Archive - Feb 2011 - Story

The week ahead is relatively light on the data front with the US only reporting on the trade balance (likely wider), claims and consumer confidence. However, there will be a slew of speeches and testimonies from Bernanke and regional Fed Presidents, in particular early in the week. Outside the US the key policy event this week will be the BOK meeting with consensus now expecting a hike, whereas GS still thinks on balance that rates will remain on hold. The other important development to watch is China's return from a week-long holiday on Wednesday. With inflation pressures rising and the Government increasingly vocal in promising price stability further tightening measures are possible. China money supply and credit numbers will be particularly interesting in that context. Outside the macro data, the rapid sell-off in US rates and the impact on interest rate differentials will likely remain the most watched development for FX investors in the upcoming week. Finally, developments in the Middle East continue to deserve some attention, given the fluidity of the political situation and the potential spill-over into commodity markets.

If the state is “an evil inflicted on men by men,” yet the preservation of society nonetheless “justifies the action of the organs of the state,” then the inescapable conclusion is that the state is indeed “a necessary evil.” But how can this be? How can this or any other evil be necessary without rendering evil itself necessary? And if evil itself is necessary, then what of right and wrong, and thus of human morality? For surely the necessity of evil renders human morality null and void, as any action, no matter how heinous, can therefore be justified. Law is then whatever anyone who has the power to back it up says it is; might then makes right; and the state, which is inherently an instrument of might, is then the only legitimate authority, never mind that legitimacy itself is rendered null and void.

Some time ago, SocGen's Dylan Grice wrote an extended essay which could be synthesized in the following line: "to be 'long commodities is to be short human ingenuity'." Many took this statement as a sign of capitulation from the otherwise highly skeptical Grice, who not once has criticized the current financial and economic status quo.  Last week, as Zero Hedge pointed out, Grice made the effort to clear up any confusion about why gold is not and was never meant to be included under this broad umbrella defintion: "although I've said I'm not a fan of plain commodities as investment vehicles because buying commodities was equivalent to selling human ingenuity, I exclude gold from that logic. I prefer to see buying gold as buying into the stupidity of governments, policy-makers and economists, and I'm comfortable doing that." Then over the last few days, Diapason Securities' Sean Corrigan, took a turn at also deconstruction the corollary to the Grice "pair trade" adding the key qualifier: "while Mr. Grice is right in so far as he goes, he has only stated half the case. The true dictum is that 'to be long commodities is to be short human ingenuity but also to be long political stupidity and avarice.'" What has gotten Corrigan so riled up? Why the same underlying premise that makes all those who once had a fascination with the stock market, deride and ridicule it: namely the fact that in doing all he can to flip reality by 180 degrees, Ben Bernanke has completely destroyed the core principle of capital markets: price formation by way of proper information content, i.e. "the free market [must] be allowed to work its magic and that price formation not be deprived of much of its crucial informational content by our dysfunctional monetary and, hence, corrupted financial systems." Sadly, free markets are now only a topic best left to the history books, and as such any idealistic perspective on commodities and the like must take this key persistent variation from the mean into account.

The concept of a foreign tax repatriation holiday is nothing new to Zero Hedge, and has been discussed extensively before (here and here). There are those who believe that this "holiday", should it be allowed by Congress, will have a far greater stimulus on the economy than the ongoing "QE to infinity" rolling fiat destruction, which does nothing for real asset values and merely revalues prices in nominal terms. Today we present the thoughts of Citi's FX strategist Steven Englander on the topic of a second "Homeland Investment Act" which soon enough may be the last trump card to jump start a once again sputtering "recovery" despite the ongoing impact of QE2 and the unwind of the SFP program. And just like Goldman 10 days ago, Citi is the second major bank to reach the conclusion that louder whispers of a HIA2 will be broadly dollar positive (something to keep in mind considering net USD spec non-commercial bets are at multi-year bearish positions), with the following key differences from HIA1: "1) Be more front-loaded; 2 ) Result in much higher volumes; 3)… And maybe a higher USD component; 4) But will result in more selling flows from reserve managers into the buying by the private sector."

We are experiencing unprecedented moves in financial equity markets as a direct result of the US Federal Reserve money printing operations. The Federal Reserve is no longer operating as the traditional "Lender of Last Resort" but rather is now experimenting in untested waters as the "Buyer of First Resort". Everything is being done by the US government to restore consumer confidence in an attempt to restart the US economy, which even after trillions of government spending, lending and guarantees is at best lethargic. Employment is no longer just a US problem as systemic growth and rebalancing issues face the entire globe. These issues are acute enough to now be seen to be igniting social unrest in many countries other than just the EU. - LCMGroupe

Today, for the first time in two weeks, the Egyptian banking system will be open, and the result: huge lines and a very possible bank run at the 200 or so banks which the Egyptian central bank announced would be open between 10:00 am and 1:30 pm today. And just to make things a little bit easier (yet harder) on itself, courtesy of a withdrawal limit of 50,000 Egyptian pounds and $10,000 a day, depositors will take out the max which should promptly deplete bank stores, and also set the population on edge, which withdrawal limits tend to do virtually everywhere. Also, the Egyptian central bank, which has one upped Blackhawk Ben, and been restocking through a military cargo plane, will soon need a far bigger one: "The central bank moved 5 billion pounds ($854 million) of cash into the financial system as depositors gained access to their savings. The regulator, which has $36 billion in reserves and guarantees deposits, used military cargo planes to bring in the funds, Governor Farouk El-Okdah said yesterday on state-run television." And another lesson Egypt has learned from both the US and the EU: mask any smell of insolvency with that truty old pyramid scheme known as bond issuance: "The government plans to sell 15 billion pounds in treasury bills tomorrow after canceling last week’s auction as protests against Mubarak intensified. Yields on Egypt’s bills may surge about 30 percent, said Shahinaz Foda, the head of treasury at BNP Paribas Egypt."

