CNBC's Rick Santelli on the parlour game that is Quantitative Easing

Courtesy of Zero Hedge, will we ever see 'reality' again? Judging by CNBC's Rick Santelli's one-sentence epic rant Friday morning of the centrally-planned farce that we are living through... no. This exchange is in the clip above:

Liesman: "Why would you normalize rates?" 

Santelli: "Are we really that far down the hole that normalizing rates after this tremendous number - the huge drop in the unemployment rate - that you guys still wanna have the hammer-and-sickle on the flag"

So the short answer, it appears, is 'No'.

But perhaps it is Rick's seething anger in a second clip that exposes the reality of "the apologists" for the Fed and as he notes: "This whole thing is a Parlor Game and the country deserves better than Fed experimentation." 

Later in the day - an even more epic-er exchange.  In Liesman and Santelli II:

Liesman: "The Fed is doing the only thing it knows" 

Santelli: "The economy is better despite them." 

Anchor: "Where would we be today without the Fed?" 

Santelli: "We'd be significantly better now! What wouldn't have been significantly better is the one-year after the crisis - that would have been worse - but we would have been 'on the mend' Sam Zell-style, we would have hit a 'real' bottom."

Rick Santelli is so right.  The pain would have been sever, but malinvestment would have been cleared away and we would have had a genuine recovery by now.  Instead we are looking at a 'crisis' situation for years to come yet.

Both clips are well worth watching if economic policy interests you.

   

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A significant development on the precious metals front

Intriguing article on the cutting edge blog Zero Hedge today.

It Begins: Bundesbank To Commence Repatriating Gold From New York Fed

In what could be a watershed moment for the price, provenance, and future of physical gold, not to mention the "stability" of the entire monetary regime based on rock solid, undisputed "faith and credit" in paper money, German Handelsblatt reports in an exclusive that the long suffering German gold, all official 3,396 tons of it, is about to be moved. 

Specifically, it is about to be partially moved out of the New York Fed, where the majority, or 45% of it is currently stored, as well as the entirety of the 11% of German gold held with the Banque de France, and repatriated back home to Buba in Frankfurt, where just 31% of it is held as of this moment. 

And while it is one thing for a "crazy, lunatic" dictator such as Hugo Chavez to pull his gold out of the Bank of England, it is something entirely different, and far less dismissible, when the bank with the second most official gold reserves in the world proceeds to formally pull some of its gold from the bank with the most. 

In brief: this is a momentous development, one which may signify that the regime of mutual assured and very much telegraphed - because if the central banks don't have faith in one another, why should anyone else? - trust in central banks by other central banks is ending.

Much more importantly, it is being telegraphed as such, with Buba fully aware of just what the consequences of this (first partial, and then full; and certainly full vis-a-vis the nouveau socialist regime of Francois Hollande which will soon hold zero German gold) repatriation will be in a global monetary arena, which is already scraping by on the last traces of faith in a monetary system that is slowly but surely dying but first diluting itself to oblivion. And in simple game theory terms, the first party to defect from the prisoner's dilemma of all the bulk of global gold being held by the Fed, defects best. Then the second. Then the third. Until, in this particular case, the last central bank to pull its gold from the NY Fed and the other 2 primary depositories of developed world gold, London and Paris, just happens to discover their gold was never there to begin with, and instead served as collateral to paper gold subsequently rehypothecated several hundred times, and whose ultimate ownership deed is long gone.

It would be very ironic, if the Bundesbank, which many had assumed had bent over backwards to accommodate Mario Draghi's Goldmanesque demands to allow implicit monetization of peripheral nations' debts has just "returned the favor" by launching the greatest physical gold scramble of all time.

The story, for those who follow precious metals, is a significant one.

Meanwhile Ireland is starting to question the status of their Gold.

As other nations scramble to build their Gold reserves or to protect the reserves they have already acquired, you may be wondering where all the Gold belonging to Canada is stored?

Canadian Watchdog bring us the wonder graph which reminds us that our country does not have any Gold...  we sold it all in the 1990s to pay our debts.

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The Dollar dump continues

Last Saturday we made reference to a Zero Hedge article that commented about what was then a record $77 billion in Treasury sales from the Fed's custody account.

The obvious conclusion from that data is that, contrary to what one hears in the media, foreigners are offloading US paper hand over fist.

ZH then wondered, if Treasurys are being dumped, "what they are converting the USD into, and how much longer will the go on for? The last thing the US can afford is a wholesale dumping of its Treasurys."

The concern is that the traditional diagonal rise in foreign holdings of US paper has not only pleateaued, but it is in fact declining: a first in the history of the post-globalization world.

Well here we are a week later and as of yesterday's H.4.1 update, the outflow has increased to it's 6th consecutive week by yet another $8 billion to a new all time record of $85 billion.

