Archive - Apr 2011

Several days ago, courtesy of an analysis by JPM's Michael Feroli, we quantified that the implied "rents" benefit to the US economy arising from squatters not paying mortgages is about $50 billion per year, or just about 0.4% of GDP. Today, thanks to 60 Minutes, this number is about to soar, because if anyone didn't know before that paying mortgages is for suckers, now virtually every single mortgage borrower, and there are about 48 million of them, will think long and hard before mailing out the next mortgage payment. And if not all, then certainly the 11.1 million underwater mortgages will be one step closer to throwing in the towel on feeding the mortgage monster. Considering that 4.6 million mortgages are currently delinquent for 30 days or more, look for this number to at least double as everyone who is underwater says no mas to a losing game. Which of course is precisely what the banks want: consider that the "rents" benefit is about to double to $100 billion per year, all of which will accrue to the banking system first, then one can see why a $20 billion settlement deal is not a bad investment for the bank to generate a 2.5x ROI in a few short months.

No QE3? Really? Oh yes, Zero Hedge 1, Goldman Sachs (who can possibly forget Goldman's shark jumping "New US Golden Age" report from December after all it took was one bad NFP print for Goldman to launch QE2 back in August?) 0 (here and here)

Goldman summarizes the key phenomena of the last week (inflation) and presents the most important items to watch for: "the post-payrolls week will be relatively light on macro data releases but of course we are heading for a number of central bank meetings against a background of a gradually deteriorating inflation-growth trade-off. Key will be the ECB on Thursday, though a 25bp hike is fully anticipated after the unwaveringly hawkish comments from a number of ECB officials. At the press conference we do not expect to hear an even more hawkish tone from Trichet. There is a lot of Fed speak with Bernanke and Yellen on schedule, among others, as well as the latest FOMC minutes. In last week’s key Fed speech Bill Dudley continued to sound quite dovish highlighting ample spare capacity in the economy still. "

The current rally has left some very good companies behind, and nowhere is this more evident than in the technology sector.

For those wondering just why TEPCO and Japan in general have been in such as scramble to cover up as much of the reactor in a concrete sarcophagus, after up until now the utility had been perfectly happy to come up with one after another useless idea of delaying the inevitable moment of sarcophagation, here is Arnie Gunderson from Fairewinds and Associates explaining that now there is definitive proof, courtesy of Tellurium 129 and a order of magnitude higher concentration of Iodine 131 in Reactor 1, that the reactor is now undergoing sporadic events of recriticality: in other words, the fission reaction is recommencing on its own, and without any supervision, emitting undetectable neutron beams which are irradiating any and all personnel still on location. For the time being these recritical events are isolated, although courtesy of the whole premise behind a nuclear power plant, all it takes is for some form of critical threshold to be reached, and for a full blown self-sustaining chain reaction to result in Chernobyl part 2. If nothing else, we now know why the authorities are desperate to bury everything literally under the sand. Because at least a few thousands tons of concrete will provide a modest buffer for unprecedented amount of radiation before these hit the surrounding environment. Lastly, all those hoping that natural rod cooling is sufficient, and if the plant is left along long enough on its own, things will get better, are now proven wrong. We can only hope the outcome this time will be a tad more favorable than all the previously disastrously aborted attempts at restoring order.

A review of the Commitment of Traders and Retail Trader Positioning Analysis.

The only thing necessary for the triumph of evil is for good men (and women) to do nothing...

