Archive - Mar 31, 2011 - Story

Tomorrow's NFP number will be one of the most critical releases from the BLS: if on one hand the number is far greater than expected, it will effectively mean that QE3 will not begin immediately after the end of QE2, just like QE1 ended on March 31, 2010 only to see QE Lite implemented 4 months later. That the Fed is not willing to take a political gamble and send oil to $150 is conceivable, which is what would happen should Jon Hilsenrath start leaking QE3 rumors. On the other hand, the economy is once again turning lower as recent diffusion data (not to mention housing) has been indicating. Should the Fed implicitly tighten, by not loosening, the economic contraction will accelerate drastically, and capital markets will follow suit. And since as Hugh Hendry noted earlier, there is no China to pick up the slack, the stakes on the all in gamble in this bet that the virtuous cycle has picked up, will likely cost Bernanke his job if he ends up wrong and QE3 is needed anyway. Of course, as many believe, and as Bernanke himself has said, manipulating the market and stimulating inflation is and continues to be the Fed's only objective. Obviously, the waterfall effects in either direction here are huge. Which is why if tomorrow's NFP number is a beat and not just any beat but a massive one (read well over 250,000), it will be an attempt by the administration to cement the idea that the economy is now recovering. Anything at or below consensus will merely push the decision one month forward, however it will be too late to prepare the political landscape for QE3 in May, just two months ahead of the end of QE2. So tomorrow is likely D-Day on QE3 (or at least a direct continuation of POMO past the June 30 expiration date).

Of today’s major events, our biggest concern lies with the uncertainty in the Middle East & North Africa. Most Westerners, ourselves included, do not understand the complexities of these societies. What we do (and need to) understand is that the situation today is at its most strenuous in any of our lifetimes. This region produces over 35% of the World’s oil supply. Since current global production is about 88 millions of barrels/day, and current global consumption at close to 86 millions of barrels/day, the slightest disruption of production from anywhere, especially the Middle East, will have profound effects on this delicate equilibrium. In response to these unusual times, we are holding healthy allocations to gold bullion, crude oil and other commodities. We continue with our neutral allocation to stocks and will do so until our trend models signal otherwise.

It's a bird, it's a plane, it's the Adjusted Monetary Base...

From Grant Williams: "There are many commentators for whom I have the utmost respect, who completely discount any silver conspiracy theories. They cite the fact that it would be impossible for the manipulation to be conducted in the way that the conspiracy theorists allege or that there are corresponding longs for every short, but yet answers from either the regulators or those supposedly involved in the manipulation are conspicuous by their absence. Let’s face it - if this were a simple case of a misunderstanding it wouldn’t take much in the way of evidence to clear it up now, would it? Over the past several months, each time a futures contract has expired since the price break in silver began in earnest, the delivery situation has gotten progressively tighter until progressively closer to the wire and talk of a commercial signal failure has become progressively louder. The number of people opting to take warehouse receipts for delivery on first notice day has been climbing and stocks in the various warehouses have been declining to the point that it has been touch-and-go as to whether there would be enough physical silver on hand in the warehouses to satisfy demand for delivery. If, at some point in the (near?) future, time runs out and enough people stand for physical delivery, we will find out once and for all whether there is any truth to the manipulation/massive short position stories, and we will CERTAINLY discover how much physical metal there is available for delivery."

In my previous article, “Legerdemath: Tricks of the Banking Trade,” I made brief mention of Treasury-rate locks:

Most brazenly, we taught clients phony math that involved
settling Treasury-rate locks by referencing Treasury yields rather than
prices.

A number of readers expressed a doubt that using a settlement method
based on Treasury prices was appropriate. What follows is as good an
explanation of Treasury-rate lock settlements as 2,000 words will allow.
I have simplified some of the bond math and concepts and will end with
an analogy that I hope will elucidate what the math did not. However, as
this post hardly qualifies as an easy read, feel free to ask questions
in the comments section. Confession: I fudged the word count a few
sentences ago to increase the likelihood of you reading on.

Hugh Hendry proposes a very simple thought experiment to all those (apparently the Fed) who believe that QE2 can end: who will drive global growth if the suddenly marginal economy, that would be the US for some ungodly reason, contracts, which it already is, and will do so even more once rates start rising. Sorry, but unlike last time China is not here to pick up the slack. And it appears that China will not be stepping in to fill the growth void, read inflation, (read Jasmine revolution) which can only lead to more social unrest.

And so we move on to the long overdue reaction of pent up popular anger by the general public, which may have just hit its tipping point of being constantly lied to and put in harm's way to protect the status quo.

• A 25-year-old man arrested for driving into Fukushima Daini nuclear plant, smashing the gate. Says he wanted to "stand out": RTRS
  

Comparisons to a self-immolating fruit vendor in Tunisia need not apply.

Well, as we first supposed three weeks ago when the stock was 80% higher, the CDS was in double digits, and the "situation was contained", TEPCO is about to be nationalized. According to the Mainichi newspaper Japan's government plans to take control of Tokyo
Electric Power Co , the operator of a stricken nuclear power plant, by
injecting public funds. However, it appears that Japan has learned a thing or two from Tim Geithner and the concept of partially pregnant: " But the government is unlikely to take more than a 50 percent stake in the company, an unnamed government official was quoted by the daily as saying. "If the stake goes over 50 percent, it will be nationalised. But that's not what we are considering," the official was quoted by the paper as saying." To semi-quote Hans Gruber: you asked for miracles, I give you... the Japanese government. Nonetheless, how the government will deal with what is now an official groundwater spill of radiaction is beyond us.

