Archive - Apr 2011

Now that the Obama approval rating has hit a plateau where it correlates only with the inverse average price of gas instead of the Russell 2000, the AAA brings some more ominous news for the man who last week launched a crusade to wipe out all oil speculators (and witches) from the face of the earth. While last week the average price at the pump was $3.81, it has since surged once again to hit a new multi year nominal high of $3.86, getting dangerously close to the all time high record price of $4.114 recorded on July 17, 2008. Incidentally premium is already above that mark,currently averaging $4.128. The number is also a nearly 10% increase from a month ago when the average price was $3.561. Seven states reported an average gas price above $4 with Hawaii once again leading the pack at a $5 rounding up $4.534. And of course, instead of focusing on the real cause of surging commodity prices, the administration's response: the creation of a "working group" to battle manipulation.

The Federal Reserve has lost all credibility on Wall Street, and most of the American public with the absolute refusal to recognize the dire effects on asset prices that QE2 has created. But the refusal is part of the problem.

It is one thing for sellside research, caught in its traditional lemming frenzy, to cut national GDP outlook. In the case of Japan the resistance to reality provide futile early on and based on the average of 43 economists' forecasts, economic growth is now expected to post a 0.22% GDP decline in Q1 and a whopping 2.83% in the April-June period. As had been predicted this is not surprising. What is surprising, is that the head of the BOJ, Shirakawa-san himself has now indicated that Japanese growth is stalling. Per the WSJ: ""We are now expecting production and GDP will decline in the first quarter and the second quarter," Mr. Shirakawa said in an interview on Friday. It is rare for the central bank governor to make such forecasts and is the first time that Mr. Shirakawa officially admitted the likelihood that the economy may shrink in the first two quarters of the year, in line with many private-sector economists' predictions." So for those wondering who will take the temporary lead in money printing in the brief period between QE2 and QE3, look no more: "given high uncertainties surrounding the Japanese economy, many analysts expect Japan's central bank to be eventually forced to take additional easing steps." And just how much money printing are we talking here? "The central bank currently buys ¥1.8 trillion of long-term JGBs every
month from financial firms as part of its regular market operations. The bank's hands are tied by the so-called banknote rule, which
limits long-term JGB buying to the amount of banknotes in circulation.
But the central bank still has capacity to purchase around ¥20 trillion
of long-term bonds, according to the central bank's latest account data." In other words, lots.

Don't blame the specs. Blame the reasoning why the specs are acting.

For those needing yet another reminder of how in America the incestuous conflicts of interest between the various branches of government and Wall Street run to the very top, here is Time with an article highlighting yet another example of impropriety. Today's case focuses on Iowa’s Democratic Attorney General Tom Miller, who at least superficially took the noble lead on the investigation by all 50 state attorneys general into the “robo-signing” foreclosure scandal. Alas, one look below the surface reveals that we may be days away from a very ignoble and very BAC-friendly settlement, courtesy of a few backroom "arrangements" brought to you by none other than Bank of America's petty cash account.

Don't forget to put all your 2B2F eggs in one basket...

Confused by the recent dramatic moves in General Collateral repo rates? Carry trade killing FDIC assessments got you down (and copycatting other blogs)? Still anguished by relentless end of quarter window dressing even as primary dealers reduce leverage to post crisis lows? Surprised by the ongoing deterioration in near term shadow banking despite the so-called improvement? Stunned by how the Fed has seemingly lost control of the near end even as the announcement of implicit tightening could be a few shorts days away? Then the following presentation from Barclay's Joseph Abate on the regulatory changes in money markets, and their broad consequences for funding markets is a must read for anyone concerned by the very peculiar recent goings on in shadow banking.

My big picture, we call this The Meatball Marketplace.

The WSJ reports that another very likely casualty of the not so velvet revolution in MENA, and of backdoor deals with Saudi Arabia the UAE, is Yemen's president Ali Abdullah Saleh who has accepted "a political deal brokered by neighboring Arab countries that would have him step down from power after 30 days in exchange for immunity for himself and his close relatives, according to a presidential aide." Let's not forget that Gadaffi also offered to step down (or was rumored in one of the frail attempts to take down oil before the big guns, read Goldman, had to step in with their "research") - a gambit which led to just more massacres of innocent civilians. And since Al Qaeda is likely the biggest loser in such a deal, we don't expect this plan to be pulled off without a lot off fireworks.

