Archive - Sep 2011 - Story

Earlier today Jim Quinn rhetorically asked why the price of oil hasn't collapsed despite the contraction in the global economy. Well, in a completely unrelated letter, Grant Williams of Things That Make You Go Hmmm, answers not only the question of why Brent and WTI continue to disconnect (must read for anyone interested in the oil market), but also Grant's underlying quandary (as rhetorical as it may be): "As stock markets plummeted in August, one thing that was noticeable was the resilience of both ‘the oil price’ (in the shape of Brent Crude, of course) and that of copper - two bellwether indicators of any slowdown in growth that can be relied upon to flash signals when a recession is nigh. To be sure, the data reported in August was dreadful. In the US we saw a slew of appalling regional manufacturing reports, (the Philly Fed and Empire numbers could genuinely be described as ‘shock- ers’), shattered consumer confidence numbers and rising inflation all topped off with a big fat goose egg in the NFP report last Friday, while in Europe, as the periphery continued to confirm just how week their economies continue to be, the real shocks came from the region’s perennial powerhouse economy, Germany. So why doesn’t ‘the oil price’ reflect this likelihood? Simple: 1. China has a LOT of paper money and is happy to swap it for hard assets that it knows will ulti- mately be far more beneficial in the long run as Western governments continue to debase their currencies. 2. Western governments continue to debase their currencies."

One of the recurring themes on Zero Hedge ever since the announcement of the EFSF is that in addition to onboarding contagion fears by transferring financial risk from the PIIGS to itself, Germany's ruling party, and particularly Frau Chancellor Merkel, has been on the receiving end of ever increasing popular anger at putting German wealth at risk in order to rescue lying, thieving countries like Greece and Italy, which have proven beyond a reasonable doubt, they will do none of the fiscal reforms demanded of them, yet promise the world in exchange for yet another bailout tranche, or more ECB-backstopped purchases of their debt (even Sean Corrigan would be proud of that sentence). Sure enough, today we get the latest confirmation that as national elections loom ever closer, as does the specter of a government crisis following the EFSF expansion vote some time in late September (it is fluid), the ruling CDU continues to take on water. Per Reuters: "Chancellor Angela Merkel's centre-right bloc suffered another defeat on Sunday in a regional election in Germany's poorest state, Mecklenburg-Vorpommern, with both her conservatives and their Free Democrat allies losing support. A first projection by the ARD network at 1615 GMT showed Merkel's Christian Democrats (CDU) falling to 24 percent from the 28.8 percent won in the sparsely populated state on the Baltic shore in 2006. It was the CDU's worst result ever there."

Americans pay 43 cents in taxes out of the $3.70 they pay at the pump for a gallon of gasoline. A driver in the UK is paying $4 per gallon in taxes out of the $9 per gallon cost. Gasoline costs between $8 and $9 per gallon across Europe today. The extreme level of gas taxes certainly reduces car sizes, consumption and traffic. Too bad the mad socialists across Europe spent the taxes on expanding their welfare states and promising even more to their populations. Maybe a $6 per gallon tax will do the trick. Forcing Americans to drive less by doubling the gas tax is a quaint idea, but it is too late in the game. Europe is still made up of small towns and cities with the populations still fairly consolidated. Biking, walking and small rail travel is easy and feasible. The sprawling suburban enclaves that proliferate across the American countryside, dotted by thousands of malls and McMansion communities, accessible only by automobiles, make it impossible to implement a rational energy efficient model for moving forward. We cannot reverse 60 years of irrationality. Even without higher gas taxes, the price of gasoline will move relentlessly higher due to the stealth tax of currency debasement.

While the bulk of his weekly parable is primarily about the Swiss Franc (certainly worth the read coming from an old FX trader), the subtext is far more nuanced, and as usual, presents what "next steps" will be in terms of policy response from the G-20 to prevent the end of the Status Quo^TM. For all those who ridiculed us about consistently presenting what Goldman believes is in the economy's "best interest", we have only one thing to say: QE3 is coming. Just as Hatzius demanded it several months ago (as predicted by us back in January). Indeed, the instruction flow never errs: from Goldman to the Fed; from the Fed to the SecTres and teleprompter; from theteleprompter  and out of taxpayers' pockets. So speaking of flow charts, here is what the world should expect, tongue in cheek, in terms of G-20 intervention over the next several months, to prevent a swift plunge into the mother of all depressions.  1.    Clear, credible, targeted action from President Obama and Congress to create US jobs and stimulate domestic investment; 2.    If not more QE from the Fed, an ongoing clarity about their bias; 3.    A quick resurrection of a credible budget in Italy; 4.    A move towards an interest rate cut from the ECB. There is no inflation problem and the Euro Area economy has weakened a lot; 5.    Some indication by German Chancellor Merkel that as part of a more fiscally coherent EMU, Germany would accept the principle of Euro Bonds; 6.    A clear signal from Beijing that once inflation has peaked, monetary tightening is finished. In other words: not just more of the same, but much, much more of the same. In yet more other words: insanity defined.

