utterlycorrelated

There Will Be a, "Solidarity Tax", in the US

2012-01-26T16:15:00.000-08:00

Please don't ask me to explain why: you can not leave your house without adducing evidence for the obscene wealth-transfer from the working classes to the capital market classes.

There will be a one-time, "Solidarity Tax", or if not that, then Obama will get his Rich Surtax, as he mentioned in his address this past week.

Fools will fight it, but it's inevitable. If you have net worth over $10m or income over $1m, considering making friends in high places and a foundation or corporation to use as your, "lifestyle vehicle".

The PLA Put

2012-01-26T07:05:00.001-08:00

You guys might wonder why Obama is shifting US military focus from Europe & Middle East to Asia...

Here's why:

China is run by the PLA. If China's economy meaningfully slows down to the point where social unrest could compromise the authority of the regime, the PLA junta will provoke a war in Asia and blackmail its neighbors, and the world, for concessions that can help the PLA junta cling on to power.

That's all there is to it. It really is that simple. Hence, the US' move into Asia: it's a sign of Chinese weakness, not strength!

Resurrection

2012-01-11T05:46:00.000-08:00

I am back.

Let's revisit the gold & silver markets, shall we?

Firstly, let's agree that the precious metal markets are driven ENTIRELY by SPECULATIVE CAPITAL FLOWS. Gold & silver have such trivial industrial demands relative to their speculative demand (at these price levels) that their consideration proves specious (apropos adjective, no?), at best.

Hence, we can examine the components of this speculative demand to determine possible future price movements, as I assert that industrial demand doesn't matter at these prices. For those who claim Jewelry provides a source of demand, I remind them that the mark-up on non-crap Jewelry (i.e. stuff traders buy for their mistresses at Bergdorf Goodman, not the nightmare that is the post-classical Arab/South Asian aesthetic aborted into golden form you buy from some sweaty bastard at a slight premium to spot) ranges from 500-2000% of COGS. As one major Jewelry CFO told me, "I couldn't care less about metal prices."

If you look at a gold chart, priced in dollars AND euros, please focus on the period from the Fall of 2009 to the Summer of 2010. At the end of 2009, was there a massive liquidity squeeze? No: in fact, Treasuries were range-bound until the Greek situation became critical towards the end of April, 2010.

Gold had its HUGE move UP, in fact, cooincident with the first major bump-up in Greek yields, which occurred around the end of December 2009/early January 2010. Then, both Greek yields and gold receded, only for both to surge even higher in June 2010. HOWEVER, if you look at the RELATIVE PERFORMANCE, gold in EUROS handily outperformed gold in DOLLARS. Please look at a chart comparing gold in EUROS to gold in DOLLARS from this period, and you can see for yourself.

What does this tell us? It tells us that the SOVEREIGN UNCERTAINTY OF THE EU is the catalyst for GOLD UPSIDE. I interpret this, for myself, as meaning that unless the EU totally collapses, it would take a US sovereign-debt crisis to send gold even higher.

Well, considering Obama has already done the right thing with the military (cutting it, meaningfully) and hopefully will do the right thing with entitlements, I see long odds of the US having a similar fiscal crisis.

The black-swan for gold upside remains a big war in the Middle East, which, of course, we covered here about a year ago.

What has gold become, then? It's become the anti-Euro trade, it seems, especially as it hangs tough these days despite a weakening EUR/USD.

My personal feeling is that we're due for a huge spike in gold in 2012. Why? Well, firstly, Spanish banks have yet to reveal the extent of their distress, and they are surely quite distressed! The problem with Spanish banks, though, is that they are a PRIVATE credit event that has SOVEREIGN implications for Spain: this is very complicated, politically, to compass, and so resolving this ought to prove quite difficult. How do you get the ECB and EU to bail-out Spanish BANKS, PRIVATE debtors? It's quite one thing to bail-out Italian STATE: that's a relatively palatable medicine. However, to forestall a deflationary crisis in Spain due to SPECULATION in real estate USING EU & ECB funds... politically, that could be suicidal for many EU politicians and impossible for the ECB to indulge given its supposed mandate for price-stability and moral-hazard control. My opinion: the EU & ECB give in, but not before a proper auto-da-fe and perhaps a few burning of cities and infidels!

In conclusion, gold has upside so long as the EU remains in doubt. If the EU has its "Gettysburg" moment (this is a reference to Greenback convertibility to gold during civil war peaking at Gettysburg) in 2012, then even another Gulf war would only provide cushioning for a sustained bear-market in gold, since the only other catalyst, a US fiscal crisis, remains quite far off.

My personal capitulation

2011-09-22T14:23:00.000-07:00

I am so frustrated with myself: I really fucked up the European situation. I am not fit to have an opinion, much less a blog.

Brezinski update

2011-09-22T09:25:00.001-07:00

Watch:

http://www.salem-news.com/articles/september212011/brezinski-usa-dm.php

Africa, food capacity, and infrastructure

2011-09-15T06:30:00.001-07:00

I've spent a decent amount of time in Central and Southern Africa. I've flown, for hours, in a heli over virgin forest.

You know what that forest is?

It's the new Grain Belt of the world.

The G20 just put out a communique stating their intention to invest in INFRASTRUCTURE to enable the DEVELOPMENT of AGRICULTURE in Africa.

Boy, to own a cement factory in DRC... profitable!

China update and Euro stuff

2011-09-09T08:40:00.000-07:00

China is planning to issue three muni bonds, soon, and by next year, shift from a centralized debt-issuance model to a localized one. The question one must ask himself is, "Why did China wait so long to do this?" The answer is obvious: the Chinese had huge losses and problems to clean-up in the various major muni districts, and so it made no sense to blow yourself up in some sort of "rigged" muni auction.

Recall China had a quiet "mini-TARP" a few months ago to clean up some muni issues, and now they have confidence in opening the muni's books to the public (whatever that means) and putting the munis at risk, rather using Beijing's credit.

This is big news, though, especially if the muni auctions go well: it means the munis can become more independent financially, and hence, politically. This also might reflect the realization that central-planning has run its course in China. Central planning for FX, capital reserves, etc will remain, but the amount of fraud and losses Beijing suffered due to abuse of Chinese PIIGS on Beijing's dime has taught them a lesson, it seems.

I have no evidence to really support my thesis, but it just, "makes sense."

Now, with the muni situation "stabilized", the Chinese can FINALLY revalue their RMB PROPERLY. Before, with the muni situation volatile and potentially crippling w.r.t Chinese banks, a strong reval could have risked a massive crash, as the deflationary shock wiped out banks saturated with shitty Chinese infrastructure loans. With a nice "muni" buffer, the Chinese can more confidently address the inflation issue. Also, new muni issues will have terms several years out, buying key time for the big, bloated GosBanks of China.

Now, let's address Europe, today:

Stark resigned: great! He was another Weber: an asinine, archaic hard-money guy who helped make this entire EU catastrophe far, far worse than it needed to be. If we had guys like Stark and Weber running the Fed, the US would have resorted to martial law by 2010: I kid you not.

The bad news, of course, is that Greece is kaput. Duh. The good news is that the ensuing PANIC and DESTRUCTION caused by a soft Greek default SHOULD compel Italy and Spain to get their collective shit together, and ideally, compel the Euro-skeptics to converge in Brussels and pray to the image of van Rompuy. Merkel did say, today, that the EU must converge and unite MORE in order to stave off disaster, right?

While waiting for the end of September...

2011-08-28T14:47:00.000-07:00

I believe that we will witness some very interesting developments at the end of September, and the markets have been put on hold, by the powers to be, at least until the middle of September, when some policy changes will be made public to the masses.

The bathtub announcement, (Warren Bufet announcing his interest of buying into BAC in a relative repeat of the GS deal in 2008) seem to be a clear indication in that sense. It is very easy to be a visionary investor when you have a very good insight into the moral hazard aggregate which is Gov+Wall Street. Knowing in advance (or being to be able to accurately predict) what the Fed will do helps a lot your bottom line.

In other news, Michael Pettis has just wrote another interesting entry, making his predictions for the next decade:

We are so caught up in noise and market volatility – as the market swings first in one direction and then, as regulators react, in the other direction – that it is easy to lose sight of the bigger picture.
My basic sense is that we are at the end of one of the six or so major globalization cycles that have occurred in the past two centuries. If I am right, this means that there still is a pretty significant set of major adjustments globally that have to take place before we will have reversed the most important of the many global debt and payments imbalances that have been created during the last two decades. These will be driven overall by a contraction in global liquidity, a sharply rising risk premium, substantial deleveraging, and a sharp contraction in international trade and capital imbalances.

I happen to agree with that view and the handful of people who are reading this blog are already familiar with the coming deglobalization stage. I hoped Michael Pettis was going to talk about the global productivity readjustment and comment a little bit more on the causes of future rises in risk premium levels, but his line of thinking is quite obvious.

On an unrelated note I have had recently a lunch with an acquaintance who is an economic anthropologist at heart and the discussion went on the slope of trying to predict the potential of social unrest in America, resulting in some sort of Arab Spring equivalent. I don't believe there is a strong possibility to face a massive wave of social unrest in US, but there is always a good idea to check with experts the facts used as premises for your investment strategies.

I must say I have received a very enlightening lecture on the human nature and learned about a lot of things I was completely clueless before. While my acquaintance agreed that any situation of excessive debt has to be solved by war (acquisition by violent means of enough wealth to pay the debt), revolution (default imposed on the creditors by violent means, or jubilee (partial default agreed by creditors in order to conserve their future dominant position) he made some interesting observation pointing to some caveats in my mantra.

Human beings are a curious beast having evolved from an ancestor who was a pack oportunistic predator and pack scavenger. The social behavior of baboon troops, clubs of vultures or hyena packs offers some great insights in the social behavior of human beings.

We are trapped in a perpetual dynamic equilibrium between the benefits of belonging to a group-pack and the natural tendency to raise in the pack hierarchy and take advantage of the members of our own pack who are on an inferior position to us. In short we feel an instinctual need to belong to a group (family, clan, tribe, party, nation, etc) while at the same time we are ready to screw the members of our own group to the maximum extent as long as it doesn't have negative consequences on our own standing in the hierarchy.

As a result of this paradigm, the masses of enraged proles can be tricked into forgetting about rebellion/revolutions by several simple means.

A) Panem et Circenses. Bread and circuses. The Roman elites brought this method to the level of an art. It's fairly simple: offer a minimum level of subsistence (bread) and offer a distraction by association. The roots of modern social entitlements packages as well as mass entertainment should be obvious. These days it should be called "Watch TV in the trailer park and collect food stamps and unemployment benefits.

B) Create a false enemy. Hitler did that with the jews just before the start of WWII. The majority of Germans never stop to think that the power elites in the pre war Germany were the industrial capitalists who were German not Jews.

C) Rally against an external enemy. The instinct of defending yourself by defending your own pack structure trumps the instinct to rebel against your own hierarchy. I think the most recent example of this stunt was pulled off by GWB.

D) Invoke a catastrophic act of God. The terrible situation of the majority is blamed on nature or things which are not under the control of any human being. I would put in this category the Global Warming scam.

E) The Byzantine Method. This is a little bit more complicated. When the members at the bottom of a hierarchy rebel they start to fight against the members at the top of the hierarchy. The public anger needs a public immage to focuss on (like Mubarak in Egypt). If you leave the top of the hyerarchy without a figurehead to be blamed for fleecing of the majority, a rebellion is delayed/repressed by means of confusion.

What is happening in US with the bypartizan alternation of power is a clear example. Democrats are replaced at the top by Republicans, but nothing changes while the masses hope in vain that their vote counts and can bring some change.

The EU is another example closer to the Bysantine model since they have created a faces burocracy populated by expendable nobodies like Rumpoy. In case there is anger in the masses they will replace a Rumpoy with another Rumpoy and the show will go on.

F) False hope. Masses can be sold dreams, and accept to have a little patience if they can be convinced that next month/year things will improve.

I find it very ironical that Obama, who I believe is a sellout to Wall Street went to the White House on a ticket of Change and Hope.

That was a good one...

A good read and a subtle point

2011-08-17T17:49:00.000-07:00

First I would urge all readers of this blog to go and read the latest blog entry put by Michael Pettis, in which he deals with the myth of the catastrophic scenario of China stopping their aquisition of Treasury paper. This is nothing new, but very well presented in a simple manner. Here is the link:

Foreign capital, go home!

I would like also to make a point about this whole idea of introducing an EU wide Tobin-style tax. There are two very important issues we are dealing with here:

First a Tobin-style tax has important effects on the flows of capital not only within a monetary entity but also on the inflows and outflows and as a result on the Fx markets. The adoption of such an EU wide tax would amount to trade protectionism by monetary means. We have to see the exact stipulations concerning this tax to be able to understand the strength of the new protectionist barriers of Europe.

In a way, this idea would make sense, because when fiscal union will be achieved, EU needs protection from predatory protectionism and aggressive internal leverage if there are any expectation to see such an imperfect union survive. The devil is in the details.

The second observation I want to make is that in a lose federal model, the Euro space does not need to have a full fiscal union in order to have the eurobond train started.

As I've said before, right now we don't have one EURO but a fiat currency Bretton Woods style agreement in which a bunch of individual fiat currencies of Europe are given all the same name, and by an artificial convention and monetary intervention those Euro currency (all having the same name in a very misleading way) are kept at a rigid conversion rate of 1:1

However any currency needs to be issued under the authority of a government (or government type structure) and has to have granted status for all debt clearing and especially taxation debt clearing. This issue is very important because any medium of exchange in order to become a true currency has to represent an instrument for payment of taxes. Without a tax denominated specifically in a currency we cannot talk about a real currency.

As a result this EU Tobin-style tax is a stepping stone towards a fiscal union realized in stealth. The whole trick is to have one single EU wide tax (financial transactions, carbon credits, or whatever can be sold to the masses and accepted as a general EU tax) than reference this tax and collect the fiscal inflows into a supranational entity or institution that can issue debt or insure the risk of individual national debt denominated in EUR.

If they do this and at the same time Germany and France get medieval on the PIIGS to enforce the fiscal and budget deficit discipline, there will be a fiscal union and European Union will become a true supranational empire.

Repeat this tax does not have to go directly to an institution which issued debt (like the ECB). It may be as subtle as an entity which insures debt on sovereign bond risk, like some sort of European super FDIC. It will still do the trick.

By the time the europroles are going to figure out that the idea to have a small tax to make the problem of the PIIGS go away has resulted into a new form of slavery it will be too late.

If the Euro banksters succeed in pulling this scam out in plain view,... well, what can I say ? Europeans deserve their faith, because stupidity and ignorance are always costly.

Do we have a debt problem?

2011-08-16T17:48:00.000-07:00

We hear everywhere that there is a debt problem. This seems to be a general mantra. We are talking here about credit card debt, household debt, muni debt, sovereign debt and so on. Every type of debt seem to be a component of some sort of a crisis.

When talking about too much debt, there is one thing that is usually missed: when there is a debtor, somebody had to lend that money to the person or entity in debt. I mean there is also a creditor which is a person or an entity which had an excess of wealth stored in a form of currency, which was lent (usually with interest) to a person or a group of persons which needed that wealth.

When any debt becomes a problem (that occurs only when there is a possibility of default), it means that the bondholders/creditors are at risk of losing part of their wealth (or at least the benefits of lending that accumulated wealth).

Actually the problem is one of wealth unbalance in a monetary system, nothing more.

Does US gov has a debt problem? The answer to that question depends on the answer of another one: who has a problem with the size of the US gov debt?

I believe the crux of the issue is the mechanism which has allowed the creditors to accumulate a huge level of wealth, which has been parked in treasuries (to create a leverage basis for the financial system) , and that section of excess wealth has become US gov debt. I believe it is obvious that there are two simple instruments to bring back the system to a more fiscal responsibility state: cutting spending and increasing revenues.

The issue of cutting spending is so obvious that only the morons in the Clowngress can't see a solution to it. The taxpayers don't have a say on how most of their tax money is spend from municipal, state and up to federal government levels. If I remember correctly at the time of the American Revolution, a few people within the power elite in London, were wasting and spending the money of the colonists on wars and other things which increased the wealth of the imperial elite. There was that thing with "No taxation without representation!" This is actually an issue of fiscal democracy. It can be solved with a referendum or simply by opinion polls and that would leave off the hook all the politicians (although may hit the profits of those who are paying for the campaigns of some of the politicians).

Of course, I don't even try to pretend to say that fiscal democracy works or a referendum would result in the best formula of cutting spending. One can think at the result of disputes related to cutting spending in his or hers household to understand that all such solutions are imperfect by definition.

The issue of increasing tax revenues is a tricky one. The wealth allocation imbalance is the result of a fiscal system in which a few are benefiting from a favourable fiscal and/or business environment which allow them to accumulate high levels of wealth... It's the thing with the rich becoming richer and the poor becoming poorer... Nothing new here.

The problem is that if tax revenue are to be increased, that cannot be done by extracting more wealth from the vast majority which is poor and is already in debt up to their eyeballs. This is a reality.

If Joe Six Pack, who is already at the verge of bankruptcy and with the value of his house at some underwater level, is forced by gov to pay higher taxes, this will mean bankruptcy for sure in his case. His personal default will result in some loss (few steps down the financial lending chain) for those who have lent him the money to buy his house (or car, or to drink a lot of beer charged on a credit card).

So there are two ways to increase tax revenues in such a situation of unsustainable wealth imbalance or disparity:
A) one option is to tax the rich directly, which is criticized as socialism, by some sort of progressive tax
B) the other option is to tax the rich indirectly, which can be done by taxing more the poor, create a wave of individual debt defaults of the poor, which will be reflected as losses on the wealth which was accumulated and lent to those poor.

