Good morning, worker drones: This Week in Mayhem
by Project Mayhem
After some interesting disclosures over the past week -- including the fact that a large percentage of the U.S. market volume is comprised of just five financial stocks -- let us review new information and take a look at the week ahead, in order to make some sense of the train wreck already in progress.
PART I: Last Week in Mayhem
Project Mayhem highlights the most important stories of the last week
1) Five Financial Stocks Dominate Market Volume
An increasing majority of equity market volume has been comprised of just five financial stocks -- Citi, AIG, CIT, Fannie, and Freddie. On Friday August 21, these five stocks accounted for roughly 30% of overall market volume. This is quite remarkable.
2) Federal Reserve Disclosed Trading $1.4 trillion in OTC "Other" Derivatives in March 2009 *corrected
The Federal Reserve has apparently been engaged in OTC derivatives trading. As of March 2009, they began publishing this information in several categories broken down by 'risk'. Tyler discovered this bombshell last Friday. In Treasury TIC data there are large sums classified as "Other Contracts". While it is not clear what specifically is being traded , we know these are not "Single-currency Interest Rate Contracts" nor are they "Foreign Exchange Contracts". These contracts are classified as "Other Contracts by Type of Risk" -- and they include $85 billion in OTC equity derivatives , and $1.169 trillion (yes, with a T) in OTC credit derivatives.
What is interesting here is that prior to March 2009 such trading was not reported in detail. The March disclosure by category is what is completely new. These Fed OTC derivatives have $1 trillion+ in capital in "Other". It is unclear what aspect of the credit capital markets this is allocated to or propping up: is it CDS? And if so, what entities are the contracts written on? At this time, it is unclear what relationship, if any, these $1.4 trillion in Federal Reserve OTC derivatives have to the unusual market activity many of us have been observing.
3) Capital Flees U.S. -- Heads to Undisclosed Tropical Location
Jim Willie and JSmineset broke this story last week -- capital appears to be subscribing to Keynes's little-known "OMG GTFO" theory. In other words, the flow of funds for US Corporate Bonds and US Government Agency Bonds have turned negative. Let me run this through our CNBC translator -- ah yes, here we go, CNBC translation was successful: "It's never been a better time to buy"
Indeed. Come and catch these falling knives.
PART II: This Week in Mayhem
Well there are several things brewing. Project Mayhem prefers to put world events in context. Those of you that are familiar with our style realize we prefer to look at finance through an international geopolitical lens, seasoned to taste with measured speculation. There are multiple financial and geopolitical plane crashes coinciding, although nothing have gone 'hot' as of yet. It is only a matter of time , worker bees!
Unfortunately, we are all on this plane together.
The slow motion disaster in progress could fly a bit further before the wings come off. So we need to pay attention to sources of trouble. This is what we intend to highlight here. These trouble spots could simply fizzle, as they will likely do -- or they may be the source of a black swan which gets sucked into the engine. You will know there is a problem when the airplane starts to shake.
Let's start with the finance.
1) International Financial Situation:
a. Equity Rally May Be Hot Air; Bernanke Checks For Rips In USS Spaceblimp
We have highlighted the two important disclosures in Part I -- namely the interesting yet strange facts regarding market volume, as well as the discovery of uncharacterized "other" OTC derivatives on the Federal Reserve TIC data. Based on this information , we believe that there is a good case to be made that this 'rally' is mostly running on gasoline fumes -- fumes provided by sprawling and corrupt institutions such as the Federal Reserve. Something to keep in mind. The rug may be pulled at any time. If you want to trade this mess, you'd best know what you are doing. Don't pass out.
b. FDIC Has Probably Depleted Its Funds; Tapped Emergency Credit Line
On Tuesday August 25th, the FDIC will release its Q2 report. At the end of Q1, the FDIC had drained its $52.8 billion down to a mere $13 billion. There have been 56 bank failures since March 31st -- they have cost the FDIC an estimated $16 billion. Our math ain't so good , but captcha says that's a negative number. We may find with the release of the FDIC's Q2 report that "the well ran dry".
