Archive - 2010 - Story

With most world markets operating on half mast today, here are the reasons why ES futures, at least for now, are trading in the red.

We now live in a world where governments print worthless pieces of paper to buy other worthless pieces of paper that combined with worthless derivatives, finance assets whose values are totally dependent on all these worthless debt instruments. Thus most of these assets are also worth-less. So the world financial system is a house of cards where each instrument’s false value is artificially supported by another instrument’s false value. The fuse of the world financial market time bomb has been lit. There is no longer a question of IF it will happen but only WHEN and HOW. The world lives in blissful ignorance of this. Stockmarkets remain strong and investors worldwide have piled into government bonds in a perceived flight to safety. -

Today's must see TV comes from the following interview of Pimm Fox on the consumer and the economy with retail expert Howard Davidowitz, who in 10 minutes provides more quality content and logical thought than we have seen from CNBC guests in probably all of 2010 (except of course for that one time when Erin Burnett kicked out Mike Pento, but that's a different story). Where does one start? Probably at the end: "I am not surprised by the strength of retail sales, because i knew that 30% of consumers are responsible for retail sales, and these 30% did much better because of the performance of capital markets. I don't think it is indicative of anything going forward. I don't think the economy is going to get any better. If you look at our fiscal and monetary policy, we went two trillion in the hole last year. Two trillion... to produce this... and unemployment went up to 9.8%! We've spent two trillion we're printing money we're going bananas. Our balance sheet, we've got $2.6 trillion on there, and what;s on there government securities, and MBS." And here is the kicker for the world's biggest hedge fund, which at least one person besides Zero Hedge appears to get: "If interest rates go up a point Bernanke's bankrupt. Everything he's bought is underwater. All the MBS are underwater, the whole country is underwater." Does anyone see the issue now with why rising interest rates, aside from predicting a "recovery", may also, courtesy of its now $2 billion DV01, "predict" the insolvency of the Federal Reserve?

Marc Faber, who just like Nassim Taleb has never hidden his disdain for investments in US-backed paper, is back to bashing Treasurys, although with logic diametrically opposite to that espoused by those such as Morgan Stanley who see rising rates as a sign of economic growth. "This is a suicidal investment,” Faber told Bloomberg in a telephone interview from St. Moritz, Switzerland. “Over time, interest rates on U.S. Treasuries will go up. Investors will gradually understand that the Federal Reserve wants to have negative real interest rates. The worst investment is in U.S. long-term bonds.” As for equities, Faber increasingly sees a Zimbabwe outcome: “If you print money, the currency goes down and the S&P 500 goes up. By the end of 2011, people will look at 2012 and think 2012 could be a very bad year because the policies applied are not sustainable and create a lot of instability. Investors may look at 2012 and 2013 with horror.” Not Wall Street thought. By the end of 2011, bankers will most likely be looking at the second consecutive record bonuses year, and by then will have enough gold safely stashed away in non-extradition countries to where the host organism may finally be allowed to die in peace.

Presented without commentary

There were two things that surprised me this past year. First, was the effectiveness of propaganda and market manipulation. Despite, the obvious lack of any real economic recovery other than phony aggregate demand increases due to inflationary policies many people actually think things are getting better. The Larry Summers’ of the world and other economic magicians like him have one economic policy and that is expectations management, which really means create enough propaganda, push the stock market up, and people will then believe things are getting better and then things will get better in reality. I believe this policy has been half successful so far. It has been successful is kicking the can down the road but it has not been and will not be successful in improving the standards of living for the American people and it is becoming more and more widely understood that this “respite” is merely being used by the small oligarch class in Washington D.C. and Wall Street to steal what little is left and push the middle class into serfdom. When this thing collapses again let’s never lose sight of this and remember who did what during these days of “recovery.”..This is not to say I am bearish on mankind or the world 10-20 years from now. I am not. I think once we finish the next 5-10 years which could be very, very difficult we can emerge into a New Renaissance. We just need to clean out the trash first. That means the current group of political and economic leaders that have infected the global economy. My advice remains the same. You must accept the fact that the current model has failed and will be replaced. - Mike Krieger

