Another financial company selling off after a weaker than expected earning announcement, in an earnings seasons that so far has been largely disappointing for financials (except for those that enjoy adjusting their loss reserve ratios ever lower).
A must read reply to that discredited shaman of voodoonomics, Paul Krugman, by one of the more notable proponents of Austrian theory, Mises Institute's Robert Murphy."As many readers already know, last week Paul Krugman linked to one of my Mises Daily articles explaining the importance of capital theory in any discussion of the business cycle. Although Krugman graciously described my fable about sushi-eating islanders as "the best exposition I've seen yet of the Austrian view that's sweeping the GOP," naturally he derided the approach as a "great leap backward" and a repudiation of 75 years of economic progress since the work of John Maynard Keynes. To bolster his rejection, Krugman listed several problems he saw with the Austrian understanding. In the present article I'll first summarize the Austrian (in the tradition of Ludwig von Mises) positions on capital theory, interest, and the business cycle. With that as a backdrop, I will then answer Krugman's specific objections."
While not necessarily a new topic, one which has been previously dissected by such strategists as Dylan Grice, the quandary of Japan's deteriorating demographic shift is one that the country can not afford to delay in addressing, yet continues to do just what the US does so very well, by kicking the problem into the future, and hoping it will resolve itself on its own. Today, Sovereign Man Simon Black shifts his focus on the Japanese demographic crunch in a piece titled "Japan is causing its own demise." As always clear and concise, the questions he brings up are critical. And therefore very unlikely to get an answer by anyone in "control" before it is too late. "With a median age of 44.6 years, Japan already has one of the oldest societies in the world (compared to 39.6 in Singapore, 40.7 in Canada, 36.8 in the United States, 28.9 in Brazil, 25.9 in India, and 31.7 here in Chile). One would think that the Japanese government would be rolling out the red carpet for young foreigners, yet Japan remains a fairly closed society. Foreign residents comprise less than 2% of the population according to government statistics, not enough to even qualify as a drop in the bucket. Without serious addressing this issue and attracting young foreigners both at the economic and cultural level, Japan runs substantial risk of fading into obscurity."
The solution to the ongoing fraudclosure fiasco is so simply and yet so brilliant (in a way that benefits the banks naturally) is so brilliant, that it has to date evaded most... but not all. The solution: just shred it all. That is what insolvent mortgage lenders Mortgage Lenders Network USA and American Home Mortgage are pushing hard to get permission from their respectively bankruptcy judges in their chapter 7 liquidation cases. Says Reuters: "Federal bankruptcy judges in Delaware are due to hold separate hearings Monday on requests by two defunct subprime mortgage lenders to destroy thousands of boxes of original loan documents. The requests, by trustees liquidating Mortgage Lenders Network USA and American Home Mortgage, come despite intense concerns that paperwork critical to foreclosures and securitized investments may be lost." With servicer banks increasingly unable and unwilling to provide the original lender docs (since they don't have access to them) to parties curious in seeing if there is a legal case to continue paying their mortgage, what better solution than to have the banks retort that the original document was sadly destroyed in a court-appointed shredding. In that way all the fraud canaries are killed with one stone, and the party responsible is none other than some bankruptcy judge who had given the go ahead for the wholesale destruction. And since we are not talking peanuts, in the case of MLN it comes to 18,000 boxes of records, while in the AHOM case it is just over 4,000 boxes, we wonder just how many other originators have gotten a comparable idea from the banks, and are currently busy shredding every last detail of an original mortgage note. Good luck trying to convince anyone that the bank is not in possession of a mortgage that was "purposefully" destroyed as part of a company's liquidation proceedings. Soon to follow: the burning of all books and the banning of all websites that dare to claim this is nothing but pure, grade-A criminal destruction of evidence.
The first major regime change due to unpalatable combination of austerity and a highly unpopular (most recent) banker bailout is coming to a European country in precisely one month. From Sky News.
Some very bad news for the former Obama head henchman:according to NBC Chicago, the mayoral candidate has just been bounced from the mayoral ballot after an appellate court has overturned a previous decision to allow Emanuel on the mayoral ballot. One can only imagine the firestorm of profanity that has erupted upon Rahm's learning of the news...
According to PhysOrg.com, two Italian scientists from the University of Bologna have taken on one of physics' historically most discredited concepts, cold fusion, and have actually succeeded in creating a sustainable reaction. Aside from the major implications of the energy market should this be validated and recreated (an issue that buried the original Cold Fusion discovery by Stanley Pons and Martin Fleishmann), one of the more economically important side effects of this purported rediscovery is that one of the byproducts of the reaction is none other than recently uber-bubbleicious copper. One wonders what the implications for the copper supply and demand curves (and equilibrium price) would be should the reaction documented by Andrea Rossi and Sergio Focardi be proven to not be a hoax. Is modern day alchemy the only thing that can dethrone copper from its historic price highs?
After last week we actually saw some volume participation for the first time in 2011, today the no-volume meltup has resumed. The chart below shows the relative to average volume in the ES. Which ironically shows the Catch 22 the banks find themselves in: the higher they run up the market, the less participation there is, the less trading volume, the lower commissions, and the lower the profits from the traditionally biggest contributors to bank P&L over the past 2 years: flow and prop trading (as confirmed recently by Goldman, Morgan Stanley, JPM, Jefferies and everyone else). Which simply means that banks will have to increasingly rely on the Treasury curve trade (and of course, fudged accounting) to make their bottom line. This would work if consumers had actually stopped deleveraging. Which they haven't. Meaning simply that banks will need to make all their trading profits on market distributions and other crashes that see volume spike. But that as we now know, is contrary to the Fed's third mandate. A curious bind indeed.
RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 24/01/11
Today's Edition Of The FRBNY's "Flip That Bond" Criminal Reality Show Is Now In The Books, As Primary Dealers Continue To Churn Just Issued BondsSubmitted by Tyler Durden on 01/24/2011 12:50 -0400
The Fed's blatant "Flip That Bond" criminal reality show, funded entirely by you, dear taxpayer, continues, and is in fact accelerating. Over the weekend we provided a list of the 10 cheapest bonds that the Fed should monetize based on their relative position on the spline, in terms of cheapness/richness (link) and implied that should the Fed veer away from this list, it would be engaging in what is certainly non-fiduciary activity, by merely facilitating taxpayer rape on behalf of the Primary Dealers who "put" to Sack Frost whatever issue they want, and certainly not the cheapest ones to be monetized by the US taxpayers (i.e., an act that would at least pretend to save some money). Specifically, we said: "The just auctioned off 2.75% of 12/31/2017 is not even among the top 10 cheapest bonds, which means that if on Monday the PN4 makes up for a material percentage of the $7-9 billion buyback, then something is very, very wrong." Well, one look at the final completion list of Today's POMO indicates that it is preciseley the just auctioned off PN4 due 12/31/2017 that made up over half of the entire bloody operation! At 4.551 billion (out of a total $8.869 billion in bonds monetized), the Fed actively conspired with PDs to defraud taxpayers by engaging in monetization not of bonds that were cheapest and thus bonds the Fed should have been buying, but merely was taking the other side of the trade in today's version of "Flip That Bond." And so the criminality continues unabated.
Bob Janjuah was interviewed by Bloomberg TV's Erik Schatzker earlier in which the famous former RBS and now Nomura contrarian who predicted the 2008 crash shares his "skeptically strategic" and tactical outlook on the market: in a nutshell he joins technicians such as Tom DeMark in calling for a 10% correction in the market. Among the three key themes underlying his skeptical views are the following: i) Asia slow down (hard or soft) which will have implications on US markets; ii) Is Europe closer to the endgame; and iii) the US recovery, and the question of how sustainable it is especially following the elimination of the ES boost courtesy of now-daily POMO operations. In terms of asset allocations, Janjuah believes that a reallocation out of EM and into DM makes sense (time for reverse reverse decoupling already?). And just to clarify what Bob's personal position is, for those who may have missed his last two years of letters and memos, he says "I think we are going to have a deeper and harder slowdown in Asia, I think the European situation is closer to the endgame, my biggest doubt is on the US recovery...I think in Q2 and Q3 the grow slowly weakens, and much like last year we are going to be looking for QE3, and my concern is that the hurdle rate for further policy, fiscal and monetary, is much much higher." But most importantly, as Schtazker points out: "Effectively the Fed was the bid. If the Fed's hadn't been in the market, flooding investors with liquidity giving them cash to buy risk assets, the S&P would have declined." Finally people get how central planning works...
Morgan Stanley Sees Recent Market Conditions As Reminiscent Of August 2007 Quant Crash, As "Don't Fight The Fed" Groupthink Trade FizzlesSubmitted by Tyler Durden on 01/24/2011 10:26 -0400
Something scary this way comes from Morgan Stanley's Quantiative and Derivative Strategies: "market conditions over the last two weeks are somewhat reminiscent of that during the August 2007 ‘Quant Crisis’. In only a few days, a number of quantitative long-short equity funds experienced unprecedented losses in seemingly ‘normal’ market conditions. We do not suggest here that the magnitude of hypothetical losses match those from 2007, however, there is little question that the rotation has drawn attention of many quant investors." In other words, the massive groupthink trade that we have been warning about for months may be about to claim its first mass casualties. The just released report by author Charles Crow elaborates what many have been suspecting, yet few dared to voice: "Recent substantial factor movements in Europe have contributed to portfolio volatility and, in some cases, abrupt performance degradation. Portfolios positioned to take advantage of prevailing factor trends may have suffered substantially over the last two weeks." Is the groupthink trade about to end? If so, does that mean the funds will be forced to stop "not fighting the Fed" as this is really the only factor-driven trade that has made sense. If so, we have reached the critical point where being aligned alongside the Fed has no incremental marginal returns, at least for the non-Primary Dealers. This could promptly transform to a watershed event, especially since as Morgan Stanley adds, the market currently has "relatively low liquidity" to absorb the fringe moves.
Just headlines for now. And so after the great subprime debacle, the latest yard winner for JP is piggybacking on the government's at all costs rescue of the biggest financial zombie in the American financial hierarchy. As a reminder as of the last publicly filed 13F, Paulson held 424 million shares of C, a drop from just over half a billion shares at June 30. In other words, the $2 pick up in Citi shares is the monetary equivalent of having Goldman tell ACA that Paulson was long the equity tranche of something or another.
The WSJ reports that The Central Bank of Russia, which seems to have missed Doug Kass' Friday Fast Money appearance, plans to buy 100 metric tons of gold from domestic banks a year in order to replenish the country's gold reserves, Deputy Head of the bank Georgy Luntovsky said Monday, according to the bank's press service. In 2010 Russia's gold reserve increased 23.9% to 790 tons, or 25.4 million Troy ounces. As a reminder China has just over 1,000 tonnes in official holdings. Which means the PBOC will most certainly not be late to get on the bandwagon, although unlike the CBR, will unlikely issue a press release to announce its plans.