Archive - Apr 8, 2011 - Story

According to Jamie Dimon, he did America a favor when he agreed to take bailout money from taxpayers (and we didn’t even have the decency to thank him). Last week ,we learned that the JP Morgan CEO likes his catastrophe’s predictable, but as Mick Jagger once observed, “You can’t always get what you want.” So in case you’re wondering who might be stupid enough to buy silver at $40, chances are extremely high it’s going to be the guys who sold at $15, $20, $25, 30, 31, 32, 33….. On April 6, Bloomberg reported Comex Silver Stockpiles as of April 5, and if you scroll down through the report, you’ll notice that JP Morgan has enough silver to fill, wait for it, 6 contracts. Yep 30,844 troy ounces, that’s all.

As always happens following massive liquidity injections, there comes a time when the price of oil ends the party prematurely. And with localized Cushing issues preventing another 10% to be tacked on to the cost of gasoline for now, we once again look to Europe for the fair view of what is happening with the energy market. To our surprise we find that there is now only a 5% difference between the all time highs hit in 2008 and currently in the price of Brent expressed in euros. Yet what is of particular interest is that the liquidity induced rally may be about to fizzle: we have no experienced the same near-parabolic blow off top move that we saw at the end of the summer 2008 rally (which ended up with the market plunging over 50%), and the first QE1 which plateaued oil prices and only further hopes of more QE prevented the market from dropping. Is the same fate in store for crude if indeed the Fed is prepared to let the market find its natural clearing price without daily injections of billions.

Earlier this week I discussed the devolution of the consumer economy with a focus on the diminishing returns of consumption and the limits imposed by servicing ever-growing debts. Today I will address a series of other interconnected reasons why the consumer economy is devolving. The cost structure of the entire U.S. economy has bloated to unsustainable levels. Here's the basic mechanism: when money is "free," costs rise. If you had to explain why sickcare in the U.S. consumes 17% of our nation's GDP while other developed nations provide universal care for half that cost per capita (7-9% of their GDP), the answer boils down to "there's an unlimited amount of free money here for sickcare." There are no real limits on Medicaid or Medicare spending, and none on insurance cartels (it's a free market for health insurance, except there's only two providers in your area and their prices are the same--welcome to a "free market," hahahahaha).

Is it time to start quoting that famous William Butler Yeats poem yet?

Some stunning remarks from Dallas Fed's Dick Fisher: " Our duty is most distinctly not to monetize?or even
be perceived as monetizing?the debt of fiscally imprudent government.
Throughout the history of nations, monetizing the budgetary excesses of
governments has proven to be a direct path to economic perdition.
Having already peeked inside that door, I feel strongly that we must
now shut it, lock it and throw away the key." Well, thanks Dick. You are only $2.6 trillion dollars late.

Notorious contrarian Alfred Little, who recently made a splash in the alleged Chinese fraud basket, by issuing a scathing report against Deer Consumer Products (Nasdaq: DEER) which has since cut the price of the stock in half, yet gotten the author in hot trouble with the company which decided to sue both him and Seeking Alpha which hosted the report (even as shareholders of DEER should be thanking him for issuing the report when the stock was still at $11) is out with his latest report, taking on the next in a seemingly endless sequence of potential frauds (check the Nasdaq halt list and find the most recurring word): Puda Coal, Inc (NYSE: PUDA). Cutting to the chase: "Considering the 2009 and 2010 audited financials can no longer be relied upon, and  more importantly the complete lack of internal control that allowed Chairman Zhao to first steal the company, then sell half the company (pocketing the proceeds) and then pledge the other half of the company to a Chinese PE fund while piling on $530.3 million of 14.5% debt, I strongly believe $2.66 is the most this stock is worth today." Those buying puts are cautioned that the stock may halt and never reopen. Place your bets appropriately.

An intrepid Japanese duo has decided to do the reverse Fukushima commute and in a stunning filmed expose, drives through cracked roads, herds of animals in city streets and ghost towns to measure the radiation from 30 km out to 1.5 km away from Fukushima, where it hits 112 microsieverts, or roughly 350 times normal radiation. But don't worry. Everything is still under the recently updgraded (twice) legal limit.... for those clad in lead armor.

Confused why the dollar is getting destroyed, the EURUSD is at 1.44 and nothing makes sense in FX anymore? Here is Citi's Stephan Englander attempting to explain it all.

