Archive - Apr 2012 - Story

When Operation Twist began in late September 2011, Primary Dealers reported that their net position in bonds with a maturity between 1 and 3 years was ($23) billion or the biggest short since January 2010, while reporting holdings of bonds between 11 and 30 years of $12.4 billion, for a net carry position (Short minus Long) of $(35) billion. What a difference just over 6 months makes: courtesy of Treasury Primary Dealer data, we now know that in the preceding weeks, with the Fed selling paper maturing in under 3 years, the Primary Dealers have loaded up to the gills on short-dated maturities, and in the week ended April 11, they reported $54 billion in 1-3 Year Holdings. At the same time 11-30 Year Maturities declined from othe $12.4 billion at the start of Twist to just $7 billion: don't forget - this is the only type of bonds sold by the Fed (if also including short maturities than the explicit long-end that the Fed is buying). What is interesting is that with nearly 80% of Twist over, the 10 Year was at just under 2.00% the day Twist started, and was....just shy of 2.00% on Friday. In other words in order to "sterilize" the Fed's duration extension, keep rates, and the price of gold, low and promote a "housing recovery" Dealers have been "forced" to part ways with about $100 billion in Net Interest Margin generating units, as the Short minus Long position has risen from -$35 billion to +$54 billion, hitting over $60 billion a few weeks ago.

For those who have not been following the Bo Xilai drama unfolding with furious pace over the past month, we have some advice: you should be, as the fate of China will be defined by who is left standing at the end, which in turn will have momentous consequences for the entire Developed World. But where does one start? Luckily, Grant Williams' latest TTMYGH has one simple plot line: presenting the past, present and future of the epic power struggle between Wen Jiabao and Bo Xilai which has already claimed at least on death, and within China's top power echelon, the Politburo Standing Committee.  "This week’s edition of Things That Make You Go Hmmm..... is a little different to those that have come before it in that it is more of a murder mystery/whodunnit and focuses on the machinations behind a very significant power struggle currently raging in the shadowy world of China’s ruling party. For those amongst you who like tales of drunken British businessmen, unexplained deaths, cyanide poisoning, swift autopsies, mysterious political figures, Lady Macbeth-type wives and police chiefs fleeing for their lives - read on. For those of you who prefer less sensationalist tales..... well read on anyway - this one’s a doozy!"

The focus has shifted. The all seeing orb is now focused on Spain but it may well turn back to Greece soon. The loan money is exhausted again and the Greeks have elections lined up on Sunday, May 6 which is coincidentally the same day of the French run-off elections. To answer the question of at what point Greece might leave the Eurozone and return to the Drachma is relatively simple; it will be the day when the European loan spigot is shut off. Greece will pander, promise and proclaim until that point and then they will say, “have a nice day and thanks for all the fish.”

Throughout the postwar period, banks have almost always lent out all the way up to the reserve requirement. So, does the accumulation of excess reserves lead to inflation? Only so much as the frequentation of brothels leads to chlamydia and syphilis. Excess reserves are only non-inflationary so long as the banks — the people holding the reserves — play along with the Fed-Treasury game of monetising debt and trying to hide the inflation . The banks don’t have to lend these reserves out, just as having sex with hookers doesn’t have to lead to an infection. But eventually — so long as you do it enough — the condom will break. As soon as banks start to lend beyond the economy’s inherent productivity (which lest we forget is around the same level as ten years ago) there will be inflation.

At first we were going to comment on this "response" by the high priest of Keynesian shamanic tautology to Mark Spitznagel's latest WSJ opinion piece, but then we just started laughing, and kept on laughing, and kept on laughing...

We present our favorite chart of 2012 (now freshly updated and with that new, NINJA subprime-loan subsidized, car smell) without any further commentary.

22% of the Q1 earnings season (by market cap) is over, and anyone listening merely to soundbites and reading media headlines would likely think that stocks have soared as a result of a relentless parade of beats. One would be mistaken. In fact, as the chart below shows, there is something very wrong with this earnings season...

Harvey Organ has been analyzing the bullion markets closely for decades. The quality and accuracy of his work is respected enough to have earned him an invitation to testify before the CFTC on position limits for precious metals back in 2010. And he minces no words: gold and silver prices are suppressed. With extreme prejudice. In this detailed interview, Harvey explains to Chris the mechanics how of he sees this manipulation occurring, why he predicts this fraudulent pricing scheme will collapse soon, and why it's critical to be holding physical (vs paper) bullion when it does.

Maybe it is the activity in Europe that made the markets feel more volatile than the weekly changes show. Or maybe it was that the futures traded in an almost 3% range – from 1,359 to 1,390 with several 0.5% swings during the course of most days. Market darling Apple isn’t helping calm the market either. That can reverse on a moment’s notice, or a great earnings release, but the momentum that was dragging more and more hedge funds into the trade, is now working in reverse as stop losses are being triggered. So often lately, the bulls are able to point to a decent tape in face of weak data and no stimulus, and this week ended with the opposite. Bulls will be nervous that decent earnings and a mega-plan from the IMF failed to provide strength to the market. So, it was a strange week that was more volatile than the weekly changes show, and where some real cracks are being exposed.

