Market Manipulation

What's $2 Billion for Ben Bernanke's Chosen Son?

Goldman maintains “constructive” 6-month forecast, says case for higher prices remains in place. Goldman stands by its forecast for a rally in gold this year, saying that the precious metal will advance to $1,840/oz over six months as the U.S. central bank embarks on a third round of stimulus in June. The precious metal remains the “currency of last resort,” according to analysts led by Jeffrey Currie in a report released yesterday. Goldman’s gold forecast implies a 15% return in 6 months. “In early 2009, we suggested that gold had become the currency of last resort, overtaking the U.S. dollar’s status due the rising risk of sovereign default and debasement concerns,” Currie wrote in the report. Even as the U.S. currency advanced and gold fell on the European crisis in recent months, “it is too early for the dollar to reclaim this status,” they wrote. “The case for higher gold prices remains in place,” the analysts wrote. “U.S. economic and employment data has now disappointed for several weeks, European election results point to further stress in the euro area, while anecdotal data suggests that physical gold demand remains resilient.”

One word: Spain, and more specifically, 6.00%+. That's where Spanish 10 Year bond yields are again, with Spanish CDS soaring to a fresh all time wide of 512 bps (+13.5 bps), and the Spanish-Bund spread blowing out to the widest since November. And to think it was only two days ago that the schizo market interpreted Spain's bank sector nationalization as good news. It may be for the bank sector (for a few days at least), but it sure isn't for the sovereign which would end up onboarding on the risk. Naturally, 48 hours later the market has figured out this fine nuance and is dumping everything Spain related once again. That this is surprising is an overstatement: we have seen all of this before, only last time it was Greece. Hopefully the same playbook works for Spain, and works better. The result - redness everywhere, especially in the aftermath of an implosion, and halt, in Italy's oldest and one of its biggest banks (guess which PIIG is next on the nationalization bandwagon), after Italian prosecutors on Wednesday ordered searches at the headquarters of Banca Monte dei Paschi di Siena and its top shareholder in a probe over alleged market manipulation linked to Monte Paschi's 2007 purchase of smaller peer Antonveneta. From Reuters: "Prosecutors in Siena, where Monte dei Paschi is based, said in a statement the offices of several Italian and foreign financial institutions based in Italy were also being searched by financial police as well as private homes, without elaborating. They said the searches were part of an investigation into possible market manipulation and obstructing the work of regulators with regard to raising the funds to buy Antonveneta." But probably the worst news comes from Bank of America which summarizes the Greek situation as follows: "If another election takes place, as seems very likely, Syriza could win. Their populist rhetoric is gaining momentum in Greece. Moreover, left voters from the Communist Party of Greece and Democratic Left are likely to vote for Syriza given its chance to win." Which naturally, is Europe's biggest nightmare. Sorry to say, but Europe appears very much unfixed and is about to break even more.

Dollar vs. Stocks 

In the shady underground world of banking, doing wrong means doing right, up is down, and left is right.

Throughout the postwar period, banks have almost always lent out all the way up to the reserve requirement. So, does the accumulation of excess reserves lead to inflation? Only so much as the frequentation of brothels leads to chlamydia and syphilis. Excess reserves are only non-inflationary so long as the banks — the people holding the reserves — play along with the Fed-Treasury game of monetising debt and trying to hide the inflation . The banks don’t have to lend these reserves out, just as having sex with hookers doesn’t have to lead to an infection. But eventually — so long as you do it enough — the condom will break. As soon as banks start to lend beyond the economy’s inherent productivity (which lest we forget is around the same level as ten years ago) there will be inflation.

Four time Fed Chairman Marriner Eccles: "As long as the Federal Reserve is required to buy government securities at the will of the market for the purpose of defending a fixed pattern of interest rates established by the Treasury, it must stand ready to create new bank reserves in unlimited amount. This policy makes the entire banking system, through the action of the Federal Reserve System, an engine of inflation. (U.S. Congress 1951, p. 158)... [We are making] it possible for the public to convert Government securities into money to expand the money supply....We are almost solely responsible for this inflation. It is not deficit financing that is responsible because there has been surplus in the Treasury right along; the whole question of having rationing and price controls is due to the fact that we have this monetary inflation, and this committee is the only agency in existence that can curb and stop the growth of money.. . . [W]e should tell the Treasury, the President, and the Congress these facts, and do something about it....We have not only the power but the responsibility....If Congress does not like what we are doing, then they can change the rules. (FOMC Minutes, 2/6/51, pp. 50–51)"

