Archive - May 2011 - Story

By now it has been made very clear that Jim Grant is firmly in the (correct, at least according to us) camp that no matter what, the Fed will be forced to proceed with at least one more (and likely many) round of quantitative easing. In his latest must read interview, the author of Grant's Interest Rate Observer further explains, in simple terms, not only why the Fed is boxed in when it comes to monetary policy (an assessment comparable to that by Marc Faber back in March: "We may drop 10 to 15 percent. Then QE 2 will come, (then) QE 4, QE 5,
QE 6, QE 7—whatever you want. The money printer will continue to print,
that I'm sure. Actually I made a mistake. I meant to
say QE 18."),  but also refutes the fallacy of counterfactual statements that the world would end if the Fed had not intervened to prevent a systemic collapse in 2008, why a gold standard in our lifetimes is coming, on whether he is buying gold currently, on inflation, on corporate valuation, and where (and more importantly when) investors should be putting money to work.

Jan Hatzius' economic team finally comes out with a report that bears presenting as it aptly discloses one of the core conundrums facing the Fed: you can have low unemployment (eventually... courtesy of many years of ZIRP and QE in an environment of "fiscal adjustment", or Goldman's term for Congressional "austerity"), or you can have low gas prices. But you can't have both. To wit: "The combination of tight energy markets and high unemployment poses a dilemma for monetary policy. If policy is kept easy to boost growth, unemployment will decline but the oil market is at risk of overheating. But if policy is tightened to confront the pressure from higher oil prices on (headline) inflation, unemployment is likely to remain  far above desirable levels for a long time to come." And while the price of gas can be (very briefly) controlled by various volatility enhancing margin moves by the exchanges (which for those confused are nothing but self-reinforcing loops - increased vol leading to a margin hike, leads to more vol, leading to more margin hikes, etc). Too bad the CME can't just lower margin on unemployment to -100%. But it can't. Which is why very soon the Fed will be forced to admit to the whole world that "ultimately, a return to equilibrium in both the oil and labor market is likely to require an increase in the real price of oil. In theory, policymakers could react to this by  targeting either a combination of temporarily higher headline inflation with stable core inflation, or stable headline with lower—and in an extreme case negative—core inflation."  And here Goldman throws a stunner: when debating the implications for fiscal policy (we all know what monetary policy will look like: QE 3 through N), the firm proposes the following: "one complement to a low interest rate policy could be a higher energy tax. If one believes that higher real energy prices will be needed in coming years, an energy tax would promote that shift and also capture some of the surplus that would otherwise have gone to foreign producers." Is the government about to unleash some EPS destruction in the E&P and refining space? It appears Goldman has already given the green light which is really all it takes.

Today's EUR trading session which begins in about 4 hours, may be rather violent. While on one hand we have bond-negative news out of Spain, the biggest news once again comes out of the Swiss journal NZZ, which citing greek newspaper Kahtimerini, discloses that insolvent Greece has less than two months of cash left, or enough to last it until July 18, unless a new installment in the bailout tranche is approved for the country by the now headless IMF, and the "suddenly" insolvent ECB. Insolvent, because as Spiegel will report in its headline article tomorrow, and as we have noted many times before, the bank is suddenly finding itself lending out money collateralized by now virtually D-rated bonds: something not even Trichet will be able to spin off to the increasingly malevolent media. Per Dow Jones: "Skeleton risks amounting to several hundreds of billions of euros are on the balance sheet of the European Central Bank, magazine Der Spiegel writes in a preview of its edition to be published Monday. Those risks arise because banks, above all from Greece, Ireland, Portugal and Spain, have provided as collateral asset-backed securities that are unfit for central bank loans as their debt rating is low or non-existent, the magazine says." Alas, the European central bank's dirty laundry is being exposed just as a rift between the bank and Germany: its most solvent backer, is starting to develop. Also from Dow Jones: "German Finance Minister Wolfgang Schaeuble cautioned in an interview published Sunday that there shouldn't be a conflict with the European Central Bank over a possible restructuring of Greek debt. "If in the end it should come to an extension of bonds, of course, we need the approval of the IMF and above all of the ECB. Under no circumstances should it come to a conflict with the ECB," Schaeuble told Bild am Sonntag. "I advise all of us to use restraint in public debates about this question." Several ECB officials have rejected a restructuring of Greek debt and have warned of possible catastrophic consequences, while European finance ministers are slowly warming up to the possibility of some kind of restructuring as a last resort." Thus the crunch time for Europe's latest kick the can down the road round, once again centered on a bankrupt Greece, may be coming fast, and this time with a rather furious Germany.

