Las Vegas

The REAL World Series of Poker (WSOP) is a currency war with far greater implications and consequences for every human being on earth than the one that plays out in Las Vegas every year. Many of the Western nations' bluffs are now being exposed and falling apart.  This will have significant implications for much higher gold & silver prices in the future.

It is easy to get swept into the momentum of the housing market. The Federal Reserve has managed to push interest rates to historically low levels creating additional buying power for US households. As we enter the slower fall and winter selling season, there is unlikely to be any major changes until 2013 as the election year concludes. We do face major challenges ahead. This current momentum in housing isn’t being caused by flush state budgets or solid wage growth. No, this is being caused by low inventory, big investors crowding out households, and a concerted effort to push mortgage rates lower. If you simply follow the herd, you would think that prices are now near peak levels again (or soon will be) and household incomes are hitting record levels. Let us examine where things stand today deep in 2012.

Please, point me to the floor. 

• Markets Go Dark Ahead of Storm (WSJ, RTRS, BBG, FT)
• MF Global Problems Started Years Ago (WSJ)
• Major Greek daily reprints Swiss accounts list, editor who published list to go on trial for violating data privacy laws (RTRS)
• Coming soon to a USA near you: Hong Kong government imposes a property tax on overseas buyers (Bloomberg)
• The pain in Spain is endless: Spain’s Pain Seen Intensifying as Slump Deepens Plight (BBG)
• Las Vegas Sands Discusses Possible Settlement With Justice Department (WSJ)
• Why Does the SEC Protect Banks’ Dirty Secrets? (BBG)
• Honda slashes forecast on China territorial spat (AFP)
• UBS shares jump on expected radical overhaul (Reuters) ...so if UBS cuts 150% of workforce, shares will hit +?
• CEOs Seeking Global Range Tilts Market to 8,000-Mile Jets (Bloomberg)

There is an interesting dynamic unfolding in the housing market. Real estate agents in places like California are arguing that there is a lack of inventory and are also generally against the government unloading blocks of properties to big investors. Why? There has been bulk selling and buying to the investor class and a large amount of crowding out has occurred. This brings about an interesting set of problems for your average buyer in the current market. They are competing with swaths of big investors but also local flippers trying to make a quick buck once again courtesy of low interest rates and another mania in some markets. SoCal is now in a mania again as you will see with some of the patterns occurring. This is also happening in many other states as well. A new feudal system has emerged. The banks were bailed out by the Fed, were allowed to circumvent accounting standards, and now deep pocket investors in the financial class are buying up these places either to increase prices on flips or to hike up rents. In the end, if you want to compete in today’s market you need to bow down to the Fed, put on a football helmet and go head-to-head with big investors, flippers, suckers, and take on a massive mortgage.

The last time we checked on the (funding) status of America's real presidential race - the one where America's uber-wealthy try to outspend each other in hopes of purchasing the best president money can buy - the totals were substantially lower. With November 6 rapidly approaching, however, the scramble to lock in those record political lobbying IRRs is in its final lap. And thanks to the unlimited nature of PAC spending, look for the spending to really go into overdrive in the next 2 weeks as the spending frenzy on the world's greatest tragicomedy hits previously unseen heights.

The nature of what is ‘legal’ has become a truly bizarre concept these days. Developed nations of the west have hundreds of thousands of pages of rules, codes, regulations, laws, decrees, executive orders, etc., many of which are contradictory, archaic, and incomprehensible. Across these ‘free’ nations, the law is selectively enforced, selectively applied, and completely set aside whenever it pleases the state. As such, even the most harmless of activities (operating a lemonade stand, collecting rainwater, etc.) can be cast as illegal… while the direct theft of people’s wealth through taxes and manipulation of the currency is considered legal. There is no morality anymore in the law. And even still, whatever few activities may still be considered ‘legal’ are subject to consequences if the enforcers simply decide they don’t like it.

Anti-Japan protests may have quieted down on the day after the anniversary of Japan's invasion of China (which is not saying much: after disappearing for two weeks, perhaps in some Las Vegas strip club, the Chinese leader-in-waiting Xi Jinping denounced Japan's decision to buy disputed islands "as a farce" on Wednesday and said Tokyo should "rein in its behavior"), but that does not mean anything has been resolved, and the Chinese 1000 boat armada is still supposedly on its way to the Senkakus. Elsewhere, the US foreign department may have to promptly find an anti-Buddhist hate tape made in the US, because otherwise the attack of the US ambassador Gary Locke's car in Beijing may have to be explained using good old fashioned simmering hatred and anti-American sentiment without an actual inflamatory event. LA Times reports: "The car of the U.S. ambassador to China was surrounded by a small group of demonstrators on Tuesday, who damaged the vehicle and briefly prevented it from entering the U.S. Embassy compound in Beijing. A YouTube video of the incident showed the protesters chanting slogans such as “down with the U.S. imperialists” and, in an apparent reference to the Chinese government’s purchase of U.S. government debt, “return the money!”

