Archive - Jan 2011 - Story

Personal spending and income, Chicago purchasing managers, and the Dallas Fed index…. And then the traditional 11am POMO of course- must monetize those bonds.

The most predictable, (and certainly worthless: see Mark Zandi) entity in the world has gone ahead and done precisely what Zero Hedge said 24 hours ago it would. Moody's has just downgraded Egypt's bond rating from Ba1 to Ba2, with the outlook changed from stable to negative. The move which was as a surprise to idiots everywhere comes as "Moody's notes that Egypt suffers from deep-seated political and socio-economic challenges. These include a chronic high rate of unemployment, elevated inflation and widespread poverty. These, together with a desire for political change, have fueled popular frustrations." And as we predicted yesterday, Egypt CDS continues to slide ever higher, pushing around 460 on the offer side, in those rare occasions it is actually offered.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 31/01/11

A week after Zero Hedge first speculated what may happen to oil prices should the Suez Canal be shut down, Goldman arrives on the scene... And as expected, to Goldman it is all (mostly) priced in - the risk of contagion to Saudi is zero. After all, rich people never revolt... And things must always evolve according to what only Goldman Sachs has foreseen.

With all the hoopla over Egypt some have forgotten that this is merely a geopolitical event (one of those that absolutely nobody, with a few exceptions, was talking about less a month ago, so in many ways this is a mainstream media black swan which once again exposes the entire punditry for the pseudo-sophist hacks they are), and that the actual mines embedded within the financial system continue to float just below the surface. Below we present the five key fat tail concerns that keep SocGen strategist Dylan Grice up at night, which happen to be: i) long-term deflation, ii) a bond market blow-up, iii) a Chinese hard-landing, iv) an inflation pick-up, and v) an Emerging Markets bubble. Far more importantly, Grice provides the most comprehensive basket of trades to put on as a hedge against all five of these, while also pocketing a premium associated with simple market beta in a world in which the Central Banks continue to successfully defy gravity and economic cycles. For all those who continue to trade as brainless lemmings, seeking comfort in numbers, no matter how wrong the "numbers" of the groupthink herd are, we urge you to establish at least some of the recommended trades in advance of what will inevitably be a greater crash than anything the markets experienced during the depths of the 2008 near-cataclysm.

Complete market commentary of Friday's shocking events.

And so the long anticipated incursion by the PBOC, whose holdings of gold are behind even those of GLD, begins. Bloomberg has just reported, that "China central bank adviser Xia Bin said the country should increase its gold and silver reserves, the Economic Information Daily reported today, citing an interview with Xia." But how can this be: after all China has trillions in USD-denominated reserves, and any indication that it believes these are based on a currency that may actually be impaired will be an act of Mutual Assured Destruction. Well, yes and no. China is merely taking the next defection step in what is already failed Nash equilibrium. The first? The Fed's gross monetization of all US debt. The observant ones will realize that Chinese holdings in November were lower than they were in June of 2009! Who has picked up the slack? Why the Federal Reserve of course. Simply said, the Fed is explicitly making China's creditor status increasingly less relevant. Zero Hedge has long been wondering how much longer China will take this direct defection in what previously had been a stable equilibrium balance in which China provides the US vendor financing, while the US imports China's crap. As the Criminal Reserve is increasingly taking away the leverage that China used to enjoy as Creditor numero uno, it is only a matter of time before China fires back. And it may have just done that.

By now everyone knows that over the past few days, Egypt CDS has taken a hard right angle and has doubled from 200 bps to well over 400 bps (making it just slightly riskier than Illinois). And tomorrow Egypt risk will add another 80 or so basis points. No surprise there. What may surprise some, however, is that just like Egypt, Saudi CDS has also gone vertical. And with momentum chasers finally realizing that there is a direction other than tighter, expect the contagion vigilantes to do some serious damage here. If history is any precedent, there is a long way to go.

When a country, among other shortcomings, relinquishes its financial system and its population's well-being to the pursuit of 'good deals', there is going to be substantial fallout. The citizens protesting in the streets of Greece, England, Tunisia, Egypt and anywhere else, may be revolting on a national basis against individual leaderships that have shafted them, but they have a common bond; they are revolting against a world besotted with benefiting the powerful and the deal-makers at the expense of ordinary people.

