Archive - Jan 2014 - Story

Chalk this one up to US (f)austerity, and a $1.1 trillion omnibus spending bull that forgot to add Pentobarbital among the billions in pork spending. Two months ago we reported that due to a shortage of Pentobarbital, Ohio would be unable to execute death row convicts. It appears that the shortage has persisted into the new year, and now some states are taking matters into their own hands. Or rather the hands of the firing squad. As NBC reports, due to the lethal drug shortage, lawmakers in at least two states to call for the return of firing squads. "Missouri state Rep. Rick Brattin, a Republican representing Harrisonville, introduced legislation Friday (.pdf) that would add five-person firing squads as an alternative to the state's current method of capital punishment, lethal injection."

Shanghai Daily: "China may soon announce an increase in its official gold reserve from 1,054 tons to 2,710 tons, Jeffrey Nichols, managing director of American Precious Metals Advisors, said. The People’s Bank of China has not reported any increase in official gold holdings since 2009, when the central bank said the official reserve was at 1,054 tons, which accounted for only about 1 percent of its multi-trillion foreign exchange reserves. The PBOC has been “surreptitiously” adding to its official gold reserves. It has bought a total of 654 tons in 2009 through 2011, another 388 tons in 2012, and more than 622 tons last year, mostly from domestic mine production and secondary supplies, Nichols said in a commentary posted on NicholsOnGold.com yesterday. Central bank purchases comprise the smallest fraction of global gold demand — less than 10 percent. “If China announces an increase in gold reserves, there would be an immediate drag-up force in the gold market,” Albert Cheng, managing director of the industrial association World Gold Council for the Far East, told Shanghai Daily. China is the biggest gold consumer and producer in the world."

Jeff Gundlach recently warned that the trade that could inflict the most pain to the most people is a significant move down in yields (and potential bull flattening to the yield curve). Citi's FX Technicals group laid out numerous reasons why this is entirely possible (technically and fundamentally) but despite this, investors remain entirely enamored with stocks and, as the following chart shows, Treasury Bond sentiment now stands at 20-year extremes of bearishness.

Last week we were the first to raise the very real and imminent threat of a default for a Chinese wealth management product (WMP) default - specifically China Credit Trust's Credit Equals Gold #1 (CEQ1) - and its potential contagion concerns. It seems BofAML is now beginning to get concerned, noting that over 60% of market participants expects repo rates to rise if a trust product defaults and based on the analysis below, they think there is a high probability for CEQ1 to default on 31 January, i.e. no full redemption of principal and back-coupon on the day. Crucially, with the stratospheric leverage ratios now engaged in such products, BofAML warns trust companies must answer some serious questions: will they stand back behind every trust investment or will they have to default on some or potentially many of them? BofAML believes the question needs an answer because investors and Trusts can’t have their cake and eat it too. The potential first default, even if it’s not CEQ1 on 1/31, would be important based on the experience of what happened to the US and Europe; the market has tended to underestimate the initial event.

Altogether, of the 1881 days starting on November 25, 2008 and continuing through January 19, 2014, the Fed has directly and unambiguously intervened in the markets for a total of 1592 days. It was not been directly involved in the market for a tiny 289 days. In sum: the New Normal is best characterized by a Federal Reserve which has been actively manipulating the equity "market" 85% of the time.

Did you know the war on drugs is founded on racist principles? Prof. Stephen Davies shows the historical thought process behind banning drugs. One of the main reasons drugs were banned initially is because people were concerned drug use would lead to interracial relationships. Can you imagine someone making that argument today? Yet it was a principle reason for some of the laws banning drugs that we still have. Other reasons for banning drugs included fear of conspiracies and the misguided notion that the government somehow has a right to the productivity of its citizens. All three of these reasons are truly absurd, but all three were historically used as arguments that contributed to the war on drugs. If these are the arguments on which the drug war is founded, can we be sure it's a war worth fighting for?

On this day in 1980, after more than doubling in the prior month, gold prices peaked amid "trading that reached delirious proportions" at a record $820. Between The Hunt Brothers precious metals miasma and rumors that the Soviet Union had invaded Iran, one trader at the time described gold's bull run as "like going to a strip show knowing the place is about to be raided." The exuberance described in the WSJ's headlines below echo so strongly forward into the current "buying opportunity" that any dip represents in the US equity market... and just as it is never different this time, the WSJ reported, "no one wants to leave until they're sure the party is over."

