The erosion of the profitability of the U.S. banking industry over the past two years under the glorious Summers-Geithner-Bernanke rescue scheme is the proverbial fly in the ointment for both major political parties. Democrats and republicans alike are going to be fed into the meat grinder over the next several years as the banking sector deals with literally hundreds of billions of dollars in direct and indirect expenses from the deflation of the mortgage bubble. For the economy, this slow process of muddle along championed by Summers and Geithner will ensure that Barack Obama becomes the Herbert Hoover of the Democratic Party. The economic carnage that will causes these losses, as we described in a recent post in Reuters, "Double Dip or Global Deflation?," is going to represent the worst economic contraction since WWI. Forget WWII. Think "shrinkage" to use the Gilded Age description for economic deflation. - Chris Whalen
When a central bank says it is effectively LBOing Keynesianism, you know it is over. Which is precisely what Guido Mantega, Brazil's finance minister has promised to do. The Latin American country which has been caught in the crossfire of developed world central bank wars, in which it is every last man for himself and he who defects first wins, has just stated it is about to defect (and just in case it is unclear, Mantega clarified that "Brazil's would act on the currency, not just a promise"). And to confirm he means business, Mantega also added that the Brazil Central Bank has no limit to buy dollars. But here's the twist - as reported by Bloomberg, Mantega, speaking to reporters in Brasilia, said the Treasury can sell more debt to increase liquidity to buy dollars. You heard that right: debt-financed currency intervention. At least the trade surplus countries use capital generated from excess exports. Brazil is threatening to do something never before seen, which is to lever up in its FX intervention. Surely, this has to be the last boundary of Keynesian insanity.
Today's POMO Begins: The Fed, Via The PDs, Prepares To Inject Between $3 And $5 Billion Into High Beta StocksSubmitted by Tyler Durden on 09/22/2010 - 10:17
All those who were observing the pounding in futures overnight, and are stunned once again by how stocks can be higher with horrendous data out of the FHFA on the home price index which plunged to -0.5% on expectations of -0.2% and a prior print of 0.3%, need look no further than the FRBNY, where Brian Sack is warming up the Bloomberg Terminals. Up on deck: anywhere between $3 and $5 billion in repurchases of bonds maturing between 3/15/2013 – 8/31/2014, with the money immediately going to the Primary Dealers, who bid up Amazon, Apple, etc, etc, perpetuating the myth that the American economy is not dead. Expect a run up in stocks into the 11 AM close of today's POMO.
I’d like to reiterate that the point of these primers is to explain the big-picture factors that have shaped my opinion on the direction of the economy in general, and housing in particular. So far we have seen that deflation and not inflation will be the dominant force over the next several years as we have reached a point of peak credit and peak consumption in the Western world. Beyond that is anyone’s guess, and the inflationists and hyperinflationists may yet be proven right. But it won’t be in the next few years, at least not in Canada. We’ve seen that real estate in Canada absolutely is in bubble territory when the data is considered rationally and compared to widely accepted measures of fundamental value. We’ve seen that the two big drivers of this bubble growth have been mass psychology (how many times have you heard, “real estate only goes up,” despite all the contrary evidence just south of our border) and also by the erroneous and self-defeating policies of CMHC. We’re once again looking at one of the macro factors that will exert significant downward pressure on real estate prices over the next several years: demographics.
Jefferies Principal Trading Revenues Plummet 80% Confirming Q3 Wall Street Drubbing: "Trading Volumes Painfully Slow Across The Board"Submitted by Tyler Durden on 09/22/2010 - 09:45
Jefferies shares have swooned today as one of the last remaining true broker dealers released Q3 results which missed massively on both the top and the bottom line. And if these are an indication of what most of Wall Street has to look forward to, Q3 will be a bloodbath for banks. As Barron's Tiernan Ray reports, citing CEO Dick Handler (talk about mean parents) that "trading volumes across the board were painfully slow during the months
of June, July and August,” said CEO Richard Handler — quite a contrast
from Q2’s results, when Handler said the firm was “pleased with solid
quarterly results.” Putting this number in context (from the 8-K), Q3 net revenues were $520 million, versus $700 million last year, a whopping 25% decline primarily as a result in the complete collapse in principal trading revenues to $74.3MM from $338,6MM, an 80% decline in this main profit center for Wall Street firms, which have recently all become nothing but glorified hedge funds.
