Archive - Oct 2010

Karl Denninger, who has been tracking the issue of title fraud in the mortgage space for years, was on the Dylan Ratigan show earlier, and not only provided one of the most comprehensive explanations of where we are, how we got here, and where we are going (unfortunately nowhere pleasant) to date, but also was gleefully and sarcastically rhetorical with his closing remarks: "What if we find that of these $6 trillion in securities that are out there, outstanding right now, half or more of them are defective. You put them back on the banks and they all blow up. You know what - we have a resolution authority under Frank-Dodd, how about if we use it?" We would only add that courtesy of second degree, third degree, and fourth degree leverage, as we presented yesterday, the final amount of net capital at risk, courtesy of numerous other layers of debt, will end up being far, far greater than just $3 trillion. And yes, there is a reason why the OCC keeps a track of the $233 trillion in total derivatives held by US banks.

M2 continues its seemingly endless rise higher...at least on a seasonal adjusted basis. In the week ended September 27, M2 rose to a fresh record of $8,741.9 trillion: a$30.9 billion W/W jump which was the 4th largest weekly rise year to date. This was the 12th sequential increase in M2, which in 2010 has increased by over quarter of a trillion dollars. Not surprisingly, the biggest swing factor in the weekly change was the $20 billion rotation in Demand Deposits, which switched from an outflow of ($9.2) to $12.8 billion. Surely, this is precisely as the administration had intended: some may recall that last week we noted that the broke FDIC had decided to increase the insurance on demand deposits from $250,000 to infinity, precisely in hopes of achieving this effect.

To get a more complete understanding of our current crisis, we need to look at the history of events that led up to it. We need to peer deeply into the inner workings of the Global Banking Intelligence Complex. Without acknowledging and exposing the covert forces that are aligned against us, we will not be able to effectively overcome them.

It's not just a Canadian problem...but hold on, bubbles are on their way!

In the past, we have digested in painful detail the theoretical impact that QE will have on equities (initial euphoria and long, hard leg down), rates (constant drop in yield to zero as Fed is forced to not only buy up every piece of government paper, but to outright monetize auctions), and on the monetary system in general (the beginning of the end for the dollar). Yet the practical impact of QE always ends up being something very much unpredictable, and is what happens when the market is making other plans. Which is why the following piece from Shadow Capitalism, titled, "A delve into the current discounting of QE expectations and its market implications going forward" is particularly useful reading for those who wish to determine just how the market participants are evaluating the impact of QE2 in practical terms.

29 percent of all mortgage debt ($2.9 trillion) is underwater. This is incredible given that the number of underwater mortgages amounts to 22 percent of all mortgages which tells us that there are some big loans skewing the figure here. Of the 11 million mortgages underwater, 10 percent (1.1 million) are underwater by 25 percent or more! These loans are setup for foreclosures. No market is going to recover 25 percent in the near future. So what will happen to these 1.1 million active underwater mortgages? As you can see from the chart above, you also have many in the -5, -10, and -20 percent equity ranges as well. In other words, these people basically rent their home with no mobility. If they want to move, they would actually have to bring money to the table. And given the massive number of toxic mortgages in the market, the worst of the worst underwater mortgages are in states that Wall Street lovingly dubs “sand states” or Nevada, Arizona, California, and Florida.

Last week, during our regular scheduled Fed balance sheet update, we said "We believe that within one week the Fed will surpass Japan as the second largest holder of Treasurys, and China, the current top holder, in just over a month." Ww were right: as of Wednesday, the Fed disclosed it held $819.1 billion in US Treasurys. That excludes yesterday's $2.1 billion POMO which settled today, which does in fact bring the total to above the $821 billion held by Japan as of the end of July. With only $25 billion to go, and a rate of monetization of about $8 billion per week (and likely faster now that prepays are accelerating), we believe the Fed will be #1 by the mid-terms, just in time for the QE2 party to really blast things off. Aside from this there was little notable in the weekly balance sheet update: bank reserves increased by $16 billion in the past week, as Primary Dealers added to their purchasing capacity post the end of quarter window dressing.

