All The Cards Were Coming From The Bottom Of The Pack

She gave me the Queen
She gave me the King
She was wheelin' and dealin'
Just doin' her thing
She was holdin' a pair
But I had to try
Her Deuce was wild
But my Ace was high
But how was I to know
That she'd been dealt with before
Said she'd never had a Full House
But I should have known
From the tattoo on her left leg
And the garter on her right
She'd have the card to bring me down
If she played it right

"The Jack" by AC/DC  AC/DC - The Jack

Now this is the real World Series of Poker, a real-time economic showdown being played out before our very eyes by the world's Central Banks. As opposed to the annual Las Vegas World Series of Poker, the buy in at the Central Bank World Series of Poker table is exponentially higher, in the range of trillions of dollars, yen, Euros, and Yuan. The stakes are default of sovereign debt and the accompanying collapse of that country's fiat currency. Like any poker tournament, there are players like the UK, the US, and Japan that have terrible hands (too much debt relative to GDP, slow GDP growth, and lousy demographics), versus those players with strong hands like China, and the Middle Eastern States (which have strong surpluses, strong growth, and favorable demographics). The crazy thing about the economic tournament is that we know who the weak and the strong are.

In most high-stakes poker tournaments bluffing is an integral part of the game. Knowing when to bluff, and equally important, when to call your opponents bluff, is crucial. If everyone knows you have a weak hand, you probably shouldn't be bluffing aggressively, unless you are really good at drawing to an inside straight. Last week, in the preliminary rounds, we had Greece bluffing to the Germans that they would run to the IMF if Germany didn't help them. Germany called their bluff and now the IMF is helping rescue Greece.

At the higher stakes table you have 130 US Congressmen calling on the Treasury Secretary to label China a "currency manipulator" and slap them with trade tariffs. Lets just hope that China doesn't call the US's bluff by selling a few hundred billion treasury bonds. Hilarious to think that we who have a constantly stated "strong dollar" policy, are so eager to have our dollar depreciated versus the Yuan! And while we're on the subject, all central banks are currency manipulators, including (though this may be a shocker to those 130 fools we call Congressmen), the US Federal Reserve. If Central Banks set interbank lending rates in their countries and do not allow free markets to set these interest rates (as they do), then by definition, they are manipulating the purchasing power of their domestic currencies.

Furthermore, US economists that continue to state that China is “trapped” by their large amounts of US dollar denominated debt and cannot offload their dollar denominated debt obviously know nothing about poker. The player with the strongest hand often may not win the hand, but they always have many more exit strategies at their disposal that will yield success than players with weaker hands. To believe China has no way out of this situation is patently foolish. For players with strong hands and a better cash position (which China possesses), there are always ways out that will yield acceptable results.

While most attention is focused on the US and China, lets not forget the dark horse sitting at the table, the Middle Eastern Sovereign Wealth Funds. Cumulatively the OPEC nations own hundreds of billions of petrodollars, and they will definitely have a say in who the ultimate winner is. Will the ultimate winner be the fiat currency that depreciates the least, or will it be something else like gold? Let's not forget that China secretly doubled its gold reserves over a 6-1/2 year period, while they bluffed telling the world that their gold reserves hadn't changed. 

When AC/DC wrote this song, several members of the band had caught the clap (venereal disease), hence the cute play on words (clap/jack). Let's hope that our bluffing doesn't result in us catching anything nearly as serious. 

Atlas Shrugged

"When you see that trading is done, not by consent, but by compulsion--when you see that in order to produce, you need to obtain permission from men who produce nothing--when you see that money is flowing to those who deal, not in goods, but in favors--when you see that men get richer by graft and by pull than by work, and your laws don't protect you against them, but protect them against you--when you see corruption being rewarded and honesty becoming a self-sacrifice--you may know that your society is doomed." ---"Atlas Shrugged" by Ayn Rand

I'm sure most of you are already sick of reading or hearing about Healthcare Reform, but I thought the quotes from ex-CBO director (2003-2005) Douglas Holtz-Eakin in Sundays NY Times were excellent.  He said that the job of the CBO (Congressional Budget Office) was to take only the data and assumptions given to them and calculate the outcome, he called it "fantasy in, fantasy out". He said, "front-end loaded revenues and back-end loaded expenses promote a fiction that a program that will cost $950 billion over the next ten years actually reduces the deficit by $138 billion." After analyzing the details Mr Holt-Eakin's numbers affirm what everyone suspects...the deficit will actually grow by $526 billion over the next decade. 

