Archive - Jan 2011 - Story

Several days ago we highlighted that wage inflation in China spreading after Shanghai announced it would hike minimum salaries by 10%. Today, through Global Times we learn that this is just the beginning. Or the continuation rather: it seems that 30 provinces had already hiked minimum wages in 2010: "By the end of 2010, 30 provincial-level regions had raised the standard for the minimum wage, with an average increase of 22.8 percent year-on-year., Yin Chengji, spokesman for the Ministry of Human Resources and Social Security (MHRSS), said Tuesday. According to him, 29 provinces have issued the guideline for the minimum wages, and the benchmark line grew about 2 percent. In Shanghai, the local minimum wage was the highest nationwide, totaling 1,120 yuan ($170.2) per month." And 2011 will be even worse: " Also, according to a China Business News (CBN) report Tuesday, in 2011, many areas would continue to raise the standard. A Xinhua News Agency report Wednesday revealed that northern Chinese city of Tianjin is considering raising the minimum working wage by 16 percent this year amid rising inflationary pressure and labor shortages." We are confident America's workers will be delighted to know that Bernanke's massively destructive monetary policies are finally resulting in higher salaries... In China. But wait: this also means US consumer purchasing power is about collapse as since very soon all imported Made in China trinkets are about to get far more expensive as already razor thin margined China producers scramble to raise costs to their primary export market.

Even Goldman is not buying the Fed's (and of course Steve Liesman's) religious and nonsensical belief that only the core CPI is relevant: "To us, the main surprise-and it is a small one-is that the FOMC continued to characterize core inflation as trending downward despite an uptick in the December CPI." We were more surprised that the Fed did not acknowledge its new role as the CIA for the QE generation, where with the push of a (printer) button, Bernanke can now incite revolutions.

There was a time when stocks would make massive moves in the post-FOMC minutes, when there were actually things called "traders" participating in this algorithmic joke of a matrix/market. Not anymore. Which is not saying there is no vol. As we have now long been claiming, the only vol left is in FX and commodities. Observe the reaction in the EURUSD. With 500 margin, someone just got totally wiped out.

Some of the observations in this snoozer: observations on the lack of unemployment improvement, on the less than sufficient household spending, but most notably, the Fed notes the increase in commodity prices, yet still believes longer-term inflation expectations are stable. Notable is the deletion of the $75 billion per month deletion of the monetization run-rate, no reason is given for the change in the runrate purchases. And with Hoenig gone, every voting Fed president is now a docile little lamb. Lastly, there is no discussion anywhere of the Fed's only (third) mandate: that of getting the Russell 2000 to 36,000 in one massive flash smash (see IBM yesterday).

The world gold council has released its quarterly comprehensive investment digest, as usual chock full of actual data, and not just anti-gold speculation based on myth. Probably most relevant are the core facts: "The gold price rose by 29% in 2010. By comparison the S&P Goldman Sachs Commodities Index (S&P GSCI) rose by 20%, the S&P 500 rose by 13%, the MSCI World ex US Index increased by 6% in US dollar terms, and the Barclays US Treasuries Aggregate Index rose only by 6% over the year." The main reason for the jump: excess supply of paper currency alternatives, and surging investor demand. And while the recent pull back has been primarily driven by the flawed assumption that the Fed will not monetize any more debt and pump the "Yucca Mountain" of excess reserves (it will), many forget that the demand is actually still there. The chart below confirm this, and provide some other observations on the gold market.

Today's $35 billion 5 Year auction closed at a 2.97 Bid to Cover, the second highest following the 3.06 in July of 2010. The bond priced 2 bps inside of the When Issued indicating a substantial interest. The high yield dropped marginally from the last auction which came at 2.041% (29.85% allotted at high), with Indirect Bidders taking down a substantial portion of the auction or 45.0% a major jump from the prior 35.6%. Still there was a little change in the hit rate on the Indirect bid which was 76.6% compared to 80% last time. Altogether just another auction: there are many more to go. We are confident primary dealers will monetize roughly 30% of their allocation at the first opportunity, which will be on the February 9 02/15/2015 – 07/31/2016 POMO.

We can debate whether Wall Street owes society a fiduciary duty. But the Vampire Squid Clause is an affront to the efficiencies and benefits of capitalism. As my boss told me on my first day as an investment banker, “Don’t get a big head. You’re nothing more than a glamorized used-car salesman.” In other words, all I did was repackage and sell interests in used businesses. Goldman is doing just that when they connect prospective investors with Facebook. Nothing more, nothing less.

You won't see these images on the TV. After all we haven't even anniversaried Waddell & Reed's sudden and dramatic selling of ES into a bidless market that caused the world's most "liquid" stock market to lose 1,000 points. In the meantime, what is going on in Egypt is promptly deteriorating. Our only question is: who's next?

