Archive - 2010 - Story

The main focus of QE2 is not domestic but international, exporting inflation and forcing BIC's hands. This is highlighted by Brazil's immediate and very public, very undiplomatic response as well as Bernanke's very undiplomatic jab at China shortly after QE2 announcement. In this it's been very successful. BIC have been trying very hard to resist. Although India has given in and raised rates, Brazil and China (along with other export economies such as Japan and South Korea) have been resorting to other means. But for how much longer can they resist?

The topic of Howard Marks' latest letter is gold. The Oaktree Chairman presents one the better comprehensive pieces on the precious metal, laying out both the pros and cons. Presenting the current broad schizophrenia when debating the value of of gold, Marks, in a comparative allegory to 1952 opinion of Noah "Soggy" Sweat on whiskey, Marks states: "I have no doubt: gold is the ideal investment"...yet..."Gold has no financial value other than that which people accord it, and thus it should have no role in a serious investment  program. Of this I’m certain." Arguably one of the better two-sided presentations on gold's true value, we are nonetheless surprised that Marks did not reference the opinion of Dylan Grice (and others before him), who analyzes the price of gold in terms of the global monterey supply, which can be read in its entirety here.  Nonetheless, as Marks is always one of the most thoughtful observers on markets, this piece is a must read for everyone.

Here's a hint: it's all great. Just like the 10 Year hitting 0% was great for stocks, Jim explains why its round trip bacl to 5% is even gooder. In fact, it may be one of the goodest things to ever happen to the gnome underpants business that Goldman suddenly believes the US economy is: "I would guess that GDP growth could be above 3 pct, and it would not surprise me if some start forecasting close to 4 pct soon...checking my simple stats with Jan Hatzius this weekend, the US stock market would “only” need to rise by around 19 pct in order for the 168 bps rise in government bond yields to be entirely neutralized...Are 5 pct US 10-year yields and an S+P of 1475 possible in 2011? We shall see. In my opinion, a 19 pct rise in the US stock market seems quite likely. As for 5 pct bond yields, I think they are much less likely, but not impossible. If they did occur, it certainly wouldn’t have to be for negative reasons." That's all fine and great even if it is totally and utterly insane. The real win here, and it may be hidden at first, is that we now have not a phrase, but an entire essay to challenge that all time dumbest thing ever uttered: "If it weren't for my horse, I wouldn't have spent that year in college"...

All those who believe there is sentiment of complacency within the precious metals camp may be forgiven. After all if one likes gold, one should like silver, and/or vice versa. Today FOFOA presents a counterargument. "I don't write about silver very much. Just like I don't write about copper or pork bellies. But, in fact, I have addressed many of the standard arguments for silver over gold in various comments on this blog and others. I'm sure someone will dig them out again and post links as people pose these arguments once again in the comments. But here's a new one. One of the argument for silver that we hear often is that it is "the poor man's gold." So I guess gold is "the rich man's gold." Well, what is the main difference between rich men and poor men? Is it that the rich have an excess of wealth beyond their daily expenses? In fact, the really rich have "inter-generational wealth," that is, wealth that lies very still through generations. The poor do not have this. So what do you think is going to come of all that "poor man's gold" that the silverbugs have hoarded up? Is it going to lie very still for generations? Or will it circulate, to meet daily needs? Note that circulation velocity is the market's way of controlling the value of any currency. Faster circulation = lower value. Lying still for generations = very slow circulation." Thus today's question - is silver money too?

Bank of America just fired the preemptive escalation shot in its duel with Wikileaks. Late on Friday, America's biggest mortgage lender, and the firm that is now getting sued left and right for various mortgage transgressions, announced it is joining MasterCard, Paypal and Visa in ceasing transactions for Wikileaks. While this decision will certainly not improve Operation Anonymous' empathy toward the North Carolina bank, it may just precipitate overt retaliation by Assange, who is now rumored to be in possession of data that could provie harmful to BAC. Which is why this sudden escalation out of left field by the bank strikes as surprisingly odd: BofA's upside is very limited while its downside could be 100% - even if Wikileaks is bluffing, why provoke them. And as expected, Wikileaks has already retaliated: in two sequential tweets it advised its 568,117 (and very rapidly growing) subscribers to pull their money out of Bank of America, and also to close all their accounts with the firm, urging them to put their money "somewhere safer." What is curious is to see whether this sudden escalation, in what has now become synonymous with a quest for preserving the first amendment for a substantial deal of people (and freedom of speech globally), will have a far broader impact than the comparable "Pull Your Money" out of the Big Banks venture that was attempted by Huffington Post over a year ago, with unsatisfactory results. If people suddenly personify Bank of America with a First Amendment threat, arguably the one freedom most cherished in America, which is precisely what Assange is trying to do, all bets for the Countrywide acquirer may soon be off.

After the rather tumultuous events of the past 48 hours, it is time to take a moderate to quite moderate break. Please use this space to hyperventilate, or else breathe normally, at your leisure.

None can foretell the future, and yet the shape of what we face can be shrewdly estimated with enough attention to historical trends; with broad contextual understanding; and with sufficient insight into the character of leaders, their societies, and the structures which define their basis. These estimates will be tempered by the sudden acts of nature, the sudden emergence of true leadership from unexpected quarters, or key breakthroughs in science. Still, we can hazard reliable views on the shape of the world in, say, a decade — in 2020 — if present trends and characters remain, and on a knowledge of certain baseline levels of wealth and capability which presently exist. In 2011, the world will probably remain beset by the lingering of the present crisis of currency levels and economic performance. This is essentially a mass psychological crisis, based around the perceptions which create trust, particularly trust in asset values and institutions. In some respect, historical trends have given populations in modern societies excessive trust in the ability of their institutions to remain operational, untended by their populations. As a result, governments have grown larger and less efficient, and have arrogated to themselves more and more of the resources of societies, thereby inhibiting productivity. At some point, those societies, when beleaguered and impoverished, lose faith in the institutions of governance and leadership succession.