Four time Fed Chairman Marriner Eccles: "As long as the Federal Reserve is required to buy government securities at the will of the market for the purpose of defending a fixed pattern of interest rates established by the Treasury, it must stand ready to create new bank reserves in unlimited amount. This policy makes the entire banking system, through the action of the Federal Reserve System, an engine of inflation. (U.S. Congress 1951, p. 158)... [We are making] it possible for the public to convert Government securities into money to expand the money supply....We are almost solely responsible for this inflation. It is not deficit financing that is responsible because there has been surplus in the Treasury right along; the whole question of having rationing and price controls is due to the fact that we have this monetary inflation, and this committee is the only agency in existence that can curb and stop the growth of money.. . . [W]e should tell the Treasury, the President, and the Congress these facts, and do something about it....We have not only the power but the responsibility....If Congress does not like what we are doing, then they can change the rules. (FOMC Minutes, 2/6/51, pp. 50–51)"

On a day when Lagarde happily trots out statement after statement that the IMF has another bucketful of promises to solve the world's excess debt problems with its own debtors providing more of the wealth-creating debt in ever-increasing circles of ridiculous indebtedness, we may have found the perfect antidote. Perhaps, given the weakness in European sovereign markets this week, bond market investors have already watched the following presentation. Explaining in simple terms and for the broadest audience Paul Grignon's 'Money As Debt' explores the baffling, fraudulent and destructive arithmetic of the money system that holds us hostage to a forever-growing debt - and how we might evolve it into a new era. Get your popcorn ready.

So far, 2012 has been a banner year for the stock market, which recently closed the books on its best first quarter in 14 years. But Casey Research Chairman Doug Casey insists that time is running out on the ticking time bombs. Next week when Casey Research's spring summit gets underway, Casey will open the first general session addressing the question of whether the inevitable is now imminent. In another exclusive interview with The Gold Report, Casey tells us that he foresees extreme volatility "as the titanic forces of inflation and deflation fight with each other" and a forced shift to speculation to either protect or build wealth.

Just a month ago we raised more than a proverbial eyebrow when we noted the creation of the NSA's Utah Data Center (codename Stellar Wind) and William Binney's formidable statement that "we are this far from a turnkey totalitarian state". Democracy Now has the former National Security Agency technical director whistleblower's first TV interview in which he discusses the NSA's massive power to spy on Americans and why the FBI raided his home. Since retiring from the NSA in 2001, he has warned that the NSA’s data-mining program has become so vast that it could "create an Orwellian state." Today marks the first time Binney has spoken on national TV about NSA surveillance. Starting with his pre-9-11 identification of the world-wide-web as a voluminous problem since the NSA was 'falling behind the rate-of-change', his success in creating a system (codenamed Thin-Thread) for 'grabbing' all the data and the critical 'lawful' anonymization of that data (according to mandate at the time) which as soon as 9-11 occurred went out of the window as all domestic and foreign communications was now stored (starting with AT&T's forking over their data). This direct violation of the constitutional rights of everybody in the country was why Binney decided he could not stay (leaving one month after 9-11) along with the violation of almost every privacy and intelligence act as near-bottomless databases store all forms of communication collected by the agency, including private emails, cell phone calls, Google searches and other personal data.

There was a time when Americans still cared about matters such as personal privacy. Luckily, they now have iGadgets to keep them distracted as they hand over their last pieces of individuality to the Tzar of conformity as simply put "The NSA Is Lying - The government has copies of most of your emails".

Take your pick of how to describe this week's action. The Dow was green, S&P 500 unch (ES closed right at its 50DMA), and NASDAQ down for its biggest 2-week loss since the rally began. Heavy volume and incessant selling pressure pushed AAPL to its biggest 10-day loss in over 8 months as it closed at 5-week lows just shy of filling the gap from 3/13 and very close to testing its 50DMA for the first time in 4 months. Credit and equity markets generally did a round-trip today closing near their lows after opening the day-session near their highs off the ubiquitous overnight ramp. HY is practically unchanged on the week as IG saw up-in-quality rotation and outperformed while the S&P ended in between the two as they all traded in a broad range for the second week in a row - even though volatility remains intraday. Treasuries slid to their lowest yields of the day into the close today (though off the week's best and unch today) once again somewhat range-bound but with a notable falling-yield momentum down a few bps on the week with the long-end outperforming and 10Y closing under 1.96%. Copper and Oil rallied solidly today but aside from a little volatility Gold and Silver trod water ending the week with Gold -1% and Silver +0.55% as WTI ended back over $104. The EUR kept rallying all week (more repatriation flows?) dragging the USD lower as JPY underperformed on the week (flat today as the rest of the majors tracked USD weakness) and GBP outperformed. Broadly, the Treasury strength balanced the Oil and FX market risk-on-sentiment but risk-assets proxied higher into the US day-session open only to give it all back and drag stocks back down. It feels like there is still hope for some re-liquification but the weakness in AAPL and the financials suggest at best rotation and at worst steady risk-off while earnings beats (of drastically lowered expectations) keep the dream alive.

UPDATE: Added COMEX Silver Inventory Watch shenanigans from Jesse's Cafe Americain

We have long-discussed the currency debasement, fiat-fiasco thesis for owning hard assets and only last night noted the discussion between Biderman and Sprott on the practicalities of this plan. What we found interesting was this week we have seen a number of quite bearish articles on the precious metals - most notably Bloomberg's chart-of-the-day has had two notes citing inventory build for Silver's imminent demise and lagging futures open interest as a sign of investor's losing conviction in gold. Given that we are fair-and-balanced we thought it worth sharing these technical insights and perhaps reflecting on what Eric Sprott noted as the only thing that could break his 'hard asset' thesis - that the political and banker elite "come to their financial senses" and Dylan Grice poignantly described "eventually, there will be a crisis of such magnitude that the political winds change direction, and become blustering gales forcing us onto the course of fiscal sustainability."