Archive - Apr 2011 - Story

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 29/04/11

One group that we refuse to hold, however, is global small cap stocks and, in particular, U.S. small caps. On our data, U.S. small cap stocks are now as expensive as we have ever seen them. Perhaps more surprising still is the deafening silence about this distinctly frothy group. Although the S&P 500 price index is still some way below its all-time high, U.S. small caps are within spitting distance of theirs: a high that was last reached with a booming global economy, strong employment, and a debt-driven consumption binge in full swing.

Earlier we observed the long-overdue (noted first here in March of 2009) allegations that Markit among any others may be involved in a massive CDS pricing collusion scheme. Now it is Markit's turn to provide its side of the story.

There is some money which is printed, but does not make it into the money supply. Consider the scenario that the Fed prints a dollar that is then either lost or destroyed. It then cannot be used to buy goods, or be lent out and thus does not create inflation. There is something else which can happen to our money which has the same net effect. Foreign central banks can take cash printed from the Fed and place it on their balance sheet. US dollars on foreign banks balance sheets gives investors confidence that their own currency will not be debased. In other words, the real threat of inflation is not the current printing of money which Bernanke et al have been doing. It is the previous printing of money which has been taken out of circulation. The threat is as great as its ever been. The amount of money in foreign reserves is about one third or more of M2, or every dollar which is held by US bank account (business or retail), and all currency combined.

Friedrich Hayek is generally regarded as the apostle of a brand of economics which holds that the market will assure the optimal allocation of resources — as long as the government doesn’t interfere. It is a formalized and mathematical theory, whose two main pillars are the efficient market hypothesis and the theory of rational expectations. This is usually called the Chicago School, and it dominates the teaching of economics in the United States. I call it market fundamentalism. I have an alternative interpretation — diametrically opposed to the efficient market hypothesis and rational expectations. It is built on the twin pillars of fallibility and reflexivity. I firmly believe these principles are in accordance with Hayek’s ideas. But we can’t both be right. If I am right, market fundamentalism is wrong. That means I must be able to show some inconsistency in Hayek’s ideas, which is what I propose to do.

And another economic fail, this time an attempt from Ireland to bury bad news on a royal wedding, later afternoon Friday:

• Ireland revises 2011 GDP growth to +0.8% from +1.7%; 2012 to +2.5% from 3.2%
• Irish govt revises 2013 deficit forecast to 7.2% from 5.8%; 2012 to 4.7% from 2.8%.
• Ireland revises 2011 debt/GDP forecast to 111% from 98.6%; 2012 to 116% from 102%

Which only means more stimulus. And since fiscal is out of the question (austerity remember, duh) it means monetary. Which means gold surges to $1,566.

Remember when every appearance of Obama and Geithner would send the market plunging before the institution of central planning? Well, we now have a new phenomenon: every time the Chairsatan opens his mouth gold surges. Pretty simple. The second Bernanke started delivering his prepared propaganda at the Community Affairs Research Conference, whose parallel chat session appears to have been overtaken by conscientious objectors, gold surged from the mid $1540s to $1,558. A few dollars here, a few dollars there, and pretty soon we are talking real money...

As the Fed Chairman is about to commence his luncheon address (and yes, take more moronic questions) at the Community Affairs Research Conference, it has offered readers the option of joining in and commenting alongside in realtime on the Fed's very own chat board. Everyone is suggested to participate and tell the Chairman what they really think. The chatboard link is here.