In two recent articles "The Gold Market is not "Fixed", it's Rigged" and “The Failure of the Second London Gold Pool” I showed how the gold trading between the London AM Fix and the PM Fix was unnaturally related in an inverse way to the trading between the PM Fix and the following AM Fix. I calculated that the probability of such a counter-intuitive correlation existing by happenstance was one in 2.6 times ten raised to the power 31. This is almost irrefutable evidence that some one is continually and deliberately dumping gold into the PM Fix to suppress the price of gold. In this article I have unearthed even more forensic evidence in the form of a correlation between the gold and the silver price which again could not happen by random chance. It is necessarily a result of deliberate market intervention and what’s more it occurs on a continuous basis. - Adrian Douglas
Update: Spot now $1,296. The countdown has begun
October Gold settled at $1272.50 per 100 troy ounces on Tuesday, a net loss of of $6.60 for the day. After-hours activity was a different story entirely with a sharp rally after the FOMC minutes triggering an intense rally and prices as high as $1285. October gold was up $19.10 to $1291.80 per 100 troy ounces as of 7:50 AM EST, this morning. The December U.S. dollar index was down .643 to 80.03. October platinum was up $18.60 to $1634.70 per 50 troy ounces. December silver was up 46.5 cents to $21.10.
When the S&P future traded up 7 ticks post FOMC yesterday I stood up and offered to bet that stocks would finish negative on the day. With only a bit more than an hour to go before close, the market having shot up 11 ticks after the announcement and trading up 0.6% on the day, I thought that offering even odds should have been a no brainer for any bull out there. The funny conclusion of this anecdote is that no one took the other side. I even said I would literally shoot myself if stocks finished up on the day... Thankfully they did not though I am still not sure that was a good thing. Bottom line is that nobody seemed to understand or care what stocks were doing: that to me is very scary. - Nic Lenoir
- FTMFW: Europe Debt Crisis Is Over, Declares Spanish Leader (WSJ)... he also murmured that the ECB bailouts will continue until zombification penetration rates improve
- Hilarious: We should clone the robo-trader rather than revile him (HFT)
- Liberal Democrat Conference: 'Oil price could double in return to 1970s style shocks' (Telegraph)
- Ally Financial legal issue with foreclosures may affect other mortgage companies (WaPo)
- Moves to Weaken Yen Not Over, Says Kan (FT)
- Sakakibara Says Yen to Hit Record Despite BOJ Sales (Bloomberg)
- China Shouldn't Fear Floating Exchange Rate, Official Says (WSJ)
The Portuguese auction earlier today was a smashing success, of one considers a rise in the Bid To Cover at the expense of an interest rate increase by over 1%, smashing. The 4 Year bond came at 4.695%, while the 10 Year priced at 6.242%, both printing 100 bps wider than previous. This mirrors the deterioration seen in the recent Ireland bond auction, where the same dynamic was observed. The European periphery is paying ever more to roll its maturing debt. Just wait until these countries have to refi short-term debt at 2%+ differentials: not even the ECB will be able to save the countries from that particular toxic debt spiral.
Gold has just hit a fresh all time record (with equity futures down), as the world has finally awakened to the central banker ruse. With spot touching at $1,293.5 perhaps all those seeing some reversion to the mean occuring in the metal would be better advised to look for a career as robot algos, that do nothing but seek std dev divergences from a VWAP mean. In the meantime, gold will continue to chug along to $5,000+, now that FX interventions is how the central bankers of the world will be spending all their trading hours.
- Asia stocks mixed after Fed said it was ready to do more to recharge the US economy.
- Fed hinted it is becoming uneasy about the outlook, but deferred taking any new steps.
- Fed suggest it could buy more bonds; Way eased for new programme of QE.
- Iceland cuts base rate by 0.75% to 6.25%.
- Las Vegas home sales fall as area unemployment lingers near 15%
- Oil hovers above $75 in Asia after report shows US supplies unexpectedly rose last week.
- UK Business Secretary plans to announce a review of takeovers, executive pay.
RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 22/09/10
Tony Boeckh has issued his most recent investment letter, which, at 15 pages, discusses an outlook that can be summarized best as "we really have no clue what will happen" and may have been about 14.5 pages too long. On the other hand, with everyone having surefire money making schemes up their sleeve, and peddling a guaranteed economic outcome, perhaps some outlook humility is precisely what is needed. "Some believe the bull market in gold has just begun. Others believe we are headed for a deflationary depression in which high quality bonds would continue to thrive. Another view is that we are heading into high inflation and a dollar collapse. Yet others believe there will be a return to the good old days of stability and growth. In the time frame of most investors, we are in none of those camps. With bonds significantly overvalued, investors hardly have an edge in that area, except perhaps to go short. High yield bonds are fair value but the weak economic picture suggests growing risk for those companies with poor balance sheets and poor cash flow prospects. Gold as insurance at 5-10% of the portfolio makes sense but only for the long run and only if volatility can be ignored." All in all, some good observations.
If you think algos gone wild in stocks is bad, just wait until you see what happens when the same feedback-loop generating robots start frontrunning and churning all cotton, sugar, and other commodity contracts. According to this trader, this has already happened. Next up: plunging liquidity, and surging volatility, just in time for commodity prices to find that extra computerized "oomph" as they explode in expectation of Bernanke's reflation experiment gone wild to blow all fair value concepts to smithereens.