Archive - Jun 24, 2010

In his latest column, the Daily Telegraph's A. Evans-Pritchard does a good job of recapping all the various reasons why Bernanke has now completely cornered himself, and facing a newly collapsing economy, is left with just one recourse: the printing of more, more, more paper. This should not come as a surprise to anyone who has read even a few posts on Zero Hedge - the only response the Fed is left with as deflation accelerates, and as the Fed and the banking cabal refuse to do an orderly reorganization whereby financial firms grow into their balance sheets via a debt restructuring (and equity wipe out), is the spewage of more, inflation-stimulating, fiat. Ironically, as this newly printed and rapidly diluted monetary representation (because it increasingly is not equivalent to money) makes its way only and almost exclusively to those with direct discount window access, i.e., the mega banks (and for some ungodly reason, the clearinghouses soon), the assets that will be bid up are all tangible commodities, while secondary assets, which are contingent on a properly functioning reserve banking (money multiplier) system, collapse in a deflated heap of liquidations. Yet one notable section in AEP's post draw our attention: "Key members of the five-man Board are quietly mulling a fresh burst of asset purchases, if necessary by pushing the Fed's balance sheet from $2.4 trillion (£1.6 trillion) to uncharted levels of $5 trillion." We are very curious where the DT's reporter has found this information, since if it comes from a credible source this is a massive game changer, and while many have speculated this will happen sooner or later, to know for a fact that QE is definitely coming is major news, and, if true, we are stunned the WSJ's Jon Hilsenrath, who recently has had his ear "very close" to the Fed's internal process, has not reported on this yet.

The difference — three or four percentage points — translates into hundreds of billions of dollars when applied to pension obligations.

In our seemingly never-ending search for new economic indicators, today we look at what Americans like to read at major turning points in the equity markets. With the help of archived copies of The New York Times nonfiction bestsellers list, we looked at 12 (six highs and six lows) turning points in the S&P 500 from 1973 to the present day. The most telling category is inspirational/self help books, which grow much more popular at market lows. There are three books currently on the list that fit that bill, equal to the average number at previous market bottoms. A bullish sign if you are inclined to look for them, but a bit worrisome for us given the market’s run from the March 2009 lows. In the same vein, books on politics and public policy seem to grow more popular at slack points in the market, and the current list has two such offerings, in line with prior market lows. As a more general point, if you want to want to make big as a nonfiction writer, better stick to history and biography. Over any economic cycle since the 1970s, that’s what sells. Who says Americans aren’t interested in the past? - Nicholas Colas, BNY ConvergEx

GLD claims to have added another 3 tonnes of gold to a fresh new all time record of 1,316.18 tonnes as of close of business today. In the meantime the fixing price of gold is back to near record levels... which is where it was on May 11, when GLD held over 124 tonnes of gold less. In other words, the world's biggest real time acquiror of the precious metal has added more than all central banks purchased in Q1 (if one ignores that whole Saudi Arabia snafu which we posted first last week), and the price of gold has not budged by a penny. Well played JPMorgan, well played.

Which would REALLY suck ...

10yr 310bps/S&P 1040... all you have to watch.

Today, Greek CDS hit an all time wide in spread. For the first time, this unpleasant phenomenon seems to have registered in the minds of Greek oligarchs, as finally, after months of dithering, the country is taking serious steps to moderate its bankruptcy. The steps in question are asset sales, and the assets in question are islands including portions of Mykonos, and all of Nafsika. So if you work in Goldman and need a nice place (with a non extradition treaty in place very soon) to stash the several hundred gold bar collectionamassed over the past two years of record bonuses, here is your chance for a nice, cheap offshore vault, ironically in the very country whose finances you overrepresetned for years.