Marc Faber was on CNBC earlier, once again discussing things so patently obvious only the Fed can not grasp them. Namely that as long as cheap money floods the system hard assets will continue rising in value, and gold will continue surging. Which is merely part of the bigger picture: nominal prices continue rising as real prices, denominated in paper and linen, continue to decline. But have no fear: Bernanke can fix everything in 15 minutes. Only that's total BS: "One day they will increase it by a quarter percent. But what does it mean when commodity prices are going through the roof, energy prices are going up, health care costs are going up, insurance premiums are going up?" Somehow, Bernanke believes, a hike will immediately undo months and years of downstream costs progressing through the system. And surely subprime is contained... As for the proverbial gold bubble: "If it were a bubble a lot of people would have gold. The whole world would be trading gold 24 hours a day. But I don't think it's really a bubble. I think gold is maybe cheaper today than it was in 1999, when it was $252." Oddly enough nobody mentions that gold is the only market that is now not part of the Fed's central planning "wealth effect" mandate (and the price suppression mandate is failing by the day): surging gold prices are an indication of one thing only: the market's desire to impose its own gold standard at a mark to market price equivalent for dollar destruction. It is this aspect of the metal: to correlate with Fed stupidity, that makes it such an attractive investment. And since Fed stupidity is endless, does it mean gold's fair value is infinite?

• Japan says economy in "severe" condition (Reuters)
• Time Running Out for US Budget Deal (FT)
• Dickering on Budget Goes Down to the Wire (WSJ)
• BOJ Puts Up $11.73 Billion for Rebuilding (WSJ)
• Libyan Rebels Blame Deadly Strike on NATO Mistake (Reuters)
• Egypt Protests Go On, Seeking New Beginning (NYT)
• As Standoff Continues, a Bleaker Outlook for Ivory Coast (NYT)
• Brazil Doubles Tax on Consumer Credit to 3% to Slow Inflation, Damp Demand (Bloomberg)

The borg collective is out in full force, with more gibberish on 'transitory inflation' coming from Atlanta Fed's Lockhart: "As I've said before, my expectation is that commodity price increases that are now translating into accelerating headline inflation will be transitory. In support of this claim, I'll make three points. First, these increases have been driven by global pressures in markets for food commodities, energy, and other commodities. These pressures are largely the result of supply-and-demand factors, some of which are one-off in nature. Second, inflation indices are made up of a wide spectrum of goods and services that don't uniformly have these commodities as inputs. Roughly two-thirds of consumer spending is on services, which are not materials-intensive. And, third, to the extent that some goods and services have these commodity inputs, the pass-through to ultimate consumer prices is limited." Fair enough: on the other hand one can present the following point indicating inflation is only transitionary to higher prices: "reality."

The GFMS World Silver Survey released yesterday shows that investment demand increased by a very 47% in 2010 and industrial demand is very robust. Silver’s nominal high of $50/oz is looking like it will be seen sooner rather than later given the degree of demand and momentum. Any sell off will likely be short but sharp prior to a resumption of silver’s secular bull market and silver’s inflation adjusted high of $150/oz remains a long term price target. The long term silver chart above shows how silver rose from $1.28 to $49.45 (on a weekly basis) from 1971 to 1980 or a rise of 38 times. Given that the conditions today are far more bullish than they were in the 1970’s silver may replicate this performance. Were silver to replicate the 1970’s performance it would have to rise from a low of $4.10 in 2001 to over $150/oz – which as it happens is the all important inflation adjusted high. Whether silver will plunge or not at some stage is irrelevant if one is buying for diversification, safe haven and store of value reasons. When silver reached $10, $15 and $20 there were similar warnings which may have dissuaded some of the public from buying for the long term and diversifying.

A quiet data calendar to close the week, as eyes are now focused away from Europe and on the hill. Futures are up, commodities are surging, as the dollar destruction continues. There is no POMO.

Below is the complete list of banks to take, and then pass, the next farcical round of European stress tests. Just as a reminder of the complete useleness of this exercise, the last time Irish banks appeared on this list, they all passed swimmingly. They were all bailed out months later. We can't wait for Portugal, Spain and Italy to all pass without a single failure. Perhaps European taxpayers should inquire what percentage of the near-record gas price is financing this ridiculous waste of funds, whose only real outcome is building confidence in the utter cluelessness of Euro-leaders.

The distraction factor today will be 100%, as the government has decided to draw out the government shutdown decision to the very end. Per Reuters, Hoyer has said that both sides are very close to a shutdown "deal" with 70% agreement on dollars. Supposedly 30% disagreement on a binary issue is good news. "U.S. House of Representatives Democratic Whip Steny Hoyer said on Friday that budget negotiators were "very close" to a deal to avoid a shutdown of the federal government. "There's no deal yet unfortunately," Hoyer told NBC's Today show program as negotiators worked furiously to reach agreement. "I think we're very close. I think we've come 70 percent of the way in terms of dollars. That's a long way to go in trying to reach compromise."" Obviously the disagreement percentage will drop more and more as this soap opera season draws to a close, with only one logical outcome, which obviously will be one of market relief, even as the DXY is pennies away from both 2008 and 2009 lows, both of which preceded major global market calamities.