A year after an insolvent European continent realized it is long overdue to implement fiscal consolidation, aka tightening, also known as 2010's keyword of choice: "austerity", the political regimes who have supported fiscal prudence are one after another falling victim to the general population's dissatisfaction with the gradual elimination of a myriad of socialist policies. Following recent electoral losses in Germany, not to mention the overthrow of the Portuguese government, which like Belgium, continues to be in limbo, today we move on to the second to last domino in the PIIGS chain: Spain (and Italy is next: S&P took the time at 6pm on Saturday to remind everyone about that particular unpleasant fact). Per Reuters: "Spaniards began voting on Sunday in local and regional polls expected to deal heavy losses to the ruling Socialists, who are blamed for widespread unemployment that has off a wave of pre-election protests. Tens of thousands of Spaniards demonstrated in the past week in city squares around the country against austerity measures that have kept a fiscal crisis at bay but aggravated the highest jobless rate in the European Union. [as a reminder a webcam of the Madrid protests can be found here]. The protesters have called on Spaniards to reject the Socialists and the center-right Popular Party, the main two political options in Spain." The problem is that when you overthrow socialists, it is unlikely that you will get more socialism down the road. Which, however, is what everyone in this country of 21% unemployment, and nearly 50% joblessness in the 18-25 age group really wants.

Ever wondered what a 15 kilometer high pyroclastic cloud looks like? Here is the answer, in its full iPhone cam captured glory. Based on our sources on the ground in Iceland, the "volcanic event is at least as powerful as the Eyjafjallajokull of last year. The eventual effect on air traffic will depend on wind conditions (slow and random at the moment) and actual ash composition which has yet to be determined. Preliminary observation indicates a milder risk for aircraft, but highly uncertain pending further measurements."

When it comes to the topic of Greece, by now everyone is sick of prevaricating European politicians who even they admit are lying openly to the media, and tired of conflicted investment banks trying to make the situation appear more palatable if only they dress it in some verbally appropriate if totally ridiculous phrase (which just so happens contracts to SLiME). The truth is Greece will fold like a lawn chair: whether it's tomorrow (which would be smartest for everyone involved) or in 1 years, when the bailout money runs out, is irrelevant. The question then is what will happen after the threshold of nevernever land is finally breached, and Kickthecandowntheroad world once again reverts to the ugly confines of reality. Luckily, the Telegraph's Andrew Lilico presents what is arguably the most realistic list of the consequences of crossing the senior bondholder Styx compiled to date.

Update from ABC7: A no-fly zone has been enacted within a 120-mile radius of the erupting volcano in Iceland.

More:  BREAKING NEWS: Iceland's most active volcano erupting; white plume up to 18,000 feet seen.

And there goes European air traffic once again, with its already stagflationary economy to follow down the drains momentarily. At least depressionary apologists will have something to blame on the Q2 GDP plunge on.

More as we get it.

The world's most anticlimactic, yet overexpected, news has finally arrived. Reuters reports that Senator Chuck Grassley is investigating possible insider trading at SAC Capital Advisors LLP. Possible. LOL. And so it begins: "The Financial Industry Regulatory Authority last week provided Senate Judiciary Committee head Charles Grassley with about 20 instances of suspicious trading at the hedge fund, a spokeswoman for the senator confirmed on Saturday. Grassley had asked Finra in April for information on any such trading at Steven Cohen's $13 billion hedge fund...It was not clear if the trades had been referred to the Securities and Exchange Commission's enforcement staff, and authorities have not alleged wrongdoing by SAC or Cohen. Court filings also show prosecutors are investigating trade accounts at SAC, including one tied to Cohen, SAC Capital's founder. SAC representatives and congressional investigators met in Washington on May 10 to discuss possible suspicious trades, according to the Wall Street Journal, which earlier reported Grassley's receipt of information from Finra." So even once it is finally uncovered that Cohen's billions in personal wealth have been allegedly accumulated after years of information arbitrage, and we get yet another confirmation that hedge funds only make money through economies of scale, but mostly size (until the implode), or simple insider trading, we are supposed to remember that Cohen is a great humanitarian at heart, and has spent a few million of his allegedly ill-gotten gains for civic pursuits: "Also at the meeting, SAC Capital's
Washington-based policy adviser Michael Sullivan cited Cohen's
"civic-minded interest" in purchasing a stake in the New York Mets
baseball team, the report said." Last but not least, SEC heart SAC because with it gone, liquidity (and volume) on the NYSE would plunge by another 15% (and likely much more) in yet another confirmation that fair and efficient US capital markets are nothing but a farce. "At the meeting, SAC representatives suggested the investigators go easy on the hedge fund, saying it has internal procedures to track down and prevent illegal trading, according to the Wall Street Journal report."