I should have embraced the corruption and policies I cannot stand rather than keep too bearish a focus, which only thankfully to careful tactical considerations based on technical observations did not turn into a complete disaster. So while we did overall a good job looking for technical opportunities to express our views, I will need to be much more cynical when it comes to assessing potential government intervention in the economy...I am however convinced that no real positive societal growth will be possible in the West without addressing entitlement programs, pension issues, the cost of production in developed economies whether it is via currency revaluation or protectionism, and a more responsible management of the world's natural resources should probably make the list too. Can we continue inflating this mercantilist world economy without an absolute collapse in the value of Western currencies? The answer is not "maybe not", it's not even close: we can't and it's obvious...So with all that said, I would like to close the circle and close the discussion with what I think is possible for 2011. - Nic Lenoir

Following the release of Bill Dudley's daily schedules from the beginning of 2009, through September 30, 2010, there have been some amusing, if not very surprising, disclosures. Among them: Dudley's penchant to meet with Jamie Dimon, Vik Pandit and, of course, former boss Lloyd Blankfein. Other meetings include Sullivan and Cromwell chairman, and the banking cartel's personal chief attorney H. Rodgin Cohen. Those are to be expected: after all Dudley has to conduct the New York Fed policy exactly in accordance with Wall Street's expectations, and per Wall Street's recommendations. What is a little more surprising is that on February 9, 2009, Bill Dudley hosted a lunch roundtable with hedge fund SAC Capital... Perhaps now Dudley knows almost as much about the chances of various Phase II/III drugs to make it to market as ole' Stevie himself. Additionally, on May 14 Dudley invited Ken Griffin and Adam Cooper from Citadel into his office at about 2:00 pm. One wonders just what the quid pro quo between the New York Fed and Citadel may have been, over and above of the traditional dark pool securities purchasing relationship between the two entities of course. Where it gets a little confusing is why Dudley had to have two informal meetings with the man who singlehandedly determines US fiscal and monetary policy: Goldman's Jan Hatzius, first on March 11, and then, less than a month later, on April 6, both times as the Pound and Pence. And where it gets downright bizarre, is trying to explain why Bill Dudley on June 11, 2009, had to bring over one still unknown Brian Sack, now pervasively known as the head of the Fed's Open Market Operations Committee, to not only walk over to Goldman Sachs for a meet and greet (as opposed to Goldman coming over to the NY Fed), but specifically "introducing Brian Sack to the Goldman FX Committee" between 4:00 and 4:30 PM on that day. Just which of Brian's myriad functions is the one that requires the participation of Goldman's FX team? Last time we checked, purchasing bonds and MBS in POMO operations had little if any impact on Goldman's FX trading flow...

The Titanic offers us a timeless analogy for denial and a frantic, too-late acceptance of grim reality. Had the doomed ship's leadership actively accepted the challenge to save as many lives as possible, then lifeboats would not have been sent off half-full. The sea was calm; boats could have been safely loaded beyond their designed capacity, and crude life-rafts might have been lashed together. As poor a solution as a lashed-together assemblage of buoyant materials would have been welcomed as a better alternative than certain death. But instead, the "plan" was to maintain a veneer of normalcy: the band played on, even as the bow sank lower into the unforgiving icy water. Fed chairman Bernanke, Treasury Secretary Geitner, President Obama and Congress are all ordering the band to play spritely tunes of rising holiday spending, endless borrowing, and the carefully crafted propaganda of Fed manipulation, statistical legerdemain and happy-talk about how the Monster will be gone when we open our eyes.

Following the publication of the monthly Central Bank of Ireland flow statistics for November, that the country's bank ended up borrowing another massive amount of capital from both Europe and the central bank itself, should not be surprising. After all it was in November that Ireland followed Greece into the insolvency abyss, a place where none other than Olli Rehn guarded the gates to feudal hell. However, one much more troubling factor is that the depositor run from Irish banks, a development which many have cited as potentially being the catalyst for the next major step down in the European house of cards tumble, is accelerating. From the report: "Deposits from the Irish resident private sector were 6.7 per cent lower on a year-to-year basis in November 2010. The annual rate of change in deposits from Irish households was minus 4.5 per cent, whereas deposits from Irish NFCs fell by 14.9 per cent on an annual basis in November." What this means simply said, is that as more deposit capital is withdrawn from Irish banks, the more they will need to rely on ECB and ICB funding, the more distressed they will be perceived as, the more capital will be withdrawn and so on... But that is a 2011 story. And just in case anyone is wondering what the source of all the capital is that is pushing the EURCHF to fresh all time highs day after day, not to mention spreads of PIIGS CDS closing 2010 at near all time wides, please refer to the chart above.

