of which are waiting patiently just off Iran. As for the catalyst the two carriers may be anticipating, we provide the following update from the Gulf Daily News where we read that Israel may be on the verge of an attack of Iran, with an incursion originating from military bases in Azerbaijan and Georgia.

The NYT's Frank Rich and PressThink's Jay Rosen have both done tremendous post-mortems on Michael Hastings' McChrystal-shattering report in Rolling Stone Magazine. While Rich focuses more on the implications of the whole affair, and the containment of the fallout, possibly including its repercussions on the war in Afghanistan, concluding boldly that McChrystalgate "gives us reason to hope that the president’s first bold move to extricate America from the graveyard of empires won’t be his last", a much more relevant observation that both authors target in on is the future of reporting, and journalism in general, in the US and elsewhere. Both frame their arguments based on statement by Politico, subsequently deleted, which was spot on, in describing the media-establishment relationship. To wit: "as a freelance reporter, Hastings would be considered a bigger risk to be given unfettered access, compared with a beat reporter, who would not risk burning bridges by publishing many of McChrystal’s remarks." In other words, never again expect a (beat, but one can generalize) reporter who is invited to political press shows to break anything of importance, and most certainly never expect a columnist (or certainly an analyst) invited on CNBC, or someone who writes books describing his high-level access to financial professionals, to ever again have anything insightful or relevant to say about the very system that is supposed to be supervised, yet ends up paying his or her bills. Which is why we will forever be happy to operate in the shadows of the establishment, where bridge burning is the norm not the exception. If that means a Penguin book deal lost now and then, so be it.