As usual, the Department of [no] Labor did not fail to deliver its usual Thursday morning humor: yet more upward revisions to initial and continuing jobless claims (initial were revised upward by 8,000, while continuing were revised 12,000 higher). What was news, however, were the annual revisions that were released with the report. More humor: they were larger than the first revisions and contained comparable levels of upward bias. While free entertainment is always welcome, one can’t help but wonder why the DOL doesn’t borrow one of the FRBNY’s interns to adjust the specs in their model. It’s not like removing a predictable bias in a model is rocket science. All that said, nothing compares to Santelli finally losing it when confronted with yet another day of unimaginable bullshit coming at him from all directions, although in this case from Princeton professor Alan Blinder of whose op-ed he says: "if this is the qualification they teach in ivy league my daughter should be head of the university."

Here's one for the WTF files. While it is neither a secret that back in 2009 America had a thriving relationship with the world's suddenly most hated man Moammar Gaddafi (see "Obama is the first U.S. president to shake Gaddafi's hand") only to turn around and bomb him, nor is it surprising since after all when it comes to oil our administration will do anything and everything to procure it, no matter how many Nobel peace prizes are trampled in the process, it may come as a surprise to some that a bank majority owned by the Libya Central Bank, was the direct recipient of US taxpayer largesse in the form of discount window borrowing. Bloomberg writes that Arab Banking Corp., a lender part- owned by the Central Bank of Libya, used a branch in New York to borrow at least $5 billion from the U.S. Federal Reserve as credit markets seized up in 2008 and 2009. Indeed a quick word search through the compiled daily releases will confirm that the Fed dispersed funds to the Libya-owned venture on well over 30 occasions. And while we have querried in the past how it is possible that various Libyan financial interests managed to get past domestic Anti Money Laundering provisions, when it comes to direct funding from taxpayers would it be too much to ask of Ben Bernanke not to transact with institutions operating on behalf of various so-called tyrants, mutants and, broadly, Antichrists?

Just when you thought there was nothing more the U.S. government could do to motivate you to ship your financial life offshore, they came up with another one. And if you have a sizeable net worth, it’s a big one; you could save your family $2.2 million in taxes by acting on the opportunity during the next 21 months. A husband-and-wife effort could save twice as much. Included in the 2010 Tax Act passed by Congress late last year are gift and estate tax rules that apply only in 2011 and 2012. Compared to the rules they replaced, and compared to the rules that will take effect in 2013, they are especially permissive. The tax savings come from exploiting those interim rules before they expire. For this year and next, you are granted a $5 million exemption from gift tax. If your bank account can handle it, you could write a check today for $5 million to someone in the next generation and incur no gift tax.

Christine Harper, Michael Moore and Bob Ivry have been quite busy today. After poring through the lifetime legacy project of their late colleague Mark Pittman, the trio may have just made a discovery that in a non-banana republic could be enough to at least force a special hearing into whether Goldman COO Gary Cohn committed perjury while testifying to the FCIC on June 30. The culprit: Goldman's (ab)use of the discount window not once, not twice, but five times. Well everyone else was doing it, especially Goldman's insolvent peers like JPM, Merrill Lynch, Bear Stearns, Lehman Brothers, Bank of America, Wachovia, UBS, Credit Suisse and, well, everyone else. So what's wrong with that? Here's what: "Goldman Sachs President and Chief Operating Officer Gary D. Cohn told the Financial Crisis Inquiry Commission June 30 that “we used it one night at the request of the Fed to make sure our systems were linked with their systems, and it was for a de minimis amount of money.” Peter J. Wallison, a member of the Financial Crisis Inquiry Commission, then asked, “you never had to use it after that?” “No, and as I said, we used it on the Fed’s request,” Cohn replied. Alas, that is a lie. And last time we checked, lying to Congress under oath is not quite the right the way to conduct God's work (and yes, a perfectly innocuous "I don't recall" ala David Sokol from his CNBC interview would have sufficed). Alas no: Goldman just had to demonstrate how very immune from the legal process it is, by "risking" its credibility and reputation with the assumption that it is either never wrong, or, like Warren Buffett, that it can never be caught doing wrong. Well, it just was.

If ever there was an investment that deserved attention, by anyone trying to save and invest for the future, it is probably gold.

I can look back over the last 10 years and see how bubbles expanded and the economy soared due to a more than favorable credit environment.  I heard some gentlemen joking yesterday, about the way real estate used to be.  It used to be that you could buy anything, borrow more than it was worth and fantasize about your income in order to qualify.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 31/03/11

Alice Schroeder, who once upon a time was the current "Becky Quicky" of Buffett's inner circle (although to her not so great loss not allowed in the inner sanctum of the NetJets mile high club) until she turned rogue on the billionaire and wrote something not quite so flattering about the Octogenarian of Omaha, whose bubble of unparalleled hypocrisy has just popped, has now burned every last bridge to the annual borg collective meeting at Borsheims, writing the most scathing narrative of the revalations from the last 24 hours. Oh well, we can only advise Buffett and his sidekick Munger to suck it up, now that the dirty laundry of America's dream wealth creator is exposed for all to see.