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 26/01/11

By now everyone is aware that following tremendous pressure by the banker lobby, which knows too well the Ponzi jig will be immediately up if Quantitative Easing's TBTF Madoffs are forced to disclose the true value of their worthless assets (yes, true value comes from asset cash flow generation, not from diluting money), the FASB decided to stop its push for a return to MTM. From the WSJ: "Accounting rule makers, bowing to an intense lobbying campaign, took a key step Tuesday to reverse a controversial proposal that would have required banks to use market prices rather than cost in order to value the loans they hold on their balance sheets." Transparency? What moron would propose that in an economy that is so obviously healthy and surging. After all, the only way to validate a surging stock market, er, economic recovery, is through bullshit numbers pulled out of the ass. That way they can pretend to tell us the truth, we can pretend to believe them, and everyone will frontrun the Fed who pretends not to be buying stocks. And it would have been great if it ended there. Alas no. Following the announcement, none other than Bill Isaac, current Chairman of LECG, but far more importantly, former Chairman of the FDIC under Ronald Reagan decided to send out a gloating email to his entire address book explaining what a moral victory it is to kill the MTM monster that is the sole reason for the near collapse of capitalism in 2008, and how truly wonderful it is for everyone to live in perpetual lack of knowledge of what the true value of any company's assets really is. Unfortunately, this just goes to show what the existing, extremely bribed, leaders of the nation's most vital organizations really think.

First, Wal Mart's primary gimmick for masking inflation was confined to using smaller packages sold at the same price. Now, it has devolved to outright fraud and misrepresentation. Top global discount stores Wal-Mart and Carrefour have both been fined in China for "misleading pricing at some of their stores in the nation, as the government works to rein in rising prices for consumer goods." Presumably outright lies (and being caught) are the last bastion before even such ultra low price point retailers are finally forced to hike their prices. Bloomberg explains further: "Authorities in cities including Shanghai, Chongqing, and Kunming discovered incidents at local Wal-Mart and Carrefour outlets that included labeling on products with prices that didn’t match what shoppers were charged at payment, exaggeration of discounts and labeling that led to confusion about how much a product cost. The stores may be fined five times the revenue they earned using such methods, the National Development and Reform Commission said today on its website." Our only advice on this news: get a channel checker for rice prices in China...

The SIGTARP, Neil Barofsky, is currently testifying at the House Oversight and Government Reform Committee. Amusingly, during the Q&A, Carolyn Maloney just referenced the passage of Dow 12,000, which is supposed to indicate that the economy is healthy, instead of indicating (correctly) that every single asset class is now bid up by the Fed, but who cares about details. But anyway, Neil has nothing good to say about the Treasury and its handling of Bailouts, as well as its cause for the Foreclosure crisis. Worth a watch.

No surprise: the projected deficit just went up by another half a trillion: "For 2011, the Congressional Budget Office (CBO) projects that if current laws remain unchanged, the federal budget will show a deficit of close to $1.5 trillion, or 9.8 percent of GDP." This is up from $1.07 trillion: a very small margin of error there. But don't worry - like true Keynesians the CBO expects that future deficits will have no choice but to go down: "The deficits in CBO's baseline projections drop markedly over the next few years as a share of output and average 3.1 percent of GDP from 2014 to 2021. Those projections, however, are based on the assumption that tax and spending policies unfold as specified in current law. Consequently, they understate the budget deficits that would occur if many policies currently in place were continued, rather than allowed to expire as scheduled under current law." So between 2010's $1.3 trillion, 2011 $1.5 trillion, and 2012's revised $1.1 trillion, we have $3.9 trillion just in deficit costs to plug. And as Zero Hedge has repeatedly demonstrated the actual debt to be issued is usually about 33% higher than the deficit funding need, meaning that over the next 3 years the US will need to issue about $5 trillion in debt. Which means further debt monetization is guaranteed as foreign investors have now fully withdrawn and the Fed is all alone in gobbling up every dollar in gross issuance. QE3 is guaranteed and we are stunned that the market continues not to realize this.

Nic Lenoir throws down the gauntlet and takes on Goldman Sachs directly following their recent upgrade of the EURUSD target to 1.40: "Not that many layups or exciting trades in the G10 out there with equities in a slow melt up and the long end in Fixed Income stuck in a range for the last month. If you missed out on the sell-off in metals or did not have the UK GDP data ahead of the market don't despair just yet, we have a very interesting set-up to sell EURUSD here...We stand below the 61.8% of the sell-off since the November highs, the hourly divergence is staggering also. I strongly favor shorts here. Less convinced traders traders can wait for the break of the trend support which comes around 1.3640. Given the recent advance I think we should see a retracement back to at least 1.34 even if we are to utlimately advance further. I am bearish EUR as I don't believe this currency has a place in this world anymore, but even raging bulls should be cautious here."

PIMCO's Tony Crescenzi is out with his latest summary of US monetary conditions. Nothing revolutionary, just a good solid theoretical summary of what to look for in anticipation of the "massive monetary madness" turn. Crescenzi likens the trillion in excess reserves to a "Yucca Mountain" of toxic, hyperinflationary "nuclear waste" storage, and suggests the following approach for tracking the inflection point: "when banks begin to utilize their excess reserves to make new loans and create new money rather than store the reserves in “Yucca Mountain,” the case will then grow for the Fed to begin removing the reserves. This has not happened yet, but when the process begins it will be evident from the Fed’s weekly H.8 report on the assets and liabilities of commercial banks." None of this is new for Fed watchers. As usual what we enjoy the most are the historical anecdotes of hyperinflation, the same way in ten years, historians will put America in the same case study: "History is laden with failed attempts at creating new money to shed debt. Greek tyrant Dionysius of Syracuse, now Sicily, at around 400 B.C. resorted to coinage debasement when his fortunes declined. Germany, of course, debased its currency before World War II, leading to hyperinflation. More recently, Zimbabwe printed massive amounts of currency, also leading to hyperinflation – I purchased trillions of Zimbabwe dollars on eBay for a few U.S. dollars! Such are the ravages of excessive use of the printing press." Certainly worth the read.