Archive - Feb 2011 - Story

Just in case someone was confused about the relationship between liquidity, currency devaluation and nominal (not real) asset prices, the St. Louis Fed was kind enough to email us their weekly M2 level. And after last week's surprising drop, M2 once again rose, this time by a whopping $40 billion. Oh and before someone says that M3 is still declining, it isn't. Or rather the much more important monetary aggregate, that including all shadow banking liabilities is now increasing as we indicated during the last Z.1 spread. In one month, when the next Flow of Funds report is released we are confident we will confirm that in Q4 shadow banking increased by at least half a few hundred billion on an annualized basis. In other words the central bank reliquification is now on in full force, both in America and in every other place that has central banks. Which also explains why central banking hawks are now virtually extinct (cf: Axel Weber).

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

Since it is obvious that Bernanke is now taking his central planning tips from Laszlo "Let Me Just Whip Out My Ruler" Birinyi, and is dead set on growing the market in basically a flat line (there has been no volatility in stocks in the past 6 months - none), we decided to extrapolate the market based on the Woods Hole event, and determine when stocks will take out the all time previous closing high of 1,565.15 from October 10, 2007. In a nutshell: at the rate of ascent demonstrated since the confirmation of QE2, the S&P will pass its all time high in 96 working days, and will hit a fresh all time high on June 27, 2011 (roughly at the time housing will be about 40% down from its all time highs, and real unemployment adjusted for labor farce [sic] participation is 13% and real U-6 is 23%). Put that date in your calendar. Presumably at that point Bernanke will concede that he has created enough of a "wealth effect." Although since by then we will have started QE3 for about a month, we may well surpass Zimbabwe's daily average stock market gains 250% of at some point in Q3, and put von Havenstein's "wealth effect economic miracle" to shame in Q4.

Zero Hedge had an opportunity recently to ask Eric Sprott a variety of questions touching on everything from investment recommendations, to policy guidelines, to a general outlook for the world economy. As Sprott has long been a rare voice of contrarian reason in a field of lemming-like uniformity, lately driven by nothing more than a pursuit of centrally planned momentum and Bernanke-induced "heatmapping", we believe the answers were vastly more interesting and illuminating than anything available for mass media consumption.

Just in case there was still any lingering doubt that prices in the US are surging far above whatever the CPI may indicate, we present the MIT Billion Price Project. Unlike the CPI which is a gross misrepresentation of what is really happening on the ground in price terms, MIT actually compiles real time price data about a universe of products. From the methodology section: "our data are collected every day from online retailers using a software
that scans the underlying code in public webpages and stores the
relevant price information in a database. The resulting dataset contains
daily prices on the full array of products sold by these retailers. Our
data include information on product descriptions, package sizes,
brands, special characteristics (e.g. “organic”), and whether the item
is on sale or price control." The attached chart confirms what anyone (but not Ben Bernanke) who actually buys goods and services in the US knows all too well.

Defense Minister Field Marshal Mohamed Tantawi will travel to Washington, Tampa, and Chicago March 24-28. He will meet senior officials in Washington and at USCENTCOM HQ in Tampa, and view U.S. civil defense arrangements in Chicago. Mrs. Tantawi and as many as five senior generals will accompany him. Tantawi will seek assurances that the USG will not condition or reduce military assistance to Egypt in the future. He will emphasize Egypt’s continuing value to the United States as an indispensable ally in the region, and he will press to return BRIGHT STAR to a full field training exercise. The eighty-year-old veteran of five wars with Israel is committed to preventing another one ever. But he is also frozen in the Camp David paradigm and uncomfortable with our shift to the post-9/11 GWOT. Recognizing that he is reluctant to change, we nonetheless should urge Minister Tantawi towards a broader and more flexible partnership based on shared strategic objectives, including border security, counter-terrorism, peacekeeping and civil defense. End Summary.

Alexandra asks, "Simon, what do you make of this Egypt soap opera? Mubarak is such an ass... he's in, he's out, he's in, he's out...." Ha. Well, as I have just received a flurry of emails and text messages from some friends in the area, I see that he seems to be unofficially 'out'. We'll see if it lasts. I suggested early last month that this would be the year for Mubarak and other aging autocrats to finally croak or get kicked out. I really admire Egyptians' dedication vacating this thug from office... but at the end of the day, they are only going to trade one crook for another. These protests are underpinned by the erroneous belief that government is capable of providing solutions, and if they can just get the 'right' government in place, things will start ginning. This is the same attitude around the world-- it's all about getting the 'right' people into office, whether by 'free and fair' election, by protest, or by force. What people just about always find out a few years later is that the new guy is just as bad as the old guy... and that the more things change, the more they stay the same. There's right and wrong in this world... and standing against Mubarak is clearly right. But we all have a finite about of time, energy, and financial means at our disposal, and directing those resources towards political change, while just, generates a very low return and comes at a steep opportunity cost.

