Archive - May 2011 - Story

When I had the honor of leading the True Finn Party to electoral victory in April, we made a solemn promise to oppose the so-called bailouts of euro-zone member states. These bailouts are patently bad for Europe, bad for Finland and bad for the countries that have been forced to accept them. Europe is suffering from the economic gangrene of insolvency—both public and private. And unless we amputate that which cannot be saved, we risk poisoning the whole body. The official wisdom is that Greece, Ireland and Portugal have been hit by a liquidity crisis, so they needed a momentary infusion of capital, after which everything would return to normal. But this official version is a lie, one that takes the ordinary people of Europe for idiots. They deserve better from politics and their leaders. To understand the real nature and purpose of the bailouts, we first have to understand who really benefits from them. Let's follow the money.

Confused about the Goldman "approach" to forecasting? After reading the following most recent note from GSAM chairman Jim "BRIC" O'Neill you won't be: just predict the opposite of everything your other colleagues at Goldman anticipate, and you are covered. Indeed, in his latest note, the BRICster not only directly contradicts David Greely's latest note that the long-term prospects for commodities are strong as ever by saying that "This suggests to me that commodity prices could weaken further." (for what "this" is, read the note). As for Thomas Stolper's soon to be stopped out prediction of a EURUSD hitting 1.50, O'Neill has some contrarian cold water for that too: "In my book, even with the likelihood that the Fed will remain friendly post QE2 termination, the Euro belongs in a 1.20-1.40 range." So there you have it: one firm, an infinite number of outlooks. That way, they will always be right. As for who Goldman's clients should listen to? We suggest - nobody. But since that REDI/Sigma X feed needs serious soft dollar cash infusions, that is probably not an option. So just flip a coin. Someone will be right.

It was the best of times, it was the worst of times....This time is different.....There is nothing new under the sun.....All of us---by “us” I mean human beings---tend to think too much with our egos and not enough with our rational minds. When we are young, we think we have unique and novel insight into life and the human condition, as if we are the first person to have ever thought certain thoughts. We all read---at least back when I went to school---the classic literature, the Greek playwrights and Shakespeare, but it is only when we reread these works as adults that we realize that everything has been thought of before. The best we can do is put a slight sidespin on it. We are humbled. We bring this same tendency---a belief in our uniqueness---into the issues that face our time on Earth. “There has never been a better time to be alive.”...." This is all going to blow up faster than most people think, and it is TEOTWAWKI.”....Somewhere in the middle probably lies the truth. Many of us---myself included time to time---fear that life as we know it is about to come to an abrupt and painful end. Others---most visibly those who are wheeled out as guests on CNBC---think things are on a rise as far as the eye can see. And for some---I am thinking John Paulson and David Tepper---times have never been better. Who is right? Maybe nobody.

Back on Friday we shared a prediction that not only will Greece not leave the Eurozone, but what will happen after the weekend: "I'm convinced Greece is jealous that the portuguese got a much better deal.  They want the same deal arguing that they have already suffered long enough...  Monday they announce that Greece is getting better terms and we are off to the races... by early 2012 greece restructures debt." Once again, this was spot on. Reuters reports: "The European Union is looking to lower interest
rates on bailout loans to Greece and Ireland and is working on a second
rescue for Athens in a chaotic effort to prevent a disorderly debt
restructuring. The executive European Commission said on Monday it hoped to see a decision within weeks on reducing the rate charged to Ireland to make Dublin's debt more sustainable. "The Commission is clearly in favour of a rate
cut," a spokesman for EU Economic and Monetary Affairs Commissioner Olli
Rehn said. "The Commission is against debt restructuring."" Once again Europe looks the can in the mouth, and kicks it as far down the street as it possibly can. Next up: fully blown, uncontrolled restructuring in early 2012 as nothing will change in the interim, and more taxpayer revolts will continue taking Europe by storm until we have one that actually matters and puts the PIIGS out in the cold.

Last week we predicted that rumors of a Greek (self) expulsion are nothing but hot air, and an attempt to escalate so-far failing rhetoric at improving the economics of austerity. This was proven right, even as we also predicted, the EURUSD surprisingly remains sticky in the 1.438 area, meaning 120 pips in EURUSD was wiped out on purpose. Here is Goldman's take on this weekend's developments: "Policy makers discuss further help package for Greece. The head of the Euro group Juncker said after a meeting of finance ministers last Friday that "we believe that Greece will need a further program". According to FT Deutschland such a new program could include an extension of repayments of the loan provided under the first program as well as a reduction of the interest rate for these loans. Juncker also dismissed the idea that an exit of Greece from the Euro-zone was being discussed: "This is a stupid idea, it is not a direction we will ever embark on". Newspaper Die Welt reports that the German government demands as a pre-condition for any further program that Greece will also negotiate a - voluntary - maturity extension with its private creditors."

