The slope of the US Treasury curve is at or near record steep levels across most of the combinations. What determines where the curve slope will be going forward? This analysis attempts to answer that question by looking at yield per unit of duration risk. - Kletus Klump
At a loss for trade ideas (assuming of course that the masochistic streak is too strong to stay away from this travesty of a market for more than 24 hours)? Here is Goldman's John Noyce with some useful observations on key technical levels, correlations and pair trades to digest over the weekend. Trades covered include the EURUSD, the SPX, the Bund-UST spread, the 10 Year, China, and many other asset classes.
Guest Post: The Enduring Middle East Strategic Framework Begins to Emerge as Iran Surges, and the US ResilesSubmitted by Tyler Durden on 08/06/2010 - 18:55
The lingering impact of August 3, 2010, clash on the Israeli-Lebanese border lies in the greater context of, and wider strategic dynamics in, the Middle East. These aspects were highlighted by HizbAllah Secretary-General Hassan Nasrallah in his speech later that day.
Overall, the issue dominating the overall situation in the Middle East is the reaction by the local powers to the emerging new grand strategic reality: namely, the demise of the United States as the dominant regional power. This is a dramatic reversal of a concentrated US policy of more than half a century.
In an advance look at how the Q2 trading season turned out for Bank Holding Hedge Funds, some of which even accept your deposits to fund their 100x leveraged steepener trades, we have the first detailed 10-Q report out of Bank of America. Granted, the bank has a bunch of chimps running its trading operation and is thus not nearly indicative of the crack prop trading gurus at firms like Goldman and MS, due to not quite streamlining the whole prop-flow synergy bit while it had time (incidentally BofA is now looking for a seller for its prop operation) but the Fed and the government (or the Goved JV as it is known by those who suckle on its discount window teat) have made it so even a room full of chimps with Bloomberg terminals will pretty much generate trading perfection no matter what they do. So it comes as a shock that in the quarter following BofA's trading perfection days (which would be completely normal from a statistical point of view in a hyperbolic Universe, where superstrings don't need 10 dimensions, and where particle physicists are actually not superfluous), the bank has reported just 81% profitable trading days. Even scarier, the bank actually reported a day in which it lost $102 million, an event that has not occurred in over 60 days.
It’s kind of ironic, I find, that the very same people who are quickest to scoff when hearing the phrase “This time it’s different” – namely the professional investing class – apparently see nothing to worry about in the idea that the world’s largest debtor can run the world’s largest deficits… and do so at historically low interest rates. To which I would comment, “Trust your eyes.” If it seems as though the situation is untenable, it very likely is. The only real question in my mind is, how long can this fiction persist? To that I don’t have an answer, but I suspect that when the truth of the situation is revealed – possibly by the roundabout path of seeing one or more of the large Asian economies come unglued – things will get far uglier, far faster, than most people suspect.
RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 06/08/10
No longer in the twilight zone, the market is now democratic beyond reproach: of the idiots, for the idiots, by the idiots. The 10 Year is at 2.81% and refuses to budge as stocks explode. The catalyst - consumer credit, which came in slightly better than the expected trouncing even as the key source is revealed to be... entirely the Federal Government! In other words, forget Kremlin Joe: central planning works. Oh, and the Double DIP-ression is once again fully priced in.
