Archive - Feb 18, 2011 - Story

A week ago, when we reported on a move by the Dutch central bank that ordered a pension fund to forcibly reduce its gold holdings, we speculated that "this latest gold confiscation equivalent event is most certainly coming to a banana republic near you." And while we got the Banana republic right, the event that we are about to describe is not necessarily identical. It is much worse. A bill proposed in the State of Washington (House Bill 1716), by representatives Asay, Hurst, Klippert, Pearson, and Miloscia, whose alleged purpose is to regulate secondhand gold dealers, seeks to capture "the name, date of birth, sex, height, weight, race, and address and telephone number of the person with whom the transaction is made" or said otherwise, of every purchaser of gold in the state of Washington. Furthermore, if passed, Bill 1716 will record "a complete description of the property pledged, bought, or consigned, including the brand name, serial number, model number or name, any initials or engraving, size, pattern, and color or stone or stones" and of course price. But the kicker: if a transaction is mode for an amount over $100, which means one tenth of an ounce of golds, also required will be a "signature, photo, and fingerprint of the person with whom the transaction is made." In other words, very soon Washington state will know more about you than you know about yourself, if you dare to buy any gold object worth more than a C-note. How this proposal is supposed to protect consumers against vulture gold dealers we don't quite get. Hopefully someone will explain it to us. We do, however, get how Americans will part with any and all privacy if they were to exchange fiat for physical. And in a police state like America, this will likely not be taken lightly, thereby killing the gold trade should the proposed Bill pass, and be adopted elsewhere.

Dear Ben: I don’t know if you read ZH. I bet you do. It would be disappointing to learn that you didn’t read some of the leading edge financial blogs. But if not, I bet at least one of your staffers does. If you’re any kind of manager, they won’t be afraid to bring this to your attention. Or perhaps Ron Paul’s staffers can shoot a copy over to your office. It’s a simple petition, really, in the traditional sense. I hope you will consider it. I understand the conclusion you came to in 2008 and early 2009 after a career spent studying the Great Depression, and I also understand that you feel justified in using whatever channels are available to you as proxy helicopters to drop cash. And it works. You’ve essentially manipulated the US and world markets as though they were remote control funny-cars, bent to whatever short-term route you desire, though we have yet to see what the second and third-order effects are. I mean, beyond food riots, destabilization of the Middle East, gas prices that American citizens won’t ultimately be able to afford, agriculture prices that will play havoc with corporate margins and retail food prices, the US dollar losing its reserve-currency status… things like that.

When we reported on last week's net spec contract position per the CFTC, we noted that speculators are expecting a roughly 50% hike in the price of rice based on comparable historical patterns. Updating for this week's data confirms that the upside price bets, which increased from 6,652 to 7,114 have just surged above the previous top hit in late 2009, of 6,773. Yet they are still just shy of the all time highs from February 2008 when they stood at 7,883. As the spec activity in rice predates major price moves rather efficiently, the continued bets on a price surge mean something is bound to snap. And with rice prices continuing to be rather sticky, considering the move in all other grains, we may be in for a very major break out in the coming week. Or not: as we have now learned the hard way, the banking cartel has way to keep commodity prices low, until explosive break outs confirm that one can only manipulate a price down for so long. With recent disclosures by Wikileaks that China had been imposing pressure on the Treasury and the US banking system to get what it wants, is it too surprising to assume that just as JPM has long been manipulating the price of silver, so Chinese interests in the US (remember - quid pro quo in a M.A.D. world) have been instructed to keep the price of Rough Rice as low for as long as possible.

Feeling like the entire world is on the verge of a global revolution? It's understandable. According to the attached interactive map, based on Google News data, in the past week, there have been 88 reported instances of protest somewhere in the world. How much of this is due to snow, and how much is due to Bernanke's increasingly more genocidal policies (has anyone done a tally of how many people have died in various riots, protests and revolutions since the beginning of the year - perhaps it is time) is unknown and irrelevant. All that matters is to buy (sorry, BTFD no longer works as there just are no Ds anymore).

