This is what happens when Wall Street protesters
organize to the extent that they can actually effect the banks the same
way the corporate raiders control the Fortune 500.
Yes, outflows in domestic equities may be traditionally perceived as a
contrarian signal, but when they hit 23 out of 24 weeks for a total of
$106 billion (and the one weekly inflow was $715 million) one has to
start getting concerned about the cash levels of the broader mutual fund
space which as had been pointed out recently are already at all time
lows. In the week ended October 5, domestic equity funds saw an outflow
of $4.3 billion, which brings total 2011 outflows to a total of $93
billion. What was just as notable about the week is that while
traditionally we have seen rotation from equity assets into fixed
income, in the past week a whopping $6.2 billion was withdrawn from
taxable bond funds as well, implying that the ever increasing volatility
not only means retail has thrown in the towel on stocks but that the
already painfully low yields in bonds are forcing the long-term
investors to get out of the market in its entirety.
There are few opinions in the middle regarding the China story.
People are either convinced China is a juggernaut that can’t be stopped
and will become the dominant world power (a recent, global Pew Poll
found that 47% of respondents think China is or will be the dominant
global power), or they see a colossal bubble that will burst and cause
worldwide mayhem. While some might think my world-view has a negative
slant, I tend toward what I think is healthy skepticism that causes me
to view things in a more realistic manner. Based on the facts as I
understand them, the Chinese government has created a commercial and
residential real estate bubble in an effort to keep peasants employed
and not rioting in the streets. In the case of the US subprime mortgage
bubble, critical thinkers like Steve Eisman and Michael Burry figured
out it was a bubble three years before it burst. Jim Chanos and Andy Xei
have been warning about this Chinese bubble for over a year. They have
been scorned by the same Wall Street shills who denied the US housing
bubble. As Eisman and Burry proved (reaping billions), just because you
are early doesn’t mean you are wrong.
In a piece of news that can not be taken well by students of Dr.
Copper, the FT reveals for the first time that China's estimated copper
inventories, based on numbers from the China Non-Ferrous Metals
Industry Association, were 1.9 million tonnes at the end of 2010 which
is almost double the lower end of the consensus estimate of 1.0-1.5 MM
tonnes (and, as the FT points out, "more than the US consumes in a
year). So while copper is doing its high beta thing on the n
th
short squeeze day in stocks, the smart money is starting to bail for
very obvious reasons. And if the reasons are not obvious, this means
that "The estimates, which were announced at a recent meeting of the
International Copper Study Group but have not been made public, imply
that real Chinese copper demand may have been lower than thought in
recent years." In other words, and to all who are still confused by why
Zero Hedge jokes at each and every iteration of economic growth driven
by "inventory stockpiling", this is nothing other than trying to do at
the national level, what Goldman and JPM do at the LME level each and
every day: hoard and sell, only in China's case it is more hoard and
forget. Alas, when China itself is the only real marginal buyer (not to
mention that millions of domestic businesses operate using Letters of
Credit backed by copper), things get very, very ugly, and explains why
China has been so secretive about this number.
Philly Fed dissenter and rebel Charles Plosser, said something stunning
during
a Q&A session at the Zell/Lurie Real Estate Center at Wharton.
When asked what he thought of Operation Twist, his response: "it is fiscal, not monetary policy, and does not have much credibility ....Treasury
debt issuance could undo much of the effect of the Fed's attempt to
lower borrowing costs, known as 'Operation Twist', Plosser said. "It
doesn't have a whole lot of credibility attached to it." While we have
no doubt that Twist has no credibility and both the Fed and the market
will figure this weakest link out within a month, forcing the Fed to
proceed, over the 3 dissenters pseudo-dead bodies, with much more LSAP,
it is somewhat shocking to hear confirmation that the Fed itself now
sees its duties as those of the legislative, or the body tasked with
writing America's laws and funding required amounts of money via debt
issuance. Granted, it is well known that America's congress is now in a
state of perpetual impasse with no further stimulus likely to come as
long as the GOP controls the Congress and Obama is president. But at
least the American people (deserving as they are of their
representatives and president) pick those in congress.
The last time we checked, the "popular election" of the Fed chairman
is not in the purvey of the US constitution, and the only capacity
given to public representatives is to veto his nomination. Everything
else is decided in a banker-filled conclave. Which then begs the
question: has the Fed admitted the archaic concept of the US republic
is now over and done with?
That there are theories (and facts) blasting manipulation by various
central banks to supress the price of gold over the years is not a
secret to anyone (which incidentally is good for anyone who wishes to
purchase gold at cheaper price, but that is the topic for another day).
Yet one "conspiracy" we had not heard of until now is that America is
actively doing what it can to send gold higher. That is no longer the
case. A few days ago, none other than the capo di tutti Mexican cappi,
Iran president Mahmoud Ahmedinejad, proclaimed that "Iran's enemies were
deliberately causing the price of gold and foreign exchange to rise in
a bid to undermine the Islamic Republic's economy. "The enemies and
ill-wishers want to make a fuss and present wrong information to provoke
and deviate the market." The plot thickens.
From Reuters: "
In order to disturb the market they buy a lot of gold coins with their huge amount of money ...
they do the same in the foreign exchange market. But we have got
enough reserves to meet all the country's needs." And there you have
it: America is willing to risk the reserve status of its currency and
send everyone chasing after gold simply so it can destabilize the
Iranian economy... And now we've heard it all.
