Archive - Jun 2010

Are these people insane? Have they all really bought Tim Geithner's Kool Aid that somehow because they conduct doctored stress tests, which incidentally find that insolvent banks like STD are at the top of the healthy list, that all will be well? Do they rally think that investors are idiots and can not see behind this farce, let alone put together a 5 minute excel model and discover that all Spanish banks are now in runoff mode? So much propaganda, so little answers.

BN   8:43 *ZAPATERO SAYS STRESS TESTS WILL SHOW RUMORS UNTRUE
BN   8:43 *ZAPATERO SAYS SPAIN WILL PUBLISH STRESS TESTS FOR ALL LENDERS
BN   8:43 *ZAPATERO SAYS THERE IS NOTHING BETTER THAN TRANSPARENCY TO RESOLVE RUMOURS
BN   8:48 *MERKEL REJECTS GERMAN BANKS' CRITICISM ON STRESS TESTS
BN   8:50 *TRICHET SAYS `HAPPY' WITH CONSENSUS ON BANK STRESS TESTS

To say that the latest bout of regulatory capture-cum-bribery of SEC individuals by the HFT lobby is getting out of hand, would be like hoping to have your limit bid get hit in any stock without some computer subpennying you to death first. As the below post by Themis Trading indicates, soon there will be no SEC employees left for the HFT lobby left to poach, which is why each HFT firm is now designing new algorithms to predict whom their competitors will poach, and front run said poaching. This explains the installation of collocated "Uncle HFT Wants YOU (and pays big scalped bux)" boxes near the SEC headquarters in Washington. This will soon be followed by High Frequency churning of all the new SEC employees who are hired and fired a few million times each second.

Another week, another $100 billion in debt to be added to the US balance sheet. Yet the $108 billion on deck is $5 billion less than the prior round of like issuance: once again the US Treasury is pretending the deficit situation is under control. The trend of issuance reduction will soon reverse, and the hibernating bond vigilantes will get their first whiff of Spring. Here is the breakdown of the upcoming bond issuance:

• June 22, $40 Billion 2 Year Notes, $42 Billion issued last
• June 23, $38 Billion 5 Year Notes, $40 Billion issued last
• June 24, $30 Billion 7 Year Notes, $31 Billion issued last

The last time the EURCHF was trading in the mid 1.37 area, the SNB was stupid enough to intervene, and load up its balance sheet with even more increasingly devalued euros (which as we pointed out previously, has now reached a total of CHF 232 billion). Also, these interventions are now completely futile, as the half life of the rate returning to previous levels is about 4 hours. Nonetheless, we are confident this will not stop the SNB from pulling one off imminently, as the surging franc means nothing but huge pain for Central and Eastern European country banks, which are levered to the gills in CHF-denominated mortgage debt, which is getting more and more expensive even as it generates less and less cash flow. Letting the franc appreciate uncontrollably simply means yet another liquidity crunch episode is about to break out, this time in the Baltics, Central Europe and the Balkans. Keep an eye out for crazy spikes throughout the day, which will be comedy defined as it will refute everything the bank said last night about growth prospects, tapering of the loose policy and non-interventions. Rock, meet hard place.

Well, really one, but still sufficiently stunning. The chart below will show conclusively and definitively that the EURJPY is the only factor that determines each and every tick of the stock market. Now the EURUSD has completely decoupled, and is pursuing some stress test dream, even as the E&Y is correlating 100%. The market is nothing, nothing, more than the daily leveraging and deleveraging of the Euro-Yen carry trade. Nothing else matters - fundamentals, technicals, lunar cycles, sun spots, Gulf manatees, sneezing pandas... All that is relevant is whether or not some trading desk is putting the carry trade on or off.

For a while now I have been making for the great deflationary wave that is upon us. We have argued that for demographic reasons, because of the unprecedented productivity gains of the last 30 years, and last but not least due to the bursting of the credit bubble, deflation is inevitable . This is compounded by the fact that the phenomenon is generalized in the western world, China with excess capacity both in terms of production and workers, and with its huge credit bubble in the bursting, will absolutely not be our savior. This is why despite government officials forecasting 3/3.5% growth over the next 5 years (which is both wishful thinking, an attempt to get the consumer to spend more money he doesn't have, and a way not to have to remark all the unfunded liabilities out there) Federal Reserve officials are worried that we are caught in a liquidity trap. Central banks are in a race to try to reinflate the system using monetary largesse and currency debasement, but that only works when everybody is not in the same boat... For now their liquidity has made its way straight to the stock market and increasingly to hard assets and precious metals. That just means whatever central banks are doing is relatively useless. The core fabric of our economy remains feeble and it's bubble or bust.- Nic Lenoir

Philly Fed drops from 21.4 to 8, worst since August of 2009. Expected at 20.Why is the market down on this? This means that the Fed will soon have its Congress OpCo legalize a) negative interest rates and b) make holding any cash in deposit or money market funds treason.