The problem with option B is that it is a messy form of taxation of the rich, which can hit in a disproportionate and unpredictable way some of the rich who have huge accumulated excess wealth.

Some of the very rich, which have realized very well that the system is now unsustainable and want to protect their long term wealth accumulation drive, are obviously more inclined to adopt option A. A proportional tax on excess wealth offers, at least, the guarantee that once the system recovers, future wealth accumulation can resume as before. No nasty surprises here. Even the rich have an obsession with income security, although they don't have jobs.

That is why we see these days quite a few very rich individuals, who seem to adopt socialist stances chanting the unthinkable mantra "Let's tax the rich!"

Is Warren Buffet a socialist or an idiot? Definitely not. One may say he is a relatively smart individual and investor and at his own game he is pretty good (plus he plays only on the field on which he is good and he understands, but this is another issue).

So why is Warren Buffet calling for taxes on the rich? The answer is pretty simple: he plays for safety and doesn't want to risk being left without a chair if a massive wave of individual defaults start and the music of happy lending time suddenly stops. Lower profits for Berkshire are way better than a collapse of Berkshire.

I happen to believe that Obama is a complete sell-out to the big banks and Wall Street. We see these days Obama pushing the same mantra of taxing the rich. Unlike Buffet, Obama wants to start pushing higher taxes even on thousandiers, not only on millionaires.

These days people are accusing Obama of being a socialist. I believe these accusers are wrong, since IMHO he is actually representing the interests of the big old money. I believe he is just dispatching to the masses what he is prompted to say by those who put him in power. Those individuals (as in Buffet's case) cannot be suspected of socialist ideas or any intention of empowering the poor.

I believe this message is not socialist, but reflects the drive for safety and for securing a future dominant position, exactly by those who have gamed the system in every possible way and took full advantage of their long time privileged position, in order to accumulate excessive and unsustainable levels of wealth, at the expense of the majority.

I don't deny there is hypocrisy in this call (embraced by both Obama and Buffet and quite a few others) to tax more the rich (or anybody with an income above the median/average income). What I am saying is that many commentators don't understand the true nature of this hypocrisy. The top of the elite wants to be sure it will remain the top of the elite in the foreseeable future. It is order versus chaos. The elites hate chaos, I mean real chaos, not the false chaos and turbulence which they actually control to generate problem-reaction-solution scams.

An orderly consolidation of future dominant positions is all that matters now and the rest is just a circus and cheap demagogy for the masses. Wasn't this process of securing of future dominant position the essence of FDR's New Deal? Was the New Deal socialist? The answer to that question is provided looking at our current situation... To me it doesn't look like socialism...

Watching the grass grow...

2011-08-10T19:52:00.000-07:00

The predictable chain of events have been set in motion. Stock markets here and elsewhere are taking a dive, T yields are being judiciously floored by a global deleveraging event, the debt ceiling show was the predictable circus (which will be restarted soon when the posturing in the special spending cuts committee will be reignited).

There is not much left to blog about...

In the next stage we are supposed to see the deleveraging wave hitting EU banks, in such a way that we may start to believe that BAC and C are solid financial institutions, (only in relative terms, of course). I wouldn't be surprised to see the deleveraging wave starting to hit hard EU banks starting from this weekend.

Gold is supposed to pick up and silver to be primed for the big shorting opportunity of the year, then, later, we should see money starting to flow in the equity market producing an amazing buoyancy, while the currency of advanced economies (the coalition of the zirping) will devalue together in a coordinated move on the battle front of the new currency war.

The big unknown is what exactly will be the timing of this succession of events,... It is hazardous to make any prediction because without a good insider source it is very difficult to predict the moves of the Fed and other major central banks.

In this strange time of uncertainty the power rests in the hands of those who are the best at manipulating the perception or risk (and here the Fed is the king of the global monetary hill). These are the ones able to extend credit with impunity while everybody else is starving for liquidity. In the end it's a game of perception.

The big unknown remains China, with her total lack of transparency. It is impossible to predict (I believe this is valid even for the insiders) what is going to happen next. We may have a major fracture developing overnight on the corridors of power in Beijing. A lot of well informed Chinese commentators have fallen silent recently and this looks to me like the calm before the storm. Let's hope that something like this won't happen because the consequences of such fracture can be disastrous for the whole world.

If the Chinese leadership is extremely scared of losing the grip on power, I think they will continue to play a desperate game of kicking the can down the road for just another week or a month. They will take advantage of the EU crisis and they will proclaim they are going to support Europe by a massive buy of EU garbage bonds. They may show their nervousness by ordering a renewed sabre rattling from N Korea and we can see again military tensions rattling markets in SK and Japan.

The Chinese support of the Euro construct zombie will be highly appreciated by ECB which still has its hands tied with respect to bailing out EU banks.

We can also have a major spike in the gold price (which will be a clear sign things got out of control) and we will see a major raise in T yields, then USD taking a sharp dive on Fx market(with respect to the currencies of the coalition of the zirping) while the Yuan will soar out of control. That is highly unlikely, because I believe the Fed has its solid hedges against such a sudden move.

Therefore, for the next weeks I will not do much besides watching the gold price, the T yields, the gold leasing rates (hopefully going well into negative territory) and of course the USD/CNY rates.

Of course I will also have a good chuckle from time to time reading economic commentaries in which various individuals will struggle to understand what is happening.

What puzzles me, for example, is why on Zerohedge, there is such puzzlement about the latest 10yr auction.

There were many odd things about today's $24 billion 10 Year bond auction, which just closed at an all time low yield of 2.14% (down from 2.92% in July), the pricing being just one of them.

I really don't see anything odd about today's bond auction...

By the way, there is a little paper on Bernanke's Interest Rate Conundrum. It is not an exceptional paper ( a little too much faith in the God of regression for my taste), but it has an interesting section where one can read between the lines how Bernanke has fudged indicators (by changing algorithm constants) , which allowed him to set in motion the housing bubble. IMHO the paper is worth reading if only for that part.

A few thoughts on Yuan revaluation and global financial architecture

2011-08-07T19:23:00.000-07:00

Michael Pettis had recently a good blog entry describing the current decisional paralysis of Chinese leadership in dealing with the dysfunctional overdevelopment resulting from the mercantilist model: No hardlanding, but no solution

He believes China can continue on it's current path until 2013, when a major readjustment becomes inevitable. I believe that assesment is correct, if no major crisis occurs and the Fed and ECB do not engage in obscene and unreasonable printing (which probably they are just about to start).

The situation is getting critical by the day, and last Thursday, Yu Yongding, former member of the monetary policy committee of PBoC, voiced in FT a clear warning about pursuing the current course. For those who are familiar with the ways of taking political decisions at the top of Chinese Communist Party, it is obvious that there is already a fraction in PB0C and the Party who has wet their pants thinking at the consequences of a monetary hardlanding. The end of the opinion published in FT sounds as if mister Yongding has been for years an avid reader of UC :

China has run a current account surplus and a capital account surplus almost uninterruptedly for more than two decades. Inevitably this has led to an accumulation of foreign reserves. It is clear, however, that running these surpluses persistently is not in China’s best interests. A developing country, with per capita income ranking below the 100th in the world, lending to the world’s richest country for decades is not reasonable. Even worse is the fact that [...] China essentially lends money it borrowed at a high cost back to its creditors, by buying US Treasuries, rather than importing goods and services.
[...]
One further factor is that any losses in the financial assets held by China will not be realised until their holders decide to cash out. If the US government continues to pay back its public debt, and China continues to pack its savings into US securities, this game may continue for a very long time. However, the situation is ultimately unsustainable. The longer it continues, the more violent and destructive the final adjustment will be.

If there is any lesson China can draw from the US debt ceiling crisis, it is that it must stop policies that result in further accumulation of foreign exchange reserves. Given that many large developed countries are simply printing money [...] China must realise that it can no longer invest in the paper assets of the developed world. The People’s Bank of China must stop buying US dollars and allow the renminbi exchange rate to be decided by market forces as soon as possible. China should have done so a long time ago. There should be no more hesitating and dithering. To float the renminbi is not costless. However, its benefits for the Chinese economy will vastly offset those costs, while being favourable to the global economy as well.

Now, I would like to explain another more obscure detail of the current global financial distortions, which concerns the regime of currency manipulation practised by most of EM.

For any currency manipulation there is what we can call a narrow window of profitability. The theory is rather complicated, but in the essence the basics are simple. Assuming for the mercantilist currency a value M0 of Fx equilibrium with respect to the aggregate commodity trade required for that economy we can define:
-a value M1 (M1C0
Mx c [M1,M2]

Obviously Mx/Cx represents the foreign exchange ratio of the two currencies.

In practice there is always more than one mercantilist country praying on more than one consumer (deficit) economy and we are dealing now with a cumulative effect. Assuming that today we have a single consumer (deficit) golbal currency, since the central banks of G7 act in strict coordination, this consumer currency is lifted with respect to all commodities by the sum of al mercantilist effects produced by all mercantilist countries ranging from China to Lesotho.

I won't put here the math, but basically the consumer currencies are lifted by each mercantilist currency with a share roughly corresponding to the ratio between the GDP of each mercantilist country and the GDP of the G7 (plus minor friends).

If the G7 start to print, the mercantilist countries are pushed out of their sweet spot with respect to the Fx ratios since the value of the consumer currencies with respect to commodities decreases. If the mercantilist countries tried to maintain constant the Fx rate, then they have devalue below M2 and any they have to resort simply to exporting at a loss.

If the mercantilist countries try to maintain themselves at M2 (basically at profit margin) while the consumer countries continue to print, then they have to allow the Fx rates slide slowly while looking at the losses which keep accumulating in the system at an alarming pace. One may look at the USD/CNY rate for the past 5 years to see this trend.

Also what is not very clear understood is that if all the mercantilist countries act as a currency manipulation aggregate and all are keeping their currencies close to M2 values, it is enough to have just one of them loosing control over her currency and in that moment the debt currency is devalued just enough to get them all out of the profitability interval. Of course if Lesotho or Vietnam lose control over their currency the effect is negligible, but if that happens in Brazil, for example, the whole edifice collapses and China won't be able to maintain it's currency manipulation system. It will be a domino effect.

The last observation is with respect to commodities. Any mercantilist currency manipulation scheme results in an artificial increase in the industrial and productive activity, being it for accelerated economic development or for vendor financed trade. As a result the system is pushed into higher levels of consumption of commodities.

When such system collapses, there are are two opposite effects which determine the pricing of commodities with respect to the debt/consumer currency. One is that the debt consumer currency tends to return to it's equilibrium value with respect to all commodities, which would lead to higher prices of commodities in that currency.

The opposite effect is generated by the fact that suddenly there is an overproduction crisis and there is less demand at least for certain commodities. What happened to the price of commodities during the Great Depression is a clear illustration that a a global industrial readjustment can trump the devaluation of consumer/debt currencies if we think at the evolution of the prices of various commodities in a debt currency of the time such as the British Pound.

The Great Risk Game and selective deleverage

2011-08-06T11:16:00.000-07:00

The innevitable has happened and US was hit with a gentle credit rating downgrade. I say gentle because the new AA+ status conferred by S&P is still very optimistic. This downgrade should not be too much of a deal, unless the Fed plans to play a ruthless risk game on the global financial markets.

First let's see what this downgrade means for US economy... IMHO it doesn't amount to anything significant. With respect to US bank risk and short term financing (money markets funds and financial paper), SEC is ruling risk assessment by regulation: UST paper has been declared with zero risk.

Foreign central banks accumulate UST paper not as a form of investment or savings but as a residual effect of their Fx intervention. If foreign central banks want to keep their currencies artificially depressed with respect to USD then they have to accumulate US debt, through blatant (like in China's case) or more discrete currency sterilization operations. Of course foreign central banks can choose to convert their USD residual accumulation in some other instrument such as corporate bonds denominated in USD, or state and muni debt. This of course is a joke since UST paper still has the best credit ratings of all USD denominated debt instruments.

I believe the ones which are going to be hit by this downgrade are the global SWF and private fixed income entities. Also foreign financial entities holding collateral in UST paper are going to suffer. The next question is where to run for safety?

One of the options would be PM's but the gold and silver markets are so heavily manipulated by central banks and a few vampire squids that no sane financial manager can think of a major portfolio allocation in gold and silver.

The Eurozone is ailing and with the looming threat of having Italy going the Greek way, the EU stabilization fund definitely cannot cope with such a crisis. It would be funny to see a major move in Tsy paper with an sudden and artificial steepening of the yield curve, with T-bills and even 2-yr flooring or going negative while the 20 and 30 yr exploding. This would be a natural move since a dive of USD on Fx markets is inevitable. One may think that the Fed may not be interested in setting up a new Operation Twist if they can keep the short term yields close to zero.

China has started the usual posturing show, saying that the "good old days of borrowing are over" for US. I believe this statement is correct, but the funny part is that those "good old days" of borrowing for USA were also the "good old days" for export and over-investment based development in China. If the Chinese government wants to see USA embarked on a sound fiscal regime all what they have to do is to set the yuan free to raise to its true potential. :)

In a way the strange coincidence between the US downgrade and the Euro crisis, creates an unique opportunity to have a coordinated devaluation of the USD-EUR construct, which will reverse the global capital flows, creating an influx of cheap capital into US (and partially EU economies). Naturally, smaller partners like the Swiss will have to resort to brutal Fx interventions (like the Swiss have already done it) in order to prevent their currencies from soaring, and they can do that very simple by currency sterilizations performed directly through the swap lines offered generously by the Fed.

With the "good old days of borrowing" being over, we may see a return of the "good old days" of overseas capital influxes and cheap domestic credit returning to US. If the Fed will be able to keep the housing situation under relative control, all the toxic mortgage paper from the 2008 crisis will be brought from underwater levels at least to the floating line. Meanwhile asset bubbles will collapse all over Asia and in so called emerging markets.

The sign that this global reversal in capital flows has began to take place will be a sudden appreciation of the yuan right after a sudden drop in the gold prices (silver prices may experience a dive too but that is not a given) . If that happens we will know that Warren Buffet has been right once again with his strange bet on the domestic US economy.

However before getting to that point we have to go through the birth pain of the new global regime which will be quite similar to the global economic system before 1996. We will see the US stock markets taking a hit, to more reasonable P/E ratios, PM soaring and all that jazz.

As Rahm Emanuel has said one should never let a good crisis go to waste.

A few thoughts before a hot weekend

2011-07-29T09:12:00.000-07:00

One of my acquaintances, who seems to be very informed in matters pertaining to the Clowngress, told me this morning that a last minute deal will be reached with regard to the debt ceiling stand-off and there are few variants of compromise.

The big problem is that all politicians involved are craving for the media attention generated by this false crisis (it saves some serious campaign money) and the most convenient solution is to do something to extend the life of the circus, since this whole show is very important in deciding the outcome of the next presidential elections. The whole subject is simply to juicy to be ended so soon. Therefore, as I've suspected, a partial extension of the debt ceiling will be approved, in order to allow the false debate to continue. However, I have been told that some of the politicians involved are so pathetic, that a last minute posturing snag is possible, which would trigger a technical default. Even if that happens, Timmy and Ben do have financing contingency plans and US gov should have no problem covering Tsy paper till the end of September.

Probably I won't be able to post any new entry over this weekend and I just want to make a weekend reading recommendation and a couple of points.

Marc Flandreau has a very good piece in VoxEu : From lender of last resort to global currency? Sterling lessons for the US dollar. This is actually a very enlightening backgrounder putting the 2008 crisis, as well as the current debt ceiling circus, in a very interesting light. There is a longer version of this paper about the Overend-Gurney panic of 1866 and, for those who are fascinated by monetary history, this longer version is a must read. Although just by inference, not explicit statements, the paper offers some interesting insights on the birth of money markets, Too Big To Fail investment bank equivalents and other interesting concepts, including the triggering of deflationary episodes by drying up the financial paper fountain. Today's dark pools are nothing than the old mercantile discount houses made less transparent and more exclusive. I highly recommend reading the long version of the paper, if you have time, since it offers a wealth of historical details having interesting resonances with the present day.

I had yesterday a chat with a friend of mine, who made the point that, under Basel II, government debt which is at least AA is granted zero risk on the balance sheet of the banks and, in addition of this obscure stipulation, special provisions can be made for lowering the threshold of zero risk status for domestic government debt issued in the local currency... I think this says it all...T paper counts as domestic debt since it is issued in the local currency... Therefore, there is already a fudged antidote, which is conforming to Basel II, making Tsy paper collateral impervious to a ratings downgrade. The rating houses can eat their downgrade reports. I mean the game of lies and pretending, with respect to the risk of collateral can continue unimpeded till the end of days. The same applies for money markets: under SEC’s Rule 2a-7, government securities are deemed to be first tier securities so long as they are eligible for purchase. No comments needed... If US Tsy paper is downgraded what else will retain first tier status? Money markets will be forced by SEC to believe in rating by regulations and dump more money in treasuries.

Another point I want to make is about the IOER (interest paid on excess reserves) paid by the Fed to the depositary institutions. Currently we are in a very strange situation, which can be described as a monetary singularity point, becasue IOER and the Fed discount window are both equal and close to zero (more precisely they are at 0.25%). In this singularity point the Fed can pump trillions into TBTF banks, which in turn the banks will deposit as excess reserves with the Fed. This is a false expansion of the monetary base, which costs nothing to maintain (since the two rates are equal and close to zero), is creating the illusion of liquidity and capital level adequacy for a few select big banks. The trick is to hide the risk on the balance sheet of the Fed, since Ben is accepting a lot of garbage securities as solid collateral at nearly par level, as I've said before more than a few times.