Greece was the standout in Europe (and in fact across most sovereigns) with a 60bps decompression today (closing below 1000bps but managing to get above and trade handily upfront for much of the day). This is a 200bps decompression since the roll and while volumes remain marginal, bonds have weakened with the 2-5Y range inverting even more significantly. Calls for 50% haircuts on Greek sovereign debt in the stress tests, and an increasingly glib view of the effectiveness of the stress tests saw FINLs shift wider once again with SEN and SUB moving pretty much in line and notably FINLs and ExFINLs not decompressing. This is interesting as perhaps we are seeing the contagion leaking back into non FINLs (which would make sense via direct channel from lending/credit as well as indirect via austerity/growth slowing).

Markets have viewed China’s willingness to move to a more “market” determined value of CNY as an indication that Chinese officials believe the global economy is strong enough to weather a CNY revaluation. However, I contend just the opposite. What if China fears increased risk reversion as the worldwide economy slows down during the second half of the year? What if they are moving away from a peg to the USD because they are afraid that USD will appreciate significantly during an onset of risk aversion? Given the increasingly likely double dip scenario, China’s move toward a “market” based CNY value may ironically only exacerbate global imbalances.

Here are the top five myths the bullish pundits would love you to swallow without question:

• “European sovereign debt auctions are going well”
• “The S&P 500 is trading at an 11.5x price/earnings multiple on 2011 earnings, which is extremely cheap”
• “The Chinese RMB revaluation is a very important marker in the rebalancing of the global economy”
• “The low return on cash will continue to drive money into risky assets”
• “A return to more affordable housing will result in a housing market recovery”

Here is the refutation to each and every one.

Given that the worlds central banks answer to global speculators and their money center bank/investment bank sponsors, the people of each country must stand up for a public policy that benefits them. Central bankers have many complex tools in which to exercise their “stability” agenda. While things like currency swap facilities sound harmless when explained as short term in nature, the ability of a central bank to reinstate them at will is a perpetual back stop to global risk asset speculators. When we are asked to fund the IMF in the name of global economic stability, we are really just allowing the sovereign risk hot potato to be passed up the credit ladder in a hidden backstop of foreign folly. The unwinding of the global risk asset carry trade is the ultimate end game for decades of Keynesian lunacy. A credit bubble cannot be cured by more credit. We must recognize the widely accepted fallacies we have lived by, and devise an exit strategy that is fair to all.

Joe Saluzzi has been let out of his cage and is disseminating yet more truthiness, this time on Bloomberg with Margaret Brennan, where he references the ICI number we disclosed yesterday about $28 billion in equity outflows and says he "doesn't really blame" investors for bailing. After ongoing daily stock beatings, those people will be the smart ones. Joe has long been a proponent of the double dip, yet without a good soundbite, he could only have been classified as a second-tier bear at best so far. We are happy we has realized this little omission, and with Catherine's assistance, we now have one for JS as well: "We are one headline away from S&P 900." Definitely catchy/snazzy. As for the reasons why he thinks the market is doomed to a 150 point swoon (at least), he notes "stimulus is starting to run out, and in addition to all the problems from last year, now we've got all the issues in Europe, we've got pension funds that need to be bailed out... the government knows this, the Fed knows this, and they are just one step away from another stimulus packages, which the stock market loves." As for trading, Saluzzi once again explains why nobody should still trade stocks, courtesy of market distorting forces like the HFT SPARC brigade, whereby a few astrophysics Ph.D. determine the price of market (and thus US economy) defining Apple. Joe's long-term thesis is spot on: "Right now we are the flight to safety but that won't last long." Indeed - there is only so many countries whose CDS can hit 1,150 (ahem Greece) before the specs reorient themselves to a better upside/downside investment thesis (ahem Bund, Bobl, Schatz, and, of course, UST).

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 24/06/10

We so can't wait for a doom and gloomy weekly report out of Erik Nielsen this week. Football result (and insult) notwithstanding (Denmark's elimination by Japan), surely after the latest collapse in Europe, Goldman's European strategist will see something, anything, that leads to a slightly less favorable interpretation of the climatic conditions in his beloved Chiswick.