Archive - Apr 6, 2011 - Story

There are two problems with the consumerist paradise that is the foundation of the U.S. economy. One is that people slowly awaken to the realization they don't really need additional goods and services, as their attention becomes focused on preserving their access to those they suddenly value, such as shelter, food and electricity. In moving (out of a foreclosed house or on to another job, etc.) they suddenly feel the great freedom of no longer being enslaved to all their stuff; they realize it owned them, not the other way round. In having to come face to face with their mountains of "cute blouses," old electronic toys, busted Ikea furniture, bicycles nobody rides, etc., then they slowly realize the return gained from buying all that stuff was increasingly marginal. They might also awaken to the reality that partly why they have no capital or assets is that they squandered much of their income on instant gratification and marginal-return toys of various sizes and shapes, and costly "experiences" such as fine dining and cruises.

It appears that the Standard Operating Procedure following the Fukushima fallout so far has been: 1) deny, 2), deny 3) deny, 4) raise safety limit, 5) collapse in a sniveling heap of guilt. Korea seems to be between step 1 and 2. As the following animation from ZAMG demonstrates, courtesy of Northeastern winds, a major cloud of radioactive Iodine 131 is currently passing right over South Korea. Making matters worse is the fact that it is currently drizzling in the lucklocked nation, putting people on edge. Yet one cursory look at Korean press, in this case Arirang, demonstrates that absolutely nothing has changed in how governments, ready to sacrifice everything at the altar of mass panic, interact with their population when it comes to sensitive issues such as radioactive rain. "Meanwhile unlike many have anticipated the Korea Meteorological Administration assured that the seasonal winds accompanied by rain approaching from Japan will have almost no impact on Korea." Well, there's spin and there's facts. And for what it's worth the animation shows the facts. This way at least some people will have the choice of making an informed decision. Others may just wake up with superhuman powers soon enough.

"Dear Dr. Paul...There are serious questions about the legality of Quantitative Easing. You are among the few who are well-qualified and well-placed to get to the bottom of it. Most people believe, and the media confirm them in that belief, that the Fed can legally create dollars ‘out of the thin air’ in any quantity, and can do with them as it pleases. This may well be the pipe dream of Dr. Bernanke who is quoted as saying that the U.S. government has given the Fed a tool, the printing press, to stop deflation — but it hardly corresponds to the truth. The Fed can create new dollars only if some stringent legal conditions are satisfied, and then, it can only dispose of them in certain ways prescribed by law." Antal Fekete

As gasoline prices continue to surge day after day (and with WTI touching $109 today this will continue for a long time), the peasantry is getting restless. Not only that but it is getting nosy. In fact today some plebs had the temerity to seek answers from the teleprompter over the festering question of just how long will Bernanke, pardon, UK stagflation, pardon, default Portugal, pardon, healthy worldwide demand keep pushing gas prices to $4, then $5, then $6, and eventually to the price paid in Europe: about $9. The response was straight out of Charlie Munger's (non-frontrunning) playbook: "I'm just going to be honest with you. There's not much we can do next week or two weeks from now," the president told workers at a wind turbine plant (one operated by Spanish company Gamesa). "Gas prices? They're going to still fluctuate until we can start making
these broader changes, and that's going to take a couple of years to
have serious effect." And we doubt Obama's hard core union electorate will be happy at the following stab at Channel Stuffing Motors: "If you're complaining about the price of gas and you're only getting 8
miles a gallon, you know," Obama said laughingly. "You might want to
think about a trade-in." Let's hope the people don't get the same idea about the presidential office two years from now, even after the $1 billion spent on TV ads. As to the core question, we were surprised Bill Dudley was not present at Obama's side explaining how deluded complainers should just have a chilled glass of unleaded 98 Octane with their main course of deflationary iPad 2.

With Portugal about to enter the warm embrace of the EFSF, even though nobody still knows just what the constantly updated and revised EFSF actually is, and the IMF (read America) is far more likely to end up footing the cost of the latest European bailout, it makes sense to find out just what the status of the latest incarnation of the EFSF is, or as Peter Tchir of TF Market Advisors calls it, the EFSF V1.5. This is especially important as in 14 hours, Jean Claude Trichet will most likely announce a 25 basis point increase in the ECB funds rate, even as more and more of the European periphery is struggling with solvency and liquidity access. That tightening by the Central Bank will either make life for the PIGS even more complicated or make their lock out from traditional capital markets complete. On the other hand the ECB has no choice with inflation in Europe surging, and Trichet forced to do something, anything. Therefore, courtesy of the EFSF, Europe will quite literally have its cake and eat it too: it will have a QE-like debt monetization instrument in the form of a €400 billion monster CDO, while at the same time it will be removing market liquidity: this is supposed to achieve one goal and one goal only - keep cheap liquidity flowing for the insolvent part of Europe and slow down growth in the healthy part, read Germany. This has never been tried before, and nobody is willing to risk their career with a statement that it will work. On the other hand, this set up provides some perspective on how Bernanke may proceed in the future: he may be forced to tighten even as he continues to monetize various pieces of debt. Although by the time such a "solution" is implemented, there will be enough precedent to determine if the latest European experiment has been a complete or just partial failure.

