Archive - Jul 2011 - Story

Two weeks ago we demonstrated what happens to prices of so-called "rare" earth minerals, which are almost exclusively controlled by China, and whose exports China recently decided to cut to a mere trickle, resulting in a 10+ fold increase in some of the most rare minerals in under a month. It also has allowed the third R bubble to persist as long as it has. It appears that the bubble is about to pop big time. According to Nikkei, "Vast deposits of rare earth minerals have been discovered on the seabed of the Pacific Ocean amounting to 1,000 times those on land, media reported on Monday citing a study by Japanese researchers." Of course, this could merely be one of those not quite definitive discoveries, which end up being disproven eventually, but which serve to merely pop a temporary speculative bubble. Just like the IEA. In the meantime, it may be time to temporarily erase the Rare from Rare Earth Minerals, and change Earth to Underwater.

As is by now well known, when it comes to upside theories debunking the bearish "economic contraction" case, there are two core arguments: a Japanese pick up, and a surge in automotive production and sales. And following a jump in Japanese industrial production last week, there was a brief consensus that the soft spot as a result of the earthquake and tsunami have been overcome. Until the subsequent Tankan confidence index release, that is. And in the meantime, nobody can still explain how the economy is expected to return to trendline if peak electric consumption can not be met by a crippled electrical infrastructure. Which leaves auto production, and the latest iteration of inventory restocking. Zero Hedge already discussed the glaring split in inventory data between the Chicago PMI and the Manufacturing ISM, which as Goldman noted previously is a major wildcard in determining future GDP growth. Perhaps David Rosenberg said it best in his Friday Breakfast with Dave: "While there is no doubt that we will see an inventory boost from a revamping of auto production in the coming quarter, what will be critical is whether final sales will hold up. So far in June, chain store sales are running below plan. Auto sales, however, are the real wild card and could hold the key as to whether we are, in fact, at an inflection point. Go back to August 2007 and they put in an interim peak of 16.3 million annualized units. They bottomed for good in February 2009 at 9.2 million units. Then they hit a nearby high of 11.7 million units in March of last year just ahead of the market downturn and "double dip" concerns, only to then trough at 11.5 million in August 2010 just as the market was ready to rip. And then, in February of this year, sales peaked at 13.4 million in February. The May number was 11.8 million - and today we get June. Stay tuned." Consensus was for a significant rise to 12.0 million in June. The actual number was 11.45 million. The lowest since August 2010. So much for an inflection point (not to mention that all of this ignores the record channel stuffing in post-reorg GM).

In the week ahead, we are waiting for the second batch of key activity data in the form of service sector and non-manufacturing surveys, as well as US payrolls. The Chinese non-manufacturing PMI has already been released over the weekend, showing a decline from 61.9 to 57.0. After last week's key votes in Greece, headline risk should decline though we are now entering the phase where the final negotiations for the second support package take place. The updated funding strategy for Greece will likely be unveiled by Eurozone Finance Ministers on July 11. There will be central bank meetings by the ECB (+25bp), BOE (on hold), in Malaysia (+25bp), Mexico (on hold), and Poland (on hold).

"Regular readers may be aware that two of the author’s greatest bugbears are Malthusianism and mindlessly mathematical macroeconomics. The two of these come into no sharper focus than when we turn to the hoary old canard of ‘Peak Oil’, especially when it cites the work of those two past masters of wrongly–applied ratiocination, Hubbert and Hotelling. The former we have recently dealt with already, so let us say a few words about the latter—a gentlemen who was a statistician, not an economist, in an era when there was still an honourable degree of separation between the two disciplines (ironically, he was also, at one time, Murray Rothbard’s professor at Columbia before the latter had a self?declared ‘epiphany’ regarding the flimsy epistemological grounds upon which much statistics lies and quit the course forthwith). The better to set the scene, let us first note that those who think of themselves as ‘resource economists’ all seem to think of their subject as if they were describing an Easter egg hunt. In this, an explicitly determine number of eggs are scattered about over a given territory and the seekers are then sent off to find them. Once found and eaten, they can never be replaced. I’m sorry, boys and girls, but the fun’s over and it’s back to spinach and cauliflower from here on in." - Sean Corrigan

