We are once again delighted to bring to our readers The Punch Line: the consumate compendium of economic chart porn available, put together by Abe Gulkowitz, this time titled "The Big Swerve" for obvious reasons. As Abe comments: "There's a growing concern among even the most optimistic investors, companies and households that the United States has either entered a new recession, or never really emerged fully whole from the last great downturn. There is also a worse scenario and fear – that growth going forward could be seriously constrained because of a myriad of overwhelming issues with no quick fix. Even though many of the risks are long-term in scope, enough risks have been elevated in the near term. These concerns are centered on the weakness evident in many key indicators here in the U.S. and also overseas. And they are aggravated by the gauntlet of hurdles facing the euro area this month alone. What’s most disconcerting about the euro stress nightmare is that numerous announcements have already heralded the end of the crisis. Where was all the analysis and the review? Has no one reviewed the reality on the ground in Greece and in the other peripheral European countries at risk? And how deep are the exposures across the major banks? Weakness in a sector such as banking is different than weakness in advertising, for example. Rising vulnerabilities in banking and finance could jeopardize the entire financial system and world economy." What has made the usually cheery Gulkowitz so morose? The 18 pages of charts, headlines and factoids below explain it all.
By now we have repeatedly seen and heard Obama's vision of the American Jobs Plan, which as has been discussed previously is dead on arrival, specifically due to Republican opposition. As to what the republican oppose specifically, watch below as Boehner gives the first public appearance presenting the republican talking points on the AJA.
In light of continuing deterioration in macroeconomic data (we don't remember when the last time was that we had a materially better "than expected" data point) many are left wondering how it is possible, that when seeing broad signs of capitulation even among the permabullish contingent, the market has resumed its ceaseless levitation. Simple - as David Rosenberg recaps our post from two days ago, "Short interest on the NYSE and Nasdaq surged nearly 4% in the second half of August; these positions are now being squeezed, which is the "buying" support" the market has been experiencing in the low-volume rally of the past few sessions." Indeed, as long as the weakest hands who piled on the shorts into the latest market plunge are not cleared out, the current episode of no-volume levitation will continue. Sprinkle one or two favorable headlines which sends the robots into a frenzied bullish bias churn, and one can see why it may be time to whip out Birinyi's ruler.
By now most are used with rates for General Collateral and the OTR 10 Year particularly to trade at quite depressed levels. After all, with continued problems in European funding markets, there is little place for traditional capital to go than good old safe US repo markets. One need to just read the latest from collateral expert Joseph Abate of Barclays to find what the consensus on the matter is. To wit: "Higher bank funding rates, however, are unlikely to attract much demand from money market funds. Instead – and as they have done all summer – we expect prime funds to shorten their average WAM (from 39d currently) and to shift their asset allocations further toward repo, bills, and agencies, which already account for 30% of their holdings. We also expect prime funds to increase their already extremely high (46%) 7d liquidity buffer. In addition, money fund investors are likely to make some adjustments of their own – shifting balances out of prime funds into government-only balances. Some of the more risk averse money is likely to flow into non-interest-bearing demand deposits, which have unlimited FDIC insurance coverage through the end of 2012." On top of this there are technical considerations for even lower repo rates: "More immediately, dealers are preparing for quarter end. The normal end of quarter balance sheet repositioning (and shrinkage) is expected to further pressure overnight repo with collateral rates expected to stay pinned below 5bp through month end. Demand for term repo will also pick up as investors seek to pick up a few extra basis points." The same is just as true for the 10 Year OTR which "has traded deeply special given its limited supply – both in the market (as the first issuance) as well as in the Fed’s SOMA lending program. In recent days the issue has traded at a 250bp or more premium to GC." Yet something interesting happened in the actual General Collateral rate as of yesterday: it soared, despite both fundamentals and technicals, to the highest level since fears of an imminent US bankruptcy brought it to year highs in the first week of August.
This could probably explain a lot. According to the FT, which has managed to sneak a peek into Kweku Adoboli aka, the scourge of UBS, Facebook profile, in a July 31 update said: "Will they? Won’t they? Reduced to watching Fox News for guidance, it’s a grim affair". It appears that Adoboli should thus be commended - under those conditions we believe it is a miracle a person's loss can be confined to just $2 billion. FT continues with the cyberstalking: " That was followed a week later amid steep market falls, by an entry that read: “Can we shut down global markets for a week so everyone can just chill out?” It also appears that the Delta One'er (which is just a fancy name for "correlation desk" trader) enjoyed his downtime as well: "He came across as someone who worked quite hard to get where he was and played quite hard too," said the acquaintance. Yet by all counts it appears that the event that did ole' Kweku in was the Swiss intervention on September 6: "However, the final message left by the trader on his own Facebook page on September 6 simply read “need a miracle”." Odd: so does Tim Geithner and the Eurozone. Alas, as the latest "rogue trader" incarnation just found the hard way, those are in short supply these days.