The 6 consecutive weeks of outflows is now tied for the longest consecutive period of outflows from the Fed's Custody account ever. 

This week's sale brings the total notional of Treasurys in the Custody account to just $2.66 trillion (down from a record $2.75 trillion) and the same as April of last year. 

And since the sellers are countries who have traditionally constantly recycled their trade surplus into US paper, this is quite a distrubing development. 

As ZH notes, it is getting increasingly more difficult to ignore this disturbing trend, especially with US bond auctions mysteriously pricing at record low yields month after month. 

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Is a US dollar dump underway?

Zero Hedge notes the US Federal Reserve provides a weekly update known as the H.4.1.

Observers of the Federal Reserve's Custodial Treasury account follow these updates with keen interest. Recently they have been somewhat perplexed.  There has been a continued, weekly selloff of $56 Billion of US Treasury's.

Is the continued drop an asset rotation - under duress or otherwise - out of bonds and into stocks, to prevent the collapse of the global ponzi? Or, as Zero Hedge pondered, has the dreaded D-day in which foreign official and private investors finally start offloading their $2.7 trillion in Treasurys with impunity arrived?

Recall that a few months ago China has made it abundantly clear it will sell its Treasury holdings, the only question is when.

The most recent came out on January 4th and a further $17.7 billion has been "removed" from the Fed's custodial Treasury account.

The alarm bell that is going off her is that in six consecutive weeks, foreigners have sold off more government bonds in a sequential period of time than ever before. It means that someone, somewhere is very displeased with US paper, and, far more importantly, they want to make their displeasure heard loud and clear.

It is an interesting development worth watching.  The consolidated outflow notional is now a record high $77 Billion (beating the previous record of $52 Billion). Should the selloff accelerate, look for the Federal Reserve to have to step in.

The real question is what they are converting the USD into? And how much longer it will go on for?

The last thing the US can afford is a wholesale dumping of its Treasury's. The traditional diagonal rise in foreign holdings of US paper has not only pleateaued, but it is in fact declining: a first in the history of the post-globalization world.

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Are alarm bells sounding in the financial community about CIBC and Royal Bank?

Back in August, the website Zero Hedge sparked a debate about the soundness of Canadian banks.

The issues raised about Tangible Common Equity (TCE) were quickly dismissed by Canadian authorities, but the issue has been raised again with a slight twist.

In a post tonight, Zero Hedge strikes again zeroing in on something called Re-hypothecation which lies at the heart of the whole MF Global scandal.

In investment banking, assets deposited with a broker will be hypothecated such that a broker may sell securities if an investor fails to keep up credit payments or if the securities drop in value and the investor fails to respond to a margin call (a request for more capital).

Re-hypothecation occurs when a bank or broker re-uses collateral posted by clients, such as hedge funds, to back the broker’s own trades and borrowings. The practice of re-hypothecation runs into the trillions of dollars and is perfectly legal. It is justified by brokers on the basis that it is a capital efficient way of financing their operations much to the chagrin of hedge funds.

In the UK, there is absolutely no statutory limit on the amount that can be re-hypothecated.

By 2007, re-hypothecation had grown so large that it accounted for half of the activity of the shadow banking system.

Prior to Lehman Brothers collapse, the International Monetary Fund (IMF) calculated that U.S. banks were receiving $4 trillion worth of funding by re-hypothecation, much of which was sourced from the UK. With assets being re-hypothecated many times over (known as “churn”), the original collateral being used may have been as little as $1 trillion – a quarter of the financial footprint created through re-hypothecation.

In its quarterly report, MF Global disclosed that by June 2011 it had repledged (re-hypothecated) $70 million, including securities received under resale agreements.

The off-balance sheet treatment means that the amount of leverage (gearing) and systemic risk created in the system by re-hypothecation is staggering.

Re-hypothecation transactions are off-balance sheet and are therefore unrestricted by balance sheet controls. Whereas on balance sheet transactions necessitate only appearing as an asset/liability on one bank’s balance sheet and not another, off-balance sheet transactions can, and frequently do, appear on multiple banks’ financial statements.

What this creates is chains of counterparty risk, where multiple re-hypothecation borrowers use the same collateral over and over again.

Essentially, it is a chain of debt obligations that is only as strong as its weakest link.

With collateral being re-hypothecated to a factor of four (according to IMF estimates), the actual capital backing banks re-hypothecation transactions may be as little as 25%. This churning of collateral means that re-hypothecation transactions have been creating enormous amounts of liquidity, much of which has no real asset backing.

So what does all this have to do with CIBC and Royal Bank?

With weak collateral rules and a level of leverage that would make Archimedes tremble, firms have been piling into re-hypothecation activity with startling abandon. A review of filings reveals a staggering level of activity in what may be the world’s largest ever credit bubble.