When one thinks of gold crashes, one typically visualizes a trading floor from the 1980s onward, predicated by Nixon's nixing of Bretton Woods 40 years ago, which removed gold from the list of accepted currencies and converted it into a government-manipulated pariah, whose core function was to be suppressed in an ongoing (failed) attempt to make the dollar the undisputed reserve currency (something even China comprehends). Well, readers may be surprised to discover that one of the first, and probably biggest on a relative basis, documented gold crashes was not 3 weeks ago, nor back in October 2008, nor any time since the advent of Nixon, or even the Federal Reserve, but over 140 years ago, on September 24, 1869 when a massive gold price manipulation scandal created a financial panic. That day, also known as "Black Friday", was the culmination of an attempt to corner the gold market following the latest, however brief, termination of the gold standard, when during the reconstruction period following the US Civil War, the US dollar was backed not by gold, but simply by credit (sound familiar). The result was a surge, and then collapse in gold.

Wondering why gold at $1850 is cheap, or why gold at double that price will also be cheap, or frankly at any price? Because, as the following leaked cable explains, gold is, to China at least, nothing but the opportunity cost of destroying the dollar's reserve status. Putting that into dollar terms is, therefore, impractical at best, and illogical at worst. We have a suspicion that the following cable from the US embassy in China is about to go not viral but very much global, and prompt all those mutual fund managers who are on the golden sidelines to dip a toe in the 24 karat pool. The only thing that matters from China's perspective is that "suppressing the price of gold is very beneficial for the U.S. in maintaining the U.S. dollar's role as the international reserve currency. China's increased gold reserves will thus act as a model and lead other countries towards reserving more gold. Large gold reserves are also beneficial in promoting the internationalization of the RMB." Now, what would happen if mutual and pension funds finally comprehend they are massively underinvested in the one asset which China is without a trace of doubt massively accumulating behind the scenes is nothing short of a worldwide scramble, not so much for paper, but every last ounce of physical gold...

While the US was panicking over a double zero jobs report, things in Europe just fell off a cliff. As both the WSJ and Reuters report, it seems that the second Greek bailout, following repeated and consistent disappointments by Greece which has resolutely refused to comply with the terms of its fiscal austerity program, has just collapsed.And with the US closed on Monday: long a counterbalance to European risk pessimism, this week (especially with the news fro the latest FHFA onslaught against global banks) may just be the one that "it" all comes to a head. But back to Europe, and more specifically Greece, which it now appears is doomed. From the WSJ: "I expect a hard default definitely before March, maybe this year, and it could come with this program review," said a senior IMF economist who is keeping close tabs on the situation. "The chances for a second program are slim." It is not only Greece - Italy also thought it would sneak by with getting quid pro no and continue leeching off of Europe, or specifically Germany, indefinitely, at least until the ECB said that absent Berlusconi taking austerity seriously that implicit ECB support for Italian bonds would be yanked, sending the second most indebted country in the world into a toxic debt tailspin. And so it comes that after 2 years of waffling, Europe finally realizes that the piper always eventually gets paid. Alas, it is now far too late.

Where does one start with this one. The WaPo reports that Jon Lovett, an Obama speechwriter and the reigning champion of official Washington’s stand-up comedy circuit, is quitting his job as the teleprompter's telepronpter. "In mid-September, Lovett, 29, plans to leave the administration to write for television out West. “It’s always been a dream of mine to write comedy and be creative,” said Lovett, who insisted that the current West Wing woes had nothing to do with his timing. “I would like to be able to write in my own voice.” Uhm, Lovett may not have noticed, but his work over the past 2 years has directly created some of the most profoundly hilarious comedy in the history of the "free world."