For the first time since September of 2010, nearly two years ago, has the Case Shiller 20 City Index realized a year-over-year gain. Does this signify a sustainable turning point for the market? 

More on China kleptocracy.

Moments ago the US Treasury auctioned off the latest monthly batch of 2 Year bonds, this time $35 billion, or toward the higher end of the issuance range, which was a bit of a dud. Pricing at 0.273%, this was a brisk move from July's record low 0.22%, a weakness which was substantiated by the expected pricing of 0.266% even though the When Issued traded at 0.275% coming into the auction, so technically there was no tail. That said, a very modest 9.01% was allotted at the high yield, implying the bulk of the action in the Dutch Auction was below the closing yield. Beneath the headline, the internals were not pretty either, with just 22.3% of the total bond taken down by Indirect bidders, well below the 32.78% TTM average, demanding an increase in both the Direct and Primary take downs, the former taking down 16.08% while the Dealers having to push 54.66% of the entire auction promptly into the tri-party repo market in exchange for cash to be used for much wiser purposes, such as buying Las Vegas REO real estate and converting it into rentals. Was the weakness of the auction a harbinger of disappointment from Jackson Hole - stay tuned for an opinion from Credit Suisse which says precisely this. And while the auction itself may have been unspectacular, there is a very historic aspect to this particular $35 billion bond issue, which we will reveal after market close.

The tried strategy of "Baffle them with BS" continues today following the release of the June (two month delayed) Case Shiller data. Because whereas last week we showed that New Home Prices are plunging, and the average new home price just dropping to its 2012 lows, when it comes to the Case-Shiller index, things are looking up. In June, the Top 20 composite index rose by 0.94%, well above the expected increase of 0.45%. How much of this is due to the REO-to-Rental program in which we are now seeing actively securitization of rental properties, which in essence is converting more and more of the Residential market into commercial real estate, remains unclear. For now it is clear that those entities with access to cash are buying up properties in beaten down areas in hopes these will be filled by renters. On the other hand, the truth is that summer months always see the biggest pricing gains, and following the May data revision, which rose at a revised rate of 0.97%, one may observe that the pricing increase has now peaked even according to delayed CS data, and has begun its traditional rolling over pattern. And a pattern it is. As the second chart below shows very clearly, housing is now merely in the dead cat bounce phase of a broad housing quadruple dip, each one having been facilitated by either Fed or ECB intervention. We give this one a few more months before it too resumes the downward trendline so very well known to Japanese homeowners, and falls in line with the data reported by the Census department.

Because redemption requests are like cockroaches: once one appears, assume many, many more:

• CITIGROUP'S PRIVATE BANK SAID TO PULL $500M FROM PAULSON FUNDS - BBG
• CITIGROUP SAID TO REDEEM FROM PAULSON ADVANTAGE, ADVANTAGE PLUS - BBG

Is this the beginning of the end for the former Bear Stearns M&A banker and once infallible hedge fund manager? And to think he could have saved himself all the deep fundamental work telling him Las Vegas real estate is "cheap" and just bought Apple. Hey, everyone else is doing it. And everyone else can't possibly be wrong. As for Paulson, whose GLD holdings, which are not an investment but merely a gold denomination share class, will likely quite soon see a substantial hit as he is forced to unwind GLD holdings as more and more external investors redeem until finally JP is just left running his own and his employees' money.

From AP: "the number of Americans with incomes at or below 125 percent of the federal poverty level - the income limit for qualifying for legal aid - is expected to reach an all-time high of 66 million this year. A family of four earning 125 percent of the federal poverty level makes about $28,800 a year, government figures show." And visually...

The market may have found itself in the purgatory of the summer doldrums, where unlike last year this time, not only are volumes over 50% lower, but volatility is non-existent, but that doesn't mean that investors are sleeping easy. In fact, quite the opposite because as the following chart from MS confirms, the lack of market volatility merely mimics the complete chaos and lack of decisiveness in Congress, where each passing day brings America not only closer to the most contentious presidential election in ages, but to another debt ceiling hike debate, and, of course, the fiscal cliff. All of these combined have brought US policy uncertainty to the third all time highest level, on par with September 11 and the collapse of Lehman/TARP, and just short of last year's imminent European collapse, which was only staved off courtesy of the coordinated global central bank intervention on November 30.