Dumping yet another liquidity cold shower in the aftermath of today's less than dovish Humphrey Hawkins speech by Bernanke (and sending precious metals even lower, albeit briefly), is the Fed's resumption of even more purely optical liquidity extractions, however symbolic, in the form of reverse repos, after the NY Fed just completed the first such operation since the dark days of summer 2011. As a reminder, the last time the Fed did these was back in August 2011 which cemented the market's plunge as it gave the market the impression that at least superficially no more money was coming in (intuitively it makes no sense to have Reverse Repos running at the same time as incremental liquidity), even as the reliquification baton was quietly being passed to the ECB. Today, reverse repos resume, as the Fed pays Primary Dealers an annualized rate of 0.17% in exchange for lending out $100 million in Treasurys. Will this continue? It depends entirely on what the economy, pardon, the Russell 2000 does. After all, that is the third and only mandate of the Fed that matter. And if the market considers this an indicator that QE3 really is delayed indefinitely, the FRBNY will mostly likely be forced to reassess.
As good news appears to be bad news for now and the hopes of imminent dovish QE3-gasms gets pushed off a week or two, we thought it useful to dig into the mysterious central bank go-to play in a little more detail. Morgan Stanley's European Economics Team asks and answers five of the most frequently discussed questions with regard quantitative easing. From whether QE has worked to inflation fears and concerns over policy normalization and what happens if the public lose confidence in central bank liabilities, we suspect these questions, rather dovishly answered by the MS team, will reappear sooner rather than later, and as they interestingly note, the deployment of central bank balance sheets is, in essence, a confidence trick.
Just like the housing market in the US, following the modest blip higher in December Greek bank deposits, immediately the great unwashed took to calling an end of the Greek deposit outflow and seeing a glorious renaissance for the country's bank industry. Well look again. According to just released data from the Bank of Greece, January saw Greeks doing what they do best (in addition to striking of course): pulling their money from local banks, after a near record €5.3 billion, or the third highest on record, was withdrawn from the local banking system. As a result, total bank cash has now dropped to just €169 billion, down from €174 billion in December, and the lowest since 2006. This is an 18% decline from a year ago, or €37 billion less than the €206 billion last January, and is a whopping 30% lower than the all time deposit highs from 2007, as nearly €70 billion in cash has quietly either left the country or been parked deep in the local mattress bank.
Everyone and their mum knows by now that Italian bonds have rallied since the first LTRO and we are told that this is symptomatic of 'improvement'. While we hate to steal the jam from that doughnut, we note Peter Tchir's interesting chart showing how focused the strength is in the short-end of the bond curve (which we know is thanks to the ECB's SMP program preference and the LTRO skew) but more notably the significantly less ebullient performance of the less manipulated and more fast-money, mark-to-market reality CDS market as we suspect, like him, the CDS is pricing in the longer-term subordination and termed out insolvency risk much more clearly than the illiquid bond market does, and perhaps bears closer scrutiny for a sense of what real risk sentiment really looks like.
As we have discussed extensively, and noted this morning specifically, the LTRO is stigmatizing credit markets in Europe, no matter what European leaders or bank CEOs tell you. European credit and equity markets dropped dramatically post LTRO 2 and accelerated on Bernanke's lack of monetary exuberance. Financials underperformed but most notably, subordinated credit spreads widened significantly more than seniors holding at yesterday's wide levels. The Stigma trade is occurring in single-name credit also with the spread between LTRO and non-LTRO banks widening once again after compressing for a few days but it is the Senior-Sub spread decompression that is the liquid trade for European bank's implicit subordination for now (as the entire capital structure of LTRO banks just became subordinated at best and more levered and subordinated at worst). The EUR tumbled over 100pips towards 1.3350 as the USD rallied back to the week's highs. Silver (and Gold) crashed into the European close (down over 7% on the day at one point) while Treasuries sold off and European sovereigns leaked wider (except Portugal which crashed and Italy which compressed modestly). Quite a day.
