Archive - Mar 2011 - Story

Shortly Zero Hedge will present our quarterly analysis of the liabilities held by the shadow banking system. It's quite a doozy, and cements our belief that whether immediately following or shortly after June 30 (a day, a week, a month), the Fed will have no choice but to proceed with further monetization of public debt issuance, as the private sector debt retrenchment continues at truly alarming levels, leaving just one source of debt money available - the US central bank itself. And with the Fed's desire to stimulate inflationary expectations, it will be forced to do what it is doing precisely as shown below. In the last fortnight period, the Adjusted Monetary Base increased by the second biggest amount in the past year, or $80 billion, following the previous increase of $142 billion as of February 23, or a $222 billion increase in a month. This is due to a surge in excess reserves following the winddown of the SFP program which in the past week increased by $82.6 billion (full Fed Balance sheet breakdown to follow). We continue to expect that Excess Reserves will hit $1.7 trillion by July, or over $300 billion higher from the current level of $1.380 trillion. In the meantime, observe what happens when the Fed goes hog wild with inflationary expectations. A few more days like today in the S&P, and expect Jon Hilsenrath to start the QE3 leaks. And never forget - to the Fed, the Economy and the Russell 2000 are equivalent.

Earlier Lear Capital presented their view on what the basis for Chinese gold accumulation may be. Next we present a comparable analysis by SmartMoney.eu which takes a deeper dive into the demand mechanics originating in China. To wit: "In some parts of Asia, inflation is rampant. Especially in India, food prices and other staples are going through the roof. The prices of some vegetables and spices has risen more than 100%... In China, the prime goal of the communist party is to maintain social stability and to avoid unrest. Targeting inflation is key. Therefore, many Asians are investing their hard-earned money into precious metals. The latest news from China corroborates this: in the first two months of 2011, the Chinese have imported 200 tonnes of gold, which is as much as in the entire year 2010! This is just individual investor demand, we are not even speaking about central bank demand, accounting for the entire Chinese mainland gold production! Chinese gold fever has caused gold demand to triple in the past 10 years, according to the World Gold Council. The Chinese are about to overtake the Indians as the world’s biggest gold consumers." For short-term market timers, as we predicted a week ago, continued pressure on risk assets, such as that today, will most certainly result in forced liquidation in precious metals such as gold and silver. This is absolutely guaranteed as margin calls pile in, and hedge funds, already levered to the hilt have no choice but to sell all outperforming assets, among which gold is at the top. Once liquidations are completed, the question will then be: does the Fed resume its inflationary path (and as a just completed analysis by Zero Hedge confirms, the shadow banking system is once again declining leaving few options for Bernanke). If that is the case, then the long-term fundamentals from a speculative standpoint revert. Add to that the discussed organic demand, and increasingly loud calls for $2,000 gold may materialize sooner rather than later.

It's no secret that China's gold demand is soaring. They are buying mines, concentrates from which to extract gold and as much physical gold as they can secretly buy in world markets.

Reports also indicate, the people of China are being encouraged to buy some gold with every paycheck as the future of the world economy is uncertain at best. As world debt expands, currencies are debased and gold prices rise as a result.

When a bankrupt zombie company offers to purchase from the Fed the very instruments that put it in bankruptcy in the first place, and which the Fed was forced to put on US taxpayers in order to perpetuate the status quo farce, you know the words Banana republic don't even start to begin to express the describe the lunacy we live in.

From Reuters:

• Submits offer to buy all of rmbs owned by Maiden lane II for $15.7 billion
  in
  cash
• 
  If accepted, this offer will substantially reduce the amount of
  outstanding
  government assistance to AIG
  
• If accepted, offer will guarantee frbny earns a profit on its interest in
  Maiden lane II
  
• Says total outstanding assistance from U.S. government will be reduced by
  about $13 billion to total of about $26 billion
  
• Says conditions that necessitated Maiden lane II have been resolved

Reader Nick Ricciardi submits a rather controversial view on the future of Japan: "Over the past few weeks there has been a new round of articles and commentaries predicting doom for Japan’s economy. Yet, as usual, Japan’s bond markets have shrugged off these fears. Japan’s capital markets and its macro-economy are replete with confounding puzzles. But they are all rooted in two basic misconceptions that Japanese hold concerning their debt. Moreover they are understandable if analyzed from a perspective of both the public and private sectors. Doing so gives us insight into why Japan’s public debt offers the lowest yields of any nation when its debt/GDP ratio is the highest, why Japan’s corporate credit spreads are so narrow and its yield curve almost flat, why Japan’s bond prices are less volatile than those of other industrialized nations when its economy and stock market is “leveraged” to global growth, and why the yen tends to strengthen when Japan’s economy turns down."

After yesterday the Wisconsin Senate passed the controversial Union Bargaining Bill, using a surprising loophole, resulting in a Union occupation of the Capitol building, the next formality before its enactment has just taken place: the Wisconsin Assembly has just given final passage to the bill, meaning just the signature of Governor Walker is all that is needed at this point, something which will surely happen in the next few hours. And after earlier the Obama administration expressed its disappointment that Wisconsin managed to find this legislative loophole, thereby making the farcical taxpayer funded self-exile of the state democrats all for naught, we are confident the president will be making the teleprompted rounds imminently.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 10/03/11

After an attempt by the BTFD brigade to restore balance to the central planning force just after mid day was thwarted by developments out of Saudi Arabia, the upward bias gave up the ghost and correlation trading took over, with complete flight to safety overtaking all novel factors, and the market closed below key technical support levels, including both the 50 and 55 DMA. In fact the market closed below the 55 DMA for the first time since September 1, 2010. The stunningly resilient Euro also plunged, as all capital flew to the 10 Year. The last time we had an open to close move as large as today's was August 11 2010, when the market was spooked by the then downgrade of the economy by Jan Hatzius. As a reminder, the only thing that saved the market in August, and why stocks took off and never looked back at the end of August, was because the Fed announced QE Lite in mid August, and then leaked QE 2. What will have it this time, nobody knows.

