Archive - Jul 24, 2011 - Story

On a surprisingly quiet night, during which many, chief among them the President of the US, were expecting some fireworks, it is easy to get lost in all in your face political farce, while ignoring, and even blissfully forgetting, the real financial details behind the scenes. Luckily we have Bill Buckler, whose latest edition of "The Privateer" puts everything right back in perspective, and reminds us that "in the period between December 2007 and July 2010, the Fed parcelled out $US 16.1 TRILLION in emergency loans to financial entities all over the world. Almost half of this - a total of $US 7.75 TRILLION - was loaned to four US banks. They were Citigroup, Morgan Stanley, Merrill Lynch and the Bank of America. In July 2010 (the cut off date for this “audit”), total US stock market capitalisation was $US 15 TRILLION. The Fed provided about half of that." And here we are, haggling over $30 billion here, and $50 billion there...

After mysteriously, and briefly, appearing two weeks ago, and then again last week, we are once again experiencing one of those eerie "cross the streams" kind of moments, when both stocks and bonds are sold off (and gold jumps to record highs) on renewed concerns that the ponzi is unwinding and central planning committees around the world are furiously scratching their bald heads for contingency plans (that do not involve a Gulfstream and a crate of sold gold) which do not exist aside from doing the same old even more furiously. Below is how tonight's modest sell off in bonds looks like. In the absence of any additional newsflow (don't laugh, read this) we expect the mean reversion bots and buythedip-o-matics to get us green overnight, totally screwing up Obama's plan to scare the bejeezus out of any of his GOP adversaries on the debt hike issue courtesy of a market plunge. Elsewhere, be on the look out for yet another BOJ intervention should "newsflow" return as Japan’s Finance Minister Yoshihiko Noda says “will take resolute actions when necessary” in currency market. Then again he has been saying that for two weeks straight now, and absolutely nobody is taking the BOJ seriously any longer.

After decades of a debt financed contest to display the gaudiest plumage, is the average American happier? Considering more than 10% of all Americans are on anti-depressant drugs, I’d say not. The rat race for status, the appearance of wealth and visible faux displays of success do not increase well-being. If most of our earnings are spent on an empty game of status, we should not expect much improvement in our quality of life. There is something perverse about having more than enough. When we have more, it is never enough. It is always somewhere out there, just out of reach. This is the attitude that drives the criminals on Wall Street and politicians in Washington DC to constantly seek more power and wealth. The more we acquire, the more elusive enough becomes. Much of the debt financed purchases of consumer trinkets, baubles and gadgets is nothing more than an expensive anesthetic to deaden the pain of empty lives. Meanwhile, millions of Americans cling to their borrowed peacock feathers as the butcher of reality bears down upon them. The end won’t be pretty. The brave conquerors of strip malls across the land can enjoy their toys, gadgets, and treasures for awhile longer, but they need to remember one thing – Glory is fleeting and death can come suddenly.

Here is the first official statement of the night, this time from Nevada democrat Harry Reid (and with $41 million in career campaign contributions, well-paid we should add) who basically recaps the McConnell/Pelosi stance, and says that the Boehner position, which supposedly requires short-term debt ceiling hikes, is a "non-starter in the Senate and with the President.

Here, let us explain to you how this works: you take some "tradition", you mix some central planning, you throw the imminent threat of default by the world's reserve currency and you end up with gold surging to $1615, well on its way to $10,000 and more. Any questions?

1331.75

Sorry, Timmy, Boehner, and Obama. No apocalypse. Better luck next time.

Update: 1326...

Maybe we spoke too soon.

Update: 1322...

Hmmm

As we enter the overnight futures market open, there is still no resolution on the ongoing debt ceiling open question. Which is why we present SocGen's handy summary of the three scenarios that are currently in the running for a consensual resolution, together with the possible market reactions to each. The three plans are the McConnell-Reid plan, which as per latest news is in the frontrunning currently, not least (and probably only) due to the immediate beneficial impact it would have on stocks. The 2nd plan is a large deficit reduction plan, whose primary impact would be a significant drag on GDP. Stocks, and bonds, are likely to both rally on the news of this plan, at least in the short-term until the market realizes that some economic growth is actually necessary for the hopium illusion to continue. Lastly, the worst case outcome is no increase in the debt limit, which, logically, would mean that every illusion collapses and the emperor is finally exposed to be naked.

Just out from CNN's Lisa Desjardins

• BREAKING - NEW Dem. debt plan: Reid to offer at "least $2.5 Trillion" in deficit redux w/ no revenue increases, Dem. source tells CNN.
• NEW REID PLAN: "At least $2.5 T in deficit redux" w/ no revenue increases. BUT, unclear what baseline he's using and what he'd cut.
• REID PLAN: Dem aide tells our @tedbarrettcnn they think it meets GOP call for dollar-for-dollar spending cuts with debt increase.

And we are confident that the spending "cuts" will take place over 10 years, back-end loaded, which means no spending cuts any time soon. Said otherwise, no spending cuts, no tax hikes. And yes, $2.5 trillion debt ceiling increase. Just as we predicted two weeks ago.

