When the currency system as we know it dies, some people will become very wealthy. In this special report from the Casey Research/Sprott Inc. Summit "When Money Dies," The Gold Report cornered Global Resource Investments Founder and Chairman Rick Rule, Casey Research Senior Editor Louis James and Casey Energy Opportunities Senior Editor Marin Katusa for a roundtable discussion on the best strategies for thriving during the coming economic transition.
Still unclear on what drove the policy vehicle known as the stock market straight up, which for some reason speculators still participate in despite relentless warnings that it is broken, manipulated, etc, for nine consecutive days, following the release of the FT rumor of a bank recapitalization on October 4, since refuted? Simple: look at the chart below. The Green is the Russell 3000, while the Red is the Goldman "highest short interest index." Beginning with September 4, and continuing through today, every time the market appeared poised to drop, market makers would mysteriously squeeze shorts, with the Red line consistently leading the overall market (Green). Said otherwise: shorts panic -> weak hands cover -> market follows. Naturally, for this to work, volume has to be well below average, which was indeed the case - the volume has been abysmally low for the duration of the entire melt up which means the second there are no incremental weak hands to short, and the movement flips, most likely on the fully priced in deus ex bail out of Europe which will not happen next week or ever, massive volume will return, and the market will do what it always does in such situations: soar inversely. Until then, and as always, it is best to play in other, less manipulated venues - buy some CDS, arbitrage some shiny rocks, blow some money on Blackjack, just stay away from the frontrunning algos whose only purpose is to sniff out weak shorts and sell stops. There is no market: we would say it is a casino, if only it was even 10% as fun.
As predicted earlier today, following one of the most epic moves higher in the EURUSD in the span of 9 short days, driven without a shadow of doubt by the multi-year bearish sentiment toward the European currency, which in turn courtesy of the massive leverage inherent in the FX market, has been used as the catalyst to drive the latest risk on rally across all asset classes, the net bearish exposure in the EUR has finally relented, and after 7 straight weeks of increases in bearishness, hitting a whopping -82,697 net non-commercial contracts in the week ended October 4, the subsequent week finally saw a significant unwind in shorts, up to -73,795. And since there are 3 trading days between the end of the compilation period and Friday EOD, we are confident that by now the actual net bearish count is in the -60k's if not lower. Notable, however, is that while Euro short bets were unwound, bullish bets on the dollar continued to risk, hitting 46,886, a 7th consecutive weekly increase. While the margin covering of the EUR is already priced in, the other question is when the USD megabullishness will relent. For now, it hasn't which will likely be used by market makers to squeeze out highly correlated accounts into even more short covering across equities.
What eventually became the Arab Spring is spreading and quickly becoming a Western Winter. Protests in Europe and America are growing in size and intensity. Awareness of the unfair and crony-capitalistic nature of our current political/financial system is spreading. Americans of all economic, geographic, philosophic and political stripes are questioning the very foundations upon which our “prosperity” has been based for decades. Slowly they are realizing that they were always playing a rigged game that they were never designed to win. As you’d imagine, this is not sitting so well with them and some are starting to stand up and make their voice heard. Don’t think for one second that this is going to stop. Americans by the millions are losing their homes, their jobs, their savings and their futures.
ECB Tells Belgium Not To Backstop Dexia Interbank Deposits, Says Bailout Plan May Be Against The Euro CharterSubmitted by Tyler Durden on 10/14/2011 - 14:49
If anyone is surprised that things in Europe will get massively surreal before this is all over, we suggest finding another thread. In the meantime, for the latest example of the utter chaos and "make it up as we go along" we go to the ECB which has just, in very polite terms, warned Belgium that its bailout-cum-nationalization plan may not be quite feasible. From Bloomberg: "The European Central Bank advised Belgium not to backstop Dexia SA’s interbank deposits and to avoid providing guarantees on debt maturing within three months because it risks interfering with the central bank’s monetary policy." Reading between the lines here, it means that the ECB is effectively telling national governments to not try and become their own central banks under the ECB's umbrella, which would likely result in not only in various sovereign downgrades (that is guaranteed) but in loss of conviction in the European Central Bank, something which the insolvent European continent and the insolvent hedge fund in its core, aka Jean-Claude Trichet Capital et Cie. which holds hundreds of billions of Greek bonds at par, can certainly not avoid. It gets better: "The ECB also said the planned debt guarantees for Dexia may last as long as 20 years, which is inconsistent with European Union guidelines for national support measures to be temporary in nature, according to a statement published on the Frankfurt- based central bank’s website and dated Oct. 13. Belgium sought the ECB’s opinion on draft legislation that would grant state guarantees on Dexia loans." Oops: the ECB may have just scuttled the currently envisioned Dexia bailout plan. Oh well, just like with the Greek 50% bond haircut, so here to it is now back to the drawing board.