However, reading Flandreau's paper and seeing the reaction of the bond market to the spectre of default reminded me of a comment made a few years back by Ben Steil, about using IOER as an incentive to foreign central banks to deposit their reserves with the Fed. Considering that in the global financial system Tsy paper is the instrument of holding sovereign and capital reserves, due to their rating, liquidity and because Tsy paper is a from of interest bearing global currency, the Fed now has the ability to replace UST instruments with excess reserves in FRN's deposited with the Fed.

Therefore, instead of having China hoarding dollars in treasuries, the hoarding can take place directly as excess reserves of PBoC with the Fed. This thought may require a long stretch of imagination, but even more surprising things have happened during the last five years.

With respect to liquidity, excess reserves which can be withdrawn on demand would offer a better alternative to UST, which have to go through the bond markets. Storing CB reserves as excess reserves with the Fed has its advantages, plus the uncertainty generated by the evolution of the yield curve is removed.

If Tsy paper takes a hit of confidence simultaneously with other sovereign debt instruments used as global currency (see what is happening now in EU), we may face a general downgrade of sovereign debt bonds. I mean a downgrade of all sovereign debt. As a result, the flight for safety will be from UST's directly into FRN's deposited as excess reserves with the Fed and desperate foreign players will be happy to take a haircut and accept a stealth partial default produced by a diving USD on Fx markets. For that to happen the Fed would need a deflationary regime in Tsy paper, with yields flooring, (which is not hard to imagine considering the Euro crisis), while creating a mild inflationary regime in the domestic economy, favouring a return to cash reserves, which can offer similar yields to treasuries, once the reserves are parked with the Fed (Hello, QE 3! plus capital returning for safety from overseas).
Basically, if the Tsy paper yields are approaching zero (or even go briefly negative) and the curve is severely flattened, while the IOER is raised and becoming competitive, then there is nothing that can stand in the way of this transfer, except the political grand standing of foreign leaders protesting the loss of their monetary sovereignty. Looking at the short term yields for Tsy paper I don't think that Fed needs to raise the IOER too much since excess reserves may be considered almost like demand deposits.

Of course, while the currency reserves of foreign central banks begin to move on the balance sheet of the Fed, neither IOER nor the discount window will have to remain nailed at close to zero levels and there is nothing that prevents the Fed from keeping for ever the discount window at similar levels to IOER. :)

All what is needed is to have a clear spread between the discount window rates offered to a few select TBTF banks and funds, while the rest of the suckers will have to rely on interbank lending, which will be above IOER. By controlling the spread between LIBOR and IOER the Fed will control global interbank lending and by controlling the spread between the discount window rates (probably they will create some new special discount rate for minion banks) the Fed will be able to control the amount of liquidity in the global system. Moreover, for the expansion or contraction of this global, FRN-based liquidity, the Fed will not be strictly tied to normal inflationary or deflationary moves, exactly as it does now domestically with the dollar by fudging the BASE with the fake excess reserves of the TBTF minions.

Just to make things better, for the Fed, imagine a regime where IOER is almost as high as LIBOR, while only a few select bank can launder their garbage securities with the Fed at rates almost equal to IOER. The Fed will be able to choke the global interbank lending, while feeding with zero cost liquidity only a few select number of banks and at the same time laundering all risk from the balance sheet of its minions.

In such a scenario, the Fed would become for the first time independent from the Treasury, in controlling the global financial system. There will be no need any more for expanding US gov debt, in order to expand its global financial influence and control. Such a new global monetary regime will make the Triffin dilemma obsolete.

The Chinese have an interesting curse: "May you live through interesting times!"

A little bit of deleveraging...

2011-07-27T17:14:00.000-07:00

According to Financial Times the Great Debt Ceiling Show has already produced its first deflationary effects... US money market funds have already started to build liquidity. That is definitely a common sense move.

Those who remember the Lehman collapse also remember the famous 666 Working Paper which showed that the deflationary move, which led to Lehman collapse has been triggered by a dive in financial paper (and only after that the Fed acutally froze a few billions in a credit line) . Those who believe that the Fed has engineered the 2008 deflationary event are point (with some good reason) to the findings of that working paper from Mineapolis Fed.

A very predictable flawed logic and dominated by fallacies tend to be outright funny. I had a good laugh reading that FT article about the money market funds building liquidity.

Here are some quotes with my highlights:

While the funds will continue to hold US Treasuries in the event of a downgrade or default, they are building up liquidity and shunning certain securities due to fears that a failure to raise the debt ceiling could trigger client redemptions.

So let me get this straight! US gov defaults on its debt but the MMF continue to keep UST paper while shunning "certain securities"?

Next there is a not so funny part:

Government-only money market funds have boosted the amount of cash available to meet redemptions within one week to 68 per cent of assets, from 48 per cent at the end of March, according to Barclays Capital. “We’ve built up liquidity with a rather meaningful amount of maturities prior to the debt ceiling,” said Robert Brown, head of Fidelity’s money market business.

If this is true than the whole thing has just become very serious. A deflationary event has already started at the bottom of the liquidity fountain, the question being just how serious the deleveraging will be. I believe it is hard to know at this stage.

Now we get the monetary surrealism part:

Even money market funds rated triple A will be able to hold securities which are not themselves triple A rated, provided that the US retains at least a single A rating.

Under more drastic default scenarios, funds could also continue to hold government debt assuming that the default is temporary: a commonly heard reference is a chastened Congress passing the Troubled Asset Relief Programme in 2008 after the stock market plummeted in reaction to its initial no vote.

They would then leave the proceeds of maturing notes uninvested. Yields on short-term money are already so low that “the cost of doing that today is almost nil”, said the head of one money market trading desk.

Wow! This is priceless, but the effect of the deflationary regime engineered by the FED for UST seems to prove it's usefulness.

And in the end a little bit of vague contact with reality:

Providing some reassurance to money market providers, however, is the lack of an alternative to US government debt in the size and volume required by clients.

“It’s a question of whether a flight to quality – when there isn’t another instrument of quality out there – invokes the same kind of panic”, said Deborah Cunningham, head of money markets for Federated Investors.

I had a smile on face reading the last part.

If the debt ceiling is approved, but the pathetic show in Washington plunges the whole world in deflation this would be a great achievement in financial markets manipulations.

So far, by using circular money creation, (by paying interest on excess reserves and lending at the same rate money back to depositor institution) the Fed has succeeded to produce a huge expansion of the monetary base without any significant inflationary effect.

Just by speculating the Debt Ceiling Show, we can have Timmy and Ben creating a global deleveraging move without an actual hard default, just by invoking the spectre of such a default. If they can do that, there is one question which comes to mind: are the vast majority of financial players (on a global scale) absolutely stupid or some sort of a members of a cult which is compelled to donate continuously part of the wealth to the top levels of the power pyramid on Wall Street? I reason that they can't be that stupid so it must be some sort of secret religion.

Monetary surrealism with the threat of default

2011-07-26T17:21:00.000-07:00

While there hilarious Debt Ceiling show continues and is methodically build up in the media, today the Treasury had a 2 year auction. Just another $35 bill was gently pushed out of the house, with a 3.14 bid to cover. PD's got about half of it still the yields are pretty good...

Are all those bidders stupid or they know something? Some of them may know something (a few Primary Dealers), but there are other factors:
-China still has to sterilize its yuan to kick the can down the road for another month, hoping the bubble bust will be delayed again
-CHF is soaring so fast and it's already pumped too high, smelling like an Fx crash
-JPY is also pumped way higher that it should be, considering the long lasting effects of the Fukushima, which hasn't yet been priced in.
-CAD is also already way too high considering that Canada's economy is dependent on the Big Brother from the South.
-Buying eurobonds, it's a really tricky venture these days, when nobody knows yet how the Greek and other looming defaults of the PIIGS will be packaged. Still, some people are desperate and the currency conglomerate, also known as the Euro, hovers above 1.45 with respect to USD
-Gold, while not exactly yet into bubble territory, is slated for a fall in case of a major dollar deflationary event. No sane individual would park his money in gold at $1600/oz when there is perceived risk to have gold trading again in, or below, the $1000/oz range, in case of a medium term global deflationary bout. If ECB and a few other central banks start selling their gold, the whole PM market will crash. Retail investors simply don't have the buying power to keep the prices at current levels, regardless of how fast USD dives and is debased. Long term the story may be different.
- Silver is picking up again, way too fast, which should make any decent size entity, interested in the safe preservation of wealth, very nervous.

Therefore, where else to go in order to achieve safety and liquidity? In life everything is relative, ergo Tsy paper is still in high demand, even if everybody realizes there is no way USA can get to balance its budget.

The big question is why we have this drive to buy US treasuries and who is actually mopping this volmes up? The mystery is not that complicated.

One set of actors are the mercantilist countries (China being the leader of the pack), who are making desperate efforts to keep their currencies down to avoid domestic bubbles and the realization of the losses, which have occurred during decades of unsustainable industrial and export based development. The pattern is fairly similar: bank liabilities in domestic currency and assets in USD (Tsy paper and some agencies). A soaring domestic currency will result in a Japan post Plaza Agreement, an order of magnitude higher. They would not have the luxury of getting away only with 20+ years of quantitative easing.

The other set of actors is the globalist financial capital, which struggles to prop up its dwindling profit margins by leveraging in derivatives. They need Tsy paper like air in order to extract half decent profits and the situation is pretty desperate in that corner too.

This hunger for treasuries is a little bit counter intuitive but let's study a simple theoretical example.

Let's say I have $2 bill parked in treasuries. The yield sucks but I can make pretty a pretty good profits if I convert this power money into a solid synthetic paper. One of the simplest option is to start an ETN contraption. That is a real money making machine.

How do I do this? First I have to find something to replicate with my synthetic paper. Preferably a commodity which seem to attract a lot of attention from retail and not so small investors. It may be anything from gold to cocoa beans. The reference is important only for the success of the initial offering of the paper after that it simply doesn't matter. Let's say in my case it's oil.

I make a pair of a long index ETN for $1 bil and a short ETN for another $1 bil, which have their NAV expressed as a index calculated on the spot market for cocoa. These indexes are calculated from a standard formula (adopted by most ETNs available on the market) which insures a volatility slippage.

For each of the members of my oil ETN, I offer as return (like most of ETN issuers) the Tsy yields plus the index. The ETN paper is freely traded on the market between investors above or below the NAV established by my indexes (which are engineered to sustain daily slippage function of the volatility of the oil price). The trick is that the ETN shares can be redeemed at NAV only in baskets of a sizeable quantity (let's say $100 million or more).

Regardless the evolution of the price of the oil price, my synthetic contraption, makes the money derived from slippage. Let's say the oil goes from $100 t0 $150 the long ETN issuance which was initially priced at $1 bil, may increase in redemption value to $1.5 bil - $slippage (which may be as high at 10%, yearly profit).

Conversely, the short ETN member of the pair decreases in NAV from $1 bil to $0.5 bil -$slippage. As a result my $2 bil synthetic commodity paper, is worth after one year $2 bil -$slippage. Considering an annual rate of slippage (Praise the Lord and Volatility!) of 10%, that means my bank has made 10% profit on my initial $2bil Tsy paper of... regardless where the oil price is going or has been gone.

Now please remember that while the ETN shares trade freely in between the investors on the market, they can be redeemed only in large basket at the NAV established by my indexes. There is a good reason for that. Let's supposed that the oil price is soaring. That set of my gullible investors who bought into the short pair of my ETN may become nervous. Who would want to hold a short ETN when the oil price is raising and there is also a slippage. As a result the short ETN will trade on the free market below the NAV established by my index. However they can't simply redeem it because this has to be done in $100 million shares.

If I see the short ETN is trading well below NAV (let's say 15% below as it happened with some oil ETN's in 2008) and the there is a major sell trend, I buy from the market a basket or more until its price goes closer to the NAV and I make another 5 to 15% profit. However, there is a trick here, because I have to cover my risk. If I buy a basket of $100 mil short ETN I remain with an extra $100 million of long ETN which is unhedged. Therefore I have to hedge on the commodities market in rolling long oil contracts.

If the price of oil still soars and I am able to buy back all the short ETNs I just made another 5-10% profits out of nothing and I remain only with the long ETN which will be completely hedged in the futures market, transforming remaining long synthetic paper into a real ETF.

This is a simplified example, because in real life the math and risk management is a little bit more complicated. However, it is pretty illustrative how one can use derivatives in order to create the liquid and solid AAA collateral as the foundation of a money fountain in order to reap a pretty good spread. Who cares that the Tsy yields are pathetic, if the spread can be as high at 5-10% with virtually zero risk? But commodities are actually a pretty small slice of derivatives. Interest and Fx swaps are bigger and juicier. All these constructs need AAA liquid collateral in order to extract obscene profits.

In a recent entry on his blog, Felix Salmon has declared himself horrified by the global increase in the volume of AAA rated bonds (good sovereign debt and for a while agencies). He has even a nice chart to show.

Curiously the hunger for AAA bonds has started right at the same time with the financial globalization process ('92-'94) when global financial leveraging required liquid AAA paper.

Felix Salmon laments:

Then look at the green line. Triple-A debt wasn’t a huge part of the bond market back in the early 90s, but for the past decade it has invariably accounted for somewhere between 50% and 60% of total global fixed income issuance. That’s possibly the most horrifying bit of all: it simply defies credulity for anybody to be asked to believe that more than half the bonds issued in any given year are essentially free of any credit risk.

Finally, look at the way that the maroon bars — structured products, basically — have given way to a scarily large purple bar at the far right of the chart. That’s sovereign debt, and it tells you all you need to know about where the next crisis is likely to come from.

I see things in a simpler way: until the the 90's there was no globalist financial leverage and no need for such high levels of AAA debt. The housing bubble in US was triggered by this hunger for AAA debt, since agencies were perceived to have the same full faith and backing of the US Gov (as good as treasuries) and offered better yields. The volume of sovereign AAA debt increased spectacularly because it was needed to prop up the profits of the global financial capital.

Needless to say nobody is so stupid to believe Tsy paper is really AAA, but there is nothing else better to replace it and if the regulatory framework and the dumb investors are happy with the idea then why not pretend? Did the traders who sold the crappy CDO paper in 2006-2007 really believed in those credit ratings? No, but they pretended to believe because it was that illusion or virtually no risk, which put the bread on the table for them. Or better said put the bonus in their bank account.

Exactly as we have experienced the housing bubble generated by cheap mortgage credit (generated by the factory of AAA agencies for the global financial market), we are experiencing the collapse of the sovereign bubble generated by cheap gov credit, which in turn was generated for the hunger of AAA fixed income. Make no mistake, neither Obama nor the Republicans have any real solution for reducing the gov deficit. There is no solution.

The crux of the heated debate is in who is going to be hit by higher taxes: the global financial capital or the rest of American (slightly less) wealthy? Who is going to get the ultimate bailout? A few big banks and funds used as conduits for the globalist capital or the rest of capital elites?

History has proved time and time again that when any society or empire arrives to its last days of life, due to the accumulation of unsustainable debt, there is a cannibalistic struggle at the top of the the wealth pyramid if a war of conquest and pillage is not an option. This is one of the leading indicators of the start of revolutions.

There is no money left to be made by fleecing the serfs and the very top of the pyramid turns towards the levels just below them. It's canis canem edit... Dog eats dog. Until the feast will not be concluded inside the global financial elite kennel, the mood will be one of carpe diem or better said carpe bonus.

I can say I see a train wreck in slow motion, but the music is still on and the breaks are not yet squealing.

Boom-bust cycle and commodities

2011-07-22T17:24:00.000-07:00

In one of the comments of the previous blog entry qadi referred to a famous quote running within investment circles at the beggining of the Asian Tigers Crisis and was attributed by some to Jacque Fresco, with his Resource Based Economic Model, by others to Albert Barlett, and by a few even to Lionel Robbins. This quote has been circulated in several forms and qadi got it as:

"monetary doesn't matter, since the world has reached the point of infinite production capacity... the only constraint, of course, being natural resources!"

I know a different version which states:

"the monetary angle becomes irrelevant as the world reaches the point of infinite rate of production capacity expansion, which is constrained only by the availability of natural resources"

While everybody gets hysterical about the Debt Ceiling Show, I believe it would be interesting to discuss this issue. The best illustration is to use an example from nature described by the Lotka-Volterra equation because it is simpler and more intuitive than a control-Lyapunov model, which would better fit this situation.

I am not going to talk about eigenvalues and I will not post sets of equations. The whole thing is very simple: we have the natural variation of prey-predator populations in a stable ecosystem, and the preferred example is foxes and rabbits. Basically rabbits are prey and they have an inexhaustible supply of food (grass), as a natural resource, while the foxes are the predators and they feed on rabbits.

An increase of the population of rabbits creates a larger food supply for foxes until the population of foxes increases relative to the number of rabbits to unsustainable levels. The rate of prey consumption increases past the reproduction rate of rabbits and as a result the number of foxes decreases too until again the rabbits have a chance to breed which triggers another increase in the number of foxes. The system reaches a dynamic equilibrium defining on a long term the average population of rabbits and foxes for a given ecosystem.

The chart is fairly simple:

Now let''s assume we have the grass as the natural resources available to an economy, the rabbits (prey) are the industrial/production capital, while the foxes are the financial capital.

The model requires a few improvements to keep it closer to the natural example. First the natural resources available to the herbivore population is limited at least with respect to density. Even in nature there are only so many tons of grass which can be harvested daily from a square acre of a meadow (we are talking here about the happy case of renewables).