The Greek indigents huffed and puffed, broke a couple of marble plates from Syntagma square, striked for a few days (or is that stroke?), and achieved nothing. In the meantime, their government just sold off the country to European banking interests. But don't take our word for it. Take the word (on those very rare occasions when it is actually telling the truth) of Eurogroup chairman Jean-Claude Juncker who just told Focus magazine that "The sovereignty of Greece will be massively limited." And just like DSK's innocence was effectively granted 2 days after Christine Lagarde was made new head of the IMF (we still are waiting for the IMF to have a statement on the recent DSK developments), so Juncker's stunning disclosure comes not even 12 hours after the 5th Greek bailout package has been released. Per the Guardian: "Juncker's interview appeared just hours after Eurozone ministers signed off the fifth tranche of last year's bailout, worth €12bn. The payment must now be rubber-stamped by the International Monetary Fund (IMF) and pushed through by 15 July in time to meet several bond repayment deadlines. Agreeing the latest IMF payout, on 8 July, will be an early task for Christine Lagarde, the new IMF boss, who starts work in Washington on Wednesday." One wonders how different, it at all, DSK's probanker stance would have been had he still been the IMF head.

It was just a matter of time before wholesale debt-forgiveness became the primary source of wealth in the US. The time is now. The NYT reports that "big banks are going to borrowers who are not even in default and cutting their debt or easing the mortgage terms, sometimes with no questions asked. Two of the nation’s biggest lenders, JPMorgan Chase and Bank of America, are quietly modifying loans for tens of thousands of borrowers who have not asked for help but whom the banks deem to be at special risk." To be deemed in "special risk" one needs to simply have an Option ARM mortgage, and be underwater, even if still current on mortgage payments. End result: an up to 50% cut in the actual mortgage obligation. To wit: "Ms. Giosmas, who lives in Miami, was not in default on her $300,000 loan. She did not understand why she would receive this gift — although she wasted no time in taking it. Before Chase shaved $150,000 off her mortgage, Ms. Giosmas owed much more on her place than it was worth. It was a fate she shared with a quarter of all homeowners with mortgages across the nation. Being underwater, as it is called, can prevent these owners from moving and taking new jobs, and places the households at greater risk of foreclosure." Whether this is a strategic step by the banks who wish to avoid tens if not hundreds of billions in fraudclosure and putback related legal costs, charges and reserves is for now unclear, although all signs point to yes. Next up: everyone in America stops paying their mortgage, or demands a 50% haircut on existing debt, now that the example has been made. And in the meantime, banks will somehow continue to keep the mortgages, which they have now cut by up to half, at par on their books following some brand new, thoroughly senseless announcement by the FASB which says banks can mark anything to whatever price they chose in perpetuity. Because otherwise, the TBTF lenders will suddenly find themselves in a massive deficiency on their Tier 1 capital, also known as completely insolvent.

The very critical, and very insufficient 5th bailout tranche to Greece, has now been approved. From Reuters: "Euro zone finance ministers agreed on Saturday to disburse a further 12 billion euros to Greece and said the details of a second aid package for Athens would be finalised by mid-September. After a conference call, the 17 euro zone ministers agreed that the fifth tranche of the 110-billion-euro bailout agreed with Greece in May 2010 would be paid by July 15, as long as the IMF's board signs off on the disbursement. The IMF is expected to meet on July 8 to approve it. The payment will allow Greece to avoid the immediate threat of default, but the country still needs a second rescue package, which is also expected to total around 110 billion euros and which will now likely only be finalised in September. Between now and then, finance ministers will work on the "precise modalities and scale" of the private sector's involvement in the second aid package, which Germany hopes will eventually total around 30 billion euros. Greece said it expected a final decision on a second bailout programme by mid-September to keep the country financed. Eurogroup decided through a teleconference today to work out a new programme on time, before mid-September," Greek Finance Minister Evangelos Venizelos said shortly after the finance ministers approved the 12 billion euro disbursement." More importantly, "The 12 billion euro payment will help Athens cover a 5.9 billion euro bond redemption in August, but the government still has a monumental hill to climb if it is to return to debt sustainability, with its debt-to-GDP ratio above 150 percent."