Goldman's John Noyce once again lays out all the main charts to keep a track off in the coming week, with a particular focus on the EURUSD, EURUSD 2 Year swap spreads, USD 2 and 10 Year swap spreads, but most interesting are Noyce's observations about the 2s10s treasury curve, which he believes Noyce is set to resume flattening from record steep levels: "Putting all the pieces together; the aggressive weekly moving average setup and triangle like consolidation on 2-year swaps, the relatively less aggressive weekly moving average setup on 10-year swaps and the current extreme level of the 10-year/2-year curve, it seems the market is at a juncture where a break higher in short-end yields would be very significant both in specific yield related terms and also due to the USD’s +ve correlation to short-end U.S. yields in a number of currency pairs."

As we have highlighted over the past week, one of the best performing asset classes in trecent days has been rice. And judging by the just released CFTC Commitment of Trader data, the speculators are waking up to the possibility that rice has along way to go higher. The Non-Commercial Net Speculative positions in Rough Rice (per CBOT), have jumped to 5,811 in the week ending February 1, and are now the highest they have been in over a year. They are also double where they were less than 4 weeks ago. Of course, with increasingly more popular speculative positions, the concern that profit taking rallies will appear should be widely anticipated. We expect at least one-two broad selloffs in rice in the coming days, following which distribution the path for continued moves higher in the grain should be wide open.

Who better to explain what is going on in Cairo to America's masses than Stephen Colbert. And yes, Jersey Shore analogies are most certainly included for comprehension's sake...

As we noted yesterday, during what we called Cairo's D-Day demonstrations, Friday may well have been the last chance for Egypt to push through with a resolute attempt to finally overthrow Mubarak. Because now the doubts set in... and the desire to get back to a normal life. Sky News reports, "As anti-Mubarak demonstrators continue their protests in Cairo's Tahrir Square, away from the area there are signs of growing divisions among their ranks." In this revolution of attrition, Mobarak may have been well aware of the time value of liberation enthusiasm. And now, two weeks after the start, people have realized they also have to eat (even if wheat has gone up well over 20% in the meantime).

The folks at Future Money Trends have released another comprehensive video clip which summarizes the key aspects of the gold price thesis (which should be all too clear to our readers, who have been following it since $800). At 6 minutes long, virtually anyone can afford to take the time and hear it out, which we certainly urge now that we once again have increasing chatter that QE3 is around the corner (those $4 trillion in deficit funding pieces of paper won't monetize themselves). That alone is sure to send gold again in play: after all the biggest jump in the precious metal last year occurred only after the "incredulous" ones realized that Bernanke was not at all kidding about his infinite dilution quest (yes, the Fed will do anything to save the banking masters).

No surprise: blame the US government on the information black out. Shareholders, and the investing public of course, learn last. Our question: when did clients learn?

The man who once actually had some credibility, and has over the past two years become, very deservedly so, the biggest one-sided propaganda joke on Wall Street, Joe "Snow" LaVorgna, is out with yet another career reputation killer note. In his commentary on the BLS, the Deutsche Bank cheerleader dares to go where not even the Comcast-GE schizos fear to tread, namely in the most ridiculed never never land of Green Shoots. Because heaven forbid seasonal adjustments take account for snowfall in the deep of winter. Have no fear it is all good, and just like that other administration rag Mark Zandi, it is all back end loaded, and as a result we will see a 250k pick up in February payroll, February showers excluded... and in fact, should the weather dramatically vary by more than +/-0.01 degree from the median temperature, all bets are off. They don't call it the priced to perfection, Tungstenilock recovery for nothing. But here is the killer: while saying don't believe the bad news from the NFP report, the curly haired, CNBC sideshow Jow says: "However, the sizeable and unexpected drop in the unemployment rate was legitimate." In other words - let's pick and choose the data points he likes from any economic report going forward, blame the bad ones on ridiculous things, and pray that people are so dumb to not see the utter contempt for their intellgience that infuses the entire "analytic" process.

Joe Saluzzi, co-founder of Themis Trading LLC and outspoken exchange expert, is concerned with how high-frequency trading has brought the capital markets into uncharted - and dangerous - territory. "Things have changed," he cautions. With 50-70% of all trades being conducted by algorithms at micro-second time intervals, real human traders are increasingly challenged to understand how our markets actually work. "No longer do the technical patterns - that have lasted for years and years, and are written about all over - work anymore." In the following interview, Joe and Chris plunge into "dark pools" and other poorly-understood elements of our now-machine-dominated financial exchanges. The current system is fraught with risks of further "flash crash"-like disruptions, and at a fundmental level, feels a lot like sanctioned theft by the deep-pocketed institutions who can outspend on technology and speed. This is an important interview for anyone involved in trading (professionally or personally), as well as investors who want to know how today's markets truly operate.

I was sure that the 10,000 momentum-chasing hedge funds in Greenwich would have piled onto the short side a week ago after the indexes got shanked when the Egypt riots began. After all, all of them have made yet another New Year's Resolution to be the first one to catch the next bear market and make a killing shorting the next wave down. And be able hang out The Hamptons next summer bragging how "I nailed the top within one day". However, the tape whipped back around and a frenzy of buying resumed. When is the market going to finally top out?