In the economic sector the predation/competitive action is governed by the rate of profitability. Both financial (money rent extraction) and production capital are actually competing. Investors will crowd towards the higher yield. Like in nature there is intraspecie competition for both sectors (capital will flow from the most productive/profitable corporation within each sector).

However, there is a very interesting aspect which governs the financial predation which doesn't have a clear equivalent in nature. That is given by the profitability threshold imposed by the financial sector on the productive sector by three means:
a) Competition. If there is a great market for a certain type of mouse traps, and a company manufacturing that type of mouse trap obtains high profits then financial capital will flow into creating other companies competing for that market sector as long as the specific profitability is higher than the general profitability of financial capital.
b) Credit for expansion. At similar levels of productivity the manufacturing/production entities will be force to compete by expansion to benefit from the economy of size. Therefore they will have to raise capital (from the market, by issuing corporate bonds, etc.) As a result of this limitation the direct profitability of the industrial/manufacturing capital is eroded by the rent on the borrowed money from the financial capital. In the limit case the final expansion level is reached when the real profitability of an industrial or manufacturing entity tends to 0. Basically all big corporations have no profits, to insure endogenous growth. They exist only to pay interest on the credit taken from the financial sector. The market is full of industrial and production behemoths who are profitability zombies, being only a proxy for financial rent extraction, while small and medium productive enterprises and small family businesses can provide a real profitability above after all credit obligations have been paid.
c) Monetary expansion and inflation. This a little but tricky to present it intuitively. The financial capital has the same intraspecie competition of grow or die, and self predation. However, the profitability of financial capital is proportional with leverage. In order to attract more investors financial capital entities are forced to leverage to the maximum extent allowed by regulators and risk perception thresholds. Naturally this creates a growth in the monetary aggregate resulting in inflation. This will affect industrial manufacturing capital by increasing competition (credit availability) eroding it's real profitability threshold by decreasing the real value of its profits and by increasing the price of commodities and raw materials. It becomes obvious that the price of any commodity depends theses days not on the rate of demand/scarcity but by the specific level of sectoral inflation. If financial instruments of investment in commodities will crowd a certain market (oil for example) the price of that commodity will increase or decrease regardless the actual values of demand.

There is the particular case of gold which is still used as a minor component of the power money of the global liquidity pyramid (the overwhelming share being represented by by the US Treasury paper hoarded by central banks). It is not a simple coincidence that there is a pretty good correlation between the T paper held by central banks and the price of gold referrenced in USD.

So where does this lives us? Actually the Lotka-Volterra model is simplified because even in nature the interaction between predator and prey are far more complex. We are talking here about a dynamic equilibrium system, for the discovery of the optimum ratio between the populations of predators and prey in a stable system. One may say that the herbivore prey, in a stable system benefits from the existence of predators. Rabbits have evolved in time, by natural selection, to be able to dig deeper burrows, to have longer legs (allowing them to run faster), longer ears and better eyes (to warn them of the approach of predators) and even they developed better digestive system to allow them to extract more nutrients from the same amount of digested grass.

After thousands of years of adaptation as a herbivore, when rabbits were brought to Australia as an invasive specie, the local predators were simply no match for them. Also the local herbivores were no match for rabbits. Rabbits were able to deplete the local vegetation, by unchecked population growth, which created a food scarcity for the native herbivores reducing their numbers. Conversely in the absence of the financial predator in an economic system, we are witnessing a dramatic increase in the size of the industrial capital, resulting in the exhaustion of resources and in the transformation of the local territory into a waste land. I believe that when the monetary angle becomes irrelevant, we are moving towards the so called Resource Based Economy, where the only limmitting factor for growth is the scarcity of natural resources.

Example of this unchecked growth of industrial/production capital (similar to the multiplication of rabbits in Australia) are numerous in history. One would be the industrial development in US before the Great Depression when by the mercantilist policies adopted by the government (US was doing at that time to Europe, what China is doing now to US) and due to the absence of an antitrust legislation, there was no financial predation on industrial/productive capital.

Another example is the state of the Eastern Block economies when the Communism fell. In communism there was no financial predator since the central banks of Communist states were just the monetary division of the local Communist parties. A profitable communist bank is an oxymoron.

The most recent example is of course China, but in this case there is a twist because the Chinese banking system is allowed to hide enormous losses on its balance sheet. However the great and unchecked industrial development brought in China by globalization and free trade, has produced the result of a sick ecosystem. There is an overpopulation of industrial/manufacturing capital whose inefficiencies are for time being hidden by subsidies and and erasing of losses (especially for SOEs) the pollution is a major problem and China's resources are depleted at an incredible and unsustainable rate.

Who benefits from this massive expansion? The answer is simple: the Western predatory financial capital which in the global system has grown to never seen before levels. The Western (or better said the North American) financial predator has been able to escape the constraints of the Lotka-Voltera equation quite a few times after the Great Depression which was the last recorded instance of US financial capital collapse (major deflationary event).

Actually even from the Great Depression they escaped with little damage, by inflation, when FDR devalued the dollar (partial default) and confiscated the gold held by US citizens.

In 1937 when the economy was going towards another depression and deflationary moment, there was the inflation produced by WW II when US became the Arsenal of Democracy, entering an economic military production boom, fuelled at the expenses of the initial belligerents. The trade was so profitable that US was selling oil and industrial equipment even to the Nazy Germany until right before the Pearl Harbour attack.

After the war there was the Marshall Plan, the Bretton Woods Agreement and the Cold War. If examined in detail it is hard to believe how profitable was the Cold War for the US finacial predator and one may wonder if US wasn't actually interested in maintaning the Soviet Empire which could be leeched so well, the socialist states being the perfect victim for the international trade providing cheap resources. One of my friends was saying during that time that if US wants to defeat the Soviet Union, we shouldn't build more nukes, but to stop the grain exports and starve them to death.

The natural cycle of decrease in population was avoided again by the North American financial predator, by another partial default during the Nixon Shock when the dollar was taken off the gold standard (the huge government debt produced by the Vietnam War was essential for pulling out that default without a flaw and impose treasury paper as an international reserve currency)

Then it was the Plazza Agreement when Japan was forced to revalue it's currency, and the decrease in the financial predator population was again avoided by placing the losses on the domestic balance sheet of Japan's central bank.

The next deflationary cycle (and a decrease of the US predatory financial capital) was avoided through globalization and the proliferation of a regime of global trade/capital flow imbalances. One may think as an expansion of the trick used with Japan's development. China and other EM are used for the same stunt but on a scale a few orders of magnitude higher.

The problem is that unlike the ideal case of our example with foxes and rabbits, the surface of the Earth is finite. Therefore there is an upper limit of the population of prey (industrial and manufacturing capital). In nature, foxes don't feed only on rabbits. They also feed on many other small rodents, birds, lizards, fish and insects.

When food is scarce foxes eat berries and grasses. In situation of famine, the fox which is a solitary predator will become canibal and will attack and eat other foxes (bank eat bank).

We are now in the situation in which the US predatory financial capital does not have any more enough prey to feed it to insure it's profit margin. The globalization has progressed to the point in which we are witnessing a boundary constraint.

Analitcally there are only four outcomes possible. We return back to the cycle of inflation deflation which would result in the decrease in the size of the US financial capital.

The second outcome is granularization by intraspecie competition of the financial capital. This will amount to a process of deglobalization. Countries and multistate regions will decouple from the central harmonic of boom-bust generated by Treasury paper as international reserve currency and we return to pre-WTO paradigm. US government will declare a partial/stealth default. For USA the elimination of the unfair competition would result in an unprecedented industrial/manufacturing boom. Warren Buffet is buying rail roads in US... I believe his bet is clear, but I don't think that even Buffet believes that this outcome will happen very soon, rather he is positioning himself at the basis of the new industrial infrastructure.

The third possible outcome is the destruction of the system: global revolution or WW III. Again as the only remaining superpower USA is pretty well positioned to win in such eventuality.

The fourth possible outcome is the removal of the boundaries which limit the size of the system. That means the expansion of the human race in space which will probably be from an economic point of view to the discovery of America. While this sounds a little bit SF and definitely not bound to happen soon, eventually this is the only solution for breaking out of a static system in which the evolution has basically stopped. I don't expect to become in my life time a colonist on a Goldman Sacks space ship, but well,... in the future I would not be surprised to see the Vampire Squid selling derivative shit to aliens and then foreclosing them from their habitats while the just to get a fat bailout from the Galactic Treasury... :)

So where does this lives us with the price of commodities? The answer should be obvious... It depends on the evolution on the monetary front.

If the artificial manufacturing/industrial development in the emerging markets, collapses and we see a deglobalization, the USD price of most of industrial raw materials and commodities will decrease. N0t only that the artificial demand will be slashed, but the industrial commodity and raw material producers will be in a disastrous economic state, which would force them to sell at very low prices.

If the show goes on and the Fed continues to pump US gov debt in the global financial system as the backbone of the international currency reserve system, the commodities will enjoy a bull market.

If things get out of control and the Treasury experiences a crash default, it makes no sense to talk about the price of commodity in dollars since we will probably return to a domestic currency anchored in a basket of commodities or to some form of demand note as the original greenback. The Federal Reserve Note will be gone.

The only thing now left to discuss would be if the monetary angle becomes irrelevant since the world production capacity has reached infinity and the only remaining constraint being of course the (scarcity/availability of natural resources).

If there is a global war or revolution, then the price of commodities can be all over the chart. It would be impossible to predict without a clear view of the future political and strategic evolutions.

Obviously I believe the paradigm of the quote is misconstrued. In a system in which the monetary angle becomes ireelevant (there is no financial capital predation) the production capacity can reach infinity (as a figure of speech, but more correctly can reach unsustainable levels due to the absence of the productivity threshold) and the only remaining constraint will be the natural resources. This would be a resource based economy in a post-scarcity type society...

I am not sure I would like to live in such a society. I am also not very happy to live in a world in which the growth of the financial predator has been left unchecked, and millions of people see themselves transformed into debt slaves after all their wealth has been stolen by the crooks who control corrupt governments.

What am I saying is that I want to see a return of the economy to a state of normal and healthy equllibrium, where markets are transparent, fair and free, even if that means that the optimal capital and resource allocation levels are permanently discovered in a dynamic boom and bust cycle. That is the nature of things and part of the beauty of life,...

The Debt Ceilling Show Part II - What Sustainable Deficit?

2011-07-20T22:48:00.000-07:00

While qadi is busy I venture to talk further about the whole debt ceiling show through the prism of globalization and the Triffin Paradox. I find the scare show performed by politicians both hilarious and fascinating. Obviously since both sides involved in the false debate declare they don't want a default, the logical solution would be to approve a modest debt ceiling raise, of only a few hundred billions until the political negotiation will be finalized. That would be the perfect solution for all politicians involved in the posturing drama since would allow them more media spotlight for a longer period of time.

Therefore, leaving the pres and the other clowns to their devices for pumping up the scare hysteria, I suggest we should focus on something more productive: trying to figure out the apparently irrational reaction of the bond markets. Until now, with the exception of some 30 year yield volatility, the market doesn't seem to be very impressed by the political bullshit. Many suggest that the nervous behaviour of the 30y has more to do with uncertainty of a new Operation Twist than about a solid default of the US Treasury.

It is obvious for any bond trader worth his salt, as well as for the majority of ordinary people, that USA is currently on an unsustainable economic path and the government deficit leads to bankruptcy. The question is why everybody believes that treasuries are still solid and a good wealth storage instrument. I believe there are a few reasons behind this behaviour:
1) Size matters. This may look like a flawed argument, but a simple and intuitive logic dictates that if US enters a major crisis, probably the rest of the world is going to be far worse. While one can imagine a massive depression in the rest of the world with US left relatively unscathed, if US enters a massive depression, resulting in a default, this will trigger a global great depression anyway. Considering that US is the only true military superpower left, obviously there are better chances for a better exit from the crisis for USD debt instruments.

2) The currency hostage syndrome. After allowing mercantilist countries to play currency manipulation schemes for years (and we are not talking here only about China, but also about historical post war mercantilists like Germany and Japan) there are a lot of governments with a huge load of US treasuries blocked in pseudo reserves (or better said as balance sheet assets for domestic debt liabilities). Japan is the best example, but will be replaced soon by China. To this group one should add the oil exporting countries which have also financed the energy consumption of Uncle Sam. These dollar hoarders (for which the dollar reserves are just a residual asset accumulation on the central banks balance sheets) are the staunchest ultimate defenders of the dollar. China, Japan, Gulf Countries and quite a few others would take devastating losses if USD collapse. The Eurozone would fare a little better for a short period of time, but in the end will also collapse (assuming it won't collapse by itself well before a major decline in treasuries prices).

3) Everything is relative. Of course everybody is convinced that the system of having USA as the consumer of last resort is unsustainable, but what what are the other alternatives for parking the currency reserves? Euro obviously is not a satisfactory solution as it has been shown by the debt crisis of the PIIGS, plus it is too tied to the dollar. The Chinese yuan is out of question since there is no way China can allow its currency to leeched by other mercantilists. It it obvious why a basket made our of the Pound, Aussie, Loonie and Kronas can't be a replacement either. One may think of the Swiss Franc, which can be used for a smart game by the small investor, but Switzerland is too small to accommodate the conversion of the global currency reserves. In simple terms, there is no other currency in which the global central bank and private liquidity reserves can be transferred and parked in an orderly and non-disastrous manner. Of course some may suggest gold or silver, but their supply is simply too inelastic. There is simply not enough gold and silver for an orderly return to a bullion standard. There is no alternative to the dollar in the current global free trade and capital flow setting. While many are unhappy with USD as a global reserve currency, the alternatives are worse.

This last paradigm raises some interesting issues, casting an interesting light on the evolution of treasury yields and the nature of US government debt. For any trade there has to be counterparty. If the Treasury borrows money there has to be a lender. Regardless the relative degree of manipulation undertaken by the Fed and primary dealers, it is a matter of fact that the yields have remained at unnatural lows and the dollar hasn't collapsed on the Fx markets despite all the printing of QE 1 and 2. The appetite of Treasury paper seems to be unaffected by the by the reality that USA is on an unsustainable spending spree towards apparent insolvency and bankruptcy.

Moreover the Fed and the Treasury don't seem to be very concerned with this unsustainable path and we don't see Geitner or Bernanke crying all over the media that the government deficit has to be reduced. They are neither irresponsible nor stupid, but they simply don't seem to be very concerned with the size of US deficit.

If we consider the USD (more precisely the Federal Reserve Note) as an index national currency for USA, which is used to reference the treasury paper ( US government debt) which is a separate currency, used to store the wealth resulted from global trade imbalances, it becomes obvious that the Fed is actually dealing with two different monetary systems which are loosely linked. One is the domestic monetary system, based on FRN's, the other is the global monetary system referenced on FRN's and consisting of interest bearing Treasury paper.

In order to boost the profits of the major US financial entities and corporation, the global trade imbalances have to be maintained. There is simply not enough juice left in the US domestic economy to provide for the profitability and rent extraction rates required by the big financial players. The fuel for these profits is the USD-based (FRN-referenced) internationally traded liquidity. For all this FRN referenced liquidity, we can imagine an inverted pyramid of risk-leverage (this is an image taken from an old BIS report)

In the global inverted pyramid of liquidity we have mostly US Treasury paper as the power money at the bottom of the financial edifice (there is little gold available and EUR is a financial proxy for USD while the share of other reserve currencies is simply too small to matter).

In any crisis and deleveraging environment, by definition, there is a deflationary run to safety into the lower part of the liquidity pyramid. Obviously for the global liquidity structure, a deleveraging trend results in an increased demand for Treasury paper, which is the major share t of the power money component.

The Triffin Paradox has in this context a more interesting consequence: in order to control a global deflationary trend, the Fed has to continue to pump into the global economic system, the power money component (Treasury debt). There is no other way around it. It actually becomes irrelevant how solvent is the US government and how sustainable is the US budged deficit. The Fed has to produce the juice which feeds the globalist monetary beast in order to insure high profits for the banks and financial interests which control it (and the US government).

If the US Treasury cannot issue enough debt to quench the global thirst for the global power money (Tsy paper) then we have a Global Great Depression. Therefore, the concern of the sustainability of US government deficit becomes hilarious. In order to produce the required supply of global power money (US gov debt) the US elites have to produce spending pretexts, such as useless wars, big social spending programs, bailouts and US-based bubbles. Also the Treasury revenues have to be limited as by setting in place tax cuts not only to conserve the wealth extracted but to satisfy the requirements of the Triffin Paradox. In order to control the leveraged aggregate they also have to control the USD exchange rate and printing may be required to control the UDS exchange rate with respect to the rate of change of Treasury paper sold to foreign entities.

Otherwise, the whole global free trade and globalist financial construct collapses. In such an event the big players controlling the Fed, Wall Street and the US government, would loose their fat profits. This would be simply intolerable for those who have the power (and the money behind that power). Since the Clinton Administration, when the globalist construct has been set in place, the US Gov debt had to increase in order to satisfy the global requirement of US government debt paper.

It becomes obvious that all this bickering about spending cuts, reigning in the deficit and increasing the debt ceiling is just a pathetic drama for the herd of idiots and a smoke screen meant to hide the real name of the game. The reality is that reducing the US deficit and Treasury debt, would be catastrophic, because it would cut the global, direct and indirect, dollar seigniorage and this would be the end of USA as a global financial superpower.

What I find more disturbing is that currently the system is stable and sustainable, for the US financial elites. As long as the global GDP and the global trade/capital flow imbalances continue to grow, there will be a continuous growth in global (private and sovereign) currency reserves, referenced (directly or indirectly) in USD. The system can collapse only if there is a major uncontrollable deflationary event (such as an overnight collapse of China's economy or a bad debt domino failure in EU) or if the global GDP enters a period of prolonged stagnation, which would result in a significant decrease of the global currency reserves.