Here we go again. Another bail-out. [Sigh.]

I’ll try to make this as entertaining and easily readable as possible – but first the details of the bail-out agreed on July 21st:

• Fresh EUR 109bn EFSF/IMF loans until mid-2014
• Private sector (read: banks) participation of EUR 37bn
• EUR 12.6bn from bond repurchases at below par (100%)
• All EFSF loans extended to 15-30 years with interest rate cut to 3.5% (same relief granted for Portugal and Ireland)
• EFSF re-tooled: flexible credit lines, purchase of bonds in secondary market, recapitalizing banks
• “Marshall Plan” for Greece (increased investments by EU)

My Comments...

And it is not looking pretty for the dollar. Both the USDJPY and the USDCHF are tumbling following weaker pretrade indications, confirming that the market is indeed starting to listen to the complete cacafony from DC. Ironically, in a world in which USD weakness is SPX strength, will correlation desks send the ES to infinity even as the key marginal driving force is the ever larger fear of US bankruptcy? Or will we finally get decoupling.

With 10 minutes remaining until 4 pm, and no newsflow to the contrary, it was pretty obvious that there would be no deal, at least in the immediate future. This has now been confirmed by ABC News's Jonathan Carl: "Asian markets?  They are on their own. A Republican source tells ABC News negotiators do not expect to have a deal or even the framework of a deal on the debt ceiling by 4 p.m. today, as House Speaker John Boehner had said he wanted to steady jittery Asian markets when they open." And here is why the dip buyers will be having a field day today: "In fact, the source says a deal today is now looking unlikely." Remember: under Bernanke, nothing can possibly ever go wrong. So buy everything, buy with both hands, buy on margin. In fact, take out a 4th lien on your unborn child and margin that up while buying every dip. Remember: there is no risk. The central planners have spoken.

A few days ago, when summarizing the key weakness of the second European bailout, we suggested that the fatal flaw in the entire package (which is predicated upon the expansion of the EFSF to about €1.5 trillion for full efficacy) are the "82 Million Soon To Be Very Angry Germans, Or How Euro Bailout #2 Could Cost Up To 56% Of German GDP." Specifically, we explained, "by not monetizing European debt on its books, the ECB has effectively left Germany holding the bag to the entire European bailout via the blank check SPV. The cost if things go wrong: a third of the country economic output, and the worst case scenario: a depression the likes of which Germany has not seen since the 1920-30s. Oh, and if France gets downgraded, Germany's pro rata share of funding the EFSF jumps to a mindboggling €1.385 trillion, or 56% of German GDP!" Sure enough, as the Telegraph's Ambrose Evans Pritchard confirms, the backlash has now officially begun.

One of the more notable events in the past week was the previously discussed reopening of the Iranian Oil Bourse, an attempt by Iran to launch a venue that bypasses US sanctions against Iran which has prevented payment in the world's reserve currency for Iranian goods. "Big deal", some will say, this is not the first time Iran has attempt to upstage the Great Satan. Well, true, although as OilPrice said last week, "what it would take for Iran’s new exchange to survive and flourish are some heavy-duty customers that Washington would be wary of picking a fight with, and Tehran already has one – China... China, the world's largest buyer of Iranian crude oil, has renewed its annual import pacts for 2011. In 2010 Iran supplied about 12 percent of China's total crude imports. According to the latest report of the China Customs Organization, Iran's total oil exports to China stood at 8.549 million tons between January and April 2011, up 32 percent compared with the same period last year. Iran is currently China's third largest supplier of crude oil, providing China with nearly one million barrels per day." Still, the perceived provocation to Uncle Sam should China go ahead and slap America in the face by accepting the existence of the Kish exchange, would echo around the world. Which is why many don't think much if anything will happen. Until today, that is: according to the FT, China has decided to commence an barter system in which Iranian oil is exchanged directly for Chinese exports. The net result: not only a slap for the US Dollar, but implicitly for all fiat intermediaries, as Iran and China are about to prove that when it comes to exchanging hard resources for critical Chinese goods and services, the world's so called reserve currency is completely irrelevant. The implications of this are momentous, especially for US debt, whose indomitability is only predicated upon the continued acceptance of the currency it backs as a global reserve. If China is now openly admitting to the world that it does not need US monetary intermediation, and by implication, the "debt" backing said intermediation, what then? And who will follow China next?

While the full story can be found here, the cover of this week's Boulder Weekly probably explains most if not all there is to know about the US "recovery"

For those who missed it, here is the full video and summary from Boehner's earlier appearance on Fox News Sunday with Chris Wallace. The "Asian market open" strawman is getting closer, and there is absolutely no resolution yet. Ironically, just like with QE3, the all too habituated market will buy every dip (remember: nothing can possibly go wrong in the global Bernanke put regime) easily validating the republicans' paradoxical case that the market can more than survive a failure to reach a debt ceiling hike consensus. In the meantime, even as the S&P surges to unseen heights the economy is on the verge of cannibalizing itself as the government begins scrambling for every available penny of incremental revenue.