Archive - Apr 2011 - Story

• Obama Push to Seize Budget Initiative (FT)
• China gives all clear on bond issuance bubble: Government Boosts the Bond Markets (China Daily)
• You mean they can't use 200% debt financing? Nasdaq OMX Needs Shareholders to Embrace Rejected Bid (Bloomberg)
• Complacent Europe Must Realise Spain Will be Next (FT)
• Japan's seismic nerve center (Japan Times)
• Kan’s DPJ Suffers Election Setback One Month After Japan Quake (Bloomberg)
• Edano Says Japan Doesn't Need BOJ to Help Fund Post-Quake Disaster Relief (Bloomberg)
• State Prosecutor Summons Mubarak (FT)
• US Doubts Air Power Can Turn Libyan Tide (FT)

According to the latest Lundberg survey the average price for a gallon of gasoline in the United States has moved closer to $4, jumping more than 19 cents since mid-March to a level less than 10 percent below its all-time high. And it's not even peak driving season, which typically sees a seasonal jump of at least 15-20% from early spring levels. Per Reuters: " The Lundberg Survey said the national average price of self-serve, regular unleaded gas was $3.765 on Friday, up from $3.573 on March 18, and up 91.3 cents from $2.852 a year ago. Prices in several western U.S. cities are already above $4 per gallon, led by San Francisco at $4.13. Chicago was close behind at $4.11 a gallon, the survey said." What is not surprising is that demand saturation is starting to set in, meaning refinery margins are now going through the window: " The national average would have been higher had refiners and retailers not resisted passing on rising crude oil prices as customers grow less willing to pay what it takes to fill their gas tanks, analyst Trilby Lundberg said in an interview. "Demand has been falling at these prices," she said."

As had been anticipated for weeks, and frankly is criminally overdue, Japan has announced that it will expand the evacuation zone around Fukushima to areas beyond a 20 km (12.4 mile) radius to include villages and towns that have had more accumulated radiation, Japan's chief cabinet secretary said on Monday. "These regions could accumulate 20 millisieverts or more radiation over a period of a year," Yukio Edano told a news conference, naming Iitate village, 40km from the plant, part of the city of Kawamata and other areas. The news preceded the latest major 6.6 magnitude aftershock which shook buildings in Tokyo and a wide swathe of eastern Japan on Monday evening, knocking out power to 220,000 households and causing a halt to water pumping to cool three damaged reactors at Fukushima. " The epicentre of the latest quake was 88 km (56 miles) east of the plant and stopped power supply for pumping water to cool reactors No. 1, No. 2 and No. 3. The aftershock also forced engineers to postpone plans to remove highly contaminated water from a trench at reactor No. 2." Also spotted was the now disgraced TEPCO president who had fallen "sick" early on in the crisis and completely disappeared from view. Per Reuters "TEPCO President Masataka Shimizu visited the area on Monday for the first time the disaster. He had all but vanished from public view apart from a brief apology shortly after the crisis began and has spent some of the time since in hospital. "I would like to deeply apologise again for causing physical and psychological hardships to people of Fukushima prefecture and near the nuclear plant," said a grim-faced Shimizu. Dressed in a blue work jacket, he bowed his head for a moment of silence with other TEPCO officials at 2:46 p.m. (0546 GMT), exactly a month after the earthquake hit." But the biggest loser is surely Prime Minister Naoto Kan who saw a landslide drubbing in local elections over the weekend, leaving Japan once again leaderless precisely at a time when it needs focused leadership more than ever.

The barrage of Fed commentary in the coming week could keep the debate over the future of Fed policy in the spotlight, as will the US PPI and CPI data that will be out toward the end of the week. Meanwhile, oil prices continue to climb, with Brent sitting firmly above $120/bbl. Elsewhere, there is a deluge of China macro data on Friday, where we expect inflation to pick-up a touch and activity to remain reasonably solid. The trade data out on Sunday posted a tiny surplus. Import and export growth both improved substantially and were stronger than expected; however, we must be mindful of Chinese New Year effects. On the monetary policy front, we and the consensus expect BoK, BI, and BoC to keep rates unchanged, though the MAS is likely to re-center the SGD NEER.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 11/04/11

One word (well technically two) can describe what is going on in the electronic pre-market arena right now: inflationary hysteria. Gold is at a new record, wheat is surging, corn is at highest since 2008, crude at a new 30 month high, silver is at $41.10 - a new fresh post Hunt high, beans surging, etc, etc, etc. Essentially everything is bid, following news first reported on Zero Hedge that PIMCO is betting the farm that either inflation is about to go parabolic and force bondholders to dump everything, or that the Fed will have no choice but to pursue another round of QE, sending gold to $2,000 and unleashing the Weimar endgame.

