Imagine just a small if.

QE is, in fact, a ‘crop failure’ for the dollar. The Fed’s shifting of securities out of the economy and replacing them with clearing balances removes interest income. And the lower rates from Fed policy also reduces interest paid to the economy by the US Treasury, which is a net payer of interest. But the global markets mistakenly believed QE was producing a bumper crop for the dollar. They all believed, and some to the of panic, that the Fed was ‘printing money’ and flooding the world with dollars. So what happened? The tripped overthemselves to rid them selves of dollars in every possible manner. Buying gold, silver, and the other commodities, buying stocks, selling dollars for most every other currency, selling tsy securities, etc. etc. etc. in what was, in most ways, all the same trade.

And so now that the speculators and portfolio shifters have run up prices of all they tripped over each other to buy, the anticipated growth in spending power-underlying aggregate demand growth needed to support those prices- isn’t there. And, to throw more water on the fire, the higher prices triggered supply side repsonse that have increased net supply along with a bit of ‘demand destruction’ as well.

We could see some interesting developments, especially with Euro being at highest long positions in years, every Alpha chasing hedge fund long commodities, and consensus so strong SPX will go to the moon. Just a small reminder of how great equities are. Stoxx is flat since mid 2008. Is it worth the risk? What could happen if the crop is false, and we start moving away from the range we have been trapped in?

Cortesey Pragcap,

http://pragcap.com/qe2-captblogain-your-ship-is-sinking

The Economist lists the biggest Insider cases from 2000. Raj isn’t that spectacular especially if you compare to the big boys last century.

All these seem small fry by comparison to the great insider trading cases. Ivan Boetsky was fined $100m in 1986 (about $200m in today’s prices); Michael Milken was fined $600m in 1990 (around $1 billion).

http://www.economist.com/blogs/dailychart/2011/05/insider_trading

Greece needs to take some serious measures, and try to sort out the countrie’s many problems. Riots and demonstrations are becoming increasingly violent. The dilemma greece faces is, more loans, will mean more austerity. With private debt at the same levels as at the peak of the credit boom, austerity isn’t what people want. Watch out for further unrest. Below from Stratfor;

http://www.stratfor.com/analysis/20110512-greeces-public-protests-and-private-debt

Special edition to all the mega Silver bulls. Seems Silver is stuck in the 30-40 Usd range for the moment.

Forget what you have been taught, portfolio salvation can only be found in real assets and it is the only shelter from inflation, says renowned strategist Philipp Vorndran.

Speaking at Citywire’s Montreux event, the Flossbach von Storch strategist said the audience should stay as ‘far away from classical asset positioning as possible.’

His message to selectors was to invest in tangible assets like gold and silver, but warned them to store their precious metal investments outside of the eurozone due to the possible risk of government confiscation.

‘Silver will hit $100 in the next three years but the question is what the US dollar will be worth at that time. I would argue that gold and silver are not in a bubble, they have not increased in price but paper money has lost its value,’ said Vorndran.

http://www.citywire.co.uk/global/citywire-montreux-silver-to-hit-100-but-beware-of-confiscation-says-vorndran/a491709?re=14223&ea=221497&utm_source=BulkEmail_Global_Daily&utm_medium=BulkEmail_Global_Daily&utm_campaign=BulkEmail_Global_Daily

So maybe Wall Street is NOT guilty after all? Stupidity and huge risk taking (with abnormal bonuses) is maybe not illegal. A slightly different view to Inside Job and People vs Goldman oulined below;

“These assumptions do violence to our system of justice and hinder our understanding of the crisis. The claim that it was “caused by financial fraud” is debatable, but the weight of the evidence is strongly against it. The financial crisis was accompanied by fraud, on the part of mortgage applicants as well as banks. It was caused, more nearly, by a speculative bubble in mortgages, in which bankers, applicants, investors, and regulators were all blind to risk. More broadly, the crash was the result of a tendency in our financial culture, especially after a period of buoyancy, to push leverage and risk-taking to the extreme.

Mortgage fraud exacerbated the bubble—as did, among other factors, lax monetary policy, failure by Congress and successive administrations to rein in Fannie Mae (FNMA) and Freddie Mac (FMCC), and weak financial regulation, itself a product of the discredited but entrenched thesis that markets are efficient and self-policing. At the banks, overconfidence in “risk management” methods (which were mostly worthless) and ill-considered compensation practices were serious contributing causes.

As this list suggests, the meltdown was multi-causal. That explanation will be unsatisfying to armchair prosecutors, but it has the virtue of answering to the complex nature of the bubble. To prosecute white-collar crime is right and proper, and a necessary aspect of deterrence. But trials are meant to deter crime—not to deter home foreclosures or economic downturns. And to look for criminality as the supposed source of the crisis is to misread its origins badly.” (Businessweek)

http://www.businessweek.com/magazine/content/11_21/b4229060222515.htm

While the no volume melt up Algomania continues, we present you some unorthodox growing hedging techniques evolving. Bloomberg reports;

Terrorism can be good for bunker builders. An apocalypse can be even better for business.

Danila Andreyev started building “panic rooms” three years ago, when fears of terrorist attacks and commercial disputes turning violent created demand in Russia. Now he’s selling “survival bunkers” for as much as $400,000 each to capitalize on angst over theories the world will end next year.

