Archive - Sep 2010

We bail them out. They stiff us. Wonder why we hate the banks? Some thoughts on Ed DeMarco.

RANsquawk European Morning Briefing - 16/09/10

The globalization of Keynesian economic policy will destroy capital and harm economies worldwide. The days of refuge from economically oppressive states by fleeing to America or some other relatively free capitalist country are gone. This is Part I of a two part article.

Only a partisan two-bit hack economist/liberal rag columnist from an Ivy League University with a Nobel Prize could look at the following two charts and conclude that the Japanese Government failed to revive the Japanese economy over the last twenty years because they spent far too little on fiscal stimulus. Japanese government debt as a percentage of GDP was 52% in 1989, prior to their real estate and stock market crash. Today it stands at 200% of GDP. Current budget projections show the debt reaching 250% of GDP by 2015. Meanwhile, Japanese consumers and corporations have been reducing their debt for the last 16 years. The net result has essentially been a 20 year recession. The pundits who never see a crisis on the horizon point to the fact that Japan has not collapsed under the weight of this debt as proof that the U.S. debt level of 90% of GDP has plenty of room to grow without negative repercussions. This is the same reasoning “experts” used in 2005 when they proclaimed that home prices in the U.S. had NEVER fallen on a national basis, so therefore there was no reason to worry about home prices. A basic economic law is that an unsustainable trend will not be sustained. When the 3rd largest economy in the world implodes, the reverberations will be felt across the globe.

As we pointed out last month, in June and July Pimco raised its allocation to government bonds to the highest ever, or 63% and 54% of its then-$239.3 billion Total Return Fund. As a reminder this is when the 10 year was well above 3%, and which proceeded to plunge in yield (soar in value) in August, as the sheer panic of QE Lite (and what it means for QE 2) enveloped the market, and when the Hindenburg Omen correctly predicted a 5% drop in stocks beginning in August 12. Stocks have now risen by over 7% in September, which was to be perfectly expected considering the market has seen $10 billion in redemptions (don't ask... bizarro), yet bonds have only gradually sold off, and as rumors of QE persist, the 10 Year continues to be just off its all time tights. This may change now that it has been made clear that Pimco sold over $40 billion in UST bonds in the month of August, just as bonds reached all time highs. Yet to get the sense of urgency behind Gross' earlier actions, consider that the bulk of the purchases were done on margin (pink line in chart below) as the fund borrowed $35 billion in June (and $29 billion June), using all the borrowed cash to fund Treasury purchases. And since the cash repo rate would have effectively wiped out the carry profits on the bonds, it is now blatantly obvious that Gross was very well aware there would be a massive capital appreciation in Treasuries beginning some time in July or August (cough QE Lite cough), and was actively buying all he could on margin in advance of the move.That's right, ladies and gents - we have just discovered Bill Gross' frontrunning "tell" - 1-2 months before every Fed intervention, he loads up the securuity that will benefit the most from any particular round of QE using borrowed cash. As the effective duration of the fund increased substantially in June and July it is obvious that Gross was buying up the long end of the curve, expecting a major flattening of the curve. Which, once QE Lite was announced, is precisely what happened. Incidentally, this purchasing on mega margin was repeated by Gross just once before: when Pimco's holdings of MBS surged from $80 billion to $113 billion in January 2009... just before Ben Bernanke announced QE1. What a series of lucky coincidences!!!

It's worth stepping back on occasion to consider the progress that has been witnessed in particular academic fields. Astronomy took a giant step forward centuries ago when it finally realized the sun was at the center of the solar system. Geology adapted to the fact of a round earth. The continuous evolution of Physics boggles the mind. Engineering perpetually pushes into new frontiers. And how does Economics compare...

Just last week, it was reported that the turnout for the Democratic primary was the lowest in 80 years. While the Republicans are clearly energized by their concerns about the direction the Democrats are taking the country in, the Democrats themselves seem to have decided to forgo the voting process, perhaps in favor of a refreshing nap. No question about it, the president is in the hot seat. While I am sure that back in 2008 Barack Obama was one happy camper about having taken the presidential prize, today one has to wonder if that victory has led him to certain bitter regrets.
His problem, the problem bedeviling the government at its highest level, is that there is actually no palatable solution to the persistent debt crisis now gripping the U.S. economy by the throat. In fact, the only tangible solution might be best termed the “Smoking Ruin Solution.” Allow me to elucidate.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 15/09/10

It is beyond a joke now: ICI's latest data discloses that in the week ended September 8, domestic funds saw outflows of $2.2 billion, following last week's massive $7.7 billion. And yes, ETFs experienced outflows as well. So far September has experienced nearly $10 billion in outflows, even as the market has ramped by over 6%. Who is buying this shit? Just ask The New York Fed and Citadel: they may have a few pointers (wink wink). This is the 19th sequential outflow from US stocks, and amounts to $65 billion in redemptions for the year. With the market pretty much unchanged YTD, it means that mutual funds can not resort to capital appreciation as a substitute to outflows, and most are on their last breath (Janus: blink twice if you are still alive please). The kicker: the S&P is at the level it was when the outflows began back during the flash crash. If that doesn't restore all your confidence that Uncle Sam will be so good at managing the market (just like he has done with everything else), nothing else will. Throw in a little HFT, a little subpennying, a little Flash trading, a little DMA trading, a little quote stuffing, a little hedge fund clubbing, a little specialist front running, a little daily flash crash in big caps like Nucor Steel, and you can see why next week we will most certainly have our first inflow in 20 weeks. Or not. It doesn't matter. Nobody that is made of carbon, or who doesn't already have direct access to the Fed for zero cost funding, is trading stocks anymore.

