Archive - Feb 2011 - Story

If you, like us, are tired of all the textbook pundits claiming over and over again that QE is nothing but an asset swap (odd how asset swaps get food prices to hit all time highs, not to mention M2, and to reverse what has formerly been a trillion dollar annualized drop in shadow banking - must be that latest outbreak of disinflation...), we urge you to read the following essay from Sean Corrigan. The Diapason Securities strategist as usual manages to cut through the academic drivel and hit at the core of the issue. The conclusion: "money does not have to be borrowed into existence, it can be
spent into existence by the state for so long as that money's recipients
show a willingness to accept it as a medium of exchange - and that is
exactly what we have at work here...the government spends money it does not have into existence and
disburses it through its welfare/patronage network; the associated debt
is then taken up by a monetary institution (not least, the Fed itself,
whether by its earlier process of debt substitution on private sector
balance sheets when it was buying MBS, or in its current, direct uptake
of Treasuries at the NYFRB) and the non-bank sector ends up with increased holdings of new MONEY as a result... The Fed has successfully placed a great deal of new
money in the hands of those same banks' customers and this is patently
exerting its expected influence on the prices of a whole range of
non-money goods and assets, in a typically differentiated,
Cantillon-effect fashion. How anyone can deny this is truly a mystery!" Indeed.

As more videos such as this make the mainstream, we are concerned that not only are the days of the current Bahrain regime numbered (which also implies the future of the US Navy's 5th fleet is uncertain), but that Saudi Arabia, which has supposedly volunteered to get involved in restoring "peace" to its small neighbor, is getting ever more nervous. We continue to be amazed at how effectively the Bernanke Put is working to mask the true level of geopolitical instability. If and when the crowd realizes that Bernanke, who has proven his efficiency at printing dollar signs on pieces of cotton, may be slightly less adept at doing the same with barrels of oil, the outcome will be amusing.

World Bank's Robert Zoellick, who has recently been on a truth-telling roll, suggesting a return to the gold standard, and also highlighting that surging food prices have suddenly pushed 44 million to extreme hunger around the world raising the likelihood for many more revolutions, penned an oped in yesterday's FT, sharing his vision for a "monetary regime for a multipolar world" in which, not surprisingly he warned that the current monetary system is perilous, and that China's Yuan should be added to the SDR, as well as other currencies "over time." This is yet another dig at the dollar's status as a reserve currency, yet without China taking proactive steps to indicate its interest at becoming the new de facto world currency, the status quo may be stuck with the greenback. Essentially, China is waiting until the right moment emerges, a time when it has stockpiled enough resources, when it can, unilaterally, or in collaboration with Russia and potentially a post-EUR Europe, make an announcement that the Yuan is the new reserve currency, backed by a basket of commodities. This is precisely the step-change that Zoellick is trying to avoid: "A framework to manage a monetary system in transition may be less headline-grabbing than sudden regime change, but it is a lot more realistic. Modernising the management of international monetary affairs could prove an important contribution to future growth. The time of powerful kings is long gone. But today’s leaders still have the chance to stamp their mark on the monetary framework of tomorrow." Unfortunately, the possibility of a gradual transition in which the US willingly cedes ever increasingly more of its reserve status is unthinkable: after all the bulk of the Fed's disastrous policy is dictated that no matter what the Chair does, the world has no choice but to continue using dollars. Which will work until it doesn't (and with total US debt at almost 100% of GDP, the "doesn't" part is approaching.

The one company that will, without a shadow of a doubt, blow up the entire market should it finally reverse its trend of near exponential growth in recent months, and which has recently started indicating some (very) modest pricing weakness, is now held by more hedge funds than ever before. According to the just released Hedge Fund tracker from Goldman Sachs, Apple is now owned by 195 hedge funds, compared to 190 in Q3 as previously reported, and 181 before that. The world's biggest hedge fund hotel is filled to the brim. These fast money, marginal price determining buyers (and, yes, sellers) now hold 4% of the $332 billion equity cap. And with a solid 12% YTD return in the name, not to mention a negligible 1% short interest of market cap, the time to move on to greener pastures may be approaching. For now, all funds are docile and very well behaved participants in the game theory "don't sell" prisoner's dilemma. Yet with every dollar upside we are getting closer the first imminent defection. And a stock which can crash 10% on the merest hint of the passage of its founder, a stock which in turn accounts for 20% of the Nasdaq, and thus is a driver the ES and the global stock market, means that the continued meltup of the global stock market continues to rest on the shoulders of a sick man. That our regulators allow this is criminal and beyond reproach. But that's ok: it's all because of their prohibitively low budget. After all, how many bangbus subscriptions can $1 billion annual budget really buy?

There goes another "fat finger" red herring. On Thursday and Friday, when we noted that borrowing under the ECB's Marginal Lending Facility has spiked from roughly €1 billion to €16 billion for two days in a row, we mocked the MSM explanation that this was merely the result of a fat finger, or at worst a faulty recalendarization of a term-MRO borrowing activity for an overnight one (at the exponentially higher rate of 1.75%). As expected, and as we predicted, this was indeed a case of bank gone wrong. Or two. The FT reports that "Anglo Irish Bank and the Irish Nationwide Building Society, Ireland’s two most troubled lenders, were behind a spike in overnight borrowings this week from the European Central Bank, according to people familiar with the transactions." And while we now know who the guilty parties are, the explanation once again leave much to be desired. It is no surprise that all European banks are exclusively reliant on the ECB for funding, which as previously indicated confirms that the Euribor market is a relic of the past since nobody approaches other banks for capital - everyone goes straight to uncle Jean Claude... And in doing so pledges any and all collateral, even if it means running an outright ponzi scheme. "Both banks have become heavily reliant on the ECB’s liquidity funding over the past 2 years, as they have been unable to roll over maturing bond debt and have seen an outflow of deposits." Yet instead of acknowledging that this action is merely a liquidity crunch, the FT's explanation is that the surge in borrowing has to do with the ability to unwind collateral on a moment's notice as a function of the banks' restructuring, instead of having it locked up for a week under the MRO. We are not sure if this "explanation" is just as, or more, laughable than the fat finger one.

Another week, another POMO-induced meltup. Bill Fleckenstein must be having nightmares, as the insane non-stop bottlerocket moves in many big name stocks is being repeated again. My condolences to the "pro traders" and "technical experts" like Tom O'Brien, David White, and Larry Pesavento over at TFNN.com who have been bearish on the market for the last 6 months. Meanwhile, the Monster Energy swilling 19-year old motion chasers without MBA's or any sort of CMT credentials are killing it. How far is this thing going to go?

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