Archive - May 11, 2011 - Story

To those who follow Dylan Grice's writings closely (and everyone should), his proposal that the only possible outcome for Japan, where stunningly tax revenues no longer ever cover non-discretionary expenditures - a sad fate that awaits none other than the US eventually, is to hyperinflate its way out, is not new. Nonetheless, during the just completed annual CFA Institute annual institute held in Edinburgh, he gave an updated presentation which indicates that he has not yet changed his opinion that if forced to pick between the lesser of two defaults, the only option is that of unbridled printing, now that the US has firm leg up in the global fiat race to the currency bottom, which we predicted back in 2009, will be the key feature of the macro theme until the end of the Keynesian experiment. So, as before, Grice's recommendation, away from the natural trade of shorting bonds (a negative carry trade which has cost the likes of Kyle Bass a pretty penny over the years) as one awaits this only possible outcome, is to actually discount the future, something the market has completely forgotten how to do, and buy stocks, in advance of the Weimar Rally for the Rising Sun. Below we present "Hoping for the best, preparing for the worst...in Japan" - Grice's presentation of an upcoming Japanese hyperinflation, which explains not only why Japan can't afford higher JGB yields, but why its to-date favorable demographic are now looking uglier by the day, and the only outcome for Shirakawa is to finally bite the bullet and beat the Chairsatan at his own game, in the process forcing the Bernank's own hand if he wishes to retain the USD's place at the head of the FX devaluation race.

While Europe may have sold its soul to the devil over the past decade, after it was "forced" to engage in diabolical currency swap deal with the "godly" likes of Goldman Sachs simply to mask that Europe's monetary union is nothing but a debtor's prison to the weaker peripheral countries at the expense of the stronger ones (or one: Germany), it still retained its beating heart - the concept that served at the core of the European Union: the so-called customs union, or a mobile, borderless workforce. Alas, the heart has just entered ventricular fibrillation, as for the first time, a country, Denmark, has taken what appears to be the first step toward defecting from Europe's 60 year old experiment of intimate, and sometimes, forceful unification. As EUBusiness reports: "Denmark will reintroduce controls at its
intra-EU borders with Germany and Sweden, Finance Minister Claus Hjort
Frederiksen said Wednesday following an agreement between the government
and the far-right. "We have reached agreement on reintroducing
customs inspections at Denmark's borders as soon as possible," Hjort
Frederiksen told reporters." The official reason: "controls would counter illegal immigration and
organised crime." The unofficial reason: the great, and failed, experiment at unity may be ending.

Most have played the childhood game of Snakes and Ladders (albeit in less volatile, margin hike-free, and sovereign-solvent times). Few, however, have appreciated just how applicable this game is to a rapidly deteriorating, game theoretical balance currently sustained in Europe at the expense of hundreds of millions of middle-class taxpayers. Here is JP Morgan's Michael Cembalest explaining how one can simplify all the highly complicated political and financial machinations vis-a-vis Greece can be reduced to a simple board game. And, speaking of snakes, or in this case anacondas, perhaps just as notable is the envisaged relationship between Greece, as the pray, and Europe, as a constrictor snake, gradually engulfing the small, and recently quite militant country. For those familiar with the debtors prisons of the middle ages, it appears that the van Rompuy institution has finally managed to recreate one under a regime of globalist "democracy."

This won't sit too well with the GCLU. We are, in fact hearing, that there is already a protest organized to protest police brutality, which will culminate with more cops beating the austerty out of more protesters, and so forth at an exponential pace.

