Archive - 2009

One of the key observations of 2009 has been that Primary Dealers, courtesy of their access to the Primary Dealer Credit Facility, and, of course, to the Discount Window, are the critical cog in the Fed's plan to push markets ever higher. In a fashion, the banks that make up the PD community are the designated proxies of the Federal Reserve, allowing it to execute its trading strategy when its own traders at 33 Liberty are having a Starbucks break. As the PDs can pledge any worthless asset to the Fed, for which they get a dollar equivalent of 100 cents on the dollar, the PDs can leverage whatever toxic residuals they have on their balance sheet massively without even using explicit leverage, merely thanks to the Fed's lax standards in accepting practically any collateral. We have had occasional glimpses into what "assets" make up the tri-party repo system that is the backbone of the US financial system, but absent a full blown evaluation and transparency of the Federal Reserve, only the Fed (and specifically its New York branch) and Jamie Dimon really know the state of affairs when it comes to pledge collateral. However, there is some information that we can glean on the broader sense of risk within the Primary Dealer community, which is possible courtesy of the NY Fed's disclosure of the PD's transactions and net holdings by various asset classes. Our focus in this post are the Primary Dealers' transactions and holdings in US Treasuries.

Here is the only math you need to know as we all look at 2010: in 2009 US Dollar denominated fixed income supply, net of the Fed's Quantitative Easing operations, was $190 billion. In 2010 it will be $2,060 billion, an eleven fold increase. The Fed has three choices: 1) a QE 2 announcement soon, causing a plunge in already low Democrat popularity ahead of the mid-term elections; 2) interest rates skyrocketing, throwing the economy into a true tailspin; 3) the mother of all engineered equity crashes to return capital flow to risk-free assets. None of the three is a pleasant choice, however the Fed could only delay the inevitable hangover from the biggest private-to-public risk transfer in history for so long.

Just occasionally, we feel as if we might be a little too harsh with Barney Frank. He has, after all, been something of a singular lightning rod for many of the more adverse consequences of the housing boom. Without question he has taken a disproportionate share of the heat generated by increasing scrutiny of Government Sponsored Entities like Fannie and Freddie. True, he was involved directly in crafting provisions of the Troubled Asset Relief Program. Indeed, as he chairs the House Committee on Financial Services, he is uniquely exposed to all things "credit crisis" and most things "bailout." Yes, his loose alliance with figures like, say, Maxine Waters, tends to draw sporadic sniper fire from the trenches (well, and sustained grazing fire from the MG42 nests). And, obviously, some of the more publicly scrutinized aspects of his personal life have aligned social conservatives against the Congressman. The combined effect of these disparate circumstances gives us pause in those moments when we begin to form our critiques of the Distinguished Gentleman from Massachusetts. Then we come to our senses.

Anything goes! (Well, almost anything).

As the Zero Hedge duty officer this holiday season (we're making "The Narrator" do this next year, trust me) I'm watching closely (or at least casually) for the "take out the trash" dump of sketchy announcements, bad news and shifty disclosure this weekend. We've already seen a bit of it in the form of the Fannie and Freddie blank checking shell-game, and I'm sure there is more to come. Be that as it may, the tempo of the world has ebbed just a bit and things actually appear a bit... well... slow. So I thought I would share with you some upcoming highlights. Consider them belated holiday gifts from Zero Hedge. (All purchases final).

• Russia lowers key rate, kills carry trade.  Merry Christmas, foreigners.  ("In Soviet Russia, rates lower you") [bloomberg]
• Ethanol producers sue California to prevent low-carbon fuel restrictions. (Corn shortage forces greens to start to eating their own young?) [wall street journal]
• Latvia attempts to lower pension benefits to avoid fiscal meltdown. Courts: "Denied." Latvian PM: "We will just go bankrupt if we observe all legal norms" (Sufficiently satirical comeback fails me) [baltic reports]
• Increase in pension contribution requirement for NY Teachers causes rush to lock in old rates.  (Officials shocked, shocked to find that rational actors avoid taxes)  [wall street journal]
• Retailers extend Christmas hours to boost traffic. (Losing money for every open hour, but making it up on volume) [bloomberg]

The frenzy to cover dollar shorts seen over the last three weeks sent the greenback onto its first monthly increase since June; meanwhile, gold has fallen about 8.1%. How will the gold, dollar and euro triangle likely play out in 2010?

Katie Piper's inspirational Christmas message and my best wishes to all of you. Have a Merry Christmas, Happy Holidays and a Happy New Year.

J.S. Kim is the founder of SmartKnowledgeU™, an independent investment research and wealth consulting firm. J.S. accurately called the recent global financial crisis, sharing his thoughts on his investment blog, to his subscribers, and in a series of YouTube videos. His articles have been reprinted online by Reuters, the New York Times, USA Today, the Wall Street Journal, the Financial Times and the International Business Times. He recently authored the timely book, “Confessions of a Wall Street Insider, a Zen approach to making a fortune from the coming global economic crisis.”

I hate bankers and so should you. Why? Because bankers steal a little bit of Christmas cheer every year. For the past several years, bankers have stolen a lot of Christmas cheer. Like the Grinch from Dr. Seuss’s famous children’s tale, How the Grinch Stole Christmas, bankers have hearts two sizes too small, and by means of burglary, they do their best to deprive everyone of Christmas every year.

The Obama administration is on the case, don't you worry. Given that expanding the balance sheets of Government Sponsored Entities, increasing their regulatory caps on assets, and then, when caps could rise no further, permitting them to resort to securitization to move underpriced real estate loans off their balance sheets didn't work, let's relax caps even more, and, while we are at it, give them a blank check drawn on the Treasury.

Yet another reason these things need to be reined in a tad ...

Eric Sprott's most recent report has generated serious ripples within financial circles due to his unique interpretation of some rather nebulous data in the latest December Treasury Bulletin. Sprott raises a major question mark as to the constituency of the "Other Investors" as defined on page 48, which in his calculations, has accounted for $510 billion of Treasuries in the first three quarters of 2009. Could this be a "phantom purchaser" that is the Federal Reserve in all but name? Or is it something far more innocuous?

Dancing through the aisles this morning at TCO's Beverly Center and Westfield's Westfield Century City. (A photo essay sans javascript click-whoreish "slide show.")

In the "Everything Old is New Again" category, Tim Geithner inadvertently (we hope) invokes classic (and classically fitting) political satire in the form of Peter Sellers' cinemagraphically immortal "Chauncey Gardner," introduced to an unwitting American public in Hal Ashby's 1979 piece "Being There."  It is fitting that on the film's 30th anniversary real life political characters should so perfectly resemble the lumbering incompetence and "form over function" sketched so comically by Sellers.