Newsflow tomorrow is going to be heavy as Saudi, Yemen, Kuwait and Bahrain all prepare for protests. And if today's actions are any harbinger of what to expect, there will be serious unrest, quite possible turning violent even lethal. The wildcard still continues to be Iran, also a hotbed of recent protest, which has so far not made much noise about the crackdown on Shi'ites in the wealthy Saudi kingdom. Reuters summarizes what to look forward to: " Arab uprisings that have spread to the conservative Gulf region face a crucial test this week in Saudi Arabia where activists have made unprecedented calls for mass protests against the kingdom's absolute monarchy. Protests are planned in other Gulf countries such as Yemen, Kuwait and Bahrain on Friday, the region's weekend. The time after Friday prayers has proved to be crucial in popular uprisings that have brought down Tunisian and Egyptian rulers who once seemed invulnerable. More than 32,000 people have backed a Facebook call to hold two demonstrations in the country, the first of them on Friday. Saudi police dispersed a protest by a Shi'ite minority in the OPEC member's oil-producing Eastern province near Bahrain on Thursday with one to four people wounded as shots were heard, witnesses said." Furthermore, as we disclosed earlier, the Fed may have made a major error by not conducting a market stabilizing POMO tomorrow - arguably the day it will be needed more than ever. Those so inclined are urged to put on some fat tails insurance ahead of tomrrow's events which will most certainly result in some very violent swings in either direction.

Today the Fed released its quarterly Flow of Funds report which is traditionally used to keep track of household net worth and general leverage. While the far more important use of this data, namely tracking shadow banking data is never in the headlines (we will present an updated version later today), the media is more than happy to present any simplistic information without much thought. To be sure, based on nothing but a jump in the stock market, household net worth increased by $2.1 trillion to $56.8 trillion. This increase was due entirely to a change in the value of Corporate Stocks held by the public ($7.6 trillion to $8.5 trillion), Pension Funds ($12.3 trillion to $13 trillion) and Mutual Funds ($4.4 trillion to $4.7 trillion), for a total change of $2 trillion. What did not go up were tangible assets such as housing, which after reversing its plunge from an all time high of $25 trillion in Q4 2006, and hitting a low of $18.5 trillion in Q1 2009, has now officially double dipped, dropping to $18.2 trillion in Q4 2010: the lowest in over 6 years. In other words, the wealth effect is working, but only as long as the Fed can continue to keep the market high. Other real assets are losing value fast. And while consumers continue to deleverage, and non-financial businesses are just barely adding new debt ($11.1 trillion in Q4 2010, a $100 billion increase Q/Q), the government, both federal and state and local, continue to binge like a drunken sailor on debt, which combined for the two increased to an all time record of $11.9 trillion. So while USA Today may rejoice at its simplistic interpretation that we are all getting richer even as real assets decline in value, UBS' Andy Lees thinks that the household leverage trends will ultimately result in stagflation.

After the Fed "purchased" just over $97 billion in bonds in the last POMO schedule, according to the just released POMO schedule, Sack-Frost will monetize $102 billion in bonds between March 14 and April 11. From the release: "Across all operations in the schedule listed below, the Desk plans to purchase approximately $102 billion.
This represents $80 billion in purchases of the announced $600 billion
purchase program and $22 billion in purchases associated with principal
payments from agency debt and agency MBS expected to be received
between mid-March and mid-April" What should be disturbing for stock market bulls is that tomorrow, on the critical Day of Rage in Saudi, there will be no POMO, and thus stocks will be on their own...

It's on

AP reports that the Saudi police open fire at protesters in Qatif after government warns demonstrators it will not tolerate protests. "A witness in the eastern city of Qatif says gunfire and stun grenades were fired at several hundred protesters marching in the city streets Thursday. The witness, speaking on condition of anonymity because he feared government reprisal, said police in the area opened fire. The witness saw at least one protester injured." In other words, the shootings will continue until morale is restored. Look for crude to go antigravitational here.

This is not 2008, it is much, much worse and far more dangerous. This will not simply be the collapse of the banking system (although I fully expect that), rather it will be the collapse of the central banking system. This will not be the temporary collapse of some phony paper wealth, it will be the permanent destruction of real wealth and the end of how the economy functions today which we can simply call “the system.” While many people think the stock market will fly up 5,000% as it did in the Zimbabwe hyperinflation I have never held this view and still do not. I do however believe that the Dow Industrials and the price of gold will trade at a 1:1 ratio. If I had to take my best guess that level will be around 5,000. That said, I may change my mind about this depending on what happens going forward but I still think that is the most likely scenario.

Flight to safety into US Treasuries is back: today's $13 billion 30 Year bond priced at 4.569%, the first drop in issuance yield since September 2010, but the stunner was the Bid To Cover, which at 3.02 (compared to last month's 2.51) was the highest ever. The said, Primary Dealers did come in and buy more than half the auction or 53% to be precise with the knowledge they will promptly flip it back to the Fed in the next few months (we will find out when after the new POMO schedule is posted at 2 PM today). Indirects were 40.7%, higher than the LTM average of 37.7%, and Direct Bidders filled out the take down at 6.4%. Altogether a strong auction if one can make that statement in an environment when the PDs are well aware there is no auction purchasing risk at all courtesy of Brian Sack.