Meltdown

Just a few days ago on July 27th President Barack Obama said that the next Fed head had to consider average Americans when setting monetary policy. If only that were true.

When is the last time you got a stock tip from a cab driver or chatty not-in-the-business neighbor?  It’s probably been the better part of a decade, if not longer.  Yes, that’s probably the most bullish argument for owning stocks just now, but, as ConvergEx's Nick Colas notes, it also raises a question.  What investments are retail investors considering, exactly?  Various online tools and resources provide some answers.  From Yahoo! Finance’s analysis of number of requested price quotes last week: AAPL, BAC, TSLA, INTC and CALL.  From Google Trends: AAPL, GOOG, and YHOO.  And from one very popular online brokerage for today’s volume: AAPL, F, BRCM, BAC, and NUGT.  Whether this interest indicates a top or a crowded momentum trade is in the eye of the beholder, of course.  But in a light volume period like summer, Nick notes, tracking individual investor attention can be an important piece of the day-to-day trading puzzle.

Shunichi Tanaka, the head of the Nuclear Regulation Authority in Japan, and the country’s chief nuclear regulator announced on Wednesday, that the nuclear power plant at Fukushima, has been leaking contaminated water into the ocean for the two years since the accident that saw three of the plants six reactors suffer a meltdown.

In the aftermath of the latest humiliation for Boeing, which after getting Dreamliner clearance by absolutely every "authority" imaginable, from the NTSB to the FAA to CNBC's Phil LeBeau, that it was absolutely safe to fry, pardon, fly, just had a major meltdown, oops there we go again, on live TV in Heathrow airport, one wonders - what happens when the regulators rush to give the all clear once more, only for yet another Dreamliner to mysteriously burst in flames several months hence? Alas that would mean that the very same regulators that lifted the fry, pardon, fly ban on the plane will have to impose it all over again, thus disgracing their pre-clearance methods (likely accelerated courtesy of an occasional envelope full of cash under the door somewhere in the decision chain) even more. And how long until the damage to the brand is so great that Boeing will have no choice but to replace every 8 in its 787 nomenclature with a 9, thus pulling the brilliant GMAC->Ally Bank conversion. All these are questions that Boeing, the FAA and the NTSB will have to answer very soon, and for the benefit of BA shareholders, with a favorable resolution. Then again, in the matter of recalls, be it of cars or airplanes, the math is well-known. In the meantime, here is the latest.

"If central banks keep tacking and trimming as they edge away from accommodation, it may come to pass that none of their statements will carry much credibility. They could then lose control of long rates or, at best, stability in long rates might call for ever greater market intervention on their part. The end-result would be to render monetary measures largely useless as instruments of policy because central banks, with their controls jammed open, could never be sure of effecting any intended plan. Mr Bernanke and his co-thinkers may soon discover that, in taking a different line in coping with the current depression from that followed in the 1930s, they have fallen unsuspectingly into a trap from which escape will be painful."

Gold is little changed near a one-week high, and is marginally higher in dollars as the dollar has retreated from a three-year high, and higher in most currencies. The gold market continues to digest the ramifications of gold borrowing costs surging to the highest since the post-Lehman Brothers scramble for gold bullion. Gold Forward Offered Rates (GOFO) or the cost to borrow gold remains negative and overnight the 1 month GOFO has gone from -0.106% to -0.11167%. Other durations eased marginally. The lack of liquidity in the the interbank London Good Delivery gold market (400 ounce gold bars) has pushed gold forward rates, known as “gofo”, into negative territory, meaning that gold for future delivery is trading at a discount to physical market prices – a rare situation that has occurred only after the Lehman Brothers collapse and near the bottom of the gold market in 1999. The last time forwards were negative was in November 2008, when a scramble for physical gold led a sharp price rally of 46% from $682/oz to over $1,000/oz between October 2008 and February 2009.

We as a nation had an unparalleled, historic opportunity to set things right in the aftermath of the 2008 financial meltdown. Alas, we blew it. Instead of tearing down what had failed spectacularly, we chose to do more of what failed spectacularly: cartel-crony capitalism, centralized wealth and power and an expansion of our financialized debtocracy.

One of the sad narratives of the financial meltdown of 2008 and its aftermath is that it was and remains the result of unbridled capitalism. Too much freedom spoiled the economic broth. We must never tire of explaining the fallacies in the thinking of those who think the Great Recession is a clear case of the failure of capitalism. In fact, it is a quintessential example of the failures of interventionism to bring about anything other than economic destruction and relative impoverishment.

On Tuesday the People’s Bank of China agreed to inject money to stop the shortage that was occurring and that was already a change of attitude.

Chinese investors are holding their collective breaths to see if the banking crisis predicted two years ago by renowned Chinese economist Li Zuojun will come to fruition in the next couple of months. Li's astounding accuracy in predicting China's economy has led to him earning the nickname "China's most successful doomsayer." Though far from perfect, a lot of what he said here rings true, but the interesting insight is that he forecasts that the incoming regime will want to take its lumps early, in 2013, so as to minimize blame ("it was the old crew’s fault") and maximize praise for subsequent recovery... He notes three other drivers (aside from this political one) including external flows and credit expansion and fears social instability should the status quo be maintained.

Well, I'm not going to say I told you so... Wait a minute... Yes, I am...

Everyone knows Europe is insolvent; the only question is "when" will Europe be forced to finally admit this truism. The long overdue house of cards may start toppling in as little as 6 months, as The Telegraph reports, Mediobanca's 'index of solvency risk' suggests "time is running out fast" for Italy. With the breakdown in Eurozone talks on a banking union and the Fed's shift in policy, Europe "has become a dangerous place," warns RBS. Unless Italy can count on low borrowing costs and a broad recovery, it will "inevitably end up in an EU bailout." The current situation is as bad as when the country was blown out of the ERM in 1992 as "the Italian macro situation has not improved...rather the contrary; with 160 large corporates in Italy now in special crisis administration." If the ECB doesn’t act, one analyst warns (pleads) it could see all the gains of the past nine months vanish in two weeks. Mediobanca said the trigger for a blow-up in Italy could be a bail-out crisis for Slovenia or an ugly turn of events in Argentina, which has close links to Italian business. "Argentina in particular worries us, as a new default seems likely."

What magic Chinese rabbit has been pulled out of the hat now?

It was shaping up to be another bloodbathed session, with the futures down 10 points around the time Shanghai started crashing for the second night in a row, and threatening to take out key SPX support levels, when the previously noted rumor of an imminent PBOC liquidity injection appeared ex machina and sent the Shanghai composite soaring by 5% to barely unchanged, but more importantly for the all important US wealth effect, the Emini moved nearly 20 points higher from the overnight lows triggering momentum ignition algos that had no idea why they are buying only knowing others are buying. The rumor was promptly squashed when the PBOC did indeed take the mic, but contrary to expectations, announced that liquidity was quite "ample" and no new measures were forthcoming. However, by then the upward momentum was all that mattered and the fact that the underlying catalyst was a lie, was promptly forgotten. End result: futures now at the highs for absolutely no reason.