Friday, 5 November 2010

Bernoccio’s Super Put.

Baltic Dry Index. 2510 -32
LIR Gold Target by 2019: $30,000. Revised.

"To combat depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about; because we are suffering from a misdirection or production, we want to create further misdirection- a procedure which can only lead to a much more severe crisis as soon as the credit expansion comes to an end."

Friedrich Hayek, 1933

Buy everything but bonds and the dollar, the Bernanke “super put” has replaced the Greenspan put. That is the world’s reaction to the Fed’s announcement of another 600 billion of QE2. The world clearly thinks that QE2 will be followed by QE3, QE4, QE5, ad infinite. Once on monetization, it’s impossible to stop, until the currency gets withdrawn and replaced with another. The big powers are smart enough these days to leave the currency’s name unchanged. They just swap old dollars 100 to 1 for new dollars. Savers and the middle class get largely wiped out. This is the path the Bernoccio Fed has opted for. Stay long precious metals. At some point this decade we are headed for dollar swap of anywhere from 100 to 1 to 1000 to one, depending only on how long Bernoccio is left in charge of US dollar policy. Today we are revising our gold target to reflect our new decade of fiat currency destruction. For now we assume that the Fed and US Treasury will attempt the currency swap in multiple steps of 10 for 1. Ironically, the “strongest” major fiat currency is now the asset backed small population Russian Rouble. I’ll bet that Nixon never foresaw that when he made his great blunder at Camp David, August 15, 1971.

"The history of fiat money is little more than a register of monetary follies and inflations. Our present age merely affords another entry in this dismal register."

Hans F. Sennholz

Doubts grow over wisdom of Ben Bernanke 'super-put'

The early verdict is in on the US Federal Reserve's $600bn of fresh money through quantitative easing. Yields on 30-year Treasury bonds jumped 20 basis points to 4.07pc.

By Ambrose Evans-Pritchard, International Business Editor
Published: 7:58PM GMT 04 Nov 2010

It is the clearest warning shot to date that global investors will not tolerate Ben Bernanke's openly-declared policy of generating inflation for much longer.

Soaring bourses may have stolen the headlines, but equities are rising for an unhealthy reason: because they are a safer asset class than bonds at the start of an inflationary credit cycle.

Meanwhile, the price of US crude oil jumped $2.5 a barrel to $87. It is up 20pc since markets first concluded in early September that 'QE2' was a done deal.

This amounts to a tax on US consumers, transferring US income to Mid-East petro-powers. Copper has behaved in much the same way. So have sugar, soya, and cotton.

The dollar plunged yet again. That may have been the Fed's the unstated purpose. If so, Washington has angered the world's rising powers and prompted a reaction with far-reaching strategic consequences.

Li Deshui from Beijing's Economic Commission said a string of Asian states share China's "deep bitterness" over dollar debasement, and are examining ways of teaming up to insulate themselves from the tsunami of US liquidity. Thailand said its central bank is already in talks with neighbours to devise a joint protection policy.

Brazil's central bank chief Henrique Mereilles said the US move had created "excessive dollar liquidity which we are absorbing," forcing his country to restrict inflows. Mexico's finance minister warned of "more bubbles."

These countries cannot easily shield themselves from the inflationary effect of QE2 by raising interest rates since this leads to further "carry trade" inflows in search of yield. They are being forced to eye capital controls, with ominous implications for the interwoven global system.

In London and Frankfurt the verdict was just as harsh. "In our view, this is one of the greatest policy mistakes in the Fed's history," said Toby Nangle from Baring Asset Management.

----"A policy error," said Ulrich Leuchtmann from Commerzbank. The wording of the Fed statement is "potentially dangerous" because it leaves the door open to a further flood of Treasury purchases if unemployment stays high. "It is a bottomless pit," he said.

Of course, it is precisely this open door that has so juiced risk trades, from Australian dollar futures, to silver contracts, and junk bonds. Goldman Sachs thinks QE2 will ultimately reach $2 trillion, with no exit until 2015. Such moral hazard is irresistible. It is the Bernanke 'super-put'.

