Archive - May 23, 2011

What's with these tornadoes?

They're back...and sicker than ever!

When it comes to currency warfare, one can be polite and gentlemanly about it, like Brazil for instance, which every day, and sometimes on several occasions during the day, will proceed to buy dollars in an attempt to keep one's own currency lower. Or one can do what the Belarus central bank just did, and officially devalue one's currency, in this case the Belarus ruble, by 56% overnight, against every currency out there.

At this point, it sucks to be holding any exposure in BYR. Luckily for those who held their "money" in the form of gold and silver, they just got an instantaneous 56% value preservation and a relative boost in their purchasing power with just one central bank announcement. Also, any and all indebted parties who have BYR-denominated debts are throwing one big party tonight, as their debt was just cut by more than half. And yes, the Greeks are jealous with envy.

When the Fed takes its foot off the money pedal starting in June, money growth momentum will slow down. The consequences of this will be falling equity prices and higher unemployment. Bernanke would rather see higher inflation than higher unemployment, especially during an election year. His only choice will be the political one: QE3.

Conventional wisdom continues to believe that soon enough, as has been paraded by the various Fed presidents, the Fed will commence various tightening steps, commencing with the termination of reinvestments of various maturing securities holdings, a process that would lead to gyrations in the IOER (and thus the IOER-GC spread which as has been discussed recently has gone negative due to the FDIC assessment fee). Following the reinvestment decision, the Fed would next proceed to drain excess reserves using various operations such as reverse repos, term deposits, and SFBs (a process which many doubt would success when the total amount of excess reserves is set to hit $1.6 trillion shortly). The last step in the Fed's balance sheet renormalization would be to proceed with outright asset sales of its $2.6 trillion in Treasury and agency holdings (as for those billions in Other Assets, nobody knows). Barclays' Joseph Abate does a great summary of the pitfalls attendant each and every step in the process: "In asserting the supremacy of the Fed funds rate as the primary policy tool, the minutes outline the central bank’s longer term objective. The Fed hopes to eventually establish a corridor system – where the FF target is set between a lower bound of IOER and an upper bound of the discount rate. This would require the Fed to drain enough and to shrink its balance sheet sufficiently to push the effective funds rate over IOER and not merely eliminate the current -16bp spread. This might take a few years to accomplish. And in the process, the Fed would probably need to restore bank confidence in the discount window, which was shaken after the central bank was forced to disclose who had borrowed from the facility during the financial crisis." Abate concludes: "Taking all these into consideration, the April FOMC minutes indicate the Fed faces a pretty complicated task." Luckily, the Fed is most certainly aware of this complexity awaiting it as things return to normal. Of course, this whole discussion will be moot if and when the Fed, instead of tightening, proceeds with another monetary loosening episode, which as Jim Grant explained will go from QE 3 to QE n, in which case none of the below is even remotely relevant.

Well, it's all Greek to us, but even if we understood it, the informational value of this presentation (net of lies) is zero at best. It does have some pretty charts.

Just because the US is having so much success convincing the world its debt is money good (but don't anyone dare count the $6+ trillion in GSE debt to the total US debt), the good old US of A has now decided to backstop the debt of... Egypt. Bloomberg reports: "Egypt plans to raise $1 billion by selling Eurobonds this year to diversify borrowing and finance a widening budget deficit after its economy was rocked by the worst political crisis in 30 years. The five-year bonds will be backed by a U.S. “sovereign guarantee,” Finance Minister Samir Radwan said by telephone from Cairo today...President Barack Obama promised last week $2 billion in loan guarantees and debt forgiveness." And when it comes to Uncle Sam giving his assurances to the developing world, size does not matter: "The size is not significant but the backing from the U.S. will help raise the money at a relatively inexpensive cost." Uh, should Congress perhaps have something to say about the fact that America is now somehow the guarantor of recently revolutionary African countries? Because if, heaven forbid, should the extremely stable and economically viable, but otherwise revolutionary Egyptian country suffer default and bondholders demand to be made whole, guess out of whose pocket the deficiency claims will have to be funded...

A snapshot of the US Afternoon Briefing covering Stocks, Bonds, FX, etc.

Market Recaps to help improve your Trading and Global knowledge

And American plants are - in many ways - even MORE vulnerable than the Japanese reactors ...