President Obama has recently promoted inequality as a fundamental threat to our way of life, saying, “The combined trends of increased inequality and decreasing mobility pose a fundamental threat to the American Dream, our way of life, and what we stand for around the globe.”  You can read the rhetoric here.  Let’s look at the reality.

With your local friendly asset-gatherer constantly promoting the cheapness of stocks of the TINA (there is no alternative) to BTFATH, TV talking-heads jabbering over 'stock-pickers' markets (infuriating Cliff Asness), and CEOs trotted out day after day to espouse how bright the future looks (even if outlooks in the immediate future are down-down-down-graded); it is hardly surprising that sentiment among the sheeple is so extremely bullish. So, when we saw the chart below... we could only ask - what do the insiders know that the average-joe-investor doesn't?

How does the Federal government explain this scramble to hand over the "sole-sourced" healthcare.gov IT contract (to a company made possible thanks to Enron) so late in the process? Simple: the usual mutually assured destruction tactic used so "effectively" in all other recent rushed decisions. As the Hill reports, unless Accenture finishes (and fixes) the back-end of the HealthCare.gov portal by mid-March, the healthcare law will be jeopardized, according to a procurement document posted on a federal website. The punchline: "It says insurers could be bankrupt and the entire healthcare industry threatened if the build out is not completed." In other words, a newly retained consulting company has less than three months to fix all the errors of coding by a different company, and make sure healthcare.gov is working properly... all 500 million lines of healthcare.gov's code?

For months, rumors have been floating that China is building a second aircrafit carrier. It is not a fact. Reuters cites Chinese and Hong Kong media reports that China is building its second aircraft carrier, which is expected to take six years. While it is constructing this one, China plans to build at least two more, as it aims to have four aircraft carriers in the near future.

While the topic of rehypothecation and the shortage of physical gold is well covered here at Zero Hedge (and the ever-changing COMEX gold vaults' inventories), it appears the concept of the exploding "leverage" or default risk of the COMEX has now hit the mainstream media. As BNN reports, veteran trader Tres Knippa, pointing to recent futures data, says "there may not be enough gold to go around if everyone with a futures contract insists on taking delivery of physical bullion." As he goes on to explain to a disquieted anchor, "the underlying story here is that the people acquiring physical gold continue to do that. And that’s what is important," noting large investors like hedge fund manager Kyle Bass are taking delivery of the gold they're buying. Knippa's parting advice, buy physical gold; avoid paper.

Bernanke may be printing the wealth effect to the benefit of the richest 1%, but that only serves to make the already wealthiest even wealthier. When it comes to the creation of new millionaire households, the epicenter of new wealth creation is about as far from Wall Street, West Putnam Avenue or Rodeo Drive as can be. In fact, the state that saw the fastest climb up in millionaire rankings in 2013 doesn't have a single Tiffany or Saks Fifth Avenue, and the closest BMW dealership is a six-hour drive from the capital (stats which are guaranteed to change by the end of the year). Presenting North Dakota: the state which jumped 14 spots in the latest ranking of millionaire households.

China’s ongoing colonization of Africa represents yet another sad development in the continent’s tragic history, as we noted previously Africa remains the great untapped credit creation cauldron of the world (and therefore Keynesian growth). Unfortunately, Erik Prince of Blackwater infamy is now coming to town, which can only mean more pain, suffering and servitude for Africa.

The end of 2013 saw bond yields at their highs and the US equity markets making higher highs. This came as the Federal Reserve started to finally slow down its asset purchases and, as Citi's Tom Fitzpatrick suggest, has now seemingly turned a corner in its so called “emergency” policy. That now leaves room for the market/economy to determine the proper rate of interest; and, he notes, given the patchy economic recovery, the fragile level of confidence and the low levels of inflation, Citi questions whether asset prices belong where they are today. As the Fed’s stimulus program appears to have “peaked” Citi warned investors yesterday to be cautious with the Equity markets; and recent price action across the Treasury curve suggests lower yields can be seen and US 10 year yields are in danger of retesting the 2.40% area.