“I myself am not a believer in doomsday scenarios,” Andreyev, 31, whose Spetsgeoproekt company is completing 15 bunkers at hidden locations across Russia, said at his office in central Moscow. “But when you start hearing clients talking about the end of the world, it gets you thinking.”

While Russia has been a target for terrorists, with 37 people dying in a blast at Moscow’s busiest airport in January, more people are looking to protect themselves from what Andreyev calls a “global cataclysm” in 2012 based on predictions such as interpretations of the ancient Mayan calendar.

Full hedging below,

http://www.bloomberg.com/news/2011-05-12/apocalypse-angst-adds-to-terrorist-threat-as-rich-russians-acquire-bunkers.html

Good reading from Market Watch.

Most people think the U.S. housing market has already collapsed. But prices haven’t fallen sufficiently. Thus, the U.S. economy will turn downward again on falling property prices and rising oil prices.

U.S. residential property lost $6.3 trillion in value, or 28%, between 2006 and last year. The current value of $16.4 trillion is 110% of GDP, which is still much higher than its historical average. During the previous property burst, total value declined to below 80% of GDP. Thus, the U.S. property-market adjustment may be only half done.

Homeowners had hoped for the best after the Fed cut interest rates aggressively and the federal government introduced tax incentives for first-time home buyers. But the bear market remains. Now, homeowners with negative equity have no reason not to default. The U.S. housing market is beginning its second collapse.

May we remind you of the long term property chart by Shiller.

Rising oil prices are outweighing the benefits of low interest rates. The U.S. economy consumes 23 million barrels of oil per day. For each $10 increase in the price per barrel, the additional cost to U.S. consumers is about $84 billion, directly or indirectly, or 1.3% of America’s GDP.

Health care, the financial sector and the military-industrial complex account for about 30% of the U.S. economy — more than twice the levels found in other developed economies, or in the United States three decades ago. This suggests the United States is carrying a 15% extra cost to generate the same output. Of course, the economy should be slow.

But the U.S. government is trying to simulate the demand side to solve a supply-side problem. That doesn’t resolve the problem but instead creates a new one — inflation. No amount of monetary stimulus by the Fed can bring high growth back to the United States, in my view.

China’s problem is the high and rising share of the state sector in the economy. My rough estimate is that state-sector spending is half of GDP. Two years ago, the state sector was big on the supply side. Now, it’s big on the demand side.

The inefficiencies associated with public-sector spending are easy to identify: Image projects across China have sprouted like spring bamboo shoots over the past three years. And this declining efficiency is the main reason for inflation.

The state sector has negative cash flow. Its magnitude grows with the size of state-sector spending. Hence, monetary supply needs to grow faster, ceteris paribus, with an expanding state sector.

Let’s see what happens. First we have to figure out how the US debt ceiling situation will be resolved. Meanwhile, let’s hope no big moves in oil, silver nor equities occur….

http://www.marketwatch.com/story/chmericas-slippery-slope-to-stagflation-2011-05-13?pagenumber=2

Small dummies refresh of debt ceiling and possible implications.

“Since it’s up to Congress, there is a huge political brouhaha in Washington. You’ve heard in years past that the government needs to increase revenues, rein in spending and balance the budget. And depending on whom you speak with, the path and the timeframe to accomplish that differ greatly. But the debate is much more urgent today because of the sheer size of our debt load.    

The threat of not raising the ceiling and not showing progress toward a balanced budget means U.S. creditors may lose confidence in the U.S.’s ability and willingness to pay. If we hit the ceiling, government payments could actually stop! That has never happened. In the past, the debt limit has always been increased. That’s not to say the path to get there has been smooth. But the U.S. Treasury has never failed to pay on its obligations as a result of reaching the debt ceiling.

Because the current global economy is unstable, even the unlikely possibility that the U.S. could default is a destabilizing factor worldwide. The markets have been and will continue to react until a resolution is reached.” (moneyandmarkets)

http://www.moneyandmarkets.com/hitting-the-debt-ceiling-44611

As we have written before, somebody needs to pay for the TEPCO fiasco. With TEPCO vanishing as a company as the days go by, it seems Japan wants the creditors to take haircuts on loans made to TEPCO, before the “solid” government can enter the compensation stage. Mitsubishi UFJ Financial Group Inc. -3%, Sumitomo Mitsui Financial Group Inc -4%. Solidarity sucks.

“With his nation’s economy contracting under disaster damage of as much as 25 trillion yen ($310 billion), Bank of Japan Governor Masaaki Shirakawa is signaling that his biggest worry is inflation.

At stake for the student of Milton Friedman is protecting the bank’s independence from financing public spending, as urged by lawmakers after the record March 11 earthquake. Shirakawa, 61, instead oversaw a 40-trillion yen boost in short-term funds, eschewing the scale of longer-dated asset purchases the Federal Reserve mounted after confidence in credit markets collapsed and the U.S. entered its worst recession since the Great Depression.

His strategy, which won the plaudits of 17 of the 24 primary dealers in Japan’s government bond market in a Bloomberg News survey, may not be enough as he warns of the danger of asset bubbles. The yen’s climb to about 6 percent from a postwar high against the dollar risks undermining exporters’ earnings.

He explained that BOJ purchases include riskier assets such as exchange-traded funds that mean its plan is more ambitious than adding government debt. ”(Bloomberg)

That’s great, central banks now all becoming speculators.

http://www.bloomberg.com/news/2011-05-12/japan-s-most-important-banker-sees-only-bubbles.html