Archive - Nov 8, 2011 - Story

Eric Sprott, Chairman of Sprott Asset Management, and James Turk, Director of the GoldMoney Foundation, meet in Munich and talk about the Munich Precious metals conference (Edelmetallmesse). They comment on Eric Sprott’s speech at the conference and how increasing interventions by central banks, from zero interest rates to money printing and bond buying have completely distorted the financial markets. Other discussion topics include the choices between austerity and increasing stimulus and how both will bring on a meltdown, whether bankruptcy or hyperinflation brought on by money printing. They talk about the huge leverage in the banking system and the risk inherent in the system. People are only now starting to understand counterparty risk. They explain that 20-to-1 and even higher leverage is common in the banking system. Lastly, the two talk about the short-term focus of political decisions and the bad omens for the dollar as a world reserve currency. Kicking the can down the road is increasingly not an option for bankrupt governments, as even the bond markets are increasingly uncooperative with new stimulus efforts. As an example the recent failed attempt by the EFSF to raise 3 billion. They talk about the IMF creating $280 Billion SDRs out of thin air and ask whether that will keep the party going a bit longer.

5.5! Right on expectations! We have a winner as the landing will be neither too hard, nor too soft... Just right. As for PPI, it came at 5%, on expectations of 5.8%, so the PBoC just telegraphed what we reported two days ago, namely that that one trillion yen in deposit backstops is not only urgently needed but coming any minute now. And so the reflation game begins anew.

Surely, some algo, somewhere will ramp the futures by at least 1-2 points on this headline. In other news, anyone sufficiently brain dead after today's market action is welcome to watch the following soothing live clip of the asteroid's passage, which confirms that Bruce Willis' asteroid busting services will not be needed.

With the European drama seemingly on the backburner for a few days (although with so many promises of resignations, it is now Wednesday in Greece and who is PM? Why G-Pap, despite resolute guarantees he would have stepped down by Monday... at the latest... But aaaaaany minute now, he is resigning, promise) it may be finally time to switch attention over the US, and the fact that absent lots and lots of fiscal stimulus, Q4 GDP is rolling over, as virtually everyone has predicted. Amusingly, none other than Tim Geithner provides the perfect segue, having said earlier that "the supercommittee holds "the key" to rebuild confidence." This brings us to the supercommittee itself. And for that we go to Politico: "Congressional Democrats and Republicans are trillions of dollars apart on a deficit reduction deal as the supercommittee nears its Nov. 23 deadline." So, with confidence like that, who needs any doubt. It continues: "The most recent Republican offer, according to Democratic and Republican sources, includes roughly $770 billion in spending cuts and between $550 billion and $600 billion in new revenue from a variety of sources, including selling public lands, increasing the price tag on postage stamps and new energy leases. Republicans also say they’d be willing to limit deductions and certain tax breaks – sure to anger their conservative base – in order to reach nearly $300 billion in new tax revenues. In exchange, Republicans want to change the rate of inflation for Social Security, cut Medicaid and increase Medicare premiums for the wealthy." Needless to say this is going to go nowhere in a hurry. And all of this is happening as the second interim debt ceiling target is about to be breached after two more Treausry auction weeks. But none of this matters: the robots trading this market, saw the word confidence and sent us to highs. After all buy first, ask questions later is what the motto of the NYSE Borse is, or should be going forward. Probably in German - more fitting.

Having seen the supposed smart money miss out on the October rally in US equities, the last few days have once again surprised many with US equity performing similarly each day and ramping to close at its highs - each time notably ahead of credit markets and broad risk markets. From the early October lows, we have seen the rotation from US to Europe reverse with the last few days see US equities dramatically outperform European. We wonder, somewhat prosaically, whether the relative inaction of the ECB with regard to BTP intervention since early Friday morning is what pushed Berlusconi over the edge and US-Europe divergence to extremes as Draghi flexes the ECB's considerable muscles. Critically, we see low volume ramps in the afternoons which leave every other market trailing in the dust - only to leak back in the overnight sessions. Couple this extraordinary action in S&P futures with the MF Global SIPC news and we wonder what liquidation will impact next?

While certainly very much ironic, considering that his purchase is now completely worthless, the news that Interactive Brokers' CEO Thomas Peterffy, who up until the 11th hour was expected to be the buyer of the now liquidating exchange only to unwind the deal upon discovery of hundreds of millions in missing commingled funds, bought 8 million shares of MF Global stock for his own account is certain to raise many alarm flags at whatever disgraceful farce passes for US regulators these days. As a reminder, "the week before MF Global filed for bankruptcy on Oct. 31, the New York-based company’s shares fell 67 percent to $1.20. They have since dropped to 14 cents." So when did Peterffy start buying? "I started to buy the stock as it went down,” Peterffy, chief executive officer of Greenwich, Connecticut-based Interactive Brokers, said today in a phone interview. He said he still owns the shares. “You win a few, you lose a few." We wonder if David Sokol shares the same sentiment.

Self explanatory.

Some much needed clarity from the people who run Europe's printers. And, just as in the case of Credit Suisse, Goldman is desperately pushing for Italy to avoid precisely the outcome that Berlusconi has said is coming, namely early elections: "These could be held in mid-January at the earliest, although they would most likely be postponed until the Spring amid market turmoil. This would represent the worst scenario for markets, in our view. Since President Napolitano is aware of this, he will probably try to resist dissolving Parliament at this juncture. Also, most centrist parties would want to change the electoral law before a new vote takes place. All these scenarios will take some time to play out, a couple of weeks at least. In the meantime, the higher priced Italian government bonds will continue to be sold, as gradually higher margin requirements are applied. On our central case, intermediate to long-end bonds should continue to be supported relative to AAA-rated securities by the ECB."

