Archive - May 2010

Isn't $145 billion to save these relics enough? Why don't we ask instead: What good do they do? and, What was their role in causing the crisis? Get rid of Fannie and Freddie.

A month ago, the New York Fed came out with a paper discussing everything one needs to know about FX swap lines. We did not post it at the time, as we were somewhat confident a much more appropriate time to post would be just around the corner. Sure enough, the time has come. The below paper, written by Fed staffers, should provide the full picture (at least from the Fed's point of view) on what swap lines are, and how the Fed uses them every time the world needs to be bailed out.For our in-depth analysis of the mechanics of a global FX swap line based "bailout" posted previously, see here.

Oil prices advanced yesterday, gaining more than $2.00 a barrel as traders reacted to a broad-based rescue package for the euro and euro-zone economies. Early Monday morning, it was described as being hundreds of millions of euros. As the day wore on, it was being described as a trillion-dollar rescue package. This helped put pressure on the US dollar and it bolstered equities. By 4 PM, the DJIA was up 400 points, after having opened more than 400 points higher early in the day, before selling off slightly.

It appears that the SEC's extensive deliberations on what the cause for Thursday's crash was, have yielded no answers. Mary Schapiro, proving again that she is nothing less than an intellectual titan, met with all the guilty parties in last week's market crash, in a meeting in which shockingly, none admitted that the crash was all their doing directly and indirectly. Bloomberg reports: "The chief executive officers of NYSE Euronext, Nasdaq OMX Group Inc., Bats Global Markets Inc., Direct Edge Holdings LLC, International Securities Exchange Holdings Inc. and CBOE Holdings Inc. saw no evidence that a mistaken order caused the plunge, according to the people, who asked not to be named because the discussions were private." No, instead of raising their hands and saying it was all their fault, the execs all said that the SEC needs... circuit breakers. Which is funny cause the market already had those in overabundance. We all saw how much good curbs and circuit breakers did when the Dow was dropping by 100 points every second. So sure, let's deflect a little longer until the next market structure induced crash comes, which will take the market down by not 10% but 30%, 40%, or more. And, as usual, the SEC will say "Well, we tried, but nobody really foresaw this." And that wold be ironic, because even though the SEC could be excused for not reading blogs or anything else that is not linking externally from www.transvestitemidgetporn.com, one would think they do on occasion turn on Bloomberg TV. Which is why we bring your attention to this clip from February of this year, in which Themis' Joe Saluzzi pretty mich predicted to the dot what would happen. And instead of consulting with those who actually predicted the whole collapse, the SEC instead seeks advice from the parties responsible for the crash, and whose entire business model is dependant on perpetuating the status quo. This is the thought process of an an agency which receives $1 billion in taxpayer funding each year.

There is more to come in the drama called "EU".

You can tell alot about the questions which the government is truly interested in finding answers to by the amount of money it authorizes for the various investigations...

Two excellent commentaries on the euro bailout from an Austrian view. The folly of inflation.

A heretofore unknown volcano in Iceland could morph into a major global disaster - for Europe and the world.

Less than 24 hours after bailing out Europe for the latest time with hundreds of billlions of liquidity swaps (full terms TBD still, record short covering certainly not TBD), the Fed is pretending to be a prudent monetary power, by announcing that it will "conduct 5 small-value term deposit offers." As a reminder, in its January 2010 minutes, the Fed noted that it would "eventually" move to a less accomodative policy "using a term deposit facility (TDF) to absorb excess reserves." So the schizos at the Eccles building want the gullible public to believe that just like all those micro reverse repos that it conducted in late 2009 (which led nowhere), the TDF tests will be critical to withdrawing some of the $2.5 trillion in assets on the Fed's balance sheet. Well guess what: with about $500 billion in liquidity swaps about to hit the asset side of the ledger (that's a conservative estimate based on the last time the Fed went full bore on bailing out Europe, and sorry, that European bailout does not come cheap), Excess Reserves (fed liabilities) are about to skyrocket by a comparable amount to match the assets. And here is the double whammy: $500 billion in new excess reserves earning 0.25% for holder banks, means US banks are about to earn an additional $1.25 billion a year risk-free courtesy of US taxpayers, who already are getting the shaft by paying more for gas thanks to the privilege of having bailed out Europe and drowned the world in new and unprecedented gobs of excess liquidity! Simply stated, the Greek "bailout" is a roundabout way of funneling over another extra billion to US banks! Direct cost to US taxpayers to bailout Europe via IMF: $50 billion; Indirect cost to fund incremental bank excess reserves: $1.25 billion; The joy of being raped daily by the Fed-Wall Street complex and assuring another year of record Wall Street bonuses: priceless. Some things money can't buy. For everything else there are trillions in Federal Reserve Notes appearing each and every day out of thin air.

The one biggest bond bear since December 2009, Morgan Stanley, has just thrown in the towel, and instead of expecting 4.50% on the 10 Year by June 30, the firm has now pushed back its target by 2 quarters. Which means that its longer 5.50% Target on 10 Years has been scrapped. The firm's strategists have also adjusted their call on Fed hikes (now expected to occur no sooner than 2011 instead of September 2010). Lastly, the firm's most vocal call, one for a substantial 2s10s steepening to 325 bps has also been moderated from Q2 to Q4. We also include the latest Rates Strategy slide deck from MS.

Our friends at Research Edge referred to this weekend’s announcement as The Keynesian Elixir. Wikipedia defines an elixir as “a sweet flavored liquid used in compounding medicines to be taken orally in order to mask an unpleasant taste and intended to cure one’s ills. Elixir in the noun form means a drink which makes people last forever.” In this case, the Euro Elixir is masking the unpleasant aftertaste of unintended consequences. The cure will buy some time, but will emphatically, not last forever

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 10/05/10

Commodities update [post 1 trillion $ bailout]

Now that everyone is firmly in the "HFT is bad" bandgwagon, not to mention that every single blogger, commentator, journalist, and other fly by night "expert", especially those who were wildly mocking Zero Hedge as it labored tediously to write the script for the latest episode of the Hills, seems to suddenly have an erudite and extensively hyperlinked opinion on HFT and market structure, we thought it would be funny to expose the hypocrisy of all those whose opinion is like a windsock to whichever way the wind of public discontent blows. Obviously here we focus on those who opinion actually matters, not the name droppers who are desperate for page views. And, not surprisingly, we start with that finest example of crystallized intelligence in its purest form, Mary Schapiro.

"At a time when Greece, Portugal, Spain and other countries are experiencing dire financial crises and have their hands out to the international community, we need to know if our Federal Reserve is at all involved in bailing them out. As weary as we are of bailing out companies, the American people would not stand for bailing out entire countries. Our government is wasteful enough in its own affairs without contributing to the waste of other countries. Yet the Fed currently has the tools it needs to do just this, and to do it in secret.

If we cannot take away the Fed’s ability to waste trillions of taxpayer dollars on failing companies and failing countries, at the very least, we can take away their ability to do this with no transparency or accountability to the American people. While the Sanders Amendment no longer contains a full audit, Senator David Vitter has introduced an amendment which contains the Audit the Fed language that passed the House last fall. The Senate must pass the Vitter amendment for full disclosure and full accountability going forward." Ron Paul