Archive - Sep 17, 2012 - Story

Analogizing from the sleight-of-hand tricks of magicians to the confidence-based efforts of the world's central bankers, Brent Johnson of Santiago Capital provides at once an entertaining and also devastatingly simple explanation of what these guys are up to. As he notes, in deference to The Usual Suspects, "the greatest trick central bankers ever pulled was convincing the world that they work for the public and not for the banks." Comprehending the financial repression and inflation that is occurring - and knowing where to look to see the truth (and how to protect your assets) - is critical in not becoming the shill in Bernanke, Draghi et al.'s global game of Three-Card-Monte.

As Cantor's Peter Cecchini notes today "when things are this senseless, a reversion to sensibility will occur again at some point." His view is to be long vol and as the disconnect between the economic cycle and stocks continues to grow, we present three mind-numbing charts of the exuberant hopefulness that is now priced in (oh yeah, aside from AAPL actually selling some iPhones in pre-order). Whether it is earnings hockey-sticks, global growth ramps, or fiscal cliff resolutions, it seems the market can only see the silver-lining. We temper that extreme bullish view with the fact that all the monetary policy good news has to be out now - for Ben hath made it so with QEternity.

A regional war in the Middle East could result, potentially sucking in the United States and Eurasian powers like China, Pakistan and Russia. China and Pakistan have both hinted that they could defend Iran if Iran were attacked — and for good reason, as Iran supplies significant quantities of energy. And with the American government deep in debt to foreign powers like China who are broadly supportive of Iran’s regime, America’s ability to get involved in a war on Israel’s behalf is highly questionable. And even without a war, further hostility and tension between America and her creditors would surely result in an even faster rush toward more bilateral and multilateral agreements to ditch the dollar for trade, something that America will almost certainly seek to avoid. So even with a President in the White House significantly more sympathetic to Netanyahu than Obama, America may find herself constrained by the realities of global economics, and unable to assist Israel. Most discouragingly, such a high risk operation seems to offer very little reward — a successful Israeli strike on Iran is estimated to set back Iran’s program by only one to three years. And such an operation would likely require bombings over many days and in many locations. If Netanyahu wishes to go ahead with such a scheme then that is his prerogative. But if he will not listen to Dagan’s wise counsel, why should the West rush to his aid if his scheme backfires?

One cannot but wonder at the idiocy blindness of those who sustain that both the European and the US central banks removed “tail risks” in the last days, with their new measures. To start, the whole idea that a tail risk exists is simply a fallacy of Keynesian economics. It assumes there is a universe of possible outcomes and, as if humans acted driven by animal spirits, randomly, each one of them has a likelihood of occurring. In all honesty... what else can occur if a central bank prints money to generate a bubble? Why would the bursting of the bubble be called a tail-risk, rather than the logical outcome? Why, if that was tried in 2001 in the US, resulting in the crisis of 2008... why would it be any different now, when there is an explicit announcement to print billions per month? Why?

One of the key stories of 2011 was the revelation, courtesy of MF Global, that no asset in the financial system is "as is", and instead is merely a copy of a copy of a copy- rehypothecated up to an infinite number of times (if domiciled in the UK) for one simple reason: there are not enough money-good, credible assets in existence, even if there are more than enough 'secured' liabilities that claim said assets as collateral. And while the status quo is marching on, the Ponzi is rising, and new liabilities are created, all is well; however, the second the system experiences a violent deleveraging and the liabilities have to be matched to their respective assets as they are unwound, all hell breaks loose once the reality sets in that each asset has been diluted exponentially. Naturally, among such assets are not only paper representations of securities, mostly stock and bond certificates held by the DTC's Cede & Co., but physical assets, such as bars of gold held by paper ETFs such as GLD and SLV. In fact, the speculation that the physical precious metals in circulation have been massively diluted has been a major topic of debate among the precious metal communities, and is the reason for the success of such physical-based gold and silver investment vehicles as those of Eric Sprott. Of course, the "other side" has been quite adamant that this is in no way realistic and every ounce of precious metals is accounted for. While that remains to be disproven in the next, and final, central-planner driven market crash, we now know that it is not only precious metals that are on the vaporization chopping block: when it comes to China, such simple assets as simple steel held in inventories, apparently do not exist.

