Archive - Feb 2011 - Story

With the recent surge in geopolitical volatility (which nobody could have foreseen of course), it is easy to forget that the US economy is still deep in the abyss of a transfer process that sees trillions in capital needed to be funded by the government and plug holes in the private sector. This is not news and anyone who has followed Richard Koo over the past two years is fully aware of this: all of this is fully recreated in his latest presentation reproduced below. What is interesting is the addition of exhibit 23, which notes something very important: namely reality. Koo observes, very keenly, that "sustaining fiscal stimulus in democracy during peacetime is difficult" (of course, in authoritarian regimes nobody cares about stimulus until inflation surges to the point where the bulk of the population, which knows it has no other recourse, sees no other option than to revolt). Which leads to the question: so what? If fiscal stimulus is difficult (and virtually impossible after trillions have already been spent with little/no effect) in peacetime, does this mean that democracies are forced to turn to war as the only possible recourse (it worked with the Great Depression)? Or, alternatively, continue relying on the Fed for monetary stimulus, which however as we have all too vividly seen, is the bluntest instrument available, and tends to lead to the very same regime destabilizing revolutions that one may say are pursued by the abovementioned "democracies." The natural outcome is that instead of building up resentment against the political system, the population personifies the chairman of the Federal Reserve with the Devil, thereby deflecting anger from an impotent cadre of politicos. Yet regardless of the nuances, the bottom line is that without continued trillions of debt-funded injections in some form, the economy stagnates, and becomes another Japan case study.

Just as the military is now the defacto (and indefinite) ruler in Egypt following what was a revolution-cum-coup, it appears that Libya is poised to repeat in the same footsteps. One thing to note is the increasingly shorter halflife of Maghrebian revolutions: Tunisia took more than a month, Egypt took 18 days, Libya is in its 6th day, and all signs point to a rapidly approaching endgame in which the military will end up with control. Hopefully they know the dynamics of oil cartel game theory behavior. In the meantime, here is Stratfor's latest geopolitical outlook on Libya following earlier reports that the airforce has started firing on military installations (and civilians) to prevent them from falling into protesters' hands.

While I respect the idea that confidence and psychology affect consumerism, the reality is that a 23% unemployment figure is a depressionary red flag. This tells us that the “Great Recession” has neither ended, nor was it “just” a recession. I know it is hard to dispute the National Bureau of Economic Research (NBER) - after all they were only 9 months late in noticing and calling the greatest economic downturn in history. The fact remains: We are in a depression and failing to address the structural unemployment problems will make matters worse not better. The first step to fixing a problem is of course admitting that we have one. We’ve squandered valuable time and in doing so we’ve greatly exacerbated the situation. Globalization was an absolute unmitigated, disastrous failure. The only thing it did was temporally boost stocks and allow some CEOs to make 400 times what their wage-earners made. While the economy appeared to be doing well - it was bubble driven credit binging - not organic spending that was fueling it.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 21/02/11

The first very shy tick above $34 in the last 31 years is in the history books. Will soon be followed by many more. And only $16 more to go to all time nominal highs... and ~$160 to real ones. What is truly hilarious vis-a-vis claims that the dollar is a reserve currency is that in the period in which gold has risen by 2.9%, and silver, 12.3%, the DXY has dropped by 1.45%. It would be quite amusing if Schumer's push to unpeg the CNY came true, only for the US to realize that its currency is now completely irrelevant.

It may not be 12k RPM.... but it beats nothing.

Announcement that Muamar has slipped into a coma to hit within 3-6 hours. As a reminder, Libya had 143.8 tonnes of gold.

With pervasive shooting across Libya, stoppage of oil production, and overall revolutionary activity, it makes sense to take a look at the biggest holdings of some of the key Libyan investment players. We start with the country's Sovereign Wealth Fund, the Libyan Investment Authority. We find some interesting names...

Courtesy of endlessly trading and constantly front-run electronic markets, after watching the geopolitical carnage overnight with little reaction futures have suddenly gapped down by over 10 points to below Wednesday's closing levels, wiping out the levitation from both Thursday and Friday. Indicatively, as stocks finally appear mortal once again, silver (now a quarter away from $34) is up 11.63% from its Wednesday lows, and even gold is up 2.7%. The former traditionally takes a while to pick up momentum. Once it does, not even JPM can stop it.

