Archive - Nov 2010

Well, it’s official, Ben Bernanke has officially gone “all in” regarding currency devaluation in the name of pumping the stock market. I have to admit, even though I knew this was going to happen, I’m still in shock. After all, it’s not every day that you see a superpower collapse and lose its reserve currency status courtesy of a deranged mad man.

Regardless of your feelings on the matter, these are the cards the Fed has dealt us, so rather than devote space to critiquing our insane and corrupt Fed Chairman, I thought it better to devote today’s article to detailing what is to come as a result of the Fed’s policies.

Typically at this time on Thursday we present our weekly Fed balance sheet update. At this point, that particular data is irrelevant as what the Fed's assets look like today, is nothing compared to what they will look like in 8 months, when the Fed will own more Treasuries than China and Japan combined. So instead we present the M2 update, where after 16 consecutive weeks of increases, M2 has finally dipped. Oddly enough, this occurs just before the Fed went balls to the well in buying EVERYTHING.

FX Bottom-line: Heading into 2011, USD/CAD is facing a divergence in US-Canadian policy rates reminiscent of the 2002/03 period. Although USD/CAD declined by 15% during that period, we do not envision a similar demise in USD/CAD but diverging policy stances will keep USD/CAD under downward pressure throughout 2011. However, should the growth decoupling between the global and the US recoveries continue at the same pace as seen during the last 12 months, the 2002/03 scenario could well repeat itself in the currency market, leaving the trend in CAD against USD looking increasingly similar to the most recent rally in AUD/USD.

On the second day of quantitative easing … the markets gave to us: new highs in equities, new lows in the dollar, new recent highs in a number of commodities including oil and a weekly unemployment report that showed a rise in jobless claims. It certainly must have felt like Christmas, Chanukah and Kwanzaa for a number of longs on Thursday, but it was not necessarily good for consumers. Unless this somehow boosts employment and household earnings, it may turn out to be most noticed by a majority of consumers in the form of higher prices – for just about everything. At least, after one day, though, it does look like QE2 is doing what is supposed to. - Cameron Hanover

Following up on Time's unbelievable success with picking the 2009 person of the year, we have managed to intercept the winner of the 2010 edition. For your advance viewing pleasure.

Three and one half years ago in March of 2007, we penned a discussion entitled, "It's Delightful, It's Delovely, It's Deleverage". Of course the upshot of that missive was that we suggested that the whole idea of balance sheet deleveraging was to be a huge investment theme to come. Little did we know, huh? You already know this was well in advance of the ultimate systemic credit cycle debacle that was to come and a year and a half in front of Lehman as a singular event. Deleveraging subsequently became a popular and virtually consensus theme in late 2008 and early 2009. Associated with this headline theme were tangential anecdotes such as "new normal", etc. It's time to quickly revisit the subject of deleveraging now as per the recently released 2Q Fed Flow of Funds statement.

Another person chimes in to prove that the Chairman's schizophrenia is now at genocidal levels.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 04/11/10

Today's absolutely must watch clip comes from David Stockman, director of the OMB under Ronald Reagan. "An independent Fed is what we had when I was in the government. Volcker was the head of it...Today the Fed is scared to death that the boys and girls and robots on Wall Street are going to have a hissy fit. And therefore these programs, one after another, are simply designed to somehow pacify the stock market, and hoping to keep the stock indexes going up, and that somehow that will fool the people into thinking they are wealthier and they will spend money. The people aren't buying that. Main Street is not stupid enough to believe that engineered rallies as a result of QE2 stimulus are making them wealthier and so they should go out and buy another Coach bag. This is really crazy stuff that I can't say enough negative about...The Fed is telling a lot of lies to the market... it is telling all the politicians on Capitol Hill you can issue unlimited debt cause it doesn't cost anything. We have $9 trillion of marketable debt. Upwards of 70% of that has maturities of 5 years or less down to 90 days. All of those maturities are 1% down to 10 basis points. So from the point of view of Congress, the cost of carrying the debt is essentially free. When you tell politicians they can issue $100 billion of debt a month for free, how do you expect them to do the right thing, and ask their constituents to sacrifice... I think the Fed is injecting high grade monetary heroin into the financial system of the world, and one of these days it is going to kill the patient."

The market as we know it, is now finished. As of last night, stocks are nothing but a policy tool, controlled exclusively, and very much legally and with no legislative control, by Ben Bernanke. The Federal Reserve has rendered the economy irrelevant. We hope America enjoys paying $10 for a loaf of bread shortly. In the meantime, the market closed down 1.5% priced in gold, which closed $7 dollars short of $1,400. Next stop: $10,000.

What about you?

Yesterday's Ben Bernanke penned an Op-Ed in which he essentially said: "I am doing whatever I interpret my mandate to be, which right now means only thing: Dow 36,000. I am only accountable to the private bank that is the Federal Reserve, a few Wall Street CEOs, and no one else. Congress has no power over me. Try to stop me." And while the stock market is so far in love with this exhibition of outright hubris which promises record bonuses even as a record number of Americans subsist on foodstamps and real, not BLS, unemployment is over 20%, putting the Chairman in a long-overdue strait jacket will ultimately require an outright clash between those who still believe in that piece paper called the constitution and the kleptocratic cartel to whom the trade-off between a senior bond impairment and their first born is never all that clear. And while more and more try to educate a hypnotized, strategically defaulting US society what QE2 means to their future, the rest of the world is already rising in a tidal wave of disapproval aimed at the Federal Reserve. As the FT reports, Brazil, China, German, and Thailand, and soon everyone else, have already voiced thighest criticism and their condemnation of this escalation in FX wars.

GREED & fear’s view on QE2 remains that it will not precipitate releveraging of the American economy, just like the first version did not. But it will probably take some time for the equity market to work that out reflecting the natural bullish bias. Still when the releveraging hopes are dashed attention will then turn to QE3, which next time may include a formal inflation target and purchases of private sector debt. Billyboy will likely carry on with his mad experiment until he precipitates the collapse of the US dollar paper standard. The Fed’s attempt to combat the perceived problem of deflation will end up creating a far bigger problem. That is the systemic risk posed by the anticipated ratcheting up of QE. This is why the view here remains that America will turn out to be a case of “Japan-heavy” not “Japan-lite”.

What's that you say Bank of America and JPM, "it's all contained?" Hey Fed, it's not too late to add $8 trillion in MBS to QE2. On the other hand, now we know what QE3 will be buying. "Fitch Ratings has assigned a Negative Outlook for the entire U.S. Residential Mortgage Servicer ratings sector on increased concerns surrounding alleged procedural defects in the judicial foreclosure process. This industry-wide issue will cause all servicers to be under increased scrutiny from a wide range of state and federal regulators, state attorneys general, and GSEs. All servicers will be affected, even those fully in compliance with all foreclosure rules and regulations."

After a whole lot of people got caught flatfooted expecting the Fed to buy 30 Years as per Goldman's recent client recommendation, the long-end of the curve has gotten crushed, even as the belly was exploded. This is driven by the FRBNY's announcement that the bulk of purchases would be focused in the 4-10 year bucket and not further. Our take is that this is a bluff - the Fed will be forced to bid up the 10% of the marketable security portfolio that is beyond the 10 year point (as we demonstrated yesterday in the full maturity spread). As a reference we highlight the 35% SOMA limit which is most limiting to 10 Year plus issues. But for now, the Fed's attempt to bring back the bank carry trade is working, and as the table and chart below shows the yield change in the belly compared to the long end is simply stunning.