The recent correction in the commodities markets may be providing Bernake, Geithner and their easy money acolytes with a sense of relief given the relentless run up in prices of raw materials since the announcement of QE back in 2008, but they should not sleep tight just yet. As anyone in the markets will tell you, when any underlying has a price move so vertical in its trajectory it’s bound to face a correction as the smart money, having gotten in for fundamental reasons much earlier along the trend line now wait for the panic buyers or the Johnny-come-lately’s to give the rally that last unsustainable spike to unload their longs and leave the suckers holding $40.00 silver in their purses. So one must step back and take a long view. Although it would appear that those of us who warn that inflation is not just a threat but very much a fact of life now were knee-jerk pontificators jumping on the commodities rally trend for political (read: Fed/Obama bashing) reasons, the analysis is quite sound. Most important, it is methodical not emotional as price surges tend to make investors and analysts from time to time. Here are some facts: even with the inevitable correction in commodities, as of this writing crude oil is 35% more expensive than it was a year ago…advancing with ups and downs along the way from as low as $17.50/bbl in November of 2001 to its current level of over $100/bbl or around a 19% annual appreciation in a decade since the Fed started giving away dollars. Silver 93% Wheat 84% Cotton 100% Coffee 55% Cattle 10% etc etc. Gold is up 22% for the year. More revealing, it is up an astonishing 450% since 2001. In that same decade the USD index against all currencies shed 40% of its value.

Our chart of the day comes courtesy of Dylan Grice, and his fascinating "Hyperinflation in Japan" presentation given at the CFA annual meeting in Edinburgh which we will shortly share with readers, which shows that currency devaluation is not a Ben Bernanke, nor even a central bank, phenomenon. As the chart below shows, and as most monetarists know too well, it was the Romans who engaged in the first act of voluntary currency devaluation-cum-dilution, by progressively reducing the silver content (yes, even back then currencies were backed by precious metals: and guess what - no CDOs squared, cubed, or quadratic, were conceived by the local office of Goldmanus Sachus) until such time as it hit zero... and the Roman empire was no more. Ironically, the nearly 100% devaluation of the currency in Roman times took just over 2 centuries. This compares somewhat favorable to the 97% drop in the purchasing power of the US currency since the inception of the Federal Reserve.

CME goes full retard, and is now seriously threatening to destabilize the clearing structure of the market with what appears a panicked margin hike every single day in one or more commodities. Among today's products impacted RBOB and RBOB crack spreads, up by 21% and 50%, respectively, as the CME makes it all too clear which products the Obama memo said need to be killed post haste.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 11/05/11

We just ran across a newswire headline that said what we have been warning about for about a month: "US Treasury auction to take US over debt ceiling on Monday." As a result, we took a look at today's DTS update, and indeed, come Monday's full settlement of this week's auctions, the jig is up. Prior to this week's $72 billion in auctions, total debt subject to the $14.294 Tr ceiling has risen to $14.280 trillion. There is no way the Treasury can cut $42 billion in debt next Monday (pro forma for the $16 billion Bill paydown settlement). Next up: panic.

Matt Taibbi does the seemingly impossible: translates the 650-page Levin report "Wall Street and the Financial Crisis: Anatomy of a Financial Collapse" in simple English, and lays out the criminal case against one Goldman Sachs for everyone to read, comprehend, and scratch their heads how nobody has gone to jail yet: "They weren't murderers or anything; they had merely stolen more money than most people can rationally conceive of, from their own customers, in a few blinks of an eye. But then they went one step further. They came to Washington, took an oath before Congress, and lied about it. When it came time for Goldman CEO Lloyd Blankfein to testify, the banker hedged and stammered like a brain-addled boxer who couldn't quite follow the questions. When Levin asked how Blankfein felt about the fact that Goldman collected $13 billion from U.S. taxpayers through the AIG bailout, the CEO deflected over and over, insisting that Goldman would somehow have made that money anyway through its private insurance policies on AIG. When Levin pressed Blankfein, pointing out that he hadn't answered the question, Blankfein simply peered at Levin like he didn't understand....This isn't just a matter of a few seedy guys stealing a few bucks. This is America: Corporate stealing is practically the national pastime, and Goldman Sachs is far from the only company to get away with doing it. But the prominence of this bank and the high-profile nature of its confrontation with a powerful Senate committee makes this a political story as well. If the Justice Department fails to give the American people a chance to judge this case — if Goldman skates without so much as a trial — it will confirm once and for all the embarrassing truth: that the law in America is subjective, and crime is defined not by what you did, but by who you are.