As Bespoke points out, bearish sentiment as calculated by Investors Intelligence in the past week plunged by a whopping 32 from 23.1% to 15.7%. This is the most bullish since late 2009. Empirically speaking, this is bad news for the market, as there are virtually no contrarians left and everyone is on the same side of the boat. As John Lohman demonstrates, the returns 1, 3, 5 and 10 weeks following a more than 25% drop in bearish sentiment are as follows: -0.92%, -2.07%, -1.99%, and -1.95%, respectively. Yet of all these, only the drop in November 2009 was actually executed in an environment of central planning such as the one that continues through today: and in that one the market actually rose 0.01%, 1.38% and 3.22% in the 1, 3, and 5 weeks following (and dropped 1.6% ten weeks later). Will the current shift in sentiment revert to the average, or will the market continue to price in aggressive Fed central planning? Stay tuned and find out.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 06/04/11

The Fed has just announced that of the 52 Maiden Lane II CUSIPs offered as part of a Bid List circulated on April 4, the Fed has just sold 42 of these CUSIPs, for a total face value (not price paid) of $1.3 billion. The actual cash exchanged is likely about 50% of this amount, as the Fed has kept the OID it used when purchasing the full $39.3 billion back in October 31, 2008 for $20.5 billion pretty much flat. The list of auction winner(s) will be made available shortly, as will the actual amount of proceeds received by the Fed and the IRR on the transaction. Since there is another $38 billion in ML2 assets left, look for many more such Bid Lists over the next several months until the market crashes and yield chasing finally ends.

Following weeks and months of lies that Portugal does not need a bailout, that is is not Ireland, Greece, Algeria, Tunisia, Egypt, Middle Earth, Uranus, etc, the country finally realized it is bankrupt, unless it comes, hat in hand, bagging for a bailout from Jean Claude Trichet (who now is scratching his head how to spin this latest sovereign default as bullish ahead of tomorrow's rate hike). Which it just did. Reuters has compiled the reactions by those who felt like sharing their views on this foregone conclusion.

Or how in kleptocratic America, wealth effect poverty effects you.

World Bank president Robert Zoellick is currently speaking live on Reuters Newsmaker, and is discussing numerous topics related to the future of the monetary system, notable among them most likely being the fate of the dollar, and whether or not he still stand behind his recent statement that a return to the gold standard is needed for the world.

One of the sad side effects of the recent record in food stamp participation is that apparently the 44.2 million Americans who now subsist below the poverty line and rely on the government for basic food needs, have become quite a drag on otherwise insolvent state and local governments. And with monthly increases projected to keep rising in line with the Russell 2000 as the Wealth Effect is constrained to Wall Street, and no end in sight to the Poverty Effect, states are getting nervous. Never fear: the US taxpayer is here. In a press release, the USDA has just announced that it "will award grants to improve access to and increase participation in the Supplemental Nutrition Assistance Program (SNAP). The grants are for state and local governments and private non-profit organizations to develop projects that simplify SNAP application and eligibility systems and find efficiencies in the administration of the program with the goal of providing critical nutrition assistance to those in need." Translation: the Fed is about to add the bailout if the Food Stamp program to the infinite list of subsidies that rely exclusively on the generosity of Vassarionovich-Packard.

Update: It's Official. Portugal is Bankrupt:  Portuguese finance minister says the country will have to use European Union mechanisms to resolve its debt problems, to make announcement at 8PM.

In the biggest shocker to come out just hours before the ECB's announcement tomorrow, which many see is a guaranteed rate hike, Journal de Negocios has just announced that according to the Portuguese Finance Minister, the country needs a bailout, after weeks and weeks of Greece-style denials. And yes, nobody could have foreseen this, and all that jazz.

• *DJ Obama Admin Says IRS Would Shut Down If Budget Not Passed
• *DJ Obama Admin Says National Parks, Smithsonian Would Close
• *DJ Obama Admin: Cherry Blossom Festival Wouldn't Happen If Budget Not Passed
• *DJ Obama Admin: Roughly 800,000 Govt Employees Would Be Affected By Shutdown
• *DJ Obama Admin: EPA Permitting Would Stop If Budget Not Passed
• *DJ Obama Admin: Social Security Beneficiaries Would Continue To Receive Payments
• *DJ Obama Admin: Electronic Tax Refunds, Collections Would Continue
• *DJ Obama Admin: Military, Law Enforcement Will Continue To Function
• *DJ Obama Admin: Military Personnel Would Earn Paychecks, But Not Receive Them Immediately
• *DJ Obama Admin: White House Staffing Would Be Lower During Shutdown
• *ZH: POMO will continue come rain or snow: Russell 36,000 will not be denied, US bankruptcy notwithstanding

In order to make the biggest strawman so far in 2011 really scary and nasty, the administration just announced that as part of a government shut down, the IRS would end up being closed. While according to some this is the ulterior motive all along to avoid the premature outflow of tens of billions in cash due to federal tax refunds hitting the IRS next week, which without a debt ceiling hike would push the country into technical default possibly as soon as next week (debt subject to the limit was $14.2 trillion two days ago, just $94 billion under the ceiling and with about $74 billion in debt to be issued next week a $20 billion tax refund withdrawal would push the Treasury over the limit), what is far more amusing is that as the WSJ reminds us, the Fed would still be able to monetize debt regardless if the government was operating or not. Ergo nothing can end POMO ahead of time, not even a complete US government shutdown.