It has been a few weeks since the last attempt to extend the Build America Bonds program, even as muni bond prices continue to stagnate. Which means it is time for another valiant try, this time possibly using the post-revolutionary chaos in Egypt as a smoke screen. Bond Buyer reports that Rep. Gerald Connolly, D-Va., has introduced a bill extending the Build America Bond program through 2012 at subsidy rates of 32% in 2011 and 31% in 2012. Since we are certain that Bill Gross is lobbying about as hard as one can to get this bill passed due to his massive latent muni exposure, this last ditch attempt to subsidize the muni market just could pass. If it doesn't, that could be the bottom of the muni market.

Barely an hour has passed since Mubarak's departure, and the religious tensions in the middle east are already starting to flare up. First up: the Jordan Muslim Brotherhood has immediately taken advantage of a vacated podium and said that what happened in Egypt should be a lesson to all Arabs. While hopefully nobody will be able to hijack the success of the Egyptian people, one wonders just how heavily the various Middle Eastern regime are sweating tonight. Elsewhere, Al Arabiya reported that the Swiss foreign ministry has announced that all of Mubarak's assets have been frozen. That, of course, excludes all the gold that Mubarak has with him. Notably, however, Switzerland refuses to indicate how much money was frozen.

Now that the Egyptian military is in charge, it is time to meet the new ruler. Hopefully not the same as the old ruler.

Trust the Criminal Reserve and Criminary Dealers to take advantage of the cover provided by the Egyptian revolution to sneak a quick Flip That Bond in there. Today's POMO closed with $7.375 billion of bonds monetized out of $24 billion in submitted offers. The Submitted to Accepted ratio was 3.3x, but as usual the trickery lies just below the surface. As usual the just issued bond, the 2.625% of 2018, accounted for the bulk of the POMO. In fact, at $3.899 billion, the PT1 represented 52.9% of the entire POMO. With PDs having taken down $12.2 billion of the issue at auction, they have just reduced their holdings by 32%. But wait, there's more: on the February 3 POMO PDs put back $5.2 billion of the PT1 CUSIP. So between today and the last time the 7 Year bond (which was just auctioned off two weeks ago) was monetized, Primary Dealers have already given back 75% of the entire take down from the January 27 auction! So while Egypt has just turned a new page in its history, things in the US continue grinding just along the good old and very predictable "rape the middle class" status quo.

Update: ElBaradei has said he won't run for president. In the meantime, the Egyptian military has announced it will sack the cabinet.

Omar Suleiman has just announced that Mubarak has stepped down. And with Al Arabiya reporting that Omar Suleiman has also stepped down, this means that the military is now in charge. The countdown to peaceful revolutions all across the Muslim crescent is now on.

Silver backwardation continues and while spot silver is at $30.09/oz, the March 2011 contract is at $30.07/oz and April at $30.01/oz. Incredibly, the July 2012 contract is trading at $29.93/oz and the December 2013 contract at $29.91/oz. Backwardation is when the market quotes a lower price for spot delivery or a more nearby delivery date, and a higher price for a distant delivery date in the futures market. It indicates that buyers are concerned about securing supply in the future and are willing to pay a premium for spot delivery. It suggests that silver bullion in volume is difficult to buy and that the physical market is stressed and becoming less liquid. Backwardation starts when the difference between the forward price in the futures market and the spot price for physical delivery is less than the cost of carry, or when there can be no delivery arbitrage. This is generally because the asset is not currently available for purchase or is increasingly illiquid. It can end in default, failure to make delivery, and in sharply higher prices.

David Ganek's $4 billion hedge fund is dunzo. Full liquidation expected by March 31.

For all those wondering why the Federal Reserve will likely never hike rates on the basis of undisputed surging food and energy prices, here is the reason: in the US, the food component as a percentage of overall CPI is 7.8%. In China it is 31.4%. In India 47.1%! The US CPI, therefore, is a completely irrelevant metric when it comes to measuring the one factor that has been responsible for two revolutions already year to date. In other words, if food prices were to double, US CPI would go up by 7.8%, while in China it would grow by nearly 50%. As Nicholas Colas observes when he looks at this data: "This dichotomy points to the potential for increasingly disparate monetary policies when comparing the Federal Reserve future actions to other central banks." This is a huge point that needs far greater prominence in the media, as it confirms that the very models that run central planning for the world's increasingly more involved and desperate central banks are so divergent that it is likely that the US will continue exporting inflation to the developed world long after most of its drowning in bloodshed and rioting. Genocide Ben indeed.