Although I am not as convinced as Stefan that the US government has brought about all our economic ills through deceit, I give it ample credence; but also give a good share of the blame to a citizenry at large vested with waste and greed. On my drive back, ruminating on that blame placed on the government as the mastermind and source of deceit I thought of my friend back in Portland. Was he really the victim of deceit, or did he really invite deceit by his own self-deceit? By entering into a romantic relationship two years before with a woman less than half his age with a compromising polyamorous background, one which was not much different from that which she is exhibiting, and blamed for, today!? Is it really economic, political or romantic deceit we are sometimes victims of, or is it more often than not a case of unfulfilled wishful thinking, of self-deceit?

Whille the past week was full of economic news, most of them decidedly negative, it is next week that the house of cards could finally come unhinged. In what will be the event of the week, Germany's Constitutional Court is set to rule on the legality of the seemingly endless bailout pledges made by Merkel. If they rule against the bailouts, that would be Europe's version of a Lehman moment. Next on the docket you have Italy which has recently been softening its austerity program. Berlusconi needs to show increased leadership by solidifying his pledge towards consummate austerity in an effort to improve his country's finances. Financial markets have recently taken notice of these negative developments. Investors knew that the jobs report wouldn't be pretty, however, yesterday's large selloff was actually due to renewed euro zone jitters. If the Eurozone does blowup, all bets are off.

To sum up today's mass bank lawsuit news: first the taxpayers were asked to save Freddie and Fannie, then they were asked to save the banks, now when it is politically expedient to do so, the first entity which is still being saved ($200B of taxpayer funded capital injections later) is suing the second saved entity. In the interim, on a day when job growth in this country was essentially ZERO, we are going to lose another 30,000 private sector jobs. Finally, it is worth mentioning that these lawsuits are suggesting that Fannie Mae and Freddie Mac were semi-clueless when it came to the mortgage securitization process. Something that may be a tad difficult to prove given that they were major players in the mortgage markets. If readers are confused, they are not alone.

Because this time is never different...

We end this busy day of economic buffoonery with Goldman's scorecard for August ("the US economy has not fallen off a cliff", which we translate as a B+, and "far better than expected"), which in turn explains why Goldman, and everyone else, now assumes QE3 (yes, Op Twist is QE3; get over it) is not only a given, but why in Goldman's esteemed opinion, the Fed has at least 3 rationales for pushing for more QEasing. Incidentally, these are as follows: "First, unemployment is far above the Fed’s long-term forecast in the low 5% range; the longer high unemployment persists, the greater the risk that an erosion of skills and labor force attachment will result in permanent supply-side damage. Second, economic growth has been woeful this year and there is no convincing sign of the second-half pickup in growth that the majority of Fed officials seem to expect. The payroll report in particular will weigh heavily in the minds of many Federal Open Market Committee members. Third, there is limited prospect for near-term fiscal stimulus from a gridlocked Washington." The only thing Goldman is avoiding, of course, is the wipe out in stocks that will make QE3 a virtual certainty, as we have been predicting ever since March. Goldman is also avoiding to mention that the only outcome of more QE will be another record year of Wall Street bonuses, all at the expense of more joblessness, higher gas prices, a 120% debt/GDP ratio, and overall sovereign insolvency. Oh well - in the meantime we continue, as we have for the past 2.5 years, to buy gold... or spam for the Econ PhDs out there.

While the FHFA has targeted lawsuits at a whole bunch of employees of the 17 banks previously disclosed, nothing gives us as much amusement and frankly pleasure, as the fact that Goldman's definition of smugness - one Dan Sparks of "shitty deal" fame, is among the accused. Perhaps, even in uber crony communist America, what goes around eventually comes around. Now, if only someone can figure out how Warren Buffett's Wells Fargo, with its several hundred billion worth of Wachovia toxic biohazard, is not on the list of defendants...

Two weeks ago we had a "bear market" open thread in which we lamented the arrival of the recession, or the resumption of the depression, depending on one's proclivity for dramatic flair. It took the rest of the world about two weeks to catch up to what our commentators already knew. Today, in turn, we want to celebrate a peaceful, calm, (lack of) labor day holiday following which we are positive the markets will reopen calmly, in an orderly manner, with modest volume, declining 3M USD Libor, a collapse in the Libor OIS and with no invocation of Rule 48 whatsoever, by opening it up to our readers' very cool, calm, collected and politically correct stream of consciousness.