Archive - 2011 - Story

The WSJ has an adorable article titled "The Fed's Laugh Track" in which it has done a word search for "laughter" and come up with some amusing results. Of course it would be far funnier if the WSJ had an article disclosing all the conversation transcripts between Jon Hilsenrath and the various Fed's presidents and executives. We won't hold our breath on that on. We would, however, like to present one of tha laugh tracks that the WSJ conveniently decided to drop. Not surprisingly, the topic of that particular transcript disclosure is, well, gold.

If you still have any doubts of Fed's bias towards sustaining bubbles and being late on fighting inflation, the latest release of 2005 Fed meeting minutes should help you see it more clearly. There's some good humor and cynicism there, which certainly deserves respect. It's also obvious that many Fed officials and economists, including Greenspan and Geithner, had by 2005 at the latest realized the bubble in housing and the systemic risks posed by big banks (and Lehman and Bear Stearns in particular). Impressive foresight. But the good news stops there. Were the bubble and risks just a goddamned joke to them? They saw it quite well, made some smartass jokes and had some good laughs, and did NOTHING. When Bernanke said it takes 15 minutes to raise rates, he was being too modest. The final tally to vote on the decision, I'm sure, takes at most one minute. But this is an insult to the questioner and the audience, isn't it? The real question is how long it would take from rising inflation to them seeing it, then making the decision to act on it, then to inflation being tamed.

About the time that the Federal Reserve was created, H.G. Wells proposed a conspiracy theory.   It wasn’t a cabal of small and secretive group of people. His goal was to drive the progress of mankind:  the Open Conspiracy.  Anyone could join, in the words of Nancy Zimmerman, if they:

• Endorse the aim of the Open Conspiracy—the betterment of the human race.
• Strive to understand the world, to determine the institutions and practices that work and those that don't—what things contribute to human progress, and what things did not.
• Communicate what they learn to others.
• Listen to what others have to say independent of who they are:  “no one has a monopoly on truth or on insight, and good judgments can only be arrived at by close and open-minded scrutiny of evidence and opinions.”

The point of this Open Conspiracy is to understand and maybe domesticate risk; to turn the future into something we don’t fear.  The very attempt is itself the stuff that contests all the change and adversity that feed fear and insecurity. Even in an unpredictable, always morphing universe there is value in problem solving.  And one can find the human instinct for problem solving in virtually all institutions, even the dreaded credit default swap.

After a brief stint in the end of November dethroned Citi from the title of "most hated company" if not in the world then at least on the S&P, and replaced it with the traditional hedge fund long position offset, the SPY, December has seen a valiant rebound by Citi shorts, which successfully pushed Pandit's company back to the top. And with 355 million shares short, Citi is no danger of being overtaken any time soon by runner up, SPY. The surge in shorting also likely explains why the same company has, courtesy of various forced buy ins, once again pulled a March 2009, and soared on absolutely nothing, as a short covering spree has taken the name double digits higher in days. We would have hoped that realist speculators would know by now that any time there is a surge in the short interest, it is immediately reported by the exchanges and the brokers to the custodians who in turn enjoy institute HTB days, which just sometimes see pervasive forced buy ins to generate an industry wide short squeeze. Just like we have seen in financials in the past several weeks.

“As we peer into society’s future, we – you and I, and our government – must avoid the impulse to live only for today, plundering, for our own ease and convenience, the precious resources of tomorrow. [Emphasis added.] We cannot mortgage the material assets of our grandchildren without risking the loss also of their political and spiritual heritage.” Wow! How is it possible that we collectively seem to have forgotten this clear warning? I have not once seen it referred to...All in all it appears that Eisenhower’s worst fears have been realized and his remarkable and unique warnings given for naught. From now on, we should tread more carefully. Honoring President Eisenhower’s unique warnings, we should perhaps not take this 50-year slide lying down. Squawking loudly seems preferable. - Jeremy Grantham

Just because sometimes we need a reminder that there is a lighter side to life even when living under Hewlett-Packardian central planning...

No, not 2008. 2007. It is at the same level it traded last when the S&P hit its all time highs, when stocks moved 10% on a Cramer recommendation, when complacency was virtually infinite, and just before the first quant wipe out of August 2007. That said, the summer of 2007 did not have a politburo of 12 Fed presidents and one Chairman determining every single tick in the Russell 2000. In that regard, this time is truly is different. Expect the VIX of the policy instrument now known as the stock market, to hit 0 as vol in FX, rates and commodities approaches asymptote.

