Archive - Jan 2011 - Story

We read last night's news that the massively underfunded Illinois pension fund is now the subject of an SEC inquiry with little surprise: "The Securities and Exchange Commission has launched an inquiry into public statements by Illinois officials about the state's underfunded pension fund, the state's governor's office confirmed Monday night. The Illinois inquiry is focused on public statements concerning an overhaul measure passed in 2010 meant to help shore up the retirement system, said the governor's spokeswoman, Kelly Kraft." The issue at hand is nothing short of complete accounting fraud: "An issue being examined is whether Illinois was taking future savings and treating them as current reductions in the cost of the pension fund, said Robert Kurtter, a managing director in the public finance division at Moody's Investors Service, who said his firm spoke with Illinois officials about the inquiry. One of the measures that Illinois took to save costs was to raise the retirement age for newly hired Illinois workers." To be sure if proven, which the porn freaks at the SEC will never be able to do, unless the pension fund has animate midget porn gifs on every excel spreadheet, this only means that absolutely nobody will go to jail for massively misrepresenting the truth. What we are far more interested in is whether the Illinois Teachers Retriement System, which as readers will recall took offense to us saying they are insolvent last summer, will be the next to follow in being charged with gross fiduciary breach and alleged accounting fraud. Now that development would most certainly not surprise us.

• Who knew: Robert Rubin is a Keynesian - "America must cut its deficit but not in haste" (FT)
• Uncertainty Over Economy Clouds Obama Speech (NYT)
• Stimulus Improves US Outlook, Says IMF (FT)
• Fed Likely to Press On With QE Even as Business Lending Rises (BusinessWeek)
• EFSF first bond issue - 43 Billion Euros of Orders From 500 Investors (Asymptotix, WSJ)
• Madrid Tells Banks to Boost Core Capital (FT), causing Spanish spread weakness
• Japan's central bank keeps lending rate, lifts growth forecast (Xinhua)
• India average inflation during 2010-11 to jump up to 9 per cent (Economic Times)
• KKR Gets Surprise Help in Fundraising From Bernanke, Trichet (BusinessWeek, h/t 5U)
• U.K. Economy Contracts in Fourth Quarter (WSJ)

When we reported three days ago that 59 outbound shipments of gold were intercepted at the Egypt airport, we predicted that the country's oligarchs were proactively preparing precisely for what they knew is coming imminently. It has arrived. From Al-Jazeera: "Hundreds of protesters have begun to take to the streets in Cairo,
the Egyptian capital, chanting slogans against the police, the interior
minister and the government, in scenes that the capital has not seen
since the 1970s, Al Jazeera's correspondent reported. Downtown Cairo has come to a standstill, and protesters are now
marching towards the headquarters of the ruling National Democracy
Party. "It is unprecedented for security forces to let people march like
this without trying to stop them," Al Jazeera's Rawya Rageh reported
from the site of the protest."

Markets sluggish this AM heading into the start of the data for the week which features Case/Shiller, Consumer Confidence, and Richmond Fed. Expectations for all seem muted except for Consumer Confidence (54E, 52.5 prior). FOMC the focus tomorrow here, while the myriad of global stories will likely take the stage today.

The UK department of economic "truth, statistics and everything else" sure has learned a thing or two from America. Such as blaming snow for appearing in December. As BLSy as it may sound, it is precisely this that the surprising collapse of the UK economy in Q4 has been blamed on. Per Bloomberg: "Britain’s economy unexpectedly
shrank the most in more than a year in the fourth quarter as
construction slumped and the coldest December in a century
hampered services and retailing." What? They don't have a seasonal adjustment for "cold" winters? How quaint. "Gross domestic product fell 0.5 percent after increasing 0.7 percent in the previous quarter, the Office for National Statistics said in London today. Growth would have been “flattish” without the impact of the weather, it said. The median forecast in a Bloomberg News survey of 33 economists was for an increase of 0.5 percent." And even more shockingly, the GBP fell after the market was shocked, shocked, that the insolvent European continent may just be a little ahead of itself with expectations of interest rate hikes: "The pound dropped after the report, which shows the U.K. recovery faded even before Prime Minister David Cameron’s government increased sales tax to 20 percent this month, which may damp consumer demand this year. The data may reinforce calls for the Bank of England to hold off increasing its key interest rate to curb inflation." But how will the UK halt what Posen last week called a "temporary surge" in inflation. Does this actually mean that, gasp, surging inflation, temporary or otherwise, is occurring even in very developed countries that suddenly appear to have massive economic slack. But... didn't the.... Chairman.... no, it can't be. He was 100% confident.

RANsquawk European Morning Briefing - Stocks, Bonds, FX – 25/01/11

As we explained in our previous article Seeking an interest rate solution, real interest rates are negative and nominal short term interest rates are near zero. That is not healthy. What is a healthy interest rate? My view is that short term rates should be above 1% to make them positive and closer to 2%. It has caused consumer credit to contract. Of course, banks would argue that a healthy spread is the key to a healthy banking sector. Raising the rate would likely flatten the yield curve. What gives?

Risk was back on to start the week today, with $25b in Fed liquidity helping the campaign. Though safe havens saw some inflows early in the day after reports of a terrorist bombing at Moscow’s Domodedovo Airport (killing 35 and reportedly linked to Caucasus separatists), the dip was bought with semiconductors and alternative energy stocks leading the way.