Two weeks ago we speculated that S&P would downgrade Belgium next as the peripheral fire makes inroads to the core. Turns out Fitch is taking charge on this one. Expect S&P to follow shortly. From the just released Fitch statement which revises Belgium's outlook to negative: "In Fitch's view, without political agreement over constitutional reform, it will be difficult to achieve a balanced budget at general government level as laid out in Belgium's Stability Programme. This would require budgetary surplus at lower levels of government and/or significant social security reform, either of which would likely become entangled in Belgium's linguistic-community dispute. Sustained debt reduction will require fiscal reform as well as fiscal discipline over the coming years, which in turn requires a new government with a fresh mandate." EUR for now pretending it doesn't care.

Back on March 18, Goldman Sachs advised clients to do an outright shirt on the 5 Year treasury (with a 2.3% target). And while our skeptical approach to Goldman recommendations has been no secret for a while (as in do the opposite), little did we realize just how pervasive the counter-squid trade has become. Amusingly, since Goldman recommended putting the trade on, net non-commercial speculative contracts (longs minus shorts) have surged to a multi-year high of 265,550 as of May 17. This is nearly double the 137,765 in net contract positioning when Goldman put its recommendation on. While it is unclear how much of a factor, if at all, Goldman's reco has been in this inverse trade recommendation (it appears even the dumb money among Goldman's clients is doing what the smart money and its prop desk is engaging in: namely doing the opposite of what the sell-side recommends), it is very clear that traders have congregated in the short end of the curve, with both 2 and 5 year net exposure near multi year highs, even as the 10 Year, which has seen a rise in yield over the past month, has just tumbled to the highest short exposure since August 2010. That said, will specs again be carted out head first as they were recently in the EUR and USD mauling? And if so, will the ensuing curve flattening result in another major leg down for the financials. The answer is certainly yes, as soon as pain thresholds on either side are breached and the profit taking begins (or the CME hikes Treasury margins).

US President Barack Obama and First Lady Michelle Obama have arrived in Moneygall, Ireland, officially, for a short visit and to visit his ancestral home. Follow live coverage here. Good thing the world is not imploding in the meantime.

Finally, with about a two year delay, popular opinion has finally caught up with the fact that America has an Attorney General, and that Attorney General is not getting paid $186,600 a year merely to conduct medical research on the dangers of carbonite freezing. In its headline article "Prosecutors Faulted for Not Catching Credit-Crunch ‘Bandits’" Bloomberg has done what every other media was supposed to do years ago, namely ask the well-rested Eric Holder what the hell is the reason that not a single criminal investigation being launched against an entire generation of criminal and corrupt bankers (granted, not all of them....just the multi-millionaires). "In November 2009, Attorney General Eric Holder vowed before television cameras to prosecute those responsible for the market collapse a year earlier, saying the U.S. would be “relentless” in pursuing corporate criminals. In the 18 months since, no senior Wall Street executive has been criminally charged, and some lawmakers are questioning whether the U.S. Justice Department has been aggressive enough after declining to bring cases against officials at American International Group Inc. (AIG) and Countrywide Financial Corp." It is stunning that this is only the first time someone in the mainstream media has had the temerity to actually wonder why nobody had previously thawed Holder from his resting place deep in the nether regions of Jaba's barge where his carbonite statue is publicly presented for all to enjoy.

Take the fear premium out of crude and suddenly it is worth $50 a barrel. Saudi Arabia is ramping up from 10 to 15 million barrels a day of production. What happens if Libya’s Muammar Khadafy suddenly chokes to death on a falafel? (USO), (DUG).

A little over a year ago, when the Greek CDS scapegoating campaign was in full swing (you see, the reason why the first $1 trillion Greek bailout failed is because of those evil, evil CDS traders: it had nothing to do with Greece being, well, bankrupt), one of the most hilarious discoveries was that among the chief speculative villains was none other than the state-owned Hellenic Postbank. That's right: the government of Greece was profiting by betting on its own demise even as it was making a stink about others doing the same. Well, justice for the insolvent is short, swift and quite poetic. According to Reuters, the first entity to fall to Greece's privatization ambitions will be the very same bank. (Granted, this is not really news: Greek Reporter noted this some time ago, see below). What will be funny is when Greece puts up its insolvent banks on the block and discovers that nobody wants to come within 10 feet of them, unless, of course, it is JP Morgan buying it up with the assistance of Maiden Lane IV, also known as My Big Fat Greek Bailout Taxpayer Funded Conduit, for 2 drachmas per share.