That PrimeX, or the index based on jumbo prime mortgages formerly considered ironclad and trading just around par, recently had some "volatile" times, is no secret. Last month's collapse in the PrimeX has been well documented on these pages, following a Fitch report that the prevailing underwater equity accepted number of underwater mortgages, a sacrosanct number at about 28-29% "just because", may be too low. Yet according to a note by real estate expert Mark Hanson, referenced by CNBC's Diana Olick, the truth of the matter is that, if one were to truly factor all implicit equity reductions, the number of underwater houses is...half. Expect this to proceed like a shockwave in the PrimeX space once the market comprehends what this means, with the usual 3-6 day delay.

Well that rumor lastest all of 30 minutes:

• BERLUSCONI: `ONLY POSSIBILITY' IS EARLY ELECTIONS -Bloomberg
• BERLUSCONI: PRESIDENT WILL DECIDE HOW TO RESOLVE CRISIS -Bloomberg
• ITALY'S BERLUSCONI SAYS IMPORTANT TO ACT IN COUNTRY'S INTEREST -Bloomberg

In other news, G-Pap is still Greek PM. But any minute now. Aaaaaaany minute... And as a reminder, the worst case scenario was earlier determined by Credit Suisse to be the worst possible outcome of the Italian chaos.

UPDATE: While the on-the-run 2y yield did trade above the 10Y yield on 9/26 (2s10s inverted), Bloomberg's generic 2Y CNY yield index has not updated in three weeks meaning Mr. Darda's analysis is based upon faulty information. We do not ethat since late September's inversion, however, the curve has begun to steepen - which fits with the cycle turn analysis he discusses.

As we have heard a million times on hundreds of business media outlets, the US 'cannot' be in recession because the yield curve has not inverted. Well, unfortunately for the savior-of-the-universe Chinese economy, their yield curve (the 2s-10s differential) has just inverted for the first time -  suggesting, as per Mike Darda of MKM, the Chinese economy is “set to slow rather sharply” and that has “negative implications” for commodities tied to industrial growth. Following on from our discussion of the 1tn RMB deposit infusion bailout, Darda also points out (via Bloomberg) the 8 months-in-a-row of OECD Leading index drops, weakness in the China PMI sub-indices, and the fragility of the shadow banking system via cracks in the real estate market and notes, with a wonderfully indignant note on CB success: "It is worth remembering that the Fed has engineered only one soft landing in six decades of post-war monetary policy-making (1995)". Further to these concerns, the FT reports HSBC's CEO's concerns over the potential for an Asia credit crunch. Paging Dr. Copper?

Surely this means all Italian labor unions, which are at the heart of this whole fiasco, will now gladly unravel and Italian debt will be promptly rolled. All $400+ billion of it in the next 12 months.

Greece is about to get an installment of 8 billion Euro. Greece is running a primary deficit of about 6 billion Euro (as best as I can figure out).  So that is 1.5 billion per quarter.  So about 19 cents of every Euro of bailout money makes it way to fund Greece's current overspending. About 23 cents goes to Greek institutions, though at this point, all of that is held by the ECB, so it is not fully benefiting Greece. 18 cents are going to the ECB directly and 40 cents are going to banks and insurance companies outside of Greece.  So at least 58 cents of every bailout Euro is going outside of Greece, and depending on how you treat the repo agreements, that number could easily be 70 cents. So yes, Greece is getting a bailout, but you can see why Merkozy got so scared at the idea of a referendum.

While we are looking for the full IAEA report blasting Iran and specifically its nuclear program, claiming that Iran carried out work relevant for developing nuclear arms according to a UN report citing 'credible' info, as well as having information of activities in Iran specific to nuclear weapons, we already know what Iran's response is to any potential 'provocations' from Israel. To wit: "We'll show you 'hell'" UPI explains: "Israel will learn the true meaning of "hell" if it decides a military strike against Iran is worth the risk, an Iranian national security official said. Israeli Prime Minister Binyamin Netanyahu is said to have been reviewing strike plans against Iran's nuclear infrastructure as the International Atomic Energy Agency expressed concerns about Tehran's nuclear ambitions. Iranian officials have said any attack on its nuclear infrastructure would be suicidal." And the soundbites keep getting better: "If a military challenge is started against Iran in the region, the Zionist regime will definitely be faced with a hell," Javad Jahangirzadeh, a lawmaker on Iran's national security commission, told the semiofficial Fars News Agency." Israeli Defense Minister Ehud Barak, in a Tuesday interview with Israel Radio, said Israel doesn't want war. If dragged into conflict, he said, the casualties would be low. "Israel is the strongest country in the region and it will stay that way," he added." And while a few weeks or even days ago, the outcome of this event would have been easily predictable, following the just announced "microphone" gaffe involving Sarkozy, Obama and Netanyahu, suddenly the odds are far more interesting. Regardless, at this point, aside from concluding that Keynesians everywhere must be rejoicing at the imminent GDP boost driven by the military-industrial complex, we can also venture to gamble: short glass manufacturers. In a few months there may be a natural glut.