Volume was extremely weak on a run-rate basis during the middle of the session, picked up once we started the oil-driven algo-correction, then faded as AAPL dragged equities up to their VWAPs leaving the Dow Transports notably underperforming, NASDAAPL just in the green and small drops in the Dow and the S&P. Notably the S&P reached back down to the day-session closing price from FOMC-day and reversed all the way back to its VWAP at the close - the machines were well and truly in charge today! Treasury yields were lower on the day with the long-end outperforming and so real pullback as stocks surged. Oil dominated the price action of the day as correlation monkeys pulled and pushed around the pit close and contract roll with un-priced-in SPR rumors blamed by some. USD strength on the day saw commodities in general leaking lower. Markets had a very illiquid EKG-like feeling to them today - more so than most in recent times - with post-Europe-close activity in equity, volatility, and credit appearing to almost stop entirely. The Trannies closed today below pre-FOMC statement levels.

With a NASDAQ-100 weighting rapidly approaching the critical 24% level (and probably considerably higher in most fund manager's 'diversified' portfolios given its outperformance), the media excitement over pre-orders this morning has pushed the stock-of-all-stocks up over 1.1% to breach the magical $700 level just after the day session closed.

As we have explained recently, the US fiscal cliff is a far more important issue 'fundamentally' than the Fed's economic impotence. While most market participants believe some kind of compromise will be reached - in the lame-duck session but not before the election - the possibility of a 3.5% drag on GDP growth is dramatic to say the least in our new normal stagnation. As Goldman notes, the window to address the fiscal cliff ahead of the election has all but closed, the 40% chance of a short-term extension of most current policies is only marginally better than the probability they assign to 'falling off the cliff' at 35%. The base case assumptions and good, bad, and ugly charts of what is possible are concerning especially when a recent survey of asset managers assigned only a 17% chance of congress failing to compromise before year-end. Critically, and not helped by Bernanke's helping hand (in direct opposition to his hopes), resolution of the fiscal cliff will look harder, not easier, to address as we approach the end of the year - and its likely only the market can dictate that direction - as the "consequence is terrible, but bad enough to force a deal."

Connecting the dots between my anecdotal observations of suburbia and a critical review of the true non-manipulated data bestows me with a not optimistic outlook for the coming decade. Is what I’m seeing just the view of a pessimist, or are you seeing the same thing? A few powerful men have hijacked our economic, financial and political structure. They aren’t socialists or capitalists. They’re criminals. They created the culture of materialism, greed and debt, sustained by prodigious levels of media propaganda. Our culture has been led to believe that debt financed consumption over morality and justice is the path to success. In reality, we’ve condemned ourselves to a slow painful death spiral of debasement and despair.

“A culture that does not grasp the vital interplay between morality and power, which mistakes management techniques for wisdom, and fails to understand that the measure of a civilization is its compassion, not its speed or ability to consume, condemns itself to death.” – Chris Hedges

UPDATE: Denial: *WHITE HOUSE'S CARNEY SAYS `NO CHANGE' ON OIL RESERVES

Dismissing the ridiculous ignorance of calling the market action in the last few minutes a 'fat finger', it is clear that between no/low volume, 'banging the close in the pit', futures roll and ETF interactions, Oil's OPEX, SPR release rumors, and correlated vaccuum tubes, the reactions between US equities, oil (WTI and Brent), USD (and all major crosses), and the PMs are extremely volatile. No one knows what the 'news' is but one thing is for sure, its priced in - whatever it is. We just remind those 'trading' that with QEternity, all the good news 'help' is now out there - so what's left - jawboning Oil down. Treasuries are a littel jiggy but nothing remarkable.