Last week's surge in net commercial EUR short positions to -45,182, nearly a double from the -24,201 the week before, explains why the last few days have seen one of the sharpest and most pronounced upward moves in the EUR(USD) in recent history. All a historic short squeeze needed was a little gratuitous systemic backstop like the Chinese rhetoric about bond purchases, and a proximal catalyst such as the Goldman "tactical" upgrade of the EURUSD and the avalanche of shorts, which was at the highest it has been in over half a year, rushed like headless chickens and completely chaotically in traditional groupthink unwind fashion out of the burning theater entrance. And what certainly "helped" the EURUSD trade unwind was the massive jump in bullish USD positions from -1,268 net to 10,057. That said, next week we expect the inverse, as EUR shorts plunge, and USD shorts surge, only to be taken advantage of at the first possible opportunity by far bigger and sophisticated institution, and not to mention, countries, which have $700 billion in FX reserves in a currency that needs to be sustained at about 1.35.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 14/01/11

With the US Mint selling silver at an unprecedented pace, it was only a matter of time before the silver shortage would be spotted across the Atlantic, where distributors ran out of both gold and silver on a daily basis during the first time Europe became insolvent some time in early May 2010. Sure enough, BullionVault.com has announced that it has run out of silver in Germany "due to high demand." In the meantime, the CFTC's actions have succeeded in allowing the JPM's suppression of precious metals markets to continue indefinitely, yet all its actions have really done is to provide a short-lived lower cost basis for the precious metals as there is no indication demand is subsiding. At some point the margin calls will come. Then not even Gary Gensler will be able to bail out JPM (we wish we could say the same about Ben Bernanke to whom JPM's role as head of the tri-party repo clearing market is irreplaceable in maintaining an orderly shadow liquidity market).

Gold and silver are now down hard over the past two days and the reason may have something to do with the fact that the CFTC utterly caved to JPM in their long-awaited decision on position limits in a 4-1 vote. While position limits will eventually be set, maybe, someday, the course of action taken by the CFTC grandfathers in JPM's (and HSBC, et al) current outlandish positions. For anybody like JPM that has no intent of taking physical delivery, they are prevented from accumulating a position that is 125% of the total deliverable supply. What sort of a limit is that?? That's like trying to limit the damage from auto accidents by limiting freeway speeds to 'no more than' 175 mph. Also, anybody who might want to actually buy the physical is limited to 25%, so any potential Hunt Bros. need not apply. The outer limits of this game have been exclusively reserved for speculators and manipulators. That's not even remotely the outcome I was hoping for. This 'ruling' tantamount to saying "carry on!"

Iceland, which alone in the entire developed world allowed its banking sector to collapse, and which, also alone, has benefited from a recovery that is truly organic courtesy of a devaluation of its currency and a global restructuring of its corporate balance sheet (read wipe outs for its banker class), continues to show the world that it is possible to have at least some semblance of justice in a world captured by fraud and criminal financial interests. After the CEO of failed bank Kaputhing was arrested back in May, today AFP reports that Iceland police has also detained the former CEO and several other executives of the other major Iceland failed bank: Landsbanki.

Adding insult to injury for holders of muni bonds, whose assets have plunged in value in the past month, pretty much as expected in light of pervasive state insolvency which is no longer being masked by the government's generous "Build America Bonds" distraction, is Charlie Gasparino's breaking news that now the SEC has gotten into the fray, and is looking into muni bond prospectus disclosures. Per Gasparino: "What they are looking at whether municipalities, cities and states, are adequately disclosing their budget woes to investors who buy these bonds." Which only means that as the risk of further pervasive impropriety is unearthed, and the muni space ends up being as much of a fraud as the MBS one, that the risk of holding on to MUB-derivative equivalents will only get higher, leading to yet another round of sell offs now that the muni bond situation has entered a toxic spiral where, in the inverse of the stock market, any news creates merely greater selling pressure.

Today we present yet another analysis of the complete failure of the QE framework, this time from Van Hoisington: "From the standpoint of most households, the home is the main component of wealth, not stock market investments. The continuing drop in housing prices serves to underscore the ill advised and likely temporary drop in the personal saving rate that was so critical to economic performance late last year." The problem is that with even the Fed itself confirming that it no longer cares to even attempt to reflate housing, and merely is seeking the make the wealthiest even wealthier, why bother? Why even speculate what the theoretical framework behind the Fed's actions and what proper policy should be, when Bernanke has now made it clear that the Fed cares not one bit about its two key mandates, both of which have been made irrelevant to its only real prerogative: inflating stock prices to as high levels as possible, asset bubbles be damned. Next month we will bring you the latest all time record high number of Americans on food stamps. And the same for the month after, and after, until eventually we get a replay of the Tunisian (French citizenship) candidate situation in our own country.

Looking at the now standard daily levitation in equities on bad, good, and no news, one may be left with the impression that every asset class is on a tear. Wrong. The chart below shows the 3 year performance in MUB. One word: bidless.