Archive - May 27, 2011 - Story

Commerce is the lifeblood of a nation. Without the free flow of trade, without financial adaptability, without intuitive markets driven by the natural currents of supply, demand, and innovation, cultures stagnate, countries whither, and one generation after the next finds itself deeper in the somber doldrums of economic disintegration. In an environment of transparency, honesty, and the absence of monopoly (government or corporate), on the rare occasions in history that these conditions are actually present in one place at one time, we often see an explosion of prosperity and true wealth creation. When local, decentralized markets are given precedence over subversive elitist leviathans like mercantilism or globalism, a wellspring of abundance bursts forward. Free people, building true free markets that serve the specific needs of individual communities and insulating the overall economy from systemic collapse; this has always been the wave of the future. Not “integration”, “harmonization”, or some fantastical nonsensical “global village” administrated by a faceless unaccountable transnational entity like the IMF, infested with sociopathic maid raping euro-trolls. Unfortunately, average Americans today have grown far too accustomed to having their commerce, and thus their livelihoods, micromanaged for them. The bottom line is, if the daily fiscal life of the average American were to deviate from today’s norm even slightly, the results would be devastating. There is no flexibility in our current system. All is rigid and fragile. There is no backup plan.

In a glowering example of humanist magnanimity, the tax expert, who also on occasion pens missives describing in detail the destruction that would ensue should dealers be hindered from perpetuating the US Treasury ponzy, known as Tim Geithner, just advised China that its low exchange rate impairs China's ability to curb inflation. This, coming from the man under whose watch the dollar has gotten pounded eight ways to Sunday. The announcement came as part of the semi-annual report issued to congress, which was due originally back in April, yet which as everyone knew was delayed for no other reason that more theatrics. And just to confirm how utterly toothless US game theory bluffs have become, Geithner, contrary to much bristling rhetoric to the contrary, decided not to name China a currency manipulator, a move that is sure to require the CME to promptly issued five margin hikes of Chuck Schumer's blood pressure. But lest someone accuse Tiny Tim of being not only a tax fraud, and a liar, but also a coward, he did add that the Yuan is "substantially undervalued." And so the USDCNY revaluation debate has been pushed back for at least one more year. And to those who experience a feeling of deja vu upon reading this, worry not: Geithner had exactly the same conclusion 3 months ago. Bottom line: China 2; US 0.

The most recent CFTC data is out and the results are in: momentum chasing FX speculators continue to retrench to exit positions, as the Euro long orgy, which as recently as May 3 hit a multi year record at 99.5k net long non-commercial contracts. Fast forward 4 weeks, and the recent plunge in the EURUSD has brought the exposure to just 19.1K contracts, the lowest since January 18, and a level prevalent in October and November of 2010. The 4 week drop is the biggest one month drop, as the momentum to the downside accelerates. Although it may still have a ways to go: the recent "support" is around -50k contracts. At this rate it will be hit in about 3 weeks. In the other camp we have the USD which saw short covering bring it to net non-spec exposure climb from -1,270 to 2,485, the first net positive exposure since January 2011. That said, with the EURUSD on the verge of breaching of 1.43, it seems that the great unwind is now over. A complete historical chart of non-commercial specs, and several other products, can be seen below.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 27/05/11

Earlier today SocGen came out with a report that is a must read for everyone who has an even passing fancy in global monetary policy, as the currently rampant inflation in China, and the approaches ushered to deal with it, threatens to derail the global "recovery" (although not sure in what: printing of credit money - yes; economy - no) which according to Morgan Stanley is "too young to fail." To be sure, SocGen discusses the first of three dominoes that will or already have, fallen, as part of the increasingly popular domino theory of Chinese inflation. SocGen explains: "Quite simply, the domino theory of 2011 is that when China comes under the influence of inflation, the surrounding countries, those with the most immediate trade ties, would also fall to inflation. It will only be a matter of time till those economies with the greatest trade ties; indeed the entire world has succumbed to the great inflation cascade emanating from China." And the first domino, which SocGen claims to already  have fallen is the following: "The first domino is China creating  autonomous structural inflation: China’s domestic inflation accelerated at an unprecedented pace at the end of 2010 and policy makers remain well behind the curve. As China engineers its economy to a more domestically focused one, its demand curve is shifting outwards and the global supply curve has been inelastic in response. That domino has already fallen and is the focus of this paper." And while we respect SocGen's opinion on China, most recently referenced to debunk a BCG report on imminent US-Chinese worker wage parity, in this case we wonder if SocGen has simply gotten on the boat of conventional wisdom a little too fast. What we mean is that "structural" inflation may not be all that "structural"especially if one considers a flip to a traditional Stalin saying: "no man - no problem".... in this case "no electricity - no inflation." Bernstein's Michael Parker explains...