Up until now, the LHD 7 Iwo Jima Big-Deck Amphibious Warfare ship was all alone in the Arabian Sea, patiently awaiting orders to liberate this or that middle east country of their oil reserves. This is no longer the case: launching today in general direction - Middle East - for a brand new 7 month engagement, is the LHA 1 Peleliu Amphibious Ready Group, consisting of the amphibious assault ship, the USS Peleliu which consists of 4000 marines. LHA 1 also comprises of the amphibious transport dock USS Green Bay and the dock landing ship USS Rushmore. Also deploying Monday is the Marine Corps' 15th Marine Expeditionary Unit and elements of Fleet Surgical Team 1, Helicopter Sea Combat Squadron 23, Assault Craft Units 1 and 5, and Beach Master Unit 1. And as we reported previously, the middle east veteran - the CVN 74 Stennis aircraft carrier - was providently already on its way. In other words, in about 2 weeks, the Middle east will be the focal point of 3 aircraft carriers, 2 amphibious assault forces, and who knows how many "developed" world armadas, all hell bent on securing that one extra bit of Middle East oil, under the guise of spreading democracy and liberating the local people who "hate America's for its freedom."

Volumes are dreadful this morning in cash and futures. S&P 500 e-mini futures (ES) have seen a ridiculously low 5pt range since the open last night but in the last 2 hours, the ES has traded in a 1 point range between 1456 and 1457! Meanwhile Dow Transports are deteriorating again...

People often ask me why the West doesn’t attempt a Libya-style intervention in Syria. After all, things are going so well in Libya. Oil production is up. But oil production is merely a mirage, as is security in Libya, which was doomed from the day one PG (post-Gaddafi) because of the way it was “liberated”. Anyone who thinks that Libya will be a secure oil frontier after the formation of a new government next summer is mistaken. On Wednesday, US envoy to Libya Christopher Stevens was killed along with three other American diplomats in a rocket attack on the US consulate in Benghazi. The anti-Islamic movie is a red herring in all of this. “This is a cut and dry example of the backfire of the US intervention strategy,” Bagley said. “Let’s hope it isn’t attempted in Syria.” The post-Gaddafi Libya is not real. It’s a dangerous fabrication of materials stuck together by the glue of dubious alliances with jihadists who are cut loose with their weapons once the immediate goal (Gaddafi’s demise) was achieved. Forget about the oil for now.

Update: Looks like quite a few people have shared their thoughts in the past 30 minutes. Compare before and after.

On Friday, the San Francisco Fed, best known for such cutting edge research as "Why Is Unemployment Duration So Long?" (turns out it was Bernanke's fault), "US Household Deleveraging" which concluded incorrectly that "Going forward, it seems probable that many U.S. households will reduce their debt" (turns out completely wrong as consumer debt is now at a new all time record), and "This Time It Really Is Different" (turns out it wasn't), asked a simple question on its FacePlant page: "What effect do you think QE3 will have on the U.S. economy?" The people have now responded in a fashion that leaves little to the imagination. Actually, one thing is left to the imagination, namely whether the name of the one person responding that the $85 billion in monthly flow in perpetuity associated with QE3 is "not big enough" begins with Paul and ends with Krugman. Aside from that, in typical SF Fed fashion, no surprises at all.

Back in 2010, everyone's favorite truthsayer in Europe - MEP Nigel Farage - opined on who exactly was Herman Van Rompuy - the new EU President. Claiming HvR's charisma approached that of a damp rag, we noted at the time that this was indeed slanderous to all the hard-working damp-rags out there. Well, given the EU's need for cash - by any route possible - it seems they have chosen to start building a mountain of fines. As AP reports, the EU parliament fined Nigel EUR2980 for his self-expression.

Does everyone who call @euhvr a "damp rag" get a $4,000 fine?

— zerohedge (@zerohedge) September 17, 2012

Given Germany's EUR 190bn ESM contribution, we assume that Nigel has 63 million more insults before Europe is fixed.