When one thinks of South Korea one tends to think of stable government and an even more stable financial system. That may change very soon. According to JoongAng Daily, "more than a thousand customers lined up in front of the Busan II
Savings Bank located in Busan yesterday as soon as the nation’s
financial regulator announced a six-month business suspension of Busan
Savings Bank and its affiliate Daejeon Mutual Savings Bank." And not helping the mood was a bank employee who told the crowd that "You won’t be allowed to withdraw your money if you are just standing
there without a queue ticket number." Needless to say, most promptly got a number. Those that didn't tried to get their cash at an ATM. Unsuccessfully: "Those without a ticket then headed to the automated teller machines to
withdraw their money, but the machines quickly ran out of cash." And while the bank run at Busan was driven by capital inadequacy (shockingly Korea still hasn't figure out that the best way to mask liabilities surpassing assets is through pervasive fraud and suspension of all common sense accounting rules: they should promptly consult with Tim Geithner and Sheila Bair on the issue), it may promptly spread to the entire banking system. "Analysts expressed concerns that public panic about savings banks could spread.  “The
fears of depositors are mounting, which could lead to bank runs at a
number of savings banks, and it could eventually spread to the entire
savings bank industry,” said Jung Sung-tae, a researcher at LG Economic
Institute." But fear not, for the Korean government is one step ahead: "A way to secure capital [for savings banks] is to establish a joint
account holding fund amounting to 10 trillion won,” explained Kim
Seok-dong, FSC chairman. “This problem will be closely discussed with
the National Assembly.” Any day now Korea will end up with its own version of a taxpayer funded capital block hole, a/k/a in the US as the FDIC, and all problems will be promptly brushed under the rug. We can't wait until this brilliant idea comes to China (advised by Goldman Sachs no doubt). We just wonder if it will be before or after the Chinese bank run hits...

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 18/02/11

MERS is finished. A month after CEO and President R.K. Arnold was the first rat to jump the sinking fraudclosure enabling ship, the company's (and we use the term loosely - typically companies actually do stuff instead of just handing out $25 stamps) Corporate Secretary has Bill Hultman was just shown a purple slip, by being demoted to Senior Vice President. Although following earlier news that MERS is basically suspending its operations, we are surprised that anyone pretends there is even a business model behind the fraud. Per Bloomberg: "Merscorp Inc., operator of the electronic mortgage-registration system under criticism by consumer advocates amid a probe into lender foreclosure errors, replaced Bill Hultman as its corporate secretary."

Something interesting happened earlier today in the much underappreciated eurodollar market. As the Bloomberg chart below shows, just before noon, someone aggressively sold 100,000 contracts of the March 90 day Eurodollar future. Why is this notable? Because at a contract size of $1MM per, this is effectively a $100 billion notional bet that the eurodollar price will decline over the next month. What does this mean in simple terms is that since the eurodollar price is determined as the difference for par in 3 month Libor, someone just put a very sizable bet (probably one of the biggest single Euro$ blocks traded in recent months) that Libor is due for a jump. Now Libor, traditional economists will say, is a function of monetary policy and a reflection of the short-end of the curve (remember the now forgotten TED Spread?) which is driven almost exclusively by the Fed Funds rate. It is also driven by exogenous risks to the credit system such as what happened when Lehman blew up and Libor hit the stratosphere. In other words someone just put down up to $100 million in capital at risk ($82.5 million to be specific) that over the next month (contract expiration assuming no roll, is March 14, 2011) we will see one of two things: a bullish economic development: a rate hike (or expectations thereof) in the US, or to a lesser extent the ECB, or a very bearish one, such as a bank collapse, along the lines of what the recently disclosed surge in MLF borrowings may be predicting- recall what happened to Libor when Lehman fell... In other words your traditional barbell trade. Either way, should this single traded be imitated in the next week, one can bet that the Eurodollar trade will suddenly become far more popular.