A snapshot of the European Morning Briefing covering Stocks, Bonds, FX, etc.
Market Recaps to help improve your Trading and Global knowledge

And once again we get a reminder why the word "hedge" fund is such a misnomer. The FT reports the Clive Capital, the "world's largest commodity hedge fund" as defined by the FT (although we are more than confident various other and much largest "energy-heavy" funds would be much more appropriate for this moniker) lost $400 million out of its (paltry) $5 billion in total AUM during last week's coordinated energy take down, initiated by the forced margin intervention in precious metals. Clive "is the biggest of several big hedge funds believed to be reeling after the unexpected sell-off hit markets late last week." Clive is not alone: "Others, including Astenbeck Capital, the Phibro-owned fund run by Andrew Hall, are thought to have taken double-digit percentage point losses to their portfolios, according to investors." The FT's take: "The scale of the losses demonstrates that even the savviest investors in commodities were wrongfooted by the correction, one of the sharpest one-day falls on record." Our is slightly different: when a trade has enough momentum, and has been working long enough, even the quote unquote "savviest investors" become a momo chasing herd, with nobody hedging, and a massive drop in prices always likely to be the deathknell for some previously vaunted investor, whose only claim to fame was being lucky enough once to be at the right time and the right place, and to put a huge levered bet that worked out. And praying that he or she can recreate those conditions.

It appears not only Bill Gross is insane enough to realize that direct monetization = inevitable interest rate hike. Slowly, even the central banks are starting to gravitate toward this conclusion.  From The just released minutes by the BOJ: "One member -- referring to some recent views that the Bank should underwrite JGBs to fund restoration and rebuilding -- expressed the opinion that such an action might initially seem to work well, but lessons drawn from history showed that it would eventually result in severe inflation and thereby inflict substantial damage on people's living situation. This member continued that the Bank needed to keep working to gain the wider public's understanding on this point. In relation to this, a few members expressed the view that, if confidence in the currency were impaired due to underwriting of JGBs by the Bank as the central bank, this might lead to a rise in long-term interest rates or instability in financial markets, and hamper the smooth issuance of JGBs." Something tells us this "member" was not Bernanke (aside from the obvious reason that Benny is a gaijin). And where else, we wonder, have we seen this: an initial boost which fades away, leaving just concerns about runaway inflation. Is it possible that the dissident BOJ member can come to one or more FOMC meetings and actually give our clowns a first person perspective of how this whole "deflation battle" goes down 30 years in.

On Wednesday, May 4, 2011 - three days after he announced that American troops had killed Osama bin Laden in Pakistan - President Barack Obama talked with "60 Minutes" correspondent Steve Kroft in the Roosevelt Room of the White House. Below is a transcript of that interview, as well as the full interview.

And like clockwork, the expect avalanche of economic downgrades greenlighted by Jan Hatzius begins. Heading up the lemming crew, as always, is Morgan Stanley's David Greenlaw. "We are adjusting our GDP growth forecast lower for the third time this year. We now look for +3.3% GDP growth over the four quarters of 2011 (versus +3.6% in our April update). Essentially, this puts us back to where we were in early December – before policymakers enacted a package of tax cuts aimed at stimulating the economy." In other news David, how do you spell roundtrip (and is a refund due)? Or "hockeystick?" Or how about an imminent push for more QEasing once the inflationary "shock" is forgotten (unless Saudi Arabia falls to the tsunami of "spooks on the ground" in which case all bets are off), just in case the virtuous cycle doesn't quite kick in, in this 3rd, and soon to be failed, attempt to jump start the economy. In other news, we can't wait to hear what validation LaVorgna, who is always at the very end of the lemming bus, comes up with to justify his feverish enthusiasm over the economy, which once again proves to be worth the amount of money DB's customers pay the firm's sales coverage to bet against them.

And another huge hit to future oil supply. After Goldman released a report on Friday, backtracking on its April recommendation that clients sell crude, instead warning that "critically tight supply-demand fundamentals" will likely cause oil prices to "return to or
surpass the recent highs by next year", "should Libyan oil supplies remain off the market", which it now appears they will considering Gadaffi is winning the Libyan civil war against the West-backed rebellion, here comes a stunner out of Iraq which has just slashed its 2017 oil production estimate from 12 million barrels to just 6.5-7 million bbpd. Oddly enough, Iraq is being rational: "Baghdad believes it would not be in its interests to try to achieve the
12 million target by 2017 because boosting global supply would depress
prices." Who would have though a cartel would think of itself first... Surely, this is great news for Saudi Arabia which will promise to hike oil production and replace the missing output only for it to be discovered a few months later that not only did it not to do that (as we just discovered now following the whole Libya fiasco), but that it just does not have the excess capacity. And, of course, "speculators" will be blamed once they take WTI from $97 to $140 daring to discount the future price of oil in a (inflationary) world in which demand increases by 50% over a decade, even as supply continues to trickle down with each passing year. In other words, the CME margin hike crew is actively studying how many margin hikes it will take to break the back of the recently record number of non-commercial net specs... for at least a week or two, especially once the Chairman goes to town with the printer Turbo button. And elsewhere, the upcoming scarcity of lubricating petroleum byproducts is about to be felt through the entire supply (and demand) chain.