Greek PM Papandreou address his cabinet this morning explaining how hard he has been working, how Greece is simply the scapegoat, how the media is to blame for the ever-decreasing circles they are running in, and how achieving 85% of what was expected of them in August was good enough.
Just two hours after the coordinated global central bank intervention signaled the all-clear for risk assets to infinity and beyond and a total solution for European sovereigns and financials, we are sad to deliver the news that all of the impact in equity markets has now been removed. ES has completely retraced the spike as have French banks. The only thing that is still holding better is financials spreads in Europe which are -25bps at 263bps.
It was just three months ago that we posted that the US Misery Index (inflation plus unemployment) hit a 28 year high. Today we boldy recycle that headline, and pretty much the entire post, as the US Misery Index just hit a fresh post 1983 high. Really nothing to add here: #WinningTheFuture.
Compare and contrast. This from Marketwatch yesterday: "Treasury Secretary Timothy Geithner is not going to Poland to push European finance ministers to boost the size of the euro-zone bailout fund, a U.S. official said Tuesday" to this just released from Reuters: "U.S. Treasury Secretary Timothy Geithner is likely to suggest to European finance ministers on Friday that they leverage their bailout fund along the lines of the U.S. TALF programme, EU officials said." And this: "Geithner will probably insist on the importance of leverage to have more funds to ringfence the big Europeans, Italy and Spain, and to find a solution for Greece," one EU official said. "The leveraging of the EFSF -- I think this is something that he will put on the table," the official said. "There could be some openness to the proposal." Read more here. All in all, just another day for the world's biggest pathological liar, tax evader, and overall economic disaster since, well, ever.
Love bizarro day, Embrace bizarro day, Have its child. The Philly Fed missed consensus of -15.0, printing at -17.5, though better than last month's abysmal -30.7 print... and stocks rip on expectations of more, more, more, intervention. As for how QE will work when the Philly Fed just announced its Prices Paid category doubled from 12.8 to 23.2... well, it don't matter to Jesus.
What just happened? The Central Banks have agreed to either create programs to lend in $'s or in the case of the ECB, expand their existing 7 day program. It is definitely globally co-ordinated, but for any central bank to offer a USD program, they need to work with the Fed, so assuming the ECB decided to work with the Fed, it seems like a no brainer to involve the other central banks. Bank of England is an obvious candidate - look at the share price declines of Barclay's and RBS. The Swiss Central Bank was likely to join already, but a day with UBS announcing a $2 billion loss, they had extra reason to go along. Japan always seems to be up for a good intervention. So it is globally co-ordinated, that is important, but it was also and easy and obvious co-ordination. What is the next action? I suspect we will see some effort to push sovereign CDS spreads tighter. Would it be something as intelligent as immediately forcing all sovereign and bank cds to be cleared? Heck no, that might annoy someone. It is more likely to be announcement of banning naked shorts, increased margins, and the ability for the EFSF if not central banks themselves to sell protection. CDS would gap tighter and bonds are unlikely to react much. When the ECB intervened in the Spanish and Italian bond markets, the initial reaction in the bond market was big. Over 1% in yield terms across the board in a very short time frame. The CDS never reacted as positively. In any case, the market remained dubious of the effectiveness and we have seen yields rise in spite of continued buying. CDS shorts will be painful if this occurs, but it won't fix anything long term. There is nothing about the budget problems in various countries that are affected by CDS. It also means that auctions are likely to do less well as the short covering bid dries up and that moves down will be exaggerated, just like the moves up.
One of the bigger beneficiaries (BNP) of this mile-wide hose-pipe of USD provided by the global central bankers has already retraced more than 75% of the reaction spike. As humans realize the desperation in this move and that solvency and liquidity are two critically different things, we suspect reality will set in further.
... Why Goldman lowered their S&P price target 12 hours ago, which as we said last night "leads us to believe that today's firing of David Bianco was merely due to him refusing to play along with the revised script. Which is as follows: the banks are buying everything that their clients have to sell in advance of, you guessed it, QE3 in the US and more QE in the UK, Europe and Japan for one last record bonus hurrah. While we can only hope we are wrong, if we are right this means the short squeeze on the market is about to slam shut and Goldman will make out like a bandit as usual, with the S&P soaring several hundred points on ever worse macroeconomic and geopolitcal data" now you know.
By now, we know that isolated central bank intervention has a half life of about 24-48 hours. Next, we will find out what the duration of a concerted global central bank intervention will be. The kneejerk reaction so far, at least in the EURUSD is good to quite good. And when the impact of this latest bailout is phased out, as it eventually will, who will step in for the next much needed heroin shot of unlimited liquidity? Mars? Or, more likely, Uranus.