And while the open warfare between speculators and the administration, senators and exchanges continues, the gasoline fundamentals are poised to take another turn for the worse. As Reuters reports, "Valero Energy Corp's and Motiva Enterprises refineries in St. Charles Parish Louisiana, west of New Orleans, will be flooded if the Morganza Spillway is not opened, the St. Charles Parish emergency preparedness director said on Wednesday." Alas, the decision is not a simple one, and diverting the water from Louisiana, and attendant surge in gas prices once refining critical capacity is taken off line, would result in the flooding of Morgan City. From KFLY: "Officials say a decision on opening the
Morganza spillway could come soon.  The Morganza Spillway is upriver
from Baton Rouge and could be opened today, or this weekend. The floodway pours into the Atchafalaya River, and on to the Gulf of Mexico. Right now, inmates are filling sandbags to protect properties that could
be damaged if the spillway is opened.  If the Morganza spillway is
opened, Morgan City could see up to 20 feet of water. Mark Bernucho owns a fire and safety supply business across the street
from the 22-foot seawall, and he said it's the only thing keeping the
water away. The U.S. Army Corps of Engineers installed water gauges
Wednesday, to monitor the rising river waters." So the administration is faced with another dilemma: not divert and potentially see a surge in gas prices, or divert, and risk flooding and be accused of pandering to the oil lobby, one short year after the same lobby was villainized for the biggest oil spill in history. The biggest loser, however, is all the real estate in proximity to the flooded Mississippi river.

Today is shaping up to be an identical replica of the action from last Thursday as seen on the chart below. That's two flash crashes in less than a week. Whether this is driven by another margin hike known only to the CME and its closest, or due to news from Reuters that 17 senators have written to the CFTC to immediately crack down on excessive speculation in crude oil, is unclear, and largely irrelevant. The outright campaign to stomp out any non-stock trading is in full force. The message is clear: the only place where investors can henceforth put their money in is in stocks.

Because one video is worth one thousand pictures...

The fed has just released its new POMO schedule for the period from May 12 to June 9. In essence, every single day between now and Thursday June 9 will see a POMO, except for holidays and June 2. The total amount to be monetized is just $93 billion consisting of $80 billion in Treasurys (no surprise) and just $13 billion in MBS, confirming that as we have expected, the QE Lite component of monetization is coming to a rapid end as few if any prepay their mortgages with the Fed any longer. The MBS component is down from $17 billion as of the last schedule, and from $22 billion two months ago. The total monthly amount of $93 billion is the lowest of any monthly QE2 schedule. And following the end of this schedule, there is just another 20 days before QE2 ends on June 30, meaning from now until the end of the ramp, there is at best about $160 billion in incremental capital courtesy of Brian Sack and Printocchio. Furthermore, as of the end of this POMO schedule, the Fed will have monetized just $711 billion. Throw in another $60 billion total
for the remaining period through June 30, and the Fed will be woefully
short of its upside range of monetizing up to $900 billion in USTs and
Agencies.

Some may accuse us of simply recycling the same post over and over, with pictures of what appears like periodic violent rioting in Athens. Trust us: these are brand new, and the main reason why there is a seemingly massive media blackout of the events in Greece is because the journalists themselves are on strike. Luckily, the WSJ has compiled the following selection of pictures showing just how ugly the reality in an otherwise civilized European country has become. And since much of the proposed next round of austerity spending cuts would come from reducing wage costs in the public sector, cuts in operating expenses at state-owned enterprises, and reduced defense and health-care spending, the vicious cycle of more violent demonstrations will continue as even more cuts are implemented.