Archive - Oct 10, 2010
I have to believe this is happening. The only question is,"How much?"
One of the more obvious side-effects of Ben Bernanke's simplistic QE 2 plan is to force retail investors out of their existing trajectory directed at fixed income products, and back into stocks, so that retail can once again occupy it long-coveted (by the bankers) position of buying Apple and Amazon at triple digit forward multiples. Unfortunately, as JPM's Nikolaos Panigirtzoglou explains, all that QE's lowering of bond yields will do (in addition to sending soybeans limit up every day for the balance of 2010, despite what others claim is merely a hallucination) is "reinforcing retail investors' flows into bonds." The biggest problem with the secular shift away from equities, and into bonds, is that the very mindset that the banking cartel loved for so long: retail buying stocks high, buying even more higher, has now translated completely into bonds. As JPM says: "The more bonds rally, the stronger the buying of bond funds by retail investors." In addition to the daily flash crashes in now countless names, surely this phenomenon explains why retail investors have taken money out of stocks for 23 weeks now (leaving many mutual funds running on fumes and a prayer) and put it into the best performing asset category (after precious metals of course). And QE2 will cement not only retail, but institutional demand for bonds as well: "lower bond yields are widening the deficits of pension funds in both the US and Europe inducing them to move further into fixed income to reduce the mismatch between assets and liabilities... This raises the risk that these institutional investors will move more towards corporate bonds in search for yield. So a potential aggressive move away form government into corporate bonds could exert strong downward pressure on credit spreads." Suddenly the world will realize that the average duration on rate-based exposure is 10+ (especially if Mexico issues a few more 100 Year bonds). And when rates creep up even a tiny little bit, it is game over as the next negative convexity event will be the (credit) market itself. Which is why we have long said that the black swan is not a failed auction, but the merest hint that rates are finally starting to creep up.
The middle class were not prepared for the assaults they have been fending off. They became soft and satisfied. They stopped training. They became distracted by their gadgets, delusions of home wealth, and fear of phantom terrorist enemies behind every bush. The propaganda machine of their true enemies has convinced the middle class that foreign enemies are massing. The enemy is within. The middle class will need to sacrifice and go to war against two enemies. Are they up to the task? I’m not sure. In my opinion the following platform is the only way to save this middle class country. Liberals and supposed Conservatives will be outraged. No one will be happy with my solutions. So be it.
One of the most bullish stories coming out of Europe last month was that Ireland, despite a drunk and disorderly finmin, and banks either increasingly more nationalized or on the verge of full scale restructuring, managed to fund its €25 billion in sovereign debt maturities. Of course, the European media took that as a sign of strength and from that point on it was off to the races for the EUR. Yet it appears the celebration was just a little premature. We learn today that virtually all of the maturities were funded indirectly by the ECB: in other words the monetization shell game so well mastered by the Fed is now being conducted by European banks everywhere. In September Irish bank borrowings surged from €95 billion to €119 billion, a €24 billion increase, and virtually a euro-for-euro match for all the new Treasury issuance. And since no demented monetization ploy goes unpunished, the action raised Irish ECB borrowings to 9% of liabilities, the same as Portuguese banks. As for the balance, as readers will recall we highlighted that last week the ECB purchased €1.4 billion of government bonds directly, therefore confirming that every single Irish bond auction would have been a 100% failure had it not been for Jean Claude Trichet's direct and indirect monetization scheme. But yes, somehow the euro is considered more viable than the dollar.
FOMC minutes, retail sales, CPI, trade balance. The minutes of the Sep 21 FOMC meeting out on Tuesday will be worth watching closely for anything special about the rationale for highlighting the low level of inflation and also to gauge how strong the support was for the decision to signal readiness to make further asset purchases. Speeches by Fed officials Dudley and Bernanke on Monday and Friday respectively will also be watched.
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Columbus Day, many markets will be closed, but some futures markets are now trading.
Perhaps the ruling Fed dictators can just go for a trifecta on November 3, and in addition to determining who wins the mid-term elections and announcing QE2, they can formalize TARP 2 as well. The reason is that starting tomorrow, 36 attorney's general are expect to launch a joint probe into "charges some banks used fraudulent paperwork to kick struggling borrowers out of their homes." Which of course means that Dick Bove is about to start appearing on CNBC every 10 minutes, providing instanalysis how banks have gone from overcapitalized to non-capitalized in the span of a weekend, under very "mysterious" circumstances. More from Reuters: "The source, who spoke on condition of anonymity, said the deadline for attorneys general to sign on to the investigation effort led by Iowa's Tom Miller was at the end of the day Monday, so a formal announcement could be made Tuesday." Whether or not that call will also include demands for a moratorium remains to be seen.
Canada's Ontario Teachers' Pension Plan and Temasek, Singapore's sovereign wealth fund, are plotting a bid to spoil BHP Billiton's $39-billion (U.S.) hostile offer for Potash Corp...
Will the High Frequency Signing scandal be the proverbial straw on the camel's back. Perhaps. In the meantime, here is a soon to be viral, and all too real, parody of foreclosure gate. At this point the guilty parties are irrelevant. All that matters is that America's terminal collapse into a banana republic status is now obvious for all to see. And as for Cramer saying foreclosure gate will only force home prices to go higher, pray tell dear Jim, just which buyers will put their own money into a home when they have no idea at what time the real title holder shows up with a restraining and eviction order, and demands immediate access. Of course, there is a loophole: the Fed will simply henceforth pay for all home purchases. And should the government drop mortgage rates to zero, and subsidize tax and insurance payments into infinity, that may well happen. Of course, it will also bankrupt the country, but since when was America's insolvency news to anyone...
