Compliments of reader Chindit13, we present to you this parable on how to keep your sanity under the modern version of "efficient" markets. For full effect, we also recommend a CDS-unhedged shot of ouzo, a triple rereading of Seth Klarman's lessons promptly forgotten, and two pills of 50 mg Amoralhazardine, followed by a visit to your central banker in the morning (just to be safe).
The Primary Source Of January's Surprising Boost To Consumer Credit? Why, The US Government Of CourseSubmitted by Tyler Durden on 03/05/2010 - 17:50
Today, the market spiked in the last hour of trading after it was announced that total consumer credit increased for the first time in a year (not all credit, mind you, just car loans; consumers are still eagerly paying down their credit cards). And who was the source for this generosity you may ask? Why, the US Government of course. Not only that, but Non-Seasonally Adjusted Consumer credit was actually down by $4 billion. But let the government have its smoothing fun. On a non-seasonally adjusted basis, consumer credit has declined by $108 billion in the past 12 months. What may be surprising, is that were one to strip away the contribution from the Federal Government of $78 billion, the decline would have been almost double, or $187 billion. Furthermore, in January, NSA consumer credit would have declined by $14 billion had it not been for the... wait for it... Federal Government, which sourced $10.4 billion in new consumer credit. So here is what happens in case you haven't figured it out already: the government takes taxpayer money, and lends it out to all sorts of destitutes at zero % interest, who have to keep up with the Joneses at all costs, and even though can not afford to put down any equity, must buy a new car every 6 months (even though they have likely not made a mortgage payment in about a year... not to worry, Uncle Sam is footing that too via the Federal Reserve and Fannie and Freddie), and when the news of the government's generosity hits the market, and the spin is that Americans are again confidentenough to borrow, the few SPARC machines left trading do whatever Liberty 33 tells them to, and bump up the total capitalization of the market by about $20 billion, putting money straight into the pockets of Goldman Sachs and other recent bailoutees, who without doubt deserved a $70 billion bonus season in 2009. And now you know where your money goes to.
Paging Ken Rogoff: CBO Revises Budget Deficit Higher By $1.2 Trillion, Says In 2020 Debt Will Be Over $20 Trillion, Debt-To-GDP At 90%Submitted by Tyler Durden on 03/05/2010 - 17:24
It's Friday after the close - time for the government to sneak one past traders, who are already on their fifth moqito. And sure enough, the bomb today comes from the Congressional Budget Office: The CBO, in an annual analysis of the White House budget proposal, said today that under Obama’s plan deficits would never shrink below 4 percent of the economy between now and 2020. The cumulative deficits would total $9.76 trillion, and debt held by the public would amount to 90 percent of the nation’s gross domestic product by 2020, the CBO said. In other words, the CBO has just confirmed that America has, at best, 10 years before it is officially bankrupt. That's about 9 years of multi-trillion bonuses for Goldman Sachs. Congratulations fellas.
According to the CFTC's Commitment of Traders report, non-commercial speculative shorts in the Euro declined for the week ended March 2, and for the first time in over two months, tracking the move of the EUR higher over the past week. Total net positions declined from -71,623 to -66,770, or a net long increase of 4,853. This is still the second highest net short exposure in over two years.
On the other side, a stunning push in Yen long exposure increased the net long Yen positions from 1,717 in the prior week to a whopping 32,552. The next question: will Japan promptly ask all these speculators to performSeppuku after they have done all they can to make the Yen more expensive, thus laying Japan's best laid plans to stimulate inflation to waste.
The third most relevant currency, the British Pound, saw a net short increase, with net short Non-commercial contracts increasing from -64,647 to -67,549.
Deep thoughts from T.P. Raman, Managing Director of Sundaram BNP Paribas Asset Management (and others).
The January G.19 statement is out, and confirms that consumers are buying ever more cars on credit, as if we didn't know this. Non-revolving credit, which is basically comprised of car loans increased by about $7 billion to $1.592 trillion, even as revolving credit continued declining, hitting $864 billion, down from $866 billion. Obviously, the market, which the last time the G.19 was released bounced, regardless that credit then declined by $4 billion is now bouncing again, not really sure why, but just tagging along with the computers. And the computers may very well be right: with the government soon expected to foot all consumer credit card losses in addition to GSE and financial firm toxic asset losses, why not just max it all out, after all mortgage payments are now about 6 months in arrears and nobody from the lender bank gives a rat's ass. Out of sight is out of balance sheet impairments. Credit is back, baby. And not like anyone will ever ask you to repay it.
The primary Greek opposition party to the ruling Panhellenic Socialist Movement (PASOK, which currently has a Parliamentary majority) has announced in Greek daily Ekathimerini that it would vote against the Austerity bill, thereby splitting a tenuous and brief period of consensus with the ruling party. The conservative New Democracy, which controls a mere 91 Parliamentary seats (out of 300 total) has said it "will only back certain articles of the draft law when it is voted on in Parliament today." Just more political posturing, or a catalyst for even greater social unrest? Keep an eye out on the euro for hints (so far, none).
