Archive - Aug 26, 2011 - Story

Bernanke said QE 3.0, without really saying it. The markets, seeing the enlarged schedule for the September meeting and interpreting the likelihood of heavy discussions, have gotten the message. Stocks threw off the daily mortal struggle that is life as Bank of America and bid for the QE future that is now September (good riddance to August apparently). Gold prices followed on those expectations of a resumption to the willful and wanton dollar destruction that QE purely represents. If the Chairman can influence a major market rally without ever having to face the growing dissent within the FOMC ranks, then his speech has proven to be a stroke of genius. That is the essence of rational expectations, making others believe you have magical powers so that they do your bidding without any actual work or direct engagement on your part. But there is a huge downside to waiting, and Bernanke knows it.  The financial crisis grows while the economy is sliding further into contraction.  Time is not on his side. So why does he wait? Simple, Bernanke and QE is in a box – conditions currently in the wholesale money markets, especially the repo market, will not suffer more QE.  As the unsecured Fed funds and eurodollar markets have effectively frozen for banks outside the primary dealer network, wholesale funding has been left to repos.  However, there is already a shortage of treasury bills, the prime, vital collateral of nearly all post-2008 repo funding arrangements. 

While we have no information as to who or why (we do know when and where) engaged in a transfer of 9,173 ounces of eligible gold (for a total of about $16.5 million) from HSBC's gold depository into that of JP Morgan, according to today's closing CME Group Metal Depository Statistics, we can merely point out that it happened. One back of the envelope hypothesis: we have counterparty risk at the bank level (which is currently manifesting itself at both the CDS, the stock price, and the Li(E)bor level) are we going to start seeing counterparty concerns at the gold depository level next? What next: a run on the [    ] gold depository in a self-fulfilling prophecy? The second hypothesis is by now well known- JPM needs all the gold it can get. But a paltry 9,173 ounces? Of course, the last hypothesis is that the two precisely 9,173 ounce transactions are in no way related.

A set from I Am Legend, or a picture from a Queens supermarket taken minutes ago. You decide.

The reward for lending money to various sovereign governments around the world is ridiculous based on the amount of risk involved in doing so. At one end of the scale you have the juicy 44% yield for lending money to Greece which, let’s face it, is done. At the other end of the scale you can get basically nothing for lending money to the governments with the poorest balance sheets on the face of the planet. Your choices? Japan with its 200% debt-to-GDP and dying economy? Europe, which will likely no longer exist in its present form come the end of 2012 and which has broadened it’s accumulation of debt from the worthless kind issued by Greece to the severely dubious varieties issued by Spain and Italy (with France just waiting to be put into the game)? Or how about the United States? With its $14 trillion (and rising) deficit, it’s bloated balance sheet of toxic assets, its inestimable unfunded liabilities and its paralyzed political process? Some choice. And yet, people continue to flock to these perceived safe havens largely because, over the years, they have become used to doing so. At some point they will figure out that the ‘safety’ offered by government bonds is now a phantasm and when they do, you can be sure their awakening will be felt across the world. As fire and ash billowed into the skies over Pompeii and Herclaneum all those years ago, the terrified citizens below poured into the safety of their cellars where they had always sought protection previously. Only this time it WAS different and the cellars that had always offered them shelter from the storm became their tombs; proving conclusively that what may well have afforded protection in the past, may not do so in the future. Sadly, the 20,000 people living at the foot of Mount Vesuvius found that out the hard way. 1932 years after arguably the most storied of volcanic eruptions in history, at the foot of a volcano that still smoulders but, despite an eruption in 1944, hasn’t had a major eruption since 1631, 700,000 people now reside.

Tangible stores of wealth are indeed seductive, and apocalyptic overtones add to their allure. But what is tangible can be taken. Trading in apocalyptic settings has minimal gain and even the most tangible things carry risk: there is no profit in an unshakable faith in them. The only unshakable faith should be in one’s capacity to foster a world worthy of wonderful and useful ideas, avoiding religious matters. It is here that the rules themselves change in unpredictable ways. Bureaucracies collapse: the largest predators in the food chain become extinct. The best hope is to rise out of it and rise quickly and the smaller, nimbler, and more cunning can live to see brighter days. There is no science to living in such circumstances. But perhaps there is an art in it. If the world does melt under the unlaboring stars, one should not despair of it.

The one stop summary of the key positive and negative events in the past week.

The spam standard is ending. In news that is likely about to throw the mouth-foaming Keynesians in for a perpetual loop, the Russian Central Bank has quietly announced the sneakiest gold confiscation ploy in history. Reuters reports: "Russia's central bank will offer gold-backed loans for up to 90 days at an interest rate of 7 percent, it said in a statement on Friday, expanding its lending facilities for dealing with any future liquidity crunch in the banking system." So let's get this straight: Russia, which has been dumping US bonds with unseen vigor, and which has been buying gold at a record pace, has just offered its citizen the once in a lifetime opportunity to trade in their hard assets for paper in an imploding fiat system, but with promises to make 7% worthless percent. Oh, and when the "liquidity crunch in the banking system" goes away and one hopes to reclaim title to their gold, one will just find that the title certificate was signed by one Linda Greenova, and said title is perpetually lost in Siberian limbo. And while one waits to reclaim said title from robosigning transgressor #1, Bank of USSR, those heavily armed gentlemen in camouflage attire who just broke into your apartment will not wait to reclaim what now rightfully belongs to mother Russia.

Our thoughts are with Steve.