Assuming this mechanism is true, it would be hilarious to see the bond markets reacting irrationally if the Tsy defaults or the PIIGS problem in Europe gets out of hand. We will see the Treasury yields flooring and USD soaring, while Bernanke and Geitner would scramble to find new pretexts to print or increase the US deficit or engage in some obscene printing. The profitable global dollar tax has to be maintained at any cost.

What I find also very interesting, is that in order to maintain the profitability of this scam, the Fed has to play in a very narrow space of T yields, rate of debt increase, printing and foreign exchange rate. In order to achieve this delicate play, paying interest on the excess reserves of the depository institutions is essential, but this is a whole other subject which deserves it's own lengthy rambling.

The deflation-inflation contraption for a fiat currency used as global reserve

2011-07-14T18:53:00.000-07:00

I apologize for not having time to write a more detailed entry on this very interesting subject but Utterlycorrelated has a small readership, which I assume is already familiar with many of the strange ideas and opinions expressed here.

I will try to make my ramblings as as a collection of brief points.

First as it has been said quite a few times here on this blog, USD is a curious fiat construct based on self referenced debt since the Nixon Shock. There is absolutely no risk to have a long lasting and major deflationary event in US since the Bernank can summon the helicopters and print till the end of paper stocks. However the Fed has the ability to induce brief deflationary shocks which can have a devastating effect on the rest of the world which holds its reserves in USD, or in a proxy currency pegged directly or indirectly on USD.

These brief deflationary shocks can be very easy to induce due to three other factors:
1) USD is still overvalued since US us used as the largest consumer market and the importer of last resort.
2) US governmental debt and most of US private debt is denominated exclusively in USD (or in a proxy currency) which makes it an equivalent of domestic debt since it represents future liability on the US taxpayers.
3) Taking advantage of the 2008 Crisis the Fed has started the third piece of the scam by offering interest on excess reserves. Few people understand yet the power conferred by this relative obscure tool. By keeping both the interest paid on excess reserves and the discount window close to zero, the Fed has placed itself in a discontinuity monetary point which allows it to play with risk exactly as the Bernanke wants, without creating any inflationary or deflationary effects or by the contrary to generate inflationary or deflationary effects at will without modifying significantly the monetary aggregate. Basically the whole world is now kept hostage to the USD and the Fed and there is nothing they can do.

The game with interest paid on excess reserves is pretty simple: it hides risk. Let's say that Fed's discount window is 0.25% and the interest paid on reserves is also 0.25%. The Fed can lend to JPM $170 billion and JPM parks all this money back to the Fed as excess reserves. Cost for hiding JPM risk is zero for both the Fed and JPM and nonexistent virtual money with zero inflationary or deflationary effect is created out of nothing as a balance sheet artefact.

The interesting part is that the rate of growth of these unnatural and virtual excess reserves is a leading indicator of inflationary-deflationary events since it is dependent on the expectation of loses on bank capital. If we look at a chart of the EXCRENS evolution and at a inflation deflation indicator as the Finster Dollar Index the correlation is pretty clear. One may say that the double dip recession has already started in February-May 2008.

The problem is that this game of smoke an mirrors, makes the current definition of M1 money multiplier a joke. Officially it is well below 1. If we take out the virtual and illusory excess reserves out of the monetary base we obtain a corrected value which gives us a very interesting picture.

As it appears we are right now at the beggining of a new deflationary move, but only Bernanke knows how long he is going to hold it. Of course the first move is the flight to safety into PM, so we can see gold and silver shooting through the sky. The next step is deleveraging and covering position which in a deflationary event means selling the highly liquid PM( with a diving of gold and especially of silver) and we may see a crowding back to ... treasuries and we will see again the T yields flooring and LIBOR sky rocketing. This will burn again big time all the gold and silver bugs.

Currently the US Treasury paper is the international reserve currency not the USD (on which all T paper is referenced to). Let's say that there is a US Gov default and coupon payments are not made due to the bickering in the Clowngress.

In such situation we will have a major transient FX move with USD taking a dive. This will have a devastating effect on both China and EU which will see their currency soaring. If the yuan soars there will be game over for China because the Chinese export machine will collapse at the same time with the collapse of the real estate and development bubble.

EU will do slightly better in a first stage since a very high EUR will alleviate the pains of the PIIGS, which for a short would believe they have won the lottery. In the end it will hit the rich EU North which would be send in a huge trade deficit since their export will collapse (Germany, France and Netherlands will become the importers of last resort). The ECB by definition cannot call the helicopters to inflate.

The only problem is that it will be impossible for the ECB to generate enough debt, fast enough to allow for an orderly retreat of the international currency reserves from USD to EUR... The PIIGS are not big enough and unless the EU big players don't start running big deficits and gov debt, the EUR cannot replace USD.

My whole rambling is about the fact that in the case of a self referenced debt international reserve currency (such as the USD is) the whole notion of default is relative because of the Fx arbitrage, which keeps all creditors hostage to the Dollar (which is the index for T debt). If the show must go on US has to continue to run the so called "unsustainable deficits" in order to satisfy the appetite for reserve currency of the rest of the world otherwise the whole mechanism collapses.

If this appetite seems to vanish, the solution is simple: have the Fed engineer a deflationary shock in order to floor the Tsy yields even if USD in falling in Fx markets. I believe this is the perfect scam.

(I apologize for any spelling mistakes or poor grammar in writing this entry, but I an writing it on my laptop in a cab while rushing to a meeting. I have to stop editing now since I have just reached destination).

The Debt Ceiling Show

2011-07-07T18:15:00.000-07:00

It is obvious that this whole debt ceiling show will be over, after a thorough campaign of scare tactics. It's all political posturing.

However one should not underestimate the stupidity and incompetence of politicians. There is a small risk things will get out of control. Therefore, I believe it would be very interesting to contemplate a "What if?" scenario.

First I would like to dispel some myths:

1) The 14th Amendment guaranties that the US Treasury will never default on its debt.

I am not sure this is true. The pertinent text is:

Section 4. The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. But neither the United States nor any State shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave; but all such debts, obligations and claims shall be held illegal and void.

I am no constitutional law scholar, but I bet a twelve pack that the text of this amendment will be interpreted through the prism of the Civil War if the new debt ceiling is not approved and things get a little bit out of control.

The 14th Amendment was about the Confederate debt which was declared null and void. Those who financed the South in the Civil War were left holding the bag. It is a matter of fact that unsustainable debt cannot be repaid regardless if we are talking about Joe Six Pack, The Roman Empire or The Mighty US Gov.

2) US has never defaulted on its debt.

I am not so sure about that either... The Gold Reserve Act of 1934, which changed the price of gold from $20.67 to $35 is a selective default, since until that moment the dollar was convertible in gold.

One can consider that in 1934 the US government has had a selective default of 40%... Not bad... :)

Later, with the Nixon Shock, the Dollar was taken completely off the gold standard,... and the default was complete. However, there are still quite a few ounces of gold held by the Fed at a price of $35/oz. Unfortunately, they are not selling them, despite a large number of willing buyers. I don't know why,...

3) The Fed and the Treasury are two separate entities.

On paper yes, but in reality they are two parts of the same financial construct, which is nothing else than a giant debt pump, intended to maximize the profits of the banks and of the financial sector in general. The Fed-Treasury toy is the key of having money lending and investing profitable. While the Treasury is forbidden by law from printing, but the Fed can inflate the Dollar at will, directly (outright printing) or indirectly (various forms of illusory circular lending such the interest paid on excess reserves).

Actually, Ron Paul's proposal to avoid the crisis by selling the treasuries owned by the Fed has a sublime irony, since I am sure Ron Paul is aware about this aspect. By using the stash of US Treasury securities held by the Fed, Ron Paul wants to plug the debt machine. I've had a good laugh hearing that, but don't worry it is not going to happen.

The most laughable part was the clueless debate occurring all over the internet if such a solution would be inflationary or deflationary.... (Even Yves Smith got fooled by this joke.)

What will happen if the Treasury defaults on a few interest payments? Essentially not much, except having most of the bankers soiling their pants. The interest on Treasury paper is already ridiculously low and I am sure most of the international holders won't care very much. Moreover there is another aspect to ponder here. Few people take some time to analyse what is actually a Federal Reserve Note after the Nixon took the Dollar off the gold standard.

A FRN (aka USD) is just a fraction of a bond issued by the US Treasury which is to be settled as debt in... USD (since there is no more gold or silver backing for Dollars). Yeah, it's all circular, self-referenced debt. This may be hard to comprehend for most ordinary people, but if one looks at an H4.1 the FRN notes are placed in the liabilities section and few people try to make the effort to really understand why is it so . Therefore, if the creditors will rush to claim their money (USD) from the Treasury debt instruments they hold, they would better take some scissors and cut those bills and bonds into small pieces of paper to obtain their much needed Dollars. This is actually what the Fed does to to produce Dollars, although instead of scissors they use a complicated (and mind boggling) system of account entries where the securities become assets and the Dollars liabilities. In simple term it is all a giant scam.

It is a matter of fact that a Dollar bill represents a non interest bearing fraction of an interest bearing debt instrument issued by the US Treasury. If there is no US governemt debt there is no US Dollar. This is like using the Mastercard bill ( I am talking about the statement not a cash advance) to pay the Visa bill, or vice versa.

By definition we cannot talk of a default of the US Treasury without having an unwinding of the wondrous financial contraption known as the Federal Reserve System. It will be a Wizard of Oz moment, when we will see who has been time behind the curtain since 1913. A lot of people will feel incredibly stupid at that moment.

4) If the new debt ceiling is not approved the Dollar will collapse sending the American economy in a disaster.

I am not sure this is correct. Let's think a little bit what can happen. The US public debt is held in USD, not in RMB, or EUR. There is no other currency which can replace yet the Dollar in international trade and there is simply not enough gold to have the whole world returning to a gold standard. Oil (or any other basket of commodities) cannot be used as an international reserve currency without some sort of monstrously complicated and very artificial global agreement, which would make Bretton Woods simple and a monument of common sense. Reaching such an all encompassing international agreement is unlikely to happen overnight and definitely cannot be achieved in time of a global crisis.

If one wants to be really rigorous, US treasuries are actually the international reserve currency, and they are an interest bearing form of money. This interest bearing currency is referenced in what we know as the US Dollar, through a subtle mechanism which can be subject of endless discussions and debates, but now it's not the time to discuss it. (The day we will see the Dollar nosediving with respect to other currencies and at the same time the treasury yields going negative we can engage in a delightful monetarist hair splitting exercise to identify the trade and investment-reserve components in USD exchange rate.)

USD simply cannot collapse. If that happens the whole US public debt held by foreign entities (the investment-reserve component) simply vanishes into thin air, sending the rest of the world in a deflationary shock, which will be more catastrophic than the Great Depression. Meanwhile, the US is going skate relatively free from this whole mess.

It's difficult to predict how much the Dollar is going to fall, in terms of international trade, but it's hard to believe we are going to see the any broad trade weighted dollar index fall with more than 20-30%, without seeing the rest of the world in a complete disaster.

Actually, the disaster inflicted on the rest of the world would be so terrible that I could see some of the bondholders volunteering to take haircuts, just to make sure the Dollar would not collapse, exactly as these days we see banks in US willing to cut some of the debt of the home owners considered to be in difficulty.

I would like to see the day when PB0C and ECB announce in a joint statement they will forgive USA of half of the public debt held in Chinese and European vaults. That would be funny to watch.

5) Wall Street and the global financial system will collapse.

I believe this is only partially true, but considering the current state of things on Wall Street and in the global financial system, I wonder how much of a tragedy such an event would be. If you tell me that you are going to cry rivers if the Vampire Squid and its abominable siblings are going to go bankrupt, when they will not be bailed out again with taxpayer money, then I wonder why you read this blog? If the Treasury defaults, we may have the surprise to see that the famous "Too Big To Fail" banks simply do not exist, mega funds going belly up and Warren Buffet announcing his retirement,...

However, the banking system is quite resilient and after all the dead wood (squid) is burned to ashes, in the fire of the crisis, we may have the surprise to realize we are faring much better than before the crisis.

Unfortunately, we have little chance to see such an outcome, although we can hope that a providential clown in the Congress will derail the tragicomic scare show, preventing the timely adoption of a new debt ceiling.

Most probably we are going to see the looting continued, the Average Joe skinned again, Wall Street making the usual hefty bonuses, and so on,... until the growth of US public debt becomes truly unmanageable.

At that moment we can expect the banking interests promoting a new international global currency, which is going to be some kind of World Fed, controlled by private banks and may have some gold convertibility (as in Ben Steil's dreams of The New World Order).

After all the scam must go on until the total debt in the system becomes truly unsustainable. Only then the situation will be finally settled by one of the three usual means: jubilee, revolution or war.

Therefore, I hate to disappoint you you all, but the new debt ceiling will be approved, just in time to avoid an illusory catastrophe. Needless to say that I find the whole circus in the media and on the corridors of power simply pathetic...

Big Gas Game

2011-06-27T03:06:00.000-07:00

Germany claims to intend to shut down the remainder of its Nuclear power capacity by 2022.

This could very well be a feint to fool the Rooskies into financing a large portion of South Stream.

Wouldn't it be dick for South Stream to be half-way completed, and then the Germans decide to keep their nuclear power?

Don't think Gazprom isn't wise to this, though!

The RMB is moving up against USD

2011-06-16T03:25:00.000-07:00

NOTHING else matters in this market except THAT!

Why China supports Pakistan/Taliban/etc

2011-06-08T01:59:00.000-07:00

The gas in Turkmenistan.

http://www.atimes.com/atimes/Central_Asia/MF09Ag01.html

There is enough gas there to literally transform China economically and hence militarily.

That's the, "spice", my friends.

This is what the, "Great Game" is all about.

True, China likes Pakistan, too, as a flanking move on India -- sure.

However, their goal, NOW, is to secure that Turkmen gas ASAP.

The US is in the way of their ambition: don't doubt that for a second.

Now, does the Afghan war make more sense?

What the Market Knows

2011-05-23T08:22:00.000-07:00

1) Euro going lower: check
2) Credit market still ROCK SOLID: check
3) Deflationary impact of #1 will impact #2, eventually
4) This will probably compel MORE Fed largess or loose-ness
5) Makes many bearish activities fraught with risk.

ALSO, purely on a sentiment/price-level basis, we should be well under 1300 given the full-on Beargasm the market is having, yet we aren't!

That's bullish, imo. We'll see.

Political Update

2011-05-23T05:12:00.000-07:00

Syria:

Moving towards civil war

Egypt:

Complete collapse underway: moving towards total Islamic state.

Tunisia: limping along...

Libya: Not sure, at this point

Israel: waiting... meshiah, yet? :)

China stocks

2011-05-16T10:24:00.000-07:00

China’s stocks rose, driving the benchmark index to its biggest gain in a month, on speculation the government may limit interest-rate increases after ordering banks to set aside more reserves for a fifth time this year.

Industrial & Commercial Bank of China (601398) Ltd. and China Construction Bank Corp. (601939) led gains for lenders after Goldman Sachs Group Inc. said the increase in reserve requirements will have a limited effect on net interest margins. China Shenhua Energy Co. jumped the most in three weeks after the Securities Times reported coal prices surged to the highest in 2 1/2 years. Jiangxi Copper Co. climbed 2.9 percent as the Conference Board said the risk of a severe economic slowdown is easing.

“The reserve-ratio requirement increase isn’t necessarily bad news for the market,” said Hao Kang, a portfolio manager at ICBC Credit Suisse Asset Management Co., which oversees $9.2 billion. “It will ease speculation there will be further tightening measures like interest-rate increases in the near term. Some investors may see this as a buying opportunity amid weak market sentiment.”

http://www.bloomberg.com/news/2011-05-13/china-s-stocks-advance-spurring-rebound-from-3-month-low.html

Think about it: silver crashes => inflation expectations under control in China => money back in equities.

Most likely outcome for Greek debt situation..

2011-05-15T15:56:00.001-07:00

Here's my opinion of what will most likely occur:

Both public and private holders of Greek debt will suffer a maturity extension.

The ECB will provide liquidity to afflicted banks in the EMU.

Fed and BoJ will be ready to prop things up, too.

It might entail a bank holiday... it may not have to go that far, but I'm not sure how they can avoid it.

Fall of the House of Assad

2011-05-15T05:11:00.000-07:00

As I said before, ignorant PM's and traders ignored the Syria agitation, considering it a, "non-event".

Well, guess what, motherfuckers: it has become head-line news, now.

This is going to make Libya look CIVIL in comparison: watch those oil/gold shorts, fellas!

2011-05-12T12:02:00.000-07:00

The US exports DEBT.

After the budget deal, the US will export a LOT LESS debt, over time.

That means China can't bank on it to sustain its GDP growth.

China MUST, MUST revert to domestic consumption, then.

The negotiations between China and the US went well, last week.

This means the budget issues are more or less resolved.

With the Fed easy and fiscal tighter, the US can have a goldilocks of weakening dollar and solid Chinese demand (stimulus).

The reval of the RMB will be the paradigm-shift of the decade. Again, it will also mark the END of the gold/silver bubbles, and it could very well take the currency premium off of commodities. That said, commodity markets could tighten EVEN FURTHER upon a freshly-revalued RMB.

Just keep this in perspective: the situation, Europe aside, is under control strategically. Tactics are an entirely different matter :)

Spring '10, Reprise

2011-05-11T15:14:00.000-07:00

There will not be a deflationary death-spiral -- relax.