For nearly 30 years we have had two Global Strategies working in a symbiotic fashion that has created a virtuous economic growth spiral. Unfortunately, the economic underpinnings were flawed and as a consequence, the virtuous cycle has ended. It is now in the process of reversing and becoming a vicious downward economic spiral. One of the strategies is the Asian Mercantile Strategy. The other is the US Dollar Reserve Currency Strategy. These two strategies have worked in harmony because they fed off each other, each reinforcing the other. However, today the realities of debt saturation have brought the virtuous spiral to an end. One of the two global strategies enabled the Asian Tigers to emerge and grow to the extent that they are now the manufacturing and potentially future economic engine of the world. The other allowed the US to live far beyond its means with massive fiscal deficits, chronic trade imbalances and more recently, current account imbalances. The US during this period has gone from being the richest country on the face of the globe to the biggest debtor nation in the world... So what could possible stop this ideal symbiotic relationship from continuing to feed on itself? A number of factors, all of which are now coming together to end this Virtuous Cycle.

Asked about the fate of the economic "recovery", which incidentally is nothing more than a $2 trillion dollar dilution-funded blip on the depressionary downtrend commenced in December 2007, Greg Peters, the head of fixed income research, at Morgan Stanley, the firm whose other fixed income strategist Jim Caron will now have been proven wrong three years in a row following his annual broadly bullish call for a jump in rates (not based on bearish considerations such as those postulated by Bill Gross... bullish), tells Tom Keene that the recovery is "Too Young To Die." Yep. That's the justification. Alas there was no mention that the 98 year old ponzi scheme perpetrated by the Fed since 1913 is now "Too Obvious To All." And when that fails, many of the same people who get paid huge sums of recycled taxpayer money to come up with catchy four word slogans while spouting flawed economic projections will suddenly find themselves "Too Pitchforked To Fly Away (To Non Extradition Countries)"

The only thing that could prevent another oil shock from happening before the end of 2012 would be another major economic contraction. The emerging oil data continues to tell a tale of ever-tightening supplies that will soon be exceeded by rising global demand. This time, we will not be able to blame speculators for the steep prices we experience; instead, we will have nothing to blame but geology... With Brent crude oil having lofted over $100/bbl at the beginning of February and remained above that big, round number for four months now, we are already in the middle of a price shock. It may not be a perfect repeat of the circumstances of the 2008 oil shock, but it's close enough that the risk of an economic contraction, at least for the weaker economies, is not unthinkable here. Japan, now in recession and 100% dependent on oil imports, comes to mind. Looking at the new data and reading even minimally between the lines of recent International Energy Agency (IEA) statements, I am now ready to move my ‘Peak Oil is a statistically unavoidable fact’ event to sometime in 2012, which tightens my prediction from the prior range of 2012-2013. Upon this recognition, the next shock will drive oil to new heights that are currently unimaginable for most. First, $200/bbl will be breached, then $300, and then more.

Looking at these pictures from Barcelona one would think this is Tunisia, Cairo, or at best, Athens. Instead, it is from the once incomparably wealthy capital of Catalunia (although they did have Olympics there: an event guaranteed to result in at least one municipal bankruptcy at some point in the future), and before the Barcelona-Man United game. One can only imagine what happens if Barcelona wins (or is that loses).

A snapshot of the US Afternoon Briefing covering Stocks, Bonds, FX, etc.

Market Recaps to help improve your Trading and Global knowledge

I remember the first time I saw someone us the terms “risk on” and “risk off” as a way to describe the flow of capital into and out of certain baskets of assets that are supposedly “risky” or “safe.” The terms got under my skin back then and they continue to do so until this day. Wall Street and the media just love coming up with trite and untruthful statements as a way to condition investor behavior and ultimately separate you from your money. First of all, the world and the successful deployment of capital is much more complicated over any serious investment horizon than the simplification of everything into “risk on” and “risk off.” This way of thinking is even more dangerous when conventional wisdom allocates to the “risky” category many items that are in reality the true safe havens and to the “safe” category those that are guaranteed to destroy your financial well being... As long as the central planners have some degree of control of the markets, which they still do at the moment, if you are playing the game and managing money in this world of investment horizons of weeks if not days you have no choice but to trade the market you are given. Nevertheless, as I have said countless times before, in the final equation there will be no other asset that will lose investors more money that U.S. government bonds and nothing that will protect wealth more than gold. Moreover, when the central planners do lose control of the markets (and they most certainly will) the fact that they have spent so much time manipulating them as well as pushing investors into the worst types of capital allocation decisions they could make, guarantees the total wreckage of the life’s savings of most of this nation.

