Archive - Jan 26, 2011

No surprise: the projected deficit just went up by another half a trillion: "For 2011, the Congressional Budget Office (CBO) projects that if current laws remain unchanged, the federal budget will show a deficit of close to $1.5 trillion, or 9.8 percent of GDP." This is up from $1.07 trillion: a very small margin of error there. But don't worry - like true Keynesians the CBO expects that future deficits will have no choice but to go down: "The deficits in CBO's baseline projections drop markedly over the next few years as a share of output and average 3.1 percent of GDP from 2014 to 2021. Those projections, however, are based on the assumption that tax and spending policies unfold as specified in current law. Consequently, they understate the budget deficits that would occur if many policies currently in place were continued, rather than allowed to expire as scheduled under current law." So between 2010's $1.3 trillion, 2011 $1.5 trillion, and 2012's revised $1.1 trillion, we have $3.9 trillion just in deficit costs to plug. And as Zero Hedge has repeatedly demonstrated the actual debt to be issued is usually about 33% higher than the deficit funding need, meaning that over the next 3 years the US will need to issue about $5 trillion in debt. Which means further debt monetization is guaranteed as foreign investors have now fully withdrawn and the Fed is all alone in gobbling up every dollar in gross issuance. QE3 is guaranteed and we are stunned that the market continues not to realize this.

Nic Lenoir throws down the gauntlet and takes on Goldman Sachs directly following their recent upgrade of the EURUSD target to 1.40: "Not that many layups or exciting trades in the G10 out there with equities in a slow melt up and the long end in Fixed Income stuck in a range for the last month. If you missed out on the sell-off in metals or did not have the UK GDP data ahead of the market don't despair just yet, we have a very interesting set-up to sell EURUSD here...We stand below the 61.8% of the sell-off since the November highs, the hourly divergence is staggering also. I strongly favor shorts here. Less convinced traders traders can wait for the break of the trend support which comes around 1.3640. Given the recent advance I think we should see a retracement back to at least 1.34 even if we are to utlimately advance further. I am bearish EUR as I don't believe this currency has a place in this world anymore, but even raging bulls should be cautious here."

PIMCO's Tony Crescenzi is out with his latest summary of US monetary conditions. Nothing revolutionary, just a good solid theoretical summary of what to look for in anticipation of the "massive monetary madness" turn. Crescenzi likens the trillion in excess reserves to a "Yucca Mountain" of toxic, hyperinflationary "nuclear waste" storage, and suggests the following approach for tracking the inflection point: "when banks begin to utilize their excess reserves to make new loans and create new money rather than store the reserves in “Yucca Mountain,” the case will then grow for the Fed to begin removing the reserves. This has not happened yet, but when the process begins it will be evident from the Fed’s weekly H.8 report on the assets and liabilities of commercial banks." None of this is new for Fed watchers. As usual what we enjoy the most are the historical anecdotes of hyperinflation, the same way in ten years, historians will put America in the same case study: "History is laden with failed attempts at creating new money to shed debt. Greek tyrant Dionysius of Syracuse, now Sicily, at around 400 B.C. resorted to coinage debasement when his fortunes declined. Germany, of course, debased its currency before World War II, leading to hyperinflation. More recently, Zimbabwe printed massive amounts of currency, also leading to hyperinflation – I purchased trillions of Zimbabwe dollars on eBay for a few U.S. dollars! Such are the ravages of excessive use of the printing press." Certainly worth the read.

Following the now extremely well documented surge in short-term SHIBOR and Chinese repo rates, it appears that banks have begun attempting to extract the missing liquidity from end consumers. Various Chinese commercial banks raised lending rates between 10 and 45% over the benchmark rate because of a shortage of
funds, the China Securities Journal reported today, citing an
unidentified bank official. In the meantime, SHIBOR refuses to pull back, hitting an unsustainable 8.05%, which is worse than Portuguese 10 year rates. Will this sustain? Unclear - the Chinese new year must pass and the recent surge in snowfalls will have to recede before a steady state evaluation can be made, however as we have been warning since December, in a country having one of the biggest asset-liability mismatches, the negative curve convexity on tightening fears, will blow up the near end, isolating bank liquidity. To say that this is bad news if it persists is an understatement.  On the other hand, for the news to matter, news will have to matter period: Bernanke has managed to indoctrinate the Pavlovian Dogs, as described by Grantham yesterday, with a sense that every action, no matter how bad only leads to rewards. Which, itself, is of course also very much unsustainable.

