Archive - Apr 14, 2011 - Story

Lately everyone and their kitchen sink is coming up with one after another grandiloquent deficit cutting plan, one more unbelievable than the next. At this point nobody believes that either administration can cut $4 million let alone $4 trillion, which seems to be the bogey targeted by both the Obama and the Ryan budget proposals. Too bad no one can explain just how we get from point A to point B. But the show must go on until America finally depletes the good will of the once-reserve currency which now has become a bigger funding currency than the Yen, and pulls the plug. Until then, here is a comparison of the two most recent plan proposed to get America from its current deplorable state, which for those paying attention is located some $27 billion dollars away from the official debt ceiling following today's $13 billion auction. Courtesy of Reuters, we present a compare and contrast of the Obama and the Ryan plans. Feel free to heckle at will.

Two weeks ago the precious metals space was closely following the fate of Sumitomo's San Cristobal mine, where a long strike had paralyzed work at the world's third largest producer of silver and sixth-largest producer of zinc. While the strike was eventually resolved with concession to the domestic workers, a far more troubling report from Bolivian daily La-Razon states that Bolivia's president Evo Morales is now planning on expropriating zinc, silver and tin mines sold off by previous governments. Bloomberg reports that "Morales will announce a decree May 1 to “dismantle the privatization model,” said Nicolas Fernandez, a spokesman for state mining company Corp. Minera de Bolivia, known as Comibol. "The government is recovering all the privatized companies,” Fernandez said today in a telephone interview from La Paz. “When the decision is taken, Comibol will be ready to manage these mines.”" Among the contracts to be affected are those with Glencore International AG, Pan American Silver Corp., and most importantly, Coeur d’Alene Mines Corp., which is operator of the San Bartolome mine: the world's largest pure silver mine. Notably San Bartolome and Sumitomo's San Cristobal "account for about 83% of the nearly 1.1M tons of fine silver Bolivia produced in 2009, according to Mining Ministry data" according to The Gold Report. If indeed this news is proven true, and we will know for sure in 16 days, looks for the price of silver to spike considering about 1.33 million kilograms of silver was produced in Bolivia 2009, according to the U.S. Geological Survey: an amount which will likely fall off a cliff following the utter chaos that is unexpected nationalization.

The key paragraph from the just released speech being delivered by Fed faux hawk Charles Plosser at the 20th Annual Hyman Minsky conference is the following: "It is no secret that I have long advocated that the Fed make explicit
its commitment to a numerical inflation objective. It is consistent with
the view of central bankers and monetary economists around the world
and widely viewed as a best practice of central banking.... These advantages persuade me that the Fed should adopt an explicit
numerical inflation objective. Moreover, in my view, now is an opportune
time to do so. The apparent strengthening of the U.S. economy suggests
that, in the not-too-distant future, monetary policy will have to begin
reversing course from a very accommodative policy stance. As we
choreograph that exit, I believe that the Fed should do all it can to
underscore its commitment to maintaining price stability." Key word here being "apparent" as yet another economist confused cause (loose monetary policy impact on the Russell 2000) and effect (equating the stock market with the economy). Perhaps the Fed economists should observe the dramatic paring of economic outlooks by all sellside analysts, in line with our expectations from January 2011. Take away the trillions in free money and everyone knows, but nobody wants to say, what will happen. We, for one, can not wait to listen to Fed president speeches following a 20% drop in the stock market...

The Treasury just priced the last of its three auctions (for a total of $66 billion) in the current week, in the form of a $13 billion in 30 Year Bond reopening. The auction came in strong compared to a when issued trading 3 bps wide, although the Bid To Cover did see a dip from last month's record 3.02, with $2.83 in bids tendered for every dollar allotted. More importantly, the dramatic drop in Indirect takedown seen yesterday in the 10 Year reopening, was not repeated with 47.2% of the auction granted to foreign investors. This was the second highest Indirect take down in almost two years, with just December 2010's 49.5% higher. Primary Dealers took a respite with 42% of orders allotted to the banks (which will flip a bulk of this bond back to the Fed shortly) , and Direct taking the rest or 10.8%. With this auction, and following $19.19 billion in maturities when all of this week's action settles over the weekend, will bring total debt subject to the ceiling to just $27.2 billion away from breaching the constitutional maximum. Prepare for that to be big news on Monday when the Mainstream Media finds the batteries for its calculator.