A week ago Die Welt reported that, in what may soon be a repeat of the Cuban missile crisis, US arch-enemy Iran, following a secret agreement signed on October 19, 2010 of strategic cooperation, Venezuela has allowed Iran to commence construction of a missile base on Venezuelan soil. The base, which will be located on the northernmost peninsula de Paraguana, 120 kilometers from the Colombian border, has recently been visited by a group of leading engineers from the Iranian Revolutionary Guard-owned construction company Khatam al-Anbia, is unofficially designed "to help develop an infrastructure to protect against air attack. Also planned is the construction of a command and control station, residential areas, watchtowers, and bunkers, in which warheads, missile fuel and other items can be stored. In cooperation with its Venezuelan partners, Iran also intends to build missile silos at a depth of about 61 ft." The project appears to be funded by Iran: "Information gathered by Die Welt also suggests that on their visit to
Venezuela, members of the Iranian delegation carried cash in their
luggage for the project’s initial funding. Western security circles
suspect that this involved tens of millions of dollars siphoned off from
Iran’s burgeoning oil profits." But most importantly is the discovery that while presumably defensive, Venezuela has told Iran, that it will be granted use of the base when completed: "According to the secret agreement between the two countries, Venezuela
pledged to Iran that it will be able to strike its enemies from the
joint missile base. Iran is attempting to boost its strategic threat to
the U.S., similar to the Soviet strategy in Cuba during the 1960s." And while skeptics may say that the base located about 2,400 miles from DC has no chance in striking the US capitol, the reality is that the Iranian long-range ballistic missiles Shahab 5 and 6, are rumored to be a three-stage system, which has a range of anywhere between 3,000 and 10,000 miles. So with missile base supplies most likely to come by sea (Venezuela is a few hundred miles away from Cuba), is a recreation of the 1961 Cuban missile crisis the next big political diversion?

Ever since the DSK rape allegation surfaced, there has been an avalanche of opinions that the former head of the IMF has been "set up by vengeful Americans" and that the entire affair is nothing but a classic "Spitzer" repeat. It has gotten so far as 57% of the French population saying DSK was trapped in a plot by his enemies, a number that rises to a staggering 70% when only French socialists are queried. Well, since everyone is innocent until proven guilty, there is no point in further digging until DSK is either convicted by a jury or set free... But that does not mean that various media personalities can not have some long overdue fun at the IMF head's expense, whose past transgressions toward poor countries and "emerging economies" one can argue, dwarf his dramatic career implosion from last Saturday. And in keeping with the spirit of amusement, below is Jon Stewart's amusing takedown of the DSK situation to date.

Yesterday we presented the latest 13F quarterly compilation summary, as prepared by Goldman's David Kostin, in raw format. Today, we bring you his high level observations on what this update means for stocks from a big picture perspective, as well as thematically. "We estimate hedge funds own roughly 3% of the US equity market. Turnover of all hedge fund positions averaged 32% during 1Q
2011 (roughly 130% annualized). The tilt of hedge fund holdings towards large-cap stocks has been increasing for almost 10 years.
The typical hedge fund operates 48% net long, flat versus 4Q 2010. Combining long and short position data, hedge funds have the
greatest net portfolio exposure to Consumer Discretionary (18%), Information Technology (16%), and Energy (14%). Our Hedge Fund
VIP basket has 15 new constituents: SSCC, BP, MRO, PCLN, VRX, TEVA, YHOO, CVX, MET, NFLX, MA, SINA, CHK, EQIX, and ESV." In addition, for all you technicians, here is the full weekly chartporn from GS.

Your concise summary of the past week's key events.

Presented without commentary

First Credit Agricole, now Italy....Maestro: the EUR take down orchestra is reaching the fortissimo cadenza. Next up: the glissando. "On May 20, 2011, Standard & Poor's Ratings Services revised its outlook on the ratings on the Republic of Italy to negative from stable to reflect its views of the heightened downside risks in the government's debt reduction plan. At the same time, Standard & Poor's affirmed its 'A+' long-term and 'A-1+' short-term sovereign credit ratings on Italy. The transfer and convertibility assessment remains at 'AAA'." The negative ratings outlook on Italy (unsolicited rating A+/Negative/A-1+) reflects Standard & Poor's view of the increased downside risks to the Italian government's debt-reduction plan because of potentially weaker-than-expected economic growth and possible political gridlock that could contribute to fiscal slippage. The diminished growth prospects stem from what we consider to be a lack of political commitment to deregulating the labor market and introducing reforms to boost productivity. We believe measures to reduce the bottlenecks and rigidities in Italy's economy are especially important in light of Italy's limited monetary flexibility, which stems from its membership in the European Monetary Union and its limited fiscal room to maneuver because of Italy's high government debt burden."

The book "Confessions of an Economic Hit Man" by John Perkins is easily one of the most engrossing pieces of non-fiction one can read to learn about the true drivers behind globalization, espionage, corporate cronyism, the emergence of such "artificial" organizations as the World Bank and the IMF, and most importantly, debt "enslavement", all as seen from an insider's view. It explains in simple words why over the past 40 years the developing world paradigm has been exploited as heavily as it has, why the BRIC concept was instrumental as a Red Herring to perpetuating the myth of endless growth, and why credit must always flow no matter what to keep the status quo in power. For those who have read the book, and for those who are on the fence about reading it, below we present the three part presentation by John Perkins at the 2006 Veterans for Peace National Convention in which he expounds on all the key ideas in his book, and does an extended Q&A covering topics not discussed previously. We urge everyone to spend at least a few minutes listening to Perkins who gives a unique and non-conflicted expert opinion on the primary force for why the the modern equivalent of enslavement is not by force, but by debt.