The House of Mirrors
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Posted 09 June 2012 - 11:27 AM
The costs and implication of years of ZIRP policy has been steadily boiling the banking and insurance industry like so many cooked frogs. Case in point, a Citi analyst calls for increased earning pressure on banks suffering from scant interest rates as their holdings roll over. Seperately, the insurance industry is literally clearing out of Dodge, shuttering products and operations because of low interest rates. Of course who is even counting the shortfalls mounting up at pension funds because of poor income streams. And that’s not even considering the additional damage when the ZIRP bubble blows up taking the inflated bond market with it.It must be tough for the Bernank the man behind the curtain, seeing and knowing all this. We know he doesn’t give a rat’s ass about Aunt Millie, but it is now so bad, that his cronies in the FIRE industries have had to resort more and more to flaky derivatives and speculation (see Morgan Stanley). They are left hanging on Bennie’s every word for “market direction”. In a nutshell they are hooked and trapped. No wonder Weekend at Bennie seems to look more and more like a guy in a bathrobe who didn’t have a good morning constitutional. He is a man with just too many responsibilities, cornered into a house of mirrors world of his own making. It must be tough squaring the demise of whole industries with the need to keep the Wizard of Oz persona intact. I am frankly amazed at the spectacle.Back in the real world each and every day, market participants too are forced to square the rhetoric of a bailout, Oz infected economy versus the realities of the real economy. We have to constantly get our bearings, parceiros, because the real economy is nightmarishly distorted like a house of mirrors extraction criminals.In Spain’s case, they say they won’t accept money with conditions put on it. The bullish spin is that they will only ask for the money. Supposedly they only need 40 bn euros without strings. Now over the weekend talk is of a 100 bn euros “potential rescue”. Does that seem real? If Germany did actually sign off on this scam, then Spain’s banking collapse might be delayed for a short while (a few weeks? a few months?), as they continued to boil like frogs. Bear in mind that some estimates reach as high as 250 bn euros in order to recapitalize these banks.When you hear the propaganda term “recapitalize”, that is actually code for absorbing big losses. A real world policy would shut them down FDIC style and eventually sell the deposits to other banks. Even better, brand new fresh start privately financed banks using more stringent Basal requirements would buy the deposits and assets of value. But that would fly right in the face of the status quo house of mirrors.Also realize that once Spain takes the money, then their obligation in the EFSF bail out mechanism would be taken over by others. Those “others” are Italy, whose share rises from 19pc to 22pc. France’s share rises from 22pc to 25pc, and Germany’s from 29pc to 33pc. The smaller core countries like the Netherlands, Belgium, etc will pick up a little more as well. By piling more on Italy, and Belgium (and I have written that the Netherlands is in no great shape), the credibility of the guarantees given to EFSF bonds would collapse.Once Moody’s moves Spain to BBB, the ECB will require an additional 5% haircut on Spanish paper used as loan collateral, putting further stain on the country’s banks. Moody’s also stated, that should Greece leave the euro, they would review all euro area sovereign ratings, including those of the Aaa nations.Also on capital destruction watch, Alpha Natural Resources (ANR ) plans to reduce its Kentucky coal mining operations, which will cut thermal coal shipments by an additional 2M tons this year and 4M tons in 2013. ANR will discontinue mining at four mines and idle two coal preparation plants, production will be scaled back at several other mines, and four contract mines will close. More house of mirrors economics at play, as I believe that the only economically and environmentally feasible coal production left in the US is the Powder River Basin. The play there is Cloud Energy (CLD- more later) if it is flushed like a baby in bathwater during the next sell off.Interesting timing on these coal cutbacks, given that China will stimulate demand in oil [China set to announce steepest fuel cost drop since 2008]. Never forget that oil is too powerful of an energy source not to use if prices are down. It is very price elastic. That’s sufficient enough to push me from a fence sitting mode on the energy sector to bullish. I will make some moves the next time the market gets oversold. That’s with one caveat, generally avoid the US domestic nat gas industry that has been infected by Chesapeake Energy’s capital destruction behavior. Wait for CHK’s bankruptcy.I will be posting a major blog update on energy, but suffice to say, I don’t see a 2 standard deviation pricing event 0ff of the equilibrium price ($75), like what happened in 2008. In fact the nat gas and coal bust sets the stage for an even higher equilibrium price later. As prices slip somewhat below the 75 level, I am going to get progressively more aggressive towards this broad sector, including the incredibly neglected industrial revolution sector (update post coming soon on this).Elsewhere in the hall or mirrors world of stimulus, Sober Look quotes from China Daily about a new use it or lose it fee on vacant development land. With enormous vacancies on constructed building already, this one seems designed to clear inflated prices on land in China. So far China is not playing by the western bankster play book, and just wait until they dump US Treasuries to recapitalize their banks and counter capital flight.The S&P 500 gained over 3.5% this week. This is the best week of the year amid the lowest volume of the year. This was classic Oz, sistema hook behavior off of a very oversold condition. McClellan is back to 138, levels that have terminated rallies in the past, and this one is particularly suspect. The market is more bifurcated, with energy and materials not shortable. I’d like to pick more individual situations in the consumer area to short, like my nice LULU naked call sell last week. A number of individual names blew up even in an up week.The big kahuna continues to be the Treasury market. Commercials are moving more short across the board even as yields increased: 2 year, 5 year, 10 year, and 30 year. I wonder now if the immediate catalyst will be major involvement of the US in Spanish bank bailouts? Would also spark a hell of a reversal down in the USD. Game is over quickly if that cracks.My Ditto trading [Ditto Trade Invite] account is up and running and I am processing followers. I’d like to launch in two weeks, so get your account paperwork and funding done soon.
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