To all who panicked following the programatic Goldman downgrade of Brent two days ago and dumped their holdings right into gaping maw of Goldman's overeager prop desk (which has once again seen some notoriety today although few actually care as everyone is now aware of the 200 West M.O.), our condolences. Crude has now recouped over 60% of the drop following that downgrade. In the meantime QE3 is today pegged to ON, as the inflation trade comes back again with a vengeance. Except Goldman to pull all punches and proceed with downgrading all the other commodities it is still bullish on, including gold and silver.

TEPCO continues to be stuck between a rock and a liquid place. Following recent efforts to stop the spillage of radioactive water into the ocean, the pseudo-nationalized utility is now experiencing the aftermath of radioactive water retention. From Kyodo: "The concentration levels of radioactive iodine and cesium in groundwater
near the troubled Nos. 1 and 2 reactors at the Fukushima Daiichi
nuclear power plant have increased up to several dozen times in one
week, suggesting that toxic water has seeped from nearby reactor turbine
buildings or elsewhere, Tokyo Electric Power Co. said Thursday. According to the latest findings, a groundwater sample taken April 6
near the No. 1 reactor turbine building showed radioactive iodine-131 of
72 becquerels per cubic meter, with the concentration level growing to
400 becquerels as of Wednesday. The concentration level of cesium-134
increased from 1.4 becquerels to 53 becquerels." Conventional thought is that this is due to contaminated water used to cool down overheating reactors: "A total of around 60,000 tons of contaminated water is believed to be flooding the basements of the Nos. 1 to 3 reactor turbine buildings as well as trenches connected to them, and the water is hampering work to restore the cooling functions of the reactors lost since the March 11 earthquake and ensuing tsunami." Yet the most troubling news once again comes from the plutonium containing Reactor 3 where the temperature rose suddenly. Not to worry though: "TEPCO officials said the data were likely due to a glitch in a measuring instrument." And with that we have another data reader which indicates unpleasant information being thrown away (this follows the halt of readings from the Drywell radiation counter in Reactor 1 following a reported surge).

Today has been a busy day for central planners around the world: the IMF and the World Bank are holding their spring meetings which has resulted in an avalanche of Bloomberg excerpts. Courtesy of Reuters, here is a full summary of the key statements by various high level officials. As usual anything that is being denied is about to hit us head on. Of particular note are the statements by TeflonTurboTaxTim Geithner.

And so Olli Rehn, piggybacking on all the recent nuclear hysteria, takes Mutual Assured Destruction to a whole new mushroom cloud level:

• REHN SAYS A DEBT RESTRUCTURING COULD CAUSE A 'CHAIN REACTION'

This is better known as "MAD - Fission" Fusion

Almost a year to the day from the first Greek bailout, we thought we would revisit just how successful Europe has been in masking its pervasive insolvency, and just how far Europe has ultimately gone over the past year. As the chart below shows, pretty far. Especially if one measures the displacement by the shift in the Greek bond curve whose 3 year point just passed 18%. Buy it, hold it for 5.5 years and double your money.

Who would have thought permanent austerity and a government crisis would lead to popular unhappiness. Well, the General Confederation of Portuguese Worker, better known as Portugal's largest union, for one. From Reuters: "Portugal's largest labour union is considering calling a general strike as it steps up protests against painful austerity measures that are expected to deepen under an EU/IMF bailout, its leader said on Thursday..."A general strike is an instrument that is on the agenda."" And with 725,000 members, and the certain shutdown of the Portuguese economy that would ensue, it is perhaps time to consider what will happen in Spain and soon all of Europe as the wave of austerity started almost a year ago spreads, and what the impact to European GDP (and thus global) will be. But most importantly, where will the credit money come from to push the world from this latest imminent downturn. After all Jon Hilsenrath telegraphs to us that there will be no QE3. And who are we to disagree.

