Archive - Feb 2011 - Story

AUD pairs (and the ES, as a result) are not doing too hot today: the primary reason - Cyclone Yasi, which is now projected to be a category 5 storm according to the Australian Weather Bureau, is making landfall in Queensland and will add to the continent's flooding misery, which has already incurred over $20 billion of damages to eastern states. Yet in a case of supreme irony, the West of the continent, unlike the East which has been having flood after flood, and which is the source of Australia's bread basket and where the bulk of the grains come from, is wrapped in a drought that threatens to impair an already week wheat harvest. From Bloomberg: "At stake is the output of the country’s biggest wheat- growing state at a time when global food shortages have pushed prices to records. The drought has already prompted the government of Western Australian state Premier Colin Barnett to cut its economic growth forecast for the year to June 30 to 4 percent, from 4.5 percent."

• In 2010, total compensation and benefits at publicly traded Wall Street banks and securities firms hit a record of $135 billion (WSJ)
• The FT just a few months behind Zero hedge: Fed passes China in Treasury holdings (FT)
• Cyclone Yasi Nears Coast of Australia Packing Winds Stronger Than Katrina (Bloomberg)
• China's Wen vows to control inflation in new year (Reuters)
• Germany Rules Out Bond Buybacks by Bailout Fund, Official Says (Bloomberg)
• Bank of Japan's Kamezaki Says Economic Slowdown Is Temporary (Bloomberg)
• Florida governor may stall Obama healthcare law (Reuters)
• Much of nation's recent growth may have been a mirage (WaPo)

The completely worthless and thoroughly discredited ADP number came in at 187,000 (who can forget last month's 297K which got the Barclays experts to predict a 600K NFP number for January) on expectations of 140K. Of course, the ridiculous print from last month was cut by 50K, just as this one will be in March. Someone should inform ADP (which doesn't count government jobs) that there was snow in January and thus the NFP will come in well below expectations (ref: eternal bad number apologist Joe LaVorgna).

According to Al Jazeera, pro-Mubarak forces have clashed with the revolutionaries, in a sign that the "counter-revolution" has begun, and an Al Arabiya reporter has been stabbed by those who prefer Mubarak. It also appears that the pro-Mubarak forces are arriving on horseback, camelback and in chariots. Elsewhere, Egypt's armed forces on Wednesday told protesters that their demands had been heard and they must clear the streets: we are confident that everyone will disperse promptly and quietly... Another indication of how powerless the regime is, was that curfew hours were shortened even though nobody had been following the original curfew to begin with. Most importantly, the revolutionary concerns spread to Yemen, where president Ali Saleh followed in Mubarak's footsteps and vowed not to extend his term in 2013. Alas, his term will most likely be cut off well short of that optimistic estimate.

"To rebalance debt loads and re-equitize financial institutions that should have known better, central banks and policymakers are taking money from one class of asset holders and giving it to another. A low or negative real interest rate for an “extended period of time” is the most devilish of all policy tools. And the asset class holder that it affects, or better yet, “infects,” is the small saver and institutions such as insurance companies and pension funds that hold long-term fixed income assets. It is anyone who holds bonds with coupons that cannot keep up with inflation or the depositor in a local bank who cumulatively holds trillions of dollars in time deposits that don’t earn a real rate of interest. This is the framework that has been created by modern-day policymakers who have innovated far beyond their biblical counterparts. To put it bluntly, they are robbing savers and taking money surreptitiously from longer-term asset holders who are incorrectly measuring future inflation." - Bill Gross

I am not an economist, but as a strategist I believe there is a case for a multi-year period of weak growth in the US, which could be magnified by an EM slowdown as the EM bloc diverges policy to deal with its own domestic positive output gaps, domestic inflation problems and domestic asset bubbles. The obvious problem is that the US has an excess debt problem and a central bank that seeks to solve asset bubbles that burst by creating new asset bubbles. This policy has been proved a failure. Remember that debt does not equal wealth, that asset bubbles do not equal wealth, that more liquidity does not equal money but instead equals more debt, and that liquidity does not equal capital.

