Archive - May 8, 2012 - Story

Just as we warned at the end of today's nonsense, the afternoon ramp is fading fast now as the sad but true reality of a sun that rises in Europe awakening the maddening crowd. EURUSD is at 1.2970 (70 pips off the late-day swing highs already), ES (S&P 500 e-mini futures) are down 10 pts from the closing swing highs (which just happens to coincide with Sunday night's gap-down opening level around 1354.25), Silver has slumped back to the day's lows around $29, Gold back under $1600, and WTI is down around 2% from the day-session close at around $96.50. Treasuries are leaking lower in yield but FX markets seem very active as AUD drops to near parity with USD and carry pairs are generally weak. There are still a few more hours until Europe opens so anything can happen but for an overnight session, markets are not happy.

Today it was widely reported that the CIA thwarted a “plot by al Qaeda’s affiliate in Yemen to destroy a U.S.-bound airliner using a bomb.”  This bomb, which was to be concealed in a pair of underwear, was designed as an improvement over what Umar Farouk Abdulmutallab attempted to use to blow up an airliner over Detroit on Christmas Day of 2009.  This bomb was upgraded and designed to specifically avoid metal detectors. At first glance it would appear to be a job well done by the world’s leading domestic affairs meddlers. The truth was finally revealed as the would-be bomber was, in fact, a double agent of the CIA. When considering the nature of the state, this new instance of government supported terrorism is unsurprisingly comparable to previous cases. The alleged Yemen “underwear” bomber was just another fabricated spook in the long line of mounting justifications to keep the war on terror and its profiteers going; no matter the cost.  As long as the American people are still easily whipped into a frenzy over forged menaces from afar, their blood and treasure will go on to be squandered on military boondoggles and redundant intelligence agencies.  War and fear end up becoming a way of life.  And so does the state’s command over what could be a life of peace and tranquility for the nation it supposedly protects. This isn’t conspiracy theory; just a recognition of the various hobgoblins, as H.L. Mencken described them, invented to justify encroaching totalitarianism.

Spain's banking system bailout is quickly becoming farcical. According to the WSJ this evening, Spain is to require its banks to set aside more provisions (between EUR20 billion and EUR40 billion) in an effort to overhaul the country's financial sector. This additional need for reserves (or provisioning) puts yet more pressure on the banks' balance sheets as it comes on top of the already EUR54 billion that has been set aside from February. Interestingly the EUR20-40 billion still falls dramatically short of Goldman Sachs' estimate of an additional EUR58 billion that is needed to cover reasonable loss assumptions. We can only assume that the game is to create as large a hole as is possible without tipping the world over the brink and then fill it with the state funds a la TARP (as Rajoy has indicated will be the case).

We are in the last innings of a very bad ball game. We are coping with the crash of a 30-year–long debt super-cycle and the aftermath of an unsustainable bubble. Quantitative easing is making it worse by facilitating more public-sector borrowing and preventing debt liquidation in the private sector—both erroneous steps in my view. The federal government is not getting its financial house in order. We are on the edge of a crisis in the bond markets. It has already happened in Europe and will be coming to our neighborhood soon. The Fed is destroying the capital market by pegging and manipulating the price of money and debt capital. Interest rates signal nothing anymore because they are zero. Capital markets are at the heart of capitalism and they are not working.

You asked for it, you got it...

The beepers at the BIS crew are going off in unison as the "EURUSD under 1.3000" Code Red has just arrived, and this time it is early. And tomorrow there will be no surprising German economic activity "beats."

Whether it was stocks, credit, gold, silver, oil, EURUSD, or conk shells, the message we were to believe was clear - BTFD today. As if by clockwork, Europe closed and US equity markets surged - seemingly forgetting that Europe will re-open again tonight but should you need any reassurance of what your pre-assigned Pavlovian role in this tragi-comedic dance-with-the-devil is - we suggest the following clip as a reminder.

