Archive - Feb 16, 2011 - Story

The Federal Reserve's stated goal is to create modest inflation. Unfortunately they don't grasp the difference between speculative inflation and organic inflation. The Fed's official goals are to stabilize prices and maintain employment, and its de facto policy to achieve these lofty, high-minded goals is to divert huge sums of the national income to the insolvent banking sector. The Fed also seeks to bail out the insolvent debt machine by generating some nice solid inflation, to boost the impaired assets held by banks. In other words, the Fed is specifically seeking to create asset inflation, which will eventually enable the banks to appear marginally solvent as their real estate and other assets rise in value.

The two most prominent defenders of the Japan-inflation theme, Dylan Grice and Kyle Bass, have just gotten a key reinforcement:Goldman Sachs. Last night, Goldman released its much anticipated 6th trade, to its roster of top trades for 2011. It just happens to be a bet on Japanese inflation. Which, however, begs the question - is this one of those trades where Goldman is, naturally, on the other side and is selling Japan inflation to clients. If the performance of the Squid's Top 10 trades for 2010 is any indication, we would be very cautious, although the fundamentals presented previously by Grice and Bass certainly present a very convincing case for why Tokyo may soon have no choice but go schizo with money printing (all over again), only this time with the gusto previously exhibited only by such monetary madmen as von Havenstein, Gono, Mugabe and, naturally, von Bernankestein.

Once again China shows how it's done. Instead of continuing to issue it vastly manipulated national property price index, the Chinese statistics agency has simply decided to stop publishing this highly regarded (if completely irrelevant) metric. From the WSJ: "China's statistics agency said it will stop publishing the country's much-watched official index of national property prices." The reason: even armed with Moody's GIGO spreadsheets to "calculate" the data and provide "output", the country was unable to mask the surge in property prices, resulting in a build up of popular anger. Alas, this move which is nothing but an act of massive condescension, and is supposed to get unpleasant data "out of sight and out of mind", will achieve precisely the opposite, as one billion Chinese know too well just how rapidly surging Chinese inflation is first hand.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 16/02/11

Perhaps it is time for Doug Kass to reevaluate his "gold to triple digits" thesis?

This is not the $104 brent crude you are looking for. Ignore everything and just BTFWW3.

Two Iranian warships planned to sail through the Suez canal en route to Syria on Wednesday, Israel's foreign minister said, calling the move the latest "provocation" by Tehran and hinting at an Israeli response. "Tonight, two Iranian warships are meant to pass through the Suez Canal to the Mediterranean Sea and reach Syria, something that has not happened in many years," Foreign Minister Avigdor Lieberman said in a Jerusalem speech distributed by his office.

According to an executive of Industrial and Commercial Bank of China, the world's largest bank by market value, demand in China for
physical gold and gold-related investments is growing at an "explosive"
pace and its appetite for the yellow metal is poised to remain robust
amid inflation concerns, reports Reuters. In other words, what was previously repeatedly reported on Zero Hedge, and by the World Gold Council, is starting to be appreciated by everyone else. Yet in a market in which supply and demand are completely disconnected from price discovery thanks to global central planning, and courtesy of precious metal price suppression by JPM, China investors are able to accumulate gold and other non-dilutable metals at prices that no longer reflect surging global demand. And just like in the US, China is also starting to fall for physical substitute investments: "There is also frantic demand for non-physical gold investments. We issued 1 billion yuan worth of gold-price-linked term deposits in 2010, but we managed to sell the same amount over just a few days in January this year," Zhou said, adding that such deposits would easily exceed 5 billion yuan ($759 million) this year." Although in China, unlike in London, these deposits may actually have real coverage behind them.

In what can only be described as broadly market positive news (remember in bizarro world $200 oil is equivalent to 2,854 on the S&P), Jerusalem Post reports that the leader of Hezbollah Hassan Nasrallah is ready for another war with Israel and will "conquer the Galilee."  "I tell the fighters of the resistance that one day they might be asked to liberate the Galilee," Nasrallah said at a "Resistance Martyrs Day" ceremony. "The Israelis are afraid," Nasrallah said. "I want to assure you and tell the Israelis that they should be careful because the blood of Imad Mugniyeh will not go to waste." Presumably, Hezbollah has been closely following Israel's response to recent revolutions across the region, and likes what it sees: "The Hezbollah leader also discussed Israel's reactions to the protests across the Middle East, citing Defense Minister Ehud  Barak's assessment that the Middle East is "changing in front of our eyes." "This shows that Israel, which was confident in the past, is no longer," as it was, Nasrallah said." And following that profound piece of psychological insight, all we can say is BTFD, or we would, if Bernanke allowed dips any more.