In what is merely the latest act in the neverending play of fraud and corruption, the bipartisan panel appointed by Congress to investigate the financial crisis has concluded that several financial industry figures appear to have broken the law and has referred multiple cases to state or federal authorities for potential prosecution reports the Huffington Post. "The sources, who spoke on condition they not be named, declined to identify the people implicated or the names of their institutions. But they characterized the panel's decision to make referrals to prosecutors as a significant escalation in the government's response to the financial crisis." Well, it would be so easy to believe that this is not merely the latest political attempt at cowardly subterfuge before their Wall Street overlords by the corrupt Congressional puppets if this same ploy had worked out a little better the last time, oh, precisely zero bankers were thrown in jail. That said, the semi-informed public who sees massive fraud and endless lies now on a daily basis will get more disclosure on Thursday when the "final report" is expected to be released. Said semi-informed people will be shortly disappointed when nothing at all comes out of this. As for the 99% of the less than semi-informed US population, well, they couldn't care less.

November 2008: the situation was dire. But was it ever really an apocalypse? We were all conditioned to think that without government intervention a waking hellscape of crappiness awaited. And it continues. Over and over, we are told of being just a step away from US government default if someone dares fiscal sensibility. Or some variation of bank implosion catastrophe, or everyone going into foreclosure immediately, or something else equally horrible. These outcomes are debatable, and they deserve to be debated. Everything that happens in the future is debatable. What is not debatable is that we continue to be threatened with imminent doom if politicos don’t get what they want. I’m not a believer in global conspiracy theories, much less a perpetual ruling class, but I am a believer that democracies are absolutely awash with propaganda, veiled threats, and fear-mongering. Why? Fear is where the power is.

Russia has just announced it would proceed with price caps on a variety of foodstuffs, from buckwheat, to potatoes, assorted fruits and vegetables and all other commodities it deems "socially important" accoding to Russian newspaper gazeta.ru. And so the big margin crunch goes up several orders of magnitude, as companies, desperate to pass through surging input costs, but prohibited from raising selling prices, are forced to eliminate any and all overhead, most certainly including such trivialities as labor, in order to stay in business. More importantly, experts now predict that full year inflation in Russia will hit double digits. Just in the first 17 days of January, inflation hit 1.4%, or 9% annualized (according to gazeta... our calculation indicates a notably higher number but readers get the idea). Luckily, Russia does realize just how futile this task of price controls is: "as soon as we introduce price controls, once a deficit, the product disappears from the market, followed by an even higher rise in prices on the shadow, not covered by official supervision, market." And so a vicious circle in which high prices beget even higher prices begins. But don't worry - this could never happen in the US: see Americans only eat gold and their iPods. There is therefore massive slack in the food vertical, and, furthermore, as Steve Liesman explains so well today, a 100% rise in the price of wheat would only translate to a 10% hike in the price of bread. What happens to the other 90% (which incidentally annihilates the producer's margin but Steve didn't get to page two in that particular Inflation for Dummies book), is apparently unclear to the CNBC head economist.

It seems that not a day passes by without some major dealer running out of a precious metal in inventory. Last Thursday when we presented the most recent inventory at Scotia Mocatta (alongside the ongoing firesale at the US Mint where incidentally total silver sales in January are now at a fresh all time record 4,724,000 ounces), one of the ten market-making members of the London Bullion Market Association and one of only 5 banks to participate in the London gold fixing, we indicated that of all silver bar related products, the bank only had the 1kg Valcambi silver bar, that was listed 3 weeks ago, in stock. As of today, this object is no longer in inventory even at the unit price of CAD$980.11. Reader S. presents the two logical alternative for what is happening: "This can only conclude two things: 1. They purchased a limited amount (due to low supplies) and was sold off quickly. 2. They purchased a large amount and was sold off due to major purchases." Alternatively, the bank now has the 100 oz silver bar back in stock. We will keep tabs on how long before this also becomes "sold out." Our question is whether the ongoing shortage at most dealers, despite the so-called drubbing in PM prices, is nothing but definitive evidence that just like in stocks, precious metal investors are merely using every drop in prices as nothing more than a chance to "buy the fucking (fisical) dip"?

The benchmark for documented mortgage originators' lies is getting higher and higher. First it was the Allstate lawsuit, finding massive fraud in most Countrywide/Bank of America loans, then it was quantified at 70% after Wells Fargo sued JPM's EMC division, now it is all the way up to 91% after a just released lawsuit by the bulk of the world's biggest insurance companies has been made public, in a fresh lawsuit again Bank of America/Countrywide over "Massive mortgage fraud." 

The key catalyst for Goldman's suddenly cautious view on gold (which still has a $1,690 price target): the end of QE2 in June 2011. So, presumably, when QE 3 is announced in May in order to allow the continued monetization of $4 trillion in debt issuance over the next 2 years, that should be very bullish for gold, yes? Irrelevant: Goldman has become just one more glorified Jim Cramer: pumping anything that is green, and dumping anything in which there is even a modest (CME margin hike driven) correction.

Little commentary needed here, although why anyone would be on Yahoo is beyond us. If one can afford anti-aircraft artillery one would assume that at least a Bloomberg terminal should be up and running... which is probably the same reason why the Fed's POMO desk is also Bloomberg-less.