Any epistle whose purpose is to bash the Fed, and which begins with the following British-accented sentence, that makes even the Zero Hedge 'run on' filter cower in fear, is worth at least 10 re-reads. "In the dominant Jacobin mindset which informs our present day society — a pervasive pathology sometimes narcissistically referred to as 'Cultural Marxism' by those half-educated former Hair-bears, now elevated to power by the mere passage of years, who fondly imagine that their fumbling sexual experiences and eager consumption of hallucinogenic substances of forty years ago constituted some sort of new dawn for Mankind — the individual — in contrast to the shining, secular deity of the State - is generally seen as feckless, shifty, grasping and unethical and hence is regarded as a dehumanized lab rat fit only to be the subject of a series of ill-considered social experiments notionally aimed at his 'improvement'." Pure poetry. Sean Corrigan's latest Material Evidence is a must read.

The one country landlocked between Tunisia and Egypt has so far been oddly silent. Not so much any more. Al Jazeera reports that the Libyan government has imposed a state of emergency for "fear of demonstrations and rallies" comparable to those in Tunisia and Egypt. And ranked 17 in the world for oil production (and 9th in proven reserves), this is one that crude HFT algos may want to keep an eye on.

Confused by all the contradictions and outright lies that came out of Hillary Clinton's mouth when discussing Egypt earlier? Have no fear: here is a real-time propaganda filter that will make everything perfectly clear in words even the Egyptian Idol cognoscenti can appreciate.

Citi's head of FX, Steven Englander, has some contrarian observations on the fate of the US dollar, which a more nuanced read may even indicate a slightly conspiratorial bent, namely that in order to cut the surging global inflation dead in its tracks (alas, too late for the regimes of Tunisia and Egypt), the dollar will have to surge even more. To wit: "If the world’s inflation problem is primarily derived from rising commodity and food prices, it is very likely that a stronger USD will help mitigate this inflation quickly and efficiently. There is a well established relationship between USD strength and weaker commodity prices." Of course, with the Printing Dutchman at the helm, what hope is there for a sustainable strong USD thesis: "The problem is that there does not appear to be a market driver for USD strength." Yet this could very well be the contrarian trade going forward as the G-20 looks aghast at events in Africa and realizes that the "last case" scenario just seems that much more credible. If this happens and there a concerted effort to reincarnate the dollar, look for the EURUSD to plunge, and all USDXXX pairs to surge in the following days, especially as the carry funding shorts realize that they will once again, just like in late 2008, be the sacrificial lambs at the altar of "Kicking the can down the road one last time"-dom. Quote Englander: "During a similar high commodity price episode in mid-2008, we saw some evidence of high reserves growth, which is unusual when the private sector is buying dollars. Moreover, then as now, market macro investor positions appeared to be long commodities. While it would be unusual for reserve managers to buy USD for inflation stabilization reasons, as a quick solution to a major problem it may be more effective than most."

Sean Corrigan's weekly "Material Evidence" is always a must read. In his latest edition, the uber-eloquent Brit puts simplistically worded Fed bashing to shame with an anti-Fed manifesto masterpiece that is off the charts on the Flesch-Kincaid reading level. While we will post the full piece shortly, we wanted to bring attention to one particular chart which has not received any prominence in the past, namely the S&P adjusted for business revenues, which appears to have an 18 year periodicity, and whose mean reversion implies that we are only half way through the correction phase. In other words when all is said and done, when the Fed's POMO gun is finally out of bullets, Albert Edwards' and Nic Lenoir's S&P targets of ~400 will be spot on.

So far all attempts by the flailing Mubarak regime to stem the revolution and return life to normal in Egypt have failed, and at this point the fate of the president appears to be sealed, with its final resolution just a matter of time. The one key trade off to delaying the inevitable, however, is that the US, and specifically its Egypt-centered policies, which had far has been largely absent from the rioters' rhetoric, is starting to appear more and more often as a subject of discussion.... and not in a flattering way. Opposition leader Mohammed ElBaradei, who has just joined protesters in Cairo's main Tahrir Square, is expected to have a major speech in which he may or may not focus public anger on duplicitous US policies, which at that point will crystallize the Obama administration's hypocrisy in the eyes of Egypt. This will certainly not make progressing US national interests in the region any easier. And if ElBaradei's earlier remarks are any indication, the US is about to become very hated in Egypt. Per Agence France Presse: "“The American government cannot ask the Egyptian people to believe that a dictator who has been in power for 30 years will be the one to implement democracy,” ElBaradei told US network CBS from Cairo. “You are losing credibility by the day. On one hand you’re talking about democracy, rule of law and human rights, and on the other hand you’re lending still your support to a dictator that continues to oppress his people,” added ElBaradei, the former head of the UN’s International Atomic Energy Agency. His recommendations to President Barack Obama’s administration were blunt: “You have to stop the life support to the dictator and root with the people." On the other hand, with the US favorability rating in Egypt at an all time low of 17% in 2010, there just may not be much room to fall for the way the US is perceived by the broader Egyptian population.