Just in case there was any speculation that American-style communism as any different from Russian-style capitalism, any concerns that the Bernanke put has now gone airborne can be put to rest. As the BBC reports, "Russia's fifth largest bank, Bank of Moscow, has been given the biggest bail-out in Russian history." The hilarity ensues: the $14bn rescue came after another bank, VTB, gained control through a hostile bid, only to uncover bad loans valued at $9bn - a third of the bank's assets. So let's get this straight: VTB bid a premium to the equity price only to find out that not only was the entire market cap worth nothing, but that the purchase could have been completed by buying up Bank of Moscow's bonds at 66% cents on the dollar, promptly followed by a debt for equity swap, in which the bulk of the debt could have been equitized, and the resulting company could have been a lean mean lending machine, without a single taxpayer cent spent. Instead, Russia took the American way out, and pretended assets are worth something. Under the rescue deal, the Russian central bank will provide a 295bn rouble ($10.6bn) 10-year loan at a negligible interest rate to Bank of Moscow. But that's not all: Bank of Moscow's former head, Andrei Borodin, has fled the country, and a warrant has been issued for his arrest. And to think that only a week ago the head of the Afghanistan Central Bank Fitrat, who "obviously" is absolutely innocent of all allegations he stole hundreds of millions from Bank of Kabul, escaped to the US. And to keep some illusion as to which countries are now final destinations to exiled global kleptocrats, Borodin has decided to run away to London, until such time as he takes over some Goldman Sachs M&A banker in the New York office. And how you know how capitalism works under central planning.

When is the last time you shook a policeman’s hand, appreciative of the good work he had done for you? I live in Chile and I just did so. In North America, I would never think of doing the same thing. Cops are to be feared there. They are not helpful allies in the fight against crime. A North American is more likely to be victimized by the police rather than helped by them. In Europe, citizens are more likely to be clubbed than supported. YouTube is full of police abuse in the developed world; it is becoming a common reality of a politically correct society rather than a shocking exception. These uniformed thugs break down doors and intimidate innocent people. They plant GPS tracking devices on the cars of private citizens. They arrest people for dancing, arrest them for having a “bad attitude,” harrass people for taking photographs, and otherwise go out of their way to threaten what they are charged with protected. In Chile, things are different. Not only are the cops not corrupt like they are in every other Latin American country, they are actually helpful and efficient. Examples abound.

When in the Course of global economic events, it becomes necessary for a people to dissolve the corrupt chains of financial burden which have shackled them by means of indebtedness to the whims of the global banking elite, and to assume among the monetary powers of the earth, the solvent debt free station to which the Laws of Gravity and of Nature's God entitle them, a healthy disrespect to the opinions of Keynes, Croesus, Bernanke and JP Dimon requires they should declare the causes which impel them to the dissolution....But when a long chain of bankster douche weasel abuses, swineful swindling exploitations, and odious derivative usurpations, pursuing invariable the same Ponzinomic Objectives evinces a design to reduce them under absolute Kleptofraudtocracy, it is their right, it is their duty, to throw off such corrupt feckless Government, and to provide new Guards for the welfare and financial security of the Republic and its future generations.

Of those 56 who signed the Declaration of Independence, nine died of wounds or hardships during the war. Five were captured and imprisoned, in each case with brutal treatment. Several lost wives, sons or entire families. One lost his 13 children. Two wives were brutally treated. All were at one time or another the victims of manhunts and driven from their homes. Twelve signers had their homes completely burned. Seventeen lost everything they owned. Yet not one defected or went back on his pledged word. Their honor, and the nation they sacrificed so much to create is still intact...The 56 signers of the Declaration Of Independence proved by their every deed that they made no idle boast when they composed the most magnificent curtain line in history. "And for the support of this Declaration with a firm reliance on the protection of divine providence, we mutually pledge to each other our lives, our fortunes, and our sacred honor."

