China

Futures are currently experiencing a stunning moment of weakness, something not seen unless the entire Liberty 33 trading crew is at Scores. The culprit according to the three sober traders we could track down is the recently unembargoed speech to be delivered by the Bernank tomorrow in Frankfurt. In it, not too surprisingly, the inkmaster considers revealing details of his most recent DNA sequencing result to prove once and for all, that he is not the antichrist. More relevantly, what Bernanke has done to defend his reputation is to claim that QE will work, and that everything is really mercantilist China's fault, and the Fed is just woefully misunderstood. In other words nothing that has not been said before many times, just another overture which will likely precipitate a prompt round of Chinese retaliation in the form of accelerating trade wars, to be followed by further commodity price inflation in the US, leading to another ramp in Chinese inflation, etc. China now will have no choice but to either hike rates (which will pretty much end of the tech bubble), remove even more excess liquidity (real estate bubble burst) or merely export another $20 billion of crap to the US each month, pretending nothing happened (leading to more QE in the US). As Albert Edwards summarized so well earlier, the global game of chicken will continue until either China's or America's population decides it has had enough of being treated like a experimental gerbil in the endgame of failed economic chess.

New York City may reduce the assumed return on its $100.5 billion of pension investments from the current 8%, Comptroller John Liu said. Welcome to the new normal...

Substantially more sanguine than their two key strategists Albert Edwards and Dylan Grice, SocGen's Cross Asset research has come out with a report looking at the future of the world, and the various scenarios that may end up taking us there (although the actual reality will of course be something unforeseeable). So while we play predictive games, here is how SocGen believes the upside/neutral/downside cases could look like across asset classes, and across the globe.

As discussed earlier this week and last week, Murphy's law is verified in the bond market as we are inching closer to 122-30 in TY futures and the 5Y future is leaning dangerously on the 100-dma, eyeing the 118-30 support below. The market is arguably still long but trimming. All the buying last week post long end supply is getting stopped out for those who did not cash in on a quick buck, and a lot of pre-FOMC positioning is getting pushed out as well. The irony? People are starting to feed the sell-off mentioning next week's supply... just when real money is about to step up and bid the market again! If you have been playing from the short side the past couple weeks you have been right. I tried to play that way mostly with more or less success catching the tops on the pullbacks (or missing them by a few ticks), and even schatz which I thought would hold up broke the 108.80 level.

In his latest letter, in addition to again broaching the subject of the upcoming Eurozone collapse, SocGen's Albert Edwards shares his increasingly high level of conviction that the US will slip into recession and also explains why Ben Bernanke's trashing of the dollar is just a "devious ploy" to force a real exchange rate revaluation on the Chinese via rampant food price inflation. Keep in mind, in China food prices are actually important, noted and measured, and were the primary reason for the October spike in inflation which oddly caught so many by surprise, probably more for the reason that the government actually agreed to disclose it. In essence, Albert argues that the Chairman has raised the stakes on the global monetary game to such a level, that he risks social discontent either in the US or in China, or both, should China refuse to blink in what has quickly become the most important game of chicken in the history of modern economics.

Jeremy Grantham, who has been rather vocal in his condemnation of the Fed recently, and has been rather lukewarm in his endorsement of equities as an asset class, has released an updated (as of Oct 31) estimate for 7 Year returns by asset class. And it has bad news for pension funds which have a rather high bogey of about 8% per year. If Grantham is correct the 'new normal' (which is really the normal normal but with the cheap credit spigot taken away due to a new deleveraging regime) also means that pension fund actuarial models have to be scrapped as they will likely not be able to attain the kinds of returns needed to keep them solvent based on capital appreciation expectations. Where Grantham sees the best return potential is in international and emerging equities, presumably on the assumption that decoupling will take place. On the other hand, many are increasingly seeing the possibility of a China topping as a major risk factor. While Grantham is bearish on small cap US equities and sees just a modest outperformance of large caps, what he hates the most are all bonds, where in four out of five categories he see a negative 7 year return. Perhaps it is time for a Rosie-Grantham round table.