When it comes to pointless (and bullish) reversion to the mean exercises,it seems nobody has a problem with saying stocks have to go back to 1,500 just because that's where they were, and the unemployment rate has to go back to 5% cause that's how we know the Fed is the immaculate and flawless piece of art it is, and always gets things under control to near-peak efficiency. Well, here at Zero Hedge we (again) decided to take the reversion to the mean approach and flip it, instead applying it to a deteriorating indicator, the labor force participation rate. The first chart below demonstrates the LFP rate, which a derivative of the chart we presented earlier, has now plunged to the lowest level in over 25 years, or 64.6% (gotta go back to December 1984 for the first time this was passed). So we decided to "normalize" the LFP by keeping it at the peak achieved at the turn of millennium, or December 1999, when it hit a peak of 67.1%. Now as everyone knows the US population has been soaring since then, and with the cost of living increasing ever more with each day, and as more and more family members are forced to join the work pool, it makes sense that in a normal economy, the LFP should continue rising instead of declining. We thus kept it constant at the 67.1% level (instead of doing the conservative thing and pushing it higher along the trendline), and ran the unemployment numbers through, assuming this part of the jobless equation was constant. To our surprise, we found that the U-3 rate (not the U-6), which today was supposed to be 9.5%, in fact turns out to be 13.0% as of July: an all time record save for the 13.6% recorded in December 2009. And if instead we use the trendline number of a 68.5% LFP rate, the unemployment rate today would be 14.7%. In retrospect we sympathize with Christina Romer's decision to get the hell out of Dodge.
Bernanke's Mentor Diamond Rejected By Senate For Fed Board After Shelby Alleges Lack Of Inkjet Cartridge QualificationsSubmitted by Tyler Durden on 08/06/2010 - 14:00
For somebody of Richard Shelby's "phenomenal" skill set (at destroying capital markets) to say that someone else is unqualified to do something is the proverbial slap in the face, with a wrecking ball. Yet a textbook example of a pot calling a kettle black is precisely what happened today when the Alabama senator said Bernanke's former economics professor, and thus implicitly the man responsible for the destruction of America's middle class, was "unqualified" to make decisions on monetary policy. Um, what the hell does one need to be a skilled monetarist, aside, of course, from a willingness to accept orders from Goldman, when the firm with actual leverage of 100:1 blows up on yet another trade, or lowering the fed funds rate to -5% whenever the latest theatrical dictator of Congress calls and demands that the "politically independent" Fed do everything to boost jobs, AMZN to $1,000 be damned, without batting an eyelid? Anyway, it looks like the president will have to once again resubmit the application of Peter Diamond to the Fed's board. And since the Senate took no action on the other two applicants, Yellen and some other female uberdove, it seems that with Kohn's departure on September 1st, the Fed will have just 4 governors until September 13, at the earliest, which is the minimum quorum for a decision. In other words, if anyone wants to really destabilize the country, the two weeks in early September should prove to be quite a good opportunity to strike.
Goldman Capitulates: Lowers GDP Forecast, Increases Unemployment And Inflation Outlook, Sees Imminent QE "Lite"Submitted by Tyler Durden on 08/06/2010 - 12:41
It's official: the double dip is here. Goldman's Jan Hatzius just lowered his GDP forecast for 2011 from 2.5% to 1.9% (kiss goodbye all those 93 EPS estimates on the S&P), increased his unemployment forecast from 9.8% to 10.0%, boosted his inflation expectation from 0.4% to 1.0%, and said that QE lite is now on the table, as he expects that "the FOMC to announce that they will reinvest the paydown of mortgage-backed securities in the bond market at next Tuesday’s meeting." Look for all other sell-side "strategists" (here's looking at you Neil Dutta) to lower their economic outlook in kind, and the 2011 S&P consensus to decline accordingly.
With all of the attention given to deflation recently, I thought it might be interesting to think about how this scenario could affect gold. After all, gold is thought to be the ultimate investment in a time of inflation. Does this mean deflation will destroy the value of gold?
More interesting than the question, in my view, is the road to the potential answer because there simply isn’t a clear one. However, based on everything I’ve read and researched, the outcome is closer to no: today’s deflation will not topple gold.
If listening to Mark Zandi makes you punch your monitor every time, this is, as always, required reading.
Well I did say we were awful close to the top the other day with AUDUSD running into a strong resistance at 0.9185 and forcing an ending triangle and the first of a cluster of resistances for S&P at 1,126. We saw that level and not much more... If the USD turns it will dry up liquidity in no time and make this seamingly cozy environment in credit turn sour faster than milk in Dallas these days. - Nic Lenoir