“We must succeed at putting a stop to the speculators’ game with sovereign states. We can’t allow speculators to be the profiteers of Greece’s difficult situation. Derivatives must be curbed.” - Angela Merkel
As Extended And Emergency Unemployment Benefits Finally Begin Expiring, A Much Different Employment Picture EmergesSubmitted by Tyler Durden on 03/05/2010 - 14:31
The following very interesting analysis from Goldman focuses on an issue long-discussed on Zero Hedge and elsewhere, namely what happens when those millions in unemployed currently collecting unemployment insurance, finally start to roll off extended and emergency benefits, as terminal benefit exhaustion sets in, even with ongoing governmental unemployment stimulus programs. Goldman's estimate: approximately 400,000 people will no longer have the backdrop of so-called "government jobs" in which workers receive on average $1,200 a month for doing nothing. "If the rate of exhaustion continues at the current pace, this implies over 400,000 workers will exhaust their benefits in some months, even if Congress continues to extend the current, more generous, unemployment program." What this means for the economy is, obviously, nothing good: "Assuming something on the order of 400,000 exhaustions per month, at an average benefit of $1200 per month, this implies roughly $0.5 billion in lost monthly compensation compared with a scenario in which there are no exhaustions. If the relationship between exhaustions and initial claims 16 to 17 months prior (the maximum benefit period in most states) holds constant, the pace of exhaustions is likely to stay elevated for several months, implying several billion dollars in cumulative lost compensation." Couple this with front-loaded tax refunds, also previously discussed on Zero Hedge, and the "consumer-driven" economy in next few months is sure to see a rather substantial shakedown. Absent a dramatic increase in (c)overt Obama unemployment stimulus, is the extend-and-pretend phase of the bear market rally about to end?
“To reiterate, I continue to think that it would be a mistake for Congress to take action that formally conferred on Fannie and Freddie debt the legal status of debt issued by the Treasury. But nothing in that position prevents Treasury from acting as it thinks best with regard to its obligation to provide stability to the housing market and the financial system.” - Barney Frank, Post Appendage In Mouth
A few days ago the Cleveland Fed released one of the most pathetic attempts at pandering public support in the form of a video clip that apparently was created by a special ed detention brigade. Today, we present a remix of the very same clip, whose message we believe is much more relevant to our current economic situation.
As the Fed is ever-so-gradually shifting toward a tightening posture, many have wondered what will Bernanke's actions mean for the bond curve. With various liquidity facilities set to expire this month, and the recent discount rate hike already having been priced in, there has so far not been a muted response by the bond market, although over the past few days we have seen an odd tendency, albeit minor, for curve tightening. We say odd, because as Morgan Stanley points out, the Fed's actions, coupled with an unwillingness to actually hike rates, should be one benefiting ongoing steepening. Then again, the problem with that logic is that at this point going steep is like buying Greek CDS today: it pretty much means sloppy hundreds, with very few greater fools left over (and without the opportunity to arb a naked-short position via another nearly busted GGB auction). The silver lining is that at least the government will not go after you with an arrest warrant: after all the government wants nothing else more than a vertical yield curve. A brief analysis by MS details the argument for why steepening makes all the sense in the current environment where the long-end is looking increasingly shaky courtesy of marginal liquidity contraction, all the while risk-flaring episodes such as those in Dubai and Greece will likely keep the short-end well bid for months, if not years, to come.
While clueless politicians and bankers have still not come up with decisions that could turn around the economy, Mr. Market may soon force them into action. Greece may dominate headlines these days, but this buys other equally distressed Eurozone economies time to fly under the radar. Market talks center around the PIIGS (Portugal, Ireland, Italy, Greece, Spain) these days. While they fill headlines there is one Eurozone country that may be a stealth ticking bomb: Austria.
It is well-documented by economists at SocGen and elsewhere, that the world has now entered a race to the currency bottom. Ongoing recent actions by the BOJ, ECB, SNB and all relevant central banks have made this a near certainty. Yet the biggest question mark is how the US will approach the imminent dollar devaluation (and with many trillions in debt overhang needing to be rolled over, the Fed has two options: accelerated inflation or dollar devaluation) - will it be a gradual process or rapid and unexpected. A paper by Darryl Robert Schoon analyzes the various forces at play when evaluating the probability of a dollar devaluation. "Capitalism cannot function unless its constantly compounding debt is serviced and/or paid down. Today, the US, the world’s largest debtor, can no longer pay what it owes except by rolling its debt forward and borrowing more, what the late economist Hyman Minsky called ponzi-financing, financing common in the final stages of mature capital systems...We are in what Stephen Roach, Chairman of Morgan Stanley Asia, calls the end-game, the resolution of past monetary excesses and imbalances, excesses and imbalances that reached never-before-seen heights in the last decade." Nothing too surprising for regulars, yet a good summary of the dilemma facing the monetary authority of the United States.
Risk on - short yen for euros, buy stocks. Rinse, repeat. EURJPY back to 1.000 correlation with the S&P. Algo signals working AOK.