(In)famous artist Geoffrey Raymond has found a brilliant and 100% margin-generating scheme for boosting the prices of his trademarked annotated paintings: he opens them up for indirect commentary to the Zero Hedge community, which are then subsequently superimposed on to the painting itself. It worked for Jim Cramer, it worked for Ayn Rand, and now, it will work for Krugman (or rather the proud owner thereof). Black and White Krugman. Of course, in the process Raymond has made our prediction from two years ago that his work will be among the best IRRing cash allocation opportunities around, with recent clearing prices generating a triple digit investment CAGR for those who followed our January 2009 advice. So without further ado, here is Raymond's still unfinished Krugman, where the most eloquent ZH comments will take their rightful place. And P.S. no stimulus, fiscal or monetary, was wasted, or monetized, in the creation of this portrait.

As Zero Hedge readers predicted by a margin of more than nearly three to one, Tim Geithner's next employer of choice, per bnet's Constantine von Hoffman, is none other than the universal viceroy-cum-vampire squid presiding at 200 West according to a just "leaked" letter. And while we all know the key resume highlights (issuing $1.5 trillion in debt a year for the duration of his tenure, mopped up on both sides by Quantitative Easing, bringing America to the verge of insolvency and living on an "auction to auction" basis), here is the summary of Geithner's key qualifications that make him a shoo in for the job.

In any period of ‘reaching for yield’ the market sees a gradual shift as investors move out the curve, purchase weaker credits, or dabble in structured products. These are not their usual “comfort zone” of investing. Someone used to investing in 3 year risk, is not used to the volatility of investing in 10 year bonds. The investment grade investor may not fully understand the convexity of callable high yield bonds, not the impact of secured loans above you in the capital structure. Worst of all, the straight bond investor who takes a punt on some structured assets may not fully understand the asset and over estimate the liquidity in bad times by orders of magnitude. These shifts are generally very gradual. It takes investors awhile to get comfortable with the increased risk. As the asset class performs, the investor is more confident in their decision making, and likely has even more need to reach for yield, so they add more money to areas outside of their core competency. Then, one day, almost out of nowhere, something sparks a sell-off. It is almost as though one day the asset class is great, the investor is smart, and the next day, the market is selling off and the investor has no idea why. If it was an area they were experts in they might assess the market carefully and decide to retain their position, or even add. But in a market that they don’t have much experience, the declining price creates fear, and ultimately, it is impossible for the investor who reached for a few extra bps to bury the sensation that they could lose far more money than they hoped to make. Those few extra bps, which the investor viewed as so important, just a short while ago, were only available because this investment was MORE risky. That risk now becomes too much and the investor joins the selling parade, creating a sharp sell-off.

Goldman's David Kostin, who last week was warning about the combustible effects of a hedge and mutual fund space underperforming the general market, has again found his bearings after a week which saw the biggest move in the market in two years, primarily courtesy of an unprecedented and very much delayed shift out of bonds and into any other asset, marking the end of QE2 and substantial uncertainty as to who will buy government issuance in the future. However, the future is a topic for another day. Here is a brief recap of the past: "S&P 500 ended 2Q almost unchanged from the start of April, but has returned 6% YTD. Looking back, Health Care was the major surprise, surging 14% YTD followed by Energy at 11%. Financials was the only sector to post a negative return, falling 3%. Largecaps lagged with S&P 100 returning 5% and Russell 2000 advancing 6%. Looking ahead, macro uncertainty abounds in Europe (sovereign debt), Japan (earthquake recovery), China (inflation pressures), and US (debt ceiling and budget negotiations). However, at the micro level we expect S&P 500 EPS will establish a new high of $96 and lift the index to 1450, a return of 10% in 2H."