At least Argentina kinda, sorta had the right idea: find an expensive foreign asset and nationalize it, impotent EU sound and fury be damned. Key word here: foreign. A few days later, the latest trade was escalation move appears to have gone viral, if with some curious, and serious, modification in the process. Minutes ago we learned that the Italian Finance police had seized a 20% stake in a heretofore unnamed firm (how does the police seize a stake? They pocket 20% of the electronic shares held in custody by the local DTCC? or they kidnap 20% of the Board of Directors? Inquiring minds want to know). We vaguely expected it would be a retaliatory move, and the firm would be based out of Latin America. No such luck. As Reuters fills in, the company "seized" is Premafin, "which controls Italy's No. 2 insurer Fondiaria-SAI as part of a judicial probe on market manipulation, the tax police and a judicial source said on Thursday."

This strange event happened this past Tuesday in the COMEX New York markets but I didn't have time to post it until now. Not much to add here in the commentary that the pictures don't say themselves, except that market prices of two different assets do not plunge in tandem by 1.2% within a matter of half-an-hour or so at precisely the same time and then gain everything back in the next two hours if their prices are set by free and fair markets.

When it comes to evil, evil speculators driving stocks higher on endless gobs of cheap zero-cost liquidity, one will hear nary a peep out of the administration: after all: wealth effect or bust. However, when someone hears oil speculators, run and hife. Indeed, now that Obama's uber-central planning mandate has proven completely powerless to redirect the flow of zero-cost money from acquiring real, as opposed to paper-based, assets (read crude), the Teleprompter in Chief will have a sit down with the nation at 11:10 am and in the latest sermon from the White House mound, will "confront" oil speculators once and for all. His plan: why encourage margin hikes of course - the same principle that crushed the spine of the gold and silver spike in 2011. Unfortunately, unlike gold and silver, whose trading is still dominated by the Comex, energy has numerous alternative venues, such as the ICE, and increasing exchanges in China, which also happens to be the marginal demand setter with 3 consecutive months of near record imports. Which is why we are 100% confident that just like every failed attempt at central planning, all Obama will achieve is another spike in crude prices, just in time for the next global reliquification cycle, just in time for 2012's debt ceiling scandal, and just in time for the reelection.

We will have much more to say about the impact of central planning on price (lack of) discovery and general market manipulation shortly, courtesy of the just released latest must read report by our friends over at Artemis Capital Management, we wanted to show our readers Exhibit A of what everyone has intuitively known for years, yet been unable to put it to paper. Until today. Below is Exhibit A that courtesy of global, relentless central-planning, the market is now nothing more than a liquidity-addicted abortion, whose future discounting capabilities have been utterly destroyed, which no longer reflects  any economic fundamentals, and which is merely a fake construct in the Eye of the Benholder. It also throws temper tantrums in the form of VIX surges any time the promise of liquid heroin is taken away.

Bernanke has laid the groundwork for the next massive dislocation.

"Even Wile E. Coyote had to come back down to earth sooner or later", says Charles Biderman, founder of TrimTabs Investment Research. In his opinion, the prices of stocks and bonds - enabled by excessive financialization of our economy and central bank money printing - have been defying gravity for a dangerously long time.  If we continue to do all we can to preserve the status quo -- to maintain "phony" asset price levels as Charles calls them -- at best we will restrict overall growth and handicap the economy. The problem isn't so much the unfairness and malinvestment evident in a rigged market. As Charles shrewdly asks: what happens when the market becomes un-rigged? We've never experienced the unwinding of an entirely manipulated financial system, so we can't predict for sure. But at this point, a painful collapse of our markets and loss of the US dollar as the world's reserve currency seem entirely plausible.

How long will this last?

Back in May of last year, just after the now historic silver slamdown of "Silver Sunday" on May 1, 2011, when the metal imploded by nearly 20% in the span of seconds, a move that some considered 'normal', primarily the CFTC, we presented the extended biopic of the infamous "Silverfinger": Bunker Hunt, who attempted to corner the silver market, and succeeded, if only briefly (and they say Playboy has no good articles). Today, courtesy of Grant Williams, we have dredged up the following clip from the archives, which is a 10 minute overview of just how there is really nothing new ever in the silver market, bringing up memories of Silver Thursday, March 27, 1980, and raising questions whether last year the move in precious metals was not due to the same attempt to corner the silver and gold markets as happened 30 years prior. A far more important question perhaps is how was it that tried a redux of the Hunt brothers (and Warren Buffett of course), and when will someone take their place next?