My big fat Greek.. oh whatever.

• GREECE'S SAMARAS SAYS EU BAILOUT MUST BE RENEGOTIATED
• GREECE'S SAMARAS SAYS GOVERNMENT PLAN IS WRONG
• GREECE'S SAMARAS SAYS WON'T ACCEPT BEING BLACKMAILED
• GREECE'S SAMARAS SAYS NEED TAX RATE REDUCTION FOR GROWTH

Next up: Linda Green signs the Greek agreement to hand over all its assets to the world banker cartel.

Traveling through Vietnam provided a few valuable lessons for life. You arrive, armed only with a copy of the Lonely Planet. Any map turns out to be pretty useless, as street names are frequently changed or the street layout completely altered (this is mid-1990?s). You are being inundated with offers from “cyclo-” (bicycle rickshaw) drivers. Rule number one: negotiate the fare before hopping on the seat. The Vietnamese being excellent sales people expect further price negotiations while you are riding (“Okay, price was per person” “Sir, luggage is extra”). One particular cyclo driver left me with a memorable experience. Once given his destination he claimed the hotel was closed (“I know much better hotel”). Over the entire ride he insisted my hotel was said to be either under construction, on fire or simply full. And I insisted, too, so we actually ended up at the hotel. The pure existence of the hotel should have refuted most of his statements, but did not lead to any signs of embarrassment or repentance on his part. To my surprise he followed me into my room, still trying to lure me into changing hotels (“This room not good”). Later, I found him haggling with the hotel owner over a “finder’s fee” (which was customary for cyclo drivers bringing in hotel guests). Lessons learned: (A) When you are standing inside a hotel it does exist, no matter what someone else might say. Accordingly, when a country is burdened with a debt level approaching 160% of GDP it does need a restructuring.

A week ago we disclosed that the second Egyptian revolution (because the first one apparently was a dud) was scheduled for May 27. As expected, this is precisely what has happened: "Thousands of Egyptians packed Cairo's Tahrir Square on Friday in what organisers called a "second revolution" to push for faster reforms and a speedy trial for ousted President Hosni Mubarak and his former aides. Activists complain of delays in putting Mubarak, his family and members of his ousted regime on trial and that the army has not restored order quickly enough to the country of 80 million. Egyptians are also demanding an end to endemic graft, one of the main grievances that drove thousands of protesters onto the streets in the uprising that began on Jan. 25. "After some 1,000 martyrs ... people do not see any change," said Mustafa Ali Menshawi, a 38-year-old accountant, who was helping marshal crowds flooding into the square." Granted there has been some change: "The only change we see is that the Mubarak metro station has been changed to the Martyrs station," he said." This is happening even as deposed president Hosni Mubarak could face the death penalty as he prepares to face charges of "pre-meditated killing" of protesters during the uprising that ousted him on Feb. 11. Yet the revolution was not a failure for all: in continuation of the tried and true "economic hitman" practice, whereby MNCs land in a country and generously provide it credit, merely to extract its resources, take control of its infrastructure, and subjugate people with unmanageable credit card interest payments, the IMF just announced it will lend $35 billion to Arab countries to "stabilize their economies." Oddly there was no reference to "humanitarian" intervention or doing god's work.

We just had two completely irrelevant and largely fabricated numbers come out and offset each other: on one hand the UMichigan confidence number printed at 74.3 on expectations of 72.4, courtesy of declining inflation expectations (who would think that a shallow one week drop in gas prices could do so much), as respondents, all 10 Wall Street CEOs of them, saw 1 year inflation expectations drop from 4.4% to 4.1%, the first drop since September 2010. Ignore the fact that the Billion Price Project, when it was still updating its index, indicated a 10% annualized inflation rate in the US. Regardless, the confidence number was promptly offset by a horrible number from the now completely discredited, conflicted and irrelevant National Association of Realtors, whose press releases should have absolutely no bearing on the market, and yet they do, which showed that April Pending Home sales plunged 11.6% on expectations of a mild 1% decline (from a revised +3.5% previously). Bottom line: homeless people are confident that only 100% of their paycheck (and not 200%) will go to covering gas costs.