Archive - Apr 2011

This leads one to ask, “what is the Fed combating now?” And it’s not just Japan (the adjusted monetary base went vertical back in January). So what is requiring $200 billion per month? Also, we need to consider just how desperate the Fed is. QE 1 saw the Fed pumping $50 billion per month into the financial system. QE 2 saw $100 billion. Now we’re at $200 billion per month.

As S&P noted in its downgrade, and made all too explicit during the follow up call, the rating agency has now started a two year timer on the administration and the legislative branch to come up with not only a solution but a credible solution by the end of 2012. Yet as Reuters points out, the "S&P's action -- downgrading its outlook on the U.S. rating to negative from stable -- does not guarantee a deal." Basically expect more posturing from both sides of the aisle, which ironically may merely lead to a cementing of intractable positions, and kick the can so far down the street that not even S&P can see where it lands: a non-compromise compromise that the Hill is so good at, yet one which won't fly any longer. " While the White House dismissed the action, saying all sides were making progress toward agreement, Republicans and Democrats remain far apart on where to make the cuts that will be needed for long-term deficit reduction. "Any call for a bipartisan agreement on deficit reduction on fiscal reform is a welcome one, and in that context, I think that (the S&P move) adds to what we believe is some momentum towards that end," said Jay Carney, White House spokesman." Yes, ironically everyone: democrats and republicans are both claiming the S&P decision, which without doubt originated from Wall Street in the first place, validates their theories. Yet the biggest winner out of all this may be the Tea Party: "It is a vindication of the Tea Party and their stance that we are spending too much," Republican Representative Blake Farenthold, a member of the House Tea Party Caucus, said in a telephone interview." Or not: if the Tea Party continues "cutting" deficits like it did last week, when it was ultimately uncovered that instead of a $38 billion cut the ultimate impact on the budget was about $370 million, the Tea Party will most certainly burn all its credibility very soon if it continues to "tackle" fiscal sustainability with the same fervor.

D'oh!

And for the most unsurprising news of the day, Reuters reports that the White House has admitted it knew about the S&P rating action on Friday. Which means that all the key bond buyers (or sellers are the case may be, Pimco), knew at roughly the same time what the key market catalyst on Monday would be (we can't wait to get a declassified glimpse of Larry Meyer's phone log over the weekend one day in the future). Which also means that today's action was a strawman in which the big boys merely waited for an opportunity to buy bonds are lower prices, which the ongoing European collapse merely facilitated. Most importantly, it is now all too clear why over the weekend, Tim Geithner's face, instead of being hard at work at finalizing his tax filing, would grace each and every TV screen. Advance damage control, TurboTax style.

Putting its money where its mouth is, Dagong has a long-standing, negative outlook on US debt that doesn’t pull any punches. From its November 2010 report: “In essence the depreciation of the U.S. dollar adopted by the U.S. government indicates that its solvency is on the brink of collapse, therefore it wants to cut its debt through the act of devaluation with the national will; such a move has severely harmed the interests of creditors.” Following suit, S&P stunned financial markets this morning by revising its US outlook to ‘negative’, citing politicians’ inability to address medium-term and long-term challenges. In total contrast, US News and World Report published an article a few days ago entitled Why you should buy U.S. Treasuries,” which amounts to the worst advice I’ve seen in years.

In release timed perfectly so as not to interfere with the congressional vote last week, late on Friday the CBO put out its comparison of the Obama's budget, proposed back in February, with the CBO baseline assumption. The bottom line, and probably the main reason for the implicit S&P downgrade of the US, is that comparison the President's budget to the CBO baseline indicates that deficits are expected to rise by 41% over the next 10 years: the CBO project a deficit of $6.7 trillion while the President's number is $9.5 trillion, a 41% increase or $2.7 trillion. Got printing presses?

There are TRILLIONS in liquidity sloshing around the system right now. Inflation is already guaranteed. Sure we might have another debt Crisis, but there is absolutely no question that we’re going to be seeing massive debt defaults in the coming months and years. Currencies will be taking major hits when this occurs.

So with that in mind, I continue to maintain that we’ll be major inflation in the markets before the end of 2011

However, this time around, bad news has resulted in stocks are tanking and the US Dollar is rallying hard. The implications of this are vast. Is the Fed telling its buddies (Goldman etc) behind the scenes that they won’t be engaging in QE 3? Is the tide of easy money finally turning? I doubt it. The Fed HAS to keep funneling the money into the insolvent big banks. Failing to do so will trigger a collapse in the interest rate-based derivatives market which currently stands at $180+ TRILLION in the US alone.

Live blogging the S&P conference call. The Q&A session will be critical. A rather interesting one: "Did the Federal Reserve Board's program of quantitative easing contribute to your decision to revise the outlook to negative? Answer - No. We find that risks of deflation in the U.S. have lessened and that there are few indications that inflation expectations have become untethered. Although it will be challenging to sequence the unwinding of these operations while raising policy interest rates once the recovery has become firmly rooted, we believe that the credibility of monetary policy will continue to be a credit strength for the U.S."

Since most of us only deal with mortgage loan origination fees when we buy a home or refinance a mortgage, the average citizen will have a tough time sorting out the often-arcane issues at stake. But the bottom line is straightforward: the already-limited mortgage market is about to become more limited, as small mortgage brokers are being shoved out of business. Call it “unintended consequences” or a cloaked plan to channel more of the mortgage business to the “too big to fail” big banks, but regardless of the motivations, the rules end up limiting consumer choice and making it harder for home buyers to get a loan. That's bad for housing in two ways: limited competition drives costs up, and marginal buyers will find nobody wants their business because it's simply not worth the compensation allowed by the Fed's new rules.

Following up on his note from last week (posted here), Nomura's Bob Janjuah shares the following observations on today's market moving event.

On Monday, the S&P ratings agency downgraded the US debt outlook to negative. The Triple A debt rating was maintained by S&P, but the outlook downgrade by the agency, which hit the U.S. stock market hard and also prompted a sell off in U.S. Treasuries. Yet gold prices closed in on major psychological resistance of $1500 per troy ounce... so here's the deal!

Goldman's opinion on the S&P action took just a little longer than PIMCO to be distributed to clients: 108 minutes. Not surprisingly, after eagerly pushing rating agency opinions to clients buying CDOs from Goldman, the firm's economists are now eagerly trying to talk it down: "Clearly, the US fiscal situation is unsustainable unless a large,
multi-year fiscal tightening is implemented.  However, there is no
information in today’s report about the fiscal situation that was not
already known.  Academic research has generally found that rating agency
actions lag market pricing, rather than lead it.  Any relevance of
today’s announcement is a) as a potential catalyst for renewed market
focus on these issues, particularly if the other agencies follow suit,
b) a signal of a nonzero probability of an outright ratings downgrade
over the next few years." And who was the research conducted by? Moody's? A Princeton Ph.D. academic? Yes, we know the country is screwed. But we can sure do without this condescending BS.

That Mohamed El-Erian is the most prolific op-ed writer-cum-CEO and co-CIO of a $1.4 trillion fixed fund in history is well-known. There rarely passes a 12 hour period without Mohamed's deep thoughts hitting the tape somewhere. Yet that El-Erian took a whopping 90 minutes to pen, clear with legal, and publish an oped to the S&P 9:00 am Eastern rating action definitively proves there was absolutely no leakage of this "earth shattering" news to anyone, anywhere.