The capitalist answer to this vast financial overshoot is simple: interest rates will rise once the unlimited free money stops flowing. Once interest rates rise, then the debt--which has now doubled or tripled in the frenzied flow of free money-- quickly becomes burdensome in the extreme. In other words, the status quo is now addicted to unlimited flows of free money. If the flow continues, then inflation will destabilize it; if it's cut off, then rising interest payments will destabilize it. That's why it's easy to predict a financial collapse in the next few years. But there are still enough resources around to restabilize things after the impending financial liquidation; societies and economies have a way of finding a new equilibrium, a process described in The Onset of Catabolic Collapse

Just headlines for now, but unfortunately the escalation in Bahrain has now spread, as anticipated, to cities in Libya. Dow Jones reports that Libyan protesters have hung two policemen in Al Baida. We will bring more when we see it, but we expect reprisals by the authorities to be harsh and prompt. In addition, in a country that has far less infrastructure than Egypt, and where mass communication and organization is more problematic, protesters have managed to capture a radio station, whose live transmission can be heard streaming here. And while Tripoli has so far not seen the violence of Cairo, the same can not be said for Libya's second largest city. Per Reuters: "Soldiers sought to put down unrest in Libya's second city on Friday and opposition forces said they were fighting troops for control of a nearby town after crackdowns which Human Rights Watch said killed 24 people. Opponents of Gaddafi had designated Thursday a day of rage to try to emulate uprisings sweeping through North Africa and the Middle East. Unrest continued well into the night." We are surprised that Hillary Clinton has not yet issued a statement requesting that all Libyan, Bahraini, Iranian, and now Djiboutian protesters peacefully disperse and go their home and iPads.

The report is out. Click here to read the 14 page report. The Joint CFTC/SEC committee makes 14 recommendations which they intend to focus on to ensure the integrity of our connected market place. We would like to highlight the 3 recommendations that we think are “news” today, and that we have particularly expressed concern about over recent years: Recommendations 10, 11, and 12, which deal with order cancellation fees, internalization, and trade-at rules. Missing in the report, however, is any discussion of proprietary exchange data feeds, the proliferation of exchanges, or minimum order life. Also, this report is a stark contrast to the September 30th report, which focused more extensively on an algorithm trading eMini futures from a large money manager. The HFT community, at that time, focused on that aspect of the report extensively. This report is an improvement, as it does begin to examine structural inefficiencies and risks in our current market structure.

As what is rapidly becoming the biggest wave of revolutionary discontent since 1989 Eastern Europe spreads to every less than wealthy country and region, the next regime to topple may be that of smallish Ethiopia and Somalia neighbor Djibouti. The tiny country, with a population of less than a million, known only for being situated at the horn of Africa, has just seen a major (relatively speaking) protest, calling for President Ismael Omar Guelleh to step down. And while the country is completely insignificant geopolitically, it is merely a stepping stone as the African dominoes spread south: are Ethiopia and Somalia next to go? And after them all of central, and then southern Africa? So here's a thought - should the unrest reach Congo, and eventually South Africa, what will happen to the price of diamonds? While De Beers will be giddy to see a plunge in already artificially low supply, the story will be of course that no more shiny pure carbon crystals are made. And as the natural market for diamonds tends to be the rather affluent portion of society which is the only one to have benefited from loose liquidity, passing on diamond prices may not be perceived as all that difficult?

I had been planning an article based on the Green Day song – Static Age - about the propaganda, lies and misinformation that are endlessly directed at the American people by the government, the mainstream corporate media, and the wealthy elite that control the levers of our society. Then Barack Obama presented his 2012 Budget proposal, including his 10 year projection for our country. I know you’ve heard the term Peak Oil, but the term that came to my mind when I saw Obama’s budget was Peak Bullshit. I thought that would be a great article name, but some sites wouldn’t like the foul language. I was in a quandary until the Elvis Costello song Pump It Up came on the radio while I was driving to work. Down in the pleasure center of Washington DC, the propaganda, slander and most blatant lies are spoken without a hint of guilt or even the faintest whiff of shame. The politicians in Washington DC on both sides of the aisle believe the American people are stupid, gullible, apathetic and easily manipulated. They may be right, but there are a few people out there who can cut through their bullshit and find the truth.

After the USD has confirmed it is no longer a flight to safety currency, and stocks can only go up (91 days until we pass the all time highs at the current rate of no volume HFT-inspired, Primary Dealer facilitated and Fed funded levitation), suddenly we see a dramatic pick up in bond buying, for no reason, aside from the fact that full blown war may join the revolutions in the Middle East. And since nobody will ever sell one share of stock (if they did there will be an immediate congressional hearing to establish whether selling should be, in fact, made illegal) the only way to protect capital is to jump into the 10 Year. That this ongoing divergence makes no sense is irrelevant: such is life under Chairsatan Vissarionovich Jr.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 18/02/11