It almost seems like it was yesterday that Hugo Chavez was threatening to steal Obama's peace prize from under the president nose, when one dictator seemed on the verge of ending another dictator's multi-decade rule. But not really. And since nobody remembers that fable any more, it is time to come up with a new rehash on a common theme. Per Reuters, "Muammar Gaddafi has accepted a roadmap for ending the conflict in Libya, South African President Jacob Zuma said on Sunday after leading a delegation of African leaders at talks in Tripoli." Good thing Zuma has so much more credibility in the international community than Chavez. Or else people may see through yet another attempt at push oil prices lower for a day or two while the big boys load up, only for the rumor to dissipate in a day or so. "Zuma, who with four other African heads of state met Gaddafi for several hours at the Libyan leader's Bab al-Aziziyah compound, also called on NATO to stop air strikes on Libyan government targets to "give a ceasefire a chance."" We are not positive, but something tells us the Beatles are about to get a asston of royalties on that particular phrase. And just in case there is no confusion about just what this "roadmap" entails, there damn well should be. "No one at the talks gave details of what was contained in the roadmap. Anti-Gaddafi rebels have said they will accept nothing less than an end to Gaddafi's four decades in power, but Libyan officials say he will not step down." So no actual details, but please sell Brent or else Goldman won't be able to load up. Is that about the gist of it?

A month ago, Zero Hedge first reported that Bill Gross had taken the stunning decision to bring his Treasury exposure from 12% to 0%: a move which many interpreted as just business, and not personal: after all Pimco had previously telegraphed its disgust with US paper, and was merely mitigating its exposure. This time, in another Zero Hedge first, we discover that it is no longer business for Bill - it has now become personal (and with an attendant cost of carry). In March, Pimco's flagship Total Return Fund (TRF) has now taken an active short position in US government debt: -3% on a Market Value basis (or $7.1 billion), and a whopping -18% on a Duration Weighted Exposure basis. And confirming just what PIMCO thinks of US-related paper is the fact that the world's largest "bond" fund now has cash, at a stunning $73 billion, or 31% of all assets, as its largest asset class on both a relative and absolute basis. We repeat: cash is more than PIMCO's holdings of Treasurys and Mortgage securities ($66 billion) combined. To paraphrase: in March PIMCO was dumping everything related to US rates (see chart below). This is the first net short position that PIMCO has had in Government-related debt since the Great Financial Crisis of 2008, and going positive in February of 2009 only after it became clear that the Fed would commence monetizing US debt one month later. This is the closest that Gross has come to making a political statement and is now without doubt putting his money where his mouth is. The only event that could possibly derail Gross' thinking is a huge market crash forcing a rush to Treasury safety. Alas, as has been made all too clear recently, US debt is no longer the safe haven it once was. Which begs the question: when will the TRF break out a "gold" asset holdings line item.

In what can only be described as a stunning deterioration in foreign relations between the world's two superpowers, following Friday's release by the US State Department of the annual report on human rights, which expressed sharp criticism of the human rights records of China, North Korea, Cuba and Belarus, among others, China decided it has had enough. Less than 48 hours later, it has lashed back at the US with a report that is making headlines at every government controlled, and otherwise, media in mainland China, which makes a mockery of the US double standard when it comes to human rights, and exposes US "hypocrisy" which China (rightly many would claim) asserts is merely a pretext for continued US attempts at world "hegemony". As Xinhua reports on its front page, "The Human Rights Record of the United States in 2010 was
released by the Information Office of China's State Council, or
cabinet, in response to the Country Reports on Human Rights Practices
for 2010 issued by the U.S. Department of State on April. The U.S. reports are "full of distortions and
accusations of the human rights situation in more than 190 countries and
regions including China. However, the United States turned a blind eye
to its own terrible human rights situation and seldom mentioned it,"
China's report said." The war of words hits a new all time record: "The United States has taken human rights as "a political instrument to defame other nations' image and seek its own strategic interests," the report said. While illustrating a dismal record of the United States on its own human rights, China's report said the United States could not be justified to pose as the world's "human rights justice." "However, it released the Country Reports on Human Rights Practices year after year to accuse and blame other countries for their human rights practices," the report said. These moves fully expose the United States' hypocrisy by exercising double standards on human rights and its malicious design to pursue hegemony under the pretext of human rights, it said. The report advised the U.S. government to "take concrete actions to improve its own human rights conditions, check and rectify its acts in the human rights field, and stop the hegemonistic deeds of using human rights issues to interfere in other countries' internal affairs." While that last sentence may not be an explicit warning for the US to shut the hell up and focus on its own dirty laundry, or else, it sure does sound like one.