Ron Paul To Ben Bernanke: "People Lose Trust In The Government Because You Lie To Them About Inflation"Submitted by Tyler Durden on 02/29/2012 - 12:29
Anytime Ron Paul sits across from Ben Bernanke you know sparks will fly. Sure enough, they did: starting 3 mins 50 seconds into the clip below, Ron Paul, guns blazing, asks the Chairman if he does his own shopping, if he is aware of what true inflation is, and if he knows that Americans don't trust the government because they are being lied to about inflation. And it only gets better, once Paul starts brandishing a silver coin. The punchline: "The Fed will self-destruct anyway when the money is gone" - amen. And ironically letting the Fed keep on doing what it is doing will achieve that in the fastest possible way. In fact, letting the system cannibalize itself with no further hindrances may be the best option currently available - just go to town.
It seems the initial drop was merely the appetizer as Gold and Silver are now down considerably...
Pouring more gasoline on the fire (or, actually, quite the opposite), here is Goldman's Hatzius who confirms that anyone who wants their QuuEee3ee, will just have to wait.
The slightly delayed reaction to Bernanke's semi-annual report to Congress is now rather impressive as clearly the market is saying 'QE3-off' for now, in line with our expectation from earlier when commenting on the GDP number we said that "As for the reason why the market is less than delighted with this "beat" is that with EUR Brent at record highs, courtesy of everyone else but primarily the ECB doing the equivalent of QE 3 in 2011's biggest deception play, it firmly take the Fed's punchbowl away at least for 3 months. More at 10 am when Bernanke testifies." 10 came and went, and the heroin addict known as the stock market was less than delighted that the only drug promised by Ben is the ZIRP methadone which does absolutely nothing for incremental liquidity. The question then is - without more QEesing, where will the next trillion in liquidity come from?
Today's second most important event is the testimony of Bernanke before the House Financial Services Committee (yes, Maxine Waters will be there). Lawmakers will question him about the Fed's plans on avoiding inflation and the current unemployment rate. Committee members are also expected to inquiry about fiscal policy, the status of the nation's economic recovery, the impact of rising gas prices, and the debt crisis in Europe. Most importantly, Benny will be asked to testify on when more QEasing is coming as the markets need their fix. Watch it live at C-Span after the jump.
Earlier today, when forecasting the Chicago PMI, we warned to "expect another massive beat courtesy of consumers confident that they can have Apple apps, if not so much food, since they still don't pay their mortgages." Sure enough, the economic data is now straight out of China, with the Chicago PMI not only trouncing expectations, printing at 64, on consensus of 61 (the highest since last April when the peak of the liquidity bubble popped and the stock market rolled over), but, wait for it, the Employment index came at 64.2, up from 54.7, which was the highest employment print since April 1984! At this point it is no longer worth commenting on economic data, as between this, the NAR, the consumer confidence, it was all become farce of a blur. we now expect February unemployment to print negative as the labor participation rate slides to 50%, and seasonal adjustments and birth/date fixtures account for 5 million "additions" to jobs. One thing that is sure. There will be no more easing for a looooooooong time. Kiss any hope of more trillions in central bank liquidity goodbye.
For anyone who traded in the 2003-2007 interval (second liens what else - did anything else even trade in that period), the name DB Zwirn was synonymous with hedge fund perfection. In fact, the only name that stood above it was that of Phil Falcone's hedge fund Harbinger. Gradually, both of these high fliers were replaced in the awestruck trader lexicon with another "legendary" hedge fund, that of Paulson & Co. But for a brief period the Zwirn offce at 745 Fifth is where every fixed income trader wanted to reside. Yet as always happens, anything that is too good to be true, isn't. Below is William Cohan, who in a way that only he can, spins the tale of the the rapid rise and even more rapid fall of the hedge fund manager who had it all by his thirties, only to lose it (mostly) all shortly thereafter.
While the narrower spreads in Europe created the unintended consequence of perversely reducing the urgency for banks to delever their over-stuffed balance sheets (and in fact in many cases likely make them worse thanks to the ECB), the US Household continues to (sensibly) slowly but surely reduce their leverage. As today's Bloomberg Brief notes though, the slow pace of deleveraging will continue to weigh on growth over the next few years - even as they have drawn down debt as a percentage of personal income from its peak in June 2009 at 114.76% to 101.1% at the end of 2012. There is a long way to go to the apparent Maginot line of supposedly sustainable 90% and with wage growth stagnant, the bulk will come from debt reduction in true balance-sheet-recession style - putting still more pressure on a perniciously polarized government to do anything about it.