-----Bond funds are already restive. Pimco's Bill Gross says the great bull market in bonds is over, denigrating Fed policy as the greatest "ponzi scheme" in history. Warren Buffett has chimed in too, warning that anybody buying bonds at this stage is "making a big mistake",

----It has not been lost on markets that the Fed's purchases of $900bn of Treasuries by June (with reinvested funds from mortgage debt) covers the Treasury's deficit over the same period. The slipperly slope towards 'monetization' of public debt beckons.

Global investors mostly accepted that the motive for QE1 was emergency liquidity, and that stimulus would later be withdrawn. But there are growing suspicions that QE2 is Treasury funding in disguise.

China Says Fed Stimulus Risks Hurting Global Recovery

Nov. 5 (Bloomberg) -- China said the U.S. Federal Reserve needs to explain this week’s decision to purchase bonds to pump money into the world’s biggest economy or risk undermining the global recovery.

“Many countries are worried about the impact of the policy on their economies,” Vice Foreign Minister Cui Tiankai said at a press briefing in Beijing today. “It would be appropriate for someone to step forward and give us an explanation, otherwise international confidence in the recovery and growth of the global economy might be hurt.”

Cui’s remarks echo concerns raised across Asia as countries brace themselves for stronger currencies and possible asset- price inflation. German Finance Minister Wolfgang Schaeuble yesterday said the U.S. was creating problems for the world and the subject would be raised during next week’s Group of 20 leaders’ summit in Seoul.

Quantitative easing is just devaluation

JEFF RUBIN Posted on Wednesday, November 3, 2010 6:06AM EDT

-----It’s not domestic spending that the Fed really hopes to stimulate by printing more money, but, rather, exports. While the Fed’s zero-interest rate policy has yet to lever much in the way of a domestic spending rebound, no one can doubt its ability to drop the value of its currency.

With the U.S. Treasury depleted and interest rates already at zero, that’s about all that’s left in the policy tool kit. Lurking behind the Fed’s official concerns for deflation lies its real agenda—the old standby, the “beggar thy neighbor” policy of trying to export your unemployment to your trading partners via a falling currency.

And no one can say it isn’t working. The greenback has already fallen to a 15-year low against the yen. It’s down over 20 per cent against the euro, while the junior dollars of Canada and Australia have rallied to within parity.

Most of all, the greenback has fallen against gold (GC-FT1,388.905.800.42%), which is now a hair’s breadth from its all-time high. That’s because, unlike fiat currencies, bullion has no central bank to push back against the Fed’s devaluation efforts. Nor does gold have an export sector with millions of high-paid manufacturing jobs to protect. Gold is a currency with no economy to support, which makes it an ideal candidate as the other side of the U.S. dollar trade.

----If an already anemic recovery has spurred devaluation, consider how much more compelling that policy will be when Congress finally gets serious about reining in a record $1.3-trillion (U.S.) federal budget deficit.

If you think the economy needs help now, just wait until you see what it needs when yesterday’s bailouts become tomorrow’s spending cutbacks. It’s not zero interest rates but a euro/dollar exchange rate of 1.65 or a dollar/yen rate of 70 that are the real targets the Fed has in mind. And if it keeps its printing presses running, that’s exactly where the greenback will be headed.

It’s understandable why a country with nearly a 10 per cent jobless rate and a budget deficit roughly a matching proportion of its GDP, should want to export its unemployment. What’s puzzling is why the rest of the world still wants to hold its money as a reserve currency.

Mobius Says Fed Plan to Boost Stocks, Commodities

Nov. 5 (Bloomberg) -- The U.S. Federal Reserve’s bond purchase plan will further drive the rally for global stocks and push commodity prices “higher and higher,” said Templeton Asset Management Ltd.’s Mark Mobius.

“We could have an optimistic scenario for quite some time,” Mobius, who oversees about $34 billion, said in a telephone interview from Beijing yesterday. “Commodities are the big area for us. We are great believers in higher commodity prices and therefore are investing in commodity companies.”

----The liquidity flooding the global economy from the Fed’s quantitative easing will extend record gains for commodities and dollar depreciation cannot be avoided, said Mobius, 74, who is also the chairman of Templeton’s emerging markets group.

-----Mobius joins Goldman Sachs Asset Management’s Jim O’Neill in saying the Fed’s measures to boost the U.S. economy will spur further gains for global equities. O’Neill, creator of the BRICs acronym to describe the large emerging markets of Brazil, Russia, India and China, said this week that while a new “bull market” in global equities probably started in the past 15 months, current valuations are far from a “bubble.”