To all who have been following the recent rout in both the 10 year and the mortgage market, today's most recent jump in the 30 Year Freddie Fixed-rate mortgage, which at 4.86%just hit a 7 month high, will not come as a surprise. To Ben Bernanke, however, this is a flashing red sign, that QE2 is only working for Wall Street: its primary function of creating imaginary wealth in the form of additional home equity is not only failing, but the recent jump in mortgage rates by 1%, has had the indirect impact of forcing home prices to drop by another 10%. Look for this to hit Case Shiller data in March-April when today's near-5% mortgage rates diffuse through the marketplace. Robert Shiller describes it best: "Optimism is fading from the housing market." QE3 should promptly abort any last traces of anything even remotely resembling a housing recovery.

Since trading desks are dead, and to classify those manning them as bored would be an overstatement, here is what one such dejected individual who is neither able to ski with his/her boss over in Chamonix, nor pick 25 bps margins on CDS bid/ask spreads has come up with. Presenting the imaginary hedge fund letter describing: 2011: Year of the Rare Earth Mineral: "I have appropriated thirty-seven Chinese nationals from a Scandium Mine in Longba Town, Zhuxi Country, China, that have secured and transported my gadolinite, promethium, cerium and yttrium and other rare earth minerals holdings. As many of you are aware, I recently acquired these minerals, as well as the laborers, on a recent site visit to a rare earth mining facility in the P.B.O.C. My rare earth mineral holdings represent precisely half of my net worth."

With gold poised to close 2010 a hair's breath away from its all time nominal high price, all those who had been calling for a major correction in the gold metal "just around the corner", have been completely discredited. In fact, what may come as a surprise to many, gold is Reuters' best performing asset class of the year, well above the Nasdaq, and nearly doubling the S&P performance YTD. Yet the fact that gold continues to be a risk hedge as we suggested first about 6 months ago, has not deterred the empty chatterboxes from providing empty predictions: ten days ago we provided Doug Kass' prediction that gold is about to tumble. Granted our read of his "analysis" was one that suggest a jump in the price of gold was imminent. Sure enough, gold since then surged by nearly $50. And with global central banks having to beat their heads over the issue so well encapsulated by John Taylor, namely that global assets barely generate enough cash to service global debt, lat alone retire it, the only long-term outcome will be one of continued fiat devaluation and appreciation in hard currencies such as gold and silver (naturally with bouts of marked volatility, where one will be able to BTFD). So where will gold end 2011? Here are some more respected pundits' views on what may happen to gold in the coming year.

Even as economists were expecting a contraction in December from the November print of 62.5 to 61.0, the Chicago PMI climbed to 68.6 in December, an unprecedented 15th consecutive month surge and the highest reading since 1988! In terms of specific indices: Production reached its highest levels since October 2004; New Orders improved to 2005 levels; Employment reached its highest level in more than 5 years; Priced Paid accelerated to its highest point since July 2008. And while inventories and "prices paid" demonstrate that the prevailing weakness across inventory accumulation and margin pressures as seen in other diffusion indices persist, there was strength in most verticals. Then again, as the PMI is a B-tier indicator at best, it is unlikely that the Fed will actually look at it in determining whether or not to end its monetary stimulus. But be sure it will be trucked out to validate any stock ramp in the next several hours.

It appears someone, even if that someone is the traditionally bearish John Taylor, finally gets the fundamental issue at the core of the global financial and economic problem: "We see the health of world economy as being driven by the implied strength of three economic centers: the US, China, and the Eurozone... Each of these three centers has a problem in that the amount of debt is too high and the assets against that debt are unable to throw off enough cash to support it, much less retire it."