We have run some numbers using the New York Fed's Primary Dealer Statistical database, which in combination with the Fed's POMO operations in the second half of September, result in some peculiar conclusions. First, we have summarized all of the Fed's coupon POMOs from September 15 through the end of the month (we excluded the $550MM TIPS POMO from September 28): as the table below demonstrates, in five operations Brian Sack repurchased a total of $16.4 billion in Treasurys. So far so good. Yet when juxtaposing these presumed repurchases of coupon securities, with the disclosed holdings of coupon Treasurys by Primary Dealers, something does not jive: to wit - PDs disclosed a total of $6.8 billion in coupon (not Bill) USTs held as of September 15 (split between holdings of 1-3 Year, 3-6 Year, 6-11 Year, and 11+ Year positions). One would surmise that courtesy of over $16 billion in Coupon (not Bill - this is important) monetizations, PD holdings would at least declined, if not by the fully monetized amount, then at least partially. No such luck: in fact UST holdings increased by $400 million headed into September 29, or the last end of quarter number. What did decline, however, and to a much greater extent, was the PDs holdings of Bill securities, which dropped by a 2010 record of $50+ billion over the same period. And it did not stop there: adding in changes in the other four PD disclosed security holding categories, Agency Coupons, Discount Notes, MBS and Corporate Bonds, and the total decline since September 15 was a whopping $62 billion in PD holdings! So while POMO was used by the PDs for everything but what it was intended to monetize, the same primary dealers who were the benefactors of the Fed's guaranteed UST bid instead used the end of quarter, FRBNY-facilitated window dressing to not only not offload coupons, but to dump everything else, and use the proceeds to buy stocks, thereby explaining both the massive ramp into the end of September, and also the ongoing attempt to flush NYSE shorts, which as of September 15, were still near 2010 records.
Pimco's Mohamed El-Erian continues to attempt to push for the bond over the equity case, most recently with his just released lecture remarks for the Per Jacobsson Foundation. In it the New Normal economist reconciles, once again for all those who missed it the first few hundred times, just what the New Normal means, and warns about a short-sighted, cyclical response by the international community, being extremely vocal in his critique of the post-crisis response, which is nothing less than a continuation of the emergency measures that prevented what some believe would have been an all out collapse had Goldman and AIG been allowed to fail: "Two years ago, policymakers from around the world gathered here in Washington, DC and recognized that the world was on the verge of an economic meltdown. Together they initiated an impressive set of measures, showing a commonality of purpose, narratives, interests, and actions. The private sector also responded as companies and households took steps to navigate the sudden stop in global financial flows. The war against a global depression was won. History books will report with admiration on the crisis management phase. Unfortunately, they will be less generous when it comes to the post-crisis period. Having won the war, industrial country societies are in the process of losing the peace. Indeed, absent some important mid-course corrections, industrial countries confront the prospects of low growth; high unemployment that is increasingly structural in nature; welfare losses, including a growing number of citizens falling through the large gaps created by overly stretched safety nets; and a rising risk of protectionism.This dichotomy between winning the war and losing the peace is an important one. It points to shortfalls in diagnosis, inappropriate operational constraints, and the fact that structural and balance sheets imbalances that were years in the making cannot be overcome immediately."
What important sights should every good Banksta see when visiting our Nation's Capital? Its all right here on this handy pocket map.
The Commitment of Traders Report is created by the CFTC – The Commodity Futures Trading Commission and is published weekly every Friday. This body gathers and publishes the open futures positions on all publicly traded US futures contracts as well as the corresponding options. The data consists of 3 main categories.
Today, we have three headlines of relevance. The first one comes from BusinessWeek as of October 9, "Finance Chiefs Warn Currency ‘War’ Is Risk to Growth" in which we read: "As the International Monetary Fund’s annual meeting began in Washington, policy makers warned that efforts to boost exports by embracing weaker currencies threatened to provoke protectionism and trade imbalances at a time when economic growth is already slowing. China was again the target of criticism as foreign officials called the yuan undervalued and pushed for its appreciation to be accelerated." This was promptly followed by the Telegraph's "IMF fails to strike deal over currency frictions", in which we learn part two of the weekend's key festivities: "The International Monetary Fund on Saturday night failed to reach agreement on tackling mounting global "frictions" over exchange rate policies despite US calls to deal with the issue more forcefully." Which brings us to today's game of 'date the headline', which comes, somewhere in time, from the New York Times: "US said to allow decline of dollar against the mark" in which we read a paraphrase of a quote by then Treasury Secretary James Baker III, together with some additional commentary: "'I think if you look at the underlying economic fundamentals in this country, they're very, very good,' he said. But he added that the stock market appeared to be reacting to prospects of tax increases by Congress, the enactment of protectionist legislation to reduce foreign imports, and to fears of rising interest rates and inflation. He also said growth of computer-generated ''program trading'' of securities had contributed to the size of the daily sell-offs." Oddly enough, the situation described in the New York Times was identical, if not better, to what is transpiring right about now. As to what happened 24 hours after the original NYT article appeared, well, we all know that...