We have spent the last 24 years working with real-time market data on a tick-by-tick basis. We monitor our commercial datafeed in real-time to stay on top of market changes or issues. This past year, we have spent considerable time and effort studying the relentless growth of equity quotes. Based on our findings, virtually all of the additional quotes contribute zero or negative economic value to stock pricing, because they are either way outside the market or end up expiring before any investor or trader could possibly act on them. Furthermore, we can't find any self-limiting mechanism in place that will ever put a stop to this unnecessary and expensive growth of misinformation. The only thing that prevents a sudden explosion in quote traffic is the capacity limitation set by SIAC which runs the Consolidated Quote System (CQS) for the exchanges.
Precisely a week ago, a fringe blog had the temerity to warn that PrimeX could very well be the next coming of Subprime (and make those who got on board early very, very rich). A week later, those who got in early may not be very, very rich... but they are richer (there is time for the very, very part), while PrimeX is the worst weekly performing fixed income product in the known universe. Today, following Jeff Gundlach's presentation to David Faber which agreed with the ZH outlook that PrimeX is substantially overpriced, the entire PrimeX rack has seen its biggest plunge yet. At this rate, by Monday even the most sturdy PrimeX FRM1 will be trading below par. At that point it is Sayonara, Sam. Oh, and for those who don't realize that European banks which are now entering asset liquidation mode, are substantially pregnant with exposure to both synthetic and unhedged cash product (recall which entities were stuck holding ABX on the wrong side of the trade back in 2007) we have one thing to say: "European banks which are now entering asset liquidation mode, are substantially pregnant with exposure to both synthetic and unhedged cash product." Have fun spinning that as a function of liquidity (which for some odd reason none of the structured and synthetic product "experts" out there appear to not realize that notional outstanding can and will soar overnight if there is sufficient client demand - a bank can write $10BN or $100BN of product in a second) when the bottom falls out. Lastly, once contagion spills out from the synthetic product to cash, have fun trying to ramp stocks to unch for the year on nothing but the most recent short covering spree. Oh, and remember: the basis trade is different this time...
We recently received a note from a German journalist writing for a national paper there. He asked, “Simon, German politicians swear to support the well-being of the German people. Given this, what would you advise the German government about the euro– keep saving it? Or let everything fail regardless of the consequences?” Europe and the United States have much in common in that their sovereign debt problems are really quite simple to understand. You don’t need a PhD in economics– you just need to understand basic arithmetic.
S&P Downgrades BNP From AA To AA-, Lower Hybrid Capital Instrument Rating On All Top Five French BanksSubmitted by Tyler Durden on 10/14/2011 - 13:22
The rating agency cavalry is relentless in its attempt to catch up to credit implied spreads, which are all about 6-10 notches below where the raters have the banks and countires. Yesterday it was UBS. Today, it is BNP's turn. S&P leaves it off with the following warning: "We could move to a more negative view about the French banking industry if French and European economic and market conditions turn out to be tougher than our base case, moving for instance toward a double-dip recession, which is likely to hurt asset quality and earnings. Or, in case of a prolonged disruption of capital markets that would reduce access to euro-denominated resources."