With just 4 days left before the Irish General election, the Irish Times reports that Fine Gael is now guaranteed to be the winner of the upcoming popular vote. The only question is whether the government will be a monopoly one or coalition based. Reports the Irish Times: "When people were asked who they would vote for if there were a general
election tomorrow, the figures for party support (when undecided voters
were excluded) compared with the last Irish Times  poll on
February 3rd were: Fianna Fáil, 16 per cent (up one point); Fine Gael,
37 per cent (up four points); Labour, 19 per cent (down five points);
Sinn Féin, 11 per cent (down one point); Green Party, 2 per cent (up one
point); and Independents/Others, 15 per cent (no change)." Not surprisingly, lagging Labour party is scrambling to get some last minute votes: "Labour Party leader Eamon Gilmore has urged voters not to give Fine Gael
a “monopoly of power” and called on people to “switch to Labour” when
they cast their vote on Friday." Sounds like a call for a vote for hope and change. That worked swell back in the US. So now that the election outcome is certain, and Brian Cowen's tenure has at most 3 more days to go, here is a profile of the new Irish leader: Fine Gael Leader Enda Kenny.

As was reported on Saturday, the culprits for the surge in borrowing on the Marginal Lending Facility have been supposedly identified, with Ireland once again to blame. The flawed explanation provided was that insolvent Irish banks are paying an extra 75 bps in interest just so they have access to capital on a day's notice (as opposed to a week) as they unwind their collateral. Needless to say, we are skeptical of that "explanation." And judging by the fact that today total borrowing on the MLP, while still near record highs, dropped by €2 billion, without any news of collateral unwind to free up asset sales by either Anglo Irish Bank and the Irish Nationwide Building Society, puts the credibility of the FT source at question. What is without doubt, is that borrowings on the MLP will persist for a long time, as was insinuated in the original piece. After all the whole point was to make this latest outlier event "priced in."

Italy oil producer Eni SpA, which also happens to be the largest foreign oil producer in Libya, plunged over 5% on concerns the company's output will be crippled, after the company announced it is following BP in relocating all non-essential (for now) personnel away from Libya. Per Bloomberg: "Eni, which produced 244,000 barrels of oil equivalent a day in Libya in 2009, fell as much as 5 percent, the most since May. The company said in a statement that production is continuing as normal. BP has no producing assets in Libya and is evacuating families and non-essential staff, said David Nicholas, a spokesman for Europe’s second-largest oil company." As we have reported on numerous occasions in the past, unlike Egypt Libya has a substantial amount of oil reserves: in fact, it holds the largest crude reserves on the entire continent, and Europe, particularly Italy and Spain are primary beneficiaries, which explains the plunge in those two stock markets.

As many are always quick to point out, any talk of a record price in silver is preliminary as long as the Hunt Brothers nominal high of $50 set in 1980 remains in the history books. However, when priced in EURs, this is not exactly the case. As can be seen on the chart below, our European readers have full permission to say that silver is now at an all time high, with no caveats or footnotes.

Emerging reports early Feb. 21 indicate the unrest in Libya is spreading from eastern Libya to the capital of Tripoli. According to initial reports, heavy gunfire was heard in central Tripoli and in other districts with Al Jazeera reporting 61 people killed in Tripoli on Feb. 21. Other unconfirmed reports say that protesters attacked the headquarters of Al-Jamahiriya Two television and Al-Shababia as well as other government buildings in Tripoli overnight. According to Saudi-owned al-Arabiya, the government-owned People’s Conference Centre where the General People’s Congress (parliament) meets when it is in session in Tripoli was set on fire. U.K. energy firm British Petroleum reportedly said it would evacuate its personnel from Libya and suspend its activities due to massive unrest. Spain’s Foreign Minister Trinidad Jimenez said on Feb. 21 that the EU member states are coordinating possible evacuations of European nationals from Libya. A Turkish Airlines flight was arranged to evacuate Turkish citizens from Benghazi but was denied the opportunity to land by Libyan authorities and returned to Turkey.

Is this one of those "who could have possibly seen it coming" moments? As events in Libya overnight spiralled out of control, with dozens if not hundreds killed, the parliament buildng in Tripoli on fire, and output at one of the country's oil fields reported to have been stopped by a workers' strike, BP has said it will soon begin evacuating some of its personnel from the 9th largest producer of oil. And just to complete the total chaos, Iran warships are now going to pass the Suez on Tuesday instead of today, to the full glory of a fully open US stock market. The result: gold over $1,400; silver over $33.50; Crude front month over $93; Brent over $105; etc. Luckily, the US stock market is closed, meaning all this will be "priced in" by tomorrow, and the HFT levitation can resume tomorrow as if today never happened...