What then, asks you, corporate worker drone? We're not sure. Unfortunately, our crystal ball had a segmentation fault early this morning. There was blood everywhere. But yes, ultimately this really is a matter of perception -- and as such, is basically driven by the MSM and associated network idiocy. So it is difficult to say. Regardless of social effects, speaking pragmatically -- in May 2009, Congress extended the FDIC a Treasury line of credit worth $100bn -- with borrowing authority of up to $500 billion through 2010. You ask: Has the FDIC quietly tapped this line of credit? We may find out on Tuesday. Keep in mind that this is immediate additional pressure on the USTbond complex -- which requires borrowing from Japan, China, and the PetroStates -- or else requires covert or semi-covert monetization by the Federal Reserve.
Quick -- back to the well Little Timmy !
c. Treasury Wants to Borrow $207 billion -- Looks For Change In White House Sofa
Treasury will attempt to borrow approx $200 billion in spacebucks this week. There should be no issue -- as there are always those indirect bids coming out of the Carribean! I hear the cocaine business is booming over there. Anyway, Karl Denninger writes
*U.S. TREASURY TO AUCTION $27 BILLION IN 52-WEEK BILLS
*U.S. TREASURY TO AUCTION $42 BILLION IN TWO-YEAR NOTES
*U.S. TREASURY TO AUCTION $31 BILLION IN THREE-MONTH BILLS
*U.S. TREASURY TO AUCTION $28 BILLION IN SEVEN-YEAR NOTES
*U.S. TREASURY TO AUCTION $30 BILLION IN SIX-MONTH BILLS
*U.S. TREASURY TO AUCTION $39 BILLION IN FIVE-YEAR NOTES
2) International Geopolitical situation:
a. Georgia Initiates Naval Blockade of Abkhazia
The President of Georgia, Tie-eating psychopath Mikheil Saakashvili, has decided to enforce a naval blockade on the breakaway province of Abkhazia -- on the Black Sea. A naval blockade is usually an act of war. But perhaps not here, with any luck. As some may remember, Georgian shelling of S Ossetian civilians and subsequent Russian counterattack was responsible for a brief 'hot' war which began on 8/8/8. The situation in Georgia could flare up once again.
This may be important to your crude investment positions as the BTC pipeline runs through Georgia, and carries approx 1 mmbpd from the Caspian Sea through Azerbaijan and Georgia to both Supsa and Cehyan -- ports on the Black Sea and Mediteranian Sea, respectively. Two days prior the 2008 Russian-Georgian war, this pipeline was bombed and remained shut down for 19 days. The impact on the oil price in 2008 was muted due to the massive double-top and subsequent price collapse (Hubbert is rolling in his grave). We assume a similar non-effect would occur again, unless this were to escalate into a regional conflict.
b. Ex-ISI Chief Says Purpose of New Afghan Intelligence Agency RAMA Is ‘to destabilize Pakistan’
The map is to help the Americans. Europeans may skip.
Pakistan is a key to watch. The situation on the ground is becoming increasinly unstable due to a confluence of negative forces. This is why we bring the following to your attention -- an excellent interview with Lt. Gen. Hamid Gul published 12 days ago in the Foreign Policy Journal.
The former head of Pakistani ISI from 1987 to 1989 -- Lt. Gen. Hamid Gul (on far left in above picture)-- has made the claim that the newly created Afghan Intelligence Agency 'RAMA' has the officially-sanctioned purpose of destabilizing neighboring Pakistan. A bold claim indeed.
Pakistan Deep Water Port. US wants it. China wants it.
For those familiar with the "Great Game" once played in Central Asia by the British Empire, the current game for future control of Caspian oil and gas reserves may not be much of a surprise. Perhaps our friends in the oil and gas industry can share their perspectives on Central Asia. Pakistan has a deep water port on the Arabian Sea -- and connects via Afghanistan to the Central Asian oil fields. In some policy planning circles we may see more of "the ends justifies the means" types of thinking which characterized past US administrations. Additionally, Pakistan is a nuclear power which is of course a wildcard . . . Shall we bet? The U.S. is "all-in" on pocket 2s.