Just starting on C-SPAN 2 is a new hearing on Obama's Solargate, Solyndra, which today will focus on the question of whether the Solyndra loan restructuring broke the law. From CSM: "Newly released emails show that the Treasury Department was concerned that the loan restructuring, approved earlier this year, could violate federal law. The deal was structured so that private investors moved ahead of taxpayers for repayment on part of the loan in case of a default by Solyndra. Administration officials have defended the loan restructuring, saying that without an infusion of cash earlier this year, Solyndra would likely have faced immediate bankruptcy, putting more than 1,000 people out of work. Leaders of the House Energy and Commerce Committee say the hearing Friday will focus on whether the Energy Department broke the law when it agreed to restructure Solyndra' s debt in February. The lawmakers cite emails showing that Mary Miller, an assistant treasury secretary, said the deal could violate the law because it put investors' interests ahead of taxpayers. Miller told a top White House budget official that she had advised that any proposed restructuring be reviewed by the Justice Department before it was approved. "To our knowledge that has never happened," Miller wrote in an Aug. 17 memo to the White House Office of Management and Budget. Rep. Cliff Stearns, R-Fla., called Miller's memo "startling" and said it appears that DOE violated "the plain letter of the law" in approving the restructuring. "We need insight into Treasury's role in reviewing this loan guarantee," said Stearns, chairman of the energy panel's subcommittee on oversight and investigations." Learn more in today's hearing.
UBS' Stephane Deo has rapidly become of one of the most vocal, and luckily most erudite, critics of the veritable rumor-a-palooza that Europe has become: a continent that is now desperately throwing anything and everything at the wall in hopes it will stick and generate another intraday EURUSD short covering squeeze to perpetuate the illusion that Europe is viable for at least one more day. His note today effectively puts an end to the most current approach whereby Greece will see a 50% haircut on its debt (the 21% haircut proposal from July 21 is now dead and buried as we had suggested back then). With that, he forces Europe back to the drawing table to come up with a plan that is endorsed by the market, with just 9 short days until the Eurogroup Summit on October 23 at which point kicking the can into the future will no longer be tolerated and the market will finally judge Europe not for promises, rumors, lies, innuendo and hyperbole, not necessarily in that order, but on actual decisions and policies. Alas, if the 50% haircut idea, which is now proposed by Germany (in diametrical contrast to a month ago), and staunchly opposed by France whose banks, unlike Deutsche Bank, have not been able to dispose of legacy exposure, is killed before it is even implemented, look for a spike in panic in Europe which will now have to redo everything from scratch.
A week ago, after we had already correctly predicted the unwind of the Dexia long CDS trade on the way up in advance of the bank's nationalization announcement, we suggested a Belgium-Dexia compression trade, now that the bank is the ward of not only Belgium but France. Quite obviously, the idea is that Dexia may well trade inside of Belgium once Belgium itself is downgraded by not only Moody's but also Fitch and S&P (look at today's blow out in Belgium CDS for an indication) imminently, while Dexia still has the implicit backing of AAA-rated (for now France). Net result: 110 bps in one week, from 452 bps last Friday to 343 bps today. We expect a pick of at least another 150 bps before unwind considerations.
As the U.S.-led Afghan campaign lurches into its second decade, the country’s vast untapped mineralogical resources are again emerging in the Western media, seemingly underpinning the benefits of International Security Assistance Force troops “staying the course” and defeating the insurgency, after which these resources can be tapped, both providing the administration of Afghan President Hamid Karzai with a source beyond drugs for reconstruction and Western companies who develop the reserves a handsome profit. The latest discovery is that Afghanistan is rich in rare earth elements (RREs). China currently has a near monopoly on the global production of RREs, and the price for a ton of unprocessed ore has soared to a dizzying $100,000 a ton. So, what’s wrong with this picture?
A few days ago we brought you the delightful Chinese boat launch straight into the river bottom. Today, we observe the curious case of the JH-7 "Flying Leopard" which during an exhibition airshow decided to show just how effective gravity is at combating those pesky "highly reliable license-built Spey Mk202 engines" which as the AP reports were "considered unlikely that both would have stalled at the same time"...They stalled. "The Chinese-made JH-7 entered service in 2004 and is a mainstay of the country's air force and naval aviation, with more than 100 built." Also, how do you spell oops in Mandarin? "China rarely released information about military accidents, but the public nature of the crash and the rapid spread of images of it happening on the Internet made it impossible to keep secret." Yeah, sorry about that. Next: we can't wait to see the official launch of the first (and only) Chinese aircraft carrier.