I think that stocks are in a bubble, but one deliberately created and assisted by the Fed. One that will end as badly as Greenspan’s stock bubble did at the turn of the century. Tuesday’s US election result only adds to the likelihood that US policy is now one of monetising the continuing US Treasury debt. With gridlock and higher US unemployment the likely result of the mid term election, and dollar devaluation and loss of reserve currency status looming, there is no other policy available in the Keynesian cook book. If the US dollar fails in 2011, the dollar reserve standard will have lasted roughly 40 years. If the monetary metals are restored in the new system, by the crooked central banksters who opt instead for an IMF Bancor, SDRs, or a basket of currencies, my guess is that the new reserve standard will fail in less than a decade.

In European news, it looks like Greece still has something to hide. The ECB this morning has turned down Bloomberg’s FIA request for details the ECB used to come to Greece’s rescue. The implication is that the detail is so bad that even 6 months later it will trigger an adverse market reaction. My guess is withholding the information will create an adverse action anyway, but one that will affect all of the PIIGS not just Greece.

ECB Rejects Request for Greek Swap Files, Citing ‘Acute’ Risks

Nov. 5 (Bloomberg) -- The European Central Bank refused to disclose internal documents showing how Greece used derivatives to hide its government debt because of the “acute” risk of roiling markets, President Jean-Claude Trichet said.

The ECB turned down a request and an appeal by Bloomberg News to release two briefing documents officials drafted for the central bank’s six-member Executive Board in Frankfurt this year. The notes outline how Greece used the swaps to hide its borrowings, according to a March 3 note attached to the papers and obtained by Bloomberg News.

“The information contained in the two documents would undermine the public confidence as regards the effective conduct of economic policy,” Trichet wrote in an Oct. 21 letter in which he rejected the appeal. Disclosure “bears, in the current very vulnerable market environment, the substantial and acute risk of adding to volatility and instability.”

The ECB is withholding the information six months after the European Union and International Monetary Fund led a 110 billion-euro bailout ($154 billion) for Greece. The government didn’t originally disclose the swaps, which were designed to help it comply with the deficit and debt rules it agreed to meet when it joined the euro in 2001. Eurostat, the EU’s statistics agency, is still trying to work out how Greece hid the deficit.

The Greek swaps fueled a financial crisis that threatened the breakup of the region’s currency. The government now says the swaps, some of which were arranged by Goldman Sachs Group Inc., may have caused “long-term damage” for taxpayers.

‘Full Disclosure’

“There’s only one solution to resolving the current uncertainty: full disclosure,” said Gustavo Piga, author of “Derivatives and Public Debt Management,” and a professor at Tor Vergata University in Rome. “The ECB, the European Commission and Eurostat need to show that they are aware of all the transactions and that they have no issue in disclosing them. The market has been left to think the worst.”

We close for the day with Greece preparing for local elections at the weekend. At some point ahead even the doziest work and tax shy Greek will see restructuring their debt is the only way out. Leaving the euro is less painful than staying in.

Greeks Bombing EU Hands in Bailout Show No Shame in Elections

Nov. 5 (Bloomberg) -- Two days before local elections that will show opposition to bailout-driven austerity, there’s little shame in Greece for bombs that are landing in the post box of the European Union.

More than a dozen explosives were discovered by police this week before the Nov. 7 vote, including one sent to German Chancellor Angela Merkel, who helped put together a package of loans in May to bail out Greece.

“Our lives in Greece virtually changed overnight, so it should be no surprise that we see such actions taking place,” said Christina Angreou, 34, a teacher in Athens who is declining to vote. “Not that I’m for such actions, but it’s a protest.”

Prime Minister George Papandreou faces his first test at the ballot box since his 13-month-old government inherited an economy that required a 110 billion-euro ($154 billion) rescue package from the European Union and International Monetary Fund.

After cutting wages and pensions and raising taxes on fuel, tobacco and alcohol, the 58-year-old premier raised the stakes for this weekend by suggesting on television he might call an early national election unless people endorsed his policies. The prospect of political upheaval may spook investors again just after Greece’s costs of borrowing had started to decline.

“He has chosen to turn the municipal elections into a de facto vote of confidence, which seems to involve taking an unnecessary risk at a delicate time,” said Alastair Newton, senior political analyst at Nomura International Plc in London.

