Archive - Nov 2, 2011

The chart below indicates that should the Fed launch on the latest harebrained idea proposed by Goldman, namely to target nominal GDP, it will most likely blow up everything, as the US economy is now about 14.7% below the trendline average, and assuming a catch up to the bubble years through 2016, would mean an 8.6% annualized increase in economic growth, about double where growth has been in the past. How this is possible absent the issuance of an incremental ~10% in annual debt each year (keep in mind we are dealing with Keynesians, where debt = growth) we don't know. Neither does the Fed. So if indeed the Fed wants to revert to trendline, it means that by 2016, US Debt will be greater by an additional $10 trillion over an on top of the $10 trillion increase already forecast by the GAO over the next decade, or, numerically, by 2021, the US would have about $35 trillion in debt, and most likely, well over that amount. Brilliant.

Get your pencils out...

As usual, nothing but pure concentrated essence from the Fermentation Supercommittee Chairman

Spiegel continues to pile it on. Following yesterday's heartfelt thanks to G-Pip (as he is now known due to his impact on the EURUSD with every single public appearance), today they follow it up with: Greek Exit From Euro Zone Just A "Matter Of Time." To wit: "Despite its location on France's glamorous Cote d'Azur, Wednesday evening's meeting likely won't be a pleasant one for Giorgios Papandreou. The Greek prime minister is set to meet with German Chancellor Angela Merkel and French President Nicolas Sarkozy. None of them, one presumes, will be in the mood to enjoy their enchanting surroundings...Should Greek voters, frustrated by round after round of deep austerity measures, reject the bailout deal, it could result in an uncontrolled national bankruptcy. Markets will likely remain nervous until the results of the ballot are in -- meanwhile the euro will move even closer to the abyss. As if to highlight the dangers, German banks on Wednesday announced they were postponing their acceptance of the Greek debt haircut until after the referendum. Without voluntary bank approval, Greece faces a disorderly bankruptcy which could accelerate contagion throughout the euro zone. Papandreou's decision, said European Commissioner for Energy Günther Oettinger, "puts the euro in even greater danger."

It seems like history is accelerating. Momentous events have been occurring regularly since 2007. Our political and financial leaders are blindsided on a daily basis by each new crisis. The majority of the American public continues to be apathetic, willfully ignorant, and constantly absorbed by their array of electronic gadgets and mindless drivel spewed at them by media conglomerates. Rather than think critically, most Americans allow left wing and right wing mainstream media to formulate their opinions for them through their propaganda and misinformation operations. Linear thinkers, who make up the majority of the political, social, media and financial elite in this country, believe the world progresses and moves ever forward. In reality, the world operates in a cyclical fashion, with generations throughout history reacting to events in a predictable manner based upon their stage in life. The reason the world has turned so chaotic, angry and fraught with danger since 2007 is because we have entered another Fourth Turning. Strauss & Howe have been able to document a fourfold cycle of generational types and recurring mood eras in American history back 500 years. They have also documented the same phenomenon in other countries.

With Tim Geithner having proven repeatedly and beyond a reasonable doubt he has insurmountable intellectual challenges, many have wondered just who it is that makes the real decisions at the US Treasury? The answer is, The Treasury Borrowing Advisory Committee, or the TBAC in short, chaired by JP Morgan and Goldman Sachs, which meets every quarter, and in which the richest people in America (here is its composition) set the fate of the US for the next 3 months in the form of a very much irrelevant report to TurboTax (link). What is of huge importance, however, are the minutes, which unlike the FOMC, are released immediately following the meeting. Below are the full minutes from the latest TBAC meeting held yesterday, just released by the US Treasury (and yes, the issuance of FRN Treasurys, corporate cash hoarding as well as the resumption of the SFP program are both discussed - like we said: these guys run the world) as well as the critical associated powerpoint.

First Fukushima made a repeat appearance last night with news of a repeat fission incident, a topic which has gotten absolutely zero media coverage as discussing beta, let alone gamma decay, is considered uncouth in refined society; now it is time for the fallback geopolitical hotbed to enter the stage. Sky News has reported that Israeli Prime Minister Benjamin Netanyahu is trying to rally support in his cabinet for an attack on Iran, according to government sources. "The country's defence minister Ehud Barak and the foreign minister Avigdor Lieberman are said to be among those backing a pre-emptive strike to neutralise Iran's nuclear ambitions. But a narrow majority of ministers currently oppose the move, which could trigger a wave of regional retaliation. The debate over possible Israeli military action has reached fever pitch in recent days with newspaper leader columns discussing the benefits and dangers of hitting Iran. Mr Lieberman responded to the reports of a push to gain cabinet approval by saying that "Iran poses the most dangerous threat to world order." But he said Israel's military options should not be a matter for public discussion." Which makes one wonder: why is Sky News reporting on this, and why is it a matter for public discussion?

