Archive - Jan 2011 - Story

Ta-tata-daaaaa: Captain Goldmanerica is here to save the day. Can't have 190 hedge funds checking out from hotel Applecornia, now can we.

Two months ago, there were a variety of campaigns launched to get the mass public to demand from their bank an original, wet ink signature note for their mortgage. Many of these fizzled out. That said, we would like to present one instance of Bank of America responding negatively to just such a demand by a Zero Hedge reader, in which the bank's Home Loans unit outright refuses to provide the requested information hiding behind a lack of affirmative responsibility. Specifically, the response from the Qualified Written Request Group notes: "you cite no legal authority that supports your claim that you are entitled to view the original Note, and we are not aware of the existence of any such authority. Accordingly BAC Home Loans respectfully declines this request. If you wish to pursue this matter further, please provide such legal authority." In other words, banks continue to hide behind a legal defense that ultimately involves the jurisdiction of various (if not all) state attorneys general. In the meantime, odds are (99%) that the bank has absolutely no copy of the original and should the reader proceed to default (in a judicial state), the bank will likely ultimately be forced to give up its claim on the mortgage. And one wonders why the TBTF banks (especially BofA, Wells and JPM) are doing all they can to promptly bring the AGs under their fold (regardless of "cost") before all hell breaks loose should the required "legal authority" be provided through case law.

About two weeks ago we brought attention to the curious case of surging Chinese SHIBOR. Today we update on the short and longof it (literally). Indeed since the first post, the short end has dramatically tightened. However, just as importantly, the long-end continues to drift wider. As the chart below demonstrates the 1 Week SHIBOR has plunges from north of 6% to the mid 2% range in about ten days. However, both the 1 and 3-Month rates continue to be sticky and are well above recent averages. This will certainly portend continued liquidity scarcity in the months ahead. And speaking of, interest rates, we would like to bring attention to the seemingly paradoxical and contradictory action being taken by the PBoC, which on one hand has been hiking the Reserve Ratio Requirement (liquidity withdrawing) while concurrently adding liquidity via net liquidity injections through Open Market Operations. As Morgan Stanley's Steven Zhang suggests: "The PBOC’s purpose appears to be to substitute RRR hikes for PBoC bill issuance and repos with a view to enhancing the effectiveness while keeping the cost of liquidity management low." Yet even so, Zhang confirms that the end result will be one of incremental tightening, no matter how much the PBoC wants to moderate liquidity extraction. "Even if the spreads between reference and interbank spot yields were to narrow to acceptable levels, we don’t believe that the scale of open market operations would be restored to normal levels. In this tightening cycle, liquidity management will largely become a one-way operation - withdrawal." In other words, look for more pain in the Shanghai Composite over the coming weeks as mainland investors realize that the inflation party is, indeed, coming to an end (and that to Bernanke's chagrin, all attempts at exporting inflation to China will henceforth rebound with a magnified impact).

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 17/01/11

Per the just released OpenSecrets list of top 25 wealthiest politicians in America, there are 12 republicans and 12 democrats (and Hillary, whatever she is). While we applaud the diversity among the country's richest "representatives", we can't help but wonder if these people actually "represent" the common man, or the man (such as themselves) having a minimal average net worth of $28 million...

The PBOC is worried about asset priced inflation so they’ve attempted to reign in the credit tsunami they initiated in response to the 2008 economic crises. The outside perception is that if the Chinese government orders banks to lend, they lend. So if that’s the case, if the PBOC orders banks to reign in lending out of fear of overheating and future non performing loans, the banks should stop lending. For the past few years, the PBOC has established official loan quotas on banks, but the banks have exceeded the official thresholds each year. Unofficially, the problem is much worse, as banks have hidden another 30% or so of their loans in off balance sheet transactions, according to Fitch. Recently, the PBOC officially dropped the loan quota and decided to focus on the reserve ratio. The loan quotas failed and were not being obeyed, so issuing guidelines that are inevitably violated would merely highlight PBOC weakness

It's 3 pm on a holiday. It means it is time for another Op-Ed by Mohamed El-Erian. Tomorrow: the same. Day after: the same. Etc.

Contagion may be last year's word (this year's we are fairly confident will be 'stagflation' but we must give the mainstream media 3-6 months to figure this out), but it is never too late to visualize just how tenuous and perilous the supernational credit linkages between the various countries, especially in Europe are. Below we present a very useful interactive chart by the WaPo demonstrating the exposure linkages not only through banking and loans, but, just as importantly, and often forgotten, through trade. From WaPo: "Contagion also has much to do with actual economic links among countries. Researchers have identified financial ties in particular as responsible for the “fast and furious” spread of crisis from one country to another. Trading activity between countries, however, can propagate economic sickness more slowly." The interactive chart attached summarizes both key aspects of globalized interconnectedness.

One of the bigger semi-bubbles over the past several years has been the "solar" space: an industry that has long held promise as an alternative replacement to oil yet which continues to struggle with low efficiencies and, thus, needs ongoing government subsidies (a premise which will likely be re-evaluated should crude surge into the triple digit area). Unfortunately, in a time of global austerity, which is slowly spreading everywhere but the US, said subsidies for solar companies (and thus cash flow bleeding stocks) may soon be at an end. Dow Jones reports that Germany: one of the bigger subsidizers of a fledgling solar industry, is set to cut solar subsidies by up to 12%, 6 months ahead of schedule.