“Well, fancy giving money to the Government! Might as well have put it down the drain.”

A.P. Herbert. Misleading Cases.

At the Comex silver depositories Thursday, final figures were: Registered 51.30 Moz, Eligible 58.88 Moz, Total 110.18 Moz.


Crooks and Scoundrels Corner.

The bent, the seriously bent, and the totally doubled over.

Today, another ratings agency gets cold feet over the state of US mortgages. Thanks to MERS and the deliberate destruction of the mortgage note, in anything up to 65 million US mortgages, it’s impossible to know who really holds ownership of the note, and with it the right to foreclose, and which notes have already been paid off by the US taxpayer via the nationalisation of Fannie and Freddie and AIG’s CDS. Over the course of 2011, we are likely to find out that most of the “triple-A” RMBS are fatally flawed and worthless. Trillions of “wealth” on the books will have to be written off. Tulips will have to trade as flowers again, rather than King’s palaces and gold mines. Right now our tulip bubble continues.

The reason “many firms file lost note counts as a standard alternative pleading in the [foreclosure] complaint” is because the physical document was deliberately eliminated to avoid confusion immediately upon its conversion to an electronic file.

Florida Bankers Association.

Foreclosure Fraud – Fitch Ratings has Assigned a Negative Outlook for the Entire U.S. Residential Mortgage Servicer Ratings Sector

Posted by Foreclosure Fraud on November 4, 2010

Fitch Ratings-New York-04 November 2010: Fitch Ratings has assigned a Negative Outlook for the entire U.S. Residential Mortgage Servicer ratings sector on increased concerns surrounding alleged procedural defects FELONIES in the judicial foreclosure process.

‘Risks to servicers include cost to research and remediate any errors, additional fees and resources, potential penalties and reputational risk,’ said Diane Pendley, Managing Director and head of U.S. RMBS Operational Risk for Fitch.

This industry-wide issue will cause all servicers to be under increased scrutiny from a wide range of state and federal regulators, state attorneys general, and GSE’s. All servicers will be affected, even those fully in compliance with all foreclosure rules and regulations. This is due to the increased amount of time and manpower it will take to properly address the much higher level of oversight and inquiries that are received, as well as the anticipated additional court delays.

-----Fitch has discussed with its rated servicers their ability to track and segregate the additional costs associated with taking any corrective actions.

If corrective actions are needed because of a servicer error, any increased costs should be borne by the servicers and not passed through to the trusts.

These increased costs may include legal costs to correct and file new or amended foreclosure documents and the increased carrying costs for the extended foreclosure and liquidation timelines.

Fitch may place an individual servicer’s ratings on Rating Watch Negative and/or downgrade the ratings if the servicer does not diligently and timely review its processes and take immediate corrective action to remediate any foreclosure action or documentation failures FELONIES. Fitch may take similar actions on a servicer’s ratings if the impact of the additional costs that must be borne by the servicer significantly affects its financial condition.  Until those conclusions are reached, the Negative Outlook on the sector impacts all U.S. RMBS servicers.

An increase in loss severities on liquidated loans from expected trend lines or any downgrades to servicer ratings may result in negative rating actions on related RMBS classes.  As a direct by-product of the recent foreclosure issues FELONIES, Fitch currently expects any negative rating actions on RMBS tranches to be limited largely to non-investment grade classes and tranches that currently have a Negative Rating Outlook. Additionally, Fitch does not envision RMBS downgrades to exceed a single rating category in most cases.

It is hard to believe that a man is telling the truth when you know that you would lie if you were in his place.

H.L. Mencken.

Another weekend, and wind and Atlantic gales come to batter Britain, though nothing like the dangerous storm about to brush past Haiti. Our thoughts and prayers for Haiti this weekend that they may be spared yet further destruction and impoverishment. More on the weekend blog. Have a great weekend everyone.

The monthly Coppock Indicators finished October:

DJIA: +204 Down. NASDAQ: +289 Down. SP500: +196 Down.

The bull market (or bear market rally) that commenced on Nasdaq on 30/4/09 at 1717 has ended. (30/5/09 SP 500 at 919, 30/5/09 DJIA 8500.) While the indicators can flip flop at market turns, this action is rare on the slow monthly indicators. October is the fifth down month in a row.

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