It is no secret that since the start of QE2 in November, the US Treasury has issued a gross $890 billion in debt in the form of various Bond, Bill and TIPS. This is cash that the US received in exchange for promises to pay interest and principal at maturity on various series of bonds. At the same time, over the past 5 months, there was $291 billion in debt maturity paydowns, or cash leaving the Treasury and going to those who are lucky enough to receive principal on US debt at maturity. That leaves a net of $589 billion in debt that was issued between November 1 and March 31: money used to fund the ongoing operations of the United States. This is all perfectly public and well-known. After all, every single auction is loudly announced by CNBC at 1 pm Eastern on auction days, with a breakdown between Direct, Indirect and Primary Dealer takedowns. Note that the Fed does not feature in this list of primary issuance bidders as that would be illegal, and would be monetization beyond even any semantic argument that the Fed does not, in fact, monetize. What is less known is that the true action in US Treasurys occurs in the secondary market, or that dominated by the Federal Reserve. Here is where the daily POMO takes place, where as we have noted on many, many, many occasions Primary Dealers promptly flip bonds purchased during a primary auction right back to the Fed. This is where the real source of Treasury funding comes from. And what many may not be aware of is that since the start of QE2, the Federal Reserve has purchased $491 billion of Treasurys in the Open Market (and $556 billion since the start of QE Lite). This $491 billion in indirect monetizations ultimately ended up funding government cash needs. In other words out of $589 billion in net issuance, the Fed has been responsible for 83.4% of the money needed to fund government transfer payments (among many other uses of funds) and keep the US consumer "strong", not to mention funding US defense, education, healthcare and every other aspect of US day to day cash needs. QE2 is supposed to end in precisely three months. During that time the Fed will fund another $400 or so billion in US cash needs. What happens after, nobody knows. 

Sunday funnies. Not.

For all those who need a refresher of the scale issues at Fukushima, below we present a picture showing the scale comparison of a concrete pump and a destroyed nuclear reactor (in this case #4). A picture, in this case, is worth 1,000x scaling.

On this side of the rainbow, “How much money should an uncreditworthy entity be allowed to borrow?” is a rhetorical question. In Washington DC, it’s a topic of much rhetoric. In fiscal year 2009 Congress borrowed 53.5 cents of every dollar they spent. In FY2010 they borrowed 48 cents of every dollar (*check your numbers, Santelli). So they’ve borrowed and spent 3.5 Trillion to produce 255 Billion in GDP growth (7% efficiency!), never even bothered to pass a budget for FY2011, and still haven’t managed to get a single bankster put in jail. Now these whores are lecturing us about “moral obligations.” They also swear they’re gonna straighten up and fly right this time. There is one little detail they forgot to mention – no one actually wants to lend them money. Welcome to the last resort.

While the government wrangles over a whopping $30 billion in spending cuts for the 2011 budget (with fiscal 2011 already half way over), which threaten to shut down the government yet which we all know will be successfully addressed in the 11th hour, with a compromise of sorts confirming once again that both parties are incapable of dealing with the relentless climb in US government debt (and oh so eager to turn their back on campaign promises when faced with reality), which unfortunately is the only fuel driving the US economy, the GOP's Paul Ryan is expected to announce a whopper of a 2012 budget, one which trims a record $4 trillion in spending over the next 10 years. What this means is that the GOP is about do away with Obama's health care "revolution" and things are about to go back to the way they were. Not only that, but any hopes the Fed may have had that congressionally-mandated fiscal stimuli will take over the central bank's monetary boosts, can be put to rest, meaning that very soon the Chairman et al will be back to the drawing board debating just how much more cash needs to be injected in the economy next time around (as a rough guideline, we expect it will be about 75% of the next debt ceiling increase). And while we expect the current government shutdown crisis will be resolved within a few weeks on the back of promises of massive cuts over the next decade, which will never happen, the only thing to watch for is how big the debt ceiling increase will be when announced some time over the next 3-4 weeks. Everything else is smoke and mirrors.

I was quoted in FT
about David Sokol, CEO of a Berkshire Hathaway subsidiary, buying
shares in Lubrizol a few months before Buffett’s Berkshire Hathaway
bought Lubrizol at a significant premium, which made Sokol 3 million
dollars on his $10 million purchase.

You won't hear anything about it from the mainstream financial media or the Federal Reserve, but this chart is screaming "stocks are extremely overvalued." Although the mainstream financial media is touting low price-earnings ratios and permanently rising profits as the backdrop for a permanently bullish stock market, this chart reveals that stocks are more overvalued now than they were just prior to the Great Crash of 1929. Only the bubble of the dot-com era reached a higher extreme.