Assuming that the QE3 option is eventually exercised (as we do under the hard landing outcome) and assuming it does what we fear to the credibility and status of the US, the US dollar and US Treasuries, then we think the result, most likely at some point between 2012 and 2014, will be major fx regime changes and significant paradigm shifts in global fx markets. As these changes and shifts occur, gold could perform very well, as could other scarce physical assets (possibly super prime real estate). And the highest quality (by BS strength) nominal corporate assets – top quality equities in other words – may at least on a relative basis (if not absolute) perform fairly well.

Joe LaVorgna needs no introduction: the Deutsche Bank (not pronounced Döuche Bangk) "strategist" is easily the posterchild for Microsoft Excel's goalseek function. As such, he is rarely if ever mentioned among the first 26 tiers of economc analysts (one needs to migrate to Hex from ASCII to catch a reference), as his goal seeking tends to take place only after given the green light by Goldman, Morgan Stanley and BofA (in that order). Which is why it does not surprise us that the strategist has had enough and is now valiantly punching through to the front of the line. The permaungloomer, who for the longest time saw the physical silver lining in the mushroom cloud, has just submited his application to the big boys club by being the first to cut Q2 GDP (and yes, he also finally cut Q1). That said, as expected yesterday, look for everyone to do the same as the hockey stick in US economic activity (once again) fails to materialize.

Exactly a year ago, Zero Hedge penned "The Client Always Comes First At Goldman... Except When He Doesn't, Which Is Also Always" which was a review of Goldman's mark manipulation practices particularly as pertains to the OTC domain (read CDS) by going through self-evaluation reviews of the 4 key Goldman trades involved in the Abacus scandal (we would call it crime, but remember: Goldman neither admitted nor denied guilt). As a reminder, in April 2010 we said: "The line penned by Michael, who incidentally was the least like of the
three Goldman SPG MDs testifying on Tuesday based on peer feedback, that
broke our collective heart is the following: "Once the stress in the
mortgage market started filtering into the cash market, I spent numerous
hours on conference calls with clients discussing valuation
methodologies for GS issued transactions in the subprime and second lien
space [redacted] is prime example). I said "no" to clients who demanded that GS should "support the GSAMP" program as clients tried to gain leverage over us. Those were unpopular decisions but they saved the firm hundreds of millions of dollars." Alas, we find that all of Goldman's sincere hypocritical lies before the Senate committee were... precisely just that." This post was followed up by "Goldman Implicated In CDS Price Manipulation Scandal" which essentially recapitulated all the salient points from the first time. Today, with about a full year delay, Bloomberg's Christine Harper and Joshua Gallu realize that there was more than meets the eye to these very disingenuous revalations of impropriety by the very traders who were conducting them, and finally bring much needed broader attention to the matter in "Goldman Traders Attempted to Manipulate Market in 2007, Senate Report Says." Frankly, it's about time.

The BLS beat the expectations game continues. While this week's number of people filing initial cliams surged to 410K, blowing out expectations of 380K, it is once again the prior revision that shows the true nature of the BLS. As we said last week when claims printed at 382K, better than expectations: "last week's 388K was revised up to 392K, declining to 382K below
expectations of 385K, which in tried BLS fashion will certainly be
revised next week so that the actual number will have been a miss but by
then nobody will care." Sure enough: last week's number was revised... to 385K, meaning there was no beat. Obviously this week's number will be revised higher next week. As usual. Looking at continuing claims we see the same thing: the prior number was revised from 3,723K to 3,738K, meaning the drop to this week's 3,680K was better than expected. Lastly from the BLS, people claiming EUCs and Extended Benefits increased by about 40K in the week ended March 26 (full report here).