Archive - Apr 2011 - Story

"So Rick Ackerman posted a piece that I spotted on Zero Hedge—which surprised the hell out of me. Either Tyler and his gang of merry pranksters are losing their nerve about the downward trajectory they think the U.S. economy and monetary policy is headed in—or they ran the piece for shits and giggles. Ackerman’s piece said, in effect, that dollar hyperinflation was impossible. His post was titled “Big Gap in Logic Weakens Hyperinflation Argument”. The cause of hyperinflation is always the same: Spiralling prices that cannot be reigned in with traditional monetary policies of interest rate hikes. But Ackerman doesn’t see this: In his piece, it’s clear he doesn’t realize hyperinflation is an effect of rising prices. Eventually people realize the money itself is to blame—but only eventually, at the end. That’s why Ackerman’s first sentence sort-of makes sense, but not really. But although Ackerman is partly right in the first sentence, his second sentence? That it’s “highly unlikely that this will happen in the United States”? Brother, a panic in the dollar that leads people to exit it for commodities has happened already—and not that long ago: In 1979-’80, when inflation crossed the double digits but before Volcker slammed the brakes via interest rate hikes, people were beginning to get out of the dollar and into anything else, especially commodities, especially gold and silver." Gonzalo Lira

By now everybody knows that only a last ditch intervention by the G7 prevented the financial system from imploding three weeks ago, when the Yen carry trades blew up in the face of all those who had been short yen, long high yielding currencies. The result would have been a pervasive trading desk annihilation, possibly on par with that experienced after the Lehman collapse had the world's central banks not stepped in to sell Yen in droves. Yet what fewer know is that when it comes to funding cheap carry-type trades, the FX carry trade is merely one. A possibly far bigger one has been the one established courtesy of the Fed's generous Interest on Overnight Reserves (IOER) rate which being far higher than General Collateral (GC) Repo, presents banks with Fed deposit access, what was a sure way to earn guaranteed money on an interest rate arbitrage spread. For nearly two years banks collected the proverbial pennies in front of the rollercoaster... until last Friday, when the FDIC decided to spoil the party. What happened as a result of the FDIC's decision to establish an assessment rate which spoiled the arb, was a blow out for most institutions playing the IOER-GC carry trade leading to a major disruption in this funding market, possibly far more serious than the FX carry trade unwind, and a plunge in overnight GC repo rates on Monday (see chart) by over 75%! Does this mean banks have lost one key carry funding source? So it would appear. And it only means that the FX carry trade will be that much more a critical source of "risk-free" income for banks... At least until the next major earthquake above the ring of fire. In the meantime, as the Fed scrambles to restore normality to the repo market, will the Fed be forced to do Reverse Repos, which while fixing the carry trade, will withdraw far more liquidity form the market. Which as we all know is grounds for immediate incarceration in a Centrally Planned kleptocracy such as the USSA.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 05/04/11

There is nothing remotely ideological or personal in my prediction that President Obama will lose the 2012 election. Both parties are equally out of touch with reality in my view, and both suppport the same things: a global Empire, an increasingly intrusive Savior State, a shadow banking system which is no longer under the control of State institutions (rather, the banks control the institutions), and various crony-capitalist cartels which fund political campaigns and partner with the Central State's bloated, unaccountable fiefdoms. The only visible difference between the two parties is slight variations in the relative growth rates of the most-favored cartels and fiefdoms. President Obama seems like a nice guy. Many people said the same thing about George W. Bush. While a likeable personality is a plus in a media-obsessed society, American elections boil down to this: Americans vote their pocketbook, and their pocketbooks will be a lot lighter by November 2012.

Good news: at least it is not in backwardation. We wonder how long before Bernanke uses that excuse in a public tribunal.

Nobody could have foreseen this. Nobody. In other news, Ben Bernanke has just ordered an extra absorbent set of Huggies.

We have now gotten to the very limits of the market, where any even modestly bad news (Services ISM) even if of a secondary importance nature, sends the market surging higher as expectations that QE3 is inevitable, hit 100%. Then when good news comes, and QE3 is deemed to be impossible, the market plunges. Bizarro world, where bad news is good news and vice versa, has won. Thank you central planning. And for all those who jettisoned gold on expectations the economy was actually, chuckle, improving, here is your chart.

Time for some more theater: at 10:30 am Eastern Paul Ryan will reveal his budget proposal which sees the US government cutting $650 billion each year over the next 10 years. This simply means that even more stimulus will reside with the Fed, and with monetary policy, which also means that not only is QE3 guaranteed, but so is QE33. Watch Ryan live at the below C-Span link.

While the services PMI dropped from 59.7 to 57.3, well below expectations, the broad Business Activity series plunged from 66.9 to 59.7 The surging inflationary Price Paid series dropped from 73.3 to 72.1, or back to January's level. New Orders and Employment also declined from 64.1 and 53.7, from 64.4 and 55.6 respectively. The only growing components were Backlog of Orders rising 4.0 to 56.0, New Export Orders up 2.5 to 59.0 and Inventory Sentiment up 9.5 to 67.0, which the Surve classifies as "Too High" - this means liquidations are imminent. Hope you have your FIFO on.