There will be a devaluation of the EUR/USD. Look: it's already begun.

The market knows where the policy-tards must go: the market will beat the path for them, in fact!

The EUR/USD in a bear/downtrend could very well shift Fed expectations, making them even more dovish than they already are. This could stretch the precious metal market bull even longer. If we see EUR/USD back at 1.2x levels, it would provoke a massive bull in gold and silver again.

Watch gold: it will be the "tell" if we get a new bull-leg. The Fed story died, but we will enter a new round of currency wars if the EUR/USD tanks, again.

Now, again, is TRICHET FUCKING STUPID?

2011-05-11T14:18:00.000-07:00

I called Trichet, "FUCKING STUPID", for his rate hike.

Now, can we all agree, it was, "FUCKING STUPID"? There's enough deflation within the EU to take the whole fucker down.

Another Prediction -- CAME TRUE!!!

2011-05-07T23:04:00.001-07:00

Remember when I wrote about the Greek, "privatization" plans?

European Union officials may require Greece to provide collateral for aid as policy makers struggle to prevent the euro area’s first sovereign debt restructuring, said a person with direct knowledge of the situation.

Good luck with that: those Greek unions are militant and tightly controlled by the oligarchs/mafia/anarchists/communists/maoists/Spartans... In any case, here we are, as predicted!

http://www.bloomberg.com/news/2011-05-07/eu-said-to-consider-requiring-more-collateral-for-extra-greek-aid-on-debt.html

Great Article on China's Economic Model

2011-05-07T05:30:00.001-07:00

China’s growth model resembles that of a huge development bank: it relies on low-interest loans to catalyze growth and makes those low rates possible by reducing the incentives to consume and providing sovereign guarantees.

By keeping interest rates relatively low, China can tap household savings to subsidize lending. This represents a transfer from current consumption of households in favor of investment. But if these investments generate sufficiently high returns, the economy grows faster than it would have otherwise, enabling China to maximize household consumption over time.

In reality, personal consumption has been increasing at an impressive rate of 8–9 percent annually for two decades. Thus, because its subsidized investment has been so successful and may not have occurred otherwise, China’s model has arguably led to sustainably higher, not lower, consumption levels — contrary to the common perception.

This approach is not new. Decades ago, the “Asian Miracle” paradigm underscored the success of the industrializing East Asian tigers in shaping incentives to support a high-savings-cum-investment, export-led strategy. The Commission on Growth and Development, which assessed the experiences of a select group of successful developing countries (including China), also noted the importance of high investment and outward-oriented strategies in accelerating growth.

http://seekingalpha.com/article/268387-china-as-a-development-bank

Great Article on China's Economic Model

2011-05-07T05:30:00.000-07:00

http://seekingalpha.com/article/268387-china-as-a-development-bank

Muni and State Austerity -- 2011

2011-05-07T04:09:00.000-07:00

As predicted and duly vindicated, we're in the year of total panic for state and muni budgets.

To confirm this, please enter the word, "layoffs" into your google search and check out the associated news: it's almost ENTIRELY composed of articles regarding layoffs of state and muni workers -- across the whole country!

Sector Note: Fertilizer -- Vale

2011-05-06T05:25:00.001-07:00

If any of you wondered why Vale has pushed so aggressively into the fertilizer market:

http://www.bloomberg.com/news/2011-05-06/diesel-from-soybeans-sparks-560-million-investment-by-adm-cargill.html

Asian meltdown fears and all that...

2011-05-05T11:31:00.000-07:00

There's the "news," and then, there's the Real News.

The "news" is China blowing up: yawn.

The real NEWS is a PARADIGM SHIFT IN CAPITAL FLOWS: YUP, IT'S HERE: A DEFACTO REVAL IS IMMINENT!

Why are commods down, today? Is it the beginning of a deflationary death spiral?

NOOOOOOOOOOOOOOOOOOOO

They are down BECAUSE THE CARRY TRADE IS GOING TO END: you see, with fewer dollars flooding foreign CB's, there's less need to sterilize capital inflows, hence less need to bother with all this shit.

As someone who is still long some nat gas stock in CIS (yup -- STILL!) and some agriculture plays, I am actually relieved: the carry trade was imploding the global economy. A bit of relief will pay off --- enormously.

Want to panic? Look at XLY. /ES is flat.

There's no panic.

30 yr yields at record low: SHORT-COVERING, folks!!! Don't get too excited, yet, about deflation. All those retards who thought it'd be "easy" money... nu uh!

BEN WON, AGAIN!

BEN BEN BEN! BEN BEN BEN!!!

Also, recall Soros mentioned the "currency premium" imposed on commods?

That's getting taken off.

THAT'S the "pain" being felt in commods.

The adjustment is beginning. This is the end of the gold trade. I only have one, ST spec left in gold, though :)

Other commods should be ok, I think!

Greenbacks. Civil War, and bin Laden

2011-05-04T13:06:00.000-07:00

If you know your monetary history, you already know where I am going with this.

During the civil war, the US government issued "green backs," slang for Treasuries. However, as this was before the Fed era, you always wondered how easily you could covert your note or bond into gold, the money standard for the day. A modern form of QE, the Treasury made the notes non-convertible, providing sub-market rates of lending to finance the enormous Union effort.

There is a nice chart of the CPI during the greenbacks era. I think Fed skeptics should keep this in mind.

http://macromarketmusings.blogspot.com/2011/03/three-monetary-systems-during-civil-war.html

Soros is OUT of Gold/Silver

2011-05-04T04:24:00.000-07:00

Yet Paulson stays in?

Paulson has been sucking wind, recently: his ResRe call has been a gigantic failure. I fear he will meet the same fate in gold, or at least underperform ST.

Bill Gross does the heavy lifting for us...

2011-05-03T07:20:00.001-07:00

Well, ahoy matey, as quick as you can shout “thar she blows,” an academic working paper by Carmen Reinhart and M. Belen Sbrancia affirmed the same thing but in much more grounded, well-ballasted research. The paper, titled “The Liquidation of Government Debt,” contains a historical analysis of how governments attempt to get out from under the crushing burden of a debt crisis. For developed countries such as the United Kingdom and the United States, the period beginning in the mid-1940s (when depression and WWII sovereign debt loads were oppressive) was used as a starting point for pocket picking, “skunking,” or what they term “financial repression.” While the ancient Romans used to shave metal coins in an attempt to monetize existing debts, our evolving financial system has used more sophisticated techniques. With inflation accelerating, due to WWII and post-war demands on commodities, the Treasury capped long-term bond yields at 2½% and in so doing ensured that its debt/GDP ratio would be reduced. If savers received an average 2% on their Treasuries while the nominally based economy was advancing at 5% or more annualized growth rates, then debt to GDP could be lowered from its peak level of 116% to 112%, to 109%…etc. every 12 months. In fact, the authors found that “for the United States and the United Kingdom, the annual liquidation of debt via negative real interest rates amounted on average to 3 or 4% percent of GDP a year…which quickly accumulated (without compounding) to a 30 to 40% of GDP debt reduction in the course of a decade.” Even after interest rate “caps” were removed in 1951 via the Fed-Treasury Accord, extremely low/negative real interest rate policies continued until the Volcker revolution in 1979. By that time, U.S. (and U.K.) debt levels had been normalized, primarily at the expense of savers who had been “repressed” (and depressed!) for over three decades. At that historical turning point, government bonds were labeled “certificates of confiscation.” Not only had savers received Treasury bill rates that were negative for over 25% of the nearly four decades, but they were holding long-term AAA rated bonds trading at 30 to 40 cents on the dollar.

http://www.pimco.com/EN/Insights/Pages/The-Caine-Mutiny-Part-2.aspx

Man, the Chinese are going to drag this out...

2011-04-29T01:15:00.000-07:00

I wish we'd just revalue and END the gold/silver bull once and for all:

http://www.bloomberg.com/news/2011-04-29/china-s-yuan-strengthens-beyond-6-5-per-dollar-for-first-time-since-1993.html

Expected value?

2011-04-28T08:28:00.000-07:00

What is the expected value of a 10k bpd oil well gushing 30 API, low H2S oil?

What is the expected value of a 2nd-tier college graduate white-collar accountant in the US?

What is the expected value of the aggregate of global labor?

What is the expected value of the aggregate of global resources?

What is the expected value of the ABILITY TO CONTROL ALL OF THE ABOVE?

WHAT IS THE PAYBACK-PERIOD FOR AN INVESTMENT TO CONTROL MORE OF THE ABOVE THAN YOU ALREADY DO?

WHAT IS THE PAYBACK PERIOD FOR WAR?

No price spiral...

2011-04-27T07:59:00.000-07:00

EIA data suggests no price-wage spiral in effect.

The market is trying to suggest one, though... oil barely down after terrible EIA data. Market must anticipate Fed doves will maintain dominance as a result of such weak demand at these price levels.

Catalyst for further ferment in Near-East...

2011-04-23T05:58:00.001-07:00

http://uk.news.yahoo.com/18/20110422/tsc-europe-prays-for-easter-rain-in-wors-4de741d.html

While European Commission agriculture spokesman Roger Waite acknowledges a "slight" rise in the prices of maize and wheat, he maintained that winter crops remain "generally in good condition."

A spokeswoman for European farmers federation Copa-Cogeca said it was too soon to draw conclusions, but Belgian farmer Guy Franck, who heads a dairy collective in French-speaking Wallonia, says gut instinct tells him worse is yet to come.

"I've been in this game for 30 years, I've never seen a month of April like this one," he said.

"Everything with short roots is seriously dehydrated," he warned.

China going to throw in the towel, soon?

2011-04-20T13:45:00.000-07:00

http://online.wsj.com/article/SB10001424052748703838004576274941870618606.html?mod=googlenews_wsj

In recent days, as inflation readings have accelerated, Chinese officials have made comments that some analysts believe signal greater acceptance of that argument. Premier Wen Jiabao, at a meeting last week of the State Council, China's equivalent of a cabinet, listed "strengthening the flexibility" of the yuan's exchange rate as one of several tools the government should better use to control prices. Less senior officials have made that argument before, but Mr. Wen's remarks were unusual for a top leader.

Syria

2011-04-18T14:13:00.000-07:00

I have been to Homs, Aleppo, Damascus, and Banias.

The Syrians were seething in 2008, when I was there.

Now, impoverished due to global inflationary pressures, they truly have nothing to lose.

Syria can be the catalyst for World War III, and this is not something I say lightly: you have Kurdish, Turkish, and Sunni interests there. The only hope for stability is if the nationalists can trump the Islamists.

Homs is a very pious city, as is Aleppo.

Most traders and PM's have never visted nor care about Syria. No one cared about Serbia in 1913, either.

Things Never Change

2011-04-18T08:27:00.000-07:00

and then they do:

Americans would continuously increasing their personal debt: they stopped after 2008.

Mubarak was eternal: now, he's dying in a prison.

Congress will never cut medicare, medicaid, and social security: they will, after today's downgrade.

USA Inc got downgraded, today, and mgmt is gonna shake things up to get the stock back up. Fade at your own risk.

This isn't like CMBS in 2008, with non-stop downgrades and asinine knife-catchers: this is an entirely different BEAST in a completely different situation: bail-out support is 0; exhaustion with government largess total. With the Treasury market at their side, the deficit hawks have little reason to compromise, and they will not!

Obama's speech was definitely left-of-center, and he will return to the center in the final compromise austerity plan. However, he will get austerity WITH tax increases, and so he plans to carry 2012 with HIS budget, not Koch & sons'.

Parabolic gold catalyst

2011-04-18T03:21:00.001-07:00

Naturally, this also means that the plunge in real estate ASPs, confirmed everywhere, but most pronounced in the capital, is set to continue. This, according to JPM's Jing Ulrich, means that with real estate no longer an attractive asset bubble, the "mass affluent" Chinese will be forced to invest in gold and alternative property investments. From Dow Jones: This group "has seen its investment options sharply affected by restrictive housing measures" such as property taxes, increases in down-payment requirements, and raised interest rates, "since these households possess sufficient capital to purchase investment property, but do not have the same degree of access to investment vehicles such as private equity funds and retail property" as the super-rich, she says, adding that equities, gold and alternative property investments are therefore the key beneficiaries."

http://www.zerohedge.com/article/china-hikes-rrr-fourth-time-2011-real-estate-bubble-pops-jpm-see-mass-affluent-rushing-gold

La illa il la la...

2011-04-16T17:48:00.000-07:00

At least 13 Algerian soldiers have been killed by Islamist fighters in an attack on an army post east of Algiers, the Algerian capital, according to officials.

Two fighters in the group were killed by soldiers at the post in Kabyle, some 80 miles (130 kilometers) east of Algiers, the officials said on Saturday.

The attack is the worst since the government two weeks ago lifted a 1992 state of emergency imposed after the military-dominated authorities scrapped an vote favouring an Islamic movement, triggering civil conflict.

Security forces swept areas including the Yakourene forest, a hideout of al-Qaeda in the Islamic Maghreb, on Saturday in a search for other suspects, officials said.

The Algerian daily El Watan reported on its website that around 10 soldiers were killed in the attack late on Friday by a "terrorist" group at Azazga, 140km from the capital.

Firing lasted for some two hours, according to the report, which was not officially confirmed.

http://english.aljazeera.net/news/africa/2011/04/2011415191127848291.html

Meanwhile, Germany intends to add coal and gas capacity and shut down their nukes... and people saying AMERICANS are stupid??!

BLOW-OFF IN SILVER!!!

2011-04-08T11:46:00.000-07:00

Be careful!!!

The End-Game for a PIIG

2011-04-07T10:17:00.000-07:00

A privatization plan that will seek to raise up to 50 billion euros by 2015 will be unveiled by the government within the next couple of weeks, it was revealed on Monday, as ministers continued to argue about what Greece should sell off and what should remain in state hands.

Government spokesman Giorgos Petalotis said that the Cabinet would approve the final privatization program by April 15. The European Union and the International Monetary Fund have agreed with the government that it should raise 50 billion euros over the next four years as part of the effort to reduce its huge public debt.

http://www.ekathimerini.com/4dcgi/_w_articles_wsite1_1_28/03/2011_384920

--------------------------------------------------------------

Friends, above lays the end-game in the whole, entire EU debacle: the FINAL wealth transfer from one sovereign to another.

Greece has bottomed: it is understood the debts will be restructured, but with juicy airports, roads, and now, minerals to exploit, the creditors have suitable collateral to encumber and, more importantly, enrich their private investor colleagues and patrons.

I personally see many opportunities in Greece, naturally contingent upon the politics mentioned in the clipping above.

With the elite of Europe preparing to make an absolute killing in this fire-sale, I fail to see how the blinkered functionaries will not prop up this tragic yet beautiful country and enable their betters to further extract rent from these broken people.

One should also note, too, that privatization will have an amplifier effect, namely the first-order cuts go to the Euro-mafia, and then the lower-caste Euro investors play in second-order or derivative plays. Hence, if you privatize $10B of nat gas pipelines, you'll have probably $13B of net FDI, since the revaluation and multiple-expansion of the underlying asset impacts the associated assets and services in the supply chain and region, etc etc.

This says it all...

2011-04-05T12:26:00.001-07:00

Algeria is concerned by a noticeable increase in al-Qaeda presence in Libya, Abdelkader Messahel, the country's deputy foreign minister, said today.

Pesach (Passover) blood-bath

2011-03-25T20:05:00.000-07:00

It seems that the next FOMC meet, after Passover, will most likely produce a schedule with a plan to tighten. It'd also satisfy my lust for associating major market turns with my least favorite hag. I freaking hate passover.

Ben might be angry and light on carbs, in accordance with the asheknazi tradition. He might even be constipated from all that hashem-foresaken matzo.

History Lesson for Mr Fisher

2011-03-22T05:30:00.000-07:00

About two months before Lehman collapsed and roughly around when FNM/FRE blew up:

"I could see (GDP) approaching, certainly, broaching zero," he continued, citing "enormous stress" in the financial markets and suggesting that their struggles are not over, noting they remain "strained and difficult."

However, as concerned as he is about economic growth, Fisher was even more concerned about inflation and its impact on consumer spending. He issued one of the most direct warnings from the Federal Reserve of the danger of persistent inflation, presenting a stagflation-like scenario of slow growth and high inflation as consumers cut back on spending when faced with higher prices.

http://www.rttnews.com/ArticleView.aspx?Id=694252&SMap=1

Keep in mind who the hawks are.... this Fisher guy is pure noise.

Silver is looking good, despite a bit of a dip this morning. I am thinking the cycle tops soon, with the geopolitical icing to make this essentially a perfect clone on 1979/1980. Recall that concerns about war with Iran, not inflation, marked the top of the last gold bubble.

I am going to lay-off further political analysis unless anything else emerges: we're in the shit, knee-deep, and it's not going to change anytime soon. Yemen is about to go super-critical. Iran is causing trouble EVERYWHERE... it's getting ugly and will get uglier.

What is an interesting bit of non-news was the ECB re-iterating its intention to hike rates. Well, the ECB is staffed by morons, or they might as well be, since raising rates for the EU is precisely the WRONG thing to do at the moment. If the ECB truly wants to tighten, they can just let Greece blow up...

I am beginning to respect the Chinese now, too: I GET IT. They knew everyone would go on a tightening cycle -- or better put, they were willing to wager they would (Chinese are avid gamblers, ya know!) What better way to bail-out China with the EUR-USD north of 1.40... how many more factory jobs will be sent to China instead of originating in Germany, hmm? This coupled with qualitative tightening MIGHT allow China to squeak by in this cycle without a nasty deflationary spat.