Sometimes images can illustrate what words can't quite convey ...

Tomorrow will likely be a jobs-predicated bloodbath. First, we will get the NFP data, which expectations have pegged at -5K (and for some reason Private payrolls still matter, even though the census impact is now negligible) but as Goldman is likely spot on with their estimate of -50K, and validated by recent ADP data, the finally number will be big miss to consensus. More importantly, as we highlighted in today's Frontrunning, tomorrow the Labor Department will announce a million-ballpark wholesale downward revision to 2009 employment numbers (due to birth-death and other perpetual upwardly biased adjustments), confirming that the jobs situation is far more dire than anything Joe Biden could have ever imagined. As the ever-optimistic Neil Dutta from BofA stated: "That adjustment is probably overstating the
employment gains because we are in a very subdued recovery and the
likelihood is that the birth-death factor is making the data look better
than it otherwise would be." Tax records will probably show more businesses closed than initially estimated by the Labor Department, analysts said. This will certainly sour the mood, and the only saving grace will be how much of an impact the market will believe a near-certain QE2 will have on stocks (and has not been priced in yet). In the meantime, here is Goldman's latest view on why the labor picture in America is getting worse and worse.

As the U.S. prepares to embark on a new round of Federal Reserve quantitative easing, there are plenty of reasons to doubt that it is the right course for the economy and job creation. Here’s another: The voyage might have to be aborted — or at least diverted — soon after QE2 leaves the dock because the Fed may be sailing into a political hurricane. Even before the anticipated launch of the next round of Treasury purchases — it’s expected to be made official on Nov. 3 — the Fed’s unmistakable signals have fueled commodity price gains as the dollar has sagged. Since the Fed’s Sept. 21 policy statement, crude oil had surged more than 9% to above $83 a barrel on Wednesday, approaching its highest levels since October 2008. (Oil prices did retreat on Thursday.) The risk for the Fed is that such price increases will be felt in the economy long before any modest positive impact from lower interest rates.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 07/10/10

A shining example of "the chicken of the egg" type of analysis has emerged courtesy of Goldman's FX and European economic teams. As we disclosed first a few days ago, the Goldman FX guys raised their 12 month EURUSD forecast from $1.38 to $1.55. Obviously, Erik Nielsen economist group has now decided to cut Europe GDPs across the board, with only Italy and France getting hit in 2010, and pretty much everyone in 2011: total projected Europe GDP has now declined from 2.2% to 1.8% in 2011. Of course, this would mean immediately that the EUR currency should decline in the future, as this projection is realized, resulting in GDP growth again. Will the Goldman FX team (which incidentally once again top ticker the pair with sublime perfection) then adjust its EURUSD target lower taking account to weaker GDP projection, only to be followed by the economists raising their GDP, and so far to infinity... Catch 22?

How they steal your home Florida.

“I personally did not do it because I refused to do it.”
“I wasn’t going to falsify a military document.”
“I was told that that’s fine, somebody else on your team will do it.”

And that is not even the worst part..

GRANDPA JOE: But this roof is made of glass. It’ll shatter into a thousand pieces. We’ll be cut to ribbons! WILLY WONKA: Probably.

Who says flash crashes only take stock prices to zero (or somewhere thereabouts). Adobe just flash smashed, triggering circuit breakers, but to the upside, as this time the HFT algo that goes apeshit lifts every offer. Following the unhalting, the stock has resumed trading somewhat normally again: we will let you know which trades the exchanges decide to cancel momentarily. Of course, we can't decide if it is more surprising that a circuit breaker actually worked for once, or that Waddell & Reed has not yet been implicated in this roughly 20th flash crash following May 6 (we will compile a full list of all HFT-triggered crashes soon). We hope to provide Nanex's explanation of which particular exchange malfunctioned on this one shortly.