A day full of disappointing news concludes with the mandatory rampage that is sure to get all investors' confidence back in what is the most broken market ever seen by pretty much anyone. Anything less than a triple digit gain in the Dow and today's ICI outflow may be in the tens of billions. Or else the banks won't lend and the system will collapse. In other news, the US is rumored to be issuing High Yield bonds (at sub 5% rates) with which to fund a couple hundred trillion or so in direct "dividends" to US citizens (only those making under $250,000 and/or belonging to labor unions).

Ever since the financial crisis made it all too clear that all US banks would be insolvent if their assets were marked anywhere near fair market value, Bank Holding companies received a green card to actually represent any of their securities "held to maturity" at anything else than mark-to-model/myth/unicorn on their books. Obviously models miraculously priced all barely cash producing loans at par, and with "out of sight, out of mind" receiving the full blessing of the administration's treatment vis-a-vis an insolvent banking system (i.e., no risk, all return), investors realized they have nothing to fear as pertains to the asset side of bank balance sheets, they ended up purchasing such otherwise undercapitalized companies as Citigroup (and soon, incidentally, Government Motors, which as Jonathan Weil reported recently, would have an equity value of negative $6 billion if the bankrupt company's $30 billion in goodwill assets was removed). Well, the FASB has just fired a semi-warning salvo at the banking system with a new proposed rule that would seek the gradual return of that long lost concept known as mark-to-market.

Well, that didn't take long. Just headline for now, will bring more asap.

BN 11:32 *U.S. SAYS IT WILL FILE TWO NEW WTO CASES AGAINST CHINA

BN 11:33 *U.S. SAYS WTO CHINA CASES ARE ON STEEL, FINANCIAL SERVICES

Diana Olick, by far the best reporter at CNBC, and not merely an anchored regurgitator of propaganda bullet points, let one slip today, by posting an article on CNBC titled: "Home Price Double Dip Begins" (and we have a screenshot in case CNBC realizes the grave error it has made and retracts it). While nothing new to Zero Hedge readers, where we have been making the case that the economy has nothing to double dip to, considering it has been in one depression for 33 months now, it may catch the broader public by surprise. Ms. Olick's arguments: "given the combination of the expiration of the
home buyer tax credit and the increasing number of loans moving to final
foreclosure, we knew that home prices overall would take a hit, but it
would take a while. Well we're here." And there you have it - there is little that can and should be added when dealing with the simple truth. Of course, for CNBC to regain its floundering Nielsen ratings it would take all the daily staff to follow in Ms. Olick's example and report what is actually happening to the country, instead of what Joe LaVorgna believes should be happening, based on the goalseeked output his "economic" model is spewing forth. Alas, it is now far too late for the cable station to regain much needed credibility, especially when anchors tell guests who dare to question the propaganda assumptions that they disagree with they are not welcome.

CLSA's Russell Napier is one of the more respected strategists out there. Which is why his latest outlook on various asset classes is required reading, even if we very much disagree with some of his "facts." In essence Napier is betting on a smooth inflation premise, which will result in a surge in stocks by 30%+ over the next 18 months, and a crash in bonds. As justification for the validity of his observations, Napier refers to CLSA's M3 proxy which he notes is starting to rise, and makes reference to such shadow economy indicators as ABS whose issuance he believes is picking up, indicating a return to a normally functioning credit market. Napier also cites the often misunderstood concept of capital on the sidelines, which for Russell means only one thing: "corporates are not using [cash] to repay debt so it will be used to the benefit of the economy or asset prices." So far this premise has been proven completely wrong, as corporations more than anything demonstrate a capital prudence in light of a regulatory environment which is very uncertain, and instead of exposing themselves to counterparty banking, companies are now their own banking centers. We don't see this trend changing any time soon, especially when one considers imminent changes to the tax code, which will make hoarding of cash even more difficult. Lastly, with gross profit margins (as Hussman pointed out) having just one way to go, and the result being a substantial drop in cash generation, companies will likely store as much cash as they can get their hands on. Nonetheless, Napier does bring up some useful observations, especially as pertain to rates. Full presentation inside.

Today the US Treasury got a gift: a future guaranteed buyer of at least $300 billion more in bonds. But before we get there, the number one question in the minds of FX traders right now is just how much buffer does the BOJ have for current and future Yen selling, and just when will BOJ intervention end, as nobody wants to be selling the USDJPY/EURJPY only to be caught flatfooted as the Yen ramps another 100/200 pips lower. Goldman Chiwoong Lee provides the answer, which may not be the one those who are itching to go long the Yen again are looking to hear: essentially based on statutory limitations, the BOJ can implement as much as Y35 trillion of intervention capacity, which is roughly the same amount as used during the last intervention, when the Yen stayed relatively flat only to proceed its upward climb once again. Furthermore, the 35 number is a soft ceiling, and the Diet can easily raise it if seen as necessary, very much the same way the US can and will hike its debt ceiling in early 2011. And probably an even more important question to the US is whether or not the intervention will be sterlized (i.e. offset against Bill issuance), or unsterilized, resulting in a mismatch in funding and a jump in the current account. For the answer to this as well, read inside.