Archive - 2011 - Story

This country has not reached the level of control and fear seen in Orwell’s 1984 and V For Vendetta, yet. We are moving relentlessly in that direction. Surveillance, monitoring, spying, censorship, secret prisons, predator drones, and conforming to state rules and regulations put citizens further under the thumb of an all powerful state. The freedom to dissent, the freedom to be left alone, the freedom to speak out against injustice, the freedom to disagree with your government, and the freedom to present your ideas without fear of retribution or penalty are essential in a democratic society. The next phase of this Fourth Turning will surely include another downward spiral in financial markets as un-payable debts accumulate to a tipping point level. When ATM machines stop spitting out twenties, food shelves are bare and gas stations are shuttered, social chaos will ensue. The government will react with further command and control measures. In V For Vendetta, the government creates a terrorist incident in order to gain unquestioned control over the population. Americans will need to be more vigilant than they have been over the last ten years in keeping an eye on their government.

In her weekly HF positional analysis, BofA' Mary Ann Bartels (whose recent technical predictions did not quite pan out) finds that Long Short hedge fund exposure has declined from 25% to 18% as of January 10, well below the 40% average, market neutrals are -3% net short (explaining the ongoing bloodbath in the space), and that macro HFs are long commodities and short US equities and 10 year Treasuries. All in all, exposure continues to be below average bullish levels, yet the market continues to go up. Cue in TrimTabs...

Those oberstabsfeldwebels of the unobvious from the San Fran Fed are back at it, issuing another blisteringly original, taxpayer funded, masterpiece which finds that "in the years leading up to the financial crisis of 2008–2009, a combination of factors including low interest rates, lax lending standards, the proliferation of exotic mortgage products, and the growth of a global market for securitized loans promoted increased household borrowing." In other words, easy credit led to an increase in household leverage... How truly unbelievable. But hark, it continues: "Homebuyers with access to easy credit helped bid up U.S. house prices to unprecedented levels relative to rents and disposable income...U.S. household leverage, as measured by the ratio of debt to disposable income, reached an all-time high of 130% in 2007." You don't say- the Fed's easy credit legacy led to the biggest credit bubble in history? Wow, and it was Alan Greenspan saying just a few days ago that the Fed had nothing to do with the credit bubble... But wait, there's more: " Going forward, households may keep trying to reduce excessive debt loads by increasing their saving." In other words, broke Americans who have no access to credit, will be forced to save. Thank god for such insightful, uber-brains as Reuven Glick and Kevin J. Lansing who were able write such a brilliant research paper, with such profoundly powerful conclusions.

If there is anyone watching this video of what happens to a banana republic when its ponzi stock market plunges, it is Ben Bernanke. The Princeton-educated depression era expert is certainly learning from the mistakes of the Bangladesh stock exchange (flash crashing 9.25% at last check before being halted), which despite US investment bank pitches to the contrary, never instituted its own plunge (and subsequent riot) protection team. And this is despite an identical situtation happening just three weeks earlier. Take home message: every ponzi scheme-based banana republic needs its own President's Working Group on Flash Crash prevention.

After the Fed bought over $1 trillion of US Treasury bonds in the past 2 years, it is now reverse payback time, in which the Fed gives the Treasury just a little more cash. The FRB announced that per "unaudited" 2010 results (obviously), the Fed is provisioning to pay the Treasury $78.4 billion, a 50%+ increase from the $47 billion paid to the Treasury in 2009. What is the basis of this payment? Why the Fed's charter of course: "Under the Board's policy, the residual earnings of each Federal Reserve Bank, after providing for the costs of operations, payment of dividends, and the amount necessary to equate surplus with capital paid-in, are distributed to the U.S. Treasury." Which means that as the Fed buys up ever more Treasurys, and as rates continue their inexorable rise higher, the Fed will continue to receive interest payments from the US Treasury, which, at the end of every year, it will promptly remit back to whoever the current incarnation of Tim Geithner is, in essence nullifying the "checks and balances" impact of cash out interest expense on Treasury, and thus government, deficit decisions. In fact, the greater the amount of debt issued, and therefore monetized, the less the Treasury actually has to pay in interest. And in the meantime, the higher interest rates go, the greater the duration-adjusted loss on Fed holdings. But who cares about those: after all, results are all "unaudited" and the Fed will hold all securities to the earlier of "maturity" or default - as if anyone doubts which will happen first.

It appears that gold isn't really a currency... until it is. The Economic Times reports that India is attempting to ensure steady crude oil supplies from Iran. In doing so it is doing everything it can to pay Iran in a way that avoid loopholes associated with recent US sanctions. And the stunner: "India could settle crude oil import transaction using gold in the short term, while efforts to resolve the deadlock continue." But does Iran realize they can't possibly eat all that gold? Or that The Fed has no way of diluting to oblivion? Or that, unlike the dollar, it is currently not involved in a global race to bottom in which every central bank will have no choice but to print ever more of its linen-infused currencies? Something tells us that the answer to all three is yes.

Simon Black, whose first person observations of the world outside America have made his website Sovereign Man truly an entertaining and informative read, and who has been anticipating the encroaching transition of America to a control state, shares his two cents on this weekend's tragic shooting in Florida. "With one of their own victimized, however, I'm concerned that politicians will close ranks, capitalize on the social mood to generate a renewed faith in government, and pass a host of reactionary policies... all after sanitizing their Twitter feeds for any reference to violence, of course. Perhaps some form of gun control is in the works... though with a Republican controlled Congress, I'd think new legislation targeting suspected 'Anti-American subversives' could be on the table, or something that gives sweeping new powers to government agents and police forces." And as always, Simon's suggestion is a logical one: "I would suggest that if your ideals and beliefs make you increasingly isolated from your neighbors, maybe it's time to find new neighbors." We are sure this will anger Mike Krieger who advocates an attempt to regain control back from the kleptocratic corporatocracy (by peaceful means of course), although at some point one has to ask: when is enough, enough...