Seriously, does anyone even pretend to believe these Tim Geithner-inspired lies? What can one do but laugh.

All you need to know about today's market

Another fantastic interview and some typically outspoken observations from everyone's favorite Doom and Gloomer:"I think that governments have become like a cancer, they have expanded in the financial system...The biggest problem is too much intervention. Whatever the government touches is usually done worse than in the private sector. I think any government intervention has unintended consequences and is negative. Eventually the market will break the intervention and things will blow out...People who tell me about the big deflation in Japan, why don't they spend a day in Tokyo? It's still the most expensive city in the world. At this level I'm not particularly interested in buying anything. I buy gold, I don't know what else to buy." Faber expects another worse crisis to happen in five to ten years, "when the whole financial system collapses" - the reason: the debt problem has been kicked down the road without actually being sold. "I think US Fed, ECB and other central banks have no other option, they will continue to monetize and buy bad paper, period. The central bankers are precisely the ones that don't know that excessive money creation and excessive debt creation leads to a crisis down the road. The ECB will talk hawkishly, but act dovish, like the Fed in the US." Must watch 20 minutes.

It’s beginning to look like markets are finally pricing in QE2 (quantitative easing). Many believe the deflationary genie is out of the bottle and the conventional wisdom says it’s a long process to put it back in. President Obama will hit major political headwinds trying to push through a 2nd stimulus program but it’s looking more and more like a necessity with unemployment hovering just below the double digit (and that’s only the official measure). There can be no other explanation for the fact that gold has recoupled in its relationship to the dollar. Today the dollar is down, equities are mostly flat, oil is down slightly and bonds are unchanged for the moment. The aggressive move higher this morning in gold (up $15 currently) tells us that more people are being converted and the market is going secular. Point of interest, there are those who believe we are running out of gold. We don’t necessarily disagree but as long as bars are gettable there is a lot of gold out there to be had. Moving forward, Comex vaults and lease rates will be the next indicator of intrinsic demand.

• Swiss parliament approves UBS-US tax deal (Reuters)
• Hello deflation my old friend: May consumer prices post biggest drop in 1.5 years (Reuters)
• Weil: Bailout nation will thrive as long as AIG lives (Bloomberg)
• China warns finger-pointing could derail G-20 (Reuters)
• More Spanish propaganda: Spain may use €30 billion euros for bank restructuring (Reuters)
• Why a second Enron/Skilling trial is a great idea (Post)
• Pimco's secular outlook for the UK (Pimco)

How much do you want to buy at a 28 year market top? Last year, a staggering $375 billion poured into bond funds, a record, while $40 billion exited equity funds, despite a Dow that rose 23%.

Can we stop all discussion that we have avoided a double dip already? Initial claims came in at 472,000, up 12,000, compared to an expectation of 450,000. Last week was revised from 456,000 to 460,000. Dear Joe Biden - was the economic recovery in unemployment pushed back to 2011? Did companies receive the memo to fire, yet miss the other one, with the much more critical rhyming verb? Never fear - the BLS has an explanation for everything, and the surge in claims was presumably not only predictable, it was expected, and was blamed on the fact that there was a federal holiday in the prior week:yet somehow the consensus totally ignored this oh so obvious tidbit. Elsewhere the CPI was once again deflationary: CPI came in at -0.2%, and CPI ex-food and energy barely posted a heartbeat at 0.1%. Futures now retracing pretty much all EUR-driven gains. But not gold.

The Telegraph's Ambrose Evans-Pritchard points to a letter signed by 100 Italian economists (technically Keynesianites, but in the great Ponzi, the two have become synonymous) in which they note that "the austerity strategy imposed by Brussels/Frankfurt risks tipping Europe into a self-feeding downward spiral. Far from holding the eurozone together, it will cause weaker countries to be catapulted out of EMU. Others will leave in order to restore sovereign control over their central banks and unemployment policies." Not to mention that Italian university budgets will be slashed. These 100 establishmentarians would be wise to do the whole "look to your left, then to your right, in one year two of those people will be out on the street." While the core of the complaint has to do with the core premise of austerity, arguing that a fiscal injection is much more needed than a haircut, AEP does have a great point, that while conducting fiscal contraction is possible, it needs to be at least offset by monetary loosening. And the still relatively hawkish ECB has very little room in that regard. Evans- Pritchard's conclusion is well known in advance: "EMU has become an infernal machine. This will not be the last letter by angry economists."