The heavy price of a “head and shoulders top”. Competition from rising interest rates in emerging markets and record scrapage rates are eating into the prospects for the barbarous relic. So are higher margin rates for traders. Moving out of hard assets into paper ones. Exiting from a one sided trade. (DGZ), (GLL). (GLD).

• Mandatory Prison in Securities Frauds Sought by New York's District Attorney Cyrus Vance (Bloomberg)
• Financial Meltdown Was ‘Avoidable,’ Inquiry Concludes (NYT)
• Default worry sees US muni bond sales dry up (FT)
• Greece Default With Ireland Breaks Euro by 2016 in Global Poll (Bloomberg)
• Lehman Brothers amends bankruptcy plan (Reuters)
• Davos Moguls Adjust to Fast, Slow, Reverse: Mohamed El-Erian (Bloomberg)
• Bernanke Gets 66% Approval From Investors Disliking QE2....all of whom can afford a Bloomberg terminal (Bloomberg)
• Fed warns banks to be weary of expensive CDS: Impact of High-Cost Credit Protection Transactions on the Assessment of Capital Adequacy (Fed)
• China Is No White Knight in Euro's Debt Crisis (Bloomberg)

A look back at China 2010 econ measures and indices, plus some of my observations.

Even as the situation in Tunisia continues deteriorating broadly, the country realizes that it needs its shiny assets back, and needs them fast, regardless of edibility or recent market corrections. As such it has just issued an international arrest warrant for deposed president Ben Ali. From the BBC: "Mr Chebbi said Mr Ben Ali should be tried for property theft and transferring foreign currency." We can't repeat enough: any dictatorial or Hewlett Packardian banana republic should make sure all of its gold is secure. In fact, since we are positive all of the gold, pardon, tungsten held at Ft. Knox is right there, it may be a good idea to put tracker beacons in the fake material. We are confident that sooner or later it will lead the broader population to not only the Textron vehicle used for one way transit, but to which non-extradition countries will soon be hosting our very own versions of the Tunisian President.

When a few weeks ago we predicted that while contagion was the word of 2010, stagflation will define the current year, we had no idea how fast there would be glimmers validating our outlook. Yesterday's UK GDP data was the first datapoint that showed a decline in GDP even as the BOE's Posen infamously announced a day before that that UK inflation was surging. That, ladies and gentlemen, is the definition of stagflation. Coming soon to a banana republic near you.

Markets bulled up in the AM as they await their QE and low rates ‘morphine’ from the FOMC meeting statement later today (recall our comparison that QE is like morphine – it feels good in the short term, but you are only getting it because you are in severe pain – see QE Morphine published November 4, 2010). The tone of the statement will be key as a more bullish stance might shift the market to consider stimulus withdrawal impacts, while a continuation of the dour tone so popular as of late might cause a further USD slide. Yesterday’s slightly bullish performance in equities was topped by a strong Treasury rally that seemed to be more stimulus driven than fear hoarding. Case/Shiller showed no significant surprises, other than the continued home price spiral being slightly slower than expected. Today is all about the Fed, with MBA Apps and New Home Sales a meager appetizer before the afternoon main course. State of the Union last night was also supportive of a more fiscally conservative White House stance.

The MBA reported the results of its weekly mortgage applications survey earlier and the leading indicators for the housing price collapse continue coming fast and weak. After rising by 5% in the prior week, the market composite index plummeted by 12.9%, a major reversal, which confirms that as we have been saying, no matter the record 2s10s spread, few if any are taking "advantage" of surging mortgage yields and refinancing. Indeed, the Refinance index decreased by 15.3%, hitting the lowest level since January 2010, while the Purchase Index is at the lowest since October 2010. And so, in addition to global rioting, add the complete collapse in the housing market as the natural offset to a market meltup inducing QE 2. As such, the tradeoff becomes: debt monetization and Russell 2000 at 36,000 (bankers win) or a complete housing market wipe out and accelerating global food price revolutions (middle class is not eradicated). We take the former any day.

After this morning's sobering news on mortgage applications, we have new home sales, CBO budget update, and the FOMC statement….There is no POMO today.

Thomas Stolper's Goldman FX team, who a little over a week ago put on a tactical target of 1.37 on the EURUSD, refuses to take profits on the EURUSD, and instead has extended the target from 1.37 to 1.40 (with a 1.33 stop). Since this is the first time we have seen the firm continue selling into the close, we wonder just how big the pain for the prop side of GS is if it must be hoping to cut its losses on a reversal. With the pair trading well north of 1.37 Goldman may be forced to keep pushing the target ever higher on Asia's ongoing rescue of Europe.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 26/01/11

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