Despite relentless calls that the Chinese currency is undervalued, and that it really is China's fault that Brent is nearly at $130, in March the world's fastest growing economy posted an import number of $152 billion: an absolutely monthly record. Still, this was almost precisely offset by total exports which at $152.2 billion represent the third highest monthly total ever (following only November and December of 2010), and leading to a trade surplus of $140 million, in essence implying that the CNY is rather correctly priced (at least per the Politburo's calculations of imports and exports). This is substantially stronger than the consensus which was looking for a trade deficit of $3.35 billion in March, arguing that following February trade deficit which came at a multi year high, in part blamed on the Chinese New Year, the country is once again in aggressive inventory restocking mode. A detailed look at China's two main trade partners, the US and EU, shows that exports to the US surged back to $25.1 billion from $15.8 billion in February, while imports from the US were $12.1 billion. Yet despite a strong euro, it is the EU that exported a record amount of goods to China in March: an all time high of $19 billion. Still, this was more than offset by $28.5 billion in imports from China for a trade surplus of $9.5 billion with the European Union. Ironically, it was the Rest of the World (excluding the US, EU, Japan, ASEAN, Korea, Hong Kong, Australia and Taiwan) which benefited the most, after it exported a record amount of goods to China, or $53.9 billion in March. At least someone (who actually has worthwhile goods to export) is seeing their economy grow, regardless of just how undervalued, or fairly priced, the CNY may be.

In a shining example of how it can be done, Iceland, for the second time in as many years, by popular vote refused to provide up to $5 billion to Britain and Netherlands banks. The just completed referendum once again rejected a $5 billion Icesave debt deal, pushed on Iceland by its European banking brethren. "The debt was incurred when Britain and the
Netherlands compensated their nationals who lost savings in online
"Icesave" accounts owned by Landsbanki, one of three Icelandic banks
that collapsed in late 2008." And while Iceland PM Johanna Sigurdardottir did a brief Mutual Assured Destruction tour claiming "economic and political chaos could follow" we can't help but think we are witnessing the early stages of Europe's most flourishing economy over the next decade, while all other countries in Europe fail one after another due to their inability, unwillingness and cowardice to force bankers to experience, gasp, losses for fear of "reprisals." As for the "isolation" that Iceland is threatened with experiencing should it give banksters the finger, we are certain it is just a matter of a few months before some enterprising hedge funds, scrambling for yield career risk offsets, decide to take on the role of the IMF or of repeatedly insolvent Dexia, and lend directly to Iceland.

Lately, there has been a lot of chatter by virtually everyone with some soapbox to stand on, about this and that. That's swell... if mostly irrelevant: by now everyone should be aware that only two charts actually matter, both of which are painfully self-explanatory.

Intragovernmental debt holdings have been one of the more underreported topics during the last few economic cycles. This isn’t surprising. We’ve turned the federal debt argument into a legal, rather than financial or moral, debate where the fairness doctrine of universal applicability means any inconsistency of logic on the part renders the whole invalid. The result of this is the public grossly misunderstands the burden of proof to be the lack of controvertible evidence, and with it any hope of meaningful discourse is lost in the chicanes of grandiose political gestures. Arguments get boiled down into easy-to-swallow pills ready for mass consumption. We rally against illegal immigration without questioning who built our houses, and condemn illegal drug use while washing down an oxycodone with a highball of scotch. National debt is now far too high and government spending and waste far too pervasive. We must stop at nothing to rid ourselves of this indentured servitude... Oh, dear Faust, if it were only that easy.

Remember how happy the Egyptain population was to depose one dictator only to have him replaced with a ruling military junta, and how prosaic, not to mention cynical, our assumption was that the newly "democratic" country has three months before the country experiences another post-Thermiodrian revolution? Well, our estimate was three weeks off. As the video shows, Tahrir Square (remember it? the second black swan of 2011 after that whole Tunisia thing...) is once again the latest and greatest place to go, be seen, and occasionally, shot at.

At a time where the government has demonstrated a complete lack of will over $38 billion, we are left in the hands of Ben to determine short term rates, influence the curve, and Timmy to determine what maturity profile that 'best meets our needs'. The actions of either of these two unelected individuals could dwarf the $38 billion as every 1% of increased borrowing costs would cost $143 billion. Since the government could barely deal with $38 billion, how will they deal with increased borrowing costs? Does even congress know just how trivial their cuts look relative to the potential increases in debt cost?