• Fed Orders 2nd Round of Stress Tests  (WSJ), translation: more capital raises for Bank of America, Wells Fargo and Citi.
• Lenihan Says Ireland May Ask for Bank Package as Bailout Nears (Bloomberg)
• One in 20 Irish Mortgages in Arrears (FT)
• China Vows to Tame Inflation (Reuters)
• Korea to Revive Tax on Foreigners' Bond Holdings to Slow Capital Inflows (Bloomberg)
• IMF Says HK Currency Peg Boosting Property Prices (FT)
• India Microcredit Faces Collapse From Defaults (NYT)
• Vilsack: Food Costs Won't Surge  (WSJ)
• Failed Models and the Real Costs of QE2 (Economics21)
• California Shrinks Planned Tax-Exempt Sale, Expands Taxable (Bond Buyer)

• Asian stocks rebound as commodities climb, China government acts on prices.
• BoE plans to adopt a less-intrusive approach to overseeing U.K. banks.
• Euro climbs versus Yen, Dollar on optimism Ireland aid to calm debt market.
• IMF warns of Hong Kong housing-bubble risks.
• Irish talks turn to government bailout as EU officials join IMF in Dublin.
• Moscow approves $32B sale of state assets; disposals to help cover budget deficit.

In attempting to validate today's futures ramp, brought to your courtesy of government motors and The Sack, Goldman presents the main tangential factors, good enough for a media headline and adjoining irrelevant plotline. Amusing nonetheless.

Much has been said about how the PPI and the CPI are stuck in deflation mode (despite what everyone is seeing when buying groceries or filling up empty gas tanks). Much less has been discussed about how Bernanke's blunt policy tool of unlimited liquidity is leading to an inflation-driven bubble in Asia (and all Emerging Markets). Luckily, Macro Man Simon Black provides a first person perspective of how this bubble is developing, and how it will soon pop. In some ways this is empirical evidence of what Knight Research said previously: namely that the days of an EM push-pull mechanism are coming to an end. Here is why Knight's conclusion is spot on, paraphrased half way around the world: "when central banks start ratcheting up interest rates (like the Fed did in 2004 and what China is doing now...), buyers and developers no longer have access to cheap credit. Demand drops, and prices fall. When this finally happens, I think the subsequent fallout will serve as another strong argument to abandon the dollar and reset the financial system, especially in the developing world. All they need is a reasonable alternative. China is already allowing its currency to be used for cross-border settlement and limited reserve status, and as this function grows for the renminbi, you can bet that Asian nations will stop importing American monetary inflation and start exporting those dollars back home." A must read note for all those who base their investment decisions based on theoretical musings and thought experiment speculation.

From Knight Research: "The simple story is this: We believe the structural and cyclical terms of global trade have finally reached their tipping point. This will catalyze a wholesale change in sentiment and a historic repositioning of risk assets. The emerging market global growth story is over...Although such cataclysmic shocks rarely result in rhythmic, straight line fractures, the chain of price adjustments should be relatively clear. Accordingly, we expect a shockingly powerful rally in the dollar, broadbased weakness across the commodity sector, a dramatic widening of emerging market credit spreads, and what could prove to be a stampede of hot fund flows out of the emerging markets. We appreciate both the gravity and the brevity of this note; but then again, the story is simple.

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Bernanke is like the Sorcerer's Apprentice: Given the magic hat - he commands his broom army to fetch buckets of dollars to inflate the economy the easy way but his lazy solution quickly turns into disaster as the waters start rising and he finds he has no way to stem the rising tide

The WGC has released its complete Third Quarter gold market outlook. To summarize: major demand is seen out of China and India, whose surging populations will buy ever more PM due to "rising income levels, high savings rates and strong economic growth." Demand is seen coming from the jewelry sector, as well as from institutions, including central banks, and a jump in industrial demand "on the back of renewed growth in the electronics industry, due to the majority of semi-conductors being wired by gold." Nonetheless, even as demand continues growing, supply is rising as well: "On the supply side, we reiterate our projection that total mine supply is likely to trend higher. This is due to mine project expansions, a ramping up of production to meet the recovery in gold demand and the diminishing scope for producer de-hedging in 2010. Higher supply is also expected to come from China, Australia and US, although this may be partially offset by lower output from countries such as South Africa and Peru due to declining ore grades and rising costs." Ultimately, the only important question is whether QE will ever end. Anything less than a Yes answer, means there is virtually no upside limit to gold, absent an occasional correction.

In this week's Straight Talk with Chris Martenson, contributor is James Howard Kunstler, author and social critic. His better-known works include The Long Emergency, in which he argues that declining oil production will result in the decline of modern industrialized society and compel Americans to return to smaller-scale, localized, semi-agrarian communities; World Made By Hand and its sequel, The Witch of Hebron, all published by The Atlantic Monthly Press. He writes a weekly blog is also a leading proponent of the movement known as "New Urbanism."

This is an extensive post designed for those who want to truly comprehend what I perceive to be both the root causes and the practical solution to the Irish sovereign debt problems and the threat of Pan-European possibly global financial and economic contagion.