Lately, anywhere we look, there seems to be a pattern emerging: those economic thinkers who actually construct and run their own macro models (not the glorified powerpoint presenter variety) and actually do independent analysis and tracing of the money flow, instead of relying on Wall Street forecasts that have as much credibility as a Moody's home price hockey stick from 2006, almost inevitably end up having a very dire outlook on the economy. One such person is and has pretty much always been Shadowstats' John Williams, whose "shadow" economic recreation puts the BLS data fudging dilettantes to shame. That said any reader of Zero Hedge who has been with us for more than a few weeks, knows all too well our eagerness to ridicule the increasingly more incoherent lies coming out of the US department of truth, so no surprise there. Yet another aspect over which there is much agreement is that no matter how one slices the data, the outcome for the US currency is a very grim one. Which is why Williams over the past several years has become a major fan of the shiny metal. Below we recreate portions of his latest observations on the upcoming currency collapse, courtesy of King World News.

As we suggested earlier, there would be virtually no trading volume at all today, and any moves would be driven purely by the deltas. And following the close the fireworks would follows. Sure enough, here's the whoosh immediately following the start of the AH session.

It is no secret that Zero Hedge's favorite contemporary painter since what now seems time immemorial is none other than the unbeatably original Geoffrey Raymond. While his art has not made Sotheby's yet, it will eventually: after all who would not rather bet on the upside appreciation of an annotated painting of Dick Fuld, capturing the bipolar euphoria of a just insolvent Lehman Brothers for $30K than a diamond skull by Damien Hurst for a hundred million, with guaranteed downside?  That said, $30K may be a little steep for a population which still has to feel the impact of inflation on its paycheck. Which is why we are delighted to once again offer Zero Hedge readers the chance to get what Raymond calls The Perfect Gift for the Person who has (Almost) Everything... and at a discount. Geoffrey is offering signed and numbered prints of five of his favorite paintings with guaranteed delivery by the 24th.  They are "The Annotated Fuld", "The Annotated Fed", "The American Investor", "Big Lloyd 3 (The Root)" and one of my all-time favorites, "Cramer:  Naked Short".  Taken together, they are an amazing visual document of the American financial meltdown.  All these can be found at www.annotatedpaintings.blogspot.com. After all what better inflation hedge than acquiring a print of the unbridled genius presented below. Considering the subject's most recent Nielsen ratings, it may be archival very, very soon.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 17/12/10

One of the more peculiar observations we noted in our analysis of the Fed's balance sheet yesterday, was that in the week just ended, reserves held by banks with the Federal Reserve dropped by a very material $64.2 billion even as the Fed ended up buying a net of $4 billion in securities: a $68 billion mismatch between an increase in reserves and Fed asset increases. A quick look at how this mismatch has progressed since the announcement of QE Lite (and QE 2) demonstrates this phenomenon very distinctly: while during the QE Lite phase, net holdings of the Fed were flat, bank reserves, which should have followed suit in fact declined notably, by almost $40 billion. Yet it is during the POMO phase of QE 2 that this difference become glaring. During a period when the Fed added a total of $88 billion (net of MBS paydowns) in securities, reserves increased by only $14 billion. This does not include the cumulative differential since QE Lite. And all this came to a head in the just ended week, when the difference between cumulative asset purchases and reserve changes hit a whopping $138 billion. This is very disturbing for a variety of reasons, the number of which is that, as Jim Bianco points out, banks are rapidly exchange securities with higher reserve requirements for those with lower: the net result is a far slower increase in reserves held with the Fed. It also means that banks ever since QE Lite have been stealthily offloading lower quality fixed income products to the market and replacing these with Treasuries (motivation being unclear but likely having to do with presenting a better capitalized state). If true, this would mean that during the entire orchestrated HY bond rally sine August, those who have been buying are in fact the greatest suckers, and have been buying hundreds of billions worth of lower quality paper from none other than the allegedly smart money banks. Alternatively, what this means, is that instead of opening up capacity for banks to bid up riskier corporates and thus stimulate the economy, banks are forced to gobble up the toxic treasuries, that the Treasury puts upon them each and every week. Should this divergent trend persist, we would be very mindful of obtaining verification of either of these two hypotheses.

On April 15, the VIX contango hit its heretofore steepest of the year. What happened immediately afterward was a peak in the market followed by a plunge, and the flash crash, coupled with a massive flattening of the curve. What also happened was unprecedented pain for Goldman, which had been pushing the Variance Swap so hard, it ended up with residual inventory on its flow (but not prop) desk, resulting in a major loss for the firm once the curve flattened. Yet anyone who thought that Goldman's Delta One prop desk would ever lose money, should just look at today's ridiculous VIX curve which is now trading at a steepness unseen in years. More than obviously someone is pushing very hard on the spot, while ignoring or buying the mid and long end. And as we expected earlier this week, the only driver for stocks right now is what is happening in VIX land, driven by the near record open interest, which is now so disconnected from the volatility in all other assets (FX, bonds), it is beyond deplorable. Yet perfectly expected: with no volume, one market maker can do with the market entirely as they see fit.

... in which a familiar chart appears on page 8.

Because why go B when DD will do (and double as a gas mask). Or is Mark merely wishing he was part of the Power Lunch crew? We doubt it: for some odd reason, and completely independent of wardrobe, that particular segment continues to have some of the lowest Nielsen ratings on the Comcastic station.