Taking current trends across all employment indicators, using 12 Month trailing averages in the changes of those employed, unemployed and dropping out the labor force, we can predict, with IMF-level precision, that at the current surge of those leaving the labor force, the US unemployment rate will hit 0.0% in December of 2021 and finally go negative, or -0.1% in January 2022. So there you have it: maybe the BLS can just fast forward us to the end of this thought experiment when everyone will be so fat they couldn't look for a job if they wanted to (recall by 2020 75% of Americans will be obese), but at least the Propaganda Times will be blasting in 24/7 red flashing headlines that, for the first time ever, America's unemployed are now somehow negative, and we can all rejoice while collecting all those welfare stamps bought on negative interest credit funded directly from the uber politburo of the USSA located in the Marriner Eccles building.

Just days after his last live webcast "To QE3 or Not To QE3" DoubleLine's Jeff Gundlach is out once again with his latest presentation and live webcast titled "Deficits Don't Matter" (just don't tell that to the PIIGS). We are confident this is a Regan-referencing joke. Hopefully, in the off case it isn't, Jeff should also make the case why, in that case, taxation is also meaningless and should be abolished. After all, the Federal Government, courtesy of various newfangled economic theories can print its way to gargantuan debt and perpetual prosperity.

When the founder of the world's largest currency hedge fund FX Concepts says that Greece will be out of money by June and out of the Euro soon after, people should listen. While we disagree with the premise that Greece's exit will not be chaotic, his general thoughts on the situation in Europe, espoused in this Bloomberg TV interview, are summed up by his reply when asked if Europe is a sell "I do. I also feel passionately that the euro is effectively a break up." Taylor also points out that the stability of a post-Greece Euro landscape is really up to the ECB noting that "I think the ECB should let the Euro go down. To hell with Germany." Covering whether the Euro will crater, the contagion effects, and how the rest of Europe will behave, the non-Duran-Duran Taylor who readily admits his mistakes on misjudging the Fed's excess, sees the timeline for exit as soon after the next round of elections in Greece this summer.

The paradox of an advanced post-industrial economy is that the number of jobs needed declines even as the cost of living rises. The fundamental dynamic of America's job market is simple: we need relatively few workers to provide the absolute essentials of life even as the cost-basis of the economy inexorably rises. In other words, there are fewer jobs even as the costs of maintaining a "middle class" life rise. The solution to the post-industrial decline of labor is not unproductive "make-work" jobs and borrowing trillions of dollars until the system implodes, it's lowering the cost basis of the entire economy and culture, which means eliminating all the systemic sources of unproductive friction.

With Gold, Silver, and Oil down quite considerably since the second LTRO from the ECB ended the immediate elevations in global central bank stocks and flows and now all marginally positive/negative year-todate, the question of the day is whether this is a dip to be bought or a liquidation to be sold into. Sean Corrigan, of Diapason Commodities, provides some guidance.

Just a month ago we warned that all was not well in the political elites of China. Critically, expectations of some coordinated and massive stimulus to save the world were far overblown since "the last thing Hu & Co. would want in their final months in office would be to unleash another oligarch-enriching orgy of speculation". Sure enough, as Reuters just reported, 'China's ruling Communist Party is seriously considering a delay in its upcoming five-yearly congress by a few months amid internal debate over the size and makeup of its top decision-making body as the party struggles to finalize a once-in-a-decade leadership change.' The delay will likely further unnerve global financial markets whose perception of Chinese politics as a well-oiled machine has already been shaken this year by the extraordinary downfall of an ambitious senior leader, Bo Xilai, in a murder scandal.

While not exactly surprising, today's Senate failure to extend a bill extending the currently low interest on student loans, after a blocking vote by the GOP may bring even more attention to what Zero Hedge has dubbed one of the biggest bubbles of 2012...  That there will be politics involved in this touchy subject is not a secret. What, however, will hit the American (young) consumer class (and recidivist iGadget buyer) like a wall of bricks is if on July 1 there is still no deal, and the student protests seen in the recent past in London and Montreal spread to US campuses, where students demand the dignity to file for bankruptcy in peace... and full debt discharge. The counter of course will be whether anyone had put a gun to their head when they were taking out a loan. The counter to that counter will be that no students expected there would be zero jobs available upon graduation. And so on, in a tit for tat repeat of the housing bubble and the massive unexpected consequences as yet another $1 trillion bubble pops, which just like last time, will result in yet another broad taxpayer funded bailout, in which the all end up paying for the the few.