It also, by the way, saves the ASS of the commodity complex, since the WORST thing for commodities is an end to the sterilization activities in China and their continued M&A efforts. How charitable it is for the ECB to nuke their own economies to save those of the emerging economies...

We'll see, though, if in fact the ECB does anything meaningful: Greece is still a giant, fat zero come 2013, and Portugal has become a fait accompli in default. If Europe wants to eat that much deflation with their 60:1 levered banks, I salute their bravery.

Purim in Algeirs

2011-03-19T22:05:00.001-07:00

I wonder how the festivities are there, tonight?

Qaddafi is going to SICK IT to the junta in Algeria, if he can, and cause massive disruptions to the regime, there. Watch out: if we start getting rocky in Algeria, Europe is going to get majorly fucked over.

Watch Algeria: Qaddafi will counter-attack there -- HARD.

Gold bubble update...

2011-03-19T05:58:00.000-07:00

I still believe we make even higher-highs this year in gold, but that doesn't mean that as the bull matures, the end-game comes even closer...

After Reliance Mutual fund, which launched a gold fund last month, it is the turn of Kotak Mutual Fund to launch a gold savings fund. With this fund, you can invest in gold without having a demat account. The issue is currently open for subscription and closes on March 18.

THE PRODUCT

Kotak Gold Fund is an open-ended fund of funds (FoF) scheme, which is passively managed and will invest primarily in Kotak Gold Exchange Traded Fund. So its returns will mirror the returns of Kotak Gold Exchange traded fund. While there is no entry load, there is an exit load of 2% if you redeem or switch out units on or before the completion of one year from the date of allotment of units, 1% if you switch between six months and one year of allotment and no exit load after one year of allotment. The minimum amount on application is . 5,000. You can also do a SIP for . 1,000 per month.

http://articles.economictimes.indiatimes.com/2011-03-08/news/28668533_1_etf-expense-ratio-exchange-traded-fund

China’s first gold mutual fund, Lion Fund Management Co said it has won approval from the State Administration of Foreign Exchange to raise $500 million more to invest in gold-backed exchange traded funds abroad.

In a statement, the Fund said it got the permission to invest overseas under China's Qualified Domestic Institutional Investor scheme, reports China Knowledge.

http://www.commodityonline.com/news/China%E2%80%99s-first-gold-fund-to-invest-$500-million-in-ETFs-abroad-37040-3-1.html

Purdah and other Asian influences on Chinese finance -- or how I learned MorganLLC was right again :)

2011-03-18T07:11:00.000-07:00

Purdah is a tradition in many backward shithole countries where women can't be seen in public. I think the tradition has its inspiration from the era of mass rape and pillage and general banditry, and so you really took a chance letting wifey draw water by the stream or milk the goats.

Purdah allowed a man to have a wife, especially a wealthy man, who literally became for his eyes only. Naturally, this entailed a cost: the man would have to provide (if he were a good husband) for her entertainment and welfare, rather than allowing her to disport herself as she pleased. Whether or not the man bankrupted himself to protect his wife/wives from the vulgar world demands an entirely different focus.

Well, likewise, we've have the PBoC and PLA playing purdah with the RMB/Yuan and the wealth of the Chinese people. No more clear than with today's announcement of another reserve rate hike with suggestions of impending interest rate hike. However, despite ALL THAT, the Chinese STILL INSIST ON NO REVALUATION OF THE RMB!!!

The Chinese have still NO desire to allow convertibility of their currency: they want to persist in their controlled ''domestic'' economy with the ''purdah'' of the RMB/Yuan and various FX controls, allowing them to pursue mercantilism without imploding their domestic economy. Here's the problem: they've been using very crude mechanisms, so far, to guide their domestic investment, and so after they've already LOST THEIR ASSES on horrible investment decisions, they decide they need to tighten. Clearly, there's a massive QUALITATIVE tightening going on in China, in addition to some monetary tightening.

However, let's look at how China intends to tackle inflation without revaluing the RMB: assuming China intends to have a trade surplus, there would still be a significant amount of capital to be invested. Where could one invest it? To date, we've seen MASSIVE Chinese speculation in base and precious metals. The Chinese government actually encourages Chinese to invest in precious metals as a way to soak up cash in the economy, but they certainly don't want pig farmers speculating in copper... as they do now!

We know that raising reserve rates and interest rates kills speculation. How can it, though, occur without raising the value of the currency at hand? How can the Chinese kill ''speculation'' at home yet still keep their labor (yellow meat) cheaper than labor abroad (brown/black/white meat)? The only solution I see is to play hot-potato with capital flows, having them move from asset to another and hoping that speculators build enough fear into their expectations that they don't force a general liquidation while keeping overall price levels somewhat stable. We see this in action now with qualitative tightening (real estate) and quantitative tightening (recent news), where the quantitative tightening is far weaker than normal but should make the qualitative tightening effective, whereas pure qualitative tightening has historically been shown to be ephemeral at best.

This is an ongoing problem, and I am always keen for insights from readers on how this parallel FX adjustment mechanism will work over time.

I HOPE YOU GOT YOUR OIL!!!

2011-03-17T12:50:00.000-07:00

It's gonna get naaaasty.

The retard short gold yesterday on Kudlow & Co. is going to get REAMED when the bombing of Libya begins.

I got some cheap US-based iron ore miners today, too... look at 2008 performance of iron ore stocks.

BOOYAH

We should bottom, VERY, VERY soon...

2011-03-16T14:11:00.000-07:00

A perfunctory survey of retail sentiment made it clear to me that we should be bottoming rather soon on /ES.

I will be buying tomorrow, ESPECIALLY if there's more BS about surging radiation in spent fuel depots taking markets down... hey guys: if there's no WATER acting as a SHIELD, of COURSE the rad levels go up! It's not going to go critical just SITTING THERE!

Aye yie yie!

Godzilla

2011-03-15T07:09:00.000-07:00

I'm taking risk off the table like a mofo today.

I am buyer when panic hits downtown Tokyo. Until then, we've more downside potential.

This is a, "too hard'', situation, i.e. too hard to see through this.

I'm an idiot

2011-03-13T16:52:00.001-07:00

Syria was Russia's broker to Libya.

I'm an idiot.

Apologies...

Watch Energy Stocks in Asia, tonight!!!

2011-03-13T07:58:00.000-07:00

We'll get key info we need to play the annihilation of base japanese thermal load!

What I expect: an explosion (up!) in diesel prices, sending crude even higher, and uranium prices getting thrashed. In addition, we should see more love sent to Russian and CIS energy plays.

However, I am most curious about thermal coal in the region, given China's impending slow-down... this is where the big money can be made/lost, imo!

Suggestions from a sapient US Army friend of mine...

2011-03-12T05:04:00.000-08:00

One of best friends works very, very closely with the US Army... as in, deployed to theatre but not in uniform types.

If he's reading this blog, he knows whom I speak about... then again, he has too much shame to be caught reading my blog! :)

Anyway, he has called the entire ME/maghreb crisis from start-to-finish. I added my flourish, knowing Qaddafi's ways, but when we talked last week, he said, "It's only getting started in Libya. We're[he and his family] buying gold with our spare cash."

Wow!

He further stated that Qaddafi was going to go down, but it wouldn't be easy, and that every ambitious terrorist in the world is out making a name for themselves, now.

HE'S buying gold... he NEVER bought an ounce of gold in his LIFE before, and he is not even telling me the whole story.

Anyone else with field reports, please feel free to post what you can here!

/ES summary

2011-03-10T02:38:00.000-08:00

We've had:

1) civil war in Libya and the loss of 1.xmmpd of oil
2) spain downgraded and other PIIGS getting flushed
3) china post a psuedo-deficit (if it really were that bad, the rand would have blown up) for Feb
4) ''scary'' media reports on every political front imaginable

Yet:

The market is STILL above 1300 on the S&P 500.

Is this trading like a bear? Not by the looks of it!

Does that mean panic-sell now? I don't think so -- 6-sigma political stuff can change that, but that's always a * in trading!

Why the Rand Has Outperformed...

2011-03-10T02:25:00.000-08:00

Another great China indicator:

Chinese purchases from major exporters of minerals and farm goods surged, driven by higher prices. Imports from South Africa were up 174.6 percent, from Canada by 114 percent and from Australia by 53.6 percent.

http://www.washingtonpost.com/wp-dyn/content/article/2011/03/10/AR2011031000941.html

---

Given that the Rand barely traded above 6.9 against the dollar today, I would say panic is premature, no?

Russian Arms Embargo

2011-03-10T00:11:00.000-08:00

Obama is doing the right thing: he is not jumping into an asinine invasion, but instead is patiently closing the net on Qaddafi: Russia, now, has banned all arms exports to Libya.

Whether or not this practically slows down Libyan arms imports is one thing (it certainly raises the cost!), but it demonstrates some critical unity against a sustained campaign by Qaddafi.

I would think that Qaddafi doesn't go for broke and try to push for Benghazi, but instead cuts a deal. This week should, in my opinion, be the peak of the fighting. We'll see.

Chinese Qualitative Tightening in Action

2011-03-09T04:18:00.000-08:00

We will see if this is really working or not.

http://www.capitalvue.com/home/CE-news/inset/@10063/post/1327841

The interesting thing to see is if this allows even MORE capital to flow into commodities rather than real estate... watch that silver price!!!

Xiexie!

Algeria -- Europe's last stand

2011-03-08T07:38:00.000-08:00

If Algeria falls, sell everything.

I mean it.

Algeria is so strategic, as of now, the EU and US are sending weapons, trainers, and spec ops to help prop up that joke of a regime. They CAN NOT AFFORD for Algeria to collapse as Libya has.

Hopefully, they can buy enough time to let things calm down a bit... we'll see.

That Gold Bubble and some Chinese bits...

2011-03-07T14:12:00.001-08:00

Oh, what a delicious bubble it is!

Steady readers should recall I began scaling in long once we broke 1340's, then doubled-down hard around 1315-ish.

I've been flipping in and out of various names, playing the catalysts: it's still a bull in gold land! I am stuck flat in a name right now, and so it is not a series of victories but very few defeats and those very defeats prove no more dear than a few %.

HOWEVER, HOWEVER, I am definitely seeing signs of a rather mature bull, here!

Last week, I met a freshly-minted PM with a pure FIG background, both in banking and buy-side. This new PM had a mandate to pick MINING STOCKS. Huh? Nigga what?

Remember what I said about the parabolic phase? Well, we're getting it, and this is the 2nd-to-last dose of cash: the final dose of cash is moronic retail lemmings charging into gold mining equities AFTER the big move -- the very move that is ongoing right now. This PM will need to sell at some point, and the brokerages will jingle the handle to get the lemmings lined-up for distribution... maybe con some mining managers to declare larger dividends, hmm, or even better: buy back stock! I recall US Steel buying back stock in July of 2008... ahh yess... what a top indicator that was (btw, I held X until last summer, and so I got creamed on that one: I have become less of a fade, I hope!) The managers of these natural resource companies are generally fucking morons. The best-managed major I know of is BHP Billiton: their resource M&A dealings, and more indicatively, what they have NOT done, should demonstrate what the smart guys in the biz think... that said, world-class projects will be developed, but there are tops a dozen or so of those extant for the ENTIRE mining industry.

Base metals are wild and beyond me at this point: I just don't get how they trade, now. One day it's correlated to oil, and the next it is not. The Chinese are kicking the can: when they slip and fall, you'll know: copper will open LLD, and at that point, anyone holding ANY mining stocks is going to get creamed. I think we are no longer at that danger for the near-term, given the rhetoric out of China.

Right now, the Chinese are hoping that Libya aside, the Fed and ECB will begin a tightening cycle, taking the burden away from them. We'll see... it'll be difficult for the US to ramp up its trade deficit if C&I lending is tight. There is no question the economy in the US is improving. Ironically, I find it when the economy seems choppy rather than flagrantly atrocious, it makes forecasting quite a dangerous and futile effort. The Chinese successfully executed inverse monetary policies before -- most notably, during the Tiger blowups.

What I am curious to know more about, though, and learn about is how the ex-China BRIC's are coping with a stronger currency: are their economies maturing, or are they just less profitable, now? From what I have seen out of Brazil, C&I seems solid and there is no credit bubble, at least according to the folks at Itau...

This is why Soros thinks Iran is Going Down..

2011-03-04T13:07:00.001-08:00

Iran's next wheat harvest will be 30 percent less than forecast due to drought, forcing it to resume imports, the head of the national farmers' association was quoted as saying on Saturday. The news comes as world food prices reach record highs, with storms, floods and droughts hitting food belts around the world.

http://www.brecorder.com/news/agriculture-and-allied/world/1152536:news.html

GOD DAMN THE ECB IS FUCKING STUPID!

2011-03-03T06:56:00.000-08:00

Did the Chinese put you up to this?

Raise rates, you fucking morons: you're just going to torpedo your anachronistic economies with their vastly over-valued labor.

You think Euro white meat should trade at that much more of a premium than brown or yellow? Come on!

Well, if the ECB does tighten, the Chinese can get their Goldilocks scenario...

Staying long: Trichet is helping China stay the course. Of course, his Egghead analysts don't worry about that: they're all worried about measuring their Orthodoxy against each other.

They're going to sink their economies with the stronger Euro... man, I guess they want Obama to definitely get re-elected, eh?

I'm dying with laughter here... what a bunch of IDIOTS!!!

Crazy Libya Rumors...

2011-03-02T14:49:00.001-08:00

Zim sending military aid and men to fight for Qaddafi... Chinese and Russians pumping weapons through Zim and other proxies (*cough* ANC *cough cough!*)... the usual fucktards are busy, again!

This is far from over, in my opinion, and has excellent escalation potential.

The Fed is NOT to blame for the rising prices

2011-03-02T12:26:00.001-08:00

DUDLEY IS CORRECT!!!

From whom do we import inflation from?

CHINA
CHINA
CHINA
CHINA
CHINA

!!!

Qaddafi blackmail in Mali, Chad, and Algeria

2011-03-01T14:14:00.000-08:00

Things are moving fast, but there are reports of huge numbers of tuareg and other tribesmen, by the thousands, coming to Libya to fight for the prize.

Qaddafi is going to take this to the brink: you want US Marines and FAILTO shooting Tuareg and black muslims? I'm thinking Al Qaeda Maghreb would thank you for that... you can't BUY a better pretext for Global Jihad.

The guy has BALLS: you have to respect that.

When O Wen?

2011-02-28T01:41:00.001-08:00

Wen came out today and said there will be no big, one-off RMB reval -- again.

The PLA continues to send its fodder into the gaping maw of inflationary penury.

It proves that China has no edge aside from its ponzi FX game.

If the PBoC continues to meekly raise rates in coordination with QUALITATIVE tightening, then perhaps the Chinese can kick the can far enough to have it land in Bernanke's court... maybe a screaming Yen/Real/Rupiah can backfire on the US, given enough time?

Loose monetary policies implemented by wealthy countries in an attempt to power their economies towards recovery from the global financial crisis were another complication.

"Due to quantitative easing and near-zero interest policies, investment returns of (our foreign exchange reserves) are increasingly moving towards lower and lower levels. Although we have achieved fairly good returns through management, it should be said that the environment is not optimistic," he said.

"For me, that's a big challenge," Yi added.

To staunch the growth of its bulging reserves, Yi said that it was imperative for China to cut its current account surplus.

However, he said that China had to take "herbal medicine" in a mixture of gradual policies, rather than a radical approach.

"We will work hard this year to expand domestic demand a little bit; to reduce reliance on external demand a little bit; to increase wages and social insurance a little bit, enhance environment checks a little bit, reform resource pricing mechanisms a little bit, relax outbound investments a little bit, and make the yuan a little bit more flexible," he said.

http://uk.reuters.com/article/2011/02/26/china-economy-investments-idUKTOE71P00H20110226

Yi admits that China is losing ITS ASS on trade: their "surplus" costs them dearly, with their Treasury chits getting hammered. This is why China has such a strong Enron aspect to it: its industrial complex is moving closer and closer to NPV-negative as the dollar weakens and Treasuries sell off.

I admire their perseverance, despite PLA-level casualties: staying long!

PIIGS & Cous-cous

2011-02-25T01:33:00.000-08:00

No mention of recent riots in Greece in the media... Maghreb takes the cake.

Then again, rioting in Greece is like shitting on the beach on Liberia: it's part of life.

However, people are herding creatures, and this anger and agitation will vex many policy makers and central bankers in the developed world, too, as they seek to impose austerity.

It won't be so easy as many of them hope it will be...

Maghreb March Madness

2011-02-24T11:02:00.001-08:00

Saudi and OPEC are shitting themselves, as the continued oil surge could cause massive demand-destruction and associated economic ravages.

Here's the deal: the FACT that Saudi IS SHITTING ITSELF SO HARD MEANS THIS IS NOT A JOKE.

ANOTHER FACT: The media is UNDER-HYPING this event, given its magnitude.

INFERENCE: THIS IS SOME SERIOUS SHIT. BE VERY, VERY CAREFUL, and I AM LONG SELECT NAT GAS STOCKS IN EASTERN EUROPE AND CIS.

The End Approaches...

2011-02-18T21:06:00.000-08:00

The time for harvest is a matter of weeks and months -- not years.

2011 will be the reckoning for China.

Already, Brazil and now INDIA have turned against China. How will China defend herself? If China does not revalue her currency soon, she may find herself with tariffs on her exports from a righteously-indignant American-led coalition.

Perhaps this coup in Egypt was Chinese-led? Maybe the Chinese have a new flank open against the US? The question you must always ask yourself is: who is financing the new generals in Egypt who just let an Iranian missile-laden ship bound for Hezbollah-stan through the Suez?

