Archive - Sep 8, 2010

The Minneapolis Fed's recent addition, governor Kocherlakota, gave a speech in Missoula, Montana in which he noted the obvious, that GDP growth and inflation are both starting a decline which, if Goldman is right, will end up very close to breakeven to zero, and most likely will be materially lower. The one part of his speech that bears highlighting is his discussion on the ever deteriorating employment picture, which he classified as "disturbing."What Kocherlakota focuses is the topic of mismatch, which he classifies as follows: "There are many possible sources of mismatch—geography, skills, demography—and they probably interact in nontrivial ways." And on the topic of mismatch, the Fed governor admits that the Fed is hopeless to fix it: "The mismatch problems in the labor market do not strike me as readily amenable to the kinds of monetary policy tools currently available to the Fed." We wonder how long before the Fed realizes that not just the mismatch component of unemployment, but all of it, is not "amenable to monetary policy" tools, now that ZIRP is in session. And yes, fiscal policy during a time of structural unemployment can only provide temporary pull-forward boosts, such as the census and other Cash-4-Clunkers type programs. In other words, 10%+ unemployment is coming and will be here to stay.

This is not what the market wanted to hear: "Reports from the twelve Federal Reserve Districts suggested continued growth in national economic activity during the reporting period of mid-July through the end of August, but with widespread signs of a deceleration compared with preceding periods."

Today we turn our attention to a subject that is very dear to my heart: mass psychology. I want you to notice that in a normal, functioning economy, debt-based money should be created and destroyed at close to the same rate. Provided the population grows and GDP grows, there should be a slight upwards bias in money creation. So why have things gone so crazy in the past 10 years? Let’s look at some interesting data points.

Nanex is out with their latest analysis on what the market would have looked like on May 6 without the quote stuffing impact from HFT. If the market had in place a system such as that proposed by Nanex where there is a 50 ms minimum quote life (instead of the perpetual churning of bids and offers), 40% of quotes would not have been present during the Flash Crash sell off, and likely would not have tripped the NYSE's LRP trigger (if that was at an issue), neither would it have made NBBO arbitrage opportunities available. As Nanex shows in the second chart, the percentage of "fake" trades as a portion of total surges during the Flash Crash interval, yet eliminating those would have effectively cut the quote burden in half, making dilapidated exchanges like the NYSE capable of not losing control of the NBBO dissemination, not triggering its LRP choke points, and not providing a tremendous latency arb opportunity to subscribers of its OpenBook product.

Today's $21 Billion 10 Year auction (technically a reopening of a 9 Year 11 Month Note, cusip NT3) closed at a fresh 2010 low yield, 2.67%, and the lowest since only January 2009's 2.419%. The Bid To Cover jumped from 3.04 to 3.21, in line since the 2010 average of 3.16. Yet the most notable observation, and confirming our expectation that Indirect bidders have a soft spot for the 10 Year, or frontrunning the Fed ever to the right on the curve, was the Indirect take down, which came at the highest number, or 54.7%, since September 2009. Direct Bidders plunged to the lowest since November 2009, which is expected: when every traditional player can't get enough of the auction, there is no need for the mysterious London bidder to emerge. Primary Dealers at 38.3% dropped to the lowest level since May 2010. The auction came in tight of the When Issued (2.685%), meaning there was a selloff into the auction, and now we are likely to see a pickup in bids for the 10 Year into the close, especially with an upcoming Obama address.

While certainly not news to most people, the following visual guides from Mint on the two most critical monetary concepts should provide a vivid explanation to all those who are still confused as to why deflation is good for savers and for the middle class in general, and bad for the Fed, for banks, and for all those who are levered to their gills in toxic, non current debt. As for all those who still think that hyperinflation is a function of rising prices, there are other, more appropriate blogs for you.

But they're still spraying it ...

...and would probably be kicked right off CNBC for daring to do that. Nigel Paul Farage, who is a member of the United Kingdom Independence Party (UKIP) Member of the European Parliament for South East England, but most notably one of the most famous euroskeptics, goes nuts on EU Commission President Jose Manuel Barroso, tearing down the commission self-evaluation, and noting among many other things that according to EU polls, in the last 6 months those having faith in the EU has dropped by 10% in Germany, 17% in Greece, 9% in Portugal, and "less than half of EU citizens believe that being a mamber of the club is worth it." On the ever debated topic of the one currency, Farage says that the "euro doesn't suite Germany and doesn't suite Greece." The most damning statement address to Barroso: "People don't respect you because you cheated to get the Lisbon Treaty through." With truth like this you know this will be a must watch clip. All it is missing is Santelli... and Erin Burnett to moderate.

As usual, we present visual aids for the learning disabled (i.e., those based at 100 F Street, NE) in their Sisyphean quest of understanding a market structure that is about 20 years ahead of where the SEC currently is. Below, courtesy of William Banzai, is what the regulators would find if they could get their conflicted and confused little hands on a HFT trading terminal.

The Structure of Crude Oil,including Contango and Options Skew, provides options and futures traders unique opportunities to limit risk and initiate positions with excellent value.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 08/09/10

Sheer poetic brilliance from the world's greatest realist: "The current situation reminds me of mid 2007. Investors then were content to stick their heads into very deep sand and ignore the fact that The Great Unwind had clearly begun. But in August and September 2007, even though the wheels were clearly falling off the global economy, the S&P still managed to rally 15%! The recent reaction to data suggests the market is in a similar deluded state of mind. Yet again, equity investors refuse to accept they are now locked in a Vulcan death grip and are about to fall unconscious." Albert Edwards, Soc Gen

Cover your ears. There are a lot of "I told you so's" coming down the Irish banking pike

According to CNBC, Goldman is now seeking to sell its prop trading desk. And somehow private equity firm KKR is rumored to be involved. Let's say that again: a private equity firm (that typically has a 3-5 year investment horizon and a capital lock up even longer) is alleged to be looking at a principal trading desk (i.e. a hedge fund that has a 3-5 second investment horizon). So either KKR is becoming a hedge fund, or the firm's principals have decided to shorten their lock up to the industry average +/-3 days. Nonetheless, as this news was most certainly better than expected, the KKR follow-on offering should now have no problems to be completed without a glitch.

The CEBS has just issued the following statement on the recent disclosure by the WSJ that not only was the stress test a fraud, but all sovereign debt representations continue to be lies (and EuroStat still has no clue what the real debt of Greece is). In other words it all contained - buy stocks, sell puts, take our a 7th mortgage and buy that long awaited 576th iPad. In the meantime, lies and fraud shall continue until confidence returns.