Archive - Aug 2010

If? And, of course, the reason given for the upcoming intervention, is the good old "speculative" wolfpack. The kneejerk reaction in the Yen is lower, but quite muted. The market seems to be expecting much more from the BOJ than mere ongoing rhetoric. Having seen the disastrous example of the failed SNB intervention, the central bank-vs-everyone else game will be far more interesting this time.

No major surprises in today's 2 Year bond auction, which came as expected at a record low yield of 0.498% (0.67% previously), and a 3.12 Bid To Cover (3.33 previously). 95.59% of the auction was allotted at the high yield (oddly, the low yield was 0.396% - a pretty substantial low-high range). The Direct Bidders took down 12.07% of the auction, but the most notable shift was that Indirects (the Chinas of the world, which as we pointed out had been reducing their holdings), took down a mere 29.25%, the lowest since April 2009. The result was that Primary Dealers were stuck with buying the largest portion in a year: at 58.7%, this was the largest proportionate take down since July 2009. It seems our foreign creditors (and overlords) are aggressively frontrunning the Fed ever further to the right on the curve.

In his latest letter, Pimco's Bill Gross explains why neither he, nor his fund, are some bloodthirsty vampire squid, monopolizing the bond market: all he wants is the greater social good, which can only be perpetuated by endless government subsidizes of the housing ponzi. What follows is truly entertaining: "Having grown accustomed to a housing market aided and abetted by Uncle Sam, the habit cannot be broken by going cold turkey into the camp of private lending. The cost would be enormous in terms of yields – 300–400 basis points higher than currently offered, crippling any hopes of a housing-led revival to the economy. And why do I and PIMCO support this view? Is it some self-interested, money-making plot to allow us to dominate the bond market? Hardly. Any investor would recognize that it’s better to have a 6 or 7% yield instead of 3–4%, so it would be better for PIMCO to let the Administration flood the private market with non-guaranteed, private mortgage product and let us vultures feast on the pickins. No, the self interest rests on “Que” Street. If the housing market continues to be government dominated, then the points from originations and the fees for private insurance would all of a sudden disappear. The vested interest lies on Wall Street, not Newport Beach or Main Street." Of course, should the government go cold turkey on the housing ponzi, we leave it up to our readers to conclude what would happen to Pimco's over $1 trillion in rate exposure: here's a hint - a 300-400 bps drop in prevailing spreads will mean game over for the magnanimous Mr. Gross overnight. So yes, what's good for everyone (even as nobody really cares about rates with pretty much everyone paying down, not raising debt), just happens to be very, very, very, very good for Pimco. q.e.d.

In its September Monetary Trends letter titled "The Monetary Base and Bank Lending: You Can Lead a Horse to Water…" the St Louis Fed analyzes the phenomenon that has all monetarists up in arms, namely the surge in the monetary base and the very muted increase (and outright alleged drop in the case of the M3) of monetary stock, going back to the core topic at every debate over hyperinflation/deflation: the money multiplier, and its current reading of well below 1. What is the reason for this discrepancy: as the St Louis Fed explains: "The answer centers on the willingness of depository institutions (banks) to lend and the perceived creditworthiness of potential borrowers. A deposit is created when a bank makes a loan. Ordinarily, bank loans—and hence deposits—increase when the Fed adds reserves to the banking system. How ever, despite an increase in reserves of over $1 trillion, total commercial bank loans were some $200 billion lower in May 2010 than in September 2008. Banks added to their holdings of securities, which resulted in a modest increase in deposits and the money stock, but many banks were reluctant to make new loans." And herein lies the rub: if and when the economy ever picks up, and at this point that looks like an event that may well never happen, "Many economists worry that bank lending and monetary growth will eventually surge and, ultimately, cause higher inflation." The backstops offered by the Fed looks increasingly more brittle: reverse repos and IOER. The longer ZIRP continues, the more aggressive the Fed will have to become if and when the money multiplier finally shoots higher. If prior examples of hyperinflation are any indication, this will not be a seamless or smooth process, which is why aside from the traditional calls for hyperinflation as a result of a collapse in the faith of the monetary system as a whole, many are also calling for this outcome should the Fed, paradoxically, stabilize the economy. And it is about to get worse: the Fed's balance sheet is likely about to grow by another $2 trillion as soon as QE 2 is announced. Which means that by the time the economy needs to remove excess liquidity, the Fed will need to find a way to remove not $2Bn, but probably double that number. The simple conclusion is that the longer the Fed fights deflation, the greater the likelihood for (hyper) inflation as the final outcome once it ultimately rights the economy. We tend to think that Odysseus was faced with an easier choice.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 24/08/10

Much has been said about the comparison between Japan and the US on a macro level, as both countries succumb to the deflationary forces of social-wide deleveraging. Yet few have analyzed the transition of the US into Japan from the perspective of corporate credits. Below is BofA's Jeffrey Rosenberg, arguably the firm's best analyst, sharing what he sees as the arguments "for" and "against" the credit markets on America's one way road to Japanification.

That long title should convey my message quite well...

Are you going to fly in this thing?

And once again, all of Europe is dumping its deposits in Switzerland, running away from domestic banking centers, and making the lives of Hungarian CHF-denominated debtors a living hell. The EURCHF just hit an all time low of 1.3066. The Bank intervention sonar just went apeshit as both the BoJ and the SNB are fully expected to intervene at any moment.

Those puzzled by the recent pick up in stocks need not be puzzled much longer: today's POMO operation just closed, and the Fed just monetized $1.35 billion of bonds, an amount which apparently was enough to push stocks by about 0.5% higher, and see a slight sell off in Bonds as holders sold into the Fed's buyback. The submited to accepted ratio was a solid 12.8. Far more relevantly, Morgan Stanley continues to be on a roll in predicting precisely which bonds the Fed will monetize: today, Igor Cashyn got 6 out of the 8 repurchased issues correct. Frontrunning the Fed continues to be the most profitable trade.

In case you missed it...

We often hear figures about the 90% (or even more) that lose money on a consist basis. It’s a ‘fact’ often quoted by gurus and a common belief held by traders. The question for professional traders then becomes how do we benefit from this landslide of people on the wrong side of a trade?

The Fed has just released the 29 bonds maturing between 2013 and 2014 eligible for monetization by the 11am deadline. And since the Fed has been purchasing notional way ahead of schedule, it may have far less dry powder to reliquify the market: today's auction will likely come at around $2 billion. Anything above that would mean that the Fed is monetizing about $35-40 billion a month, well beyond what it had telegraphed previously, and in essence is undergoing a real QE2 process. The only question is whether the banks will use the new cash to buy stocks in today's smack down, or will they push the 10 Year further inside the 250 bps it was spotted last. The buyback will be complete at 11:00 am at which point we will discuss if Morgan Stanley continues to shine in its Fed frontrunning predictions.

A discussion of the essential nature of leverage and liquidity when trading futures and options contracts.

Hello Double DIPression my old friend. 3.83 million sales on 4.65 million expectation. Previous 5.37 million revised to 5.26. The chart says it all: lowest sales since May 1995, months supply largest since 1999.