Testimony

Following last night's very disappointing China HSBC PMI numbers, one would think that the traditional EURUSD, and thus ES, overnight ramp would be missing or at least delayed, especially ahead of a very possible risk off day such as Italian election day. One would be wrong. Because some time after midnight eastern, in what can only be seen as a celebration of Argo's choice as a best picture, the EURUSD resumed its upward ramp on absolutely no news, pushing the pair higher by nearly 100 pips in a smooth diagonal line, and dragging US futures up with it as usual. The catalyst apparently is that with Italian exit polls mere hours away (due out at 2pm GMT), market talk is that Berlusconi's resurgent chances have been hobbled due to a low turnout in the pro-Berlusconi northern states (recall that Lombardia is the key state for the elections) following a quick read of a Reuters recap article. What is ignored is that the referenced Reuters article also notes the "surge in protests votes being cast" in the first day of voting, which means less votes on an absolute and relative basis for Bersani and Monti, even if Berlusconi ends up getting less of the Northern vote. Of course, nobody actually has any clue what the exit polls look like. In fact, with a hung parliament a distinct possibility even assuming a Bersani-Monti coalition, both Goldman and JPM have said a 50-100 pip widening across the Italian curve is possible should a Hung Parliament develop (for more read here). But for now hope dominates and is both squeezing the shorts and causing yet another algorithmic stop hunt in FX, and thus every other asset class. Don't be surprised all of overnight's gains, and much more to be wiped out minutes after 9 am eastern when the first Italian exit polls emerge.

Here are ten things that out to be on your radar screens this week and a view on their importance.

2012 Q4 GDP has been weak in G3 and indeed Europe more broadly, (however it has generally surprised to the upside in Asia), consequently, the momentum of business sentiment will be key to watch. The Euro area flash PMI, German Ifo and the Philadelphia Fed survey are released this week (the China flash PMI will be released on Feb 25). The consensus expects a further small rise in the Euro area services and manufacturing readings. The week also brings a batch of central bank commentary, where the focus will be on references to currency strength; these include the RBA minutes followed by testimony, a speech by RBNZ governor Wheeler, Bank of Thailand policy decision and Bank of England minutes. The Federal Reserve will release the minutes from the last meeting and they may contain important clues on the bias of the Committee with respect to how long it expects the current QE program to last. Additionally, the Committee may have discussed the potential merits of outcome-based guidance for balance sheet policy, which may be reflected in the minutes.

At this point everyone in the world knows what a drone is: some have been bombarded by one, others, thousands of miles away, have done the bombardment, and everyone else is split whether or not this remote-controlled form of international retribution and global Pax Americna should be allowed over the territory of the US - either for purely peaceful, or outright military, as was the case with the Chris Dorner manhunt, purposes.  And as with most issues that polarize US society, the approach is one of form opinion first, and investigate the underlying facts later. To that end on Friday, the Government Accountability Office, or GAO, issued testimony on Unmanned Aircraft Systems (UAS, or also Drones), titled "Continued Coordination, Operational Data, and Performance Standards Needed to Guide Research and Development" which while full of largely useless information, does have an informative section detailing which entities received Certificates of Waiver or Authorization (COA) or said otherwise "permissions to drone" for a period , from the FAA, which is the ultimate authority granting UAS flyovers in the US. Among the agencies seeking and being granted such permissions are all domestic military; public (academic institutions, federal, state, and local governments including law enforcement organizations); and civil (private sector entities). So which entity engaged most actively in US-based droning in 2012? It will come as no surprise that of the 391 COAs issued in the past year, the Department of Defense accounted for 201 or, well over half of all authorized droning operations. One can rest assured that America is truly well defended, if mostly from enemies domestic.

According to dictionary.com, Deflation is “a fall in the general price level or a contraction of credit and available money.” Falling prices. That sounds good, especially if you have set some cash set aside and are thinking about a major purchase. But as some additional research with Google would seem to demonstrate, that would be a naïve and simple-minded conclusion. According to received wisdom, deflation is a serious economic disease - St.Louis Fed: "...discourages spending and investment because consumers, expecting prices to fall further, delay purchases, preferring instead to save and wait for even lower price..." The problem with deflation, then - we are told, is that it feeds on itself, destroying the economy along the way. Deflation is far worse than its counterpart, inflation, because the Fed can fight inflation by raising interest rates. Deflation is nearly impossible to stop once it has started because interest rates can only be cut to zero, no lower. In case you’re not already scared straight, the deflationary doomsday has already happened in America when (according to the New York Times) it caused the Great Depression. I hope that everyone is clear on this. Now that you understand the basics, I have some questions for the people who came up with this stuff.