Long-term bond buyers beware.

The Federal Reserve is Independent?

If you ever wondered just how independent the Federal Reserve is, wonder no more. A recently declassified transcript of a July 16, 1974 phone conversation between Henry Kissinger and then-Fed Chairman Arthur Burns, demonstrates just how very involved in global financial bailouts the Federal Reserve gets under duress of the administration. In the span of about a minute Kissinger advises Burns to do whatever he must to "not let Italy go down the drain." The facility with which the Federal Reserve throws around US taxpayer capital to bail out the "chosen ones" is simply beyond reproach. Could the Fed be preparing a comparable bail out package for Greece as a measure of last resort? Would Ben Bernanke allow Greece to fail, killing the euro and sending the dollar into the stratosphere, destroying all hope of inflating the trillions in bad debt saddling America's banks and the Federal Reserve (which is now the world's biggest bank holding company)? Time will tell. 

Kissinger: I called you yesterday about the possible assistance to Italy if that becomes necessary and I understand that one idea is to use the swap line and that you are a little reluctant to do it. I don't want to get into fiscal details which I don't fully understand. I just want to point out from a foreign policy point of view we cannot let Italy go down the drain. Whether that is the way to do it or some other way, I don't know.

Burns: I agree and I have been actively trying to get other countries to contribute to a package but what we can do through the swaplines is very limited. The amount could be large but it is a three month loan and that is not what they need.

K. Yes. My people tell me you would not approve more than $300 million.

B. As a start.

K. Yes. Look, on financial things I am not somebody - I cannot get into a debate on numbers. All I wanted to stress to you is to really give this - if it arises - very high priority.

B. I agree and I was active in getting the credit line extended. Also in a meeting with the finance ministers I went around and pushed the Germans and Japanese to contribute to a package for Italy. It is a loan of medium term duration and the swap line does not serve that purpose. That is the essential point.

K. If you can give any other thought to that problem I would appreciate it.

B. You bet I will.

Full memo in the attached PDF:

file:///Users/user/Desktop/28803221-Kissinger-and-Fed-Chariman-Burns-on-300-Mil-Swap-to-Italy.pdf

Spain to join Portugal in issuing dollar denominated bonds 

It appears that Spain wants to jump on the dollar-devaluation bandwagon and is joining Portugal in issuing dollar-denominated bonds. If Europe's most insolvent countries (granted, Greece has yet to issue $-denominated debt, although we are confident that will happen shortly as well) are getting on board of the asset side of the Fed's balance sheet, it can only mean one thing: the InTrade odds for the winner of the currency race to the bottom are squarely in favor of the US currency. Earlier, the Spanish director of Treasury and financial policy Soledad Nunez, told reporters that Spain may issue a dollar bond via syndication. In a page right out of Greenspan's dictionary Soledad said: ""Usually we syndicate in dollars, and we have not made one yet this  year, and we may do so, maybe yes, maybe no. That is the answer." She added in Alan-speak: "Doing a dollar syndication is always in our strategy, it is always depending on market conditions." Translation: while the Euro may end up being the worst currency (hence the best to issue debt in), we want to hedge our bets by also issuing debt in dollars (just in case Ben Bernanke wins the currency devaluation race). 

Be careful out there,

Chris Wiles

www.rockhavencapital.com

This article contains the current opinions of the author but not necessarily those of the Rockhaven Capital Management.  The author’s opinions are subject to change without notice. This article is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.