Engaging in hyper-hypothecation have been

• Goldman Sachs ($28.17 billion re-hypothecated in 2011),
• Canadian Imperial Bank of Commerce (re-pledged $72 billion in client assets),
• Royal Bank of Canada (re-pledged $53.8 billion of $126.7 billion available for re-pledging),
• Oppenheimer Holdings ($15.3 million),
• Credit Suisse (CHF 332 billion),
• Knight Capital Group ($1.17 billion),
• Interactive Brokers ($14.5 billion),
• Wells Fargo ($19.6 billion),
• JP Morgan($546.2 billion),
• and Morgan Stanley ($410 billion).

That's right, CIBC and Royal Bank have over $125 Billion of collateral backing up its derivatives book which is actually client collateral!!!

When the crunch came for MF Global, their clients collateral was seized and is now gone. It is being suggested that MF Global's bankruptcy has already set off a chain of events which not even all the world's central banks can halt.

Back in August, Canadian banks defended themselves against the concerns of TCE. And anyone looking through the balance sheet of Canadian banks could turn up no alert signals.

Was it because hundreds of billions of dollars worth of debt exposure was off the books?

Reuters is reporting on the MF Global Re-hypothecation scan here. It explains the whole issue very well. From the article:

A legal loophole in international brokerage regulations means that few, if any, clients of MF Global are likely to get their money back. Although details of the drama are still unfolding, it appears that MF Global and some of its Wall Street counterparts have been actively and aggressively circumventing U.S. securities rules at the expense (quite literally) of their clients.

After reading all this, do you feel safe with your money at CIBC or Royal Bank?

Look for lots of interest in Canada to be generated by this latest Zero Hedge post.

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Sat Post #3: Zero Hedge sparks a debate on Canadian Banks (updated 2)

It would be almost amusing if it weren't such a serious issue.

Thursday we referenced a post on Zero Hedge about Canada's Banks and their Tangible Common Equity (TCE).

This morning we covered an editorial by the Globe and Mail  on the Zero Hedge post (as well as pointing out that Sprott Asset Management made similar points in a 2009 report).

Even Garth Turner joined the Zero Hedge pile on.

Apparently the Globe and Mail made two editorials on the Zero Hedge post... and now Zero Hedge responds.

More as we come across it.  If you see any other articles out there on the Zero Hedge post about Canadian TCE, email them or post links in the comments section.

Update

Canada's Business News Network (BNN) discussed the Zero Hedge post here.

Financial Post: Swap market says Canadian banks super safe (hat tip: rumbleguts)

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Today in Silver

Two weeks ago we made a post that speculated that Silver might hit $40 by March 31st, 2011 in what was basically a buying feedback loop.

And while it failed to do so, 7 days later Silver has now broken that $40 barrier and closed going into the weekend at $40.93 with a stunning gain of $1.29 today.

ZeroHedge has come out with a great post citing a report from the Morgan Stanley metals desk explaining the stunning rise in price today:

• I was told on Wednesday that big buying went thru on Tuesday in may atm silver calls which should make the market short gamma.

• A short gamma position will become shorter as the price of the underlying asset increases. As the market rallies, you are effectively selling more and more of the underlying asset as the delta becomes more negative.

• So what that means is that the SELLER of the calls, probably bought Physical to delta hedge themselves neutral. As this market jumps just about 1-2% daily (this week alone +6.5%) they would need to now re hedge to bring themselves back to neutral by BUYING more Physical as SILVER goes higher, essentially driving the market Higher still and so the chase goes theoretically moving the market higher causing them to buy more to hedge and moving the market higher, thus buying into rallies.

• Now they could BUY puts also to create positive Gamma as well to offset some of that pain they are not bound to the Physical for their hedge. Lots of what if's but that’s the idea.

• On the other side if Silver were to gap lower, this would not help either as they would need to SELL Physical into a falling market to re-hedge themselves.

• Great in a slow steady market, nightmare in a volatile one.

As Tyler Durhan of ZH notes... Translation: ever-accelerating feedback loop (both higher and lower). Volume is about to go off the charts.

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Zero Hedge targets the Canadian Housing Bubble

One of the best sources for information for non-diluted non-mainstream media right now is the internet blog Zero Hedge.

For online news junkies, ZH is a daily must read - and almost mandatory you check in numerous times a day. And the site gets a lot of attention as a result.

ZH is much like the activist group Anonymous... contributions come from all over. Some stories get credited, some do not. You dutiful scribe has even had a contribution on the site.

So when ZH turns it's attention to the Canadian Housing Bubble, you know it's going to get exposure.

And in the wee hours of the morning (late last night for us West Coasters), Zero Hedge made this post titled 'The Canada Bubble?'.

The article is a reprint from the blog of Pension Pulse and is a lengthy breakdown of the Canadian Housing Bubble.

Check out both sites if the topic interests you.

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