In this podcast, Axel explains:

• Why Ben Bernanke is hell-bent on debasing the US dollar to spur economic growth
• How the politics of the Fed work, where the power lies and which arguments and actions are likely to carry the day
• Why inflation expectations actually matter more than actualy inflation, and why the Fed will not rest until it is satisfied the market expectations for inflation are higher
• That the US is on its way to a fiscal trainwreck - a reality our political leadership continues to lack to backbone to address honestly
• The Fed's powers are prodigious, but not as great as the market. If and when the market moves against policymakers, nothing will stop it. The growing risk is we quickly tip into the inflation the Fed wants, which then quickly leads to runaway prices
• His outlook for gold and why he thinks this "ultimate currency" can go much higher from current levels
• How the US is caught in a Catch-22: our loose monetary policy continues to encourages credit consumption that makes us increasingly vulnerable; but we're so indebted already that if the Fed tightens rates, the economy could easily fall into a full-blown depression

Jonathan Weil hits another one out of the ballpark.: "Geithner says the chance of a downgrade is zero. S&P says the odds it will cut its rating might be greater than one out of three. So who are you going to believe? Geithner? Or the people at S&P who actually will be deciding what S&P will do about S&P’s own rating of U.S. sovereign debt? It would be one thing to express the view that a downgrade would be unwarranted, or that the chance of it happening is remote. Either of these positions would be defensible. Geithner went beyond that and staked out an absolutist stance that reeks of raw arrogance: There is no risk a rating cut will occur. He left no room for a trace of a possibility, ever."

So I'm flipping through the channels late Wednesday night and I stop on O'Reilly visiting with Lou Dobbs. I notice that they're talking about oil prices so I figured I'd give it a listen. As the interview dragged on, I was amazed at their points of view. O'Reilly: Its all the evil speculators, oil companies and OPEC who are at fault. They are driving up the price of oil for their own benefit and screwing the consumer. Dobbs: It's all Obama's fault. He should be putting the screws to OPEC to force them to pump more oil and bring the price down. That these guys are apparently so clueless bugged me all day yesterday. In fact, I even discussed this on the phone with Mr. Hyde. How could these guys not get it? Anyone with a brain knows that crude is going up because of concerns of unrest in the Middle East and, more importantly, the rapidly declining dollar. But here are O'Reilly and Dobbs taking 5 minutes in front of O'Reilly's massive audience to construct bogey men for everyone to blame. WHY? Seriously, this really bugged me.

If you think the crude oil market has gone totally out of control in the past month or so, observe the silver market, which has basically gone parabolic the past week.

Yesterday we learned that in borrowing a page right out of 2010, when the Greek government was mounting a full frontal assault against CDS traders everywhere (only for Eurostat to tell us that CDS traders had absolutely no impact on Greek solvency), Greece is once again scapegoating unrelated third parties for its problems. In this particular case Citi London trader Paul Moss, who is being interrogated by Interpol because of a recap email indicating Greece may, gasp, restructure (or, as it isknown in enlightened circles, conduct a "liability management exercise"). Yet when Greece reads the following note by Citi's Stefan Nedialkov, it will most likely issue a cease and desist order in perpetuity against Vikram Pandit's bank. Nedialkov's summary (released one day after Moss' April 20 note): "If a 42% haircut is taken in addition to these measures, we estimate Debt/GDP falls to below 90% in 2013 and below 60% in 2020." The problem is that the market will likely give Greece at most a few months of breathing room in exchange for just a 90% debt/GDP reduction. If truly engaging in a liability exercise of some nature, Greece will likely pursue a permanently viable option. And as Nedialkov indicates, in order to achieve a far more credible 60% debt/GDP ratio, the country would need to take a 76% haircut now, or do nothing for five years, and eliminate a whopping 94% of its debt in 2015. Since the market is already expecting roughly a 50% haircut it remains to be seen just how much further bond prices will plummet, and how much bigger the ultimate impairment on Citi debt, and European banks, Greek pension funds and local bond investors, will ultimately be. One thing is certain: with Greek 2012 debt/GDP expected to peak at 159.4%, the country will restructure, and a a vast swath of insolvent European banks are about to see the tide go out.