The fundamentals of the last PIG country, which has so far avoided the bond carnage of its peripheral peers, reported that while broad unemployment was 8.7%, the "highest since the beginning of the beginning of the time series in 2004" it is youth unemployment which, like in Spain, is becoming a few bigger issues. Corriere Della Sera announced that youth unemployment has hit a record of 28.9%: "Youth unemployment, however, did rise as the rate climbed to 28.9%, up 0.9 percentage points on October and 2.4 points higher than in November 2009. This, too, is the highest level since time series were introduced in January 2004." Yet even at these levels, this is still modest compared to countries like Spain, where the same metric was trending around 40% and is expected to remain there through 2011.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 10/01/11

Back in 2007 and 2008 every single dry shipping company had put in future delivery orders for everything from Panamax to Capesize vessels, at even the most shoddy of Chinese shipyards. Now, a few years later, as these orders are starting to be completed, the world's dry bulk shipping industry is suddenly experiencing an unprecedented supply glut of coal/ore carriers, which has resulted in the Baltic Dry index droppoing below 1,500 for the first time since 2009. And as Bloomberg reports, with at least 200 capesize ships, stretching at 35 miles end to end, expected to be completed by the world's shipyards, which represents an 18% expansion in the world's shipping fleet, the excess supply will once glut the modest demand rise which is expected to come at just 7%. The winners: raw material companies which have massive pricing power in an environment in which shipping costs are plunging, as well as the shipping companies which have managed to lock in charter contracts at historic rates. The biggest loser: dry bulk shippers operating at spot, and which have large, debt-funded balance sheets.There the pain will be substantial.

And now for today's stunning mutual fund first of the month-day statistic: David Rosenberg notes that "134 points of the 143 points that were racked up in 2010 occurred in the first trading day of each month. That is truly remarkable ? 94% of the entire year boiled down to 12 sessions. And what do you know? 2011 started with a 1.1% pop and has sputtered since." Has trading for humans only been relegated to just 12 times a year when mutual funds invest their previously month's capital allocation in the stock market? Statistically, the trade is to go long at closing on the last trading session of any given month, hold long through next day's closing, and short the remainder of the month.

Our recent reports by third parties on alleged Chinese fraud companies, even if conflicted, appear to have hit the nail on the proverbial head. And after all, how different is it to have anyone present a position paper with a bearish bias, compared to what managers such as Ackman, Einhorn and Tilson do on a periodic basis when they talk their book, online or on financial TV channels? At the end of the day, it is the market that decides if the investment thesis of any bullish or bearish report is viable, and if not it merely provides a better, and lower cost entry point (long or short) for those who end up being proven correct about a given company. That said, RINO is now trading on the pink sheets, while our most recent disclosure on China Green Agiculture has pushed the stock down 20% in a few days. But who says frauds are only foreign in origin. Our latest report, courtesy of Dalrymple Finance (and yes, we were correct that a plethora of micro-funds focused on ferreting out alleged frauds would soon appear), focuses on a company that has nothing at all with China, and a lot to do with Bermuda, and the US hedge fund industry. Presenting Gerova Financial Group (NYSE:GFC), which per the authors is a "NYSE-listed shellgame, in our opinion."

Remember when the Chicago PMI came at 68.6 ten short days ago, trouncing expectations of 62.5, and the highest since July 1988? Well, post-revision reality is slowly coming back to roost: the number was just revised down to 66.8. Presumably there will be no more revisions, however since these numbers now come straight from the Department of Imaginary Numbers, we wouldn't hold our breath.

Some unpleasant news for pensioned workers who believe that their insolvent state will be able to afford ridiculous legacy pensions in perpetuity. According to Pensions and Investment magazines, Newt Gingrich is pushing for legislation that will allow insolvent states to be taken off bailout support and file bankruptcy, in the process allowing them to renege on pension and other benefit obligations promises to state workers. And if there is anything that will get government workers' blood pressure to critical levels, it is the threat that money they had taken for granted is about to be lifted, courtesy of living in an insolvent state (pretty much all of them). And obviously what this means for equity investors in assorted muni investments is that a complete wipe out is becoming a possibility, as Meredith Whitney's prediction, which everyone was quick to mock and ridicule, is about to come back with a vengeance.

For all who need another confirmation that the silver physical market is increasingly more illiquid, at least compared to its infinitely dilutable and utterly mangled paper cousin, here is PSLV manager Eric Sprott himself: "Frankly, we are concerned about the illiquidity in the physical silver market," said Eric Sprott, Chief Investment Officer of Sprott Asset Management. "We believe the delays involved in the delivery of physical silver to the Trust highlight the disconnect that exists between the paper and physical markets for silver." Curiously, this has occurred even as the US Mint reports that sales of silver in December was the lowest in 2010, at just 1,772,000 ounces. It is unclear if this number was this low due to an actual supply shortage at the mint. Perhaps the fact that 2,221,000 silver ounces were sold in just the first week of January, a number which if run-rated would be an absolutely all time monthly record, should provide some clarity on this issue.