The week begins with the China – US Strategic and Economic Dialogue (Monday and Tuesday), which will be held in Washington, DC, and will no doubt once again include discussion of the pace of appreciation of CNY against US$. The week also brings a slew of China data, including the trade balance, where consensus expects a small surplus (far below the historical average surplus), and CPI inflation for April, which we see at 5.1% yoy, slightly below consensus. The week ends with the US CPI, where we expect another unfriendly CPI report, with headline CPI rising by 0.39% mom in April, essentially in line with consensus.

30 years ago, Bunker Hunt, while trying to demand delivery for virtually every single silver bar in existence, and getting caught in the middle of a series of margin hikes (sound familiar), accused the Comex (as well as the CFTC and the CBOT) of changing the rules in the middle of the game (and ws not too happy about it). Whether or not this allegation is valid is open to debate. We do know that "testimony would reveal that nine of the 23 Comex board members held short contracts on 38,000,000 ounces of silver. With their 1.88 billion dollar collective interest in having the price go down, it is easy to see why Bunker did not view them as objective." One wonders how many short positions current Comex board members have on now. Yet by dint of being a monopoly, the Comex had and has free reign to do as it pleases: after all, where can futures investors go? Nowhere... at least until now. In precisely 9 days, on May 18, the Hong Kong Mercantile exchange will finally offer an alternative to the Comex and its alleged attempts at perpetual precious metals manipulation.

It is no secret that David Stockman, former budget director in the Reagan administration, has long been a vocal opponent of the crash course America has found itself on courtesy of record debt. In this Bloomberg interview, he presents his latest take on U.S. fiscal policy and the outlook for agreement between Congress and the Obama administration on a deficit and spending reduction plan. Suffice to say, he is not a fan of either the republican or democrat plan, and is convinced both sides are playing nothing less than class warfare to promote their flawed programs. "I think the people would respond if they knew the fact, and if they'd been were told the truth, but they haven't been, they've been lied to for the last 10-20 years by both sides saying that we can live beyond our means, new entitlements, new tax cuts constantly, tax stimulus for everything that we could imagine, and as a result of that the country doesn't know that sacrifice is going to be required, and that everyone is going to have to give up something." On the recent "spending cut" much touted by Washington: "even this noisy $39 billion package cutback, that was all flimflam and swindle: there wasn't $39 billion in that, maybe there was $5 billion at best, and had anybody in the business community reported that they had $39 billion in a package that was this fraudulent they would have every prosecutor in the country and the SEC on their tail right now." And on the much endorsed by Zero Hedge Tobin tax: "We out to put a major tax on transactions on Wall Street, because Wall Street is turning into a high speed casino. We need to start thinking about new revenue sources and that is one of them." So what will finally awake America? "I think it's going to take a major dislocation in the bond market, a real conflaguration on the part of the people who have to buy this debt, before the country wakes up." Of course, if the Fed is able to sell virtually unlimited Long-Term Treasury puts, the synthetic push on sellers will never abate and the Fed can manipulate the curve virtually in perpetuity, or until such time as those buying Treasury vol protection, ironically, decide it makes no more sense to hedge against a curve yield surge.

For those of you hunting for bubbles, and wondering why the Federal government is the biggest source of credit in each and every G.19 release, here is a hint of what's coming next from an NIA press release: "The current college education bubble is one of the largest bubbles in U.S. history. The college bubble has been fueled by the U.S. government's willingness to give out cheap and easy student loans to anybody who applied for them, regardless of if they will ever have the ability to pay the loans back. Student loan debt in America is now larger than credit card debt, but unlike credit card debt, student loan debt can't be discharged in bankruptcy. During the 1970s, college students were able to afford their own college tuition without getting into any debt, simply by working a part-time job year round or by working a full-time job during the summer. Not only that, but most college students were also able to afford their own car and a small apartment. However, since 1970, Americans have experienced a 50% decline in their standard of living due to the Federal Reserve's dangerous and destructive monetary policies. You never heard of parents setting up college savings accounts for their children 40 years ago, but thanks to the Federal Reserve, this has become the norm."