Prudential

Forget Competing Theories … What Do the Facts Say about Quantitative Easing?

New meaning to the words, use it or lose it. 

UPDATE: Added COMEX Silver Inventory Watch shenanigans from Jesse's Cafe Americain

We have long-discussed the currency debasement, fiat-fiasco thesis for owning hard assets and only last night noted the discussion between Biderman and Sprott on the practicalities of this plan. What we found interesting was this week we have seen a number of quite bearish articles on the precious metals - most notably Bloomberg's chart-of-the-day has had two notes citing inventory build for Silver's imminent demise and lagging futures open interest as a sign of investor's losing conviction in gold. Given that we are fair-and-balanced we thought it worth sharing these technical insights and perhaps reflecting on what Eric Sprott noted as the only thing that could break his 'hard asset' thesis - that the political and banker elite "come to their financial senses" and Dylan Grice poignantly described "eventually, there will be a crisis of such magnitude that the political winds change direction, and become blustering gales forcing us onto the course of fiscal sustainability."

Addressing his perception of lessons learned from the financial crisis, Ben Bernanke is speaking this afternoon on poor risk management and shadow banking vulnerabilities - all of which remain obviously as we continue to draw attention to. However, more worrisome for the junkies is the total lack of QE3 chatter in his speech. While he does note the words 'collateral' and 'repo' the proximity of the words 'Shadow, Institutions, & Vulnerabilities' are awkwardly close.

Bill Gross' monthly letters are always a fresh source of jovial imagery, although the bond king may have outdone himself in his latest monthly letter which collapses the principles of investing onto the football field: "My point about pigskin offense and defense is the perfect metaphor for the world of investing as well. Offensively minded risk takers in the markets have historically been the ones who have dominated the headlines and won the hearts of that beautiful gal (or handsome guy).... Canton, however, has an approximately equal number of defensive in addition to offensively positioned inductees, so there must be a universally acknowledged role for both sides of the scrimmage line. What fan can forget Mean Joe Greene, Deion Sanders or Mike Ditka? The old, now politically incorrect showtune laments that “you gotta be a football hero, to fall in love with a beautiful girl,” but football and any of life’s heroes can play on either side of the line, it seems." And it only gets better. While at its heart Gross' latest is merely yet another lamentation against the confines of the financially suppressive regime that arises from ZIRP and ends with what many expect is a whimper (when in reality they all forget to factor in the facility of hitting the CTRL+P keys as many times as necessary), the flourish of abandon this time around is palpable. We would not be surprised to soon see Gross hang up his offensive (and defensive) jersey, and sit back and enjoy the coming lunacy from a distance (but hopefully not before he allocates just a little to the Ron Paul SuperPAC).

But coincidentally, the ECB’s next Long Term Refinancing Operation (LTRO) is set for February 29...

• Germany Crisis Role in Focus After G-20 Rebuff (Bloomberg)
• G20 to Europe: Show us the money (Reuters)
• Draghi’s Unlimited Loans Are No Panacea (Bloomberg)
• Geithner says Europe has lowered risks of "catastrophe" (Reuters)
• Gone in 22 Seconds (WSJ)
• Gillard beats Rudd to stay Australian PM (FT)
• Brazil Will Continue Reducing Interest Rates, Tombini Says (Bloomberg)
• China to Have ‘Soft Landing’ Soon: Zoellick (Bloomberg)
• China To Be Largest Economy Before 2030: World Bank (Reuters)
• Obama pressed to open emergency oil stocks (FT)

The real world revolves around cash flow. Families across the land understand this basic concept. Cash flows in from wages, investments and these days from the government. Cash flows out for food, gasoline, utilities, cable, cell phones, real estate taxes, income taxes, payroll taxes, clothing, mortgage payments, car payments, insurance payments, medical bills, auto repairs, home repairs, appliances, electronic gadgets, education, alcohol (necessary in this economy) and a countless other everyday expenses. If the outflow exceeds the inflow a family may be able to fund the deficit with credit cards for awhile, but ultimately running a cash flow deficit will result in debt default and loss of your home and assets. Ask the millions of Americans that have experienced this exact outcome since 2008 if you believe this is only a theoretical exercise. The Federal government, Federal Reserve, Wall Street banks, regulatory agencies and commercial real estate debtors have colluded since 2008 to pretend cash flow doesn’t matter. Their plan has been to “extend and pretend”, praying for an economic recovery that would save them from their greedy and foolish risk taking during the 2003 – 2007 Caligula-like debauchery.

Debt default means huge losses for the Wall Street criminal banks. Of course the banksters will just demand another taxpayer bailout from the puppet politicians. This repeat scenario gives new meaning to the term shop until you drop. Extending and pretending can work for awhile as accounting obfuscation, rolling over bad debts, and praying for a revival of the glory days can put off the day of reckoning for a couple years. Ultimately it comes down to cash flow, whether you’re a household, retailer, developer, bank or government. America is running on empty and extending and pretending is coming to an end.

Open Europe has published a briefing note outlining the ten questions and issues that still need to be resolved in the coming weeks in order for Greece to avoid a full and disorderly default on March 20. The briefing argues that, realistically, only a few of these issues are likely to be fully resolved before the deadline meaning that Greece’s future in the euro will come down to one question: whether Germany and other Triple A countries will deem this to be enough political cover to approve the second Greek bailout package. In particular, the briefing argues that recent analyses of Greece’s woes have underplayed the importance of the problems posed by the large amount of funding which needs to be released to ensure the voluntary Greek restructuring can work – almost €94bn – as well as the massive time constraints presented by issues such as getting parliamentary approval for the bailout deal in Germany and Finland. While the eurozone also continues to ignore or side-line questions over the whether a 120% debt-to-GDP ratio in 2020 would be sustainable and if, given the recent riots, Greece has come close to the social and political level of austerity which it can credibly enforce.

According to the SEC’s complaint against Gen Re, filed in U.S. District Court for the Southern District of New York, a foreign subsidiary of Gen Re entered into two sham “reinsurance” transactions with AIG in 2000 to improperly allow AIG to reverse the declining reserve trend and falsely report additions to both loss reserves and premiums written. Senior officials at Gen Re helped AIG structure the two sham transactions. The contracts show reinsurance transactions that appeared to transfer risk to AIG, but the transactions did not transfer risk.

PRU stock getting hammered after Fitch had some choice words for the insurer.