The pulled EFSF bond sale, IIF's desperate hope to keep their 50% haircut, and the potential for Greece and China 'side-meetings' all add up to much more worrying signals than the market seems to be discounting currently.

The October ADP Private Payrolls report, which is the butt of all jokes when it comes to accurate NFP predictive ability, has come and gone, printing at 110K on expectations of 100K, and down from a revised 116K in September. For those who actually care about the quality of jobs, services added 114K of the total 110K jobs, while good-producing jobs subtracted 4K, and manufacturing jobs as a subset declined by 8K. And then they complain that China is making everything in the world...

• Market talk that China may contribute towards the EFSF. Meanwhile, Japanese PM Noda said Japan will consider continued buying of EFSF bonds
• According to an EFSF spokesman, the EFSF is putting off the sale of its 10-year securities
• Weakness in the USD-Index boosted EUR/USD, GBP/USD and commodity-linked currencies
• According to the German foreign minister, the Greek rescue plan cannot be renegotiated
• Markets look ahead to the FOMC rate decision followed by Fed’s Bernanke press-conference

Paul Krugman’s latest post is extremely bearish and he warns that “things are falling apart in Europe; the center is not holding” Krugman warns that this could lead to a “gigantic bank run” and “emergency bank closing”. Not only does Krugman warn of a massive bank run and emergency bank holidays but he warns of the euro breaking up and Italy returning to the Italian lira and even warns of similar problems confronting France. “The question I’m trying to answer right now is how the final act will be played. At this point I’d guess soaring rates on Italian debt leading to a gigantic bank run, both because of solvency fears about Italian banks given a default and because of fear that Italy will end up leaving the euro. This then leads to emergency bank closing, and once that happens, a decision to drop the euro and install the new lira.” “Next stop, France.” Uber Keynesian Krugman, has been one of the most vocal gold bears in recent years and his opinion on gold has been biased and uninformed. It will be interesting to see if his attitude towards gold has changed given the appalling vista he is now warning of. An important question we have posed for some time – is what price gold in drachma, lira, pesetas, escudos and punts? What should the ordinary people in European countries do to protect themselves from currency debasement and devaluations? Unfortunately, we may find out the answer to these questions in the coming months.

While as usual only headlines will be market moving, today we get the always completely irrelevant and very much worthless October ADP report, followed by the FOMC statement and press conference this afternoon.

Uhm, what was that? The Bund-OAT spread just soared by 7 bps to an all time record 129 and widening, which we expect is due to the EFSF bond pull. Expect a 130 handle any second...So Europe now has France to add to the Greek and Italian communicating vessels? Good work.

Once again the desperation level is high as seemingly the core driver of overnight strength was a rumor that China would inject €700 billion in the EFSF, coupled with the even more desperate expectation that in a few short hours Ben will launch the LSAP version of QE: something that is virtually impossibly unless stocks drop to triple digits, and a fact that the market with its constant attempts at Fed frontrunning makes practically impossible. Yet this was good enough to tighten the all critical Italy-Bund spread to 422bps overnight (recall it hit the catastrophic 455 bps yesterday). However some news since then have put a major damper on sentiment, notably another recessionary data point from Europe, where the October Manufacturing PMI printed at 47.1 on expectations of 47.3, and German unemployment posting a rare disappointing miss printing +10K on consensus of -10k. Yet the nail in the coffin for today's European action was that the EFSF, which as we noted already reduced its €5 billion Irish bailout package to €3 billion on subpar market demand, pulled the entire issue citing the trusty old fallback "market conditions" confirming that not only is the latest China bailout rumor a complete fabrication yet again (as explained both here and here). What is more troubling is that the EFSF has set off on its path to raise €1 trillion+ with an epic failure and an inability to raise even €3 billion. That realization has finally spread to the market and not only is the Italy-Bund spread back to morning wides at 438, but, just as disturbing, the French-Bund spread is back to all time wides of 123 bps! That the European interbank liquidity market just collapsed again with ECB deposit facility usage hitting a three week high of €229 billion, coupled with Euribor-OIS spread jumping +6 bps in a week to 0.86% and just off the 3 year highs of 0.89%, is certainly not helping things. Look for more mayhem out of Europe as the G-20 meeting slowly unwinds over the next day, and the complete lack of organization in Europe is exposed for all to see all over again.