It appears Operation Twist was not enough for all...
- SOME FED OFFICIALS SOUGHT TO RETAIN OPTION OF QE3, MINUTES SAY
- SOME FED OFFICIALS SAW QE3 AS 'MORE POTENT TOOL' TO SPUR GROWTH.
- TWO FOMC MEMBERS FAVORED `STRONGER POLICY ACTION' LAST MONTH
Remember Golidlocks:
- MANY FOMC MEMBERS SAID INFLATION RISKS `WERE ROUGHLY BALANCED'
- FOMC MEMBERS SAW `RELATIVELY LITTLE RISK OF DEFLATION'
- 4:05: “Direct help for bank recapitalization from EFSF is not at all doable” – German Economy Minister (Translation: “Frogs, I thought we told you already, your plan doesn’t fly”)
- 6:00: “It is important to us that all banks are equipped for all
eventualities and must go to market first for capital” – German Finance
Minister (Translation: “May be they’ll understand if I say it – nobody seems to take Roesler serious”)
- 6:19: “There is no doubt on the soundness of French banks” – French government (Translation: “Hopefully the dim-wits at Agence France-Presse will print my statement without embarrassing typos”)
etc.
Today's $21 billion
10 Year reopening was
not pretty. First, the tail was a notable 3 bps with the When Issued
trading at 2.24%, ahead of the auction pricing a disappointing 2.27%,
well above the record low 2.00% from September, although still
materially lower than average yields in the past year. As troubling was
the Bid To Cover which came at 2.86 or the lowest since November 2010's
2.80 (compared to the LTM 3.10). Then looking at the internals should
be a cause of concern for anyone who believes that China will not
retaliate for the currency bill passed yesterday by Congress, after
Indirects took down just 35.0% of the full $21 billion, the lowest since
February 2010, at a 81% hit rate. Directs also showed very little
interest in the bond taking down only 6.4% compared to an LTM average of
10.7% (and the previous 11%). Who was the savior? The recently
expanded Primary Dealers of course, which took down 58.5, the most
since May 2009. Overall, an ugly auction although whether the reason
for the weak demand is due to inflation expectations returning, or a
capital reallocation from bonds into other assets, is for now unknown.
Maybe the moment we should be trying to avoid is the one that allows
weak institutions to exist. The weak institutions do not provide loans
because they are too afraid of losses since they mainly survive by the
good grace (and money) from governments at central banks. That is bad
enough, but they crowd out new money. Who is going to go after markets
where even a sleepy BAC could briefly wake up and crush you before you
ever got started. I have heard of some interesting companies out there
trying to provide loans to those who need them, but they can’t get any
traction. Too Big To Fail aren’t too sleepy to allow potential
competitors to grow. Stocks can rally. Lehman Moment can be said 500
times today. Every politician can worry about the impact of triggering
CDS. Every banker can claim the world would end if they are made to pay
for their bad decisions. In the end, Iceland and Ireland both improved
only AFTER they let banks fail. The US, for all the talk about Lehman,
is only doing worse than that since it decided banks couldn’t be
allowed to fail.
I know that America’s politicians and crackerjack team of central
bankers don’t see any signs of ‘non-transitory’ inflation, but anyone
who has been to the doctor or written a check for an insurance policy
knows otherwise. Hey, they’re on government health plans anyways, how
could they know? The increase is usually in the ballpark of 10% to 20%.
It’s crazy to think about the thousands of dollars each year that go
out the door on a plan that I never use, all so that I don’t get stuck
with a $200,000 emergency room bill in case of some highly improbable
event. It makes no rational economic sense. In every other country that
I travel to, I don’t have any insurance. If I go to the doctor, I pay
cash. If I go to the emergency room (and it’s happened quite a few
times), I pay cash. This is one of the great things about travel and
living overseas– healthcare is usually quite reasonable, often
downright cheap.
While we understand the motive of Greeks to cripple the financial
nerve center of the country by effectively immobilizing the finance
ministry and subjecting the country to a
9 day shutdown, we
are yet to witness the ingenuity of the people, when angry, to
completely lock down the country's financial apparatus, especially when
it comes to the revenue side of the ledger. Behold the latest reason
why the next time the Troika does its paper napkin "assessment" of the
Greek deficit to GDP it will be double digits, and have a 2 handle.
While it won't say much new to those "stupid enough" to exist in the
intersection of the "Retired" and "Alive" Venn circles under the
Bernanke central planning regime, we suggest any pensioners who hope to
see their life savings generate some...any... return (
on capital, or
of
capital) in their lifetime, to simply skip this article and read some
of our cheerier fare. So here is the punchline for pension fund managers
which now predict an utterly
insane 11% equity return which is the only thing that would make their Pension Plans whole: "
In
the early nineties, plan sponsors, if biased in their forecast, were
generally biased toward conservatism. From 1997 through 2007,
expectations, although a bit rosy at times, were largely within the
realm of reasonableness. In our view, a long-run equity risk premium of
11% is pure jibber-jabber. It is wishful thinking. I dare not predict
the level of the S&P 500 ten years out, but an ERP this high
suggests the S&P would have to reach unprecedented levels. If this
is what plan sponsors are counting on, I, like Clubber Lang, predict
Pain." And "Hope is neither a training plan nor an investment strategy." Uh, wrong. Have you seen the EURUSD these days?
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