Per C-Span: "The Senate Finance Committee will hold a confirmation hearing Wednesday for Treasury Secretary nominee Jacob "Jack" Lew. If approved, he will replace Timothy Geithner. Among the topics he will address include the state of the economy, strategies for reducing the budget deficits, economic ties with China along with questions about global currency war. Sen. Orrin Hatch (R-UT), Ranking Member of the Senate Finance Committee, said in a statement that the "We need a better understanding of his role at Citigroup, what his knowledge is of financial markets, whether he supports reforming our tax code, whether he believes in a robust trade policy and what kind of plan the Obama Administration has to confront our skyrocketing debt and our broken entitlement programs. As we move forward, I’m hopeful that Mr. Lew will answer some remaining questions that I have." According to AP, "After Wednesday's hearing, committee members will have two days to send questions to Lew to answer before they vote. The full Senate could vote on the nomination late this month."

This graph shows everything we need to know about the geopolitical reality of Predator Drones (coming soon to the skies of America to hunt down fugitives?) - the American public loves drone strikes. Let’s be intellectually honest. If a country engages in a military program that carries out strikes that kill hundreds of civilians - many of whom having no connection whatever with terrorism or radicalism - that country is going to become increasingly hated. People in the countries targeted - those who may have lost friends, or family members - are going to plot revenge, and take revenge. That’s just how war works. It infuriates. It radicalises. It instils hatred.

Unfortunately, the spectacular rise of Wall Street’s securitization machine will likely forever frustrate attempts to ascertain the extent to which the Fed is responsible for what happened to the U.S. housing market and financial system in 2008.  After all, it wouldn’t be fair to short sell (no pun intended) all the Special Purpose Vehicle sponsors, CDO asset managers, investors, and ratings agencies who, for at least five years, worked so hard to collapse the system.

When only a few dozen claim they understand how an economic system works we have crossed over from examining and describing a complex economic entity and into a religious cult based solely upon faith and belief.

Kangaroo Court Show Trials and Blatant Obstruction of Justice

We have discussed Dallas Fed's Richard Fisher's money-where-his-mouth-is perspective on the world before and the (sadly) non-voting member is among UBS' Art Cashin's most respected and candid of the FOMC. A glance through the transcripts that Art highlights below should both make readers sick at the constant pollyanna-ish nature of Fisher's comrades and perhaps more confident that his insights will be listened to more astutely 'the next time' as he noted at the time "No amount of rewriting of history will exonerate us". Once again, after reading these transcripts, do we really believe that central bankers are omnipotent? or incompetent?

One can only hope that mild concussion has not entirely wiped the frontal cortex from Secretary of State Clinton's brain and that we get some answers today. Prepared testimony (below) shows no use of the words 'take the fifth' or 'recollection'...

Why do commercial investment advisers always tell you that gold (& silver) and PM assets are all massively risky? Here's the one chart that explains everything.

Same overnight pattern, different day. After a late day ramp in the US market, followed by a selloff in the futures after hours, taking the ES to trading session lows, we get the European trading crew which day after day sends the EURUSD soaring as Europe opens, pushing futures to unchanged or even green and easily negating the key news event of the day, in this case the full grounding of the entire global Boeing fleet which will once again weigh on the stock and DJIA. In the meantime, the big rotation behind the scenes in FX land continues, with the ongoing and very sudden pounding of the Swiss Franc taking the EURCHF to 1.2450, or the highest, since 2011. Same with the USDJPY which after another attempt to fall, rallies on more of the same regurgitated rumors. Not to mention the EURUSD of course, which as mentioned above has surged some 100 pips since the European open. In other words the overnight beating of the USD is enough to push the US stock market high enough in nominal terms, avoiding that there is no incremental cash flow. Then again, who needs cash flow when you have "multiple expansion."

Just when you thought the seemingly endless rabbit hole of Wall Street-Washington corruption, cronyism, co-option, crime and kickbacks may have finally come to an end, here comes the House Ethic Committee to pronounce that no ethics breaches were found among House members in its investigation involving the scandal surrounding Countrywide "VIP loans" and the "Friends of Angelo." And in just doing so, the House effectively cleared itself of any wrongdoing and that's it, case closed - move along... Move along.