After this morning’s news of a bounce in mortgage applications, we have two labor market indicators—layoff announcements and ADP—and the Treasury’s quarterly refunding announcement. Small POMO in the 10-17 year range of $1.5-$2.5 billion.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 02/02/11

There are left-wing blogs that maintain that the price of oil and its occasional spikes are created by elaborate speculative plays on the futures markets in New York and London. The left is traditionally paranoid about oil and oil companies, but who is to say they are not right this time? The memory of Enron is still fresh. The chances are that the summer driving season will put pressure on gasoline prices this year, after an extremely cold winter all over the Northern Hemisphere. The conservative (10-percent chance of happening) scenario by the Energy Information Administration says $4-a-gallon gas would come at the end of the summer. The second reality is that the world thirst for oil has not been slaked; as the world prospers, the greater that thirst. In 1974, the heads of 23 democracies lost their jobs because of surging energy prices. Obama, beware.

Skew firmed up today with calls being bought in December and August. Puts were sold in April, June, August and October. Volatility was roughly unchanged on the day but there is a definite change in tenor in risk reversal trading. This was in large part a reaction to a fund buying December 1800 Cs live, approx. 2000 times. Moving forward, nothing about today’s action gives a directional hint except that December calls are being bought once again.

Oil prices dropped on Tuesday in a volatile session that saw the market pass through all its different personalities. At first, it was a safe haven, and traders were kicking out long positions in oil, gold and in the dollar. After as while, though, oil prices rallied – on a weaker dollar and on a strengthening stock market. Then, finally, oil prices returned to negative territory as it was sold as yesterday’s safe haven. Traders were also selling WTI and buying Brent, as the safe haven function seemingly ended and as traders looked forward to US refinery maintenance. - Cameron Hanover

There is a simple reason why monetary inflation becomes an exponential phenomenon. As currency is debased, an increasing quantity of money is required to achieve the same real-money effect. For example, if the quantity of money is increased 25%, the initial benefit to the issuer is a tax of that amount on the holders of previously-existing money stock. To achieve the same tax in real terms for a second time requires a further expansion of 31.25% of the original monetary units, and continuing with subsequent 25% expansions on increasing totals we obtain our exponential series of monetary inflation...The only way the exponential loss of purchasing power that results from monetary inflation ends is through the complete collapse of fiat currencies. Whether this is brought on by a financial crisis or through hyperinflation is irrelevant: the result is the same. Furthermore, quantitative easing programmes have merely accelerated the trend. Particularly worrying is the dramatic expansion of the monetary base in the US, which has greatly exceeded our theoretical example of 25% by increasing 168% over the last two years. While this is routinely explained as a policy response to the banking crisis, it has the likely effect of accelerating future government demand for printed money even more, speeding up its inevitable demise.

As the topic of US Mint silver sales is not new to our readers, after we first brought attention to the record January sales by the Mint, we will not dwell much on it, suffice to say that the final January tally is in. And at 6,472,000 ounces, this is nearly 50% higher than any prior month in the Mint's 26 years of published sales history. This has occurred, despite supposed profit taking in the paper silver market in January. And just today, another 50k, were sold. It seems that physical buyers continue to enjoy the dip in paper silver that is providing them with an attractive entry point.

Another confirmation of just how insane everything is comes from West Africa. The London Club announces that the Ivory Coast is now in default after the January 31, 30 day grace period expires, and bonds jump. And with former president Gbagbo now out of negotiating options, and likely to resort to violence, resulting in further destruction of cocoa supplies, cocoa futures... drop.

The talk regarding the EFSF having the potential to buy bonds raises more questions than answers to us. For one, at what price will they be purchased? Banks that hold the sov debt are reticent to sell below par since that would make them realize a loss. The EFSF can ill afford to purchase bonds from banks at par when they are trading in the open market at prices well below that, and such a subsidy does not seem to make economic sense either. The aforementioned voters will soon recognize that this debt purchasing is a transfer and represents taxation on core country’s citizens to support periphery debt. Also, who might sell? The ECB’s program has a scant €76.5B to sell into such a scheme against an aggregate periphery debt load of over €3.2T. Direct issuance is a possibility, but then the EFSF becomes an even bigger CDO performing funding arb – at an unknown cost. With only €440B available, it seems that the funding for only a portion of the periphery would be achieved. Further, the AAA rating on the bond issuance out of the EFSF has a participant element to it. If a country needs funding, it is prohibited from contributing to the facility and whatever it draws comes out of the facility. Would a purchase of a particular country’s bonds by the facility constitute a drawdown per the facility’s rating requirements? It would seem so, though details are sketchy right now. Either way, this would seem to impact the ratings that were so important they took five months to obtain last year.