Two weeks after we presented Niall Ferguson's video lecture - "Empires On The Verge Of Chaos" to tremendous reader response and almost 30,000 views, we follow up with another must watch video presentation, this time highlighting the intellectual rigor of Ferguson, David Gergen and Mort Zuckerman. The topic once again is the Financial Crisis, and specifically how, why and whether it will lead to America's decline. Of particular note is Ferguson's spot on characterization of the primary deficiency in the so-called brains of economists, namely that they see patterns, equilibria and stable systems where there are absolutely none: i.e., in the complex (as in Lorenzian) world of economics: "Complex systems look like they are in equilibrium, but they are not: they are constantly adapting, highly decentralized, interdependent systems and this process of adaptation can continue for quite a long time. And you think to yourself when you look at it, that's in a wonderful equilibrium. That's how we think about the economy. That is how economists teach economics. They talk about it in terms of equilibrium. The bad news is that in fact we inhabit a complex system that has virtually nothing to do with the neoclassical model that you are taught in Econ 101. And that's why the economists failed to predict the financial crisis... For me American power if you generalize beyond the realm of finance through the geopolitical system is a perfect example of a highly complex system which looks like it is in equilibrium but like all the great empires of the past is quite close to the edge of chaos. And our nightmare scenario should be that something happens to us like happened to the Soviet Union... It suddenly just falls apart. And I think the trigger, the catalyst if you want to switch to chaos theory the butterfly in the tropical rainforest that flaps its wings and posits the distant thunderstorm is going to be the credibility of fiscal policy. That just seems to me like the obvious place where things can turn nasty, and they turn nasty with amazing speed."

Tim Staermose, one of our Asia partners, was in Hong Kong last week, and he conducted his normal rounds of the various banks in the Central business district that sell gold bullion coins over the counter to walk-in customers such as Hang Seng Bank, Bank of China, and Wing Lung Bank. At Hang Seng Bank, Canadian 1 Oz Maple Leaf coins -- in pure, 24 karat gold -- were available for cash purchase in Hong Kong dollars at just 0.5% above the prevailing spot price of gold. This is dirt-cheap... or as they say here in Chile, 'precio de huevos', and it certainly presents an interesting arbitrage opportunity. Depending on your objectives, however, there may be even better gold coin buys in Hong Kong at the moment. Over at the Bank of China, for example, the Chinese Panda coins were quoted at 4.9% above spot gold. Personally, I think the Panda is one of the most beautiful gold coins of all, and in North America they typically sell for much greater mark-ups above the spot price of gold than most other coins, often over 20%. In the UK it's even more.... This situation can be exploited to your advantage-- the difference between the buy price in Hong Kong and the sell price in North America is roughly $275 per 1-ounce coin.

Per the WSJ's Dennis Berman: "What a black eye for Lloyd & Co." Does this mean that not even Goldman is allowed to come up with innovative financial "schemes" any more? At least the SEC is spared the indignity of wristslapping its master. In other news first Apple, now Facebook... It is not too late for Sack-Frost to put up a provisional backstop POMO for tomorrow. The 45 minutes time slot starting at 1:15pm looks pretty vacant.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 17/01/11

And so with a slight delay, one by one the bears come out of hibernation. Today, SocGen's Albert Edwards is the first to remind us that no matter how high the Fed pushes stocks (as per Bernanke's now own admissions of the Fed's "third mandate"), it means exactly nothing for the economy, and the actual cash flow drivers that in a non-bizarro world validate any bull market, not the straight line bear market rally that has continued to defy gravity and reality for two years now. The catalyst as per Edwards, is once again the recurring threat of a demographic crunch, phrased in a way that only the SocGen strategist can: "Our Ice Age thesis called for a long secular equity valuation bear
market, just like Japan. Most reject the comparison with Japan, especially with regard to the US having better demographics. Indeed I
felt that beyond the lost decade and secular bear market, the US outlook
was much more upbeat that Japan’s. But now, I am thinking I might have been too bullish....I haven’t really cracked this one but chatting this through with a number of people, I would suggest that although GDP growth may be more closely related to the absolute growth of the working population, asset price inflation may be more closely related to the proportion of workers in the general population. If that is the case, as the former baby-boomers start to retire this burgeoning cohort will tend to liquidate assets. This only exacerbates the secular bear market for property prices (which have already begun to decline again) as well as the equity market. This means that Bernanke for all his efforts may not be able to prevent the secular valuation bear market fully playing out until rock bottom valuations are reached." Oops.

On Friday we disclosed that major PM distributor, retailer and trading house BullionVault.com had run out of physical silver inventories in Germany (and possibly elsewhere) and was advising clients to seek the precious metal elsewhere. Today, we find that the UK joins Germany in what is now becoming the second round of the global silver shortage (the first one occuring in May 2010 when it was unclear just how the ECB would deal with insolvent PIIGS). Below is the warning by British BullionByPost notifying clients that the company currently has no silver bars in stock. Inventories are expected to be restocked later in February. In the meantime, as before, we urge customs agents to do a quick check of the cargo hold of all private jets (and time shares) registered to any banker making over $25 million. After all, surely the Tunisian president didn't come up with the idea to flee with 25% of Tunisia's gold entirely on his own.