He shut his fund last year, but still manages his own money, some 2.5 billion Usd, he does not give interviews (except now, he is concerned) and he is the man who brought down the Sterling. Meet Stanley Druckenmiller, ex manager of Soros’s Quantum Fund. WSJ interview;

‘A financial crisis is surely going to happen as big or bigger than the one we had in 2008 if we continue to behave the way we’re behaving,” says Stanley Druckenmiller, the legendary investor and onetime fund manager for George Soros. Is this another warning from Wall Street that Congress must immediately raise the federal debt limit to prevent the end of civilization?

No—Mr. Druckenmiller has heard enough of such “clamor and hyperbole.” The grave danger he sees is that politicians might give the government authority to borrow beyond the current limit of $14.3 trillion without any conditions to control spending.

One of the world’s most successful money managers, the lanky, sandy-haired Mr. Druckenmiller is so concerned about the government’s ability to pay for its future obligations that he’s willing to accept a temporary delay in the interest payments he’s owed on his U.S. Treasury bonds—if the result is a Washington deal to restrain runaway entitlement costs.

Mr. Druckenmiller is puzzled that so many financial commentators see the possible failure to raise the debt ceiling as more serious than the possibility that the government will accumulate too much debt. “I’m just flabbergasted that we’re getting all this commentary about catastrophic consequences, including from the chairman of the Federal Reserve, about this situation but none of these guys bothered to write letters or whatever about the real situation which is we’re piling up trillions of dollars of debt.”

He’s particularly puzzled that Mr. Geithner and others keep arguing that spending shouldn’t be cut, and yet the White House has ruled out reform of future entitlement liabilities—the one spending category Mr. Druckenmiller says you can cut without any near-term impact on the economy.

http://online.wsj.com/article/SB10001424052748703864204576317612323790964.html?KEYWORDS=druckenmiller

Remember the debt ceiling? It is to be (b)reached this coming week. The Emperor is naked, but what would happen if Us defaulted? Better think about it, than rule out the possibility. From Reuters;

* Treasury bonds would lose their aura of safety, leading to a half-point increase in their interest rates. That would push up the U.S. government borrowing cost once lending activity resumed, leading to a $10 billion increase in annual budget deficits over the short term.

* The higher interest rates would ripple through the economy, causing gross domestic product to decrease by 1 percent and employers to shed 640,000 jobs.

* Banks would curtail lending. Small businesses would have a harder time expanding and credit-card interest rates would rise. Student loans and car loans would become more expensive.

* The S&P 500 stock index would lose 6.3 percent in value over three months, causing retirement portfolios to shrink, the report said, citing research by financial services firm Janney Montgomery Scott.

* The U.S. dollar’s status as the world’s reserve currency could be threatened as investors move cash to Swiss francs, Japanese yen, or Euros. That could boost U.S. exports but raise the cost of consumer goods like gasoline and electronics.

* Home mortgage rates, which are tied to U.S. Treasury rates, would rise. Homebuyers taking out an average mortgage for a new home, currently $221,900, would pay an extra $24,738 over the life of the loan, dealing another blow to an already struggling housing market.

http://www.reuters.com/article/2011/05/13/us-usa-budget-default-idUSTRE74C4TW20110513

We have argued that asset prices are a little too crowded trade for the time being. Usd getting rather strong this week, is telling us something is going on. Even though the extremely longs positions in Eur, have been cut during this week’s squeeze (fresh statistics out Friday evening), people are caught by surprice. We are waiting for the commodity flash crash version 2.0. Too much short term capital is overly exposed to these risk trades, and the exit is tight. Many “sophisticated” hedge funds, that have been riding the trend, won’t be able to sell out, mainly due to their love with these risk on trades. Another sudden price drop in oil, silver or equities, will leave people scratching their heads, while paralyzed. Let’s see if the market is ready for a pull back. We are getting some signs of the risk on trade loosing steam;

Small and mid-cap stocks, which typically lead a strong market, have started to see their relative outperformance to large caps wane. Meanwhile, momentum indicators show the strength in S&P 500 is starting to decline as well.

There are also signs of fatigue in the IPO market after a flood of Chinese IPOs and leveraged buyouts at the start of the year.

Shares of Chinese dating website Jiayuan.com (DATE.O) fell in their Nasdaq debut, while social networking site Renren (RENN.N), dubbed China’s Facebook, reversed all its gains on its market debut and traded below its offer price.

Goldman argues stocks have been driven further than economic fundamentals justify by heightened risk appetite. Sentiment indicators are elevated but off highs earlier in the year, while the CBOE Volatility Index, or Vix .VIX ,is at pre-financial crisis levels, signs investors may be getting complacent.

Small and mid-cap stocks, which typically lead a strong market, have started to see their relative outperformance to large caps wane. Meanwhile, momentum indicators show the strength in S&P 500 is starting to decline as well.

There are also signs of fatigue in the IPO market after a flood of Chinese IPOs and leveraged buyouts at the start of the year.

Shares of Chinese dating website Jiayuan.com (DATE.O) fell in their Nasdaq debut, while social networking site Renren (RENN.N), dubbed China’s Facebook, reversed all its gains on its market debut and traded below its offer price.

Goldman argues stocks have been driven further than economic fundamentals justify by heightened risk appetite. Sentiment indicators are elevated but off highs earlier in the year, while the CBOE Volatility Index, or Vix .VIX ,is at pre-financial crisis levels, signs investors may be getting complacent. (Reuters)

http://www.reuters.com/article/2011/05/13/us-usa-stocks-weekahead-idUSTRE74C76320110513

The original diagnosis of Greece was wrong. Its fiscal malaise was too profound to be sorted out by a bridging loan. The same mistake may well be being made with the bail-outs of Ireland and Portugal: the salve of temporary liquidity support does not necessarily help countries with deeper fiscal weaknesses. (Economist)

http://www.economist.com/node/18681704

From Economist today. Only company they forgot, Netflix.