Many may scoff at the Fed's report that stock prices will not recover to their 2010 highs until 2027.  The migration of "baby boomers" into retirement, combined with sustained high unemployment, low savings rates and a weak economy, does not bode well for strong financial markets into the future.  While there are many hopes that the economy will recover in spite of the abundance of factors building against it; the reality is that we may be dealing with the "Japanese Experience".

Last week it was Bank of America, when someone bought $2 million in November $4 Puts, today it is the Italian equivalent: UniCredit, where someone just put on (no pun intended) a $2.3 million bet expiring in just under 4 months, that the bank will be trading far lower. Earlier in the European trading session, someone bought a standalone block of 10,000 0.9 puts, a whopper in the context of traditional volume. The sizable block purchase was more of a statement than anything. In fact, the block sent the put class abuzz, with the puts being the most active on the Milan equity-options market. Granted, it could have taken place with more leverage (i.e., lower strike), but even so, we are confident many will wonder who is this serial put buyer of doomed financials, which continue existing either courtesy of private market capital raises, or regulatory intervention which prevents their shorting to death. Incidentally, isn't put buying prohibited? After all, this is treason and stuff as per the latest directives of Securitate.

Time to reestablish some compression trades. As the latest update from Capital Context indicates, ES, relative to its risk benchmark consisting of all other risk assets, is once again along in its optimism, trading about 15 points above its implied fair value. Paradoxically, the driver of today's bout of irrational exuberance is not the latest monetary stimulus announcement by the Fed, which obviously did not come, (and it may be time for the daily dose of sobriety: without fiscal and monetary stimulus Q3 and Q4 GDP will tumble; good luck buying stocks on contrarian bent when even the NBER admits we have entered a double dip), but merely "buying the news" - supposedly everyone was convinced there would be announcement by the Fed, which in itself was a catalyst to buy?! Regardless, the buying is only happening in stock as can be seen by the ES. As such it is time to put the trusty old compression trade back on: short ES, long the Contextual Risk leg.

RANsquawk Weekly Wrap - we answer questions that have come to the desk, and we highlight some of next weeks important news and data to look out for.

Every day, more people are waking up to the reality that this big, bloated, bankrupt government is the greatest threat to their livelihood. Earlier this week, in fact, I referenced an article in the Wall Street Journal entitled “Federal Asset Seizures Rise, Netting Innocent With Guilty”. The article title says it all– in the land of the free and home of the brave, you don’t even have to do anything wrong for the government to relieve you of your livelihood. They can take away your entire life, leaving you without any means to prove to them that you’ve done nothing wrong in the first place. This is why I think the most important defensive measure is to open a foreign bank account. The idea here is to have some money in a place where you can’t be locked out of it instantly by some bureaucrat. Again, this is not something that is just for the rich and jet set, there are a number of places that have low (or no) minimum balance requirements.

As most know by now, the ridiculously low $8.5 billion putback settlement, which was supposed to have been closed by now, and which was the key driver in preventing Bank of America from trading far, far lower (and requiring much more capital), is the wildcard that would allow the bank to package tens if not hundreds of billions of claims against the bank in a "tidy (and very small) little package." The key factor allowing this settlement to be structured in its existing form, was that the lawsuit was filed in New York State Court, which allows for a little something known as Article 77, or a provision permitting "special proceeding related to express trust." The details are provided below, but in essence boil down to the following: the settlement in its current form can only be enacted if the lawsuit is conducted under New York State law. Well, minutes ago, David Grais, attorney for Walnut Place, which as we have repeatedly observed represents those interests who claim the $8.5 billion settlement is massively insufficient and are engaged in litigation seeking far greater recoveries, filed a request to transfer the lawsuit from State Court to Federal Court where everything basically begins a new. More than anything, this latest development may explain why Bank of America has been scrambling to raise tens of billions in the open market as an adverse court decision, one granting Grais' request, means the bank is suddenly open to unlimited downside capital risk. In the meantime, add major litigation headline risk to everything else that BAC has going for it...

We are not sure how this is news, since it was announced weeks ago, but according to CNBC the bank that did not need capital, is following up yesterday's $5 billion capital raise with another $10 or so billion by selling "at least half of its 10% stake in CCB." That said, back on August 11, the FT came out with a report titled, "BofA faces struggle to sell CCB stake" in which we learn that "Bank of America is facing difficulties in selling its 10 per cent stake in China Construction Bank, partly because potential investors are expecting a deluge of rights issues, share sales and new listings from Chinese banks. But it might now raise less than than it had hoped. The BofA stake, once valued at $20bn, is now believed to be worth several billion dollars less, according to bankers. The US bank has approached sovereign wealth funds and other investors in the Middle East and in Asia, according to people familiar with the matter. The Kuwait Investment Authority was one potential buyer BofA approached, these people add, but the sovereign wealth fund already holds large stakes in ICBC and Agricultural Bank of China. “Right now, the KIA does not want to do anything more,” says one person with knowledge of the matter. “They think they have enough exposure to Chinese banks.” The KIA expects the two banks in which it already has shares to launch rights offers and the KIA intends to support those banks. "They will only look at CCB if the discount is high enough,” the person added...Potential buyers say the timing for BofA is particularly sensitive because, if CCB does launch a rights offer – as is widely expected – and BofA is still a main shareholder, it will be obliged to participate, using capital it can ill afford to part with." Stated otherwise, this must be one of those, "this time it's different" occasions. Next up: Bank of America does not, repeat NOT, need to sell its employee's blackberrys, but it will. Just because.