Kermit was earlier on CNBC, killing microphones with 20,000Hz+ chirping, delivering a presentation on the merits of using rulers as a market extrapolation tool. And in case anyone is not convinced to whip our their own (ruler) and see just how the S&P is expected to hit 2,853 or some ballpark number by September 14, 2013 (precisely), here is how he got that number: you take the recent surge in the S&P driven by Bernanke's and the HFT's no volume melt up market levitation and apply a straight line to it. Any questions?

Last week, the CFO of Wells Fargo suddenly resigned for "personal reasons"  and was immediately replaced by CAO Tim Sloan. The departure was promptly buried, and everyone moved on. Not so fast, says Institutional Risk Analytics' Chris Whalen, who speculated that there is much more here than meets the eye. In a report released yesterday, Institutional Risk Analytics notes that "The departure of Atkins, we are led to believe, was not merely the result of personal issues, but reflects an ongoing internal dispute within WFC’s executive suite regarding the bank’s disclosure." As a result of this action, IRR went ahead with the following rating action: "We are downgrading from “Neutral” to “Negative” the outlook for the forward operating results for Wells Fargo & Co. (“WFC”/Q3 2010 Stress Rating: “B”/Outlook: “Negative”). Recent management changes, the poor quality of WFC disclosure and unresolved issues regarding on and off balance sheet exposures to the GSEs and private investors and/or insurers led to this downgrade, as discussed below."

There is a real sense of the “calm before the storm” in markets globally. Complacency reigns, despite signs that the sovereign debt crisis in Europe is deepening and that Japanese and US bond markets also look very vulnerable due to rising inflation, very large deficits and massive public debt. US Treasuries have been sold by some of the largest investors (both private and sovereign) in the world recently (see news). These include large creditor nations Russia and China but also PIMCO, the largest bond fund in the world. A global sovereign debt crisis is now quite possible. At the very least, we are likely to have a long period of rising interest rates which will depress economic growth. Contrary to some misguided commentary, rising interest rates will benefit gold as was seen when interest rates rose sharply in the 1970s. It was only towards the end of the interest rate tightening cycle in 1980, when interest rates were higher than inflation, that gold prices began to fall.

Earlier, we got the January PPI number telling us that things are still somewhat under control on the inflationary front. Perhaps. Perhaps not. Cotton begs to differ. In a month and a half, cotton has risen 44%: since there have been about 44 days in 2011, that means about a 1% a day. Since our first warning back in September, when the world's most worn commodity passed $1, cotton is up 95%. Annualized, the YTD move in cotton is 1,512%. We are confident clothing makers and retailers have extensive hedges in place to counteract a move that will send margins negative shortly unless there is an appropriate hedge offset, or corresponding jump in prices. Either way, BTFD.

The PPI including food and energy came at 0.8%, in line with expectations, and a decline from the previous 1.1%. Ex food and energy, Producer Prices jumped from 0.2% to 0.5%, and over 100% higher than expectations of 0.2%. Somehow, food PPI increased by just 0.3%, the lowest since August, and once again making one wonder which Department of Truth is more unbelievable: ours or the Chinese. From the release: The Producer Price Index for finished goods rose 0.8 percent in January, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. This advance followed increases of 0.9 percent in December and 0.7 percent in November and marks the seventh straight rise in finished goods prices. At the earlier stages of processing, prices received by manufacturers of intermediate goods moved up 1.1 percent, and the crude goods index rose 3.3 percent. On an unadjusted basis, prices for finished goods advanced 3.6 percent for the 12 months ended January 2011.... The index for finished consumer foods moved up 0.3 percent in January, the fifth consecutive monthly increase. A 13.7-percent advance in prices for fresh and dry vegetables was the main factor in the January rise in the finished consumer foods index...In January, the index for intermediate foods and feeds moved up 0.4 percent for the second consecutive month. A 2.7-percent rise in beef and veal prices accounted for about forty percent of the January increase in the intermediate foods index.

• From Prison, Madoff Says Banks ‘Had to Know’ of Fraud (NYT)
• Rising Chinese wages pose relocation risk (FT)
• Bahrain protesters take over key junction (FT)
• Fisher Says He May Prefer Treasury Sales as First Step for Fed Tightening (Bloomberg)
• Banks Push Home Buyers to Put Down More Cash (WSJ)
• Borders Files Bankruptcy as Expense Cuts Don't Stem Losses (Bloomberg)
• China's farm produce prices down last week (ChinaDaily) - weekly food prices are now Headline news
• Brazil Dismisses Plans to Pressure China on Yuan (WSJ)
• All You Need to Know About Why Things Fell Apart: Michael Lewis (Bloomberg)