SOME time after the dotcom boom turned into a spectacular bust in 2000, bumper stickers began appearing in Silicon Valley imploring: “Please God, just one more bubble.” That wish has now been granted. Compared with the rest of America, Silicon Valley feels like a boomtown. Corporate chefs are in demand again, office rents are soaring and the pay being offered to talented folk in fashionable fields like data science is reaching Hollywood levels. And no wonder, given the prices now being put on web companies.

Facebook and Twitter are not listed, but secondary-market trades value them at some $76 billion (more than Boeing or Ford) and $7.7 billion respectively. This week LinkedIn, a social network for professionals, said it hopes to be valued at up to $3.3 billion in an initial public offering (IPO). The next day Microsoft announced its purchase of Skype, an internet calling and video service, for a frothy-looking $8.5 billion—ten times its sales last year and 400 times its operating income. And those are all big-brand companies with customers around the world. Prices look even more excessive for fledgling firms in the private market (Color, a photo-sharing social network, was recently said to be worth $100m, even though it has an untested service) or for anything involving China. There has been a stampede for shares in Renren, hailed as “China’s Facebook”, and other Chinese web giants listed on American exchanges.

http://www.economist.com/node/18681576

From Stratfor;

Flooding on the Mississippi River is approaching New Orleans, leaving officials with a dilemma on how to handle it. In about 72 hours, floodwaters will hit the Old River Control Structure — essentially a canal linking the Mississippi River with the Atchafalaya River. This structure controls how much water goes into the two rivers; under normal conditions, the Lower Mississippi gets 70 percent of the flow and the Atchafalaya gets the remainder. The U.S. Army Corps of Engineers is currently debating doubling the flow of water into the Atchafalaya and opening the Morganza Floodway downstream, which — in theory — would remove the flooding threat downstream on the Lower Mississippi, including New Orleans, at the cost of flooding the Atchafalaya Basin, a lightly populated area with only a few thousand acres of cropland. The graphic above shows the worst-case flooding scenario estimated by the Army Corps of engineers if the Morganza Floodway is not opened.

Even though Europe is closed and some may be taking a drink or two, this is almost surreal. TEPOo will save radioactivity from spreading by, yes, pulling out a giant tent. If this is a joke or not, we cannot confirm, but here is the news; 

Giant polyester covers will soon be placed around the damaged reactor buildings at Japan’s Fukushima nuclear complex to help contain the release of radioactive substances into the atmosphere, the plant operator said Friday.

Tokyo Electric Power Co. (TEPCO) will install the first cover at the No. 1 reactor, the focus of recent stabilization efforts, starting next month.

Workers will erect a steel framework and place a giant polyester tent-like cover around the reactor building. Similar covers will be placed around units No. 3 and 4. The work is expected to be completed by the end of the year.

http://www.myfoxny.com/dpps/news/japan-nuclear-reactors-giant-tents-dpgonc-20110513-fc_13185892

As we have been arguing for some time, the market has reached an Inflection Point. The consensus positions, ie everybody trying to chase Alpha, but they only get Beta, are rather worriesome. Every hedge fund is long the inflation trade, long commodities, long equities, short the Usd etc. This is creating some big dynamics in the market. People have given up on shorting the market, vol is at depressed levels, but then all of a sudden you get the Usd stronger and stronger. People double up on Euro longs, buy more oil, silver, gold and wait. What will happen if this goes down a little more? We have built up a huge vacuum on the downside. Everybody is long, anticipating Fed will buy more, but nobody wants Fed’s AIG, nor GM at these prices. All moves are interconnected via Algos, but these Algos are never there when real flow wants to sell anything. We have reached a tipping point, where we believe market could face a real Flash Crash event. Below intraday Euro and Aud/Jpy.

Is the crop actually false?

http://www.thetrader.se/2011/05/13/usd-just-a-crop-failure/

Usd getting stronger. Euro drifting lower, remember, everybody long this Euro. AudJpy accelarating down. Risk off. SPX lacks momentum to break higher with any decent volumes. Let’s see how crowded these trades are?

Gross argues that increased demand is not the only factor pushing down yields. To fight the crisis, the Federal Reserve has aggressively expanded the money supply, in large part by dumping new money into the Treasury market. “We’ve been supporting Treasuries almost one for one,” he tells me. “At 8 a.m., the Fed calls up and asks our Treasuries desk for offers to buy, and one hour later, the Fed’s asking for bids to sell them.” The Fed, complains Gross, is “picking the pockets” of investors. Though he can’t quite bring himself to blame the financial powers that be. “God bless Ben Bernanke and Tim Geithner for what they’re trying to do, but the net result of a lot of what they’re doing is to take money out of the hands of savers.”

This is exactly the problem, really. Our national conversation about deficits is about politics—about ideology—not math. It’s a proxy war in our eternal battle over how much to tax and spend. Republicans care about deficits when spending is on the table, but as soon as they get a chance to pass some tax cuts, they forget they ever cared. Meanwhile, Democrats, who were outraged—outraged!—when the deficit averaged less than 3 percent of GDP under George W. Bush, are now silent about deficits that are running three times as high, and that are projected to stay above Bush’s even after Obama has left office. Very few true deficit hawks are left in America—only deficit vultures.

http://www.theatlantic.com/magazine/print/2011/06/the-vigilante/8503/