China's options economically are basically gone. It's time for some serious war to force the hands of its trading partners. Perhaps they can shake Brazil off their back if the US gets ball-deep into a conflict with major Brazilian trading partners? As for India... hehe... the Chinese know what to do, there!

Regarding the market, I am using silver as my ''parabola'' indicator, and so far, it seems that we've begun, in my opinion, the final parabolic move up. Get ready to sell, gents!

The commodity bubble will burst -- again

2011-02-11T01:56:00.000-08:00

Bank on it.

The truth is, all OECD etc. growth metrics are predicated on lies -- namely, Chinese lies.

Just like my Congolese driver with a $300 smartphone and his kleptocrat patron with his $50k watch, the roads are a mess, the toilets don't work in the VIP lounge at the airport, and the place is generally totally unsuitable for proper, sustainable growth.

The projections used by these consultants and economists scare me, as they are wrong now as they were before.

China doesn't care to default on debt: it must then default on purchasing power, which in the end, will force them to realize massive losses on their negative-NPV projects. The US will look like a BED OF ROSES in comparison to China, especially with its ability to FEED ITSELF.

Which other market has the capacity to expand? Brazil is in decent shape, actually, and has decent fundamentals... despite itself. I can tell you right now that most of Africa is a joke and entirely dependent on bubbly Chinese demand for metals. Once the metal market corrects, you'll see social implosion returning the ANC back to where it belongs -- a junta governing a ghetto.

With Chinese GDP figures thrown into the bin, Japan with no catalyst worth mentioning, Europe retrenching for the foreseeable future, and the US in 'transition' mode, I can understand why Bernanke really doesn't fear inflation: who's buying, aside from desperate Chinese Generals?

Trading-wise, I expect a parabolic move up in agricultural commodities, and I will sell that. I don't know when the move will come, but when it does, it will provoke a global liquidity drain, and regardless of fundies, a liquidity drain IS A DRAIN. The crises is nearly 3 years old... I'm thinking we'll get massive correction, but NOT A CRASH, this year, which will savage naive LT money in commods. The problem is, the bear is commods may be long and vicious: smart guys will sell base metals and energy patiently, while baggies keep waiting for a central bank to emerge and save them, again... nope, Canada and Australia aren't that great, fellas.

I don't expect an immediate crash, especially thanks to Egypt putting everyone on high-alert for chaos. I do expect a period of complacency, another surge in greed in commods and risk in general, and hopefully, by then, I'll be well out of my gold (again!) and agriculture positions.

2011 may prove to be a real bitch, but if trading were easy, we'd all be rich, i.e. poor =)

Discounting Austerity

2011-02-10T02:17:00.000-08:00

I came up with a good one, recently, ''They unearthed a mummified black swan in Egypt, and boy, is it pissed!''

Who would have thought that the Egyptian proles would be pushed so far as to finally push back? Well, that ought to echo in Brussels, and Orthodox Central Bankers and planners seek to crush the lives of the proles to allow the debt service of insolvent 60-1 levered banks continue.

I.e. I don't expect a rocket-shot in the Euro any time soon... Egypt HAS changed the game: it HAS changed the discount-rate for factoring in austerity in a given monetary union, and it HAS changed how planners will react to future shocks.

IT HAS CHANGED THE MARKET.

Not-so-rare Earth Metals, phosphate, and trading blocs

2011-02-10T00:24:00.001-08:00

We see in the news, every once in a while these days, about Chinese forestalling further export of some commodity.

The dumbasses hence infer that there's a crisis in the phosphate market, for example, or rare earth metals (which aren't rare!)

The truth is, there's a shortage in NEITHER: there's about 200-400 years of phosphate reserves on this earth, although I'd argue maybe in 50-100 yrs phosphate prices will be significantly higher than they are today, but nothing unmanageable.

What is happening is exactly what happened during GD I: Empires formed Trading Blocs. The UK had a bloc within its Commonwealth, for example, and all major powers passed the ''pain'' to the colonies they exploited. China is doing the same with these policies.

By banning the export of phosphate, China seeks to keep DAP/MAP prices low internally, cooling inflation and giving Chinese farmers an earnings edge over their competitors. By banning the export of rare earths, China seeks to give Chinese manufacturers an edge over foreign ones who seek to use this resource.

It's an indication that the RMB-peg ponzi is coming to an end: the only tool left before capitulation is either military or domestic political upheaval -- again, either eat the pain, or export it to someone else!

End Game for Gold

2011-01-29T08:03:00.000-08:00

Soros came out recently and cut to the chase (which, by the way, we addressed, AND ACTED ON [ahem AHEM] MONTHS ago):

---

Soros said that while "the euro crisis is on the way to being solved" through closer cooperation on fiscal policy and the establishment of a permanent emergency support fund, the political consequences of the crisis could be more long-lasting.

In particular, countries such as Greece and Ireland that must repay huge debts are likely to grow much more slowly than other parts of the currency area.

"You now have two Europes, the haves and the have-nots," Soros said. "You will have a two-speed Europe and that isn't politically sustainable. There is a real danger that the common currency could lead to the political disturbance of the EU. The crisis could inflict such hardship on slow-speed Europe that it may lead to disintegration."

Soros said the agreements to provide help to Greece and Ireland are "flawed" because they do nothing to reduce the size of their debts. Irish voters want to see the debts of the nation's banks rescheduled, but Soros said that would damage banks in France and Germany, which own those bonds.

"The existing debt will be left as a burden on the debtor countries," Soros said. "You already have Ireland wanting to renege on that agreement because it is very unjust."

----

Ok, here's the deal:

The EU has galvanized its FISCAL union. This is absurdly bullish for the Euro, long-term.

However, the hitch to this giddy-up remains dragging soft-Europe through austerity: the political feasibility of keeping Greece, Ireland, and Spain tractable during this multi-year process isn't clear.

IF the market KNEW that the PIIGS would suck up the pain and deal with the misery and unemployment, etc, then gold would have well crashed in Euros, and that'd be the end of that.

This political dimension of the gold-in-euros trade is far from clear. I think while this uncertainty remains, Soros will definitely not sell all his gold.

Also, Soros alluded to the stop-go US economy, also keeping, I would suspect, interest rates in a nice spot for precious metals.

The end-game for the Euro is one of two situations:

1) PIIGS are kicked/kick themselves out, and the EUR-USD goes to 1.5+. Why Germany and France would want to doom themselves to depression, I don't know, but this is possible if they boot the PIIGS. I would think that Northern Europe wouldn't be terribly keen on engendering their own depression, but the egos of these Eurocrats knows no bounds!

2) PIIGS are kept in the EMU, France and Germany force Trichet to print. Taxes would have to be raised -- significantly -- in the wealthy bits of the EU to offset the weakness of Club Med.

Voila

Because of this POLITICAL uncertainty, it makes no sense for gold to crash quite yet. Add some ferment from Kemet, and we've a new high in the offing? Let's see if the IRA makes some hay, too :)

Gold Sentiment -- update

2011-01-27T12:37:00.000-08:00

Just an update from the trenches: the BB's for the various gold miners, be they in Canada, US, or Australia exchanges, are all on border-line panic.

We either drop another $70, or this is it... we'll see. I think it's worth a long: the sentiment is GOD AWFUL, and retail clearly is starting to panic.

There are absolutely no fundamentals at work, here: merely charts and sentiment. I'd really think we'd be under 1265, at least, if things were quite so dire.

How the ECB bailed out the PBoC

2011-01-27T05:45:00.000-08:00

Those idiots in the EU are falling into EXACTLY the same trap they fell in to during 2007-2008: 'tightening' at their own expense (for whatever vain reason) and buying China another 6 months of stupidity.

The European Bureaucrats win, since their sole priority is to preserve the monetary union -- at any cost. China bears ought to factor in the trade implications for China in a world where the Euro sits around 1.38-1.42 EURUSD...

Corporate Cash Relief -- and China

2011-01-24T04:11:00.001-08:00

I am glad to have a blog where my contributors are smarter than I am: that means I'm earning an intellectual profit, no? ;)

We are near another major catalyst in the market: the repatriation of massive amounts of corporate cash to the US.

Now, why would NOW, of all times, would HU bother with a visit to the US? Precisely because of China's interest in getting a nice chunk of the $500b-1T stimulus coming to the US in a matter of months. That Hu and Obama had such intricate trade deals involving the very companies that will receive this tax largess indicates that a very, very large wealth transfer is about to occur.

I am not sure this is all dollar-positive, though, as much of this cash repatriated to the US will be exported again to Saudi Arabia (and then duly recycled into T's and defense contracts!), Chinese sweat-shops, and Rare Earth Scam Stocks. Also, the RATE at which the money is repatriated is quite important, too, since the US would obviously want to avoid a dollar-shock to the economy. Perhaps we should keep an eye out for coordination talks amongst the major CB's w.r.t this large stimulus?

What I do not know is how Obama will control and direct this stimulus: what's the stop it all from being distributed to shareholders or for M&A, neither of which helps employment(in fact, M&A hurts employment, short-term), just as in 2004?

In any case, it's very bullish for equities to have this cash-hoard about to entire the market, but it's probably 50% priced in, by now. I guess sell the news?

Going long gold miners, again...

2011-01-20T09:21:00.001-08:00

We didn't even break the November lows on the news, today...

MOS news: TRADING 101

2011-01-19T06:46:00.000-08:00

If you still held MOS, or worse, sold yesterday and then BOUGHT BACK Like I did (ARGGHH!), then let this be a lesson:

you got SERVED.

Roll from MOS into BG. If you didn't get out at the open, I don't know what to say... it might bounce later... I would THINK so...

Hu not Cool about RMB

2011-01-17T04:59:00.001-08:00

Well, Hu came out today and said he doesn't believe the RMB-US peg needs to move.

Hmm...

China is STILL sticking to its guns, forestalling an adjustment in the value of currency -- fine. How many more Chinese can be tossed into the inflation wood-chipper until the machine gums-up and food hyperinflation collapses their crappy country?

Now, recall when the Hawks within China, namely the PLA and its associated slave-labor establishment (SEE who benefits from weak RMB, right? THE PLA AND CO!!! THE PLA OWNS A TON OF SHIT DIRECTLY OR THROUGH PROXIES!!!) tried to undermine Hu with a release about some junk "stealth" fighter that China had developed. The PLA has confidence that it can use violence to retain power, and if things do become hairy, Hu will take the blame, not the Generals of the PLA.

It's important to realise that China isn't monolithic: there are factions in China that support revaluing the RMB, and there are those that DO NOT and feel that the Chinese peasants can endure and suffer without end, especially with the persuasion of a few thousand T-72 tanks!

Adieu Vielle Europe...

2011-01-17T04:20:00.000-08:00

Truly, the reform within the EU has reached fever-pitch.

I can't be less of a euro-skeptic than I am now... again, watch those German sellers of gold!

The media has called the recent Euro run-up short-covering... I recall reading a similar causality for the S&P 500 when it went from around 700 to 850 in 2009: do you recall what happened, afterwards?

----

“European leaders need their backs to the wall in order to complete their monetary union,” Barry Eichengreen, an economics professor at the University of California at Berkeley, said on Bloomberg Television’s “Surveillance Midday” with Tom Keene. “I’m still convinced that’s what they’re about to do.”

http://www.bloomberg.com/news/2011-01-17/eu-ministers-begin-talks-on-rescue-revamp-as-germany-signals-flexibility.html
----

Prof. Eichengreen gets it. Don't fade him, or if you DO fade him, don't complain when you lose money!

Changing of the Guard

2011-01-14T09:47:00.001-08:00

Most major ag/fert names are over 2%+, today.

Most major gold stocks are off by as much as 10%+, today.

The gold move was a blip, it seems... maybe we are consolidating here for a move higher in gold, but some of the gold miner charts look awfully H&S'ish.

Anyway, staying long MOS and my hotel play, HOT, is paying nicely now.

HOT should have fabulous earnings on Feb 3... I expect that, at least!

USD driving gold, now!

2011-01-13T10:13:00.001-08:00

This is wild!

Now the USD is the driver for gold... we could still go a lot higher here, folks, but be careful, as the Germans aren't buying it...

$1375 tgt gold for today

2011-01-07T06:19:00.001-08:00

If we don't hit that today, then I might reconsider my gold trade...

SOROS on Ireland / EU

2011-01-06T13:57:00.000-08:00

NOPE, Soros isn't letting the ECB get away with their BS!

He's calling shenanigans on their restructuring plan with the Irish.

Once again, Soros is tilting at a sovereigns throat. I wondered where all this gold buying came from today, since gold, in my mind, should be quite dead...

NOPE! Soros has revivified it, at least for a while. Don't get too cozy, though, folks, and watch the gold price in EUROS carefully, as always.

One down, two to go!

2011-01-06T13:16:00.000-08:00

The military is getting a nice, fat haircut. This is good to see.

Next, Social Security and Medicare are up for some gouging.

The US won't default, the dollar won't hyperinflate, and gold won't go to 5000.

This is funny, though, since I just said I'm long gold miners for a trade, but wtf do I know =)

GOLD should have died today

2011-01-06T08:58:00.000-08:00

IT didn't.

This reminds me of copper when it was 3.6-3.7's during the China tightening hysteria late fall in 2010.

You know where copper went after that, right?

I see the same price action here: gold is running out of bears...

I bought back a whack of miners: here's to mayhem!

Pry Open the Door...

2011-01-05T20:41:00.000-08:00

"The move presents more of a symbolic value than a practical one and signals a strong interest by the World Bank in helping a wider use of the Chinese currency in global markets," said Gu Xiaoming, another representative of the World Bank in Beijing. "It also represents a landmark in that China is no longer a debtor country but a creditor, and that it will play a growing role in the World Bank."

---

Force the Chinese to suck money out... any way possible. In either case, it's a form of capitulation. I mean, come on: the Japanese have done it, and so can you!

The Chinese are sooo desperate to try and "game" their currency... they will fail. Iran is close to collapse -- again -- because of soaring FOOD prices. Watch that ag complex, folks!

How Many Months till Food Riots?

2010-12-31T06:02:00.000-08:00

Chinese President Hu Jintao visited low-income families in Beijing yesterday in a gesture to show the government is trying to narrow the widening wealth gap in the world’s fastest-growing major economy.

“The party and the government attach high importance to the issues of people’s welfare,” Hu said on the 7 p.m. news on state-run China Central Television last night, “There will be more measures to improve the lives of the people in difficulty.”

The government’s effort to provide better social welfare to low-income people comes as China’s Gini coefficient, a measure of inequality, reached 0.47 in 2009, exceeding the 0.4 mark used as a predictor for social unrest, according to World Bank data.

The Beijing Human Resources and Social Security Bureau said yesterday that it will raise the minimum wage by 20.8 percent in 2011 to 1,160 yuan ($175) a month and increase pension and unemployment benefits. Inflation reached 5.1 percent in November, the highest in 28 months.

The program also showed Hu asking Guo Chunping, a woman living in low-cost government housing, whether she can keep up with the 77 yuan rent a month for a two-bedroom apartment.

Hu urged the government to boost capital investment and land supply in the building of affordable and low-rental housing to “ensure the supply of practical and cheap housing for low- income people,” CCTV said.

http://www.bloomberg.com/news/2010-12-31/hu-jintao-visits-poor-beijing-families-vows-to-narrow-china-s-wealth-gap.html

Austerity 101

2010-12-30T08:36:00.000-08:00

http://www.nypost.com/p/news/local/sanit_filthy_snow_slow_mo_qH57MZwC53QKOJlekSSDJK

First, let your opponents vilify themselves.

Bloomberg played the Sanitation Union perfectly, and now they have the wrath of the nation upon them. This is a battle in a larger campaign to break the union contracts and restructure the state's obligations to its union workers.

Expect more episode like this one: the Fed will NOT QE5000 to bail-out stupid muni's: bank on that.

I recall driving on the UES a few days ago in the snow: there was over 3-4" of snow in one of the wealthiest sections of Manhattan. These union retards really have no idea whom they've messed with!

Anyway, muni yields out to rip in 2011, but the smart money will be scaling in once the panic headlines become obnoxious.

Rotation Defined

2010-12-30T08:28:00.000-08:00

AGU, MOS, and other ferts are strong today and have been continuously the past week.

Gold has failed to make a new ATH, yet silver HAS... as I write this, gold and silver are taking some heat off.

Again, I am "bearish" (how can you be with that chart!) on gold until it breaks 1435. I just don't like how it nor the HUI is trading at the moment.

AGU and MOS say one thing: MONEY BE HERE!!!

edit: I tried getting some shares of NovaGold to short today: none available, and this is on IBKR!

China's melting down...

2010-12-20T06:52:00.000-08:00

literally!

Now, the coal companies can't make money, anymore, given the austere price controls:

Experts have blamed the shortages on soaring coal prices, insufficient logistics facilities and increasing transportation costs, the Global Times said.

Some power cuts may be unrelated to the coal shortages, as local governments struggle to meet the annual energy efficiency targets set by Beijing, the China Daily said Monday.

China has sought to reduce energy consumption per unit of gross domestic product -- so-called carbon intensity -- by 20 percent by year's end from 2005 levels.

http://www.mysinchew.com/node/50005

Anyone who thinks we have a coal shortage is a fucking moron: we don't. We don't even have an oil, "shortage".

My view of the problem is simple: it no longer PAYS to burn coal in China. That's a fucking disaster: China has some of the cheapest power in the world. The price-controls in effect make burning coal in China a loser, given the cost inflation pouring in regardless of controls on input costs.

Like I said before, China is going to be forced to revalue their currency. They will pop. Jim Chanos will get paid.