Even as America has an insolvent government and a debt ceiling to deal with in the only way it knows - Mutual Assured Destruction, Europe still has a insolvent banking system 10 times greater than America's to worry about.  Which explains the following Friday night bomb (because it is past 6pm in Europe). From DJ:

• 15:52 29Apr11 DJN-DJ EU PAPER: LARGE PARTS OF BANK RESTRUCTURINGS YET TO COME
• 15:54 29Apr11 DJN-DJ EU: "DISTINCT VULNERABILITIES REMAIN" IN EU BANK SECTOR
• 15:55 29Apr11 DJN-DJ EU: ROLL-OVER RISK STILL PRESENT IN SOVEREIGN DEBT MARKETS
• 16:05 29Apr11 DJN-DJ EU: EXIT FROM GOVERNMENT BANK BAILOUTS MAY SPUR M&A WAVE
• 16:13 29Apr11 DJN-DJ EU: THREAT OF PRIVATE CREDITOR LIABILITY "BADLY RECEIVED"

Translation of bolded: if you hear gronin', MAD's a-bonin' (taxpayers)

Following yesterday's release of advance Q1 GDP and deflator data,for the first time since the full unwind of the Great Financial Crisis in late 2008, early 2009, the Taylor rule is not only positive (it hit 0.1% in Q4 2010, in line with the federal fund's rate) but has now jumped substantially above the prevailing interest rate, hitting +0.4% in Q1 2011. Needless to say this will not remove any of the latent animosity between John Taylor, whose rule, or at least a special case thereof, is used by the Chairman in determining monetary policy, and the Chairman: as the possibility of a hike is negligible for at least one more year, with a far greater possibility for another QE episode, we expect to see this number continue to diverge substantially from the Taylor implied number for a long time, which in turn will mean that the Fed will be forced to scramble, just as it did in the 05-07 period to catch up with runaway inflation. Only this time it will have $3 trillion in asset to unwind as well. We hope Volcker will not mind being thawed from carbonite a second time when runaway inflation surges in about a year or so, and Volcker's expertise is needed more than ever.

Hopefully at this point nobody is surprised why at this rate gold will pass $1,600 within a month, silver may be $100 by the end of the year, and the dollar will be worthless, in order, to paraphrase Bernanke, reincarnate it in a fresh start version of itself, following the refinancing of all US private and public debt at 0% interest. For everyone still confused, and the naysayers, we urge you to read the following - link.

While the miss in the April Chicago PMI was just as we predicted, with the final read of 67.6 below "expert" expectations of 68.2, and down from a near record 70.6, it seems that the full pain will only be felt yet. The reason: "In response to special questions about the Japanese disaster, panelists reported minimal impact." They will. Guaranteed. Which means that upcoming weakness is simply deferred from April to May or later, pushing back the "imminent" rebound further into the future, yet guaranteeing a major miss in Q2 GDP. Our call continues to be for a Q2 GDP of at or below 2%. Yet the most insight as usual comes from the survey respondents, where we find this pearl of wisdom which probably explains everything that is wrong with the economy: "Companies that are very profitable still behaving as if bankruptcy is around the corner". And why wouldn't they: when in the history of human events has central planning every worked?

Sounds crazy but, "Forces loyal to Muammar Gaddafi crossed into neighbouring Tunisia and fought a gun battle with Tunisian troops in a frontier town as Libya's conflict spilt beyond its borders...Pro-Gaddafi forces fired shells into the town of Dehiba, damaging buildings and injuring at least one resident, and a group of them drove into the town in a truck, local people and a Reuters photographer in the town said. The Libyan government troops were pursuing anti-Gaddafi rebels from the restive Western Mountains region of Libya who fled into Tunisia in the past few days after Gaddafi forces overran the border post the rebels had earlier seized." So is this the carte blanche that Pro Oil liberation forces need in order to justify a land invasion of Libya? And what happens to oil in that case when Gaddafi's back is truly against the wall?

And while everyone has forgotten about the terabequerels of radiation released on a daily basis out of Fukushima, even as the Japanese Center for Economic Research just revised March GDP massively lower (more shortly), TEPCO, nearly two months after the explosion, has released the following very brief video of the spent fuel rod pool at Reactor 4. The good news: it is submerged in water; the bad news: it is submerged in water, meaning nobody is even one step closer to safely removing the constantly leaking radioactive material.