There is nothing too remarkable in Absolute Return Partners' Niels Jensen's latest letter: it does a good compilation of a recent letter by James Montier posted previously, and juxtaposes it with textbook precepts from the discredited Market Portfolio Theory, in terms of what makes a good investor. Well, indeed: if one does everything correctly according to what works in a textbook definition and combines it with real world success, one will certainly end up making money. On the other hand, Jensen does have an actual trade recommendation: and it is go illiquid. "My favourite example right now is illiquid as opposed to liquid investments. I strongly believe that less liquid investments will outperform more liquid ones over the next few years for the simple reason that the less liquid ones are struggling to catch the attention of investors who, still smarting from the deep wounds inflicted in 2008-09, stay clear of anything that is not instantly liquid. This has had the effect of pushing the illiquidity premium (i.e. the extra return you can expect to earn by investing in an illiquid as opposed to a liquid instrument) to levels we haven’t seen for years." We wonder how ARP will fare if and when the markets seize up once again. But there's at least a few milliseconds until HFTs blow a fuse next and crash the market yet again.

With so much sound and fury out of Washington one would imagine something big must be happening. One would be wrong. The ongoing theatrical strawman between Republicans and Democrats is merely a massive spectacle which has one outcome: a compromise. But why not score some brownie points from the constituency in the meantime by "sticking firm to principles." And of course the spin by the MSM will lead to a huge relief rally in stocks once we get news on Thursday in the 11th hour that the government will not shut down. As if the government would shut down when it prints $100 billion in debt every two weeks. In the meantime here is a summary of the key parts and intermissions for the ongoing DC melodrama for the balance of the week, courtesy of Goldman.

And so with each passing day the veil of lies at Fukushima is being lifted. For all those who had been scratching their heads how it is possible that Fukushima would have a (very high to begin with) radiation level in the millisieverts if indeed the plant had experienced a Chernobyl style meltdown and "inadvertent recriticality", when it should have been far higher, here is your answer. According to NHK, "a radiation monitor at the troubled Fukushima Daiichi nuclear power plant says workers there are exposed to immeasurable levels of radiation." Unfortunately for the workers present, the monitor is not being metaphoric: "The monitor told NHK that no one can enter the plant's No. 1 through 3 reactor buildings because radiation levels are so high that monitoring devices have been rendered useless. He said even levels outside the buildings exceed 100 millisieverts in some places." Perhaps it is time for the discredited Japanese government to form a committee to investigate whether TEPCO, with or without the complicity of the NHK, was counterfeiting radiation reading over the past month, and thus sacrificing the lives of the 50 brave TEPCO workers who are committing an act of suicide by continuing to stay at the plant. Who knows: maybe they would have a different opinion if they actually knew their presence there is a guaranteed death sentence.

• Hilsenrath speaks again: BoJ Considers Measured Quake Response  (WSJ)
• Bernanke Says Fed Will Act If Inflation More Than ‘Transitory' (Bloomberg)
• IMF Chief: 'Black Swans' Still Haunt Global Finance (WSJ)
• Will the Real Phillips Curve Please Stand Up? (Hussman)
• China Raises Interest Rates to Counter Inflation Pressure (Bloomberg)
• Japan Food-Supply Issues Raise Questions on Tariffs, Imports (WSJ)
• Fed's Bernanke Downplays Inflation Fears (WSJ)
• U.S. Budget: Demagoguery and Sophistry Reign (RCM)
• Asian Central Banks Aim to Weaken Currencies (WSJ)

The strategy of Mutual Assured Destruction has worked so well in the "developed" world (thank you Hank Paulson, Tim Jeethner, Clearinghouse Association et al), it is time to see it in application in the "developing." In an attempt to preempt US doubts about intervening (on the proper side) in the case of escalations in Saudi Arabia (and with the possibility of Yemen becoming a potential Al Qaeda hotbed rising by the hour, this is non-trivial) the former Saudi oil minister Sheikh Zaki Yamani told Reuters on Tuesday that "Oil prices could leap to $200 to $300 a barrel if Saudi Arabia is hit by serious political unrest." We are confident he was merely talking in a very, very hypothetical scenario. After all why scaremonger in a world in which everything is under control?

Portugal’s downgrade has sent markets negative this morning, with more tightening in China and rising oil prices not helping the situation. Republicans in the House of Representatives today will release a budget plan set to shave off $6T from President Obama’s plan through the next ten years. The proposal will include a phase out of Medicare and an overhauled tax code. During a speech yesterday, Fed Chairman Ben Bernanke described the U.S.’s current level of inflation as “transitory.” The European Commission has reported that no short term loans would be made available for a country without a full rescue fund request, thus it remains to be seen whether loans can be made without austerity measures being accepted. The news was sobering for Portuguese government officials that have been calling for a bridge loan to get them through steep upcoming maturities. Tomorrow will see the first of five T-bill auctions designed to push the country through upcoming maturities and is planned to raise between €0.75B and €1.0B. PMI data out this morning. China saw another 25bp interest rate hike today. The 1Y lending rate now stands at 6.32% and the 1Y deposit rate at 3.25%. Further tightening is likely.